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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For fiscal year ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-10961
QUIDEL CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 94-2573850
(State or other jurisdiction (I.R.S. Employer
or incorporation or organization) Identification No.)
10165 McKellar Court, San Diego, California 92121
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code (619) 552-1100
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of 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 nonaffiliates
of the Registrant as of June 6, 1997 was approximately $75,695,000. For the
purposes of this calculation, shares owned by officers, directors and 5%
stockholders known to the Registrant have been deemed to be owned by
affiliates.
The number of shares outstanding of the Registrant's Common Stock as
of June 6, 1997 was 23,554,333.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement for the Annual Meeting of Stockholders
scheduled to be held on July 29, 1997 (the "Proxy Statement"), which will be
filed with the Securities and Exchange Commission no later than 120 days after
the close of the Registrant's fiscal year ended March 31, 1997 ("fiscal 1997"),
are incorporated herein as provided in Part III, and portions of the
Registrant's Annual Report to Stockholders for fiscal 1997 (the "1997 Annual
Report"), are incorporated herein as provided in Parts I, II and IV.
PART I
Item 1. BUSINESS
Quidel Corporation discovers, develops, manufactures and markets rapid
immunodiagnostic products for point-of-care detection of human medical
conditions and illnesses. These products provide simple, accurate and
cost-effective diagnoses for acute and chronic conditions in the areas of
reproductive and women's health, infectious diseases, allergies and autoimmune
disorders. Quidel's products are sold to professionals for use in the
physician's office, and clinical laboratory, and to consumers through retail
drug stores. When used in this Report, "Quidel," the "Company" and the
"Registrant" refer to Quidel Corporation.
Quidel commenced its operations in 1979 and launched its first
products, dipstick-based pregnancy tests, in 1984. The Company has expanded
its product base through internal development and acquisition in the areas of
pregnancy and ovulation, infectious disease, allergy and autoimmune products
for professional and home use. Quidel markets its products in the United
States and in over 60 other countries worldwide through a broad network of
national and regional distributors, supported by the Company's direct sales
force.
In January 1995, the Company purchased Pacific Biotech, Inc., a
California corporation ("PBI"), from Eli Lilly and Company. PBI provides a
complementary line of rapid diagnostic tests for pregnancy, strep throat and
mononucleosis. The products are sold under the CARDS(R) O.S.(R), CARDS(R)
QS(R), Concise(R) Plus(TM) and Concise(R) Performance Plus(TM) brand names on a
worldwide basis.
The Company's executive offices are located at 10165 McKellar Court,
San Diego, California 92121 and its telephone number is (619) 552- 1100.
INDUSTRY OVERVIEW
Diagnostic tests provide medically important information for the
assessment and management of human health. Immunoassays are diagnostic tests
which utilize biological compounds called antibodies to aid in the detection
and measurement of substances such as antibodies, hormones, bacteria and other
infectious agents from samples derived from blood, urine and other body fluids.
Unlike some other major segments of the diagnostic testing market, immunoassays
lend themselves readily to rapid testing formats, which generally provide test
results in minutes without the need for laboratory instrumentation to perform
and "read or interpret" the
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test result. The speed and convenience of immunoassays, in combination with
their specificity and sensitivity to substances which may be present only in
minute concentrations, have made them a tool for the early detection, screening
and monitoring of a wide range of medical conditions.
The rapid testing market has grown recently, with the following as
contributing factors:
- Technological Advances. Historically, the use of immunoassays was
limited primarily to physicians and laboratory professionals who
possessed specialized training or equipment. Recent advances in
immunochemistry and delivery-system technology have expanded the
range of available tests and made immunoassays faster, more
accurate and easier to use and interpret. These advances have led
to increased use of immunoassays by physicians and laboratory
professionals and to the introduction of immunoassays into the
over- the-counter market for consumer use in pregnancy and
ovulation testing.
- Emphasis on Health Care Cost Control. Health care professionals,
government and commercial third-party payors are placing
increasing emphasis on diagnostic testing as a cost-effective
means of early disease detection. Prompt and accurate testing
through immunoassays may allow therapeutic intervention to be
initiated earlier in the disease process and may eliminate
unnecessary therapy, thus generating significant cost savings.
For example, the use of immunoassays to distinguish between an
allergy and an upper respiratory infection can lead to immediate
commencement of appropriate therapy rather than more prolonged and
costly approaches that might otherwise be followed until an
accurate diagnosis is made.
- Introduction of New Therapies. Advanced forms of therapy often
require highly specific, real-time diagnostic information. For
example, many infertility procedures require precise information
about the timing of ovulation. Immunoassays, both as early and
precise indicators of medical conditions and as monitors of
disease progression, aid in improved patient management and
prognosis through more appropriate and timely use of available and
emerging therapeutic procedures and products.
BUSINESS STRATEGY
The Company's goal is to continue to expand its position as a
worldwide provider of rapid diagnostics for the physician's office, hospital,
clinical laboratory, and home testing markets. Key elements of the Company's
business strategy include:
- Focus on Rapid Diagnostics. The Company has dedicated its
research, manufacturing and marketing resources to rapid
diagnostics and has a well-established record of developing and
bringing to market innovative products. The Company believes that
it is well positioned to capitalize on the anticipated growth in
the market for low cost, reliable and rapid diagnostic products.
As the move to managed care increases, the utilization of rapid
testing at the point of care is expected to increase.
- Build on Core Technology. The Company's technology is based on an
innovative blend of biotechnology, immunochemistry and engineering
which has produced a number of rapid and reliable assays in
easy-to-use test formats. The Company has successfully
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applied this technology to the three important phases of
immunoassay product development - generation and purification of
biological reagents, design of innovative delivery systems and
implementation of manufacturing and engineering systems necessary
for high quality, cost-effective production. The Company
continues to target its new product opportunities in areas where
its core technology and expertise offer significant competitive
advantages.
- Continue to Broaden Product Line. The Company's strategy is to
produce a broad product line of diagnostic tests which address
significant commercial markets. The Company's growth to date has
been achieved through a combination of internal product
development, collaborative development arrangements with strategic
partners and acquisitions. The Company believes that a broad
product portfolio enhances both Quidel's reputation in the
diagnostic marketplace and the efficiency of its manufacturing and
sales and marketing organizations. The Company's product strategy
involves increasing emphasis on internally developed products.
- Utilize Multiple Distribution Channels. The Company employs
multiple distribution channels to address the unique requirements
of the physician's office, hospital, clinical laboratory, and
consumer over-the-counter and international markets. In the
physician's office, hospital and clinical laboratory markets, the
Company utilizes a network of leading medical/surgical product
distributors supported by its direct sales force. In the consumer
over-the-counter market, the Company has entered into an
agreement with Ansell Consumer Products to perform the sales and
marketing of Quidel branded products. In the international
market, the Company has established a broad network of
distributors who market the Company's products and, through the
use of four European subsidiaries, has expanded its presence
worldwide. The Company is increasing its emphasis on marketing of
its diagnostic products under Quidel brand names to the consumer,
physicians and clinical laboratories.
TECHNOLOGY
Immunoassays utilize commercially produced protein molecules called
antibodies which react with or bind to specific antigens, such as other
antibodies, viruses, bacteria, hormones and drugs. The antibodies produced in
response to a particular antigen bind specifically to that antigen. This
characteristic allows antibodies to be used in a wide range of diagnostic
applications.
The ability to detect the binding of antibodies to target antigens
forms the basis for immunoassay testing. In immunoassays, antibodies or, in
the case of allergy testing, allergens (allergy-causing substances), are
typically deposited onto a solid substrate. A chemical label is then either
incorporated onto the solid substrate or added separately once the solid
substrate has been exposed to the test sample. If the target antigen is
present in the test sample, the chemical label produces a visually identifiable
color change in response to the resulting antibody or allergen reaction with
the antigen. This provides a clear color endpoint for easy visual verification
of the test results.
Quidel incorporates antibody technology and biochemistry into uniquely
designed and engineered products. Quidel has developed four primary delivery
system formats: dipsticks, flow-through cassettes, microwell tests and a new
delivery system technology based on a proprietary one-
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step lateral flow technique. Although each is based on the same general
antibody-antigen based approach, the four formats differ in terms of speed,
ease-of-use and sensitivity, and, as a result, address the particular needs of
different end-user markets.
PRODUCT LIFE CYCLES
The Company's results can be significantly affected by the phase-out
of older products near the end of their product life cycles, as well as the
timing and success of new product introductions. A successful new product
launch can result in strong initial sales as inventories are built up during
the pipeline fill period, followed by a decline in sales before reaching
normalized levels. The ability of the Company to compete successfully in the
rapid diagnostics market depends on the continual development and introduction
of new products. There can be no assurance that the Company will be able to
develop sufficient new product entries to replace older products in a timely
manner, or that its new products will gain significant market acceptance.
VARIABILITY IN DEMAND
Sales levels for several of the Company's products are affected by
seasonal demand trends. Allergy tests, for example, are most heavily used in
the spring and thus have the greatest revenue impact in the fourth fiscal
quarter. Group A strep tests, which currently account for approximately 25% of
the Company's total annual sales, are used primarily in the winter and tend to
benefit the third and fourth fiscal quarters. As a result of these demand
trends, the Company generally may achieve lower results in the first and second
quarters and higher results in the third and fourth quarters of the fiscal
year.
MARKETING THROUGH STRATEGIC PARTNERS
Prior to fiscal 1994, approximately half of the Company's net sales
had been to Becton Dickinson and Company ("Becton Dickinson") under
arrangements which gave Quidel manufacturing rights and Becton Dickinson
marketing rights to certain products developed by Quidel or jointly developed
by Quidel and Becton Dickinson. The Company's current strategy, however, is to
reduce its dependence on a single strategic partner. Accordingly, sales to
Becton Dickinson decreased from approximately 30% of total net sales in fiscal
1994 to less than 1% of total net sales in fiscal 1997. The Company's
partnering strategy moving forward is to pursue agreements to develop products
under the Quidel brand names in several areas, including human disease
management, collaborations with pharmaceutical development companies, and
non-human areas such as veterinary medicine.
WOMEN'S REPRODUCTIVE HEALTH
According to a United States Department of Health and Human Services
1990 estimate, 5 million couples in the United States are affected by
infertility. In addition, the Company believes that a growing number of
couples desire to control the timing of their pregnancies. For conception to
occur, it is necessary for the sperm and the egg to unite during the 12-24 hour
period following ovulation. Tests that predict or confirm the occurrence of
ovulation are important tools, both for the fertility specialist and for the
consumer, for increasing the likelihood of or planning the timing of
conception.
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In 1984, Quidel introduced OvuKit(R), the first rapid ovulation
prediction product. This product enables women to accurately detect in a urine
sample the sharp increase in luteinizing hormone (LH), which triggers
ovulation. Since the introduction of OvuKit(R), Quidel has continued to expand
its presence in the ovulation market through a broadened line of products
incorporating faster, easier-to-use delivery systems.
- OvuKit(R) Self-Test and OvuQuick(R) Self-Test. Quidel's ovulation
prediction tests each detect urinary LH and are differentiated
according to the delivery system they employ and the end-user
markets they address. OvuKit Self-Test uses the Company's
proprietary dipstick technology and is marketed by Quidel to
physicians who dispense it to their patients for home use.
OvuQuick Self-Test is a four minute proprietary technology that is
marketed by Quidel to pharmacies and physicians who in turn
dispense it to their patients.
- Conceive(R) One-Step Ovulation Predictor, Q-Test(R) Ovulation
Test, and OvuQuick(R) One-Step. The Company introduced
Conceive(R) during the fourth quarter of fiscal 1992. The product
represents the first of a line of new generation rapid one-step
tests and allows the user, in three minutes, to predict ovulation.
Conceive(R) is sold to the consumer over-the-counter market and is
designed for the family who is planning for conception rather than
for couples with infertility problems. Pursuant to an agreement
in mid-1995, Quidel obtained marketing rights to Q-Test(R)
Ovulation Test and reintroduced the product in its latest one-step
technology. During fiscal 1996, the Company introduced
OvuQuick(R) One-Step employing this same rapid, one-step
technology.
Sales of the Company's ovulation products for the years ended March
31, 1997, 1996 and 1995 accounted for approximately 13%, 18% and 19%,
respectively, of total net sales.
PREGNANCY PRODUCTS
The worldwide pregnancy test market is one of the largest rapid
testing market segments. The early detection of pregnancy allows the physician
and patient to institute proper prenatal care, helping to ensure the health of
the developing embryo and the mother. In 1984, Quidel introduced its first
products for the early detection of pregnancy. These dipstick-based products
detect minute amounts of human Chorionic Gonadotropin ("hCG"), a hormone which
is present in the urine of pregnant women very early in the gestation period.
Since 1984, Quidel has continued to improve its delivery system technology,
resulting in faster, easier-to-use pregnancy detection products.
- Q-Test(R) Pregnancy Test. Quidel's pregnancy prediction tests
each detect urinary hCG and are differentiated according to the
delivery system they employ and the end-user markets they address.
Q-Test(R) Pregnancy Test originally used the Company's patented
dipstick chemistry and was sold in the consumer over-the-counter
market by Becton Dickinson pursuant to a distribution agreement
with Quidel. In the second half of fiscal 1995 marketing rights
were transferred to Quidel, and the Company updated the product
with its latest one-step technology.
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- Conceive(R) One-Step Pregnancy Test, QuickVue(R) One-Step
Pregnancy Test, QuickVue(R) One-Step Urine-Serum Combo Test and
RapidVue(R)One-Step Pregnancy Test. As a complement to the
Company's Conceive(R) line of family planning products, the
Company introduced the Conceive(R) One-Step Pregnancy Test in
fiscal 1993 and the RapidVue(R) One-Step Pregnancy Test in fiscal
1994. Both tests utilize lateral flow technology, provide results
in as fast as one minute and address two different segments of the
over-the-counter market. QuickVue(R) One-Step Pregnancy Test is
the professional pregnancy product and the QuickVue(R) One-Step
Urine-Serum Combo test provides doctors' offices and hospitals
with the convenience of using either a urine or serum sample for
their pregnancy determinations. During fiscal 1994, the Company
began distribution of its Conceive(R) One-Step products in Europe
under the existing French tradenames of Blue Test(R) Confidence
Pregnancy Test (Europe) and BlueCard(R) pregnancy Test (France).
During fiscal 1996, the Company launched a new brand in Spain
under the SupraPlus(R) trademark.
- CARDS(R) QS(R) HCG-Urine and Concise(R) Performance Plus(TM)
HCG-Urine. The PBI one-step pregnancy test has strong trademark
recognition globally in professional markets and in selected
over-the-counter markets. The tests' plus and minus sign
endpoints provide easy results interpretation which have universal
appeal.
Sales of the Company's pregnancy products for the years ended March
31, 1997, 1996 and 1995 accounted for approximately 41%, 49% and 44%,
respectively, of total net sales.
INFECTIOUS DISEASE PRODUCTS
Infectious diseases are the cause of a wide range of often
debilitating and potentially fatal health care problems. The Company
manufactures and markets a variety of products designed to detect several
common infectious diseases. These tests detect the specific infectious agent,
generally bacterial or viral in nature, or antibodies generated in response to
the infection. The Company's products are targeted to the professional market
where the early detection of infectious diseases through rapid diagnostics can
provide opportunities for more effective and efficient therapeutic
intervention.
- Quidel QuickVue(R) In-Line One-Step Strep A Test. Each year
millions of people in the United States are tested for Group A
streptococcal infections, commonly referred to as strep throat.
Group A streptococci are organisms that typically cause illnesses
such as tonsillitis, pharyngitis and scarlet fever which, if left
untreated, can progress to complications such as rheumatic fever.
During fiscal 1995, the Company introduced a unique one-step test
which utilizes an in-line extraction procedure from a throat swab
specimen. This test differentiates itself from all other strep
tests which require as many as five or six separate and sometimes
time-dependent steps. In March 1996, this test received CDC-CLIA
Waived classification status which potentially expands the market
available for this product.
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- CARDS(R) QS(R) Strep A and Concise(R) Performance Plus(TM) Strep
A. The PBI brands of Strep A tests are notable for their easy to
read plus and minus sign endpoints. The simple procedure is
ideally suited for large volume testing sites such as reference
laboratories and HMOs. These products were under development
during fiscal 1996 as the Company converted PBI's technology to
its own for improved operational efficiencies. Both products were
under review by the U.S. Food and Drug Administration ("FDA") for
market clearance during fiscal 1996.
- Quidel QuickVue(R) H. Pylori Test. In February 1994, a meeting
convened by the National Institutes of Health confirmed
Helicobacter pylori (H. pylori) as a major cause of ulcers and
chronic gastritis. The Quidel QuickVue(R) H. Pylori Test kit was
the first rapid test developed and then cleared by the FDA for the
physician's office market. The test uses a few drops of serum or
plasma and provides results in as few as four minutes. During
fiscal 1996, the Company's QuickVue(R) One Step H. Pylori Test was
cleared for sale by the FDA. This product employs the Company's
Generation III, one-step technology and can also use finger stick
whole blood samples which are very convenient for the physician.
In October 1996, this test received CDC "CLIA Waived"
classification status which potentially expands the market
available for this product.
- CARDS(R) O.S.(R) Mono and Concise(R) Plus(TM) Mono. Infectious
mononucleosis ("IM") is a self-limiting disease in adolescence
which often has symptomology mimicking other potentially serious
disease states. Screening for IM is an important step to ensure
proper patient follow-up. The PBI mononucleosis test was the
first to utilize a simple whole blood patient sample. The plus
and minus sign endpoints are easy to interpret and make this test
easy to use in the physician's office.
- QuickVue(R) Chlamydia Test. The Chlamydia trachomatis organism is
responsible for the most widespread sexually transmitted disease
in the United States. Over one-half of infected women do not have
symptoms and if left untreated, Chlamydia can cause pelvic
inflammatory disease and is a leading cause of involuntary
sterility. The test utilizes the Company's lateral flow
technology, and is fast and easy to use in the doctor's office or
clinical laboratory.
Total sales of the Company's infectious disease products for the years
ended March 31, 1997, 1996 and 1995 accounted for approximately 37%, 17%, and
18%, respectively, of total net sales.
ALLERGY PRODUCTS
It is currently estimated that over 40 million people in the United
States suffer from one or more significant allergies. Differentiating the
allergic rhinitis patient from one with viral or bacterial upper respiratory
distress is an important step in prescribing the appropriate patient treatment.
The recent introduction of non-sedating antihistamine drugs for the treatment
of various allergic conditions has increased the importance of accurate allergy
diagnosis. Historically, the basic tool for allergy testing has been skin
testing, a procedure which requires the injection or scratching of the skin
with a tiny amount of allergen followed by an evaluation of the inflamed zone.
Technological advances at Quidel have made in vitro tests available in a format
which requires no
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specialized equipment, is easy to use and can be readily performed in the
primary care physician's office.
Total sales of the Company's allergy products for the years ended
March 31, 1997, 1996 and 1995 accounted for approximately 4%, 8%, and 8%,
respectively, of total net sales.
CLINICAL LAB/AUTOIMMUNE PRODUCTS
Autoimmune disorders, such as rheumatoid arthritis and systemic lupus
erythematosus, are among the most complex major medical problems not yet
conquered by medical science. Diagnostic testing in this area is an emerging
field. Much of the current knowledge about diagnosis and monitoring of these
diseases has been discovered within the last decade and is based on the fact
that circulating immune complexes ("CICs") appear to act as accurate markers
for autoimmune disorders. The current market for autoimmune diagnostic
products is in the clinical laboratory. Quidel believes that, as this testing
market develops and moves toward more rapid, non-instrumented testing
procedures, the market for diagnostic testing for autoimmune disorders will
increase, particularly in the physician's office segment.
Quidel's Immune Complex Products include tests for the measurement of
CICs and antibodies directed against the body's own healthy cells, and other
tests which measure the activation of other components of the immune response
system. These tests may enhance the ability to diagnose disease onset, to
monitor disease progression, to evaluate organ damage and to assess the effects
of therapy. In addition, Quidel offers a line of monoclonal and polyclonal
antibodies, purified complement proteins and other specialized reagents sold
primarily to research scientists.
RESEARCH AND PRODUCTS UNDER DEVELOPMENT
In the development of new products, the Company seeks to maximize
product reliability, speed, shelf-life and ease-of-use, while ensuring
cost-effective manufacturing through automation and engineering design. Quidel
is currently developing several new products in a delivery system format based
on a one-step lateral flow technology, which the Company believes will provide
faster results and be more convenient to use than previous test formats.
Quidel's anticipated future products include: an influenza A and B diagnostic
test, a male Chlamydia test, additional one-step allergy screens (an outdoor
panel and a food panel), and a QuickVue(R) Fecal Hemoglobin Test, which
measures non-obvious blood in the feces for the identification of patients at
risk for colorectal cancer. Quidel believes that it has made significant
progress in the development of its new products; however, all such products are
still subject to substantial uncertainty regarding completion of development,
clinical trials and regulatory clearance. There can be no assurance of the
successful development or marketing of new products.
For the fiscal years ended March 31, 1997, 1996 and 1995, the Company
incurred $6,700,000, $4,130,000, and $3,728,000, respectively, for research and
development, including costs incurred under research contracts.
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RESEARCH AND DEVELOPMENT COLLABORATIONS
Since its inception, the Company has entered into research and
development collaborations with other companies in order to increase the pace
of its new product introductions. The Company's research and development
agreements have, in the past, generally provided that the research and
development partner fund a portion of the research and development cost of a
new product in exchange for exclusive marketing rights to such product in a
specific geographic region once the product is introduced. Such partner also
agrees to enter into a supply agreement with Quidel when the new product is
introduced, pursuant to which Quidel agrees to manufacture and such partner
agrees to purchase from Quidel certain minimum quantities of the product to be
sold by such partner.
The Company's new research and development collaboration strategy
emphasizes human disease management. This strategy pairs the Company's
development efforts with the drug development efforts of pharmaceutical
companies. The goal of such collaborations is to have available a differential
diagnostic rapid test at the time of market introduction of the therapeutic
product. By diagnostically identifying the patients most likely to benefit
from new therapies, it is believed that costs related to inappropriate therapy
delivered to "negative" patients can be avoided, while increasing the efficacy
of therapy among those patients most in need.
During fiscal 1996, the Company entered into an agreement with Glaxo
Group Ltd., a wholly-owned subsidiary of Glaxo Wellcome, to develop an
influenza A and B diagnostic test to be sold under the Quidel brand name and
used in conjunction with their new drug to treat influenza, presently in phase
II clinical trials. This multi-year program represents the largest
independently funded research and development program in Quidel's history.
In February 1996, the Company entered into a development agreement
with Heska Corporation to develop and supply certain rapid in-clinic veterinary
diagnostic tests. This agreement allows the Company to broaden the markets
addressed with its rapid diagnostic technology.
In November 1996, the Company entered into a multi-year development
and supply agreement with Bayer Corporation's Business Group Diagnostics to
develop immunodiagnostic tests for use with Bayer's CLINITEK(R) analyzers. The
CLINITEK family of analyzers has made Bayer the world leader in urine chemistry
systems. The products developed under this agreement will expand the menu of
tests available for use on this installed base of equipment.
MARKETING AND DISTRIBUTION
The Company markets its products through a network of domestic and
international distributors, European subsidiaries and to a lesser extent
strategic partners, all of which are directed at three primary market segments:
physician's office, hospitals and clinical laboratories, and consumer
over-the-counter.
- Physician's Office. Quidel utilizes various national and regional
distributors to service the physician's office market, supporting
these distributors' efforts with the Company's own sales force.
The Company believes that this approach affords it greater control
over product marketing with a greater ability to introduce product
innovations in response to
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market demands. The Company supports and promotes its products to
this market segment through direct mailings of product
information, trade journal advertising, sales calls, press
releases and presentations at professional conferences.
- Hospitals and Clinical Laboratories. Quidel serves a select group
of hospitals and clinical laboratories through its national
distributors, supported by sales specialists.
- Consumer Over-the-Counter. During the past three years, with the
introduction of its Conceive(R) Ovulation Predictor and
Conceive(R) Pregnancy Test, the Company has increased its presence
in the consumer market with Quidel branded products. These
products were sold to chain and independent drug stores through a
network of brokers, wholesalers and directly by the Company.
Effective January 1996, the Company entered into an agreement with
Ansell Consumer Products, under which Ansell will assume the sales
and marketing of the Quidel brands.
- International. Quidel markets its products to these same three
market segments in over 60 countries. The Company's primary
international territories include Korea, Japan, Germany and other
Western European countries. In some cases, Quidel ships its
products unpackaged to its international distributors, who perform
final packaging of the products to meet local market requirements.
This provides the Company with quick access to multiple
international markets without the costs, regulatory issues and
inventory investment associated with international packaging. In
order to increase sales and marketing focus within the European
markets, the Company has acquired or established sales
subsidiaries in France, Germany, The Netherlands and Spain.
In the fiscal years ended March 31, 1997, 1996 and 1995, export sales,
which are denominated in United States dollars and represent export sales from
the United States to third parties, were $8,060,000, $9,059,000 and $6,562,000,
respectively. Total international sales, including both export sales from the
United States to third parties and third party sales by Quidel's European
subsidiaries, represented approximately 30%, 38%, and 33% of total net sales
for the fiscal years ended March 31, 1997, 1996 and 1995, respectively. For
additional information concerning export sales by geographic region, see Note 5
of Notes to Consolidated Financial Statements included on page 16 of the
Company's 1997 Annual Report incorporated herein by reference.
The Company generally ships products to its customers within 15 days
of receipt of purchase orders. Shipments to international distributors are
made under purchase orders received from 30 to 90 days in advance of shipment.
Because the amounts ordered and the lead times specified vary widely from order
to order and period to period, the Company does not consider backlog to be a
meaningful indicator of future revenues.
MANUFACTURING
Quidel's manufacturing facilities, located in San Diego, California,
consist of laboratories devoted to tissue culture and immunochemistry, and
production areas dedicated to packaging and filling. In the manufacturing
process, the Company uses biological, chemical and packaging supplies and
equipment which are generally available from several competing suppliers.
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The Company believes that its manufacturing is conducted in compliance
with the "Good Manufacturing Practices" ("GMP") regulations of the FDA
governing the manufacture of medical devices. Quidel has registered its
facility with the FDA and with the Department of Health Services of the State
of California and has passed routine federal and state inspections confirming
the Company's compliance with the GMP regulatory requirements for in vitro
diagnostic products.
The manufacture of medical diagnostic products is difficult,
particularly with respect to the stability and consistency of complex
biological components. Because of these complexities, manufacturing
difficulties occasionally occur that delay the introduction of products, result
in excess manufacturing costs or require the replacement of products already
introduced into the distribution channel.
GOVERNMENT REGULATION
The manufacture and marketing of medical devices, including in vitro
diagnostic test kits, are regulated under the 1976 Medical Device Amendments to
the Federal Food, Drug and Cosmetic Act and its amended and/or new provisions
under the Safe Medical Act of 1990. These regulations are administered by the
FDA. While these regulations are demanding, they are considerably less
burdensome than those applicable to the manufacture and marketing of drugs or
monoclonal antibodies for in vivo applications. In addition to the foregoing,
the Company's present and future operations or products may be subject to
regulation under the Occupational Safety and Health Act, Environmental
Protection Act, Resource Conversion and Recovery Act, Toxic Substances Control
Act, Clinical Laboratory Improvement Act and other present or possible future
legislation and regulations, as well as by governmental agencies with
regulatory authority relating to the Company's business.
PATENTS AND TRADE SECRETS
Because of the length of time and the expense associated with bringing
healthcare products through development and government approval to the
marketplace, the healthcare industry has traditionally placed considerable
importance on obtaining and maintaining patent and trade secret protection for
significant new technologies, products and processes. Quidel and other
companies engaged in research and development of new diagnostic products using
advanced biomedical technologies are actively pursuing patents for their
technologies which they consider novel and patentable. However, important
legal issues remain to be resolved as to the extent and scope of available
patent protection in the United States and in other important markets
worldwide. The resolution of these issues and their effect upon the long-term
success of Quidel and other biotechnology firms cannot be determined.
It has been Quidel's policy to file for patent protection in the
United States and other countries with significant markets, such as Western
European countries and Japan, if the economics are deemed to justify such
filing and Quidel's patent counsel determines that a strong patent position can
be obtained. Quidel currently has been issued and/or licensed twenty-three
United States patents with potential applications for diagnostic products and
has additional United States patent applications on file covering technology
with potential diagnostic uses. No assurance can be given that patents will be
issued to Quidel pursuant to its patent applications in the United States and
abroad or that Quidel's patent portfolio will provide Quidel with a meaningful
level of commercial protection.
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A large number of individuals and commercial enterprises seek patent
protection for technologies, products and processes in fields related to
Quidel's areas of product development. To the extent such efforts are
successful, Quidel may be required to obtain licenses in order to exploit
certain of its product strategies. There can be no assurance that such
licenses will be available to Quidel at all, or if so, on acceptable terms.
Quidel is aware of certain issued and filed patents, issued to various
developers of diagnostic products with potential applicability to Quidel's
diagnostic technology. The Company has licensed certain rights from companies
such as Syntex and Becton Dickinson. There can be no assurance that Quidel
would prevail if a patent infringement claim were to be asserted against
Quidel.
Quidel seeks to protect its trade secrets and nonproprietary
technology by entering into confidentiality agreements with employees and third
parties (such as potential licensees, customers, joint ventures and
consultants). In addition, Quidel has taken certain security measures in its
laboratories and offices. Despite such efforts, no assurance can be given that
the confidentiality of Quidel's proprietary information can be maintained.
Also, to the extent that consultants or contracting parties apply technical or
scientific information independently developed by them to Quidel projects,
disputes may arise as to the proprietary rights to such data.
Under certain of its distribution agreements, Quidel has agreed to
indemnify the distributor against costs and liabilities arising out of any
patent infringement claim by a third party relating to products sold under
those agreements. In some cases, the distributor has agreed to share the costs
of defending such a claim and will be reimbursed for the amount of its
contribution if the infringement claim is found to be valid.
COMPETITION
The Company believes that the competitive factors in the rapid
diagnostic market include convenience, price and product performance as well as
the distribution, advertising, promotion and brand name recognition of the
marketer. Competition in the development and marketing of diagnostic products
is intense and diagnostic technologies have been subject to rapid change.
Management believes that Quidel's success will depend on its ability to remain
abreast of technological advances, to introduce technologically advanced
products, and to attract and retain experienced technical personnel, who are in
great demand. Many of the Company's current and prospective competitors,
including several large pharmaceutical and diversified health care companies,
have substantially greater financial, marketing and other resources than
Quidel. There can be no assurance that technological advances by competitors
will not render the Company's products obsolete, or that it will be able to
compete successfully in the marketing of products.
HUMAN RESOURCES
As of March 31, 1997, the Company had 290 employees, none of whom is
represented by a labor union. The Company has experienced no work stoppages
and believes that its employee relations are good.
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Item 2. PROPERTIES
The Company's executive, administrative, manufacturing and research
and development facilities are located in San Diego, California. On February
8, 1994, the Company purchased the land underlying such facilities and the
65,000 square-foot building located thereon for approximately $7,700,000. The
Company believes that its current facilities are adequate for its present
needs.
PBI, which was acquired during the fourth quarter of fiscal 1995,
initially had three leased facilities. The leases related to two of PBI's
production facilities were terminated on March 31, 1995 and April 30, 1995.
The remaining facility lease terminated on October 15, 1995. All of the PBI
business activities have been consolidated into the Quidel facilities.
Item 3. LEGAL PROCEEDINGS
The Company received a letter dated April 24, 1992 from the United
States Environmental Protection Agency (the "EPA") notifying the Company that
it is a potentially responsible party for cleanup costs at a federal Superfund
site, the Marco of Iota Drum Site (the "Marco Site"), near Iota, Louisiana.
Documents gathered in response to such letter indicate that the Company sent a
small amount of hazardous waste to facilities in Illinois. It is possible that
subsequently, such waste could have been transshipped to the Marco Site. The
EPA letter indicates that a similar notice regarding the Marco Site was sent by
the EPA to over 500 other parties. At this time, the Company does not know how
much of its waste may have reached the Marco Site, the total volume of waste at
the Marco Site or the likely site remediation costs. There is, as in the case
of most environmental litigation, the theoretical possibility of joint and
several liability being imposed upon the Company for damages that may be
awarded.
In April 1997, Becton Dickinson and Co. (the "plaintiff") filed a
lawsuit against the Company alleging that the Company's strep and chlamydia
products and certain of its pregnancy and ovulation products (collectively, the
"Products") infringe two patents of the plaintiff. The Products in issue
represent a substantial majority of the Company's current revenues. In June
1997, the Company entered into a settlement agreement with the plaintiff. As a
part of that agreement, the Company received a license from the plaintiff under
both patents in exchange for a cash license fee, a royalty on net sales of the
Products after April 1, 1997, and a license of the Company's Q-Label technology
back to plaintiff (with a royalty on future net sales). The Company currently
estimates that the annual amortization of the license fee and royalty payments
(based on current sales levels of the Products) will result in an annual
expense of approximately $1,900,000 per year. While the Company denied the
allegations in the complaint and admitted no liability as part of the suit's
resolution, the Company believed the settlement was warranted when balanced
against the anticipated defense costs, the uncertainties of litigation in
general, and the expected diversion of management's time and attention over an
extended period.
In May 1997, Quidel's wholly owned subsidiary Pacific Biotech, Inc.
("PBI") was named as a co-defendant in a suit filed in Bowie County, Texas.
The suit states in part that in July 1993, as a result of a false negative
pregnancy test result from a PBI product, the plaintiff (who was 12 to 14 weeks
pregnant) was informed in error that she was not pregnant and was prescribed
oral contraceptives. The suit further states that the PBI product's advertised
accuracy was false and
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misleading and was the producing cause of the complained of damages. The
plaintiff states that she was not aware of being pregnant until the time of
delivery when, due to complications which could have been avoided by Cesarean
section had she known she was pregnant, the baby sustained injuries. It is
uncertain as to the outcome of this suit; however, the Company believes it has
adequate product liability insurance coverage.
The Company is involved in litigation matters from time to time in the
ordinary course of business. Management believes that any and all such
actions, in the aggregate, will not have a material adverse effect on the
Company. The Company maintains insurance, including coverage for product
liability claims, in amounts which management believes appropriate given the
nature of the Company's business.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions of all executive officers of the Company
as of June 6, 1997 are listed below, followed by a brief account of their
business experience during the past five years. Officers are normally
appointed annually by the Board of Directors at a meeting of the directors
immediately following the Annual Meeting of Stockholders. There are no family
relationships among these officers nor any arrangements or understandings
between any officer and any other person pursuant to which an officer was
selected. None of these officers has been involved in any court or
administrative proceeding within the past five years adversely reflecting on
the officer's ability or integrity.
Steven T. Frankel, 54, Chief Executive Officer, President and Chief
Operating Officer, joined Quidel in June 1992 as President and Chief Operating
Officer. In May 1994, Mr. Frankel was elected Chief Executive Officer of the
Company. Mr. Frankel has over 30 years of experience in the areas of sales and
marketing to the medical professional and consumer markets. Most recently as
the head of the Asia Pacific Division of Becton Dickinson, he was responsible
for sales and marketing, manufacturing and country operations. Prior to
establishing the Asia Pacific Division in 1985, Mr. Frankel was President of
Becton Dickinson's U.S. Consumer Products Division and also had similar
responsibility for Becton Dickinson's European Consumer Products Division.
Steven C. Burke, 52, Vice President - Finance and Administration and
Chief Financial Officer, joined Old Quidel in 1986. From May 1984 until August
1986, he was Vice President, Controller of American Bentley, a subsidiary of
American Hospital Supply. Mr. Burke is a Certified Public Accountant.
Darryll J. Getzlaff, 46, Vice President - Human Resources, joined
Quidel in April 1987 with nine years of personnel management experience, with
special expertise in recruiting, management development and equal opportunity.
Mr. Getzlaff was Personnel Director, Corporate Marketing, for the Ernest &
Julio Gallo Winery from December 1984 until March 1987.
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Lauren G. Otsuki, 44, Vice President - Operations, joined Quidel in
May 1983 and held numerous positions in Operations from 1983 to 1989, including
Manager of Quality Control, Manager of Process Development and Director of
Manufacturing. From November 1989 to January 1992 she was the Director of
Business Development and in January 1992 became the Vice President of
Operations.
Allan D. Pronovost, Ph.D., 45, Vice President - Research and
Development, joined Quidel in April 1987. Dr. Pronovost has over 12 years of
experience in the diagnostic industry and held various key research and
development positions at Eastman Kodak from 1986 to March 1987, Ortho
Diagnostic Systems, Inc. from 1983 to 1986, and E.I. duPont Corporation from
1980 to 1983. Dr. Pronovost received his post-doctoral clinical training at
Yale University School of Medicine and received his Ph.D. degree in virology
from the University of Rhode Island. He has a number of patents and has
published numerous papers in immunology and diagnostic assay methods.
John D. Tamerius, Ph.D., 51, Vice President - Clinical Laboratory
Business, joined Quidel in August 1989 and assumed responsibility for quality
assurance and clinical and regulatory affairs. In April 1994, Dr. Tamerius
became responsible for the research and development, manufacture and sales and
marketing activities for the Company's clinical laboratory business. From 1983
to 1989, Dr. Tamerius served as Vice President of Research and Development for
Cytotech, Inc. where he was in charge of Corporate Research Programs and
Clinical and Regulatory Affairs. Before co-founding Cytotech, Inc., Dr.
Tamerius was a postdoctoral fellow at the Fred Hutchinson Research Center in
Seattle, Washington from 1976 to 1978 and a research associate at the Research
Institute of Scripps Clinic in San Diego, California from 1978 to 1983. Dr.
Tamerius received his M.S. and Ph.D. degrees in Microbiology and Immunology
from the University of Washington in 1976.
Robin G. Weiner, 41, Vice President - Clinical Development and
Regulatory Affairs, joined Quidel in March 1982. She has over twelve years
experience in regulatory affairs and has held numerous management positions at
Quidel in Operations and Clinical/Regulatory. From December 1992 to July 1995
she was Senior Director of Clinical, Regulatory and Quality Systems and in July
1995 was promoted to Vice President.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information required by this item is included on page 20 of
the Registrant's 1997 Annual Report and is incorporated herein by reference.
Item 6. SELECTED FINANCIAL DATA
The information required by this item is included on the inside
front cover of the Registrant's 1997 Annual Report and is incorporated herein
by reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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The information required by this item is included on pages 8 - 10
of the Registrant's 1997 Annual Report and is incorporated herein by reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is included on pages 11 - 19
of the Registrant's 1997 Annual Report and is incorporated herein by reference.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is included in the sections
entitled "Election of Directors" and "Executive Compensation and Other
Information - Compliance with Section 16(a) of the Exchange Act" of the Proxy
Statement which will be filed with the Securities and Exchange Commission no
later than 120 days after the close of the fiscal 1997 year and is incorporated
herein by reference and is included in the section entitled "Executive Officers
of the Registrant" in Part I of this Report.
Item 11. EXECUTIVE COMPENSATION
The Company maintains certain employee benefit plans and programs
in which its executive officers are participants. Copies of these plans and
programs are set forth or incorporated by reference as Exhibits 10.1, 10.4,
10.5, 10.6, 10.8, and 10.12 to this report. The additional information
required by this item is included in the section entitled "Executive
Compensation and Other Information" of the Proxy Statement which will be filed
with the Securities and Exchange Commission no later than 120 days after the
close of the fiscal 1997 year and is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included in the sections
entitled "Security Ownership of Certain Beneficial Owners" and "Security
Ownership of Management" of the Proxy Statement which will be filed with the
Securities and Exchange Commission no later than 120 days after the close of
the fiscal 1997 year and is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
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PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements, Financial Statement Schedules and Exhibits
I. Financial Statements. The following Financial
Statements of the Registrant listed below are incorporated herein by reference
from the following pages of the 1997 Annual Report:
PAGE IN
ANNUAL REPORT
-------------
1. Report of Ernst & Young LLP, Independent Auditors 20
2. Consolidated Balance Sheets --
March 31, 1997 and 1996 12
3. Consolidated Statements of Operations --
Years ended March 31, 1997, 1996 and 1995 11
4. Consolidated Statements of Stockholders' Equity --
Years Ended March 31, 1997, 1996 and 1995 14
5. Consolidated Statements of Cash Flows --
Years Ended March 31, 1997, 1996 and 1995 13
6. Notes to Consolidated Financial Statements 15-19
II. Financial Schedules. None.
(b) Reports on Form 8-K filed in the fourth quarter of fiscal
1997:
None.
(c) Exhibits:
Exhibit
Number
------
3.1 Certificate of Incorporation, as amended. (Incorporated by
reference to Exhibit 3.1 to the Registrant's Current Report
on Form 8-K dated February 26, 1991.)
3.2 Amended and Restated Bylaws. (Incorporated by reference to
Exhibit 3.2 to the Registrant's Current Report on Form 8-K
dated June 16, 1995.)
3.3 Certificate of Designations of the Series B Preferred
Stock. (Incorporated by reference to Exhibit 4.1 to the
Registrant's Current Report on Form 8-K dated
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January 5, 1995.)
10.1 Registrant's 1983 Employee Stock Purchase Plan, as
amended. (Incorporated by reference to Exhibit 10.1 to
the Registrant's Current Report on Form 8-K dated February
26, 1991.)
10.2 Form of Indemnification Agreement - Corporate Officer.
(Incorporated by reference to Exhibit 10.2 to the
Registrant's Form 10-K dated March 31, 1995.)
10.2.1 Form of Indemnification Agreement - Corporate Director.
(Incorporated by reference to Exhibit 10.2.1 to the
Registrant's Form 10-K dated March 31, 1995.)
10.3 Form of Warrant Agreement between Registrant and American
Stock Transfer & Trust Company. (Incorporated by reference
to Exhibit 10.3 to the Registrant's Form 10-K dated March
31, 1995.)
10.4 Registrant's 1990 Employee Stock Option Plan.
(Incorporated by reference to Exhibit 10.3 to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1990.)
10.5 Registrant's 1990 Director Option Plan. (Incorporated by
reference to Exhibit 10.4 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1990.)
10.6 Registrant's Amended 1981 Stock Option Plan, as revised.
(Incorporated by reference to Exhibit 10.5 to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1990.)
10.7 Common Stock and Warrant Purchase Agreement dated November
2, 1990 between Morgan Investment Corporation and Old
Quidel, including form of Common Stock Warrant.
(Incorporated by reference to Exhibit 10.6 to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1990.)
10.8 Registrant's Amended and Restated 1982 Incentive and
Nonstatutory Stock Option Plans, including Form of Option
Agreement. (Incorporated by reference to Exhibit 10.28 to
the Registrant's Registration Statement No. 33-38324 on
Form S-4 filed on December 20, 1990.)
10.9 Form of Registration Rights Agreement of the Registrant.
(Incorporated by reference to Appendix C to the final Joint
Proxy Statement/Prospectus dated January 4, 1991 included
within Amendment No. 2 to the Registrant's Registration
Statement No. 33-38324 on Form S-4 filed on January 4,
1991.)
10.10 Common Stock and Warrant Purchase Agreement dated January
31, 1991, by and among Old Quidel, John Hancock Capital
Growth Fund IIB L.P., John Hancock Capital Growth Fund III
L.P., H&Q Healthcare Investors, S.R. One, Limited and
Golodetz Finance Company, S.A., including form of Common
Stock Warrant.
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(Incorporated by reference to Exhibit 10.52 to the
Registrant's Current Report on Form 8-K dated
February 26, 1991.)
10.11 Assumption Agreement dated January 31, 1991. (Incorporated
by reference to Exhibit 10.52.1 to the Registrant's Current
Report on Form 8-K dated February 26, 1991.)
10.12* Summary of Management Incentive Compensation Plan as in
effect in fiscal 1998.
10.13 Warrant to Purchase Common Stock issued to Imperial Bank.
Issued February 8, 1994, 117,871 shares with an initial
exercise price of $5.94 per share. Warrant expires
February 8, 1999. (Incorporated by reference to Exhibit
10.43 to the Registrant's Form 10-Q dated December 31,
1993.)
10.14 Consulting Agreement, dated May 12, 1994, between the
Registrant and Scott L. Glenn and SR Associates.
(Incorporated by reference to Exhibit 10.45 to the
Registrant's Form 10-K dated March 31, 1994.)
10.15 Trademark License Agreement dated October 1, 1994 between
the Registrant and Becton Dickinson and Company regarding
the Q-Test trademark. (Incorporated by reference to
Exhibit 10.15 to the Registrant's Form 10-K dated March 31,
1995.)
10.16 Warrant to Purchase 275,000 Shares of Common Stock issued
to Genesis Merchant Group Securities on May 16, 1995 at an
initial exercise price of $4.50 per share. Warrant expires
January 15, 2000. (Incorporated by reference to Exhibit
10.17 to the Registrant's Form 10-K dated March 31, 1995.)
10.17 Stock Purchase Agreement dated January 5, 1995 between
Registrant and Eli Lilly & Company for the sale of all the
outstanding capital stock of Pacific Biotech, Inc.
(Incorporated by reference to Exhibit 2.1 to the
Registrant's Form 8-K dated January 5, 1995.)
10.18* Settlement Agreement effective April 1, 1997 between the
Registrant and Becton Dickinson and Company.
10.19* Campbell License Agreement effective April 1, 1997 between
the Registrant and Becton Dickinson and Company
10.20* Rosenstein License Agreement effective April 1, 1997
between the Registrant and Becton Dickinson and Company.
10.21* Employment Agreement dated June 23, 1997 between the
Registrant and Andre de Bruin.
10.22* Stock Option Agreement dated June 23, 1997 between the
Registrant and Andre de Bruin to purchase 300,000 shares
issued under the Registrant's General
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Nonstatutory Stock Option Plan.
13.1* Certain portions of the 1997 Annual Report to Stockholders
for the fiscal year ended March 31, 1997 which have been
incorporated herein by reference.
23.1* Consent of Ernst & Young LLP, Independent Auditors.
27* Financial Data Schedule.
* Filed herewith
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