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1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission File Number 000-21873
BIOSITE DIAGNOSTICS INCORPORATED
(Exact name of registrant as specified in its charter)
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Delaware 33-0288606
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11030 Roselle Street 92121
San Diego, California (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (619) 455-4808
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Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.01 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) Yes X No , and (2) has been
--- ---
subject to such filing requirements for the past 90 days. Yes No X
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ___
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing sale price of the Common Stock on
February 28, 1997 as reported on the Nasdaq National Market, was approximately
$62,945,000. Shares of Common Stock held by each executive officer and director
and by each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
As of February 28, 1997, there were 12,730,460 shares of the Registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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BIOSITE DIAGNOSTICS INCORPORATED
FORM 10-K
INDEX
PAGE
PART I
Item 1. Business....................................................................................... 1
Item 2. Properties .................................................................................... 27
Item 3. Legal Proceedings ............................................................................. 27
Item 4. Submission of Matters to a Vote of Security Holders ........................................... 27
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ......................... 29
Item 6. Selected Financial Data........................................................................ 30
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................................... 31
Item 8. Financial Statements and Supplementary Data ................................................... 35
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure............................................................ 35
PART III
Item 10. Directors and Executive Officers of the Registrant............................................. 36
Item 11. Executive Compensation......................................................................... 39
Item 12. Security Ownership of Certain Beneficial Owners and Management................................. 42
Item 13. Certain Relationships and Related Transactions................................................. 44
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................... 45
SIGNATURES ............................................................................................... 48
Biosite(R) and Triage(R) are registered trademarks of the Company. Immediate
Response Diagnostics(TM), Express-Test(SM), Triage CareLink(TM) and the
Company's logo are servicemarks or trademarks of the Company.
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PART I
ITEM 1. BUSINESS
Except for the historical information contained herein, the matters
discussed in this Annual Report on Form 10-K are forward-looking statements that
involve risks and uncertainties, including the timely development, introduction
and acceptance of new products, dependence on others, the impact of competitive
products, patent issues, changing market conditions and the other risks detailed
throughout this Form 10-K. Actual results may differ materially from those
projected. These forward-looking statements represent the Company's judgment as
of the date of the filing of this Form 10-K. The Company disclaims, however, any
intent or obligation to update these forward-looking statements.
BACKGROUND
Biosite Diagnostics Incorporated ("Biosite" or the "Company") develops,
manufactures and markets rapid, accurate and cost-effective diagnostic products
that improve the quality of patient care and simplify the practice of laboratory
medicine. The Company believes that its Immediate Response Diagnostics can have
an important impact on medical decisions, patient care and the cost of medical
treatment. The Company's first product, Triage Panel for Drugs of Abuse ("Triage
DOA"), a small self-contained test capable of detecting a broad spectrum of
commonly overdosed prescription and illicit drugs in approximately 10 minutes,
is used by over 2,600 hospitals and emergency departments. Since its
introduction in 1992, over 4.6 million Triage DOA panels have been sold
worldwide for use in hospital emergency department screening and workplace
testing. The Company estimates that sales to end-users of the Company's Triage
DOA in 1996 were approximately $42.2 million, as compared to net sales of
approximately $28.2 million. The Company utilizes distributors in the United
States and abroad, as well as a small direct sales force, for the distribution
of Triage DOA to end-users of the product. The Company is developing several
additional products for applications where the Company believes its Immediate
Response Diagnostics can play an important role in improving patient care.
Products under development include tests that are intended to aid in the
diagnosis of heart attacks, the dosing of certain therapeutic drugs, the
management of certain chronic diseases and the detection of certain bacterial
and parasitic infections.
The Company has two product platforms that are designed to provide
rapid results through either qualitative visual readings or quantitative meter
readings. These platforms are based upon the Company's proprietary technologies
in the areas of reagent development, signaling chemistry and micro capillary
fluidics. The Company's testing formats are designed to measure single or
multiple analyte targets simultaneously, and to allow for the analysis of
various sample sources, including urine, serum, plasma, whole blood and stool.
The Company has entered into strategic arrangements with major pharmaceutical
and diagnostic companies, including Novartis Pharma, Inc. ("Novartis," formerly
Sandoz Pharma Ltd.) for the development of a product to monitor the
concentrations of the immunosuppressant drug, cyclosporine; Merck KGaA ("Merck")
and Kyoto Dai-ichi Kagaku Co., Ltd. ("KDK") for the development of a cardiac
marker product used in the diagnosis of heart attacks; and LRE Relais +
Electronik GmbH ("LRE") for the development of a fluorescent meter. The products
covered by such arrangements are currently under development and have not
generated any revenue for the Company. In addition, the Company uses the Fisher
Healthcare division ("Fisher," formerly the Curtin Matheson Scientific division)
of the Fisher Scientific Company to distribute Triage DOA to hospital-based
laboratories and emergency departments in the United States and Merck to
distribute Triage DOA in certain countries in Europe, Latin America, the Middle
East, Asia and Africa.
INDUSTRY OVERVIEW
In 1995, the worldwide market for immunoassay tests exceeded $5.1
billion, consisting primarily of testing related to infectious disease,
endocrinology, therapeutic drug monitoring, drugs of abuse testing,
immunology/allergy, tumor markers and blood typing. The global market for
immunoassay tests continues to expand as new disease states are identified, new
therapies become available, and worldwide standards of living and access to
health care improve. Such tests are performed primarily in hospital-based
laboratories and commercial laboratories, which account for approximately 80% of
all diagnostic tests performed annually. In recent years, diagnostic tests that
can be performed
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nearer to the point of patient care have emerged as an important tool in disease
diagnosis and management. It has been estimated that the market for
point-of-care tests, primarily hospitals and physician office/satellite
facilities, will grow at approximately 27% annually through the year 2000.
Immunoassay tests were first developed based on technology developed in
the 1960s. Although early immunoassay tests offered unprecedented levels of
sensitivity for the detection of low concentration analytes, they suffered from
relatively short shelf-lives, long reaction times, a need for radioactive labels
to detect completed reactions and lack of consistent results among products from
different suppliers. Over time, technological advancements such as the
introduction of monoclonal antibodies, enzyme and fluorescent labels and various
solid phase mechanisms shortened immunoassay test reaction times, provided
higher specificity and allowed development of tests with longer shelf-lives and
greater consistency.
Such advancements also led to the development of immunoassay analyzers,
testing systems utilizing automated liquid handling mechanisms and
reagent-adding pipetting systems. Modern immunoassay analyzers are capable of
storing and selecting multiple reagents for a variety of analytes, including
drugs, hormones and cancer antigens. They also provide accurate and highly
sensitive test results and help to simplify the performance of antibody-based
tests. However, immunoassay analyzers are large and complex, have lengthy
turnaround times and require high volumes of sample throughput to justify the
investment in equipment, training, staffing and the costs required to operate
and support the system.
In recent years, there has been a continuing shift from the use of such
conventional analyzer systems to more technologically advanced point-of-care
tests that can be performed in minutes by less highly trained personnel. Simple,
rapid immunoassay tests are capable of detecting a single analyte target with a
color change that can be visually interpreted. Formats such as dipsticks, test
tubes and wicking membrane test cartridges have been used to provide fast
non-instrument read results for conditions where a single analyte target is
present in high concentrations and where a simple yes/no non-numeric answer is
clinically relevant. Rapid color change test formats are widely available for
pregnancy, strep throat and ovulation prediction. Until recently, simple test
formats have remained incapable of precise, multi-analyte detection or highly
sensitive, quantitative measurements. As a result, medical conditions where the
detection of one or more analytes is required or where the precise quantitation
of the target analyte is required have remained the domain of immunoassay
analyzers.
The Company believes that there is significant market potential for
advanced point-of-care diagnostic products. Point-of-care testing helps to
reduce overall health care delivery costs and can improve patient outcomes by
providing diagnosis during the patient visit, thereby minimizing the time to
medical intervention and reducing the need for additional patient follow-up.
Patients undergoing emergency procedures can benefit from more timely and
accurate testing results, both to ensure correct decision making and to avoid
unnecessary use of costly inpatient care. Disease management programs such as
therapeutic drug monitoring programs can benefit from real-time, point-of-care
evaluations that enable care-givers to optimize drug dosing. Quicker diagnosis
of infectious agents can also permit earlier prescription of appropriate
medications, shortening the duration of illness.
TECHNOLOGY
Biosite's Immediate Response Diagnostics technology is based on several
proprietary advances in the biological and physical sciences that make practical
the development and manufacture of rapid, accurate and cost-effective
point-of-care diagnostics. The Company's products integrate its expertise in
several core scientific and engineering disciplines, including antibody
development and engineering, analyte cloning and synthesis, signaling chemistry
and micro capillary fluidics, each of which is described below. Biosite's
research and development program is supported by 68 employees, including 15
Ph.D.s with expertise in the Company's core technologies. By combining research
capabilities in each of these areas, Biosite is able to create novel single and
multi-analyte diagnostics which overcome the limitations of traditional rapid
diagnostic technologies and seek to address the significant unmet need for
effective point-of-care diagnostic information.
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Antibody Development and Engineering
Biosite believes that its internal antibody development and engineering
capabilities allow rapid identification and development of antibodies with
optimal specificity, affinity and stability characteristics. The Company
initially utilized hybridoma technology for the selection and production of its
novel antibodies. Two disadvantages of hybridoma technology are the length of
time required to develop antibody candidates and the need to restart the
antibody development process when unwanted characteristics such as cross
reactivities are discovered. The Company has developed a proprietary process
that enables the selection and production of antibodies more rapidly and
efficiently than is possible using hybridoma technology. In addition, Biosite
has isolated the genes encoding the antibodies that permit the genetic
engineering of antibodies. As a result, Biosite can alter or add specific amino
acids or polypeptides in an antibody in order to improve the antibody's
specificity and to facilitate purification of the antibody. This technology
accelerates the antibody selection process by rapidly eliminating unwanted cross
reactivities discovered in product development.
Analyte Cloning and Synthesis
The Company has molecular biology capabilities that include the cloning
and identification of specific proteins useful in the development of
immunoassays. Biosite has developed proprietary expression vectors that enable
the production and purification of these proteins for the development of
antibodies and for use as calibrators and controls in its immunoassay products.
In addition, the Company has considerable expertise in synthetic organic
chemistry which allows the synthesis of targets and useful derivatives. The
Company develops products for which the targeted analyte can be small (i.e.,
haptens, such as drugs) or large (i.e., proteins, such as cardiac enzymes). The
Company believes that the ability to develop, stabilize and manufacture the
target analyte or its analogues is key to the development of highly accurate
immunoassays.
Color/Photochemical Signaling
Immunoassays require the attachment of a detectable label to an
antibody or target analyte. The Company has developed a variety of labels for
the development of its products. For yes/no tests, a visual label that produces
color is attached to antibodies or analytes through either non-covalent or
covalent chemical methods. For its quantitative products, the Company has
developed novel fluorescent dyes which are attached to antibodies or analytes
using both noncovalent and covalent chemical means. Although fluorescence is a
potentially powerful label for use in immunoassays, its potential has been
limited by the lack of available dyes that are stable and have no sample
interference, and the requirement of a complex instrument for detection. The
Company's novel fluorescent dyes are stable and exhibit properties that permit
their use in complex biological samples such as serum, plasma and whole blood
without interference from the sample. Furthermore, these novel dyes absorb light
at wavelengths where a simple instrument can be used to excite and detect
fluorescence for quantitative measurements.
Micro Capillary Test Device Technology
Biosite has developed proprietary technology to design, develop and
manufacture devices containing micro capillaries to control the flow of fluids
in immunoassay processes. The qualitative device format uses micro capillaries
to draw fluids through a membrane that contains immobilized antibody zones for
the detection of specific substances. The quantitative device format uses
several different micro capillary designs to control the contact of sample with
reagents and to control the flow of fluid throughout the device. When sample is
added to the quantitative device, a filter contained within the device separates
blood cells from plasma which is further directed by capillary forces into a
chamber that contains dried immunoassay reagents. After an incubation time that
is determined by another micro capillary element of the device, the volume of
sample that contacted the reagents flows down a capillary path that brings it
into contact with immobilized antibody zones. The binding of fluorescent
reagents at these zones is detected by an instrument and is related to the
concentration of the substance being tested for in the sample. The Company has
also developed the engineering capability to design unique micro capillary
structures in plastic parts and to fabricate them in commercial scale quantities
using injection molding processes.
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Sample Handling
The Company has developed proprietary technology relating to sample
handling and preparation, including technology that allows whole blood to be
passively separated into its plasma component or to be passively lysed to
release the target analyte. The Company has also developed technologies for the
handling of stool samples which concentrate and purify the target analytes or
organisms from solid stool materials. In addition, the Triage Panel platform can
be used to assay urine samples.
PRODUCT PLATFORMS
The Company has used its core technologies to develop two product
platforms: the Triage Panel and the Triage CareLink System. Both of the
Company's product platforms utilize the Company's expertise in antibody
engineering, analyte cloning, signaling chemistry, micro capillary fluidics and
sample handling technologies.
Triage Panel
The Triage Panel platform is designed for rapid, qualitative screening
of multiple analytes in a small single-use hand-held device. The Triage Panel
has a visual (yes/no) display containing simultaneous tests for up to eight
analytes and two control standards, can be performed in a simple multi-step
process, and is capable of performing tests on both urine and stool. Triage DOA,
the first product developed on this platform, tests for up to eight drugs of
abuse in approximately 10 minutes. Triage Panel products under development
include tests for the detection of microorganisms which cause severe
gastrointestinal disease.
Triage CareLink System
The Triage CareLink System platform is designed to provide rapid
quantitative results for immunoassay tests of whole blood, serum and plasma. The
Triage CareLink System consists of two parts: a small single-use disposable test
cartridge and a proprietary hand-held point-of-care fluorescent meter. After
blood is applied to the cartridge, the cartridge is inserted into the meter,
which is designed to automatically detect up to six analytes simultaneously and
display the results on a numerical electronic read-out. The meter incorporates
proprietary software in erasable programmable read-only memory ("EPROM") chips
which are intended to be plugged into each meter to perform multiple types of
tests and automatically determine which test is being run. In addition, the
EPROM chips are designed to automatically calibrate the meter on a lot specific
basis. The software may also provide important information regarding the analyte
measured, such as normal or abnormal levels of a marker which could then be used
to initiate therapy or manage patient disease. The Company believes that the
analyte measuring sensitivity of the Triage CareLink System products under
development will approximate the sensitivity levels of the conventional
immunoassay analyzers. The Company is currently developing two applications for
this platform, Triage Cardiac, a device for the quantification of three cardiac
markers associated with acute myocardial infarction ("AMI"), and Triage
Transplant, a product for the monitoring of the concentration of cyclosporine,
an immunosuppressant drug prescribed for organ transplant recipients to prevent
transplant rejection.
PRODUCT ATTRIBUTES
Although the current products and products under development are based
upon the Triage Panel and Triage CareLink System platforms and utilize different
technologies, they share common attributes which the Company believes make them
superior to conventional immunoassay analyzers:
- RAPID RESULTS: Triage DOA and the Company's products under
development are designed to offer complete results in a STAT
timeframe, and to have room temperature stability, making them
immediately available for use.
- EASE OF USE: Triage DOA and the Company's products under
development are designed to be simple to use. Triage DOA has
only three steps while Triage Cardiac and Triage Transplant
are expected to require only one step.
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- HIGH ANALYTICAL ACCURACY: The Company develops and uses high
quality biological and chemical reagents to yield highly
specific, accurate and reproducible analytical results.
- CAPABILITY OF PERFORMING MULTIPLE ANALYSES: Triage DOA and the
Company's products under development are designed to measure
one or more target analytes simultaneously, including reagent
controls, without sacrificing the quality of the individual
analysis. This simultaneous detection capability can provide
significant time and cost savings compared to current
technologies.
- RELIABILITY: Biosite's use of internal thresholds, built-in
controls, lockouts and other controlling mechanisms are
intended to make its current and future products extremely
reliable in any hospital or clinical laboratory setting.
- COST EFFECTIVENESS: Triage DOA and the Company's products
under development are designed to eliminate the need for
highly trained technicians and significant outlays for testing
equipment acquisition and maintenance, making them
cost-effective alternatives to conventional immunoassay
analyzers.
PRODUCTS AND PRODUCTS UNDER DEVELOPMENT
Triage DOA was introduced in 1992 and has been used by hospital
emergency departments to screen for up to eight commonly abused prescription and
illicit drugs or drug classes. The Company is developing five additional
products (Triage Cardiac, Triage C. diff., Triage O&P, Triage Enteric and Triage
Transplant) which apply the Company's Immediate Response Diagnostics
technologies to a variety of other medical testing needs. The Company continues
to evaluate other point-of-care diagnostic product opportunities that can
utilize the Company's technologies.
The Company intends, where appropriate, to enter into licensing and/or
collaborative arrangements to develop and commercialize additional future
products. There can be no assurance that the Company will be able to negotiate
license or collaborative arrangements on favorable terms, if at all, in the
future, or that its current or future licensing or collaborative arrangements
will be successful.
The Company recently obtained a license to certain technology and
patents developed by Scios, Inc. for use in developing a test for the diagnosis
of congestive heart failure by monitoring levels of B-type Natriuretic Peptide
("BNP"), a hormone made primarily in the ventricles of the heart. Levels of BNP
become elevated in cardiac and circulating blood plasma during heart dysfunction
associated with congestive heart failure in both symptomatic and asymptomatic
patients.
Biosite also recently obtained a U.S. license to certain technology and
patents developed by XOMA Corporation related to methods of measuring levels of
Lipopolysaccharide Binding Protein ("LBP") in human blood. Levels of LBP become
elevated as a specific response to endotoxin exposure, a poisonous component of
gram-negative bacteria. Biosite is assessing whether it can use this technology
to develop a diagnostic test for sepsis or endotoxemia, a condition which can
cause widespread damage to blood vessels, leading to shock, organ failure,
gangrene of extremities and death. There can be no assurance that the Company
will develop or introduce any products based upon the Scios or XOMA licensed
technology.
Triage Panel for Drugs of Abuse
The Company believes the worldwide market for abused drug testing is
approximately $350 million annually, the majority of which is accounted for by
testing performed in the United States. The U.S. market can be divided into
three major categories:
- MEDICAL TESTING: The medical testing segment represents
testing typically performed in a hospital laboratory. Such
tests have the highest need for rapid turnaround of results,
and generally have the
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highest cost per result. The results are generally reported
to emergency physicians and psychiatrists.
- NON-MEDICAL TESTING: The non-medical testing market consists
of testing performed for industry, as well as in the criminal
justice setting and drug rehabilitation centers. Testing may
be performed on-site but generally samples are sent to
independent reference laboratories. Typically, the demands for
a rapid result are not quite as great as in the medical
segment. Additionally, the cost per result is slightly
reduced.
- REFERENCE LABORATORY TESTING: The reference laboratory testing
market accounts for a sizable portion of the total drug
testing market. The majority of samples come from the
non-medical testing market, although some smaller hospitals in
the medical testing market also send their samples to
reference laboratories. In general, results are not available
for at least 24 hours from the time the specimen is collected.
Despite relatively long turnaround times, the reference
laboratory market has remained substantial because of its
ability to produce results on a low cost per panel basis.
Emergency Department Screening
A 1988 Substance Abuse and Mental Health Services Administration
("SAMHSA") survey concluded that over 14.5 million Americans had used an illicit
drug at least once in the prior month. Emergency physicians have indicated that
drug abuse plays a role in 5% to 10% of the emergency medicine cases occurring
annually in the United States, either as a primary cause such as an overdose, or
as a contributing factor such as in the case of an accident. A diagnostic
dilemma confronts physicians when a patient is presented with symptoms that
could either be drug related or non-drug related. A patient brought to a
hospital emergency department in a coma may be under the influence of narcotics
or sedatives, which may require one type of treatment or intervention.
Conversely, the same patient may have had a stroke or suffered some form of
trauma, requiring a completely different type of care. The ability to have a
differential diagnosis in a timely manner greatly aids the course of treatment.
Prior to the introduction of Triage DOA, drug or toxicology screening
was accomplished by several technologies, primarily Gas Chromatography/Mass
Spectroscopy ("GC/MS") and automated immunoassays. Although GC/MS is the most
specific identification method commercially available, it is time consuming
(requiring an average of approximately three hours per test), complex and
expensive, and is generally reserved for final confirmation of specimens that
have been screened positive by an immunoassay. Automated immunoassay tests,
although less expensive than those performed by GC/MS, also require significant
amounts of time (approximately one to two hours) because of the necessity of
performing analyses of several drugs sequentially on each patient specimen.
Additionally, in many cases the equipment required to perform an immunoassay is
not accessible on an immediate or STAT basis.
Triage DOA is a rapid qualitative urine screen that analyzes a single
test sample for up to eight different illicit and prescription drugs or drug
classes and provides results in approximately 10 minutes. Triage DOA is
instrument independent, contains built-in controls for accuracy and is capable
of a high degree of specificity. Illicit drugs tested for by Triage DOA include
Amphetamines/Methamphetamines (speed, crystal), Cocaine (crack), Opiates
(heroin), Phencyclidine (angel dust), Tetrahydrocannabinol (pot, marijuana),
while prescription drugs tested by Triage DOA include Barbiturates
(Phenobarbital), Benzodiazepines (Valium, Librium, Halcion), Tricyclic
Antidepressants (Elavil, Tofranil) and Methadone. Triage DOA can be configured
to test various combinations of the foregoing drugs. In February 1995, the
Company launched Triage DOA Plus TCA, a configuration which includes a test for
Tricyclic Antidepressants ("TCA") that otherwise requires a separate blood test.
Since its introduction in February 1992, the Company has sold over 4.6 million
Triage DOA panels worldwide, and over 2,600 hospitals and emergency departments
in the United States are users of the product.
The Company distributes Triage DOA and Triage DOA Plus TCA to the U.S.
medical market through Fisher. Merck is the exclusive distributor of Triage DOA
and Triage DOA Plus TCA in certain countries in Europe, Latin America, the
Middle East, Asia and Africa.
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Workplace Screening
It is estimated that in 1996 over 33% of new hires in the U.S.
workforce would be screened for drug usage as part of pre-employment physicals.
The majority of these test samples are sent to centralized reference
laboratories that can provide both the initial immunoassay screening result and
the confirmation of presumptive positive results by an alternate method, such as
GC/MS. Testing of government and certain government regulated employees and
contractors must be performed at SAMHSA certified reference laboratories.
Employers that are not government contractors send their drug screens to their
laboratory of choice or perform on-site testing. Non-SAMHSA testing is estimated
to account for over eight million tests performed annually.
The majority of employers with drug screening programs have chosen not
to implement "on-site" testing in their facilities due to costly personnel and
regulatory burdens on an employer's in-house testing laboratory. These
industrial testers, however, still have a need for rapid results since many
employment decisions hinge on an employee's ability to pass physical and other
examinations that include a test for illegal drugs. Despite this need for rapid
results, there is a 24 to 48 hour wait based on the sample transportation and
testing process used by major reference laboratories. Additionally, it is
estimated that approximately 90% of all employee tests have negative results.
Therefore, an immunoassay test that provides rapid results, such as Triage DOA,
can get employees back to work quickly and save employers money.
In January 1996, the Company established the ExpressTest One-Hour Drug
Screen service, a marketing program in conjunction with regional suppliers of
occupational health services, as a means of expanding the market for Triage DOA.
The ExpressTest program incorporates the Company's "near-site" testing strategy
of providing the benefits of rapid drug test results using Triage Intervention
(a test for five illicit drugs or drug classes) without the burdens that would
be imposed on employers setting up an on-site laboratory. Participating
occupational health clinics provide rapid results to industrial clients that
send prospective employees to them for pre-employment physicals and drug
screens. Biosite's sales force actively supports these selected occupational
health clinics in their marketing of the ExpressTest program to potential
industrial clients in their regional area. Biosite currently has six sales
professionals actively establishing select providers to be a part of the
ExpressTest program.
Triage Cardiac
In 1992, over six million people in the United States visited hospital
emergency departments exhibiting symptoms of a heart attack. Of those,
approximately 650,000 were diagnosed with AMI and approximately 800,000 were
diagnosed with unstable angina. In total, approximately 1.9 million of the
patients who presented with chest pain were admitted to coronary care units. Of
these, approximately 30,000 to 60,000 patients were misdiagnosed as not having
an AMI. Additionally, approximately 500,000 of these patients who had not had an
AMI were admitted to hospitals and ultimately released within two days. The
Company believes that rapid, quantitative results for multiple cardiac markers
provided at the point-of-care may have a positive impact on misdiagnosed AMI,
and may provide substantial benefits to patients and savings to the hospital.
AMI is generally caused by the blocking or "occlusion" of an artery
providing oxygen-carrying blood to the heart. Without oxygen, the heart muscle
is destroyed, and a prolonged occlusion results in additional muscle damage. The
destruction of such cells in the heart muscle results in the release of several
markers into the bloodstream, including creatinine kinase ("CK-MB"), Troponin I
and Myoglobin.
In general, for early diagnosis of AMI clinicians rely on
electrocardiograms and on the measurement, over time, of CK-MB. Troponin I and
Myoglobin are also emerging as useful adjuncts to CK-MB in the detection of
heart attacks. The Company believes that the concentrations of these three
markers typically peak and fall over different time periods and that the
simultaneous measurement of these markers is a more accurate diagnostic
technique for AMI than the measurement of any one single marker. Studies have
shown that serum concentrations of Myoglobin are elevated most quickly post-AMI.
Additionally, serial quantitative measurement of Myoglobin has demonstrated a
significantly higher sensitivity in diagnosing AMI than CK-MB in patients
presenting within 12 hours of AMI symptom onset. Troponin I has been shown to
maintain an elevated concentration for a longer period of time than CK-MB and
Myoglobin.
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Several diagnostic tests have recently been developed to quantitatively
measure the blood levels of such markers. Unfortunately, the measurement of
multiple markers currently requires large, centralized immunoassay systems that
cannot directly analyze whole blood and are not always available on a STAT
basis. Additionally, these systems require multiple reagent packs, frequent
standardization and quality control. Since turnaround time for such test results
is critical, current immunoassay systems may not satisfy physician needs.
The Company believes that a point-of-care test capable of
quantitatively measuring multiple markers of an AMI would have a positive impact
on patient care. Accordingly, the Company's Triage Cardiac product under
development is being designed to quantitatively measure the level of CK-MB,
Troponin I and Myoglobin in a single test device from a whole blood sample. The
hand-held Triage CareLink meter under development is being designed to provide
quantitative results of such measurements at or near the point-of-care. Triage
Cardiac may aid in the detection of AMI by providing point-of-care quantitative
results, providing physicians with the ability to make treatment decisions in a
timely manner.
Triage Cardiac is in the late stages of development with clinical
investigations expected to begin in the first half of 1997. If successfully
developed and cleared for marketing, the Company anticipates selling Triage
Cardiac directly in the United States and through KDK in Japan. The Company
currently has an agreement with Merck regarding distribution of Triage Cardiac
in certain countries in Europe and Latin America and in South Africa. However,
as part of its decision to refocus away from certain aspects of the human
diagnostics business, Merck has informed the Company that Merck is considering
assigning its rights concerning the marketing of Triage Cardiac either to a
third party or back to the Company.
Triage C. diff
Clostridium difficile ("C. difficile") is an opportunistic pathogen of
the intestinal tract that may thrive as a result of broad spectrum antibiotic
treatment. The bacteria may be found in asymptomatic carriers or may be spread
among hospital patients that are immunocompromised or receiving antibiotics.
Cytotoxins produced by the bacteria mediate C. difficile-associated disease
("CDAD"), which may include antibiotic-associated diarrhea and
antibiotic-associated pseudo-membranous colitis. Due to the contagiousness of
CDAD, patients identified as possibly having CDAD are usually placed in
isolation until the infection is controlled. Symptoms of CDAD include diarrhea
as well as fluid and weight loss. It has been estimated that in 1995,
approximately three million rapid tests for C. difficile were performed in the
United States. This number is expected to continue to rise due to the expected
increase in the number of patients who are immunocompromised.
Until recently, the use of a cytotoxic test, which takes 48 to 72 hours
to produce diagnostic results, was the only means to identify the toxin
associated with C. difficile. More recently, in response to the need for more
rapid identification of the C. difficile toxin, several manufacturers have
developed and marketed enzyme-linked immunosorbent assay ("ELISA") tests that
can be performed in one to two hours. These ELISA test formats are increasingly
used by the hospitals testing for the toxin.
Although the ELISA technology has been a great improvement over the
cytotoxic test, it still requires several precisely timed steps as well as
multiple standards every time the test is performed, making it unlikely the
testing will be done whenever an individual specimen is sent to the laboratory.
The multiple standards and quality controls required with each run make the
processing of individual specimens expensive. As a result, specimens are
generally only processed in "batch" mode, delaying the time to a diagnostic
result, and the time by which a physician receiving the information can take
therapeutic measures.
Triage C. diff is designed to simplify the laboratory procedure and
improve time to result to the physician by enabling laboratories to complete
testing for the bacteria and toxin in approximately 10 minutes. Because the test
is being designed with built-in controls and standards, the test may be able to
be performed individually or in batches, by any laboratory technician, without
compromising the quality of the result. Triage C. diff may thus reduce time to
initiate therapy and minimize time in isolation. Rapid, accurate diagnosis of
the bacteria and toxin should enable earlier treatment, which may reduce length
of stay in the hospital and reduce cost.
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Triage C. diff is in the late stages of development with clinical
investigations expected to begin in the first half of 1997. If successfully
developed and cleared for marketing, the Company expects to market this product
directly in the United States.
Triage O&P
Parasitic infection is a common cause of gastrointestinal disease and
diarrhea. Some of the more common parasites responsible for such infection are
Giardia lamblia ("Giardia"), Cryptosporidium parvum ("C. parvum"), Entamoeba
histolytica and Microsporidia species. According to the U.S. Centers for Disease
Control and Prevention ("CDC"), more than 900,000 people in the United States
become ill each year from waterborne parasites. Additionally, with the increase
in world travel, it is probable that the number of cases diagnosed in the United
States will rise. Further, parasites frequently infect immunocompromised
patients, especially HIV infected patients, which has lead to an increase in the
incidence of infection by Microsporidia species.
The most commonly employed method of detecting parasites from stool
samples is by manual ova and parasite ("O&P") microscopic examination, typically
of three consecutive stool specimens from the patient. The preparation of the
sample by a laboratory technologist involves stool specimen dilution and the
preparation of multiple microscope slides. Each slide must then be observed via
microscope by a technologist trained in the identification of parasites. The
time to diagnose parasitic infection is prolonged due to the need for manual
microscopic examination of multiple stool specimens per patient. The prolonged
time to obtain results may delay the treatment of patients, and ultimately
increase the cost of health care for such patients.
It is estimated that in 1995 over four million O&P microscopic
examinations were performed in the United States. Because of the cumbersome
procedure and limited test menu of the current ELISA test formats, these tests
have had limited success in hospitals that perform larger volumes of tests in
batches. Recently, several manufacturers have developed and marketed ELISA tests
for the more rapid identification of two of the more common parasites Giardia
and C. parvum..
Triage O&P is designed to replace the standard O&P microscopic
detection method for three of the most commonly encountered parasites: Giardia,
C. parvum and Entamoeba histolytica in a single test device. Future versions of
Triage O&P may include a test for Microsporidia species. Because each test
device includes standards and controls, the product may be able to be used for
any volume of tests. If successfully developed and approved for marketing,
Triage O&P may make rapid results (approximately 10 minutes) available to
hospitals of any size, including facilities that previously sent such testing to
a reference lab. The Company expects that Triage O&P will have sensitivity
comparable to the current O&P microscopic examination, but will require only a
single patient specimen. This should greatly reduce the collection burden for
the patient, and reduce the amount of labor for the laboratory technician,
thereby reducing costs. Additionally, the length of time physicians wait for
results may be reduced.
Triage O&P is in the late stages of preclinical development.
Triage Enteric
Gastroenteritis, commonly described as "food poisoning," often occurs
among individuals who have consumed contaminated foods or been exposed to stool
contaminated with microorganisms such as Salmonella, Campylobacter jejuni/coli,
Shigella and E. coli 0157. Eight to 24 hours after such exposure, individuals
may experience abdominal pain, nausea and diarrhea. It is estimated that in the
United States over 14 million stool cultures are performed annually for the
diagnosis of food poisoning. Microorganisms are often implicated in such cases.
According to the CDC, there are over six million cases of foodborne disease
annually in the United States.
Stool culture, currently the primary method of diagnosing food
poisoning, involves the inoculation of multiple culture plates with stool
specimen. After 24 to 48 hours, culture plates that exhibit bacterial growth are
subjected to biochemical tests that typically take an additional 24 hours. As a
result of such a prolonged testing procedure, physicians generally wait 48 to 72
hours for test results.
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Triage Enteric is being developed for identification of three of the
most common enteric bacteria responsible for food poisoning, Salmonella,
Campylobacter jejuni/coli and Shigella. Future versions of Triage Enteric may
include a test for E. coli 0157. Triage Enteric would enable the laboratory
technician to rapidly detect from a stool specimen the presence of such enteric
bacteria. This should greatly reduce the amount of labor required of laboratory
technicians, thereby reducing costs. Additionally, the length of time by which
results can be returned to the physician would be improved.
Triage Enteric is in the development stage.
Triage Transplant
Transplants of human organs generally require suppression of the immune
system of the organ recipient. Cyclosporine is the most widely used
pharmaceutical for such purposes, with annual worldwide sales in excess of $1.0
billion. Novartis is the developer and leading supplier of cyclosporine, and is
involved in several collaborations in the organ transplant field that include
health care management, xenotransplantation, and near-patient testing in an
effort to support the use of organ transplantation. Cyclosporine is chronically
administered to patients who have received an organ transplant. Over 18,000
patients undergo organ transplantation in the United States annually. In excess
of 200,000 organ recipients worldwide take immunosuppressant drugs on a daily
basis.
The blood level of cyclosporine must be monitored to ensure that a
patient receives the appropriate therapeutic dose while minimizing toxicity.
Patients receiving cyclosporine must maintain a minimum concentration of the
drug for it to be effective, yet maintain a level that is low enough not to be
toxic. This range is often referred to as the therapeutic window. Physicians
primarily rely on large, centralized laboratories to measure cyclosporine blood
levels. The physician typically does not receive test results for at least 24 to
48 hours, requiring a call back to the patient if the dose of the drug needs to
be adjusted. A smaller share of cyclosporine testing is performed by high
performance liquid chromatography ("HPLC"). The current worldwide market for
cyclosporine testing by immunoassay is estimated to be over 4.0 million tests
per year. Patients are monitored frequently in the immediate post-transplant
time-frame with reduced but continued testing, an average of four times per
year, for the remainder of the patient's lifetime.
Triage Transplant is designed to utilize the Triage CareLink meter to
enable a physician to easily, rapidly and accurately measure cyclosporine
levels. Triage Transplant is being developed to provide physicians with a
cost-effective means of determining cyclosporine levels at the point-of-care
which provides the physician with the ability to optimize drug therapy during
the patient's visit. As part of its research and development collaboration with
Novartis, Biosite has obtained licenses to certain technology that makes rapid
analysis of cyclosporine levels possible. See " -- Strategic and Distribution
Arrangements."
Triage Transplant is in the preclinical development stage. If
successfully developed and approved for marketing, the Company expects Novartis
to support the promotion of Triage Transplant worldwide.
RESEARCH AND DEVELOPMENT
As of December 31, 1996, the Company had 68 employees in research and
development, of which 15 have Ph.D.s. The Company's research and development
organization is dedicated to the discovery and development of new technologies
which can be applied to future products and the development of new products in
its existing platform technologies.
The Company has research staff dedicated to the development and
production of antibodies through a variety of techniques. Recombinant techniques
are used to express proteins for use as diagnostic targets. The Company's staff
of chemists and biochemists synthesize drug targets and compounds for use as
diagnostic labels as well as seek to perfect techniques for coupling these
compounds to biological reagents such as antibodies. The Company's development
engineering staff is involved in the design and development of new diagnostic
device technologies as well as processes for their fabrication and interface
with biological and chemical reagents. The Company's product development group
completes final optimization of assays and the Company's regulatory affairs
group controls all in-house and external clinical trials of the Company's
products and prepares applications to the U.S.
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Food and Drug Administration ("FDA") for pre-market clearance or approval.
MANUFACTURING
As of December 31, 1996, the Company had 46 employees in manufacturing
involved in reagent production, device assembly, engineering, quality
assurance/quality control and materials management.
Biosite maintains worldwide manufacturing rights to all current and
future products. A key strategy of the Company is to provide high quality
analytical results in an efficient manner. To this end, the Company invests in
the design and development of manufacturing systems and technologies that can
produce a high quality product using controlled, cost-effective manufacturing
processes and equipment. Triage C. diff, Triage O&P, and Triage Enteric are
being developed to utilize the same or similar processes and equipment as Triage
DOA. The Company believes that the experience it has acquired in manufacturing
Triage DOA will provide benefits in product quality and cost in manufacturing
for its products under development. The Company expects its manufacturing
capacities will allow such potential products and Triage DOA to be manufactured
concurrently in the same facility.
All raw materials required to manufacture Triage DOA are obtained from
outside suppliers. All antibodies used in the manufacture of Triage DOA were
developed by Biosite and the cell lines are owned by Biosite. Production
quantities of most of the antibodies are produced by two vendors. In addition,
Biosite maintains its own in-house antibody production capability.
The Company manufactures Triage DOA at its facility in San Diego,
California. The facility has received its registration as a diagnostic product
manufacturer from the FDA and from the California Department of Health Services.
The Company has also been licensed and certified to manufacture products using
controlled substances by the U.S. Drug Enforcement Agency. There can be no
assurance that the Company can continue to comply with all government
requirements and regulations which may lead to the suspension or revocation of
its right to manufacture. See " -- Government Regulation" and "Risk Factors --
Government Regulation."
The Company is also developing novel and sophisticated processes and
equipment for the future production of its Triage Cardiac and Triage Transplant
products. LRE will manufacture and supply the meter used in conjunction with the
Company's Triage CareLink System platform products. The Company is increasing
its manufacturing space at its San Diego facility to accommodate production of
Triage Cardiac.
SALES AND MARKETING
As of December 31, 1996, the Company has 32 employees in various sales
and marketing functions. The Company markets its Triage DOA to hospital
laboratories and emergency departments in the United States through Fisher, a
laboratory products distributor, and in certain countries in Europe, Latin
America, the Middle East, Asia and Africa through Merck. The Company anticipates
it may directly market in the United States its cardiac, microbiology and
therapeutic drug monitoring products under development. In geographic markets
outside the United States, the Company intends to establish relationships with
marketing partners, where appropriate, for these potential products. The Company
believes it has the management resources necessary to significantly expand its
sales force for the promotion of its potential products. There can be no
assurance that any of the Company's products under development will be
successfully developed and approved for marketing.
STRATEGIC AND DISTRIBUTION ARRANGEMENTS
Biosite's strategy for the research, development, commercialization and
distribution of certain of its products entails entering into various
arrangements with corporate partners, licensors, licensees and others, and is
dependent upon the success of these parties in performing their
responsibilities. There can be no assurance that such parties will perform their
obligations as expected or that any revenue will be derived from such
arrangements. Under the provisions of Biosite's existing arrangements, Biosite
is not obligated to make any material capital expenditures. Biosite does
currently plan to expend approximately $4.0 million for the expansion and
development of its manufacturing capabilities in connection with the anticipated
launch of the Company's products currently under
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development. If products are successfully developed under certain of the
Company's existing arrangements, royalties will be payable by the Company at
rates up to 8% of sales of products which incorporate licensed technology.
Fisher Healthcare division (formerly Curtin Matheson Scientific division) of
Fisher Scientific Company
In November 1991, the Company entered into a distribution agreement
(the "Fisher Agreement") with Fisher pursuant to which the Company granted to
Fisher an exclusive right to distribute Triage DOA to hospitals, non-industrial
laboratories and certain other health and medical organizations within the
United States. Under certain circumstances, the Company is obligated to make a
one-time payment to Fisher in the event that the Company elects to terminate the
Fisher Agreement without cause or to engage in a merger, reorganization or
transfer or sale of substantially all of its stock or assets to which the Fisher
Agreement relates, provided that Fisher gives timely notice of objection to such
merger, reorganization or transfer or sale of stock or assets. Fisher purchases
Triage DOA on a monthly basis through firm purchase orders on a per device fixed
price basis. Fisher accounted for 88%, and 81% of Biosite's product sales for
the years ended December 31, 1995 and 1996, respectively. In March 1996, the
parties executed an amendment to the Fisher Agreement, setting forth certain
purchase and cumulative sales targets for the first half of 1996 and third and
fourth quarters of 1996 which if not met gave Biosite the option to terminate
the Fisher Agreement and further obligated Fisher to pay to Biosite a penalty if
it failed to meet such purchase and cumulative sales targets for 1996. Fisher
missed the first half of 1996 purchase and cumulative sales targets by 18% and
consequently incurred a penalty. In August 1996, Biosite agreed to continue the
distribution agreement and to forgive a portion of the penalty each year that
Fisher meets additional sales milestones commencing with the fourth quarter of
1996 and continuing through 1999. The August 1996 agreement eliminated the 1996
third quarter purchase and cumulative sales targets, and the 1996 fourth quarter
purchase and cumulative sales targets were replaced by revised milestones. The
revised milestones are based upon quarterly average monthly kit sales of Triage
DOA (each kit consisting of 25 Triage DOA devices). Fisher achieved the initial
sales target for the fourth quarter of 1996 and consequently a portion of the
penalty has been forgiven. There can be no assurance that the additional targets
will be met. The Fisher Agreement provides for a six-month transition period in
the event of termination. If Biosite elects to terminate the Fisher Agreement,
it may appoint a new distributor or expand its own sales force to sell Triage
DOA directly in the United States.
Merck KGaA
In July 1992, the Company entered into a distribution agreement with
Merck, pursuant to which the Company granted to Merck an exclusive right to
market and distribute Triage DOA in certain countries in Europe, Latin America,
the Middle East, Asia and Africa. Merck purchases Triage DOA in U.S. dollars on
a quarterly basis through firm purchase orders on a per device fixed price
basis. The distribution agreement provides for minimum annual purchase
quantities. Merck accounted for $1,345,000 and $2,096,000 of Biosite's product
sales for the years ended December 31, 1995 and 1996, respectively.
In June 1994, the Company entered into two additional agreements with
Merck, a collaborative development agreement and a supply and distribution
agreement, in connection with the Company's development of Triage Cardiac. Under
the terms of such agreements, the Company and Merck agreed to jointly develop,
perform clinical testing of, and obtain regulatory approval for Triage Cardiac.
The agreement further provides that the Company is to be responsible for the
design, development and manufacturing scale-up of Triage Cardiac and the
reagents used in connection therewith, and for the clinical trials and
regulatory approval of Triage Cardiac for use in the AMI diagnosis field in
Japan and the United States. Merck is obligated to perform clinical trials and
obtain regulatory approval for the product for use in the AMI diagnosis field in
certain countries in Europe and Latin America and in South Africa. Additionally,
Biosite is obligated to fund 60% and Merck is obligated to fund the remaining
40% of the costs incurred by both parties in developing, manufacturing and
obtaining regulatory approval for the product, subject to certain maximum
aggregate expenditure limitations and subject further to a reduction in Merck's
funding obligations of 40% of payments which Biosite receives from KDK in
connection with the development and commercialization of Triage Cardiac in
Japan. The agreements further specify that Merck is to be the exclusive
distributor of Triage Cardiac for use in the AMI diagnosis field in certain
countries in Europe and Latin America and in South Africa, while the Company is
to retain distribution rights to the product in the remainder of the world and
for uses other than the diagnosis of AMI. The total cost of the development of
Triage Cardiac is estimated to be approximately $10.0 million. If Triage Cardiac
is approved for commercial sale, Merck will purchase the Triage
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Cardiac test cartridges from Biosite in U.S. dollars on a quarterly basis
through firm purchase orders on a per device formula price basis. Merck will
purchase the Triage CareLink meter directly from LRE. Under certain
circumstances, if the Company is unable to supply forecasted quantities of
Triage Cardiac to Merck, Merck can obtain a license to manufacture Triage
Cardiac for its requirements in return for a royalty payable to Biosite. As part
of its decision to refocus away from certain aspects of the human diagnostics
business, Merck has informed the Company that Merck is considering assigning its
rights under its agreements with the Company concerning the marketing of Triage
Cardiac either to a third party or back to the Company.
LRE Relais + Elektronik GmbH
In September 1994, the Company entered into an agreement with LRE (the
"LRE Agreement") for the development of a hand-held meter to be used in all
Triage CareLink System products currently under development, including Triage
Cardiac and Triage Transplant. Under the terms of the LRE Agreement, LRE is
obligated to develop and produce the fluorescent meter according to
specifications provided by Biosite. In return, the Company agreed to compensate
LRE for certain development and tooling expenses incurred in connection
therewith, based upon LRE's successful completion of certain feasibility,
prototype and preproduction milestones. Under the terms of the LRE Agreement,
the Company's obligations for development expenses and costs are not to exceed
approximately $1.9 million, of which approximately $470,000 is for prototype and
preproduction tooling costs. As of December 31, 1996, the Company had paid or
accrued expenses and costs under the LRE Agreement of approximately $1.8
million. In addition, the agreement specifies that LRE is to be the Company's
exclusive supplier of the Triage CareLink meter during the term of the LRE
Agreement, unless LRE is incapable of satisfying Biosite's needs or is
prohibited from producing such meters for a specific immunoassay application.
Biosite will purchase the Triage CareLink meter from LRE in Deutsche Marks on a
quarterly basis through firm purchase orders on a per device price basis which
varies according to sales volume. Biosite has the right to designate third
parties, including Merck, who can purchase Triangle CareLink meters directly
from LRE.
ARKRAY KDK Corporation
In February 1995, the Company entered into a development, supply and
distribution agreement with KDK, pursuant to which the parties agreed to
collaborate in the development and marketing of Triage Cardiac. Under the terms
of the agreement, KDK is obligated to provide certain funding of up to $2.0
million for the Company's development of Triage Cardiac, $500,000 of which has
been paid and the remainder of which is to be paid based upon the Company's
achievement of certain milestones. In exchange for this funding, the Company has
granted KDK the exclusive right to distribute Triage Cardiac in Japan and in
certain countries of Asia, the Middle East and Pacific Island countries. The
Company is responsible for costs associated with performing clinical trials on
and obtaining regulatory approval of Triage Cardiac in the United States, while
KDK is responsible for such costs in Japan and in certain countries of Asia, the
Middle East and Pacific Island countries. If Triage Cardiac is approved for
commercial sale, KDK will purchase Triage Cardiac test cartridges from Biosite
in U.S. dollars on a quarterly basis through firm purchase orders on a per
device fixed price basis. KDK will also purchase the Triage CareLink meter from
the Company on a per device fixed price basis. The distribution agreement
provides for minimum annual purchase quantities. KDK can terminate this
agreement at any time.
Novartis Pharma Inc.
In September 1995, the Company entered into two license agreements with
Novartis relating to the Company's development of Triage Transplant. The first
license is for cyclosporine antibodies and the second license is for certain
antibody-based assays. Under the terms of the agreements, and upon the Company's
successful completion of certain feasibility requirements, the Company has the
right to make, have made, use and sell Triage Transplant using the licensed
Novartis antibodies and related technologies. The agreements contemplate that
the Company is to be responsible for all costs associated with the development
of Triage Transplant. Additionally, upon entering into the two licenses, the
Company made certain initial payments (aggregating approximately $325,000) to
Novartis and is obligated to make additional payments of up to approximately
$225,000 to Novartis based upon the achievement of certain product development
milestones, and to pay royalties on sales of products developed by the Company
using such antibodies or related technologies. In connection with the agreement,
Novartis purchased $1.0
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million of five-year 8% convertible debentures which converted into 92,575
shares of Common Stock of the Company upon the closing of the Company's initial
public offering in February 1997. The Company is obligated to sell to Novartis
up to $1.0 million in additional five-year 8% convertible debentures upon the
attainment of certain milestones. The debentures will be convertible, at the
sole option of the Company, into shares of Biosite Common Stock at $12.00 per
share.
PROPRIETARY TECHNOLOGY AND PATENTS
The Company's ability to compete effectively will depend in part on its
ability to develop and maintain proprietary aspects of its technology, and to
operate without infringing the proprietary rights of others or to obtain rights
to such proprietary rights. Biosite has U.S. and foreign issued patents and is
currently prosecuting patent applications in the United States and with certain
foreign patent offices. There can be no assurance that any of the Company's
pending patent applications will result in the issuance of any patents, that the
Company's patent applications will have priority over others' applications, or
that, if issued, any of the Company's patents will offer protection against
competitors with similar technology. There can be no assurance that any patents
issued to the Company will not be challenged, invalidated or circumvented in the
future or that the rights created thereunder will provide a competitive
advantage.
Litigation may be necessary to enforce any patents issued to the
Company, to protect trade secrets or know-how owned by the Company or to
determine the enforceability, scope and validity of the proprietary rights of
others. In March 1996, the Company settled a potential patent infringement claim
by obtaining a license to the contested patent in return for a one-time payment
of $2.2 million. In September 1996, the Company settled a patent infringement
lawsuit filed by Abbott Laboratories and obtained a license to the contested
patent in return for the payment of $5.5 million and the agreement to pay
certain royalties. There can be no assurance that the Company will not in the
future become subject to patent infringement claims and litigation or
interference proceedings conducted in the U.S. Patent and Trademark Office
("USPTO") to determine the priority of inventions.
The Company recently received a letter from Becton Dickinson and
Company ("B-D"), a major manufacturer of medical supplies, devices and
diagnostic systems, offering to license a U.S. patent held by B-D to the
Company. B-D did not propose any license terms in its letter. The Company has
reviewed such patent and believes that it has defenses to any infringement claim
under such patent. In addition, Biosite recently received a letter from Spectral
Diagnostics Incorporated ("Spectral"), a manufacturer of rapid-format
cardiac-diagnostic panels, informing the Company that Spectral holds a U.S.
patent covering a kit for diagnosing and distinguishing chest pain and that it
recently received a notice of allowance from the USPTO with respect to a second
patent application. This letter states that Spectral has not yet determined its
position with respect to the licensing of its technology. The Company is
currently reviewing the issued patent cited in this letter and the materials
provided by Spectral with respect to the allowed patent application and is
evaluating their potential impact on Triage Cardiac. There can be no assurance
that B-D or Spectral will not initiate litigation alleging that Triage DOA or
Triage Cardiac, respectively, infringe claims under such manufacturer's patents.
Such litigation, if initiated, could seek to recover damages as a result of any
sales of such products and to enjoin further such sales. The outcome of
litigation is inherently uncertain and there can be no assurance that a court
would not find such claims valid and that the Company had no successful defense
to such claims. An adverse outcome in litigation or the failure to obtain a
necessary license could subject the Company to significant liability and could
prevent Biosite from selling Triage DOA or Triage Cardiac which could have a
material adverse effect on the company's business, financial condition and
results of operations.
The defense and prosecution of intellectual property suits, USPTO
interference proceedings, and related legal and administrative proceedings will
result in substantial expense to the Company and significant diversion of effort
by the Company's technical and management personnel. An adverse determination in
litigation or interference proceedings to which the Company may become a party
could subject the Company to significant liabilities to third parties. Further,
either as the result of such litigation or proceedings or otherwise, the Company
may be required to seek licenses from third parties which may not be available
on commercially reasonable terms, if at all.
Triage DOA and products under development may incorporate technologies
that are the subject of patents issued to, and patent applications filed by,
others. The Company has obtained licenses for certain technologies.
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However, there can be no assurance that the Company will be able to obtain
licenses for technology patented by others on commercially reasonable terms, if
at all, that it will be able to develop alternative approaches if unable to
obtain licenses or that the Company's current and future licenses will be
adequate for the operation of Biosite's business. The failure to obtain
necessary licenses or to identify and implement alternative approaches would
prevent the Company from commercializing certain of its products under
development and would have a material adverse effect on the Company's business,
financial condition and results of operations.
Biosite is aware of a U.S. patent owned by Celltech Limited
("Celltech") relating to the manufacture of antibodies, such as those developed
or being developed by Biosite for Triage Cardiac, Triage O&P, Triage C. diff and
Triage Enteric. Biosite is also aware that this patent is the subject of an
interference proceeding in the USPTO which was initiated in February 1991 with a
patent application filed by Genentech, Inc. ("Genentech"). In June 1996, the
European Patent Office ("EPO") invalidated, following an opposition, certain
claims under Celltech's corresponding EPO-granted patent which may be relevant
to Biosite's products and products under development. Celltech has indicated
that it will appeal such decision. If Celltech does appeal, such claims can be
reinstated, at least until a final decision is rendered. If it is determined
that aspects of the manufacturing of Biosite's antibodies are covered by patent
claims stemming from the interference or if Celltech were to have such claims
upheld on appeal, or if patent infringement litigation is brought against the
Company by either Celltech or Genentech, Biosite may be required to obtain a
license under such patents and corresponding patents in other countries. There
can be no assurance that a license would be made available to Biosite on
commercially reasonable terms, if at all. If such license is required and not
obtained the Company might be prevented from using certain of its manufacturing
technologies. The Company's failure to obtain any required licenses could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company also relies upon trade secrets, technical know-how and
continuing invention to develop and maintain its competitive position. There can
be no assurance that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
the Company's trade secrets or disclose such technology, or that the Company can
meaningfully protect its trade secrets, or that the Company will be capable of
protecting its rights to its trade secrets.
Others may have filed and in the future are likely to file patent
applications that are similar or identical to those of the Company. To determine
the priority of inventions, the Company may have to participate in interference
proceedings declared by the USPTO that could result in substantial cost to the
Company. No assurance can be given that any patent application of another will
not have priority over patent applications filed by the Company.
The commercial success of the Company also depends in part on the
Company neither infringing patents or proprietary rights of third parties nor
breaching any licenses that may relate to the Company's technologies and
products. The Company is aware of several third-party patents that may relate to
the Company's technology. There can be no assurance that the Company does not or
will not infringe these patents, or other patents or proprietary rights of third
parties. In addition, the Company has received and may in the future receive
notices claiming infringement from third parties as well as invitations to take
licenses under third party patents. Any legal action against the Company or its
collaborative partners claiming damages and seeking to enjoin commercial
activities relating to the Company's products and processes affected by third
party rights, in addition to subjecting the Company to potential liability for
damages, may require the Company or its collaborative partner to obtain a
license in order to continue to manufacture or market the affected products and
processes. There can be no assurance that the Company or its collaborative
partners would prevail in any such action or that any license (including
licenses proposed by third parties) required under any such patent would be made
available on commercially acceptable terms, if at all. There are a significant
number of U.S. and foreign patents and patent applications in the Company's
areas of interest, and the Company believes that there may be significant
litigation in the industry regarding patent and other intellectual property
rights. If the Company becomes involved in such litigation, it could consume a
substantial portion of the Company's managerial and financial resources, which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
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COMPETITION
The market in which the Company competes is intensely competitive.
Biosite's competitors include health care companies that manufacture
laboratory-based tests and analyzers, as well as clinical and hospital-based
laboratories. Currently, the majority of diagnostic tests used by physicians and
other health care providers are performed by independent clinical and
hospital-based laboratories. The Company expects that these laboratories will
compete vigorously to maintain their dominance of the testing market. In order
to achieve market acceptance for its products, the Company will be required to
demonstrate that its products are an attractive alternative to testing performed
by clinical and hospital-based laboratories. This will require physicians to
change their established means of having such tests performed. There can be no
assurance that the Company's products will be able to compete with the testing
services provided by these laboratories. In addition, companies with a
significant presence in the diagnostic market, such as Abbott Laboratories,
Boehringer Mannheim GmbH ("Boehringer Mannheim"), Chiron Diagnostics, Clinical
Diagnostic Systems, a division of Johnson & Johnson, DADE International, and
Roche Biosciences, Inc., have developed or are developing diagnostic products
that do or will compete with the Company's products. These competitors have
substantially greater financial, technical, research and other resources and
larger, more established marketing, sales, distribution and service
organizations than the Company. Moreover, such competitors offer broader product
lines and have greater name recognition than the Company, and offer discounts as
a competitive tactic. In addition, several smaller companies are currently
making or developing products that compete with or will compete with those of
the Company. There can be no assurance that the Company's competitors will not
succeed in developing or marketing technologies or products that are more
effective or commercially attractive than the Company's current or future
products, or that would render the Company's technologies and products obsolete.
Moreover, there can be no assurance that the Company will have the financial
resources, technical expertise or marketing, distribution or support
capabilities to compete successfully in the future. In addition, there can be no
assurance that competitors, many of which have made substantial investments in
competing technologies that may be more effective than the Company's
technologies will not prevent, limit or interfere with the Company's ability to
make, use or sell its products either in the United States or in international
markets. See " -- Technology and " -- Products and Products under Development."
GOVERNMENT REGULATION
The testing, manufacture and sale of the Company's products are subject
to regulation by numerous governmental authorities, principally the FDA and
corresponding state and foreign regulatory agencies. Pursuant to the Federal
Food, Drug, and Cosmetic Act, and the regulations promulgated thereunder, the
FDA regulates the preclinical and clinical testing, manufacture, labeling,
distribution and promotion of medical devices. The Company will not be able to
commence marketing or commercial sales in the United States of new products
under development until it receives 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 premarket clearance or premarket
approval for devices, withdrawal of marketing clearances or approvals and
criminal prosecution. The FDA also has the authority to request recall, repair,
replacement or refund of the cost of any device manufactured or distributed by
the Company.
In the United States, medical devices are classified into one of three
classes (i.e., Class I, II or III) on the basis of the controls deemed necessary
by the FDA to reasonably ensure their safety and effectiveness. Class I devices
are subject to general controls (e.g., labeling, premarket notification and
adherence to the Quality System Regulation ("QSR") (formerly Good Manufacturing
Practices) and Class II devices are subject to general and special controls
(e.g., performance standards, postmarket surveillance, patient registries and
FDA guidelines). Generally, Class III devices are those which must receive
premarket approval by the FDA to ensure their safety and effectiveness (e.g.,
life-sustaining, life-supporting and implantable devices or new devices which
have been found not to be substantially equivalent to legally marketed devices).
Before a new device can be introduced in the market, the manufacturer
must generally obtain FDA clearance or approval through either 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 preamendment Class III device for which the FDA has called
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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 the FDA asking for more information or clarification
of information already provided in the submission. During the review period, an
advisory committee, typically a panel of clinicians, will likely 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 are necessary, 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 a preamendment Class III medical
device for which the FDA has not called for PMAs. The FDA recently has been
requiring more rigorous demonstration of substantial equivalence than in the
past, including in some cases requiring submission of clinical data. It
generally takes from four to 12 months from submission to obtain 510(k)
premarket 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.
The Company has made modifications to Triage DOA since receipt of
initial 510(k) clearance. With respect to several of these modifications, the
Company has filed new 510(k) notices describing the modifications, and has
received FDA clearance of those 510(k) notices. The Company has made other
modifications to Triage DOA which the Company believes do not require the
submission of new 510(k) notices. There can be no assurance, however, that the
FDA would agree with any of the Company's determinations not to submit a new
510(k) notice for any of these modifications, or would not require the Company
to submit a new 510(k) notice for any of these modifications made to Triage DOA.
If the FDA requires the Company to submit a new 510(k) notice for any device
modification, the Company may be prohibited from marketing the modified Triage
DOA until the 510(k) notice is cleared by the FDA.
The Company is uncertain of the regulatory path to market that the FDA
will ultimately apply to the Company's products currently in development.
Although Triage DOA received 510(k) clearance, a PMA may be required for Triage
Transplant or other products now in development. There can be no assurance that
the FDA will
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not determine that the Company must adhere to the more costly, lengthy and
uncertain PMA approval process for any of the Company's products in development.
There can be no assurance that the Company will be able to obtain
necessary regulatory approvals or clearances for its products on a timely basis,
if at all, and delays in receipt of or failure to receive such approvals or
clearances, the loss of previously received approvals or clearances, limitations
on intended use imposed as a condition of such approvals or clearances, or
failure to comply with existing or future regulatory requirements would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Before the manufacturer of a device can submit the device for FDA
approval or clearance, it generally must conduct a clinical investigation of the
device. Although clinical investigations of most devices are subject to the
investigational device exemption ("IDE") requirements, clinical investigations
of in vitro diagnostic ("IVD") tests, such as all of the Company's products and
products under development, are exempt from the IDE requirements, including the
need to obtain the FDA's prior approval, provided the testing is noninvasive,
does not require an invasive sampling procedure that presents a significant
risk, does not intentionally introduce energy into the subject, and is not used
as a diagnostic procedure without confirmation by another medically established
test or procedure. In addition, the IVD must be labeled for research use only
("RUO") or investigational use only ("IUO"), and distribution controls must be
established to assure that IVDs distributed for research or clinical
investigation are used only for those purposes.
The Company intends to conduct clinical investigations of its 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 the
Company's IUO distribution of its IVD products under development will meet the
requirements for IDE exemption. Furthermore, failure by the Company or the
recipients of its products under development to maintain compliance with the IDE
exemption requirements could result in enforcement action by the FDA, including,
among other things, the loss of the IDE exemption or the imposition of other
restrictions on the Company's distribution of its products under development,
which would adversely affect the Company's ability to conduct the clinical
investigations necessary to support marketing clearance or approval.
Any devices manufactured or distributed by the Company 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.
The Company is subject to routine inspection by the FDA and certain
state agencies for compliance with QSR requirements, MDR requirements and other
applicable regulations. The recently finalized QSR requirements include the
addition of design controls that will likely increase the cost of compliance.
Changes in existing requirements or adoption of new requirements could have a
material adverse effect on the Company's business, financial condition and
results of operation. There can be no assurance that the Company 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 the Company's
business, financial condition and results of operations.
The Company also is 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 the Company
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 the Company's business, financial condition and results of operations.
The use of Biosite's 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
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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 the Company's ability to market its products or on its
business, financial condition or results of operations.
EMPLOYEES
As of December 31, 1996, Biosite employed 176 individuals. Of these, 18
hold Ph.D.s and 13 hold other advanced degrees. None of the Company's employees
is covered by collective bargaining agreement. The Company believes that it
maintains good relations with its employees.
RISK FACTORS
DEPENDENCE ON DEVELOPMENT AND INTRODUCTION OF NEW PRODUCTS FOR REVENUE GROWTH
AND PROFITABILITY
Except for Triage DOA, all of the Company's products are still under
development, and there can be no assurance that such products will be
successfully developed or commercialized on a timely basis, if at all. The
Company believes that its revenue growth and profitability will substantially
depend upon its ability to complete development of and successfully introduce
these new products. In addition, the successful development of some of these new
products will depend on the development of new technologies, including the
Triage CareLink System's fluorescent meter and assay devices. The Company will
be required to undertake time-consuming and costly development activities and
seek regulatory approval for these new products. There can be no assurance that
the Company will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of these new products, that
regulatory clearance or approval of any new products will be granted by the FDA
or foreign regulatory authorities on a timely basis, if at all, or that the new
products will be successfully commercialized. The Company has limited resources
to devote to the development of all its products and consequently a delay in the
development of one product may delay the development of other products. In order
to successfully commercialize any new products, the Company will be required to
establish and maintain reliable, cost-efficient, high-volume manufacturing
capacity for such products. If the Company is unable, for technological or other
reasons, to complete the development, introduction or scale-up of manufacturing
of any new product or if any new product is not approved for marketing or does
not achieve a significant level of market acceptance, the Company's business,
financial condition and results of operations would be materially and adversely
affected. See "Business -- Products and Products Under Development," " --
Manufacturing" and " -- Government Regulation."
LIMITED HISTORY OF PROFITABILITY; POTENTIAL QUARTERLY FLUCTUATIONS IN FUTURE
OPERATING RESULTS
The Company first achieved profitability in fiscal 1994 and prior to
that time incurred significant operating losses. There can be no assurance that
the Company will remain profitable on a quarterly or annual basis in the future.
The Company believes that future operating results will be subject to quarterly
fluctuations due to a variety of factors, including whether and when new
products are successfully developed and introduced by the Company, market
acceptance of current or new products, regulatory delays, product recalls,
manufacturing delays, shipment problems, seasonal customer demand, the timing of
significant orders, changes in reimbursement policies, competitive pressures on
average selling prices, changes in the mix of products sold and patent
conflicts. Operating results would also be adversely affected by a downturn in
the market for the Company's current and future products, if any, order
cancellations or order rescheduling. Because the Company is continuing to
increase its operating expenses for personnel and new product development, the
Company's operating results would be adversely affected if its sales did not
correspondingly increase or if its product development efforts are unsuccessful
or subject to delays. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
NEAR-TERM DEPENDENCE OF THE COMPANY ON TRIAGE DOA
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Sales of Triage DOA have to date accounted for all of the Company's
sales. The Company expects its revenue and profitability will substantially
depend on the sale of Triage DOA for the foreseeable future. A reduction in
demand for Triage DOA would have a material adverse effect on the Company's
business, financial condition and results of operations. The Company believes
that growth in sales of Triage DOA will slow as the available U.S. market
becomes saturated. Competitive pressures could also erode the Company's profit
margins for Triage DOA. The Company's continued growth will depend on its
ability to successfully develop and commercialize other products and to gain
additional acceptance of Triage DOA. There can be no assurance that the Company
will be able to successfully develop and commercialize new products or that the
Company will be able to maintain or expand its share of the drug testing market.
Technological change or the development of new or improved diagnostic
technologies could result in the Company's products becoming obsolete or
noncompetitive. See "Business -- Products and Products Under Development."
DEPENDENCE ON KEY DISTRIBUTORS; LIMITED DIRECT SALES EXPERIENCE
The Company relies upon distributors and its own sales force to
distribute Triage DOA and may rely upon distributors to distribute products
under development. Triage DOA is currently marketed pursuant to exclusive
distribution agreements in the U.S. medical market by Fisher (which accounted
for 81% of product sales in 1996) and in certain countries in Europe, Latin
America, the Middle East, Asia and Africa by Merck. The loss or termination of
either of these distributors could have a material adverse effect on the
Company's sales unless suitable alternatives can be arranged. The Fisher
distribution agreement has minimum quarterly sales milestones which, if the
milestones are not met allows the Company to terminate the agreement, obligates
Fisher to pay Biosite a portion of a penalty Fisher incurred in 1996 and allows
the Company to appoint a new distributor or to sell Triage DOA directly in the
U.S. medical market.
If any of the Company's distribution or marketing agreements are
terminated and the Company is unable to enter into replacement agreements or if
the Company elects to distribute new products directly, the Company would have
to invest in additional sales and marketing resources, including additional
field sales personnel, which would significantly increase future sales and
marketing expenses. The Company currently has limited experience in direct
sales, marketing and distribution of its products. There can be no assurance
that the Company's direct sales, marketing and distribution efforts would be
successful or that revenue from such efforts would exceed expenses. Further,
there can be no assurance that Biosite would be able to enter into new
distribution or marketing agreements on satisfactory terms, if at all.
Biosite currently has an agreement with Merck regarding distribution of
Triage Cardiac in certain countries in Europe and Latin America and in South
Africa. As part of its decision to refocus away from certain aspects of the
human diagnostics business, Merck has informed the Company that Merck is
considering assigning its rights concerning the marketing of Triage Cardiac
either to a third party or back to the Company. There can be no assurance that a
suitable third party will be found or if the rights are returned to the Company,
that the Company can make successful alternative distribution arrangements. The
Company anticipates that it may enter into additional distribution agreements
with respect to its products currently under development and products that it
develops in the future, if any of such products receive the requisite regulatory
clearance or approvals. There can be no assurance that the Company will be able
to enter into such agreements on acceptable terms, if at all, or if the Company
elects to distribute new products directly that the Company's direct sales,
marketing and distribution efforts would be successful. See "Business --
Strategic and Distribution Arrangements."
DEPENDENCE ON OTHERS FOR THE DEVELOPMENT OF NEW PRODUCTS
Biosite's strategy for the research, development, commercialization and
distribution of certain of its products entails entering into various
arrangements with corporate partners, licensors, licensees and others, and is
dependent upon the success of these parties in performing their
responsibilities. There can be no assurance that such parties will perform their
obligations as expected or that any revenue will be derived from such
arrangements.
Biosite has entered into agreements with, among others, Merck, Novartis
and KDK for the development and marketing of products. The agreements are
subject to certain rights of termination, and there can be no assurance that
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any such agreement will not be terminated. There also can be no assurance that
the Company's collaborators will abide by their contractual obligations or will
not discontinue or sell their current lines of business. There also can be no
assurance that any of the research for which the Company receives or provides
funding will lead to the development of products. The Company intends to enter
into additional development and marketing agreements. However, there can be no
assurance that the Company will be able to enter into such agreements on
acceptable terms, if at all.
The Company is developing with LRE a hand-held point-of-care
fluorescent meter for use in Triage CareLink System products. The meter will be
programmed to run a specific test through the use of changeable proprietary
software which is also under development by LRE. There can be no assurance that
LRE will develop the hardware or software on schedule, if at all, or that new
software will be developed to permit the meter to be used for another Triage
CareLink System product. See "Business -- Strategic and Distribution
Arrangements."
INTENSELY COMPETITIVE INDUSTRY; RAPID TECHNOLOGICAL CHANGE
The market in which the Company competes is intensely competitive.
Biosite's competitors include health care companies that manufacture
laboratory-based tests and analyzers, as well as clinical and hospital-based
laboratories. Currently, the majority of diagnostic tests used by physicians and
other health care providers are performed by independent clinical and
hospital-based laboratories. The Company expects that these laboratories will
compete vigorously to maintain their dominance of the testing market. In order
to achieve market acceptance for its products, the Company will be required to
demonstrate that its products are an attractive alternative to testing performed
by clinical and hospital-based laboratories. This will require physicians to
change their established means of having such tests performed. There can be no
assurance that the Company's products will be able to compete with the testing
services provided by these laboratories. In addition, companies with a
significant presence in the diagnostic market, such as Abbott Laboratories,
Boehringer Mannheim, Chiron Diagnostics, Clinical Diagnostic Systems, a division
of Johnson & Johnson, DADE International, and Roche Biosciences, Inc., have
developed or are developing diagnostic products that do or will compete with the
Company's products. These competitors have substantially greater financial,
technical, research and other resources and larger, more established marketing,
sales, distribution and service organizations than the Company. Moreover, such
competitors offer broader product lines and have greater name recognition than
the Company, and offer discounts as a competitive tactic. In addition, several
smaller companies are currently making or developing products that compete with
or will compete with those of the Company. There can be no assurance that the
Company's competitors will not succeed in developing or marketing technologies
or products that are more effective or commercially attractive than the
Company's current or future products, or that would render the Company's
technologies and products obsolete. Moreover, there can be no assurance that the
Company will have the financial resources, technical expertise or marketing,
distribution or support capabilities to compete successfully in the future. In
addition, there can be no assurance that competitors, many of which have made
substantial investments in competing technologies that may be more effective
than the Company's technologies, will not prevent, limit or interfere with the
Company's ability to make, use or sell its products either in the United States
or in international markets. See "Business -- Technology," " -- Products and
Products Under Development" and " -- Competition."
UNCERTAINTY OF PATENT AND PROPRIETARY TECHNOLOGY PROTECTION; POTENTIAL INABILITY
TO LICENSE TECHNOLOGY FROM THIRD PARTIES
The Company's ability to compete effectively will depend in part on its
ability to develop and maintain proprietary aspects of its technology, and to
operate without infringing the proprietary rights of others or to obtain rights
to such proprietary rights. Biosite has U.S. and foreign issued patents and is
currently prosecuting patent applications in the United States and with certain
foreign patent offices. There can be no assurance that any of the Company's
pending patent applications will result in the issuance of any patents, that the
Company's patent applications will have priority over others' applications, or
that, if issued, any of the Company's patents will offer protection against
competitors with similar technologies. There can be no assurance that any
patents issued to the Company will not be challenged, invalidated or
circumvented in the future or that the rights created thereunder will provide a
competitive advantage.
Litigation may be necessary to enforce any patents issued to the
Company, to protect trade secrets or know-how owned by the Company or to
determine the enforceability, scope and validity of the proprietary rights of
others.
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In March 1996, the Company settled a potential patent infringement claim
by obtaining a license to the contested patent in return for a one-time payment
of $2.2 million. In September 1996, the Company settled a patent infringement
lawsuit filed by Abbott Laboratories and obtained a license to the contested
patent in return for the payment of $5.5 million and the agreement to pay
certain royalties. There can be no assurance that the Company will not in the
future become subject to patent infringement claims and litigation or
interference proceedings conducted in the USPTO to determine the priority of
inventions.
The Company recently received a letter from B-D, a major manufacturer
of medical supplies, devices and diagnostic systems, offering to license a U.S.
patent held by B-D to the Company. B-D did not propose any license terms in its
letter. The Company has reviewed such patent and believes that it has defenses
to any infringement claim under such patent. In addition, Biosite recently
received a letter from Spectral, a manufacturer of rapid-format
cardiac-diagnostic panels, informing the Company that Spectral holds a U.S.
patent covering a kit for diagnosing and distinguishing chest pain and that it
recently received a notice of allowance from the USPTO with respect to a second
patent application. This letter states that Spectral has not yet determined its
position with respect to the licensing of its technology. The Company is
currently reviewing the issued patent cited in this letter and the materials
provided by Spectral with respect to the allowed patent application and is
evaluating their potential impact on Triage Cardiac. There can be no assurance
that B-D or Spectral will not initiate litigation alleging that Triage DOA or
Triage Cardiac, respectively, infringe claims under such manufacturer's patents.
Such litigation, if initiated, could seek to recover damages as a result of any
sales of such products and to enjoin further such sales. The outcome of
litigation is inherently uncertain and there can be no assurance that a court
would not find such claims valid and that the Company had no successful defense
to such claims. An adverse outcome in litigation or the failure to obtain a
necessary license could subject the Company to significant liability and could
prevent Biosite from selling Triage DOA or Triage Cardiac which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The defense and prosecution of intellectual property suits, USPTO
interference proceedings, and related legal and administrative proceedings will
result in substantial expense to the Company and significant diversion of effort
by the Company's technical and management personnel. An adverse determination in
litigation or interference proceedings to which the Company may become a party
could subject the Company to significant liabilities to third parties. Further,
either as the result of such litigation or proceedings or otherwise, the Company
may be required to seek licenses from third parties which may not be available
on commercially reasonable terms, if at all.
Triage DOA and products under development may incorporate technologies
that are the subject of patents issued to, and patent applications filed by,
others. The Company has obtained licenses for certain technologies. However,
there can be no assurance that the Company will be able to obtain licenses for
technology patented by others on commercially reasonable terms, if at all, that
it will be able to develop alternative approaches if unable to obtain licenses
or that the Company's current and future licenses will be adequate for the
operation of Biosite's business. The failure to obtain necessary licenses or to
identify and implement alternative approaches would prevent the Company from
commercializing certain of its products under development and would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Biosite is aware of a U.S. patent owned by Celltech relating to the
manufacture of antibodies, such as those developed or being developed by Biosite
for several products, including Triage Cardiac. Biosite is also aware that this
patent is the subject of an interference proceeding in the USPTO which was
initiated in February 1991 with a patent application filed by Genentech. In June
1996, the EPO invalidated, following an opposition, certain claims under
Celltech's corresponding EPO-granted patent which may be relevant to Biosite's
products and products under development. Celltech has indicated that it will
appeal such decision. If Celltech does appeal, such claims can be reinstated, at
least until a final decision is rendered. If it is determined that aspects of
the manufacturing of Biosite's antibodies are covered by patent claims stemming
from the interference or if Celltech were to have such claims upheld on appeal,
or if patent infringement litigation is brought against the Company by either
Celltech or Genentech Biosite may be required to obtain a license under such
patents and corresponding patents in other countries. There can be no assurance
that a license would be made available to Biosite on commercially reasonable
terms, if at all. If such license is required and not obtained the Company might
be prevented from using certain of its manufacturing technologies. The Company's
failure to obtain any required licenses could have a material adverse effect on
the Company's business, financial condition and results of operations.
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The Company also relies upon trade secrets, technical know-how and
continuing invention to develop and maintain its competitive position. There can
be no assurance that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
the Company's trade secrets or disclose such technology, that the Company can
meaningfully protect its trade secrets, or that the Company will be capable of
protecting its rights to its trade secrets.
Others may have filed and in the future are likely to file patent
applications that are similar or identical to those of the Company. To determine
the priority of inventions, the Company may have to participate in interference
proceedings declared by the USPTO that could result in substantial cost to the
Company. No assurance can be given that any patent application of another will
not have priority over patent applications filed by the Company.
The commercial success of the Company also depends in part on the
Company neither infringing patents or proprietary rights of third parties nor
breaching any licenses that may relate to the Company's technologies and
products. The Company is aware of several third-party patents that may relate to
the Company's technology. There can be no assurance that the Company does not or
will not infringe these patents, or other patents or proprietary rights of third
parties. In addition, the Company has received and may in the future receive
notices claiming infringement from third parties as well as invitations to take
licenses under third party patents. Any legal action against the Company or its
collaborative partners claiming damages and seeking to enjoin commercial
activities relating to the Company's products and processes affected by third
party rights, in addition to subjecting the Company to potential liability for
damages may require the Company or its collaborative partner to obtain a license
in order to continue to manufacture or market the affected products and
processes. There can be no assurance that the Company or its collaborative
partners would prevail in any such action or that any license (including
licenses proposed by third parties) required under any such patent would be made
available on commercially acceptable terms, if at all. There are a significant
number of U.S. and foreign patents and patent applications in the Company's
areas of interest, and the Company believes that there may be significant
litigation in the industry regarding patent and other intellectual property
rights. If the Company becomes involved in such litigation, it could consume a
substantial portion of the Company's managerial and financial resources, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Proprietary Technology and
Patents."
GOVERNMENT REGULATION; NO ASSURANCE OF OBTAINING REGULATORY APPROVALS
The testing, manufacture and sale of the Company's products are subject
to regulation by numerous governmental authorities, principally the FDA and
corresponding state and foreign regulatory agencies. Pursuant to the Federal
Food, Drug, and Cosmetic Act, and the regulations promulgated thereunder, the
FDA regulates the preclinical and clinical testing, manufacture, labeling,
distribution and promotion of medical devices. The Company will not be able to
commence marketing or commercial sales in the United States of new products
under development until it receives 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 premarket clearance or premarket
approval for devices, withdrawal of marketing clearances or approvals, and
criminal prosecution. The FDA also has the authority to request recall, repair,
replacement or refund of the cost of any device manufactured or distributed by
the Company.
Any devices manufactured or distributed by the Company pursuant to FDA
clearance or approvals are subject to pervasive and continuing regulation by the
FDA and certain state agencies. Before a new device can be introduced in the
market, the manufacturer must generally obtain FDA clearance of a 510(k)
notification or FDA approval of a PMA application. The PMA approval process is
more expensive, uncertain and lengthy than the 510(k) clearance process. The
Company is uncertain of the regulatory path to market that the FDA will
ultimately apply to the Company's products currently in development. Although
Triage DOA received 510(k) clearance, a PMA may be required for Triage Cardiac
and Triage Transplant products now in development. There can be no assurance
that with respect to any of the Company's products in development, the FDA will
not determine that the Company must adhere to the more costly, lengthy and
uncertain PMA approval process. Modifications to a device that is the subject of
an approved PMA application, its labeling or manufacturing process may require
approval by the FDA of a PMA supplement or a new PMA application. 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
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of the device, will require new 510(k) submissions.
There can be no assurance that the Company will be able to obtain
necessary regulatory approvals or clearances for its products on a timely basis,
if at all, and delays in receipt of or failure to receive such approvals or
clearances, the loss of previously received approvals or clearances, limitations
on intended use imposed as a condition of such approvals or clearances, or
failure to comply with existing or future regulatory requirements would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Before the manufacturer of a device can submit the device for FDA
clearance or approval, it generally must conduct a clinical investigation of the
device. Although clinical investigations of most devices are subject to the IDE
requirements, clinical investigations of IVD tests, such as all of the Company's
products and products under development, are exempt from the IDE requirements,
including the need to obtain the FDA's prior approval, provided the testing is
noninvasive, does not require an invasive sampling procedure that presents a
significant risk, does not intentionally introduce energy into the subject, and
is not used as a diagnostic procedure without confirmation by another medically
established test or procedure. In addition, the IVD must be labeled for RUO or
IUO, and distribution controls must be established to assure that IVDs
distributed for research or clinical investigation are used only for those
purposes.
The Company intends to conduct clinical investigations of its 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 the
Company's IUO distribution of its IVD products under development will meet the
requirements for IDE exemption. Furthermore, failure by the Company or the
recipients of its products under development to maintain compliance with the IDE
exemption requirements could result in enforcement action by the FDA, including,
among other things, the loss of the IDE exemption or the imposition of other
restrictions on the Company's distribution of its products under development,
which would adversely affect the Company's ability to conduct the clinical
investigations necessary to support marketing clearance or approval.
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 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 would be likely to cause or contribute to a death
or serious injury upon recurrence. 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.
The Company is subject to routine inspection by the FDA and certain
state agencies for compliance with QSR requirements, MDR requirements and other
applicable regulations. The recently finalized QSR requirements include the
addition of design controls, that will likely increase the cost of compliance.
There can be no assurance that the Company will not incur significant costs to
comply with laws and regulations in the future or that such laws and regulations
will not have a material adverse effect upon the Company's business, financial
condition and results of operation.
The use of Biosite's products is also affected by the 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 would not
have a material adverse effect on the Company's ability to market its products
or on its business, financial condition and results of operations.
DEPENDENCE ON SOLE-SOURCE SUPPLIERS
Certain key components and raw materials used in the manufacture of
Triage DOA are currently provided by single-source vendors. Although the Company
believes that alternative sources for such components and raw materials are
available, any supply interruption in a sole-sourced component of raw material
would have a material adverse effect on the Company's ability to manufacture
Triage DOA until a new source of supply is qualified and, as a
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result, would have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, an uncorrected
impurity or supplier's variation in a raw material, either unknown to the
Company or incompatible with the Company's Triage DOA manufacturing process,
could have a material adverse effect on the Company's ability to manufacture
products. The Company currently has under development products other than Triage
DOA which, if developed, may require that the Company enter into additional
supplier arrangements. There can be no assurance that the Company will be able
to enter into additional supplier arrangements on commercially reasonable terms,
if at all. Failure to obtain a supplier for the manufacture of its future
products, if any, would have a material adverse effect on the Company's
business, financial condition and results of operations.
If successfully developed, the Company expects to rely upon LRE for
production of the fluorescent meter to be used in connection with its Triage
CareLink System platform of products currently under development. The Company's
dependence upon LRE for the manufacture of such a meter may adversely affect the
Company's profit margins, its ability to develop and manufacture products on a
timely and competitive basis, the timing of market introductions and subsequent
sales of products incorporating the LRE meter. See "Business -- Strategic and
Distribution Arrangements."
LIMITED MANUFACTURING EXPERIENCE; POTENTIAL INABILITY TO SCALE-UP MANUFACTURING
To be successful, the Company must manufacture its current and future
products in compliance with regulatory requirements, in sufficient quantities
and on a timely basis, while maintaining product quality and acceptable
manufacturing costs. The Company has limited experience manufacturing products
other than Triage DOA. To achieve the level of production necessary for
commercialization of Biosite's products under development, the Company will need
to scale-up current manufacturing capabilities. Significant additional work will
be required for the scaling-up of each potential Biosite product prior to
commercialization, and there can be no assurance that such work can be completed
successfully. In addition, although the Company expects that certain of its
products under development will share certain production attributes with Triage
DOA, production of such products may require the development of new
manufacturing technologies and expertise. There can be no assurance that such
products can be manufactured by the Company or any other party at a cost or in
quantities to make such products commercially viable. If the Company is unable
to develop or contract for manufacturing capabilities on acceptable terms for
its products under development, the Company's ability to conduct preclinical and
clinical testing will be adversely affected, resulting in the delay of
submission of products for regulatory clearance or approval and initiation of
new development programs, which would have a material adverse effect on the
Company's business, financial condition and results of operations. See "Business
- -- Manufacturing."
The Company anticipates making significant expenditures to develop high
volume manufacturing capabilities required for each of its products currently
under development, if such products are successfully developed. There can be no
assurance that manufacturing and quality control problems will not arise as the
Company attempts to scale-up its manufacturing or that such scale-up can be
achieved in a timely manner or at a commercially reasonable cost, if at all.
The Company's manufacturing facilities and those of its contract
manufacturers are or will be subject to periodic regulatory inspections by the
FDA and other federal and state regulatory agencies and such facilities are
subject to QSR requirements of the FDA. There can be no assurance that the
Company or its contractors will satisfy such regulatory requirements, and any
failure to do so would have a material adverse effect on the Company's business,
financial condition and results of operations.
UNCERTAINTY RELATING TO THIRD PARTY REIMBURSEMENT AND POTENTIAL COST CONSTRAINTS
In the United States, health care providers that purchase Triage DOA
and other diagnostic products, such as hospitals and physicians, generally rely
on third party payors, principally private health insurance plans, federal
Medicare and state Medicaid, to reimburse all or part of the cost of the
procedure. Such third party payors can affect the pricing or the relative
attractiveness of the Company's products by regulating the maximum amount of
reimbursement provided by such payors for testing services. In addition, the
tests performed by public health departments, corporate wellness programs and
other large volume users in the drug screening market are generally not subject
to reimbursement. Further, certain health care providers are moving towards a
managed care system in
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which such providers contract to provide comprehensive health care for a fixed
cost per patient. The Company is unable to predict what changes will be made in
the reimbursement methods utilized by third party payors. The Company could be
adversely affected by changes in reimbursement policies of governmental or
private health care payors, particularly to the extent any such changes affect
reimbursement for procedures in which the Company's products are used. Third
party payors are increasingly scrutinizing and challenging the prices charged
for medical products and services. Decreases in reimbursement amounts for tests
performed using the Company's products may decrease amounts physicians and other
practitioners are able to charge patients, which in turn may adversely affect
the Company's ability to sell its products on a profitable basis. Failure by
physicians and other users to obtain reimbursement from third party payors, or
changes in government and private third party payors' policies toward
reimbursement of tests utilizing the Company's products could have a material
adverse effect on the Company's business, financial condition or results of
operation. Given the efforts to control and reduce health care costs in the
United States in recent years, there can be no assurance that currently
available levels of reimbursement will continue to be available in the future
for the Company's existing products or products under development.
In addition, market acceptance of the Company's products in
international markets is dependent, in part, upon the availability of
reimbursement within prevailing health care payment systems. Reimbursement and
health care payment systems in international markets vary significantly by
country, and include both government sponsored health care and private
insurance.
The Company believes that the overall escalating cost of medical
products and services has led to and will continue to lead to increased
pressures on the health care industry, both foreign and domestic, to reduce the
cost of products and services, including products offered by the Company. There
can be no assurance that third party reimbursement and coverage will be
available or adequate in either U.S. or foreign markets, that current
reimbursement amounts will not be decreased in the future or that future
legislation, regulation or reimbursement policies of third party payors will not
otherwise adversely affect the demand for the Company's products or its ability
to sell its products on a profitable basis.
POSSIBLE FUTURE CAPITAL REQUIREMENTS; UNCERTAINTY OF ADDITIONAL FUNDING
While the Company believes that its available cash, cash from
operations and funds from existing credit arrangements will be sufficient to
satisfy its funding needs for at least the next 24 months, there can be no
assurance the Company will not require additional capital. The Company's future
liquidity and capital funding requirements will depend on numerous factors,
including the extent to which the Company's products under development are
successfully developed and gain market acceptance, the timing of regulatory
actions regarding the Company's potential products, the costs and timing of
expansion of sales, marketing and manufacturing activities, facilities expansion
needs, procurement and enforcement of patents important to the Company's
business, results of clinical investigations and competition. There can be no
assurance that such additional capital, if needed, will be available on terms
acceptable to the Company, if at all. Certain funding arrangements may require
the Company to relinquish its rights to certain of its technologies, products or
marketing territories. Furthermore, any additional equity financing may be
dilutive to stockholders, and debt financing, if available, may include
restrictive covenants. The failure by the Company to raise capital on acceptable
terms when needed could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
POTENTIAL INABILITY TO MANAGE GROWTH; DEPENDENCE ON KEY PERSONNEL
The Company anticipates increased growth in the number of its
employees, the scope of its operating and financial systems and the geographic
area of its operations as new products are developed and commercialized. This
growth will result in an increase in responsibilities for both existing and new
management personnel. The Company's ability to manage growth effectively will
require it to continue to implement and improve its operational, financial and
management information systems and to train, motivate and manage its employees.
There can be no assurance that the Company will be able to manage its expansion,
and a failure to do so could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's future success depends in part on the continued service
of its key technical, sales, marketing
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and executive personnel, and its ability to identify and hire additional
qualified personnel. Competition for such personnel is intense and there can be
no assurance that the Company can retain existing personnel or identify or hire
additional personnel.
PRODUCT LIABILITY EXPOSURE; INADEQUACY OR UNAVAILABILITY OF INSURANCE COVERAGE
The testing, manufacturing and marketing of medical diagnostic devices
such as Triage DOA, as well as the Company's products currently under
development, entail an inherent risk of product liability claims. To date, the
Company has not experienced any material product liability claims, but any such
claims arising in the future could have a material adverse effect on the
Company's business, financial condition and results of operations. Potential
product liability claims may exceed the amount of the Company's insurance
coverage or may be excluded from coverage under the terms of the policy. There
can be no assurance that the Company's existing insurance can be renewed at a
cost and level of coverage comparable to that presently in effect, if at all. In
the event that the Company is held liable for a claim against which it is not
indemnified or for damages exceeding the limits of its insurance coverage, such
claim could have a material adverse effect on the Company's business, financial
condition and result of operations.
ITEM 2. PROPERTIES
The Company currently leases approximately 83,000 square feet of space
in five buildings in the Sorrento Valley area in San Diego under leases that
expire from September 1997 through September 1998 with renewal options through
2001. The Company believes these facilities are adequate for its current needs
and that suitable additional or alternative space will be available in the
future on commercially reasonable terms as needed. The Company's current
facilities are used for its administrative offices, research and development
facilities and manufacturing operations.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In December 1996, the Company sought stockholder approval of the
following matters pursuant to a written consent solicitation:
(1) amendment of the Company's Restated Certificate of
Incorporation to increase the number of authorized shares of Common
Stock $.01 par value (the "Common Stock") by 9,671,153 shares (thereby
increasing the total authorized capital stock to 30,000,000 shares);
(2) adoption of a post-offering Restated Certificate of
Incorporation and Bylaws, each to be effective following the closing of
the Company's initial public offering, which, among other things: (a)
sets the authorized Common Stock to 25,000,000 shares and the
authorized Preferred Stock, $.01 par value (the "Preferred Stock") to
5,000,000 shares, (b) adopts certain antitakeover provisions (including
implementing a classified Board of Directors, eliminating the right of
stockholders to act by written consent and providing for certain
supermajority voting requirements), (c) adopts an indemnification
provision and (d) simplifies the then current form of Restated
Certificate of Incorporation;
(3) adoption of a new 1996 Stock Incentive Plan which provides
for the issuance of up to 900,000 shares of Common Stock plus any
additional shares remaining or forfeited under the 1989 Stock Plan;
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(4) adoption of a new Employee Stock Purchase Plan providing
for the issuance of up to 100,000 shares of Common Stock; and
(5) adoption of a form of indemnification agreement to be
entered into between the Company and its officers and directors.
These proposals were approved by the written consent of the holders of
7,357,802 shares of the 8,328,847 shares of Series A, Series B, Series C, Series
D and Series E Preferred Stock of the Company then outstanding and by the
written consent of the holders of 820,544 shares of the 1,464,099 shares of
Common Stock of the Company then outstanding.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common stock is traded in the over-the-counter market on
the Nasdaq National Market (the "NNM") under the symbol "BSTE". The following
tables set forth the high and low sale prices, for the Company's common stock as
reported on the NNM for the period indicated commencing on February 11, 1997,
the date the initial public offering price was determined.
1997 HIGH LOW
---- ---- ---
First Quarter, commencing on
February 11, 1997 through March 14, 1997... $ 14.125 $ 10.750
There were approximately 300 holders of record of common stock as of
February 28, 1997. The Company has not paid any cash dividends to date and does
not anticipate any being paid in the foreseeable future.
From January 1, 1996 to December 31, 1996, the Company sold and issued
the following unregistered securities:
(1) On various dates through December 31, 1996, the Registrant issued
66,978 shares of its Common Stock to 32 non-officer employees pursuant to the
exercise of options granted under its 1989 Stock Plan between September 1990 and
April 1996. The exercise prices per share ranged from $0.24 to $3.25, for an
aggregate consideration of $71,624. The Registrant relied on the exemption
provided by Rule 701 under the Act.
(2) On various dates through December 31, 1996, the Registrant issued
37,000 shares of its Common Stock to four officers pursuant to the exercise of
options granted under its 1989 Stock Plan between January 1992 and March 1993.
The exercise prices per share ranged from $0.30 to $1.00, for an aggregate
consideration of $14,600. The Registrant relied on the exemption provided by
Rule 701 under the Act.
The recipients of the above-described securities represented their
intention to acquire the securities for investment only and not with a view to
distribution thereof. Appropriate legends were affixed to the stock certificates
issued in such transactions. All recipients had adequate access, through
employment or other relationships, to information about the Registrant.
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ITEM 6. SELECTED FINANCIAL DATA
(in thousands, except per share data)
Years Ended December 31,
------------------------
1992 1993 1994 1995 1996
------- -------- -------- ------- --------
STATEMENT OF INCOME DATA:
Net sales ................................. $ 2,920 $ 9,866 $ 16,320 $25,147 $ 28,206
Cost of sales ............................. 1,612 3,268 4,416 5,649 5,983
------- -------- -------- ------- --------
Gross profit .............................. 1,308 6,598 11,904 19,498 22,223
Research and development .................. 2,593 2,796 3,836 6,553 9,268
Selling, general and administrative ....... 3,622 4,841 5,960 7,134 8,623
Settlement of patent matters .............. -- -- 338 1,217 2,368
------- -------- -------- ------- --------
Total operating expenses .................. 6,215 7,637 10,134 14,904 20,259
Income (loss) from operations ............. (4,907) (1,039) 1,770 4,594 1,964
Interest and other income, net ............ 630 613 649 1,647 1,846
------- -------- -------- ------- --------
Income (loss) before benefit (provision)
for income taxes .......................... (4,277) (426) 2,419 6,241 3,810
Benefit (provision) for income taxes ...... -- -- (63) 1,667 (261)
------- -------- -------- ------- --------
Net income (loss) ......................... $(4,277) $ (426) $ 2,356 $ 7,908 $ 3,549
======= ======== ======== ------- --------
Net income (loss) per share ............... $ (0.49) $ (0.04) $ 0.22 $ 0.74 $ 0.33
======= ======== ======== ======= ========
Common and common equivalent shares used in
computing per share amounts(1) .......... 8,754 10,098 10,553 10,766 10,896
DECEMBER 31,
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
BALANCE SHEET DATA:
Cash, cash equivalents and marketable
securities ........................ $ 6,435 $ 5,129 $ 5,916 $13,979 $ 9,916
Working capital ..................... 7,049 6,407 7,974 14,428 14,307
Total assets ........................ 10,287 10,269 14,364 27,935 30,089
Long-term obligations ............... 668 634 772 2,739 3,253
Stockholders' equity ................ 8,573 8,155 10,512 18,526 22,153
- ----------
(1) Computed on the basis described in Note 1 of Notes to Financial
Statements.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The matters discussed in this Management's Discussion and Analysis of Financial
Condition and Results of Operations contain forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those discussed here. Factors that could cause or contribute to
such differences include, but are not limited to, those discussed in the
sections entitled "Business" and " Risk Factors," as well as those discussed
elsewhere in this Annual Report on Form 10-K. The Company disclaims, any intent
or obligation to update these forward-looking statements.
OVERVIEW
Since the Company's inception in 1988, the Company has been primarily
involved in the research, development, manufacturing and marketing of
point-of-care diagnostic tests. The Company began commercial sales of Triage DOA
in February 1992 and currently markets the product worldwide primarily through
distributors supported by a small direct sales force. The Company is engaged in
research and development of additional point-of-care diagnostic products in the
microbiology, cardiology and therapeutic drug monitoring fields.
Funding for operations was provided primarily from equity financings
from the Company's inception through launch of Triage DOA in 1992. Additional
funding has come from corporate partners in the form of debt and equity
financing, license fees and other corporate funding. The Company has a limited
history of operations and first achieved profitability in fiscal 1994. All of
the Company's sales to date have been due to sales of the Triage DOA product
line.
In February 1997, the Company completed its initial public offering of
2,760,000 shares of Common Stock (including an exercised underwriters'
over-allotment option for 360,000 shares of Common Stock) at a price to the
public of $12.00 per share, providing the Company with proceeds of approximately
$30.8 million, after deducting underwriting discounts and commissions of
approximately $2.3 million. At December 31, 1996, the Company had deferred
offering expenses associated with this offering of approximately $474,000.
Additionally, all outstanding shares of Preferred Stock were converted into
8,328,847 shares of Common Stock and an outstanding $1.0 million convertible
debenture and related accrued interest was converted into 92,575 shares of
Common Stock upon the completion of the initial public offering.
Triage DOA is currently marketed pursuant to exclusive distribution
agreements in the U.S. medical market by Fisher (which accounted for 81% of
product sales in 1996) and in certain countries in Europe, Latin America, the
Middle East, Asia and Africa by Merck. The Fisher distribution agreement has
minimum quarterly sales milestones which, if the milestones are not met, allows
the Company to terminate the agreement, obligates Fisher to pay Biosite a
penalty and allows the Company to appoint a new distributor or to sell Triage
DOA directly in the U.S. medical market. If the Company chooses to terminate the
Fisher distribution agreement, the Company may appoint a new distributor or it
may have to invest in additional sales and marketing resources including
additional field sales personnel which could significantly increase future sales
and marketing expenses and may adversely affect sales of Triage DOA.
Since the launch of Triage DOA in fiscal 1992, the Company has
experienced significant revenue growth primarily as a result of greater demand
and more recently, the introduction of Triage Plus TCA Panel for Drugs of Abuse
("Triage DOA Plus TCA"); however, there can be no assurance that such revenue
growth will continue in the future. In order to support increased levels of
sales in the future and to augment its long-term competitive position, the
Company anticipates that it will be required to make significant additional
expenditures in manufacturing, research and development, sales and marketing and
administration, both in absolute dollars and as a percentage of sales. In
addition, the Company anticipates higher administrative expenses resulting from
its obligations as a public reporting company.
The Company anticipates that its results of operations may fluctuate
for the foreseeable future due to several factors, including whether and when
new products are successfully developed and introduced by the Company,
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market acceptance of current or new products, regulatory delays, product
recalls, manufacturing delays, shipment problems, seasonal customer demand, the
timing of significant orders, changes in reimbursement policies, competitive
pressures on average selling prices, changes in the mix of products sold and
patent conflicts. Operating results would also be adversely affected by a
downturn in the market for the Company's current and future products, if any,
order cancellations or order rescheduling. Because the Company is continuing to
increase its operating expenses for personnel and new product development, the
Company's operating results would be adversely affected if its sales did not
correspondingly increase or if its product development efforts are unsuccessful
or are subject to delays. The Company's limited operating history makes accurate
prediction of future operating results difficult or impossible. Although the
Company has experienced growth in recent years, there can be no assurance that,
in the future, the Company will sustain revenue growth or remain profitable on a
quarterly or annual basis or that its growth will be consistent with predictions
made by securities analysts.
The Company currently manufactures and ships product shortly after
receipt of orders and anticipates that it will do so in the future. Accordingly,
the Company has not developed a significant backlog and does not anticipate it
will develop a material backlog in the future.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage
of net sales:
YEAR ENDED DECEMBER 31,
1994 1995 1996
----------- ----------- --------
Net sales............................. 100% 100% 100%
Cost of sales......................... 27 22 21
---- ---- ----
Gross profit.......................... 73 78 79
Operating expenses:
Research and development.............. 24 26 33
Selling, general and
administrative...................... 37 29 31
Settlement of patent matters.......... 2 5 8
---- ---- ----
Total operating expenses.............. 63 60 72
Income from operations............... 10 18 7
Other income, net..................... 4 7 7
---- ---- ----
Income before benefit
(provision) for income taxes........ 14 25 14
Benefit (provision) for income taxes.. -- 7 (1)
---- ---- -----
Net income ..................... 14% 32% 13%
==== ==== ====
Years ended December 31, 1996 and 1995
Revenues. Revenues increased 12% to $28.2 million in 1996 from $25.1
million in 1995. The increase is primarily attributable to the Company's
expansion of the Triage DOA product line to include the higher-priced Triage DOA
Plus TCA product, which was launched in February 1995. Sales of Triage DOA Plus
TCA increased 43% to $13.7 million in 1996 from $9.6 million in 1995. As a
result of the market acceptance of Triage DOA Plus TCA, a shift from other
Triage DOA products occurred as customers converted their orders to the Triage
DOA Plus TCA product.
Gross profit. Gross profit increased 14% to $22.2 million in 1996 as a
result of increased sales for Triage DOA product line. Gross margins increased
to 79% for 1996 from 78% for 1995. The increase in gross margins resulted from
continued improvements in the Company's manufacturing efficiency.
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Research and Development Expenses. Research and development expenses
increased 41% to $9.3 million in 1996 from $6.6 million in 1995. This increase
resulted from the expansion of the Company's research and development and
manufacturing scale-up efforts on its microbiology, cardiac, and therapeutic
drug monitoring assays under development. In December 1996, the Company recorded
a charge to research and development of $600,000 for payments under two separate
license agreements for in-process technology. The Company expects its research
and development expenses to increase significantly in 1997, reflecting increased
expenditures primarily related to hiring additional personnel.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 21% to $8.6 million in 1996 from $7.1 million
in 1995. This increase was a result of the cost of expanding the Company's
direct sales force and in-house marketing and administrative functions to
support the Company's expanded operations. The Company expects selling, general
and administrative costs to increase significantly as the Company expands its
level of operations and in anticipation of potential changes in its operations
resulting from, among other things, the potential introduction of new products
and the Company's obligations as a public reporting entity.
Settlement of Patent Matters. In September 1996, the Company reached a
settlement with Abbott Laboratories, with respect to all claims set forth in a
lawsuit filed by Abbott Laboratories in May 1994. The lawsuit alleged that
Triage DOA infringed a patent licensed to Abbott Laboratories. The company
vigorously defended the lawsuit. However, to avoid protracted litigation, the
Company settled the patent matter in September 1996, paid $2.0 million as a
settlement of the litigation and, for an additional $3.5 million and the
agreement to pay certain royalties, obtained a license to certain technology.
Future amortization of the license fee will be charged to cost of sales over the
life of the license. The $2.0 million litigation settlement payment, as well as
the amortization related to prior fiscal years and related legal defense costs
were charged to settlement of patent matters in 1996.
Other Income. Contract revenues from a related party increased $541,000
in 1996 to $1.1 million from $561,000 in 1995. This increase was primarily due
to higher expenditures related to the Triage Cardiac development program with
Merck which resulted in higher revenues to the Company. Contract revenues from
an unrelated party decreased $300,000 in 1996. The decrease was attributable to
the timing of the achievement of milestones under the Company's development
agreement with KDK.
Benefit (Provision) for Income Taxes. The Company's provision for
income taxes increased to $261,000 in 1996 from a benefit for income taxes of
$1.7 million in 1995. The increase in the provision for income taxes resulted
primarily from the smaller decrease in the valuation allowance for deferred tax
assets in 1996 as compared to 1995. The Company decreased the valuation
allowance for deferred tax assets by $1.1 million and $3.9 million in 1996 and
1995, respectively, as the realization of such assets became probable. As of
December 31, 1996, the Company had federal and California research and
development credit carryforwards of approximately $774,000 and $20,000
respectively. The federal and California research and development credit
carryforwards will begin expiring in 2003 unless previously utilized. In 1996,
the Company utilized all remaining net operating loss carryforwards of
approximately $3.1 million to offset taxable income as compared to $11.6 million
in 1995. The Company's ability to utilize its tax credit carryforwards in future
years will be subject to an annual limitation pursuant to the "change in
ownership rules" under Section 382 of the Internal Revenue Code of 1986, as
amended. However, any annual limitation is not expected to have a material
adverse effect on the Company's ability to utilize its tax credit carryforwards.
Years ended December 31, 1995 and 1994
Revenues. Revenues increased 54% to $25.1 million for the year ended
December 31, 1995 from $16.3 million in 1994. This increase is primarily
attributable to the Company's continued acceptance and the introduction of
Triage DOA Plus TCA, which was launched in February 1995. Sales of Triage DOA
Plus TCA totaled approximately $9.6 million in 1995.
Gross Profit. Gross profit increased $7.6 million to $19.5 million for
the year ended December 31, 1995 primarily as a result of the introduction of
the higher priced Triage DOA Plus TCA. Gross margin increased to 78% for the
year ended December 31, 1995 from 73% in 1994. The Company increased its
manufacturing efficiency
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during 1995 resulting in a reduction of per unit cost of sales. This reduction
was partially offset by an increase in cost of sales of $405,000 in license
amortization for 1995 relating to the technology license agreement signed in
March 1996.
Research and Development Expenses. Research and development expenses
increased 71% to $6.6 million for the year ended December 31, 1995 from $3.8
million in 1994. This increase resulted from the expansion of the Company's
research and development and manufacturing scale-up efforts on the microbiology,
cardiac and therapeutic drug monitoring assays.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 20% to $7.1 million for the year ended
December 31, 1995 from $6.0 million in 1994. During the year ended December 31,
1995, the Company expanded its direct sales force and its in-house marketing and
administrative functions to support the Company's higher level of operations as
compared to 1994.
Settlement of Patent Matters. Settlement of patent matters expenses
increased primarily due to increased legal defense costs related to the patent
litigation described above. Additionally, in December 1995, the Company accrued
a one-time payment of $2.2 million for a worldwide license to technology related
to the Triage Panel products. Amortization of this license payment related to
fiscal years prior to 1995 of $440,000 was charged to settlement of patent
matters in 1995.
Other Income. Contract revenues from related parties increased $217,000
as a result of progress in the development of Triage Cardiac. Contract revenues
from unrelated parties increased by $300,000 for the year ended December 31,
1995 from 1994. The increase was attributable to the timing of the achievement
of milestones under the Company's development agreement with KDK which was
signed in February 1995. Interest income increased $360,000 as a result of
income received on increased cash balances in 1995.
Benefit (Provision) for Income Taxes. The Company's benefit for income
taxes increased to $1.7 million for the year ended December 31, 1995 from a
provision for income taxes of $63,000 in 1994. The increase in the benefit for
income taxes resulted primarily from a reduction in the valuation allowance for
deferred tax assets in 1995 of $3.9 million. The Company utilized $11.6 million
in net operating loss carryforwards in fiscal 1995. As of December 31, 1995, the
Company had net operating loss carryforwards of approximately $3.1 million for
federal income tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations through private
placements of equity securities, revenues from operations, debt and capital
lease financing and interest income earned on the net proceeds from the private
placements. Since its inception, the Company has raised over $21.7 million in
net cash proceeds from the private placement of equity securities and $1.0
million from the issuance of convertible debentures. In February 1997, the
Company raised approximately $30.8 million in cash proceeds from its initial
public offering of Common Stock.
During the year ended December 31, 1996, the Company generated $2.4
million in cash from operating activities. Cash generated from net sales was
reduced primarily by the payment of $2.2 million for a license right accrued as
of December 31, 1995 and the payment of $2.0 million to settle patent litigation
with Abbott Laboratories. Cash generated from operating activities was offset by
cash used in investing activities, primarily the acquisition of license rights
from Abbott Laboratories for $3.5 million. Additionally, other significant
business activities affecting cash included the generation of $3.4 million in
cash as a result of maturing marketable securities which were not reinvested,
the expenditure of $2.0 million for capital equipment and leasehold
improvements, the receipt of $1.6 million in proceeds from equipment financing
and payments under equipment financing agreements of $1.2 million.
During 1995 and 1994, the Company generated $7.9 million and $1.9
million of cash from operating activities, respectively. In 1995, the Company
used $8.5 million in cash for investing activities, which primarily consisted of
increased investment in marketable securities of $6.2 million and the purchase
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of capital equipment for $2.7 million. Additionally, the Company generated $2.5
million in cash from financing activities which consisted primarily of proceeds
from the issuance of a $1.0 million convertible debenture and proceeds of
capital equipment financing of $2.3 million.
The Company's primary short-term needs for capital, which are subject
to change, are for expansion of its manufacturing capacity to adequately deliver
new products, expansion of its direct sales force and marketing programs related
to new products and the continued advancement of research and development
efforts. The Company currently plans to expend approximately $4.0 million for
the expansion and development of its manufacturing capabilities in connection
with the anticipated launch of the Company's products currently under
development. The Company utilizes credit arrangements with financing companies
and leasing companies for financing the purchase of capital equipment. As of
December 31, 1996, the Company had a $2.5 million equipment financing
arrangement with a financial institution, of which approximately $2.2 million
was available for future borrowing. The line of credit expires on December 31,
1997. Additionally, the Company utilizes cash generated from operating
activities to meet its capital requirements.
The Company expects its capital requirements to increase over the next
several years as it expands its research and development efforts, sales and
administration infrastructure, manufacturing capabilities and facilities. The
Company's future liquidity and capital funding requirements will depend on
numerous factors, including the extent to which the Company's products under
development are successfully developed and gain market acceptance, the timing of
regulatory actions regarding the Company's potential products, the costs and
timing of expansion of sales, marketing and manufacturing activities, facilities
expansion needs, procurement and enforcement of patents important to the
Company's business, results of clinical investigations and competition.
The Company believes that its available cash, cash from operations and
funds from existing credit arrangements will be sufficient to satisfy its
funding needs for at least the next 24 months. Thereafter, if cash generated
from operations is insufficient to satisfy the Company's working capital and
capital expenditure requirements, the Company may be required to sell additional
equity or debt securities or obtain additional credit facilities. There can be
no assurance that such financing, if required, will be available on satisfactory
terms, if at all.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Refer to the Index on Page F-l of the Financial Report included herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company, their positions
with the Company and ages as of December 31, 1996 are as follows:
NAME AGE POSITION
-------------------------- --- ----------------------------------------------
Kim D. Blickenstaff..... 44 President, Chief Executive Officer, Treasurer,
Secretary and Director
Gunars E. Valkirs, Ph.D. 44 Vice President, Research and Development,
Chief Technical Officer and Director
Thomas M. Watlington.... 41 Senior Vice President
Charles W. Patrick...... 42 Vice President, Sales and Marketing
Christopher J. Twomey... 37 Vice President, Finance and Chief Financial
Officer
S. Nicholas Stiso, Ph.D. 52 Vice President, Operations
Kenneth F. Buechler, Ph. 43 Vice President, Research
Timothy J. Wollaeger(1)(2) 53 Chairman of the Board
Thomas H. Adams, Ph.D... 53 Director
Frederick J. Dotzler(1)(2) 51 Director
Howard E. Greene, Jr.... 54 Director
Stephen K. Reidy........ 46 Director
Jesse I. Treu, Ph.D..... 49 Director
- ---------------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
KIM D. BLICKENSTAFF, a founder of the Company, has been a director and
the Company's President, Chief Executive Officer, Treasurer and Secretary since
April 1988. He previously held various positions in finance, operations,
research management, sales management, strategic planning, and marketing with
Baxter Travenol, National Health Laboratories, and Hybritech Incorporated
("Hybritech"). Mr. Blickenstaff holds an M.B.A. from the Graduate School of
Business, Loyola University, Chicago.
GUNARS E. VALKIRS, PH.D., a founder of Biosite and a co-inventor of
certain of its proprietary technology has been a director since April 1988 and
Vice President, Research and Development and Chief Technical Officer since 1988.
Prior to forming Biosite, he was a Scientific Investigator with the Diagnostics
Research & Development Group at Hybritech, where he was the primary inventor of
Hybritech's patented ICON technology. Dr. Valkirs holds a Ph.D. in Physics from
the University of California at San Diego.
THOMAS M. WATLINGTON joined the Company as Senior Vice President in
December 1996. He was formerly Vice President, Marketing for the Diabetes Care
Division for Boehringer Mannheim. From 1982 to December 1996, Mr. Watlington
held various positions in marketing, strategic analysis and product development
with Boehringer Mannheim. Mr. Watlington holds a B.S. degree from the University
of Maryland.
CHARLES W. PATRICK joined the Company in August 1990 as Vice President,
Sales and Marketing. From 1978 to August 1990, Mr. Patrick held various
positions in sales, sales management and product and marketing management with
Abbott. From 1987 to August 1990, he was Group Marketing Manager for the Abused
Drug
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Business Unit of Abbott where he managed the worldwide product launch of
Abbott's TDx and ADx bench top testing systems. Mr. Patrick holds a B.A. from
the University of Central Florida.
CHRISTOPHER J. TWOMEY joined the Company as Director of Finance in
March 1990 and was promoted to Vice President of Finance and Chief Financial
Officer in 1993. From 1981 to March 1990, Mr. Twomey was employed at Ernst &
Young LLP, where from October 1985 to March 1990, he served as Audit Manager.
Mr. Twomey holds a B.A. in Business Economics from the University of California
at Santa Barbara.
S. NICHOLAS STISO, PH.D. joined the Company as Vice President,
Operations in November 1989. Prior to joining Biosite, he was with Syntex
Medical Diagnostics, a division of SYVA Co., where from April 1980 to April
1989, he was Manufacturing Director for the AccuLevel line of quantitative,
non-instrumented, therapeutic drug assays. Dr. Stiso holds a Ph.D. in Physical
Chemistry from Michigan State University in East Lansing, Michigan.
KENNETH F. BUECHLER, PH.D., a founder of Biosite and a co-inventor of
certain of Biosite's proprietary technology, has been Vice President, Research
since January 1994. From April 1988 to January 1994, he was Director of
Chemistry. Prior to forming Biosite, he was a Senior Scientist in the
Diagnostics Research and Development Group at Hybritech. Dr. Buechler holds a
Ph.D. in Biochemistry from Indiana University.
TIMOTHY J. WOLLAEGER has served as Chairman of the Board of Directors
since the Company's inception. He is the general partner of Kingsbury
Associates, L.P., a venture capital firm he founded in December 1993. From May
1990 until December 1993, he was Senior Vice President and a director of
Columbia Hospital Corporation (now Columbia/HCA Healthcare Corporation). From
October 1986 until July 1993, he was a general partner of the general partner of
Biovest Partners, A California Limited Partnership ("Biovest"), a seed venture
capital firm. From 1983 to 1986, Mr. Wollaeger served as Senior Vice President
and Chief Financial Officer of Hybritech. He is a director of Amylin
Pharmaceuticals, Inc. ("Amylin") and Phamis, Inc., and a founder and director of
several privately held medical products companies. He received an M.B.A. from
Stanford University.
THOMAS H. ADAMS, PH.D. joined the Board of Directors in September 1988.
Dr. Adams was a founder of Genta Incorporated, a biotechnology company, and has
been Chairman of the Board and Chief Executive Officer of Genta since February
1989. He previously served as Chairman of the Board and Chief Executive Officer
of Gen-Probe Incorporated ("Gen-Probe"), which he co-founded in 1984. Prior to
joining Gen-Probe, he held the positions of Senior Vice President of Research &
Development and Chief Technical Officer at Hybritech. He had previously held
senior scientific management positions with Technicon Instruments Corp., the
Hyland Laboratories Division of Baxter Travenol, and DuPont. Dr. Adams is a
director of Genta Incorporated, Life Technologies, Inc., La Jolla Pharmaceutical
Company and two private biotechnology companies. He received his Ph.D. in
Biochemistry from the University of California at Riverside.
FREDERICK J. DOTZLER joined the Board of Directors in July 1989. Mr.
Dotzler is General Partner of Medicus Venture Partners, a venture capital firm
he founded in 1989. Prior to founding Medicus, Mr. Dotzler was a general partner
of Crosspoint Venture Partners. Previously he held management positions with
Millipore Corporation, G.D. Searle & Co., and IBM. He is a director of several
privately held companies. Mr. Dotzler received a B.S. in Industrial Engineering
from Iowa State University, an M.B.A. from the University of Chicago, and a
degree in Economics from the University of Louvain, Belgium.
HOWARD E. GREENE, JR. joined the Board of Directors in June 1989. Mr.
Greene is a founder and Chairman of the Board of Amylin, a biotechnology company
in late stage development of a drug candidate for diabetes, and he was Chief
Executive Officer of Amylin from inception in September 1987 to July 1996. From
October 1986 until July 1993, Mr. Greene was a general partner of the general
partner of Biovest. From March 1979 to March 1986, he was Chief Executive
Officer of Hybritech, and he was a co-inventor of Hybritech's monoclonal
antibody assay technology. Prior to joining Hybritech, he was an executive with
the medical diagnostics division of Baxter Healthcare Corporation from 1974 to
1979 and a consultant with McKinsey & Company from 1967 to 1974. He is Chairman
of the Board of Cytel Corporation, a director of Allergan, Inc., Neurex
Corporation and The International Biotechnology Trust plc, a foreign
biotechnology investment company. Mr. Greene received an M.B.A. from Harvard
University.
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STEPHEN K. REIDY joined the Board of Directors in July 1989. Since
1987, Mr. Reidy has been affiliated with Euclid Partners Corporation, a company
engaged in venture capital investments in the health care and information
technology industries. Mr. Reidy is a general partner of the General Partner of
Euclid Partners III, L.P. and Euclid Partners IV, L.P. He is a director of
Zynaxis, Inc., a drug delivery company, Chairman of the Board of a privately
held neurological company and a director of a privately-held hospital software
company. Mr. Reidy has an M.B.A. from Columbia University.
JESSE I. TREU, PH.D. joined the Board of Directors in June 1990. He has
been a general partner of Domain Associates, a venture capital firm specializing
in life sciences, since 1986. Before joining Domain Associates in 1986, he was a
principal of Channing, Weinberg and Company, Inc., and its venture capital
spin-off CW Ventures, and was a director of Technicon Corporation responsible
for marketing strategy and new product development in immunology and
histopathology and previously held research and development, management and
corporate staff positions at General Electric Company. Dr. Treu is a director of
Geltex Pharmaceuticals, Inc., a developer of polymer based pharmaceuticals, and
Lumisys, Inc., an electro-optical systems company. Dr. Treu received a Ph.D.
in Physics from Princeton University.
The Company currently has authorized eight directors. There are no
family relationships among any of the directors or executive officers of the
Company.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under Section 16(a) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), upon the Company becoming registered under the
Exchange Act, the Company's directors, executive officers, and any persons
holding more than 10% of the Company's Common Stock are required to report their
initial ownership of the Company's Common Stock and any subsequent changes in
that ownership to the SEC. Specific due dates for these reports have been
established and the Company is required to identify in this Form 10-K those
persons who failed to timely file these reports. The Company was not a reporting
company in 1996 and no filings were required. However, the Company became
registered under Section 12 of the Exchange Act at 5:27 P.M. on February 10,
1997 and the initial statements of beneficial ownership on Form 3 for all
directors, executive officers and 10% stockholders were not filed until the
morning of February 11, 1997.
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ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth compensation paid or awarded by the
Company during the fiscal years ended December 31, 1995 and 1996 to the
Company's Chief Executive Officer and the Company's four most highly compensated
executive officers other than the Chief Executive Officer whose salary and bonus
exceeded $100,000 during 1996.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION SECURITIES
--------------------------------------------------
OTHER UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY ($)(1) BONUS ($) COMPENSATION ($)(2) OPTIONS
- --------------------------------- ---- ------------- --------- ------------------- ----------
Kim D. Blickenstaff.................... 1996 $189,242 $92,991 $ 980 100,000(4)
President and Chief Executive Officer 1995 169,633 78,462 900 40,000
Charles W. Patrick..................... 1996 157,409 29,086 540 50,000(4)
Vice President, Sales and Marketing 1995 151,000 27,002 59,290(3) 5,000
Gunars E. Valkirs...................... 1996 151,545 60,450 844 50,000(4)
Vice President, Research and 1995 139,208 36,244 793 25,000
Development
Kenneth F. Buechler.................... 1996 140,466 60,450 768 50,000(4)
Vice President, Research 1995 125,823 36,244 709 25,000
S. Nicholas Stiso...................... 1996 146,033 26,042 1,980 50,000(4)
Vice President, Operations 1995 134,554 27,002 1,787 20,000
- ----------
(1) Includes amounts deferred by each individual under the Company's 401(k)
Plan.
(2) Except where noted amounts represent payments on behalf of each
individual for group term life insurance and separate term life
insurance.
(3) Amount also includes forgiveness of a $36,000 relocation loan made in
August 1990 which was forgiven in August 1995 and $22,776 related to
income taxes associated with the forgiveness of the loan.
(4) On September 6, 1996, one half of these options were cancelled.
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42
The following tables set forth certain information as of December 31,
1996 and for the fiscal year then ended with respect to stock options granted to
and exercised by the individuals named in the Summary Compensation Table above.
OPTION GRANTS IN FISCAL YEAR 1996
INDIVIDUAL GRANTS
POTENTIAL REALIZABLE
VALUE
AT ASSUMED ANNUAL RATE
PERCENTAGE OF OF STOCK PRICE
TOTAL OPTIONS APPRECIATION
GRANTED TO EXERCISE OR FOR OPTION TERM(5)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ---------------------
NAME GRANTED (1) FISCAL YEAR ($/SH)(4) DATE 5% ($) 10% ($)
- ----------------------- ----------- ----------- --------- ------- ---------- --------
Kim D. Blickenstaff.... 50,000(2) 5.2219% $8.25 5/17/06 $ 259,419 $ 657,419
50,000(3) 5.2219% $5.50 9/6/06 $ 172,946 $ 438,279
Charles W. Patrick..... 25,000(2) 2.6110% $8.25 5/17/06 $ 129,710 $ 328,709
25,000(3) 2.6110% $5.50 9/6/06 $ 86,473 $ 219,140
Gunars E. Valkirs...... 25,000(2) 2.6110% $8.25 5/17/06 $ 129,710 $ 328,709
25,000(3) 2.6110% $5.50 9/6/06 $ 86,473 $ 219,140
Kenneth F. Buechler.... 25,000(2) 2.6110% $8.25 5/17/06 $ 129,710 $ 328,709
25,000(3) 2.6110% $5.50 9/6/06 $ 86,473 $ 219,140
S. Nicholas Stiso...... 25,000(2) 2.6110% $8.25 5/17/06 $ 129,710 $ 328,709
25,000(3) 2.6110% $5.50 9/6/06 $ 86,473 $ 219,140
- ----------
(1) These options vest daily over a four-year period commencing on the date
of grant, except that no options are exercisable for the first six
months after the date of grant. The number of shares which have vested
under an option grant is determined by ascertaining the number of days
subsequent to the date of the option grant, multiplying that number of
days by the number of shares subject to the option grant, and in turn
multiplying that product by 0.000684931 (one divided by the product of
365 days and four years).
(2) These options were granted on May 17, 1996 and would have become
exercisable commencing November 17, 1996, but they were cancelled on
September 6, 1996 prior to becoming exercisable.
(3) These options were granted on September 6, 1996, vest daily through
September 6, 2000 and vested options are exercisable from March 6, 1997
to September 6, 2006.
(4) The exercise price of each option was equal to 100% of the fair market
value of the Common Stock on the date of grant, as determined by the
Compensation Committee of the Board of Directors.
(5) The potential realizable value of each grant of options has been
calculated, pursuant to the regulations promulgated by the Securities
and Exchange Commission, assuming that the market price of the Common
Stock appreciates in value from the date of grant to the end of the
option term at the annualized rates of 5% and 10%, respectively. These
values do not represent the Company's estimate or projection of future
Common Stock value. There can be no assurance that any of the value
reflected in the table will be achieved.
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43
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1996
AND OPTION VALUES AT END OF FISCAL 1996
NUMBER OF VALUE OF
SECURITIES UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS AT
OPTIONS AT FISCAL
FISCAL YEAR-END(#) YEAR-END($)
----------------- -------------
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE
------------------- --------------- ---------- ------------------ --------------
Kim D. Blickenstaff 20,000 $59,000 60,716/72,484 $298,906/$128,694
Charles W. Patrick. -- -- 44,589/27,811 259,862/ 34,839
Gunars E. Valkirs.. 10,000 29,500 54,147/39,053 275,915/ 74,186
Kenneth F. Buechler 2,000 12,400 62,680/44,520 317,713/ 98,787
S. Nicholas Stiso.. -- -- 14,320/36,242 61,244/ 64,347
- ----------
(1) Calculated on the basis of the fair market value of the underlying
securities at December 31, 1996, the fiscal year-end, minus the
exercise price.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Company's Compensation Committee during 1995 were
Mr. Dotzler and Mr. Wollaeger. There were no interlocks or other relationships
among the Company's executive officers and directors that are required to be
disclosed under applicable executive compensation disclosure regulations.
COMPENSATION OF DIRECTORS
Outside Directors of the Company receive $1,000 for each board meeting
attended. Directors are also reimbursed for their expenses for each meeting
attended. Directors are eligible to participate in the 1996 Stock Plan, although
as of December 31, 1996, no options had been granted to non-employee directors.
In February 1997, the Board of Directors approved an annual grant to each
non-employee director of 2,500 non-qualified stock options under the 1996 Stock
Plan. These options vest daily over a four-year period commencing on the date of
grant, and vested options are exercisable commencing on the date of grant.
PENSION AND LONG-TERM INCENTIVE PLANS
The Company has no pension or long-term incentive plans.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of February 28, 1997, by: (i) each
person who is known by the Company to beneficially own more than 5% of the
Company's Common Stock, (ii) each of the Company's directors, (iii) each of the
Company's officers named under "Management -- Summary Compensation Table," and
(iv) all directors and executive officers of the Company as a group.
SHARES PERCENT
NAME AND ADDRESS BENEFICIALLY BENEFICIALLY
OF BENEFICIAL OWNER OWNED OWNED(1)
------------------------------------------- ------------ -------------
Medicus Venture Partners(2)(4).............. 1,662,663 13.1%
2180 Sand Hill Road
Suite 400
Menlo Park, CA 94025
Kleiner, Perkins, Caufield & Byers V(3)..... 1,485,476 11.7
2750 Sand Hill Road
Menlo Park, CA 94025
Merck KGaA.................................. 1,187,667 9.3
Frankfurter Strasse 250
D-6100 Darmstadt 1
Federal Republic of Germany
Euclid Partners III, L.P.................... 1,005,869 7.9
50 Rockefeller Plaza
New York, NY 10020
Kingsbury Capital Partners, L.P............. 635,417 5.0
3655 Nobel Drive, Suite 490
San Diego, CA 92122
Frederick J. Dotzler(2)(4).................. 1,662,663 13.1
Stephen K. Reidy(4)(5)...................... 1,013,523 8.0
Timothy J. Wollaeger(4)(6).................. 707,119 5.6
Jesse I. Treu, Ph.D.(4)(7).................. 329,271 2.6
Howard E. Greene, Jr.(4)(8)................. 298,031 2.3
Thomas H. Adams, Ph.D(4).................... 53,937 *
Gunars E. Valkirs(4)(9)..................... 296,066 2.3
Kim D. Blickenstaff(4)...................... 298,738 2.3
Kenneth F. Buechler(4)...................... 285,259 2.2
S. Nicholas Stiso(4)........................ 86,835 *
Charles W. Patrick(4)....................... 76,379 *
Thomas M. Watlington(4)..................... -- *
All directors and executive officers as a
group (13 persons)(4)(10)................... 5,165,728 39.6%
- ----------
* Less than 1%.
(1) To the Company's knowledge, the persons named in the table have sole
voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them, subject to community property
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45
laws where applicable and the information contained in the footnotes to
this table.
(2) Includes (i) 704,225 shares held by Medicus Venture Partners 1989, (ii)
520,833 shares held by Medicus Venture Partners 1990, (iii) 333,334
shares held by Medicus Venture Partners 1991, (iv) 104,167 shares held
by Medicus Venture Partners 1992 and (v) 104 shares which may be
acquired pursuant to the exercise of options within 60 days of February
28, 1997 by Medicus Venture Partners 1997 (collectively, the "Medicus
Entities"). A limited partnership affiliated with The Hillman Company
and a limited partnership with general partners Frederick J. Dotzler
and John Reher are each general partners of each of the Medicus
Entities, and therefore may be deemed to be the beneficial owner of
these shares because they share the power to vote and dispose of these
shares. The Hillman Company is controlled by Henry L. Hillman, Elsie
Hilliard Hillman and C.G. Grefenstette, trustees (the "HLH Trustees")
of the Henry L. Hillman Trust U/A dated November 18, 1985 (the "HLH
Trust"), which three trustees share the power to vote and dispose of
shares representing a majority of the voting shares of The Hillman
Company. Does not include 50,409 shares held directly by the HLH Trust
or 134,423 shares held directly by Wilmington Interstate Corporation,
an indirect, wholly-owned subsidiary of The Hillman Company. Also does
not include an aggregate of 20,164 shares held by four irrevocable
trusts for the benefit of members of the Hillman family (the "Family
Trusts"), as to which shares the HLH Trustees (other than Mr.
Grefenstette) disclaim beneficial ownership. C.G. Grefenstette and
Thomas G. Bigley are trustees of the Family Trusts and share voting and
dispositive power over the assets of the Family Trusts.
(3) Includes 56,044 shares held by KPCB Zaibatsu Fund I.
(4) Includes shares which may be acquired pursuant to the exercise of
options within 60 days of February 28, 1997 as follows: Medicus Venture
Partners 1997, 104, Mr. Reidy, 104, Mr. Wollaeger, 104, 104, Dr. Treu,
104, Mr. Greene, Dr. Adams, 104, Dr. Valkirs, 60,232, Mr. Blickenstaff,
72,071, Dr. Buechler, 70,425, Dr. Stiso, 19,997, Mr. Patrick, 49,045,
Mr. Watlington, none and all directors and executive officers as a
group (13 persons), 299,726.
(5) Includes 1,005,869 shares held by Euclid Partners III, L.P. Mr. Reidy
is a general partner of the general partner of Euclid Partners III,
L.P., and as such, may be deemed to share voting and investment power
with respect to such shares. Mr. Reidy disclaims beneficial ownership
of such shares except to the extent of his pecuniary interest in such
partnership.
(6) Includes 635,417 shares held by Kingsbury Capital Partners I, L.P. Mr.
Wollaeger is a general partner of the general partner of Kingsbury
Capital Partners I, L.P., and as such, may be deemed to share voting
and investment power with respect to the shares held by the
partnership. Mr. Wollaeger disclaims beneficial ownership of such
shares, except to the extent of his pecuniary interest in such
partnership. Includes 6,722 shares held in a trust for the benefit of
Mr. Wollaeger's family as to which Mr. Wollaeger has shared voting and
investment power.
(7) Includes 329,167 shares held by Domain Partners, L.P. Dr. Treu is a
general partner of the general partner of Domain Partners, L.P., and as
such, may be deemed to share voting and investment power with respect
to such shares. Dr. Treu disclaims beneficial ownership except to the
extent of his pecuniary interest in such partnership. Excludes 429,167
shares beneficially held by Biotechnology Investments Ltd. ("BIL"). Dr.
Treu is a general partner of Domain Associates, the United States
venture capital advisor to BIL pursuant to a contractual arrangement.
Domain Associates has no voting or investment power over BIL. Dr. Treu
disclaims beneficial ownership of the shares held by BIL.
(8) Includes 297,927 shares held in a trust for the benefit of Mr. Greene's
family as to which Mr. Greene has shared voting and investment power.
(9) Includes 235,834 shares held of record by the Valkirs Family Trust.
(10) Includes shares held by entities referenced in footnotes 2, 5, 6, 7, 8
and 9 which are affiliated with certain directors, except for shares
excluded in footnote 7.
-43-
46
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In June 1994, the Company entered into two agreements with Merck, a
collaborative development agreement and a supply and distribution agreement, in
connection with the Company's development of Triage Cardiac. Merck beneficially
owns more than 5% of the Company's Common Stock and distributes the Triage DOA
in certain counties in Europe, Latin America, the Middle East, Asia and Africa.
See "Business -- Strategic and Distribution Arrangements" and Note 1 and 3 of
Notes to Financial Statements.
The Company believes that the foregoing transaction was in its best
interests. As a matter of policy this transaction was, and all future
transactions between the Company and its officers, directors or principal
shareholders will be, approved by a majority of the independent and
disinterested members of the Board of Directors, on terms no less favorable to
the Company than could be obtained from unaffiliated third parties and in
connection with bona fide business purposes of the Company.
-44-
47
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(A) (1) FINANCIAL STATEMENTS
The financial statements of the Company are included herein as required
under Item 8 of this annual report on Form 10-K. See Index on page F-l.
(2) FINANCIAL STATEMENT SCHEDULES
Financial statement schedules have been omitted since they are either
not required, not applicable, or the information is otherwise included.
(3) EXHIBITS
The exhibits listed below are required by Item 601 of Regulation S-K.
Each management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Form 10-K has been identified.
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- -----------------------
3.(i)3 Restated Certificate of Incorporation, as filed with the Delaware Secretary
of State on February 18, 1997.
3.(ii)2* Amended and Restated Bylaws of the Company.
4.1* Form of Common Stock Certificate.
10.1*(A) Amended and Restated 1989 Stock Plan of Biosite Diagnostics Incorporated.
10.2*(A) 1996 Stock Incentive Plan of Biosite Diagnostics Incorporated ("1996 Stock
Plan").
10.3*(A) Form of Incentive Stock Option Agreement under the 1996 Stock Plan.
10.4*(A) Form of Nonstatutory Stock Option Agreement under the 1996 Stock Plan.
10.5* Biosite Diagnostics Incorporated Employee Stock Purchase Plan.
10.6*(A) Form of Indemnity Agreement between the Registrant and its officers and
directors.
10.7* Sublease Agreement between the Registrant and General Atomics, dated
February 17, 1992, as amended on August 10, 1992, January 21, 1993, October
29, 1993, March 1, 1995 and October 1, 1996.
10.8*(+) Antibody License Agreement between the Registrant and Sandoz Pharma Ltd.
(currently known as Novartis Pharma Inc.), dated September 22, 1995, as
amended on July 26, 1996.
-45-
48
10.9*(+) Easy Assay License Agreement between the Registrant and Sandoz Pharma Ltd.
(currently known as Novartis Pharma Inc.), dated September 22, 1995.
10.10*(+) Distribution Agreement between the Registrant and Curtin Matheson
Scientific, Inc. (currently known as the Fisher Healthcare division of the
Fisher Scientific Company), dated November 11, 1991, as amended on March 7,
1994, March 12, 1996 and August 9, 1996.
10.11*(+) Development, Supply and Distribution Agreement between the Registrant and
Kyoto Dai-Ichi Kagaku Co., Ltd., dated as of February 14, 1995.
10.12*(+) Development and Supply Agreement between the Registrant and LRE Relais + Elektronik GmbH --
Medical Technology, dated September 23, 1994.
10.13*(+) Distributorship Agreement between the Registrant and E. Merck KGaA, dated
July 27, 1992, as amended on November 10, 1993, January 13, 1994 and
December 11, 1995.
10.14*(+) Collaborative Development Agreement between the Registrant and E. Merck
KGaA, dated as of June 28, 1994.
10.15*(+) Supply and Distribution Agreement between the Registrant and E. Merck KGaA,
dated as of June 28, 1994.
10.16*(+) Research and Development Agreement between the Registrant and Ixsys, Inc.,
dated July 1, 1992.
10.17* Stock Purchase Agreement dated as of October 30, 1991 between the Registrant and certain
purchasers of Series D Preferred Stock.
10.18* Stock Purchase Agreement dated as of November 25, 1992 between the
Registrant and E. Merck KGaA concerning Series E Preferred Stock.
10.19* Debenture Purchase Agreement between the Registrant and Sandoz Pharma Ltd.
(currently known as Novartis Pharma Inc.), dated as of September 22, 1995.
10.20*(+) Settlement and License Agreement & Agreement of Dismissal with Prejudice,
dated as of September 6, 1996, by and between the Registrant and Abbott
Laboratories.
10.21* Lease Agreement between the Registrant and TCEP II Properties Limited
Partnership dated July 26, 1996.
10.22* Lease Agreement between the Registrant and Sorrento West Limited dated
September 21, 1994.
11.1 Statement of computation of earnings per share.
23.1 Consent of Ernst & Young LLP, independent auditors.
27.1 Financial Data Schedule.
- ----------
-46-
49
* Incorporated by reference to the exhibits of the same number to the
Company's Registration Statement on Form S-1, No. 333-17657.
(A) Indicates management contract or compensatory plan or arrangement.
(+) Confidential treatment has been granted for certain portions of these
exhibits.
(B) REPORTS ON FORM 8-K
The Company was not subject to the reporting requirements of Section 13 of the
Exchange Act and consequently did not file any reports during the last quarter
covered by this report.
-47-
50
BIOSITE DIAGNOSTICS INCORPORATED
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf of the undersigned, thereunto duly authorized.
BIOSITE DIAGNOSTICS INCORPORATED
/s/ Kim D. Blickenstaff Date: March 24, 1997
- --------------------------------------------
Kim D. Blickenstaff
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the date indicated.
Name Title Date
- ---- ----- ----
/s/ Kim D. Blickenstaff
- ---------------------------------------- President, Chief Executive Officer March 24, 1997
Kim D. Blickenstaff (Principal Executive Officer) and
Director
/s/ Christopher J. Twomey
- ---------------------------------------- Vice President and Chief Financial March 24, 1997
Christopher J. Twomey Officer (Principal Financial Officer
and Accounting Officer)
/s/ Timothy J. Wollaeger Chairman of the Board March 24, 1997
- ----------------------------------------
Timothy J. Wollaeger
/s/ Gunars E. Valkirs
- ---------------------------------------- Director March 24, 1997
Gunars E. Valkirs, Ph.D.
/s/ Thomas H. Adams
- ---------------------------------------- Director March 24, 1997
Thomas H. Adams, Ph.D.
/s/ Howard E. Greene
- ---------------------------------------- Director March 24, 1997
Howard E. Greene, Jr.
/s/ Frederick J. Dotzler
- ---------------------------------------- Director March 24, 1997
Frederick J. Dotzler
/s/ Stephen K. Reidy
- ---------------------------------------- Director March 24, 1997
Stephen K. Reidy
/s/ Jesse Treu
- ---------------------------------------- Director March 24, 1997
Jesse Treu
-48-
51
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Ernst & Young LLP, Independent Auditors............................................... F-2
Balance Sheets at December 31, 1995 and 1996.................................................... F-3
Statements of Income for each of the three years in the period ended
December 31, 1996........................................................................... F-4
Statements of Stockholders' Equity for each of the three years in the period ended
December 31, 1996............................................................................ F-5
Statements of Cash Flows for each of the three years in the period ended December 31,
1996......................................................................................... F-6
Notes to Financial Statements................................................................... F-7
F-1
52
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Biosite Diagnostics Incorporated
We have audited the accompanying balance sheets of Biosite Diagnostics
Incorporated as of December 31, 1995 and 1996, and the related statements of
income, stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Biosite Diagnostics
Incorporated at December 31, 1995 and 1996, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1996 in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
San Diego, California
February 18, 1997
F-2
53
BIOSITE DIAGNOSTICS INCORPORATED
BALANCE SHEETS
DECEMBER 31,
1995 1996
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,276,403 $ 1,609,861
Marketable securities, available-for-sale 11,702,607 8,305,663
Accounts receivable 3,801,755 4,608,072
Receivable from stockholder 141,000 869,535
Inventory 1,689,124 1,732,180
Deferred income taxes 1,073,000 1,180,000
Prepaid expenses and other current assets 413,917 684,298
------------ ------------
Total current assets 21,097,806 18,989,609
Property, equipment and leasehold improvements, net 3,599,969 4,140,163
Deferred income taxes 754,000 537,000
Patents and license rights, net 1,759,809 4,292,277
Deposits and other assets 723,349 2,129,569
------------ ------------
$ 27,934,933 $ 30,088,618
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable $ 776,393 $ 967,974
Accrued salaries and other 912,259 1,950,800
Accrued contract payable 1,053,052 751,544
Accrued settlement of patent matters 2,200,000 --
Deferred revenue from stockholder 615,282 --
Current portion of long-term obligations 1,112,712 1,012,073
------------ ------------
Total current liabilities 6,669,698 4,682,391
Long-term obligations 2,739,473 3,252,944
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, $.01 par value, 8,328,847 shares authorized;
8,328,847 shares issued and outstanding, liquidation
value, $21,662,030 83,288 83,288
Common stock, $.01 par value, 12,000,000 shares authorized;
1,369,595, and 1,473,573 shares issued and outstanding at
December 31, 1995 and 1996, respectively 13,696 14,736
Additional paid-in capital 21,570,516 22,094,711
Unrealized net gain (loss) on marketable securities, net of related tax effect
of $11,058 and $(1,837) at December 31, 1995
and 1996, respectively 16,588 (2,754)
Deferred compensation -- (427,345)
Retained earnings (accumulated deficit) (3,158,326) 390,647
------------ ------------
Total stockholders' equity 18,525,762 22,153,283
------------ ------------
$ 27,934,933 $ 30,088,618
============ ============
See accompanying notes.
F-3
54
BIOSITE DIAGNOSTICS INCORPORATED
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
1994 1995 1996
------------ ----------- ------------
Net sales $ 16,319,752 $25,146,540 $ 28,205,974
Cost of sales 4,415,344 5,648,786 5,982,673
------------ ----------- ------------
Gross profit 11,904,408 19,497,754 22,223,301
Operating Expenses:
Research and development 3,835,649 6,553,454 9,268,460
Sales and marketing 3,851,933 4,943,392 5,643,112
General and administrative 2,109,150 2,190,246 2,979,465
Settlement of patent matters 338,004 1,217,065 2,368,282
------------ ----------- ------------
10,134,736 14,904,157 20,259,319
------------ ----------- ------------
Operating income 1,769,672 4,593,597 1,963,982
Other income:
Interest income 238,990 599,477 736,445
Contract revenue-related party 343,678 561,048 1,101,649
Contract revenue -- 300,000 --
Licensing and other income 66,207 187,208 7,897
------------ ----------- ------------
648,875 1,647,733 1,845,991
Income before benefit (provision) for income
taxes 2,418,547 6,241,330 3,809,973
Benefit (provision) for income taxes (63,000) 1,667,000 (261,000)
------------ ----------- ------------
Net income $ 2,355,547 $ 7,908,330 $ 3,548,973
============ =========== ============
Net income per share $ .22 $ .74 $ .33
============ =========== ============
Shares used in calculating per share amounts
10,553,000 10,766,000 10,896,000
============ =========== ============
See accompanying notes.
F-4
55
BIOSITE DIAGNOSTICS INCORPORATED
STATEMENTS OF STOCKHOLDERS' EQUITY
ADDITIONAL
PREFERRED STOCK COMMON STOCK PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
---------- ------ ---------- --------- -----------
Balance at December 31, 1993 8,328,847 $83,288 1,152,367 $11,524 $21,482,288
Issuance of common stock -- -- 1,699 17 1,512
Net income -- -- -- -- --
---------- ------ ---------- --------- -----------
Balance at December 31, 1994 8,328,847 83,288 1,154,066 11,541 21,483,800
Issuance of common stock -- -- 215,529 2,155 86,716
Change in unrealized net gain
(loss) on marketable securities,
net of income taxes of $11,058 -- -- -- -- --
Net income -- -- -- -- --
---------- ------ ---------- --------- -----------
Balance at December 31, 1995 8,328,847 83,288 1,369,595 13,696 21,570,516
Issuance of common stock -- -- 103,978 1,040 85,185
Change in unrealized net gain
(loss) on marketable securities,
net of income taxes of $(1,837) -- -- -- -- --
Deferred compensation related to
issuance of stock options -- -- -- -- 439,010
Amortization of deferred
compensation -- -- -- -- --
Net income -- -- -- -- --
---------- ------ ---------- --------- -----------
Balance at December 31, 1996 8,328,847 $83,288 1,473,573 $14,736 $22,094,711
========== ====== ========== ========= ===========
UNREALIZED
NET GAIN RETAINED
(LOSS) ON EARNINGS/ TOTAL
MARKETABLE DEFERRED (ACCUMULATED STOCKHOLDERS'
SECURITIES COMPENSATION DEFICIT) EQUITY
----------- ------------ ------------ ------------
Balance at December 31, 1993 $ -- $ -- $(13,422,203) $ 8,154,897
Issuance of common stock -- -- -- 1,529
Net income -- -- 2,355,547 2,355,547
----------- --------- ------------ ------------
Balance at December 31, 1994 -- -- (11,066,656) 10,511,973
Issuance of common stock -- -- -- 88,871
Change in unrealized net gain
(loss) on marketable securities,
net of income taxes of $11,058 16,588 -- -- 16,588
Net income -- -- 7,908,330 7,908,330
----------- --------- ------------ ------------
Balance at December 31, 1995 16,588 -- (3,158,326) 18,525,762
Issuance of common stock -- -- -- 86,225
Change in unrealized net gain
(loss) on marketable securities,
net of income taxes of $(1,837) (19,342) -- -- (19,342)
Deferred compensation related to
issuance of stock options -- (439,010) -- --
Amortization of deferred
compensation -- 11,665 -- 11,665
Net income -- -- 3,548,973 3,548,973
----------- --------- ------------ ------------
Balance at December 31, 1996 $ (2,754) $(427,345) $ 390,647 $ 22,153,283
=========== ========= ============ ============
See accompanying notes.
F-5
56
BIOSITE DIAGNOSTICS INCORPORATED
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
1994 1995 1996
----------- ------------ ------------
OPERATING ACTIVITIES
Net income $ 2,355,547 $ 7,908,330 $ 3,548,973
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 544,332 1,787,386 2,417,816
Amortization of deferred compensation -- -- 11,665
Deferred income taxes -- (1,827,000) 110,000
Changes in operating assets and liabilities:
Accounts receivable (1,712,708) (625,856) (806,317)
Receivable from stockholder (412,000) 330,000 (728,535)
Inventory (402,193) (551,294) (43,056)
Prepaid expenses and other current assets 147,309 (71,673) (257,486)
Accounts payable 50,979 168,308 191,581
Accrued liabilities 487,385 950,111 (1,462,967)
Contract advance 500,000 (500,000) --
Deferred revenue from stockholder 316,330 298,952 (615,282)
----------- ------------ ------------
Net cash provided by operating activities 1,874,981 7,867,264 2,366,392
INVESTING ACTIVITIES
Proceeds from sales and maturities of marketable securities 4,531,676 8,189,035 13,019,169
Purchase of marketable securities (5,712,424) (14,340,836) (9,654,462)
Purchase of property, equipment and leasehold improvements (1,063,418) (2,682,315) (1,967,143)
Patents, license rights, deposits and other assets (409,423) 321,782 (4,929,555)
----------- ------------ ------------
Net cash used in investing activities (2,653,589) (8,512,334) (3,531,991)
FINANCING ACTIVITIES
Proceeds from issuance of convertible debentures -- 1,000,000 --
Proceeds from issuance of equipment loans payable 919,988 2,290,561 1,641,340
Principal payments under long-term obligations (536,769) (850,392) (1,228,508)
Proceeds from issuance of stock, net 1,529 88,871 86,225
----------- ------------ ------------
Net cash provided by financing activities 384,748 2,529,040 499,057
----------- ------------ ------------
Increase (decrease) in cash and cash equivalents (393,860) 1,883,970 (666,542)
Cash and cash equivalents at beginning of year 786,293 392,433 2,276,403
----------- ------------ ------------
Cash and cash equivalents at end of year $ 392,433 $ 2,276,403 $ 1,609,861
=========== ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 172,512 $ 208,623 $ 280,245
=========== ============ ============
Income taxes paid $ 38,800 $ 171,243 $ 103,350
=========== ============ ============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Accrued liability for license rights acquired $ -- $ 2,200,000 $ --
=========== ============ ============
See accompanying notes.
F-6
57
BIOSITE DIAGNOSTICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT POLICIES
ORGANIZATION AND BUSINESS ACTIVITY
Biosite Diagnostics Incorporated (the "Company") was established in
1988. The Company has been primarily involved in the research, development,
manufacturing and marketing of point-of-care assays. The Company's first product
is Triage DOA, a urine test for the rapid detection of common drugs of abuse.
The Company began commercial sales of Triage DOA in February 1992 and currently
markets the product worldwide primarily through distributors supported by a
small direct sales force. The principal markets of the Company are hospital
laboratories and emergency departments. The Company is also engaged in research
and development of several additional point-of-care diagnostic products in the
microbiology, cardiology and therapeutic drug monitoring fields.
REVENUE RECOGNITION AND SIGNIFICANT CUSTOMERS
The Company recognizes sales upon shipment. The Company's U.S.
distributor accounted for 85%, 88% and 81% of the product sales in 1994, 1995
and 1996, respectively.
The Company's agreement with its U.S. distributor contains sales
milestones based on the U.S. distributor's sales performance that allows the
Company, if the milestones are not met by the U.S. distributor, to terminate the
agreement, collect a penalty payment, and appoint a new distributor or sell the
product directly in the U.S. medical market.
Export sales to international customers amounted to $1,457,000,
$1,944,000 and $2,846,000 in 1994, 1995 and 1996, respectively. Sales to a
stockholder amounted to approximately $1,242,000, $1,345,000 and $2,096,000 in
1994, 1995 and 1996, respectively. Accounts receivable from a stockholder were
approximately $141,000 and $383,000 at December 31, 1995 and 1996, respectively.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and highly liquid debt
investments with maturities of 90 days or less when purchased.
MARKETABLE SECURITIES
Effective January 1, 1994 the Company adopted Financial Accounting
Standards Board ("FASB") Statement No. 115, "Accounting for Certain Investments
in Debt and Equity Securities", which requires that investments in equity
securities that have readily determinable fair values and investments in debt
securities be classified in three categories: held-to-maturity, trading and
available-for-sale. Based on the nature of the assets held by the Company and
management's investment strategy, the Company's investments have been classified
as available-for-sale. Management determines the appropriate classification of
debt securities at the time of purchase and reevaluates such designation as of
each balance sheet date.
Securities classified as available-for-sale are carried at estimated
fair value, as determined by quoted market prices, with unrealized gains and
losses, net of tax, reported in a separate component of stockholders' equity. At
December 31, 1996, the Company had no investments that were classified as
trading or held-to-maturity as defined by the Statement.
F-7
58
BIOSITE DIAGNOSTICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (Continued)
The amortized cost of debt securities classified as available-for-sale
is adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in interest income. Realized gains and losses are
included in interest income. The cost of securities sold is based on the
specific identification method. Interest on securities classified as
available-for-sale is included in interest income.
INVENTORY
Inventories are carried at the lower of cost (first-in, first-out) or
market.
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements are stated at cost.
DEPRECIATION AND AMORTIZATION
Depreciation of property and equipment is computed using the
straight-line method over five years. Amortization of leased equipment is
computed using the straight-line method over the estimated useful lives of the
assets or the lease term. Amortization of leasehold improvements is computed
using the straight-line method over the shorter of the estimated useful lives of
the assets or the remaining lease term.
PATENTS AND LICENSE RIGHTS
The Company has been issued patents covering its threshold immunoassay
and other related technologies. Capitalized patent costs associated with issued
patents are amortized over five to seventeen years. License rights related to
products for sale are amortized to cost of sales over the life of the license,
ranging from four to twelve years, using a systematic method based on the
estimated revenues generated from products during such license period.
STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its stock options. Under APB 25, because the
exercise price of the Company's employee stock options is not less than the fair
value of the underlying stock on the date of grant, no compensation was
recorded.
CONCENTRATION OF CREDIT RISK
The Company sells its products primarily to its U.S. distributor.
Credit is extended based on an evaluation of the customer's financial condition,
and generally collateral is not required. Credit losses have been minimal and
within management's expectations.
The Company invests its excess cash in debt instruments of financial
institutions and corporations with strong credit ratings. The Company has
established guidelines relative to diversification and maturities that maintain
safety and liquidity. These guidelines are periodically
F-8
59
BIOSITE DIAGNOSTICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (Continued)
reviewed and modified to take advantage of trends in yields and interest rates.
The Company has not experienced any realized losses on its marketable
securities.
ASSET IMPAIRMENT
In March 1995, the FASB issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the estimated
undiscounted cash flows to be generated by those assets are less than the
assets' carrying amount. SFAS No. 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. The Company adopted the
provisions of SFAS No. 121 effective January 1, 1996. There was no effect of
such adoption on the Company's financial position or results of operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NET INCOME PER SHARE
Net income per share is computed using the weighted average number of
common shares and common equivalent shares outstanding during each period.
Common equivalent shares are computed using the treasury stock method and
consist of common stock which may be issuable upon exercise of outstanding
common stock options, when dilutive. Pursuant to the requirements of the
Securities and Exchange Commission, common stock issued by the Company during
the twelve months immediately preceding the initial public offering, plus the
number of common equivalent shares which became issuable during the same period
pursuant to the grant of stock options, have been included in the calculation of
the shares used in computing net income per share as if these shares were
outstanding for all periods presented using the treasury stock method. In
addition, the calculation of the shares used in computing net income per share
also includes the convertible preferred stock which converted into 8,328,847
shares of common stock and an outstanding $1.0 million convertible debenture and
related accrued interest which converted into 92,575 common shares (based on the
initial public offering price of $12.00 per share) upon the completion of the
initial public offering, as if they were converted into common stock as of the
original dates of issuance.
2. LICENSING AGREEMENTS
The Company has entered into licensing agreements to utilize certain
antibodies and/or technologies in exchange for up-front, annual milestone, or
royalty payments or a combination thereof. Certain of the upfront and annual
payments are creditable towards future royalties payable. Royalties may be
payable at rates up to 8% of product sales derived from the licensed
technologies.
The Company purchased license rights for technologies utilized in
products for sale of $2.2 million and $3.5 million during the years ended
December 31, 1995 and 1996, respectively.
F-9
60
BIOSITE DIAGNOSTICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (Continued)
Accumulated amortization of license rights at December 31, 1995 and 1996 was
$845,467 and $1,832,039, respectively.
3. COLLABORATIVE AGREEMENTS
In June 1994, the Company entered into a collaborative development
agreement and a distribution agreement with a preferred stockholder for the
development and marketing of a new diagnostic product (the "European development
and distribution agreement"). In exchange for distribution rights to the product
in Europe, the stockholder has agreed to fund 40% of the Company's product
development costs, subject to certain maximum limits, plus certain clinical
trial costs. The total cost of the project is estimated to be approximately
$10.0 million. The stockholder's obligation to fund its share of the development
costs of the product is reduced by 40% of the consideration received from other
parties for the development of the new product and marketing rights in Japan.
The stockholder paid $660,000 in 1994 and paid an additional $660,000 in 1995.
At December 31, 1996, the Company has a receivable from the stockholder of
$487,000 under the agreement. Additionally, the stockholder will directly incur
certain of the clinical trial costs. The Company recognizes revenue under this
agreement on the percentage of completion basis as costs are incurred. For the
years ended December 31, 1994, 1995 and 1996, the Company incurred $962,000,
$2,453,000 and $2,554,000 respectively, in expenses under this agreement and
recognized $344,000, $561,000 and $1,102,000 respectively, as contract revenue.
In February 1995, the Company entered into a collaborative development
and distribution agreement that included the Asian marketing rights to a new
diagnostic product being developed. Under this agreement, the Company will
receive up to $2,000,000 upon the completion of certain milestones. Recognition
of revenue under this agreement will occur as the milestones are attained. As of
December 31, 1996, the Company has received $500,000, of which $300,000 was
recognized as contract revenue in 1995 and in accordance with the European
development and distribution agreement, the remaining $200,000 was applied
against the stockholder's obligation to fund its share of the development costs.
4. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
The following is a summary of cash, cash equivalents and
available-for-sale securities by balance sheet classification at December 31,
1995:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ---------
Cash and cash equivalents:
Cash $ 964,854 $ -- $ -- $ 964,854
Money market fund 915,359 -- -- 915,359
Commercial paper 396,190 -- -- 396,190
----------- -------- ------------ -----------
2,276,403 -- -- 2,276,403
Marketable securities:
Commercial paper 1,662,383 -- (1,337) 1,661,046
Corporate debt securities 10,012,578 52,109 (23,126) 10,041,561
----------- -------- ------------ -----------
11,674,961 52,109 (24,463) 11,702,607
----------- -------- ------------ -----------
Total cash, cash equivalents and marketable
securities $13,951,364 $ 52,109 $ (24,463) $13,979,010
=========== ======== ============ ===========
F-10
61
BIOSITE DIAGNOSTICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (Continued)
The following is a summary of cash, cash equivalents and
available-for-sale securities by balance sheet classification at December 31,
1996:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
Cash and cash equivalents:
Cash $ 462,619 $ -- $ -- $ 462,619
Money market fund 647,272 -- -- 647,272
Corporate debt securities 500,053 -- (83) 499,970
---------- ------- ----------- ----------
1,609,944 -- (83) 1,609,861
Marketable securities:
Certificate of deposit 899,264 736 -- 900,000
Commercial paper 392,080 -- (1,240) 390,840
Corporate debt securities 7,018,827 937 (4,941) 7,014,823
---------- ------- ----------- ----------
8,310,171 1,673 (6,181) 8,305,663
---------- ------- ----------- ----------
Total cash, cash equivalents and marketable securities
$9,920,115 $ 1,673 $ (6,264) $9,915,524
========== ======= =========== ==========
The amortized cost and estimated fair value of available-for-sale
securities at December 31, 1996, by contractual maturity, are as follows:
AMORTIZED ESTIMATED
COST FAIR VALUE
---- ----------
Marketable securities:
Due in one year or less $7,786,846 $7,783,136
Due after one year through two years 523,325 522,527
---------- ----------
$8,310,171 $8,305,663
========== ==========
F-11
62
BIOSITE DIAGNOSTICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (Continued)
5. BALANCE SHEET INFORMATION
Inventories consist of the following:
DECEMBER 31,
1995 1996
---------- ----------
Raw materials $ 645,097 $ 441,719
Work in process 965,925 1,125,608
Finished goods 78,102 164,853
---------- ----------
$1,689,124 $1,732,180
========== ==========
Property, equipment and leasehold improvements consist of the following:
DECEMBER 31,
1995 1996
----------- -----------
Machinery and equipment $ 5,666,978 $ 7,218,694
Furniture and fixtures 548,824 697,135
Leasehold improvements 652,335 919,451
----------- -----------
6,868,137 8,835,280
Less accumulated depreciation and amortization (3,268,168) (4,695,117)
----------- -----------
$ 3,599,969 $ 4,140,163
=========== ===========
6. DEBT AND LEASE COMMITMENTS
Debt and capital lease obligations consist of the following:
DECEMBER 31,
1995 1996
---------- ----------
Convertible debenture, payable on September 29,
2000, including interest at 8% per annum $1,000,000 $1,000,000
Equipment financing notes, payable $122,585 monthly
including interest at 8.1% to 11.1%, due February
1997 to December 2001 secured by equipment 2,648,272 3,265,017
Capital lease obligations 203,913 --
---------- ----------
3,852,185 4,265,017
Less current portion 1,112,712 1,012,073
---------- ----------
$2,739,473 $3,252,944
========== ==========
Concurrent with the closing of the Company's initial public offering
("IPO") in February 1997, the convertible debenture and related accrued interest
was converted, at the initial public offering price of $12.00 per share, into
92,575 shares of common stock. At the sole option of the Company, the debenture
was convertible into shares of common stock of the Company upon consummation of
a public offering of common stock with aggregate proceeds in excess of
$7,500,000 and at a price of not less than $9.00 per share. The debenture was
convertible at the public offering price. Under a licensing agreement, the
Company is obligated to issue up to a maximum of $1,000,000 of additional
convertible debentures with five-year terms upon the attainment of certain
milestones. The debentures are convertible, at the option of the Company, into
shares of common stock at the initial public offering price.
F-12
63
BIOSITE DIAGNOSTICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (Continued)
As of December 31, 1996, approximate future principal payments of the
equipment financing notes are due as follows: 1997 - $1,012,000; 1998 -
$796,000; 1999 - $695,000; 2000 - $558,000 and 2001 - $204,000.
Interest charged to expense to arrive at operating income was
approximately $173,000, $228,000, and $360,000 for the years ended December 31,
1994, 1995, and 1996, respectively.
The Company leases its office and research facilities and certain
equipment under operating and capital leases. The minimum annual rent on the
facilities is subject to increases based on changes in the Consumer Price Index,
taxes, insurance and operating costs, subject to certain minimum and maximum
annual increases. The Company has options to renew certain of the facilities
leases for a period of two years. Included in deposits and other assets in the
accompanying balance sheets is approximately $367,000 and $204,000 of security
deposits in conjunction with operating lease and equipment financing agreements
at December 31, 1995 and 1996, respectively.
Approximate annual future minimum lease payments as of December 31, 1996 are as
follows:
OPERATING
YEAR LEASES
---- ------
1997 $ 949,000
1998 105,000
-----------
Total minimum lease payments $ 1,054,000
===========
Rent expense for the years ended December 31, 1994, 1995 and 1996 was
approximately $550,000, $734,000 and $876,000 respectively. Equipment under
equipment financing notes and capital leases was approximately $4,407,000 and
$4,559,000 at December 31, 1995, and 1996, respectively. Accumulated
depreciation of equipment under equipment loans and capital leases at December
31, 1995 and 1996 was approximately $1,465,000 and $1,450,000, respectively.
7. STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
A summary of the convertible preferred stock issued and outstanding at
December 31, 1996 is as follows:
SHARES ISSUED AND PREFERENCE IN
OUTSTANDING PAR VALUE LIQUIDATION
----------- --------- -----------
Series A 610,000 $ 6,100 $ 610,000
Series B 2,156,336 21,563 3,061,997
Series C 2,204,167 22,042 5,290,000
Series D 1,900,010 19,000 5,700,030
Series E 1,458,334 14,583 7,000,003
---------- ---------- ---------------
8,328,847 $ 83,288 $ 21,662,030
========== ========= ============
F-13
64
BIOSITE DIAGNOSTICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (Continued)
Concurrent with the closing of the Company's IPO in February 1997, all
of the outstanding shares of all series of preferred stock were converted into
8,328,847 shares of common stock. Prior to the closing of the Company's IPO, the
Series A, Series B, Series C, Series D and Series E preferred stock was
convertible on a one to one basis into a total of 8,328,847 shares of the
Company's common stock, respectively, subject to certain antidilution
adjustments. Additionally, outstanding preferred stock would automatically
convert into common stock immediately upon the closing of an underwritten public
offering of the common stock of the Company at an offering price of at least
$9.00 per share and having an aggregate offering price to the public of at least
$7.5 million. The holder of each share of preferred stock was entitled to one
vote for each share of common stock into which it would convert. Annual
dividends of $.08, $.1278, $.216, $.27 and $.432 per share of Series A, Series
B, Series C, Series D and Series E preferred stock, respectively, are payable
whenever funds are legally available when and as declared by the Board of
Directors. No dividends were declared prior to the conversion of the preferred
stock.
COMMON STOCK
1989 Stock Plan
The Company has adopted a stock plan which provides for both the direct
sale of common stock and for the grant of options to purchase common stock to
employees, directors, consultants and advisors of the Company. A total of
1,692,000 shares have been reserved for issuance under the plan. As of December
31, 1996, 144,476 shares have been sold directly under the plan.
The options are generally subject to four year vesting and expire ten
years from the date of grant. At December 31, 1996, no shares were available for
future issuance of common stock or grant of options to purchase common stock
under the 1989 Stock Plan. As of December 31, 1996, no options have expired.
During the period of May 17, 1996 to September 6, 1996, the Company
granted options to purchase 331,950 shares of common stock at $8.25 to $9.00 per
share which were repriced to $5.50 per share on September 6, 1996 by
cancellation of the original options and issuance of replacement options.
1996 Stock Incentive Plan
In December 1996, the Company adopted the 1996 Stock Incentive Plan
(the "1996 Stock Plan") effective as of December 1, 1996. The 1996 Stock Plan
replaced the Company's 1989 Stock Plan. Although all future awards will be made
under the 1996 Stock Plan, awards made under the 1989 Stock Plan will continue
to be administered in accordance with the 1989 Stock Plan. The 1996 Stock Plan
provides for awards in the form of restricted shares, stock units, options or
stock appreciation rights or any combination thereof. A pool of 900,000 shares
plus 35,756 shares remaining under the 1989 Stock Plan on December 31, 1996
(subject to anti-dilution provisions) has been reserved for issuance under the
1996 Stock Plan. Any unpurchased shares of common stock pursuant to expired or
terminated options under the 1989 Stock Plan become available for awards under
the 1996 Stock Plan.
The options are generally subject to four year vesting and expire ten
years from the date of grant. At December 31, 1996, 826,306 shares were
available for future issuance of common stock or grant of options to purchase
common stock under the 1996 Stock Plan.
F-14
65
BIOSITE DIAGNOSTICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (Continued)
Information with respect to the Company's 1989 Stock Plan and 1996 Stock Plan
option activity is as follows:
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
------ -----
Balance at December 31, 1993 612,900 $0.60
Granted at fair value 109,150 $2.00
Exercised (1,699) $0.90
Cancelled (5,701) $1.58
---------- -----
Balance at December 31, 1994 714,650 $0.81
Granted at fair value 160,750 $2.43
Granted at above fair value 140,000 $3.00
Exercised (215,529) $0.41
Cancelled (11,616) $1.47
---------- -----
Balance at December 31, 1995 788,255 $1.63
Granted at fair value 957,500 $6.45
Exercised (103,978) $0.83
Cancelled (361,597) $7.88
---------- -----
Balance at December 31, 1996 1,280,180 $3.45
========== =====
Following is a further breakdown of the options outstanding under the
1989 Stock Plan and 1996 Stock Plan as of December 31, 1996:
WEIGHTED AVERAGE WEIGHTED AVERAGE
REMAINING EXERCISE PRICE OF
RANGE OF EXERCISE OPTIONS CONTRACTUAL LIFE WEIGHTED AVERAGE OPTIONS OPTIONS
PRICE OUTSTANDING IN YEARS EXERCISE PRICE EXERCISABLE EXERCISABLE
----- ----------- -------- -------------- ----------- -----------
$0.24 - $0.50 110,931 4.72 $0.34 110,931 $0.34
$1.00 - $2.00 362,409 6.99 $1.47 275,979 $1.33
$3.00 - $5.50 802,140 9.40 $4.76 93,755 $3.11
$6.50 - $8.25 4,700 9.97 $6.59 40 $8.25
============= ========= ===== ===== ========= =====
$0.24 - $8.25 1,280,180 8.32 $3.45 480,705 $1.45
============= ========= ===== ===== ========= =====
Adjusted pro forma information regarding net income is required by SFAS
123, and has been determined as if the Company had accounted for its employee
stock options under the fair value method of that Statement. The fair value for
these options was estimated at the date of grant using the Black-Scholes method
for option pricing with the following weighted-average assumptions for both 1995
and 1996: risk-free interest rates of 6%; volatility of 55%; dividend yields of
0%; and an expected life of the option of six years.
F-15
66
BIOSITE DIAGNOSTICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (Continued)
For purposes of adjusted pro forma disclosures, the estimated fair
value of the options is amortized to expense over the options' vesting period.
The Company's adjusted pro forma information follows:
YEARS ENDED DECEMBER 31,
1995 1996
--------------- ---------------
Adjusted pro forma net income $ 7,846,266 $ 3,201,956
Adjusted pro forma net income per share $ 0.73 $ 0.29
The pro forma effects on net income for 1995 and 1996 is not likely to
be representative of the effects on reported net income or loss in future years.
In management's opinion, existing stock option valuation models do not provide a
reliable single measure of the fair value of employee stock options that have
vesting provisions and are not transferable. In addition, option valuation
models require the input of highly subjective assumptions, including expected
stock price volatility. Changes in such subjective input assumptions can
materially affect the fair value estimate of employee stock options.
Deferred Compensation
The Company records and amortizes over the related vesting periods
deferred compensation representing the excess of the deemed value for accounting
purposes of the options granted over their aggregate exercise price.
Employee Stock Purchase Plan
In December 1996, the Company adopted an Employee Stock Purchase Plan
("ESPP") which provides employees the opportunity to purchase common stock at a
discount and pay for such purchases through payroll deductions. A pool of
100,000 shares of common stock has been reserved for issuance under the ESPP
(subject to anti-dilution provisions).
F-16
67
BIOSITE DIAGNOSTICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (Continued)
8. INCOME TAXES
Significant components of the income tax benefit (provision) are as
follows:
YEARS ENDED DECEMBER 31,
1994 1995 1996
----------- ----------- -----------
Current:
Federal $ (63,000) $ (150,000) $ (146,000)
State -- (10,000) (5,000)
----------- ----------- -----------
(63,000) (160,000) (151,000)
Deferred:
Federal -- 1,668,000 (304,000)
State -- 159,000 194,000
----------- ----------- -----------
-- 1,827,000 (110,000)
----------- ----------- -----------
$ (63,000) $ 1,667,000 $ (261,000)
=========== =========== ===========
As of December 31, 1996, the Company had federal and California
research and development credit carryforwards of approximately $774,000 and
$20,000 respectively. The federal and California research and development credit
carryforwards will begin expiring in 2003 unless previously utilized. In 1996,
the Company utilized federal net operating loss carryforwards of approximately
$3,100,000 to offset taxable income.
Significant components of the Company's deferred tax assets as of
December 31, 1995 and 1996 are shown below. For the year ended December 31,
1995, and 1996, the Company decreased the valuation allowance for deferred tax
assets by $3,919,000 and $1,119,000, respectively, as the realization of such
assets became probable.
DECEMBER 31,
1995 1996
----------- -----------
Deferred tax assets:
Research and development credit $ 998,000 $ 794,000
Net operating loss carryforwards 1,070,000 --
Federal Alternative Minimum Tax credit 203,000 203,000
California Manufacturers' credit -- 198,000
Capitalized research expenses 154,000 67,000
Other 651,000 632,000
----------- -----------
Total deferred tax assets 3,076,000 1,894,000
Deferred tax liability:
Tax over book depreciation (130,000) (177,000)
----------- -----------
2,946,000 1,717,000
Valuation allowance for deferred tax assets (1,119,000) --
----------- -----------
Net deferred tax assets $ 1,827,000 $ 1,717,000
=========== ===========
F-17
68
BIOSITE DIAGNOSTICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (Continued)
The reconciliation of income tax computed at the federal statutory tax
rate to the (provision) benefit for income taxes is as follows:
DECEMBER 31,
1994 1995 1996
--- --- ---
Tax at federal statutory rate 35% 35% 35%
Permanent tax differences 5 1 2
Decrease of the valuation allowance for deferred tax assets (36) (63) (29)
Other (1) -- (1)
--- --- ---
Effective rate 3% (27)% 7%
=== === ===
Pursuant to Internal Revenue Code Section 382, use of the Company's tax
credit carryforwards may be limited if a cumulative change in ownership of more
than 50% occurs within any three year period. However, any annual limitation is
not expected to have a material adverse effect on the Company's ability to
utilize its tax credit carryforwards.
9. EMPLOYEE SAVINGS PLAN
In 1991, the Company implemented a 401(k) program which allows all
qualifying employees to contribute up to a maximum of 20% of their annual
salary, subject to annual limits. The Board of Directors may, at its sole
discretion, approve Company contributions. No such contributions have been
approved or made.
10. SETTLEMENT OF PATENT MATTERS
In September 1996, the Company reached a settlement with a competitor
with respect to all claims in a lawsuit filed by the competitor in May 1994. The
complaint alleged that the Company's Triage Panel for Drugs of Abuse product
infringed a patent licensed to the competitor. The Company vigorously defended
the lawsuit. However, to avoid protracted litigation, the Company settled the
patent matter in September 1996, and paid $2.0 million as a settlement of the
litigation and, for an additional $3.5 million and the agreement to pay certain
royalties, obtained a license to certain technology.
The Company has charged to settlement of patent matters in the
accompanying statements of income the $2.0 million litigation settlement,
applicable license costs related to prior years and the related legal defense
costs. Legal defense costs totaled $338,004, $777,070 and $17,119 for the years
ended December 31, 1994, 1995 and 1996, respectively.
Additionally, in December 1995, the Company was notified that it should
evaluate whether its current products infringe upon certain patent claims held
by another company. In March 1996, the Company settled this matter by obtaining
a world-wide license to the technology. The Company accrued the one-time license
fee of $2.2 million in December 1995. Amortization of this license related to
fiscal years prior to 1995 was charged to Settlement of Patent Matters in 1995.
F-18
69
BIOSITE DIAGNOSTICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (Continued)
11. INITIAL PUBLIC OFFERING
In February 1997, the Company completed its initial public offering of
2,760,000 shares of common stock (including an exercised underwriters'
over-allotment option for 360,000 shares) at a price of $12.00 per share,
providing the Company with proceeds of approximately $30.8 million, after
deducting underwriting discounts and commissions of approximately $2.3 million.
At December 31, 1996, the Company had deferred offering expenses associated with
this offering of approximately $474,000. Additionally, all outstanding shares of
preferred stock were converted into 8,328,847 shares of common stock and an
outstanding $1.0 million convertible debenture and related accrued interest was
converted into 92,575 common shares (based on the initial public offering price
of $12.00 per share) upon the completion of the initial public offering. Upon
completion of an initial public offering, the authorized number of shares of
common and preferred stock issuable by the Company was amended to 25,000,000
shares of common stock and 5,000,000 shares of preferred stock.
F-19