<PAGE>
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, 1998
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), 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, 1998 was 12,937,170
<PAGE>
BIOSITE DIAGNOSTICS INCORPORATED
FORM 10-Q
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Balance Sheets as of September 30, 1998
(Unaudited) and December 31, 1997...................... 1
Condensed Statements of Operations (Unaudited) for
the three and nine months ended September 30, 1998
and 1997............................................... 2
Condensed Statements of Cash Flows (Unaudited) for the
nine months ended September 30, 1998 and 1997.......... 3
Notes to Condensed Financial Statements (Unaudited)..... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 6
Item 3. Quantitative and Qualitative Disclosure
about Market Risk......................................Not Applicable
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................... 19
Item 2. Changes in Securities and Use of Proceeds...............Not Applicable
Item 3. Defaults Upon Senior Securities.........................Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders..... 19
Item 5. Other Information.......................................Not Applicable
Item 6. Exhibits and Reports on Form 8-K........................ 19
Signatures .................................................. 20
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIOSITE DIAGNOSTICS INCORPORATED
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ -----------
(Unaudited) (Note)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,508,932 $ 2,330,274
Marketable securities, available-for-sale 35,895,172 36,927,167
Accounts receivable 5,799,675 5,931,164
Inventory 3,910,785 2,169,896
Other current assets 3,663,841 3,677,348
----------- -----------
Total current assets 50,778,405 51,035,849
Property, equipment and leasehold improvements, net 7,504,123 7,216,983
Patents and license rights, net 6,467,463 3,720,035
Other assets 1,119,368 1,338,341
----------- -----------
$65,869,359 $63,311,208
=========== ===========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 2,880,765 $ 1,420,969
Accrued salaries and other 1,960,359 1,107,476
Accrued contract payable 205,928 563,812
Current portion of long-term obligations 1,565,048 1,332,200
----------- -----------
Total current liabilities 6,612,100 4,424,457
Long-term obligations 3,905,243 3,796,975
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized,
none issued and outstanding at September 30, 1998 and
December 31, 1997 -- --
Common stock, $.01 par value, 25,000,000 shares authorized; 12,933,270
and 12,864,745 shares issued and outstanding at
September 30, 1998 and December 31, 1997, respectively 129,333 128,647
Additional paid-in capital 54,190,557 53,684,302
Unrealized net gain (loss) on marketable securities, net of related
tax effect 98,249 5,658
Deferred compensation (235,508) (317,595)
Retained earnings 1,169,385 1,588,764
----------- -----------
Total stockholders' equity 55,352,016 55,089,776
----------- ------------
$65,869,359 $63,311,208
=========== ===========
</TABLE>
Note: The balance sheet at December 31, 1997 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.
-1-
<PAGE>
BIOSITE DIAGNOSTICS INCORPORATED
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1998 1997 1998 1997
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 8,752,524 $ 8,079,163 $ 25,347,261 $ 23,409,100
Cost of sales 3,037,921 1,693,255 7,135,167 4,930,506
------------ ------------ ------------- -------------
Gross profit 5,714,603 6,385,908 18,212,094 18,478,594
Operating Expenses:
Research and development 2,895,744 3,022,469 8,834,055 8,441,900
Selling, general and administrative 3,750,436 2,987,028 11,300,650 8,002,699
Defense of patent matters 1,334,957 49,916 3,337,788 105,739
----------- -------------- ------------- --------------
7,981,137 6,059,413 23,472,493 16,550,338
----------- ------------ ------------ ------------
Operating income (loss) (2,266,534) 326,495 (5,260,399) 1,928,256
Other income:
Interest and other income 575,506 630,640 1,835,215 1,508,790
Contract revenue 1,909,805 197,740 2,609,805 777,767
------------ ------------ ------------- -------------
Income (loss) before provision for income taxes 218,777 1,154,875 (815,379) 4,214,813
Benefit (provision) for income taxes 236,000 (266,000) 396,000 (1,348,000)
------------ ------------ ------------- -------------
Net income (loss) $ 454,777 $ 888,875 $ (419,379) $ 2,866,813
------------ ------------ ------------- -------------
Net income (loss) per share
- Basic $ 0.04 $ 0.07 $ (0.03) $ 0.27
============ ============ ============= =============
- Diluted $ 0.03 $ 0.07 $ (0.03) $ 0.22
============ ============ ============= =============
Shares used in calculating per share amounts
- Basic 12,986,000 12,803,000 12,944,000 10,725,000
============ ============ ============= =============
- Diluted 13,514,000 13,454,000 12,944,000 12,926,000
============ ============ ============= =============
</TABLE>
See accompanying notes.
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<PAGE>
BIOSITE DIAGNOSTICS INCORPORATED
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net cash provided by operating activities $ 2,368,619 $ 2,387,154
INVESTING ACTIVITIES
Proceeds from sales and maturities of marketable
securities 26,272,742 21,268,180
Purchase of marketable securities (25,086,428) (49,399,837)
Purchase of property, equipment and leasehold improvements (2,489,026) (4,477,333)
Patents, license rights, deposits and other assets (2,735,306) 1,215,682
----------- -----------
Net cash used in investing activities (4,038,018) (31,393,308)
FINANCING ACTIVITIES
Proceeds from issuance of financing obligations 1,391,112 3,109,408
Principal payments under financing obligations (1,049,996) (1,191,067)
Proceeds from issuance of convertible debenture 500,000 --
Repurchase and retirement of common stock (478,125) --
Proceeds from issuance of stock, net 485,066 30,304,766
----------- -----------
Net cash provided by financing activities 848,057 32,223,107
----------- -----------
Increase (decrease) in cash and cash equivalents (821,342) 3,216,953
Cash and cash equivalents at beginning of period 2,330,274 1,609,861
----------- -----------
Cash and cash equivalents at end of period $ 1,508,932 $ 4,826,814
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 320,008 $ 238,233
=========== ===========
Income taxes paid $ 4,800 $ 859,550
=========== ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Conversion of convertible debenture into common stock $ 499,992 $ 1,110,904
=========== ===========
</TABLE>
See accompanying notes.
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<PAGE>
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, 1997.
2. EARNINGS PER SHARE
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 Company such as common stock which may be issuable
upon exercise of outstanding common stock options.
Shares used in calculating basic and diluted earnings per share were as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Shares used in calculating per share amounts - Basic
(Weighted average common shares outstanding) 12,986 12,803 12,944 10,725
Effect of common share equivalents:
Assumed conversion of preferred shares -- -- -- 1,481
Assumed conversion of convertible debenture -- -- -- 16
Net effect of dilutive common stock options using the
treasury stock method 528 651 -- 704
============= ============= ============= =============
Shares used in calculating per share amounts - Diluted 13,514 13,454 12,944 12,926
============= ============= ============= =============
</TABLE>
-4-
<PAGE>
3. BALANCE SHEET INFORMATION
Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Raw materials $ 1,344,900 $ 779,965
Work in process 2,460,149 1,214,894
Finished goods 105,736 175,037
------------ ------------
$ 3,910,785 $ 2,169,896
============ ============
</TABLE>
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<PAGE>
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, 1997.
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 its 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. In 1992, the Company began commercial sales of the Company's
primary product, Triage Panel for Drugs of Abuse ("Triage DOA Panel"), and
currently markets the product worldwide primarily through distributors supported
by the Company's direct sales force. In 1998, the Company began selling three
additional products, the Triage C. DIFFICILE Panel, the Triage Parasite Panel
and the Triage Cardiac System. In addition to focusing its attention on
commercial activities associated with these products, the Company continues to
invest in the research and development of additional rapid tests to aid in the
diagnosis of several critical diseases or conditions, including congestive heart
failure and certain bacterial and parasitic infections. The Company also is
developing a diagnostic test to aid in the dosing of immunosuppressant drugs.
The Company anticipates that its results of operations may fluctuate for
the foreseeable future due to several factors, including whether and when new
products are successfully developed and introduced by the Company, market
acceptance of current or new products, defense and resolution of patent matters,
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 and
changes in the mix of products sold. The Company has incurred, and will continue
to incur, significant costs associated with its defense of patent matters. The
magnitude and timing of such costs are primarily dependent on unpredictable
activities associated with the patent lawsuits. If the Company's Triage DOA
Panel or Triage Cardiac System products were found to infringe patents, and if
acceptable licenses were not available, the Company would be materially and
adversely affected. Operating results would also be adversely affected by a
downturn in the market for the Company's current and future products, order
cancellations or order rescheduling or manufacturing delays. As a result of
manufacturing scale-up and capacity constraint issues related to the production
of the Triage Cardiac System, the Company developed a backlog of orders for the
Triage Cardiac System of approximately $377,000 in estimated net sales as of
October 29, 1998. The Company is addressing the manufacturing scale-up issues
and may be able to fill the backlog orders during the fourth quarter of 1998.
The Company manufactures and ships its other products shortly after receipt of
orders and has not developed a significant backlog for such products and does
not anticipate it will develop a material backlog for such products in the
future. Because the Company is continuing to increase its operating expenses
primarily for personnel and activities supporting newly-introduced products 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 are 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, the Company may not sustain revenue growth or remain profitable on a
quarterly or annual basis and that its operating results may not be consistent
with predictions made by securities analysts.
-6-
<PAGE>
RECENT DEVELOPMENTS
NEW PRODUCTS
During the first quarter of 1998, the Company received final approval from
the U.S. Food and Drug Administration ("FDA") to market the Triage Cardiac
Panel and the Triage Meter (together called "Triage Cardiac System") and the
Triage C. DIFFICILE Panel in the United States. The Triage Cardiac System is
Biosite's first product to utilize the Company's Triage Meter System technology
and is designed to deliver precise, quantitative results in a STAT timeframe.
The Triage Cardiac System may aid in the diagnosis of Acute Myocardial
Infarction ("AMI") and provide physicians with an enhanced ability to make
treatment decisions in a timely manner. Used in conjunction with the Triage
Meter, the Triage Cardiac Panel quantitatively measures, in a single test
device, the level of CK-MB, troponin I and myoglobin from a whole-blood sample.
The Triage C. DIFFICILE Panel is a rapid test designed to identify CLOSTRIDIUM
DIFFICILE, an opportunistic pathogen of the intestinal tract that may thrive as
a result of broad spectrum antibiotic treatment. The Company began selling the
Triage C. DIFFICILE Panel in March and the Triage Cardiac System in May. The
Company is addressing manufacturing scale-up and capacity constraint issues
related to the production of the Triage Cardiac system and may be able to fill
backlog orders during the fourth quarter of 1998. In October 1998, the Company
received final approval from the FDA to market the Triage Parasite Panel, the
Company's third product launched in 1998. The Triage Parasite Panel is a rapid
test designed to simultaneously detect three common waterborne parasites,
GIARDIA LAMBLIA, CRYPTOSPORIDIUM PARVUM AND ENTAMOEBA HISTOLYTICA/DISPAR, that
can cause severe gastrointestinal infections. Sales of the Triage Parasite Panel
were initiated in mid-October.
RESEARCH AND DEVELOPMENT
In January 1998, Novartis finalized its investment of an additional
$500,000 in Biosite in exchange for a convertible debenture as a result of
Biosite's successful completion of the initial feasibility studies for the
NeoralChek System (formerly the "Triage Neoral System"). The convertible
debenture was immediately converted into 41,666 shares of common stock of the
Company based on a conversion price of $12.00 per share. Additionally, the
Company and Novartis expanded the scope of their collaboration to include the
development of a second version of the NeoralChek System. The attainment of
certain milestones under the expansion of the collaboration resulted in contract
revenues of $1.1 million during 1998. Additional payments to Biosite will be
made if certain milestones are achieved. The Company initiated clinical trials
for both versions of the NeoralChek System in June and July 1998. The clinical
trials were temporarily suspended in September 1998 to permit the Company to
make improvements to the NeoralChek System. The clinical trials may resume in
the first half of 1999. The NeoralChek Systems are designed to provide a
cost-effective means of measuring a patient's level of cyclosporine on a
real-time basis in order to enable physicians to optimize the dosing of the
therapeutic drug during the patient's visit.
PRODUCT DISTRIBUTION AGREEMENTS
As the Company has launched three new products in 1998 and with the
potential launch of additional products from the Company's development pipeline,
the Company has increased the size of its sales force in the U.S. and negotiated
a new long-term distribution agreement with the Fisher HealthCare Division
("Fisher") of the Fisher Scientific Company, the Company's distributor of the
Triage DOA Panel products in the U.S. hospital market segment. This long-term
distribution agreement expanded Fisher's role to include the distribution of the
Triage Cardiac System, the Triage C. DIFFICILE Panel, the Triage Parasite Panel
and certain of the potential new products in the U.S. medical market.
As a result of a decision by Merck KGaA ("Merck"), the Company's
distributor of Triage DOA in Europe, to refocus away from certain aspects of the
human diagnostic business, the Company terminated agreements with Merck for the
development and distribution of the Triage Cardiac System and the distribution
of the Triage DOA Panel product line. During the third quarter, the Company
finalized alliances with several European partners, forming a network of
distributors to market its products in certain European countries. The Company
is continuing to evaluate product distribution alternatives for the other
international markets, including, among other things,
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<PAGE>
alliances with various regional distribution partners and the establishment of
a direct sales and marketing force in certain European countries.
The Company anticipates that it may, if appropriate, enter into additional
distribution agreements with respect to its current products, products currently
under development and products that it may develop in the future, if any of such
products receive the requisite regulatory clearance or approvals.
The Company may not be able to enter into these or other distribution
agreements on acceptable terms or at all. If the Company elects to distribute
products directly, the Company's direct sales, marketing and distribution
efforts may not be successful. A failure to enter into acceptable distribution
agreements or a failure of the Company to successfully market its products would
have a material and adverse effect on the Company.
LITIGATION
In September 1997, Behring Diagnostics, Inc. and Behring Diagnostics, GmbH
filed a patent infringement action against the Company in the U.S. District
Court for the District of Delaware. The patent infringement action alleges that
the Company's Triage DOA Panel products infringe a patent held by the
plaintiffs, which expires in August 2000. The plaintiffs seek to recover damages
of an unspecified amount and to enjoin future sales of the Triage DOA Panel
products by the Company. Biosite has answered the complaint, denying
infringement and asserting affirmative defenses that the patent is invalid and
unenforceable. The Company also has asserted counterclaims arising under the
antitrust laws that seek to require Dade International Inc. to divest itself of
its acquisition of Behring Diagnostics, Inc. and Behring Diagnostics, GmbH,
treble monetary damages and attorney fees. In February 1998, the plaintiffs
filed an amended complaint, adding a new party, Dade-Behring, Inc., and changing
the names of the parties, Behring Diagnostics Inc. to Syva Company and Behring
Diagnostics GmbH to Dade Behring Marburg. If the Company's Triage DOA Panel
products were found to infringe the patent, and if an acceptable license was not
available, the Company would be materially and adversely affected. The Company's
Triage Meter product platform, including the Triage Cardiac System is not the
subject of the patent infringement claims as filed.
On April 28, 1998, Spectral Diagnostics, Inc. ("Spectral") filed a patent
infringement action against the Company in the U.S. District Court for the
Western District of Wisconsin, alleging that the Company's Triage Cardiac Panel
infringes U.S. patent 5,744,358 which was issued on the date the suit was filed.
Spectral seeks a permanent injunction and damages. Spectral also sought a
preliminary injunction that would enjoin the Company from selling the Triage
Cardiac Panel prior to the conclusion of the trial, which was scheduled to
commence on August 31, 1998. On July 16, 1998, the Court issued an opinion
denying the motion for a preliminary injunction. Spectral also moved for partial
summary judgment on the issue of infringement. That motion was denied on July
20, 1998. The established trial date of August 31, 1998 was set aside while the
two companies engage in negotiations in an attempt to arrive at a settlement in
regards to all disputes outstanding between Biosite and Spectral. The Company
may not be able to enter into a settlement on acceptable terms or at all. If the
Company's Triage Cardiac products were found to infringe the patent, and if an
acceptable license was not available, the Company would be materially and
adversely affected.
The Company believes it has meritorious defenses to each of these suits and
intends to vigorously defend its position. The Company has incurred and will
continue to incur significant legal costs in executing its defenses.
-8-
<PAGE>
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,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales................................. 100% 100% 100% 100%
Cost of sales............................. 35 21 28 21
---- ---- ---- ----
Gross profit.............................. 65 79 72 79
Operating Expenses:
Research and development................. 33 37 35 36
Selling, general and administrative...... 43 37 45 34
Defense of patent matters................ 15 1 13 1
---- ---- ---- ----
Total operating expenses.................. 91 75 93 71
Income (loss) from operations............. (26) 4 (21) 8
Interest and other income, net............ 28 10 18 10
---- ---- ---- ----
Income (loss) before benefit (provision)
for income taxes........................ 3 14 (3) 18
Benefit (provision) for income taxes...... 2 (3) 1 (6)
---- ---- ---- ----
Net income (loss)......................... 5% 11% (2)% 12%
==== ==== ==== ====
</TABLE>
NET SALES. Net sales for the three and nine months ended September 30,
1998 were $8.8 million and $25.3 million, respectively, representing increases
of 8%, compared to the same periods of 1997. The increase in net sales for the
third quarter of 1998 as compared to the third quarter of 1997, was primarily
attributable the introduction of the TRIAGE C. DIFFICILE Panel and Triage
Cardiac System during 1998. The increase in net sales for the nine months ended
September 30, 1998 as compared to the same period in 1997 was primarily
attributable to an increase in the volume of Triage DOA sold in the U.S, as well
an increase in net sales from the introduction of the TRIAGE C. DIFFICILE Panel
and the Triage Cardiac System. The Company believes that the overall growth in
sales of the Triage DOA Panel products is slowing as the available U.S. market
becomes saturated and competitive pressures become more prominent in a maturing
market. Net sales of the Company's newly introduced products totaled
approximately $580,000 for the third quarter of 1998 and $1.0 million
year-to-date.
GROSS PROFIT. Gross profit for the three and nine months ended
September 30, 1998 was $5.7 million and $18.2 million, respectively,
representing decreases of 11% and 1%, respectively, from the comparable periods
of 1997. Gross margins for the three months and nine months ended September 30,
1998 were 65% and 72%, respectively, as compared to 79% for the same periods of
1997. The gross margins decreased during the third quarter of 1998 primarily as
a result of the introduction of the Triage C. DIFFICILE Panel and Triage Cardiac
System. Such new products are expected to realize lower or potentially negative
gross margins during the early stages of their commercialization as incremental
manufacturing costs are spread over smaller sales volumes and manufacturing
scale-up issues are addressed. The Company expects that the overall gross
margins will continue to decrease as a result of competitive pricing pressures
related to the maturing Triage DOA product line and the incremental
manufacturing costs associated with new products until economies of scale can be
achieved with such new products and until other manufacturing scale-up issues
are addressed.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for
the three months and nine months ended September 30, 1998 were $2.9 million and
$8.8 million, respectively, representing a decrease of 4% and an increase of 5%,
respectively, from the comparable periods of 1997. Manufacturing scale-up and
optimization expenses were significantly higher during the third quarter of 1998
as compared to the third quarter of 1997 as the Company dedicated significant
resources to addressing capacity constraint issues related to the Triage Cardiac
System. Although there was a quarter-to-quarter increase in manufacturing
scale-up costs, the timing of clinical trials and other product development
expenses resulted in an overall decrease in the research and development
expenses for the third quarter of 1998 as compared to the same period in 1997.
During the third quarter of 1997, the Company expended significant efforts
related to clinical trials and product development expenses associated with the
Triage Cardiac System. Additionally, during the third quarter of 1998, the
Company
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<PAGE>
utilized certain research and development resources in the production of
components of the Triage DOA Panel and Triage Parasite Panel and charged such
cost to inventory. The year-to-year increase in research and development
expenses resulted primarily from the expansion of the Company's research and
development and manufacturing scale-up efforts for its cardiac, microbiology,
and therapeutic drug monitoring products under development, while increasing
research and development activities related to other products under development.
The Company expects that its research and development expenses will continue to
remain higher in 1998, as compared to 1997. The increased expenditures are
expected to primarily relate to preclinical and clinical studies, product
development efforts and manufacturing scale-up activities for potential
products. The timing of such expenditures and their magnitude are primarily
dependent on the progress and success of the research and development, clinical
studies and the timing of potential product launches.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the three and nine months ended September 30, 1998
were $3.8 million and $11.3 million, respectively, representing increases of 26%
and 41%, respectively, from the comparable periods of 1997. The 1998 increases
resulted primarily from the costs of the Company's expanded sales force,
increased marketing activities related to the introduction of new products and
potential new products, and the expansion of administrative functions to support
the Company's expanded operations and business development activities. During
the third quarter of 1998, the Company expended efforts related to transitioning
its product distribution in Europe from E. Merck to a network of regional
distributors, initial planning and development activities for the potential
launch of the NeoralChek System, market research and other new product awareness
activities. The Company expects selling, general and administrative costs in
1998 to remain significantly higher than in 1997, as the Company continues to
expand its operations and in anticipation of potential changes in its operations
resulting from, among other things, the potential introduction of additional
products and the Company's business development activities. The timing of such
increased expenditures and their magnitude are primarily dependent on the
commercial success and sales growth of the Triage C. DIFFICILE Panel, Triage
Parasite Panel and Triage Cardiac System products, the development of other
potential new products and the timing of their commercialization, and
international distribution strategies.
DEFENSE OF PATENT MATTERS. Costs associated with the defense of patent
matters for the three and nine months ended September 30, 1998 were $1.3 million
and $3.3 million, respectively, as compared to $50,000 and $106,000,
respectively, for the same periods in 1997. The Company intends to vigorously
defend itself in these matters and expects that total legal costs associated in
executing its defenses for the remainder of 1998 will continue to be
substantially higher than in 1997 and may continue to be significant in 1999.
OTHER INCOME. Contract revenues were $1.9 million and $2.6 million for the
three and nine months ended September 30, 1998, respectively, as compared to
$198,000 and $778,000, respectively, for the same period in 1997. Contract
revenues in the third quarter of 1997 consisted of $198,000 from Merck related
to the development of the Triage Cardiac System while contract revenues
recognized in the third quarter of 1998 consisted primarily of $1.3 million from
Kyoto Dai-Ichi Kagaku Co., Ltd. ("KDK") related to milestones achieved in the
development of the Triage Cardiac System, $400,000 from Novartis related to the
milestones achieved in the development of the NeoralChek System and $171,000
related to an SBIR grant from the U.S. Government for research related to
potential microbiology products.
BENEFIT (PROVISION) FOR INCOME TAXES. As a result of the pre-tax loss
recorded for the first nine months of 1998 and estimated 1998 pre-tax loss and
estimated tax credits to be generated in 1998, the Company recorded a benefit
for income taxes of $236,000 for the third quarter of 1998 resulting in a
benefit for income taxes for the nine months ended September 30, 1998 of
$396,000. The Company recorded provisions for income taxes of $266,000 and $1.3
million, respectively, for the same periods of 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations principally through a public
offering, private placements of equity securities, revenues from operations,
debt and capital lease financing and interest income earned on the net proceeds
from the public offering and private placements. Since its inception, the
Company has raised over $21.7 million in net proceeds from the private placement
of equity securities and $1.5 million from the issuance of convertible
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debentures. In February 1997, the Company raised approximately $29.8 million in
net proceeds from its initial public offering of 2,760,000 shares of common
stock. At September 30, 1998, the Company had cash, cash equivalents, and
marketable securities of approximately $37.4 million compared to $39.3 million
at December 31, 1997.
The decrease in cash, cash equivalents, and marketable securities during
the nine months ended September 30, 1998 was largely attributable to cash used
in the acquisition of licenses to patented technology and expenditures for
capital equipment and leasehold improvements totaling $5.2 million.
Additionally, during the third quarter, the Company expended approximately
$500,000 for the repurchase and retirement of shares of its common stock.
Significant sources of cash for the nine months ended September 30, 1998
included cash generated from operating activities totaling $2.4 million, the
receipt of $1.4 million in proceeds from equipment financing and $985,000 in
proceeds from the issuance of a convertible debenture and common stock.
The Company's primary short-term needs for capital, which are subject to
change, are for the support of its commercialization efforts related to new
products, defense and resolution of patent matters including potential licensing
of certain technologies patented by others, potential procurement and
enforcement of patents, expansion of its manufacturing capacity for new
products, potential repurchase of the Company's common stock and the continued
advancement of research and development efforts. The Company executed agreements
to license technologies patented by others which call for cash payments and
future royalties based on product sales utilizing the licensed technologies. The
Company may enter into additional licensing agreements which may include cash
payments and future royalties based on product sales utilizing the licensed
technologies. The Company utilizes credit arrangements with financial
institutions to finance the purchase of capital equipment. As of October 31,
1998, the Company had equipment financing lines of credit with financial
institutions totaling $6.0 million, of which $5.2 million was available for
future borrowing. The $4.0 million and $2.0 million lines of credit expire on
June 30, 1999 and March 31, 1999, respectively. Additionally, the Company
utilizes cash generated from operating activities to meet its capital
requirements.
The Company is evaluating various alternatives in addressing its future
facilities expansion needs. The alternatives being evaluated include
negotiations with various parties for the leasing of additional facility space
and potentially a new campus corporate facility to be constructed in San Diego,
which would be adequate for its foreseeable future needs. If a new campus
corporate facility is constructed to meet future needs, the Company would not
anticipate relocating its operations to the new facility prior to January 2000.
Relocation to a new facility or leasing of additional facility space would be
expected to result in an increase in rent upon occupancy.
The Company believes that its available cash, cash from operations and
funds from existing credit arrangements will be sufficient to satisfy its
funding needs for at least the next 24 months. 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. 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 new products and products under development are successfully
developed, gain market acceptance and become and remain competitive, the timing
and results of clinical studies and regulatory actions regarding the Company's
potential products, the costs and timing of further expansion of sales,
marketing and manufacturing activities, facilities expansion needs, and the
costs and timing associated with the enforcement, defense and resolution of
patent matters, including potential licensing of certain technologies patented
by others. 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.
IMPACT OF YEAR 2000 ("Y2K") ISSUE
The Company has developed a plan to ensure its system, software and
facilities infrastructure will function properly with respect to dates in the
year 2000 and thereafter. Key financial, information and operational systems are
being assessed and plans will be developed to address required systems
modifications. The Company will coordinate these activities with suppliers,
distributors, financial institutions and others with whom it does business
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beginning in the fourth quarter of 1998. The Company believes that, with
modifications to existing software and conversions to new software, the Y2K
Issue will not pose significant operational problems for its computer systems
and will not have a material adverse effect on the Company's business. To date
the Company has expended less than $25,000 addressing the Y2K Issue and is in
the process of estimating the total cost of the project and contingency plans,
if necessary. The Company anticipates that the Company will be in compliance
with Y2K requirements by June 1999. However, if such modifications and
conversions are not made or are not completed in a timely fashion, the Y2K Issue
could have a material adverse impact on the operations of the Company.
Additionally, the systems of other companies on which Biosite's systems rely may
not be timely converted, which may have an adverse effect on the Company's
systems. For example, to the extent that customers would be unable to order
products or pay invoices or suppliers would be unable to manufacture or deliver
product, the Company's operations would be adversely affected. Biosite has
initiated a program to qualify critical suppliers as being Y2K compliant.
The Triage Meter and related software is the only product that the Company
currently sells which needs evaluation for Y2K readiness, as the other products
do not process or store any date and time data. The Triage Meter and related
software has been tested and shown to properly process and store date and time
data between the 20th and 21st centuries, and the years 1999 and 2000. This
processing and storage included calculating, comparing, displaying and recording
sequence operations involving date and time data. Correct processing of the leap
year date and time data has also been demonstrated. The software functions as
intended or expected, regardless of the date.
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, 1997. 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.
- -DEPENDENCE ON DEVELOPMENT AND INTRODUCTION OF NEW PRODUCTS FOR REVENUE GROWTH
AND PROFITABILITY
Except for the Triage DOA Panel, Triage C. DIFFICILE Panel, Triage Parasite
Panel and Triage Cardiac System, all of the Company's products are still under
development, and such products may not be successfully developed or
commercialized on a timely basis, or 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. The Company will be required to undertake time-consuming and
costly development activities and seek regulatory approval for these new
products. The Company may 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 may not be granted by
the U.S. Food and Drug Administration or foreign regulatory authorities on a
timely basis, or at all, and the new products may not 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 administrative infrastructure and an effective product
distribution system for such products. The Company has experienced manufacturing
delays for its Triage Cardiac product, which have adversely affected the
Company. If the Company is unable, for technological or other reasons, to
complete the development, introduction or scale-up of manufacturing for 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.
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- -LIMITED HISTORY OF PROFITABILITY; POTENTIAL QUARTERLY FLUCTUATIONS IN FUTURE
OPERATING RESULTS
The Company incurred an operating loss during the last four quarters. The
Company may not return to operating profitability 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 or capacity constraints, 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 defense and resolution of patent matters. The
Company has and will continue to incur significant costs associated with its
defense of patent matters. The magnitude and timing of such costs are primarily
dependent on unpredictable activities associated with the Behring and Spectral
lawsuits. If the Company's Triage DOA Panel or Triage Cardiac products were
found to infringe such patents, and if an acceptable license was not available,
the Company would be materially and adversely affected. Operating results would
also be adversely affected by a downturn in the market for the Company's current
and future products, if there are any. Because the Company is continuing to
increase its operating expenses for supporting its expanded sales and marketing
activities, manufacturing scale-up costs, defense of patent matters and new
product development, the Company's operating results would be adversely affected
if its sales and gross profits 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, in the future, the Company may not sustain revenue growth or remain
profitable on a quarterly or annual basis and its growth or operating results
may not be consistent with predictions made by securities analysts.
- -NEAR-TERM DEPENDENCE OF THE COMPANY ON THE TRIAGE DOA PANEL PRODUCTS
To date, sales of the Triage DOA Panel products have accounted for almost
all of the Company's sales. The Company expects its revenue and profitability
will substantially depend on the sale of the Triage DOA Panel products for the
foreseeable future. A reduction in demand for the Triage DOA Panel products
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 the Triage DOA Panel products is slowing as the available U.S. market becomes
saturated. Competitive pressures could also erode the Company's profit margins
for the Triage DOA Panel products. The Company's continued growth will depend on
its ability to successfully develop and commercialize other products, including
the Triage C. DIFFICILE Panel, Triage Parasite Panel and Triage Cardiac System,
and to gain additional acceptance of the Triage DOA Panel products in new market
segments, such as occupational health.
The Company has received FDA approval to market the Triage C. DIFFICILE
Panel, Triage Parasite Panel and the Triage Cardiac System and began selling
each of the products in March, October and May, respectively. Sales of these new
products represented less than 5% of net sales thus far in 1998.
The Company may not be able to successfully develop and commercialize new
products, including the Triage C. DIFFICILE Panel, Triage Parasite Panel, and
Triage Cardiac System, and the Company may not 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 KEY DISTRIBUTORS; LIMITED DIRECT SALES EXPERIENCE
The Company relies upon key distributor alliances, such as with Fisher, to
distribute the Triage DOA Panel products, Triage C. DIFFICILE Panel, Triage
Parasite Panel and Triage Cardiac System and may rely upon distributors to
distribute products under development. The Triage DOA Panel products are
currently marketed pursuant to exclusive distribution agreements in the U.S.
hospital market segment by Fisher (which accounted for 80% of product sales in
1997) and in certain countries in Europe, Latin America, the Middle East, Asia
and Africa by Merck. The loss or termination of either of these distributors
could have a material adverse effect on the Company's sales unless suitable
alternatives can be arranged.
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As a result of a decision by Merck to refocus away from certain aspects of
the human diagnostic business, the Company terminated agreements with Merck for
the development and distribution of the Triage Cardiac System and the
distribution of the Triage DOA Panel product line . During the third quarter,
the Company finalized alliances with several European partners, forming a
network of distributors to market its products in certain European countries.
The Company is continuing to evaluate product distribution alternatives for the
other international markets, including, among other things, alliances with
various regional distribution partners and the establishment of a direct sales
and marketing force in certain European countries.
As the Company has launched three new products in 1998 and with the
potential launch of additional products from the Company's development pipeline,
the Company has increased the size of its sales force in the U.S. and negotiated
a new long-term distribution agreement with Fisher. This long-term distribution
agreement expanded Fisher's role to include the distribution of the Triage
Cardiac System, the Triage C. DIFFICILE Panel, Triage Parasite Panel and certain
of the potential new products in the U.S. medical market.
If any of the Company's distribution or marketing agreements are terminated
and the Company is unable to enter into alternative 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 selling, general and
administrative 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, or at all, or if the
Company elects to distribute potential new products directly that the Company's
direct sales, marketing and distribution efforts would be successful. A failure
to enter into acceptable distribution agreements or a failure of the Company to
successfully market its products would have a material and adverse effect on the
Company.
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. The Company may not be able to
enter into such agreements on acceptable terms, or at all.
- -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 rapid
tests, laboratory-based tests and analyzers, as well as clinical reference
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 provide cost-effective and time
saving alternatives to tests performed by clinical reference laboratories or
traditional hospital-based laboratory procedures. This will require physicians
to change their established means of having such tests performed. The Company's
products may not be able to compete with the testing services provided by
traditional laboratory services. In addition, companies with a significant
presence in the diagnostic market, such as Abbott Laboratories, Roche Boehringer
Mannheim Corporation, Bayer Diagnostics, Ortho Clinical Diagnostics, a division
of Johnson & Johnson, and DADE Behring Marburg GmbH, 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. The Company's competitors may 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, the
Company may not have the financial resources, technical expertise or marketing,
distribution or support capabilities to compete successfully in the future. In
addition, competitors, many of which have made substantial investments in
competing technologies, may be more
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effective than the Company's technologies,
or may 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.
- -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
licenses 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. The Company's pending patent applications may
not result in the issuance of any patents. Additionally, the Company's patent
applications may not have priority over others' applications, or, if issued, the
Company's patents may not offer protection against competitors with similar
technology. Any patents issued to the Company may be challenged, invalidated or
circumvented in the future and the rights created thereunder may not provide a
competitive advantage.
The Triage DOA Panel, Triage C. DIFFICILE Panel, Triage Parasite Panel,
Triage Cardiac System 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 and
is negotiating to obtain licenses for technologies patented by others. However,
the Company may not be able to obtain licenses for technology patented by others
on commercially reasonable terms, or at all. The Company may not be able to
develop alternative approaches if it is unable to obtain licenses and the
Company's current and future licenses may not be adequate for the operation of
it'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.
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 claim
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.
In September 1997, Behring Diagnostics, Inc. and Behring Diagnostics, GmbH
filed a patent infringement action against the Company in the U.S. District
Court for the District of Delaware. The patent infringement action alleges that
the Company's Triage DOA Panel products infringe a patent held by the
plaintiffs, which expires in August 2000. The plaintiffs seek to recover damages
of an unspecified amount and to enjoin future sales of the Triage DOA Panel
products by the Company. Biosite has answered the complaint, denying
infringement and asserting affirmative defenses that the patent is invalid and
unenforceable. The Company also has asserted counterclaims arising under the
antitrust laws that seek to require Dade International Inc. to divest itself of
its acquisition of Behring Diagnostics, Inc. and Behring Diagnostics, GmbH,
treble monetary damages and attorney fees. In February 1998, the plaintiffs
filed an amended complaint, adding a new party, Dade-Behring, Inc., and changing
the names of the parties, Behring Diagnostics Inc. to Syva Company and Behring
Diagnostics GmbH to Dade Behring Marburg. If the Company's Triage DOA Panel
products were found to infringe the patent, and if an acceptable license was not
available, the Company would be materially and adversely affected. The Company's
Triage Meter product platform, including the Triage Cardiac System is not the
subject of the patent infringement claims as filed.
On April 28, 1998, Spectral Diagnostics, Inc. ("Spectral") filed a patent
infringement action against the Company in the U.S. District Court for the
Western District of Wisconsin, alleging that the Company's Triage Cardiac Panel
infringes U.S. patent 5,744,358 which was issued on the date the suit was filed.
Spectral seeks a permanent injunction and damages. Spectral also sought a
preliminary injunction that would enjoin the Company from selling the Triage
Cardiac Panel prior to the conclusion of the trial, which was scheduled to
commence on August 31, 1998. On July 16, 1998, the Court issued an opinion
denying the motion for a preliminary injunction. Spectral also has moved for
partial summary judgment on the issue of infringement. That motion was denied on
July 20, 1998. The established trial date of August 31, 1998 was set aside while
the two companies engage in
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negotiations in an attempt to arrive at a settlement
in regards to all disputes outstanding between Biosite and Spectral. The Company
may not be able to enter into a settlement on acceptable terms or at all. If the
Company's Triage Cardiac products were found to infringe the patent, and if an
acceptable license was not available, the Company would be materially and
adversely affected.
The Company believes it has meritorious defenses to each of these suits and
intends to vigorously defend its position. The Company has incurred and will
continue to incur significant legal costs in executing its defenses. The Company
may become subject to additional patent infringement claims and litigation or
interference proceedings conducted in the U.S. Patent and Trademark Office
("USPTO") to determine the priority of inventions.
The Company also has received correspondence from other parties calling to
the Company's attention the existence of certain patents for which they believe
Biosite's products and products under development may incorporate technologies
that are the subject of such patents. Such correspondence has in certain
instances included offers to negotiate the licensing of the patented
technologies. Such matters may result in litigation to determine the
enforceability, scope, and validity of the patents. Litigation, if initiated,
could seek to recover damages as a result of any sales of the products and to
enjoin further sales of such products.
The Behring and Spectral litigation and any other litigation that could be
brought forth by other parties may result in material expenses to the Company
and significant diversion of effort by the Company's technical and management
personnel, 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 the Triage DOA Panel, Triage C. DIFFICILE Panel, Triage
Parasite Panel, the Triage Cardiac System or other products it may develop,
which would 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. Others
may independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's trade secrets or disclose
such technology, and the Company may not be able to protect its trade secrets or
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. Patent applications of others may 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. The Company or its collaborative partners may not prevail in any such
action and any license (including licenses proposed by third parties) required
under any such patent may not be made available on commercially acceptable
terms, or 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. Litigation concerning patent and other
intellectual property rights could consume a substantial portion of the
Company's managerial and financial resources, which would have a material
adverse effect on the Company's business, financial condition and results of
operations.
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- -LIMITED MANUFACTURING EXPERIENCE; POTENTIAL INABILITY TO SCALE-UP MANUFACTURING
To be successful, the Company must manufacture its current and future
products in compliance with regulatory requirements, in sufficient quantities
and on a timely basis, while maintaining product quality and acceptable
manufacturing costs. The Company has limited experience manufacturing products
other than the Triage DOA Panel products. To achieve the level of production
necessary for commercialization of Biosite's new products and products under
development, the Company will need to scale-up current manufacturing
capabilities. Significant additional work will be required for the scaling-up of
each new Biosite product prior to commercialization, and there can be no
assurance that such work can be completed successfully. In addition, although
the Company expects that certain of its new products and products under
development will share certain production attributes with the Triage DOA Panel,
production of such products may require the development of new manufacturing
technologies and expertise. Such products may not be able to be manufactured by
the Company or any other party at a cost or in quantities to make such products
commercially viable. If the Company is unable to develop or contract for
manufacturing capabilities on acceptable terms for its products under
development, the Company's ability to conduct preclinical and clinical testing
will be adversely affected, resulting in the delay of submission of products for
regulatory clearance or approval and initiation of new development programs,
which would have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company anticipates making significant expenditures to develop high
volume manufacturing capabilities required for each of its new products and
products currently under development, if such products are successfully
developed. Manufacturing and quality control problems may arise as the Company
attempts to scale-up its manufacturing and such scale-up may not be achieved in
a timely manner or at a commercially reasonable cost, or at all. As a result of
manufacturing scale-up and capacity constraint issues related to the production
of the Triage Cardiac System, the Company developed a backlog of orders for the
Triage Cardiac System of approximately $377,000 in estimated net sales as of
October 29, 1998. The Company is addressing the manufacturing scale-up issues
and may be able to fill the backlog orders during the fourth quarter of 1998.
The Company's manufacturing facilities and those of its contract
manufacturers are or will be subject to periodic regulatory inspections by the
FDA and other federal and state regulatory agencies and such facilities are
subject to QSR requirements of the FDA. The Company or its contractors may not
satisfy such regulatory requirements, and any failure to do so would have a
material adverse effect on the Company's business, financial condition and
results of operations.
- - POSSIBLE FUTURE CAPITAL REQUIREMENTS; UNCERTAINTY OF ADDITIONAL FUNDING
While the Company believes that its available cash, cash from operations
and funds from existing credit arrangements will be sufficient to satisfy its
funding needs for at least the next 24 months, there can be no assurance the
Company will not require additional capital. 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, defense and
resolution of patent matters, potential repurchase of the Company's common
stock, results of clinical investigations and competition. Such additional
capital, if needed, may not be available on terms acceptable to the Company, or
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 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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
-17-
<PAGE>
- -IMPACT OF YEAR 2000 ("Y2K") ISSUE
The Company has developed a plan to ensure its system, software and
facilities infrastructure will function properly with respect to dates in the
year 2000 and thereafter. Key financial, information and operational systems are
being assessed and plans will be developed to address required systems
modifications. The Company will coordinate these activities with suppliers,
distributors, financial institutions and others with whom it does business
beginning in the fourth quarter of 1998. The Company believes that, with
modifications to existing software and conversions to new software, the Y2K
Issue will not pose significant operational problems for its computer systems
and will not have a material adverse effect on the Company's business. To date
the Company has expended less than $25,000 addressing the Y2K Issue and is in
the process of estimating the total cost of the project and contingency plans,
if necessary. The Company anticipates that the Company will be in compliance
with Y2K requirements by June 1999. However, if such modifications and
conversions are not made or are not completed in a timely fashion, the Y2K Issue
could have a material adverse impact on the operations of the Company.
Additionally, the systems of other companies on which Biosite's systems rely may
not be timely converted, which may have an adverse effect on the Company's
systems. For example, to the extent that customers would be unable to order
products or pay invoices or suppliers would be unable to manufacture or deliver
product, the Company's operations would be adversely affected. Biosite has
initiated a program to qualify critical suppliers as being Y2K compliant.
The Triage Meter and related software is the only product that the Company
currently sells which needs evaluation for Y2K readiness, as the other products
do not process or store any date and time data. The Triage Meter and related
software has been tested and shown to properly process and store date and time
data between the 20th and 21st centuries, and the years 1999 and 2000. This
processing and storage included calculating, comparing, displaying and recording
sequence operations involving date and time data. Correct processing of the leap
year date and time data has also been demonstrated. The software functions as
intended or expected, regardless of the date.
-18-
<PAGE>
PART II. OTHER INFORMATION.
ITEM 1. LEGAL PROCEEDINGS
In September 1997, Behring Diagnostics, Inc. and Behring Diagnostics, GmbH
filed a patent infringement action against the Company in the U.S. District
Court for the District of Delaware. The patent infringement action alleges that
the Company's Triage DOA Panel products infringe a patent held by the
plaintiffs, which expires in August 2000. The plaintiffs seek to recover damages
of an unspecified amount and to enjoin future sales of the Triage DOA Panel
products by the Company. Biosite has answered the complaint, denying
infringement and asserting affirmative defenses that the patent is invalid and
unenforceable. The Company also has asserted counterclaims arising under the
antitrust laws that seek to require Dade International Inc. to divest itself of
its acquisition of Behring Diagnostics, Inc. and Behring Diagnostics, GmbH,
treble monetary damages and attorney fees. In February 1998, the plaintiffs
filed an amended complaint, adding a new party, Dade-Behring, Inc., and changing
the names of the parties, Behring Diagnostics Inc. to Syva Company and Behring
Diagnostics GmbH to Dade Behring Marburg. If the Company's Triage DOA Panel
products were found to infringe the patent, and if an acceptable license was not
available, the Company would be materially and adversely affected. The Company's
Triage Meter product platform, including the Triage Cardiac System is not the
subject of the patent infringement claims as filed.
On April 28, 1998, Spectral Diagnostics, Inc. ("Spectral") filed a patent
infringement action against the Company in the U.S. District Court for the
Western District of Wisconsin, alleging that the Company's Triage Cardiac Panel
infringes U.S. patent 5,744,358 which was issued on the date the suit was filed.
Spectral seeks a permanent injunction and damages. Spectral also sought a
preliminary injunction that would enjoin the Company from selling the Triage
Cardiac Panel prior to the conclusion of the trial, which was scheduled to
commence on August 31, 1998. On July 16, 1998, the Court issued an opinion
denying the motion for a preliminary injunction. Spectral also has moved for
partial summary judgment on the issue of infringement. That motion was denied on
July 20, 1998. The established trial date of August 31, 1998 was set aside while
the two companies engage in negotiations in an attempt to arrive at a settlement
in regards to all disputes outstanding between Biosite and Spectral. The Company
may not be able to enter into a settlement on acceptable terms or at all. If the
Company's Triage Cardiac products were found to infringe the patent, and if an
acceptable license was not available, the Company would be materially and
adversely affected.
The Company believes it has meritorious defenses to each of these suits and
intends to vigorously defend its position. The Company has incurred and will
continue to incur significant legal costs in executing its defenses.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
If a stockholder wishes to have a stockholder proposal considered at the
Company's next annual meeting, the stockholder must have given timely notice of
the proposal in writing to the Secretary of the Company. To be timely, a
stockholder's notice of the proposal must be delivered to or mailed and received
at the executive offices of the Company no less than 50 days nor more than 75
days prior to the date of the annual meeting; provided, however that if less
than 65 days notice or prior public disclosure of the date of the annual meeting
is given or made to stockholders, notice of the proposal to be timely must be
received no later than the 15th day following the day on which such notice of
the date of the annual meeting was mailed or public disclosure of the meeting
date was given.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
None
-19-
<PAGE>
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 12, 1998 BIOSITE DIAGNOSTICS INCORPORATED
By: /s/ CHRISTOPHER J. TWOMEY
--------------------------
Christopher J. Twomey
Vice President, Finance and Chief
Financial Officer (Principal
Financial and Accounting Officer)
-20-
<PAGE>
Exhibit Index
--------------
Exhibit
Number Description
- ------- -----------
27.1 Financial Data Schedule
-21-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S FINANCIAL STATEMENTS AS OF AND FOR THE QUARTER ENDED SEPTEMBER 30,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
INCLUDED IN THE COMPANY'S 1997 ANNUAL REPORT ON FORM 10-K.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1509
<SECURITIES> 35895
<RECEIVABLES> 5800
<ALLOWANCES> 0
<INVENTORY> 3911
<CURRENT-ASSETS> 50778
<PP&E> 16546
<DEPRECIATION> 9042
<TOTAL-ASSETS> 65869
<CURRENT-LIABILITIES> 6612
<BONDS> 3905
0
0
<COMMON> 129
<OTHER-SE> 55223
<TOTAL-LIABILITY-AND-EQUITY> 65869
<SALES> 8753
<TOTAL-REVENUES> 11238
<CGS> 3038
<TOTAL-COSTS> 7981
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 219
<INCOME-TAX> (236)
<INCOME-CONTINUING> 455
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 455
<EPS-PRIMARY> .04<F1>
<EPS-DILUTED> .03<F1>
<FN>
<F1>EARNINGS PER SHARE IS CALCULATED BASED UPON PRO FORMA SHARES OUTSTANDING.
SEE NOTE 2 OF NOTES TO FINANCIAL STATEMENTS.
</FN>
</TABLE>
