<PAGE>
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
-----------------
(Mark One)
/X/ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1999
OR
/ /TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 000-21873
BIOSITE DIAGNOSTICS INCORPORATED
(Exact name of registrant as specified in its charter)
-----------------
Delaware 33-0288606
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1030 Roselle Street 92121
San Diego, California (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (858) 455-4808
-----------------
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.01 par value
Preferred Stock Purchase Rights
(Title of Class)
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ___
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing sale price of the Common Stock on
February 29, 2000 as reported on the Nasdaq National Market, was approximately
$336,000,000. Shares of Common Stock held by each executive officer and director
and by each person who owns 10% or more of the outstanding Common Stock have
been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of February 29, 2000, there were 13,249,515 shares of the Registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the solicitation of proxies for the Registrant's
1999 Annual Meeting of Stockholders to be held on May 31, 2000 is incorporated
by reference in Part III, Item 10 (as to directors), 11, 12 and 13 of this Form
10-K.
===============================================================================
<PAGE>
BIOSITE DIAGNOSTICS INCORPORATED
FORM 10-K
INDEX
<TABLE>
<CAPTION>
PAGE
----
PART I
<S> <C> <C>
Item 1. Business....................................................................................... 1
Item 2. Properties .................................................................................... 24
Item 3. Legal Proceedings ............................................................................. N/A
Item 4. Submission of Matters to a Vote of Security Holders ........................................... N/A
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ......................... 25
Item 6. Selected Financial Data........................................................................ 26
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................................... 27
Item 7a. Quantitative and Qualitative Disclosures About Market Risk..................................... 33
Item 8. Financial Statements and Supplementary Data ................................................... 33
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure............................................................ 33
PART III
Item 10. Directors and Executive Officers of the Registrant............................................. 34
Item 11. Executive Compensation......................................................................... 35
Item 12. Security Ownership of Certain Beneficial Owners and Management................................. 35
Item 13. Certain Relationships and Related Transactions................................................. 35
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................... 36
SIGNATURES ............................................................................................... 39
</TABLE>
Biosite-Registered Trademark-, Triage-Registered Trademark-,
ExpressTest-Registered Trademark- and Immediate Response
Diagnostics-Registered Trademark- are registered trademarks of the Company.
Omniclonal-TM- and the Company's logo are trademarks or service marks of the
Company.
-i-
<PAGE>
PART I
ITEM 1. BUSINESS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED IN THIS ANNUAL REPORT ON FORM 10-K ARE FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES, INCLUDING THE TIMELY DEVELOPMENT, INTRODUCTION
AND ACCEPTANCE OF NEW PRODUCTS, MANUFACTURING EFFICIENCY ISSUES, DEPENDENCE ON
OTHERS, THE IMPACT OF COMPETITIVE PRODUCTS, THIRD PARTY REIMBURSEMENT ISSUES,
CHANGING MARKET CONDITIONS AND THE OTHER RISKS DETAILED THROUGHOUT THIS FORM
10-K. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE PROJECTED. THESE
FORWARD-LOOKING STATEMENTS REPRESENT OUR JUDGMENT AS OF THE DATE OF THE FILING
OF THIS FORM 10-K. WE DISCLAIM, HOWEVER, ANY INTENT OR OBLIGATION TO UPDATE
THESE FORWARD-LOOKING STATEMENTS.
BACKGROUND
We develop, manufacture and market rapid, accurate and cost-effective
diagnostic products that improve the quality of patient care and simplify the
practice of laboratory medicine. We believe our Immediate Response Diagnostics
positively impact medical decisions, patient care and the cost of medical
treatment.
Our two product platforms are designed to provide rapid results through
either qualitative visual readings or quantitative meter readings. These
platforms are based upon our proprietary technologies in the areas of antibody
development, signaling chemistry and micro capillary fluidics. Our testing
formats are designed to measure single analyte targets or multiple analytes
simultaneously. They also allow for the analysis of various sample sources,
including urine, serum, plasma, whole-blood and stool.
In 1992, we launched our first qualitative platform product. Approximately
45% of U.S. acute care hospitals use the Triage Panel for Drugs of Abuse
("Triage DOA Panel"), our small self-contained test capable of detecting a broad
spectrum of commonly overdosed prescription and illicit drugs in approximately
10 minutes. Since its introduction, over 9.9 million Triage DOA Panels have been
sold worldwide for use primarily in hospital emergency department patient
screening and occupational health testing. Net sales of the Triage DOA Panel
Products were approximately $33.7 million in 1999.
In 1998, we began selling two additional qualitative platform products, the
Triage C. DIFFICILE Panel and the Triage Parasite Panel. The Triage C. DIFFICILE
Panel is a rapid test designed to identify CLOSTRIDIUM DIFFICILE, an
opportunistic pathogen of the intestinal tract that may thrive as a result of
broad spectrum antibiotic treatment. The Triage Parasite Panel is a rapid test
designed to simultaneously detect three common waterborne parasites, GIARDIA
LAMBLIA, CRYPTOSPORIDIUM PARVUM and ENTAMOEBA HISTOLYTICA/DISPAR, that can cause
severe gastrointestinal infections. Net sales of these Triage Microbiology Panel
products were approximately $2.7 million in 1999.
Also in 1998, we launched our first quantitative platform product, the
Triage Cardiac System. The Triage Cardiac System, comprised of the Triage
Cardiac Panel and the Triage Meter, is designed to deliver precise, quantitative
results in a rapid timeframe. The Triage Cardiac System aids in the diagnosis of
acute myocardial infarction ("AMI"), commonly known as heart attacks, and
provides physicians with an enhanced ability to make treatment decisions in a
timely manner. The Triage Cardiac System quantitatively measures the level of
CK-MB, troponin I and myoglobin from a whole-blood sample using a single,
disposable test device. Net sales of the Triage Cardiac System were
approximately $6.6 million in 1999.
In December 1999, we began initial shipments of our second quantitative
platform product, the Triage BNP System, to some international customers. The
Triage BNP Test is a rapid, quantitative diagnostic test that measures B-type
natriuretic peptide ("BNP"), a protein marker indicated as an aid in the
diagnosis of congestive heart failure ("CHF"). Additionally, we filed a
pre-market approval application ("PMA") with the United States Food and Drug
Administration ("FDA") seeking approval to market the Triage BNP Test in the
United States. At the present time, in the United States, there is no blood test
available to aid in diagnosing CHF. On March 24, 2000, the FDA Clinical
Chemistry and Clinical Toxicology Device Panel ("Advisory Panel") recommended
not to approve our PMA for the Triage BNP Test. In voting, the Advisory Panel
indicated the need for additional data, including data concerning
-1-
<PAGE>
people in higher age groups that did not have CHF. Despite this outcome, we
continue to believe in the potential utility, safety and effectiveness of the
Triage BNP Test. We will work with the FDA to answer any questions they may
have. We intend to submit an amendment to our PMA application if we develop
the additional data requested by the FDA. We will continue to market the
Triage BNP Test internationally.
The principal markets for our products are hospital laboratories, emergency
departments and other point-of-care locations. We market our products worldwide
primarily through distributors supported by our direct sales force. We utilize
the Fisher HealthCare division ("Fisher") of the Fisher Scientific Company to
distribute our products in the hospital market segment in the United States and
utilize country-specific and regional distributors to market the products
internationally.
In addition to focusing our attention on commercial activities associated
with these products, we continue to invest in the research and development of
additional rapid tests designed to aid in the diagnosis of several acute
diseases or conditions. We are focusing our efforts in four core areas:
cardiovascular, cerebrovascular, infectious disease and oncology. We believe our
Immediate Response Diagnostics can play an important role in improving patient
care by aiding in the rapid diagnosis of acute diseases or conditions where
initiation of the most effective treatment is time-sensitive.
In March 1999, we introduced our Biosite Discovery program, a collaborative
research and diagnostics development program focused on the identification of
new protein markers for acute diseases. We use our expertise in antibody
development to help pharmaceutical and biotechnology partners accelerate their
research programs. We utilize our proprietary Omniclonal antibody development
technology to develop high affinity antibodies for our customers' use in
characterizing and validating protein targets. The Omniclonal technology
combines antibody phage display capabilities and a highly efficient antibody
expression and purification process. In return, we have obtained and seek to
continue to obtain diagnostic rights to the proteins under study. Initially, we
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 our product development pipeline. We have
executed collaborative agreements under the Biosite Discovery program with
several partners in the areas of cardiovascular, cerebrovascular, infectious
disease and oncology.
INDUSTRY OVERVIEW
According to industry reports, in 1998, the worldwide market for
immunoassays exceeded $3.8 billion, consisting primarily of testing related to
infectious disease, endocrinology, therapeutic drug monitoring, drugs of abuse
testing, immunology/allergy, tumor markers and blood typing. The global market
for immunoassays continues to expand as new disease states are identified, new
therapies become available, and worldwide standards of living and access to
health care improve. Such tests are performed primarily in hospital-based
laboratories (56%) and commercial laboratories (34%), which cummulatively
account for approximately 90% of all diagnostic tests performed annually. In
recent years, diagnostic tests that can be performed nearer to the point of
patient care have emerged as an important tool in disease diagnosis and
management.
Immunoassays were first developed based on technology developed in the
1960s. Although early immunoassays offered unprecedented levels of sensitivity
for the detection of low concentration analytes, they suffered from relatively
short shelf-lives, long reaction times, a need for radioactive labels to detect
completed reactions and lack of consistent results among products from different
suppliers. Over time, technological advances such as the introduction of
monoclonal antibodies, enzyme and fluorescent labels and various solid phase
formats shortened immunoassay reaction times, provided higher specificity and
allowed the development of tests with longer shelf-lives and greater
consistency.
These advances also led to the development of immunoassay analyzers, testing
systems utilizing automated liquid handling mechanisms and pipetting systems for
reagent addition. Modern immunoassay analyzers are capable of storing and
selecting multiple reagents for a variety of analytes, including drugs, hormones
and cancer antigens. They also provide accurate and highly sensitive test
results and help to simplify the performance of immunoassays. However,
immunoassay analyzers are large and complex, may have lengthy turnaround times
and require high volumes of sample throughput to justify the investment in
equipment, training, staffing and other costs required to operate and support
the systems. Even those systems with rapid onboard turnaround times require
transport of the
-2-
<PAGE>
sample to the testing lab and preparation of the samples to obtain serum or
plasma, which can be time consuming.
In recent years, there has been a continuing shift from the use of such
conventional analyzer systems to more technologically advanced rapid testing
methods that can be performed in minutes by less skilled personnel. Simple,
rapid immunoassays are capable of detecting a single analyte target with a color
change that can be visually interpreted. Formats such as dipsticks, test tubes
and membrane test cartridges have been used to provide fast, non-instrument read
results for conditions where a single analyte target is present in high
concentrations and where a simple yes/no non-numeric answer is clinically
relevant. Rapid color change test formats are widely available for drugs of
abuse, pregnancy, strep throat and ovulation prediction. Until recently, simple
test formats have remained incapable of precise, multi-analyte detection or
highly sensitive, quantitative measurements. As a result, medical conditions
where the detection of one or more analytes is required or where the precise
measurement of the target analyte is required have remained the domain of
immunoassay analyzers.
We believe that significant market potential exists for advanced rapid
diagnostic products that are capable of precise quantitative measurement of
multiple analytes. Rapid testing, including point-of-care testing, may help to
reduce overall health care delivery costs and can improve patient outcomes by
providing diagnosis in a reduced period of time , thereby minimizing the time to
medical intervention. Patients undergoing emergency procedures can benefit from
more timely and accurate testing results, both of which ensure correct decision
making and to avoid unnecessary use of costly inpatient care. Quicker diagnosis
of infectious agents can also permit earlier prescription of appropriate
medications, potentially shortening the duration of illness.
TECHNOLOGY
Several proprietary advances in the biological and physical sciences that
make practical the development and manufacture of rapid, accurate and
cost-effective point-of-care diagnostics form the basis of our Immediate
Response Diagnostics technology. Our products integrate our expertise in several
core scientific and engineering disciplines, including antibody development and
engineering, analyte cloning and synthesis, signaling chemistry and micro
capillary fluidics, each of which is described below. Our research and
development program is supported by 82 employees, including 21 Ph.D.s with
expertise in our core technologies. By combining research capabilities in each
of these areas, we create novel single and multi-analyte diagnostics that
overcome the limitations of traditional rapid diagnostic technologies and seek
to address the significant unmet need for effective point-of-care diagnostic
information.
ANTIBODY DEVELOPMENT AND ENGINEERING
We believe that our internal antibody development and engineering
capabilities allow rapid identification and development of antibodies with
optimal specificity, affinity and stability characteristics. We initially
utilized hybridoma technology for the selection and production of our novel
antibodies. Three disadvantages of hybridoma technology are the length of time
required to develop antibody candidates, the higher costs associated with the
use of this technology and the need to restart the antibody development process
when unwanted characteristics such as cross reactivities are discovered.
We developed a proprietary process utilizing phage display of antibodies
that enables the selection and production of antibodies more rapidly and
efficiently than is possible using hybridoma technology. The technology enables
the generation of custom Omniclonal antibody libraries containing genes encoding
antibodies specific for the target analyte. Omniclonal antibodies produced from
such libraries can contain thousands of different antibodies that bind to the
target analyte with high affinity. Monoclonal antibody candidates can be rapidly
selected from an Omniclonal antibody library and produced in quantities
sufficient for product development. During the course of product development,
unexpected antibody cross reactivities often require additional selection of
antibodies to improve the assay specificity. Unlike hybridoma technology,
Omniclonal antibody libraries can rapidly provide additional antibody candidates
in these circumstances.
ANALYTE CLONING AND SYNTHESIS
Our molecular biology capabilities include the cloning and identification of
specific proteins useful in the development of immunoassays. We developed
proprietary expression vectors that enable the production and purification of
these proteins for the development of antibodies and for use as calibrators and
controls in our
-3-
<PAGE>
immunoassay products. In addition, our considerable expertise in synthetic
organic chemistry allows the synthesis of targets and useful derivatives. We
develop products where the targeted analyte is small (i.e., haptens, such as
drugs) or large (i.e., proteins, such as cardiac enzymes). We believe that
the ability to develop, stabilize and manufacture the target analyte or its
analogues is key to the development of highly accurate immunoassays.
COLOR/PHOTOCHEMICAL SIGNALING
Immunoassays require the attachment of a detectable label to an antibody or
target analyte. We developed a variety of labels for the development of our
products. For our qualitative tests, a visual label that produces color is
attached to antibodies or analytes through either non-covalent or covalent
chemical methods to provide yes/no results. For our quantitative products, we
developed novel fluorescent dyes that are attached to antibodies or analytes
using both noncovalent and covalent chemical means. Although fluorescence is a
potentially powerful label for use in immunoassays, its potential has been
limited by the lack of available dyes that are stable and have no sample
interference, and by the requirement of a complex instrument for detection. Our
novel fluorescent dyes are stable and exhibit properties that permit their use
in complex biological samples such as serum, plasma and whole blood without
interference from the sample. Furthermore, these novel dyes absorb light at
wavelengths where a simple instrument can be used to excite and detect
fluorescence for quantitative measurements.
MICRO CAPILLARY TEST DEVICE TECHNOLOGY
We developed proprietary technology to design, develop and manufacture
devices containing micro capillaries to control the flow of fluids in
immunoassay processes. The qualitative device format uses micro capillaries to
draw fluids through a membrane that contains immobilized antibody zones for the
detection of specific substances. The quantitative device format uses several
different micro capillary designs to control the contact of sample with reagents
and to control the flow of fluid throughout the device. When sample is added to
the quantitative device, a filter contained within the device separates blood
cells from plasma which is further directed by capillary forces into a chamber
that contains dried immunoassay reagents. After an incubation time that is
determined by another micro capillary element of the device, the volume of
sample that contacted the reagents flows down a capillary path that brings it
into contact with immobilized antibody zones. The binding of fluorescent
reagents at these zones is detected by an instrument and is related to the
concentration of the substance being tested for in the sample. We also developed
the engineering capability to design unique micro capillary structures in
plastic parts and to fabricate them in commercial scale quantities using
injection molding processes.
SAMPLE HANDLING
We developed proprietary technology relating to sample handling and
preparation, including technology that allows whole blood to be passively
separated into its plasma component or to be passively lysed to release the
target analyte. We developed technologies for the handling of stool samples that
concentrate and purify the target analytes or organisms from solid stool
materials. In addition, we developed technologies that can be used to assay
urine samples.
BIOSITE DISCOVERY PROGRAM
In March 1999, we introduced our Biosite Discovery program, a collaborative
research and diagnostics development program focused on the identification of
new protein markers for acute diseases. We use our expertise in antibody
development to help pharmaceutical and biotechnology partners accelerate their
research programs. In return, we have obtained and seek to continue to obtain
diagnostic rights to the proteins under study. We utilize our proprietary
Omniclonal antibody development technology to develop high affinity antibodies
for our customers' use in characterizing and validating protein targets. The
Omniclonal technology combines antibody phage display capabilities and a highly
efficient antibody expression and purification process.
Initially, we will focus on disease target markers in four core areas:
cardiovascular, cerebrovascular, infectious disease and oncology. We have
invested in a high throughput robotic immunoassay analyzer that is capable of
performing an immunoassay for up to 10,000 serum or plasma samples in a 24-hour
period. We intend to use this high throughput immunoassay system along with
Omniclonal antibodies developed for potential diagnostic markers to detect the
markers in a large population of clinical samples from patients with diseases in
our core areas of interest as well as from normal, healthy people. The results
of this analysis may establish the diagnostic sensitivity and
-4-
<PAGE>
specificity of the potential markers for specific diseases. If the diagnostic
utility of a marker is established, it will then be assessed for
commercialization potential, with high value markers being added to our
product development pipeline. We executed collaborative agreements under the
Biosite Discovery program with several partners in the areas of
cardiovascular, cerebrovascular, infectious disease and oncology.
PRODUCT PLATFORMS
We have used our core technologies to develop two product platforms: the
Triage Panel and the Triage Meter System. Both of our product platforms utilize
our expertise in antibody engineering, analyte cloning, signaling chemistry,
micro capillary fluidics and sample handling technologies.
TRIAGE PANEL - QUALITATIVE PLATFORM
We designed the Triage Panel platform for rapid, qualitative screening of
multiple analytes in a small single-use device. The Triage Panel has a visual
(yes/no) display containing simultaneous tests for any combination of analytes
and control standards. It can be performed in a simple multi-step process and is
capable of performing tests on both urine and stool. The Triage DOA Panel, the
first product developed on this platform, tests for up to eight abused drugs
analytes in approximately 10 minutes. The Triage C. DIFFICILE Panel and the
Triage Parasite Panel test for microorganisms that cause severe gastrointestinal
disease.
TRIAGE METER SYSTEM - QUANTITATIVE PLATFORM
Our Triage Meter System platform is designed to provide rapid quantitative
results for immunoassays using whole blood, serum or plasma. The Triage Meter
System consists of two parts: a small single-use disposable test panel and a
proprietary, compact, fluorescent meter that can be used in laboratories or at
the point-of-care. After a blood sample is applied to the panel, the panel is
inserted into the meter, which is designed to automatically and simultaneously
detect multiple analytes and display the numerical results on an electronic
read-out. The meter incorporates proprietary software in erasable, programmable,
read-only memory, EPROM, chips, which are plugged into the meter. The software
may also provide important information regarding the analyte measured, such as
normal or abnormal levels of a marker, which could then be used to initiate
therapy or manage patient disease. Studies have validated that the analyte
measuring sensitivity of the Triage Meter System products is comparable to the
clinical sensitivity levels of the conventional immunoassay analyzers. The
Triage Cardiac System and the Triage BNP System are our first commercialized
products developed under this platform. We are developing other applications for
this platform.
PRODUCT ATTRIBUTES
Although our commercial products and products under development are based
upon our Triage Panel and Triage Meter System platforms and utilize different
technologies, they share common attributes which we believe make them superior
to conventional immunoassay analyzers:
- RAPID RESULTS: Our products and products under development are
designed to offer complete results in a rapid timeframe.
- EASE OF USE: Our products and products under development are
designed to be simple to use. The Triage DOA Panel has only
three steps while the Triage Meter System products require
only one assay step.
- HIGH ANALYTICAL ACCURACY: We develop and use high quality
biological and chemical reagents to yield highly specific,
accurate and reproducible analytical results.
- CAPABILITY OF PERFORMING MULTIPLE ANALYSES: We design our
products and products under development to measure one or more
target analytes simultaneously, including reagent controls,
without sacrificing the quality of the individual analysis.
This simultaneous detection capability can provide significant
time and cost savings compared to current technologies.
-5-
<PAGE>
- RELIABILITY: We use internal thresholds, built-in controls,
software lockouts and other controlling mechanisms that are
intended to make our current and future products extremely
reliable in any hospital or clinical laboratory setting.
- COST EFFECTIVENESS: We design our products and products under
development to simplify the performance of highly complex
testing procedures and potentially reduce the cost of patient
care, equipment acquisition and maintenance, making them
cost-effective alternatives to conventional immunoassay
analyzers.
COMMERCIALIZED PRODUCTS AND PRODUCTS UNDER DEVELOPMENT
We introduced the Triage DOA Panel in 1992. It has been used by hospital
laboratories and emergency departments to screen for up to eight commonly abused
prescription and illicit drugs or drug classes. During 1998, we began selling
three new products, the Triage C. DIFFICILE Panel, Triage Parasite Panel and
Triage Cardiac System. The Triage BNP System was launched on a limited basis in
Europe in December 1999.
We have additional products under development which apply our Immediate
Response Diagnostics technologies to a variety of other medical testing needs
and we continue to pursue the expansion of menu options and additional uses of
our current products. We continue to evaluate other rapid diagnostic product
opportunities that can utilize our technologies.
We intend, where appropriate, to enter into licensing and/or collaborative
arrangements to develop and commercialize additional future products. We may not
be able to negotiate license or collaborative arrangements on favorable terms,
if at all, in the future. Our current or future licensing or collaborative
arrangements may not be successful.
TRIAGE PANEL FOR DRUGS OF ABUSE
We believe that the U.S. market for abused drug testing totals approximately
$725 million annually. Our Triage Panel for Drugs of Abuse is marketed primarily
in the hospital testing segment which accounts for approximately 16 percent of
total drug testing market sales. Hospital laboratories or emergency departments
typically perform medical testing. The results are generally reported to
emergency physicians and psychiatrists. Such tests have the highest need for
rapid turnaround of result and generally have the highest cost per result.
Drug abuse plays a significant role in emergency medicine cases occurring
annually in the United States, either as a primary cause such as an overdose, or
as a contributing factor such as in the case of an accident. A diagnostic
dilemma confronts physicians when a patient is presented with symptoms that
could either be drug related or non-drug related. A patient brought to a
hospital emergency department in a coma may be under the influence of narcotics
or sedatives, which may require one type of treatment or intervention.
Conversely, the same patient may have had a stroke or suffered some form of
trauma requiring a completely different type of care. The ability to obtain a
differential diagnosis in a timely manner greatly aids the course of treatment.
Prior to the introduction of the Triage DOA Panel, drug or toxicology
screening was accomplished by several technologies, primarily automated
immunoassays and Gas Chromatography/Mass Spectroscopy, GC/MS. Although GC/MS is
the most specific identification method commercially available, it is time
consuming, requiring an average of approximately three hours per test, complex
and expensive, and is generally reserved for final confirmation of specimens
that have been screened positive by an immunoassay. Automated immunoassays,
although less expensive than those performed by GC/MS, also require significant
amounts of time, approximately one to two hours, because of the necessity of
performing analyses of several drugs sequentially on each patient specimen.
Additionally, in many cases the equipment required to perform an immunoassay is
not accessible on an immediate or rapid basis.
-6-
<PAGE>
The Triage DOA Panel is a rapid, qualitative urine screen that analyzes a
single test sample for up to eight different illicit and prescription drugs or
drug classes and provides results in approximately 10 minutes. The Triage DOA
Panel is instrument independent, contains built-in controls for accuracy and is
capable of a high degree of specificity. Illicit drugs detected by the Triage
DOA Panel include:
- Amphetamines/Methamphetamines (ecstasy, speed, crystal)
- Cocaine (crack)
- Opiates (heroin)
- Phencyclidine (angel dust)
- Tetrahydrocannabinol (pot, marijuana)
Prescription drugs tested by the Triage DOA Panel include
- Barbiturates (Phenobarbital)
- Benzodiazepines (Valium, Librium, Halcion)
- Tricyclic Antidepressants (Elavil, Tofranil)
- Methadone.
The Triage DOA Panel is configured to test various combinations of the above
drugs. In February 1995, We launched the Triage DOA Plus TCA Panel, a
configuration which includes a test for Tricyclic Antidepressants ("TCA") which
otherwise require a separate blood test. Since its introduction in February
1992, over 9.9 million Triage DOA panels have been sold worldwide, and
approximately 45% of acute care hospitals in the United States use the product.
We distribute the Triage DOA Panel products in the U.S. hospital market
segment through Fisher and internationally through country-specific and regional
distributors.
THE TRIAGE CARDIAC SYSTEM
We estimate that, in 1998, over 6 million people in the United States
visited hospital emergency departments with complaints of chest pain. Of those,
approximately 10% were ultimately diagnosed with AMI although approximately 1.9
million of the patients who present with chest pain were admitted to coronary
care units. We believe that rapid, quantitative results for multiple cardiac
markers provided at the point-of-care may improve a physician's ability to
manage, diagnose and treat patients suffering from chest pain.
AMI is generally caused by the blocking or "occlusion" of an artery
providing oxygen-enriched blood to the heart. Without oxygen, the heart muscle
is destroyed, with prolonged occlusion resulting in additional muscle damage.
The destruction of cells in the heart muscle results in the release of several
markers into the bloodstream, including CK-MB, troponin I and myoglobin.
Clinicians generally rely on patient history, physical exam,
electrocardiograms and serial measurement of cardiac markers in diagnosing AMI.
CK-MB and troponin I are the most widely used cardiac markers, while myoglobin
is also emerging as a useful adjunct in the detection of heart attacks. Because
the concentrations of these three markers typically peak and fall over different
time periods, we believe that simultaneous measurement of these markers is a
more accurate diagnostic technique for AMI than the measurement of any one
single marker. Studies have shown that concentrations of myoglobin are elevated
most quickly post-AMI. Therefore, myoglobin is recognized as a good marker for
early chest pain presenters to the Emergency Department However, since myoglobin
is not cardiac specific, the use of CK-MB and troponin are necessary to
accurately diagnosis an AMI. In patients with an AMI, CK-MB and troponin are
detectable several hours after myoglobin elevation. Since troponin is cardiac
specific, an elevated level of this marker is an indication that the patient is
suffering from an AMI. We believe the panel approach to diagnosing an AMI is
optimal since the individual cardiac marker release timeframes are different.
For this reason many hospitals have adopted serial testing of all three markers.
Several diagnostic tests have been developed to quantitatively measure the
blood levels of such markers. Unfortunately, the quantitative measurement of
multiple markers generally requires large, centralized immunoassay systems that
cannot directly analyze whole-blood and are not always available on a rapid
basis. Additionally, these systems require multiple reagent packs, as well as
frequent standardization and quality control. Since turnaround time
-7-
<PAGE>
for such test results is critical, current immunoassay systems may not
satisfy physician needs. Smaller automated systems have recently been
developed, however these are not portable, have low throughput and often
cannot provide results for three markers in less than 45 minutes.
We believe that a rapid, serial, quantitative measurement of multiple
markers of an AMI can have a positive impact on a physician's ability to make
medical decisions relative to patient care. Accordingly, our Triage Cardiac
System is designed to quantitatively measure the levels of CK-MB, troponin I and
myoglobin in a single test device from a whole-blood sample. We designed the
Triage Cardiac System to provide results of these measurements at or near the
point-of-care to aid in the detection of AMI by providing point-of-care
quantitative results. This enables physicians to make treatment decisions in a
timely manner. We utilize distributor alliances in marketing the Triage Cardiac
System in hospitals with fewer than 150 beds and a direct sales force in
marketing the Triage Cardiac System in hospitals with greater than 150 beds.
THE TRIAGE BNP SYSTEM
Congestive Heart Failure, CHF, is a chronic inability of the heart to
maintain an adequate output of blood from one or both ventricles of the heart,
resulting in congestion or swelling of certain veins or organs, and an
inadequate blood supply to the body. It is estimated that 5 million Americans
live with CHF and that over 15 million people suffer from CHF worldwide. With
approximately 400,000 new cases diagnosed annually, CHF imposes a growing toll
on Americans, in terms of disability and mortality, contributing to 250,000
deaths each year. CHF is an important public health problem, in part because
survival following diagnosis is poor, with only 50% of the patients surviving
longer than 5 years. Survival can be improved with the use of effective therapy
such as angiotensin-converting enzyme inhibitors and B-andrenergic receptor
blockers. Currently, CHF is the single most frequent cause of hospitalization
among the population of Medicare recipients. Readmission is common, occurring in
almost half of CHF patients within six months of hospital discharge. CHF ranks
among the costliest cardiovascular diseases and the estimated direct and
indirect costs attributable to CHF exceeded $18.8 billion in 1997. In 1995, $3.4
billion was paid to Medicare beneficiaries for the disease, according to the
Health Care Financing Administration.
At the present time in the United States there is no blood test available to
aid in diagnosing CHF. Instead, CHF is most commonly diagnosed on the basis of
symptoms and signs, augmented by x-rays or echocardiograms, which are used to
identify left ventricular dysfunction.
We obtained a semi-exclusive license (worldwide, except Japan, with the
right to grant sublicenses on a limited basis) to technology and patents
developed by Scios, Inc. for use in developing a test that aids in the diagnosis
of CHF by monitoring levels of B-type Natriuretic Peptide ("BNP"), a hormone
made primarily in the ventricles of the heart. Studies suggest that levels of
BNP become elevated in circulating blood plasma during heart dysfunction
associated with congestive heart failure in both symptomatic and asymtomatic
patients.
We developed the Triage BNP System (consisting of the Triage BNP Test and
the Triage Meter) to provide physicians a cost effective tool to easily, rapidly
and accurately measure BNP levels at the point-of-care and aid in the diagnosis
of congestive heart failure. We initiated clinical trials for the Triage BNP
Test in December 1998 and filed a pre-market application, known as a class III
PMA with the United States Food and Drug Administration (FDA) in December 1999.
We also commercialized the Triage BNP System internationally in early 2000. At
the present time, in the United States, there is no blood test available to aid
in diagnosing CHF. We are conducting an international multi-center clinical
trial to explore other potential applications of measuring BNP.
On March 24, 2000, the FDA Clinical Chemistry and Clinical Toxicology Device
Panel ("Advisory Panel") recommended not to approve our PMA for the Triage BNP
Test. In voting, the Advisory Panel indicated the need for additional data,
including data concerning people in higher age groups that did not have CHF.
Despite this outcome, we continue to believe in the potential utility, safety
and effectiveness of the Triage BNP Test. We will work with the FDA to answer
any questions they may have. We intend to submit an amendment to our PMA
application if we develop the additional data requested by the FDA. We will
continue to market the Triage BNP Test internationally.
-8-
<PAGE>
THE TRIAGE C. DIFFICILE PANEL
CLOSTRIDIUM DIFFICILE ("C. DIFFICILE") is an opportunistic pathogen of the
intestinal tract that may thrive as a result of broad spectrum antibiotic
treatment. The bacteria may be found in asymptomatic carriers or may spread
among immunocompromised hospital patients. Toxins produced by the bacteria
mediate C. DIFFICILE-associated disease, CDAD, which may include
antibiotic-associated diarrhea and antibiotic-associated pseudo-membranous
colitis. It has been estimated that over 3 million rapid tests for C. DIFFICILE
were performed annually in the United States. We expect this number to continue
to rise due to the expected increase in the number of patients who are
immunocompromised.
We designed the Triage C. DIFFICILE Panel to simplify the laboratory
procedure and improve the turnaround time for a physician to receive a result by
enabling laboratories to complete direct testing for the bacteria, as well as
testing for the toxin in less than 20 minutes. We believe the Triage C.
DIFFICILE Panel provides a negative predictive value that is superior to that of
existing immunoassays by coupling the results of direct organism detection with
toxin detection. The built-in controls and standards of the Triage C. DIFFICILE
Panel allow it to perform individually or in batches, by any laboratory
technician, without compromising the quality of the result. By improving the
turnaround time to result, the clinician may initiate therapy earlier and thus
minimize a patient's time in isolation. Rapid, accurate diagnosis of the
bacteria and toxin should enable earlier treatment, which may reduce length of
stay in the hospital and may reduce cost. We utilize distributor alliances in
marketing the Triage C. DIFFICILE Panel.
THE TRIAGE PARASITE PANEL
Parasitic infection is a common cause of gastrointestinal disease and
diarrhea. Some of the more common parasites responsible for such infection are:
- GIARDIA LAMBLIA ("GIARDIA")
- CRYPTOSPORIDIUM PARVUM ("C. PARVUM")
- ENTAMOEBA HISTOLYTICA
- microsporidia species
According to the U.S. Center for Disease Control and Prevention ("CDC"),
intestinal parasitic infection is a problem in the United States and that the
prevalence of GIARDIA may be increasing.
It is estimated that in 1998 approximately 1 million ova and parasite
("O&P") microscopic examinations were performed in the United States. Recently,
several manufacturers have developed and marketed ELISA tests for the more rapid
identification of two of the more common parasites, GIARDIA and C. PARVUM.
Because of the cumbersome procedures and limited test menu of the current ELISA
test formats, these tests have had limited success in hospitals that perform
larger volumes of tests in batches.
The Triage Parasite Panel is designed to replace the standard O&P
microscopic detection method for three of the most commonly encountered
parasites: GIARDIA, C. PARVUM AND ENTAMOEBA HISTOLYTICA/DISPAR in a single test
device. The Triage Parasite Panel that makes rapid results in less than 20
minutes is available to hospitals of any size, including facilities that
previously sent such testing to a reference lab. The sensitivity of the Triage
Parasite Panel is comparable to that of the current O&P microscopic examination,
using only a single patient specimen. This should greatly reduce the collection
burden for the patient, and reduce the amount of labor for the laboratory
technician. Additionally, the length of time physicians spend waiting for
results may be reduced. We utilize distributor alliances in marketing the Triage
Parasite Panel. Sales of the Triage Parasite Panel are expected to be seasonal
in nature as parasitic infections are less prevalent during the colder seasons
of the year.
-9-
<PAGE>
COMPETITION
The market in which we compete is intensely competitive. Our competitors
include:
- health care companies
- laboratory-based tests and analyzers
- 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. We expect that these laboratories
will compete vigorously to maintain their dominance of the testing market. In
order to achieve market acceptance for our products, we will be required to
demonstrate that our 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. Our 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
- Dade Behring
have developed or are developing diagnostic products that do or will
compete with our products. These competitors have substantially greater
financial, technical, research and other resources and larger, more established
marketing, sales, distribution and service organizations than us. Moreover,
these competitors offer broader product lines and have greater name recognition
than us, 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 our products. Our competitors may succeed in developing or
marketing technologies or products that are more effective or commercially
attractive than our products, or that would render our technologies and products
obsolete. Moreover, we 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 us or may
prevent, limit or interfere with our ability to make, use or sell its products
either in the United States or in international markets. See " -- Technology"
and "-- Commercial Products and Products under Development".
EMPLOYEES
As of December 31, 1999, we employed 303 individuals. Of these, 23 hold
Ph.D.s and 18 hold other advanced degrees. None of our employees are covered by
the collective bargaining agreement. We believe that we maintain good relations
with our employees.
RESEARCH AND DEVELOPMENT
As of December 31, 1999, we employed 82 employees in research and
development, 21 that have Ph.D.s. Our research and development organization is
dedicated to the discovery and development of new technologies which can be
applied to future products and to the development of new products with its
existing platform technologies.
We have a research staff dedicated to the development and production of
antibodies through a variety of techniques. Recombinant techniques are used to
express proteins for use as diagnostic targets. Our staff of chemists and
biochemists synthesize drug targets and compounds for diagnostic use and seek to
perfect techniques for coupling these compounds to biological reagents such as
antibodies or labels. We developed a proprietary process utilizing phase display
of antibodies that enables the selection and production of antibodies more
rapidly and efficiently than is possible using hybridoma technology. Our
development engineering staff is involved in the design and development of new
diagnostic device technologies as well as the processes for their fabrication
and interaction
-10-
<PAGE>
with biological and chemical reagents. Our product development group
completes final optimization of assays and our regulatory affairs group
controls all in-house and external clinical studies of our products and
prepares applications to the FDA for pre-market clearance or approval.
MANUFACTURING
As of December 31, 1999, we had 107 employees in manufacturing involved in
reagent production, device assembly, engineering, quality assurance/quality
control and materials management.
We maintain worldwide manufacturing rights to all current and future
products, except for the Triage Meter for which LRE maintains the manufacturing
rights. We seek to provide high quality analytical results in an efficient
manner. To this end, we invest in the design and development of manufacturing
systems and technologies that can produce a high quality product using
controlled, cost-effective manufacturing processes and equipment. The Triage C.
DIFFICILE and Triage Parasite Panels utilize the same or similar processes and
equipment as the Triage DOA Panel. We believe that the experience we acquired in
manufacturing the Triage DOA Panel provided benefits in product quality and cost
in manufacturing these new products. We have developed and continue to improve
our novel and sophisticated processes and equipment for the manufacturing of our
quantitative platform products, the Triage Cardiac Test and Triage BNP Test. We
increased our manufacturing space at our San Diego facility to accommodate
production of the quantitative platform products. We evaluate potential
automation projects, capital expenditures and facility expansion to address
potential growth in the manufacturing requirements for current and potential new
products.
Except for the Triage Meter, all of our products are manufactured at our
facility in San Diego, California. The Triage Meter is purchased from LRE Relais
+ Elektronik GmbH ("LRE"), which is located in Germany. Most of the antibodies
used in the manufacture of our products were developed by us and the cell lines
are owned or licensed by us. In addition, we maintain our own in-house antibody
production capability. All other raw materials required to manufacture our
products are obtained from outside suppliers.
Our San Diego facility received its registration as a diagnostic product
manufacturer from the FDA and from the California State Department of Health &
Services in 1991. We have also been licensed and certified to manufacture
products using controlled substances by the U.S. Drug Enforcement Agency. We may
not continue to comply with all government requirements and regulations which
may lead to the suspension or revocation of our right to manufacture. See
"Government Regulation.
SALES AND MARKETING
As of December 31, 1999, we had 55 employees in various sales and marketing
functions. We distribute our products to hospital facilities in the United
States primarily through Fisher, and internationally through country-specific
and regional distributors.
We anticipate that we may, if appropriate, enter into additional
distribution agreements with respect to our current products, products currently
under development and products that we develop in the future. We may not be able
to enter into these or other distribution agreements on acceptable terms, if at
all. If we elect to distribute products directly, our direct sales, marketing
and distribution efforts may not be successful. A failure to enter into
acceptable distribution agreements or a failure by us to successfully market our
products would have a material and adverse effect on us.
-11-
<PAGE>
STRATEGIC AND DISTRIBUTION ARRANGEMENTS
Our strategy for the research, development, commercialization and
distribution of some of our 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 or that any revenue will be
derived from any of the arrangements. Under our existing arrangements, we are
not obligated to make any material capital expenditures. If products are
successfully developed under some of our existing arrangements, royalties will
be payable by us on sales of products which incorporate licensed technology.
FISHER HEALTHCARE DIVISION OF FISHER SCIENTIFIC COMPANY
In April 1998, we entered into a new distribution agreement, the Fisher
Agreement, with Fisher which expanded Fisher's role to include the distribution
of certain of our new products and some potential new products currently under
development. Under the agreement, we granted to Fisher an exclusive right to
distribute Triage DOA Panel products, Triage Micro Panel products, and Triage
Cardiac System products to hospitals and reference laboratories within the
United States. Under some circumstances, in the event that we elect to terminate
the Fisher Agreement without cause, we will be obligated to make a one-time
payment to Fisher. Fisher purchases our products on a monthly basis through firm
purchase orders. Fisher accounted for 80%, 86%, and 83% of our product sales for
the years ended December 31, 1997, 1998 and 1999, respectively.
LRE RELAIS + ELEKTRONIK GMBH ("LRE")
In September 1994, we entered into an agreement with LRE, the LRE Agreement,
for the development, manufacturing and supply of a hand-held meter to be used in
all Triage Meter System products commercially available or under development,
including the Triage Cardiac System and Triage BNP System. Under the terms of
the LRE Agreement, LRE developed and produced the fluorescent meter according to
specifications provided by us. LRE is our exclusive supplier of the Triage Meter
during the term of the LRE Agreement, unless LRE is incapable of satisfying our
needs or is prohibited from producing the meters for a specific immunoassay
application. We purchase the Triage Meters from LRE in Deutsche Marks, or a
successor currency to Deutsche Marks, through firm purchase orders on a per
meter price basis which varies according to sales volume.
ARKRAY KDK CORPORATION ("KDK")
In February 1995, we entered into a development, supply and distribution
agreement with KDK, pursuant to which the parties agreed to collaborate in the
development and marketing of the Triage Cardiac System. We granted KDK the
exclusive right to distribute the current version of the Triage Cardiac System
in Japan and in some countries of Asia, the Middle East and Pacific Island
countries. KDK began distributing the Triage Cardiac System in January 2000 to
certain countries. KDK purchases Triage Cardiac Panels and Triage Meters from us
in U.S. dollars through firm purchase orders on a per test or meter fixed price
basis. The distribution agreement provides for minimum annual purchase
quantities. KDK can terminate this agreement at any time.
BIOSITE DISCOVERY PROGRAM
In March 1999, we introduced our Biosite Discovery program, a collaborative
research and diagnostics development program focused on the identification of
new protein markers for acute diseases. We use our expertise in antibody
development to help pharmaceutical and biotechnology partners accelerate their
research programs. We utilize our proprietary Omniclonal antibody development
technology to develop high affinity antibodies for our customers' use in
characterizing and validating protein targets. In return, we obtained and seek
to continue to obtain diagnostic rights to the proteins under study. If the
diagnostic utility of a marker is established, it will then be assessed for
commercialization potential, with high value markers being added to our product
development pipeline. We executed collaborative agreements under the Biosite
Discovery program with several partners, including Corixa Corporation, Diadexus
L.L.C., Morphosys AG, Scios Inc. and Duke University in the areas of
cardiovascular, cerebrovascular, infectious disease and oncology.
-12-
<PAGE>
PROPRIETARY TECHNOLOGY AND PATENTS
Our ability to compete effectively will depend in part on our ability to
develop and maintain proprietary aspects of our technology, and to operate
without infringing the proprietary rights of others or to obtain licenses to
such proprietary rights. We have U.S. and foreign issued patents and are
currently prosecuting patent applications in the United States and with certain
foreign patent offices. There can be no assurance that any of our pending patent
applications will result in the issuance of any patents, that our patent
applications will have priority over others' applications, or that, if issued,
any of our patents will offer protection against competitors with similar
technology. There can be no assurance that any patents issued to us will not be
challenged, invalidated or circumvented in the future or that the rights created
thereunder will provide a competitive advantage.
Our current products and products under development may incorporate
technologies that are the subject of patents issued to, and patent applications
filed by, others. We obtained licenses for some technologies and are negotiating
to obtain licenses for technologies patented by others. We may not be able to
obtain licenses for technology patented by others on commercially reasonable
terms, if at all. We may not be able to develop alternative approaches if we are
unable to obtain licenses or that our current and future licenses will be
adequate for the operation of our business. The failure to obtain necessary
licenses or to identify and implement alternative approaches would prevent us
from commercializing certain of our products under development and would have a
material adverse effect on our business, financial condition and results of
operations.
Litigation may be necessary to enforce any patents issued to us to protect
trade secrets or know-how owned by us or to determine the enforceability, scope
and validity of the proprietary rights of others. We have settled three patent
infringement claims by obtaining licenses to the contested patent in return for
up-front payments and/or royalty obligations.
We have received correspondence from other parties calling to our attention
the existence of patents that they believe cover technology which is or may be
incorporated in our products and products under development. Some of this
correspondence has included offers to negotiate the licensing of the patented
technologies. These matters may result in litigation to determine the
enforceability, scope, and validity of the patents. Litigation, if initiated,
could seek to recover damages as a result of any sales of the products and to
enjoin further sales of such products.
Litigation that could be brought forth by other parties have in the past and
may in the future result in material expenses to us and significant diversion of
effort by our 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 we had no
successful defense to such claims. An adverse outcome in litigation or the
failure to obtain a necessary license could subject us to significant liability
and could prevent us from selling any or all of our products, which could have a
material adverse effect on our business, financial condition and results of
operations.
We rely upon trade secrets, technical know-how and continuing invention to
develop and maintain our competitive position. There can be no assurance that
others will not independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to our trade secrets or
disclose such technology, or that we can meaningfully protect our trade secrets,
or that we will be capable of protecting our rights to our trade secrets.
Others may have filed and in the future are likely to file patent
applications that are similar or identical to ours. To determine the priority of
inventions, we may have to participate in interference proceedings declared by
the United States Patent and Trademark Office that could result in substantial
cost to us. No assurance can be given that any patent application of another
will not have priority over patent applications filed by us.
Our commercial success also depends in part on us neither infringing patents
or proprietary rights of third parties nor breaching any licenses that may
relate to our technologies and products. We are aware of several third-party
patents that may relate to our technology. There can be no assurance that we do
not or will not infringe these patents, or other patents or proprietary rights
of third parties. In addition, we have 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
-13-
<PAGE>
legal action against us or our collaborative partners claiming damages
and seeking to enjoin commercial activities relating to our products and
processes affected by third party rights, in addition to subjecting us to
potential liability for damages, may require us or our collaborative partner
to obtain a license in order to continue to manufacture or market the
affected products and processes. There can be no assurance that we or our
collaborative partners would prevail in any such action or that any license
(including licenses proposed by third parties) required under any such patent
would be made available on commercially acceptable terms, if at all. There
are a significant number of U.S. and foreign patents and patent applications
in our areas of interest, and we believe that there may be significant
litigation in the industry regarding patent and other intellectual property
rights. If we become involved in such litigation, it could consume a
substantial portion of our managerial and financial resources, which could
have a material adverse effect on our business, financial condition and
results of operations.
GOVERNMENT REGULATION
The testing, manufacture and sale of our 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 the FDA regulates the preclinical and clinical testing,
manufacture, labeling, distribution and promotion of medical devices. We will
not be able to commence marketing or commercial sales in the United States of
new products under development until we receive 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
us.
We may not be able to obtain necessary regulatory approvals or clearances
for our 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 us.
In December 1999, we filed a pre-market approval application ("PMA") with
the United States Food and Drug Administration ("FDA") seeking approval to
market the Triage BNP Test in the United States. At the present time, in the
United States, there is no blood test available to aid in diagnosing CHF. On
March 24, 2000, the FDA Clinical Chemistry and Clinical Toxicology Device Panel
("Advisory Panel") recommended not to approve our PMA for the Triage BNP Test.
In voting, the Advisory Panel indicated the need for additional data, including
data concerning people in higher age groups that did not have CHF. Despite this
outcome, we continue to believe in the potential utility, safety and
effectiveness of the Triage BNP Test. We will work with the FDA to answer any
questions they may have. We intend to submit an amendment to our PMA application
if we develop the additional data requested by the FDA. We will continue to
market the Triage BNP Test internationally.
-14-
<PAGE>
RISK FACTORS
WE HAVE ONLY A LIMITED HISTORY OF PROFITABILITY AND WE MAY NOT MAINTAIN
PROFITABILITY. IN ADDITION OUR QUARTERLY RESULTS WILL FLUCTUATE
We achieved operating profitability in the third and fourth quarters of
1999. However, we incurred an operating loss during the prior seven quarters. We
may not be able to maintain operating profitability on a quarterly or annual
basis in the future. We believe that our 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 us
- market acceptance of current or new products
- changes in the mix of products sold
- manufacturing delays or inefficiencies
- competitive pressures on average selling prices
- the timing of significant orders
- research and development efforts
- seasonal customer demand
- changes in reimbursement policies
- regulatory uncertainties or delays
- product recalls
- shipment problems
- costs and timing associated with business development activities,
including potential licensing of technologies
Operating results would also be adversely affected by a downturn in the
market for our products. Because we continue to increase our operating expenses
to support our expanded sales and marketing activities, manufacturing operations
and new product development, our operating results would be adversely affected
if our sales and gross profits did not correspondingly increase or if our
product development efforts are unsuccessful or subject to delays. Our limited
operating history makes accurate prediction of future operating results
difficult or impossible. We may not sustain revenue growth or sustain
profitability on a quarterly or annual basis and our growth or operating results
may not be consistent with predictions made by securities analysts.
WE ARE DEPENDENT ON THE DEVELOPMENT AND INTRODUCTION OF NEW PRODUCTS FOR REVENUE
GROWTH AND PROFITABILITY
Except for our commercialized products, all of our products are still under
development and may not be successfully developed or commercialized on a timely
basis, or at all. If we are 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, we will be harmed.
We believe that our revenue growth and profitability will substantially
depend upon our ability to complete development of and successfully introduce
these new products as well continue to achieve a growing level of market
acceptance of new products such as the Triage Cardiac System and Triage BNP
System. In addition, the successful development of some of these new products
will depend on the development of new technologies. We will be required to
undertake time-consuming and costly development activities and seek regulatory
approval for these new products. We 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. In December 1999, we filed a PMA with FDA seeking
approval to market the Triage BNP Test in the United States. At the present
time, in the United States, there is no blood test available to aid in
diagnosing CHF. On March 24, 2000, the FDA Clinical Chemistry and Clinical
Toxicology Device Panel ("Advisory Panel") recommended not to approve our PMA
for the Triage BNP Test. In voting, the Advisory Panel indicated the need for
additional data, including data concerning people in higher age groups that did
not have CHF.
-15-
<PAGE>
Despite this outcome, we continue to believe in the potential utility, safety
and effectiveness of the Triage BNP Test. We will work with the FDA to answer
any questions they may have. We intend to submit an amendment to our PMA
application if we develop the additional data requested by the FDA. We have
limited resources to devote to the development of our 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, we will be required
to establish and maintain:
- reliable, cost-efficient, high-volume manufacturing capacity
- a cost-effective sales force and administrative infrastructure
- an effective product distribution system for our products
OUR LIMITED MANUFACTURING EXPERIENCE AND OUR POTENTIAL INABILITY TO SCALE-UP
MANUFACTURING MAY ADVERSELY AFFECT OUR ABILITY TO PRODUCE PRODUCTS
We must manufacture our products in compliance with regulatory requirements,
in sufficient quantities and on a timely basis, while maintaining product
quality and acceptable manufacturing costs. Significant additional work will be
required for the scaling-up of each new product prior to commercialization, and
this work may not be completed successfully.
In addition, although we expect some of our newer products and products
under development to share production attributes with our 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
us or any other party at a cost or in quantities to make these products
commercially viable. If we are unable to develop or contract for manufacturing
capabilities on acceptable terms for our products under development, our 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 us.
Manufacturing and quality control problems have arisen and may arise as we
attempt to scale-up our manufacturing and such scale-up may not be achieved in a
timely manner or at a commercially reasonable cost, or at all.
Our manufacturing facilities and those of our 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 requirements of the FDA. We or our contractors may not satisfy such
regulatory requirements, and any failure to do so would have a material adverse
effect on us.
WE ARE DEPENDENT ON SOLE-SOURCE SUPPLIERS FOR OUR PRODUCTS. A SUPPLY
INTERRUPTION WOULD HARM US
Key components and raw materials used in the manufacture of our products are
provided by single-source vendors. Any supply interruption in a sole-sourced
component or raw material would have a material adverse effect on our ability to
manufacture these products until a new source of supply is qualified and, as a
result, would have a material adverse effect on us. In addition, an uncorrected
impurity or supplier's variation in a raw material, either unknown to us or
incompatible with our manufacturing processes of the Triage DOA Panel, Triage C.
DIFFICILE Panel, Triage Parasite Panel, Triage Cardiac System and Triage BNP
System, could have a material adverse effect on our ability to manufacture
products. We have under development products which, if developed, may require us
to enter into additional supplier arrangements. We 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 us.
We rely upon LRE for production of the fluorescent meter used in connection
with our Triage Meter System platform products, including the Triage Cardiac
System and Triage BNP System and others currently under development. Our
dependence upon LRE for the manufacture of the meter may adversely affect
- our profit margins
- our 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
-16-
<PAGE>
WE ARE DEPENDENT IN THE NEAR TERM ON SALES OF THE TRIAGE DOA PANEL. A
SIGNIFICANT REDUCTION IN SALES OF THE TRIAGE DOA PANEL WOULD HARM US
Sales of the Triage DOA Panel products accounted for approximately 83% of
our sales in 1999. We expect our revenue and profitability to substantially
depend on the sale of the Triage DOA Panel products for the foreseeable future.
A significant reduction in demand for the Triage DOA Panel products would have a
material adverse effect on us. We believe 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 our profit margins for the Triage DOA
Panel products. Our continued growth will depend on:
- our ability to successfully commercialize our newer products
- develop and commercialize other products
- gain additional acceptance of the Triage DOA Panel products in new
market segments, such as the international market segments.
Sales of our newer products represented less than 22% of net sales during
1999.
We may not be able to successfully commercialize new products, including the
Triage C. DIFFICILE Panel, Triage Parasite Panel, and Triage Cardiac System, and
we may not be able to maintain or expand our share of the drug-testing market.
Technological change or the development of new or improved diagnostic
technologies could result in our products becoming obsolete or noncompetitive.
WE ARE DEPENDENT ON KEY DISTRIBUTORS AND HAVE LIMITED DIRECT SALES EXPERIENCE.
IF OUR DISTRIBUTORS TERMINATE THEIR RELATIONSHIP WITH US OR FAIL TO ADEQUATELY
PERFORM, OUR PRODUCT SALES WILL SUFFER
We rely upon a key distributor alliance with Fisher HealthCare to distribute
our products in the United States 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 83% of net sales in 1999) and
internationally by country-specific and regional distributors. The loss or
termination of one or more of these distributors would have a material adverse
effect on our sales.
If any of our distribution or marketing agreements are terminated and we are
unable to enter into alternative agreements or if we elect to distribute new
products directly, we 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. We have limited
experience in direct sales, marketing and distribution of our products. Our
direct sales, marketing and distribution efforts may not be successful. Further,
we 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 our failure to successfully market our products would have a
material and adverse effect on us.
COMPETITION AND TECHNOLOGICAL CHANGE MAY MAKE OUR PRODUCTS LESS ATTRACTIVE OR
OBSOLETE
The market in which we compete is intensely competitive. Our competitors
include:
- health care companies
- laboratory-based tests and analyzers
- 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. We expect that these laboratories
will compete vigorously to maintain their dominance of the testing market. In
order to achieve market acceptance for our products, we will be required to
demonstrate that our 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. Our products
may not be able to compete with the testing services provided by traditional
laboratory services.
-17-
<PAGE>
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
- Dade Behring
have developed or are developing diagnostic products that do or will compete
with our products. These competitors have substantially greater financial,
technical, research and other resources and larger, more established marketing,
sales, distribution and service organizations than us. Moreover, these
competitors offer broader product lines and have greater name recognition than
us, 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 our products. Our competitors may succeed in developing or
marketing technologies or products that are more effective or commercially
attractive than our products, or that would render our technologies and products
obsolete. Moreover, we 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 us or may
prevent, limit or interfere with our ability to make, use or sell its products
either in the United States or in international markets.
HEALTHCARE REFORM AND RESTRICTIONS ON REIMBURSEMENT MAY ADVERSELY AFFECT OUR
RESULTS
In the United States, health care providers that purchase the Triage DOA
Panel and other diagnostic products generally rely on third party payors to
reimburse all or part of the cost of the procedure. Third party payors can
affect the pricing or the relative attractiveness of our 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, some health care
providers are moving towards a managed care system in which providers contract
to provide comprehensive health care for a fixed cost per patient. We are unable
to predict what changes will be made in the reimbursement methods utilized by
third party payors. We 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 our
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 our products may decrease amounts physicians and other
practitioners are able to charge patients, which in turn may adversely affect
our ability to sell our 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 our products could have a material adverse effect on us. 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 our existing
products or products under development.
In addition, market acceptance of our 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.
We believe 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 us. 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 our products or our ability to sell our products
on a profitable basis.
-18-
<PAGE>
OUR PATENT AND PROPRIETARY TECHNOLOGY MAY NOT PROVIDE US WITH ANY BENEFIT AND
THE PATENTS OF OTHERS MAY PREVENT US FROM COMMERCIALIZING OUR PRODUCTS
Our ability to compete effectively will depend in part on our ability to
develop and maintain proprietary aspects of our technology, and to operate
without infringing the proprietary rights of others or to obtain licenses to
such proprietary rights. Our patent applications may not result in the issuance
of any patents. Additionally, our patent applications may not have priority over
others' applications, or, if issued, our patents may not offer protection
against competitors with similar technology. Any patents issued to us may be
challenged, invalidated or circumvented in the future and the rights created
thereunder may not provide a competitive advantage.
Our products may incorporate technologies that are the subject of patents
issued to, and patent applications filed by, others. We have obtained licenses
for some technologies and may negotiate to obtain other licenses for
technologies patented by others. However, we may not be able to obtain licenses
for technology patented by others on commercially reasonable terms, or at all.
We may not be able to develop alternative approaches if we are unable to obtain
licenses and our current and future licenses may not be adequate for the
operation of our business. The failure to obtain necessary licenses or to
identify and implement alternative approaches would prevent us from
commercializing some of our products under development and would have a material
adverse effect on us.
Litigation may be necessary to enforce any patents issued to us, to protect
trade secrets or know-how owned by us or to determine the enforceability, scope
and validity of the proprietary rights of others. We settled a number of patent
infringement claims prior to 1999.
THE LEGAL PROCEEDINGS TO OBTAIN PATENTS AND LITIGATION OF THIRD-PARTY CLAIMS OF
INTELLECTUAL PROPERTY INFRINGEMENT COULD REQUIRE US TO SPEND SUBSTANTIAL AMOUNTS
OF MONEY AND COULD IMPAIR OUR OPERATIONS
We 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. We also have
received correspondence from other parties calling to our attention the
existence of patents that they believe cover technology which is or may be
incorporated in our 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 us and significant diversion of effort by our 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 we had no successful defense to such
claims. An adverse outcome in litigation or the failure to obtain a necessary
license could subject us to significant liability and could prevent us from
selling our products, which would have a material adverse effect on us.
We also rely upon trade secrets, technical know-how and continuing invention
to develop and maintain our competitive position. Others may independently
develop substantially equivalent proprietary information and techniques or
otherwise gain access to our trade secrets or disclose such technology, and we
may not be able to protect our trade secrets or our rights to our trade secrets.
Others may have filed and in the future are likely to file patent
applications that are similar or identical to ours. To determine the priority of
inventions, we may have to participate in interference proceedings declared by
the USPTO that could result in substantial cost to us. Patent applications of
others may have priority over patent applications filed by us.
Our commercial success depends in part on us neither infringing patents or
proprietary rights of third parties nor breaching any licenses that may relate
to our technologies and products. We are aware of several third-party patents
that may relate to our technology. We may infringe these patents, or other
patents or proprietary rights of third parties. In addition, we have 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 us or our collaborative partners claiming damages and seeking to
enjoin commercial activities relating to our products and processes affected by
third party rights, in addition to subjecting us to potential liability for
damages, may require us or our collaborative partner to obtain a license in
order to continue to manufacture or market the affected products and processes.
We or our collaborative partners may not prevail in any such action and any
license (including licenses proposed by third parties) required under any such
patent may
-19-
<PAGE>
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
our areas of interest, and we believe 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 our managerial and financial
resources, which would have a material adverse effect on us.
WE MAY NEED ADDITIONAL CAPITAL. IF ADDITIONAL CAPITAL IS NOT AVAILABLE, WE MAY
HAVE TO CURTAIL OR CEASE OPERATIONS
If cash generated from operations is insufficient to satisfy our working
capital and capital expenditure requirements, we 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. Our future liquidity and capital funding requirements will depend on
numerous factors, including:
- the extent to which our new products and products under development are
successfully developed, gain market acceptance and become and remain
competitive
- the costs and timing of further expansion of sales, marketing and
manufacturing activities, facilities expansion needs
- the timing and results of clinical studies and regulatory actions
regarding our potential products
- changes in third party reimbursement policies
- the costs and timing associated with business development activities,
including potential licensing of technologies patented by others
The failure by us to raise capital on acceptable terms when needed would
cause us to have to scale back our operations, reduce our work force and license
to others products we would otherwise seek to develop or commercialize
ourselves. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
THE REGULATORY APPROVAL PROCESS IS EXPENSIVE, TIME CONSUMING AND UNCERTAIN WHICH
MAY PREVENT US FROM OBTAINING REQUIRED APPROVALS OR HAVE APPROVALS RESCINDED FOR
THE COMMERCIALIZATION OF OUR PRODUCTS
The testing, manufacture and sale of our 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. We will not be able to commence marketing or
commercial sales in the United States of new products under development until we
receive 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 us.
In the United States, medical devices are classified into one of three
classes, i.e. Class I, II or III, on the basis of the controls deemed necessary
by the FDA to reasonably ensure their safety and effectiveness. Class I devices
are subject to general controls, e.g., labeling, premarket notification and
adherence to the Quality System Regulation, QSR, and Class II devices are
subject to general and special controls, e.g., performance standards, postmarket
surveillance, patient registries and FDA guidelines. Generally, Class III
devices are those which must receive premarket approval by the FDA to ensure
their safety and effectiveness, e.g., life-sustaining, life-supporting and
implantable devices or new devices which have been found not to be substantially
equivalent to legally marketed devices.
Before a new device can be introduced in the market, the manufacturer must
generally obtain FDA clearance through clearance of a 510(k) notification or
approval of a pre-market approval, PMA, application. A PMA
-20-
<PAGE>
application must be filed if a proposed device is a new device not
substantially equivalent to a legally marketed Class I or Class II device, or
if it is a preamendment Class III device for which the FDA has called for
PMAs. A PMA application must be supported by valid scientific evidence to
demonstrate the safety and effectiveness of the device, typically including
the results of clinical investigations, bench tests, laboratory and animal
studies. The PMA application must also contain a complete description of the
device and its components and a detailed description of the methods,
facilities and controls used to manufacture the device. In addition, the
submission must include the proposed labeling, advertising literature and any
training materials. The PMA approval process can be expensive, uncertain and
lengthy, and a number of devices for which FDA approval has been sought by
other companies have never been approved for marketing.
Upon receipt of a PMA application, the FDA makes a threshold determination
as to whether the application is sufficiently complete to permit a substantive
review. If the FDA determines that the PMA application is complete, the FDA will
accept the application for filing. Once the submission is accepted, the FDA
begins an in-depth review of the PMA. The FDA review of a PMA application
generally takes one to three years from the date the application is accepted,
but may take significantly longer. The review time is often significantly
extended by FDA requests for additional information or clarification of
information already provided in the submission. During the review period, it is
likely that an advisory committee, typically a panel of clinicians, will be
convened to review and evaluate the application and provide recommendations to
the FDA as to whether the device should be approved. The FDA is not bound by the
recommendation of the advisory panel. Toward the end of the PMA review process,
the FDA generally will conduct an inspection of the manufacturer's facilities to
ensure that the facilities are in compliance with applicable QSR requirements.
If FDA evaluations of both the PMA application and the manufacturing facilities
are favorable, the FDA may issue either an approval letter or an approvable
letter, which usually contains a number of conditions that must be met in order
to secure final approval of the PMA. When and if those conditions have been
fulfilled to the satisfaction of the FDA, the agency will issue a PMA approval
letter, authorizing commercial marketing of the device for certain indications.
If the FDA's evaluation of the PMA application or manufacturing facilities is
not favorable, the FDA will deny approval of the PMA application or issue a
non-approvable letter. The FDA may determine that additional clinical
investigations must be performed, in which case the PMA may be delayed for one
or more years while additional clinical investigations are conducted and
submitted in an amendment to the PMA. Modifications to a device that is the
subject of an approved PMA, its labeling or manufacturing process may require
approval by the FDA of PMA supplements or new PMAs. Supplements to an approved
PMA often require the submission of the same type of information required for an
initial PMA, except that the supplement is generally limited to that information
needed to support the proposed change from the product covered by the original
PMA.
A 510(k) clearance will be granted if the submitted information establishes
that the proposed device is "substantially equivalent" to a legally marketed
Class I or Class II medical device or to a preamendment Class III medical device
for which the FDA has not called for PMAs. The FDA recently has been requiring
more rigorous demonstration of substantial equivalence than in the past,
including in some cases requiring submission of clinical data. It generally
takes from three to 12 months from submission to obtain 510(k) pre-market
clearance but may take longer. The FDA may determine that a proposed device is
not substantially equivalent to a legally marketed device or that additional
information is needed before a substantial equivalence determination can be
made. A "not substantially equivalent" determination, or a request for
additional information, could prevent or delay the market introduction of new
products that fall into this category. 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.
We have made modifications to the Triage DOA Panel since receipt of initial
510(k) clearance. With respect to several of these modifications, we filed new
510(k) notices describing the modifications, and have received FDA clearance of
those 510(k) notices. We made other modifications to the Triage DOA Panel which
we believe do not require the submission of new 510(k) notices. There can be no
assurance, however, that the FDA would agree with any of our determinations not
to submit a new 510(k) notice for any of these modifications, or would not
require us to submit a new 510(k) notice for any of these modifications made to
the Triage DOA Panel. If the FDA requires the Company to submit a new 510(k)
notice for any device modification, we may be prohibited from marketing the
modified the Triage DOA Panel until the 510(k) notice is cleared by the FDA.
We are uncertain of the regulatory path to market that the FDA will
ultimately apply to our products currently in development. Although the Triage
DOA Panel, Triage C. DIFFICILE Panel, Triage Parasite Panel and Triage Cardiac
-21-
<PAGE>
Panel received 510(k) clearance, a PMA is required for Triage BNP Test and may
be required for the other products now in development. There can be no assurance
that the FDA will not determine that we must adhere to the more costly, lengthy
and uncertain PMA approval process for any of our products in development.
In December 1999, we filed a PMA with the FDA, seeking approval to market
the Triage BNP Test in the United States. At the present time, in the United
States, there is no blood test available to aid in diagnosing CHF. On March 24,
2000, the FDA Clinical Chemistry and Clinical Toxicology Device Panel ("Advisory
Panel") recommended not to approve our PMA for the Triage BNP Test. In voting,
the Advisory Panel indicated the need for additional data, including data
concerning people in higher age groups that did not have CHF. Despite this
outcome, we continue to believe in the potential utility, safety and
effectiveness of the Triage BNP Test. We will work with the FDA to answer any
questions they may have. We intend to to submit an amendment to our PMA
application I few develop the additional data requested by the FDA. The FDA has
not conducted its inspection of our facilities to ensure that the facilities are
in compliance with applicable QSR requirements.
We may not be able to obtain necessary regulatory approvals or clearances
for our products on a timely basis, if at all. 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 our business,
financial condition and results of operations.
Before the manufacturer of a device can submit the device for FDA approval
or clearance, 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, IVD, tests, 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.
We intend to conduct clinical investigations of our 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 our IUO
distribution of its IVD products under development will meet the requirements
for IDE exemption. Furthermore, failure by us 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 our
distribution of its products under development, which would adversely affect our
ability to conduct the clinical investigations necessary to support marketing
clearance or approval.
Any devices manufactured or distributed by us pursuant to FDA clearance or
approvals are subject to pervasive and continuing regulation by FDA and certain
state agencies. 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 Reporting, 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, if the malfunction were to recur, it would be likely to cause or contribute
to a death or serious injury. 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.
We are subject to routine inspection by the FDA and certain state agencies
for compliance with QSR requirements, MDR requirements and other applicable
regulations. The recently finalized QSR requirements include the addition of
design controls that will likely increase the cost of compliance. Changes in
existing requirements or adoption of new requirements could have a material
adverse effect on our business, financial condition and results of operation.
There can be no assurance that we will not incur significant costs to comply
with laws and regulations in the future or that laws and regulations will not
have a material adverse effect upon our business, financial condition and
results of operations.
We are also subject to numerous federal, state and local laws relating to
such matters as safe working conditions,
-22-
<PAGE>
manufacturing practices, environmental protection, fire hazard control and
disposal of hazardous or potentially hazardous substances. There can be no
assurance that we will not incur significant costs to comply with laws and
regulations in the future or that such laws or regulations will not have a
material adverse effect upon our business, financial condition and results of
operations.
The use of our products is also affected by the Clinical Laboratory
Improvement Amendments of 1988, 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 will not have a material adverse effect
on our ability to market our products or on our business, financial condition or
results of operations.
WE ARE DEPENDENT ON OTHERS FOR THE DEVELOPMENT OF PRODUCTS. THE FAILURE OF OUR
COLLABORATIONS TO SUCCESSFULLY DEVELOP PRODUCTS WOULD HARM OUR BUSINESS
Our strategy for the research, development, commercialization and
distribution of some of our products entails entering into various arrangements
with third parties. We are or will be 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.
We entered into agreements with partners for the development and marketing
of products. The agreements are subject to rights of termination and may be
terminated. Our collaborators may not abide by their contractual obligations and
may discontinue or sell their current lines of business. The research for which
we receive or provide funding may not lead to the development of products. We
intend to enter into additional development and marketing agreements. We may not
be able to enter into agreements on acceptable terms, or at all.
We are 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 improvements by LRE. LRE may not improve the
hardware or software on schedule, or at all, and new software that permits the
meter to be used for another Triage Meter System product may not be further
improved.
WE MAY NOT BE ABLE TO MANAGE OUR GROWTH
We anticipate increased growth in the number of our employees, the scope of
our operating and financial systems and the geographic area of our operations as
new products are developed and commercialized. This growth will result in an
increase in responsibilities for both existing and new management personnel. Our
ability to manage growth effectively will require us to continue to implement
and improve our operational, financial and management information systems and to
train, motivate and manage our employees. We may not be able to manage our
expansion, and a failure to do so could have a material adverse effect on us.
IF WE LOSE OUR KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN ADDITIONAL
PERSONNEL, WE MAY NOT BE ABLE TO PURSUE COLLABORATIONS OR DEVELOP OUR OWN
PRODUCTS
Our future success depends in part on the continued service of our key
technical, sales, marketing and executive personnel, and its ability to
identify, hire and retain qualified personnel. Competition for such personnel is
intense and we may not be able to retain existing personnel or identify or hire
additional personnel.
WE MAY HAVE SIGNIFICANT PRODUCT LIABILITY EXPOSURE
The testing, manufacturing and marketing of medical diagnostic devices
entails an inherent risk of product liability claims. Potential product
liability claims may exceed the amount of our insurance coverage or may be
excluded from coverage under the terms of the policy. Our 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 we are held liable for a claim against
which we are not indemnified or for damages exceeding the limits of our
insurance coverage, that claim could exceed our total assets.
-23-
<PAGE>
ITEM 2. PROPERTIES
We lease approximately 134,000 square feet of space in eight buildings in
the Sorrento Valley area in San Diego under leases that expire from December
2000 through December 2004. We have renewal options for one building through
March 2005. We believe these facilities are adequate for our current needs and
that suitable additional or alternative space will be available in the future on
commercially reasonable terms as needed. Our current facilities are used for our
administrative offices, research and development facilities and manufacturing
operations. We are evaluating various alternatives in addressing our future
facilities expansion needs. The alternatives being evaluated include
negotiations with various parties for the leasing of additional facility space,
which would be adequate for our foreseeable future needs. Leasing of additional
facility space would be expected to result in an increase in rent upon
occupancy.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
-24-
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Our common stock is traded in the over-the-counter market on the Nasdaq
National Market, the NNM, under the symbol BSTE. The following tables set forth
the high and low sale prices, for our common stock as reported on the NNM for
the periods indicated.
<TABLE>
<CAPTION>
1999 HIGH LOW
---- ---- ---
<S> <C> <C>
First Quarter................................ $ 14.375 $ 9.500
Second Quarter............................... $ 11.000 $ 7.000
Third Quarter................................ $ 10.125 $ 7.500
Fourth Quarter............................... $ 17.875 $ 7.625
<CAPTION>
1998 HIGH LOW
---- ---- ---
<S> <C> <C>
First Quarter................................ $ 17.750 $ 8.125
Second Quarter............................... $ 16.313 $ 9.250
Third Quarter................................ $ 11.000 $ 3.563
Fourth Quarter............................... $ 12.500 $ 4.250
</TABLE>
There were approximately 101 holders of record of common stock as of
February 29, 2000. We have not paid any cash dividends to date and do not
anticipate any being paid in the foreseeable future.
-25-
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................................... $25,147 $28,206 $31,677 $34,424 $43,011
Cost of sales................................ 5,649 5,983 6,926 10,513 13,636
------- ------- ------- ------- -------
Gross profit................................. 19,498 22,223 24,751 23,911 29,374
Selling, general and administrative.......... 7,134 8,623 11,549 15,469 17,581
Research and development..................... 6,553 9,268 11,662 11,167 13,347
Defense of patent matters.................... 1,217 2,368 331 4,861 --
------- ------- ------- ------- -------
Total operating expenses..................... 14,904 20,259 23,542 31,497 30,928
Income (loss) from operations................ 4,594 1,964 1,209 (7,586) (1,553)
Interest and other income, net............... 1,647 1,846 3,435 5,026 2,491
Reacquisition of distribution rights......... -- -- (3,364) -- --
------- ------- ------- ------- -------
Income (loss) before benefit (provision) for
income taxes............................... 6,241 3,810 1,280 (2,560) 938
Benefit (provision) for income taxes......... 1,667 (261) (82) 1,448 166
------- ------- ------- ------- -------
Net income (loss)............................ $ 7,908 $ 3,549 $ 1,198 $(1,113) $ 1,104
------- ------- ------- ------- -------
Basic net income (loss) per share............ $ 6.46 $ 2.48 $ 0.11 $ (0.09) $ 0.08
======= ======= ======= ======= =======
Diluted net income (loss) per share.......... $ 0.79 $ 0.34 $ 0.09 $ (0.09) $ 0.08
======= ======= ======= ======= =======
Common and common equivalent shares used in
computing per share amounts(1)
- Basic............................... 1,225 1,431 11,249 12,939 13,032
- Diluted............................. 10,004 10,392 13,081 12,939 13,728
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and marketable
securities................................ $13,979 $ 9,916 $ 39,257 $ 34,229 $ 32,272
Working capital........................... 14,428 14,305 46,611 41,214 39,978
Total assets.............................. 27,935 30,089 63,311 65,809 68,148
Long-term obligations, less current portion 2,739 3,253 3,797 4,038 4,069
Stockholders' equity...................... 18,526 22,153 55,090 54,683 56,885
</TABLE>
- ----------
(1) Computed on the basis described in Note 1 of Notes to Financial
Statements.
-26-
<PAGE>
ITEM 7. 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. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE DISCUSSED HERE. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE SECTIONS ENTITLED
"BUSINESS" AND "RISK FACTORS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS
ANNUAL REPORT ON FORM 10-K. WE DISCLAIM ANY INTENT OR OBLIGATION TO UPDATE THESE
FORWARD-LOOKING STATEMENTS.
OVERVIEW
We were established in 1988. We develop, manufacture and market rapid,
accurate and cost-effective diagnostic products that improve the quality of
patient care and simplify the practice of laboratory medicine. Our two product
platforms are designed to provide rapid results through either qualitative
visual readings or quantitative meter readings. In 1992, we launched our first
qualitative platform product, the Triage DOA Panel. In 1998, we began selling
two additional qualitative platform products, the Triage C. DIFFICILE Panel and
the Triage Parasite Panel. Also, in 1998, we launched our first quantitative
platform product, the Triage Cardiac System. We followed these product launches
with the introduction of our second quantitative platform product, the Triage
BNP System, in certain international countries in December 1999.
We market our products worldwide primarily through distributors supported by
our direct sales force. Our principal markets are hospital laboratories,
emergency departments and other point-of-care locations. In addition to focusing
our attention on commercial activities associated with these products, we
continue to invest in the research and development of additional rapid tests
designed to aid in the diagnosis of several critical diseases or conditions in
four core areas: cardiovascular, cerebrovascular, infectious diseases and
oncology.
Our sales to date have primarily been attributed to sales of the Triage DOA
Panel product line. The Triage DOA Panel products are marketed pursuant to
exclusive distribution agreements in the U.S. hospital market segment by Fisher,
which accounted for 83% of product sales in 1999, and internationally by
country-specific and regional distributors. Since the launch of the Triage DOA
Panel in fiscal 1992, we experienced continued revenue growth from our Triage
DOA Panel product line. The growth in sales of Triage DOA Panel products has
slowed and we believe it may decline as the available U.S. market becomes
saturated and competitive pressures become more and more prominent in a maturing
market.
We returned to operating profitability during the third and fourth quarters
of 1999. However, we incurred an operating loss during the prior seven quarters.
We may not be able to maintain operating profitability on a quarterly or annual
basis in the future and our operating results may not be consistent with
predictions made by securities analysts.
We anticipate that our 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 us
- market acceptance of current or new products
- manufacturing inefficiencies
- progress of research and development projects including clinical trials
and regulatory delays
- seasonal customer demand, the timing or cancellation of significant
orders, product recalls and shipment problems
- changes in reimbursement policies
- competitive pressures on average selling prices
- changes in the mix of products sold
Operating results would also be adversely affected by a downturn in the
market for our current and future products. We continue to increase our
operating expenses, primarily for personnel, capital equipment and activities
supporting newly-introduced products and new product development. Our operating
results would be adversely affected if our net sales or gross profit did not
correspondingly increase or if our product development efforts were
-27-
<PAGE>
unsuccessful or are subject to delays. Our limited operating history makes
accurate prediction of future operating results difficult or impossible. We
may not sustain revenue growth or maintain profitability on a quarterly or
annual basis.
RECENT DEVELOPMENTS
NEW PRODUCTS
New product sales of the Triage Cardiac System and the Triage Microbiology
panels were approximately $9.2 million in 1999. The Triage Cardiac System is the
first product line of our new quantitative measurement product platform. Sales
of the Triage Cardiac System totaled approximately $6.6 million in 1999. During
the first quarter of 1999, we experienced manufacturing inefficiencies related
to the production of the Triage Cardiac System. We addressed those issues,
initiated a focused-factory approach and reorganized our manufacturing
operations to better suit the two different product platforms. The manufacturing
costs of the Triage Cardiac System improved significantly during the last three
quarters of 1999, which resulted in corresponding increases in the gross margin
of that product.
In December 1999, we began initial shipments of our second quantitative
platform product, the Triage BNP System, to certain international customers. The
Triage BNP System is a rapid, quantitative diagnostic test that may aid in the
diagnosis of congestive heart failure, CHF, and therefore potentially enable
earlier therapeutic intervention. Additionally, we filed a pre-market approval
application ("PMA") with the FDA, seeking approval to market the Triage BNP Test
in the United States. At the present time, in the United States, there is no
blood test available to aid in diagnosing CHF. On March 24, 2000, the FDA
Clinical Chemistry and Clinical Toxicology Device Panel ("Advisory Panel")
recommended not to approve our PMA for the Triage BNP Test. In voting, the
Advisory Panel indicated the need for additional data, including data concerning
people in higher age groups that do not have CHF. Despite this outcome, we
continue to believe in the potential utility, safety and effectiveness of the
Triage BNP Test. We will work with the FDA to answer any questions they may
have. We intend to submit an amendment to our PMA application if we develop the
additional data requested by the FDA. We will continue to market the Triage BNP
Test internationally.
BIOSITE DISCOVERY PROGRAM
In March 1999, we introduced our Biosite Discovery program, a collaborative
research and diagnostics development program focused on the identification of
new protein markers for acute diseases. We use our expertise in antibody
development to help pharmaceutical and biotechnology partners accelerate their
research programs. In return, we obtained and seek to continue to obtain
diagnostic rights to the proteins under study. We utilize our proprietary
Omniclonal-TM- antibody development technology to develop high affinity
antibodies for the characterization and validation of protein targets.
Initially, we focused on disease target markers in four core areas:
cardiovascular, cerebrovascular, infectious diseases 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 our product
development pipeline. We have executed collaborative agreements under the
Biosite Discovery program with several partners in the areas of cardiovascular,
cerebrovascular, infectious disease and oncology.
-28-
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth operating data as a percentage of net
sales:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1998 1999
----------- ----------- --------
<S> <C> <C> <C>
Net sales..................................... 100% 100% 100%
Cost of sales................................. 22 31 32
--- --- ---
Gross profit.................................. 78 69 68
Operating expenses:
Selling, general and administrative......... 36 45 41
Research and development.................... 37 32 31
Defense of patent matters................... 1 14 --
--- --- ---
Total operating expenses.................. 74 91 72
Income from operations....................... 4 (22) (4)
Other income, net............................. 11 15 6
Reacquisition of distribution rights.......... (11) -- --
---- --- ---
Income before benefit (provision) for income
taxes....................................... 4 (7) 2
Benefit (provision) for income taxes.......... -- 4 --
--- --- ---
Net income (loss)............................. 4% (3)% 2%
== ==== ==
</TABLE>
YEARS ENDED DECEMBER 31, 1999 AND 1998
NET SALES. Net sales increased 25% to $43.0 million in 1999 from $34.4
million in 1998. The increase in net sales was primarily attributable to the
growth in net sales 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 1999
were approximately $9.2 million, as compared to $2.3 million for 1998. Net sales
of the Triage DOA Panel for 1999 were 5% higher than net sales of the product
for 1998. Growth in sales of the Triage DOA Panel products has slowed and we
believe it 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 increased 23% to $29.4 million in 1999 from $23.9
million in 1998. The increase in gross profit was primarily attributable to the
overall sales growth and the realization of higher gross margins in 1999 as
compared to 1998 for our newer products. The overall gross margin decreased to
68% for 1999 from 69% for 1998. The overall gross margin for 1999 decreased
primarily as a result of a greater proportion of net sales representing the
newer products, which experienced lower gross margins than the Triage DOA Panel.
Also, during the first quarter of 1999, we experienced significant
inefficiencies related to the production of the Triage Cardiac System, resulting
in negative gross profits related to that product during that quarter. Gross
margins increased to profitable levels during the remaining quarters of 1999,
primarily as a result of efficiencies achieved in the manufacturing operations.
As a result of efficiencies achieved, we were able to utilize some of our
manufacturing resources for new product scale-up and validation activities
related to the Triage BNP and Triage LBP tests, two products under development.
The costs of new product scale-up and validation activities were charged to
research and development expenses, contributing to higher gross margins during
the remaining quarters of 1999. Our newer products are expected to continue to
realize lower gross margins than the Triage DOA Panel during the early stages of
their commercialization as incremental manufacturing costs are spread over
smaller sales volumes and efficiency issues are addressed. We also expect that
the overall gross margins will continue to decrease as a result of competitive
pricing pressures related to the maturing Triage DOA product line and the
changing mix of net sales of products with different gross margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 14% to $17.6 million in 1999 from $15.5
million in 1998. Increases in SG&A expenses were primarily associated with
additional marketing activities relating to new products, the expanded sales
activities related to our broader product lines and the increased administrative
costs to support our expanded operations and business development activities.
-29-
<PAGE>
Additionally, SG&A expenses for 1999 included administrative costs associated
with the reorganization of our manufacturing operations totaling approximately
$300,000 and costs related to a business development opportunity that we decided
to forego totaling approximately $425,000. We expect selling, general and
administrative costs in 2000 to be significantly higher than in 1999, as we
continue to expand our overall operations, including sales and marketing
activities for our 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 our new products and the progress of business development activities.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 20% to $13.3 million in 1999 from $11.2 million in 1998. Significant
manufacturing scale-up and validation expenses were incurred during 1998 related
to the Triage Cardiac System and Triage Microbiology panels. The Triage Cardiac
System was the first product on our new quantitative product platform and
required significant investments in the scale-up and validation of its
manufacturing and quality processes. Manufacturing scale-up and validation
expenses decreased during 1999. The decreases in manufacturing scale-up and
validation costs were offset by increases in other product development expenses.
During 1999, our research and development resources were focused primarily on
the development, clinical studies, manufacturing scale-up and validation of
products under development, potential improvements to our existing products and
research activities associated with the Biosite Discovery Program. We expect
that our research and development expenses will increase in 2000, as compared to
1999 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 costs associated
with the clinical trials are expected to be significant. Some of our potential
products are subject to more complex regulatory approval requirements than our
previous products. 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 Diagnostics litigation totaled $4.9 million in 1998. In February
1999, a settlement agreement was executed that resolved all disputes between
Spectral Diagnostics and us without a material adverse financial impact to us.
In March 1999, to avoid protracted litigation and continued significant legal
defense costs, we executed a settlement agreement with Dade Behring that
resolved all disputes outstanding between the companies. Accordingly, all
settlement costs were known prior to filing our 1998 Form 10-K and therefore
were expensed as of December 31, 1998.
OTHER INCOME (EXPENSES). Interest and other income decreased 25% to $1.8
million in 1999 from $2.4 million in 1998. Interest income decreased 19% to $1.9
million in 1999 from $2.3 million in 1998. The decrease in interest income
resulted primarily from the lower average balance of cash and marketable
securities and lower overall interest rates on marketable debt securities during
1999 as compared to 1998. Contract revenue decreased to $703,000 in 1999 from
$2.6 million in 1998. Contract revenues recognized during 1999 related to
activities associated with a research and development feasibility study being
performed by us and research and development activities related to the Biosite
Discovery Program. In 1998, we recognized $1.3 million from Kyoto Dai-Ichi
Kagaku C., Ltd. ("KDK") related to milestones achieved in the development of the
Triage Cardiac System, $1.1 million from Novartis related to milestones achieved
in the development of the NeoralChek System and $192,000 related to an SBIR
(Small Business Innovation Research) grant from the U.S. Government for research
related to potential microbiology products.
BENEFIT (PROVISION) FOR INCOME TAXES. For 1999 and 1998, as a result of the
pre-tax income (loss) and the estimated tax credits generated in each year, we
recorded a benefit for income taxes of $166,000 and $1.4 million, respectively.
The benefit for income taxes recognized in the fourth quarter of 1999 included
$112,000 of benefit resulting from the recognition of research and development
credits generated during the first three quarters of 1999. Recognition of these
credits had been deferred until management determined that their realization had
become more likely than not. At December 31, 1999, we had net deferred tax
assets of $4.4 million. The realization of the deferred tax assets is dependent
upon the generation of future taxable income of approximately $10.9 million. We
will continue to assess the likelihood of realization of our net deferred tax
assets. If future events occur which do not make the realization of such assets
more likely than not, a valuation allowance will be established against all or a
portion of the net deferred tax assets.
-30-
<PAGE>
YEARS ENDED DECEMBER 31, 1998 AND 1997
NET SALES. Net sales increased 9% to $34.4 million in 1998 from $31.7
million in 1997. The increase was primarily attributable to the introduction of
new products in 1998 and the continued market acceptance of our higher-priced
Triage DOA Plus TCA Panel products. Net sales for the products introduced in
1998 totaled approximately $2.3 million.
GROSS PROFIT. Gross profit decreased 3% to $23.9 million in 1998 primarily
as a result of experiencing negative gross profits related to the new products
introduced in 1998. The overall gross margin decreased to 69% for 1998 from 78%
for 1997. The gross margins decreased during the year primarily as a result of
the introduction of the Triage C. DIFFICILE and Parasite Panels and Triage
Cardiac System. During 1998, we experienced manufacturing scale-up and capacity
constraint issues related to the Triage Cardiac System that resulted in a
backlog of orders during the fourth quarter that was filled by February 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 34% to $15.5 million in 1998 from $11.5
million in 1997. The 1998 increases resulted primarily from the cost of our
expanded sales force, increased marketing activities associated with new
products and potential new products, and the expansion of administrative
functions to support our expanded operations and business development
activities. Additionally, our expended efforts related to transitioning our
product distribution in Europe from E. Merck to a network of regional
distributors.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
decreased 4% to $11.2 million in 1998 from $11.7 million in 1997. Although
manufacturing scale-up and optimization expenses were significantly higher in
1998 than 1997, the timing of clinical trials and other product development
expenses in 1997 resulted in an overall decrease in 1998 research and
development expenses as compared to 1997. There were significant product
development activities associated with the Triage Cardiac System in the fourth
quarter of 1997.
DEFENSE OF PATENT MATTERS. In 1998, we recorded a charge of approximately
$4.9 million associated with the defense and settlement of two separate patent
litigations. Settlement agreements were executed during the first quarter of
1999 that resolved both matters. Under the terms of the Dade Behring agreement,
we obtained a license to the patent and provided Dade Behring the option to
evaluate certain proprietary antibodies, resulting in a net payment of
$1,050,000 to Dade Behring by Biosite. We charged to defense of patent matters
in the 1998 statements of operations the applicable license costs related to
years prior to 1998 of $604,000.
OTHER INCOME. Contract revenue increased $1.4 million in 1998 from $1.2
million to $2.6 million. In 1998, we recognized $1.3 million from KDK related to
milestones achieved in the development of the Triage Cardiac System, $1.1
million from Novartis related to milestones achieved in the development of the
NeoralChek System and $192,000 related to an SBIR (Small Business Innovation
Research) grant from the U.S. Government for research related to potential
microbiology products. In 1997, we recognized $778,000 from Merck related to the
development of the Triage Cardiac System and $400,000 from Novartis related to
milestones in the development of the NeoralChek System.
BENEFIT (PROVISION) FOR INCOME TAXES. As a result of the pre-tax loss
recorded for 1998 and the pre-tax income for 1997, as well as the estimated tax
credits generated in each year, we recorded a benefit for income taxes of $1.4
million in 1998 and a provision for income taxes of $82,000 in 1997.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations through revenues from operations, private
and public placements of equity securities, debt and capital lease financing,
cash received under collaborative agreements and interest income. At December
31, 1999, the Company had cash, cash equivalents and marketable securities of
approximately $32.3 million compared to $34.2 million at December 31, 1998.
The decrease in cash, cash equivalents and marketable securities during 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, an additional $1.0 million payment made under a technology licensing
arrangement
-31-
<PAGE>
previously entered into and the purchases of equipment and leasehold
improvements totaling approximately $5.2 million. These significant uses of cash
were offset by the cash generated from operating activities and proceeds from
equipment financing and issuances of common stock under our stock plans.
Cash generated from operating activities totaled $4.4 million for 1999
compared to $674,000 for 1998. Other significant sources of cash for 1999
included the receipt of $5.5 million from the sale of marketable securities that
were not reinvested in other marketable securities, the receipt of $2.1 million
in proceeds from equipment financing and $1.3 million in proceeds from the
issuance of common stock under our stock plans. These proceeds were used to meet
our cash requirements during 1999.
During the year ended December 31, 1998, we generated $674,000 in cash from
operating activities despite significant investment of cash into our defense of
patent matters and new product launch activities such as manufacturing scale-up
tasks, inventory buildup for new products and sales and marketing activities.
Other significant business activities affecting cash included the purchase of
license rights to patented technologies totaling $3.7 million, the expenditure
of $3.1 million for capital equipment and leasehold improvements, the receipt of
$2.0 million in proceeds from equipment financing and payments under equipment
financing agreements of $1.5 million.
Our primary short-term needs for capital, which are subject to change, are
for the support of its commercialization efforts related to new products,
expansion of our manufacturing capacity and efficiency for new products,
potential licensing of technologies patented by others, potential procurement
and enforcement of patents and the continued advancement of research and
development efforts. We executed agreements to license technologies patented by
others which call for cash payments and future royalties based on product sales
utilizing the licensed technologies. We may enter into additional licensing
agreements that may include up-front and annual cash payments and future
royalties based on product sales utilizing the licensed technologies. We
utilized and may continue to utilize credit arrangements with financial
institutions to finance the purchase of capital equipment. Additionally, we may
utilize cash generated from operating activities, if any, to meet our capital
requirements.
We are evaluating various alternatives in addressing our future facilities
expansion needs. The alternatives being evaluated include negotiations with
various parties for the leasing of additional facility space, which would be
adequate for our foreseeable future needs. Leasing of additional facility space
would be expected to result in an increase in rent upon occupancy.
We believe that our available cash, cash from operations and funds from
existing credit arrangements will be sufficient to satisfy our funding needs for
at least the next 24 months. Thereafter, if cash generated from operations is
insufficient to satisfy our working capital and capital expenditure
requirements, we 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. Our future liquidity and capital funding
requirements will depend on numerous factors, including:
- the extent to which our new products and products under development are
successfully developed, gain market acceptance and become and remain
competitive
- the costs and timing of further expansion of sales, marketing and
manufacturing activities, facilities expansion needs
- the timing and results of clinical studies and regulatory actions
regarding our potential products
- changes in third party reimbursement policies
- the costs and timing associated with business development activities,
including potential licensing of technologies patented by others.
Our failure to raise capital on acceptable terms, when needed, could have a
material adverse effect on our business.
-32-
<PAGE>
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
We are exposed to changes in interest rates, primarily from its
variable-rate long-term debt arrangements and, to a lesser extent, our
investments in available-for-sale marketable securities. Under our current
policies, we do not use interest rate derivatives instruments to manage this
exposure to interest rate changes. We do have the option to convert our
variable-rate long-term debt arrangements to fixed-rate debt arrangements for a
nominal transaction fee. At December 31, 1999, we had variable-rate debt
totaling approximately $1.5 million. A hypothetical 1% adverse move in interest
rates along the entire interest rate yield curve would not materially effect the
fair value of our financial instruments that are exposed to changes in interest
rates.
Additionally, our purchases of Triage Meters from LRE Technology Partner
GmbH ("LRE") are denominated in German Deutsche Marks (DM) and sales of some
products to some international customers are denominated in the local currency
of customers. We have on occasion purchased forward exchange contracts to manage
this exposure to exchange rate changes. As of December 31, 1999, we had no
outstanding forward exchange contracts. Total receivables and payables
denominated in foreign currencies at December 31, 1999 were not material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Refer to the Index on Page F-l of the Financial Report included herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
-33-
<PAGE>
PART III
Some information required by Part III is incorporated by reference from our
definitive Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the solicitation of proxies for our 1999 Annual
Meeting of Stockholders (the "Proxy Statement").
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this section with respect to Directors is
incorporated by reference from the information in the section entitled "Election
of Directors" in the Proxy Statement. Our executive officers, their positions,
and ages as of March 31, 2000 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------- --- -----------------------------------------------
<S> <C> <C>
Kim D. Blickenstaff 47 President, Chief Executive Officer, Treasurer,
Secretary and Director
Thomas M. Watlington 44 Senior Vice President, Commercial Operations
Kenneth F. Buechler, Ph.D. 46 Vice President, Research
James E. Douglas 45 Vice President, Marketing
Christopher R. Hibberd 34 Vice President, Strategic Planning and
Business Development
Charles W. Patrick 45 Vice President, Sales
Christopher J. Twomey 40 Vice President, Finance and Chief Financial
Officer
Gunars E. Valkirs, Ph.D. 48 Vice President, Research and Development,
Chief Technical Officer and Director
Peter Witerzens, Ph.D. 58 Vice President, Operations
</TABLE>
KIM D. BLICKENSTAFF, one of our founders, has been President and Chief
Executive Officer since April 1988. Mr. Blickenstaff also is a director of Micro
Therapeutics Incorporated, Amira Medical and Medi Spectra Inc. Prior to joining
Biosite, he held various positions in finance, operations, research management,
sales management, strategic planning, and marketing with Baxter Travenol,
National Health Laboratories, and Hybritech Incorporated ("Hybritech"). Mr.
Blickenstaff holds an M.B.A. from the Graduate School of Business, Loyola
University, Chicago.
THOMAS M. WATLINGTON joined us as Senior Vice President in December 1996. He
was formerly Vice President, Marketing for the Diabetes Care Division for
Boehringer Mannheim. From 1982 to December 1996, Mr. Watlington held various
positions in marketing, strategic analysis and product development with
Boehringer Mannheim. Mr. Watlington holds a B.S. degree from the University of
Maryland.
KENNETH F. BUECHLER, PH.D., one of our founders and a co-inventor of certain
of our proprietary technology, has been Vice President, Research since January
1994. From April 1988 to January 1994, he was Director of Chemistry. Prior to
forming us, he was a Senior Scientist in the Diagnostics Research and
Development Group at Hybritech. Dr. Buechler holds a Ph.D. in Biochemistry from
Indiana University.
JAMES E. DOUGLAS joined us in August 1999 as Vice President, Marketing. He
was formerly Vice President, Marketing for Gen-Probe. From 1983 to August 1999
Mr. Douglas held various management positions in sales, marketing and business
development with Abbott Laboratories, Sanofi Diagnostics Pasteur, Centocor and
Gen-Probe. Mr. Douglas received his B.A. from Davidson College and his MBA from
the University of South Carolina.
CHRISTOPHER R. HIBBERD joined us in June 1997 to head our business
development activities after spending five years with the Boston Consulting
Group ("BCG"). At BCG, Mr. Hibberd was a Manager, leading client case teams in
developing and implementing value-creating strategies for businesses in a
variety of industry sectors. Prior to that, he held consulting positions at
various companies and also was a Development Engineer for Albright & Wilson
Americas from 1987 to 1990. Mr. Hibberd received an Engineering degree from the
University of Toronto, Canada and his M.B.A. from the University of Western
Ontario, Canada.
-34-
<PAGE>
CHARLES W. PATRICK joined us in August 1990 as Vice President, Sales and
Marketing. From 1978 to August 1990, Mr. Patrick held various positions in
sales, sales management and product and marketing management with Abbott
Laboratories. From 1987 to August 1990, he was Group Marketing Manager for the
Abused Drug Business Unit of Abbott, where he managed the worldwide product
launch of Abbott's TDx and ADx bench top testing systems. Mr. Patrick holds a
B.A. from the University of Central Florida.
CHRISTOPHER J. TWOMEY joined us as Director of Finance in March 1990 and was
promoted to Vice President of Finance and Chief Financial Officer in 1993. From
1981 to March 1990, Mr. Twomey was employed at Ernst & Young LLP, where from
October 1985 to March 1990, he served as an Audit Manager. Mr. Twomey holds a
B.A. in Business Economics from the University of California at Santa Barbara.
GUNARS E. VALKIRS, PH.D., one of our founders and a co-inventor of some of
our proprietary technology has been a director, Vice President, Research and
Development and Chief Technical Officer since 1988. Prior to forming Biosite, he
was a Scientific Investigator with the Diagnostics Research & Development Group
at Hybritech, where he was the primary inventor of Hybritech's patented ICON
technology. Dr. Valkirs holds a Ph.D. in Physics from the University of
California at San Diego.
PETER WITERZENS, PH.D., joined us as Vice President of Operations in
February 2000. From 1998 to the end of 1999, Dr. Witerzens was the Senior
Director, Lab Systems Operations at Roche Diagnostics Indianapolis where he was
responsible for the manufacturing activities of Roche's Laboratory Systems
products, including the consolidation and relocation of two Roche production
sites. From 1989 to 1998 he was Senior Director, Production Immunological Test
and Control Sera for Roche Diagnostics in Penzberg Germany. Dr. Witerzens
received his Diploma in Chemistry and his Ph.D. in Pharmaceutical Chemistry from
the University of Karlsruhe, Germany.
Item 405 of Regulation S-K calls for disclosure of any known late filing or
failure by an insider to file a report required by Section 16 of the Exchange
Act. This disclosure is contained in the section entitled "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Proxy Statement and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
information in the section entitled "Compensation of Executive Officers and
Directors" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item is incorporated by reference from the
information in the section entitled "Stock Ownership of Management and Certain
Beneficial Owners" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
information in the section entitled "Certain Relationship and Related
Transactions" in the Proxy Statement.
-35-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS
Our financial statements are included herein as required under Item 8 of
this annual report on Form 10-K. See Index on page F-l.
(2) FINANCIAL STATEMENT SCHEDULES
Schedule II Valuation and Qualifying Accounts
The other financial statement schedules have been omitted since they are
either not required, not applicable, or the information is otherwise included.
(3) EXHIBITS
The exhibits listed below are required by Item 601 of Regulation S-K. Each
management contract or compensatory plan or arrangement required to be filed as
an exhibit to this Form 10-K has been identified.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
3.(i)(1) Restated Certificate of Incorporation, as filed
with the Delaware Secretary of State on February
18, 1997.
3.(i)(4) Certificate of Designation, as filed with the
Delaware Secretary of State on October 23, 1997.
3.(ii)(2) Amended and Restated Bylaws of Biosite.
4.1 Form of Common Stock Certificate with rights
legend.
10.1(2)(A) Amended and Restated 1989 Stock Plan of Biosite
Diagnostics Incorporated.
10.2(5)(A) Amended and Restated 1996 Stock Incentive Plan of
Biosite Diagnostics Incorporated ("1996 Stock
Plan").
10.3(2)(A) Form of Incentive Stock Option Agreement under the
1996 Stock Plan.
10.4(2)(A) Form of Nonstatutory Stock Option Agreement under
the 1996 Stock Plan.
10.5(6) Biosite Diagnostics Incorporated Employee Stock
Purchase Plan.
10.6(2)(A) Form of Indemnity Agreement between the Company
and its officers and directors.
10.7(2) Sublease Agreement between Biosite and General
Atomics, dated February 17, 1992, as amended on
August 10, 1992, January 21, 1993, October 29,
1993, March 1, 1995 and October 1, 1996.
-36-
<PAGE>
10.8(2)(+) Antibody License Agreement between Biosite and
Sandoz Pharma Ltd. (currently known as Novartis
Pharma AG), dated September 22, 1995, as amended
on July 26, 1996.
10.9(2)(+) Easy Assay License Agreement between Biosite and
Sandoz Pharma Ltd. (currently known as Novartis
Pharma AG), dated September 22, 1995.
10.11(2)(+) Development, Supply and Distribution Agreement
between Biosite and Kyoto Dai-Ichi Kagaku Co.,
Ltd., dated as of February 14, 1995.
10.12(2)(+) Development and Supply Agreement between Biosite
and LRE Relais + Elektronik GmbH -- Medical
Technology, dated September 23, 1994.
10.19(2) Debenture Purchase Agreement between Biosite and
Sandoz Pharma Ltd. (currently known as Novartis
Pharma AG), dated as of September 22, 1995.
10.20(2)(+) Settlement and License Agreement & Agreement of
Dismissal with Prejudice, between Biosite and
Abbott Laboratories, dated as of September 6,
1996.
10.21(2) Lease Agreement between Biosite and TCEP II
Properties Limited Partnership dated July 26,
1996.
10.22(2) Lease Agreement between Biosite and Sorrento West
Limited dated September 21, 1994
10.24(4) Rights Agreement dated as of October 22, 1997
between Biosite and BankBoston, N.A.
10.25 Amendment No. 1 to Rights Agreement dated as of
December 9, 1999 between Biosite and BankBoston,
N.A.
10.26(7) (+) Letter Agreement between Biosite and Novartis
Pharma AG, dated November 20, 1997.
10.28(8) (+) Distributorship Agreement between Biosite and
Fisher Scientific Company L.L.C. dated April 3,
1998.
23.1 Consent of Ernst & Young LLP, independent
auditors.
27.1 Financial Data Schedule for year ended December
31, 1999
- ----------
</TABLE>
(1) Incorporated by reference to Exhibit 3.(i)3 to Biosite's Annual Report
on Form 10-K for the fiscal year ended December 31, 1996.
(2) Incorporated by reference to the exhibits of the same number to
Biosite's Registration Statement on Form S-1, No. 333-17657.
(3) Incorporated by reference to Exhibit 16.23 to Biosite's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997.
(4) Incorporated by reference to Exhibit 4.1 to Biosite's Registration
Statement of Form 8-A, filed on October 28, 1997
(5) Incorporated by reference to Exhibit A to Biosite's Definitive Proxy
Statement dated April 28, 1999 and filed with the Securities and
Exchange Commission
-37-
<PAGE>
(6) Incorporated by reference to Exhibit 10.2 to Biosite's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1998
(7) Incorporated by reference to Exhibit 10.25 to Biosite's Annual Report
on Form 10-K for the year ended December 31, 1997
(8) Incorporated by reference to Exhibit 10.28 to Biosite's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998
(A) Indicates management contract or compensatory plan or arrangement.
(+) Confidential treatment has been granted for certain portions of these
exhibits.
(b) REPORTS ON FORM 8-K
We did not file any report on Form 8-K in the quarter ended December 31,
1999.
-38-
<PAGE>
BIOSITE DIAGNOSTICS INCORPORATED
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Biosite has duly caused this report to be signed on its behalf of
the undersigned, thereunto duly authorized.
BIOSITE DIAGNOSTICS INCORPORATED
/s/ KIM D. BLICKENSTAFF Date: March 29, 2000
- ------------------------------------
Kim D. Blickenstaff
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the date indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ---- ----- ----
<S> <C> <C>
/s/ KIM D. BLICKENSTAFF President, Chief Executive Officer March 29, 2000
----------------------- (Principal Executive Officer) and
Kim D. Blickenstaff Director
/s/ CHRISTOPHER J. TWOMEY Vice President and Chief Financial March 29, 2000
------------------------- Officer (Principal Financial Officer
Christopher J. Twomey and Accounting Officer)
/s/ TIMOTHY J. WOLLAEGER Chairman of the Board March 29, 2000
------------------------
Timothy J. Wollaeger
/s/ ANTHONY DEMARIA Director March 29, 2000
-------------------
Anthony DeMaria, M.D.
/s/ HOWARD E. GREENE, JR. Director March 29, 2000
-------------------------
Howard E. Greene, Jr.
/s/ LONNIE M. SMITH Director March 29, 2000
-------------------
Lonnie M. Smith
/s/ GUNARS E. VALKIRS Director March 29, 2000
---------------------
Gunars E. Valkirs, Ph.D.
</TABLE>
-39-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors............................................ F-2
Balance Sheets at December 31, 1998 and 1999................................................. F-3
Statements of Operations for each of the three years in the period ended December 31,
1999...................................................................................... F-4
Statements of Stockholders' Equity for each of the three years in the period ended
December 31, 1999......................................................................... F-5
Statements of Cash Flows for each of the three years in the period ended December 31,
1999...................................................................................... F-6
Notes to Financial Statements................................................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Biosite Diagnostics Incorporated
We have audited the accompanying balance sheets of Biosite Diagnostics
Incorporated as of December 31, 1998 and 1999, and the related statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1999. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Biosite Diagnostics
Incorporated at December 31, 1998 and 1999, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1999 in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
San Diego, California
January 26, 2000
F-2
<PAGE>
BIOSITE DIAGNOSTICS INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1998 1999
----------- -----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $762,337 $4,594,217
Marketable securities, available-for-sale 33,466,841 27,677,307
Accounts receivable 6,573,735 6,192,161
Inventories 4,364,367 6,058,856
Deferred income taxes 1,666,000 1,165,000
Prepaid expenses and other current assets 1,467,960 1,484,607
----------- -----------
Total current assets 48,301,240 47,172,148
Property, equipment and leasehold improvements, net 7,313,673 9,936,429
Deferred income taxes 2,360,000 3,186,000
Patents and license rights, net 7,203,433 7,555,771
Deposits and other assets 630,765 297,632
----------- -----------
$65,809,111 $68,147,980
=========== ===========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $1,503,354 $1,831,282
Accrued salaries and other 2,699,663 3,423,541
Accrued costs for defense of patent matters 1,248,191 -
Current portion of long-term obligations 1,636,265 1,939,372
----------- -----------
Total current liabilities 7,087,473 7,194,195
Long-term obligations 4,038,444 4,068,814
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized; no
shares issued and outstanding at December 31, 1998 and 1999 - -
Common stock, $.01 par value, 25,000,000 shares authorized;
12,926,706, and 13,141,302 shares issued and outstanding at
December 31, 1998 and 1999, respectively 129,267 131,413
Additional paid-in capital 54,250,324 55,398,048
Unrealized net gain (loss) on marketable securities, net of related tax
effect of $23,510 and $(87,611) at December 31, 1998 and
1999, respectively 35,266 (131,416)
Deferred compensation (207,845) (93,086)
Retained earnings 476,182 1,580,012
----------- -----------
Total stockholders' equity 54,683,194 56,884,971
----------- -----------
$65,809,111 $68,147,980
=========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE>
BIOSITE DIAGNOSTICS INCORPORATED
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $31,676,630 $34,424,461 $43,010,764
Cost of sales 6,925,318 10,513,524 13,636,286
------------ ------------ ------------
Gross profit 24,751,312 23,910,937 29,374,478
Operating expenses:
Selling, general and administrative 11,549,734 15,469,717 17,581,015
Research and development 11,661,894 11,166,702 13,346,949
Defense of patent matters 330,537 4,860,857 --
------------ ------------ ------------
23,542,165 31,497,276 30,927,964
------------ ------------ ------------
Operating income (loss) 1,209,147 (7,586,339) (1,553,486)
Other income (expense):
Interest income and other income 2,190,837 2,395,957 1,788,316
Contract revenue-related parties 777,767 -- --
Contract revenue-unrelated parties 466,500 2,629,800 703,000
Reacquisition of distribution rights (3,364,134) -- --
------------ ------------ ------------
70,970 5,025,757 2,491,316
Income (loss) before benefit (provision) for
income taxes 1,280,117 (2,560,582) 937,830
Benefit (provision) for income taxes (82,000) 1,448,000 166,000
------------ ------------ ------------
Net income (loss) $1,198,117 $(1,112,582) $1,103,830
============ ============ ============
Net income (loss) per share:
Basic $0.11 $(0.09) $0.08
============ ============ ============
Diluted $0.09 $(0.09) $0.08
============ ============ ============
Shares used in calculating per share amounts:
Basic 11,249,000 12,939,000 13,032,000
============ ============ ============
Diluted 13,081,000 12,939,000 13,728,000
============ ============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE>
BIOSITE DIAGNOSTICS INCORPORATED
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Stock Common Stock
Shares Amount Shares Amount
----------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 8,328,847 $ 83,288 1,473,573 $14,736
Comprehensive income:
Net income -- -- -- --
Other comprehensive income, net of tax
Change in unrealized net gain (loss) on
marketable securities -- -- -- --
Comprehensive income -- -- -- --
Issuance of common stock from initial public
offering (IPO), net of offering costs of
$3,291,630 -- -- 2,760,000 27,600
Conversion of preferred stock into common stock
in connection with IPO (8,328,847) (83,288) 8,328,847 83,288
Conversion of convertible debenture into common
stock in connection with IPO -- -- 92,575 926
Issuance of common stock under employee stock
plans -- -- 209,750 2,097
Amortization of deferred compensation -- -- -- --
Income tax benefit from exercise of stock
options -- -- -- --
------------ ------------ ------------ ------------
Balance at December 31, 1997 -- -- 12,864,745 128,647
Comprehensive loss:
Net loss -- -- -- --
Other comprehensive income, net of tax
Change in unrealized net gain (loss) on
marketable securities -- -- -- --
Comprehensive loss -- -- -- --
Conversion of convertible debenture into common
stock -- -- 41,666 417
Issuance of common stock under employee stock
plans -- -- 142,695 1,427
Repurchase and retirement of common stock -- -- (122,400) (1,224)
Amortization of deferred compensation -- -- -- --
Income tax benefit from exercise of stock
options -- -- -- --
------------ ------------ ------------ ------------
Balance at December 31, 1998 -- -- 12,926,706 129,267
Comprehensive income:
Net income -- -- -- --
Other comprehensive income, net of tax
Change in unrealized net gain (loss) on
marketable securities -- -- -- --
Comprehensive income -- -- -- --
Issuance of common stock under employee stock
plans -- -- 252,596 2,526
Repurchase and retirement of common stock -- -- (38,000) (380)
Deferred compensation related to cancelled
stock options -- -- -- --
Amortization of deferred compensation -- -- -- --
Income tax benefit from exercise of stock
options -- -- -- --
------------ ------------ ------------ ------------
Balance at December 31, 1999 -- $ -- 13,141,302 $131,413
============ ============ ============ ============
<CAPTION>
Accumulated Retained
Additional Other Earnings Total
Paid-in Comprehensive Deferred (Accumulated Stockholders'
Capital Income Compensation Deficit) Equity
------------- ----------- ------------ --------------- ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $22,094,711 $(2,754) $(427,345) $390,647 $ 22,153,283
Comprehensive income:
Net income -- -- -- 1,198,117 1,198,117
Other comprehensive income, net of tax
Change in unrealized net gain (loss) on
marketable securities -- 8,412 -- -- 8,412
------------
Comprehensive income -- -- -- -- 1,206,529
------------
Issuance of common stock from initial public
offering (IPO), net of offering costs of
$3,291,63 29,800,770 -- -- -- 29,828,370
Conversion of preferred stock into common stoc
in connection with IPO -- -- -- -- --
Conversion of convertible debenture into commo
stock in connection with IPO 1,109,978 -- -- -- 1,110,904
Issuance of common stock under employee stock
plans 618,896 -- -- -- 620,993
Amortization of deferred compensation -- -- 109,750 -- 109,750
Income tax benefit from exercise of stock
options 59,947 -- -- -- 59,947
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1997 53,684,302 5,658 (317,595) 1,588,764 55,089,776
Comprehensive loss:
Net loss -- -- -- (1,112,582) 1,112,582)
Other comprehensive income, net of tax
Change in unrealized net gain (loss) on
marketable securities -- 29,608 -- -- 29,608
------------
Comprehensive loss -- -- -- -- (1,082,974)
------------
Conversion of convertible debenture into commo
stock 499,575 -- -- -- 499,992
Issuance of common stock under employee stock
plans 812,620 -- -- -- 814,047
Repurchase and retirement of common stock (841,173) -- -- -- (842,397)
Amortization of deferred compensation -- -- 109,750 -- 109,750
Income tax benefit from exercise of stock
options 95,000 -- -- -- 95,000
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1998 54,250,324 35,266 (207,845) 476,182 54,683,194
Comprehensive income:
Net income -- -- -- 1,103,830 1,103,830
Other comprehensive income, net of tax
Change in unrealized net gain (loss) on
marketable securities -- (166,682) -- -- (166,682)
------------
Comprehensive income -- -- -- -- 937,148
------------
Issuance of common stock under employee stock
plans 1,331,538 -- -- -- 1,334,064
Repurchase and retirement of common stock (358,261) -- -- -- (358,641)
Deferred compensation related to cancelled
stock options (19,553) -- 19,553 -- --
Amortization of deferred compensation -- -- 95,206 -- 95,206
Income tax benefit from exercise of stock
options 194,000 -- -- -- 194,000
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1999 $55,398,048 $(131,416) $(93,086) $1,580,012 $56,884,971
============ ============ ============ ============ ============
</TABLE>
See accompanying notes
F-5
<PAGE>
BIOSITE DIAGNOSTICS INCORPORATED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $1,198,117 $(1,112,582) $1,103,830
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 2,738,230 4,608,081 3,660,580
Amortization of deferred compensation 109,750 109,750 95,206
Deferred income taxes (931,000) (1,378,000) (325,000)
Changes in operating assets and liabilities:
Accounts receivable (674,428) (1,291,235) 381,574
Inventory (437,716) (2,194,471) (1,694,489)
Prepaid expenses and other current assets (467,788) 528,314 94,474
Accounts payable 452,995 82,385 327,928
Accrued liabilities (860,205) 1,321,558 719,687
------------ ------------ ------------
Net cash provided by operating activities 1,127,955 673,800 4,363,790
INVESTING ACTIVITIES:
Proceeds from sales and maturities of marketable securities 37,340,473 33,898,842 29,082,267
Purchase of marketable securities (65,947,956) (30,389,170) (23,570,536)
Purchase of property, equipment and leasehold improvements (5,221,969) (3,091,536) (5,179,893)
Patents, license rights, deposits and other assets 1,108,389 (3,677,057) (2,172,648)
------------ ------------ ------------
Net cash used in investing activities (32,721,063) (3,258,921) (1,840,810)
FINANCING ACTIVITIES:
Proceeds from issuance of convertible debenture -- 500,000 --
Proceeds from issuance of equipment loans payable 3,077,701 1,993,123 2,093,464
Principal payments under long-term obligations (1,213,543) (1,447,589) (1,759,987)
Proceeds from issuance of stock, net 30,449,363 814,047 1,334,064
Repurchase of common stock, net -- (842,397) (358,641)
------------ ------------ ------------
Net cash provided by financing activities 32,313,521 1,017,184 1,308,900
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents 720,413 (1,567,937) 3,831,880
Cash and cash equivalents at beginning of year 1,609,861 2,330,274 762,337
------------ ------------ ------------
Cash and cash equivalents at end of year $2,330,274 $762,337 $4,594,217
============ ============ ============
Supplemental disclosures of cash flow information:
Interest paid $356,694 $320,008 $441,454
============ ============ ============
Income taxes paid $1,203,900 $5,400 $2,061
============ ============ ============
Supplemental schedule of non-cash investing and financing
activities:
Conversion of convertible debenture into common stock $1,110,904 $499,992 $ -
============ ============ ============
Accrued liability for license rights acquired $- $1,050,000 $ -
============ ============ ============
</TABLE>
See accompanying notes
F-6
<PAGE>
BIOSITE DIAGNOSTICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT POLICIES
ORGANIZATION AND BUSINESS ACTIVITY
Biosite Diagnostics Incorporated (the "Company") was established in 1988.
The Company develops, manufactures and markets rapid, accurate and
cost-effective diagnostic products that are designed to improve the quality of
patient care and simplify the practice of laboratory medicine. In 1992, the
Company began commercial sales of its first qualitative platform product, the
Triage DOA Panel ("Triage DOA Panel"). In 1998, the Company began selling two
additional qualitative platform products, the Triage C. DIFFICILE Panel and the
Triage Parasite Panel. Also, in 1998, it launched its first quantitative
platform product, the Triage Cardiac System. The Company followed these product
launches with the introduction of its second quantitative platform product, the
Triage BNP System, in certain European countries in December 1999.
The Company markets its products worldwide primarily through distributors
supported by its direct sales force. The Company's principal markets are
hospital laboratories, emergency departments and other point-of-care locations.
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 in four core areas: cardiovascular, cerebrovascular,
infectious diseases and oncology.
REVENUE RECOGNITION AND SIGNIFICANT CUSTOMERS
The Company recognizes sales upon shipment. The Company's U.S. distributor
accounted for 80%, 86% and 83% of the product sales in 1997, 1998 and 1999,
respectively.
Export sales to international customers amounted to $2,982,000, $2,749,000
and $4,820,000 in 1997, 1998 and 1999, respectively. Sales to a stockholder
amounted to approximately $2,013,000 in 1997. The stockholder disposed of its
Biosite common stock holding in 1998.
The Company records revenues under collaborative development agreements,
based on the performance criteria of each contract, either as milestones are
earned or on the percentage of completion basis as costs are incurred.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and highly liquid investments in
debt securities with maturities of 90 days or less when purchased.
MARKETABLE SECURITIES
Financial Accounting Standards Board ("FASB") Statement No. 115, Accounting
for Certain Investments in Debt and Equity Securities, requires that investments
in equity securities that have readily determinable fair values and investments
in debt securities be classified in three categories: held-to-maturity, trading
and available-for-sale. Based on the nature of the assets held by the Company
and management's investment strategy, the Company's investments have been
classified as available-for-sale. Management determines the appropriate
classification of debt securities at the time of purchase. Securities classified
as available-for-sale are carried at estimated fair value, as determined by
quoted market prices, with unrealized gains and losses, net of tax, reported in
a separate component of comprehensive income. At December 31, 1999, the Company
had no investments that were classified as trading or held-to-maturity as
defined by the Statement. The amortized cost of debt securities classified as
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization is included in interest income.
Realized gains and losses are included in interest income. The cost of
securities sold is based on the specific identification method. Interest on
securities classified as available-for-sale is included in interest income.
F-7
<PAGE>
BIOSITE DIAGNOSTICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INVENTORIES
Inventories are carried at the lower of cost (first-in, first-out) or
market.
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements are stated at cost.
DEPRECIATION AND AMORTIZATION
Depreciation of property and equipment is computed using the
straight-line method over three to five years. Amortization of leasehold
improvements is computed using the straight-line method over the shorter of
the estimated useful lives of the assets or the remaining lease term.
PATENTS AND LICENSE RIGHTS
The Company has been issued patents covering its threshold immunoassay
and other related technologies. Capitalized patent costs associated with
issued patents are amortized over five to seventeen years. License rights
related to products for sale are amortized to cost of sales over the life of
the license, not to exceed ten years, using a systematic method based on the
estimated revenues generated from products during such license period.
STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB 25) and related
interpretations in accounting for its stock options. For options granted
during the one-year period prior to the Company's initial public offering of
common stock, the Company recorded and amortizes, over the related vesting
periods, deferred compensation representing the excess of the value for
accounting purposes of the options granted over their aggregate exercise
price.
CONCENTRATION OF CREDIT RISK
The Company sells its products primarily to its U.S. distributor. Credit
is extended based on an evaluation of the customer's financial condition, and
generally collateral is not required. Credit losses have been minimal and
within management's expectations.
The Company invests its excess cash in debt instruments of the U.S.
Government, financial institutions and corporations with strong credit
ratings. The Company has established guidelines relative to diversification
and maturities that maintain safety and liquidity. These guidelines are
periodically reviewed and modified to take advantage of trends in yields and
interest rates. The Company has not experienced any significant realized
losses on its marketable securities.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
F-8
<PAGE>
BIOSITE DIAGNOSTICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
EARNINGS PER SHARE
Earnings per Share ("EPS") is computed in accordance with Statement of
Financial Accounting Standards No. 128, Earnings per Share ("FAS 128"). FAS
128 requires dual presentation of basic and diluted earnings per share. Basic
EPS includes no dilution and is computed by dividing net income (loss) by the
weighted average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution of securities that could share in the
earnings of the Company, such as common stock equivalents which may be
issuable upon exercise of outstanding common stock options. Common stock
equivalents are not considered in loss years as the effect is antidilutive.
Shares used in calculating basic and diluted net income per share were as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Shares used in calculating per share amounts - Basic
(Weighted average common shares outstanding ) 11,249 12,939 13,032
Effect of common share equivalents:
Assumed conversion of preferred shares 1,110 -- --
Assumed conversion of convertible debenture 12 -- --
Net effect of dilutive common stock options using the
treasury stock method 699 -- 696
Contingently issuable shares 11 -- --
------ ------ ------
Shares used in calculating per share amounts - Diluted 13,081 12,939 13,728
====== ====== ======
</TABLE>
COMPREHENSIVE INCOME
Financial Accounting Standards Board's Statement No. 130, Comprehensive
Income, ("FAS 130") establishes rules for the reporting and display of
comprehensive income and its components. FAS 130 requires the change in net
unrealized gains or losses on marketable securities be included in
comprehensive income. Included in the Company's statements of Stockholders'
equity, other comprehensive income consisting of unrealized gains and losses
on investments are reported.
SEGMENT INFORMATION
Financial Accounting Standards Board's Statement No. 131, Segment
Information, ("FAS 131") amends the requirements for public enterprises to
report financial and descriptive information about its reportable operating
segments. Operating segments, as defined in FAS. 131, are components of an
enterprise for which separate financial information is available and is
evaluated regularly by the Company in deciding how to allocate resources and
in assessing performance. The Company believes it currently operates in one
business and operating segment.
EFFECT OF NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which will
be effective January 1, 2001. This Statement establishes accounting and
reporting standards requiring that every derivative instrument, including
certain derivative instruments imbedded in other contracts, be recorded in
the balance sheet as either an asset or liability measured at its fair value.
The Statement also requires that changes in the derivative's fair value be
recognized in earnings unless specific hedge accounting criteria are met. The
Company has not yet determined what impact SFAS No. 133 will have on the
financial statements.
2. LICENSING AGREEMENTS
F-9
<PAGE>
BIOSITE DIAGNOSTICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company has entered into licensing agreements to utilize certain
antibodies and/or technologies in exchange for up-front, annual, milestone,
or royalty payments or a combination thereof. Certain of the up-front and
annual payments are creditable towards future royalties payable. Royalties
may be payable at various rates for product sales derived from the licensed
technologies.
The Company purchased license rights for technologies utilized in
products for sale of $5.0 million and $1.1 million during the years ended
December 31, 1998 and 1999, respectively. Accumulated amortization of license
rights at December 31, 1998 and 1999 was approximately $4.0 million and $4.7
million, respectively.
3. BIOSITE DISCOVERY PROGRAM AND COLLABORATIVE AND DISTRIBUTION AGREEMENTS
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 uses
its expertise in antibody development to help pharmaceutical and
biotechnology partners accelerate their research programs. In return, Biosite
has obtained and seeks to continue to obtain diagnostic rights to the
proteins under study. Initially, Biosite has focused on disease target
markers in four core areas: cardiovascular, cerebrovascular, infectious
disease and oncology. The Company executed collaborative agreements under the
Biosite Discovery program with several partners in all of these core areas.
During 1999, the Company recognized $703,000 related to the achievement of
milestones under the collaborative agreements.
In 1997, the Company successfully completed feasibility studies for the
NeoralChek System under its antibody license agreement with Novartis Pharma
AG ("Novartis"). As a result of this milestone achievement, Novartis
invested, in January 1998, an additional $500,000 in Biosite in exchange for
a convertible debenture. The convertible debenture was immediately converted
into 41,666 shares of common stock of the Company based on the IPO price of
$12.00 per share. Additionally, the Company and Novartis entered into an
agreement to expand the scope of the collaborative development of the
NeoralChek System. For the years ended December 31, 1997 and 1998, the
Company recognized contract revenues of $400,000 and $1.1 million,
respectively. The expansion of the collaboration may result in additional
payments to Biosite upon attainment of milestones.
In February 1995, the Company entered into a collaborative development
and distribution agreement that included the Asian marketing rights to the
Triage Cardiac Panel under development. Under this agreement, the Company
will receive up to $2.0 million upon the completion of certain milestones.
Recognition of revenue under this agreement will occur as the milestones are
attained. For the year ended December 31, 1998, the Company recognized
contract revenues of $1.3 million for the completion of certain milestones
under the agreement.
In June 1994, the Company entered into a collaborative development
agreement and a distribution agreement with Merck KgaA ("Merck"), a former
stockholder, for the development and marketing of the Triage Cardiac Panel
and under such agreements, Merck was to fund a portion of the development
costs. The Company recognized revenue under this agreement on the percentage
of completion basis as costs were incurred. For the year ended December 31,
1997, the Company incurred $2,866,000 in expenses under this agreement and
recognized $778,000 as contract revenue.
As a result of a decision by Merck to refocus away from certain aspects
of the human diagnostic business, in 1997, the Company terminated agreements
with Merck for the development and distribution of the Triage Cardiac System
and the distribution of the Triage DOA Panel product line. Upon termination,
the Company paid a $2.1 million cash payment and forgave approximately $1.3
million owed to the Company by Merck related to the development of the Triage
Cardiac System. Such expenses were charged to reacquisition of distribution
rights in the accompanying statements of operations. During the last half of
1998, the Company finalized alliances with several European partners, forming
a network of distributors to market its products in certain European
countries.
F-10
<PAGE>
BIOSITE DIAGNOSTICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
The following is a summary of cash, cash equivalents and
available-for-sale securities by balance sheet classification at December 31,
1998:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Cash and cash equivalents:
Cash $449,352 $ - $ - $449,352
Corporate debt securities 312,985 - - 312,985
----------- ------- --------- -----------
762,337 - - 762,337
Marketable securities:
Certificate of deposit 2,005,724 1,784 - 2,007,508
U.S. Government debt securities 499,182 1,133 - 500,315
Corporate debt securities 30,903,159 79,836 (23,977) 30,959,018
----------- ------- --------- -----------
33,408,065 82,753 (23,977) 33,466,841
----------- ------- --------- -----------
Total cash, cash equivalents and available-for-sale
marketable securities $34,170,402 $82,753 $(23,977) $34,229,178
=========== ======= ========= ===========
</TABLE>
The following is a summary of cash, cash equivalents and
available-for-sale marketable securities by balance sheet classification at
December 31, 1999:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Cash and cash equivalents:
Cash $3,120,725 $- $- $3,120,725
Money market fund 1,473,492 - - 1,473,492
--------- - - ---------
4,594,217 - - 4,594,217
Marketable securities:
Certificates of deposit 1,000,338 81 - 1,000,419
U.S. Government debt securities 5,320,156 - (54,187) 5,265,969
Corporate debt securities 21,575,839 1,413 (166,333) 21,410,919
---------- ----- --------- ----------
27,896,333 1,494 (220,520) 27,677,307
---------- ----- --------- ----------
Total cash, cash equivalents and available-for-sale
marketable securities $32,490,550 $1,494 $(220,520) $32,271,524
=========== ====== ========== ===========
</TABLE>
The amortized cost and estimated fair value of available-for-sale
securities at December 31, 1999, by contractual maturity, are as follows:
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
----------- -----------
<S> <C> <C>
Marketable securities:
Due in one year or less $8,768,875 $8,726,607
Due after one year through two years 16,135,957 15,975,190
Due after two years 2,991,501 2,975,510
----------- -----------
$27,896,333 $27,677,307
=========== ===========
</TABLE>
F-11
<PAGE>
5. BALANCE SHEET INFORMATION
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
1998 1999
---------- ----------
<S> <C> <C>
Raw materials $1,405,176 $2,088,530
Work in process 2,938,548 3,058,179
Finished goods 20,643 912,147
---------- ----------
$4,364,367 $6,058,856
========== ==========
</TABLE>
Property, equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
December 31,
1998 1999
----------- -----------
<S> <C> <C>
Machinery and equipment $12,936,671 $17,505,021
Furniture and fixtures 986,368 1,083,906
Leasehold improvements 3,225,746 4,095,532
----------- -----------
17,148,785 22,684,459
Less accumulated depreciation and amortization (9,835,112) (12,748,030)
----------- -----------
$7,313,673 $9,936,429
=========== ===========
</TABLE>
Depreciation expense was approximately $2,106,000, $3,071,000 and $2,987,000
for years ended December 31, 1997, 1998, and 1999, respectively.
6. DEBT AND COMMITMENTS
Debt consisted of the following:
<TABLE>
<CAPTION>
December 31,
1998 1999
---------- ----------
<S> <C> <C>
Equipment financing notes, payable $222,134 monthly
including interest at 6.60% to 8.98% due October
2000 to December 2004; secured by equipment $5,674,709 $6,008,186
Less current portion 1,636,265 1,939,372
---------- ----------
Total long-term obligations $4,038,444 $4,068,814
========== ==========
</TABLE>
As a result of the attainment of one of the milestones (the successful
completion of feasibility studies for the NeoralChek System under
development), the Company received $500,000 from Novartis, in January 1998,
in exchange for a convertible debenture. The convertible debenture was
immediately converted into 41,666 shares of common stock of the Company based
on the IPO price of $12.00 per share. The Company is obligated to sell to
Novartis an additional $500,000 five-year 8% convertible debenture upon the
attainment of a certain milestone. The debenture would be convertible, at the
sole option of the Company, into shares of Biosite common stock at $12.00 per
share.
As of December 31, 1999, approximate future principal payments of the
equipment financing notes are due as follows: 2000 - $1,939,000; 2001
- -$1,700,000; 2002 - $1,304,000; 2003 - $746,000; and 2004 - $319,000.
Interest charged to expense to arrive at operating income (loss) was
approximately $357,000, $320,000, and $441,000 for the years ended December
31, 1997, 1998, and 1999, respectively.
The Company leases its office, manufacturing and research facilities
under operating leases. The minimum annual rent on the facilities is subject
to increases based on changes in the Consumer Price Index, taxes, insurance
and
F-12
<PAGE>
BIOSITE DIAGNOSTICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
operating costs, subject to certain minimum and maximum annual increases. The
Company has options to renew certain of the facilities leases for a period of
2 years.
Approximate annual future minimum operating lease payments as of December 31,
1999 are as follows:
<TABLE>
<CAPTION>
Operating
Year Leases
---- ---------
<C> <C>
2000 $1,296,000
2001 855,000
2002 858,000
2003 577,000
2004 538,000
----------
Total minimum lease payments $4,124,000
==========
</TABLE>
Rent expense for the years ended December 31, 1997, 1998 and 1999 was
approximately $1,033,000, $879,000 and $1,076,000 respectively. Equipment
under equipment financing notes was approximately $8,510,000 and $9,687,000
at December 31, 1998, and 1999, respectively. Accumulated depreciation of
equipment under equipment financing at December 31, 1998 and 1999 was
approximately $3,607,000 and $4,529,000, respectively.
7. STOCKHOLDERS' EQUITY
INITIAL PUBLIC OFFERING
In February 1997, the Company completed its initial public offering of
2,760,000 shares of common stock (including an exercised underwriters'
over-allotment option for 360,000 shares) at a price of $12.00 per share,
providing the Company with net proceeds of approximately $29.8 million.
Additionally, all outstanding shares of preferred stock were converted into
8,328,847 shares of common stock and an outstanding $1.0 million convertible
debenture and related accrued interest was converted into 92,575 common
shares upon the completion of the IPO.
STOCK PLANS
The Company's 1989 Stock Plan provided for both the direct sale of common
stock and for the grant of options to purchase common stock to employees,
directors, consultants and advisors of the Company. As of December 31, 1999,
144,476 shares have been sold directly under the plan and no shares were
available for future issuance of common stock or grant of options to purchase
common stock under the 1989 Stock Plan.
In December 1996, the Company adopted the 1996 Stock Incentive Plan (the
"1996 Stock Plan"). The 1996 Stock Plan replaced the Company's 1989 Stock
Plan. Although all future awards will be made under the 1996 Stock Plan,
awards made under the 1989 Stock Plan will continue to be administered in
accordance with the 1989 Stock Plan. The 1996 Stock Plan provides for awards
in the form of restricted shares, stock units, options or stock appreciation
rights or any combination thereof. As of December 31, 1999, a pool of
2,400,000 shares has been reserved for issuance under the 1996 Stock Plan.
Additionally, any unpurchased shares of common stock pursuant to unissued,
expired or cancelled options under the 1989 Stock Plan become available for
awards under the 1996 Stock Plan.
The options are generally subject to four year vesting and expire ten
years from the date of grant. At December 31, 1999, 338,125 shares were
available for future issuance of common stock or grant of options to purchase
common stock under the 1996 Stock Plan.
F-13
<PAGE>
BIOSITE DIAGNOSTICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Information with respect to the Company's 1989 Stock Plan and 1996 Stock Plan
option activity is as follows:
<TABLE>
<CAPTION>
Weighted
average
exercise
Shares price
------ -----
<S> <C> <C>
Balance at December 31, 1996 1,281,980 $3.46
Granted at fair value 388,400 $9.93
Exercised (154,996) $1.27
Cancelled (75,661) $5.65
--------- ------
Balance at December 31, 1997 1,439,723 $5.33
Granted at fair value 956,025 $12.35
Exercised (71,391) $3.06
Cancelled (64,777) $9.66
--------- ------
Balance at December 31, 1998 2,259,580 $8.24
Granted at fair value 964,850 $10.11
Exercised (191,823) $4.23
Cancelled (182,456) $10.98
--------- ------
Balance at December 31, 1999 2,850,151 $8.97
========= ======
</TABLE>
The following is a further breakdown of the options outstanding under the 1989
Stock Plan and 1996 Stock Plan as of December 31, 1999:
<TABLE>
<CAPTION>
Weighted average Weighted average
remaining exercise price
Range of exercise Options contractual life Weighted average Options of options
price outstanding in years exercise price exercisable exercisable
- --------------------- ------------------ ------------------- ------------------ ------------------- ------------------
<S> <C> <C> <C> <C> <C>
$0.24 - $5.50 845,466 5.77 $3.78 728,012 $3.57
$6.38 - $10.00 1,134,878 8.99 $9.45 271,642 $9.24
$10.13 - $13.75 279,742 8.33 $11.87 105,625 $11.93
$13.88 - $16.31 590,065 8.39 $14.11 237,569 $14.09
- --------------------- ------------------ ------------------- ------------------ ------------------- ------------------
$0.24 - $16.31 2,850,151 7.85 $8.97 1,342,848 $7.24
===================== ================== =================== ================== =================== ==================
</TABLE>
Adjusted pro forma information regarding net income is required by SFAS
123, and has been determined as if the Company had accounted for its employee
stock options under the fair value method of that Statement. The fair value
for these options was estimated at the date of grant using the Black-Scholes
method for option pricing with the following weighted-average assumptions for
1997, 1998, and 1999:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate 6% 5.25% 6.36%
Volatility 55% 83% 83%
Dividend yield 0% 0% 0%
Expected life of options 6 years 5 years 5 years
</TABLE>
F-14
<PAGE>
BIOSITE DIAGNOSTICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For purposes of adjusted pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options' vesting period. The
Company's adjusted pro forma information follows:
<TABLE>
<CAPTION>
Year ended December 31,
1997 1998 1999
-------- ------------ ------------
<S> <C> <C> <C>
Adjusted pro forma net income (loss) $430,973 $(3,256,548) $(2,248,997)
Adjusted pro forma diluted net income (loss)
per share $ 0.03 $ (0.25) $ (0.16)
</TABLE>
The pro forma effects on net income for 1997, 1998, and 1999 are not
likely to be representative of the effects on reported net income or loss in
future years. In management's opinion, existing stock option valuation models
do not provide a reliable single measure of the fair value of employee stock
options that have vesting provisions and are not transferable. In addition,
option valuation models require the input of highly subjective assumptions,
including expected stock price volatility. Changes in such subjective input
assumptions can materially affect the fair value estimate of employee stock
options.
EMPLOYEE STOCK PURCHASE PLAN
In December 1996, the Company adopted an Employee Stock Purchase Plan
("ESPP") which provides employees the opportunity to purchase common stock at
a discount and pay for such purchases through payroll deductions, subject to
certain limitations. A pool of 350,000 shares of common stock has been
reserved for issuance under the ESPP (subject to anti-dilution provisions).
During the years ended December 31, 1997, 1998 and 1999, 54,754, 71,304, and
60,773 shares, respectively, were issued under the ESPP. As of December 31,
1999, 163,169 shares of common stock were available for issuance under the
ESPP.
At December 31, 1999, a total of 3,351,445 shares of the Company's common
stock were reserved for future issuances under the Company's stock plans and
employee stock purchase plan.
STOCK REPURCHASE PROGRAM
In September 1998, the Company initiated a common stock repurchase
program, under which it may purchase up to one million shares of its common
stock. The repurchase program was terminated in January 2000. Under the
program, Biosite purchased shares of its common stock from time to time
through open market transactions at prices deemed appropriate by its
management. The Company repurchased 122,400 shares and 38,000 shares of its
common stock, respectively, in 1998 and 1999 at a total cost of approximately
$842,000 and $359,000 respectively.
STOCKHOLDER RIGHTS PLAN
In October, 1997, the Board of Directors of the Company declared a
dividend distribution of one preferred stock purchase right (a "Right") for
each outstanding share of common stock of Biosite held of record at the close
of business on November 3, 1997. Each Right represents a contingent right to
purchase, under certain circumstances, one-one-thousandth of a share of a new
series of Biosite preferred stock at a price of $50.00 per one one-thousandth
of a share, subject to adjustment. The Rights would be traded independently
from Biosite's common stock and become exercisable under certain
circumstances involving the acquisition or a tender or exchange offer by a
person or group for 15% or more of Biosite's common stock. In December 1999,
the agreement governing the Rights was amended to provide that Kopp Holding
Company and related entities could acquire up to 20% of Biosite's outstanding
common stock without making the Rights exercisable. The Rights expire on
October 22, 2007, unless redeemed by the Company's Board of Directors. The
Rights can be redeemed by the Board at a price of $0.01 per Right at any time
before the Rights become exercisable, and in limited circumstances thereafter.
F-15
<PAGE>
BIOSITE DIAGNOSTICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES
Significant components of the income tax benefit (provision) are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1998 1999
---- ---- ----
<C> <C> <C> <C>
Current:
Federal $ (555,000) $69,000 $(124,000)
State (458,000) 1,000 (35,000)
----------- ---------- ----------
(1,013,000) 70,000 (159,000)
Deferred:
Federal 499,000 1,053,000 229,000
State 432,000 325,000 96,000
----------- ---------- ----------
931,000 1,378,000 325,000
----------- ---------- ----------
$ (82,000) $1,448,000 $ 166,000
=========== ========== ==========
</TABLE>
As of December 31, 1999, the Company had federal research and
development, California research and development, and California
manufacturers' credit carryforwards of approximately $1,990,000, $940,000,
and $485,000, respectively. The federal research and development, California
research and development, and California manufacturers' credits will begin
expiring in 2005, 2011 and 2004, respectively, unless previously utilized.
As of December 31, 1999, the Company had federal and California tax net
operating loss carryforwards of approximately $643,000 and $518,000,
respectively. The federal and California tax net operating loss carryforwards
will begin expiring in 2019, unless previously utilized.
Significant components of the Company's deferred tax assets as of
December 31, 1998 and 1999 are shown below.
<TABLE>
<CAPTION>
December 31,
1998 1999
---- ----
<S> <C> <C>
Deferred tax assets:
Research and development credit $1,997,000 $2,601,000
Federal and California Alternative Minimum Tax credit 277,000 287,000
California Manufacturers' credit 276,000 315,000
Capitalized research expenses 21,000 2,000
Other 1,476,000 1,254,000
---------- ----------
Total deferred tax assets 4,047,000 4,459,000
Deferred tax liability:
Tax over book depreciation (21,000) (108,000)
---------- ----------
Net deferred tax assets $4,026,000 $4,351,000
========== ==========
</TABLE>
No valuation allowance has been recorded to offset the deferred tax
assets as the Company has determined that it is more likely than not that
such assets will be realized. As of December 31, 1999, the Company has
approximately $4.4 million of net deferred tax assets, with no offsetting
valuation allowance. The realization of the deferred tax assets is dependent
upon the generation of future taxable income of approximately $10.9 million.
The Company will continue to assess the likelihood of realization of such
assets; however, if future events occur which do not make the realization of
such assets more likely than not, the Company will record a valuation
allowance against all or a portion of the net deferred tax assets.
F-16
<PAGE>
BIOSITE DIAGNOSTICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The reconciliation of income tax computed at the federal statutory tax
rate to the benefit (provision) for income taxes is as follows:
<TABLE>
<CAPTION>
December 31,
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Tax at federal statutory rate 35% 35% 35%
Permanent tax differences (2) (5) 14
Decrease in valuation allowance for deferred tax assets - - -
Tax credits (30) 31 (70)
Other 3 (4) 3
------- ------- ---------
Effective rate 6% 57% (18)%
======= ======= =========
</TABLE>
Pursuant to Internal Revenue Code Section 382, use of the Company's tax
credit carryforwards may be limited if a cumulative change in ownership of
more than 50% occurs within any three year period. However, any annual
limitation is not expected to have a material adverse effect on the Company's
ability to utilize its tax credit carryforwards.
9. EMPLOYEE SAVINGS PLAN
In 1991, the Company implemented a 401(k) program which allows all
qualifying employees to contribute up to a maximum of 20% of their annual
salary, subject to annual limits. The Board of Directors may, at its sole
discretion, approve Company contributions. No such contributions have been
approved or made.
10. DEFENSE OF PATENT MATTERS
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 antibodies, resulting in a
net payment of $1,050,000 to Dade Behring by Biosite. In 1998, the Company
charged to defense of patent matters $604,000 which represented the
applicable license costs for years prior to 1998. The Company continues to
amortize the applicable license costs until the expiration of the related
patent.
F-17
<PAGE>
BIOSITE DIAGNOSTICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. QUARTERLY INFORMATION (UNAUDITED)
The following quarterly information includes all adjustments which management
considers necessary for a fair statement of such information. For interim
quarterly financial statements, the provision for income taxes is estimated
using the best available information for projected results for the entire year
<TABLE>
<CAPTION>
1998
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------------- ------------- ------------- -------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales $7,884 $8,711 $8,752 $9,077
Gross profit 6,129 6,368 5,715 5,699
Income (loss) before income taxes (724) (310) 219 (1,745)
Net income (loss) (500) (374) 455 (693)
Net income (loss) per share
- Basic $(0.04) $(0.03) $0.04 $(0.05)
- Diluted $(0.04) $(0.03) $0.03 $(0.05)
Shares used in calculating per share amounts
- Basic 12,906 12,938 12,986 12,923
- Diluted 12,906 12,938 13,514 12,923
<CAPTION>
1999
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------------- ------------- ------------- -------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales $9,448 $10,594 $11,317 $11,652
Gross profit 5,706 7,331 8,137 8,201
Income (loss) before income taxes (1,786) 193 1,394 1,137
Net income (loss) (1,057) 97 840 1,224
Net income (loss) per share
- Basic $(0.08) $0.01 $0.06 $0.09
- Diluted $(0.08) $0.01 $0.06 $0.09
Shares used in calculating per share amounts
- Basic 12,973 13,015 13,056 13,083
- Diluted 12,973 13,624 13,593 13,909
</TABLE>
The benefit for income taxes recognized in the fourth quarter of 1999
included $112,000 of benefit resulting from the recognition of research and
development credits generated during the first three quarters of 1999.
Recognition of these credits had been deferred until management determined
that their realization had become more likely than not.
F-18
<PAGE>
SCHEDULE II
BIOSITE DIAGNOSTICS INCORPORATED
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
- ------------------------------------------- ---------------- --------------------------------------- --------------- -------------
COL. A COL. B COL. C COL. D COL. E
- ------------------------------------------- ---------------- --------------------------------------- --------------- -------------
Additions
- ------------------------------------------- ---------------- ----------------------- --------------- --------------- -------------
Charged to
Balance at Other Balance at
Beginning of Charged to Costs and Accounts- Deductions - End of
Description Period Expenses Describe Describe Period
- ------------------------------------------- ---------------- ----------------------- --------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999
Allowance for doubtful accounts $ 18,032 $ 4,999 $- $ 5,380 (1) $ 17,651
Reserve for obsolete or excess inventory $798,644 $741,856 $- $909,849 (2) $630,651
Warranty reserve for Triage Meters $ - $170,373 $- $- $170,373
Year ended December 31, 1998
Allowance for doubtful accounts $ 13,721 $ 4,311 $- $- $ 18,032
Reserve for obsolete or excess inventory $304,860 $540,662 $- $ 46,878 (2) $798,644
Year ended December 31, 1997
Allowance for doubtful accounts $ 4,405 $19,555 $- $ 10,239 (1) $ 13,721
Reserve for obsolete or excess inventory $193,736 119,230 $- $ 8,106 (2) $304,860
</TABLE>
(1) Uncollectible accounts written off, net of recoveries
(2) Write off of obsolete or excess inventory
<PAGE>
Exhibit 10.25
AMENDMENT NO. 1 TO RIGHTS AGREEMENT
THIS AMENDMENT NO. 1 (this "Amendment"), dated as of December 9, 1999,
to the Rights Agreement, dated as of October 22, 1997 (the "Rights Agreement"),
between Biosite Diagnostics Incorporated, a Delaware corporation (the
"Company"), and BankBoston, N.A., as Rights Agent (the "Rights Agent"), is made
with reference to the following facts:
A. The Company and the Rights Agent have heretofore entered into the
Rights Agreement. Pursuant to Section 27 of the Rights Agreement, the Company
and the Rights Agent may, from time to time, supplement or amend the Rights
Agreement in accordance with the provisions of such Section.
B. The Board of Directors of the Company has determined that it is in
the best interests of the Company to amend the Rights Agreement such that, with
respect to the acquisition by Kopp Holding Company, LeRoy C. Kopp, Kopp
Investment Advisor, Inc. and Kopp Emerging Growth Fund (collectively, "Kopp") of
up to an aggregate of 20% of the shares of Common Stock of the Company that
neither Kopp nor any of its affiliates is or will become an "Acquiring Person"
and that no "Stock Acquisition Date" or "Distribution Date" (as such terms are
defined in the Rights Agreement) will occur.
NOW, THEREFORE, in consideration of the foregoing and the mutual
agreements set forth herein, the parties hereto agree as follows:
1. The definition of "Acquiring Person" set forth in Section 1(a) of
the Rights Agreement is hereby amended in its entirety to read as follows:
(a) "Acquiring Person" shall mean any Person (as such term
is hereinafter defined) who or which, together with all
Affiliates (as such term is hereinafter defined) and Associates
(as such term is hereinafter defined) of such Person, shall be
the Beneficial Owner (as such term is hereinafter defined) of
securities representing 15% or more of the shares of Common Stock
then outstanding or who was such a Beneficial Owner at any time
after the date hereof, whether or not such Person continues to be
the Beneficial Owner of securities representing 15% or more of
the outstanding shares of Common Stock. Notwithstanding the
foregoing,
(i) in no event shall a Person who or which, together
with all Affiliates and Associates of such Person, is the
Beneficial Owner of less than 15% of the Company's
outstanding shares of Common Stock become an Acquiring
Person solely as a result of a reduction of the number of
shares of outstanding Common Stock, including repurchases of
outstanding shares of Common Stock by the Company, which
reduction increases the percentage of outstanding shares of
Common Stock beneficially owned by such Person (provided
that any subsequent increase in the amount of Common Stock
beneficially owned by such Person, together with all
Affiliates and Associates of such Person, without the prior
approval of the Company shall cause such Person to be an
Acquiring Person);
(ii) the term Acquiring Person shall not mean (A) the
Company, (B) any subsidiary of the Company (as such term is
hereinafter defined), (C) any employee benefit plan of the
Company or any of its subsidiaries, (D) any entity holding
securities of the Company organized, appointed or
established by the
-1-
<PAGE>
Company or any of its subsidiaries for or pursuant to the
terms of any such plan or (E) Kopp, or any Affiliate or
Associate thereof as a result of the acquisition by Kopp of
up to 20% of the shares of Common Stock of the Company; and
(iii) no Person shall be deemed to be an Acquiring
Person if (A) within five business days after such Person
would otherwise have become an Acquiring Person (but for the
operation of this clause (iii)), such Person notifies the
Board of Directors that such Person did so inadvertently and
within two business days after such notification, such
Person is the Beneficial Owner of less than 15% of the
outstanding shares of Common Stock, (B) by reason of such
Person's Beneficial Ownership of 15% or more of the
outstanding shares of Common Stock on the date hereof if
prior to the Record Date, such Person notifies the Board of
Directors that such Person is no longer the Beneficial Owner
of 15% or more of the then outstanding shares of Common
Stock or (C) if the Board of Directors determines in good
faith that a Person who would otherwise be an "Acquiring
Person," as defined pursuant to the foregoing provisions of
this paragraph (a), has become such inadvertently, and such
Person divests as promptly as practicable a sufficient
number of Common Stock so that such Person would no longer
be an "Acquiring Person," as defined pursuant to the
foregoing provisions of this paragraph (a).
2. The first sentence of Section 3(a) of the Rights Agreement is
hereby amended by adding the following to the end of such sentence:
; PROVIDED, HOWEVER, that in no event shall a Distribution
Date be deemed to occur as a result of the acquisition by
Kopp of up to 20% of the shares of Common Stock of the
Company.
3. No "Stock Acquisition Date" shall be deemed to occur under the
Rights Agreement as a result of to the acquisition by Kopp of up to 20% of the
shares of Common Stock of the Company.
4. Section 1(d) of the Rights Agreement is hereby amended in its
entirety to read as follows:
(d) "Business Day" shall mean any day other than a Saturday,
Sunday or a day on which banking institutions in the
Commonwealth of Massachusetts are authorized or obligated by
law or executive order to close.
5. Section 26 of the Rights Agreement is hereby amended to substitute
"Equiserve Limited Partnership" for "Boston Equiserve Limited Partnership" and
to substitute "Client Administration" for "Shareholder Services, Mail Stop:
45-02-623".
6. All amendments made to the Rights Agreement in this Amendment shall
be deemed to apply retroactively as well as prospectively.
7. This Amendment shall be governed by and construed in accordance
with the laws of the State of Delaware and for all purposes shall be governed by
and construed in accordance with all laws of such State applicable to contracts
to be made and performed entirely within such State.
8. This Amendment may be executed in counterparts, each of which shall
be an original, but such counterparts shall together constitute one and the same
instrument.
-2-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed and attested, all as of the date and year first above written.
Attest: BIOSITE DIAGNOSTICS INCORPORATED
By: /s/ Chris Twomey By: /s/ Kim Blickenstaff
------------------------------- -----------------------------
Title: Chief Financial Officer Title: President
---------------------------- ----------------------------
Attest: BANKBOSTON, N.A.
By: /s/ Sandra Burgess By: /s/ Katherine Andersen
------------------------------- -----------------------------
Title: Account Manager Title: Director of Client Services
---------------------------- ----------------------------
-3-
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
Forms S-8 Nos. 333-21537 and 333-59701 pertaining to the Employee Stock Purchase
Plan and Nos. 333-26763, 333-59705 and 333-83429 pertaining to the Amended and
Restated 1996 Stock Incentive Plan of Biosite Diagnostics Incorporated of our
report dated January 26, 2000, with respect to the financial statements and
schedule of Biosite Diagnostics, Inc. included in the Annual Report (Form 10-K)
for the year ended December 31, 1999.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
San Diego, California
March 27, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANTS FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED DECEMBER 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>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 4,594
<SECURITIES> 27,677
<RECEIVABLES> 6,192
<ALLOWANCES> 0
<INVENTORY> 6,059
<CURRENT-ASSETS> 47,172
<PP&E> 22,684
<DEPRECIATION> 12,748
<TOTAL-ASSETS> 68,148
<CURRENT-LIABILITIES> 7,194
<BONDS> 4,069
0
0
<COMMON> 131
<OTHER-SE> 68,148
<TOTAL-LIABILITY-AND-EQUITY> 55,529
<SALES> 43,011
<TOTAL-REVENUES> 45,502
<CGS> 13,636
<TOTAL-COSTS> 30,928
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 938
<INCOME-TAX> 166
<INCOME-CONTINUING> 1,104
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,104
<EPS-BASIC> 0.08
<EPS-DILUTED> 0.08
</TABLE>
