Back to GetFilings.com
1
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
For the fiscal year ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________to _________
Commission file number 0-28194
DIGENE CORPORATION
-----------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 52-1536128
------------------------------ -----------------------------------
State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
9000 Virginia Manor Road
Beltsville, Maryland 20705
------------------------------------ ------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (301) 470-6500
--------------
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share
--------------------------------------
(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
--- ---
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 24, 1997, the aggregate market value of the 6,561,058 outstanding
shares of voting stock held by non-affiliates of the registrant was
$88,574,283.
As of September 24, 1997, 11,590,361 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 (incorporated into
Part III).
2
PART I
ITEM 1. BUSINESS
THE COMPANY
The Company develops, manufactures and markets proprietary DNA and RNA
tests for the detection, screening and monitoring of human diseases. The
Company's lead product, the Hybrid Capture HPV Test, is the only FDA-approved
test for the detection of human papillomavirus ("HPV"), the cause of essentially
all cervical cancer. In addition, Digene has developed and launched tests
internationally for the detection and viral load monitoring of major blood
viruses, including human immunodeficiency virus ("HIV"), cytomegalovirus ("CMV")
and hepatitis B virus ("HBV"), and tests for the detection of two of the most
common sexually transmitted diseases ("STDs"), chlamydia trachomatis
("chlamydia") and neisseria gonorrhea ("gonorrhea"). The Company's products are
designed to improve clinical outcomes and reduce the overall cost of disease
management. The Company believes its Hybrid Capture technology, the basis for
its DNA and RNA tests, represents a significant improvement over existing
technologies because of its sensitivity, speed, ease-of-use, accuracy and
ability to measure viral load.
BACKGROUND: WOMEN'S HEALTH AND BLOOD VIRUSES
WOMEN'S HEALTH
The Company has initially focused on two major women's health issues,
cervical cancer and sexually transmitted diseases. Cervical cancer is the second
most common cancer among women worldwide. Although the Pap smear has
successfully reduced deaths caused by cervical cancer in the United States, it
does not detect HPV, which is the cause of essentially all cervical cancer. In
addition, the Pap smear is a subjective, labor intensive test that has limited
sensitivity and diagnostic accuracy leading to equivocal test results and false
negative diagnoses, resulting in significant costs to the healthcare system due
to over-treatment or under-diagnosis.
Sexually transmitted diseases, in addition to HPV, are also a serious
health problem, with more than 300 million new cases worldwide each year. Women
are five times more likely than men to have a sexually transmitted disease.
Although treatments are available for most sexually transmitted diseases, many
cases remain undiagnosed. If undetected and left untreated in women, STDs, such
as chlamydia and gonorrhea, have potentially serious and costly consequences,
including infertility and pelvic inflammatory disease.
Cervical Cancer
Cervical cancer is the second most common cancer among women worldwide,
with approximately 440,000 new cases reported annually. If detected in the
precancerous stage, virtually all cases of cervical cancer are preventable. The
treatment of cervical cancer after it reaches the invasive stage may require
chemotherapy, radiation treatment or surgery, including hysterectomy. These
treatments are expensive and often unsuccessful. The United States has a
relatively low incidence of cervical cancer due to widespread use of cervical
cancer screening and significant expenditures on screening infrastructure, which
includes sophisticated laboratory facilities and highly trained
cytotechnologists, and extensive regulatory oversight. Outside the United
States, limited resources and underdeveloped or non-standardized testing
infrastructure often lead to under-diagnosis of cervical disease, resulting in a
significantly higher incidence of cervical cancer.
HPV Infection and Cervical Cancer
According to the National Institutes of Health ("NIH"), HPV is the cause of
essentially all 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, a recent prospective study conducted by
the National Cancer Institute ("NCI") on 21,000 women with a history of normal
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.
2
3
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 approximately 100 million are
performed annually 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 Prospectus, 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. The estimated
percentage of Pap smears classified in each category annually is shown below.
CLASSIFICATION OF PAP SMEARS IN THE UNITED STATES
TOTAL PAP SMEARS:
50 MILLION
NORMAL PAP SMEARS: EQUIVOCAL PAP SMEARS: ABNORMAL PAP SMEARS:
45 MILLION 3.5 MILLION 1.5 MILLION
90% 7% 3%
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 women with equivocal Pap smears do
not have cervical disease. However, women with equivocal Pap smears often
undergo colposcopy and biopsy. These invasive procedures cost approximately $300
and $100, respectively, and may 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 of a large volume of slides
containing cervical cells. A Pap smear may contain only a small number of
abnormal cells among
3
4
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%. As a result, 20% to 40% of cervical disease is not detected by Pap
smear testing. False negatives may result in delayed treatment for cervical
lesions and in the failure to detect cervical cancer at an early stage. Delays
in treatment may also allow the disease to progress further, thereby increasing
the need for invasive and costly treatments, and reducing the efficacy of
available therapies and 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 cause of essentially all
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 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. As
a result, there is a substantially higher incidence of cervical cancer outside
the United States.
Chlamydia and Gonorrhea
Chlamydia is the most common sexually transmitted disease in the United
States, and is a major health problem worldwide, with approximately 89 million
new cases annually. Genital chlamydia infection, if left untreated, has serious
potential consequences, such as infertility, ectopic pregnancy, cervicitis, and
pelvic inflammatory disease. Gonorrhea, which affects approximately 62 million
people worldwide each year, is the second most common sexually transmitted
disease in the United States and, if left untreated, may result in severe
genital complications in both women and men. If properly detected, both
chlamydia and gonorrhea are easily treatable with low cost antibiotic therapy.
However, routine and broad based screening for chlamydia and gonorrhea has been
limited by the insufficient sensitivity of some culture methods, the invasive
and cumbersome specimen collection methods frequently employed and the time and
cost associated with performing these tests.
BLOOD VIRUSES AND VIRAL LOAD MONITORING
Blood viruses, such as HIV, CMV and HBV, are leading causes of morbidity
and death, and until recently, were untreatable. Early, accurate and ongoing
detection of blood viruses and monitoring of viral load is essential for
effective patient management. Over the last several years, antiviral therapies
have been developed to treat these diseases. To maximize the efficacy of these
expensive and toxic therapies, physicians rely on viral load monitoring to
quantify the amount of virus present in the patient's system. By precisely
measuring viral load and identifying non-responders early in their treatment,
physicians are able to better tailor antiviral therapies by more precisely
monitoring responses to different therapies, recognizing when a patient develops
drug resistance and projecting how quickly the infection will progress to
chronic disease.
Human Immunodeficiency Virus
Development of antiviral therapies for HIV is an area of intense research
and development. The availability of numerous potent drugs to inhibit HIV
replication has permitted the design of therapeutic strategies involving
combinations of antiviral drugs that may accomplish prolonged suppression of HIV
in patients to undetectable levels. However, the Company believes that
approximately 25% of these patients have exhibited some level of resistance to
these antiviral drugs, thereby necessitating continual re-evaluation of the
efficacy of the combination therapy. Measurement of viral load has been
demonstrated to be a powerful predictor of the efficacy of potential therapeutic
agents, as well as an important indicator of an individual's risk
4
5
of progressing to AIDS and death. Recent NIH treatment guidelines for AIDS
patients recommend the measurement of HIV viral load at the time of diagnosis
and at least every three to four months thereafter.
Currently, there is only one FDA approved test capable of detecting HIV RNA
viral load. However, clinical reference laboratories frequently rely on
internally developed HIV tests or commercially produced tests designed for
research purposes to measure HIV viral load. The Company believes that the
currently available HIV tests are technically complex to perform, and as a
result, may produce unreliable or irreproducible results. Additionally, these
tests are unable to detect certain important subtypes of the HIV virus,
resulting in false negative diagnoses.
Cytomegalovirus
CMV is a systemic infection that causes complications in several sites in
the body, including the retina, gastrointestinal tract, lungs, liver and central
nervous system. CMV is the most common viral opportunistic infection in
transplant patients and AIDS patients, with approximately 60% and 95% of
patients being infected, respectively. 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
confirmed.
While tests exist to detect the presence of CMV, these tests suffer from
significant limitations. Conventional tissue culture tests have a low level of
sensitivity, can require up to 28 days to produce results and are labor
intensive. Rapid culture tests can provide results within one or two days, but
have a low level of sensitivity. In addition, culture-based tests often provide
inaccurate results when used to monitor patients being treated with CMV
antiviral therapies. Although antigen tests can detect active CMV infection and
are highly sensitive, they are technically complex and labor intensive and have
limited reliability. Antibody tests, which are currently used to detect viruses
such as HIV, are of limited utility in detecting CMV since most healthy adults
have antibodies against CMV. Additionally, current tests do not provide viral
load quantification, and therefore, have limited effectiveness in monitoring CMV
infection.
Hepatitis B Virus
HBV is the fifth most common cause of death from disease worldwide, causing
an estimated one million deaths annually, and is the second most common chronic
infectious disease worldwide. The World Health Organization estimates that more
than two billion people are infected with HBV, including an estimated 300
million people chronically infected. HBV is 100 times more contagious than the
HIV virus and is transmitted through blood transfusions, contaminated needles,
sexual contact and vertical transmission (from mother to child). Currently, the
only approved drug for the treatment of HBV is alpha interferon, which is only
effective in approximately 25% to 40% of infected patients. However, new
therapies are being developed, including several nucleoside analogues, such a
lamivudine and famciclovir, which have demonstrated great promise for the
treatment of patients with chronic HBV infection. HBV viral load monitoring is
required to measure the efficacy of HBV antiviral therapy and to identify the
onset of drug resistance.
Antigen tests have significant limitations in the diagnosis of HBV
infection and the monitoring of HBV therapeutic response. Since antigen tests
can only detect HBV antigens, they are not capable of measuring viral load and
cannot adequately monitor therapeutic response. In addition, certain mutant
strains of HBV do not produce antigens and therefore cannot be detected by
antigen tests, resulting in false negative diagnoses.
Currently available HBV DNA tests lack the sensitivity and range of
quantification necessary for use with the new therapeutic approaches under
development. These tests are adequate for monitoring alpha interferon therapy,
but because their sensitivity is limited (typically not less than 50,000 viral
genome copies per milliliter), they cannot be used to confirm the complete
suppression of HBV virus in serum. As with current HIV treatment guidelines, the
new HBV therapeutic approaches are designed to eliminate the HBV virus from a
patient's blood. Consequently, new tests are required to measure viral load over
a very broad range.
5
6
THE DIGENE SOLUTION
Digene develops, manufactures and markets proprietary DNA and RNA tests,
based on its Hybrid Capture technology, for the detection, screening and
monitoring of HPV, STDs including chlamydia and gonorrhea, and blood viruses
including HIV, CMV and HBV. The Company's products are designed to improve
clinical outcomes by providing more rapid, accurate and objective detection of
disease and reduce the overall cost of disease management. The Company believes
its Hybrid Capture technology is a significant improvement over existing
technologies because of its sensitivity, speed, ease of use, accuracy and
ability to quantify viral load. In addition, the Company believes its tests can
be reliably used without the necessity of sophisticated technology or highly
trained lab technicians.
Women's Health
Digene manufactures and markets the only FDA-approved test for the
detection of 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. Digene's HPV Test has been approved by the
FDA for the follow-up screening of women with equivocal Pap smears and is being
marketed in selected European and South American countries as a primary screen
either in conjunction with or separate from the Pap smear. The Company is also
developing its Chlamydia and Gonorrhea Tests to deliver superior sensitivity
compared to traditional culture methods and the Company believes such tests are
well suited for use in moderate to high volume laboratory environments. In
addition, the Company's Chlamydia and Gonorrhea Tests can be performed using the
same sample obtained for HPV detection. The Company believes that the key
benefits provided by its Hybrid Capture technology for the detection, screening
and monitoring of HPV and STDs 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 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. 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 and reduce the need for costly and
invasive follow-up procedures, such as colposcopy and biopsy.
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 and biopsy, while those testing
negative require no immediate follow-up beyond routine Pap smear testing. The
Company's HPV Test may be performed with clinical samples taken at the same time
as the Pap smear, thus eliminating the need for a return visit to the
physician's office. The following diagram outlines the use of the Company's HPV
Test for the follow-up screening of women with equivocal Pap smears.
6
7
FOLLOW-UP SCREENING OF EQUIVOCAL PAP SMEARS WITH HPV TESTING
TOTAL PAP SMEARS:
NORMAL PAP SMEARS: EQUIVOCAL PAP SMEARS: ABNORMAL PAP SMEARS:
90% 7% 3%
HYBRID CAPTURE HPV
TEST
HPV NEGATIVE: REPEAT PAP HPV POSITIVE: PROCEED TO
SMEAR IN 6 MONTHS COLPOSCOPY/BIOPSY/ABLATION
Provides Accurate, Easily Interpreted Results. Clinical studies conducted
by the Company indicate that the Company's HPV Test is highly sensitive for the
detection of cervical disease. Such clinical studies indicate 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, thereby 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 therapies
are more effective and 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.
Reducing Laboratory Costs by Linking STD Testing to HPV Detection. Digene
believes that the ability to test for chlamydia and gonorrhea from the same
patient sample used for Digene's HPV tests will provide a marketing advantage by
reducing laboratory costs and providing greater convenience to physicians and
patients. The Chlamydia and Gonorrhea Tests are designed to deliver superior
sensitivity as compared to traditional culture methods. Preliminary results of
clinical studies on women indicate that Digene's Chlamydia Test is capable of
detecting chlamydia in up to 97% of the cases in which the disease is present,
while the Gonorrhea Test is capable of detecting gonorrhea in up to 91% of the
cases in which it is present. Since these tests are based on a 96-well
microtiter plate format, the Company believes they are ideally suited for
moderate to high volume testing. Additionally, unlike traditional culture-based
tests, the Chlamydia and Gonorrhea Tests can be performed using urine samples.
7
8
Blood Viruses
The Company is currently developing Hybrid Capture tests for HIV, CMV and
HBV. The Company's tests for these blood viruses are designed to provide highly
sensitive, accurate, reproducible and reliable viral detection and viral load
measurement. Similar to its tests for detection of HPV and STDs, the Company's
blood virus tests are easier to use than current tests and do not require
expensive or sophisticated laboratory equipment or highly trained lab
technicians to generate timely and reliable results.
Digene's Hybrid Capture blood virus tests have been designed to provide
highly sensitive, accurate, reproducible and reliable measurement of viral load
and enable physicians to monitor infection levels on an ongoing basis. As a
result, the Company believes that physicians using the Company's tests will be
able to make more informed treatment decisions regarding the timing and
effectiveness of antiviral therapy for the treatment of HIV, CMV and HBV. The
Company believes that the major benefits provided by its blood virus tests
include the following:
Improved HIV Detection and Monitoring. Based on preliminary tests
conducted by an independent third party, the Company believes that its HIV Test
is a significant improvement over currently available tests because of its
sensitivity, rapid processing time, improved accuracy and ability to quantify
viral load. In addition, currently available HIV RNA tests are unable to detect
certain important subtypes of the HIV virus. Consequently, current HIV viral
load tests may produce false negative diagnoses, which can result in infected
patients remaining untreated. The Company's HIV Test can detect 92% of the HIV
genome, which allows accurate detection of critical subtypes of HIV. As a
result, the Company believes that its HIV Test will reduce the number of false
negative diagnoses and allow earlier detection of the virus, thereby allowing
antiviral therapy to be initiated at an earlier stage.
Confirmation of Active CMV Infection. The Company believes that its CMV
Test can accurately measure and differentiate active from latent CMV infection
in transplant, AIDS and other immunocompromised patients. In clinical trials,
the Hybrid Capture CMV Test accurately detected CMV infection in 94% of the
cases in which it was present. The Company believes that its test will improve
patient management by ensuring that costly and toxic CMV therapies are only
administered when active CMV infection is confirmed.
Accurately Measure the Effectiveness of HBV Antiviral Therapies. The
Company has designed its HBV Test to measure the effectiveness of new nucleoside
analogue therapies. The Company's test is capable of measuring viral load across
a broad range of HBV levels, from approximately seven thousand to one billion
viral genome copies per milliliter. The Company believes that its test is more
sensitive than currently available antigen tests and will therefore reduce the
number of false negative results, resulting in a significant improvement in the
standard of care.
8
9
PRODUCTS
Digene's Hybrid Capture technology, which is the basis for all of the
Company's DNA and RNA tests, is a rapid, accurate, easy-to-use, sensitive
technology which can be used with standard laboratory equipment. The Company
believes that its Hybrid Capture technology is a significant improvement over
other detection technologies because of its sensitivity, speed, ease-of-use,
improved accuracy and ability to quantify viral load. The Company has developed
two versions of its Hybrid Capture technology, Hybrid Capture I ("HC I") and
Hybrid Capture II ("HC II"). HC I, the Company's first generation detection
technology, tests samples individually in polystyrene tubes. HC II uses a
96-well microtiter plate format which permits simultaneous screening of multiple
samples from a single plate and is designed to be more efficient, less expensive
and easier to use than HC I.
9
10
The Company is using its Hybrid Capture technology to develop and
commercialize a wide range of DNA and RNA tests for the detection, screening and
monitoring of HPV, STDs including chlamydia and gonorrhea, and blood viruses
such as HIV, CMV and HBV. The following table summarizes the status of the
Company's DNA and RNA tests:
STATUS(1)
-------------------------------------------------------------- POTENTIAL
OUTSIDE WORLDWIDE
TARGET UNITED STATES UNITED STATES MARKET
- ------------------- ------------------------------ ------------------------------ -----------------
Human HPV HC I Test approved for HPV HC I Test marketed for 10 million(2)
Papillomavirus follow-up screening of women screening of women in
with equivocal Pap smears conjunction with Pap smear
HPV HC I Test approved for
testing with Cytyc's sample
collection system
PMA supplement for HPV HC II HPV HC II Test marketed for 150 million(2)
Test for follow-up screening primary screening of women
of women with equivocal Pap
smears expected to be
submitted in 1997
Chlamydia and 510(k) notification for Launched in August 1997 89 million(3)
Gonorrhea Chlamydia and Gonorrhea HC II (Chlamydia) 62
Tests expected to be submitted million(3)
in 1998 (Gonorrhea)
Human Expect to begin clinical Launched in July 1997 21 million(4)
Immunodeficiency trials in 1998 on HIV HC II
Virus Test
Cytomegalovirus 510(k) notification expected Launched in March 1997 1 million(6)
to be submitted in late 1997
for CMV HC I Test(5)
Hepatitis B Virus HBV HC I Test available for HBV HC I Test marketed and 300 million(7)
research use only distributed
Launch of HBV HC II Test
expected in 1998
---------------------
(1) As described herein, certain of the Company's products have not
received marketing approvals from the FDA or certain foreign
authorities. There can be no assurance that any such products will
receive such approvals on a timely basis, if at all. See "Risk
Factors -- Government Regulation."
(2) 10 million and 150 million are estimates of the total number of
equivocal Pap smears diagnosed annually and the total number of Pap
smears performed annually, respectively.
(3) Represents estimated number of new cases worldwide on an annual basis.
(4) Represents estimated number of cases worldwide.
(5) 510(k) notification withdrawn in July 1997. The Company is currently
compiling additional data and expects to submit another 510(k)
notification in late 1997.
(6) Represents estimated number of cases worldwide of active CMV
infection.
(7) Represents estimated number of cases worldwide of chronic HBV
infection.
Digene HPV Test
Digene manufactures and markets the only test approved by the FDA to detect
cancer-causing types of HPV. Clinical studies indicate that the Company's HPV HC
I Test, utilizing 14 HPV types, is capable of detecting cervical disease in up
to 92% of the cases in which cervical disease is present. The Company's HPV HC
II Test utilizes DNA sequences for 18 HPV types. Preliminary studies indicate
that the HPV HC II Test is capable of detecting cervical disease in up to 95% of
those cases in which cervical disease is present.
10
11
Currently, the Company's HPV HC I Test is being marketed and distributed in
the United States for the follow-up screening of women with equivocal Pap
smears. The Company expects to submit a PMA supplement to the FDA for its HPV HC
II Test in 1997. In March 1997, the Company launched its HPV HC II Test
internationally where it is being marketed for the primary screening of women
either in conjunction with or separate from the Pap smear.
Digene Chlamydia and Gonorrhea Tests
The Company is developing its HC II Chlamydia and Gonorrhea Tests to
provide clinicians with accurate, timely and non-invasive means of diagnosing
these STDs. The Digene Chlamydia and Gonorrhea Tests can be run either together
or individually. In addition, these tests are the only STD tests which can be
run from the same patient sample as the HPV HC II Test, thereby reducing the
number of specimens collected and lowering overall costs associated with disease
management. The tests detect the presence of chlamydia and gonorrhea in women
through samples taken with cervical swabs, as well as in men through the
collection of urine samples. Preliminary clinical studies on women have
indicated that Digene's Chlamydia Test is capable of detecting chlamydia in up
to 97% of the cases in which the disease is present, and the Gonorrhea Test is
capable of detecting gonorrhea in up to 91% of the cases in which it is present.
The Company intends to submit 510(k) notifications for its Chlamydia and
Gonorrhea Tests to the FDA in 1998 and launched the tests outside the United
States in August 1997.
Digene HIV Test
Digene is currently developing its HIV HC II Test for HIV detection,
screening and monitoring. The HIV HC II Test was shown in an independent
preliminary study conducted by the Ministry of Health of the Republic of Mexico
to provide highly sensitive, accurate, reproducible and reliable measurements of
HIV viral load. In the preliminary study, the test was also shown to be easy to
perform in an independent laboratory setting. The Company's HIV HC II Test is
the only test which can detect 92% of the HIV genome, which allows accurate
detection of critical subtypes of HIV. In conjunction with its marketing
relationship with Murex, Digene's HIV Test is expected to be the first HIV RNA
test to be available in combination with HIV drug resistance monitoring, CMV
DNA, and traditional HIV serology tests. Clinical studies in the United States
relating to the HIV HC II Test are expected to begin in 1998. The Company
launched the HIV HC II Test internationally in July 1997.
Digene CMV Test
Digene's CMV HC I Test delivers both qualitative and quantitative viral
load information to accurately differentiate active from latent CMV infection
for AIDS, transplant and other immunocompromised patients. The Company plans to
market its CMV HC I Test to (i) AIDS patients at risk of CMV end organ disease
who would benefit from preemptive therapy, (ii) select transplant patients with
active CMV infection needing protective therapy, and (iii) patients receiving
CMV antiviral therapy. The Company expects to market its CMV and HIV Tests
together for the management of patients with HIV/AIDS.
Digene conducted clinical trials of its CMV HC I Test at The Mayo Clinic,
The Cleveland Clinic and the UCLA Medical Center. The preliminary results of
these trials indicated that the CMV HC I Test detected active CMV infection in
94% of the cases in which it was present. Based on these results the Company
submitted a 510(k) notification to the FDA in January 1997. The 510(k)
notification was subsequently withdrawn in July 1997 and the Company is
currently compiling additional data and expects to re-file a 510(k) notification
in 1997. The Company has marketed its CMV HC I Test outside the United States
since March 1997.
Digene HBV Test
Digene is developing its HBV HC II Test for improved detection,
screening and monitoring of patients with HBV infection. The test is expected
to detect viral levels across a broad range of HBV genomes. Preliminary studies
indicate that the Company's HBV DNA Test can detect approximately seven
thousand to
11
12
one billion viral genome copies per milliliter. The Company believes the HBV HC
II Test will be effective for determining disease prognosis as well as
optimizing the efficacy of the antiviral therapy by monitoring viral load. In
addition, the HBV HC II Test is designed to replace antigen-based monitoring
methods because it is able to detect patients who have HBV infection but do not
have HBV antigens. The HBV HC I Test is currently marketed and distributed
outside the United States and the Company expects to launch its HBV HC II Test
outside the United States in 1998.
SALES AND MARKETING
The Company's sales and marketing strategy is to achieve broad market
acceptance of its Hybrid Capture technology in the areas of women's health and
blood virus detection, screening and monitoring. The Company sells its products,
either directly or through distributors, to more than 500 customers worldwide.
United States Market
The Company currently markets its products in the United States to
substantially all major clinical reference and hospital laboratories through a
direct sales force supported by technical and customer service representatives.
The Company expects to increase its 10 person sales force to approximately 20
persons by 1999.
The Company believes that adoption of its HPV tests by managed care
providers is essential for rapidly achieving broad based acceptance.
Accordingly, the Company is working with Kaiser Permanente on a study involving
46,000 women which the Company believes will demonstrate the clinical utility
and cost-effectiveness of the Company's HPV tests in a managed care setting.
Preliminary findings of the Kaiser Permanente study indicate that the Company's
HPV HC II Test based on its HC II technology identified 90% of women with
high-grade cervical disease from a population of patients with equivocal Pap
smears. The preliminary results further indicate that, for those healthcare
providers who would otherwise refer all patients with equivocal Pap smears for
colposcopy, use of the Company's HPV HC II Test could reduce the referral rate
for colposcopy of such patients by up to 61%. This reduction could eliminate
laboratory tests and doctors office procedures and significantly decrease costs
associated with cervical cancer screening. The Company intends to market this
data and its relationship with Kaiser Permanente to other managed care
providers.
The Company intends to market its products through joint marketing programs
with clinical reference laboratories and through co-marketing arrangements with
other strategic partners. For example, the Company is currently marketing its
HPV Test together with Cytyc Corporation's ThinPrep Pap Test, a sample
preparation system which allows for the automated preparation of cervical cell
specimens. The collaboration with Cytyc is designed to provide physicians with a
cost-effective and practical procedure for better management of those patients
with equivocal Pap smears. The new single sample approach, approved by the FDA
in September 1997, enables the use of the Digene HPV Test with the Cytyc
ThinPrep Pap Test to eliminate the need for a return office visit to collect a
second sample for HPV DNA testing.
Revenues from product sales in the United States were $2,689,000,
$2,948,000 and $3,882,000 in fiscal 1995, 1996 and 1997, respectively.
International Markets
In Europe, the Company's women's health products are marketed primarily
through a direct European sales force that Digene has established using the
sales and marketing infrastructure of Murex. Murex also serves as the European,
Middle Eastern and African distributor of the Company's blood virus products. In
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 do Brazil LTDA. See "-- Distribution
Arrangements" for information regarding the Company's relationship with Murex.
The Company expects to tailor its marketing efforts and healthcare
educational campaigns to the circumstances of each country to encourage
physicians, local authorities and industry opinion leaders to accept the
Company's women's health and blood virus products. In particular, the Company is
working closely with
12
13
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.
Revenues from export sales were $3,295,000, $3,759,000 and $5,979,000 in
fiscal 1995, 1996 and 1997, respectively.
RESEARCH AND DEVELOPMENT
The Company's principal research and development programs relate to further
improving the sensitivity, ease of interpretation and improved productivity of
its Hybrid Capture technology. In an effort to simplify and shorten test
processing, the Company has developed HC II, based on a 96-well microtiter plate
format, as a replacement for HC I, based on individual tubes. In addition, the
Company intends to develop a fully automated next generation Hybrid Capture III
delivery platform to incorporate direct DNA and RNA detection technologies. The
Company is also developing a proprietary target amplification system to couple
with the Hybrid Capture technology that may permit enhanced clinical sensitivity
for detecting particular viruses and bacteria.
At June 30, 1997, the Company had 43 employees engaged in research and
development. Company-sponsored research and development expenditures in fiscal
1995, 1996 and 1997 were approximately $1,107,000, $2,048,000 and $3,719,000,
respectively. In addition to Company-sponsored research and development, the
Company performs research and development through contracts with third parties,
such as Murex.
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 DNA and 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 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
Quality Systems Regulations ("QSRegs"). In late 1997, the Company plans to
initiate either the lease and build-out of a new facility or the expansion of
its existing facilities for manufacturing purposes. See "Risk Factors -- Limited
Manufacturing Experience; Uncertainties Regarding Manufacturing and Operations
Scale-up" for a discussion of those risks involved in the integration of the
Company's operations into a new facility.
COMPETITION
The medical diagnostics and biotechnology industries are subject to intense
competition. The Company's competitors in the United States and abroad for DNA
and RNA diagnostic probes include Roche Diagnostic Systems, Abbott Laboratories,
Chiron Corporation and Gen-Probe Incorporated. Other companies, including large
pharmaceutical and biotechnology companies, may enter the market for DNA and RNA
probe diagnostics. Additionally, for certain of the Company's tests, the Company
competes against existing screening, monitoring and diagnostic technologies,
including the Pap smear, tissue culture and antigen based diagnostic
methodologies.
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 the Digene HPV tests have 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
13
14
Company's existing and potential competitors have substantially greater
financial, marketing, sales, distribution and technological resources than the
Company. Accordingly, there can be no assurance that the Company will be able to
compete effectively against such potential competitors. Such existing and
potential competitors may be in the process of seeking FDA or foreign regulatory
approval for their respective products 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 may have established third-party
reimbursement for their products.
In marketing its HPV tests for the follow-up screening of women with
equivocal Pap smears in the United States, the Company competes with
well-established follow-up procedures, such as Pap smear re-testing, colposcopy
and biopsy, which are widely accepted and have a long history of use.
Additionally, in the event the Company is able to obtain FDA and applicable
foreign approvals to market its HPV tests as primary cervical cancer screening
tests, it will compete against the Pap smear, which is widely accepted as an
inexpensive and, with regular use, 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 primary screening in the United States, the Company's
HPV tests may be seen as adding unnecessary expense to the accepted cervical
cancer screening methodology. Consequently, there is no assurance that the
Company's HPV tests will be able to attain market acceptance as screening tests
on a timely basis, or at all.
The Company faces competition from a variety of technologies in the blood
virus area. There are several advanced technologies commercially available for
the detection and viral load measurement of HIV and HBV. Additionally, there are
several emerging DNA probe amplification technologies to detect CMV being
developed by competitors. There can be no assurance that the Company's tests for
CMV, HIV or HBV will be able to gain market acceptance on a timely basis, or at
all. There can be no assurance that the Company will be able to compete
successfully against existing or future competitors or that competition will not
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company believes the primary competitive factors in the market for DNA
and RNA 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 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 QSRegs), 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).
14
15
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 QSRegs 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.
Exports of products subject to 510(k) notification requirements, but not
yet cleared to market, are permitted without FDA export approval, provided that
certain requirements are met. Unapproved products subject to PMA requirements
can be exported to any country without prior FDA approval provided, among other
things, they are not contrary to the laws of the country to which they are
intended for import, they are manufactured in substantial compliance with the
QSRegs and have been granted valid marketing authorization by any member country
of the European Union, Australia, Canada, Israel, Japan, New Zealand,
Switzerland or South Africa. The Company must also provide FDA with simple
notification indicating the products to be exported and the countries to which
they will be exported. Failure on the part of the Company to obtain valid
marketing authorization from one of the listed countries, when needed, could
have a material adverse effect on the Company's business, financial condition
and results of operations.
15
16
FDA approval must be obtained for exports of products subject to the PMA
requirements if these export conditions are not met. To obtain export approval,
when required, 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 cases, safety data for the device. There can be no
assurance that the FDA will grant export approval, when necessary, or that
countries to which the device is to be exported will approve the device for
import. Failure on the part of the Company to obtain FDA export authorization,
when necessary, could have a material adverse effect on the Company's business,
financial condition and results of operations.
In April 1995 the Company obtained a PMA for its HPV test to detect the
presence of HPV in women with equivocal Pap smears. In August 1997, the Company
obtained FDA approval of a PMA supplement for use of the HPV Test using the
Cytyc Corporation sample collection system. 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 submitted a 510(k) notification for its CMV Test in December
1996. After changing certain reagents used in the test and following discussions
with the FDA, the Company decided to withdraw the original 510(k) notification
and a second 510(k) notification was submitted in March 1997. Upon review of the
second 510(k) notification, the FDA determined that additional data would be
needed and the submission was withdrawn on the basis that it would take the
Company more than thirty days to collect the necessary data. The Company expects
to submit another 510(k) notification for the CMV Test in late 1997 after
collecting the necessary data. The FDA will likely subject the CMV submission to
a "Tier 3" level of review which includes close scrutiny of the clinical data
that support the submission. The Company also understands that the FDA may seek
an advisory committee review and recommendation concerning the safety and
efficacy of the product. There can be no assurance that when the Company submits
a third 510(k) notification for the CMV Test, the FDA will grant clearance in a
timely manner, if at all, or that the FDA will not require the submission of
additional clinical data or find the product not substantially equivalent and
require the submission of a PMA application.
The Company also is developing tests for HIV and HBV which are Class III
devices that will necessitate the collection of extensive clinical data and the
eventual submission and approval of a PMA application. There can be no assurance
that the Company will be able to collect adequate data to support a PMA
application for either the HIV or HBV Tests or that when a PMA application is
submitted, FDA approval would be granted in a timely manner, if at all.
The Company also is developing tests for chlamydia and gonorrhea. The
Company believes marketing authorization for its Chlamydia and Gonorrhea Tests
in the United States can be obtained through the 510(k) notification process.
The Company anticipates that FDA may subject the 510(k) notifications to a "Tier
3" level of review which includes close scrutiny of the clinical data that
support the submissions. The Company also understands that the FDA may seek an
advisory committee review and recommendation concerning the safety and efficacy
of the Chlamydia and Gonorrhea Tests. There can be no assurance that once a
510(k) notification is submitted for the Chlamydia and Gonorrhea Tests the FDA
will grant clearance in a timely manner, if at all, or that the FDA will not
find the product not substantially equivalent and require the submission of a
PMA application.
The Company intends to export the HPV Test as a primary cervical cancer
screening test prior to obtaining FDA approval for this use in the United
States. The Company also intends to export the HIV Test for clinical use abroad
prior to pursuing FDA approval in the United States. Exports of the HPV Test as
a
16
17
primary cervical cancer screening test and exports of the HIV Test can be
undertaken without prior FDA approval provided, among other things, these tests
are not contrary to the laws of the country to which they are intended for
import, they are manufactured in substantial conformance with the QSRegs and the
Company has valid marketing authorization by any member country of the European
Union, Australia, Canada, Israel, Japan, New Zealand, Switzerland or South
Africa. FDA approval must be obtained for exports of products subject to the PMA
requirements if these export conditions are not met. There can be no assurance
that the Company will be able to obtain valid marketing authorization for either
test from one of the listed countries. Failure of the Company to obtain valid
marketing authorization from one of the listed countries or otherwise obtain
appropriate FDA export approval, if necessary, could have a material adverse
effect on the Company's business, financial condition and results of operations.
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 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 QSRegs, 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.
International sales are subject to foreign government regulation, the
requirements of which vary substantially from country to country. The time
required to obtain foreign approval may be longer or shorter than that required
for FDA approval and the requirements may substantially differ. Within the next
year a company must obtain the CE Mark prior to engaging in sales within the EU
of certain medical devices. During this process the sponsor must also
demonstrate compliance with ISO manufacturing and quality requirements. Failure
on the part of the Company to obtain necessary foreign approvals could have a
material adverse effect on the Company's business, financial condition and
results of operations.
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.
17
18
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 QSRegs
which impose certain procedural and documentation requirements upon the Company
with respect to manufacturing and quality assurance activities. Noncompliance
with QSRegs 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 QSRegs which, if
finalized, would likely increase the cost of compliance with the requirements.
Any failure by the Company to comply with QSRegs could have a material adverse
effect on the Company's business, financial condition and results of operations.
LICENSES, PATENTS AND PROPRIETARY INFORMATION
The Company's success will depend in part on its ability, and the ability
of its collaborators or licensors, to obtain and maintain patent protection for
its products and technologies under United States and foreign patent laws, to
preserve its trade secrets, and to operate without infringing the proprietary
rights of third parties. Because of the substantial length of time and expense
associated with bringing new products through development to the marketplace,
the medical diagnostics and biotechnology industries place 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. Corresponding patents have issued in
Canada and several European countries and a corresponding application is pending
in Japan. 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) an issued U.S. patent and certain
corresponding foreign patents and patent applications relating to HPV type 52
and an issued 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 patents and patent applications relating to HPV types
33, 39 and 42. 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
18
19
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 an issued U.S. patent
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.
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 HPV type 58 probe and a related Japanese patent application. 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.
The Company has pending U.S. patent applications relating to certain
aspects of its Hybrid Capture technology and to 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. The Company currently is in discussions with a third
party regarding a license to a pending United States patent application which
might cover one of the HPV types utilized by its Hybrid Capture II technology.
If such a license is necessary, the failure of the Company to successfully
negotiate such a license may require the Company to redesign its Hybrid Capture
II technology to exclude such HPV type. Such exclusion would result in delays in
the approval of Hybrid Capture II for marketing and could have a material
adverse effect on the Company's business, financial condition and results of
operations. 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 on
commercially reasonable terms, if at all.
No assurance can be given that the United States 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
19
20
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, 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.
DISTRIBUTION ARRANGEMENTS
In August 1997, the Company and Murex entered into a distribution agreement
(the "1997 Distribution Agreement") granting Murex the exclusive right to
distribute the Company's HIV, CMV and HBV HC II Tests in most of Europe, Eastern
Europe, Africa, the Middle East and Singapore. Pursuant to the 1997 Distribution
Agreement, Murex has agreed to use its reasonable efforts to distribute and
support the products, to maintain a qualified sales force, to provide technical
support for the products, to comply with the Company's packaging and delivery
requirements, and to assist the Company in protecting its proprietary rights in
the products. The Company is required to use reasonable efforts to deliver
products ordered by Murex, to provide current promotional materials and to
assist Murex in making sales presentations. The 1997 Distribution Agreement has
an initial term of four years and seven months, subject to automatic renewal for
successive one-year terms. Two years after the effective date of the 1997
Distribution Agreement, however, the Company will have the right to terminate
the 1997 Distribution Agreement with respect to particular countries, subject to
Murex's right to continue such products within any such country on a
co-exclusive basis during a "wind-down" period of six months.
In February 1997, the Company entered into two agreements (the "Agency
Agreement" and the "Customer Transfer Agreement," collectively the "1997
Agreements") with Murex to create a Digene-direct European sales operation for
the Company's women's health business. Under the 1997 Agreements, the Company
has begun marketing its HPV tests directly in Europe using Murex's distribution
infrastructure. The 1997 Agreements provide for a transition period during which
the administrative infrastructure will be agreed to and established. During this
transition period, the Company is recording its transactions consistent with a
prior distribution agreement with Murex. Prior to February 1, 1997, Murex had
been acting as the exclusive distributor in certain designated non-US
territories for the Company's HPV Test and other of the Company's products.
Under the 1997 Agreements, Murex will act as the exclusive agent for the Company
in designated European and Eastern European countries for a period of five years
during which Murex will receive selling service fees and a percentage of the
Company's HPV revenues in the designated territory. No other Digene products
(except the Company's HPV products) exclusively distributed by Murex in Europe
and Eastern Europe will be affected by the 1997 Agreements.
20
21
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
women's health and blood virus tests. Successful sales of the Company's products
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 products is clinically useful and cost-effective, not experimental or
investigational, and 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 each of the
Company's products to each payor separately. According to a third party report
commissioned by the Company, numerous providers have indicated they reimburse
for the Company's HPV HC I Test, including Aetna Life Insurance Company, United
Healthcare Corporation, CIGNA Corp. and Travelers Group. The report also
indicates that CPT codes, which are used in the submission of claims to insurers
for reimbursement for medical services, specific for HPV testing have been
proposed by the American Medical Association ("AMA") for its 1998 CPT manual.
The AMA assigns, maintains and revises CPT codes. There can be no assurance that
third-party reimbursement will be consistently available for the Company's
products, that such third-party reimbursement will be adequate or that CPT codes
for HPV testing will be adopted. 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 for certain of the Company's
products in their respective territories. The Company or its distributors have
established reimbursement for the HPV HC I Test in Germany, the Czech Republic
and Brazil. Accordingly, the establishment of reimbursement for certain of the
Company's products 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 could have a material adverse effect on the Company's business,
financial condition and results of operations.
PRODUCT LIABILITY
The Company's business is subject to product liability risks inherent in
the testing, manufacturing and marketing of the Company's products. 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 of $5,000,000 per occurrence and in the aggregate.
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.
21
22
EMPLOYEES
At August 29, 1997, the Company employed 120 persons, including 44 in
research and development, 41 in manufacturing, including quality assurance, 24
in sales and marketing and 11 in accounting, finance and administration. The
Company is not subject to any collective bargaining agreements and believes that
its relationship with its employees is good.
22
23
ADDITIONAL CONSIDERATIONS
HISTORY OF OPERATING LOSSES; UNCERTAINTY OF PROFITABILITY; FLUCTUATIONS IN
QUARTERLY RESULTS
The Company has incurred substantial operating losses since inception and,
at June 30, 1997, had an accumulated deficit of approximately $25.3 million.
Such losses have resulted principally from expenses associated with the
Company's research and development programs, including preclinical studies,
clinical trials and regulatory submissions for the Company's women's health and
blood virus products, the scale-up of the Company's manufacturing facilities,
and the expansion of the Company's sales and marketing activities in the United
States and abroad. The Company expects such operating losses to continue for the
foreseeable future as it continues its product development efforts, seeks United
States Food and Drug Administration ("FDA") and foreign approvals of its women's
health and blood virus products, expands its manufacturing capabilities, and
further expands its sales and marketing activities. In order to achieve
profitability, the Company must successfully manufacture, market and sell its
women's health and blood virus products in the United States and abroad. The
markets targeted by the Company are heavily regulated and are characterized by
an increasing number of entrants, intense competition and a high rate of
failure. There can be no assurance that the Company will ever be able to
successfully commercialize its products or that profitability will ever be
achieved. The Company's quarterly operating results have fluctuated
significantly in the past and the Company believes that they may continue to
fluctuate significantly in the future with lower product revenues in the first
and second fiscal quarters as compared with the third and fourth fiscal
quarters, primarily attributable to the lower demand for certain women's
health-related medical procedures during the summer months and the December
holiday season in the United States and Europe. In addition, the Company's
quarterly operating results, as well as annual results, may fluctuate from
period to period due to the degree of market acceptance of the Company's
products, competition, the timing of regulatory approvals and other regulatory
announcements, the volume and timing of orders from and shipments to
distributors, variations in the Company's distribution channels, the timing of
new product announcements and introductions by the Company and its competitors,
product obsolescence resulting from new product introductions and other factors,
many of which are outside the Company's control. Due to one or more of these
factors, in one or more future quarters the Company's results of operations may
fall below the expectations of securities analysts and investors. In that event,
the market price of the Company's Common Stock could be materially and adversely
affected.
UNCERTAINTY OF MARKET ACCEPTANCE
The Company's success depends, in part, upon the acceptance by the
worldwide medical community, including third-party payors, clinical laboratories
and health care providers, of the Company's Hybrid Capture technology as a
clinically useful and cost-effective method for detecting, screening and
monitoring human papillomavirus ("HPV"), chlamydia, gonorrhea, human
immunodeficiency virus ("HIV"), cytomegalovirus ("CMV"), and hepatitis B virus
("HBV"). There can be no assurance that the worldwide medical community will
accept the use of the Company's technology. Market acceptance of the Company's
products based on its Hybrid Capture II technology will depend on the Company's
ability to arrange for the distribution to its customers of luminometers with
the capability to analyze the results from such products. The Company has
identified a manufacturer for such luminometers and is currently arranging for
the manufacture and distribution of luminometers to its customers. No assurance
can be given that the Company's efforts will be successful. Failure to arrange
for the manufacture or distribution of such luminometers on a timely basis, or
any related delays, could delay or prevent market acceptance of the Company's
Hybrid Capture II products or increase the costs related to the distribution of
such luminometers, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations. Furthermore,
the Company's growth and success will depend upon market acceptance by the
medical community of the Company's HPV tests for the follow-up screening of
women with equivocal Pap smears as a clinically useful and cost-effective
alternative to well-established follow-up procedures, such as Pap smear
re-testing, colposcopy and biopsy,
24
which are widely accepted and have a long history of use. There can be no
assurance that HPV testing, in general, or the Company's HPV tests, in
particular, will achieve market acceptance in the United States on a timely
basis, or at all. Additionally, there can be no assurance that the Company's
products will be accepted in any markets outside the United States due to the
influence of established medical practices, lack of education about women's
health and blood viruses, and other social and economic factors beyond the
Company's control. Failure of the Company's technology or products to achieve
market acceptance would have a material adverse effect on the Company's
business, financial condition and results of operations.
RISKS INHERENT IN INTERNATIONAL TRANSACTIONS
The Company sells its products both in the United States and abroad.
International sales and operations may be limited or disrupted by the imposition
of government controls, export license requirements, economic and political
instability, price controls, trade restrictions, changes in tariffs and
difficulties with foreign distributors. Foreign countries often establish
product standards different from those of the United States and any inability to
obtain or maintain international approvals on a timely basis could have a
material adverse effect on the Company's international business operations.
Additionally, the Company's business, financial condition and results of
operations may be materially and adversely affected by fluctuations in currency
exchange rates as well as increases in duty rates and difficulties in obtaining
required licenses and permits. There can be no assurance that the Company will
be able to successfully commercialize any of its products in any foreign market.
In addition, the laws of some countries do not protect the Company's proprietary
rights to the same extent as those of the United States.
The Company markets its women's health and blood virus products abroad
using both a direct sales force and a network of distributors. For the Company's
products being sold through distributors, such distributors are responsible for
obtaining regulatory approvals and establishing reimbursement from third-party
payors in their respective territories. Generally, the extent and complexity of
regulation of medical products are increasing worldwide, with regulation in some
countries already nearly as exhaustive as that in the United States. The Company
anticipates that this trend will continue, and that the cost and time required
to obtain approval to market in any given country will increase, with no
assurance that such approval will be obtained. The Company's inability to obtain
approval to market its products internationally would have a material adverse
effect on the Company's business, financial condition and results of operations.
LIMITED SALES AND MARKETING EXPERIENCE
The Company has limited sales and marketing experience, and no assurance
can be given that the Company will be able to successfully establish and
maintain a significant sales and marketing organization or that the Company's
direct sales force will succeed in promoting the Company's products to
third-party payors, clinical laboratories, health care providers and government
entities worldwide. In addition, due to limited market awareness of the
Company's products, the Company believes that the marketing effort may be a
lengthy process, requiring the Company to educate the worldwide medical
community regarding both the clinical utility and cost-effectiveness of HPV
testing, in general, and the Company's HPV tests, in particular, and the
efficacy, clinical utility and cost-effectiveness of the Company's blood virus
products in detecting the presence of blood viruses and monitoring the
effectiveness of particular antiviral therapies. The Company intends to use a
direct sales force as well as a network of distributors to market and sell its
HPV tests in the United States and abroad. There can be no assurance that the
Company will be able to recruit and retain skilled sales, marketing, service or
support personnel, that agreements with foreign distributors will be available
on terms commercially reasonable to the Company, or at all, or that the
Company's sales and marketing efforts will be successful. Failure to
successfully establish and maintain a significant sales and marketing effort,
whether directly or through third parties, would have a material adverse effect
on the Company's business, financial condition and results of operations. The
Company's marketing success in the United States and abroad also will depend on
whether it can obtain required approvals for marketing, successfully demonstrate
25
the clinical utility and cost-effectiveness of its products, further develop a
direct sales capability, and establish arrangements with distributors and
marketing partners. Failure by the Company to successfully sell and market its
products would have a material adverse effect on the Company's business,
financial condition and results of operations.
DEPENDENCE ON THIRD-PARTY REIMBURSEMENT
Sales of the Company's products 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 products is
clinically useful and cost-effective, not experimental or investigational, and
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 each of the Company's
products to each payor separately. There can be no assurance that third-party
reimbursement will be consistently available for the Company's products or that
such third-party reimbursement will be adequate. Federal and state government
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. In addition, third-party payors
are increasingly limiting reimbursement coverage for medical diagnostic products
and in many instances are exerting pressure on medical suppliers to lower their
prices. Outside the United States, the Company relies on a network of
distributors distributing certain of the Company's products to establish
reimbursement from third-party payors in their respective territories.
Accordingly, the establishment of reimbursement for certain of the Company's
products 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
available for the Company's products under any other reimbursement system. Lack
of or inadequate reimbursement by government and other third-party payors for
the Company's products would have a material adverse effect on the Company's
business, financial condition and results of operations.
COMPETITION
The medical diagnostics and biotechnology industries are subject to intense
competition. The Company's competitors in the United States and abroad for DNA
and RNA diagnostic probes include Roche Diagnostic Systems, Abbott Laboratories,
Chiron Corporation and Gen-Probe Incorporated. Other companies, including large
pharmaceutical and biotechnology companies, may enter the market for DNA and RNA
probe diagnostics. Additionally, for certain of the Company's tests, the Company
competes against existing detection, screening and monitoring technologies,
including the Pap smear, tissue culture and antigen-based diagnostic
methodologies. In May 1996, Oncor, Inc. announced that it had 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. The Company's existing 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, manufacturing, distribution and technological resources than the Company.
Such existing and potential competitors may be in the process of seeking FDA or
foreign regulatory approval for their respective products 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 may
have established third-party reimbursement for their products. Accordingly,
there can be no assurance that the Company will be able to compete effectively
against such existing or potential competitors. In marketing its HPV tests for
the follow-up screening of women with equivocal Pap smears in the United States,
the Company competes with
26
well-established follow-up procedures, such as Pap smear re-testing, colposcopy
and biopsy, which are widely accepted and have a long history of use.
Additionally, in the event the Company is able to obtain FDA and applicable
foreign approvals to market its HPV tests for primary cervical cancer screening
either in conjunction with or separate from the Pap smear, it will compete
against the Pap smear, which is widely accepted as an inexpensive and, with
regular use, 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 primary screening in the United States, the Company's HPV tests
may be seen as adding unnecessary expense to the accepted cervical cancer
screening methodology. Consequently, there is no assurance that the Company's
HPV tests will be able to attain market acceptance as a primary screening test
on a timely basis, or at all. The Company faces competition from a variety of
technologies in the blood virus area. There are several advanced technologies
commercially available for the detection and viral load measurement of HIV and
HBV. Additionally, there are several emerging DNA probe amplification
technologies to detect CMV being developed by competitors. There can be no
assurance that the Company's tests for CMV, HIV or HBV will be able to gain
market acceptance on a timely basis, or at all. There can be no assurance that
the Company will be able to compete successfully against existing or future
competitors or that competition will not have a material adverse effect on the
Company's business, financial condition and results of operations.
LIMITED MANUFACTURING EXPERIENCE; UNCERTAINTIES REGARDING MANUFACTURING AND
OPERATIONS SCALE-UP
The Company has limited commercial-scale manufacturing experience and
capabilities and it is anticipated that the Company will be required to further
scale-up its manufacturing capabilities. In late 1997, the Company plans to
initiate either the lease and build-out of a new facility or the expansion of
its existing facility. The integration of the Company's manufacturing operations
into a new or expanded facility may result in inefficiencies and delays.
Specifically, companies often encounter difficulties in scaling up
manufacturing, including problems involving production yield, quality control
and assurance, and shortages of qualified personnel. In addition, the Company's
new or expanded manufacturing facilities will be subject to Quality Systems
Regulations ("QSRegs"), international quality standards and other regulatory
requirements. Difficulties encountered by the Company in expansion of
manufacturing or the failure by the Company to establish and maintain its
facilities in accordance with QSRegs, international quality standards or other
regulatory requirements could result in a delay or termination of manufacturing,
which could have a material adverse effect on the Company's business, financial
condition and results of operations. Additionally, ongoing sales of the
Company's Hybrid Capture II products will be dependent, in part, upon the
Company's ability to provide service and support to users of luminometers and
related software and equipment. The Company's inability to successfully develop
necessary service and support capabilities could have a material adverse effect
on the Company's business, financial condition and results of operations.
DEPENDENCE ON EUROPEAN DISTRIBUTOR
For the fiscal year ended June 30, 1997, approximately 42% of the Company's
total revenues resulted from transactions with International Murex Technologies
Corporation (together with its affiliates, "Murex"). After this Offering, Murex
will own approximately 5.3% of the Company's outstanding shares of Common Stock.
The Company has established a direct European sales operation for its women's
health products whereby, pursuant to an agreement, the Company markets such
products directly using Murex's sales and marketing infrastructure. In addition,
the Company has a co-exclusive distribution agreement with Murex for sales of
its other products in Europe, the Middle East and Africa. Consequently, the
Company expects that sales to Murex will continue to constitute a significant
portion of total revenues for the foreseeable future. The loss of Murex's sales
and marketing infrastructure, a significant decrease in product shipments to or
an inability to collect receivables from Murex or any other adverse change in
the Company's relationship with Murex could have a material adverse effect on
the Company's business, financial condition and results of operations.
27
UNCERTAINTY REGARDING PATENTS AND PROPRIETARY RIGHTS
The Company's success will depend, in part, on its ability, and the ability
of its collaborators or licensors, to obtain protection for its products and
technologies under United States and foreign patent laws, to preserve its trade
secrets, and to operate without infringing the proprietary rights of third
parties. Because of the substantial length of time and expense associated with
bringing new products through development to the marketplace, the medical
diagnostics and biotechnology industries place considerable importance on
obtaining, and maintaining, patent and trade secret protection for new
technologies, products and processes.
The Company has obtained rights to certain patents and patent applications
and may, in the future, obtain, or seek rights from third parties to additional
patents and patent applications. There can be no assurance that patent
applications relating to the Company's products or technologies will result in
patents being issued, that any issued patents will afford adequate protection to
the Company, or that such patents will not be challenged, invalidated, infringed
or circumvented. Furthermore, there can be no assurance that others have not
developed, or will not develop, similar products or technologies that will
compete with those of the Company without infringing upon the Company's
intellectual property rights.
Legal standards relating to the scope of claims and the validity of patents
in the medical diagnostics and biotechnology industries are uncertain and still
evolving, and no assurance can be given as to the degree of protection that will
be afforded any patents issued to, or licensed by, the Company. There can be no
assurance that, if challenged by others in litigation, any patents assigned to
or licensed by the Company will not be found invalid. Furthermore, there can be
no assurance that the Company's activities would not infringe patents owned by
others. Defense and prosecution of patent matters can be expensive and
time-consuming and, regardless of whether the outcome is favorable to the
Company, can result in the diversion of substantial financial, management and
other resources. An adverse outcome could subject the Company to significant
liability to third parties, require the Company to obtain licenses from third
parties, or require the Company to cease any related research and development
activities and product sales. No assurance can be given that any licenses
required under any such patents or proprietary rights would be made available on
terms acceptable to the Company, if at all. Moreover, the laws of certain
countries may not protect the Company's proprietary rights to the same extent as
United States law.
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. The Company currently is in discussions with a third
party regarding a license to a pending United States patent application which
might cover one of the HPV types utilized with its HPV HC II Test. Should a
license prove necessary, the failure of the Company to successfully negotiate
such a license on commercially reasonable terms, or at all, may require the
Company to redesign its HPV HC II Test to exclude this HPV type. Such exclusion
could result in delays in any approval of the Company's HPV HC II Test for
marketing and 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 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 Company's success also is 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.
28
GOVERNMENT REGULATION
The Company's current and any future products are and will be 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 April 1995, the Company obtained approval of a PMA application for its
HPV Test to detect the presence of HPV in women with equivocal Pap smears. In
August 1997, the Company obtained FDA approval of a PMA supplement for use of
the HPV Test using the Cytyc Corporation sample collection system. The Company
intends to submit a PMA supplement with the FDA 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 pre-
market approval ("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 in the United States. 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 as a primary cervical cancer screening
test prior to obtaining FDA approval for this use in the United States. Such
exports may require regulatory approvals from various countries. There can be no
assurance that such foreign regulatory agencies will grant approval of such
products, 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 submitted a 510(k) notification for its CMV Test in December
1996. After changing certain reagents used in the test and following discussions
with the FDA, the Company decided to withdraw the original 510(k) notification
and a second 510(k) notification was submitted in March 1997. Upon review of the
second 510(k) notification, the FDA determined that additional data would be
needed and the submission was withdrawn on the basis that it would take the
Company more than 30 days to collect the necessary data. The Company expects to
submit another 510(k) notification for the CMV Test in late 1997 after
collecting the necessary data. The FDA will likely subject the CMV submission to
a "Tier 3" level of review which includes close scrutiny of the clinical data
that support the submission. The Company also understands that the FDA may seek
an advisory committee review and recommendation concerning the safety and
efficacy of the product. There can be no assurance that, when the Company
submits a third 510(k) notification for the CMV Test, the FDA will grant
clearance in a timely manner, if at all, or that the FDA will not require the
submission of additional clinical data or find the product not substantially
equivalent and require the submission of a PMA application.
The Company is developing tests for HIV and HBV which are class III devices
that will necessitate the collection of extensive clinical data and the eventual
submission and approval of a PMA application. There can be no assurance that the
Company will be able to collect adequate data to support a PMA application for
either the HIV Test or HBV Test or that when a PMA application is submitted, FDA
approval would be granted in a timely manner, if at all.
The Company is also developing tests for chlamydia and gonorrhea. The
Company believes marketing authorization for its Chlamydia and Gonorrhea Tests
in the United States can be obtained through the 510(k) notification process.
The Company understands that the FDA will subject the submissions to a "Tier 3"
level of review which includes close scrutiny of the clinical data that support
the submissions. The Company also
29
understands that the FDA may seek an advisory committee review and
recommendation concerning the safety and efficacy of the Chlamydia and Gonorrhea
Tests. There can be no assurance that, once a 510(k) notification is submitted
for the Chlamydia and Gonorrhea Tests, the FDA will grant clearance in a timely
manner, if at all, or that the FDA will not find such tests not substantially
equivalent and require the submission of a PMA application.
The Company intends to export the HPV Test as a primary cervical cancer
screening test prior to obtaining FDA approval for this use in the United
States. The Company also intends to export the HIV Test for clinical use abroad
prior to pursuing FDA approval in the United States. Exports of the HPV Test as
a primary cervical cancer screening test and exports of the HIV Test can be
undertaken without prior FDA approval provided, among other things, that the
marketing of these tests are not contrary to the laws of the country to which
they are intended for import, they are manufactured in substantial conformance
with QSRegs and the Company has valid marketing authorization by any member
country of the European Union, Australia, Canada, Israel, Japan, New Zealand,
Switzerland or South Africa. FDA approval must be obtained for exports of
products subject to the PMA requirements if these export conditions are not met.
The Company must also provide the FDA with simple notification indicating the
products to be exported and the countries to which they will be exported. There
can be no assurance that the Company will be able to obtain valid marketing
authorization for either test from one of the listed countries or that the FDA
would grant specific export approval. Failure of the Company to obtain valid
marketing authorization from one of the listed countries or otherwise meet the
FDA export approval requirements, could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company currently sells various products on a research use only ("RUO")
basis. Failure of the Company or recipients of the Company's RUO devices to
comply with the user certification requirements and other regulatory limitations
placed 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 the
products.
The FDA product clearance process 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, or the loss of any previously received
approvals or clearances, could have a material adverse effect on the business,
financial condition and results of operations of the Company.
Any products manufactured or distributed by the Company pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA. 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 QSRegs
which impose certain procedural and documentation requirements upon the Company
with respect to manufacturing and quality assurance activities. Noncompliance
with QSRegs 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. Any failure by the Company to comply with the requirements of
QSRegs could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company must comply with similar registration requirements of foreign
governments and with import and export regulations when distributing its
products to foreign nations. Each foreign country's regulatory requirements for
product approval and distribution are unique and may require the expenditure of
substantial time, money and effort. The regulation of medical devices in a
number of such jurisdictions, particularly in the European Union, continues to
develop and there can be no assurance that new laws or regulations will not have
a material adverse effect on the Company's business, financial condition and
results
30
of operations. Noncompliance with state, local, federal or foreign regulatory
requirements can result in fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, delay or denial
or withdrawal of premarket clearance or approval of devices and criminal
prosecution.
DEPENDENCE ON SINGLE SOURCE SUPPLIERS
Certain key components of the Company's products are currently provided to
the Company, on a purchase-order basis, by single sources. The Company does not
have long-term supply contracts with any of such suppliers nor has the Company
arranged for alternative supply sources. In the event that the Company is unable
to obtain sufficient quantities of such components on commercially reasonable
terms, or in a timely manner, the Company would not be able to manufacture its
products on a timely and cost-competitive basis which would have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, if any of the components of the Company's products are
no longer available in the marketplace, the Company may be forced to further
develop its technology to incorporate alternate components. The incorporation of
new components into the Company's products may require the Company to seek
necessary approvals from the FDA or appropriate foreign regulatory agencies
prior to commercialization. There can be no assurance that such development
would be successful or that, if developed by the Company or licensed from third
parties, such alternative components would receive requisite regulatory approval
on a timely basis, or at all.
The success of the Company's products based on its Hybrid Capture II
technology will depend, in part, on the Company's ability to arrange for the
distribution to its customers of luminometers and related software and equipment
with the capability to analyze the results of its tests. The luminometers
currently are manufactured for the Company by a single supplier. Although the
Company believes that such luminometers could be acquired from alternative
sources, such sources may be more expensive than the Company's current supplier
and may require substantial lead time. Consequently, the failure of the
Company's supplier to produce luminometers in accordance with specifications, in
accordance with applicable regulations and on a timely basis, could
significantly inhibit the Company's ability to market its Hybrid Capture II
products and have a material adverse effect on the Company's business, financial
condition and results of operations.
UNCERTAINTIES RELATING TO PRODUCT DEVELOPMENT
There can be no assurance that the Company's new product development
efforts will result in any commercially viable or successful products. The
Company has a number of product candidates in various early stages of
development. These product candidates will require substantial additional
investment, laboratory development, clinical testing and regulatory approval
prior to their commercialization. The Company's inability to successfully
develop these product candidates or achieve market acceptance of such products
could have a material adverse effect on the Company's business, financial
condition and results of operations.
ATTRACTION AND RETENTION OF KEY PERSONNEL
The Company is highly dependent on the principal members of its management
team, the loss of whose services might impede achievement of the Company's
strategic objectives. The Company's success will depend on its ability to retain
key employees and to attract additional qualified employees. Competition for
such personnel is intense, and there can be no assurance that the Company will
be able to retain existing personnel and to attract, assimilate or retain
additional highly qualified employees in the future. If the Company is unable to
hire and retain personnel in key positions, such inability would have a material
adverse effect on the Company's business, financial condition and results of
operations.
POTENTIAL INADEQUACY OF PRODUCT LIABILITY INSURANCE
The Company's business is subject to product liability risks inherent in
the testing, manufacturing and marketing of its products. There can be no
assurance that product liability claims will not be asserted against
31
the Company, its collaborators or licensees. The Company currently maintains
product liability insurance coverage of $5,000,000 per occurrence and in the
aggregate. 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.
ENVIRONMENTAL REGULATION
The Company is subject to a variety of local, state and federal government
regulations relating to the storage, discharge, handling, emission, generation,
manufacture and disposal of toxic, infectious or other hazardous substances used
to manufacture the Company's products. Any failure by the Company to control the
use, disposal, removal or storage of hazardous chemicals or toxic substances
could subject the Company to significant liabilities, which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the shares of Common Stock, like that of the common
stock of many other medical diagnostics and biotechnology companies, has been
and is likely to remain highly volatile. Factors such as announcements of
technological innovations or new products by the Company or its competitors,
clinical trial results relating to or regulatory approvals or disapprovals of
the Company's or competitors' product candidates, government regulation, health
care legislation, developments or disputes concerning patent or other
proprietary rights of the Company or its competitors, including litigation,
fluctuations in the Company's operating results and market conditions for health
care stocks and biotechnology stocks in general could have a significant impact
on the future price of the Common Stock. In addition, the stock market has
experienced from time to time extreme price and volume fluctuations that may be
unrelated to the operating performance of particular companies. Since the
Company's initial public offering of Common Stock on May 22, 1996, the average
daily trading volume in the Common Stock as reported on the Nasdaq National
Market has been relatively low. There can be no assurance that a more active
trading market will develop in the future.
32
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING
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 expand its manufacturing capabilities.
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 products, progress in its product
development efforts, the magnitude and scope of such efforts, progress with
preclinical studies and clinical trials, progress with regulatory affairs
activities, the cost and timing of expansion of manufacturing capabilities, the
expansion of the Company's direct European sales operations, the development and
maintenance 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, together with its
existing capital resources, 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.
CONTROL BY MANAGEMENT
As of September 24, 1997, the Company's President and Executive Vice
President beneficially own an aggregate of approximately 46.4% of the
Company's outstanding shares of Common Stock. As a result, these officers,
acting together, effectively control the election of directors and matters
requiring approval by the Company's stockholders.
ANTITAKEOVER CONSIDERATIONS
The Company's Board of Directors has the authority, without further action
by the stockholders, to issue from time to time, up to 1,000,000 shares of
Preferred Stock in one or more classes or series, and to fix the rights and
preferences of such Preferred Stock. The Company's Certificate of Incorporation
also provides for staggered terms for members of the Board of Directors. The
Company is subject to provisions of Delaware corporate law which, subject to
certain exceptions, will prohibit the Company from engaging in any "business
combination" with a person who, together with affiliates and associates, owns
15% or more of the Company's Common Stock (an "Interested Stockholder") for a
period of three years following the date that such person became an Interested
Stockholder, unless the business combination is approved in a prescribed manner.
Additionally, the Bylaws of the Company establish an advance notice procedure
for stockholder proposals and for nominating candidates for election as
directors. These provisions of Delaware law and of the Company's Certificate of
Incorporation and Bylaws may have the effect of delaying, deterring or
preventing a change in control of the Company, may
33
discourage bids for the Common Stock at a premium over market price and may
adversely affect the market price, and the voting and other rights of the
holders, of the Common Stock.
34
ITEM 2. PROPERTIES
The Company's executive office and manufacturing facility is located in
Beltsville, Maryland. The lease on this 28,280-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 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. Due
to the Company's recent and expected future growth, in late 1997 the Company
plans to initiate either the lease and build-out of a new facility or the
expansion of its existing Beltsville, Maryland facility.
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.................................. 40 President, Chief Executive Officer and Chairman of the
Board (1)
Charles M. Fleischman....................... 39 Executive Vice President, Chief Operating Officer,
Chief Financial Officer and Director (2)
Attila D. Lorincz, Ph.D..................... 42 Vice President, Research and Development, and
Scientific Director (3)
Deborah J. Oronzio ......................... 45 Vice President, Marketing (4)
Steven A. Owings ........................... 45 Vice President, Sales and Marketing (5)
William J. Payne, Jr., Ph.D. ............... 47 Vice President, Development (6)
Donna Marie Seyfried ....................... 39 Vice President, Business Development (7)
Joseph P. Slattery ......................... 32 Controller (8)
- ----------
(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 Chairman of the Board since September 1995. Mr. Jones
received a B.A. in Biochemistry from the University of Colorado and an M.B.A.
from The Wharton School at the University of Pennsylvania.
(2) Mr. Fleischman has served as Executive Vice President and a
director since Armonk Partners acquired a controlling interest in the Company
in July 1990, Chief Operating Officer since September 1995 and Chief Financial
Officer since March 1996. Mr. Fleischman received an A.B. in History from
Harvard University and an M.B.A. from The Wharton School at the University of
Pennsylvania.
(3) Dr. Lorincz has served as Vice President, Research and
Development, and Scientific Director since the Company's acquisition of the
molecular diagnostics division of Life Technologies Inc. in December 1990. His
research career includes postdoctoral fellowships at the University of
California. Dr. Lorincz received his Ph.D. in Genetics from Trinity College,
Dublin, Ireland. 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 served as Director of Sales and Marketing from August 1991 to March
1996. Ms. Oronzio is a registered medical technologist and has received a B.S.
in Medical Technology from Neumann College and an M.A.S. in Management from The
Johns Hopkins University.
23
35
(5) Mr. Owings has served as Vice President, Sales and Marketing
since January 1997. From August 1992 until January 1997 he served as Director,
PCR Business Unit USA, of Roche Diagnostic Systems, Inc. Mr. Owings received a
B.S. in Microbiology from Northern Arizona University.
(6) Mr. Payne has served as Vice President, Development since July
1997. From August 1995 to July 1997, he was Vice President, Research and
Development in the IVD Medical Diagnostic division of Sigma Diagnostics. From
July 1993 to July 1995, Mr. Payne served as Director of Research and
Development in the IVD Diagnostic Medical division of Sanofi Diagnostic
Pasteur. From August 1990 to July 1993, he was the Manager, Research and
Development, for Sanofi Diagnostic Pasteur. Dr. Payne received a B.S. in
Microbiology from University of Georgia and a M.S. and a Ph.D. in Microbiology
from Virginia Commonwealth University.
(7) Ms. Seyfried has served as Vice President, Business Development
since October 1996. From October 1985 to September 1996 Ms. Seyfried held
several positions with Perkin-Elmer Corp., serving most recently as Senior
Director, Business Development from March 1993 to September 1996 and Director,
PCR Instrumentation Business Unit from 1990 to March 1993. Ms. Seyfried
received a B.S. in Biology from Lehigh University.
(8) 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. Mr. Slattery received a B.S. in
Accounting from Bentley College and is a certified public accountant.
24
36
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Since 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 bid prices for the Common Stock, as
reported by the Nasdaq National Market:
HIGH LOW
--------- -------
FISCAL 1998
First quarter (through September 24, 1997).......................... $ 15 $ 12 3/8
FISCAL 1997
Fourth quarter...................................................... 13 1/2 9 1/2
Third quarter....................................................... 13 1/4 10 7/8
Second quarter...................................................... 12 3/4 5 1/8
First quarter....................................................... 8 5
FISCAL 1996
Fourth quarter (from May 22, 1996).................................. 11 1/2 8
On September 24, 1997, the closing sale price for the Common Stock, as
reported by the Nasdaq National Market was $13 1/2. As of September 24, 1997,
the Company's Common Stock was held by 165 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.
Except as hereinafter set forth, there have been no sales of unregistered
securities by the Company within the past three years.
From September 1995 through December 1995, 158,250 shares of Series 1994
Redeemable Convertible Preferred Stock were sold to certain existing
stockholders and certain new investors at a price per share of $4.00. During
the period May 1994 through April 1996, 1,000,000 shares of Series 1994
Redeemable Convertible Preferred Stock were sold to International Murex
Technologies Limited at a price of $3.00 per share under the terms of a Stock
Purchase Agreement.
In connection with sales of Series 1994 Redeemable Convertible Preferred
Stock, the Company granted each purchaser warrants to purchase Common Stock up
to an amount equal to 41.67% of their investment in Series 1994 Redeemable
Convertible Preferred Stock at a price per-share escalating from $4.20 in May
1994 to $6.65 in February 1996. In April 1996, pursuant to the exercise of such
warrants, the Company issued 70,436 shares of Common Stock for $6.65 per share,
to certain existing stockholders. (Amounts in this paragraph are adjusted to
reflect a one-for-.714 reverse split of the Common Stock effected in connection
with the initial public offering of the Company's Common Stock.)
In each of the transactions described above, the securities were not
registered under the Securities Act in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act.
Since July 1, 1994, in transactions which were exempt from registration
pursuant to Section 4(2) of the Securities Act and Rule 701 promulgated under
the Securities Act, the Company has issued options to certain employees,
directors, consultants and others to purchase an aggregate of 340,555 shares of
the Company's Common Stock at prices per share ranging from $2.10 to $13.00.
Between July 1, 1994 and September 24, 1997, 39 of such employees, consultants
and others exercised options to purchase an aggregate of 303,008 shares at
an aggregate price of $182,175.31.
25
37
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below with respect to
the Company's Consolidated Statements of Operations for the fiscal years ended
June 30, 1995, 1996 and 1997 and with respect to the Company's Consolidated
Balance Sheets at June 30, 1996 and 1997 are derived from the audited
Consolidated Financial Statements of the Company which are included elsewhere in
this report and are qualified by reference to such Consolidated Financial
Statements and the related Notes thereto. Statement of Operations data for the
fiscal years ended June 30, 1993 and 1994 and Balance Sheet data at June 30,
1993, 1994 and 1995 are derived from the audited Financial Statements of the
Company not included herein. The selected financial data set forth below is
qualified by, and should be read in conjunction with the Consolidated 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,
--------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues:
Product sales............................. $ 4,624 $ 4,767 $ 5,413 $ 6,359 $ 9,434
Research and development contracts........ 141 527 749 381 626
------- ------- ------- ------- ------
Total revenues......................... 4,765 5,294 6,162 6,740 10,060
Costs and expenses:
Cost of product sales..................... 2,698 2,464 2,652 2,895 3,441
Research and development.................. 1,047 1,103 1,856 2,430 4,131
Selling and marketing..................... 1,194 1,398 1,375 2,095 5,236
General and administrative................ 1,162 1,191 1,245 1,792 4,412
Amortization of intangible assets......... 349 265 330 248 241
------- ------- ------- ------- ------
Loss from operations........................ (1,685) (1,127) (1,296) (2,720) (7,401)
Other income (expense)...................... 67 (13) 14 40 (36)
Interest income (expense)................... (299) (293) (232) 45 1,443
------- ------- ------- ------- ------
Net loss.................................... $ (1,917) $ (1,433) $ (1,514) $ (2,635) $ (5,994)
======= ======= ======= ======= ======
Net loss per share(1)....................... $ (2.34) $ (1.69) $ (1.78) $ (1.30) $ (0.53)
======= ======= ======= ======= ======
Weighted average shares outstanding(1)...... 818 847 850 2,027 11,394
AT JUNE 30,
--------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments............................... $ 397 $ 1,090 $ 1,217 $ 28,575 $ 19,514
Total assets................................ 4,308 4,307 4,485 33,174 30,207
Long-term debt, less current maturities..... 3,100 3,005 2,812 152 553
Redeemable Convertible Preferred Stock...... 10,276 11,768 13,115 0 0
Accumulated deficit......................... (13,750) (15,184) (16,698) (19,333) (25,327)
Total stockholders' equity (deficit)........ (10,058) (11,490) (13,004) 30,119 24,266
- ---------------
(1) Computed on the basis described in Note 2 of Notes to Consolidated Financial
Statements.
26
38
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Consolidated
Financial Statements and the related Notes thereto included elsewhere in this
report. This report contains forward-looking statements that involve
risks and uncertainties. The Company's actual results may differ significantly
from the results discussed in the forward-looking statements. Factors that might
cause or contribute to such differences include, but are not limited to,
uncertainty of profitability, uncertainty of market acceptance, risks inherent
in international transactions, limited sales and marketing experience,
dependence on third-party reimbursement, competition, dependence on European
distributor, extent of government regulations, and uncertainty regarding
patents and proprietary rights.
OVERVIEW
Digene develops, manufactures and markets proprietary DNA and RNA tests,
based on its Hybrid Capture technology, for the detection, screening and
monitoring of HPV, STDs including chlamydia and gonorrhea, and blood viruses
including HIV, CMV and HBV. Currently, the Company is marketing its HPV Test in
the United States for the follow-up screening of women with equivocal Pap smears
and the Company is marketing its HPV tests internationally as a primary screen
to be used either in conjunction with or separate from the Pap smear.
Internationally, the Company launched its HBV Test in 1992, its CMV Test in
March 1997, and its HIV Test in July 1997. In addition, the Company introduced
its Chlamydia and Gonorrhea Tests internationally in August 1997. Other than the
Company's HPV Test, the Company's products currently are available in the United
States for research use only. The Company expects that sales of its HPV tests
will account for a substantial portion of the Company's revenues for at least
the next two years. In addition, the Company expects that international sales
will account for a significant portion of its revenues for at least the next two
years.
The Company currently markets its products in the United States through a
direct sales force supported by technical and customer service representatives.
In Europe, the Company's women's health products are marketed primarily through
a direct sales force that Digene has established with Murex, which also serves
as a distributor of the Company's blood virus products in certain European,
Middle Eastern and African markets. The Company's products are also sold through
a network of distributors in Asia and South America, and in Brazil through the
Company's majority owned subsidiary.
The Company has incurred substantial operating losses since inception,
resulting principally from expenses associated with the Company's research and
development programs, including preclinical studies, clinical trials and
regulatory submissions for the Company's women's health and blood virus
products, the scale-up of the Company's manufacturing facilities, and the
expansion of the Company's sales and marketing activities in the United States
and abroad. The Company expects such operating losses to continue for the
foreseeable future as it continues its product development efforts, seeks FDA
and foreign approvals of its women's health and blood virus products, expands
its manufacturing capabilities and further expands its sales and marketing
activities. In late 1997, the Company plans to initiate either the lease and
build-out of a new facility or the expansion of its existing facility for
additional manufacturing, laboratory, warehouse and office space, which will
increase operating expenses beginning in 1998. During the next two years, the
Company also intends to make a significant investment in luminometers and
related software and equipment, which will be provided to clinical laboratories
to assist in the Company's launch of the HPV HC II Test, primarily in Europe.
The Company's quarterly operating results have fluctuated significantly in
the past and the Company believes that they may continue to fluctuate
significantly in the future with lower product revenues in the first and second
fiscal quarters as compared with the third and fourth fiscal quarters, primarily
attributable to the lower demand for certain women's health-related medical
procedures during the summer months and the December holiday season in the
United States and Europe. In addition, the Company's quarterly operating
results, as well as annual results, may fluctuate from period to period due to
the degree of market acceptance of the Company's products, competition, the
timing of regulatory approvals and other regulatory announce-
27
39
ments, the volume and timing of orders from and shipments to distributors,
variations in the Company's distribution channels, the timing of new product
announcements and introductions by the Company and its competitors, product
obsolescence resulting from new product introductions and other factors, many of
which are outside the Company's control. Due to one or more of these factors, in
one or more future quarters the Company's results of operations may fall below
the expectations of securities analysts and investors. In that event, the market
price of the Company's Common Stock could be materially and adversely affected.
RESULTS OF OPERATIONS
Comparison of Fiscal Year Ended June 30, 1997 to Fiscal Year Ended June 30,
1996
Product sales increased to $9,434,000 in fiscal 1997 from $6,359,000 in
fiscal 1996. The increase was due primarily to increased sales of the Company's
HPV tests. The Company anticipates that sales of its HPV tests will account for
a substantial portion of its product sales for at least the next two years.
Research and development contract revenues increased to $626,000 in fiscal
1997 from $381,000 in fiscal 1996 due primarily to revenues recorded under a new
contract.
Cost of product sales increased to $3,441,000 in fiscal 1997 from
$2,895,000 in fiscal 1996 due to increased sales volume. Gross margin on product
sales increased to 63.5% in fiscal 1997 from 54.4% in fiscal 1996. This increase
was due primarily to sales of higher margin HPV tests and increases in overhead
absorption and unit pricing. The Company expects gross margins to increase in
the future due to improved overhead absorption and manufacturing efficiencies,
and more favorable terms for its distribution relationships.
Research and development expenses increased to $4,131,000 in fiscal 1997
from $2,430,000 in fiscal 1996 due to the hiring of additional research and
development personnel and increases in clinical trial activity related to the
development of its blood virus and STD tests and to the further development of
the Company's Hybrid Capture II technology. The Company expects research and
development expense to increase for the next few years.
Selling and marketing expenses increased to $5,236,000 in fiscal 1997 from
$2,095,000 in fiscal 1996 due to substantial increases in sales and marketing
programs and to the hiring of additional selling and marketing personnel, as
well as to other selling costs, incurred under the Company's international
distribution agreements. The Company expects selling and marketing expenses to
increase substantially over the next few years as it expands its advertising and
promotional activities and increases its sales and marketing force.
General and administrative expenses increased to $4,412,000 in fiscal 1997
from $1,792,000 in fiscal 1996, due to the hiring of additional administrative
personnel, set-up costs associated with the Company's expansion into the
European market, and the related expenses incurred to support the Company's
requirements as a publicly traded company. In addition, general and
administrative expenses increased as a result of the formation of Digene do
Brasil, a majority-owned subsidiary. The Company expects general and
administrative expenses to increase over the next few years.
Amortization of intangible assets decreased to $241,000 in fiscal 1997 from
$248,000 in fiscal 1996. The Company expects amortization of intangible assets
to increase significantly in the next fiscal year and to remain at such
increased level through fiscal 2001 due to the acquisition during 1997 of
certain assets relating to the establishment of its women's health business in
Europe.
Interest income increased to $1,443,000 in fiscal 1997 from $45,000 in
fiscal 1996 due primarily to the investment of the net proceeds from the
Company's initial public offering, completed in May 1996, partially offset by a
decrease in interest expense due to the repayment of notes related to an
acquisition.
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 in December 1995.
28
40
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.
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 on the discontinued radioactive
product line.
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.
Selling and marketing expense increased 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.
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 becoming a publicly traded 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.
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 an
acquisition and the investment of the proceeds from the Company's initial public
offering which was completed in May 1996.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company's expenses have significantly exceeded its
revenues, resulting in an accumulated deficit of approximately $25.3 million at
June 30, 1997. The Company has funded its operations primarily through the sale
of equity securities. At June 30, 1997, the Company had cash, cash equivalents
and short-term investments aggregating approximately $19,514,000. 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
$6,527,000 for the fiscal year ended June 30, 1997.
Capital expenditures increased to $971,000 in fiscal 1997 from $330,000 in
fiscal 1996, due primarily to the acquisition of leasehold improvements and
related furniture and equipment associated with the expansion of the Company's
Beltsville, Maryland facility and to additional laboratory and computer
equipment purchases. In late 1997, the Company plans to initiate either the
lease and build-out of a new facility or the expansion of its existing
facilities. The integration of the Company's operations into a new or expanded
facility may result in inefficiencies and delays. Specifically, companies often
encounter difficulties in scaling up manufacturing, including problems involving
production yield, quality control and assurance, and shortages of qualified
personnel. During the next two years, the Company also intends to make a
significant investment in luminometers, software and related equipment, which
will be provided to clinical laboratories to assist in the Company's launch of
the HPV Test, based on the Company's second generation Hybrid Capture
technology, primarily in Europe.
The Company does not have any bank financing arrangements. The Company's
indebtedness consists of notes payable in the principal amount of $1,762,000
related to its expansion into the European market, notes payable in the
principal amount of $85,000 to former stockholders of the Company, and notes
payable in the principal amount of $44,000 related to leasehold improvements.
29
41
The Company anticipates that working capital requirements will increase
significantly for the foreseeable future due to increased accounts receivables
as a result of direct sales to European customers, which have a longer
collection cycle than sales to distributors.
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 expand its manufacturing capabilities.
The Company expects that its existing capital resources will be adequate to
fund the Company's operations through 1998. No assurances can be given that
there will be no changes 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 products, progress
in its product development efforts, the magnitude and scope of such efforts,
progress with preclinical studies and clinical trials, progress in its
regulatory affairs activities, the cost and timing of expansion of
manufacturing capabilities, the expansion of the Company's direct European
sales operations, the development and maintenance 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 the Company's existing capital
resources and funds generated from the Company's operations, together with its
existing capital resources 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.
30
42
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Digene Corporation
We have audited the accompanying consolidated balance sheets of Digene
Corporation as of June 30, 1996 and 1997, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for
each of the three years in the period ended June 30, 1997. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Digene Corporation at June 30, 1996 and 1997, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended June 30, 1997, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
-------------------------------------
ERNST & YOUNG LLP
Vienna, Virginia
August 15, 1997
31
43
DIGENE CORPORATION
CONSOLIDATED BALANCE SHEETS
JUNE 30,
----------------------------
1996 1997
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents.................................... $ 24,107,325 $ 8,452,864
Short-term investments....................................... 4,467,978 11,061,283
Accounts receivable, less allowance of approximately $61,000
at June 30, 1996 and 1997................................... 845,727 1,767,682
Due from related party....................................... 780,319 2,395,792
Inventories (Note 4)......................................... 1,806,333 2,425,167
Prepaid expenses and other current assets.................... 299,435 446,368
------------ ------------
Total current assets.............................................. 32,307,117 26,549,156
Property and equipment, net (Note 5).............................. 705,040 1,214,548
Intangible assets, net (Note 6)................................... 49,008 2,308,641
Deposits.......................................................... 112,462 134,564
------------ ------------
Total assets...................................................... $ 33,173,627 $ 30,206,909
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................. $ 1,852,417 $ 2,093,893
Accrued expenses............................................. 521,858 772,037
Accrued payroll.............................................. 206,761 602,555
Due to related party......................................... -- 443,332
Current maturities of long-term debt (Note 8)................ 109,857 1,338,220
------------ ------------
Total current liabilities......................................... 2,690,893 5,250,037
Long-term debt, less current maturities (Note 8).................. 151,532 552,733
Accrued rent (Note 9)............................................. 149,907 100,618
Deferred rent..................................................... 62,014 37,318
Commitments (Notes 9, 10 and 14)
Stockholders' equity:
Preferred stock, $0.01 par value, 1,000,000 shares
authorized, no shares issued and outstanding................ -- --
Common stock, $0.01 par value, 50,000,000 shares authorized,
11,303,705 and 11,579,530 shares issued and outstanding at
June 30, 1996 and 1997, respectively........................ 113,037 115,795
Additional paid-in capital................................... 49,339,001 49,477,621
Accumulated deficit.......................................... (19,332,757) (25,327,213)
------------ ------------
Total stockholders' equity........................................ 30,119,281 24,266,203
------------ ------------
Total liabilities and stockholders' equity........................ $ 33,173,627 $ 30,206,909
=========== ===========
See accompanying notes.
32
44
DIGENE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30,
-----------------------------------------
1995 1996 1997
----------- ----------- -----------
Revenues:
Product sales...................................... $ 5,413,370 $ 6,359,062 $ 9,434,183
Research and development contracts................. 749,217 381,425 626,096
----------- ----------- -----------
Total revenues.......................................... 6,162,587 6,740,487 10,060,279
Costs and expenses:
Cost of product sales.............................. 2,652,091 2,894,731 3,440,963
Research and development........................... 1,855,988 2,429,711 4,131,090
Selling and marketing.............................. 1,375,496 2,094,696 5,236,246
General and administrative......................... 1,245,128 1,792,426 4,411,899
Amortization of intangible assets.................. 330,164 248,435 240,902
----------- ----------- -----------
Loss from operations.................................... (1,296,280) (2,719,512) (7,400,821)
Other income (expense):
Other income (expense)............................. 14,446 40,072 (36,825)
Interest expense................................... (232,076) (207,349) (83,777)
Interest income.................................... -- 251,776 1,526,967
----------- ----------- -----------
Net loss................................................ $(1,513,910) $(2,635,013) $(5,994,456)
========== ========== ==========
Net loss per share...................................... $ (1.78) $ (1.30) $ (0.53)
========== ========== ==========
Weighted average shares outstanding..................... 849,924 2,026,815 11,393,978
========== ========== ==========
See accompanying notes.
33
45
DIGENE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK ADDITIONAL TOTAL
---------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY (DEFICIT)
---------- -------- ----------- ------------ ----------------
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... 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
Exercise of Common Stock
options....................... 275,825 2,758 138,620 -- 141,378
Net loss........................ -- -- -- (5,994,456) (5,994,456)
---------- -------- ----------- ------------ ----------------
Balance at June 30, 1997........ 11,579,530 $115,795 $49,477,621 $(25,327,213) $ 24,266,203
========= ======== ========== =========== ===========
See accompanying notes.
34
46
DIGENE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30,
------------------------------------------
1995 1996 1997
----------- ----------- ------------
OPERATING ACTIVITIES
Net loss.............................................. $(1,513,910) $(2,635,013) $ (5,994,456)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization of property and
equipment...................................... 346,401 356,680 461,603
Amortization of intangible assets................ 330,164 248,435 240,902
Start-up expenses................................ -- -- 833,179
Changes in operating assets and liabilities:
Accounts receivable......................... (195,014) (115,801) (921,955)
Due from related party...................... (133,355) (382,087) (1,615,473)
Inventories................................. (61,196) (817,018) (618,834)
Prepaid expenses and other current assets... 15,563 (228,276) (146,933)
Deposits.................................... (6,720) (52,022) (22,102)
Accounts payable............................ 387,035 1,402,113 241,476
Accrued expenses............................ 82,746 (59,937) 250,179
Accrued payroll............................. 15,981 145,226 395,794
Due to related party........................ -- -- 443,332
Accrued rent................................ (39,226) (33,869) (49,289)
Deferred rent............................... (12,815) (16,796) (24,696)
----------- ----------- ------------
Net cash used in operating activities................. (784,346) (2,188,365) (6,527,273)
INVESTING ACTIVITIES
Purchases of short-term investments................... -- (4,392,978) (15,045,827)
Sales of short-term investments....................... -- -- 8,452,522
Capital expenditures.................................. (246,436) (329,661) (971,111)
Acquisition of customer lists......................... -- -- (1,000,000)
Additions to goodwill and intangible assets........... (100,773) (10,528) (3,363)
----------- ----------- ------------
Net cash used in investing activities................. (347,209) (4,733,167) (8,567,779)
FINANCING ACTIVITIES
Net proceeds from issuance of Redeemable Convertible
Preferred Stock..................................... 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...................... 13 25,666 141,378
Principal repayments on long-term debt................ (88,148) (2,756,796) (700,787)
----------- ----------- ------------
Net cash provided by (used in) financing activities... 1,258,865 29,886,591 (559,409)
----------- ----------- ------------
Net increase (decrease) in cash and cash
equivalents......................................... 127,310 22,965,059 (15,654,461)
Cash and cash equivalents at beginning of year........ 1,014,956 1,142,266 24,107,325
----------- ----------- ------------
Cash and cash equivalents at end of year.............. $ 1,142,266 $24,107,325 $ 8,452,864
========== ========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid......................................... $ 172,000 $ 313,000 $ 17,000
========== ========== ===========
See accompanying notes.
35
47
DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS
Digene Corporation (the "Company") was incorporated in the state of
Delaware in 1987. The Company develops, manufactures and markets proprietary DNA
and RNA tests for the detection, screening and monitoring of human diseases. The
Company's lead product, the Hybrid Capture HPV Test, is the only FDA-approved
test for the detection of human papillomavirus ("HPV"), the cause of essentially
all cervical cancer. In addition, Digene has developed and launched tests
internationally for the detection and viral load monitoring of major blood
viruses, including human immunodeficiency virus, cytomegalovirus and hepatitis B
virus, and tests for the detection of two of the most common sexually
transmitted diseases, chlamydia trachomatis and neisseria gonorrhea.
On June 28, 1996, Digene Corporation entered into a joint venture agreement
with a Brazilian national and pursuant thereto, established Digene do Brasil, a
majority-owned subsidiary of Digene Corporation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MANAGEMENT ESTIMATES
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.
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of Digene
Corporation and its majority-owned subsidiary. All significant intercompany
transactions have been eliminated in consolidation.
RECLASSIFICATION
Certain 1996 balances have been reclassified to conform with the 1997
presentation.
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
consolidated balance sheets. As of June 30, 1996 and 1997, short-term
investments are stated at cost, which approximates market.
IMPAIRMENT OF LONG-LIVED ASSETS
In the event that facts and circumstances indicate that long-lived assets
or other assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset would be compared to the asset's carrying amount
to determine if a write-down is required. If a write-down is required, the
Company would prepare a discounted cash flow analysis to determine the amount of
the write-down.
36
48
DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
SIGNIFICANT CUSTOMERS
For the years ended June 30, 1995, 1996 and 1997, the Company generated
38%, 43% and 42%, respectively, of total revenues from a single customer who is
also a stockholder. Export sales accounted for approximately 53% in 1995, 56% in
1996, and 59% in 1997, respectively, of total revenues.
Export sales consist of the following:
YEAR ENDED JUNE 30
--------------------------------------
1995 1996 1997
---------- ---------- ----------
Europe........................................... $2,660,767 $3,019,004 $4,342,175
South America.................................... 49,463 221,131 881,048
Pacific Rim...................................... 295,398 301,067 592,480
Other............................................ 289,789 217,717 162,815
---------- ---------- ----------
Total export sales............................... $3,295,417 $3,758,919 $5,978,518
========= ========= =========
FOREIGN CURRENCY VALUATION
Certain of the Company's accounts receivable may be paid in a foreign
currency and as such a foreign currency gain (loss) may be recorded in the
Company's future statements of operations.
RESEARCH AND DEVELOPMENT
The Company expenses its research and development costs as incurred.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising costs
amounted to approximately $107,000, $93,000, and $188,000 during fiscal 1995,
1996 and 1997, respectively.
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 filing of the
registration statement relating to the initial public offering
37
49
DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER SHARE (CONTINUED)
("IPO") of the Company's Common Stock in May 1996 have been included in the
computation of net loss per share as if they were outstanding for the years
ended June 30, 1995 and 1996 (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. In periods subsequent to the IPO, Common Stock options
and warrants under the treasury stock method will be included to the extent they
are dilutive.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("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 account for stock-based
compensation either under the provisions of SFAS No. 123 or under the provisions
of Accounting Principles Board No. 25 ("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 account 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.
RECENT PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings Per
Share," which is required to be adopted for the Company's June 30, 1998
financial statements. At that time, the Company will be required to change the
method currently used to compute net loss per share and to restate all prior
periods. Under the new requirements for calculating primary net loss per share,
the dilutive effect of stock options will be excluded. The impact of SFAS No.
128 on the calculation of primary and fully diluted net loss per share on the
financial statements is not expected to be material.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131 ("SFAS No. 131"), "Disclosures about
Segments of an Enterprise and Related Information," which is required to be
adopted for the fiscal years beginning after December 31, 1997. SFAS No. 131
changes the way public companies report segment information in annual financial
statements and also requires those companies to report selected segment
information in interim financial reports to shareholders. SFAS No. 131
supersedes Financial Accounting Standards No. 14, "Financial Reporting for
Segments of a Business Enterprise." The impact of SFAS No. 131 on the disclosure
for segment information on the financial statements which is not expected to be
material.
3. TRANSACTIONS WITH A RELATED PARTY
DISTRIBUTION AGREEMENTS
In May 1992, the Company and International Murex Technologies Corporation
(together with its affiliates, "Murex") entered into a Distribution Agreement
("Distribution Agreement"), whereby the Company granted to Murex the exclusive
right to distribute the Company's HBV DNA assays in specified countries in the
European Community and the co-exclusive right (meaning that the Company may also
distribute its products) to distribute the Company's HBV DNA test (for the
detection of the hepatitis B virus) in Africa. The agreement was amended in May
1993 to expand Murex's exclusive right to include certain countries in Eastern
Europe and in the Middle East.
38
50
DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. TRANSACTIONS WITH A RELATED PARTY (CONTINUED)
DISTRIBUTION AGREEMENTS (CONTINUED)
In February 1996, the Company and Murex entered into the 1996 Distribution
Agreement granting Murex the exclusive right to distribute certain of the
Company's HC I products, including its Hybrid Capture human papillomavirus DNA
test, in most of Europe, Africa and certain countries in the Middle East. The
1996 Distribution Agreement has a five-year term, subject to automatic renewal
for successive one-year terms. The Company has the right to terminate the 1996
Distribution Agreement with respect to particular countries, subject to Murex's
right to continue to distribute products within any such country on a
co-exclusive basis during a "wind-down" period of up to two years. Subsequent to
June 30, 1997, the Company and Murex entered into a new distribution agreement
(See Note 16).
DEVELOPMENT AND LICENSE 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 any 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 were 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. 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. In connection
with the Company's IPO, all shares of Redeemable Convertible Preferred Stock
were converted to Common Stock (see Note 11). IMTC holds a license that is
co-exclusive (with the Company) to market products developed under the 1994
Agreement.
AGENCY AGREEMENT AND CUSTOMER TRANSFER AGREEMENT
Effective February 1, 1997, the Company entered into two agreements (the
"Agency Agreement" and the "Customer Transfer Agreement", collectively the
"Agreements") with Murex Diagnostics Corporation ("MDC"), to create a
Digene-direct European sales operation for the Company's women's health
products. Under the Agreements, the Company will begin selling its Hybrid
Capture human papillomavirus ("HPV") DNA tests directly in Europe using Murex's
distribution infrastructure. Murex will act as the exclusive agent for the
Company in designated European and Eastern European countries (the "Territory")
for a period of five years during which Murex will receive selling service fees
and a percentage of the Company's HPV revenues in the Territory.
The Agreements provide for a transition period during which the
administrative infrastructure will be agreed to and established. During this
transition period, the Company is recording its transactions consistent with the
Distribution Agreement with Murex. Furthermore, the Distribution Agreement still
remains in effect to cover the distribution of the Company's products in areas
outside the Territory. Prior to February 1, 1997, pursuant to the Distribution
Agreement, Murex had been acting as the exclusive European distributor in
designated non-US territories for the Company's HPV test and other of the
Company's products.
39
51
DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. TRANSACTIONS WITH A RELATED PARTY (CONTINUED)
AGENCY AGREEMENT AND CUSTOMER TRANSFER AGREEMENT (CONTINUED)
In connection with the Agreements, the Company acquired Murex's HPV
business assets (customer lists) for approximately $2,500,000 in exchange for
promissory notes in the aggregate amount of $1,702,750 and cash of $1,000,000.
The non-cash portion of this transaction related to imputed interest has been
excluded from the Statements of Cash Flows. The unsecured notes payable to Murex
are noninterest-bearing and have been discounted at 10.00% over the eleven month
term of the notes. The Company is amortizing the HPV business assets over five
years, the term of the Agency Agreement. In accordance with the Agency
Agreement, the Company agreed to pay to Murex costs of approximately $853,000
over eleven months, which costs have been expensed. Digene has agreed to
reimburse Murex for all costs incurred for selling and marketing expenses. All
other Digene products (except the Company's HPV products) exclusively
distributed by Murex in Europe and Eastern Europe will not be affected by the
Agreements.
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,
------------------------
1996 1997
---------- ----------
Finished goods............................................... $ 616,458 $ 748,072
Work in process.............................................. 999,222 1,254,495
Raw materials................................................ 440,653 761,100
---------- ----------
2,056,333 2,763,667
Obsolescence reserve......................................... (250,000) (338,500)
---------- ----------
$1,806,333 $2,425,167
========= =========
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,
--------------------------
1996 1997
----------- -----------
Furniture, fixtures and office equipment.................... $ 679,624 $ 1,048,854
Machinery and equipment..................................... 1,371,109 1,807,448
Leasehold improvements...................................... 664,633 830,175
----------- -----------
2,715,366 3,686,477
Accumulated depreciation and amortization................... (2,010,326) (2,471,929)
----------- -----------
$ 705,040 $ 1,214,548
========== ==========
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
40
52
DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INTANGIBLE ASSETS (CONTINUED)
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.
In connection with the Agreements (See Note 3), the Company capitalized
approximately $2,500,000 for the acquisition of Murex's HPV customer lists and
is amortizing such amount over five years. The Company assesses the
recoverability of this intangible asset based upon several factors' including
management's intention with respect to the acquired customer lists and those
customer lists' projected undiscounted cash flows.
Intangible assets consist of the following:
JUNE 30,
--------------------------
1996 1997
----------- -----------
Noncompetition agreements................................... $ 1,087,349 $ 1,087,349
Acquired customer lists..................................... -- 2,497,172
Goodwill and other intangibles.............................. 180,877 184,240
----------- -----------
1,268,226 3,768,761
Accumulated amortization.................................... (1,219,218) (1,460,120)
----------- -----------
$ 49,008 $ 2,308,641
========== ==========
7. INCOME TAXES
The Company's net deferred tax assets are as follows:
JUNE 30,
---------------------------
1996 1997
----------- ------------
Net operating loss carryforwards........................... $ 5,193,000 $ 7,959,000
Research and development credits........................... 443,000 443,000
Patent costs, net.......................................... 788,000 669,000
Research and developmental deferral, net................... 957,000 1,567,000
Acquired customer lists.................................... -- 50,000
Other...................................................... 399,000 681,000
----------- ------------
Deferred tax assets........................................ 7,780,000 11,369,000
Valuation allowance........................................ (7,780,000) (11,369,000)
----------- ------------
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, 1995, 1996 and 1997. At
June 30, 1997, the Company had tax net operating loss carryforwards for income
tax purposes of approximately $19,900,000. At June 30, 1997, 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 2012.
41
53
DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. LONG-TERM DEBT
Long-term debt consists of the following:
JUNE 30,
------------------------
1996 1997
--------- -----------
Notes payable to Murex (See Note 3), net of unamortized
discount................................................... $ -- $ 1,762,033
Amounts due to former stockholders, net of unamortized
discount................................................... 187,260 85,007
Note payable to lessor....................................... 70,049 43,913
Other........................................................ 4,080 --
--------- -----------
261,389 1,890,953
Current maturities of long-term debt......................... (109,857) (1,338,220)
--------- -----------
Long-term debt, less current maturities...................... $ 151,532 $ 552,733
======== ==========
The unsecured notes payable to Murex arose in conjunction with the
Company's acquisition of Murex's HPV customer lists (See Note 3), are
noninterest-bearing and have been discounted at 10.00%. Payments are due in ten
installments, through December 1998. During 1997, the Company made payments
totaling $577,864 and incurred interest expense of $76,107. At June 30, 1997,
accrued interest related to these notes totaled $66,562.
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 payable 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, 1997 are as
follows:
1998............................................ $1,338,220
1999............................................ 552,733
----------
$1,890,953
=========
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 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 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.
42
54
DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. LEASE COMMITMENTS (CONTINUED)
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, 1997:
1998.............................................. $577,959
1999.............................................. 217,820
2000.............................................. 28,670
2001.............................................. 13,143
2002.............................................. 8,068
--------
$845,660
========
Rent expense under these leases was $380,804, $363,691 and $449,449 for the
years ended June 30, 1995, 1996 and 1997, respectively.
Remaining lease payments, net of anticipated sublease income of
approximately $380,000, for facilities vacated as a result of relocation and
consolidation were accrued in 1992. The remaining accrual at June 30, 1997 is
$100,618.
10. EMPLOYMENT AGREEMENTS
During 1997, the Company executed employment agreements with certain key
executives under which the Company is required to pay the following base
salaries annually over the next four years:
1998............................................ $ 510,000
1999............................................ 418,334
2000............................................ 255,000
2001............................................ 141,875
----------
$1,325,209
=========
11. REDEEMABLE CONVERTIBLE PREFERRED STOCK
Immediately upon completion of the IPO, all outstanding shares of 1990,
1991, and 1994 Series Preferred Stock converted into shares of Common Stock on a
1 for 0.714 basis.
12. 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 6, 1996, the Company's stockholders approved a 1 for 1.4 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.
On May 21, 1996, the Company issued 3,000,000 shares of Common Stock in the
IPO, which generated net proceeds of approximately $30,700,000.
43
55
DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. 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 Option Plans, 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 162,761 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. 2,000,000 shares have been reserved
for issuance under the Omnibus Plan.
In October 1996, the Company adopted the Digene Corporation Directors'
Stock Option Plan (the "Directors' Plan"). Pursuant to the Directors' Plan,
directors of the Company may receive options to purchase Common Stock. The
Directors' Plan is administered by the Board of Directors. 500,000 shares have
been reserved for issuance under the Directors' Plan.
Common stock options activity is as follows:
YEARS ENDED JUNE 30,
--------------------------------------------------------------------------
1995 1996 1997
---------------------- ---------------------- ----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- --------- --------- --------- ---------
Outstanding at beginning of
year........................... 1,778,313 $1.08 1,753,211 $1.19 2,660,582 $ 4.14
Options granted.................. 57,372 4.20 987,033 8.86 460,000 10.14
Options exercised................ (18) .70 (40,510) .55 (275,825) .52
Options canceled or expired...... (82,456) 2.79 (39,152) 2.30 (32,424) 8.66
--------- --------- ---------
Outstanding at end of year....... 1,753,211 1.19 2,660,582 4.14 2,812,333 5.43
======== ======== ========
Options exercisable at
year-end....................... 1,133,926 $1.77 1,393,787 $1.88 1,288,218 $ 2.53
======== ======== ========
44
56
DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. COMMON STOCK OPTIONS (CONTINUED)
The following table summarizes information about fixed-price stock options
outstanding at June 30, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ ---------------------------
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF AT JUNE 30, CONTRACTUAL EXERCISE AT JUNE 30, EXERCISE
EXERCISE PRICES 1997 LIFE PRICE 1997 PRICE
- -------------------------------------- -------------- ----------- --------- -------------- ---------
$ 0.00 - $ 2.00....................... 880,292 3.57 $0.79 866,597 $ 0.78
$ 2.01 - $ 5.00....................... 533,946 5.95 2.40 389,343 2.26
$ 5.01 - $ 8.00....................... 139,753 9.14 6.19 25,612 5.83
$ 8.01 - $11.00....................... 1,124,342 8.83 9.50 6,666 10.00
$11.01 - $13.25....................... 134,000 9.55 13.25 -- --
-------------- --------- -------------- ---------
2,812,333 $5.43 1,288,218 $ 2.53
=========== ======= ========== =======
During fiscal 1997, the Company adopted the disclosure-only provisions of
SFAS No. 123. Had compensation cost for the Company's stock option plans been
determined based upon the fair value at the grant date for awards under the
plans consistent with the methodology prescribed under SFAS No. 123, the
Company's net loss in fiscal 1996 and 1997 would have been approximately
$3,607,000 and $7,594,000, or $1.78 per share and $0.67 per share, respectively.
The effect of applying SFAS No. 123 on 1996 and 1997 pro forma net loss as
stated above is not necessarily representative of the effects on reported net
loss for future years due to, among other things, (1) the vesting period of the
stock options and the (2) fair value of additional stock options in future
years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing fair value model with the following
weighted-average assumptions used for grants in 1996: dividend yield of 0%;
expected volatility of 73%; risk-free interest rate of 5.875%; and expected life
of the option term of 6.6 years. The fair value of each option grant is
estimated on the date of grant using the Black-Sholes option-pricing fair value
model with the following weighted-average assumptions used for grants in 1997:
dividend yield of 0%; expected volatility of 73%; risk-free interest rate of
6.5%; and expected life of the option term of 6.6 years. The weighted average
fair values of the options granted in 1996 with a stock price equal to the
exercise price is $9.20 and with a stock price less than the exercise price is
$10.29. The weighted average fair values of the options granted in 1997 with a
stock price greater than the exercise price is $5.88, with a stock price equal
to the exercise price is $10.08 and with a stock price less than the exercise
price is $11.50.
14. 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, 1995,
1996 and 1997.
15. 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 which are based on an aggregate of 3% of applicable future
gross sales. During fiscal 1995, 1996 and 1997, total royalties amounted to
$124,701, $324,925, and $396,665 respectively.
45
57
DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. SUBSEQUENT EVENTS
In August 1997, the Company and Murex entered into a Distribution
Agreement, whereby the Company granted to Murex the exclusive right to
distribute the Company's HIV RNA Hybrid Capture II, CMV DNA, and HBV DNA Hybrid
Capture II assays in specified countries in Europe, Africa, Asia and the Middle
East.
46
58
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
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Directors. The information with respect to directors required by this
item is incorporated herein by reference to the Registrant's definitive
Proxy Statement for its Annual Meeting of Stockholders, scheduled to
be held on October 28, 1997, which shall be filed with the Securities
and Exchange Commission within 120 days from the end of the
Registrant's fiscal year (the "1997 Proxy Statement").
(b) Executive Officers. The information with respect to executive officers
required by this item is set forth in Part I of this report.
ITEM 11. EXECUTIVE COMMPENSATION
The information required under this item is incorporated herein by
reference to the 1997 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by
reference to the 1997 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by
reference to the 1997 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements of the Company
Consolidated Financial Statements of the Registrant and Report of
Independent Auditors thereon
Consolidated Balance Sheets as of June 30, 1996 and 1997
Consolidated Statements of Operations for the fiscal years ended June
30, 1995, 1996 and 1997
Consolidated Statements of Stockholders' Equity (Deficit) for the
fiscal years ended June 30, 1995, 1996 and 1997
Consolidated Statements of Cash Flows for the fiscal years ended June
30, 1995, 1996 and 1997
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
I. Valuation and Qualifying Accounts and Reserves
47
59
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").
10.20 Escrow Agreement dated May 31, 1994 among the Company, IMTL
and Reid & Priest, as Escrow Agent.
48
60
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.
10.29 Employment Agreement dated as of January 9, 1997 between the
Company and Steven A. Owings (Incorporated by reference to
Exhibit 10 of the Registrant's Current Report on Form 8-K
dated January 22, 1997).
10.30** Agency and Sales Representation Agreement between the Company
and Murex dated as of February 1, 1997 (Incorporated by
reference to Exhibit 10.1 of the Registrant's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1997).
10.31** Customer Transfer Agreement between the Company and Murex
dated as of February 1, 1997 (Incorporated by reference to
Exhibit 10.2 of the Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997).
10.32 First Amendment to the Distribution Agreement between the
Company and Murex dated as of February 1, 1997 (Incorporated
by reference to Exhibit 10.3 of the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1997).
10.33 Employment Agreement dated as of September 3, 1996 between the
Company and Donna Marie Seyfried (Incorporated by reference to
Exhibit 10 of the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996).
10.34 Director's Stock Option Plan (Incorporated by reference to
Exhibit A of the Registrant's Schedule 14A filed on September
20, 1996).
10.35 Employment Agreement dated as of July 11, 1997 between the
Company and William J. Payne (Incorporated by reference to
Exhibit 10.1 to the Company's Registration Statement on Form
S-3, File No. 333-35463).
10.36 Distribution Agreement dated August 1, 1997 between the
Company and Murex Diagnostics Corporation (Incorporated by
reference to Exhibit 10.2 to the Company's Registration
Statement on Form S-3, File No. 333-35463).
11.1* Statement Re: Computation of Per Share Loss.
21* Subsidiaries of the Registrant.
23.1* Consent of Ernst & Young LLP.
27* Financial Data Schedule.
- ----------
* Filed herewith.
** Confidential status has been granted for certain portions thereof
pursuant to a Commission Order granted June 3, 1997. Such provisions
have been filed separately with the Commission.
49
61
(b) Reports on Form 8-K.
The Registrant has not filed any reports on Form 8-K since the
beginning of the quarter ended June 30, 1997.
50
62
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 29, 1997 By /s/ EVAN JONES
-----------------------
Evan Jones
Chief Executive Officer
We, the undersigned directors and officers of Digene Corporation, do
hereby constitute and appoint each of Evan Jones and Charles M. Fleischman,
each with full power of substitution, our true and lawful attorney-in-fact and
agent to do any and all acts and things in our names and in our behalf in our
capacities stated below, which acts and things either of them may deem
necessary or advisable to enable Digene Corporation to comply with the
Securities Exchange Act of 1934, as amended, any rules, regulations and
requirements of the Securities and Exchange Commission, in connection with this
Annual Report on Form 10-K, including specifically, but not limited to, power
and authority to sign for any or all of us in our names, in the capacities
stated below, any and all amendments (including post-effective amendments)
hereto; and we do hereby ratify and confirm all that they shall do or cause to
be done by virtue hereof).
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 29, 1997
- ------------------------------- Officer (principal executive
Evan Jones officer) and Chairman
/s/ CHARLES M. FLEISCHMAN Executive Vice President, September 29, 1997
- ------------------------------- Chief Operating Officer,
Charles M. Fleischman Chief Financial Officer and
Director (principal financial
officer)
/s/ JOSEPH P. SLATTERY Controller (principal September 29, 1997
- ------------------------------- accounting officer)
Joseph P. Slattery
63
/s/ JOHN J. WHITEHEAD Director September 29, 1997
- ------------------------------
John J. Whitehead
/s/ JOSEPH M. MIGLIARA Director September 29, 1997
- ------------------------------
Joseph M. Migliara
/s/ JOHN H. LANDON Director September 29, 1997
- ------------------------------
John H. Landon
/s/ WAYNE T. HOCKMEYER Director September 29, 1997
- ------------------------------
Wayne T. Hockmeyer
64
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.
65
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.
10.29 Employment Agreement dated as of January 9, 1997 between the Company and
Steven A. Ownings (Incorporated by reference to Exhibit 10 of the Registrant's
Current Report 8-K dated January 22, 1997)
10.30** Agency and Sales Representation Agreementbetween the Company and Murex dated as
of February 1, 1997 (Incorporated by reference to Exhibit 10.1 of the
Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31,
1997)
10.31** Customer Transfer Agreement between the Company and Murex dated as of February
1, 1997 (Incorporated by reference to Exhibit 10.2 of the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997)
10.32 First Amendment to the Distribution Agreement between the Company and Murex
dated as of February 1, 1997 (Incorporated by reference to Exhibit 10.3 of the
Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31,
1997)
10.33 Employment Agreement dated as of September 3, 1996 between the Company and
Donna Marie Seyfried (Incorporated by reference to Exhibit 10 of the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30,
1996)
10.34 Director's Stock Option Plan
10.35 Employment Agreement dated as of July 11, 1997 between the Company and William
J. Payne
10.36 Distribution Agreement dated August 1, 1997 between the Company and Murex
Diagnostics Corporation
11.1* Statement Re: Computation of Per Share Loss.
21* Subsidiaries of the Registrant.
23.1* Consent of Ernst & Young LLP
27* Financial Data Schedule.
- ----------
* Filed herewith.
** Confidential status has been granted for certain portions thereof
pursuant to a Commission Order granted June 3, 1997. Such provisions
have been filed separately with the Commission.
66
SCHEDULE I
67
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Digene Corporation
We have audited the consolidated financial statements of Digene
Corporation as of June 30, 1996 and 1997 and for each of the three years in the
period ended June 30, 1997 and have issued our report thereon dated August 15,
1997 (included elsewhere in this report). Our audits also included the
financial statement schedule listed in Item 14(a) of this report. The schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic consolidated financial statements
taken as a whole, present fairly in all material respects the information set
forth therein.
/s/ ERNST & YOUNG LLP
Vienna, Virginia
August 15, 1997
68
SCHEDULE I -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
DIGENE CORPORATION
BALANCE AT
BEGINNING OF BALANCE AT
CLASSIFICATION PERIOD ADDITIONS DEDUCTIONS END OF PERIOD
- ------------------------------------------------- ------------ --------- ---------- -------------
Allowance for doubtful accounts:
Year ended June 30, 1995.................... $ 55 $ 15 $ (19)(1) $ 51
Year ended June 30, 1996.................... 51 10 -- 61
Year ended June 30, 1997.................... 61 -- -- 61
Reserve for inventory obsolescence:
Year ended June 30, 1995.................... $200 $ 63 $ (128)(2) $ 135
Year ended June 30, 1996.................... 135 115 -- 250
Year ended June 30, 1997.................... 250 89 -- 339
- ---------------
(1) Write off of accounts receivable
(2) Write off of obsolete inventory