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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(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 June 30, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission file number 0-28194
DIGENE CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 52-1536128
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State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
9000 Virginia Manor Road
Beltsville, Maryland 20705
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (301) 470-6500
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act: Common Stock,
par value $.01 per
share
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(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), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) 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. / /
Based upon the last sale price of the Registrant's Common Stock on
September 16, 1996, the aggregate market value of the 5,557,507 outstanding
shares of voting stock held by non-affiliates of the Registrant was
$45,849,433.
As of September 16, 1996, 11,306,684 shares of the Registrant's Common
Stock were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference in
this Report on Form 10-K:
1) The Registrant's definitive Proxy Statement for its Annual
Meeting of Stockholders to be filed not later than 120 days
after the close of the fiscal year.
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PART I
ITEM 1. BUSINESS
THE COMPANY
The Company develops, manufactures and markets DNA testing systems for
the screening, monitoring and diagnosis of human diseases. The Company's
products are designed to help improve clinical outcomes and reduce the overall
cost of disease management. The Company's lead product, the Hybrid Capture HPV
DNA test, detects the presence of human pappillomavirus ("HPV"), the primary
cause of cervical cancer, which is the second most common cancer among women
worldwide. The Company's HPV test for the follow-up screening of women with
equivocal Pap smears is the first HPV test to have been approved for marketing
in the United States by the U.S. Food and Drug Administration (the "FDA"). The
Company's objective is to establish its HPV test as the new standard of care
for cervical cancer screening.
The Company is also developing a test to detect the presence of
cytomegalovirus ("CMV"). The basis for the Company's HPV and CMV tests is its
proprietary Hybrid Capture technology. The Company is also using its Hybrid
Capture technology as a platform to develop a wide range of DNA diagnostic and
monitoring tests for blood viruses, sexually transmitted diseases ("STDs") and
opportunistic infections.
The key elements of the Company's business strategy include (i)
establishing HPV testing as the new standard of care for cervical cancer
screening by working closely with clinical reference laboratories, third-party
payors and health care providers; (ii) focusing the Company's marketing efforts
on the use of its HPV test for the follow-up screening of equivocal Pap smears;
(iii) expanding the Company's sales and marketing capabilities; (iv) pursuing
strategic alliances to increase market acceptance of its products and to expand
marketing efforts; and (v) capitalizing on its core technology and expertise to
develop a wide range of DNA diagnostic and monitoring tests.
The Company was incorporated under Delaware law in 1987, succeeding to
the business of a partnership organized in 1985.
CERVICAL CANCER
Cervical cancer is the second most common cancer among women worldwide,
with approximately 440,000 new cases reported annually. The American Cancer
Society estimates that approximately 15,800 new cases of invasive cervical
cancer and 65,000 cases of carcinoma in situ, a precancerous condition, were
diagnosed in the United States in 1995. If detected in the precancerous stage,
virtually all cervical cancer is preventable. The treatment of cervical cancer
after it reaches the invasive stage may require chemotherapy, radiation
treatment or surgery, including hysterectomy. These forms of treatment are
difficult and expensive, and are often unsuccessful.
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HPV Infection and Cervical Cancer
HPV is the primary cause of cervical cancer. Recent studies have
demonstrated that at least 93% of cervical cancers and high-grade cervical
lesions contain one or more cancer-causing types of HPV. Moreover, it has been
shown that women without cervical disease who test positive for one or more of
the cancer-causing HPV types have a high probability of developing cervical
lesions over time. A recent prospective study conducted by the National Cancer
Institute ("NCI") on 21,000 women with a history of normal cervical cytologic
examinations (Pap smears) found that approximately 80% of those who tested
positive for cancer-causing types of HPV developed clinically significant
cervical lesions within four years.
Pap Smear Testing
To enable the early detection of cervical cancer, gynecologists
typically recommend annual screening examinations. The standard screening
method in the United States and in other major industrialized countries is the
Pap smear test, in which a sample of cervical cells is examined under a
microscope. Pap smears have been the principal means of cervical cancer
screening in the United States since the 1940s. More than 50 million Pap
smears are performed annually in the United States, and the Company believes
that an equivalent number are performed in the rest of the world. Each Pap
smear is classified according to the Bethesda System for Reporting
Cervical/Vaginal Cytologic Diagnoses into one of five categories: (1) Negative;
(2) Atypical Squamous Cells of Undetermined Significance ("ASCUS"); (3) Low
Grade Squamous Intraepithelial Lesions ("LSIL"); (4) High Grade Squamous
Intraepithelial Lesions ("HSIL"); and (5) Carcinoma. For purposes of this
report, negative Pap smear results are referred to as "normal;" ASCUS, as
"equivocal;" and LSIL, HSIL and Carcinoma, as "abnormal." An equivocal
classification is given to Pap smear results that cannot be definitely
classified as either normal or abnormal.
Follow-up testing and treatment is based on the classification of the
Pap smear result. Women with normal Pap smears typically require no follow-up
beyond continuation with annual Pap smear testing. In general, women with
abnormal Pap smears undergo a colposcopic examination (visual examination of
the cervix with the aid of a colposcope). Most of these women also undergo
biopsy at the time of colposcopy, and many go on to have any suspected lesions
ablated (physically removed with a scalpel or cauterizing instrument). Many
women with equivocal Pap smears are treated as if they have abnormal Pap
smears, even though only an estimated 25% to 35% of these women actually have
cervical disease.
Problems With the Pap Smear
Although the Pap smear has been successful in reducing deaths due to
cervical cancer in the United States, Pap smears have significant limitations,
including the following:
Equivocal Pap Smears Lead to Unnecessary, Costly Intervention. Each
year in the United States, approximately 3.5 million Pap smears are classified
as equivocal. It is estimated that 65% to 75% of the women with equivocal Pap
smears do not have cervical disease. However, women with equivocal Pap smears
often undergo colposcopy and biopsy and, in certain cases, ablation. These
invasive procedures cost approximately $300, $100 and $500, respectively, and
result in significant physical and emotional stress.
Pap Smears are Difficult to Interpret. Screening and interpreting Pap
smears is a highly subjective, complex and tedious task. The screening process
requires intense visual review through a microscope
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of a large volume of slides containing cervical cells. A Pap smear may contain
only a small number of abnormal cells among 50,000 to 300,000 normal cells.
The subjective nature of this screening process often leads to equivocal test
results. In addition, the difficulty and tediousness of the screening process
and the limitations of the visual review result in a large number of Pap smears
which are misinterpreted as normal ("false negatives").
False Negative Diagnoses. Pap smears fail to identify cervical disease
in a significant number of women. The sensitivity of Pap smears is estimated
to be 60% to 80%, which means that 20% to 40% of cervical disease is not
detected by Pap smear testing. False negatives may result in delayed treatment
for cervical lesions and may result in the failure to detect cervical cancer at
an early stage. The resultant delays in treatment may allow the disease to
progress further, thereby increasing the need for invasive and costly
treatments, reducing the efficacy of available therapies and reducing the
likelihood of patient survival. False negative diagnoses present a particular
health risk for women who do not undergo routine Pap smear testing at
recommended time intervals.
Pap Smears Have Limited Predictive Value. The Pap smear is not
designed, and is unable, to detect the presence of HPV, the primary cause of
cervical cancer. Consequently, Pap smears do not allow the clinician to
identify women with no overt signs of cervical disease but who are infected
with cancer-causing types of HPV and are therefore highly likely to develop
cervical cancer or advanced cervical lesions in the future.
Limited Availability of Pap Smear Screening. In many countries, Pap
smears are not widely used or are unavailable. Extensive cervical disease
screening programs using the Pap smear require large numbers of
cytotechnologists and sophisticated laboratory procedures. Properly trained
cytotechnologists and adequate laboratory facilities are often unavailable in
developing countries.
THE DIGENE SOLUTION
Digene manufactures and markets the first test approved by the FDA to
detect cancer-causing types of HPV. The Company's HPV test allows physicians
to identify women who are most at risk of having or developing cervical disease
and cervical cancer. The Company's HPV test consists of biological reagents
(RNA probes, antibodies and detection reagents) and other components,
consisting of polystyrene tubes and packaging materials, and can be interpreted
using standard laboratory equipment. The Company believes that the key
benefits provided by its HPV test include the following:
Enables Cost-Effective Follow-up Screening of Equivocal Pap Smears.
Digene's HPV test enables clinicians to, in effect, classify equivocal Pap
smears as either normal or abnormal. The Company's test detects and measures
the presence of cancer-causing types of HPV, thereby allowing the clinician to
identify women who are most at risk of having or developing cervical disease
and cervical cancer, at a fraction of the cost of colposcopy, biopsy or
ablation. The Company believes that the use of its HPV test for the follow-up
screening of women with equivocal Pap smears will improve the ability to
accurately screen for cervical cancer, reduce the need for costly and invasive
follow-up procedures, and provide health care cost savings.
Under Digene's recommended follow-up protocol, women with equivocal Pap
smears undergo the Company's HPV test to determine the presence of
cancer-causing HPV types. Only those patients testing positive for
cancer-causing types of HPV undergo colposcopy, biopsy and, when necessary,
ablation, while those testing negative return for a repeat Pap smear in six
months. The Company's test may be
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performed on clinical samples taken at the same time as the Pap smear and
stored until needed, thus eliminating the need for a return visit to the
physician's office.
Provides Accurate, Easily Interpreted Results. Clinical studies
conducted by the Company indicate that the Company's HPV test is highly
sensitive and highly specific for the detection of cervical disease. Such
clinical studies indicated that Digene's HPV test is capable of detecting
cervical disease in up to 92% of the cases in which cervical disease is
present. This represents a significant improvement over the Pap smear's
estimated sensitivity of 60% to 80%. The results generated by the Company's
HPV test are objective, providing a clear determination of the presence of
cancer-causing types of HPV, and are easy to interpret, reducing the need for
highly trained cytotechnologists.
Reduces Likelihood of False Negatives. The high level of sensitivity of
the Company's HPV test should increase the possibility that precancerous
cervical lesions will be detected. Studies indicate that when used in
conjunction with Pap smear testing, the Company's HPV test can detect 95% to
100% of high grade lesions and virtually all instances of cervical cancer. The
Company believes that by reducing the number of false negatives, many cases of
precancerous cervical disease will be detected at earlier stages, when the
available therapies are more effective and the survival rates are higher.
Predicts Development of Disease. The Company believes that testing for
the presence of cancer-causing types of HPV has considerable predictive value.
In one study, approximately 80% of women with a history of normal Pap smears
who tested positive for cancer-causing types of HPV developed clinically
significant cervical lesions within four years. The Company's HPV test is the
first FDA-approved test for the detection of cancer-causing types of HPV.
The Company holds issued patents relating to the detection of four HPV
types and has licenses to issued patents and patent applications covering five
additional HPV types. The Company's HPV test for the follow-up screening of
women with equivocal Pap smears utilizes DNA sequences for seven of these HPV
types. The Company believes that for a competing HPV test to be commercially
viable, it must be able to detect the HPV types for which the Company has
non-exclusive proprietary rights covering the DNA sequences. For a more
detailed discussion of the Company's intellectual property position, see
"Business -- Licenses, Patents and Proprietary Information."
CYTOMEGALOVIRUS (CMV) TESTING
CMV infection is a serious and growing health care problem. Active CMV
infection causes blindness in many AIDS patients and is a major cause of
infection and mortality in organ transplant recipients. It is estimated that
95% of AIDS patients will ultimately suffer from active CMV infection. In 20%
to 40% of AIDS patients, CMV infects the retina, causing blindness. Organ
transplant recipients, because they are deliberately immunosuppressed to lessen
the probability of organ rejection, are also susceptible to CMV infection.
Approximately 60% of organ transplant patients develop active CMV infection
during the first twelve weeks after transplantation.
An estimated $1 billion is spent annually in the United States on the
prevention and treatment of CMV-related diseases. The drugs available to treat
CMV infection are both toxic and expensive and, ideally, should be administered
only when active CMV infection has been definitively identified. Annual costs
for these drugs are estimated to be between $37,000 and $115,000 per patient
per year. Nevertheless, because of the difficulty in detecting the virus with
currently available technology and the serious consequences of CMV infection,
antiviral therapy is often prescribed as a prophylactic measure.
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Additionally, because current testing methods do not allow quantification, and
therefore effective monitoring, of CMV infection, physicians often prescribe
unnecessarily large doses of anti-viral drugs.
Current CMV Tests
All of the current methods available to detect the presence of CMV have
significant limitations. Conventional tissue culture methods have a low level
of sensitivity, can take up to 28 days to produce a definitive answer, are
labor intensive and because of the time required, are not useful for patient
monitoring. Rapid culture methods can provide results within one or two days,
but have a low level of sensitivity. Antigen tests can detect active CMV
infection and are highly sensitive. They are, however, complex and labor
intensive and have limited reliability. Additionally, antibody tests, which
are commonly used to detect viruses such as HIV, are of limited utility in
detecting CMV, since most healthy adults have antibodies against CMV.
The Digene CMV Solution
The Company is developing its Hybrid Capture CMV DNA test to provide
clinicians with an accurate and timely means of diagnosing and monitoring CMV
infection. The Company's CMV test can quantify the amount of CMV present in a
serum or tissue sample. This information allows physicians to track
therapeutic efficacy. Studies have shown that the Company's CMV test is
capable of detecting CMV infection in 94% of the cases in which it is present.
Digene's CMV test can be performed by relatively unskilled laboratory
technicians using standard clinical laboratory equipment with same day results.
Digene is currently conducting clinical trials of its CMV test at The
Mayo Clinic and The Cleveland Clinic. The Company expects to complete these
trials and submit a 510(k) premarket notification to the FDA by the end of
1996. There can be no assurance that, once a 510(k) notification is submitted
for the Company's CMV test, the FDA will grant clearance in a timely manner, if
at all, or will not require the submission of additional clinical data or a
premarket approval ("PMA") application. See "Business -- Government
Regulation."
BUSINESS STRATEGY
The Company's principal objective is to successfully commercialize its
HPV test. The Company has achieved the following milestones:
- received FDA approval for its HPV test in 1995 for the follow-up
screening of women with equivocal Pap smears
- consummated an initial public offering of shares of its Common
Stock in May 1996
- achieved acceptance by all major clinical reference laboratories
throughout the United States
- validated the clinical utility of the HPV test through peer
reviewed publications in prominent medical journals
- established reimbursement by many third-party payors
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The Company intends to build on these accomplishments in order to commercialize
its HPV test. In addition, the Company intends to continue to develop its CMV
test and other Hybrid Capture tests. The key components of the Company's
strategy are as follows:
Establish HPV Testing as the New Standard of Care. The Company is
focused on establishing its HPV test as the new standard of care for cervical
cancer screening. In order to achieve this objective, the Company is working
closely with clinical reference laboratories, third-party payors, health care
providers and institutions, and their affiliated physicians who influence the
introduction and acceptance of new tests. The Company has supported and
participated in more than a dozen major multi-center trials, including an
ongoing $21 million NCI study designed to establish the clinical utility and
the cost-effectiveness of HPV screening of women with equivocal or low-grade
Pap smears. The Company believes that the adoption of the Company's HPV test
by managed care organizations is critical for establishing the Company's HPV
test as the new standard of care for cervical cancer screening. Accordingly,
the Company is working with a number of managed care organizations, including
Kaiser Permanente (the largest health maintenance organization in the United
States) and Omnia, a provider of gynecological services to managed care
organizations, to demonstrate the clinical utility and cost-effectiveness of
the Company's HPV test.
Focus Initially on Equivocal Pap Smears. The Company believes that
there is a need for a rapid, accurate, objective and non-invasive method to
screen women with equivocal Pap smears and that the Company's FDA-approved HPV
test presents an immediate market opportunity. Women with equivocal Pap smears
often undergo colposcopy, biopsy and, in certain cases, ablation, which cost
approximately $300, $100 and $500, respectively. The Company believes that the
use of its HPV test for the follow-up screening of women with equivocal Pap
smears will improve the ability to accurately screen for cervical disease and
reduce the need for costly and invasive follow-up procedures. As a result, the
Company will initially focus its marketing and sales efforts on gaining market
acceptance for the Company's test for the follow-up screening of women with
equivocal Pap smears.
Establish HPV Test as a Primary Screen in Conjunction With Pap Smears.
The Company intends to submit a PMA supplement for use of its HPV test as a
primary cervical cancer screening test in the United States either in
conjunction with or separate from Pap smear testing. The Company believes that
if used routinely in conjunction with Pap smears, its HPV test could result in
more accurate diagnosis of precancerous cervical disease and reduce the number
of false negatives associated with Pap smears. There can be no assurance that
the FDA will grant approval of such a PMA supplement in a timely manner, if at
all, or that the FDA will not require the submission of additional information,
data or a PMA application.
Expand Sales and Marketing. The Company has established a limited
direct sales force in the United States and Canada, and a network of
distributors in Europe, South America and Asia. The Company intends to expand
its sales and marketing efforts in its existing markets and to expand into
additional markets as opportunities arise. In addition, the Company intends to
enter into joint marketing arrangements with clinical reference laboratories
having large sales forces which have the ability to market the Company's
products directly to gynecologists and other primary care physicians. The
Company believes these marketing efforts, along with the Company's marketing
efforts, will encourage physicians to request the Company's HPV test as a
regular part of their cervical cancer screening protocol. The Company also
believes that educating physicians on the benefits of the Company's HPV test
will be an effective method to achieve market penetration, and it intends to
continue to launch marketing and sales campaigns designed to increase product
awareness through educational and promotional programs.
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Pursue Strategic Alliances. The Company intends to continue to pursue
strategic alliances with other manufacturers of medical diagnostic products,
pharmaceutical companies and clinical reference laboratories in order to
increase market acceptance of its products and to expand its marketing efforts.
The Company is pursuing co-marketing and distribution agreements with clinical
testing laboratories and large multinational diagnostic companies and is also
pursuing collaborations with clinical testing laboratories for the development
of new diagnostic tests. The Company may seek strategic alliances with
pharmaceutical companies for the co-promotion of the Company's viral diagnostic
tests that are under development with antiviral drugs as a complete therapeutic
package.
Capitalize on Core Technology and Expertise. The Company believes that
its proprietary Hybrid Capture technology is a significant improvement over
current DNA diagnostic testing methods. The Company intends to use its
proprietary technology platform to develop a wide range of DNA diagnostic tests
for blood viruses, STDs and opportunistic infections. Research and development
programs include efforts to continuously improve the sensitivity and
reliability of its tests, further simplify assays, and apply the Hybrid Capture
technology to the development of products for the early detection and
management of other diseases. The Company is developing a next generation
format which is designed to allow simultaneous testing for multiple STDs from a
single patient sample.
MARKETING AND SALES
The Company currently sells its products in the United States and Canada
to clinical reference and hospital laboratories through its direct sales force.
In Europe, Asia and South America, the Company's products are sold through a
network of distributors. In Brazil, the Company's products are sold through
the Company's majority owned subsidiary, Digene Brazil.
United States Market
The Company's HPV test for the follow-up screening of women with
equivocal Pap smears is offered by substantially all major clinical reference
laboratories throughout the United States. The Company expects to increase its
four person sales force to approximately 30 persons by 1998 to market its HPV
test and its other products, directly and indirectly, to (i) the more than
4,000 laboratories in the United States, (ii) insurers, managed care
organizations and other third-party payors and (iii) the approximately 30,000
gynecologists and other clinicians who perform Pap smears.
The Company has active marketing programs directed at the managed care
market and the fee-for-service market. In managed care, the Company is working
with Kaiser Permanente on a study involving 40,000 women which the Company
believes will demonstrate the clinical utility and cost effectiveness of the
Company's HPV test in a managed care setting. In the fee-for-service market,
the Company intends to create demand through joint marketing programs with
clinical reference laboratories. The Company also plans to market directly to
physicians by providing educational and promotional materials, and by making
presentations at continuing education programs and medical meetings. The
Company also plans to develop educational programs and advertising directed at
women. Finally, the Company intends to market directly to insurers and managed
care organizations with the goal of establishing uniform reimbursement for HPV
testing.
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International Markets
The Company currently sells its products outside the United States
through a network of distributors. The Company intends to enter into
additional marketing and distribution agreements with multinational corporate
partners and may establish direct sales forces in certain countries, if demand
warrants. A substantial portion of the Company's international marketing
activities are performed by, or in conjunction with, the Company's distribution
partners. In addition, distribution partners are responsible for obtaining
regulatory approvals and establishing reimbursement from third-party payors in
their respective territories.
The Company expects to tailor its marketing efforts to the circumstances
of each country to encourage local authorities and industry opinion leaders to
accept HPV testing as the standard of care for cervical cancer screening. The
Company is working closely with EUROGIN (the European Research Organization on
Genital Infection and Neoplasia), the Imperial Cancer Research Foundation of
the United Kingdom and other leading research groups to accelerate the
implementation of HPV testing by focusing opinion leaders, clinicians and
public health officials on the benefits of HPV testing.
The Company currently markets its DNA tests through distributors in,
among other countries, the United Kingdom, Germany, France, Spain, Italy and
Brazil. Revenues from export sales were $2,286,000, $3,295,000 and $3,564,000
in fiscal 1994, 1995 and 1996, respectively.
In June 1996, the Company established a new subsidiary in Brazil, Digene
Do Brasil LTDA, with a leading gynecologist and educator of gynecologists in
Brazil, who has a minority interest in the new company. The new company is
offering the Hybrid Capture HPV DNA test through a network of more than 18
gynecologic service laboratories.
TECHNOLOGY
The Company's Hybrid Capture technology offers a rapid, accurate,
easy-to-use detection system that can be performed in any laboratory setting
with standard laboratory equipment. The Company's Hybrid Capture technology
uses RNA probes to bind specific DNA sequences, which creates DNA:RNA hybrids
that can be detected with chemiluminescent materials. To perform a test using
the Hybrid Capture system, the test sample is mixed with RNA probes.
Complementary DNA sequences in the sample immediately bind to the RNA, creating
DNA:RNA hybrids. The DNA:RNA hybrids are then captured on the surface of a
specially coated polystyrene tube. All remaining DNA and specimen contaminants
are removed by washing the tube. Captured hybrids are then reacted with the
Company's proprietary signal amplification system, which uses antibodies to
detect any DNA:RNA hybrids bound to the tube. If DNA:RNA hybrids from the
specimen are present on the surface of the tube, light is emitted, signaling a
positive test result. The amount of DNA present in the sample can be rapidly
and accurately quantified using standard laboratory luminometers. The entire
test can be completed in four to six hours.
The Company believes that its Hybrid Capture system is a significant
improvement over other existing technologies because of its specificity,
shortened processing time, ease of use, greater accuracy, and ability to
quantify viral and bacterial load. The Company is also using its Hybrid
Capture technology as a platform to develop a wide range of DNA diagnostic and
monitoring tests for blood viruses, STDs and opportunistic infections.
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RESEARCH AND DEVELOPMENT
The Company's research and development efforts are designed to (i)
refine and expand the Company's core technology and (ii) apply its core
technology to additional blood viruses, STDs and opportunistic infections.
The Company's principal research and development program relates to the
improvement of the sensitivity and ease of interpretation of its Hybrid Capture
technology. In an effort to automate its Hybrid Capture technology in order to
further simplify and shorten test processing, the Company is developing, among
other things, a microtiter plate which, subject to FDA approval, will replace
the polystyrene tubes as a standard component in its tests. In addition, the
Company is developing a proprietary target amplification system, designed to be
coupled with the Hybrid Capture technology, that may permit enhanced clinical
sensitivity for detecting particular viruses and bacteria.
Future intended applications of the Company's technology include the
detection of additional STDs and blood viruses. The Company is developing a
test designed to detect, from a single specimen, HPV and other STDs such as
chlamydia, gonorrhea and herpes. Additional blood virus tests that the Company
is developing include quantitative DNA or RNA measures for HIV and HBV. The
Company also intends to begin a pilot program in the area of genomics (the
study of gene sequences) in an effort to develop products, using its Hybrid
Capture technology, for the early detection and management of genetic disease
and cancer.
At September 16, 1996, the Company had 33 employees engaged in research
and development. Company-sponsored research and development expenditures in
fiscal 1994, 1995 and 1996 were approximately $576,000, $1,107,000 and
$2,048,000, respectively. In addition to Company-sponsored research and
development, the Company performs research and development through contracts
with third parties, such as International Murex Technologies Corporation
(together with its affiliates, "Murex").
COMPETITION
The medical diagnostics and biotechnology industries are subject to
intense competition. The Company's competitors in the United States and abroad
are numerous and include, among others, diagnostic, health care, pharmaceutical
and biotechnology companies. Among the Company's major competitors in the
market for DNA-probe diagnostics are Roche, Abbott Laboratories, Chiron and
GenProbe. Other companies, including large pharmaceutical and biotechnology
companies, may enter the market for DNA-probe diagnostics.
In May 1996, Oncor, Inc. announced that it received notification from
the FDA that its HPV test is approvable by the FDA, subject to certain
conditions. To date, the product has not been approved for clinical diagnostic
use. Although the Company believes its HPV test has commercial advantages over
the competing test, Oncor, Inc. and other competitors and potential competitors
may be able to develop technologies that are as effective as, or more effective
or easier to interpret than, those offered by the Company, which would render
the Company's products noncompetitive or obsolete. Moreover, many of the
Company's existing and potential competitors have substantially greater
financial, marketing, sales, distribution and technological resources than the
Company. Such existing and potential competitors may be in the process of
seeking FDA approval for their respective HPV tests or may also enjoy
substantial advantages over the Company in terms of research and development
expertise, experience in conducting clinical trials, experience in regulatory
matters, manufacturing efficiency, name recognition, sales and marketing
expertise and distribution channels. In addition, many of these companies have
established
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third-party reimbursement for their products. Accordingly, there can be no
assurance that the Company will be able to compete effectively against such
potential competitors.
In marketing its HPV test for the follow-up screening of women with
equivocal Pap smears, the Company will compete with well-established follow-up
procedures, such as Pap smear retesting, colposcopy and biopsy. These
procedures are widely accepted and have a long history of use, and there can be
no assurance that HPV testing, in general, or the Company's HPV test for the
follow-up screening of women with equivocal Pap smears, in particular, will be
able to gain market acceptance on a timely basis, or at all.
Subject to FDA and other applicable regulatory approvals, the Company
plans to market its HPV test as a primary cervical cancer screening test. In
doing so, the Company will compete against the Pap smear, which is the only
widely used primary cervical cancer screening test. Although the Company
believes the Pap smear has significant limitations, it has a long history of
use and is widely accepted as an inexpensive and, with regular screening,
adequate screening test for cervical cancer. Additionally, technological
advancements designed to improve quality control over sample collection and
preservation, and to reduce the Pap smear test's susceptibility to human error,
may serve to increase physician reliance on the Pap smear and solidify its
market acceptance. Further, if marketed as an adjunct to the Pap smear test
for initial screening in the United States and Canada, the Company's HPV test
may be seen as adding unnecessary expense to the accepted cervical cancer
screening methodology. Consequently, there is no assurance that the Company's
HPV test will be able to attain market acceptance as a screening test on a
timely basis, or at all. See "Business -- Government Regulation."
The Company believes the primary competitive factors in the market for
DNA-probe diagnostics are clinical performance and reliability, ease of use,
cost, proprietary position, regulatory approvals and availability of
reimbursement.
GOVERNMENT REGULATION
The medical devices to be marketed and manufactured by the Company are
subject to extensive regulation by the FDA, and, in some instances, by foreign
governments. Pursuant to the Federal Food, Drug and Cosmetic Act, as amended,
and the regulations promulgated thereunder (the "FDC Act"), the FDA regulates
the clinical testing, manufacture, labeling, distribution and promotion of
medical devices. Noncompliance with applicable requirements can result in,
among other things, fines, injunctions, civil penalties, recalls or seizures of
products, total or partial suspension of production, failure of the government
to grant premarket clearance or premarket approval for devices, withdrawal of
marketing approvals and criminal prosecution. The FDA also has the authority
to request repair, replacement or refund of the cost of any device manufactured
or distributed by the Company.
In the United States, medical devices and diagnostics are classified
into one of three classes (class I, II or III), on the basis of the controls
deemed necessary by the FDA to reasonably assure their safety and
effectiveness. Under FDA regulations, class I devices are subject to general
controls (for example, labeling, premarket notification and adherence to good
manufacturing practices ("GMPs")), and class II devices are subject to general
and special controls (for example, performance standards, postmarket
surveillance, patient registries and FDA guidelines). Generally, class III
devices are those which must receive a PMA by the FDA to ensure their safety
and effectiveness (for example, life-sustaining, life-supporting and
implantable devices, or new devices which have not been found substantially
equivalent to legally marketed devices).
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Before a new device can be introduced into the market, the manufacturer
generally must obtain marketing clearance through the filing of either a 510(k)
notification or a PMA application. 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 II medical device or to a class
III medical device for which the FDA has not called for a PMA. It generally
takes from four to twelve months from submission to obtain a 510(k) clearance,
but it may take longer. The FDA may determine that a proposed device is not
substantially equivalent to a legally marketed device or that additional
information or data is needed before a substantial equivalence determination
can be made, either of which could delay market introduction of a new product.
A request for additional data may require that clinical studies of the device's
safety and efficacy be performed. Additionally, modifications or enhancements
that could significantly affect the safety or efficacy of the device or that
constitute a major change to the intended use of the device will require new
510(k) submissions.
A PMA application must be filed if a proposed device is not
substantially equivalent to a legally marketed class I or class II device or if
it is a class III device for which the FDA has called for a PMA. A PMA
application must be supported by valid scientific evidence, including
preclinical and clinical trial data, to demonstrate the safety and
effectiveness of the device. The PMA application must also contain the results
of all relevant bench tests, laboratory and animal studies, a complete
description of the device and its components, a detailed description of the
methods, facilities and controls used to manufacture the device in addition to
device labeling and advertising literature.
If a PMA application is accepted for filing, the FDA begins an in-depth
review of the submission. FDA review of a PMA application generally takes one
to two years from the date the PMA application is accepted for filing, but may
take significantly longer. The PMA review process includes an inspection of
the manufacturer's facilities to ensure that the facilities are in compliance
with the applicable GMP requirements. In addition, an advisory committee made
up of clinicians and/or other appropriate experts is typically convened to
evaluate the application and make recommendations to the FDA as to whether the
device should be approved. The PMA 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.
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 a PMA often require the submission of
the same type of information required for an initial PMA to support the
proposed change.
Although clinical investigations of most devices are subject to the
investigational device exemption ("IDE") requirements, clinical investigations
of in vitro diagnostic ("IVDs") tests are exempt from the IDE requirements,
including FDA approval of investigations, provided the testing meets certain
exemption criteria. IVD manufacturers must also establish distribution
controls to assure that IVDs distributed for the purpose of conducting clinical
investigations are used only for that purpose. Pursuant to current FDA policy,
manufacturers of IVDs labeled for investigational use only ("IUO") or research
use only ("RUO") are encouraged by the FDA to establish a certification program
under which investigational IVDs are distributed to or utilized only by
individuals, laboratories, or health care facilities that have provided the
manufacturer with a written certification of compliance indicating that the IUO
or RUO product will be restricted in use and will, among other things, meet
institutional review board and informed consent requirements.
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Export of products subject to the 510(k) notification requirements, but
not yet cleared to market, are permitted with FDA authorization provided
certain requirements are met. Unapproved products subject to the PMA
requirements must be approved by the FDA for export. To obtain FDA export
approval certain requirements must be met and information must be provided to
the FDA, including, with some exceptions, documentation demonstrating that the
product is approved for import into the country to which it is to be exported
and, in some instances, safety data for the devices. There can be no assurance
that the FDA will grant export approval when such approval is necessary or that
countries to which the devices are to be exported will approve the devices for
import. Failure on the part of the Company to obtain export approvals when
required, could significantly delay and impair the Company's ability to export
its devices and could have a material adverse effect on the Company.
In April 1995 the Company obtained a PMA for its HPV test to detect the
presence of HPV in women with equivocal Pap smears. The Company intends to
submit a PMA supplement to obtain market approval for use of its HPV test as a
primary cervical cancer screening test either in conjunction with or separate
from Pap smear testing. The Company anticipates that a substantial amount of
clinical data will be required to support the PMA supplement. There can be no
assurance that the data the Company submits will be adequate to support the use
of the HPV test as a primary cervical cancer screening test. Moreover, there
can be no assurance that the FDA will grant approval of a PMA supplement for
use of the HPV test as a primary cervical cancer screening test in a timely
manner, if at all, or that the FDA will not require the submission of
additional information, data or a PMA application. Failure to obtain FDA
approval for the HPV test as a primary cervical cancer screening test could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company intends to export its HPV test for use in primary cervical
cancer screening prior to obtaining FDA approval for this use in the United
States. Such exports may require regulatory approvals from various countries,
will require FDA approval and will necessitate the submission of certain
information and data to the FDA. There can be no assurance that the FDA will
grant approval of such exports, and failure on the part of the Company to
obtain such approvals could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company intends to submit a 510(k) notification for its Hybrid
Capture CMV DNA test by the end of 1996. The Company is currently collecting
clinical data on the test's safety and effectiveness to submit to the FDA in
connection with a 510(k) notification. Based on discussions to date with the
FDA, the Company believes that its CMV test can be cleared to market through
the 510(k) notification process; however, the Company understands that the FDA
will likely subject the submission to a "Tier 3" level of review, which
includes close scrutiny of the clinical data and product performance. The FDA
will require substantial clinical data in support of the submission and may
seek an advisory committee review and recommendation concerning the safety and
effectiveness of the test. There can be no assurance that, once a 510(k)
notification is submitted for the CMV test, the FDA will grant clearance in a
timely manner, if at all, or will not require the submission of additional
clinical data or a PMA application.
The Company has developed viral and bacterial tests that it distributes
in the United States on a RUO basis. Failure of the Company or recipients of
the Company's RUO devices to comply with the regulatory limitations on the
distribution and use of RUO devices could result in enforcement action by the
FDA that would adversely affect the Company's ability to distribute the tests
prior to obtaining FDA clearance or approval for them.
Any products manufactured or distributed by the Company pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA, including recordkeeping requirements and
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reporting of adverse experiences with the use of the device. Device
manufacturers are required to register their establishments and list their
devices with the FDA and are subject to periodic inspections by the FDA and
certain state agencies. The FDC Act requires devices to be manufactured in
accordance with GMP regulations, which impose certain procedural and
documentation requirements upon the Company with respect to manufacturing and
quality assurance activities.
The FDA actively enforces regulations prohibiting the promotion of
devices for unapproved uses and the promotion of devices for which premarket
clearance or approval has not been obtained. Failure to comply with these
requirements can result in regulatory enforcement action by the FDA and
possible limitations on the promotion of the Company's products.
The Company and its products are subject to a variety of state laws and
regulations in those states and localities where its products are or will be
marketed. Any applicable state or local regulations may hinder the Company's
ability to market its products in those states or localities. Manufacturers
are also subject to numerous federal, state and local laws relating to such
matters as safe working conditions, manufacturing practices, environmental
protection, fire hazard control and disposal of hazardous or potentially
hazardous substances. There can be no assurance that the Company will not be
required to incur significant costs to comply with such laws and regulations
now or in the future or that such laws or regulations will not have a material
adverse effect upon the Company.
The introduction of the Company's developmental stage test products in
foreign markets will also subject the Company to foreign regulatory clearances,
which may impose additional substantial costs and burdens. International sales
of medical devices are subject to the regulatory requirements of each country.
The regulatory review process varies from country to country and many countries
also impose product standards, packaging requirements, labeling requirements
and import restrictions on devices. In addition, each country has its own
tariff regulations, duties and tax requirements.
The approval by the FDA and foreign government authorities is
unpredictable and uncertain, and no assurance can be given that the necessary
approvals or clearances will be granted on a timely basis or at all. Delays in
receipt of, or a failure to receive, such approvals or clearances could have a
material adverse effect on the business, financial condition and results of
operations of the Company.
Changes in existing requirements or adoption of new requirements or
policies could adversely affect the ability of the Company to comply with
regulatory requirements. Failure to comply with regulatory requirements could
have a material adverse effect on the Company's business, financial condition
and results of operations. There can be no assurance that the Company will not
be required to incur significant costs to comply with laws and regulations in
the future or that laws or regulations will not have a material adverse effect
upon the Company's business, financial condition and results of operations.
The FDC Act requires devices to be manufactured in accordance with GMPs
which impose certain procedural and documentation requirements upon the Company
with respect to manufacturing and quality assurance activities. Noncompliance
with GMPs can result in, among other things, fines, injunctions, civil
penalties, recalls or seizures of products, total or partial suspension of
production, failure of the government to grant premarket clearance or premarket
approval for devices, withdrawal of marketing approvals, and criminal
prosecutions. The FDA also has proposed changes to the GMPs regulations which,
if finalized, would likely increase the cost of compliance with the
requirements. Any failure by the Company to comply with GMP requirements could
have a material adverse effect on the Company's business, financial condition
and results of operations.
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LICENSES, PATENTS AND PROPRIETARY INFORMATION
The Company's success will depend in part on its ability to obtain and
maintain patent protection for its technologies, products and processes,
preserve its trade secrets, and operate without infringing the proprietary
rights of other parties. Because of the substantial length of time and expense
associated with bringing new products through development to the marketplace,
the biotechnology industry places considerable importance on obtaining and
maintaining patent and trade secret protection for new technologies, products
and processes. Despite these precautions, it may be possible for unauthorized
third parties to utilize the Company's technology or to obtain and use
information that the Company regards as proprietary. The laws of some
countries do not protect the Company's proprietary rights in its technologies,
products and processes to the same extent as do the laws of the United States.
The Company holds four issued U.S. patents relating to HPV types 35, 43,
44 and 56. These patents expire in 2007. The Company has also filed
corresponding foreign patent applications in certain countries. The patents
relating to HPV types 35, 43 and 56 have been licensed to Institut Pasteur (see
Cross License discussion below). In addition, the Company is the exclusive,
worldwide licensee of (i) a U.S. patent application and certain corresponding
foreign patents and patent applications relating to HPV type 52 and a U.S.
patent and certain corresponding foreign patents relating to the use of the L1
gene sequence to detect specific HPV types (see Georgetown License discussion
below) as well as (ii) certain trade secrets relating to HPV type 58 (see
Kanebo License discussion below).
Through a cross license with Institut Pasteur (the "Cross License"), the
Company has obtained a worldwide license to U.S. patents and patent
applications and corresponding foreign patent applications relating to HPV
types 39 and 42 and foreign patents and applications relating to HPV type 33.
In return, the Company has granted to Institut Pasteur a worldwide license to
its three U.S. patents and corresponding foreign patents and applications
relating to HPV types 35, 43 and 56. The Company has granted Institut Pasteur
the right to extend the scope of the Cross License to include the U.S. patent
and corresponding patent applications relating to HPV type 44 at such time as
Institut Pasteur shall have discovered and developed an additional HPV type
which is equivalent in value to HPV type 44. In return for such an extension,
the Company will receive a license to the new HPV type discovered and developed
by Institut Pasteur. The Cross License is co-exclusive, except that Institut
Pasteur has sublicensed its rights to Beckman Instruments, Diagnostic Pasteur,
and their affiliates, and the Company has sublicensed its rights on a
non-exclusive basis to Toray Fuji Bionics, and its affiliates, for use outside
North America and certain countries in Western Europe. See "Business --
Competition." There can be no assurance that a sublicensee will not use its
rights under the Cross License to develop additional products or services that
compete with the Company's products. The Company believes that the Cross
License terminates on the last to expire of the underlying patent rights. Any
prior termination of the Cross License could have a material adverse effect on
the Company's business, financial condition and results of operations.
Through a license with Georgetown University (the "Georgetown License"),
the Company has obtained exclusive, worldwide rights to a U.S. patent
application and corresponding foreign patents and patent applications relating
to HPV type 52 and to a U.S. patent and corresponding foreign patents relating
to the use of the L1 gene sequence to detect specific HPV types. Unless
terminated earlier, the Georgetown License will terminate upon the last to
expire of the licensed patent rights. All of the issued foreign patents
relating to HPV type 52 and the L1 related patent will expire in 2008. The
Company is obligated to make certain royalty payments to Georgetown University
based on the percentage of net sales of products incorporating the licensed
technologies.
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Through a license with Kanebo, Ltd. (the "Kanebo License"), the Company
has obtained exclusive, worldwide rights (except for Japan where Kanebo, Ltd.
retained the right to grant a non-exclusive sublicense to Toray Industries,
Inc.) to a foreign patent application relating to HPV type 58. Unless
terminated earlier, the Kanebo License expires on the later to occur of January
1, 2010 or the expiration of any patent relating to HPV type 58. The Company
is obligated to make certain royalty payments to Kanebo, Ltd. based on a
percentage of net sales of products incorporating or using HPV type 58. The
Company will be required to obtain FDA approval in order to utilize HPV type 58
as part of its HPV test, and there can be no assurance that the Company will be
successful in obtaining the required FDA approval. See "Business -- Government
Regulation."
The Company has filed a U.S. patent application relating to certain
aspects of its Hybrid Capture technology. The Company has also filed U.S.
patent applications in the areas of direct DNA probe labeling, signal
amplification and biotin-avidin probe chemistry and its continuous
amplification reaction ("CAR") amplification method. The inventions claimed by
these applications may be used in the Company's DNA probes and any patents that
issue from such applications may provide some ancillary protection for certain
aspects of the Company's products. Under current law, patent applications in
the United States are maintained in secrecy until patents are issued and patent
applications in foreign countries are maintained in secrecy for a period of
time after filing. There can be no assurance that a U.S. patent or any foreign
patents relating to the Company's Hybrid Capture technology will be issued to
the Company on a timely basis, or at all.
The Company has received inquiries regarding possible patent
infringements relating to, among other things, certain aspects of its Hybrid
Capture technology. The Company believes that the patents of others to which
these inquiries relate are either not infringed by the Company's Hybrid Capture
technology or are invalid. However, there can be no assurance that the Company
will not be subject to further claims that its technology, including its Hybrid
Capture technology, or its products infringe the patents or proprietary rights
of third parties. The defense of any such claims, if made, could be time
consuming and expensive, even if the outcome is favorable. An adverse outcome
could subject the Company to significant liabilities to third parties, require
the Company to obtain licenses from third parties, or require the Company to
cease sales of related products. No assurance can be given that any licenses
required under any such third party patents or proprietary rights would be made
available or commercially reasonable terms, if at all.
No assurance can be given that the U.S. Patent and Trademark Office or
any foreign patent office will grant patent protection for the subject matter
of any pending patent applications, or that present or future patents will
provide commercially significant protection to the Company's present or future
technologies, products, or processes. Furthermore, no assurance can be given
that others will not independently develop substantially equivalent proprietary
information not covered by patents to which the Company owns rights or obtain
access to the Company's know-how or that others will not be issued patents that
may prevent the sale of one or more of the Company's products, or require
licensing and the payment of significant fees or royalties by the Company to
third parties in order to enable the Company to conduct its business. There
can be no assurance that such licenses would be available or, if available,
would be on terms acceptable to the Company or that the Company would be
successful in any attempt to redesign its products or processes to avoid
infringement. The Company's failure to obtain these licenses or to redesign
its products or processes would have a material adverse effect on the Company's
business, financial condition and results of operations. Legal standards
relating to the scope of claims and the validity of patents in the
biotechnology field are still evolving, and no assurance can be given as to the
degree of protection any patents issued to or licensed by the Company will not
be infringed by the products of others. Defense and prosecution of patent
claims can be expensive and time consuming,
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regardless of whether the outcome is favorable to the Company, and can result
in the diversion of substantial resources from the Company's other activities.
An adverse outcome could subject the Company to significant liabilities to
third parties, require the Company to obtain licenses from third parties, or
require the Company to cease any related research and development activities or
product sales. In addition, the laws of certain countries may not protect the
Company's intellectual property.
The Company's success is also dependent upon the skill, knowledge, and
experience of its scientific and technical personnel. To help protect its
rights, the Company requires all employees, consultants, advisors, and
collaborators to enter into confidentiality agreements that prohibit the
disclosure of confidential information to anyone outside the Company and
require disclosure and, in most cases, assignment to the Company of their
ideas, developments, discoveries, and inventions. There can be no assurance,
however, that these agreements will provide adequate protection for the
Company's trade secrets, know-how, or other proprietary information in the
event of any unauthorized use or disclosure.
THIRD-PARTY REIMBURSEMENT
Hospitals, physicians and other health care providers rely on
third-party payors, such as government entities, managed care organizations and
private insurance plans, to reimburse the costs and fees associated with the
use of diagnostic tests, such as the Company's HPV test for the follow-up
screening of women with equivocal Pap smears. Successful sales of the
Company's HPV test for the follow-up screening of women with equivocal Pap
smears in the United States and other markets will depend, in part, on the
availability of adequate reimbursement from third-party payors such as
government entities, managed care organizations and private insurance plans.
There is significant uncertainty concerning third-party reimbursement for the
use of any medical test incorporating new technology. Reimbursement by a
third-party payor may depend on a number of factors, including the payor's
determination that the use of the Company's HPV test for the follow-up
screening of women with equivocal Pap smears is clinically useful and
cost-effective, not experimental or investigational, medically necessary and
appropriate for the specific patient. Since reimbursement approval is required
from each payor individually, seeking such approvals is a time consuming and
costly process which requires the Company to provide scientific and clinical
support for the use of the Company's HPV test for its approved indications to
each payor separately. There can be no assurance that third-party
reimbursement will be consistently available for the Company's HPV test for its
approved indications or any of the Company's other products that may be
developed or that such third-party reimbursement will be adequate. Federal and
state governmental agencies are increasingly considering limiting health care
expenditures. For example, the United States Congress is currently considering
various proposals to significantly reduce Medicaid and Medicare expenditures.
Such proposals, if enacted, could have a material adverse effect on the
Company's business, financial condition and results of operations.
Outside the United States, the Company relies on a network of
distributors to establish reimbursement from third-party payors in their
respective territories. The Company's distributors have established
reimbursement for the HPV test in Germany and Brazil. Accordingly, the
establishment of reimbursement from third-party payors in such countries is
outside the Company's control. Health care reimbursement systems vary from
country to country and, accordingly, there can be no assurance that third-party
reimbursement will be made available for the Company's products under any other
reimbursement system.
Third-party payors are increasingly limiting reimbursement coverage for
medical diagnostic products and in many instances are exerting significant
pressure on medical suppliers to lower their prices. Lack of or inadequate
reimbursement by governmental and other third-party payors for the Company's
products
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could have a material adverse effect on the Company's business, financial
condition and results of operations.
MANUFACTURING
Manufacturing of the Company's products involves the combination of more
than 200 biological reagents, inorganic and organic reagents and kit components
(such as vials and packaging material) into finished test kits. Biological
reagents include RNA probes, antibodies and detection reagents. These reagents
are manufactured in the Company's manufacturing facility in Beltsville,
Maryland. Kit components, inorganic and organic reagents and other reagents
and materials that are classified as low-complexity components are generally
purchased from outside vendors and processed into finished reagents and test
products. The Company believes it has sufficient manufacturing capacity to
expand production for the foreseeable future. The Company has established a
quality control program, including a set of standard manufacturing and
documentation procedures intended to ensure that, where required, the Company's
products are manufactured in accordance with GMP. See "Business -- Government
Regulation."
PRODUCT LIABILITY
The Company's business is subject to product liability risks inherent in
the testing, manufacturing and marketing of the Company's HPV test for its
approved indications and other products developed by the Company. There can be
no assurance that product liability claims will not be asserted against the
Company, its collaborators or licensees. The Company currently maintains
product liability insurance coverage with a combined single limit of
$3,000,000. There can be no assurance, however, that this coverage will be
adequate to protect the Company against future product liability claims or that
product liability insurance will be available to the Company in the future on
commercially reasonable terms, if at all. Furthermore, there can be no
assurance that the Company will be able to avoid significant product liability
claims and the attendant adverse publicity. Consequently, a product liability
claim or other claim with respect to uninsured or underinsured liabilities
could have a material adverse effect on the Company's business, financial
condition and results of operations.
EMPLOYEES
At September 16, 1996, the Company employed 89 persons, including 33 in
research and development, 29 in manufacturing, including quality assurance, 16
in sales and marketing and 11 in accounting, finance, administration and
clinical studies. The Company is not subject to any collective bargaining
agreements and believes that its relationship with its employees is good.
ITEM 2. PROPERTIES
The Company's executive office and manufacturing facility is located in
Beltsville, Maryland. The lease on this 19,780-square foot facility expires on
July 31, 1998, and can be renewed by the Company for an additional five-year
period. In addition, the Company has a 9,286-square-foot administrative office
and research and development facility in Silver Spring, Maryland. The lease on
this facility will terminate on December 31, 1998, subject to renewal at the
Company's option.
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ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings and is not
aware of any threatened litigation that could have a material adverse effect on
the Company's business, financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITIONS WITH THE COMPANY
---------------------- ----- -----------------------------------------------
Evan Jones . . . . . . . . . . . 39 President, Chief Executive Officer and Chairman of the
Board (1)
Charles M. Fleischman . . . . . . 38 Executive Vice President, Chief Operating Officer,
Chief Financial Officer and Director (2)
Attila D. Lorincz, Ph.D. . . . . 41 Vice President, Research and Development, and
Scientific Director (3)
Deborah J. Oronzio . . . . . . . 44 Vice President, Marketing (4)
Joseph P. Slattery . . . . . . . 31 Controller (5)
- ----------
(1) Mr. Jones has served as President, Chief Executive Officer and a
director since Armonk Partners acquired a controlling interest in the Company
in July 1990, and has served as Chairman of the Board since September 1995.
(2) Mr. Fleischman has served as Executive Vice President and a
director since July 1990, Chief Operating Officer since September 1995 and
Chief Financial Officer since March 1996. Mr. Fleischman was named to the
position of Executive Vice President after Armonk Partners acquired a
controlling interest in the Company in July 1990.
(3) Dr. Lorincz has served as Vice President, Research and
Development, and Scientific Director since the LTI Acquisition (as defined
herein) in December 1990. His research career includes postdoctoral
fellowships at the University of California. He also serves on a number of
advisory committees and is an Adjunct Associate Professor in the Georgetown
University Medical School Department of Pathology.
(4) Ms. Oronzio has served as Vice President, Marketing since March
1996 and from August 1991 to March 1996 served as Director of Sales and
Marketing. Prior to that, she was International Product Manager, AIDS and
Hepatitis Systems, at Pharmacia Diagnostics, Inc., a biomedical products
company.
(5) Mr. Slattery has served as Controller since February 1996. From
March 1995 to February 1996, Mr. Slattery was Director, Business Management,
for I-NET, Inc., a computer services company. From April 1994 to March 1995,
he was the Managing Principal of Payne, Slattery and Company, a management
consulting firm. From October 1992 to April 1994, Mr. Slattery was Treasurer
and Vice President, Finance and Accounting, for Telos Corporation, a computer
hardware and services company. From August 1992 to October 1992, Mr. Slattery
was self employed as a management consultant. From March 1992 to August 1992,
Mr. Slattery was a consultant with Argus Management, a management consulting
firm. Prior to that, he was employed in various capacities by KPMG Peat
Marwick.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Following the Company's initial public offering of Common Stock on May
22, 1996, the Company's Common Stock has been traded on the Nasdaq National
Market under the symbol "DIGE." The following table sets forth, for the fiscal
quarter indicated, the high and low closing sale prices for the Common Stock,
as reported by the Nasdaq National Market:
Fiscal 1996 High Low
---- ---
Fourth Quarter (from May 22, 1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11 3/4 $8
On September 16, 1996, the closing sale price for the Common Stock, as
reported by the Nasdaq National Market was $8 1/4. As of September 16, 1996,
the Company's Common Stock was held by 226 holders of record.
The Company has never paid dividends on its Common Stock and does not
anticipate paying any cash dividends on its Common Stock in the foreseeable
future.
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ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below with respect to the
Company's Statements of Operations for the fiscal years ended June 30, 1994,
1995 and 1996 and with respect to the Company's Balance Sheets at June 30, 1995
and 1996 are derived from the audited Financial Statements of the Company which
are included elsewhere in this report and are referenced to such Financial
Statements and the related Notes thereto. Statements of Operations data for the
fiscal years ended June 30, 1992 and 1993 and Balance Sheet data at June 30,
1992, 1993 and 1994 are derived from Financial Statements of the Company not
included herein. The selected financial data set forth below is qualified in
its entirety by, and should be read in conjunction with the Financial
Statements, the related Notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
report.
FISCAL YEAR ENDED
JUNE 30,
-------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(in thousands, except per share loss)
Statement of Operations Data:
Revenues:
Product Sales $ 4,665 $ 4,624 $ 4,767 $ 5,413 $ 6,359
Research and development contracts -- 141 527 749 381
-------- ------- -------- -------- --------
Total revenues 4,665 4,765 5,294 6,162 6,740
Cost of product sales 2,552 2,698 2,464 2,652 2,895
-------- ------- -------- -------- --------
Gross margin on product sales 2,113 1,926 2,303 2,761 3,464
Other costs and expenses:
Research and development 933 1,047 1,103 1,856 2,430
Selling and marketing 1,288 1,194 1,398 1,375 2,095
General and administrative 1,835 1,162 1,191 1,245 1,792
Amortization of intangible assets 772 349 265 330 248
-------- ------- -------- -------- --------
Total operating expenses 4,828 3,752 3,957 4,806 6,565
-------- ------- -------- -------- --------
Loss from operations (2,715) (1,685) (1,127) (1,296) (2,720)
Other income (expense) 104 67 (13) 14 40
Interest income (expense) (311) (299) (293) (232) 45
-------- ------- -------- -------- --------
Net loss $ (2,922) $(1,917) $ (1,433) $ (1,514) $ (2,635)
======== ======= ======== ======== ========
Net loss per share(1) $ (3.61) $ (2.34) $ (1.69) $ (1.78) $ (1.30)
======== ======= ======== ======== ========
Weighted average shares outstanding(1) 810 818 847 850 2,027
AT JUNE 30,
----------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(in thousands)
Balance Sheet Data:
Working capital $ 1,827 $ 1,854 $ 2,195 $ 2,107 $ 29,616
Total assets 4,935 4,308 4,307 4,485 33,174
Long-term debt, less current maturities 3,165 3,100 3,005 2,812 152
Redeemable Convertible Preferred Stock 8,732 10,276 11,768 13,115 0
Accumulated deficit (11,834) (13,750) (15,184) (16,698) (19,333)
Total stockholders' equity (deficit) (8,147) (10,058) (11,490) (13,004) 30,119
- --------------------
(1) Computed on the basis described in Note 2 of Notes to Financial
Statements.
21
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Statements regarding the Registrant's expectations as to demand for its
products and certain other information presented in this Annual Report on Form
10-K constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Although the Registrant believes
that its expectations are based on reasonable assumptions within the bounds of
its knowledge of its business and operations, there can be no assurance that
actual results will not differ materially from its expectations. Factors which
could cause actual results to differ from expectations include, but are not
limited to, uncertainty of future profitability, uncertainty of market
acceptance, dependence on single product, limited sales and marketing
experience, adequacy of third party reimbursement, extent of regulations, and
the uncertainty regarding patents and proprietary rights and technological
obsolescence.
OVERVIEW
The Company develops, manufactures and markets DNA testing systems for
the screening, monitoring and diagnosis of human disease. The Company was
founded in 1985, and incorporated in 1987 and originally focused on the
development of research diagnostic products. In July 1990, the Company began
the development of clinical diagnostic tests. In December 1990, the Company
acquired the molecular diagnostics division of Life Technologies, Inc.,
including its DNA tests which relied on the use of radioactive probes (the "LTI
Acquisition"). In the five years following the LTI Acquisition, the Company
continued to market radioactive DNA probe tests, including a radioactive HPV
test, but directed its primary research and development efforts towards its
non-radioactive Hybrid Capture DNA tests. The Company introduced its HPV test
and Hepatitis B virus ("HBV") DNA tests utilizing the chemiluminescent Hybrid
Capture system for research purposes in Europe in fiscal 1992. In 1995, the
Company obtained FDA approval for its Hybrid Capture HPV test for the follow-up
screening of women with equivocal Pap smears and commenced shipment of the test
in November 1995. The Company ceased production of its radioactive product
line in December 1995. The Company based its decision to discontinue its
radioactive product line on the perceived advantages of its non-radioactive
Hybrid Capture technology, particularly in terms of shelf life and ease of use.
The Company believes that its decision to discontinue production of its
radioactive product line will not have a material adverse effect on its results
of operations. To facilitate sales of its Hybrid Capture products, the Company
also sells luminometers and related equipment, which it purchases from
third-party manufacturers. The Company receives additional revenues for
performing certain research and development services under contracts with third
parties, primarily Murex. Contract research and development activities are
billed on a cost reimbursable basis.
Since inception, the Company has incurred substantial operating
losses, principally from expenses associated with the Company's research and
development programs, the clinical trials conducted in connection with the
Company's HPV test for use in the follow-up screening of women with equivocal
Pap smears and the preparation of the related PMA application for submission to
the FDA. The Company expects such operating losses to increase in the near
term and continue for the foreseeable future as it continues its product
development efforts, expands its marketing and sales activities and scales up
its manufacturing operations. The Company's ability to achieve profitability is
dependent upon its ability to
22
23
successfully manufacture, market and sell its HPV test for the follow-up
screening of women with equivocal Pap smears. There can be no assurance that
the Company will be able to successfully commercialize its HPV test or that
profitability will ever be achieved. The operating results of the Company have
fluctuated significantly in the past on an annual and a quarterly basis. The
Company expects that its operating results will fluctuate significantly from
quarter to quarter in the future and will depend on a number of factors, many
of which are outside the Company's control.
RESULTS OF OPERATIONS
Comparison of Fiscal Year Ended June 30, 1996 to Fiscal Year Ended June 30,
1995
Product sales increased to $6,359,000 in fiscal 1996 from $5,413,000
in fiscal 1995. The increase was due, primarily, to increased sales of the
Company's Hybrid Capture tests, which more than offset the decline of
radioactive product sales due to the discontinuance of the radioactive product
line. The Company anticipates that sales of its HPV test will account for a
substantial portion of its product sales in the foreseeable future.
Cost of product sales increased to $2,895,000 in fiscal 1996 from
$2,652,000 in fiscal 1995 due to increased sales volume. Gross margins are
typically higher on the Hybrid Capture line than were experienced on the
radioactive product line. The Company expects gross margins to increase in the
future due to improved overhead absorption and manufacturing efficiencies.
Research and development contract revenue decreased to $381,000 in
fiscal 1996 from $749,000 in fiscal 1995 due to a decrease in contract
development services relating to its CMV test, performed under the Company's
development agreement with Murex. For a more complete description of the
Company's relationship with Murex, see Note 3 to the Financial Statements
included herein.
Research and development expense increased to $2,430,000 in fiscal
1996 from $1,856,000 in fiscal 1995 due to increased personnel costs associated
with the development of new products utilizing the Company's Hybrid Capture
technology. The Company expects to increase its expenditures for research and
development to fund the development of additional tests using the Hybrid
Capture technology and to improve the sensitivity and ease of use of the
Company's Hybrid Capture technology. See "Business -- Research and
Development."
Selling and marketing expense increased in amount and as a percentage
of sales to $2,095,000 in fiscal 1996 from $1,375,000 in fiscal 1995 due to
increased personnel costs resulting from the addition of marketing personnel to
support the Hybrid Capture product line, and increased sales commissions and
royalties as a result of higher sales volume. Sales personnel receive a salary
plus commissions based upon the attainment of certain sales levels. The Company
expects selling and marketing expense to increase substantially as it expands
its advertising and promotional activities and increases its marketing and
sales force, principally for the commercialization of its HPV test in the
United States and Canada.
General and administrative expense increased to $1,792,000 in fiscal
1996 from $1,245,000 in fiscal 1995, due to increased personnel costs, as well
as increased professional fees associated with being a publicly held company.
Amortization of intangible assets decreased to $248,000 in fiscal 1996
as compared to $330,000 in fiscal 1995 as a result of certain intangibles
becoming fully amortized during the year.
23
24
Interest income (expense) increased to $45,000 in fiscal 1996 from
($232,000) in fiscal 1995, due to a reduction in the interest rate and
subsequent repayment of the note issued by the Company in connection with the
LTI Acquisition (the "LTI Note") and the investment of the proceeds from the
Company's initial public offering which was consummated on May 29, 1996.
Comparison of Fiscal Year Ended June 30, 1995 to Fiscal Year Ended June 30,
1994
Product sales increased to $5,413,000 in fiscal 1995 from $4,767,000
in fiscal 1994. The increase was due, primarily, to increased sales volume to
European distributors of the Company's Hybrid Capture tests and, to a lesser
extent, to increased sales of luminometers.
Cost of product sales increased to $2,652,000 in fiscal 1995 from
$2,464,000 in fiscal 1994 due to increased sales volume. Cost of product sales
decreased as a percentage of product sales due to improved overhead absorption
and manufacturing efficiencies, which improvement was offset, in part, by an
increase in lower margin sales of luminometers.
Research and development contract revenue increased to $749,000 in
fiscal 1995 from $527,000 in fiscal 1994. The increase was due to contract
services, primarily relating to the development of the Company's CMV test,
performed under the Company's contract with Murex. For a more complete
description of the Company's relationship with Murex, see Note 3 to the
Financial Statements included herein.
Research and development expense increased to $1,856,000 in fiscal
1995 from $1,103,000 in fiscal 1994. Most of the increase was due to internal
development efforts relating to the Company's core technologies as well as
contract development services relating to the Company's CMV test, performed
under the Company's development agreement with Murex.
Selling and marketing expense decreased slightly to $1,375,000 in
fiscal 1995 from $1,398,000 in fiscal 1994.
General and administrative expense increased to $1,245,000 in fiscal
1995 from $1,191,000 in fiscal 1994 as a result of cost of living increases in
salaries.
Amortization of intangible assets increased to $330,000 in fiscal 1995
from $265,000 in fiscal 1994 primarily as a result of the amortization of
certain capitalized costs related to the installation of the Company's
management information system.
Interest expense decreased to $232,000 in fiscal 1995 from $293,000 in
fiscal 1994 due to a negotiated reduction in interest on the LTI Note.
24
25
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company's expenses have significantly exceeded
its revenues, resulting in an accumulated deficit of approximately $19.3
million at June 30, 1996. The Company has funded its operations primarily
through the sale of equity securities. At June 30, 1996, the Company had cash,
cash equivalents and short-term investments aggregating approximately
$28,575,000. Short-term investments of $75,000 are restricted under a
collateral agreement related to leasehold improvements. Net cash used in the
Company's operating activities was $2,188,000 for the fiscal year ended June
30, 1996.
Capital expenditures for the fiscal year ended June 30, 1996 were
$330,000. The Company anticipates making capital expenditures of $735,000,
primarily for automation and manufacturing scale-up, in the fiscal year ending
June 30, 1997.
The Company does not have any bank financing arrangements. The
Company's indebtedness consists of notes payable to former stockholders of the
Company of $187,000 and notes related to leasehold improvements of $74,000.
The Company has incurred negative cash flows from operations since its
inception, and has expended, and expects to continue to expend in the future,
substantial funds to complete its planned product development efforts, expand
its sales and marketing activities and scale up its manufacturing. The Company
expects that its existing capital resources will be adequate to fund the
Company's operations through 1998. No assurance can be given that there will be
no change in the Company that would consume a significant amount of its
available resources before that time. The Company's future capital requirements
and the adequacy of available funds will depend on numerous factors, including
the successful commercialization of its HPV test, progress in its product
development efforts, the magnitude and scope of such efforts, progress with
preclinical studies and clinical trials, the cost and timing of manufacturing
scale-up, the development of effective sales and marketing activities, the cost
of filing, prosecuting, defending and enforcing patent claims and other
intellectual property rights, competing technological and market developments,
and the development of strategic alliances for the marketing of its products.
To the extent that funds generated from the Company's operations are
insufficient to meet current or planned operating requirements, the Company
will be required to obtain additional funds through equity or debt financing,
strategic alliances with corporate partners and others, or through other
sources. The Company does not have any committed sources of additional
financing, and there can be no assurance that additional funding, if necessary,
will be available on acceptable terms, if at all. If adequate funds are not
available, the Company may be required to delay, scale-back or eliminate
certain aspects of its operations or attempt to obtain funds through
arrangements with collaborative partners or others that may require the Company
to relinquish rights to certain of its technologies, product candidates,
products or potential markets. If adequate funds are not available, the
Company's business, financial condition and results of operations will be
materially and adversely effected.
25
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Digene Corporation
We have audited the accompanying balance sheets of Digene Corporation (formerly
Digene Diagnostics, Inc.) as of June 30, 1995 and 1996, and the related
statements of operations, stockholders' equity (deficit), and cash flows for
each of the three years in the period ended June 30, 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 Digene Corporation (formerly
Digene Diagnostics, Inc.) at June 30, 1995 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1996, in conformity with generally accepted accounting principles.
/s/ERNST & YOUNG LLP
Vienna, Virginia
August 22, 1996
26
27
DIGENE CORPORATION
BALANCE SHEETS
JUNE 30,
--------------------------------
1995 1996
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 1,142,266 $ 24,107,325
Short-term investments 75,000 4,467,978
Accounts receivable, less allowance of approximately $51,000
and $61,000 at June 30, 1995 and 1996, respectively 1,128,158 1,626,046
Inventories (Note 4) 989,315 1,806,333
Prepaid expenses and other current assets 71,159 299,435
----------- ------------
Total current assets 3,405,898 32,307,117
Property and equipment, net (Note 5) 732,059 705,040
Intangible assets, net (Note 6) 286,915 49,008
Deposits 60,440 112,462
----------- ------------
Total assets $ 4,485,312 $ 33,173,627
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 722,569 $ 2,124,682
Accrued expenses 371,065 456,354
Current maturities of long-term debt (Note 8) 205,695 109,857
----------- ------------
Total current liabilities 1,299,329 2,690,893
Long-term debt, less current maturities (Note 8) 2,812,490 151,532
Accrued rent (Note 9) 183,776 149,907
Deferred rent 78,810 62,014
Commitments (Notes 9 and 14)
Redeemable Convertible Preferred Stock, $.10 par value; 13,000,000 shares
authorized; 10,543,907 and 0 shares issued and outstanding at June 30, 1995
and 1996, respectively (Note 10) 13,114,942 -
Stockholders' equity (deficit):
Common stock, $.01 par value; 50,000,000 shares authorized, 368,356 and
11,303,705 shares issued and outstanding at June 30, 1995 and 1996,
respectively 3,684 113,037
Additional paid-in capital 3,690,025 49,339,001
Accumulated deficit (16,697,744) (19,332,757)
----------- ------------
Total stockholders' equity (deficit) (13,004,035) 30,119,281
----------- ------------
Total liabilities and stockholders' equity (deficit) $ 4,485,312 $ 33,173,627
=========== ============
See accompanying notes.
27
28
DIGENE CORPORATION
STATEMENTS OF OPERATIONS
YEAR ENDED JUNE
----------------------------------------------------------
1994 1995 1996
------------ ------------- ------------
Revenues:
Product sales $ 4,766,803 $ 5,413,370 $ 6,359,062
Research and development contracts 527,467 749,217 381,425
------------ ------------ ------------
Total revenues 5,294,270 6,162,587 6,740,487
Costs and expenses:
Cost of product sales 2,463,564 2,652,091 2,894,731
Research and development 1,102,945 1,855,988 2,429,711
Selling and marketing 1,398,280 1,375,496 2,094,696
General and administrative 1,191,314 1,245,128 1,792,426
Amortization of intangible assets 264,882 330,164 248,435
------------ ------------ ------------
Loss from operations (1,126,715) (1,296,280) (2,719,512)
Other income (expense):
Other income (expense) (13,191) 14,446 40,072
Interest expense (293,533) (232,076) (207,349)
Interest income - - 251,776
------------ ------------ ------------
Net loss $ (1,433,439) $ (1,513,910) $ (2,635,013)
============ ============ ============
Net loss per share $ (1.69) $ (1.78) $ (1.30)
============ ============ ============
Weighted average shares outstanding 847,488 849,924 2,026,815
============ ============ ============
See accompanying notes.
28
29
DIGENE CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK ADDITIONAL TOTAL
------------------------------ PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY (DEFICIT)
------------ ----------- ------------- -------------- ----------------
Balance at June 30, 1993 360,386 $ 3,604 $ 3,688,625 $ (13,750,395) $(10,058,166)
Exercise of Common Stock options 7,952 79 1,388 - 1,467
Net loss - - - (1,433,439) (1,433,439)
------------ ----------- ------------- -------------- ------------
Balance at June 30, 1994 368,338 3,683 3,690,013 (15,183,834) (11,490,138)
Exercise of Common Stock options 18 1 12 - 13
Net loss - - - (1,513,910) (1,513,910)
------------ ----------- ------------- -------------- ------------
Balance at June 30, 1995 368,356 3,684 3,690,025 (16,697,744) (13,004,035)
Issuance of Common Stock, net of
offering costs of $3,768,678 3,000,000 30,000 30,701,322 - 30,731,322
Exercise of Common Stock warrants 70,436 704 467,695 - 468,399
Exercise of Common Stock options 40,510 405 25,261 - 25,666
Conversion of Redeemable Convertible
Preferred Stock to Common Stock 7,824,403 78,244 14,454,698 - 14,532,942
Net loss - - - (2,635,013) (2,635,013)
------------ ----------- ------------- -------------- ------------
Balance at June 30, 1996 11,303,705 $ 113,037 $ 49,339,001 $ (19,332,757) $ 30,119,281
============ =========== ============= ============== ============
See accompanying notes.
29
30
DIGENE CORPORATION
STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30,
--------------------------------------------------
1994 1995 1996
--------------- -------------- --------------
OPERATING ACTIVITIES
Net loss $(1,433,439) $(1,513,910) $(2,635,013)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization of property and
equipment 311,686 346,401 356,680
Amortization of intangible assets 264,882 330,164 248,435
Changes in operating assets and liabilities:
Accounts receivable 80,286 (328,369) (497,888)
Inventories 188,325 (61,196) (817,018)
Prepaid expenses and other current assets 26,266 15,563 (228,276)
Deposits (4,956) (6,720) (52,022)
Accounts payable 51,136 387,035 1,402,113
Accrued expenses 6,130 98,727 85,289
Accrued rent (35,329) (39,226) (33,869)
Deferred rent 12,054 (12,815) (16,796)
----------- ----------- -----------
Net cash used in operating activities (532,959) (784,346) (2,188,365)
INVESTING ACTIVITIES
Additions to short-term investments - - (4,392,978)
Capital expenditures (129,709) (246,436) (329,661)
Additions to intangible assets (42,553) (100,773) (10,528)
----------- ----------- -----------
Net cash used in investing activities (172,262) (347,209) (4,733,167)
FINANCING ACTIVITIES
Net proceeds from issuance of Redeemable Convertible
Preferred Stock 1,492,206 1,347,000 1,418,000
Net proceeds from issuance of Common Stock - - 30,731,322
Exercise of Common Stock warrants - - 468,399
Exercise of Common Stock options 1,467 13 25,666
Principal repayments on long-term debt (95,124) (88,148) (2,756,796)
----------- ----------- -----------
Net cash provided by financing activities 1,398,549 1,258,865 29,886,591
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 693,328 127,310 22,965,059
Cash and cash equivalents at beginning of year 321,628 1,014,956 1,142,266
----------- ----------- -----------
Cash and cash equivalents at end of year $ 1,014,956 $ 1,142,266 $24,107,325
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $312,000 $ 172,000 $ 313,000
=========== =========== ===========
See accompanying notes.
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31
DIGENE CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS
Digene Corporation (the "Company"), formerly Digene Diagnostics, Inc., was
incorporated in the state of Delaware in 1987. The Company develops,
manufactures and markets DNA testing systems for the screening, monitoring and
diagnosis of human diseases. The Company's products are designed to help
improve clinical outcomes and reduce the overall cost of disease management.
The Company's lead product, the Hybrid Capture HPV DNA test, detects the
presence of human papillomavirus ("HPV"), the primary cause of cervical cancer,
the second most common cancer among women worldwide. The Company's HPV test for
the follow-up screening of women with equivocal Pap smears is the first HPV
test approved for marketing in the United States by the Food and Drug
Administration (the "FDA"). The Company's objective is to establish its HPV
test as the new standard of care for cervical cancer screening.
The preparation of the 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
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.
31
32
DIGENE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash equivalents, which are stated at cost, consist of highly liquid
investments with original maturities of three months or less.
SHORT-TERM INVESTMENTS
The Company classifies its short-term investments as available-for-sale.
Investments in securities that are classified as available-for-sale and have
readily determinable fair values are measured at fair market value in the
balance sheet. As of June 30, 1995 and 1996, short-term investments are stated
at cost, which approximates market.
REVENUE RECOGNITION
Revenue from product sales is recognized upon shipment of goods. Revenue from
research and development contracts is recognized as research and development
activities are performed. Cash received in advance of services being performed
is deferred until the related revenue has been earned.
32
33
DIGENE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
For the years ended June 30, 1994, 1995 and 1996, the Company generated 29%,
38% and 43%, respectively, of total revenue from a single customer who is also
a stockholder. Export sales accounted for approximately 43% in 1994, 53% in
1995, and 56% in 1996 of total revenue.
Export sales consist of the following:
YEAR ENDED JUNE 30,
--------------------------------------------------
1994 1995 1996
---------- ---------- ----------
Europe $1,931,395 $2,660,767 $3,019,004
Pacific Rim 264,581 295,398 301,067
Other 89,566 339,252 438,848
---------- ---------- ----------
Total export sales $2,285,542 $3,295,417 $3,758,919
========== ========== ==========
RESEARCH AND DEVELOPMENT
The Company expenses its research and development costs as incurred.
INCOME TAXES
The Company provides for income taxes in accordance with the liability method.
Under this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
NET LOSS PER SHARE
The Company's net loss per share calculations are based upon the weighted
average number of shares of Common Stock outstanding. Pursuant to the
requirements of Securities and Exchange Commission Staff Accounting Bulletin
No. 83, Redeemable Convertible Preferred Stock, Common Stock and options and
warrants to purchase Common Stock issued at prices below the initial public
offering price during the twelve months immediately preceding the initial
filing of the registration statement relating to the
33
34
DIGENE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER SHARE (CONTINUED)
initial public offering ("IPO"), have been included in the computation of net
loss per share as if they were outstanding for all periods presented (using the
treasury method assuming repurchase of Common Stock at the IPO price). Other
shares issuable upon the exercise of stock options and warrants or conversion
of Redeemable Convertible Preferred Stock have been excluded from the
computation because the effect of their inclusion would be antidilutive.
Effective with the Company's fiscal 1996 fourth quarter and for all subsequent
periods, Common Stock options and warrants under the treasury stock method will
be included to the extent they are dilutive.
RECENT PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which is effective for the Company's
June 30, 1997 financial statements. SFAS No. 123 allows companies to either
account for stock-based compensation under the new provisions of SFAS No. 123
or under the provisions of APB No. 25, but requires pro forma disclosures in
the footnotes to the financial statements as if the measurement provisions of
SFAS No. 123 had been adopted. The Company intends to continue accounting for
its stock-based compensation in accordance with the provisions of APB No. 25.
As such, the adoption of SFAS No. 123 will not impact the financial condition
or the results of operations of the Company.
3. RESEARCH AND DEVELOPMENT AGREEMENTS
In April 1993, the Company entered into a Development and License Agreement
(the "1993 Agreement") with International Murex Technologies Limited ("IMTC").
Under the terms of the 1993 Agreement, IMTC funded certain of the Company's DNA
probe product development programs on a dollar for dollar cost reimbursement
basis. IMTC and the Company hold a co-exclusive license to market the products
developed under the 1993 Agreement.
In May 1994, the Company entered into an additional Development and License
Agreement (the "1994 Agreement") with IMTC . Under the terms of the 1994
Agreement, IMTC purchased 333,333 shares of the Company's Redeemable
Convertible Preferred Stock and placed $2 million in escrow to purchase 666,667
additional shares of the Company's Redeemable Convertible Preferred Stock, over
the term of the 1994 agreement. Generally, amounts released from escrow are
used to fund mutually approved research and development projects on a dollar
for dollar cost reimbursement basis. As funding was released from escrow,
shares of the Company's Redeemable Convertible Preferred Stock were issued.
34
35
DIGENE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. RESEARCH AND DEVELOPMENT AGREEMENTS (CONTINUED)
During the years ended June 30, 1995 and 1996, $1,215,000 and $785,000,
respectively, were released from the escrow and accordingly, the Company issued
405,000 and 261,667 shares, respectively, of Redeemable Convertible Preferred
Stock. As of June 30, 1995 and 1996, an independent third party held $785,000
and $0, respectively, in escrow for the Company's future research and
development projects. IMTC holds a license that is co-exclusive (with the
Company) to market products developed under the 1994 Agreement.
4. INVENTORIES
Inventories are stated at the lower of cost or market on a first-in, first-out
basis.
Inventories consist of the following:
JUNE 30,
-----------------------------------
1995 1996
---------- ------------
Finished goods $ 312,366 $ 616,458
Work in process 624,307 999,222
Raw materials 188,158 440,653
---------- ----------
1,124,831 2,056,333
Obsolescence reserve (135,516) (250,000)
---------- ----------
$ 989,315 $1,806,333
========== ==========
35
36
DIGENE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. PROPERTY AND EQUIPMENT
Property and equipment, including leasehold improvements, are stated at cost
and depreciated or amortized using the straight-line method over the estimated
useful lives of three to ten years. Leasehold improvements are amortized over
the lesser of the related lease term or the useful life.
Property and equipment consist of the following:
JUNE 30,
--------------------------------------------
1995 1996
------------------- ------------------
Furniture, fixtures and office equipment $ 578,336 $ 679,624
Machinery and equipment 1,142,736 1,371,109
Leasehold improvements 664,633 664,633
------------------- ------------------
2,385,705 2,715,366
Accumulated depreciation and amortization (1,653,646) (2,010,326)
------------------- ------------------
$ 732,059 $ 705,040
=================== ==================
6. INTANGIBLE ASSETS
Patents application costs are expensed as incurred. Noncompetition agreements
are amortized on a straight-line basis over their respective terms, generally
two to six years. Goodwill, which resulted from the acquisition of the
Molecular Diagnostics Division of Life Technologies, Inc. ("LTI") in December
1990, is being amortized using the straight-line method over five years.
Intangible assets consist of the following:
JUNE 30,
--------------------------------------------
1995 1996
------------------- ------------------
Noncompetition agreements $ 1,087,349 $ 1,087,349
Goodwill and other intangibles 398,046 180,877
------------------- ------------------
1,485,395 1,268,226
Accumulated amortization (1,198,480) (1,219,218)
------------------- ------------------
$ 286,915 $ 49,008
=================== ==================
During 1996, the Company wrote off approximately $228,000 of fully amortized
goodwill and other intangibles.
36
37
DIGENE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES
The Company's net deferred tax assets are as follows:
JUNE 30,
--------------------------------------------
1995 1996
------------------- ------------------
Net operating loss carryforwards $ 4,032,000 $ 5,193,000
Research and development credits 488,000 443,000
Patent costs, net 788,000 788,000
Research and developmental deferral, net 1,055,000 957,000
Other 409,000 399,000
------------------- ------------------
Deferred tax assets 6,772,000 7,780,000
Valuation allowance (6,772,000) (7,780,000)
------------------- ------------------
Net deferred tax assets $ - $ -
=================== ==================
Due to the Company's net operating loss carryforwards, the Company did not
recognize a tax provision for the years ended June 30, 1994, 1995 and 1996. At
June 30, 1996, the Company had tax net operating loss carryforwards for income
tax purposes of approximately $12,981,000. At June 30, 1996, the Company also
had research and development credit carryforwards of approximately $443,000.
In 1990, the Company experienced a change in ownership pursuant to Section 382
of the Internal Revenue Code, which will cause the utilization of pre-change
losses and credits to be limited. Subject to this limitation, the Company's
net operating loss carryforwards and tax credits expire, if unused, at various
dates from 2003 through 2011.
8. LONG-TERM DEBT
Long-term debt consists of follows:
JUNE 30,
--------------------------------------------
1995 1996
------------------- ------------------
8% secured note payable to LTI $ 2,625,000 $ -
Amounts due to former stockholders, net of
unamortized discount 289,514 187,260
Note payable to lessor 93,956 70,049
Other 9,715 4,080
------------------- ------------------
3,018,185 261,389
Current maturities of long-term debt (205,695) (109,857)
------------------- ------------------
Long-term debt, less current maturities $ 2,812,490 $ 151,532
=================== ==================
37
38
DIGENE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. LONG-TERM DEBT (CONTINUED)
The secured note payable to LTI arose in conjunction with the Company's
acquisition of LTI's Molecular Diagnostics Division in December 1990. During
1996, the Company repaid in full the principal balance of the note plus accrued
interest. No prepayment penalties were incurred.
Amounts due to former stockholders, related to repurchases of Common Stock
during 1991, are noninterest-bearing, but have been discounted at 8.74%.
Payment is due in seven equal annual installments beginning July 1991.
The note payable to lessor represents the financing of a portion of leasehold
improvements made by the lessor under terms of the lease agreement for the
Company's research and development facility (See Note 9). The note, originally
for $200,000, is repayable through December 1998 in 114 equal monthly
installments of $2,616 in principal plus interest at 9%. A $75,000 certificate
of deposit held by the Company is assigned to the lessor as collateral for the
lease obligation.
Annual maturities of long-term debt outstanding at June 30, 1996 are as
follows:
1997 $109,857
1998 129,583
1999 21,949
--------
$261,389
========
9. LEASE COMMITMENTS
The Company occupies a facility serving as its research and development
facility. The lease agreement for this facility terminates on December 31,
1998, but provides for a five-year renewal at the Company's option. Under the
lease agreement, no rent was due during the period of construction and the
initial period of occupancy. The total minimum lease obligation is being
expensed over the term of the lease obligation on a straight-line basis, with
expense in excess of cash outlays recorded as deferred rent. The lessor agreed
to make approximately $372,000 of improvements to the facility at the Company's
expense, paid for in cash of $172,000 and a note payable for $200,000 (See Note
8). The minimum annual base rentals are subject to an annual increase of 30%
of the increase in the Consumer Price Index.
The Company's corporate headquarters and production operations are in an office
and manufacturing facility. The related lease agreement terminates in July
1998, but is renewable at the Company's option
38
39
DIGENE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. LEASE COMMITMENTS (CONTINUED)
for an additional five-year period. The total minimum lease obligation is
being expensed over the term of the lease on a straight-line basis, with the
expense in excess of cash outlays recorded as deferred rent.
Future minimum rental commitments under these lease agreements, including where
applicable the Company's pro rata share of insurance, real estate taxes and
common area operating expenses, are as follows as of June 30, 1996:
1997 $360,760
1998 360,760
1999 114,061
-------
$835,581
========
Rent expense under these leases was $366,616, $380,804, and $363,691, for the
years ended June 30, 1994, 1995 and 1996, respectively.
Remaining lease payments, net of anticipated sublease income of approximately
$380,000, for facilities previously vacated were accrued in 1992. The
remaining accrual at June 30, 1996 is $149,907.
10. REDEEMABLE CONVERTIBLE PREFERRED STOCK
Immediately upon completion of the IPO, all outstanding shares of 1990, 1991,
and 1994 Series Redeemable Convertible Preferred Stock converted into shares of
Common Stock on a 1 for 0.714 basis.
11. COMMON STOCK
On April 15, 1996, the holders of Common Stock purchase warrants elected to
purchase 70,436 shares of Common Stock at an exercise price of $6.65 per share.
As a result of this warrant exercise, the Company received net proceeds of
$468,399. The remaining unexercised warrants expired on April 15, 1996.
On May 7, 1996, the Company's stockholders approved a 0.714 for 1 reverse stock
split of the Company's Common Stock, which became effective on May 20, 1996.
All references in the accompanying financial statements to the number of shares
of common stock and per-share amounts have been restated to reflect the split.
39
40
DIGENE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. COMMON STOCK (CONTINUED)
On May 21, 1996, the Company issued 3,000,000 shares of Common Stock in an
initial public offering, which generated net proceeds of approximately
$30,700,000.
12. COMMON STOCK OPTIONS
The Company has adopted Stock Option Plans (the "Option Plans") under which
2,622,821 shares of Common Stock were reserved for issuance upon exercise of
options granted to employees, officers and consultants of the Company. The
Option Plans provide for grants of stock options to employees (including
officers and employee directors), directors and consultants of the Company.
The Option Plans were previously administered by the Board of Directors and
presently are being administered by the Compensation Committee, which
determines recipients and types of awards to be granted, including the exercise
price, number of shares subject to the award and the exercisability thereof.
The terms of stock options granted under the Option Plans may not exceed ten
years. The exercise price of options granted under the Options Plan, as
determined by the Compensation Committee approximates fair value. The Company
does not intend to grant further options under these Option Plans.
The Company has also granted 37,761 options to purchase Common Stock to outside
consultants.
In March 1996, the Company adopted the Digene Corporation Omnibus Plan (the
"Omnibus Plan"). Pursuant to the Omnibus Plan, officers or other employees of
the Company may receive options to purchase Common Stock. The Omnibus Plan is
administered by the Compensation Committee. 1,700,000 shares have been
reserved for issuance under the Omnibus Plan.
40
41
DIGENE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. COMMON STOCK OPTIONS (CONTINUED)
Common stock options activity is as follows:
Number of
Shares
-----------
Outstanding at June 30, 1993 1,556,028
Granted 284,689
Exercised (7,952)
Canceled or expired (54,452)
-----------
Outstanding at June 30, 1994 1,778,313
Granted 57,372
Exercised (18)
Canceled or expired (82,456)
-----------
Outstanding at June 30, 1995 1,753,211
Granted 987,033
Exercised (40,510)
Canceled or expired (39,152)
-----------
Outstanding at June 30, 1996 2,660,582
===========
Exercisable at June 30, 1996 1,393,787
===========
Exercise prices range from $0.028 to $10.285 per share. The options generally
vest on a time-based schedule over a period of three to six years.
13. RETIREMENT PLAN
Effective January 1, 1994, the Company adopted a 401(k) Profit Sharing Plan
(the "Plan"). The Plan, which covers all employees who have completed six
months of service, stipulates that employees may elect an amount between 1% and
15% of their total compensation to contribute to the Plan. Employee
contributions are subject to Internal Revenue Service limitations. All
employees who have completed 1,000 hours of service during the plan year and
are employed by the Company on the last day of the plan year are eligible to
share in discretionary Company contributions. Employees vest in employer
contributions over five years. No contributions were made by the Company
during the years ended June 30, 1994, 1995 and 1996.
41
42
DIGENE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. OTHER COMMITMENTS
The Company's access to various probes, diagnostic techniques and a key product
component were acquired under agreements requiring the Company to pay future
royalties based upon specified percentages of applicable future gross sales.
None of the royalty commitments have had, or are expected to have in the
future, a materially adverse impact on the Company's financial position or the
results of operations.
42
43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
No change of accountants and/or disagreements on any matter of
accounting principles or financial statement disclosures have occurred within
the last two years.
PART III
The information called for by Item 10, Directors and Executive
Officers of the registrant; Item 11, Executive Compensation; Item 12, Security
Ownership of Certain Beneficial Owners and Management; and Item 13, Certain
Relationships and Related Transactions, is incorporated herein by reference to
the Registrant's definitive Proxy Statement for its Annual Meeting of
Stockholders, scheduled to be held on October 29, 1996, which shall be filed
with the Securities and Exchange Commission within 120 days from the end of the
Registrant's fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON
FORM 8-K
(a) 1. Financial Statements of the Company
Financial Statements of the Registrant and Report of
Independent Auditors thereon
Balance Sheets as of June 30, 1996 and 1995
Statements of Operations for the fiscal years ended June 30,
1996, 1995 and 1994
Statements of Stockholders' Equity (Deficit) for the fiscal
years ended June 30, 1996, 1995 and 1994
Statements of Cash Flows for the fiscal years ended June 30,
1996, 1995 and 1994
Notes to Financial Statements
2. Financial Statement Schedules
I. Valuation and Qualifying Accounts and Reserves
43
44
3. Exhibits
The following exhibits are incorporated in this report by reference or
included and submitted with this report, as indicated. Except as otherwise
noted, the exhibit has previously been filed as an exhibit to the Company's
Registration Statement on Form S-1, File No. 333-2968 (the "Registration
Statement"), and is incorporated herein by reference. The exhibit numbers
shown below for exhibits incorporated by reference correspond to those shown in
the Registration Statement.
3.1 Amended and Restated Certificate of Incorporation of the Company.
3.2 Amended and Restated Bylaws of the Company.
4.1 Specimen Common Stock certificate.
10.1 1987 Stock Option Plan.
10.2 1989 Special Employee Stock Option Plan.
10.3 1990 Stock Option Plan.
10.4 1991-A Stock Option Plan.
10.5 1991-B Stock Option Plan.
10.6 1996 Omnibus Plan.
10.7* Employment Agreement dated as of May 1, 1996 between the Company and Evan
Jones, as amended.
10.8* Employment Agreement dated as of May 1, 1996 between the Company and
Charles M. Fleischman, as amended.
10.9 Employment Agreement dated February 1, 1991, as amended, between the
Company and Attila D. Lorincz, Ph.D.
10.10 Letter Agreement dated May 1, 1992 among the Company, Joseph Migliara,
Harris Kaplan, Migliara/Kaplan Associates and Valley Partners.
10.11 Lease Agreement dated January 13, 1988 between the Company and West Farm
Associates Limited Partnership.
10.12 Lease Agreement dated June 20, 1991 between the Company and Murkirk Manor
Associates Limited Partnership
10.13 Distribution Agreement dated May 19, 1992 between the Company and
International Murex Technologies Corporation, as amended, May 26, 1993.
10.14 License Agreement dated September 1, 1995 between the Company and Institut
Pasteur.
10.15 Cross-License, Inc. Agreement dated April 1, 1990 among Life Technologies,
Inc. and Institute Pasteur.
10.16 License Agreement dated December 1, 1983 between Bethesda Research
Laboratories, a division of Life Technologies, Inc. and Georgetown
University.
10.17 Stock Purchase Agreement dated September 26, 1988 between the Company and
Mitsubishi PetroChemical Company, Limited.
10.18 License Agreement dated December 19, 1990 between the Company and Life
Technologies, Inc.
10.19 Stock Purchase Agreement dated May 31, 1994 between the Company and
International Murex Technologies Limited ("IMTL").
44
45
10.20 Escrow Agreement dated May 31, 1994 among the Company, IMTL and Reid &
Priest, as Escrow Agent.
10.21 Development and License Agreement dated April 14, 1993 between the Company
and International Murex Technologies Corporation ("IMTC").
10.22 Development and License Agreement dated May 31, 1994 between the Company
and IMTC.
10.23 Common Stock Purchase Warrant of IMTL.
10.24 Form of Common Stock Purchase Warrant.
10.25 Stockholders' Agreement dated May 31, 1994 among the Company, IMTL and
Armonk Partners.
10.26* Registration Rights Agreement dated as of May 24, 1996 between the
Company, Armonk Partners, Murex Diagnostics Corporation and Certain other
Stockholders.
10.27 Distribution Agreement dated as of February 28, 1996 between the Company
and Murex Biotech Limited (confidential treatment has been requested for
certain portions of this agreement).
10.28 License Agreement dated September 27, 1995 between the Company and Kanebo,
Ltd.
11.1* Statement Re: Computation of Per Share Loss.
21* Subsidiary of the Registrant.
27* Financial Data Schedule.
- ----------
* Filed herewith.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the last quarter of the
period covered by this report.
45
46
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 by the undersigned, thereunto duly authorized.
DIGENE CORPORATION
September 20, 1996 By /s/ EVAN JONES
-----------------------------------
Evan Jones
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ EVAN JONES President and Chief Executive September 20, 1996
- --------------------------- Officer (principal executive
Evan Jones officer) and Chairman
/s/ CHARLES M. FLEISCHMAN Executive Vice President, September 20, 1996
- --------------------------- Chief Operating Officer,
Charles M. Fleischman Chief Financial Officer and
Director (principal financial
officer)
/s/ JOSEPH P. SLATTERY Controller (principal September 20, 1996
- --------------------------- accounting officer)
Joseph P. Slattery
/s/ JOHN J. WHITEHEAD Director September 20, 1996
- ---------------------------
John J. Whitehead
/s/ JOSEPH M. MIGLIARA Director September 20, 1996
- ---------------------------
Joseph M. Migliara
47
EXHIBIT INDEX
Exhibit No. Description Page
----------- ------------------------------------------------------------------------------------------------------- -----
3.1 Amended and Restated Certificate of Incorporation of the Company.
3.2 Amended and Restated Bylaws of the Company.
4.1 Specimen Common Stock certificate.
10.1 1987 Stock Option Plan.
10.2 1989 Special Employee Stock Option Plan.
10.3 1990 Stock Option Plan.
10.4 1991-A Stock Option Plan.
10.5 1991-B Stock Option Plan.
10.6 1996 Omnibus Plan.
10.7* Employment Agreement dated as of May 1, 1996 between the Company and Evan Jones, as amended.
10.8* Employment Agreement dated as of May 1, 1996 between the Company and Charles M. Fleischman, as
amended.
10.9 Employment Agreement dated February 1, 1991, as amended, between the Company and Attila D. Lorincz,
Ph.D.
10.10 Letter Agreement dated May 1, 1992 among the Company, Joseph Migliara, Harris Kaplan, Migliara/Kaplan
Associates and Valley Partners.
10.11 Lease Agreement dated January 13, 1988 between the Company and West Farm Associates Limited
Partnership.
10.12 Lease Agreement dated June 20, 1991 between the Company and Murkirk Manor Associates Limited
Partnership
10.13 Distribution Agreement dated May 19, 1992 between the Company and International Murex Technologies
Corporation, as amended, May 26, 1993.
10.14 License Agreement dated September 1, 1995 between the Company and Institut Pasteur.
10.15 Cross-License, Inc. Agreement dated April 1, 1990 among Life Technologies, Inc. and Institute
Pasteur.
10.16 License Agreement dated December 1, 1983 between Bethesda Research Laboratories, a division of Life
Technologies, Inc. and Georgetown University.
10.17 Stock Purchase Agreement dated September 26, 1988 between the Company and Mitsubishi PetroChemical
Company, Limited.
10.18 License Agreement dated December 19, 1990 between the Company and Life Technologies, Inc.
10.19 Stock Purchase Agreement dated May 31, 1994 between the Company and International Murex Technologies
Limited ("IMTL").
10.20 Escrow Agreement dated May 31, 1994 among the Company, IMTL and Reid & Priest, as Escrow Agent.
10.21 Development and License Agreement dated April 14, 1993 between the Company and International Murex
Technologies Corporation ("IMTC").
10.22 Development and License Agreement dated May 31, 1994 between the Company and IMTC.
10.23 Common Stock Purchase Warrant of IMTL.
10.24 Form of Common Stock Purchase Warrant.
10.25 Stockholders' Agreement dated May 31, 1994 among the Company, IMTL and Armonk Partners.
10.26* Registration Rights Agreement dated as of May 24, 1996 between the Company, Armonk Partners, Murex
Diagnostics Corporation and Certain other Stockholders.
48
10.27 Distribution Agreement dated as of February 28, 1996 between the Company and Murex Biotech Limited
(confidential treatment has been requested for certain portions of this agreement).
10.28 License Agreement dated September 27, 1995 between the Company and Kanebo, Ltd.
11.1* Statement Re: Computation of Per Share Loss.
21* Subsidiary of the Registrant.
27* Financial Data Schedule.
- ------------------------------
* Filed herewith.
49
SCHEDULE I
50
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Digene Corporation
We have audited the financial statements of Digene Corporation (formerly Digene
Diagnostics, Inc.) as of June 30, 1995 and 1996, and for each of the three
years in the period ended June 30, 1996, and have issued our report thereon
dated August 22, 1996 (included elsewhere in this annual report). Our audits
also included the financial statement schedules listed in Item 14 (a) of this
Annual Report. These schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects, the information set forth therein.
/s/ERNST & YOUNG LLP
Vienna, Virginia
August 22, 1996
51
SCHEDULE I -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
Balance at
Beginning of Balance At
Classification Year Additions Deductions End of Year
- ---------------------------------------------- ------------ --------- ---------- -------------
Allowance for doubtful accounts:
Year ended June 30, 1995 $ 55 $15 $(19)(1) $51
Year ended June 30, 1996 51 10 -- 61
Reserve for inventory obsolescence:
Year ended June 30, 1995 $200 $63 $(128)(2) $135
Year ended June 30, 1996 135 115 -- 250
- --------------------
(1) Write off of accounts receivable.
(2) Write off of obsolete inventory.