Back to GetFilings.com
1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended June 30, 1999
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 10, 1999, the aggregate market value of the 9,514,504 outstanding
shares of voting stock held by non-affiliates of the registrant was
$132,013,743.
As of September 10, 1999, 14,585,655 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
TABLE OF CONTENTS
PART I
Item 1. Business.......................................................................1
Item 2. Properties....................................................................31
Item 3. Legal Proceedings.............................................................31
Item 4. Submission of Matters to a Vote of Our Stockholders...........................31
Executive Officers of Digene..................................................32
PART II
Item 5. Market For Our Common Equity and Related Stockholder Matters..................33
Item 6. Selected Consolidated Financial Data..........................................34
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................35
Item 7A. Quantitative and Qualitative Disclosures About Market Risk....................40
Item 8. Financial Statements and Supplementary Data...................................41
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure...................................59
PART III
Item 10. Directors and Executive Officers..............................................59
Item 11. Executive Compensation........................................................59
Item 12. Security Ownership of Certain Beneficial Owners and Management................59
Item 13. Certain Relationships and Related Transactions................................59
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...............59
Signatures...............................................................................62
i
3
PART I
ITEM 1. BUSINESS
We develop, manufacture and market our proprietary DNA and RNA
testing systems for the screening, monitoring and diagnosis of human diseases.
We have developed and are commercializing our patented Hybrid Capture(R) Gene
Analysis System and tests in three areas: women's cancers and infectious
diseases, blood viruses, and pharmaceutical clinical research. Our primary focus
is in women's cancers and infectious diseases where our lead product is the only
FDA approved test for human papillomavirus, or HPV, which is the cause of
greater than 99% of cervical cancer cases. Our product portfolio also includes
DNA tests for the detection of chlamydia, gonorrhea and other sexually
transmitted infections. We believe our Hybrid Capture technology platform
represents a significant improvement over existing technologies because of its
accuracy, speed, ease of use and ability to quantitate DNA and RNA. In the
United States, we market our products through a direct sales force and in other
countries through distributors. Abbott Laboratories, one of the world's leading
medical diagnostic companies, markets and distributes all of our women's cancers
and infectious diseases products and certain of our blood virus products in
Europe, Africa and the Middle East.
Our commercial objective is to become the world leader in gene-based
testing for women's cancers and infectious diseases. We are working to
establish our HPV test as the standard for cervical cancer screening, the
world's largest cancer screening market. Virtually all cases of cervical cancer
are preventable if detected in the precancerous stage. Currently, the Pap smear
is a test used to screen for cervical cancer. 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, which result in
significant costs to the healthcare system due to over-treatment or
under-diagnosis.
Our HPV test allows physicians to identify women who are most at
risk of having or developing cervical disease and cervical cancer. We intend to
capitalize on our leadership position in HPV testing to obtain a significant
share of the global cervical cancer screening market, both as a primary
screening test and as a follow-up to the Pap smear. We are targeting this
global opportunity primarily by marketing our disease management strategy for
cervical cancer screening to managed care providers in the United States and
government-funded national screening programs outside the United States. In
addition, we have developed a network of women's health advocates, public health
providers and physician organizations to communicate the diagnostic and
cost-effective benefits of HPV testing to physicians, reimbursement providers,
testing laboratories and the public.
We have applied our Hybrid Capture technology to provide for the
simultaneous detection of chlamydia, gonorrhea and other sexually transmitted
infections, in addition to HPV, from a single patient sample. We also can use a
liquid-based Pap smear sample for our DNA tests and have FDA approval to use the
specimen provided by Cytyc Corporation's ThinPrep(R) Pap Test(TM) for our HPV
tests. We believe the ability to perform multiple tests from a single patient
specimen provides greater convenience to patients and their physicians and
reduces healthcare costs by decreasing the frequency of patient visits and
testing.
Our second major focus is in blood viruses where we have developed
unique testing products using our Hybrid Capture System to detect the presence
of hepatitis B virus (HBV) and cytomegalovirus (CMV). These blood viruses are
leading causes of morbidity and death. Our tests detect and measure the amount
of virus in a patient sample, helping physicians determine disease prognosis and
optimize the efficacy of the antiviral therapy. The sensitivity of our blood
virus tests, along with their ability to quantitate viral load, provide a
competitive advantage over other methods. Our CMV test is the only DNA test
cleared for the detection of CMV by the FDA. Abbott, one of the world's leading
providers of HBV tests, is selling our HBV and CMV products in Europe, Africa
and the Middle East where we believe that our HBV test is the leading HBV DNA
test.
4
Our Hybrid Capture System utilizes signal amplification and combines
the accuracy of nucleic acid probe diagnostics with the ease of use and
mass-market capabilities of the antibody-based immunodiagnostic systems that are
used routinely by clinical labs today. Our Hybrid Capture technology uses RNA
probes to bind specific DNA sequences to create hybrid DNA:RNA molecules. The
captured hybrids are then reacted with our proprietary signal amplification
system which uses antibodies to detect DNA:RNA hybrids. The Hybrid Capture
System and tests are sensitive, rapid, accurate, objective, non-invasive and
easy to use, and can be performed by laboratory staff using standardized testing
equipment. Recently, we have developed an automated, microplate-based Hybrid
Capture testing system. In the pharmaceutical clinical research area, we are
utilizing the capabilities of our Hybrid Capture System to identify, develop and
validate new gene-based testing opportunities. As a result of the high
throughput capability of the Hybrid Capture System, PE Biosystems entered into
an exclusive technology and marketing partnership with us to address
opportunities in high throughput gene expression screening for pharmaceutical
drug discovery.
We have established a strong proprietary position in our Hybrid
Capture technology. We have an exclusive license to a patent covering
the use of the monoclonal antibodies, which are central to the Hybrid Capture
detection system. Additionally, in July 1999, the European Patent Office
allowed a broad patent covering the entire Hybrid Capture System. We have
exclusive licenses and co-exclusive cross licenses with the Institut Pasteur to
issued and pending patents covering the use of HPV genetic sequences from six
of the thirteen key cancer causing HPV types. We believe that these patents
create a unique proprietary position for Digene in the HPV testing field.
We have achieved a number of important regulatory milestones over the
last year. Our next generation Hybrid Capture II HPV Test received premarket
(PMA) approval from the FDA in March 1999. In 1999, our portfolio of women's
cancers and infectious disease tests was cleared for sale in almost every major
European country and in Brazil and Argentina. In the blood virus area, our
Hybrid Capture CMV Test received 510(k) clearance from the FDA in October 1998.
In addition, we received ISO 9001 certification in June 1999.
We also have achieved a number of important commercial milestones
over the past year. We entered into a partnering arrangement with PE Biosystems
in October 1998 and into a marketing and distribution alliance with Abbott in
May 1999. Our Hybrid Capture HPV Test was used in numerous clinical trials, and
the results of such trials were published in peer reviewed publications. We
developed a program to expand reimbursement coverage for our products,
resulting in coverage in the United States for our Hybrid Capture HPV Tests
from significant managed care providers. Our efforts and accomplishments over
the last year have resulted in continued revenue growth from $12.0 million in
fiscal 1998 to $17.5 million in fiscal 1999.
WOMEN'S CANCERS AND INFECTIOUS DISEASES
We have initially focused on two major disease areas, cervical
cancer and sexually transmitted infections. Cervical cancer is the second most
common cancer among women worldwide. Currently, the primary cervical cancer
screening test is the Pap smear. Although the Pap smear has successfully
reduced deaths caused by cervical cancer in the United States, cervical cancer
remains prevalent in the United States. In addition, cervical cancer rates have
remained at high levels outside the United States. 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. Recently, it has been
established that HPV, a sexually transmitted virus, is the primary cause of
cervical cancer and that 99% of cervical cancers contain cancer-causing HPV
sequences. The Pap smear cannot detect HPV. Furthermore, 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. These
limitations have contributed to continuing high rates of cervical cancer.
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 reported annually. Genital chlamydia infection, if left
untreated, has serious potential consequences, such as infertility, ectopic
2
5
pregnancy, cervicitis and pelvic inflammatory disease. Gonorrhea, which affects
62 million people worldwide, is the second most common sexually transmitted
disease in the United States and may result in severe genital complications in
both women and men if left untreated. 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.
We believe our Hybrid Capture HPV Tests could revolutionize cervical
cancer screening around the world by allowing early detection of HPV. Our Hybrid
Capture tests also represent the first effort to accurately detect HPV and the
other major sexually transmitted infections from a single specimen. This may
reduce the overall cost of patient management and help eliminate these serious
health threats. Our Hybrid Capture tests detect the presence of both chlamydia
and gonorrhea in women from cervical swabs, as well as in men through the
collection of urine samples. Preliminary clinical studies on women have
indicated that our Hybrid Capture II Chlamydia Test is capable of detecting
chlamydia in up to 98% of the cases in which the disease is present, while our
Hybrid Capture II Gonorrhea Test is capable of detecting gonorrhea in up to 92%
of the cases in which it is present.
To implement our strategy in the area of women's cancers and
infectious diseases, we intend to:
- create a marketing distribution infrastructure and
marketing communications program appropriate to each
market;
- establish ourselves as the leader in single-sample testing
for women's cancers and infectious diseases;
- validate our products through clinical trials with
respected academic institutions and healthcare providers;
- communicate the diagnostic and cost-effective benefits of
HPV testing to managed care providers, physicians and
government-funded national screening programs and continue
to develop a network of women's health advocates, public
health providers and physician organizations to help
communicate our message to physicians, testing laboratories
and the public; and
- expand reimbursement for our HPV tests from managed care
organizations, third party payors and government-funded
insurance programs.
DISTRIBUTION INFRASTRUCTURE
A key element of our commercialization strategy is to
partner our marketing and sales efforts with established leaders in the field.
We have established a marketing alliance with Abbott for all of our women's
cancers and infectious diseases products and certain of our blood virus testing
products. Under this alliance, Abbott is responsible for sales and marketing of
these Hybrid Capture products in Europe, Africa and the Middle East and our
Hybrid Capture II Chlamydia and Gonorrhea Tests in the United States, when
cleared by the FDA. We are working together with Abbott to promote the use of
HPV testing for primary screening in the European market. In Europe, Abbott is
responsible for marketing activities directed toward obtaining laboratory
endorsements and routine use of HPV testing, and we are responsible for
marketing
3
6
activities directed toward obtaining governmental endorsement of HPV testing,
institutional reimbursement and maximizing consumer awareness and education
of the benefits of HPV testing.
SINGLE-SAMPLE SYSTEM
We are the first to develop tests that detect HPV,
chlamydia, gonorrhea and herpes from a single patient specimen. We believe the
ability to perform multiple tests from a single specimen provides greater
convenience to patients and physicians and reduces healthcare costs by
decreasing the frequency of patient visits and testing. Our single-sample system
is now available in Europe and South America for the detection of HPV, chlamydia
and gonorrhea, and upon receipt of 510(k) clearance from the FDA, the system
will be available in the United States. Our tests also are cost efficient in
that they can be performed using commercial liquid-based Pap smear collection
devices, such as the Cytyc Corporation ThinPrep Pap Test.
CLINICAL TRIAL VALIDATION
Clinical evidence published in medical journals and
presented at important medical meetings has validated our products and
technology platform, the Hybrid Capture System, and the role of HPV in cervical
cancer. These studies include:
- May 1999: a study involving 46,000 women
conducted by Kaiser Permanente and published in
the Journal of the American Medical Association
(JAMA) which concluded that our HPV test
identified 97% of women with high-grade cervical
disease compared with just 76% using the Pap
smear alone;
- July 1999: a six-year study published in The
Lancet which confirmed that persistent HPV
infection is the primary cause of cervical cancer
and, therefore, that new guidelines for cervical
cancer screening should include testing for HPV;
- July 1999: a study involving 1,518 European
women published in The British Journal of Cancer
which confirmed the high sensitivity (98%) of our
HPV test;
- August 1999: a 22-country study completed by the
International Agency for Cancer Research
confirming that HPV is the cause of cervical
cancer in 99.7% of cases worldwide; and
- September 1999: a study involving 2,988 women
in the United Kingdom published in The British
Journal of Cancer reported the high sensitivity
of our test (95%) compared to the Pap smear (79%)
in screening women over age 35 for cervical
disease.
In addition to these studies, we are currently
participating in HPV clinical trials involving more than 100,000 women on four
continents. Successful completion of these clinical trials should help to
accelerate further adoption of our HPV tests. The following is a summary of
these trials:
4
7
- --------------------------------------------------------------------------------------------------------------------------------
COUNTRY LEAD INVESTIGATOR TRIAL DESCRIPTION SIZE TARGET COMPLETION DATE
United States National Cancer Institute ALTS Borderline Pap Trial 7,000 Completed*
Canada Newfoundland Department of Health HPV Primary Screening 3,000 Completed*
Mexico Johns Hopkins; Mexican Government HPV Primary Screening 7,500 December 1999
Netherlands Free University of Amsterdam HPV Primary Screening 40,000 December 2001
United Kingdom Imperial Cancer Research Fund HPV Primary Screening 10,000 December 2000
Germany University of Tubingen HPV Primary Screening 8,000 June 2000
Russia University of Turku, Finland HPV Primary Screening 12,000 December 2001
Brazil University of Rio Grande do Sul HPV Primary Screening 2,000 December 2000
Argentina Institut Papincolau HPV Primary Screening 1,000 Completed*
Costa Rica National Cancer Institute HPV Primary Screening 10,000 Completed*
China Cleveland Clinic Foundation HPV Primary Screening 2,500 November 1999
- ---------------------------------------------------------------------------------------------------------------------------------
* Trials have been completed and the results are being prepared for publication.
- ---------------------------------------------------------------------------------------------------------------------------------
IMPROVING WOMEN'S HEALTH AWARENESS
We actively support the efforts of the American Medical
Women's Association and the National Cervical Cancer Public Education Campaign
to inform women about the link between HPV and cervical cancer. The HPV Summit
1999, a conference dedicated to discussing HPV and related women's health issues
and attended by leading authorities, including physicians, researchers and
women's health advocates, was held in Chamonix, France in February 1999. The
contribution of our HPV test to the early detection of cervical cancer was a
major theme of the summit. As a result of these efforts and growing evidence
supporting HPV testing, an advocacy group of nationally recognized women called
"Women for HPV Testing," the London Express newspaper and Cosmopolitan magazine
have all called on the government of the United Kingdom to adopt HPV testing as
part of the national cervical cancer screening program. In the United States,
the first congressional hearing dedicated to addressing the need to better
inform women about the link between HPV infections and cervical cancer was held
in Washington, D.C. in March 1999, and the Centers for Disease Control (CDC)
held its first hearings about the HPV issue in April 1999.
INCREASING REIMBURSEMENT COVERAGE
We are working to expand reimbursement coverage for our HPV
tests through targeted clinical studies and outcome-oriented research. These
studies are being performed in conjunction with managed care organizations,
university-based clinicians and governmental authorities worldwide. Our efforts
to increase reimbursement coverage were boosted recently when an FDA advisory
panel recommended expanded labeling for our Hybrid Capture tests to incorporate
the signal amplification description. We expect this expanded labeling to
provide a distinct competitive advantage in the market, because reimbursement
levels for amplified tests are up to two times the level for non-amplified
tests.
The Health Care Financing Administration (HCFA),
administrator for Medicaid and Medicare, has established reimbursement for our
HPV test, and the American Medical Association has assigned specific CPT codes
(necessary for reimbursement) for HPV testing. Third party payors and managed
care entities that provide health insurance coverage to 50 million people
currently authorize reimbursement for our HPV test.
5
8
BLOOD VIRUSES
Blood viruses, such as HBV, CMV and HIV, are leading causes of
morbidity and death and, until recently, were untreatable. Rapid, 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 sometimes toxic therapies, physicians rely on viral load
monitoring to measure the level of virus present in the patient's system. By
precisely measuring viral load and identifying patients who are not responding
to therapy early in their treatment, physicians are better able to tailor
antiviral therapies by more precisely monitoring individual responses,
recognizing when a patient develops drug resistance and projecting how quickly
the infection will progress to chronic disease.
The commercialization strategy for our blood virus business is to
develop tests for the hepatitis, transplant and AIDS testing markets where the
sensitivity and viral load monitoring capabilities of our Hybrid Capture System
provide a competitive advantage over other methods, and where our products can
be marketed to laboratories through an established market participant such as
Abbott in the case of HBV and CMV in Europe or through our own marketing and
sales efforts. Our Hybrid Capture System utilizes signal amplification and can
detect and quantitate as few as 100 molecules of the HIV virus and as many as
one billion copies of the hepatitis B virus.
We believe our Hybrid Capture HBV Tests are the leading HBV DNA tests
in the European market. These tests are used to monitor viral load to determine
disease prognosis and optimize the efficacy of the antiviral therapy. Currently,
our HBV tests are used by more than 250 laboratories worldwide. We expect that
demand for HBV DNA testing will continue to grow as new hepatitis treatment
guidelines incorporating viral load monitoring are implemented. Our second
important blood virus testing product is our Hybrid Capture CMV Test, which
delivers both qualitative and quantitative viral load information to accurately
differentiate active from latent CMV infection for AIDS, transplant and other
patients with impaired immune systems. We market our CMV test to patients
receiving CMV antiviral therapy, select transplant patients with active CMV
infection needing protective therapy, and AIDS patients at risk of developing
CMV-related organ disease who could benefit from preemptive therapy.
We are currently developing our Hybrid Capture HIV Test based on our
Hybrid Capture technology for HIV viral load monitoring. Our HIV test has been
shown in independent studies to provide highly sensitive, accurate,
reproducible and reliable measurements of HIV viral load. Our HIV test is the
only system which can detect 92% of the HIV genome.
PHARMACEUTICAL CLINICAL RESEARCH
We approach the pharmaceutical clinical research market by seeking to
enter into strategic partnerships that enable us to identify, develop and
validate new gene-based testing opportunities. The first such partnership is our
exclusive technology and marketing partnership with PE Biosystems, one of the
world leaders in this field. Our partnership was formed to address opportunities
in high-throughput gene expression screening for pharmaceutical drug discovery.
In addition, we are expanding our leadership position in cervical cancer disease
management through an active in-licensing program for potential new genetic
markers and through collaborations with vaccine and drug development programs of
major pharmaceutical companies. As part of this effort, we are working with
MedImmune, Inc. in the HPV vaccine area. In 1998, we also acquired Viropath
B.V., a leader in the HPV clinical research field, and we have obtained an
exclusive license to the p53arg gene, a potential risk assessment marker for
cervical disease progression.
6
9
PRODUCTS
Our Hybrid Capture System, which is the basis for all of our gene
analysis testing systems, is a rapid, accurate, easy to use, ultra-sensitive
technology that can be used in virtually any laboratory with standard
equipment. We believe that our Hybrid Capture System is a significant
improvement over other detection technologies because of its specificity, rapid
processing time, improved accuracy and ability to quantitate viral load. We have
developed two versions of our Hybrid Capture technology, the Hybrid Capture I
and Hybrid Capture II Systems. The Hybrid Capture I System, our first generation
DNA hybrid detection system, which is currently being used at more than 600
laboratories worldwide, tests samples individually in polystyrene tubes and has
been approved by the FDA for the follow-up screening of HPV in women with
equivocal Pap smears. The Hybrid Capture II System, which was approved by the
FDA for the detection of HPV in March 1999, uses a 96-well microtiter plate
format that permits simultaneous screening of multiple samples from a single
plate and is designed to be more efficient, less expensive and easier to use
than the Hybrid Capture I System.
7
10
The following table summarizes the commercial and regulatory status
and potential worldwide market of our Hybrid Capture tests:
HYBRID CAPTURE TESTS (1)
- --------------------------------------------------------------------------------
POTENTIAL
OUTSIDE WORLDWIDE
DISEASE TARGET UNITED STATES UNITED STATES MARKET
- -------------- ------------- ------------- ---------
Women's Cancers
and Infectious
Diseases
HPV Approved and marketed as Marketed as a primary test for cervical cancer 150 million(2)
an adjunct to Pap smears screening. Distributed in Europe, Africa and the
for cervical cancer screening. Middle East by Abbott.
Chlamydia and Under review at FDA. Marketed. Distributed in Europe, Africa and the 89 million(3)
Gonorrhea Middle East by Abbott. (chlamydia)
62 million(3)
(gonorrhea)
Herpes Under development. Under development; expect to introduce in 107 million(3)
simplex calendar 2000.
Blood Viruses
HBV Available for research use only. Marketed. Distributed in Europe, Africa and the 300 million(4)
Middle East by Abbott.
CMV Cleared and marketed for Marketed. Distributed in Europe, Africa 1 million(5)
diagnosing infection in organ and the Middle East by Abbott.
transplant, bone marrow
transplant and HIV-positive AIDS
patients.
HIV Available for research use only. Marketed. 41 million(6)
- ----------
(1) As described herein, certain of our products have not received marketing
approvals or clearance from the FDA or certain foreign authorities. There
can be no assurance that any such products will receive approvals on a
timely basis, if at all.
(2) Represents estimate of the total number of Pap smears performed annually.
(3) Represents estimated number of new cases worldwide on an annual basis.
(4) Represents estimated number of cases worldwide of chronic HBV infection.
(5) Represents estimated number of cases worldwide of active CMV infection.
(6) Represents estimated number of cases worldwide.
8
11
SALES AND MARKETING
Our sales and marketing strategy focuses on achieving broad market
acceptance of our Hybrid Capture technology in the areas of women's cancers and
infectious diseases and blood virus testing. We sell our Hybrid Capture products
either directly, or through strategic partners or distributors, to clinical
laboratories and healthcare providers worldwide.
Acceptance of our Hybrid Capture technology requires improving
awareness, both in the United States and in international markets, of the
prevalence and the severity of cervical cancer and sexually transmitted diseases
among women, and, more importantly, identifying our Hybrid Capture tests as a
cost-efficient means of helping to prevent disease. We believe that increased
education and awareness will create a powerful consensus that diseases which are
preventable with the help of a commercially available and cost-effective test
should be targeted by physicians and managed care providers alike. We intend to
promote increased awareness through our active sponsorship of educational
programs, including programs with affiliated "Centers of Excellence," and
through links to the web sites of organizations dedicated to educating the
public and physicians about improvements in healthcare. Additionally, we intend
to continue our public relations campaign, conducted through our expanding
network of women's health advocates, public health providers and physicians
organizations, carrying our message of low cost prevention to physicians,
laboratories and the public.
Currently, we sell our products either directly or through strategic
partners or distributors to more than 1,000 laboratories worldwide.
NORTH AMERICAN MARKET
We currently market our products in the United States and Canada to
substantially all clinical reference laboratories through a direct sales force
supported by technical and customer service representatives.
Adoption of our Hybrid Capture HPV Tests by managed care providers
and the laboratory testing market is essential for rapidly achieving broad based
market acceptance. We have made significant progress in both of these areas.
HCFA has established reimbursement for our HPV test, and the American Medical
Association has assigned specific CPT codes (necessary for reimbursement) for
HPV testing. Third party payors and managed care entities that provide health
insurance coverage to 50 million people currently authorize reimbursement for
our HPV test.
In addition, substantially all major clinical reference laboratories
in the United States offer our HPV test. We work closely with clinical
reference laboratories, third party payors, healthcare providers and their
affiliated physicians to help accelerate the adoption of our HPV test. As part
of this effort, we collaborated with Kaiser Permanente in the study described
under "Business - Women's Cancers and Infectious Diseases - Clinical Trial
Validation" above. We are marketing the data from that study and additional
clinical trial validation data to other managed care providers, physicians and
government-funded national screening programs. As part of this effort, we are
working to establish a "Centers of Excellence" program with a group of the top
academic medical centers in the United States. We are also participating in an
ongoing 7,200 patient National Cancer Institute study designed to establish the
clinical
9
12
utility and the cost effectiveness of HPV testing of women with equivocal Pap
smear results. We expect that the results from this trial will be released in
our current fiscal year.
We market our HPV test to physicians through joint marketing programs
with clinical reference laboratories and through co-marketing arrangements with
other strategic partners. For example, we currently market our 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 combined single-sample approach, approved by the FDA in
September 1997, enables the use of our 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.
INTERNATIONAL MARKETS
Internationally, we are working to establish HPV testing as the
standard of care for primary cervical cancer screening. We have entered into a
marketing and distribution agreement with Abbott for the distribution of certain
of our products in Europe, Africa and the Middle East. Abbott is one of the
world's leading diagnostic companies. We are working together with Abbott to
promote the use of HPV testing for primary screening in the European market.
In Brazil, our products are sold by Digene do Brazil LTDA, a
majority-owned subsidiary. We use independent distributors in the rest of South
America, Asia and the remaining countries in which we sell our products. In
Japan, Mitsubishi Chemical Company acts as our distributor. Mitsubishi is
working to obtain regulatory approval and reimbursement for our Hybrid Capture
HPV, Chlamydia and Gonorrhea Tests.
TECHNOLOGY
Our Hybrid Capture System utilizes signal amplification and combines
the accuracy of nucleic acid probe diagnostics with the ease of use and
mass-market capabilities of antibody-based immunodiagnostic systems which are
routinely used by virology and immunology laboratories today. Our Hybrid Capture
technology uses RNA probes to bind specific DNA sequences to create hybrid
DNA:RNA molecules. The captured hybrids are then reacted with our proprietary
signal amplification system which uses antibodies to detect DNA:RNA hybrids. Our
Hybrid Capture technology offers a rapid, accurate and easy-to-use detection
system that can be performed in any laboratory with standard equipment. These
capabilities are particularly important in the commercial markets we have
targeted.
We have established a strong proprietary position in our Hybrid
Capture technology. We have an exclusive license to a patent covering the use of
the monoclonal antibodies that are central to the Hybrid Capture System.
Additionally, in July 1999, the European Patent Office granted us a broad patent
covering the entire Hybrid Capture System. We have exclusive licenses and
co-exclusive cross licenses with the Institut Pasteur to issued and pending
patents covering the use of HPV genetic sequences from six patented cancer
causing HPV types. We believe that these patents create a unique proprietary
position for us in the HPV testing field.
10
13
Our Hybrid Capture technology has been applied successfully to a
number of testing formats including: individual tubes (Hybrid Capture I);
96-well microtiter plates (Hybrid Capture II); 384-well test arrays; and DNA
gene chips. Our Hybrid Capture I and II test formats are used in our
commercially available testing products. Using these test systems, it is
possible to economically process between 4 and 360 clinical specimens in a
single technician shift. As part of our partnership efforts, PE Biosystems
offers high throughput gene expression analysis products and services to the
pharmaceutical drug discovery, biotechnology and agricultural markets. The
automated Hybrid Capture gene expression screening service offered by PE
Biosystems employs high capacity automation capable of running 100,000 tests per
day.
The following diagram illustrates the key elements of the Hybrid
Capture System.
[Diagram with explanatory notes showing how our Hybrid Capture
technology platform allows for the detection of specific DNA and RNA
sequences and therefore has potential applications for a variety of
diagnostic and monitoring tests.]
RESEARCH AND DEVELOPMENT
One of our key goals is to expand continually our core technology and
expertise in molecular diagnostics in order to remain at the forefront of DNA
testing for infectious diseases and to capture new high-growth and high-margin
market opportunities. To achieve this goal, we have invested aggressively in
research and development and particularly in clinical trials to validate the
performance of our new products.
Our research programs are geared to deliver continuing improvements
in the detection of cervical cancer and sexually transmitted infections,
including chlamydia, gonorrhea and herpes, and we seek to increase our
technological leadership position in these areas. Further, we are working to
make it possible for a physician to order all four of these tests and cytology
results simultaneously. Our single-sample system is now available in Europe and
South America for the detection of HPV, chlamydia and gonorrhea. We expect to
introduce our herpes test internationally in calendar year 2000. We have
developed our tests so that they can be performed on samples collected for
routine Pap smears, and we have developed our proprietary single patient sample
system which we expect to introduce internationally in calendar year 2000.
We intend to continue our investment in the women's cancers and
infectious diseases and blood virus areas and to expand efforts to automate our
existing tests. We expect that the first of these tests, our automated chlamydia
and gonorrhea test, will be introduced in the United States by Abbott during
calendar year 2000, subject to clearance by the FDA.
MANUFACTURING
Manufacturing our products involves combining 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 biological
reagents are currently manufactured in our facility in Beltsville, Maryland. In
December 1999, we expect to relocate our manufacturing operations to a new
facility in Gaithersburg, Maryland. We believe that we currently have sufficient
manufacturing capacity for our existing demand and that the new facility will
allow us to expand our production capability for the foreseeable future.
11
14
We have established a quality control program, including a set of
standard manufacturing and documentation procedures intended to ensure that,
where required, our products are manufactured in accordance with quality service
regulations (QSR). We received ISO 9001 certification in June 1999.
COMPETITION
The medical diagnostics and biotechnology industries are subject to
intense competition. Our competitors in the United States and abroad for
gene-based diagnostic probes include Roche Diagnostics, Bayer Corporation,
Chiron Corporation and Gen-Probe Incorporated. We also compete with Abbott, even
though they act as our marketing partner in Europe, Africa and the Middle East.
We believe the primary competitive factors in the market for
gene-based probe diagnostics and other screening devices are clinical
performance and reliability, ease of use, cost, proprietary position, the
competitor's share of the existing market, regulatory approvals and availability
of reimbursement.
Other companies, including large pharmaceutical and biotechnology
companies, may enter the market for gene-based probe diagnostics. Some of our
products compete against existing screening, monitoring and diagnostic
technologies, including the tissue culture and antigen-based diagnostic
methodologies. In marketing our HPV tests for the follow-up screening of women
with equivocal Pap smears in the United States, we compete 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
we are able to obtain FDA and applicable foreign approvals to market our HPV
tests for primary cervical cancer screening, either in conjunction with or
separate from the Pap smear, our products will compete against the Pap smear,
which is widely accepted as an inexpensive and, with regular use, adequate
screening test for cervical cancer. Future 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, our HPV tests may be seen as adding unnecessary expense to the
accepted cervical cancer screening methodology. Consequently, our HPV tests may
not be able to attain market acceptance as a primary screening test.
We face 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 HBV and HIV. Additionally, there are
several emerging DNA probe amplification technologies to detect CMV being
developed by competitors. Thus, our tests for HBV, CMV or HIV may not be able to
gain market acceptance.
Our 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 us 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. We may not be
able to compete effectively against existing or future competitors, which may
12
15
have a material adverse effect on our business, financial condition and results
of operations.
GOVERNMENT REGULATION
The medical devices to be marketed and manufactured by us are subject
to extensive regulation by the FDA and, in some instances, by foreign
governments. Pursuant to the Federal Food, Drug, and Cosmetic Act and the
related regulations, 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 that we manufacture or distribute.
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 and adherence to QSR), 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 premarket approval (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).
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 preamendment class III medical device (i.e., on the market on or before May
28, 1976) 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 effectiveness
be performed. Additionally, modifications or enhancements that could
significantly affect the safety or effectiveness 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 preamendment 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 QSR
13
16
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. 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, but limited to the
information necessary 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 (IVD) 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 and not improperly commercialized. 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 healthcare 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.
Export of products subject to the 510(k) notification requirements,
but not yet cleared to market, are permitted provided certain requirements are
met. Unapproved products subject to the PMA requirements must be approved by the
FDA for export under certain circumstances. To obtain FDA export approval,
certain requirements must be met and information must be provided to the FDA,
including, with some exceptions, documentation demonstrating that the product is
approved for import into the country to which it is to be exported and, in some
instances, safety data for the devices. The FDA may not grant export approval
when such approval is necessary, and countries to which the devices are to be
exported may not approve the devices for import. Failure on our part to obtain
export approvals when required could significantly delay and impair our ability
to export our devices and could have a material adverse effect on our business,
financial condition and results of operations.
In April of 1995, we obtained a PMA approval for our HPV test to
detect the presence of HPV in women with equivocal Pap smears. In August of
1997, we obtained FDA approval of a PMA supplement for the use of the HPV test
using the Cytyc sample collection system. We received FDA marketing clearance
for our Hybrid Capture II HPV Test in March 1999. We also intend to submit a PMA
supplement with the FDA to obtain market clearance for use of our Hybrid Capture
II HPV Test as a primary cervical cancer screening test either in conjunction
with or separate from Pap smear testing. We anticipate that a substantial amount
of clinical data will be required to support the PMA supplement. The data we
submit may not be adequate to support the use of the Hybrid Capture II HPV Test
as a primary cervical cancer screening test in the United States. Failure to
obtain FDA approval for the use of the Hybrid Capture II HPV Test as a primary
cervical cancer screening test could have a material adverse effect on our
business, financial condition and results of operations.
14
17
We received FDA marketing clearance for our Hybrid Capture I CMV Test
in October 1998. We submitted three 510(k) notifications for each of our tests
for chlamydia and gonorrhea in April 1998. Upon review of the 510(k)
notification for our tests, the FDA determined that additional data would be
needed. After collecting the necessary data, we submitted the information to
the FDA. These three 510(k) notifications remain pending with the FDA. The FDA
may not grant clearance of these 510(k) notifications in a timely manner, if
at all, and the FDA may require the submission of additional data or find the
products not substantially equivalent and require the submission of a PMA
application.
We are developing tests for HBV and HIV which are class III devices
that will necessitate the collection of extensive clinical data and the eventual
submission and approval of a PMA application. We may not be able to collect
adequate data to support a PMA application for either the HBV test or HIV test,
and when a PMA application is submitted, FDA approval may not be granted in a
timely manner, if at all.
We are exporting our HPV test as a primary cervical cancer screening
test prior to obtaining PMA approval for this use in the United States. We are
also exporting our HBV test and HIV test for clinical use abroad prior to
pursuing PMA approval in the United States. Exportation of the HPV test as a
primary cervical cancer screening test and exports of the HBV test and HIV test
can be undertaken without prior FDA approval of a PMA provided, among other
things, that:
- the marketing of these tests is not contrary to the laws
of the country to which they are intended for import,
- they are manufactured in substantial conformance with the
QSRs and
- we have valid marketing authorization for these products
from any member country of the European Union, Australia,
Canada, Israel, Japan, New Zealand, Switzerland or South
Africa.
We also must provide the FDA with simple notification indicating the
products to be exported and the countries to which they will be exported. FDA
approval must be obtained for exports of products subject to the PMA
requirements if these export conditions are not met. We may not be able to
obtain and maintain valid marketing authorization for these tests from one of
the listed countries, and the FDA may not grant specific export approval. Our
failure to obtain and maintain valid marketing authorization from one of the
listed countries or otherwise meet the FDA export approval requirements, could
have a material adverse effect on our business, financial condition and results
of operations.
We have developed viral and bacterial tests that we distribute in the
United States on a RUO basis. Failure by us or recipients of our 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 our ability to distribute the tests prior to obtaining FDA clearance or
approval for them.
Any products manufactured or distributed by us 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
Federal Food, Drug, and Cosmetic Act requires devices to be manufactured in
accordance with QSRs, which impose certain procedural and documentation
requirements upon us with respect to manufacturing and quality assurance
activities.
15
18
The FDA actively enforces regulations prohibiting the promotion of
devices for unapproved ("off label") 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 our products.
We and our products are subject to a variety of state laws and
regulations in those states and localities where our products are or will be
marketed. Any applicable state or local regulations may hinder our ability to
market our 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. We
may be required to incur significant costs to comply with such laws and
regulations now or in the future, and such laws or regulations may have a
material adverse effect on our business, financial condition and results of
operations.
The introduction of our developmental stage test products in foreign
markets will also subject us 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 the necessary approvals or clearances may not
be granted on a timely basis or at all. Delays in receipt of, or a failure to
receive, such approvals or clearances could have a material adverse effect on
our business, financial condition and results of operations.
Changes in existing requirements or adoption of new requirements or
policies could adversely affect our ability to comply with regulatory
requirements. Failure to comply with regulatory requirements could have a
material adverse effect on our business, financial condition and results of
operations. We may be required to incur significant costs to comply with laws
and regulations in the future, and laws or regulations may have a material
adverse effect upon our business, financial condition and results of operations.
The Federal Food, Drug, and Cosmetic Act requires devices to be
manufactured in accordance with QSRs which impose certain procedural and
documentation requirements upon us with respect to manufacturing and quality
assurance activities. Noncompliance with QSRs 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 QSRs which,
if finalized, would likely increase the cost of compliance with the
requirements. Any failure by us to comply with QSR requirements could have a
material adverse effect on our business, financial condition and results of
operations.
We must comply with similar registration requirements of foreign
governments and with import and export regulations when distributing our
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 new laws or regulations may have a material adverse effect on our
business, financial condition and
16
19
results 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.
The IVD directive promulgated by the European Union goes into effect
in June 2000 and we must be in full compliance with such directive by 2003. One
of the critical components of such compliance is ISO 9001 certification, which
we received in June 1999.
LICENSES, PATENTS AND PROPRIETARY INFORMATION
Our success will depend in part on our ability to obtain and maintain
patent protection for our technologies, products and processes, preserve our
trade secrets, and operate without infringing the proprietary rights of other
parties. Because of the substantial length of time and expense associated with
bringing new products through development to the marketplace, the biotechnology
industry places considerable importance on obtaining and maintaining patent and
trade secret protection for new technologies, products and processes. Despite
these precautions, it may be possible for unauthorized third parties to utilize
our technology or to obtain and use information that we regard as proprietary.
The laws of some countries do not protect our proprietary rights in our
technologies, products and processes to the same extent as do the laws of the
United States.
We hold four issued U.S. patents relating to HPV types 35, 43, 44,
and 56. These patents expire in 2007. We have also filed corresponding foreign
patent applications in certain countries. The patents relating to HPV types 35,
43, and 56 have been licensed to Institut Pasteur (see cross license discussion
below). In addition, we are the exclusive, worldwide licensee of a U.S. patent
application and certain corresponding foreign patents and patent applications
relating to HPV type 52 and a U.S. patent and certain corresponding foreign
patents relating to the use of the L1 gene sequence to detect specific HPV types
(see Georgetown license discussion below) as well as certain trade secrets
relating to HPV type 58 (see Kanebo license discussion below).
Through a cross license with Institut Pasteur, we have obtained a
worldwide license to U.S. patents and patent applications and corresponding
foreign patent applications relating to HPV types 39 and 42 and foreign patents
and applications relating to HPV type 33. In return, we have granted to Institut
Pasteur a worldwide license to our three U.S. patents and corresponding foreign
patents and applications relating to HPV types 35, 43, and 56. We have 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, we 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 we have sublicensed our rights on a
non-exclusive basis to Toray Fuji Bionics, and its affiliates, for use outside
North America and certain countries in Western Europe. A sublicensee may use
its rights under the cross license to develop additional products or services
that compete with our products. We believe that the cross license terminates on
the last to expire of the underlying patent rights. Any prior termination of the
cross license could have a material adverse effect on our business, financial
condition and results of operations.
17
20
Through a license with Georgetown University, we have obtained
exclusive, worldwide rights to a U.S. patent application and corresponding
foreign patents and patent applications relating to HPV type 52 and to a U.S.
patent and corresponding foreign patents relating to the use of the L1 gene
sequence to detect specific HPV types. Unless terminated earlier, the Georgetown
license will terminate upon the last to expire of the licensed patent rights.
All of the issued foreign patents relating to HPV type 52 and the L1 related
patent will expire in 2008. We are 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., we have obtained exclusive,
worldwide rights (except for Japan where Kanebo, Ltd. retained the right to
grant a non-exclusive sublicense to Toray Industries, Inc.) to a foreign patent
application relating to HPV type 58. Unless terminated earlier, the Kanebo
license expires on the later to occur of January 1, 2010 or the expiration of
any patent relating to HPV type 58.
We have filed a U.S. patent application relating to certain aspects
of our Hybrid Capture technology. A foreign filing of this patent has been
granted in Australia and was allowed by the European Patent Office in July 1999.
We have an exclusive license with the University of Hawaii for a patent covering
monoclonal antibodies for detection of DNA:RNA hybrid complexes. We have also
filed U.S. patent applications in the areas of direct DNA probe labeling, signal
amplification and biotin-avidin probe chemistry and our continuous amplification
reaction amplification method. The inventions claimed by these applications may
be used in our DNA probes and any patents that issue from such applications may
provide some ancillary protection for certain aspects of our 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. A U.S. patent or any
foreign patents relating to our Hybrid Capture technology may not be issued to
us on a timely basis, or at all.
We have received inquiries regarding possible patent infringements
relating to, among other things, certain aspects of our Hybrid Capture
technology. We believe that the patents of others to which these inquiries
relate are either not infringed by our Hybrid Capture technology or are invalid.
However, we may be subject to further claims that our technology, including our
Hybrid Capture technology, or our 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 us to significant liabilities to third parties, require us to
obtain licenses from third parties, or require us to cease sales of related
products. Any licenses required under any such third party patents or
proprietary rights may not be made available on commercially reasonable terms,
if at all.
The U.S. Patent and Trademark Office or any foreign patent office may
not grant patent protection for the subject matter of any pending patent
applications, and present or future patents may not provide commercially
significant protection to our present or future technologies, products, or
processes. Furthermore, others may develop independently substantially
equivalent proprietary information not covered by patents to which we have
rights or obtain access to our know-how, and others may be issued patents that
may prevent the sale of one or more of our products, or require licensing and
the payment of significant fees or royalties by us to third parties in order to
enable us to conduct our business. Such licenses may not be available or, if
available, may not be on terms acceptable to us or we may not be successful
in any attempt to redesign our products or processes to avoid infringement. Our
failure to obtain these licenses or to redesign our products or processes would
have a material adverse effect on our 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 us
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
18
21
outcome is favorable to us, and can result in the diversion of substantial
resources from our other activities. An adverse outcome could subject us to
significant liabilities to third parties, require us to obtain licenses from
third parties, or require us to cease any related research and development
activities or product sales. In addition, the laws of certain countries may not
protect our intellectual property.
Our success is also dependent upon the skill, knowledge, and
experience of our scientific and technical personnel. To help protect our
rights, we require all employees, consultants, advisors, and collaborators to
enter into confidentiality agreements that prohibit the disclosure of
confidential information to anyone outside Digene and require disclosure and, in
most cases, assignment to Digene of their ideas, developments, discoveries, and
inventions. There can be no assurance, however, that these agreements will
provide adequate protection for our trade secrets, know-how, or other
proprietary information in the event of any unauthorized use or disclosure.
THIRD-PARTY REIMBURSEMENT
Hospitals, physicians, and other healthcare providers rely on
third-party payors, such as government entities, managed care organizations, and
private insurance plans, to reimburse the costs and fees associated with the use
of diagnostic tests. Successful sales of our tests 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 our
tests are clinically useful and cost-effective, not experimental or
investigational, medically necessary and appropriate for the specific patient.
Since reimbursement approval is required from each payor individually, seeking
such approvals is a time consuming and costly process which requires us to
provide scientific and clinical support for the use of our tests for their
approved indications to each payor separately. Third-party reimbursement may not
be consistently available for our tests for their approved indications or any of
our other products that may be developed and such third-party reimbursement may
not be adequate. Federal and state governmental agencies are increasingly
considering limiting healthcare 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 our business, financial condition and results of
operations.
Outside the United States, we rely on a network of distributors to
establish reimbursement from third-party payors in their respective territories.
Our distributors have established reimbursement for the HPV test in Germany, the
Czech Republic, and Brazil. Accordingly, the establishment of reimbursement from
third-party payors in such countries is outside our control. Healthcare
reimbursement systems vary from country to country and, accordingly, there can
be no assurance that third-party reimbursement will be made available for our
products under any other reimbursement system. In Europe, Africa and the Middle
East, we are working closely with Abbott on advocacy efforts and to work with
government and/or ministry officials to establish appropriate reimbursement
coverage in the major countries.
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 our products
could have a material adverse effect on our business, financial condition and
results of operations.
19
22
PRODUCT LIABILITY
Our business is subject to product liability risks inherent in the
testing, manufacturing and marketing of our tests that are currently being
marketed and sold, as well as our other products in development. There can be no
assurance that product liability claims will not be asserted against us, our
collaborators or licensees. We currently maintain product liability insurance
coverage with a combined single limit of $6,000,000. This coverage may not be
adequate to protect us against future product liability claims, and product
liability insurance may not be available to us in the future on commercially
reasonable terms, if at all. Furthermore, we may not 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 our
business, financial condition and results of operations.
EMPLOYEES
At September 27, 1999, we employed 124 persons, including 39 in
research and development, 38 in manufacturing, including quality assurance, 24
in sales and marketing and 23 in accounting, finance, administration and
regulatory affairs. We are not a party to any collective bargaining agreements,
and we believe our relationships with our employees are good.
PRINCIPAL EXECUTIVE OFFICES
We were incorporated in Delaware in 1987. Our principal executive
offices are located at 9000 Virginia Manor Road, Beltsville, Maryland 20705.
20
23
ADDITIONAL CONSIDERATIONS
WE HAVE A HISTORY OF OPERATING LOSSES AND ANTICIPATE WE WILL INCUR CONTINUED
LOSSES FOR THE FORESEEABLE FUTURE.
We have had substantial operating losses since incorporation in 1987,
and we have never earned a profit. At June 30, 1999, our accumulated deficit was
approximately $48.7 million. These losses have resulted principally from: (1)
expenses associated with our research and development programs; (2) the
expansion of our manufacturing facilities; and (3) the expansion of our sales
and marketing activities in the United States and abroad.
We expect that these operating losses will continue for the
foreseeable future. Our future profitability depends, in part, on:
- the success of our product development efforts;
- obtaining regulatory approvals for our product candidates
from the FDA and foreign regulatory authorities;
- our ability to expand our manufacturing capabilities to
meet any increase in demand for our products; and
- our sales and marketing activities.
OUR OPERATING RESULTS HAVE, AND MAY CONTINUE TO, FLUCTUATE SIGNIFICANTLY.
Our quarterly operating results have fluctuated significantly in the
past. We believe that they may continue to fluctuate significantly in the future
with lower product revenues in our first and second fiscal quarters (July 1
through December 31) as compared with our third and fourth fiscal quarters of
each year. 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 primarily causes this fluctuation.
In addition, our quarterly operating results, as well as our annual
results, may fluctuate from period to period due to:
- the degree of market acceptance of our products;
- the timing of regulatory approvals and other regulatory
announcements;
- variations in our distribution channels;
- the timing of new product announcements and introductions
of new products by us and our competitors; and
- product obsolescence resulting from new product
introductions.
Due to any one or more of these or other factors, in one or more
future quarters our results of operations may fall below the expectations of
securities analysts and investors.
WE HAVE LIMITED MANUFACTURING EXPERIENCE, AND OUR MANUFACTURING OPERATIONS MAY
BE INTERRUPTED AS A RESULT OF OUR PLANNED MOVE.
We have limited commercial-scale manufacturing experience and
capabilities, and we anticipate that we will be required to expand our
manufacturing capabilities.
21
24
To address this anticipated expansion, we have entered into a lease
for a new facility in Gaithersburg, Maryland. We intend to relocate our
corporate, research and development and manufacturing operations to this new
facility in December 1999. We cannot begin manufacturing activities at the new
facility until our manufacturing process there has been validated by the FDA.
The FDA may not provide such validation in a timely manner which could delay our
ability to meet the demand for our products. To minimize this potential problem,
we will continue manufacturing certain components in our Beltsville, Maryland
facility until our new facility is validated appropriately and will stockpile
product inventory during the second quarter of fiscal 2000. This stockpiling
will cause an increase in our expenses for that period.
Once the new facility is validated by the FDA, it will still be
subject, on an ongoing basis, to a variety of quality systems regulations,
international quality standards and other regulatory requirements, including
requirements for good manufacturing practices, which are commonly referred to as
"cGMP." The integration of our manufacturing operations into this new facility
may result in problems involving production yield and quality control and
assurance. We may encounter difficulties expanding our manufacturing operations
in accordance with these regulations and standards, which could result in a
delay or termination of manufacturing.
WE MANUFACTURE ALL OF OUR PRODUCTS IN A SINGLE FACILITY.
We face risks inherent in the operation of a single facility for
manufacture of our products. These risks include unforeseen plant shutdowns due
to personnel, equipment or other factors, and the possible inability of our
facility to produce products in quantities sufficient to meet customer demand.
Any delay in the manufacture of our products could result in delays in product
shipment.
OUR PRODUCTS MAY NOT BE FULLY ACCEPTED BY THE MARKET.
We cannot predict whether the worldwide medical community will accept
our technology to the extent we believe is appropriate or to the extent which is
required for us to operate profitably. Our success depends, in part, upon the
acceptance by third-party payors, clinical laboratories and healthcare
providers of our Hybrid Capture technology as a clinically useful and
cost-effective detection, screening and monitoring method in the areas of
women's cancers and infectious diseases and blood viruses.
In addition, our growth and success will depend upon market
acceptance by the medical community of our HPV tests as a primary cervical
cancer screening method and as a follow-up screening method for women with
equivocal Pap smears. This entails acceptance of our HPV tests as a clinically
useful and cost-effective alternative to well-established follow-up procedures,
such as Pap smear re-testing, colposcopy and biopsy. HPV testing, in general, or
our HPV tests, in particular, may not achieve market acceptance on a timely
basis and, in fact, may never achieve market acceptance.
Furthermore, 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. If marketed as an adjunct
to the Pap smear test for primary screening in the United States, our HPV tests
may be seen as adding unnecessary expense to the accepted cervical cancer
screening methodology. Consequently, we can provide no assurance that our HPV
tests will be able to achieve market acceptance as a primary screening test on a
timely basis, or at all.
22
25
OUR SALES TO INTERNATIONAL MARKETS ARE SUBJECT TO ADDITIONAL RISKS THAT ARE
BEYOND OUR CONTROL.
Our 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.
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. We anticipate 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. Additionally, our 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.
We may not be able to successfully commercialize any of our products
in any foreign market beyond the level of commercialization we have already
achieved. In addition, the laws of some countries do not protect our proprietary
rights to the same extent as those of the United States.
WE HAVE LIMITED SALES AND MARKETING EXPERIENCE.
We have limited sales and marketing experience and may be unable to
successfully establish and maintain a significant sales and marketing
organization. Due to the relatively limited market awareness of our products, we
believe that the marketing effort may be a lengthy process.
We intend to continue using a direct sales force as well as a network
of distributors to market and sell our HPV tests, chlamydia and gonorrhea tests
and blood virus tests. Our direct sales force may not succeed in promoting our
products to third-party payors, clinical laboratories, healthcare providers and
government entities. The risks of pursuing this strategy include:
- we may be unable to recruit and retain skilled sales,
marketing, service or support personnel;
- agreements with distributors for U.S. and foreign sales may
not be available on terms commercially reasonable to us, or
at all; and
- our sales and marketing efforts may be unsuccessful.
OUR SALES ARE HIGHLY DEPENDENT ON A SINGLE INTERNATIONAL DISTRIBUTOR.
In May 1999 we entered into a marketing and distribution agreement
with Abbott Laboratories. Under this agreement, Abbott is exclusively
responsible for sales and marketing of certain of our Hybrid Capture products in
Europe, Africa and the Middle East and, when cleared by the FDA, our Hybrid
Capture II Chlamydia and Gonorrhea Tests in the United States. We expect that
sales to Abbott will constitute a significant portion of our total revenues for
the foreseeable future. We could be materially adversely affected by:
23
26
- the loss of Abbott's sales and marketing infrastructure;
- a significant decrease in product shipments to or an
inability to collect receivables from Abbott; or
- any other adverse change in our relationship with Abbott.
OUR SALES ARE HIGHLY DEPENDENT ON REIMBURSEMENTS FROM THIRD-PARTY PAYORS.
Sales of our 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 insurance plans, including Medicare and Medicaid in
the United States, managed care organizations and private insurance plans.
Third-party payors often express reluctance to reimburse healthcare providers
for the use of any medical test incorporating new technology, such as ours.
Reimbursement by a third-party payor may depend on a number of factors,
including the payor's determination that our products are clinically useful,
cost-effective, not experimental or investigational, and medically necessary and
appropriate for the specific patient.
Because each payor individually approves reimbursement, seeking such
approvals is a time consuming and costly process which requires us to provide
scientific and clinical support for the use of each of our products to each
payor separately. 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. Thus, third-party
reimbursement may not be consistently available for our products or financially
adequate to cover our costs and achieve profitability.
Outside the United States, the responsibility for obtaining
reimbursement approval from third-party payors is handled by our distributors
and, therefore, is out of our direct control. Healthcare reimbursement systems
vary from country to country and, accordingly, we cannot guarantee that
third-party reimbursement will be available for our products under any other
reimbursement system.
FUTURE LEGISLATION COULD AFFECT OUR ABILITY TO ACHIEVE PROFITABILITY.
One of our ongoing concerns is that from time to time, Congress has
considered restructuring the delivery and financing of healthcare services in
the United States. We cannot predict what form of legislation, if any, may be
implemented or the effect of this legislation on our business. It is possible
that future legislation will contain provisions which may adversely affect our
business, financial condition and results of operations. It is also possible
that future legislation could result in modifications to the nation's public and
private healthcare insurance systems, which could negatively affect
reimbursement policies or encourage integration or reorganization of the
healthcare industry in a manner that could negatively affect us. We cannot
predict what legislation, if any, relating to our business or to the healthcare
industry may be enacted.
OUR STRATEGY FOR THE DEVELOPMENT AND COMMERCIALIZATION OF OUR PRODUCTS AND
PRODUCT CANDIDATES IS DEPENDENT IN PART ON COLLABORATIONS WITH THIRD PARTIES.
We have entered into and intend to continue to enter into corporate
collaborations for the development of new products, clinical collaborations with
respect to trials using our products and product candidates and strategic
alliances for the distributions of our Hybrid Capture System and tests. Our
success depends in large part on the efforts of these third parties in
performing their responsibilities. We cannot assure you that we will be able to
enter into arrangements that may be necessary in order to develop and
commercialize our products or that we will realize any of the contemplated
benefits from these
24
27
arrangements. Furthermore, we cannot assure you that any revenues or profits
will be derived from our collaborative and other arrangements.
WE FACE INTENSE COMPETITION IN THE BIOTECHNOLOGY INDUSTRY.
The medical diagnostics and biotechnology industries are subject to
intense competition. We can provide no assurance that we will be able to compete
successfully against existing or future competitors. For certain of our tests,
we also compete against existing detection, screening and monitoring
technologies, including the Pap smear, tissue culture and antigen-based
diagnostic methodologies.
Our 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 us, which would render our products noncompetitive or
obsolete. Moreover, many of our existing and potential competitors have
substantially greater financial, research and development, marketing, sales,
manufacturing, distribution and technological resources than us.
In addition, many of these companies may have established third-party
reimbursement for their products. In marketing our HPV tests for primary
cervical cancer screening either in conjunction with or separate from the Pap
smear, our tests will compete against the Pap smear, which is widely accepted as
an inexpensive and, with regular use, adequate screening test for cervical
cancer. Additionally, in marketing our HPV tests for the follow-up screening of
women with equivocal Pap smears in the United States, we compete with
well-established follow-up procedures, such as Pap smear re-testing, colposcopy
and biopsy, which are also widely accepted and have a long history of use.
We face 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 hepatitis B virus. Additionally,
there are several emerging DNA probe amplification technologies to detect CMV
being developed by competitors.
WE MAY BE UNABLE TO PROTECT OUR PROPRIETARY RIGHTS, PERMITTING COMPETITORS TO
DUPLICATE OUR PRODUCTS AND SERVICES.
Patent protection for our technologies and products will be a crucial
factor in our ability to develop and commercialize our products. 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. Large pharmaceutical companies consider a strong patent estate
critical when they evaluate whether to enter into a collaborative arrangement to
support the research, development and commercialization of a technology. Without
the prospect of reasonable patent protection, it would be difficult for us or
any corporate partner to justify the time and money that is necessary to
complete the development of a product.
We have 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. We can provide no assurance that patent
applications relating to our products or technologies will result in patents
being issued, that any issued patents will afford adequate protection to us, or
that such patents will not be challenged, invalidated, infringed or
circumvented. Furthermore, we can provide no assurance that others have not
developed, or will not develop, similar products or technologies that will
compete with our products or technologies without infringing upon our
intellectual property rights.
25
28
Any success in protecting our proprietary rights will depend in large
part on our ability to:
- obtain, maintain and enforce patent protection for our
products and technologies both in the United States and
internationally;
- license rights to patents from third parties;
- maintain trade secret protection;
- operate without infringing upon the proprietary rights of
others; and
- prevent others from infringing our proprietary rights.
Any licenses we may be required to secure under any patents or
proprietary rights of third parties may not be made available on terms
acceptable to us, if at all. Moreover, the laws of certain countries may not
protect our proprietary rights to the same extent as United States law.
In addition to the risk that we could be a party to patent
infringement litigation, the U.S. Patent and Trademark Office, or its foreign
counterparts, could require us to participate in patent interference proceedings
that it declares. These proceedings are often expensive and time-consuming, even
if we were to prevail in such a proceeding. We may also be forced to initiate
legal proceedings to protect our patent position or other proprietary rights.
These proceedings typically are costly, protracted and offer no assurance of
success.
We have received inquiries regarding possible patent infringements
relating to, among other things, certain aspects of our Hybrid Capture
technology. We believe that the patents of others to which these inquiries
relate are either not infringed by our Hybrid Capture technology or are invalid.
Nevertheless, we cannot be sure that our patents and patent applications will
adequately protect our Hybrid Capture technology. We can provide no assurance
that we will not be subject to further claims that our technology, including
our Hybrid Capture technology, or our products, infringe the patents or
proprietary rights of third parties.
Our success also is dependent upon the skill, knowledge and
experience of our scientific and technical personnel. To help protect our
rights, we require all employees, consultants, advisors and collaborators to
enter into confidentiality agreements that prohibit the disclosure of
confidential information to anyone outside our company and require disclosure,
and in most cases, assignment to us of their ideas, developments, discoveries
and inventions. We can provide no assurance, however, that these agreements will
provide adequate protection for our trade secrets, know-how or other proprietary
information in the event of any unauthorized use or disclosure.
WE ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION AND MAY NOT BE ABLE TO OBTAIN
REGULATORY APPROVALS.
The FDA product clearance process is unpredictable and uncertain. We
can provide no assurance that the necessary approvals or clearances for our
product candidates will be granted on a timely basis, or at all. In particular:
26
29
- we may be unable to collect adequate data to support a
premarket approval for either our HIV test or hepatitis B
virus test or to receive approval for those tests in a
timely manner;
- the FDA may determine that our chlamydia and gonorrhea
tests are not substantially equivalent to legally marketed
devices or that additional information or data is needed to
make such a determination;
- we may be unable to obtain or keep valid marketing
authorization from one or more of the countries to which
we export our products;
- we, or recipients of our products that are limited to
research use only, may fail to comply with the user
certification requirements and other regulatory limitations
placed on the distribution and use of these devices, which
could result in an enforcement action by the FDA against
us; or
- we may lose previously received approvals, particularly
the approvals for our HPV tests using our Hybrid Capture I
and II technologies.
Further, we must comply with similar requirements of foreign
governments and with import and export regulations when distributing our
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 jurisdictions, particularly in the European Union, continues to
develop.
CLINICAL TRIALS FOR OUR PRODUCT CANDIDATES ARE EXPENSIVE AND THEIR OUTCOME IS
UNCERTAIN.
Conducting clinical trials is a lengthy, time-consuming and expensive
process. Before obtaining regulatory approvals for the commercial sale of any
products, we or our corporate partners must demonstrate through preclinical
testing and clinical trials that our product candidates are safe and effective
for use in humans. We have incurred and will continue to incur substantial
expense for, and devote a significant amount of time to, preclinical testing and
clinical trials.
Historically, the results from preclinical testing and early clinical
trials have often not predicted results of later clinical trials. A number of
new medical devices have shown promising results in clinical trials, but
subsequently failed to establish sufficient safety and efficacy data to obtain
necessary regulatory approvals. Data obtained from preclinical and clinical
activities is susceptible to varying interpretations, which may delay, limit or
prevent regulatory approval. In addition, regulatory delays or rejections may be
encountered as a result of many factors, including changes in regulatory policy
during the period of product development.
Clinical trials conducted by us, by our collaborators or by third
parties on our behalf may not demonstrate sufficient safety and efficacy to
obtain the requisite regulatory approvals for our product candidates. Regulatory
authorities may not permit us to undertake any additional clinical trials for
our product candidates.
Completion of clinical trials may take several years or more. The
length of time can vary substantially with the type, complexity, novelty and
intended use of the product candidate. Our commencement and rate of completion
of clinical trials may be delayed by many factors, including:
27
30
- our inability to manufacture sufficient quantities of
materials used for clinical trials;
- our inability to recruit patients at the expected rate;
- the failure of clinical trials to demonstrate a product
candidate's efficacy;
- our inability to follow patients adequately after
treatment;
- our inability to predict unforeseen safety issues; and
- the potential for unforeseen governmental or regulatory
delays.
If a product candidate fails to demonstrate safety and efficacy in
clinical trials, this failure may delay development of other product candidates
and hinder our ability to conduct related preclinical testing and clinical
trials. As a result of these failures, we may also be unable to find additional
collaborators or to obtain additional financing.
CERTAIN KEY COMPONENTS OF OUR PRODUCTS ARE PROVIDED BY A SINGLE SUPPLIER.
Several key components of our products come from single source
suppliers. These suppliers are subject to many strict regulatory requirements
regarding the supply of these components. We cannot be sure that these suppliers
will comply, or have complied, with applicable regulatory requirements or that
they will otherwise continue to supply us with the key components we require. If
suppliers are unable or refuse to supply us, or will supply us only at a
prohibitive cost, we may not be able to access additional sources at acceptable
prices, on a timely basis, if ever.
We acquire these components on a purchase-order basis, meaning that
the supplier is not required to supply us with a specified quantity of product
within a given time period or set-aside part of its inventory for our orders. We
have not arranged for alternative supply sources.
In the event that we cannot obtain sufficient quantities of these
components on commercially reasonable terms, or in a timely manner, we would not
be able to manufacture our products on a timely and cost-competitive basis.
In addition, if any of the components of our products are no longer
available in the marketplace, we may be forced to further develop our technology
to incorporate alternate components. The incorporation of new components into
our products may require us to seek necessary approvals from the FDA or
appropriate foreign regulatory agencies prior to commercialization. We can
provide no assurance that this development would be successful or that, if
developed by us or licensed from third parties, any alternative components would
receive requisite regulatory approval on a timely basis, or at all.
The success of our products based on our Hybrid Capture technology
will depend, in part, on our ability to arrange for the distribution to our
customers of luminometers and related software and equipment with the
capability to analyze the results of our tests. Two suppliers currently provide
us with all of our luminometers. We may be unable to locate other suppliers if
our current suppliers fail to produce luminometers for us in accordance with
specifications, in accordance with applicable regulations and on a timely
basis. Even if we could locate an alternate supplier, that supplier may be more
expensive than our current suppliers and may require substantial lead time. Any
of these events could significantly inhibit our ability to market our Hybrid
Capture products.
28
31
RAPID GROWTH MAY PLACE SIGNIFICANT DEMANDS ON OUR PERSONNEL.
We currently have limited management and administrative resources. If
we are successful in implementing our business strategy, we may experience a
period of rapid growth and expansion which could place significant additional
demands on our management and administrative resources.
OUR SYSTEMS MAY NOT BE YEAR 2000 COMPLIANT.
We have substantially completed an assessment of our manufacturing
and research equipment, computer programs and telephone systems and have
identified the mission-critical equipment, computer programs and systems that
were not year 2000 compliant, at least 80% of which have been upgraded and
vendor-certified for year 2000 compliance. We have also tested a majority of
such mission-critical equipment, computer programs and systems for year 2000
compliance. We expect to complete our upgrade and replacement activities by
November 1999 and complete the remainder of our testing activities by December
1999. During the remainder of calendar 1999, we intend to communicate with our
significant raw material and product vendors to determine their respective
states of year 2000 readiness.
If we, or any third parties upon which we rely, are unable to address
the year 2000 issue in a timely and successful manner, our business could be
materially adversely affected.
WE ARE EXPOSED TO PRODUCT LIABILITY CLAIMS FOR WHICH OUR INSURANCE MAY BE
INADEQUATE.
We may be exposed to liability claims arising from the use of our
products and the commercial sale of our products as well as from use of our
products or product candidates in clinical trials. These claims may be brought
by consumers, our collaborators or licensees or parties selling our products. We
currently carry product liability insurance coverage but we can provide no
assurance that this coverage will be adequate to protect us against future
product liability claims or that product liability insurance will be available
to us in the future on commercially reasonable terms, if at all. Furthermore, we
can provide no assurance that we will be able to avoid significant product
liability claims and the attendant adverse publicity.
WE ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION CONCERNING ENVIRONMENTAL
MATTERS.
We are 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 our products. We cannot completely eliminate the risk of
accidental contamination or injury from these materials. Moreover, we cannot be
sure that our collaborative partners are currently complying with the governing
standards. We also cannot be sure that we and our collaborative partners will be
in compliance with such standards in the future or that we will not incur
significant costs to comply with environmental laws and regulations in the
future. If we were to fail to comply with any of these regulations, this failure
could subject us to significant liabilities.
29
32
WE NEED TO SPEND SUBSTANTIAL FUNDS TO BECOME PROFITABLE.
We have spent, and expect to continue to spend in the future,
substantial funds to complete our planned product development efforts, expand
our sales and marketing activities and expand our manufacturing operations. We
expect that our existing capital resources, together with the net proceeds from
this offering, will be adequate to fund our operations through calendar year
2000, but we cannot guarantee that this will be the case.
Our future capital requirements and the adequacy of available funds
will depend on numerous factors, including:
- the successful commercialization of our existing products;
- progress in our product development efforts;
- progress with regulatory affairs activities;
- the cost and timing of expansion of manufacturing
operations;
- the expansion of our European, African and Middle Eastern
sales operations with Abbott;
- the growth and success of effective sales and marketing
activities;
- successful relocation to our new facility;
- the cost of filing, prosecuting, defending and enforcing
patent claims and other intellectual property rights; and
- the development of strategic alliances for the marketing
of our products.
If funds generated from our operations, together with our existing
capital resources, are insufficient to meet current or planned operating
requirements, we will have to obtain additional funds through equity or debt
financing, strategic alliances with corporate partners and others, or through
other sources. We do not have any committed sources of additional financing, and
we cannot provide assurance that additional funding, if necessary, will be
available on acceptable terms, if at all. If adequate funds are not available,
we may have to delay, scale-back or eliminate certain aspects of our operations
or attempt to obtain funds through arrangements with collaborative partners or
others. This may result in the relinquishment of our rights to certain of our
technologies, product candidates, products or potential markets. Therefore, the
inability to obtain adequate funds could have a material adverse impact on our
business, financial condition and results of operations.
CONTROL BY MANAGEMENT
As of September 10, 1999, our Chairman and Chief Executive Officer
and our President, Chief Operating Officer and Chief Financial Officer
beneficially own an aggregate of approximately 37.7% of our outstanding shares
of Common Stock. As a result, these officers, acting together, effectively
control the election of directors and matters requiring approval by our
stockholders.
ANTITAKEOVER CONSIDERATIONS
Our 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. Our Certificate of Incorporation also
provides for staggered terms for members of the board of directors. We are
subject to provisions of Delaware corporate law which, subject to certain
exceptions, will prohibit us from engaging in any "business combination" with a
person who, together with affiliates and associates, owns 15% or more of our
Common Stock (referred to as 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, our Bylaws establish an advance notice procedure for stockholder
proposals and for nominating candidates for election as directors. These
provisions of Delaware law and of our Certificate of Incorporation and Bylaws
may have the effect of delaying, deterring or preventing a change in our
control, may 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.
30
33
ITEM 2. PROPERTIES
Due to our recent and expected future growth, on March 2, 1998, we
entered into a lease for two buildings, under construction, in Gaithersburg,
Maryland, comprising a total of approximately 90,000 square-feet. We intend to
relocate our operation to this new facility in December 1999. The lease for the
new facility has a term of ten years, and we have two options to extend the term
for a five-year period each.
Our current executive office and manufacturing facility is located in
Beltsville, Maryland. The lease on this 19,780 square-foot facility expires upon
completion of the new facility. In addition, we currently lease a 9,286
square-foot research and development facility in Silver Spring, Maryland on a
month-to-month basis. We will move operations from both of these facilities to
the Gaithersburg, Maryland facility.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material legal proceedings and are not
aware of any threatened litigation that could have a material adverse effect on
our business, financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF OUR STOCKHOLDERS
Not applicable.
31
34
EXECUTIVE OFFICERS OF DIGENE
NAME AGE POSITIONS WITH THE COMPANY
Evan Jones(1) 42 Chief Executive Officer and Chairman of the Board
Charles M. Fleischman(2) 41 President, Chief Operating Officer and Chief Financial
Officer
Robert McG. Lilley(3) 54 Senior Vice President, Global Sales and Marketing
Jeanmarie Curley(4) 39 Vice President, Manufacturing
Attila T. Lorincz, Ph.D.(5) 44 Vice President, Research and Development and Scientific
Director
William J. Payne, Jr., Ph.D.(6) 49 Vice President, Development
Donna Marie Seyfried(7) 41 Vice President, Business Development
Joseph P. Slattery(8) 34 Vice President, Finance and Controller
- ---------------------
(1) Mr. Jones has served as our Chief Executive Officer since Armonk
Partners acquired a controlling interest in Digene in July 1990 and
as Chairman of the Board since September 1995. He previously served
as our President from July 1990 until June 1999.
(2) Mr. Fleischman has served as our President since June 1999, as Chief
Financial Officer since March 1996 and as Chief Operating Officer
since September 1995. He previously served as our Executive Vice
President from July 1990, when Armonk Partners acquired a
controlling interest in Digene, to June 1999.
(3) Mr. Lilley has served as our Senior Vice President, Global Sales and
Marketing since June 1999, and before that as Vice President, Sales
& Marketing at Digene from July 1998 until June 1999, and as General
Manager for Digene Europe from March 1997 until July 1998. From
September 1994 to February 1997, Mr. Lilley was General Manager for
Europe, Middle East & Africa for Alltel Healthcare Information
Services.
(4) Ms. Curley has served as our Vice President, Manufacturing since
April 1998, and from December 1990 until April 1998, she was our
Director of Manufacturing.
(5) Dr. Lorincz has served as our Vice President, Research and
Development and Scientific Director since December 1990. His
research career includes postdoctoral fellowships at the University
of California. He also serves on a number of advisory committees and
is an Adjunct Associate Professor in the Georgetown University
Medical School Department of Pathology.
(6) Dr. Payne has served as our 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 and from July 1993 to July 1995, he was Director of
Research and Development in the IVD Diagnostic Medical division of
Sanofi Diagnostic Pasteur.
(7) Ms. Seyfried has served as our Vice President, Business Development
since October 1996. Ms. Seyfried served as Senior Director, Business
Development of The Perkin-Elmer Corporation from March 1993 to
September 1996.
(8) Mr. Slattery has served as our Vice President, Finance and
Controller since April 1998 and as Controller from February 1996 to
April 1998. From March 1995 to February 1996, Mr. Slattery was
Director, Business Management, for I-NET, Inc., a computer services
company, and from April 1994 to March 1995, he was the Managing
Principal of Payne, Slattery and Company, a management consulting
firm.
32
35
PART II
ITEM 5. MARKET FOR OUR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since our initial public offering of common stock on May 22, 1996,
our common stock has been traded on the Nasdaq National Market under the symbol
"DIGE." The following table sets forth, for the fiscal quarters indicated, the
high and low bid prices for our common stock, as reported by the Nasdaq National
Market.
High Low
1999
----
Fourth quarter................................................... $ 15 1/8 $ 6 1/4
Third quarter.................................................... 9 1/8 5 1/4
Second quarter................................................... 7 1/8 5 5/8
First quarter.................................................... 11 6 1/2
1998
----
Fourth quarter................................................... 11 3/16 7 3/8
Third quarter.................................................... 11 3/8 6 5/8
Second quarter................................................... 13 3/8 8 1/4
First quarter.................................................... 15 1/4 12
On September 10, 1999, the closing sale price for the Common Stock,
as reported by the Nasdaq National Market was $13 7/8. As of September 10, 1999,
our Common Stock was held by 169 holders of record.
We have never paid dividends on our Common Stock and do not
anticipate paying any cash dividends on our Common Stock in the foreseeable
future.
(a) Recent Sales of Unregistered Securities.
Since July 1, 1998, in transactions which were exempt from
registration pursuant to Section 4(2) of the Securities Act and Rule 701
promulgated under the Securities Act, Digene issued options to certain
employees, directors, consultants and others to purchase an aggregate of
933,250 shares of our Common Stock at prices per share ranging from $6.19 to
$11.19. Between July 1, 1998 and September 10, 1999, 32 of such employees,
consultants and others exercised options to purchase an aggregate of 286,463
shares at an aggregate price of $406,043.
On July 1, 1998, we issued 181,884 shares of our Common Stock as
consideration for our purchase of all the outstanding capital stock of Viropath
B.V. We acquired these shares from three Dutch individuals and one Dutch
foundation. In addition, we granted options to purchase an aggregate of 50,000
shares of our Common Stock to the three Viropath individual shareholders in
connection with their execution of consulting agreements with us. One-fifth of
these options became exercisable on June 30, 1999 and the remaining options will
become exercisable in equal installments on each of June 30, 2000, 2001, 2002
and 2003. All of these options are exercisable at a price of $9.75 per share.
The options expire on June 29, 2008.
(b) Use of proceeds from Registered Securities.
Not applicable.
33
36
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below with
respect to Digene's Consolidated Statements of Operations for the fiscal years
ended June 30, 1997, 1998 and 1999 and with respect to Digene's Consolidated
Balance Sheets at June 30, 1998 and 1999 are derived from the audited
Consolidated Financial Statements of Digene which are included elsewhere in this
Form 10-K. Consolidated Statements of Operations data for the fiscal years ended
June 30, 1995 and 1996 and Consolidated Balance Sheet data at June 30, 1995,
1996 and 1997 are derived from Consolidated Financial Statements of Digene not
included herein. The selected consolidated financial data set forth below is
qualified in its entirety 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 Form 10-K.
FISCAL YEAR ENDED JUNE 30,
1995 1996 1997
-----------------------------------------------------------
(in thousands, except per share loss)
Consolidated Statement of Operations Data:
Revenues:
Product sales $ 5,413 $ 6,359 $ 9,434
Research and development contracts 749 381 626
-----------------------------------------------------------
Total revenues 6,162 6,740 10,060
Costs and expenses:
Cost of product sales 2,652 2,895 3,441
Research and development 1,856 2,430 4,131
Selling and marketing 1,375 2,095 5,236
General and administrative 1,245 1,792 4,412
Amortization of intangible assets 330 248 241
-----------------------------------------------------------
Loss from operations (1,296) (2,720) (7,401)
Other income (expense) 14 40 (36)
Interest expense (277) (207) (84)
Interest income 45 252 1,527
-----------------------------------------------------------
Loss from operations before income taxes (1,514) (2,635) (5,994)
Provision for income taxes -- -- --
-----------------------------------------------------------
Net loss before cumulative effect of a
change in accounting principle (1,514) (2,635) (5,994)
Cumulative effect of a change
in accounting principle -- -- --
-----------------------------------------------------------
Net loss $ (1,514) $ (2,635) $ (5,994)
-----------------------------------------------------------
Basic and diluted net loss per share(1) $ (4.11) $ (1.71) $ (0.53)
-----------------------------------------------------------
Weighted average shares outstanding(1) 368 1,545 11,394
AT JUNE 30,
1995 1996 1997
-----------------------------------------------------------
(in thousands)
Consolidated Balance Sheet Data:
Working capital $ 2,107 $ 29,616 $ 21,299
Total assets 4,485 33,174 30,207
Long-term debt, less current maturities 2,812 152 553
Redeemable Convertible Preferred Stock 13,115 -- --
Accumulated deficit (16,698) (19,333) (25,327)
Total stockholders' equity (deficit) (13,004) 30,119 24,266
FISCAL YEAR ENDED JUNE 30,
1998 1999
---------------------------------------
(in thousands, except per share loss)
Consolidated Statement of Operations Data:
Revenues:
Product sales $ 11,980 $ 17,014
Research and development contracts 29 453
-------------------------------------
Total revenues 12,009 17,467
Costs and expenses:
Cost of product sales 3,848 6,112
Research and development 5,285 4,643
Selling and marketing 10,057 10,531
General and administrative 5,690 5,957
Amortization of intangible assets 386 150
-------------------------------------
Loss from operations (13,257) (9,926)
Other income (expense) (83) (184)
Interest expense (164) (30)
Interest income 1,378 985
-------------------------------------
Loss from operations before income taxes (12,126) (9,155)
Provision for income taxes 48 149
-------------------------------------
Net loss before cumulative effect of a
change in accounting principle (12,174) (9,304)
Cumulative effect of a change
in accounting principle (1,915) --
-------------------------------------
Net loss $ (14,089) $ (9,304)
-------------------------------------
Basic and diluted net loss per share(1) $ (1.06) $ (0.65)
-------------------------------------
Weighted average shares outstanding(1) 13,236 14,354
AT JUNE 30,
1998 1999
-------------------------------------
(in thousands)
Consolidated Balance Sheet Data:
Working capital $ 28,428 $ 20,499
Total assets 35,440 28,108
Long-term debt, less current maturities -- --
Redeemable Convertible Preferred Stock -- --
Accumulated deficit (39,416) (48,720)
Total stockholders' equity (deficit) 31,099 23,687
(1) Computed on the basis described in Note 2 of Notes to Consolidated Financial
Statements.
34
37
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with our Consolidated Financial
Statements and the related Notes to such Consolidated Financial Statements also
included in this Form 10-K. Some of the information that follows are not
statements of historical fact, and reflect our intent, belief or expectations
regarding the anticipated effect of events, circumstances and trends. Such
statements should be considered as forward looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. Although we believe
that our expectations are based on reasonable assumptions within the bounds of
our knowledge of our business and operations, there can be no assurance that
actual results will not differ materially from our expectations. Factors that
might cause or contribute to such differences include: uncertainty of future
profitability and cash generation from operations; manufacturing delays while
awaiting regulatory approval for our new manufacturing facility; uncertainty of
clinical trial results for our products under development; uncertainty of market
acceptance of our products by the worldwide medical community; risks inherent in
international transactions, including those relating to our expansion in Europe,
Brazil and elsewhere; our limited sales and marketing experience; the extent of
future expenditures for sales and marketing programs; dependence on third-party
reimbursement from government entities, managed care organizations, and private
insurance plans; dependence on Abbott Laboratories as our principal European
distributor; delay in or failure to obtain regulatory approvals for our products
in development; uncertainty regarding patents and proprietary rights in
connection with our products; our ability to obtain requisite additional
financing to fund our operations beyond calendar 2000; and other factors as set
forth under the caption "Additional Considerations" beginning on page 21.
OVERVIEW
We develop, manufacture and market our patented Hybrid Capture(R)
Gene Analysis System and tests, and we are commercializing these Hybrid Capture
products in three areas: women's health testing, blood virus testing, and
pharmaceutical clinical research. Our primary focus is in women's health where
our lead product is the only FDA approved DNA test for human papillomavirus, or
HPV, which is associated with more than 99% of cervical cancers. We are the
world's leading supplier of HPV tests. Our Hybrid Capture II HPV Test received
PMA marketing approval from the FDA in March 1999. Internationally, our
portfolio of women's health tests is now cleared for sale in almost every major
European country and in Brazil and Argentina. Our objective in the women's
health area is to become the world leader in gene-based testing for women's
cancers and infectious diseases. We have also developed a family of unique blood
virus testing products based on our Hybrid Capture System including tests for
cytomegalovirus (CMV) and hepatitis B. Our CMV Test is the only CMV DNA test
cleared by the FDA; we received 510(k) clearance in October 1998.
Internationally, we are working to establish our HPV Test as the
standard for cervical cancer screening. Pursuant to a Marketing and Distribution
Agreement that became effective in May 1999, our women's health and blood virus
tests are marketed in Europe by Abbott Laboratories and, once FDA clearance is
received, our chlamydia and gonorrhea tests will be marketed by Abbott
Laboratories in the United States. We currently market our Hybrid Capture
products in the United States through a direct sales force supported by
technical and customer service representatives. In the United States, we are
currently marketing our HPV Test for the follow-up screening of women with
equivocal Pap smears. In the pharmaceutical clinical research market we are
using the unique capabilities of our Hybrid Capture System to provide us access
to complimentary early-stage technologies and to link our tests with novel
therapeutics and vaccines.
35
38
We have incurred substantial operating losses since inception,
resulting principally from expenses associated with our research and development
programs, including preclinical studies, clinical trials and regulatory
submissions for our products and the expansion of our manufacturing facilities
and our global sales and marketing activities. We expect such operating losses
to continue at least through fiscal 2000 as we continue our product development
efforts, seek FDA and foreign regulatory approvals of our products, expand our
manufacturing capabilities and expand our sales and marketing activities. In
March 1998, we entered into a lease agreement for a new facility where we will
consolidate our research and development facility, our corporate office and our
manufacturing facility into one location in Gaithersburg, Maryland, to which we
expect to relocate in December 1999. This new facility will result in increased
operating expenses.
Our quarterly operating results have fluctuated significantly in the
past and we believe 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 in the United States and Europe, and during the December
holiday season. In addition, our quarterly operating results, as well as annual
results, may fluctuate from period to period due to
- the degree of market acceptance of our products,
- competition, the timing of regulatory approvals and other
regulatory announcements,
- the volume and timing of orders from and shipments to
distributors,
- variations in our distribution channels,
- the timing of new product announcements and introductions by us
and our competitors,
- product obsolescence resulting from new product introductions
and other factors, many of which are outside our control. Due to one or more of
these factors, in one or more future quarters our results of operations may fall
below the expectations of securities analysts and investors. In that event, the
market price of our common stock could be materially and adversely affected.
RESULTS OF OPERATIONS
COMPARISON OF FISCAL YEAR ENDED JUNE 30, 1999 TO FISCAL YEAR ENDED
JUNE 30, 1998
Product sales increased to $17,014,000 in fiscal 1999 from
$11,980,000 in fiscal 1998. The increase was due primarily to increased sales of
our Hybrid Capture tests, primarily HPV tests and related equipment, partially
offset by lower sales of our non-core products. We anticipate that sales of our
HPV tests will account for a substantial portion of our product sales for at
least the next two fiscal years.
Research and development contract revenues increased to $453,000 in
fiscal 1999 from $29,000 in fiscal 1998 due primarily to our performance during
the entire fiscal year under a major research contract with the National
Institutes of Health for the development of tests for herpes simplex virus. We
anticipate that fiscal 2000 research and development contract revenues will
remain approximately the same as they were in fiscal 1999.
36
39
Cost of product sales increased to $6,112,000 in fiscal 1999 from
$3,848,000 in fiscal 1998 due primarily to increased sales volume. Gross margin
on product sales decreased to 64.1% in fiscal 1999 from 67.9% in fiscal 1998.
This decrease was due primarily to increased sales of lower-margin equipment and
increased write-offs for inventory obsolescence, partially offset by improved
manufacturing efficiencies and product pricing. We expect gross margins to
fluctuate moderately based on product mix in the coming years.
Research and development expenses decreased to $4,643,000 in fiscal
1999 from $5,285,000 in fiscal 1998 due primarily to reductions in expenditures
for clinical trials and laboratory supplies, partially offset by higher
personnel costs. We expect research and development expenses to increase
moderately for the next few fiscal years.
Selling and marketing expenses increased to $10,531,000 in fiscal
1999 from $10,057,000 in fiscal 1998 due to increases in European sales and
marketing programs, partially offset by decreases in expenditures in the United
States associated with lower personnel costs. We expect selling and marketing
expenses to decrease over the next fiscal year as a result of the marketing and
distribution activities performed in Europe, the Middle East and Africa by
Abbott under our Marketing and Distribution Agreement rather than through the
expansion of a Digene sales and marketing force in those areas. Thereafter, we
expect selling and marketing expenses to increase moderately for the following
few fiscal years.
General and administrative expenses increased to $5,957,000 in
fiscal 1999 from $5,690,000 in fiscal 1998, due primarily to costs associated
with the planned December 1999 move to our new facility in Gaithersburg,
Maryland, as well as increases in professional services expense, partially
offset by a reduction in bad debt expense. We expect general and administrative
expenses to increase moderately for the following few fiscal years.
Amortization of intangible assets decreased to $150,000 in fiscal
1999 from $386,000 in fiscal 1998, due primarily to the write-off of certain
intangible assets in fiscal 1998, partially offset by amortization expense
attributable to goodwill associated with our acquisition of Viropath, B.V. on
July 1, 1998. We expect amortization of intangible assets to remain constant in
the next fiscal year.
Interest expense decreased to $30,000 in fiscal 1999 from $164,000
in fiscal 1998 due primarily to the repayment in December 1998 of debt incurred
in February 1997.
Interest income decreased to $985,000 in fiscal 1999 from $1,378,000
in fiscal 1998 due primarily to lower average cash and cash equivalents balances
primarily as a result of negative cash flows from operations.
COMPARISON OF FISCAL YEAR ENDED JUNE 30, 1998 TO FISCAL YEAR ENDED
JUNE 30, 1997
Product sales increased to $11,980,000 in fiscal 1998 from
$9,434,000 in fiscal 1997. The increase was due primarily to increased sales of
our Hybrid Capture tests, primarily HPV, partially offset by lower sales of
equipment and non-core products.
Research and development contract revenues decreased to $29,000 in
fiscal 1998 from $626,000 in fiscal 1997 due primarily to substantial completion
of contract activities during fiscal 1998.
37
40
Cost of product sales increased to $3,848,000 in fiscal 1998 from
$3,441,000 in fiscal 1997 due to increased sales volume. Gross margin on product
sales increased to 67.9% in fiscal 1998 from 63.5% in fiscal 1997. This increase
was due primarily to sales of higher margin Hybrid Capture tests and increases
in overhead absorption and unit pricing.
Research and development expenses increased to $5,285,000 in fiscal
1998 from $4,131,000 in fiscal 1997 due to the hiring of additional research and
development personnel and increases in clinical trial activity related to the
development of our blood virus and sexually transmitted disease tests and to the
further development of our Hybrid Capture technology.
Selling and marketing expenses increased to $10,057,000 in fiscal
1998 from $5,236,000 in fiscal 1997 due to substantial increases in sales and
marketing programs, the hiring of additional selling and marketing personnel,
and other selling costs incurred under our international distribution
agreements.
General and administrative expenses increased to $5,690,000 in
fiscal 1998 from $4,412,000 in fiscal 1997, due to the hiring of additional
administrative personnel, and costs associated with our expansion into the
European and Brazilian markets.
Amortization of intangible assets increased to $386,000 in fiscal
1998 from $241,000 in fiscal 1997.
Interest expense increased to $164,000 in fiscal 1998 from $84,000
in fiscal 1997 due primarily to debt incurred in February 1997 as a result of
our expansion into the European market.
Interest income decreased to $1,378,000 in fiscal 1998 from
$1,527,000 in fiscal 1997 due primarily to lower average cash and cash
equivalents balances as a result of negative cash flows from operations,
partially offset by the interest income generated by the investment of the net
proceeds from the public offering of our common stock in October 1997.
The $1,915,000 cumulative effect of change in accounting principle
is a result of the early adoption of Statement of Position 98-5, "Reporting on
the Costs of Start-Up Activities". The write-off of the unamortized balance of
capitalized costs was incurred in connection with our acquisition of HPV
customer lists under our 1997 agreements with International Murex Technologies
Corporation to establish a Digene-direct European sales operation for our
women's health products.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, our expenses have significantly exceeded our
revenues, resulting in an accumulated deficit of approximately $48.7 million at
June 30, 1999. We have funded our operations primarily through the sale of
equity securities. At June 30, 1999, we had cash, cash equivalents and
short-term investments aggregating approximately $18,281,000. Net cash used in
our operating activities was $6,073,000 for the fiscal year ended June 30, 1999.
Capital expenditures decreased to $934,000 in fiscal 1999 from
$2,481,000 in fiscal 1998, due primarily to changes in our distribution
agreements requiring a smaller investment in equipment. In March 1998, we
entered into a lease agreement for a new facility in Gaithersburg, Maryland, to
which we expect to relocate in December 1999. The integration of our operations
into this new facility may result initially in inefficiencies and delays.
Specifically, we may encounter difficulties in expanding and/or moving our
manufacturing operations.
38
41
We do not have any bank financing arrangements.
We anticipate that working capital requirements will increase
moderately for the foreseeable future due to increasing accounts receivable as a
result of expected revenue growth. We have incurred negative cash flows from
operations since our inception, and have expended, and expect to continue to
expend in the future, substantial funds to complete our planned product
development efforts, expand our sales and marketing activities and expand our
manufacturing capabilities. We expect that our existing capital resources will
be adequate to fund our operations through calendar 2000. We cannot give
assurances that we will not need to consume a significant amount of our
available resources more rapidly than we presently anticipate. Our future
capital requirements and the adequacy of available funds will depend on numerous
factors, including the successful commercialization of our products, progress in
our product development efforts and the magnitude and scope of such efforts,
progress with preclinical studies and clinical trials, progress in our
regulatory affairs activities, the cost and timing of expansion of our
manufacturing capabilities, 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 our products. To the extent that our existing
capital resources and funds generated from operations are insufficient to meet
current or planned operating requirements, we will be required to obtain
additional funds through equity or debt financing, strategic alliances with
corporate partners and others, or through other sources. Although we expect to
seek additional equity financing, we do 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, we may be required to delay, scale back or eliminate certain
aspects of our operations or attempt to obtain funds through arrangements with
collaborative partners or others that may require us to relinquish rights to
certain of our technologies, product candidates, products or potential markets.
If adequate funds are not available, our business, financial condition and
results of operations will be materially and adversely affected.
On July 1, 1998, we purchased all of the outstanding capital stock
of Viropath B.V., a company with limited liability registered in Amsterdam, The
Netherlands, for total consideration of 181,884 shares of our common stock. In
addition, we are obligated to pay royalties, not to exceed $1,000,000, on future
sales of Viropath's licensed HPV products in the field of cervical cancer
testing. We also granted options to purchase an aggregate of 50,000 shares of
our common stock to the three Viropath individual shareholders in connection
with their execution of consulting agreements with us. The options were
compensatory options and were valued on July 1, 1998 at approximately $316,500.
This amount will be expensed ratably over five fiscal years.
YEAR 2000 READINESS DISCLOSURE
We are working to resolve the potential impact of the year 2000 on
the ability of our computerized information programs and systems and certain
manufacturing and other equipment to accurately process information that may be
date-sensitive. Any of our technology that recognizes a date using "00" as the
year 1900 rather than the year 2000 could result in errors or system failures.
We have substantially completed an assessment of our manufacturing
and research equipment, computer programs and telephone systems and have
identified the mission-critical equipment, computer programs and systems that
were not year 2000 compliant, at least 80% of which have been upgraded and
vendor-certified for year 2000 compliance. We have also tested a majority of
such mission-critical equipment, computer programs and systems for year 2000
compliance. We expect to complete our
39
42
upgrade and replacement activities by November 1999 and complete the remainder
of our testing activities by December 1999. During the remainder of calendar
1999, we intend to communicate with our significant raw material and product
vendors to determine their respective states of year 2000 readiness.
In connection with our planned move to the new facility in
Gaithersburg, Maryland in December 1999, we have upgraded or replaced the
mission-critical computer programs, systems and manufacturing and other
equipment with new computer programs, systems and equipment which the suppliers
have certified or will certify to be year 2000 compliant. In anticipation of the
possibility that our relocation will not occur in 1999, which we do not expect,
we have also made the necessary year 2000-related changes to the few systems,
such as our existing telephone system, that we do not intend to relocate to the
new facility and have developed contingency plans. We do not expect that
continuing our operations in our existing space, if necessary, would be
materially impacted by the advent of the year 2000.
We are in the process of testing our upgraded or replaced computer
programs, systems and equipment and will continue the testing throughout the
remainder of calendar 1999. Based on information developed to date as a result
of our assessment and testing efforts, we do not anticipate that the total cost
of upgrading or replacing our computer programs, systems and equipment will be
material. In anticipation of possible year 2000-related failures and possible
delays in our manufacturing processes in connection with our planned relocation,
we are also formulating contingency plans, including the stockpiling of product
inventory during the second quarter of fiscal 2000. If we, or any third parties
upon which we rely, are unable to address the year 2000 issue in a timely and
successful manner, our business could be materially adversely affected.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Digene is subject to market risk associated with changes in foreign
currency exchange rates and interest rates. Our exchange rate risk is limited to
our operations in Europe and South America. We do not believe that the impact
from foreign currency exchange rate fluctuations will have a material impact on
our financial statements. The net impact of foreign exchange activities on
earnings was immaterial for the years ended June 30, 1997, 1998 and 1999.
Interest rate exposure is primarily limited to the $4.3 million of short-term
investments owned by us. Such securities are debt instruments which generate
interest income for Digene on excess cash balances. We do not actively manage
the risk of interest rate fluctuations; however, such risk is mitigated by the
relatively short term, less than 12 months, nature of these investments. We do
not consider the present rate of inflation to have a significant impact on its
business.
40
43
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL 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, 1998 and 1999, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended June 30, 1999. 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, 1998 and 1999, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended June 30, 1999, in conformity with generally accepted accounting
principles.
As discussed in Note 2 of Notes to Consolidated Financial
Statements, in 1998 the Company changed its method of accounting for costs
related to start-up activities.
/s/ Ernst & Young LLP
Washington, DC
August 20, 1999
41
44
DIGENE CORPORATION
CONSOLIDATED BALANCE SHEETS
JUNE 30,
1998 1999
----------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 18,330,803 $ 13,934,415
Short-term investments 7,181,572 4,347,084
Accounts receivable, less allowance of approximately $209,000
and $170,000 at June 30, 1998 and 1999, respectively 3,072,224 2,356,537
Inventories (Note 6) 3,557,289 2,894,210
Prepaid expenses and other current assets 560,706 1,388,224
--------------------------------
Total current assets 32,702,594 24,920,470
Property and equipment, net (Note 7) 2,627,244 1,737,078
Intangible assets, net (Note 5) -- 1,350,774
Deposits 109,700 100,157
--------------------------------
Total assets $ 35,439,538 $ 28,108,479
================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,424,245 $ 2,503,387
Accrued expenses 542,064 809,811
Accrued payroll 755,490 1,108,236
Current maturities of long-term debt (Note 9) 552,717 --
--------------------------------
Total current liabilities 4,274,516 4,421,434
Accrued rent 54,340 --
Deferred rent 11,980 --
Commitments (Notes 10, 11 and 16)
Stockholders' equity:
Preferred stock, $0.01 per value, 1,000,000 shares authorized, no shares
issued and outstanding
Common stock, $0.01 par value, 50,000,000 shares authorized, 14,117,308 and
14,565,937 shares issued and outstanding at June 30, 1998 and 1999,
respectively 141,173 145,659
Additional paid-in capital 70,373,310 72,514,583
Deferred stock compensation -- (253,200)
Accumulated deficit (39,415,781) (48,719,997)
--------------------------------
Total stockholders' equity 31,098,702 23,687,045
--------------------------------
Total liabilities and stockholders' equity $ 35,439,538 $ 28,108,479
================================
See accompanying notes.
42
45
DIGENE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30,
1997 1998 1999
------------------------------------------------------
Revenues:
Product sales $ 9,434,183 $ 11,980,445 $ 17,013,735
Research and development contracts 626,096 28,500 453,364
----------------------------------------------------
Total revenues 10,060,279 12,008,945 17,467,099
Costs and expenses:
Cost of product sales 3,440,963 3,847,725 6,111,774
Research and development 4,131,090 5,284,761 4,643,458
Selling and marketing 5,236,246 10,057,596 10,531,187
General and administrative 4,411,899 5,689,783 5,956,911
Amortization of intangible assets 240,902 385,679 150,086
----------------------------------------------------
Loss from operations (7,400,821) (13,256,599) (9,926,317)
Other income (expense):
Other expense (36,825) (83,047) (183,394)
Interest expense (83,777) (163,625) (30,144)
Interest income 1,526,967 1,377,665 984,708
----------------------------------------------------
Loss from operations before income taxes (5,994,456) (12,125,606) (9,155,147)
Provision for income taxes -- 48,463 149,069
----------------------------------------------------
Net loss before cumulative effect of a change in accounting principle (5,994,456) (12,174,069) (9,304,216)
Cumulative effect of a change in accounting principle -- (1,914,499) --
----------------------------------------------------
Net loss $ (5,994,456) $(14,088,568) $ (9,304,216)
====================================================
Basic and diluted net loss per share $(0.53) $(1.06) $(0.65)
====================================================
Weighted average shares outstanding 11,393,978 13,235,901 14,353,720
====================================================
See accompanying notes.
43
46
DIGENE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ADDITIONAL DEFERRED
COMMON STOCK PAID-IN STOCK
SHARES AMOUNT CAPITAL COMPENSATION
-------------------------------------------------------------------
Balance at June 30, 1996 11,303,705 $ 113,037 $ 49,339,001 $ --
Exercise of Common Stock options 275,825 2,758 138,620 --
Net loss -- -- -- --
-------------------------------------------------------------------
Balance at June 30, 1997 11,579,530 115,795 49,477,621 --
Issuance of Common Stock,
net of offering costs of $1,845,585 2,250,000 22,500 20,631,915 --
Exercise of Common Stock options 287,778 2,878 263,774 --
Net loss -- -- -- --
-------------------------------------------------------------------
Balance at June 30, 1998 14,117,308 141,173 70,373,310 --
Exercise of Common Stock options 266,745 2,667 326,595 --
Issuance of Common Stock in
connection with the acquisition
Of Viropath 181,884 1,819 1,498,178 --
Grant of Common Stock options
to non-employees -- -- 316,500 (316,500)
Compensatory stock options
earned by nonemployees -- -- -- 63,300
Net loss -- -- -- --
-------------------------------------------------------------------
Balance at June 30, 1999 14,565,937 $ 145,659 $ 72,514,583 $ (253,200)
===================================================================
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
-------------------------------------
Balance at June 30, 1996 $(19,332,757) $ 30,119,281
Exercise of Common Stock options -- 141,378
Net loss (5,994,456) (5,994,456)
-------------------------------------
Balance at June 30, 1997 (25,327,213) 24,266,203
Issuance of Common Stock,
net of offering costs of $1,845,585 -- 20,654,415
Exercise of Common Stock options -- 266,652
Net loss (14,088,568) (14,088,568)
-------------------------------------
Balance at June 30, 1998 (39,415,781) 31,098,702
Exercise of Common Stock options -- 329,262
Issuance of Common Stock in
connection with the acquisition
of Viropath -- 1,499,997
Grant of Common Stock options
to non-employees -- --
Compensatory stock options
earned by nonemployees -- 63,300
Net loss (9,304,216) (9,304,216)
-------------------------------------
Balance at June 30, 1999 $(48,719,997) $ 23,687,045
=====================================
See accompanying notes.
44
47
DIGENE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30,
1997 1998 1999
----------------------------------------------------
OPERATING ACTIVITIES
Net loss $ (5,994,456) $(14,088,568) $ (9,304,216)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization of property and equipment 461,603 1,068,211 951,364
Amortization of intangible assets 240,902 385,679 150,086
Compensation expense related to stock options -- -- 63,300
Cumulative effect of a change in accounting principle -- 1,914,499 --
Start-up expenses 833,179 -- --
Changes in operating assets and liabilities:
Accounts receivable (2,094,096) 647,918 715,687
Inventories (618,834) (1,132,122) 1,547,736
Prepaid expenses and other current assets (146,933) (114,338) (827,518)
Deposits (22,102) 37,648 (3,241)
Accounts payable 241,476 330,352 79,142
Accrued expenses 250,179 (229,973) 267,747
Accrued payroll 395,794 152,935 352,746
Accrued rent (49,289) (46,278) (54,340)
Deferred rent (24,696) (25,338) (11,980)
---------------------------------------------------
Net cash used in operating activities (6,527,273) (11,099,375) (6,073,487)
INVESTING ACTIVITIES
Purchases of short-term investments (15,045,827) (14,634,204) (8,183,962)
Sales of short-term investments 8,452,522 18,513,915 11,018,450
Capital expenditures (971,111) (2,480,907) (933,934)
Acquisition of customer lists (1,000,000) -- --
Additions to goodwill and intangible assets (3,363) (4,321) --
---------------------------------------------------
Net cash (used in) provided by investing activities (8,567,779) 1,394,483 1,900,554
FINANCING ACTIVITIES
Net proceeds from issuance of Common Stock -- 20,654,415 --
Exercise of Common Stock options 141,378 266,652 329,262
Principal repayments on debt (700,787) (1,338,236) (552,717)
---------------------------------------------------
Net cash (used in) provided by financing activities (559,409) 19,582,831 (223,455)
---------------------------------------------------
Net (decrease) increase in cash and cash equivalents (15,654,461) 9,877,939 (4,396,388)
Cash and cash equivalents at beginning of year 24,107,325 8,452,864 18,330,803
---------------------------------------------------
Cash and cash equivalents at end of year $ 8,452,864 $ 18,330,803 $ 13,934,415
===================================================
Supplemental cash flow information
Interest paid $ 17,000 $ 206,000 $ 30,000
===================================================
See accompanying notes.
45
48
DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS
Digene Corporation (the "Company" or "Digene") was incorporated in
the state of Delaware in 1987. The Company develops, manufactures and markets
its proprietary Hybrid Capture(R) Gene Analysis System and tests for the
detection, screening and monitoring of human diseases. The Company's products
are designed to help improve clinical outcomes and reduce the overall cost of
disease management. The Company's lead product, the Hybrid Capture II HPV DNA
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 cytomegalovirus and hepatitis B
virus, and tests for the detection of two of the most common sexually
transmitted infections, chlamydia and gonorrhea.
On June 28, 1996, Digene Corporation entered into a joint venture
agreement with a Brazilian national to establish Digene do Brasil LTDA, a
majority-owned subsidiary of Digene Corporation. On October 29, 1997, the
Company established a wholly-owned subsidiary, Digene B.V., for the distribution
of the Company's products in Europe. On March 3, 1998, the Company established a
wholly-owned subsidiary, Digene Europe, for the marketing of the Company's
products in Europe. On July 1, 1998, the Company completed the acquisition of
Viropath B.V., a company with limited liability, registered in Amsterdam, The
Netherlands (See Note 5).
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
and its subsidiaries. All significant intercompany transactions have been
eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash equivalents, which are stated at cost, consist of highly liquid
investments with original maturities of three months or less.
46
49
DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, 1998 and
1999, short-term investments are stated at cost, which approximates market.
CONCENTRATION OF CREDIT RISK
The Company performs ongoing credit evaluations of its customers'
financial condition and generally does not require collateral. The Company
maintains reserves for credit losses, and such losses have been within
management's expectations.
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.
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.
SIGNIFICANT CUSTOMERS
For the years ended June 30, 1997, 1998 and 1999, the Company
generated 42%, 42%, and 50%, respectively, of total revenues from a single
customer.
COMPREHENSIVE INCOME
Effective July 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130").
SFAS No. 130 establishes new rules for the reporting and display of
comprehensive income and its components. Comprehensive income includes all
changes in equity during a period except those resulting from the issuance of
shares of stock and distributions to stockholders. For the years ended June 30,
1997, 1998 and 1999 the Company's comprehensive loss approximates its net loss
and as such no disclosure is presented in the consolidated financial statements.
47
50
DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY VALUATION
The local currency is the functional currency for the Company's
international subsidiaries and, as such, assets and liabilities are translated
into U.S. dollars at year-end exchange rates. Income and expense items are
translated at average exchange rates during the year. Translation adjustments
resulting from changes in exchange rates are not considered material and have
been recognized in the Consolidated 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 $188,000, $215,000 and $309,000 during fiscal
1997, 1998 and 1999, 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
In 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No.
128"). SFAS No. 128 replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities, except as required by Staff
Accounting Bulletin No. 98 ("SAB 98"). The definition of diluted earnings per
share is very similar to the previous definition of fully diluted earnings per
share. All net loss per share amounts for all periods have been presented, and,
where appropriate, restated to conform to the SFAS No. 128 requirements.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation in accordance
with the provisions of APB No. 25 and has provided the pro forma disclosures of
net loss and net loss per share in accordance with Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
No. 123") in Note 13 of these Notes to Consolidated Financial Statements.
48
51
DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CHANGE IN ACCOUNTING PRINCIPLE
In April 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
98-5, "Reporting the Costs of Start-up Activities" ("SOP 98-5"), which requires
that costs related to start-up activities be expensed as incurred. Prior to
1998, the Company capitalized $2,497,172 for the acquisition of Murex's HPV
customer lists related to the Customer Transfer Agreement (See Note 4).
Effective April 1, 1998, the Company elected early adoption of SOP 98-5. The
effect of adoption of SOP 98-5 was to increase net loss by $1,914,499 to expense
costs that had been capitalized prior to 1998.
RECLASSIFICATION
Certain 1997 and 1998 balances have been reclassified to conform
with the 1999 presentation.
3. MARKETING AND DISTRIBUTION AGREEMENT
On April 17, 1998, Abbott Laboratories ("Abbott") and International
Murex Technologies Corporation (together with its affiliates, "Murex") entered
into an agreement pursuant to which Abbott acquired all of the outstanding
shares of Murex's common stock. Effective May 7, 1999, the Company entered into
a Marketing and Distribution Agreement ("Abbott Agreement") with Abbott, and
thereby created an exclusive marketing alliance for Digene's Women's Health and
Blood Virus testing products in certain geographic areas. The Abbott Agreement
calls for Abbott to assume sales and marketing responsibility for all of
Digene's Hybrid Capture products in Europe, the Middle East and Africa and for
Digene's Hybrid Capture II chlamydia and gonorrhea tests in the United States.
The Abbott Agreement replaces all previous agreements between the Company and
Murex. In connection with these previous agreements, Murex owned an equity
interest in the Company. This equity interest was sold by Murex during fiscal
1998. Abbott will act as the sole distributor for Digene's HBV and HPV products
in Europe, the Middle East and Africa through December 31, 2003. In addition,
Abbott will act as the sole distributor in the United States for Digene's Hybrid
Capture chlamydia and gonorrhea tests.
4. CUSTOMER TRANSFER AGREEMENT
Effective February 1, 1997, the Company acquired Murex's HPV
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. In accordance with an
agency agreement, which was superseded by the Abbott Agreement, the Company
agreed to pay to Murex costs of approximately $853,000 over eleven months, which
costs had been expensed during the year ended June 30, 1997. The intangible
asset recorded to account for the Murex customer lists was written off during
1998 (See Note 2--"Change in Accounting Principle").
49
52
DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. ACQUISITION OF VIROPATH B.V.
On July 1, 1998, the Company issued 181,884 shares of its Common
Stock, par value $0.01 per share, as consideration for its purchase of all of
the outstanding capital stock (the "Shares") of Viropath B.V., a company with
limited liability, registered at Amsterdam, The Netherlands ("Viropath"). The
181,884 shares of the Company's Common Stock were recorded at $8.247 per share,
in accordance with the Stock Purchase Agreement, and resulted in total
consideration of approximately $1.5 million. In accordance with the Stock
Purchase Agreement, seventy percent of these shares were held in escrow until
July 1, 1999. The remaining thirty percent of these shares will be held in
escrow by the Company until January 1, 2000. In addition, the Company is
obligated to pay royalties on future sales of Viropath's licensed products, not
to exceed $1 million. Through June 30, 1999, the Company has not been required
to pay any such royalties. The acquisition was accounted for using the purchase
method and resulted in an excess of purchase price over the fair value of net
assets acquired of approximately $1.5 million, which the Company recorded as
goodwill and is amortizing over ten years using the straight-line method. As of
June 30, 1999, goodwill and the related accumulated amortization was $1,500,860
and $150,086, respectively. The results of operations of Viropath have been
consolidated with those of the Company since the date of acquisition. The
operating results of Viropath are not considered material to the consolidated
financial statements of the Company, and accordingly, pro forma financial
information has not been presented for this acquisition.
In addition, the Company granted options to purchase an aggregate of
50,000 shares of its Common Stock to the three Viropath individual shareholders
in connection with their execution of consulting agreements with the Company.
The options are exercisable in equal installments on each of June 30, 1999,
2000, 2001, 2002 and 2003 at an exercise price of $9.75 per share. The options
expire on June 29, 2008. The options were compensatory options and were valued
on July 1, 1998 at approximately $316,500. This amount will be expensed ratably
over the vesting period of the options. During fiscal 1999, the Company
recognized $63,300 of compensation expense related to these options.
6. 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,
1998 1999
------------------------------
Finished goods $ 1,341,391 $ 1,100,661
Work in process 1,773,977 1,636,552
Raw materials 780,421 894,537
------------------------------
3,895,789 3,631,750
Obsolescence reserve (338,500) (737,540)
------------------------------
$ 3,557,289 $ 2,894,210
==============================
50
53
DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. 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 five 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,
1998 1999
------------------------------
Furniture, fixtures and
office equipment $ 1,324,978 $ 1,413,735
Machinery and equipment 3,911,642 3,287,618
Leasehold improvements 930,764 925,415
------------------------------
6,167,384 5,626,768
Accumulated depreciation
and amortization (3,540,140) (3,889,690)
------------------------------
$ 2,627,244 $ 1,737,078
==============================
8. INCOME TAXES
Significant components of the provision for income taxes on
operations consist of the following:
YEAR ENDED JUNE 30,
1997 1998 1999
----------------------------------
Current:
Federal $-- $ -- $ --
State -- -- --
Foreign -- 48,463 149,069
---------------------------------
Total current -- 48,463 149,069
Deferred:
Federal -- -- --
State -- -- --
Foreign -- -- --
---------------------------------
Total deferred -- -- --
------------------------ --------
Total provision
for income taxes $-- $48,463 $149,069
=================================
There is no net tax benefit recorded for the change in accounting
principle because such benefit creates a deferred tax asset which the Company
has fully reserved.
51
54
DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES (CONTINUED)
The components of loss from operations before income taxes are as
follows:
YEAR ENDED JUNE 30,
1997 1998 1999
-------------------------------------------------
United States $ (5,923,876) $ (9,971,255) $ (9,018,900)
Foreign (70,580) (2,154,351) (136,247)
-------------------------------------------------
$ (5,994,456) $(12,125,606) $ (9,155,147)
=================================================
The following is a summary of the items which caused recorded income
taxes attributable to continuing operations to differ from taxes computed using
the statutory federal income tax rate for the years ended June 30, 1997, 1998,
and 1999:
JUNE 30,
1997 1998 1999
-------------------------------------------------
Tax benefit
at statutory rate $ (2,098,000) $ (4,244,000) $(3,204,000)
Effect of:
State income tax, net (300,000) (606,000) (458,000)
Foreign tax -- 48,463 149,069
Stock options (1,142,000) (1,005,000) (863,000)
Other (49,000) 114,000 55,000
Foreign losses
not used -- 861,000 37,000
Valuation allowance 3,589,000 4,880,000 4,433,000
-------------------------------------------------
Provision for income taxes $ -- $ 48,463 $ 149,069
=================================================
The Company's net deferred tax assets are as follows:
JUNE 30,
1998 1999
--------------------------------
Net operating loss carryforwards $ 12,636,000 $ 16,840,000
Research and development credits 828,000 1,083,000
Patent costs, net 577,000 491,000
Research and developmental
deferral, net 1,346,000 1,125,000
Murex customer lists 899,000 857,000
Other 812,000 1,568,000
--------------------------------
Deferred tax assets 17,098,000 21,964,000
Valuation allowance (17,098,000) (21,964,000)
--------------------------------
Net deferred tax assets $ -- $ --
================================
52
55
DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES (CONTINUED)
Due to the Company's net operating loss carryforwards, the Company
did not recognize a tax provision for the year ended June 30, 1997. The Company
recognized a tax provision of $48,463 and $149,070 for the years ended June 30,
1998 and 1999, respectively, which related to the Company's foreign operations.
At June 30, 1999, the Company had tax net operating loss carryforwards for
income tax purposes of approximately $42 million. Approximately $7.7 million of
the net operating loss carryforwards is attributable to exercised stock options,
the benefit of which, when realized, will directly increase additional paid-in
capital. At June 30, 1999, the Company also had research and development credit
carryforwards of approximately $1,083,000. 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 2019.
Realization of total deferred tax assets is contingent upon the generation of
future taxable income. Due to the uncertainty of realization of these tax
benefits, the Company has provided a valuation allowance for the full amount of
its deferred tax assets.
9. LONG-TERM DEBT
Long-term debt consists of the following:
JUNE 30,
1998 1999
---------------------------------
Net Notes payable to Murex (See Note 4),
net of unamortized discount $ 537,424 $ --
Note payable to lessor 15,293 -
---------------------------------
552,717 --
Current maturities of long-term debt (552,717) -
---------------------------------
Long-term debt, less current maturities $ -- $ -
---------------------------------
The unsecured notes payable to Murex arose in conjunction with the
Company's acquisition of Murex's HPV customer list (See Note 4), are
noninterest-bearing and have been discounted at 10%. The Company made payments
totaling $1,577,864, $1,420,000 and $557,750 and incurred interest expense of
$76,107, $128,830 and $20,326 for the years ended June 30, 1997, 1998 and 1999,
respectively.
The note payable to lessor represented 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. The note, in the original
principal amount of $200,000, was paid during fiscal 1999. A $75,000 certificate
of deposit, which was assigned to the lessor as collateral for the lease
obligation, will be returned to the Company.
53
56
DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. LEASE COMMITMENTS
On March 2, 1998, the Company entered into a lease for two
buildings, under construction, in Gaithersburg, Maryland, comprising a total of
approximately 90,000 square feet. The Company intends to relocate its operation
to this new facility in December 1999. The lease for the new facility has a
ten-year term and the Company has two consecutive rights to extend the term of
the lease for five years each.
The Company's executive office and manufacturing facility is located
in Beltsville, Maryland. The Company's research and development facility is
located in Silver Spring, Maryland. These leases expire upon the completion of
the new facility.
Future minimum rental commitments under these and other operating
lease agreements, including the agreements mentioned above, are as follows as of
June 30, 1999:
2000 $ 1,140,881
2001 1,441,308
2002 1,462,821
2003 1,483,469
2004 1,520,556
Thereafter 8,769,331
--------------
$15,818,366
==============
Rent expense was $449,449, $763,126, and $678,394 for the years
ended June 30, 1997, 1998 and 1999, respectively.
11. EMPLOYMENT AGREEMENTS
The Company has executed employment agreements with certain key
executives under which the Company is required to pay the following base
salaries over the next three years:
2000 $ 739,375
2001 427,500
2002 124,493
-------------
$1,291,368
=============
12. COMMON STOCK
On October 20, 1997, the Company issued 2,250,000 shares of Common
Stock in a public offering, which generated net proceeds of approximately
$20,654,000.
54
57
DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. COMMON STOCK OPTIONS
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.
In September 1997, the Company adopted the Digene Corporation 1997
Stock Option Plan (the "1997 Stock Option Plan"). Pursuant to the 1997 Stock
Option Plan, consultants and other non-employees of the Company may receive
options to purchase Common Stock. The 1997 Stock Option Plan is administered by
the Board of Directors. 500,000 shares have been reserved for issuance under the
1997 Stock Option Plan.
Prior to March 1996, the Company had adopted Stock Option Plans (the
"Option Plans") under which 2,622,821 shares of Common Stock were reserved for
issuance upon exercise of options. 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 Company does not intend to grant further options
under these Option Plans.
The terms of all stock options granted may not exceed ten years. The
exercise price of options granted, as determined by the Compensation Committee,
approximates fair value.
Common stock options activity is as follows:
YEAR ENDED JUNE 30,
1997 1998 1999
-------------------------------------------------------------------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------------------------------------------------------------------------------------------
Outstanding at beginning of year 2,660,582 $ 4.14 2,812,333 $ 5.43 2,712,162 $ 6.42
Options granted 460,000 10.14 486,500 11.69 933,250 8.77
Options exercised (275,825) .52 (287,778) .93 (266,745) 1.23
Options canceled or expired (32,424) 8.66 (298,893) 11.15 (201,138) 10.17
---------- ---------- ----------
Outstanding at end of year 2,812,333 5.43 2,712,162 6.42 3,177,529 7.31
========== ========== ==========
Options exercisable at year-end 1,288,218 2.53 1,131,492 1.81 1,434,192 4.72
========== ========== ==========
55
58
DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. COMMON STOCK OPTIONS (CONTINUED)
The following table summarizes information about fixed-price stock
options outstanding at June 30, 1999:
OPTIONS OUTSTANDING
----------------------------------------------------------------
AVERAGE WEIGHTED-
NUMBER REMAINING AVERAGE
RANGE OF OUTSTANDING AT CONTRACTUAL EXERCISE
EXERCISE PRICES JUNE 30, 1999 LIFE (YEARS) PRICE
- -------------------------------------------------------------------------------------------------
$0.01-$2.00 533,967 1.5 $ 1.15
$2.01-$5.00 319,522 1.5 2.30
$5.01-$8.00 353,399 8.7 6.49
$8.01-$11.00 1,751,641 7.8 9.55
$11.01-$13.25 219,000 8.1 12.89
-----------
3,177,529 6.2 7.31
===========
OPTIONS EXERCISABLE
------------------------------------------
WEIGHTED-
NUMBER AVERAGE
RANGE OF EXERCISABLE AT EXERCISE
EXERCISE PRICES JUNE 30, 1999 PRICE
- --------------------------- ------------------------------------------
$0.01-$2.00 533,967 $1.15
$2.01-$5.00 295,099 2.25
$5.01-$8.00 62,638 5.94
$8.01-$11.00 542,488 9.43
$11.01-$13.25 -- --
---------
1,434,192 4.72
=========
If the compensation cost for the Company's stock option plans had
been determined based upon the fair value at the grant date for options under
the plans consistent with the methodology prescribed under SFAS No. 123, the
Company's net loss in fiscal 1997, 1998 and 1999 would have been approximately
$7,594,000 and $16,574,000, and $12,842,000 or $0.67, $1.25, and $0.89 per
share, respectively. The effect of applying SFAS No. 123 on 1997, 1998 and 1999
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 (2) the 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:
YEAR ENDED JUNE 30,
1997 1998 1999
---------------------------------
Dividend yield 0.00% 0.00% 0.00%
Expected volatility 73% 73% 77%
Risk-free interest rate 6.5% 6.5% 6.0%
Expected life of the
option term (in years) 6.6 5.5 6.1
The weighted average fair values of the options granted during the
years ended June 30, 1997, 1998 and 1999 were $8.03, $7.99, and $6.26,
respectively.
56
59
DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted
net loss per share:
YEAR ENDED JUNE 30,
1997 1998 1999
----------------------------------------------------
Numerator:
Net loss $ (5,994,456) $(14,088,568) $ (9,304,216)
====================================================
Denominator:
Denominator for
basic and diluted
earnings per
share--weighted-
average shares 11,393,978 13,235,901 14,353,720
====================================================
Basic and diluted
net loss per share $ (0.53) $ (1.06) $ (0.65)
====================================================
The following table sets forth the computation of basic and diluted
net loss per share to reflect the cumulative effect of a change in accounting
principle:
YEAR ENDED JUNE 30,
1997 1998 1999
----------------------------------------------------
Basic and diluted loss per common share
Net loss before cumulative
effect of a change in
accounting principle $ (0.53) $ (0.92) $ (0.65)
Cumulative effect
of a change in
accounting principle (0.00) (0.14) (0.00)
----------------------------------------------------
Net loss $ (0.53) $ (1.06) $ (0.65)
====================================================
15. RETIREMENT PLAN
The Company sponsors a 401(k) Profit Sharing Plan (the "Plan"),
which covers all employees who have completed ninety days of service. The Plan
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, 1997,
1998 and 1999.
57
60
DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. OTHER COMMITMENTS AND CONTINGENCIES
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 up to 4.0% of applicable future net sales on certain
products. During fiscal 1997, 1998 and 1999, total royalties amounted to
$396,665, $769,930, and $655,062, respectively.
During fiscal 1999, the Company executed a purchase commitment with
a vendor to acquire $1,125,000 of equipment. As of June 30, 1999, the Company
has recorded a prepaid expense of $281,250 related to this obligation.
17. SEGMENT REPORTING
Effective July 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information" ("SFAS No. 131"). 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 stockholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The Company operates one business segment which develops, manufactures and
markets proprietary DNA and RNA tests for the detection, screening and
monitoring of human diseases. Worldwide operations are summarized by geographic
region in the following table:
YEAR ENDED JUNE 30,
1997 1998
ASSETS REVENUES ASSETS REVENUES
------------------------------------------------------------------------------
North America $29,450,973 $ 4,244,576 $34,396,189 $ 4,776,036
Europe -- 4,342,175 445,434 4,938,758
South America 312,604 881,048 597,915 1,619,334
Pacific Rim -- 592,480 -- 674,817
------------------------------------------------------------------------------
$29,763,577 $10,060,279 $35,439,538 $12,008,945
==============================================================================
YEAR ENDED JUNE 30,
1999
ASSETS REVENUES
------------------------------------
North America $27,575,447 $ 5,930,026
Europe 165,583 9,055,571
South America 367,449 1,860,242
Pacific Rim -- 621,260
------------------------------------
$28,108,479 $17,467,099
====================================
58
61
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
- Directors. The information with respect to directors
required by this item is incorporated herein by
reference to Digene's definitive Proxy Statement for its
Annual Meeting of Stockholders, scheduled to be held on
October 28, 1999, which shall be filed with the
Securities and Exchange Commission within 120 days from
the end of the Digene's fiscal year (the "1999 Proxy
Statement").
- 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 COMPENSATION
The information required under this item is incorporated herein by
reference to the 1999 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required under this item is incorporated herein by
reference to the 1999 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by
reference to the 1999 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) - Consolidated Financial Statements of Digene
Corporation:
Report of Independent Auditors
Consolidated Balance Sheets as of June 30,
1998 and 1999
Consolidated Statements of Operations for
the fiscal years ended June 30, 1997,
1998, and 1999
Consolidated Statements of Stockholders'
Equity for the fiscal years ended June 30,
1997, 1998, and 1999
Consolidated Statements of Cash Flows for
the fiscal years ended June 30, 1997, 1998
and 1999
Notes to Consolidated Financial Statements
59
62
- Financial Statement Schedules:
Schedule II - Valuation and Qualifying
Accounts and Reserves
All other schedules for which provision is
made in the applicable accounting regulation
of the Commission are not required under the
related instructions or are inapplicable and
therefore have been omitted.
- Exhibits:
3.1 Amended and Restated Certificate of Incorporation of Digene.**
3.2 * Amended and Restated Bylaws of Digene.
4.1 Specimen Common Stock Certificate.**
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 Digene and Evan
Jones, as amended.**
10.8 ! Employment Agreement dated as of May 1, 1996 between Digene and Charles
M. Fleischman, as amended.**
10.11 Lease Agreement dated January 13, 1988 between Digene and West Farm
Associates Limited Partnership.**
10.12 Lease Agreement dated June 20, 1991 between Digene and Murkirk Manor
Associates Limited Partnership.**
10.14 License Agreement dated September 1, 1995 between Digene and Institut
Pasteur.**
10.15 Cross-License Agreement dated April 1, 1990 among Life Technologies, Inc.
and Institut Pasteur.**
10.16 License Agreement dated December 1, 1983 between Bethesda Research
Laboratories, a division of Life Technologies, Inc. and Georgetown
University.**
10.18 License Agreement dated December 19, 1990 between Digene and Life
Technologies, Inc.**
10.26 Registration Rights Agreement dated as of May 24, 1996 between Digene,
Armonk Partners, Murex Diagnostics Corporation and Certain Other
Stockholders.**
10.28 License Agreement dated September 27, 1995 between Digene and Kanebo,
Ltd.**
10.30 *** Agency and Sales Representation Agreement between
Digene 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.)
60
63
10.31 *** Customer Transfer Agreement between Digene 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 Digene 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 Digene 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
Digene's Proxy Statement filed pursuant to Section 14(a) of the Securities
Exchange Act, dated September 20, 1996.)
10.35 ! Employment Agreement dated as of July 11, 1997 between Digene and William
J. Payne. (Incorporated by reference to Exhibit 10.1 to Digene's Registration
Statement on Form S-3, File No. 333-35463, dated November 12, 1997.)
10.36 1997 Stock Option Plan. (Incorporated by reference to Exhibit 99 of Digene's
Registration Statement on Form S-8, dated November 24, 1997.)
10.37 Stock Purchase Agreement dated as of June 30, 1998 by and among Digene and
Stichting Researchfonds Pathologie, Ewald C.R.M. Keijser, Christophorus
J.L.M. Meijer and Jan M. M. Walboomers. (Incorporated by reference to Exhibit
10.37 of Digene's Annual Report on Form 10-K for the fiscal year ended June
30, 1998.)
10.38 Lease dated as of March 2, 1998 by and between Digene and ARE -
Metropoliton Grove I, LLC. (Incorporated by reference to Exhibit 10.1 of
Digene's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.)
10.39 ! Employment Agreement dated as of December 22, 1998 between Digene and
Joseph P. Slattery. (Incorporated by reference to Exhibit 10.2 of Digene's
Quarterly Report on Form 10-Q for the quarter ended December 31, 1998.)
10.40 ! Employment Agreement dated as of December 22, 1998 between Digene and
Jeanmarie P. Curley. (Incorporated by reference to Exhibit 10.1 of Digene's
Quarterly Report on Form 10-Q for the quarter ended December 31, 1998.)
10.41 * Marketing and Distribution Agreement between Digene and Abbott Laboratories,
**** dated May 7, 1999.
21 * Subsidiaries of the Registrant.
23.1 * Consent of Ernst & Young LLP, Independent Auditors.
27 * Financial Data Schedule.
- --------------------
* Filed herewith.
** Incorporated by reference to the like-numbered exhibits to Digene's
Registration Statement on Form S-1, File No. 333-2968, dated March 29,
1996.
*** 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.
**** Confidential treatment has been requested for certain portions thereof
pursuant to a Confidential Treatment Request filed September 28, 1999. Such
provisions have been filed separately with the Commission.
! Constitutes a management contract or compensatory plan required to be filed
as an exhibit to this Form 10-K.
(b) Reports on Form 8-K.
NONE.
61
64
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 28, 1999 By: /s/ Evan Jones
---------------------------------
Chairman and 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 Chairman and Chief Executive September 28, 1999
- -------------------------------------------- Officer (principal executive officer)
Evan Jones
/s/ Charles M. Fleischman President, Chief Operating Officer, September 28, 1999
- -------------------------------------------- Chief Financial Officer and
Charles M. Fleischman Director (principal financial officer)
/s/ Joseph P. Slattery Vice President, Finance and September 28, 1999
- ------------------------------------------- Controller (principal accounting officer)
Joseph P. Slattery
/s/ Wayne T. Hockmeyer Director September 28, 1999
- --------------------------------------------
Wayne T. Hockmeyer
/s/ John H. Landon Director September 28, 1999
- ------------------------------------------
John H. Landon
/s/ Joseph M. Migliara Director September 28, 1999
- -----------------------------------------
Joseph M. Migliara
/s/ John J. Whitehead Director September 28, 1999
- ------------------------------------------
John J. Whitehead
65
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3.1 Amended and Restated Certificate of Incorporation of Digene.**
3.2 * Amended and Restated Bylaws of Digene.
4.1 Specimen Common Stock Certificate.**
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 Digene and Evan Jones, as
amended.**
10.8 ! Employment Agreement dated as of May 1, 1996 between Digene and Charles M.
Fleischman, as amended.**
10.11 Lease Agreement dated January 13, 1988 between Digene and West Farm Associates
Limited Partnership.**
10.12 Lease Agreement dated June 20, 1991 between Digene and Murkirk Manor Associates
Limited Partnership.**
10.14 License Agreement dated September 1, 1995 between Digene and Institut
Pasteur.**
10.15 Cross-License Agreement dated April 1, 1990 among Life
Technologies, Inc. and Institut Pasteur.**
10.16 License Agreement dated December 1, 1983 between Bethesda Research Laboratories, a
division of Life Technologies, Inc. and Georgetown University.**
10.18 License Agreement dated December 19, 1990 between Digene and Life Technologies,
Inc.**
10.26 Registration Rights Agreement dated as of May 24, 1996 between Digene, Armonk
Partners, Murex Diagnostics Corporation and Certain Other Stockholders.**
10.28 License Agreement dated September 27, 1995 between Digene and Kanebo,
Ltd.**
10.30 *** Agency and Sales Representation Agreement between Digene 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 Digene 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 Digene 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 Digene 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 Digene's Proxy
Statement filed pursuant to Section 14(a) of the Securities Exchange Act, dated
September 20, 1996.)
63
66
10.35 ! Employment Agreement dated as of July 11, 1997 between Digene and William J. Payne.
(Incorporated by reference to Exhibit 10.1 to Digene's Registration Statement on Form
S-3, File No. 333-35463, dated November 12, 1997.)
10.36 1997 Stock Option Plan. (Incorporated by reference to Exhibit 99 of Digene's
Registration Statement on Form S-8, dated November 24, 1997.)
10.37 Stock Purchase Agreement dated as of June 30, 1998 by and among Digene and Stichting
Researchfonds Pathologie, Ewald C.R.M. Keijser, Christophorus J.L.M. Meijer and Jan
M. M. Walboomers. (Incorporated by reference to Exhibit 10.37 of the Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30, 1998.)
10.38 Lease dated as of March 2, 1998 by and between Digene and ARE - Metropoliton Grove
I, LLC. (Incorporated by reference to Exhibit 10.1 of Digene's Quarterly Report on Form
10-Q for the quarter ended March 31, 1998.)
10.39 ! Employment Agreement dated as of December 22, 1998 between Digene and Joseph P.
Slattery. (Incorporated by reference to Exhibit 10.2 of Digene's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1998.)
10.40 ! Employment Agreement dated as of December 22, 1998 between Digene and Jeanmarie
P. Curley. (Incorporated by reference to Exhibit 10.1 of Digene's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1998.)
10.41 * Marketing and Distribution Agreement between Digene and Abbott
**** Laboratories, dated May 7, 1999.
21 * Subsidiaries of the Registrant.
23.1 * Consent of Ernst & Young LLP, Independent Auditors.
27 * Financial Data Schedule.
- --------------------
* Filed herewith.
** Incorporated by reference to the like-numbered exhibit to Digene's
Registration Statement on Form S-1, File No. 333-2968, dated March 29,
1996.
*** 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.
**** Confidential treatment has been requested for certain portions thereof
pursuant to a Confidential Treatment Request filed September 28, 1999. Such
provisions have been filed separately with the Commission.
! Constitutes a management contract or compensatory plan required to be filed
as an exhibit to this Form 10-K.
64
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, 1998 and 1999 and for each of the three years in the period ended
June 30, 1999 and have issued our report thereon dated August 20, 1999 (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, presents fairly in all material respects the information set forth
therein.
/s/ Ernst & Young LLP
Washington, DC
August 20, 1999
65
68
DIGENE CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
BALANCE AT BALANCE
BEGINNING OF AT END
CLASSIFICATION PERIOD ADDITIONS DEDUCTIONS PERIOD
- -------------- ------------ ----------------------------- -------
Allowance for doubtful accts:
Year ended June 30, 1997 $ 61 -- -- $ 61
Year ended June 30, 1998 61 150 (2) (1) 209
Year ended June 30, 1999 209 -- (39) (1) 170
Reserve for inventory obsolescence:
Year ended June 30, 1997 $250 89 -- $339
Year ended June 30, 1998 339 -- -- 339
Year ended June 30, 1999 339 399 -- 738
(1) "Deductions" represent accounts written off during the period less
recoveries of accounts previously written off.
66