<PAGE>
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 April 30, 1999 was 13,040,963
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<PAGE>
BIOSITE DIAGNOSTICS INCORPORATED
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Balance Sheets as of March 31, 1999 (Unaudited)
and December 31, 1998....................................................... 1
Condensed Statements of Operations (Unaudited) for the three months
ended March 31, 1999 and 1998................................................ 2
Condensed Statements of Cash Flows (Unaudited) for the three
months ended March 31, 1999 and 1998......................................... 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 Disclosure about Market Risk...................... 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................................. 18
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............................ Not Applicable
Item 5. Other Information.............................................................. Not Applicable
Item 6. Exhibits and Reports on Form 8-K............................................... 18
Signatures ............................................................................... 19
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIOSITE DIAGNOSTICS INCORPORATED
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------- -------------
(Unaudited) (Note)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,757,746 $ 762,337
Marketable securities, available-for-sale 30,059,573 33,466,841
Accounts receivable 6,699,698 6,573,735
Inventory 4,822,633 4,364,367
Other current assets 3,302,953 3,133,960
------------- -------------
Total current assets 46,642,603 48,301,240
Property, equipment and leasehold improvements, net 7,060,594 7,313,673
Patents and license rights, net 7,007,814 7,203,433
Other assets 4,304,222 2,990,765
------------- -------------
$ 65,015,233 $ 65,809,111
============= =============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 2,486,197 $ 1,503,354
Accrued salaries and other 3,044,144 2,699,663
Accrued costs for defense of patent matters -- 1,248,191
Current portion of long-term obligations 1,655,367 1,636,265
------------- -------------
Total current liabilities 7,185,708 7,087,473
Long-term obligations 3,921,250 4,038,444
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized, none
issued and outstanding at March 31, 1999 and December 31, 1998 -- --
Common stock, $.01 par value, 25,000,000 shares authorized; 13,002,373
and 12,926,706 shares issued and outstanding at March 31, 1999 and
December 31, 1998, respectively 130,024 129,267
Additional paid-in capital 54,531,955 54,250,324
Unrealized net gain on marketable securities, net of related tax effect 7,840 35,266
Deferred compensation (180,784) (207,845)
Accumulated deficit (580,760) 476,182
------------- -------------
Total stockholders' equity 53,908,275 54,683,194
------------- -------------
$ 65,015,233 $ 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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<PAGE>
BIOSITE DIAGNOSTICS INCORPORATED
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 1998
------------ ------------
<S> <C> <C>
Net sales $ 9,447,721 $ 7,883,961
Cost of sales 3,741,917 1,755,061
------------ ------------
Gross profit 5,705,804 6,128,900
Operating Expenses:
Selling, general and administrative 4,945,059 3,951,424
Research and development 3,045,235 2,964,702
Defense of patent matters -- 849,163
------------ ------------
7,990,294 7,765,289
------------ ------------
Operating income (loss) (2,284,490) (1,636,389)
Other income:
Interest and other income 498,548 611,908
Contract revenue -- 300,000
------------ ------------
Income (loss) before benefit (provision) for
income taxes (1,785,942) (724,481)
Benefit (provision) for income taxes 729,000 224,000
------------ ------------
Net income (loss) $ (1,056,942) $ (500,481)
============= ============
Net income (loss) per share
- Basic $ (0.08) $ (0.04)
============= ============
- Diluted $ (0.08) $ (0.04)
============= ============
Shares used in calculating per share amounts
- Basic 12,973,000 12,906,000
============= ============
- Diluted 12,973,000 12,906,000
============= ============
</TABLE>
See accompanying notes.
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<PAGE>
BIOSITE DIAGNOSTICS INCORPORATED
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net cash provided by (used in) operating activities $ (505,148) $ 1,339,982
INVESTING ACTIVITIES
Proceeds from sales and maturities of marketable securities 9,716,659 12,364,404
Purchase of marketable securities (6,355,101) (13,851,677)
Purchase of property, equipment and leasehold improvements (456,840) (1,178,922)
Patents, license rights, deposits and other assets (1,588,457) 407,344
------------ -------------
Net cash provided by (used in) investing activities 1,316,261 (2,258,851)
FINANCING ACTIVITIES
Proceeds from issuance of financing obligations 326,121 661,406
Principal payments under financing obligations (424,213) (341,600)
Proceeds from issuance of convertible debenture -- 500,000
Proceeds from issuance of stock, net 282,388 78,093
------------ -------------
Net cash provided by financing activities 184,296 897,899
------------ -------------
Increase (decrease) in cash and cash equivalents 995,409 (20,970)
Cash and cash equivalents at beginning of period 762,337 2,330,274
------------ -------------
Cash and cash equivalents at end of period $ 1,757,746 $ 2,309,304
============ =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 110,241 $ 103,721
============ =============
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
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 March 31,
1999 1998
--------------- -------------
<S> <C> <C>
Shares used in calculating per share amounts -- Basic
(Weighted average common shares outstanding ) 12,973 12,906
Effect of common share equivalents:
Net effect of dilutive common stock options using the
treasury stock method -- --
=============== =============
Shares used in calculating per share amounts -- Diluted 12,973 12,906
=============== =============
</TABLE>
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<PAGE>
3. BALANCE SHEET INFORMATION
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- -----------
<S> <C> <C>
Raw materials $ 1,483,369 $ 1,405,176
Work-in-process 3,035,899 2,938,548
Finished goods 303,365 20,643
----------- -----------
$ 4,822,633 $ 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, however, the adoption of SFAS 130 had no impact on
the Company's net income or stockholder's equity. 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 MARCH 31,
1999 1998
------------ -----------
<S> <C> <C>
Net income (loss) $ (1,056,942) $ (500,481)
Change in unrealized net gain (loss) on marketable
securities, net of tax 27,426 (20,174)
------------ -----------
Comprehensive income
$ 1,029,516 $ (520,655)
============ ===========
</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 six 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.
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 during the third and fourth
quarters of 1998. The Company addressed the manufacturing scale-up and
capacity constraint issues and filled the backlog orders during December 1998
and the first quarter of 1999. During the first quarter of 1999, the Company
encountered manufacturing inefficiencies related to the production of the
Triage Cardiac System. 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 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.
-6-
<PAGE>
RECENT DEVELOPMENTS
BIOSITE DISCOVERY PROGRAM
In March 1999, the Company introduced its Biosite Discovery program, a
collaborative research and diagnostics development program focused on the
identification of new protein markers for acute diseases. The Company will
seek to use its expertise in antibody development to help pharmaceutical and
biotechnology partners accelerate their research programs. In return, Biosite
intends to obtain diagnostic rights to the proteins under study. Biosite will
utilize its proprietary Omniclonal(TM) antibody development technology to
develop high affinity antibodies for the characterization and validation of
protein targets. Initially, Biosite will focus on disease target markers in
four core areas: cardiovascular, cerebrovascular, infectious disease and
oncology. If the diagnostic utility of a marker is established, it will then
be assessed for commercialization potential, with high value markers being
added to Biosite's product development pipeline. The Company executed its
first collaborative agreement under the Biosite Discovery program in the
cardiovascular area with Scios Inc. in November 1998.
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
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. The terms of
the settlement resulted in a net payment of $1,050,000 to Dade Behring by
Biosite.
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.
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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
MARCH 31,
1999 1998
------------ ------------
<S> <C> <C>
Net sales................................. 100% 100%
Cost of sales............................. 40 22
------------ ------------
Gross profit.............................. 60 78
Operating Expenses:
Selling, general and administrative...... 52 50
Research and development................. 32 38
Defense of patent matters................ -- 11
------------ ------------
Total operating expenses.................. 85 99
Income (loss) from operations............. (24) (21)
Interest and other income, net............ 5 12
------------ ------------
Income (loss) before benefit (provision)
for income taxes........................ (19) (9)
Benefit (provision) for income taxes...... 8 3
------------ ------------
Net income (loss)......................... (11)% (6)%
------------ ------------
------------ ------------
</TABLE>
NET SALES. Net sales increased 20% to $9.4 million for the three months
ended March 31, 1999 from $7.9 million for the three months ended March 31,
1998. The increase was 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. Net sales for the new products were
approximately $1.6 million for the first quarter of 1999, as compared to
$53,000 for the same period in 1998. Net sales of the Triage DOA Panel for
the first quarter of 1999 were consistent with net sales of the product for
the same period 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 decreased 7% to $5.7 million for the first
quarter of 1999 from $6.1 million for the same period in 1998. The overall
gross margin decreased to 60% for the first quarter of 1999 from 78% for the
same period 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, the Company experienced significant
inefficiencies related to the production of the Triage Cardiac System,
resulting in negative gross profits related to this product. The 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 manufacturing scale-up,
capacity constraint, and efficiency issues are addressed. The Company also
expects the overall gross margins to continue to decrease as compared to 1998
as a result of both 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 the new
products and until other manufacturing scale-up and efficiency issues are
addressed.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 25% to $4.9 million for the first quarter
of 1999 from $4.0 million for the first quarter of 1998. The 1999 increases
resulted primarily from non-recurring administrative costs associated with
reorganization of the Company's manufacturing operations totaling
approximately $300,000. The Company also expended approximately $425,000.
related to a business development opportunity that the Company has since
decided to forego. Other increases in expenses were associated with
additional marketing activities associated with 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. 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
-8-
<PAGE>
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 were
approximately $3.0 million for the three months ended March 31, 1999,
consistent with the same period in 1998. During the first quarter of 1999,
the Company's research and development resources were focused primarily on
the development and clinical studies 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 first 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 third quarter of 1999. The costs associated with such clinical trials is
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 $849,000 for the first quarter of
1998. Settlement agreements were executed during the first quarter of 1999
that resolved both matters. 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.
INTEREST AND OTHER INCOME. Interest income decreased 16% to $499,000 for
the three months ended March 31, 1999 from $595,000 for the same period in
1998. The decrease resulted primarily from the lower average balance of cash
and marketable securities during the first quarter of 1999 as compared to the
same period in 1998. No contract revenue was recognized in the first quarter
of 1999 while contract revenues recognized in the first quarter of 1998
consisted of $300,000 from Novartis Pharma AG related to the development of
the NeoralChek System.
BENEFIT (PROVISION) FOR INCOME TAXES. The Company recorded a benefit for
income taxes of $729,000 and for the same period in 1998, the Company
recorded a benefit for income taxes of $224,000. At March 31, 1999, the
Company has net deferred tax assets of $4,724,000; however, due to the fact
that the Company has incurred operating losses in 1998 and through the first
quarter 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 private placements. Since its inception, the Company has raised over
$21.7 million in net cash proceeds from the private placement of equity
securities and $1.5 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 March 31, 1999,
the Company had cash, cash equivalents and marketable securities of
approximately $31.8 million compared to $34.2 million at December 31, 1998.
The decrease in cash, cash equivalents and marketable securities during
the three months ended March 31, 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 used in
operating activities totaled $505,000 for the
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<PAGE>
quarter compared to net cash generated from operating activities of
$1,340,000 for the quarter ended March 31, 1998. Other significant uses of
cash during the first quarter of 1999 included deposits and purchases of
equipment and leasehold improvements totaling approximately $1 million.
Proceeds from the sale of marketable securities that were not reinvested in
other marketable securities totaled approximately $3.4 million and were used
to meet the cash requirements of the Company during the first quarter of 1999.
Significant sources of cash, cash equivalents and marketable securities
for the quarter ended March 31, 1998 included proceeds from the issuance of a
convertible debenture to Novartis for $500,000 (which was immediately
converted into common stock) and the receipt of $661,000 in proceeds from
equipment financing. Significant uses of cash, cash equivalents and
marketable securities for the quarter ended March 31, 1998 included
expenditures of $1.2 million for capital equipment and leasehold improvements
and principal payments under equipment financing obligations of $342,000.
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 utilizes credit arrangements with financial institutions to finance
the purchase of capital equipment. As of March 31, 1999, the Company had an
equipment financing line of credit with a financial institution totaling $4.0
million, of which $2.4 million was available for future borrowing. The line
of credit expires on June 30, 1999. 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.
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 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.
IMPACT OF YEAR 2000 ("Y2K") ISSUE
The Company is implementing 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
have been assessed and approximately 90% of them have been verified as being
compliant. The Company is on schedule to have all remaining systems verified
as compliant by June 30, 1999. All key suppliers, distributors, financial
institutions and others with whom it does business have been contacted by the
Company to assess their
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Y2K readiness, and approximately 60% have stated that they are compliant or
will be compliant before December 31, 1999. The Company is continuing to
communicate with key 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 $50,000. The Company anticipates
that the Company will be in compliance with Y2K requirements by the end of
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. 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 Company currently does not have contingency plans in the event it
does not complete all phases of the Y2K program. Management, however, is
considering contingency plans which involve, among other actions, manual
workarounds, increasing inventories of key components to the manufacturing
process and validating alternate vendors. The Company plans to evaluate the
status of the contingency plans by June 1999 and determine whether such plans
are necessary.
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 March 31,
1999, the Company had variable-rate debt totaling $1,922,000. 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 are
denominated in German Deutch 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 March 31, 1999, the Company had
no outstanding forward exchange contracts. Total receivables and payables
denominated in foreign currencies at March 31, 1999 were not material.
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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, 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.
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 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, a cost-effective sales force and administrative
infrastructure and an effective product distribution system for its products.
LIMITED HISTORY OF PROFITABILITY; POTENTIAL QUARTERLY FLUCTUATIONS IN FUTURE
OPERATING RESULTS
The Company incurred an operating loss during the last six 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.
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 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 remain profitable
on a quarterly or annual basis and its growth or operating results may not be
consistent with predictions made by securities analysts.
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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 Triage DOA
Panel, 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 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.
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 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 occupational health.
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 7% of net sales 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.
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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 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
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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.
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
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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
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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.
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, 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."
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.
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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
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. The settlement
resulted in a net payment of $1,050,000 to Dade Behring by Biosite.
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 11, 1999 BIOSITE DIAGNOSTICS INCORPORATED
By: /s/ CHRISTOPHER J. TWOMEY
----------------------------------
Christopher J. Twomey
Vice President, Finance and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
-19-
<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 MARCH 31, 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>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,758
<SECURITIES> 30,060
<RECEIVABLES> 6,700
<ALLOWANCES> 0
<INVENTORY> 4,823
<CURRENT-ASSETS> 46,643
<PP&E> 17,606
<DEPRECIATION> 10,545
<TOTAL-ASSETS> 65,015
<CURRENT-LIABILITIES> 7,186
<BONDS> 3,921
0
0
<COMMON> 130
<OTHER-SE> 53,778
<TOTAL-LIABILITY-AND-EQUITY> 65,015
<SALES> 9,448
<TOTAL-REVENUES> 9,946
<CGS> 3,742
<TOTAL-COSTS> 7,990
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,786)
<INCOME-TAX> 729
<INCOME-CONTINUING> (1,057)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,057)
<EPS-PRIMARY> (0.08)<F1>
<EPS-DILUTED> (0.08)
<FN>
<F1> EARNINGS PER SHARE IS CALCULATED ON THE BASIS DESCRIBED IN NOTE
2 OF NOTES TO FINANCIAL STATEMENTS.
</FN>
</TABLE>
