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OSTEX INTERNATIONAL INC /WA/
10-Q, 2000-08-14
IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-Q

/x/	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 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                

0-25250
Commission File Number

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OSTEX INTERNATIONAL, INC.
Name of Registrant as Specified in Its Charter

2203 Airport Way South, Suite 400, Seattle, Washington 98134
206-292-8082
Address and Telephone Number of Principal Executive Offices

[n/a]
Former name, address and fiscal year, if changed since last report

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    Indicate by checkmark 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 outstanding as of August 8, 2000 was 12,529,139.

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OSTEX INTERNATIONAL, INC.
INDEX TO FORM 10-Q
PART I—FINANCIAL INFORMATION

						Page
ITEM 1		—		FINANCIAL STATEMENTS
				Condensed Balance Sheets		F-1
				Condensed Statements of Operations		F-2
				Condensed Statements of Cash Flows		F-3
				Notes to Condensed Financial Statements		F-4
ITEM 2		—		MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL   CONDITION AND RESULTS OF OPERATIONS		1
ITEM 3		—		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET   RISK		4
PART II—OTHER INFORMATION
ITEM 4		—		SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		5
ITEM 6		—		EXHIBITS AND REPORTS ON FORM 8-K		5

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OSTEX INTERNATIONAL, INC.

CONDENSED BALANCE SHEETS

				June 30, 2000			December 31, 1999
				(Unaudited)
ASSETS
Current Assets:
	Cash and cash equivalents			$	939,000		$	1,562,000
	Short-term investments				6,438,000			6,838,000
	Trade receivables and other current assets, net				1,169,000			1,142,000
	Inventory, at cost				341,000			251,000
		Total current assets			8,887,000			9,793,000
Property, Plant and Equipment, net					1,708,000			1,905,000
Other Assets					599,000			599,000
		Total assets		$	11,194,000		$	12,297,000
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
	Accounts payable			$	356,000		$	278,000
	Accrued expenses				241,000			195,000
	Current portion of note payable				—			115,000
		Total current liabilities			597,000			588,000
Noncurrent Liabilities
	Note payable, net of current portion				—			—
Commitments and Contingencies
Shareholders' Equity:
	Common stock, $.01 par value, 50,000,000 authorized; 12,529,139 and 12,469,050 issued and outstanding at June 30, 2000 and December 31, 1999 respectively				125,000			125,000
	Additional paid-in capital				45,642,000			45,494,000
	Accumulated items of comprehensive loss				(130,000	)		(117,000	)
	Accumulated deficit				(35,040,000	)		(33,793,000	)
		Total shareholders' equity			10,597,000			11,709,000
		Total liabilities and shareholders' equity		$	11,194,000		$	12,297,000

The accompanying notes are an integral part of these condensed financial statements.

F-1

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OSTEX INTERNATIONAL, INC.

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

				Quarter Ended						Year to Date
				June 30, 2000			June 30, 1999			June 30, 2000			June 30, 1999
Revenues:
	Product sales and research testing services			$	1,568,000		$	1,127,000		$	2,454,000		$	2,028,000
Cost of products sold					619,000			274,000			697,000			520,000
Gross Profit					949,000			853,000			1,757,000			1,508,000
Operating Expenses:
	Research and development				404,000			478,000			777,000			949,000
	Selling, general and administrative				1,279,000			999,000			2,416,000			1,943,000
		Total operating expenses			1,683,000			1,477,000			3,193,000			2,892,000
		Loss from operations			(734,000	)		(624,000	)		(1,436,000	)		(1,384,000	)
Other Income, net					99,000			121,000			189,000			247,000
		Net loss		$	(635,000	)	$	(503,000	)	$	(1,247,000	)	$	(1,137,000	)
Basic and diluted net loss per common share				$	(0.05	)	$	(0.04	)	$	(0.10	)	$	(0.09	)
Weighted average shares used in calculation of net loss per share					12,504,000			12,530,000			12,488,000			12,557,000

The accompanying notes are an integral part of these condensed financial statements.

F-2

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OSTEX INTERNATIONAL, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

				Year to Date
				June 30, 2000			June 30, 1999
CASH FLOWS FROM OPERATING ACTIVITIES				$	(949,000	)	$	(1,614,000	)
CASH FLOWS FROM INVESTING ACTIVITIES:
	Purchases of short-term investments				(3,907,000	)		(5,451,000	)
	Proceeds from sales and maturities of short-term investments				4,294,000			5,873,000
	Proceeds from sale of property, plant and equipment				—			15,000
	Purchases of property, plant and equipment				(71,000	)		(34,000	)
		Net cash from investing activities			316,000			403,000
CASH FLOWS FROM FINANCING ACTIVITIES:
	Net proceeds from the exercise of stock options				125,000			1,000
	Repurchase of common stock				—			(229,000	)
	Payments on note payable				(115,000	)		(102,000	)
		Net cash from financing activities			10,000			(330,000	)
NET DECREASE IN CASH AND EQUIVALENTS					(623,000	)		(1,541,000	)
CASH AND CASH EQUIVALENTS, beginning of period					1,562,000			2,744,000
CASH AND CASH EQUIVALENTS, end of period				$	939,000		$	1,203,000

The accompanying notes are an integral part of these condensed financial statements.

F-3

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OSTEX INTERNATIONAL, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

1.  Basis of Presentation

    The unaudited condensed financial statements include the accounts of Ostex International, Inc., a Washington corporation (the "Company"). These financial statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting and pursuant to the rules and regulations of the Securities and Exchange Commission. While these statements reflect all normal recurring adjustments which are, in the opinion of management, necessary for fair presentation of the results of the interim periods, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the financial statements and footnotes thereto included in the Company's Annual Report filed on Form 10-K for the year ended December 31, 1999.

2.  Comprehensive Income

    SFAS No. 130, "Reporting Comprehensive Income", which was effective for the Company beginning January 1, 1998, establishes standards for reporting and disclosure of comprehensive income. The components of comprehensive income for the six months ended June 30, 2000 and June 30, 1999, are as follows:

			June 30, 2000			June 30, 1999
Net Loss			$	(1,247,000	)	$	(1,137,000	)
Unrealized loss on short-term investments				(13,000	)		(58,000	)
Total comprehensive loss			$	(1,260,000	)	$	(1,195,000	)

F-4

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

    This Quarterly Report on Form 10-Q contains forward-looking statements which reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including those discussed below, that could cause actual results or the timing of certain events to differ materially from historical results or those anticipated. Words used herein such as "believes," "anticipates," "expects," "intends," and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. In addition, the disclosures in this Item 2 under the caption "Other Factors that May Affect Operating Results" consist principally of a brief discussion of risks which may affect future results and are thus, in their entirety, forward-looking in nature. Readers are urged to carefully review and consider the various disclosures made by the Company in this report and in the Company's other reports previously filed with the Securities and Exchange Commission (the "Commission"), including the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999, that attempt to advise interested parties of the risks and factors that may affect the Company's business.

Overview

    Ostex was incorporated in the State of Washington in 1989. The Company is engaged in the discovery and commercialization of products associated with osteoporosis and other collagen-related diseases. The Company believes that its lead product, the OSTEOMARK® test, now available in multiple test formats, incorporates breakthrough and patented technology in the area of bone resorption measurement. As of June 30, 2000, the Company had 38 employees.

    Osteoporosis is a significant health problem. According to the National Osteoporosis Foundation (the "NOF"), osteoporosis afflicts over 28 million people in the U.S. alone. Additionally millions of people are at risk of skeletal degradation associated with Paget's disease of bone, cancer that metastasizes to bone, hyperparathyroidism (overactivity of the parathyroid gland, characterized by a reduction of bone mass) and renal osteodystrophy. In spite of the serious human and economic consequences of these diseases (according to the NOF, the national direct expenditures for osteoporosis and associated fractures exceed $14 billion annually in the U.S. alone), medical intervention usually commences only after pain, immobility, fractures, or other symptoms have appeared. The Company expects the osteoporosis therapeutic market will continue to increase as the population ages.

    The Company is the exclusive licensee of the Osteomark technology, known clinically as the NTx test, which is available in multiple formats that can aid in healthcare decision-making at early menopause and beyond. The Osteomark test is a non-invasive test that quantitatively indicates the level of bone resorption. Individuals who are losing bone collagen at accelerated rates may progress to low bone mass, a major cause of osteoporosis. The Company believes that early identification of high levels of bone resorption provides the opportunity to predict skeletal response (bone mineral density) to hormonal antiresorptive therapy in postmenopausal women, which are intended to prevent the onset of osteoporosis. The Company's Osteomark test can be used to effectively predict a patient's response to osteoporosis therapy. In addition, the Company's Osteomark test aids clinicians in monitoring the effects of antiresorptive therapies in postmenopausal women, as well as patients who have already lost bone mass in a matter of three months versus one to two years with conventional technology.

    In May 1995, the Company's Osteomark test became commercially available in the United States as a urinary test that provides a quantitative measure of the excretion of cross-linked N-telopeptides of Type I collagen (NTx) as an indicator of human bone resorption. In July 1996, the Company received expanded claims for the urine test. The 1996 claims allow that an Osteomark test measurement, if taken prior to the initiation of hormonal antiresorptive therapy, can be utilized to predict a patient's response to that therapy, in terms of its effect on bone mineral density. Additionally, the claims allow that the test can be used to measure the effect of antiresorptive therapies in postmenopausal women, as well as individuals diagnosed

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with osteoporosis and Paget's disease. In March 1998 the claims were further expanded by allowing that, in addition to the 1996 claims, an Osteomark test measurement can identify the probability of a decrease in bone mineral density in postmenopausal women taking calcium supplements relative to those treated with hormonal antiresorptive therapy.

    In February 1999, Osteomark NTx Serum became the first and only commercially available test in the United States that measures specific bone breakdown by osteoclasts using a blood sample. The Company believes that the use of a serum NTx test provides a number of advantages to testing laboratories, including the elimination of the requirement to normalize NTx values to creatinine concentration. The Company is manufacturing and marketing the Osteomark test in an Enzyme-linked Immunosorbent Assay ("ELISA") format for testing urine or serum samples.

    Worldwide promotion of the Osteomark urine test kits is also supported by Johnson & Johnson Clinical Diagnostics, Inc. ("Johnson & Johnson"). In 1995 the Company entered into research, development, license and supply agreements with Johnson & Johnson. These agreements grant Johnson & Johnson a license to manufacture, sell and distribute certain products using Ostex's bone resorption technology. Currently, Johnson & Johnson distributes in the United States and certain foreign countries the Osteomark test in the existing microtiter plate format and beginning in March 1999 it offered the NTx test on its Vitros® automated analyzer. Ostex receives material transfer payments and royalties on Johnson & Johnson's sales of products incorporating the Ostex technology. Under the Johnson & Johnson license agreement, the Company has the right to license its technology for use on automated instruments to one other company in addition to Johnson & Johnson.

    In 1992, Ostex entered into a research and development agreement and a license agreement with Mochida Pharmaceutical Co., Ltd. ("Mochida"), a Japanese pharmaceutical company, for the commercialization of the Osteomark test in Japan. Under the research and development agreement, Mochida has an option to license the NTx serum test and has paid Ostex $3,350,000 in development fees to date. Future payments of $750,000 under the agreement are contingent upon Mochida's decision to exercise its option. Under the license agreement, Ostex granted Mochida exclusive marketing and distribution rights to certain Ostex products in Japan. Since 1992, Mochida has paid Ostex $2,500,000 in licensing fees for the Osteomark test. In January 1998, Mochida launched the Osteomark test in Japan for the management of patients with hyperparathyroidism and for patients with metastatic bone tumors. In December 1999, Mochida received an additional regulatory indication from the Japanese Ministry of Health and Welfare for the Osteomark test for selecting suitable drugs for the treatment of osteoporosis and monitoring efficacy of drug therapy for osteoporosis. During 1999, Ostex sold Mochida the critical reagents to be assembled into finished products in Japan by Mochida. In first quarter 2000, Ostex began selling the finished product to Mochida.

    The Company has, through an agreement with Metrika, Inc. ("Metrika") a diagnostic device company, developed a physician's office "point-of-care" Osteomark test device. The Company and Metrika developed the fully disposable point-of-care NTx test as an indicator of bone resorption that computes a NTx value and displays it digitally. In October 1999, the Osteomark NTx Point-of-Care device became commercially available. At the same time, the Company signed an agreement with PSS World Medical, Inc. as its exclusive U.S. distribution partner of the NTx Point-of-Care device. On May 10, 2000, the Company announced it had acquired the exclusive right from Metrika to manufacture the Osteomark NTx Point-of-Care device as well as exclusive worldwide license to manufacture, market and sell this device for the measurement of other connective tissue markers, including those associated with arthritis.

Results of Operations for the Three Months Ended June 30, 2000 and June 30, 1999

    Total revenues were $1,568,000 for the quarter ended June 30, 2000, compared to $1,127,000 for the quarter ended June 30, 1999. The increase in product sales was due primarily to the launch of the NTx Point-of-Care device and increased shipments of NTx urine kits to the Company's Japanese partner.

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    The gross profit as a percentage of sales was 61% for the quarter ended June 30, 2000, compared to 76% for the quarter ended June 30, 1999. The decrease was primarily due to shared start-up and production costs related to acquiring the manufacturing rights for the NTx Point-of-Care device. The gross profit percentage can also fluctuate depending on the average sales price per unit and sales mix for both urine and serum products.

    The Company's research and development expenditures totaled $404,000 for the quarter ended June 30, 2000, compared to $478,000 for the quarter ended June 30, 1999. The $74,000 decrease was attributable primarily to a reduction in outside services in second quarter 2000 versus the same period in 1999.

    Selling, general and administrative expenses totaled $1,279,000 for the quarter ended June 30, 2000, compared to $999,000 for the quarter ended June 30, 1999. The $280,000 increase was due primarily to higher marketing related expenditures related to launching the NTx Point-of-Care device as well as increased legal fees incurred for the maintenance and enforcement of the Company's patents.

    Net other income consists primarily of interest income and totaled $99,000 for the quarter ended June 30, 2000, compared to $121,000 for the quarter ended June 30, 1999. The decrease is due to a lower investment base which resulted from using cash to fund the Company's operating losses.

Results of Operations for the Six Months Ended June 30, 2000 and June 30, 1999

    Total revenues were $2,454,000 for the six-month period ended June 30, 2000, compared to $2,028,000 for the six-month period ended June 30, 1999. The increase in product sales was due to growth in serum sales, the launch of the NTx Point-of-Care device and increased shipments of NTx urine kits to the Company's Japanese partner.

    The gross profit as a percentage of sales was 71% for the six-month period ended June 30, 2000, compared to 74% for the six-month period ended June 30, 1999. The decrease was primarily due to shared start-up and production costs related to acquiring the manufacturing rights for the NTx Point-of-Care device. The gross profit percentage can also fluctuate depending on the average sales price per unit and sales mix for both urine and serum.

    The Company's research and development expenditures totaled $777,000 for the six-month period ended June 30, 2000, compared to $949,000 for the six-month period ended June 30, 1999. The $172,000 decrease was attributable primarily to a reduction in outside services and lower labor and related expenses.

    Selling, general and administrative expenses totaled $2,416,000 for the six-month period ended June 30, 2000, compared to $1,943,000 for the six-month period ended June 30, 1999. The $473,000 increase was due primarily to higher professional service fees, marketing related expenditures related to launching the NTx Point-of-Care device, and increased legal fees incurred for the maintenance and enforcement of the Company's patents.

    Net other income consists primarily of interest income and totaled $189,000 for the six-month period ended June 30, 2000, compared to $247,000 for the period ended June 30, 1999. The decrease is due to a lower investment base, which resulted from using cash to fund the Company's operating losses.

Liquidity and Capital Resources

    As of June 30, 2000, the Company had cash and cash equivalents and short-term investments of $7,377,000, working capital of $8,290,000 and total shareholders' equity of $10,597,000. As a result of funding operating losses during the six months ended June 30, 2000, cash, cash equivalents and short-term investments decreased by $1,023,000, working capital decreased by $915,000 and shareholders' equity decreased by $1,112,000. During the six-month period ended June 30, 2000, the Company purchased

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$71,000 in property, plant and equipment, received net proceeds from the exercise of stock options of $125,000 and reduced notes payable by $115,000.

    The Company's future capital requirements depend upon many factors, including the effectiveness of Osteomark NTx Serum and Urine tests and the new point-of-care device's commercialization activities and arrangements; continued scientific progress in its research and development programs; the costs involved in filing, prosecuting and enforcing patent claims; and the time and costs involved in obtaining regulatory approvals. Presently the Company is seeking debt financing to help fund the expansion of it's manufacturing facility in Seattle, Washington as a result of acquiring the manufacturing rights of the NTx Point-of-Care device.

    Depending on sales growth realization and expenses associated with this activity, additional funds from equity or debt financing may be required in the future. There can be no assurance that such additional funds will be available on favorable terms, if at all. If additional funds become necessary, the Company may seek to raise additional capital if conditions in the public equity markets are favorable or through private placements, even if the Company does not have an immediate need for additional cash at that time. If additional financing is not available, the Company believes that its existing available cash, its future license and research revenues from existing collaboration agreements, its current level of product sales and interest income from short-term investments, and the impact of current cost reduction activities, will be adequate to fund operations into the foreseeable future.

Other Factors that May Affect Operating Results

    The Company's operating results may fluctuate due to a number of factors including, but not limited to: volume and timing of product sales, pricing, market acceptance of the Company's products, changing economic conditions in the healthcare industry, activities of competitors, delays and increased costs of product and technology development, increased production costs of the new point-of-care device, the Company's ability to develop and maintain collaborative arrangements, the outcome of litigation, and the effect of the Company's accounting policies and other risk factors detailed in the Company's 1999 Form 10-K and other Commission filings. All of the foregoing factors are difficult for the Company to predict and can materially adversely affect the Company's business and operating results.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

    Not Applicable

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PART II—OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders

    On May 24, 2000 the Company held its 2000 Annual Meeting of Shareholders (the "Annual Meeting"), at which the following members were elected to the Board of Directors:

    The following members continued their terms on the Board of Directors:

    The following proposals were also approved at the Annual Meeting:

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

    The following exhibits are filed herewith:

10.37(1)		Manufacturing and License Agreement, dated March 10, 2000, with Metrika, Inc.
27.1		Financial Data Schedule

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(1)

Confidential Treatment has been requested for portions of this exhibit. The Copy filed herewith omits the information subject to the confidentiality request. Omissions are designated as *****. A complete version of this exhibit has been filed separately with the Securities and Exchange Commission.

(b) Reports on Form 8-K

    None

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SIGNATURES

    Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		OSTEX INTERNATIONAL, INC.
DATED: August 14, 2000		By	/s/ THOMAS A. BOLOGNA    Thomas A. Bologna Chairman, President and Chief Executive Officer (Principal financial and principal accounting officer)

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OSTEX INTERNATIONAL, INC. INDEX TO FORM 10-Q PART I—FINANCIAL INFORMATION
PART II—OTHER INFORMATION
SIGNATURES

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