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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 June 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 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 July 26, 1999 was 13,054,932
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<PAGE>
BIOSITE DIAGNOSTICS INCORPORATED
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION.......................................................1
ITEM 1. FINANCIAL STATEMENTS........................................................1
Condensed Balance Sheets..........................................................1
Condensed Statements of Operations (Unaudited)....................................2
Condensed Statements of Cash Flows (Unaudited)....................................3
Notes to Condensed Financial Statements (Unaudited)...............................4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...........................................................6
ITEM 2A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..................10
PART II. OTHER INFORMATION.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........................19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................................19
SIGNATURES...........................................................................20
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIOSITE DIAGNOSTICS INCORPORATED
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
(Unaudited) (Note)
----------- ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,252,448 $ 762,337
Marketable securities, available-for-sale 29,989,228 33,466,841
Accounts receivable 6,795,510 6,573,735
Inventories 4,954,114 4,364,367
Other current assets 3,506,523 3,133,960
------------ ------------
Total current assets 46,497,823 48,301,240
Property, equipment and leasehold improvements, net 7,418,194 7,313,673
Patents and license rights, net 6,907,225 7,203,433
Other assets 4,747,162 2,990,765
------------ ------------
$ 65,570,404 $ 65,809,111
------------ ------------
------------ ------------
Liabilities and stockholders' equity Current liabilities:
Accounts payable $ 1,892,977 $ 1,503,354
Accrued salaries and other 3,265,385 2,493,735
Accrued costs for defense of patent matters - 1,248,191
Accrued contract payable 199,439 205,928
Current portion of long-term obligations 1,784,049 1,636,265
------------ ------------
Total current liabilities 7,141,850 7,087,473
Long-term obligations 4,357,552 4,038,444
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized, none
issued and outstanding at June 30, 1999 and December 31, 1998 - -
Common stock, $.01 par value, 25,000,000 shares authorized; 13,044,661
and 12,926,706 shares issued and outstanding at June 30, 1999 and
December 31, 1998, respectively 130,447 129,267
Additional paid-in capital 54,636,172 54,250,324
Unrealized net gain (loss) on marketable securities, net of related (58,844) 35,266
tax effect
Deferred compensation (153,421) (207,845)
Accumulated deficit (483,352) 476,182
------------ ------------
Total stockholders' equity 54,071,002 54,683,194
------------ ------------
$ 65,570,404 $ 65,809,111
------------ ------------
------------ ------------
</TABLE>
Note: The balance sheet at December 31, 1998 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 OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $10,593,579 $ 8,710,776 $ 20,041,300 $16,594,737
Cost of sales 3,262,624 2,342,185 7,004,541 4,097,246
----------- ----------- ------------ -----------
Gross profit 7,330,955 6,368,591 13,036,759 12,497,491
Operating Expenses:
Selling, general and administrative 4,292,491 3,598,790 9,237,550 7,550,214
Research and development 3,596,798 2,973,609 6,642,033 5,938,311
Defense of patent matters -- 1,153,668 -- 2,002,831
----------- ----------- ------------ -----------
7,889,289 7,726,067 15,879,583 15,491,356
----------- ----------- ------------ -----------
Operating income (loss) (558,334) (1,357,476) (2,842,824) (2,993,865)
Other income:
Interest and other income 441,742 577,185 940,290 1,189,093
Contract revenue 310,000 470,616 310,000 770,616
----------- ----------- ------------ -----------
Income (loss) before benefit (provision)
for income taxes 193,408 (309,675) (1,592,534) (1,034,156)
Benefit (provision) for income taxes (96,000) (64,000) 633,000 160,000
----------- ----------- ------------ -----------
Net income (loss) $ 97,408 $ (373,675) $ (959,534) $ (874,156)
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Net income (loss) per share
- Basic $ 0.01 $ (0.03) $ (0.07) $ (0.07)
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
- Diluted $ 0.01 $ (0.03) $ (0.07) $ (0.07)
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Shares used in calculating per share amounts
- Basic
13,015,000 12,938,000 12,994,000 12,922,000
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
- Diluted 13,624,000 12,938,000 12,994,000 12,922,000
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
</TABLE>
See accompanying notes
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<PAGE>
BIOSITE DIAGNOSTICS INCORPORATED
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1999 1998
------------ -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net cash provided by (used in) operating activities $ 166,651 $ (570,768)
INVESTING ACTIVITIES
Proceeds from sales and maturities of marketable securities 14,607,103 21,716,132
Purchase of marketable securities (11,286,339) (21,147,529)
Purchase of property, equipment and leasehold improvements (1,545,827) (1,817,116)
Patents, license rights, deposits and other assets (2,305,397) 315,966
------------ ------------
Net cash used in investing activities (530,460) (932,547)
FINANCING ACTIVITIES
Proceeds from issuance of financing obligations 1,342,520 1,132,492
Principal payments under financing obligations (875,628) (681,052)
Proceeds from issuance of convertible debenture -- 500,000
Repurchase and retirement of common stock (350,641) --
Proceeds from issuance of common stock, net 737,669 439,280
------------ ------------
Net cash provided by financing activities 853,920 1,390,720
------------ ------------
Increase (decrease) in cash and cash equivalents 490,111 (112,595)
Cash and cash equivalents at beginning of period 762,337 2,330,274
------------ ------------
Cash and cash equivalents at end of period $ 1,252,448 $ 2,217,679
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 220,095 $ 210,114
------------ ------------
------------ ------------
Income taxes paid $ -- $ 4,800
------------ ------------
------------ ------------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Conversion of convertible debenture into common stock $ -- $ 499,992
------------ ------------
------------ ------------
</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 both generally accepted accounting principles for interim
financial information, and 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, 1998.
2. EARNINGS PER SHARE
Earnings per Share is computed in accordance with Statement of
Financial Accounting Standards No. 128, Earnings per Share ("Statement
No. 128"). Statement No. 128 replaces APB Opinion 15, Earnings per Share
("EPS"). Statement No. 128 requires dual presentation of basic and
diluted earnings per share. 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- --------------------
1999 1998 1999 1998
---------------------- --------------------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 13,015 12,938 12,994 12,922
Effect of the assumed conversion of preferred shares - - - -
Effect of the assumed conversion of convertible debenture - - - -
------- ------ ------ ------
Shares used in calculating per share amounts - Basic 13,015 12,938 12,994 12,922
Net effect of dilutive common share equivalents using the
treasury stock method 609 - - -
------- ------ ------ ------
Shares used in calculating per share amounts - Diluted 13,624 12,938 12,994 12,922
------- ------ ------ ------
------- ------ ------ ------
</TABLE>
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<PAGE>
3. BALANCE SHEET INFORMATION
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
---------- ------------
<S> <C> <C>
Raw materials $1,821,830 $1,405,176
Work-in-process 2,492,834 2,938,548
Finished goods 639,450 20,643
---------- ----------
$4,954,114 $4,364,367
---------- ----------
---------- ----------
</TABLE>
4. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted the Financial Accounting
Standards Board's Statement No. 130, Comprehensive Income, ("SFAS 130"). SFAS
130 establishes new rules for the reporting and display of comprehensive income
and its components. SFAS 130 requires the change in net unrealized gains or
losses on marketable securities be included in comprehensive income. As adjusted
for this item, comprehensive income is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------- ---------------------------------
1999 1998 1999 1998
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net income (loss) $ 97,408 $ (373,675) $ (959,534) $ (874,156)
Change in unrealized net gain (loss) on
marketable securities, net of tax (66,683) 10,878 (94,110) (9,296)
----------- ------------ ----------- -----------
Comprehensive income (loss) $ 30,725 $ (362,797) $(1,053,644) $ (883,452)
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
</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, manufacturing scale-up and
efficiency issues, dependence on others, the impact of competitive products,
third party reimbursement 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, 1998. 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
Biosite Diagnostics Incorporated (the "Company") was established 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, the Triage Panel for
Drugs of Abuse ("Triage DOA Panel"). In 1998, the Company began selling three
additional products, the Triage C. DIFFICILE Panel, the Triage Parasite Panel
and the Triage Cardiac System. The Company markets the products worldwide
primarily through distributors supported by the Company's direct sales force.
The Company's principal markets are hospital laboratories and emergency
departments. 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 designed to aid in the diagnosis of
several critical diseases or conditions, including congestive heart failure and
certain bacterial infections. The Company is also developing a diagnostic test
to aid in the dosing of immunosuppressant drugs.
The Company incurred an operating loss during the last seven quarters. The
Company may not return to operating profitability on a quarterly or annual basis
in the future. 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, manufacturing scale-up issues,
manufacturing inefficiencies or delays, regulatory delays, product recalls,
shipment problems, seasonal customer demand, the timing or cancellation of
significant orders, changes in reimbursement policies, competitive pressures on
average selling prices and changes in the mix of products sold.
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 or gross profit did not correspondingly increase or if its
product development efforts were unsuccessful or are subject to delays. The
Company's limited operating history makes accurate prediction of future
operating results difficult or impossible. The Company may not sustain revenue
growth or return to profitability on a quarterly or annual basis and its
operating results may not be consistent with predictions made by securities
analysts.
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<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of net
sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1999 1998 1999 1998
-------------------------- -------------------------
<S> <C> <C> <C> <C>
Net sales................................. 100% 100% 100% 100%
Cost of sales............................. 31 27 35 25
----------- ---------- ---------- ---------
Gross profit.............................. 69 73 65 75
Operating Expenses:
Research and development................. 34 34 33 36
Selling, general and administrative...... 40 41 46 45
Defense of patent matters................ 0 13 0 12
----------- ---------- ---------- ---------
Total operating expenses.................. 74 88 79 93
Income (loss) from operations............. (5) (15) (14) (18)
Interest and other income, net............ 7 12 6 12
----------- ---------- ---------- ---------
Income (loss) before benefit (provision)
for income taxes........................ 2 (3) (8) (6)
Benefit (provision) for income taxes...... (1) (1) 3 1
----------- ---------- ---------- ---------
Net income (loss)......................... 1% (4)% (5)% (5)%
----------- ---------- ---------- ---------
----------- ---------- ---------- ---------
</TABLE>
NET SALES. Net sales for the three and six months ended June 30, 1999 were
$10.6 million and $20.0 million, respectively, representing increases of 22% and
21%, respectively, compared to the same periods of 1998. The increases in net
sales were primarily attributable to the introduction of new products. The
Triage C. DIFFICILE Panel and Triage Parasite Panel were launched in March 1998
and October 1998, respectively. The Triage Cardiac System was introduced in May
1998. New product sales for the three and six months ended June 30, 1999 were
approximately $2.1 million and $3.7 million, respectively, as compared to
$379,000 and $432,000, respectively, for the same periods of 1998. Net sales of
the Triage DOA Panel for the second quarter and first half of 1999 were
consistent with net sales of the product for the same periods in 1998. The
Company believes that the growth in sales of the Triage DOA Panel products has
slowed and may begin to decline as the available U.S. market becomes saturated
and competitive pressures become more prominent in a maturing market.
GROSS PROFIT. Gross profit for the three and six months ended June 30, 1999
was $7.3 million and $13.0 million, respectively, representing an increases of
15% and 4%, respectively, over the comparable periods of 1998. The overall gross
margin decreased to 69% for the second quarter and to 65% for the first half of
1999 from 73% and 75% for the same periods in 1998. Gross margins decreased
primarily as a result of the introduction of the Triage C. DIFFICILE and
Parasite Panels and the Triage Cardiac System, which experienced lower gross
margins than the Triage DOA Panel. During the first quarter of 1999, the Company
experienced significant inefficiencies related to the production of the Triage
Cardiac System, resulting in negative gross profits related to this product.
Gross margins increased during the second quarter, primarily as a result of
efficiencies achieved from the reorganization of our manufacturing operations.
Also, as a result of efficiencies achieved, the Company was able to utilize some
of its manufacturing resources for new product scale-up and validation
activities related to the Triage BNP and Triage LBP systems, two products under
development. The costs of new product scale-up and validation activities were
charged to research and development expenses, which also contributed to higher
gross margins during the second quarter. The Company expects its overall gross
margins to continue to decrease as compared to 1998 as a result of a greater
proportion of its net sales representing new products and competitive pricing
pressures related to the maturing Triage DOA product line. The Company's new
products are expected to continue to realize lower or negative gross margins
during the early stages of their commercialization as incremental manufacturing
costs are spread over smaller sales volumes and efficiency issues are addressed.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the three and six months ended June 30, 1999 were
$4.3 million and $ 9.2 million, respectively, representing increases of 19% and
22%, respectively, from the comparable periods of 1998. Increases in expenses
were primarily associated with additional marketing activities relating to new
products, the expanded sales activities related to the Company's broader product
lines and the increased administrative costs to support the Company's expanded
operations and business development activities. Additionally, expenses for the
first half of 1999 included administrative costs associated with the
reorganization of the Company's manufacturing operations totaling approximately
$300,000 and approximately
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<PAGE>
$425,000 related to a business development opportunity that the Company
decided to forego. The Company expects selling, general and administrative
costs in 1999 to be significantly higher than in 1998, as the Company
continues to expand its overall operations, including sales and marketing
activities for the Company's new products, business development activities
and administrative support functions. The timing of such increased
expenditures and their magnitude are primarily dependent on the commercial
success and sales growth of the Company's new products, the progress of
business development activities, and domestic and international marketing and
distribution strategies.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for the
three months and six months ended June 30, 1999 were $3.6 million and $6.6
million, respectively, representing increases of 21% and 12%, respectively, from
the comparable periods of 1998. During the second quarter of 1999, the Company's
research and development resources were focused primarily on the development,
clinical studies, manufacturing scale-up and validation of the Triage BNP System
and Triage LBP System, development of the Triage Enteric Panel, potential
improvements to the Triage Cardiac System and Triage Micro Panel products and
research activities associated with the Biosite Discovery Program. Significant
activities in the second quarter of 1998 related to manufacturing scale-up
activities for the Triage Cardiac System and Triage C. DIFFICILE Panel. The
Company expects that its research and development expenses will increase in
1999, as compared to 1998 levels. The increased expenditures are expected to
primarily relate to pre-clinical and clinical studies, product development
efforts, the Biosite Discovery program and manufacturing scale-up activities.
The Company initiated clinical trials for its Triage BNP System and Triage LBP
System in late December and expects such clinical trials to extend into the
fourth quarter of 1999. The costs associated with such clinical trials are
expected to be significant. These potential products are subject to more complex
regulatory approval requirements than the Company's previous products. The
Company also may resume clinical trials for its NeoralChek System during the
second half of 1999. The timing of the increased expenditures and their
magnitude are primarily dependent on the progress and success of the research
and development and the timing of potential product launches.
DEFENSE OF PATENT MATTERS. Legal expenses associated with the Dade Behring
and Spectral litigation totaled $1.2 million and $2.0 million for the second
quarter and first half of 1998. In February 1999, a settlement agreement was
executed that resolved all disputes between Spectral Diagnostics and the Company
without a material adverse financial impact to Biosite. In March 1999, to avoid
protracted litigation and continued significant legal defense costs, the Company
and Dade Behring executed a settlement agreement that resolved all disputes
outstanding between the companies. Accordingly, all settlement costs were known
prior to filing the Company's 10-K and therefore were accrued as of December 31,
1998.
INTEREST AND OTHER INCOME. Interest income decreased 23% and 21%,
respectively, for the three months and six months ended June 30, 1999 from the
same periods in 1998. The decrease resulted primarily from the lower average
balance of cash and marketable securities during the second quarter of 1999 as
compared to the same period in 1998. Contract revenues recognized during the
second quarter of 1999 related to activities associated with a research and
development feasibility study being performed by the Company. Contract revenue
was recognized in the second quarter of 1998 consisted primarily of $400,000
from Novartis Pharma AG related to the development of the NeoralChek System.
BENEFIT (PROVISION) FOR INCOME TAXES. For the three months ended June 30,
1999, the Company recorded a provision for income taxes of $96,000 and for the
same period in 1998, the Company recorded a provision for income taxes of
$64,000. At June 30, 1999, the Company has net deferred tax assets of
$4,593,000; however, due to the fact that the Company has incurred pre-tax
losses in 1998 and through the first half of 1999, the Company will continue to
evaluate the realizability of its net deferred tax assets. If realization
becomes uncertain, a valuation allowance will be established against previously
recognized deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations through revenues from
operations, private and public placements of equity securities, debt and capital
lease financing and interest income earned on the net proceeds from the equity
placements. Since its inception, the Company has raised over $21.7 million in
net cash proceeds from the private placement of equity securities and $1.5
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 common stock. At June 30, 1999, the Company had cash, cash
equivalents and marketable securities of approximately $31.2 million compared to
$34.2 million at December 31, 1998.
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<PAGE>
The decrease in cash, cash equivalents and marketable securities during the
six months ended June 30, 1999 is largely attributable to the net payment of
$1,050,000 made to Dade Behring as part of the settlement of litigation between
Dade Behring and Biosite in March 1999. Cash generated from operating activities
totaled $167,000 for the six months ended June 30, 1999 compared to net cash
used in operating activities of $571,000 for the six months ended June 30, 1998.
Significant sources of cash for the six months ended June 30, 1999 included the
receipt of $3.3 million from the sale of marketable securities that were not
reinvested in other marketable securities and the receipt of $1.3 million in
proceeds from equipment financing. These proceeds were used to meet cash
requirements of the Company in the first half of 1999. Significant uses of cash
during the six months ended 1999 included deposits and purchases of equipment
and leasehold improvements totaling approximately $2.8 million.
Significant sources of cash for the six months ended June 30, 1998 included
the receipt of $1.1 million in proceeds from equipment financing and $939,000 in
proceeds from the issuance of a convertible debenture and common stock.
Significant uses of cash for the six months ended June 30, 1998 included
expenditures of $2.0 million for expenses associated with the defense of patent
matters and $1.8 million for the purchase of capital equipment and leasehold
improvements.
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, potential licensing of certain technologies patented by others,
potential procurement and enforcement of patents, expansion of its manufacturing
capacity and efficiency 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 has utilized and may
continue to utilizes credit arrangements with financial institutions to finance
the purchase of capital equipment. Additionally, the Company may utilize cash
generated from operating activities, if any, 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 the Company's 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
2001. 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. Additional capital,
if needed, may not 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, changes in third party reimbursement policies, and the costs
and timing associated with business development activities, 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.
-9-
<PAGE>
IMPACT OF YEAR 2000 ("Y2K") ISSUE
The Company has implemented a plan to ensure its system, software and
facilities infrastructure will function properly with respect to dates in the
year 2000 and thereafter. All key financial, information and operational systems
have been assessed and verified as being compliant. All key suppliers,
distributors, financial institutions and others with whom it does business have
been contacted by the Company to assess their Y2K readiness, and approximately
90% have certified compliance, or their plans have been reviewed and assessed as
being at minimal risk of significant Y2K problems. The remaining 10% have stated
that they will be compliant before December 31, 1999. The Company is continuing
to communicate with suppliers, distributors, financial institutions and others
and believes that their readiness will not pose significant operational problems
for the Company, nor have a material adverse effect on the Company's business.
To date the Company has expended less than $35,000 addressing the Y2K Issue and
estimates the total cost of the project and contingency plans, if necessary, to
be under $40,000. The Company is also preparing contingency plans as an extra
precaution in case key suppliers have unanticipated Y2K problems in supplying
goods or services. The Company anticipates that it will be in compliance with
Y2K requirements by the end of December 1999.
The Company assesses that there is minimal risk of a material adverse impact
on the operations of the Company. However, the systems of other companies on
which Biosite's systems rely may not be timely converted and may have an adverse
effect on the Company's operations. The most likely worst case scenario is that
customers would be unable to order products or pay invoices or suppliers would
be unable to manufacture or deliver product. This would result in reduced orders
of products and the inability of the Company to manufacture product.
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.
ITEM 2A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to changes in interest rates, primarily from its
variable-rate long-term debt arrangements and, to a lesser extent, its
investments in certain available-for-sale marketable securities. Under its
current policies, the Company does not use interest rate derivatives instruments
to manage this exposure to interest rate changes. The Company does have the
option to convert its variable-rate long-term debt arrangements to fixed-rate
debt arrangements for a nominal transaction fee. At June 30, 1999, the Company
had variable-rate debt totaling $1.8 million. A hypothetical 1% adverse move in
interest rates along the entire interest rate yield curve would not materially
effect the fair value of the Company's financial instruments that are exposed to
changes in interest rates.
Additionally, the Company's purchases of Triage Meters from LRE Technology
Partner GmbH ("LRE") are denominated in German Deutsche Marks (DM) and sales of
certain products to some international customers are denominated in the local
currency of customers. The Company has on occasion purchased forward exchange
contracts to manage this exposure to exchange rate changes. As of June 30, 1999,
the Company had no outstanding forward exchange contracts. Total receivables and
payables denominated in foreign currencies at June 30, 1999 were not material.
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FACTORS THAT MAY AFFECT RESULTS
This report includes 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 in the Form 10-Q and in the Company's Annual Report on Form 10-K for
the year ended December 31, 1998. 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 RESULTS
The Company incurred an operating loss during the last seven 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 inefficiencies, 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 possible defense and resolution of patent matters..
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 to support its
expanded sales and marketing activities, manufacturing operations 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. The Company may not sustain revenue growth or become
profitable on a quarterly or annual basis and its growth or operating results
may not be consistent with predictions made by securities analysts.
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 may not be successfully developed or commercialized on a timely
basis, or at all. 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.
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.
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 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, a cost-effective sales force and administrative
infrastructure and an effective product distribution system for its products.
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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 this work may not be
completed successfully.
In addition, although the Company expects some of its new products and
products under development to share production attributes with the Company's
existing products, production of these products may require the development of
new manufacturing technologies and expertise. These products may not be able to
be manufactured by the Company or any other party at a cost or in quantities to
make these 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 pre-clinical 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 the products are successfully
developed. Manufacturing and quality control problems have arisen and 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.
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 these facilities are
subject to Quality System Regulations ("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.
DEPENDENCE ON SOLE-SOURCE SUPPLIERS
Key components and raw materials used in the manufacture of the Triage DOA
Panel, Triage C. DIFFICILE Panel, Triage Parasite Panel and Triage Cardiac
System are currently provided by single-source vendors. Although the Company
believes that alternative sources for such components and raw materials are
available, any supply interruption in a sole-sourced component of raw material
would have a material adverse effect on the Company's ability to manufacture
these products until a new source of supply is qualified and, as a result, would
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, an uncorrected impurity or supplier's
variation in a raw material, either unknown to the Company or incompatible with
the Company's Triage DOA Panel, Triage C. DIFFICILE Panel, Triage Parasite Panel
and Triage Cardiac System manufacturing processes, could have a material adverse
effect on the Company's ability to manufacture products. The Company has under
development products other than the Triage DOA Panel, Triage C. DIFFICILE Panel,
Triage Parasite Panel and Triage Cardiac System which, if developed, may require
that the Company enter into additional supplier arrangements. The Company may
not be able to enter into additional supplier arrangements on commercially
reasonable terms, or at all. Failure to obtain a supplier for the manufacture of
its future products, if any, would have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company expects to rely upon LRE for production of the fluorescent meter
to be used in connection with its Triage Meter System platform products,
including the Triage Cardiac System and others currently under development. The
Company's dependence upon LRE for the manufacture of the meter may adversely
affect the Company's profit margins, its ability to develop and manufacture
products on a timely and competitive basis, the timing of market introductions
and subsequent sales of products incorporating the LRE meter.
NEAR-TERM DEPENDENCE OF THE COMPANY ON THE TRIAGE DOA PANEL
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 to
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
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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 commercialize its new products (the Triage C. DIFFICILE Panel,
Triage Parasite Panel and Triage Cardiac System), develop and commercialize
other products, and to gain additional acceptance of the Triage DOA Panel
products in new market segments, such as the occupational health sector and
international market segments.
During 1998, the Company 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 19% of net sales during the first half
of 1999.
The Company may not be able to successfully 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
HealthCare, 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 86% of product
sales in 1998) and internationally by country-specific and regional
distributors. The loss or termination of one or more of these distributors could
have a material adverse effect on the Company's sales unless suitable
alternatives can be arranged.
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 has limited experience in direct sales,
marketing and distribution of its products. The Company's direct sales,
marketing and distribution efforts may not be successful. Further, Biosite may
not be able to enter into new distribution or marketing agreements on
satisfactory terms, or at all. 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.
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, 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, these 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
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technologies, may be more effective than the Company 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 RELATING TO THIRD PARTY REIMBURSEMENT AND POTENTIAL COST CONSTRAINTS
In the United States, health care providers that purchase the Triage DOA Panel
and other diagnostic products, such as hospitals and physicians, generally rely
on third party payors, principally private health insurance plans, federal
Medicare and state Medicaid, to reimburse all or part of the cost of the
procedure. Such third party payors can affect the pricing or the relative
attractiveness of the Company's products by regulating the maximum amount of
reimbursement provided by such payors for testing services. In addition, the
tests performed by public health departments, corporate wellness programs and
other large volume users in the drug screening market are generally not subject
to reimbursement. Further, certain health care providers are moving towards a
managed care system in which such providers contract to provide comprehensive
health care for a fixed cost per patient. The Company is unable to predict what
changes will be made in the reimbursement methods utilized by third party
payors. The Company could be adversely affected by changes in reimbursement
policies of governmental or private health care payors, particularly to the
extent any such changes affect reimbursement for procedures in which the
Company's products are used. Third party payors are increasingly scrutinizing
and challenging the prices charged for medical products and services. Decreases
in reimbursement amounts for tests performed using the Company's products may
decrease amounts physicians and other practitioners are able to charge patients,
which in turn may adversely affect the Company's ability to sell its products on
a profitable basis. Failure by physicians and other users to obtain
reimbursement from third party payors, or changes in government and private
third party payors' policies toward reimbursement of tests utilizing the
Company's products could have a material adverse effect on the Company's
business, financial condition or results of operation. Given the efforts to
control and reduce health care costs in the United States in recent years, there
can be no assurance that currently available levels of reimbursement will
continue to be available in the future for the Company's existing products or
products under development.
In addition, market acceptance of the Company's products in international
markets is dependent, in part, upon the availability of reimbursement within
prevailing health care payment systems. Reimbursement and health care payment
systems in international markets vary significantly by country, and include both
government sponsored health care and private insurance.
The Company believes that the overall escalating cost of medical products and
services has led to and will continue to lead to increased pressures on the
health care industry, both foreign and domestic, to reduce the cost of products
and services, including products offered by the Company. Third party
reimbursement and coverage may not be available or adequate in either U.S. or
foreign markets, current reimbursement amounts may be decreased in the future
and future legislation, regulation or reimbursement policies of third-party
payors may adversely affect the demand for the Company's products or its ability
to sell its products on a profitable basis.
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 some technologies and
may negotiate to obtain other 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.
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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 alleged that
the Company's Triage DOA Panel products infringed a patent held by the
plaintiffs, which expires in August 2000. The plaintiffs sought to recover
damages of an unspecified amount and to enjoin future sales of the Triage DOA
Panel products by the Company. Biosite answered the complaint, denying
infringement and asserting affirmative defenses that the patent is invalid and
unenforceable. Because of a merger, the identity of the plaintiffs changed to
Dade Behring Inc., Dade Behring Marburg GmbH and Syva Company (collectively
"Dade Behring"). To avoid protracted litigation and continued significant legal
defense costs, the Company and Dade Behring executed a settlement agreement in
March 1999 that resolved all disputes outstanding between the companies. Under
the terms of the settlement agreement, the Company obtained a license to the
patent and will provide Dade Behring the option to evaluate certain proprietary
technology, resulting in a net payment of $1,050,000 to Dade Behring by Biosite.
The Company has charged to defense of patent matters in the accompanying
statements of income the applicable license costs related to years prior to
1998.
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
infringed U.S. patent 5,744,358 which was issued on the date the suit was filed.
Spectral sought a permanent injunction and damages. Spectral also sought a
preliminary injunction that would enjoin the Company from selling the Triage
Cardiac Panel. 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
engaged in negotiations in an attempt to arrive at a settlement in regards to
all disputes outstanding between Biosite and Spectral. In February 1999, a
settlement agreement was executed that resolved all disputes between the
companies without a material adverse financial impact to Biosite.
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 patents that they believe cover technology which is
or may be incorporated in Biosite's products and products under development.
Some of this correspondence has included offers to negotiate the licensing of
the patented technologies. There can be no assurance that these matters will not
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.
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.
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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.
POSSIBLE FUTURE CAPITAL REQUIREMENTS; UNCERTAINTY OF ADDITIONAL FUNDING
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. Additional capital,
if needed, may not be available on satisfactory terms, or 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, changes in third party reimbursement
policies 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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
GOVERNMENT REGULATION; NO ASSURANCE OF OBTAINING REGULATORY APPROVALS
The testing, manufacture and sale of the Company's products are subject to
regulation by numerous governmental authorities, principally the FDA and
corresponding state and foreign regulatory agencies. Pursuant to the Federal
Food, Drug and Cosmetic Act, and the regulations promulgated thereunder, the FDA
regulates the preclinical and clinical testing, manufacture, labeling,
distribution and promotion of medical devices. The Company will not be able to
commence marketing or commercial sales in the United States of new products
under development until it receives clearance or approval from the FDA, which
can be a lengthy, expensive and uncertain process. Noncompliance with applicable
requirements can result in, among other things, fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production, failure of the government to grant pre-market clearance or premarket
approval for devices, withdrawal of marketing clearances or approvals, and
criminal prosecution. The FDA also has the authority to request recall, repair,
replacement or refund of the cost of any device manufactured or distributed by
the Company.
Any devices manufactured or distributed by the Company pursuant to FDA
clearance or approvals are subject to pervasive and continuing regulation by the
FDA and certain state agencies. Before a new device can be introduced in the
market, the manufacturer must generally obtain FDA clearance of a 510(k)
notification or FDA approval of a PMA application. The PMA approval process is
more expensive, uncertain and lengthy than the 510(k) clearance process. The
Company is uncertain of the regulatory path to market that the FDA will
ultimately apply to the Company's products currently in development. Although
the Triage DOA Panel, Triage C. difficile Panel, Triage Parasite Panel and
Triage Cardiac System received 510(k) clearance, a PMA may be required for the
NeoralChek System, the Triage BNP System and Triage LBP System now in
development. With respect to any of the Company's products in development, the
FDA may determine that the Company must adhere to the more costly, lengthy and
uncertain PMA approval
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process. Modifications to a device that is the subject of an approved PMA
application, its labeling or manufacturing process may require approval by
the FDA of a PMA supplement or a new PMA application. For any devices that
are cleared through the 510(k) process, modifications or enhancements that
could significantly affect safety or effectiveness, or constitute a major
change in the intended use of the device, will require new 510(k) submissions.
The Company may not be able to obtain necessary regulatory approvals or
clearances for its products on a timely basis, if at all, and delays in receipt
of or failure to receive such approvals or clearances, the loss of previously
received approvals or clearances, limitations on intended use imposed as a
condition of such approvals or clearances, or failure to comply with existing or
future regulatory requirements would have a material adverse effect on the
Company's business, financial condition and results of operations.
Before the manufacturer of a device can submit the device for FDA clearance
or approval, it generally must conduct a clinical investigation of the device.
Although clinical investigations of most devices are subject to the
Investigational Device Exemption ("IDE") requirements, clinical investigations
of In-vitro Diagnostic tests ("IVD"), such as all of the Company's products and
products under development, are exempt from the IDE requirements, including the
need to obtain the FDA's prior approval, provided the testing is noninvasive,
does not require an invasive sampling procedure that presents a significant
risk, does not intentionally introduce energy into the subject, and is not used
as a diagnostic procedure without confirmation by another medically established
test or procedure. In addition, the IVD must be labeled for "research use only"
("RUO") or "investigational use only" ("IUO"), and distribution controls must be
established to assure that IVDs distributed for research or clinical
investigation are used only for those purposes.
The Company intends to conduct clinical investigations of its products under
development, which will entail distributing them in the United States on an IUO
basis. There can be no assurance that the FDA would agree that the Company's IUO
distribution of its IVD products under development will meet the requirements
for IDE exemption. Furthermore, failure by the Company or the recipients of its
products under development to maintain compliance with the IDE exemption
requirements could result in enforcement action by the FDA, including, among
other things, the loss of the IDE exemption or the imposition of other
restrictions on the Company's distribution of its products under development,
which would adversely affect the Company's ability to conduct the clinical
investigations necessary to support marketing clearance or approval.
Manufacturers of medical devices for marketing in the United States are
required to adhere to QSR, which includes testing, control, documentation and
other quality assurance requirements. Manufacturers must also comply with
Medical Device Report ("MDR") requirements that a manufacturer report to the FDA
any incident in which its product may have caused or contributed to a death or
serious injury, or in which its product malfunctioned and would be likely to
cause or contribute to a death or serious injury upon recurrence. Labeling and
promotional activities are subject to scrutiny by the FDA and, in certain
circumstances, by the Federal Trade Commission. Current FDA enforcement policy
prohibits the marketing of approved medical devices for unapproved uses.
The Company is subject to routine inspection by the FDA and certain state
agencies for compliance with QSR requirements, MDR requirements and other
applicable regulations. The QSR requirements include the addition of design
controls, that will likely increase the cost of compliance. There can be no
assurance that the Company will not incur significant costs to comply with laws
and regulations in the future or that such laws and regulations will not have a
material adverse effect upon the Company's business, financial condition and
results of operation.
The use of Biosite's products is also affected by the Clinical Laboratory
Improvement Amendments ("CLIA") and related federal and state regulations which
provide for regulation of laboratory testing. The scope of these regulations
includes quality control, proficiency testing, personnel standards and federal
inspections. CLIA categorizes tests as "waived," "moderately complex" or "highly
complex," on the basis of specific criteria. There can be no assurance that any
future amendment of CLIA or the promulgation of additional regulations impacting
laboratory testing would not have a material adverse effect on the Company's
ability to market its products or on its business, financial condition and
results of operations.
DEPENDENCE ON OTHERS FOR THE DEVELOPMENT OF NEW PRODUCTS
Biosite's strategy for the research, development, commercialization and
distribution of certain of its products entails entering into various
arrangements with corporate partners, licensors, licensees and others, and is
dependent upon the success of these parties in performing their
responsibilities. These parties may not perform their obligations as expected
and no revenue may be derived from these arrangements.
-17-
<PAGE>
Biosite has entered into agreements with, among others, Novartis, Scios, and
Xoma for the development and marketing of products. The agreements are subject
to rights of termination and may be terminated. The Company's collaborators may
not abide by their contractual obligations and may discontinue or sell their
current lines of business. The research for which the Company receives or
provides funding may not lead to the development of products. The Company
intends to enter into additional development and marketing agreements. The
Company may not be able to enter into agreements on acceptable terms, or at all.
The Company is continuing to enhance, with LRE, a hand-held point-of-care
fluorescent meter for use in Triage Meter System products. The meter can be
programmed to run a specific test through the use of changeable proprietary
software that is also under further development by LRE. LRE may not develop the
hardware or software on schedule, or at all, and new software may not be
developed to permit the meter to be used for another Triage Meter System
product.
POTENTIAL INABILITY TO MANAGE GROWTH; DEPENDENCE ON KEY PERSONNEL
The Company anticipates increased growth in the number of its employees, the
scope of its operating and financial systems and the geographic area of its
operations as new products are developed and commercialized. This growth will
result in an increase in responsibilities for both existing and new management
personnel. The Company's ability to manage growth effectively will require it to
continue to implement and improve its operational, financial and management
information systems and to train, motivate and manage its employees. The Company
may not be able to manage its expansion, and a failure to do so could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company's future success depends in part on the continued service of its
key technical, sales, marketing and executive personnel, and its ability to
identify, hire and retain qualified personnel. Competition for such personnel is
intense and the Company may not be able to retain existing personnel or identify
or hire additional personnel.
PRODUCT LIABILITY EXPOSURE; INADEQUACY OR UNAVAILABILITY OF INSURANCE COVERAGE
The testing, manufacturing and marketing of medical diagnostic devices such
as the Triage DOA Panel, Triage C. DIFFICILE Panel, Triage Parasite Panel and
Triage Cardiac System, as well as the Company's products currently under
development, entail an inherent risk of product liability claims. To date, the
Company has not experienced any material product liability claims, but any such
claims arising in the future could have a material adverse effect on the
Company's business, financial condition and results of operations. Potential
product liability claims may exceed the amount of the Company's insurance
coverage or may be excluded from coverage under the terms of the policy. The
Company's existing insurance may not be renewed at a cost and level of coverage
comparable to that presently in effect, or at all. In the event that the Company
is held liable for a claim against which it is not indemnified or for damages
exceeding the limits of its insurance coverage, that claim could have a material
adverse effect on the Company's business, financial condition and result of
operations.
IMPACT OF YEAR 2000 ISSUE
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.
-18-
<PAGE>
PART II. OTHER INFORMATION.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 9, 1999, the Company held its Annual Meeting of Stockholders. The
following actions were taken at the annual meeting. As of April 12, 1998, the
record date, 13,002,373 shares were entitled to vote at the Annual Meeting. Of
these 13,002,373 shares, 1,025,956 were not voted.
1. The following Class II Directors were elected:
a. Anthony DeMaria. 11,946,006 shares voted in favor of the nominee,
30,411 shares withheld their vote;
b. Howard E. Greene, Jr. 11,949,761 shares voted in favor of the nominee,
26,656 shares withheld their vote;
c. The following directors continue in office for their existing terms:
Lonnie M. Smith
Timothy J. Wollaeger
Kim D. Blickenstaff
Gunars E. Valkirs
2. A proposal to amend and restate the 1996 Stock Incentive Plan of Biosite
Diagnostics Incorporated, among other things, increase the number of shares
of Common Stock authorized for issuance thereunder by 1,000,000 shares.
7,212,619 shares were voted in favor of the proposal, 693,730 shares were
voted against the proposal, 38,605 shares abstained and 4,031,463 shares
were not voted (includes broker non-votes);
3. The selection of Ernst & Young LLP as the Company's independent auditor was
ratified. 11,955,588 shares were voted in favor of the proposal, 5,094
shares were voted against the proposal, 15,735 shares abstained and 0
shares were not voted (includes broker non-votes);
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: July 29, 1999 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 JUNE 30, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
INCLUDED IN THE COMPANY'S 1998 ANNUAL REPORT ON FORM 10-K.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1.
<CASH> 1,252
<SECURITIES> 29,989
<RECEIVABLES> 6,796
<ALLOWANCES> 0
<INVENTORY> 4,954
<CURRENT-ASSETS> 46,498
<PP&E> 18,695
<DEPRECIATION> (11,276)
<TOTAL-ASSETS> 65,570
<CURRENT-LIABILITIES> 7,142
<BONDS> 4,358
0
0
<COMMON> 130
<OTHER-SE> 53,941
<TOTAL-LIABILITY-AND-EQUITY> 65,570
<SALES> 10,594
<TOTAL-REVENUES> 11,345
<CGS> 3,263
<TOTAL-COSTS> 7,889
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 193
<INCOME-TAX> 96
<INCOME-CONTINUING> 97
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 97
<EPS-BASIC> .01<F1>
<EPS-DILUTED> .01<F2>
<FN>
<F1> Earnings per share is calculated on the basis described in Note 2
of Notes to Financial Statements.
<F2> Earnings per share is calculated on the basis described in Note 2
of Notes to Financial Statements.
</TABLE>
