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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

(Mark One)

For the quarterly period ended June 30, 2002

OR

For the transition period from            to            

Commission file number 000-21873

BIOSITE INCORPORATED
(Exact name of Registrant as specified in its charter)

11030 Roselle Street
San Diego, California, 92121
(Address of principal executive offices)

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 ý No o

        The number of shares of the Registrant's Common Stock, $0.01 par value, outstanding at July 31, 2002 was 14,767,444.

BIOSITE INCORPORATED
FORM 10-Q
INDEX

        Biosite®, Triage®, Omniclonal® and Immediate Response Diagnostics® are registered trademarks of the Company. The Company's logo is also a trademark or service mark of the Company.

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BIOSITE INCORPORATED
Condensed Balance Sheets
(in thousands, except par value)

Note: The balance sheet at December 31, 2001 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 INCORPORATED
Condensed Statements of Income (Unaudited)
(in thousands, except per share amounts)

See accompanying notes.

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BIOSITE INCORPORATED
Condensed Statements of Cash Flows (Unaudited)
(in thousands)

See accompanying notes.

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BIOSITE 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) that 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, 2001.

2. EARNINGS PER SHARE

        At June 30, 2002, we have 14,753,451 common shares and 4,132,425 common stock options outstanding. Earnings per share, EPS, is computed in accordance with the Financial Accounting Standards Board's Statement 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 (in thousands):

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3. BALANCE SHEET INFORMATION

        Net inventories consist of the following (in thousands):

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 the change in net unrealized gains or losses on marketable securities be included in comprehensive income. As adjusted, our comprehensive income is as follows (in thousands):

5. RECENT ACCOUNTING PRONOUNCEMENTS

        In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 142, Goodwill and Other Intangibles Assets, FAS 142. Under FAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed annually, or more frequently if impairment indicators arise, for impairment. Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives, but with no maximum life. The amortization provisions of FAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, the Company is required to adopt FAS 142 effective January 1, 2002. The adoption of FAS 142 had no impact on our financial statements.

        In October 2001, the FASB issued Statements of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, FAS 144, which establishes one accounting model to be used for long-lived assets to be disposed of by sale and broadens the presentation of discontinued operations to include more disposal transactions. FAS 144 supercedes the Financial Accounting Standards Board's Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30. FAS 144 is effective for fiscal years beginning after December 15, 2001. The adoption of FAS 144 had no impact on our financial statements.

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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, dependence on others, the impact of competitive products, the enforcement, defense and resolution of license and patent disputes, 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, 2001. 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 are a research-based diagnostics company dedicated to the discovery and development of novel protein-based tests that improve a physician's ability to diagnose debilitating and life-threatening diseases and conditions. We combine integrated discovery and diagnostics businesses to access proteomics research, identify proteins with high diagnostic utility, develop and commercialize products and educate the medical community on new diagnostic approaches that improve health care outcomes.

        Our diagnostics business is a leading provider of rapid tests that aid in the diagnosis of a variety of critical diseases and conditions. These tests are sold worldwide primarily for use in hospitals. Our two product platforms are designed to provide rapid results through either qualitative visual readings or meter readings. These platforms are based upon our proprietary technologies in the areas of antibody development, signaling chemistry and micro-capillary fluidics. Our testing formats are designed to measure single analyte targets or multiple analytes simultaneously. They also allow for the analysis of various sample sources, including urine, serum, plasma, whole-blood and stool. Among the products expected to contribute most significantly to product sales in the future are the Triage® Drugs of Abuse Panel, the Triage Cardiac Panel and the Triage BNP Test.

        The principal market for our products is comprised of hospitals, which number approximately 5,000 in the United States. We aim to place our products in emergency departments and other point-of-care locations, as well as in laboratories. In marketing our products we utilize a direct sales team that includes general account executives and cardiovascular account executives, who have extensive experience selling cardiovascular devices or drugs. The Fisher HealthCare division of the Fisher Scientific Company, Fisher, distributes our products in U.S. hospitals and supports our direct sales force. In international markets we utilize a network of country-specific and regional distributors.

        In March 1999, we launched Biosite Discovery, a collaborative research program dedicated to the identification of new protein markers for acute diseases. Through Biosite Discovery, we conduct analyses on both known disease markers and potential markers accessed from pharmaceutical and biotechnology companies in order to determine their diagnostic utility. We refer to this process as marker mining. If the diagnostic utility of a marker is established, it is then assessed for commercialization potential, with high value markers being added to our product development pipeline. To gain access to novel proteins, we primarily leverage our expertise in phage display antibody development, providing pharmaceutical and biotechnology companies with high throughput development of high affinity antibodies for research use and seeking, in exchange, licenses to their protein targets in addition to fees. Under Biosite Discovery, we have executed agreements with different clinical and collaborative partners, including Amgen Inc., the TIMI Group of Brigham and Woman's Hospital, Duke University, Eli Lilly and Company, Eos Biotechnology Inc., Johns Hopkins Hospital, Large Scale Biology Corporation, Medarex, Inc. and the San Diego VA Medical Center in the

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areas of cardiovascular, cerebrovascular, infectious disease and oncology. Among the payments we might receive under the agreements are: up-front technology access fees, research funding, antibody development fees upon the delivery of antibodies, annual maintenance fees on targets for which Biosite has produced antibodies for as long as the targets remain in development by our partners, milestone fees on drug targets that reach certain development milestones and royalties should products successfully be commercialized as a result of the collaboration. Also under Biosite Discovery, we've executed several license or cross-license agreements with companies such as BioInvent International, Morphosys AG, Dyax Corp. and others.

        Our product sales to date have primarily resulted from sales of the Triage Drugs of Abuse Panel product line. Sales of Triage Drugs of Abuse Panel products represented approximately 42% of our product sales in the first half of 2002 and 59% of our product sales during the full year 2001. We believe 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 prominent in a maturing market. Our cardiovascular products, consisting of the Triage Cardiac Panel, Triage BNP Test and Triage meter, are becoming a greater proportion of our product sales as a result primarily of their own sales growth.

        All of our products are marketed by Fisher, pursuant to a distribution agreement, in the U.S. hospital market segment. Product sales to Fisher represented 85% of our product sales in the first half of 2002 and 85% of our product sales during 2001. Fisher reported to us that end-user sales of our products by Fisher were $42.2 million during the first half of 2002, and $62.1 million during the full year 2001. Fisher's end-user sales are not directly comparable to our product sales because the timing of shipments from Biosite to Fisher may not match the timing of shipments from Fisher to the end-user hospitals and due to changes in the quantities of our products Fisher purchases and stocks in its inventory. Internationally, our products are distributed by country-specific and regional distributors.

        We have reported quarterly operating profits since the third quarter of 1999, after incurring quarterly operating losses during the prior seven quarters. Our operating results may fluctuate on a quarterly or annual basis in the future and our growth or operating results may not be consistent with predictions made by securities analysts. We may not be able to maintain profitability in the future.

        We believe that our future operating results will be subject to quarterly fluctuations due to a variety of factors, including:

•

market acceptance of current or new products



•

changes in the mix of products sold



•

the timing and variability of significant orders



•

seasonal or unanticipated changes in customer demand



•

manufacturing capacity constraints, delays or inefficiencies



•

whether and when new products are successfully developed and introduced by us



•

research and development efforts, including clinical trials and new product scale-up activities



•

enforcement, defense and resolution of license and patent disputes



•

ability to execute, enforce and maintain license and collaborative agreements necessary to earn contract revenues



•

attainment of milestones under collaborative agreements necessary to earn contract revenues



•

competitive pressures on average selling prices

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•

competition, including the introduction of products competitive with our Triage BNP Test, from diagnostic companies with greater financial capital and resources



•

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, Biosite Discovery and new product development, our operating results would be adversely affected if our sales and gross profits did not correspondingly increase or if our Biosite Discovery or 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.

Recent Developments

License and patent disputes

        Our dispute with XOMA Ltd. and its affiliates, XOMA, pertains to patents that were licensed to us in 1998 and 1999. In May 2001, XOMA claimed that we were in breach of its license agreements and subsequently purported to terminate the licenses, which led to continuing litigation between the two companies. We maintain that we are in full compliance with the license agreements and have not breached our obligations, and therefore there is no basis for termination.

New Antibody Expression Technology

        In February 2002, we announced that we had designed our own novel antibody expression technology that is fundamentally different than that at the center of our dispute with XOMA. Our Biosite Discovery group has already implemented our new technology for the development of new antibodies and we expect that prior to December 31, 2002, all recombinant antibodies used in our diagnostics products except the Triage Parasite Panel will be produced using our new technology. Manufacturing priorities and capacity demands may result in a delay in conversion of the recombinant antibodies used in the Triage Parasite Panel until 2003. As a result, we believe we are now protected both by the current licenses, which we believe were not validly terminated by XOMA, and our new processes. XOMA has asserted that this new technology also infringes XOMA patents, and has added such allegations to the pending litigation. We responded by denying infringement and by asserting our defenses.

New Products—Triage TOX Drug Screen

        In January 2002, we received FDA clearance to market the Triage TOX Drug Screen within the U.S. The Triage TOX Drug Screen is a qualitative test that enables hospital physicians to quickly and conveniently perform toxicology screening of urine for eight classes of commonly abused drugs in approximately fifteen minutes. Based on the Triage MeterPlus platform, the test can be used at the point-of-care as an aid in identifying patients with drug overdose.

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        In June 2002, we extended the menu of our Triage Drugs of Abuse Panel to include propoxyphene. Sold under the brand name Darvon®, propoxyphene is usually prescribed for relief of mild to moderate pain. Darvon can produce psychological and physical dependence like other narcotics.

New Corporate Headquarters

        We are currently in escrow to purchase 34.7 acres of land in San Diego for the relocation of our corporate headquarters, which would be adequate for our foreseeable future needs. The estimated purchase price of the land is $28.1 million. As of June 30, 2002 we had deposited $1.0 million in escrow. There are various contingencies that remain before the close of escrow, including the construction of an access road that must be complete by January 31, 2003, subject to allowable delays. Upon the close of escrow, expected to occur by the end of April 2003, we intend to pursue financing a portion of the land purchase price and the subsequent buildings construction costs through construction and long term debt financing. The new headquarters will provide us with up to 800,000 square feet and will be constructed in phases as needed. The first phase will provide us with approximately 200,000 square feet of space. The total land and construction cost of the first phase is estimated to be $70.0 million. We expect the first phase of construction to be completed in 2004. We may decide to seek additional capital to fund this new facility. If a new corporate facility were to be constructed to meet our future facility needs, we would not anticipate expanding our operations to the new facility prior to 2004. Expanding into a new facility would be expected to result in both cash expenditures for the purchase of the land and construction costs that would be reimbursed from loan proceeds if we are successful in obtaining financing, and an increase in occupancy costs.

Critical Accounting Policies Involving Management Assumptions and Estimates

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying financial statements and related footnotes. In preparing these financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. We do not believe there is a great likelihood that materially different amounts would be reported related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.

        Revenue Recognition.    We recognize product sales upon shipment unless there are significant post-delivery obligations or collection is not considered probable at the time of shipment. Generally, we do not have any significant post-delivery obligations associated with our product sales. We accrue for warranty costs and other allowances at the time of shipment based on historical experience, trends and estimates.

        Our collaborative development agreements generally contain specific payments for specific activities or elements of the agreements. Among the payments we might receive under the agreements are: up-front technology access fees, research funding, antibody development fees upon the delivery of antibodies, annual maintenance fees on targets for which Biosite has produced antibodies for as long as the targets remain in development by our partners, milestone fees on drug targets that reach certain development milestones and royalties should products successfully be commercialized as a result of the collaboration. Up-front technology access fees are recognized over the term of the agreement or ongoing research period, as applicable, unless the Company has no further continuing performance obligations related to the fees. Research funding is recognized over the applicable research period on a straight-line basis, which approximates the underlying performance. Milestone payments, such as antibody development fees and clinical milestones, are recognized when earned, as the milestone events are substantive and their achievability is not reasonably assured at the inception of the agreement.

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Contract revenues that are based on the performance of and collection by our collaborative partners or their partners are deferred until such performance is complete and collection is probable. We believe that each payment element of these agreements represents the fair value of the element at the date of the agreement.

        The Securities and Exchange Commission's Staff Accounting Bulletin No. 101, Revenue Recognition, SAB No. 101, provides guidance on the application of generally accepted accounting principles to selected revenue recognition issues. We believe that our revenue recognition policy is appropriate and in accordance with generally accepted accounting principles and SAB No. 101.

        Inventories and Related Allowance for Obsolete and Excess Inventory.    Net inventories are valued at the lower of the first-in, first-out (FIFO) cost or market value and have been reduced by an allowance for excess and obsolete inventories. We utilize a standard cost system to track our inventories on a part-by-part, full absorption cost basis. Adjustments are made to the standard labor and standard overhead costs to approximate actual labor and actual overhead costs on a FIFO cost basis. The estimated allowance for excess and obsolete inventories is based on management's review of inventories on hand compared to estimated future usage and sales and assumptions about the likelihood of obsolescence.

        Intangible and Other Long-Lived Assets.    At June 30, 2002, we had approximately $31.3 million of long-lived assets, including $15.5 million of property, plant and equipment and $8.6 million of capitalized patents and license rights. Property, plant and equipment, intangible and certain other long-lived assets are amortized over their useful lives. Useful lives are based on management's estimates of the period that the assets will generate revenue directly or indirectly. License rights related to products for sale are amortized to cost of sales over the life of the license, not to exceed ten years, using a systematic method based on the estimated revenues generated from products during the shorter of the license period or ten years from the inception of the license. The estimated revenues used as the base by which we amortize the license rights only includes estimated sales for products we are currently selling and does not include any estimated product sales expected to be realized during the license amortization term from products still in development today. Our intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

        Deferred Income Taxes.    As of June 30, 2002, we have approximately $5.5 million of deferred tax assets, consisting primarily of research and development credits. No valuation allowance has been recorded to offset the deferred tax assets as we have determined that it is more likely than not that these assets will be realized. We will continue to assess the likelihood of realization of such assets; however, if future events occur which do not make the realization of such assets more likely than not, we will record a valuation allowance against all or a portion of the net deferred tax assets. Examples of future events that may occur which would make the realization of such assets not likely would be a lack of taxable income resulting from poor operating results or rising tax deductions generated from disqualifying dispositions of stock issued under our stock plans.

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        Litigation.    Our dispute with XOMA pertains to patents that were licensed to us in 1998 and 1999. In May 2001, XOMA claimed that we were in breach of its license agreements and subsequently purported to terminate the licenses, which led to continuing litigation between the two companies. We maintain that we are in full compliance with the license agreements and have not breached our obligations, and therefore there is no basis for termination and therefore no impairment of the carrying amount of these licenses. The range of possible outcomes from these proceedings could include judgments in our favor, judgments against us or settlements that might or might not have a material adverse impact on our business. As of June 30, 2002, we have approximately $1.0 million of capitalized license rights related to the patent licenses from XOMA. The carrying amounts of the XOMA license rights are affected whenever events or changes in circumstances indicate that the carrying amount of the license rights may not be recoverable. Such events or circumstances might include judgments against us or settlements.

Results of Operations

        Product Sales.    Product sales by product family were as follows (in thousands):

        Product sales for the three and six months ended June 30, 2002 were $23.1 million and $40.9 million, respectively, representing increases of 51% and 39%, respectively, compared to $15.3 million and $29.5 million, respectively, for the same periods of 2001. The increases in total product sales, as compared to the same periods of 2001, were primarily attributable to the growth in net sales of our Triage BNP Test, one of our cardiovascular diagnostic products, of $7.6 million and $11.6 million, respectively.

        Net sales of our cardiovascular products, consisting of our Triage Cardiac Panel, Triage BNP Test and the Triage Meter, totaled approximately $13.3 million and $21.4 million, respectively, for the three and six months ended June 30, 2002, as compared to $5.1 million and $9.8 million, respectively, for the same periods of 2001. The net sales growth of our cardiovascular products for the three and six months ended June 30, 2002 was primarily due to growth in sales volume of our Triage BNP Test and the Triage meter. The Triage BNP Test was launched in the U.S. in December 2000.

        The Triage BNP Test is currently the only FDA cleared test for use as an aid in the diagnosis of congestive heart failure. Other companies have certain diagnostic rights to the protein or have another product under development that may compete against our Triage BNP Test and we anticipate competition from these companies in the future. These competitors may succeed in developing or marketing products that are more effective or commercially attractive than the Triage BNP Test. Moreover, we may not have the financial resources, technical expertise or marketing, distribution or support capabilities to compete successfully against these companies and other competitors in the future. Due to the continued acceleration in customer demand for the Triage BNP Test, distributor inventory levels of some of our products were below targeted stocking levels at June 30, 2002. We are expanding our manufacturing capacity through added production shifts and through the implementation

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of additional automated manufacturing equipment. Product sales in future quarters will be impacted as Biosite and our distributors attempt to adjust distributor inventories to targeted stocking levels.

        Net sales of our qualitative products, consisting of the Triage Drugs of Abuse Panel, Triage TOX Drug Screen, Triage C. difficile Panel and Triage Parasite Panel were approximately $9.8 million and $19.6 million, respectively, for the three and six months ended June 30, 2002, as compared to $10.3 million and $19.8 million, respectively, for the same periods of 2001. The decline in our qualitative products for the three months ended June 30, 2002, as compared to the same period of 2001, was primarily related to a decrease in the average net sales price of the Triage Drugs of Abuse Panel. The decline in our qualitative products for the six months ended June 30, 2002, as compared to the same period of 2001, was primarily related to a decrease in the sales volume of the Triage Drugs of Abuse Panel offset by an increase in sales volume of our microbiology products. 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.

        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 and six months ended June 30, 2002 were $1.8 million and $2.7 million, respectively, compared to $877,000 and $1.8 million, respectively, for the same periods of 2001. Contract revenues recognized during the three and six months ended June 30, 2002 consisted primarily of license fees, research funding and antibody fees. In June 2000, we entered into an alliance with Medarex Inc. Under the terms of the agreement, we 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 recognized $750,000 during each quarter of 2002 and 2001 of research funding from the alliance with Medarex. Other contract revenues recognized during the three and six months ended June 30, 2002 and 2001 included license fees, antibody fees, and amortization of up-front technology access fees. The increase in contract revenues during the second quarter of 2002 resulted primarily from the grant of a non-exclusive license from Biosite to a company for certain proprietary technology.

        Biosite Discovery activities are performed and its costs are incurred by certain of our research and development teams. These Biosite Discovery research and development resources concurrently focus on programs for our partners, which generated our contract revenue, and on internal research and development programs. Costs of the research and development resources performing collaborative and internal Biosite Discovery activities were approximately $1.3 million and $2.5 million for the three and six months ended June 30, 2002, respectively, and are included in research and development expenses. Costs of the research and development resources performing collaborative and internal Biosite Discovery activities were approximately $1.0 million and $2.0 million for the three and six months ended June 30, 2001, respectively. Although we continue to conduct business with existing and potential partners, our dispute with XOMA has interfered with certain activities with existing and potential partners.

        Cost of Sales and Gross Profit From Product Sales.    Gross profit from product sales for the three and six months ended June 30, 2002 were $16.0 million and $28.0 million, respectively, representing increases of 45% and 35%, compared to $11.0 million and $20.8 million, respectively, for the same periods of 2001. Gross profits increased primarily due to an overall increase in product sales. The overall gross margin for the three and six months ended June 30, 2002 was 69%, compared to 72% and 71%, respectively, for the same periods of 2001. The decrease in the overall gross margin was primarily as a result of the changing mix of net sales of our products that have different gross margins and manufacturing inefficiencies. Our cardiovascular products have lower gross margins than our Triage Drugs of Abuse Panel. Sales of our cardiovascular products represented 57% and 52% of our product sales for the three and six months ended June 30, 2002, respectively, compared to 33% for the same periods in 2001.

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        Our newer products are expected to continue to 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 smaller sales volumes and efficiency issues are addressed. We also expect that although our gross profits may continue to grow, our overall gross margins may continue to 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).    SG&A expenses for the three and six months ended June 30, 2002 were $7.9 million and $13.9 million, respectively, representing increases of 41% and 25%, respectively, compared to $5.6 million and $11.2 million, respectively, for the same periods of 2001. The increases in SG&A expenses was primarily associated with the addition of sales, clinical education and technical service resources, expanded sales activities related to our broader product lines, additional marketing activities relating to new products, increased administrative costs to support our expanded operations and higher performance-based compensation, such as sales commissions and bonuses based on the Company's financial performance.

        We expect selling, general and administrative costs in 2002 to be higher than in 2001, as we continue to expand our overall operations, including sales and marketing activities for our new products. We expect greater utilization of expanded sales, clinical education and technical service resources, and continued business development activities and administrative support functions. We also expect our performance-based compensation to be higher in 2002 than in 2001. The timing of such increased expenditures and their magnitude are primarily dependent on the commercial success and sales growth of our new products and the progress of business development activities.

        Research and Development Expenses.    Research and development expenses for the three and six months ended June 30, 2002 were $3.9 million and $7.5 million, respectively, compared to $3.3 million and $6.6 million, respectively, for the same periods of 2001. During the second quarter and first half of 2002, our research and development resources were focused primarily on new product development, the development of potential improvements to our existing products, and research activities associated with Biosite Discovery. Expenses related to the performance of our obligations associated with earning our contract revenues were incurred by our research and development group, primarily Biosite Discovery. We expect our research and development expenses for 2002 to be higher than in 2001. The increased expenditures will relate primarily to product development efforts, including the potential development of diagnostic products for stroke and acute coronary syndromes, clinical studies, Biosite Discovery, new product scale-up activities associated with potential new products and performance-based compensation resulting from the Company's performance versus its beginning of the year goals. The timing of the expenditures and their magnitudes depends primarily on the progress and success of research and development and the timing of potential product launches.

        License and Patent Disputes.    Expenses associated with license and patent disputes incurred during the three and six months ended June 30, 2002 totaled $1.5 million and $2.8 million, respectively, compared to $473,000 for the same periods of 2001. No expenses associated with the XOMA litigation were incurred prior to May 2001. The expenses consisted primarily of legal costs related to our litigation with XOMA. We intend to vigorously defend ourselves in these disputes and expect that the total costs associated with executing our defense in the XOMA litigation may continue to be significant in 2002 and 2003. Additionally, license and patent disputes during the second quarter of 2002 included $223,000 of costs associated with a European patent opposition proceedings concerning one of our patents. In June 2002, the European Patent Office upheld our patent in oral proceedings.

        Interest and Other Income, net.    Interest and other income for the three and six months ended June 30, 2002 decreased $52,000 and $3,000, respectively, from the same periods of 2001. The decreases resulted primarily from lower returns on our cash equivalents and marketable securities due

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to overall decline in interest rates, offset by the higher average balance of cash and marketable securities during the second quarter and first half of 2002 compared to the same periods of 2001.

        Benefit (Provision) for Income Taxes.    As a result of the pre-tax income and the estimated tax credits to be generated in 2002, we recorded a provision for income taxes of $3.0 million for the first half of 2002. For the same period in 2001, we recorded a provision for income taxes of $2.2 million. We will continue to assess the likelihood of realization of our tax credits and other net deferred tax assets. If future events occur that 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 from operations, private and public placements of equity securities, debt and capital lease financing, cash received under collaborative agreements and interest income. As of June 30, 2002, we had cash, cash equivalents and marketable securities of approximately $62.9 million compared to $55.5 million as of December 31, 2001.

        The increase in cash, cash equivalents and marketable securities during the first half of 2002 was largely attributable to cash generated from operating activities of $8.8 million. The cash generated from operating activities included increases in income taxes payable, account payable and accrued liabilities totaling approximately $3.6 million and non-cash expenses such as depreciation and amortization of $2.1 million offset by increases in inventory of $1.7 million. Other sources of cash included the receipt of $2.8 million in proceeds from equipment financing and proceeds from the issuance of stock under our employee stock plans of $1.3 million. Significant uses of cash during the first half of 2002 included expenditures for leasehold improvements and capital equipment of $3.3 million and principal payments under equipment financing debt arrangements of $1.2 million.

        The increase in cash, cash equivalents and marketable securities during the first half of 2001 was largely attributable to cash generated from operating activities that totaled $15.1 million. The cash generated from operating activities resulted primarily from the reduction of accounts receivable of $5.2 million, tax benefit of disqualifying dispositions of $4.4 million and a refund of income taxes paid of $1.6 million. Other significant sources of cash included proceeds from the issuance of common stock under employee stock plans totaling $4.9 million. Significant uses of cash for the first half of 2001 included the purchase of leasehold improvements and capital equipment of approximately $3.9 million.

        Our primary short-term needs for capital, which are subject to change, are for the support of our commercialization efforts related to our products, including expansion of our direct sales force and field support resources, improvements of our manufacturing capacity and efficiency, facility expansion, new product development, license and patent disputes, clinical trials, and the continued advancement of research and development efforts. We executed agreements to license technologies patented by others that call for milestone 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, milestone 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 also addressing our future facilities expansion needs. We are currently in escrow to purchase 34.7 acres of land in San Diego for the relocation of our corporate headquarters, which would be adequate for our foreseeable future needs. The estimated purchase price of the land is $28.1 million. As of July 31, 2002 we had deposited $1.0 million in escrow. There are various contingencies that remain before the close of escrow, including the construction of an access road that must be complete by January 31, 2003, subject to allowable delays. Upon the close of escrow, expected to occur by the end of April 2003, we intend to pursue financing a portion of the land purchase price

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and the subsequent buildings construction costs through construction and long term debt financing. The new headquarters will provide us with up to 800,000 square feet and will be constructed in phases as needed. The first phase will provide us with approximately 200,000 square feet of space. The total land and construction cost of the first phase is estimated to be $70.0 million. We expect the first phase of construction to be completed in 2004. We may decide to seek additional capital to fund this new facility. If a new corporate facility were to be constructed to meet our future facility needs, we would not anticipate expanding our operations to the new facility prior to 2004. Expanding into a new facility would be expected to result in both cash expenditures, for the purchase of the land and construction costs, that would be reimbursed from loan proceeds if we are successful in obtaining financing, and an increase in occupancy costs.

        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, except for the potential funding requirement of a portion of the cost of our facility expansion plan. 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. We intend to pursue additional credit facilities to finance a portion of the land purchase price and the subsequent buildings construction costs. 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, expansion of our manufacturing capacity and Biosite Discovery activities and our facilities expansion needs



•

the enforcement, defense and resolution of license and patent disputes



•

the ability to execute, enforce and maintain license and collaborative agreements and attain the milestones under these agreements necessary to earn contract revenues



•

the timing and results of research and development efforts including 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. As of June 30, 2002, we had variable-rate debt totaling approximately $88,000. A hypothetical 1% adverse move in interest rates along the entire interest rate yield curve would not materially affect the fair value of our financial instruments that are exposed to changes in interest rates.

        Additionally, our purchases of Triage Meters from LRE Technology Partner GmbH, LRE, are denominated in Euros 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 June 30, 2002, we had no outstanding forward exchange contracts. Total receivables and payables denominated in foreign currencies as of June 30, 2002 were not material.

FACTORS THAT MAY AFFECT RESULTS

        This report includes forward-looking statements about our business and results of operations that are subject to risks and uncertainties that could cause our actual results to vary materially from that indicated from such forward-looking statements. Factors that could cause or contribute to such differences include those discussed below, as well as those discussed elsewhere in the Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2001. 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 have reported quarterly operating profits since the third quarter of 1999 after incurring quarterly operating losses during the prior seven quarters. Our operating results may fluctuate on a quarterly or annual basis in the future. We may not be able to maintain profitability in the future. We believe that our future operating results will be subject to quarterly fluctuations due to a variety of factors, including:

•

market acceptance of current or new products



•

whether and when new products are successfully developed and introduced by us



•

changes in the mix of products sold



•

the timing and variability of significant orders



•

seasonal or unanticipated changes in customer demand



•

manufacturing capacity constraints, delays or inefficiencies



•

research and development efforts, including clinical trials and new product scale-up activities



•

enforcement, defense and resolution of license and patent disputes



•

ability to execute, enforce and maintain license and collaborative agreements necessary to earn contract revenues



•

attainment of milestones under collaborative agreements necessary to earn contract revenues



•

competitive pressures on average selling prices

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•

competition, including the introduction of products competitive with our Triage BNP Test, from diagnostic companies with greater financial capital and resources



•

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, Introduction, and Market Acceptance 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 or maintain 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 new products, as well as continue to achieve a growing level of market acceptance of our newer products such as the Triage Cardiac Panel and the Triage BNP Test. 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 clearance for these new products. We may experience difficulties that could delay or prevent the successful development, introduction and marketing of these new products. Regulatory clearance or approval of any new products may not be granted by the U.S. Food and Drug Administration, the FDA, or foreign regulatory authorities on a timely basis, or at all, and the new products may not be successfully commercialized.

        If we fail to establish and maintain:

•

reliable, cost-efficient, high volume manufacturing capacity



•

a cost-effective sales force, implementation and customer support resources and administrative infrastructure, or



•

an effective product distribution system for our products

we may not be able to successfully commercialize our current or new products or maintain or increase the market acceptance of these products. Unanticipated acceleration of customer demand for our products may result in constraints or inefficiencies related to our manufacturing, sales force, implementation resources and administrative infrastructure. Such constraints or inefficiencies may adversely affect us as a result of delays or loss of current or potential customers due to their dissatisfaction.

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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 42% of our product sales in the first half of 2002 and 59% of our product sales during the full year 2001. 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, including the Triage TOX Panel



•

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.

        We may not be able to successfully commercialize, maintain or increase the market acceptance of our newer products, including the Triage Cardiac Panel and Triage BNP Test, which represented 19% and 30%, respectively, of our product sales in the first half of 2002, as compared to 27% and 6%, respectively, of our product sales for the year 2001. We may not be able to maintain or expand our share of the drug-testing and cardiovascular markets. Technological change, competition or the development of new or improved diagnostic technologies could result in our products becoming obsolete or noncompetitive.

The Triage BNP Test May Encounter Significant Competition From Products To Be Developed and Commercialized By Companies with Greater Financial Capital and Resources

        Net sales of our Triage BNP Test represented 30% of our product sales during the first half of 2002. The Triage BNP Test is currently the only FDA cleared test for use as an aid in the diagnosis of congestive heart failure. Abbott Laboratories, Bayer Diagnostics and Shionogi & Co., Ltd. have certain diagnostic rights to the protein and we anticipate competition from these companies in the future. In addition, Roche Diagnostics has another product under development that may compete against the Triage BNP Test. These competitors may succeed in developing or marketing products that are more effective or commercially attractive than the Triage BNP Test. Moreover, we may not have the financial resources, technical expertise or marketing, distribution or support capabilities to compete successfully against these companies and other competitors in the future.

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. All of our products are currently marketed pursuant to distribution agreements in the U.S. hospital market segment by Fisher (which accounted for 85% of product sales in the first half of 2002 and 85% in the full year 2001) and internationally by country-specific and regional distributors. The loss or termination of one or more of these distributors could have a material adverse effect on 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 account executives and field support resources, which would significantly increase future selling, general and administrative expenses. Changes in the distribution of our products may also result in contract termination fees. We have limited experience in direct sales, marketing and distribution of our products. Our direct sales,

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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.

        A significant portion of our product sales is made to Fisher domestically and other distributors internationally. As a result, our financial results, quarterly product sales, trends and comparisons are affected by fluctuations in the buying patterns of the end-user customers, Fisher and our other distributors, as well as the changes in inventory levels of our product held by these distributors. We are unable to verify the inventory levels of our international distributors. We only have limited visibility over the inventory levels of our products at Fisher. While we attempt to assist Fisher in maintaining a normal stocking level of our products, which is equal to one month of end-user demand, we may not consistently be accurate or successful. This process involves the exercise of judgment and use of assumptions as to future uncertainties including end-user customer demand and, as a result, actual results could differ from our estimates. Inventory levels of our products held by distributors may exceed the levels we consider desirable on a going-forward basis.

Competition and Technological Change May Make Our Products Less Attractive or Obsolete.

Diagnostics

        The market in which we compete is intensely competitive. Our competitors include:

•

companies making laboratory-based tests and analyzers



•

clinical reference laboratories, and



•

other rapid diagnostic test manufacturers.

        Currently, the majority of diagnostic tests used by physicians and other health care providers are performed by independent clinical reference laboratories and hospital-based laboratories. We expect that these laboratories will compete vigorously to maintain their dominance of the testing market. In order to achieve market acceptance for our products, we will be required to demonstrate that our products provide cost-effective and time saving alternatives to tests performed by clinical reference laboratories or traditional hospital-based laboratory procedures. This will require physicians to change their established means of having such tests performed. Our products may not be able to compete with the testing services provided by traditional laboratory services.

        In addition, companies with a significant presence in the diagnostic market, such as:

•

Abbott Laboratories



•

Dade Behring



•

Roche Diagnostics



•

Bayer Diagnostics, and



•

Beckman Coulter

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. The Triage BNP Test is currently the only FDA cleared test for use as an aid in the diagnosis of congestive heart failure. Abbott Laboratories, Bayer Diagnostics and Shionogi & Co., Ltd. have certain diagnostic rights to the protein

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and we anticipate competition from these companies in the future. In addition, Roche Diagnostics has another product under development that may compete against the Triage BNP Test.

        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.

Discovery

        Several companies, including Cambridge Antibody Technology, Morphosys and Dyax have invested significantly in phage display technology and each generally employs naïve human antibody libraries to select antibodies for target validation purposes and for the development of therapeutic antibodies. Our competitors entered the marketplace before Biosite Discovery and have established a significant presence in the marketplace. Our competitors may succeed in entering into agreements and providing antibodies to biotechnology and pharmaceutical companies and thereby prevent Biosite Discovery from penetrating the marketplace.

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 resources, implementation of additional automated manufacturing equipment or changes in our manufacturing processes may be required for the scaling-up of each new product prior to commercialization or in order to meet increasing customer demand once commercialization begins, 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. Unanticipated acceleration or deceleration in customer demand for our products may result in manufacturing constraints or production inefficiencies. 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.

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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 that, 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, Triage BNP System and Triage TOX Drug Screen and others currently under development. If LRE is unable to manufacture sufficient quantities or quality of meters, this may adversely affect

•

our sales and 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 Triage meter.

Health Care Reform and Restrictions on Reimbursement May Adversely Affect Our Results.

        In the United States, health care providers that purchase our products 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

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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.

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 and activities may be covered by technologies that are the subject of patents issued to, and patent applications filed by, others. We have obtained licenses for some technologies. We may negotiate to obtain other licenses for technologies patented by others. Some of our current licenses are subject to rights of termination and may be terminated. Our licensors may not abide by their contractual obligations and, as a result, may limit the benefits we currently derive from their licenses. We may not be able to renegotiate or 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, maintain or enforce necessary licenses or to identify and implement alternative approaches would prevent us from operating some or all of our business 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 have already settled a number of patent infringement claims in the past.

Long-lived and Intangible Assets May Become Impaired and Result in An Impairment Charge

        At June 30, 2002, we had approximately $15.5 million of property, plant and equipment and $8.6 million of capitalized patents and license rights. The carrying amounts of these long-lived and intangibles assets are affected whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Such events or circumstances might include a significant decline in market share, a significant decline in profits, rapid changes in technology, significant litigation such as our dispute with XOMA or other items. Adverse events or changes in circumstances may affect the estimated undiscounted future operating cash flows expected to be derived from long-lived and intangible assets. In the event impairment exists, an impairment charge would be determined by comparing the carrying amount of the asset to the applicable estimated future cash flows, discounted at a risk-adjusted interest rate. An impairment charge may result in a material adverse effect on our operating results. In addition, the remaining amortization period for the impaired asset would be reassessed and revised if necessary.

        As of June 30, 2002, we have approximately $4.2 million of long-term deferred tax assets, consisting primarily of research and development credits. No valuation allowance has been recorded to offset the deferred tax assets as we have determined that it is more likely than not that these assets will be realized. We will continue to assess the likelihood of realization of such assets; however, if future events occur which do not make the realization of such assets more likely than not, we will record a valuation allowance against all or a portion of the net deferred tax assets. Examples of future events

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that may occur which would make the realization of such assets not likely would be a lack of taxable income resulting from poor operating results or rising tax deductions generated from disqualifying dispositions of stock issued under our stock plans.

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 may receive correspondence from other parties calling to our attention the existence of patents that they believe cover technology that is or may be incorporated in our products and products under development. Some of this correspondence may include offers to negotiate the licensing of the patented technologies. There can be no assurance that these matters would 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.

        On May 10, 2001, we received notice from XOMA Ltd. and its affiliates, XOMA, alleging that we have breached our obligations under three license agreements with XOMA. The license agreements relate to the bacterial expression of antibodies. On June 8, 2001, we filed an action in the U.S. District Court for the Northern District of California, seeking declaratory relief that XOMA has no right to terminate the agreements and that Biosite is not infringing any XOMA patents, and injunctive relief related to XOMA's threat to terminate the agreements. We believe that XOMA's conduct threatens to cause damages to Biosite that are not easily calculable or easily compensable by money damages. On July 5, 2001, XOMA filed a complaint in the same court, the XOMA action. In September, 2001, the Court denied Biosite's request for a preliminary injunction, dismissed XOMA's action in part with leave to amend, and dismissed Biosite's action without prejudice to Biosite's right to plead its claims in defense and counterclaims in the XOMA action. XOMA's complaint, which has now been amended, alleges fraud, breach of contract, patent infringement, misappropriation and unfair business practices on the part of Biosite. XOMA seeks injunctive relief, unspecified damages, a trebling of damages under the patent laws and punitive damages. On November 7, 2001, Biosite filed its answer denying the material allegations of the XOMA amended complaint, and counterclaims against XOMA including claims for breach of contract and tortious interference. Biosite intends to contest XOMA's claims vigorously. We believe that there has been no misrepresentation or breach of the agreements, that our rights under the agreements have not been terminated and, accordingly, no misappropriation or unfair business practice has occurred, and that our activities do not infringe XOMA's patents. The range of possible outcomes from these proceedings could include judgments in our favor, judgments against us or settlements that might or might not have a material adverse impact on our business. As of June 30, 2002, we have approximately $1.0 million of capitalized license rights related to the patent licenses from XOMA. The carrying amounts of the XOMA license rights are affected whenever events or changes in circumstances indicate that the carrying amount of the license rights may not be recoverable. Such events or circumstances might include judgments against us or settlements. Although we continue to conduct business with existing and potential partners, our dispute with XOMA has interfered with certain activities with existing partners and potential partners, with a resulting reduction of our contract revenues. In the third quarter, Large Scale Biology Corporation suspended the delivery

24

of future protein targets pending further evaluation of the situation between Biosite and XOMA. During the fourth quarter of 2001, we established a $267,000 reserve for doubtful accounts related to our collaboration with Large Scale Biology Corporation as a result of the impact of the XOMA dispute on our collaboration with them. On January 29, 2002, Large Scale Biology Corporation notified us that it would not perform under the terms of its agreement with us and that it considered itself excused from any duties and obligations under the agreement. We do not agree with Large Scale Biology Corporation's position and are attempting to find a mutually acceptable solution.

        In February 2002, we announced that we had designed our own novel antibody expression technology that is fundamentally different than that at the center of our dispute with XOMA. Our Biosite Discovery group has already implemented our new technology for the development of new antibodies and we expect that prior to December 31, 2002, all recombinant antibodies used in our diagnostics products except the Triage Parasite Panel will be produced using our new technology. Manufacturing priorities and capacity demands may result in a delay in conversion of the recombinant antibodies used in the Triage Parasite Panel until 2003. As a result, we believe we are now protected both by the current licenses, which we believe were not validly terminated by XOMA, and our new processes. XOMA has asserted that this new technology also infringes XOMA patents, and has added such allegations to the pending litigation. We responded by denying infringement and by asserting our defenses.

        We also rely upon trade secrets, technical know-how and continuing invention to develop and maintain our competitive position. Others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or disclose such technology, and we may not be able to protect our trade secrets or our rights to our trade secrets.

        Others may have filed and in the future are likely to file patent applications that are similar or identical to ours. To determine the priority of inventions, we may have to participate in interference proceedings declared by the USPTO that could result in substantial cost to us. Patent applications of others may have priority over patent applications filed by us.

        Our commercial success depends in part on us neither infringing patents or proprietary rights of third parties nor breaching any licenses that may relate to our technologies and products. We are aware of several third-party patents that may relate to our technology. We may infringe these patents, or other patents or proprietary rights of third parties. In addition, we have received and may in the future receive notices claiming infringement from third parties as well as invitations to take licenses under third-party patents. Any legal action against us or our collaborative partners claiming damages and seeking to enjoin commercial activities relating to our products and processes affected by third-party rights, in addition to subjecting us to potential liability for damages, may require us or our collaborative partner to obtain a license in order to continue to manufacture or market the affected products and processes. We or our collaborative partners may not prevail in any such action and any license (including licenses proposed by third parties) required under any such patent may 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, including the litigation with XOMA, 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.

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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, expansion of our Biosite Discovery capacity and facilities expansion needs



•

the enforcement, defense and resolution of license and patent disputes



•

the ability to execute, enforce and maintain license and collaborative agreements and attain the milestones under these agreements necessary to earn contract revenues



•

the timing and results of research and development efforts including clinical studies and regulatory actions regarding our potential products



•

competition, including the introduction of products competitive with our Triage BNP Test, from diagnostic companies with greater financial capital and resources



•

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."

Ownership of a New Corporate Headquarters May Negatively Impact Operating Results

        We are currently in escrow to purchase 34.7 acres of land in San Diego for the relocation of our corporate headquarters, which would be adequate for our foreseeable future needs. The new headquarters will provide us with up to 800,000 square feet and will be constructed in phases as needed. The first phase will provide us with approximately 200,000 square feet of space. The total cost of the land and construction costs of the first phase is estimated to be $70.0 million. We expect the first phase of construction to be completed in 2004. We expect our occupancy costs to increase. Should there be a downturn in our business or the markets in which we compete, we may not have a need to expand our facilities as we have planned. As a result, we may then seek an alternative use for all or a portion of the property, or seek to sell the property, which may have a negative impact on our operating results.

The Regulatory Approval Process is Expensive, Time Consuming and Uncertain. As a Result, We May Not Obtain Required Approvals or Previously Acquired Approvals for the Commercialization of Our Products May Be Rescinded.

        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.

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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, replacement or refund of the cost of any device manufactured or distributed by us.

        In the United States, medical devices are classified into one of three classes (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, post-market surveillance, patient registries and FDA guidelines). Generally, Class III devices are those which must receive pre-market clearance 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, 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

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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 and other performance data. It generally takes from four to twelve 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 our products 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 some of our products that 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 our products. 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 products 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, Triage Cardiac Panel and Triage BNP Test received 510(k) clearance, a PMA was initially required for the 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.

        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 our products and products under development, are exempt from the IDE requirements, including the need to obtain the FDA's prior clearance or 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

28

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 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 have a material adverse effect on our ability to market our products or on our business, financial condition or results of operations.

        The Food and Drug Administration Modernization Act of 1997 makes changes to the device provisions of the FD&C Act or the Act and other provisions in the Act affecting the regulation of devices. Among other things, the changes will affect the Investigational Device Exemption, 510(k) and PMA processes, and also will affect device standards and data requirements, procedures relating to humanitarian and breakthrough devices, tracking and postmarket surveillance, accredited third-party review, and the dissemination of off-label information. We cannot predict how or when these changes will be implemented or what effect the changes will have on the regulation of our products. There can

29

be no assurance that the new legislation will not impose additional costs or lengthen review times of our products.

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. Under our Biosite Discovery collaborations, we rely and are dependent upon other parties to perform their responsibilities. Although we continue to conduct business with existing and potential partners, our dispute with XOMA has interfered with certain activities with existing partners and potential partners, with a resulting reduction in contract revenues. In the third quarter, Large Scale Biology Corporation suspended the delivery of future protein targets pending further evaluation of the situation between Biosite and XOMA. On January 29, 2002, Large Scale Biology Corporation notified us that it would not perform under the terms of its agreement with us and that it considered itself excused from any duties and obligations under the agreement. We do not agree with Large Scale Biology Corporation's position and are attempting to find a mutually acceptable solution.

        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 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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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

        On May 10, 2001, we received notice from XOMA Ltd. and its affiliates, XOMA, alleging that we have breached our obligations under three license agreements with XOMA. The license agreements relate to the bacterial expression of antibodies. On June 8, 2001, we filed an action in the U.S. District Court for the Northern District of California, seeking declaratory relief that XOMA has no right to terminate the agreements and that Biosite is not infringing any XOMA patents, and injunctive relief related to XOMA's threat to terminate the agreements. We believe that XOMA's conduct threatens to cause damages to Biosite which are not easily calculable or easily compensable by money damages. On July 5, 2001, XOMA filed a complaint in the same court (the "XOMA action"). In September, 2001, the Court denied Biosite's request for a preliminary injunction, dismissed XOMA's action in part with leave to amend, and dismissed Biosite's action without prejudice to Biosite's right to plead its claims in defense and counterclaims in the XOMA action. XOMA's complaint, which has now been amended, alleges fraud, breach of contract, patent infringement, misappropriation and unfair business practices on the part of Biosite. XOMA seeks injunctive relief, unspecified damages, a trebling of damages under the patent laws and punitive damages. On November 7, 2001, Biosite filed its answer denying the material allegations of the XOMA amended complaint, and counterclaims against XOMA including claims for breach of contract and tortious interference. Biosite intends to contest XOMA's claims vigorously. We believe that there has been no misrepresentation or breach of the agreements, that our rights under the agreements have not been terminated and, accordingly, no misappropriation or unfair business practice has occurred, and that our activities do not infringe XOMA's patents. The range of possible outcomes from these proceedings could include judgments in our favor, judgments against us or settlements that might or might not have a material adverse impact on our business. As of June 30, 2002, we have approximately $1.0 million of capitalized license rights related to the patent licenses from XOMA. The carrying amounts of the XOMA license rights are affected whenever events or changes in circumstances indicate that the carrying amount of the license rights may not be recoverable. Such events or circumstances might include judgments against us or settlements. Although we continue to conduct business with existing and potential partners, our dispute with XOMA has interfered with certain activities with existing partners and potential partners, with a resulting reduction of our contract revenues. In the third quarter of 2001, Large Scale Biology Corporation suspended the delivery of future protein targets pending further evaluation of the situation between Biosite and XOMA. On January 29, 2002, Large Scale Biology Corporation notified us that it would not perform under the terms of its agreement with us and that it considered itself excused from any duties and obligations under the agreement. We do not agree with Large Scale Biology Corporation's position and are attempting to find a mutually acceptable solution. In February 2002, we announced that we had designed our own novel antibody expression technology that is fundamentally different than that at the center of our dispute with XOMA. Our Biosite Discovery group has already implemented our new technology for the development of new antibodies and we expect that prior to December 31, 2002, all recombinant antibodies used in our diagnostics products except the Triage Parasite Panel will be produced using our new technology. Manufacturing priorities and capacity demands may result in a delay in conversion of the recombinant antibodies used in the Triage Parasite Panel until 2003. As a result, we believe we are now protected both by the current licenses, which we believe were not validly terminated by XOMA, and our new processes. XOMA has asserted that this new technology also infringes XOMA patents, and has added such allegations to the pending litigation. We responded by denying infringement and by asserting our defenses.

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        On June 14, 2002, the Company held its Annual Meeting of Stockholders. The following actions were taken at the annual meeting. As of April 19, 2002, the record date, 14,691,468 shares were entitled to vote at the Annual Meeting. Of these 14,691,468 shares, 2,294,443 were not voted.

1.

The following Class II Directors were elected:

a.

Anthony DeMaria. 12,790,655 shares voted in favor of the nominee, 1,093,377 shares withheld their vote;

b.

Howard E. Greene Jr. 13,373,232 shares voted in favor of the nominee, 510,800 shares withheld their vote;

c.

The following directors continue in office for their existing terms:

Kim D. Blickenstaff
Gunars E. Valkirs
Lonnie M. Smith
Timothy J. Wollaeger

2.

A proposal to amend and restate the 1996 Stock Incentive Plan of Biosite Incorporated to, among other things, increase the number of shares of Common Stock authorized for issuance thereunder by 700,000 shares was approved. 9,269,011 shares were voted in favor of the proposal, 3,762,076 shares were voted against the proposal, 852,945 shares abstained and 807,436 shares were not voted (includes broker non-votes);

3.

The selection of Ernst & Young LLP as the Company's independent auditor was ratified. 13,515,428 shares were voted in favor of the proposal, 175,271 shares were voted against the proposal, 192,833 shares abstained and 807,436 shares were not voted (includes broker non-votes).

ITEM 5. OTHER INFORMATION

        The Chief Executive Officer and Chief Financial Officer of the Company have certified that the Quarterly Report of the Company on Form 10-Q for the quarterly period ended June 30, 2002 fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. (ss) 78m or (ss) 78o(d)) and that information contained in such report fairly presents, in all material respects, the financial condition and results of operations of the Company.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)

Exhibits

        3(ii)    Amended and Restated Bylaws of Biosite Incorporated

(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.

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QuickLinks

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K