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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 000-21873
BIOSITE DIAGNOSTICS INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 33-0288606
[State or other jurisdiction [I.R.S. Employer Identification No.]
of incorporation or organization]
11030 Roselle Street
San Diego, California 92121
[Address of principal executive offices] [Zip Code]
Registrant's telephone number, including area code: (858) 455-4808
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
The number of shares of the Registrant's Common Stock, $0.01 par value,
outstanding at October 31, 2000 was 14,024,749
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BIOSITE DIAGNOSTICS INCORPORATED
FORM 10-Q
INDEX
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PAGE
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PART I. FINANCIAL INFORMATION.....................................................................................1
ITEM 1. FINANCIAL STATEMENTS......................................................................................1
CONDENSED BALANCE SHEETS........................................................................................1
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)..................................................................2
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)..................................................................3
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED).............................................................4
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED).............................................................5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................6
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................................11
PART II. OTHER INFORMATION.......................................................................................21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.........................................................................21
SIGNATURES........................................................................................................22
</TABLE>
Biosite-Registered Trademark-, Triage-Registered Trademark-,
ExpressTest-Registered Trademark- and Immediate Response Diagnostics-Registered
Trademark- are registered trademarks of the Company. Omniclonal-TM-, an Unfair
Advantage-TM-, the Company's logo, and the logo for Biosite Discovery an Unfair
AdvantagE are trademarks or service marks of the Company.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIOSITE DIAGNOSTICS INCORPORATED
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------------- ---------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,865,505 $ 4,594,217
Marketable securities, available-for-sale 33,914,340 27,677,307
Accounts receivable, net 6,763,709 6,192,161
Inventories, net 7,325,224 6,058,856
Other current assets 2,816,449 2,649,607
--------------- ---------------
Total current assets 55,685,227 47,172,148
Property, equipment and leasehold improvements, net 10,812,740 9,936,429
Patents and license rights, net 8,504,986 7,555,771
Other assets 3,407,195 3,483,632
--------------- ---------------
$ 78,410,148 $ 68,147,980
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,028,966 $ 1,831,282
Accrued salaries and other 4,859,313 3,423,541
Current portion of long-term obligations 2,094,944 1,939,372
--------------- ---------------
Total current liabilities 7,983,223 7,194,195
Long-term obligations 4,198,213 4,068,814
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized, none
issued and outstanding at September 30, 2000 and December 31, 1999 - -
Common stock, $.01 par value, 25,000,000 shares authorized; 14,012,025
and 13,141,302 shares issued and outstanding at September 30, 2000 and
December 31, 1999, respectively 140,120 131,413
Additional paid-in capital 59,987,209 55,398,048
Unrealized net gain (loss) on marketable securities, net of related
tax effect (158,091) (131,416)
Deferred compensation (21,944) (93,086)
Retained earnings 6,281,418 1,580,012
--------------- ---------------
Total stockholders' equity 66,228,712 56,884,971
--------------- ---------------
$ 78,410,148 $ 68,147,980
=============== ===============
</TABLE>
Note: The balance sheet at December 31, 1999 has been derived from the
audited financial statements at that date but does not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes.
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BIOSITE DIAGNOSTICS INCORPORATED
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Product sales $ 13,330,041 $ 11,316,525 $ 38,661,843 $ 31,357,825
Contract revenue 1,051,749 300,000 2,076,546 610,000
------------- ------------- ------------- -------------
Total revenues 14,381,790 11,616,525 40,738,389 31,967,825
Operating Expenses:
Cost of product sales 3,935,640 3,179,876 11,325,606 10,184,417
Selling, general and administrative 4,057,424 4,031,770 13,294,608 13,269,320
Research and development 3,656,048 3,417,318 10,148,787 10,059,351
------------- ------------- ------------- -------------
Total operating expenses 11,649,112 10,628,964 34,769,001 33,513,088
------------- ------------- ------------- -------------
Operating income (loss) 2,732,678 987,561 5,969,388 (1,545,263)
Interest and other income 589,379 406,454 1,609,018 1,346,744
------------- ------------- ------------- -------------
Income (loss) before benefit (provision)
for income taxes 3,322,057 1,394,015 7,578,406 (198,519)
Benefit (provision) for income taxes (1,300,000) (554,000) (2,877,000) 79,000
------------- ------------- ------------- -------------
Net income (loss) $ 2,022,057 $ 840,015 $ 4,701,406 $ (119,519)
============= ============= ============= =============
Net income (loss) per share
- Basic $ 0.15 $ 0.06 $ 0.35 $ (0.01)
============= ============= ============= =============
- Diluted $ 0.13 $ 0.06 $ 0.31 $ (0.01)
============= ============= ============= =============
Shares used in calculating per share amounts
- Basic 13,923,000 13,056,000 13,614,000 13,014,000
============= ============= ============= =============
- Diluted 15,620,000 13,593,000 15,197,000 13,014,000
============= ============= ============= =============
</TABLE>
See accompanying notes.
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BIOSITE DIAGNOSTICS INCORPORATED
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2000 1999
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<S> <C> <C>
OPERATING ACTIVITIES
Net cash provided by operating activities $ 5,971,653 $ 1,648,667
INVESTING ACTIVITIES
Proceeds from sales and maturities of marketable securities 19,387,885 21,240,345
Purchase of marketable securities (25,669,377) (16,265,758)
Purchase of property, equipment and leasehold improvements (2,767,902) (3,776,217)
Patents, license rights, deposits and other assets (1,435,038) (2,062,466)
------------- -------------
Net cash used in investing activities (10,484,432) (864,096)
FINANCING ACTIVITIES
Proceeds from issuance of financing obligations 1,841,462 1,342,520
Principal payments under financing obligations (1,556,491) (1,320,302)
Repurchase and retirement of common stock - (358,641)
Proceeds from issuance of common stock, net 4,499,096 811,915
------------- -------------
Net cash provided by financing activities 4,784,067 475,492
------------- -------------
Increase in cash and cash equivalents 271,288 1,260,063
Cash and cash equivalents at beginning of period 4,594,217 762,337
------------- -------------
Cash and cash equivalents at end of period $ 4,865,505 $ 2,022,400
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 369,810 $ 333,217
============= =============
Income taxes paid $ 1,253,132 $ 2,744
============= =============
</TABLE>
See accompanying notes.
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BIOSITE DIAGNOSTICS INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared
in accordance with both generally accepted accounting principles for interim
financial information, and the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The accompanying financial statements reflect all
adjustments (consisting of normal recurring accruals) which are, in the opinion
of management, considered necessary for a fair presentation of the results for
the interim periods presented. Interim results are not necessarily indicative of
results for a full year. We have experienced significant quarterly fluctuations
in our operating results and we expect that these fluctuations in sales,
expenses and operating results may continue.
The financial statements and related disclosures have been prepared with the
presumption that users of the interim financial information have read or have
access to the audited financial statements for the preceding fiscal year.
Accordingly, these financial statements should be read in conjunction with the
audited financial statements and the related notes thereto contained in our
Annual Report on Form 10-K for the year ended December 31, 1999.
2. 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 our earnings,
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 earnings per share were as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------------------------
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Weighted average common shares outstanding 13,923 13,056 13,614 13,014
Net effect of dilutive common share equivalents using the
treasury stock method 1,697 537 1,583 -
-------------------------------------------------------
Shares used in calculating per share amounts - Diluted 15,620 13,593 15,197 13,014
=======================================================
</TABLE>
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BIOSITE DIAGNOSTICS INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
3. BALANCE SHEET INFORMATION
Net inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
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<S> <C> <C>
Raw materials $ 1,835,936 $ 2,088,530
Work-in-process 3,966,042 3,058,179
Finished goods 1,523,246 912,147
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$ 7,325,224 $ 6,058,856
============ ============
</TABLE>
4. 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 that the change in net
unrealized gains or losses on marketable securities be included in comprehensive
income. As adjusted, our comprehensive income is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-----------------------------------------------------------------------
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Net income (loss) $ 2,022,057 $ 840,015 $ 4,701,406 $ (119,519)
Change in unrealized net gain (loss) on
marketable securities, net of tax 37,489 (10,893) (26,675) (105,003)
-----------------------------------------------------------------------
Comprehensive income (loss) $ 2,059,540 $ 829,122 $ 4,674,731 $ (224,522)
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</TABLE>
5. NEW ACCOUNTING PRONOUNCEMENTS
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.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements. SAB 101 provides guidance
in applying generally accepted accounting principles to revenue recognition in
financial statements. The Company is required to adopt the pronouncement during
the fourth quarter of 2000. The Company does not expect SAB 101 to have a
material effect on its financial statements.
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<PAGE>
PART I. FINANCIAL INFORMATION.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The matters discussed in this Management's Discussion and Analysis of
Financial Condition and Results of Operations contain forward-looking statements
that involve risks and uncertainties, including the timely development,
introduction and acceptance of new products, manufacturing efficiency issues,
dependence on others, the impact of competitive products, third party
reimbursement issues, changing market conditions and the other risks detailed
under "Factors that May Affect Results" and throughout our Annual Report on Form
10-K for the year ended December 31, 1999. 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-Q and our Form 10-K, respectively. 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-Registered
Trademark- Panel for Drugs of Abuse. 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 customers are hospitals, which use our
products in laboratories, emergency departments and other point-of-care
locations. In addition to focusing our attention on commercial activities
associated with our 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.
In March 1999, we introduced Biosite Discovery, a collaborative research and
diagnostics development program focused on identifying new protein markers for
acute diseases. In addition to our internal diagnostic marker discovery
programs, we use our expertise in antibody development to establish
collaborative programs with pharmaceutical and biotechnology partners. We
utilize our proprietary Omniclonal(TM) phage display 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
to accelerate our partners' research programs. In return for our services, we
have obtained and seek to continue to obtain diagnostic rights to the proteins
under study. Initially, we are focusing on disease target markers in our 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 Biosite
Discovery with several partners in the areas of cardiovascular, cerebrovascular,
infectious disease and oncology.
Our product sales to date have primarily been attributed to sales of the
Triage Drugs of Abuse Panel product line. The Triage Drugs of Abuse Panel
products are marketed pursuant to exclusive distribution agreements in the U.S.
hospital market segment by Fisher Healthcare, or Fisher, which accounted for 83%
of product sales in 1999 and 85% in the first nine months of 2000, and
internationally by country-specific and regional distributors. Since its launch
in fiscal 1992, the Triage Drugs of Abuse Panel product line has experienced
continued annual revenue growth. We believe, however, that domestic sales of the
Triage Drugs of Abuse Panel products may decline as the available U.S. market
becomes saturated and competitive pressures become more and more prominent in a
maturing market.
During the second half of 1999 and the first nine months of 2000 we returned
to operating profitability after incurring operating losses 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.
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<PAGE>
We anticipate that our results of operations may fluctuate for the
foreseeable future due to several factors, including :
- potential expansion of our distribution channels and Biosite sales
force
- 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, potential product launches and 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 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 maintain profitability on a quarterly or
annual basis.
RECENT DEVELOPMENTS
BIOSITE DISCOVERY - MEDAREX
In June 2000, we launched an alliance with Medarex Inc. aimed at accelerating
drug research via Trans-Phage Technology-SM-. This high throughput method to
create fully human antibodies combines the immunological power of Medarex's
HuMAb-Mouse-TM- with the speed of Biosite's Omniclonal-TM- phage display
technology. Through this alliance, Biosite and Medarex will offer pharmaceutical
and biotechnology companies access to large volumes of high-affinity,
fully-human antibodies to validate genomic targets and identify promising drug
candidates. We believe that the Trans-Phage Technology will enable scientists to
make large volumes of fully-human antibodies to disease targets in a fraction of
the time typically associated with traditional technologies. Under the terms of
the agreement, Biosite will receive research funding of $3.0 million per year
over eight years from Medarex, along with research fees and, if any products are
generated through the collaboration, milestone payments and royalties. We may
also receive diagnostic rights to targets identified through the collaboration.
NEW PRODUCTS - TRIAGE BNP TEST
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, or CHF, and therefore potentially enable
earlier therapeutic intervention. Additionally, we filed a pre-market approval
application, or PMA, with the FDA, seeking approval to market the Triage BNP
Test in the United States. In March 2000, the FDA Clinical Chemistry and
Clinical Toxicology Device Panel, or Advisory Panel, voted 6-3 to recommend
non-approval of our PMA for the Triage BNP Test. In voting, the Advisory Panel
indicated the need for additional data. Despite this outcome, we continue to
believe in the potential utility, safety and effectiveness of the Triage BNP
Test. In October 2000, we submitted an amendment to our PMA, providing to the
FDA additional data that was requested following the Advisory Panel meeting. We
submitted data relevant to female CHF patients and to patients in certain ethnic
groups. Also, to better demonstrate the sensitivity and specificity of our test
in different age groups, we accumulated data from a control group of healthy
individuals that is representative of the age distribution among the diseased
population. The FDA is expected to review our PMA within six months. At the
present time, in the United States, there is no blood test available to aid in
diagnosing CHF. We continue to market the Triage BNP System internationally.
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<PAGE>
RESULTS OF OPERATIONS
PRODUCT SALES. Product sales for the three and nine months ended
September 30, 2000 were $13.3 million and $38.7 million, respectively,
representing increases of 18% and 23% respectively, compared to the same
periods of 1999. The increase in net product sales was primarily attributable
to the growth in net sales of our Triage Cardiac System. Net sales of our
quantitative platform products, consisting of the Triage Cardiac System and
Triage BNP System, were approximately $3.2 million and $10.1 million,
respectively, for three and nine months ended September 30, 2000, as compared
to $1.8 million and $4.4 million, respectively, for the same periods of 1999.
The Triage Cardiac System's net sales growth, on both a quarterly and
year-to-date basis, was primarily due to growth in the size of our customer
base. As we transition the focus of our selling efforts to the larger
hospitals and driving point-of-care applications, we have made changes aimed
at upgrading the sales force skills. We accelerated personnel changes at the
territory and management levels of our sales force, implemented additional
clinical training, increased utilization of our clinical specialists in the
field and began hiring a core group of cardiovascular sales specialists, who
will focus solely on large cardiac centers. Though many of our account
executives are currently performing at levels that meet our expectations,
many territories have open positions or new account executives. We anticipate
that it may take three to six months to bring the balance of our sales force
to full effectiveness. As a result, sales of the Triage Cardiac System for
the fourth quarter of 2000 may be sequentially flat or below the third
quarter 2000 revenues.
Net sales of our qualitative platform products, consisting of the Triage
Drugs of Abuse Panel and Triage Microbiology Panels, were approximately $10.1
million and $28.5 million, respectively, for three and nine months ended
September 30, 2000, as compared to $9.5 million and $26.9 million,
respectively, for the same periods of 1999. The growth in our qualitative
platform products for the third quarter of 2000 as compared to the same
period of 1999 was primarily related to sales growth of the Triage Drugs of
Abuse Panel. Net sales of the Triage Drugs of Abuse Panel for the three
months ended September 30, 2000 increased $428,000 or 5%, as compared to the
same period in 1999. Net sales of the Triage Drugs of Abuse Panel for the
nine months ended September 30, 2000 increased $1.0 million or 4%, as
compared to the same period in 1999. We believe that the domestic sales of
the Triage Drugs of Abuse Panel products may decline as the available U.S.
market becomes saturated and competitive pressures become more prominent in a
maturing market. Also, our distribution agreement with Fisher expires on
December 31, 2000. We are currently evaluating various distribution
alternatives and negotiating with potential partners.
CONTRACT REVENUES. Contract revenues consist of revenues associated with
our research and development and licensing arrangements, including license
fees, milestone revenues, royalties, research funding and antibody fees.
Contract revenues for the three months ended September 30, 2000 were $1.1
million as compared to $300,000 for the same period in 1999. Contract
revenues for the nine months ended September 30, 2000 were $2.1 million,
representing an increase of 240% as compared to the same period of 1999.
Contract revenues recognized during the three and nine months ended September
30, 2000 related primarily to the licensing of technology and performance of
activities under collaborative research and development agreements. In June
2000, the Company entered into an alliance with Medarex Inc. Under the terms
of the agreement, Biosite will receive research funding of $3.0 million per
year over eight years from Medarex, along with research fees and, if any
products are generated through the collaboration, milestone payments and
royalties. During the third quarter of 2000, we recognized $750,000 of
revenue from the alliance with Medarex. We may also receive diagnostic rights
to targets identified through the collaboration. Contract revenues recognized
during the third quarter of 1999 related to activities associated with a
research and development feasibility study being performed by the Company.
Costs associated with corporate partners revenues are included in research
and development expenses.
COST OF SALES AND GROSS PROFIT FROM PRODUCT SALES. Gross profit from
product sales for the three and nine months ended September 30, 2000 was $9.4
million and $27.3 million, respectively, representing increases of 15% and
29%, respectively, over the same periods of 1999. The overall gross margin
decreased to 70% for the third quarter of 2000 from 72% for the same period
of 1999. Gross margins decreased primarily due to a decline in the margin for
the Triage Cardiac System which resulted primarily from under-utilization of
the manufacturing capacity for that product line. The overall gross margin
increased to 71% for the first nine months of 2000 from 68% for the same
period of 1999. Our newer products, which continued to experience lower gross
margins than the Triage Drugs of Abuse Panel, were produced with greater
efficiency during first nine months of 2000 than the same period of 1999.
During the first quarter of 1999, we experienced significant inefficiencies
related to the production of the Triage Cardiac Panel, which adversely
affected gross profits related to that product during that period. Our newer
products are expected to continue to
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<PAGE>
realize lower gross margins than the Triage Drugs of Abuse Panel during the
early stages of their commercialization as incremental manufacturing costs are
spread over lower sales volumes and efficiency issues are addressed. We also
expect that the overall gross margin may decrease as a result of competitive
pricing pressures related to the maturing Triage Drugs of Abuse product line and
the changing mix of net sales of products with different gross margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A EXPENSES). Our SG&A
expenses for the three months ended September 30, 2000 were $4.1, million
representing an increase of 1% over the same period of 1999. The increase in
SG&A expenses during the third quarter of 2000, as compared to the same
period of 1999, was primarily due to an increase in employee expenses which
was offset by decreased spending in sales and marketing programs. Our SG&A
expenses for the nine months ended June 30, 2000 are consistent with the same
period in 1999. Our SG&A expenses are expect to increase during the fourth
quarter and 2001 as we fill open account executive positions, expand our
sales force and prepare for the potential launch of the Triage BNP System in
the U.S.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for the
three months and nine months ended September 30, 2000 were $3.7 million and
$10.1 million, respectively, representing increases of 7% and 1%, respectively,
from the same periods of 1999. The increase in expenses in the three and nine
months ended September 30, 2000 is primarily related to an increase in Biosite
Discovery activities and activities relating to the gathering of the additional
data needed for our amendment to our PMA for the Triage BNP test which was filed
in early October. During the third quarter of 2000, our research and development
resources were focused primarily on clinical studies, the development of
potential improvements to our existing and new products, and research activities
associated with Biosite Discovery. Expenses related to the performance of our
obligations associated with earning our contract revenue was incurred by our
research and development group, primarily Biosite Discovery. We expect that our
research and development expenses will increase during the last quarter of 2000,
as compared to 1999 levels. The increased expenditures are expected to primarily
relate to clinical studies, product development efforts and Biosite Discovery.
INTEREST AND OTHER INCOME. Interest income increased $183,000 and $262,000,
respectively, for the three months and nine months ended September 30, 2000 from
the same periods in 1999. The increase resulted primarily from the higher
average balance of cash and marketable securities during the third quarter and
first nine months of 2000 as compared to the same periods in 1999.
BENEFIT (PROVISION) FOR INCOME TAXES. As a result of the pre-tax income and
the estimated tax credits to be generated in 2000, we recorded a provision for
income taxes of $2.9 million for the first nine months of 2000. For the same
period in 1999, we recorded a benefit for income taxes of $79,000. We will
continue to assess the likelihood of realization of our tax credits and other
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.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations through cash provided by operating
activities, private and public placements of equity securities, debt and capital
lease financing, cash received under collaborative agreements and interest
income. At September 30, 2000, the Company had cash, cash equivalents and
marketable securities of approximately $38.8 million compared to $32.3 million
at December 31, 1999.
The increase in cash, cash equivalents and marketable securities during the
first nine months of 2000 was largely attributable to cash generated from the
operating activities of $6.0 million, the receipt of $4.5 million in proceeds
from the issuance of common stock under our employee stock plans, and the
receipt of $1.8 million in proceeds from equipment financing. Significant uses
of cash for the first nine months of 2000 included purchase of leasehold
improvement and capital equipment of approximately $2.8 million, principal
payments under equipment financing obligations of $1.6 million, and an
additional $1.0 million payment made under a technology licensing arrangement
previously entered into.
The decrease in cash, cash equivalents and marketable securities during the
nine months ended September 30, 1999 is largely attributable to the net payment
of $1,050,000 made to Dade Behring as part of the settlement of litigation
between Dade Behring and Biosite in March 1999 and an additional $1.0 million
payment made under a technology licensing arrangement previously entered into.
Cash generated from operating activities totaled $1.6 million for the nine
months ended September 30, 1999. Significant sources of cash for the nine months
ended September 30, 1999 included the receipt of $5.0 million from the sale of
marketable securities that were not
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reinvested in other marketable securities and the receipt of $1.3 million in
proceeds from equipment financing. These proceeds were used to meet cash
requirements of the Company during the first nine months of 1999. Significant
uses of cash during the nine months ended September 30, 1999 included purchases
of equipment and leasehold improvements totaling approximately $3.8 million.
Our primary short-term needs for capital, which are subject to change, are
for the support of our commercialization efforts related to new products,
expansion of our manufacturing capacity and efficiency for new products,
expansion of our sales force and market education resources, 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 that 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, and facilities expansion needs
- the timing and results of clinical studies and regulatory actions
regarding our potential products
- changes in third-party reimbursement policies, and
- 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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to changes in interest rates, primarily from our
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 September 30, 2000, we had variable-rate debt
totaling approximately $1.1 million. A hypothetical 1% adverse move in interest
rates along the entire interest rate yield curve would not materially effect the
fair market 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 September 30, 2000, we had no
outstanding forward exchange contracts. Total receivables and payables
denominated in foreign currencies at September 30, 2000 were not material.
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FACTORS THAT MAY AFFECT RESULTS
This report includes forward-looking statements about our business and
results of operations which are subject to risks and uncertainties that could
cause our actual results to vary materially from those indicated from such
forward-looking statements. Factors that could cause or contribute to such
differences include those discussed below, as well as those discussed elsewhere
in the Form 10-Q and in our Annual Report on Form 10-K for the year ended
December 31, 1999. The factors discussed below should be read in conjunction
with the risk factors discussed in our Annual Report on Form 10-K, which are
incorporated by reference.
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
and, to date, each quarter of 2000. 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
- changes in distribution channel arrangements
- expansion of our sales force and market education resources
- research and development efforts
- seasonal customer demand
- changes in reimbursement policies
- regulatory uncertainties or delays
- product recalls
- shipment problems, and
- 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 the 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 FDA or foreign regulatory authorities on a timely basis, or at
all, and the new products may not be successfully commercialized.
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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. In March 2000, the
FDA Clinical Chemistry and Clinical Toxicology Device Panel (Advisory Panel)
recommended non-approval of our PMA for the Triage BNP Test. In voting, the
Advisory Panel indicated the need for additional data. Our amendment to our PMA
for the Triage BNP test was filed in early October 2000. We have limited
resources to devote to the development of our potential products and thus the
delay in the development of the Triage BNP Test may delay the development of
other products.
If we fail to establish and maintain:
- reliable, cost-efficient, high volume manufacturing capacity
- a cost-effective sales force and administrative infrastructure, or
- an effective product distribution system for our products
we may not be able to successfully commercialize new products.
WE ARE DEPENDENT IN THE NEAR TERM ON SALES OF THE TRIAGE DRUGS OF ABUSE PANEL. A
SIGNIFICANT REDUCTION IN SALES OF THE TRIAGE DRUGS OF ABUSE PANEL WOULD HARM US.
Sales of the Triage Drugs of Abuse Panel products accounted for
approximately 79% of our sales in 1999 and 68% of our sales in the first nine
months of 2000. We expect our revenue and profitability to substantially depend
on the sale of the Triage Drugs of Abuse Panel products for the foreseeable
future. A significant reduction in demand for the Triage Drugs of Abuse Panel
products would have a material adverse effect on us. We believe that domestic
net sales of the Triage Drugs of Abuse Panel products may decline as the
available U.S. market becomes saturated. Competitive pressures could also erode
our profit margins for the Triage Drugs of Abuse Panel products. Our continued
growth will depend on our ability to:
- successfully commercialize our newer products
- develop and commercialize other products, and
- gain additional acceptance of the Triage Drugs of Abuse Panel products
in new market segments, such as international markets.
Sales of our newer products represented less than 22% of net sales during
1999 and less than 33% during the first nine months of 2000.
We may not be able to successfully commercialize new products, including our
four newer products that we have launched in the last two years, 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 to distribute our
products in the United States and may rely upon distributors to distribute
products under development. Our 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 85% of net sales in the first
nine months of 2000) 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.
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Our distribution agreement with Fisher expires on December 31, 2000. We are
currently evaluating various distribution alternatives and negotiating with the
potential partners.
COMPETITION AND TECHNOLOGICAL CHANGE MAY MAKE OUR PRODUCTS LESS ATTRACTIVE OR
OBSOLETE.
The market in which we compete is intensely competitive. Our competitors
include:
- companies marketing laboratory-based tests and analyzers, and
- 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 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 laboratory procedures. This will require physicians to
change their established means of having such tests performed and changed their
clinical practices. 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
- Dade Behring
- Roche Boehringer Mannheim Corporation
- Bayer Diagnostics, and
- Ortho Clinical Diagnostics, a division of Johnson & Johnson,
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 our products
either in the United States or in international markets.
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.
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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 our products, 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 our 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, or
- the timing of market introductions and subsequent sales of products
incorporating the LRE meter.
HEALTH CARE REFORM AND RESTRICTIONS ON REIMBURSEMENT MAY ADVERSELY AFFECT OUR
RESULTS.
In the United States, health care providers that purchase the Triage Drugs
of Abuse 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.
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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, or 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
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parties) required under any such patent may not be made available on
commercially acceptable terms, or at all. There are a significant number of U.S.
and foreign patents and patent applications in 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, and
- 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 pre-market approval for devices, withdrawal of
marketing clearances or approvals and criminal prosecution. The FDA also has the
authority to request recall, repair, replace 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, pre-market 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 pre-market 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 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 pre-amendment 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,
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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 pre-amendment 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 Drugs of Abuse 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
Drugs of Abuse 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 Drugs of Abuse 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 Drugs of Abuse 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
Drugs of Abuse Panel, Triage C. difficile Panel, Triage Parasite Panel and
Triage Cardiac 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. In March
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2000, the Advisory Panel recommended non-approval of our PMA for the Triage BNP
Test. In voting, the Advisory Panel indicated the need for additional data. Our
amendment to our PMA for the Triage BNP test was filed in early October 2000. In
April 2000, the FDA conducted an audit of our manufacturing facility. No
citations or observations resulted from this audit.
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 our IVD products under development will meet the requirements
for IDE exemption. Furthermore, failure by us or the recipients of our 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 our 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, 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
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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 our 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.
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<PAGE>
PART II. OTHER INFORMATION.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
None
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 13, 2000 BIOSITE DIAGNOSTICS INCORPORATED
By: /s/ CHRISTOPHER J. TWOMEY
---------------------------------
Christopher J. Twomey
Vice President, Finance and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
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<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
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