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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 000-21873
BIOSITE DIAGNOSTICS INCORPORATED
(Exact name of registrant as specified in its charter)
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Delaware 33-0288606
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11030 Roselle Street 92121
San Diego, California (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (619) 455-4808
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Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.01 par value
Preferred Stock Purchase Rights
(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 is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. __
The aggregate market value of the voting stock held by non-affiliates
of the registrant, based upon the closing sale price of the Common Stock on
February 28, 1999 as reported on the Nasdaq National Market, was
approximately $84,134,220. Shares of Common Stock held by each executive
officer and director and by each person who owns 10% or more of the
outstanding Common Stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As of February 28, 1999, there were 12,978,031 shares of the Registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the solicitation of proxies for the
Registrant's 1998 Annual Meeting of Stockholders to be held on June 9 1999
is incorporated by reference in Part III, Item 10 (as to directors), 11,
12 and 13 of this Form 10-K.
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BIOSITE DIAGNOSTICS INCORPORATED
FORM 10-K
INDEX
PAGE
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PART I
Item 1. Business..................................................................... 1
Item 2. Properties .................................................................. 29
Item 3. Legal Proceedings ........................................................... 29
Item 4. Submission of Matters to a Vote of Security Holders ......................... N/A
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ....... 30
Item 6. Selected Financial Data...................................................... 31
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................ 32
Item 7a. Quantitative and Qualitative Disclosures About Market Risk................... 39
Item 8. Financial Statements and Supplementary Data ................................. 39
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure.......................................... N/A
PART III
Item 10. Directors and Executive Officers of the Registrant........................... 40
Item 11. Executive Compensation....................................................... 41
Item 12. Security Ownership of Certain Beneficial Owners and Management............... 41
Item 13. Certain Relationships and Related Transactions............................... 41
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............. 42
SIGNATURES ............................................................................. 45
Biosite-Registered Trademark-, Triage-Registered Trademark- and Immediate
Response Diagnostics-Registered Trademark- are registered trademarks of the
Company. Omniclonal-TM-, ExpressTest-SM- and the Company's logo are
trademarks or servicemarks of the Company.
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PART I
ITEM 1. BUSINESS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED IN THIS ANNUAL REPORT ON FORM 10-K ARE FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES, INCLUDING THE TIMELY DEVELOPMENT, INTRODUCTION
AND ACCEPTANCE OF NEW PRODUCTS, DEPENDENCE ON OTHERS, THE IMPACT OF COMPETITIVE
PRODUCTS, PATENT ISSUES, CHANGING MARKET CONDITIONS AND THE OTHER RISKS DETAILED
THROUGHOUT THIS FORM 10-K. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE
PROJECTED. THESE FORWARD-LOOKING STATEMENTS REPRESENT THE COMPANY'S JUDGMENT AS
OF THE DATE OF THE FILING OF THIS FORM 10-K. THE COMPANY DISCLAIMS, HOWEVER, ANY
INTENT OR OBLIGATION TO UPDATE THESE FORWARD-LOOKING STATEMENTS.
BACKGROUND
Biosite Diagnostics Incorporated ("Biosite" or the "Company") develops,
manufactures and markets rapid, accurate and cost-effective diagnostic products
that improve the quality of patient care and simplify the practice of laboratory
medicine. The Company believes that its Immediate Response Diagnostics can have
an important impact on medical decisions, patient care and the cost of medical
treatment. The Company utilizes distributors in the United States and abroad, as
well as a direct sales force, for the distribution of its products to end-users.
The Company has two product platforms that are designed to provide rapid
results through either qualitative visual readings or quantitative meter
readings. These platforms are based upon the Company's proprietary technologies
in the areas of antibody development, signaling chemistry and micro capillary
fluidics. The Company's testing formats are designed to measure single analyte
targets or multiple analytes simultaneously. They also allow for the analysis of
various sample sources, including urine, serum, plasma, whole blood and stool.
The Company's first product, the Triage Panel for Drugs of Abuse ("Triage
DOA Panel"), a small self-contained test capable of detecting a broad spectrum
of commonly overdosed prescription and illicit drugs in approximately 10
minutes, is used by approximately 45% of U.S. hospitals. Since its introduction
in 1992, over 8.1 million Triage DOA Panels have been sold worldwide for use in
hospital emergency department screening, occupational health and workplace
testing. The Company estimates that sales to end-users of the Company's Triage
DOA Panel products in 1998 were approximately $43.5 million, and net sales were
approximately $32.2 million in 1998.
During the first quarter of 1998, the Company received final clearance from
the U.S. Food and Drug Administration ("FDA") to market the Triage Cardiac Panel
and the Triage Meter (together called "Triage Cardiac System") and the Triage C.
DIFFICILE Panel in the United States. The Company began selling the Triage C.
DIFFICILE Panel in March and the Triage Cardiac System in May.
The Triage Cardiac System is Biosite's first product to utilize the
Company's Triage Meter System technology and is designed to deliver precise,
quantitative results in a rapid timeframe. The Triage Cardiac System aids in the
diagnosis of Acute Myocardial Infarction ("AMI") and provide physicians with an
enhanced ability to make treatment decisions in a timely manner. The Triage
Cardiac System quantitatively measures the level of CK-MB, troponin I and
myoglobin from a whole-blood sample using a single test device. As a result of
manufacturing scale-up and capacity constraint issues related to the production
of the Triage Cardiac System, the Company developed a backlog of orders for the
Triage Cardiac System during the third and fourth quarter of 1998. The Company
addressed manufacturing scale-up and capacity constraint issues related to the
production of the Triage Cardiac system and filled the backlog orders during
December 1998 and the first quarter of 1999.
The Triage C. DIFFICILE Panel is a rapid test designed to identify
CLOSTRIDIUM DIFFICILE, an opportunistic pathogen of the intestinal tract that
may thrive as a result of broad spectrum antibiotic treatment.
In October 1998, the Company received final clearance from the FDA to market
the Triage Parasite Panel, the Company's third product launched in 1998. The
Triage Parasite Panel is a rapid test designed to simultaneously detect three
common waterborne parasites, GIARDIA LAMBLIA, CRYPTOSPORIDIUM PARVUM and
ENTAMOEBA HISTOLYTICA/DISPAR, that can cause severe gastrointestinal infections.
Sales of the Triage Parasite Panel were initiated
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in mid-October.
The Company uses the Fisher Healthcare division ("Fisher," formerly the
Curtin Matheson Scientific division) of the Fisher Scientific Company to
distribute its products to the hospital market segment in the United States
and country-specific and regional distributors to market the products in
countries in Europe, Latin America, the Middle East, Asia and Africa.
The Company is developing several additional products for applications
where the Company believes its Immediate Response Diagnostics can play an
important role in improving patient care. Products under development include
tests that are intended to aid in the diagnosis of congestive heart failure
and sepsis or bacteremia, the dosing of certain therapeutic drugs and the
detection of certain bacterial infections.
The Company has entered into agreements with pharmaceutical and diagnostic
companies, including Novartis Pharma AG ("Novartis,") for the development of
a product to monitor the concentrations of the immunosuppressant drug,
cyclosporine; and Scios Inc ("Scios") for the development of a product to be
used in the diagnosis of congestive heart failure; and XOMA Corporation
("Xoma") for the development of a product to be used in the diagnosis of
sepsis or bacteremia. The products covered by these arrangements are under
development and have not generated any revenue from product sales for the
Company.
In March 1999, the Company introduced its Biosite Discovery program, a
collaborative research and diagnostics development program focused on the
identification of new protein markers for acute diseases. The Company will
seek to use its expertise in antibody development to help pharmaceutical and
biotechnology partners accelerate their research programs. In return, Biosite
intends to obtain diagnostic rights to the proteins under study. Biosite will
utilize its proprietary Omniclonal antibody development technology to develop
high affinity antibodies for the characterization and validation of protein
targets. Initially, Biosite will focus on disease target markers in four core
areas: cardiovascular, cerebrovascular, infectious disease and oncology. If
the diagnostic utility of a marker is established, it will then be assessed
for commercialization potential, with high value markers being added to
Biosite's product development pipeline. The Company executed its first
collaborative agreement under the Biosite Discovery program in the
cardiovascular area with Scios in November 1998.
INDUSTRY OVERVIEW
In 1998, the worldwide market for immunoassays exceeded $3.9 billion,
consisting primarily of testing related to infectious disease, endocrinology,
therapeutic drug monitoring, drugs of abuse testing, immunology/allergy,
tumor markers and blood typing. The global market for immunoassays continues
to expand as new disease states are identified, new therapies become
available, and worldwide standards of living and access to health care
improve. Such tests are performed primarily in hospital-based laboratories
and commercial laboratories, which account for approximately 80% of all
diagnostic tests performed annually. In recent years, diagnostic tests that
can be performed nearer to the point of patient care have emerged as an
important tool in disease diagnosis and management.
Immunoassays were first developed based on technology developed in the
1960s. Although early immunoassays offered unprecedented levels of
sensitivity for the detection of low concentration analytes, they suffered
from relatively short shelf-lives, long reaction times, a need for
radioactive labels to detect completed reactions and lack of consistent
results among products from different suppliers. Over time, technological
advances such as the introduction of monoclonal antibodies, enzyme and
fluorescent labels and various solid phase formats shortened immunoassay
reaction times, provided higher specificity and allowed the development of
tests with longer shelf-lives and greater consistency.
These advances also led to the development of immunoassay analyzers, testing
systems utilizing automated liquid handling mechanisms and pipetting systems for
reagent addition. Modern immunoassay analyzers are capable of storing and
selecting multiple reagents for a variety of analytes, including drugs, hormones
and cancer antigens. They also provide accurate and highly sensitive test
results and help to simplify the performance of immunoassays. However,
immunoassay analyzers are large and complex, may have lengthy turnaround times
and require high volumes of sample throughput to justify the investment in
equipment, training, staffing and other costs required to operate and support
the systems. Even those systems with rapid onboard turnaround times require
transport of the
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sample to the testing lab and preparation of the samples to obtain serum or
plasma, which can be time consuming.
In recent years, there has been a continuing shift from the use of such
conventional analyzer systems to more technologically advanced rapid testing
methods that can be performed in minutes by less skilled personnel. Simple,
rapid immunoassays are capable of detecting a single analyte target with a
color change that can be visually interpreted. Formats such as dipsticks,
test tubes and membrane test cartridges have been used to provide fast,
non-instrument read results for conditions where a single analyte target is
present in high concentrations and where a simple yes/no non-numeric answer
is clinically relevant. Rapid color change test formats are widely available
for drugs of abuse, pregnancy, strep throat and ovulation prediction. Until
recently, simple test formats have remained incapable of precise,
multi-analyte detection or highly sensitive, quantitative measurements. As a
result, medical conditions where the detection of one or more analytes is
required or where the precise quantitation of the target analyte is required
have remained the domain of immunoassay analyzers.
The Company believes that there is significant market potential for
advanced rapid diagnostic products. Rapid testing, including point-of-care
testing, helps to reduce overall health care delivery costs and can improve
patient outcomes by providing diagnosis during the patient visit, thereby
minimizing the time to medical intervention and reducing the need for
additional patient follow-up. Patients undergoing emergency procedures can
benefit from more timely and accurate testing results, both to ensure correct
decision making and to avoid unnecessary use of costly inpatient care.
Disease management programs such as therapeutic drug monitoring programs can
benefit from real-time, point-of-care evaluations that enable care-givers to
optimize drug dosing. Quicker diagnosis of infectious agents can also permit
earlier prescription of appropriate medications, potentially shortening the
duration of illness.
TECHNOLOGY
Biosite's Immediate Response Diagnostics technology is based on several
proprietary advances in the biological and physical sciences that make
practical the development and manufacture of rapid, accurate and
cost-effective point-of-care diagnostics. The Company's products integrate
its expertise in several core scientific and engineering disciplines,
including antibody development and engineering, analyte cloning and
synthesis, signaling chemistry and micro capillary fluidics, each of which is
described below. Biosite's research and development program is supported by
75 employees, including 17 Ph.D.s with expertise in the Company's core
technologies. By combining research capabilities in each of these areas,
Biosite is able to create novel single and multi-analyte diagnostics which
overcome the limitations of traditional rapid diagnostic technologies and
seek to address the significant unmet need for effective point-of-care
diagnostic information.
ANTIBODY DEVELOPMENT AND ENGINEERING
Biosite believes that its internal antibody development and engineering
capabilities allow rapid identification and development of antibodies with
optimal specificity, affinity and stability characteristics. The Company
initially utilized hybridoma technology for the selection and production of
its novel antibodies. Three disadvantages of hybridoma technology are the
length of time required to develop antibody candidates, the higher costs
associated with the use of this technology and the need to restart the
antibody development process when unwanted characteristics such as cross
reactivities are discovered. The Company has developed a proprietary process
utilizing phage display of antibodies that enables the selection and
production of antibodies more rapidly and efficiently than is possible using
hybridoma technology. In addition, Biosite has isolated the genes encoding
the antibodies that permit the genetic engineering of antibodies. As a
result, Biosite can alter or add specific amino acids or polypeptides in an
antibody in order to improve the antibody's specificity and to facilitate
purification of the antibody. This technology accelerates the antibody
selection process by rapidly eliminating unwanted cross reactivities
discovered in product development.
ANALYTE CLONING AND SYNTHESIS
The Company has molecular biology capabilities that include the cloning
and identification of specific proteins useful in the development of
immunoassays. Biosite has developed proprietary expression vectors that
enable the production and purification of these proteins for the development
of antibodies and for use as calibrators and controls in its immunoassay
products. In addition, the Company has considerable expertise in synthetic
organic chemistry which allows the synthesis of targets and useful
derivatives. The Company develops products for which the targeted analyte can
be small (i.e., haptens, such as drugs) or large (i.e., proteins, such as
cardiac enzymes). The Company believes that the ability to develop, stabilize
and manufacture the target analyte or its analogues is key to the
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development of highly accurate immunoassays.
COLOR/PHOTOCHEMICAL SIGNALING
Immunoassays require the attachment of a detectable label to an antibody
or target analyte. The Company has developed a variety of labels for the
development of its products. For yes/no tests, a visual label that produces
color is attached to antibodies or analytes through either non-covalent or
covalent chemical methods. For its quantitative products, the Company has
developed novel fluorescent dyes which are attached to antibodies or analytes
using both noncovalent and covalent chemical means. Although fluorescence is
a potentially powerful label for use in immunoassays, its potential has been
limited by the lack of available dyes that are stable and have no sample
interference, and the requirement of a complex instrument for detection. The
Company's novel fluorescent dyes are stable and exhibit properties that
permit their use in complex biological samples such as serum, plasma and
whole blood without interference from the sample. Furthermore, these novel
dyes absorb light at wavelengths where a simple instrument can be used to
excite and detect fluorescence for quantitative measurements.
MICRO CAPILLARY TEST DEVICE TECHNOLOGY
Biosite has developed proprietary technology to design, develop and
manufacture devices containing micro capillaries to control the flow of
fluids in immunoassay processes. The qualitative device format uses micro
capillaries to draw fluids through a membrane that contains immobilized
antibody zones for the detection of specific substances. The quantitative
device format uses several different micro capillary designs to control the
contact of sample with reagents and to control the flow of fluid throughout
the device. When sample is added to the quantitative device, a filter
contained within the device separates blood cells from plasma which is
further directed by capillary forces into a chamber that contains dried
immunoassay reagents. After an incubation time that is determined by another
micro capillary element of the device, the volume of sample that contacted
the reagents flows down a capillary path that brings it into contact with
immobilized antibody zones. The binding of fluorescent reagents at these
zones is detected by an instrument and is related to the concentration of the
substance being tested for in the sample. The Company has also developed the
engineering capability to design unique micro capillary structures in plastic
parts and to fabricate them in commercial scale quantities using injection
molding processes.
SAMPLE HANDLING
The Company has developed proprietary technology relating to sample
handling and preparation, including technology that allows whole blood to be
passively separated into its plasma component or to be passively lysed to
release the target analyte. The Company has also developed technologies for
the handling of stool samples which concentrate and purify the target
analytes or organisms from solid stool materials. In addition, the Triage
Panel platform can be used to assay urine samples.
BIOSITE DISCOVERY PROGRAM
In March 1999, the Company introduced its Biosite Discovery program, a
collaborative research and diagnostics development program focused on the
identification of new protein markers for acute diseases. The Company will
seek to use its expertise in antibody development to help pharmaceutical and
biotechnology partners accelerate their research programs. In return, Biosite
intends to obtain diagnostic rights to the proteins under study. Biosite will
utilize its proprietary Omniclonal antibody development technology to develop
high affinity antibodies for the characterization and validation of protein
targets. The Omniclonal technology combines antibody phage display
capabilities and a highly efficient antibody expression and purification
process. Initially, Biosite will focus on disease target markers in four core
areas: cardiovascular, cerebrovascular, infectious disease and oncology.
Biosite has invested in a high throughput robotic immunoassay analyzer that
is capable of performing an immunoassay for up to 10,000 serum or plasma
samples in a 24-hour period. Biosite intends to use this high throughput
immunoassay system and the Omniclonal antibodies developed for potential
diagnostic markers to detect the markers in a large population of clinical
samples from patients with diseases in our core areas of interest as well as
normal, healthy people. The results of this analysis may establish the
diagnostic sensitivity and specificity of the potential markers for specific
diseases. If the diagnostic utility of a marker is established, it will then
be assessed for commercialization potential, with high value markers being
added to Biosite's product development pipeline. The Company executed its
first collaborative agreement under the Biosite Discovery program in the
cardiovascular area with Scios in November 1998.
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PRODUCT PLATFORMS
The Company has used its core technologies to develop two product
platforms: the Triage Panel and the Triage Meter System. Both of the
Company's product platforms utilize the Company's expertise in antibody
engineering, analyte cloning, signaling chemistry, micro capillary fluidics
and sample handling technologies.
TRIAGE PANEL
The Triage Panel platform is designed for rapid, qualitative screening of
multiple analytes in a small single-use device. The Triage Panel has a visual
(yes/no) display containing simultaneous tests for any combination of
analytes and control standards up to a total of ten. It can be performed in a
simple multi-step process, and is capable of performing tests on both urine
and stool. The Triage DOA Panel, the first product developed on this
platform, tests for up to eight abused drugs analytes in approximately 10
minutes. The Triage C DIFFICILE Panel and the Triage Parasite Panel test for
the detection of microorganisms that cause severe gastrointestinal disease.
The Company is currently developing one other application for this platform,
the Triage Enteric Panel, which would test for the detection of certain
common enteric bacteria responsible for food poisoning.
TRIAGE METER SYSTEM
The Triage Meter System platform is designed to provide rapid quantitative
results for immunoassays in whole blood, serum and plasma. The Triage Meter
System consists of two parts: a small single-use disposable test cartridge
and a proprietary, compact, point-of-care, fluorescent meter. After a blood
sample is applied to the cartridge, the cartridge is inserted into the meter,
which is designed to automatically and simultaneously detect up to six
analytes and display the results on a numerical electronic read-out. The
meter incorporates proprietary software in erasable, programmable, read-only
memory ("EPROM") chips which are intended to be plugged into each meter. The
software may also provide important information regarding the analyte
measured, such as normal or abnormal levels of a marker which could then be
used to initiate therapy or manage patient disease. Studies have validated
that the analyte measuring sensitivity of the Triage Meter System products is
comparable to the sensitivity levels of the conventional immunoassay
analyzers. The Triage Cardiac System is the first of the Company's
commerialized products developed under this platform. The Company is
developing three other applications for this platform: 1) the NeoralChek
System, a product for the monitoring of the concentration of cyclosporine, an
immunosuppressant drug prescribed to prevent organ rejection in organ
transplant recipients. 2) the Triage BNP Assay, a product to be used as an
aid in the diagnosis of congestive heart failure, and 3) the Triage LBP
Assay, a product to assist in the diagnosis of sepsis or bacteremia.
PRODUCT ATTRIBUTES
Although the Company's commercial products and products under development
are based upon the Triage Panel and Triage Meter System platforms and utilize
different technologies, they share common attributes which the Company
believes make them superior to conventional immunoassay analyzers:
- RAPID RESULTS: The Company's products and products under
development are designed to offer complete results in a rapid
timeframe .
- EASE OF USE: The Company's products and products under
development are designed to be simple to use. The Triage DOA
Panel has only three steps while the Triage Meter System
products are expected to require only one assay step.
- HIGH ANALYTICAL ACCURACY: The Company develops and uses high
quality biological and chemical reagents to yield highly
specific, accurate and reproducible analytical results.
- CAPABILITY OF PERFORMING MULTIPLE ANALYSES: The Company's
products and products under development are designed to
measure one or more target analytes simultaneously, including
reagent controls, without sacrificing the quality of the
individual analysis. This simultaneous detection capability
can provide significant time and cost savings compared to
current technologies.
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- RELIABILITY: Biosite's use of internal thresholds, built-in
controls, software lockouts and other controlling mechanisms
are intended to make its current and future products extremely
reliable in any hospital or clinical laboratory setting.
- COST EFFECTIVENESS: The Company's products and products under
development are designed to simplify the performance of highly
complex testing procedures and significantly reduce the cost
of testing, equipment acquisition and maintenance, making them
cost-effective alternatives to conventional immunoassay
analyzers.
PRODUCTS AND PRODUCTS UNDER DEVELOPMENT
The Triage DOA Panel was introduced in 1992 and has been used by hospital
labs and emergency departments to screen for up to eight commonly abused
prescription and illicit drugs or drug classes. During 1998, the Company
began commercialization of three new products, the Triage C. DIFFICILE Panel,
Triage Parasite Panel and Triage Cardiac System.
The Company has four additional products under development (Triage
Enteric Panel, NeoralChek System, Triage BNP System and Triage LBP System)
which apply the Company's Immediate Response Diagnostics technologies to a
variety of other medical testing needs. The Company continues to evaluate
other rapid diagnostic product opportunities that can utilize the Company's
technologies.
The Company intends, where appropriate, to enter into licensing and/or
collaborative arrangements to develop and commercialize additional future
products. The Company may not be able to negotiate license or collaborative
arrangements on favorable terms, if at all, in the future, or that its
current or future licensing or collaborative arrangements will be successful.
TRIAGE PANEL FOR DRUGS OF ABUSE
The Company believes the U.S. market for abused drug testing is
approximately $628 million annually. The U.S. market can be divided into
four major categories:
- MEDICAL TESTING: The medical testing segment represents
testing typically performed in a hospital laboratory. The
results are generally reported to emergency physicians and
psychiatrists. Such tests have the highest need for rapid
turnaround of results, and generally have the highest cost per
result.
- NON-MEDICAL TESTING: The non-medical testing market consists
of testing performed for the workplace, the criminal justice
setting and drug rehabilitation centers. Testing may be
performed on-site or at an occupational health provider, but
generally samples are sent to independent reference
laboratories. The demand for a rapid result varies by type of
industry, but typically is not quite as great as in the
medical segment. Additionally, the cost per result is slightly
reduced.
- REFERENCE LABORATORY TESTING: The reference laboratory
testing market accounts for a significant percentage of the
total drug testing market. The majority of samples come from
the non-medical testing market, although some smaller
hospitals in the medical testing market also send their
samples to reference laboratories. In general, results are
not available for at least 24 hours from the time the specimen
is collected. Despite relatively long turnaround times, the
reference laboratory market has remained substantial because
of its ability to produce results on a low cost per panel
basis and reduce the potential liability associated with
workplace testing.
HOSPITAL/EMERGENCY DEPARTMENT
Drug abuse plays a significant role in emergency medicine cases occurring
annually in the United States, either as a primary cause such as an overdose, or
as a contributing factor such as in the case of an accident. A diagnostic
dilemma confronts physicians when a patient is presented with symptoms that
could either be drug related or non-drug related. A patient brought to a
hospital emergency department in a coma may be under the influence of narcotics
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or sedatives, which may require one type of treatment or intervention.
Conversely, the same patient may have had a stroke or suffered some form of
trauma requiring a completely different type of care. The ability to obtain a
differential diagnosis in a timely manner greatly aids the course of
treatment.
Prior to the introduction of the Triage DOA Panel, drug or toxicology
screening was accomplished by several technologies, primarily automated
immunoassays and Gas Chromatography/Mass Spectroscopy ("GC/MS"). Although
GC/MS is the most specific identification method commercially available, it
is time consuming (requiring an average of approximately three hours per
test), complex and expensive, and is generally reserved for final
confirmation of specimens that have been screened positive by an immunoassay.
Automated immunoassays, although less expensive than those performed by
GC/MS, also require significant amounts of time (approximately one to two
hours) because of the necessity of performing analyses of several drugs
sequentially on each patient specimen. Additionally, in many cases the
equipment required to perform an immunoassay is not accessible on an
immediate or rapid basis.
The Triage DOA Panel is a rapid qualitative urine screen that analyzes a
single test sample for up to eight different illicit and prescription drugs
or drug classes and provides results in approximately 10 minutes. The Triage
DOA Panel is instrument independent, contains built-in controls for accuracy
and is capable of a high degree of specificity. Illicit drugs detected by the
Triage DOA Panel include: Amphetamines/Methamphetamines (speed, crystal),
Cocaine (crack), Opiates (heroin), Phencyclidine (angel dust),
Tetrahydrocannabinol (pot, marijuana), while prescription drugs tested by the
Triage DOA Panel include Barbiturates (Phenobarbital), Benzodiazepines
(Valium, Librium, Halcion), Tricyclic Antidepressants (Elavil, Tofranil) and
Methadone. The Triage DOA Panel is configured to test various combinations of
the foregoing drugs. In February 1995, the Company launched the Triage DOA
Plus TCA Panel, a configuration which includes a test for Tricyclic
Antidepressants ("TCA") which otherwise requires a separate blood test. Since
its introduction in February 1992, the Company has sold over 8.1 million
Triage DOA panels worldwide, and approximately 45% of hospitals in the United
States use the product.
The Company distributes the Triage DOA Panel products in the U.S.
hospital market segment through Fisher. Other country-specific and regional
distributors sell the Triage DOA Panel products in certain countries in
Europe, Latin America, the Middle East, Asia and Africa.
WORKPLACE SCREENING
New hires in major U.S. firms may be screened for drug usage as part of
pre-employment physicals. The majority of these test samples are sent to
centralized reference laboratories that could provide both the initial
immunoassay screening result and the confirmation of presumptive positive
results by an alternate method, such as GC/MS. Testing of government and
certain government regulated employees and contractors must be performed at
SAMHSA certified reference laboratories. Employers that are not government
contractors send their drug screens to their laboratory of choice or perform
on-site testing. Non-SAMHSA testing is estimated to account for over eight
million tests performed annually.
The majority of employers with drug screening programs have chosen not to
implement "on-site" testing in their facilities due to costly personnel and
regulatory burdens on an employer's in-house testing laboratory. These
industrial testers, however, still have a need for rapid results since many
employment decisions hinge on an employee's ability to pass physical and
other examinations that include a test for illegal drugs. Despite this need
for rapid results, there is a 24 to 48 hour wait based on the sample
transportation and testing process used by major reference laboratories.
Therefore, an immunoassay that provides rapid results, such as the Triage DOA
Panel, can get employees back to work quickly and save employers' money.
The Company established the ExpressTest One-Hour Drug Screen service, a
marketing program initiated in conjunction with regional providers of
occupational health services, as a means of expanding the market for the
Triage DOA Panel. The ExpressTest program incorporates the Company's
"near-site" testing strategy, using the Triage ExpressTest Panel (a test for
five illicit drugs or drug classes) to provide the benefits of rapid drug
test results without requiring employers to set up an on-site laboratory.
Participating occupational health clinics provide rapid results to industrial
clients that send prospective employees to them for pre-employment physicals
and drug screens. Biosite's sales force actively supports these selected
occupational health clinics in their marketing of the ExpressTest program to
potential industrial clients in their regional areas.
-7-
THE TRIAGE CARDIAC SYSTEM
The Company has estimated that, in 1998, over six million people in the
United States visited hospital emergency departments with complaints of chest
pain. Of those, approximately 650,000 were diagnosed with AMI and
approximately 800,000 were diagnosed with unstable angina. In total,
approximately 1.9 million of the patients who present with chest pain were
admitted to coronary care units. Of these, approximately 30,000 to 60,000
patients were misdiagnosed as not having an AMI. Additionally, approximately
450,000 of these patients who did not have an AMI were admitted to hospitals
and ultimately released within two days. The Company believes that rapid,
quantitative results for multiple cardiac markers provided at the
point-of-care may have a positive impact on misdiagnosed AMI, and may provide
substantial benefits to patients and savings to the hospital.
AMI is generally caused by the blocking or "occlusion" of an artery
providing oxygen-enriched blood to the heart. Without oxygen, the heart
muscle is destroyed, with prolonged occlusion resulting in additional muscle
damage. The destruction of cells in the heart muscle results in the release
of several markers into the bloodstream, including CK-MB, troponin I and
myoglobin.
Clinicians generally rely on patient history, electrocardiograms and
serial measurement of CK-MB for early diagnosis of AMI. Troponin I and
myoglobin are also emerging as useful adjuncts to CK-MB in the detection of
heart attacks. The Company believes that the concentrations of these three
markers typically peak and fall over different time periods and that
simultaneous measurement of these markers is a more accurate diagnostic
technique for AMI than the measurement of any one single marker. Studies have
shown that serum concentrations of myoglobin are elevated most quickly
post-AMI. Additionally, in patients presenting within 12 hours of AMI symptom
onset, quantitative serial measurement of myoglobin has demonstrated
significantly higher sensitivity in diagnosing AMI than CK-MB. Troponin I has
been shown to maintain an elevated concentration for a longer period of time
than CK-MB and myoglobin.
Several diagnostic tests have recently been developed to quantitatively
measure the blood levels of such markers. Unfortunately, the quantitative
measurement of multiple markers currently requires large, centralized
immunoassay systems that cannot directly analyze whole blood and are not
always available on a rapid basis. Additionally, these systems require
multiple reagent packs, as well as frequent standardization and quality
control. Since turnaround time for such test results is critical, current
immunoassay systems may not satisfy physician needs.
The Company believes that a rapid, point-of-care test capable of
quantitatively measuring multiple markers of an AMI would have a positive
impact on patient care. Accordingly, the Company's Triage Cardiac System is
designed to quantitatively measure the levels of CK-MB, troponin I and
myoglobin in a single test device from a whole-blood sample. The Triage Meter
System is designed to provide quantitative results of these measurements at
or near the point-of-care and may aid in the detection of AMI by providing
point-of-care quantitative results, enabling physicians to make treatment
decisions in a timely manner. The Company utilizes both distributor alliances
and a direct sales force in marketing the Triage Cardiac System.
THE TRIAGE C. DIFFICILE PANEL
CLOSTRIDIUM DIFFICILE ("C. DIFFICILE") is an opportunistic pathogen of
the intestinal tract that may thrive as a result of broad spectrum antibiotic
treatment. The bacteria may be found in asymptomatic carriers or may spread
among immunocompromised hospital patients. Toxins produced by the bacteria
mediate C. difficile-associated disease ("CDAD"), which may include
antibiotic-associated diarrhea and antibiotic-associated pseudo-membranous
colitis. Due to the potential spread of infection, patients identified as
possibly having CDAD are usually placed in isolation until the infection is
controlled. Symptoms of CDAD include diarrhea as well as fluid and weight
loss. It has been estimated over 3.0 million rapid tests for C. DIFFICILE
were performed annually in the United States. This number is expected to
continue to rise due to the expected increase in the number of patients who
are immunocompromised.
Historically, the use of a cytotoxin test, which takes 2 to 48 hours to
produce diagnostic results, was the only means to identify the toxin
associated with C. DIFFICILE. More recently, in response to the need for more
rapid identification of the C. DIFFICILE toxin, several manufacturers have
developed and marketed enzyme-linked immunosorbent assays ("ELISA") that can
be performed in one to two hours. These ELISA test formats are increasingly
used by hospitals testing for the toxin.
-8-
Although the ELISA technology is significantly faster than the cytotoxin
test, it still requires several precisely timed steps as well as multiple
standards every time the test is performed, making it unlikely that the
testing will be done when an individual specimen is sent to the laboratory.
The multiple standards and quality controls required with each run make the
processing of individual specimens expensive. As a result, specimens are
generally only processed in "batch" mode, delaying the diagnostic result, and
limiting the information available to a physician evaluating therapeutic
measures.
The Triage C. DIFFICILE Panel is designed to simplify the laboratory
procedure and improve the turnaround time for a physician to receive a result
by enabling laboratories to complete direct testing for the bacteria, as well
as testing for the toxin in less than 20 minutes. The Triage C. DIFFICILE
Panel is also designed to provide a negative predictive value that is
superior to that of existing immunoassays by coupling the results of direct
organism detection with toxin detection. Since the test is being designed
with built-in controls and standards, it may be performed individually or in
batches, by any laboratory technician, without compromising the quality of
the result. By improving the turnaround time to result, the clinician may
initiate therapy earlier and thus minimize a patient's time in isolation.
Rapid, accurate diagnosis of the bacteria and toxin should enable earlier
treatment, which may reduce length of stay in the hospital and may reduce
cost. The Company utilizes distributor alliances in marketing the Triage C.
DIFFICILE Panel.
THE TRIAGE PARASITE PANEL
Parasitic infection is a common cause of gastrointestinal disease and
diarrhea. Some of the more common parasites responsible for such infection
are GIARDIA LAMBLIA ("GIARDIA"), CRYPTOSPORIDIUM PARVUM ("C. PARVUM"),
ENTAMOEBA HISTOLYTICA and microsporidia species. According to the U.S. Center
for Disease Control and Prevention ("CDC"), intestinal parasitic infection is
a problem in the United States and that the prevalence of GIARDIA may be
increasing.
The most commonly employed method of detecting parasites from stool
samples is by a cumbersome ova and parasite ("O&P") microscopic examination,
typically of three consecutive stool specimens from the patient. The
preparation of the sample by a laboratory technologist involves stool
specimen dilution and the preparation of multiple microscope slides. Each
slide must then be observed via microscope by a technologist trained in the
identification of parasites. The time to diagnose parasitic infection is
prolonged due to the need for microscopic examination of multiple stool
specimens per patient. The prolonged time required to obtain results may
delay the treatment of patients.
It is estimated that in 1998 approximately 1.0 million O&P microscopic
examinations were performed in the United States. Because of the cumbersome
procedures and limited test menu of the current ELISA test formats, these
tests have had limited success in hospitals that perform larger volumes of
tests in batches. Recently, several manufacturers have developed and marketed
ELISA tests for the more rapid identification of two of the more common
parasites, GIARDIA and C. PARVUM.
The Triage Parasite Panel is designed to replace the standard O&P
microscopic detection method for three of the most commonly encountered
parasites: Giardia, C. parvum and Entamoeba histolytica/dispar in a single
test device. Because each test device includes controls, the product may be
used for any volume of tests. The Triage Parasite Panel makes rapid results
(less than 20 minutes) available to hospitals of any size, including
facilities that previously sent such testing to a reference lab. The
sensitivity of the Triage Parasite Panel is comparable to that of the current
O&P microscopic examination, using only a single patient specimen. This
should greatly reduce the collection burden for the patient, and reduce the
amount of labor for the laboratory technician. Additionally, the length of
time physicians spend waiting for results may be reduced. The Company
utilizes distributor alliances in marketing the Triage Parasite Panel. Sales
of the Triage Parasite Panel are expected to be seasonal in nature as
parasitic infections are less prevalent during the colder seasons of the year.
THE TRIAGE ENTERIC PANEL
Gastroenteritis, commonly described as "food poisoning," often occurs
among individuals who have consumed contaminated food or water or have been
exposed to stool contaminated with microorganisms such AS SALMONELLA,
CAMPYLOBACTER JEJUNI/COLI, SHIGELLA and ENTEROHEMORRHAGIC E. COLI. Eight to
24 hours after such exposure, individuals may experience abdominal pain,
nausea and diarrhea. It is estimated that in the United States approximately
3.0 million stool cultures are performed annually for the diagnosis of food
poisoning. Microorganisms
-9-
are often implicated in such cases.
Stool culture, currently the primary method of diagnosing food poisoning,
involves the inoculation of multiple culture plates with stool specimen.
After 24 to 48 hours, culture plates that exhibit bacterial growth are
subjected to biochemical tests that typically take an additional 24 hours. As
a result of the prolonged testing procedure, physicians generally wait 48 to
72 hours for test results.
The Triage Enteric Panel is being developed for identification of the
most common enteric bacteria responsible for food poisoning such as
SALMONELLA, CAMPYLOBACTER JEJUNI/COLI, SHIGELLA and ENTEROHEMORRHAGIC E.
COLI. The Triage Enteric Panel would enable the laboratory technician to
rapidly detect the presence of such enteric bacteria from a stool specimen.
This should greatly reduce the amount of labor required of laboratory
technicians, thereby reducing costs. Additionally, results can be returned to
the physician in a shorter period of time.
The Triage Enteric Panel is in the development stage.
THE NEORALCHEK SYSTEM
Transplants of human organs require suppression of the organ recipient's
immune system. Cyclosporine is the most widely used pharmaceutical for such
purposes, with annual worldwide sales in excess of $1.3 billion. Cyclosporine
is chronically administered to patients who have received an organ
transplant. Over 20,000 patients undergo organ transplantation in the United
States annually. In excess of 200,000 organ recipients worldwide take
immunosuppressant drugs on a daily basis. Novartis is the developer and
leading supplier of cyclosporine, and is involved in several collaborations
in the organ transplant field including health care management,
xenotransplantation, and near-patient testing in an effort to support the use
of organ transplantation.
The blood level of cyclosporine must be monitored to ensure that a
patient receives the appropriate therapeutic dose while minimizing toxicity.
Patients receiving cyclosporine must maintain a minimum concentration of the
drug that enables it to be effective, yet maintain a level that is low enough
not to be toxic. This range is often referred to as the therapeutic window.
Physicians primarily rely on large, centralized laboratories to measure
cyclosporine blood levels. The physician typically does not receive test
results for at least 4 to 48 hours, requiring a call back to the patient if
the dose of the drug needs to be adjusted. A smaller share of cyclosporine
testing is performed by high performance liquid chromatography ("HPLC"). The
current worldwide market for cyclosporine testing by immunoassay is estimated
to be over 5 million tests per year. Patients are monitored frequently in the
immediate post-transplant time frame with reduced, but continued testing,
averaging four times per year, for the remainder of the patient's lifetime.
The NeoralChek System (consisting of the NeoralChek Assay and the Triage
Meter) is designed to enable a physician to easily, rapidly and accurately
measure cyclosporine levels. The NeoralChek System is being developed to
provide a cost-effective means of determining cyclosporine levels on a
real-time basis in order to enable physicians to optimize drug therapy during
a patient's visit. As part of its research and development collaboration with
Novartis, Biosite has obtained licenses to certain technology that makes
rapid analysis of cyclosporine levels possible. See "-- Strategic and
Distribution Arrangements."
The NeoralChek System is in the development stage. If successfully developed
and approved for commercialization, the Company expects Novartis to support
the promotion of the NeoralChek System worldwide. The Company successfully
completed feasibility studies for the NeoralChek System under its antibody
license agreement with Novartis. Additionally, the Company and Novartis
expanded the scope of their collaboration to include the development of a
second version of the NeoralChek System. The attainment of certain milestones
under the expansion of the collaboration resulted in contract revenues of
$1.1 million during 1998. Additional payments to Biosite will be made if
certain milestones are achieved. The Company initiated clinical trials for
both versions of the NeoralChek System in June and July 1998. The clinical
trials were suspended in September 1998 to permit the Company to make
improvements to the NeoralChek System. The clinical trials may resume in the
first half of 1999.
THE TRIAGE BNP SYSTEM
Congestive Heart Failure ("CHF") is a chronic inability of the heart to
maintain an adequate output of blood from one or both ventricles of the heart,
resulting in congestion or swelling of certain veins or organs, and an
inadequate
-10-
blood supply to the body. It is estimated that approximately 400,000 new
cases of CHF occur each year. Current testing methods used in diagnosing CHF
include electrocardiograms, chest x-rays, echocardiography, and the analysis
of blood gases and electrolytes.
The Company has obtained a license to technology and patents developed by
Scios, Inc. for use in developing an assay for the diagnosis of congestive
heart failure by monitoring levels of B-type Natriuretic Peptide ("BNP"), a
hormone made primarily in the ventricles of the heart. Studies suggest that
levels of BNP become elevated in circulating blood plasma during heart
dysfunction associated with congestive heart failure in both symptomatic and
asymtomatic patients.
The Triage BNP System (consisting of the Triage BNP Assay and the Triage
Meter) is designed to enable a physician to easily, rapidly and accurately
measure BNP levels. The Triage BNP System is being developed to provide
physicians with a cost-effective means of determining BNP levels at the
point-of-care and aid in the diagnosis of congestive heart failure and assist
in the differentiation of CHF from other conditions with similar clinical
symptoms. Additionally, by providing physicians with a convenient means of
monitoring BNP levels in CHF patients, the Triage BNP Assay may aid in the
evaluation of the effectiveness of therapies utilized in CHF patient care.
The Company initiated clinical trials for the Triage BNP System in December
1998. The Company may not successfully develop or introduce any products
based upon the Scios-licensed technology.
THE TRIAGE LBP SYSTEM
Sepsis occurs when the bloodstream is infected by gram-negative bacteria.
An inflammatory reaction initiated by these bacteria and their associated
endotoxin can cause widespread damage to blood vessels leading to circulatory
shock, organ failure, gangrene of extremities and death. The complications
associated with sepsis can advance rapidly.
Biosite has obtained a U.S. license to certain technology and patents
developed by XOMA Corporation related to methods of measuring levels of
Lipopolysaccharide Binding Protein ("LBP") in human blood. Studies suggest
that levels of LBP become elevated as a specific response to endotoxin, a
poisonous component of gram-negative bacteria. Biosite is using this
technology to develop a diagnostic test to assist in the diagnosis of sepsis
or bacteremia.
The Triage LBP System (consisting of the Triage LBP Assay and the Triage
Meter) is designed to enable a physician to easily, rapidly and accurately
measure LBP levels. The Triage LBP System is being developed to provide
point-of-care physicians with a cost-effective diagnostic tool that will aid
them in differentiating endotoxin-related complications from other
inflammatory states with similar clinical symptoms. Additionally, the Triage
LBP System may help identify patients that would benefit from treatment with
anti-endotoxin drugs. The Company initiated clinical trials for the Triage
LBP System in December 1998. The Company may not successfully develop or
introduce any products based upon the XOMA licensed technology.
RESEARCH AND DEVELOPMENT
As of December 31, 1998, the Company had 75 employees in research and
development, 17 of which have Ph.D.s. The Company's research and development
organization is dedicated to the discovery and development of new
technologies which can be applied to future products and to the development
of new products with its existing platform technologies.
The Company has a research staff dedicated to the development and
production of antibodies through a variety of techniques. Recombinant
techniques are used to express proteins for use as diagnostic targets. The
Company's staff of chemists and biochemists synthesize drug targets and
compounds for diagnostic use and seek to perfect techniques for coupling
these compounds to biological reagents such as antibodies or labels. The
Company's development engineering staff is involved in the design and
development of new diagnostic device technologies as well as the processes
for their fabrication and interaction with biological and chemical reagents.
The Company's product development group completes final optimization of
assays and the Company's regulatory affairs group controls all in-house and
external clinical studies of the Company's products and prepares applications
to the FDA for pre-market clearance or approval.
-11-
MANUFACTURING
As of December 31, 1998, the Company had 106 employees in manufacturing
involved in reagent production, device assembly, engineering, quality
assurance/quality control and materials management.
Biosite maintains worldwide manufacturing rights to all current and
future products, except for the Triage Meter for which LRE maintains the
manufacturing rights. A key strategy of the Company is to provide high
quality analytical results in an efficient manner. To this end, the Company
invests in the design and development of manufacturing systems and
technologies that can produce a high quality product using controlled,
cost-effective manufacturing processes and equipment. The Triage C. DIFFICILE
and Triage Parasite Panels utilize the same or similar processes and
equipment as the Triage DOA Panel. The Company believes that the experience
it has acquired in manufacturing the Triage DOA Panel will provide benefits
in product quality and cost in manufacturing these new products and the
Triage Enteric Panel under development. During 1997 and 1998, the Company
developed the processes and systems for the manufacturing of its Triage
Cardiac System. As a result of manufacturing scale-up and capacity constraint
issues related to the production of the Triage Cardiac System, the Company
developed a backlog of orders for this product during the third and fourth
quarter of 1998. The Company addressed the manufacturing scale-up issues and
filled the backlog orders during December 1998 and the first quarter of 1999.
The Company expects its manufacturing capacities to be sufficient to
concurrently manufacture these new products and the Triage DOA Panel in the
same facility.
Except for the Triage Meter, all of the Company's products are
manufactured at its facility in San Diego, California. The Triage Meter is
purchased from LRE Relais + Elektronik GmbH ("LRE"), which is located in
Germany. Most of the antibodies used in the manufacture of the products were
developed by Biosite and the cell lines are owned or licensed by Biosite. In
addition, Biosite maintains its own in-house antibody production capability.
All other raw materials required to manufacture the Company's products are
obtained from outside suppliers.
The San Diego facility has received its registration as a diagnostic
product manufacturer from the FDA and from the California State Department of
Health & Services. The Company has also been licensed and certified to
manufacture products using controlled substances by the U.S. Drug Enforcement
Agency. However, there can be no assurance that the Company can continue to
comply with all government requirements and regulations that may lead to the
suspension or revocation of its right to manufacture. See "-- Government
Regulation" and "Risk Factors-- Government Regulation."
The Company has also developed and continues to improve its novel and
sophisticated processes and equipment for the production of its Triage
Cardiac Panel. LRE manufactures and supplies the meters used in the Company's
Triage Meter System platform products. The Company has increased its
manufacturing space at its San Diego facility to accommodate production of
the Triage Cardiac Panel.
SALES AND MARKETING
As of December 31, 1998, the Company has 49 employees in various sales and
marketing functions. The Company distributes its products to hospital
facilities in the United States primarily through Fisher, and in certain
countries in Europe, Latin America, the Middle East, Asia and Africa through
country-specific and regional distributors.
The Company anticipates that it may, if appropriate, enter into
additional distribution agreements with respect to its current products,
products currently under development and products that it develops in the
future, provided such products receive the requisite regulatory clearance or
approvals. The Company may not be able to enter into these or other
distribution agreements on acceptable terms, if at all. If the Company elects
to distribute products directly, it's direct sales, marketing and
distribution efforts may not be successful. A failure to enter into
acceptable distribution agreements or a failure of the Company to
successfully market its products would have a material and adverse effect on
the Company.
STRATEGIC AND DISTRIBUTION ARRANGEMENTS
Biosite's strategy for the research, development, commercialization and
distribution of some of its products entails entering into various arrangements
with corporate partners, licensors, licensees and others, and is dependent upon
the
-12-
success of these parties in performing their responsibilities. There can be
no assurance that these parties will perform their obligations as expected or
that any revenue will be derived from any of the arrangements. Under
Biosite's existing arrangements, Biosite is not obligated to make any
material capital expenditures. If products are successfully developed under
certain of the Company's existing arrangements, royalties will be payable by
the Company on sales of products which incorporate licensed technology.
FISHER HEALTHCARE DIVISION (FORMERLY CURTIN MATHESON SCIENTIFIC DIVISION) OF
FISHER SCIENTIFIC COMPANY
In April 1998, the Company entered into a new distribution agreement (the
"Fisher Agreement") with Fisher which expanded Fisher's role to include the
distribution of the Company's new products and certain potential new products
currently under development. Under the agreement, the Company granted to
Fisher an exclusive right to distribute Triage DOA Panel products, Triage
Micro Panel products, and Triage Cardiac System products to hospitals and
reference laboratories within the United States. Under certain circumstances
in the event that the Company elects to terminate the Fisher Agreement
without cause, the Company is obligated to make a one-time payment to Fisher.
Fisher purchases Biosite products on a monthly basis through firm purchase
orders. Fisher accounted for 81%, 80%, and 86% of Biosite's product sales for
the years ended December 31, 1996, 1997 and 1998, respectively.
LRE RELAIS + ELEKTRONIK GMBH ("LRE")
In September 1994, the Company entered into an agreement with LRE (the
"LRE Agreement") for the development of a hand-held meter to be used in all
Triage Meter System products commercially available or under development,
including the Triage Cardiac System, NeoralChek System, Triage BNP System and
Triage LBP System. Under the terms of the LRE Agreement, LRE developed and
produced the fluorescent meter according to specifications provided by
Biosite. For a total of approximately $1.9 million, the Company paid LRE for
certain development and tooling expenses incurred in the development of the
meter, based upon LRE's successful completion of certain feasibility,
prototype and preproduction milestones. In addition, the agreement specifies
that LRE is to be the Company's exclusive supplier of the Triage Meter during
the term of the LRE Agreement, unless LRE is incapable of satisfying
Biosite's needs or is prohibited from producing such meters for a specific
immunoassay application. Biosite will purchase the Triage Meters from LRE in
Deutsche Marks (or a successor currency to Deutsche Marks) on a quarterly
basis through firm purchase orders on a per device price basis which varies
according to sales volume.
ARKRAY KDK CORPORATION ("KDK")
In February 1995, the Company entered into a development, supply and
distribution agreement with KDK, pursuant to which the parties agreed to
collaborate in the development and marketing of the Triage Cardiac System.
Under the terms of the agreement, KDK is obligated to provide funding of up
to $2.0 million for the Company's development of the Triage Cardiac System,
$1.8 million of which has been paid and the remainder of which is to be paid
based upon the Company's achievement of milestones. In exchange for this
funding, the Company has granted KDK the exclusive right to distribute the
Triage Cardiac System in Japan and in certain countries of Asia, the Middle
East and Pacific Island countries (the "KDK countries"). The Company was
responsible for costs associated with performing clinical trials on and
obtaining regulatory approval of the Triage Cardiac System in the United
States, while KDK is responsible for such costs in Japan and in countries of
Asia, the Middle East and Pacific Island countries. If the Triage Cardiac
System is approved for commercial sale in the KDK countries, KDK will
purchase Triage Cardiac Panels from Biosite in U.S. dollars on a quarterly
basis through firm purchase orders on a per device fixed price basis. KDK
will also purchase the Triage Meters from the Company on a per device fixed
price basis. The distribution agreement provides for minimum annual purchase
quantities. KDK can terminate this agreement at any time.
NOVARTIS PHARMA AG ("NOVARTIS")
In September 1995, the Company entered into two license agreements with
Novartis relating to the Company's development of the NeoralChek System. The
first license is for cyclosporine antibodies and the second license is for
certain antibody-based assays. Under the terms of the agreements, and upon the
Company's successful completion of certain feasibility requirements, the Company
has the right to make, have made, use and sell the NeoralChek System using the
licensed Novartis antibodies and related technologies. The agreements
contemplate that the Company is to be responsible for all costs associated with
the development of the NeoralChek System. Under the two licenses, the
-13-
Company made payments (aggregating approximately $361,000) to Novartis and is
obligated to make additional payments of up to approximately $170,000 to
Novartis based upon the achievement of certain product development
milestones, and to pay royalties on sales of products developed by the
Company using such antibodies or related technologies. In connection with the
agreement, Novartis purchased $1.0 million of five-year 8% convertible
debentures which converted into 92,575 shares of Common Stock of the Company
upon the closing of the Company's initial public offering in February 1997.
In January 1998, as a result of the attainment of one of the milestones (the
successful completion of feasibility studies for the NeoralChek System under
development), the Company received $500,000 from Novartis in exchange for a
convertible debenture. The convertible debenture was immediately converted
into 41,666 shares of common stock of the Company based on the conversion
price of $12.00 per share. The Company is obligated to sell to Novartis an
additional $500,000 five-year 8% convertible debenture upon the attainment of
a milestone. The debenture would be convertible, at the sole option of the
Company, into shares of Biosite Common Stock at $12.00 per share.
Additionally, the Company and Novartis expanded the scope of their
collaboration to include the development of a second version of the
NeoralChek System. The attainment of certain milestones under the expansion
of the collaboration resulted in contract revenues of $1.1 million during
1998. Additional payments to Biosite will be made if certain milestones are
achieved. The Company initiated clinical trials for both versions of the
NeoralChek System in June and July 1998. The clinical trials were suspended
in September 1998 to permit the Company to make improvements to the
NeoralChek System. The clinical trials may resume in the first half of 1999.
PROPRIETARY TECHNOLOGY AND PATENTS
The Company's ability to compete effectively will depend in part on its
ability to develop and maintain proprietary aspects of its technology, and to
operate without infringing the proprietary rights of others or to obtain
licenses to such proprietary rights. Biosite has U.S. and foreign issued
patents and is currently prosecuting patent applications in the United States
and with certain foreign patent offices. There can be no assurance that any
of the Company's pending patent applications will result in the issuance of
any patents, that the Company's patent applications will have priority over
others' applications, or that, if issued, any of the Company's patents will
offer protection against competitors with similar technology. There can be no
assurance that any patents issued to the Company will not be challenged,
invalidated or circumvented in the future or that the rights created
thereunder will provide a competitive advantage.
The Triage DOA Panel, Triage C. DIFFICILE Panel, Triage Parasite Panel,
Triage Cardiac System and products under development may incorporate
technologies that are the subject of patents issued to, and patent
applications filed by, others. The Company has obtained licenses for certain
technologies and is negotiating to obtain licenses for technologies patented
by others. However, there can be no assurance that the Company will be able
to obtain licenses for technology patented by others on commercially
reasonable terms, if at all, that it will be able to develop alternative
approaches if it is unable to obtain licenses or that the Company's current
and future licenses will be adequate for the operation of Biosite's business.
The failure to obtain necessary licenses or to identify and implement
alternative approaches would prevent the Company from commercializing certain
of its products under development and would have a material adverse effect on
the Company's business, financial condition and results of operations.
Litigation may be necessary to enforce any patents issued to the Company
to protect trade secrets or know-how owned by the Company or to determine the
enforceability, scope and validity of the proprietary rights of others. In
March 1996, the Company settled a potential patent infringement claim by
obtaining a license to the contested patent in return for a one-time payment
of $2.2 million. In September 1996, the Company settled a patent infringement
claim filed by Abbott Laboratories and obtained a license to the contested
patent in return for the payment of $5.5 million and the agreement to pay
certain royalties.
In September 1997, Behring Diagnostics, Inc. and Behring Diagnostics,
GmbH filed a patent infringement action against the Company in the U.S.
District Court for the District of Delaware. The patent infringement action
alleged that the Company's Triage DOA Panel products infringed a patent held
by the plaintiffs, which expires in August 2000. The plaintiffs sought to
recover damages of an unspecified amount and to enjoin future sales of the
Triage DOA Panel products by the Company. Biosite answered the complaint,
denying infringement and asserting affirmative defenses that the patent is
invalid and unenforceable. Because of a merger, the identity of the
plaintiffs changed to Dade Behring Inc., Dade Behring Marburg GmbH and Syva
Company (collectively "Dade-Behring"). To avoid protracted litigation and
continued significant legal defense costs, the Company and Dade Behring
executed a settlement agreement in March 1999 that resolved all disputes
outstanding between the companies. Under the terms
-14-
of the settlement agreement, the Company obtained a license to the patent and
will provide Dade-Behring the option to evaluate certain proprietary
antibodies, resulting in a net payment of $1,050,000 to Dade-Behring by
Biosite.
On April 28, 1998, Spectral Diagnostics, Inc. ("Spectral") filed a patent
infringement action against the Company in the U.S. District Court for the
Western District of Wisconsin, alleging that the Company's Triage Cardiac
Panel infringes U.S. patent 5,744,358 which was issued on the date the suit
was filed. Spectral sought a permanent injunction and damages. Spectral also
sought a preliminary injunction that would enjoin the Company from selling
the Triage Cardiac Panel. On July 16, 1998, the Court issued an opinion
denying the motion for a preliminary injunction. Spectral also moved for
partial summary judgment on the issue of infringement. That motion was denied
on July 20, 1998. The established trial date of August 31, 1998 was set aside
while the two companies engaged in negotiations in an attempt to arrive at a
settlement in regards to all disputes outstanding between Biosite and
Spectral. In February 1999, a settlement agreement was executed that resolved
all disputes between the companies without a material adverse financial
impact to Biosite.
The Company also has received correspondence from other parties calling
to the Company's attention the existence of patents that they believe cover
technology which is or may be incorporated in Biosite's products and products
under development. Some of this correspondence has included offers to
negotiate the licensing of the patented technologies. There can be no
assurance that these matters will not result in litigation to determine the
enforceability, scope, and validity of the patents. Litigation, if initiated,
could seek to recover damages as a result of any sales of the products and to
enjoin further sales of such products.
Litigation that could be brought forth by other parties may result in
material expenses to the Company and significant diversion of effort by the
Company's technical and management personnel, regardless of the outcome. The
outcome of litigation is inherently uncertain and there can be no assurance
that a court would not find the third-party claims valid and that the Company
had no successful defense to such claims. An adverse outcome in litigation or
the failure to obtain a necessary license could subject the Company to
significant liability and could prevent the Company from selling the Triage
DOA Panel, Triage C. DIFFICILE Panel, Triage Parasite Panel or the Triage
Cardiac System, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company also relies upon trade secrets, technical know-how and
continuing invention to develop and maintain its competitive position. There
can be no assurance that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
the Company's trade secrets or disclose such technology, or that the Company
can meaningfully protect its trade secrets, or that the Company will be
capable of protecting its rights to its trade secrets.
Others may have filed and in the future are likely to file patent
applications that are similar or identical to those of the Company. To
determine the priority of inventions, the Company may have to participate in
interference proceedings declared by the USPTO that could result in
substantial cost to the Company. No assurance can be given that any patent
application of another will not have priority over patent applications filed
by the Company.
The commercial success of the Company also depends in part on the Company
neither infringing patents or proprietary rights of third parties nor breaching
any licenses that may relate to the Company's technologies and products. The
Company is aware of several third-party patents that may relate to the Company's
technology. There can be no assurance that the Company does not or will not
infringe these patents, or other patents or proprietary rights of third parties.
In addition, the Company has received and may in the future receive notices
claiming infringement from third parties as well as invitations to take licenses
under third party patents. Any legal action against the Company or its
collaborative partners claiming damages and seeking to enjoin commercial
activities relating to the Company's products and processes affected by third
party rights, in addition to subjecting the Company to potential liability for
damages, may require the Company or its collaborative partner to obtain a
license in order to continue to manufacture or market the affected products and
processes. There can be no assurance that the Company or its collaborative
partners would prevail in any such action or that any license (including
licenses proposed by third parties) required under any such patent would be made
available on commercially acceptable terms, if at all. There are a significant
number of U.S. and foreign patents and patent applications in the Company's
areas of interest, and the Company believes that there may be significant
litigation in the industry regarding patent and other intellectual property
rights. If the Company becomes involved in such litigation, it could consume a
substantial portion of the Company's managerial and financial resources, which
could have a material adverse effect on the Company's
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business, financial condition and results of operations.
COMPETITION
The market in which the Company competes is intensely competitive.
Biosite's competitors include health care companies that manufacture rapid
tests, laboratory-based tests and analyzers, as well as clinical reference
laboratories. The majority of diagnostic tests used by physicians and other
health care providers are performed by independent clinical reference
laboratories and hospital-based laboratories. The Company expects that these
laboratories will compete vigorously to maintain their dominance of the
testing market. In order to achieve market acceptance for its products, the
Company will be required to demonstrate that its products provide
cost-effective and time saving alternatives to tests performed by clinical
reference laboratories or traditional hospital-based laboratory procedures.
This will require physicians to change their established means of having
these tests performed. The Company's products may not be able to compete with
the testing services provided by traditional laboratory services. In
addition, companies with a significant presence in the diagnostic market,
such as Abbott Laboratories, Roche Boehringer Mannheim Corporation, Bayer
Diagnostics, Ortho Clinical Diagnostics, a division of Johnson & Johnson, and
Dade Behring, have developed or are developing diagnostic products that do or
will compete with the Company's products. These competitors have
substantially greater financial, technical, research and other resources and
larger, more established marketing, sales, distribution and service
organizations than the Company. Moreover, such competitors offer broader
product lines and have greater name recognition than the Company, and offer
discounts as a competitive tactic. In addition, several smaller companies are
currently making or developing products that compete with or will compete
with those of the Company. The Company's competitors may succeed in
developing or marketing technologies or products that are more effective or
commercially attractive than the Company's current or future products, or
that would render the Company's technologies and products obsolete. Moreover,
the Company may not have the financial resources, technical expertise or
marketing, distribution or support capabilities to compete successfully in
the future. In addition, competitors, many of which have made substantial
investments in competing technologies, may be more effective than the
Company's technologies, or may prevent, limit or interfere with the Company's
ability to make, use or sell its products either in the United States or in
international markets. See " -- Technology" and "-- Products and Products
under Development."
GOVERNMENT REGULATION
The testing, manufacture and sale of the Company's products are subject
to regulation by numerous governmental authorities, principally the FDA and
corresponding state and foreign regulatory agencies. Pursuant to the Federal
Food, Drug, and Cosmetic Act, and the regulations promulgated thereunder, the
FDA regulates the preclinical and clinical testing, manufacture, labeling,
distribution and promotion of medical devices. The Company will not be able
to commence marketing or commercial sales in the United States of new
products under development until it receives clearance or approval from the
FDA, which can be a lengthy, expensive and uncertain process. Noncompliance
with applicable requirements can result in, among other things, fines,
injunctions, civil penalties, recall or seizure of products, total or partial
suspension of production, failure of the government to grant premarket
clearance or premarket approval for devices, withdrawal of marketing
clearances or approvals and criminal prosecution. The FDA also has the
authority to request recall, repair, replacement or refund of the cost of any
device manufactured or distributed by the Company.
In the United States, medical devices are classified into one of three
classes (i.e., Class I, II or III) on the basis of the controls deemed
necessary by the FDA to reasonably ensure their safety and effectiveness.
Class I devices are subject to general controls (e.g., labeling, premarket
notification and adherence to the Quality System Regulation ("QSR") (formerly
Good Manufacturing Practices) and Class II devices are subject to general and
special controls (e.g., performance standards, postmarket surveillance,
patient registries and FDA guidelines). Generally, Class III devices are
those which must receive premarket approval by the FDA to ensure their safety
and effectiveness (e.g., life-sustaining, life-supporting and implantable
devices or new devices which have been found not to be substantially
equivalent to legally marketed devices).
Before a new device can be introduced in the market, the manufacturer must
generally obtain FDA clearance through clearance of a 510(k) notification or
approval of a pre-market approval ("PMA") application. A PMA application must be
filed if a proposed device is a new device not substantially equivalent to a
legally marketed Class I or Class II device, or if it is a preamendment Class
III device for which the FDA has called for PMAs. A PMA application must be
supported by valid scientific evidence to demonstrate the safety and
effectiveness of the device,
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typically including the results of clinical investigations, bench tests,
laboratory and animal studies. The PMA application must also contain a
complete description of the device and its components and a detailed
description of the methods, facilities and controls used to manufacture the
device. In addition, the submission must include the proposed labeling,
advertising literature and any training materials. The PMA approval process
can be expensive, uncertain and lengthy, and a number of devices for which
FDA approval has been sought by other companies have never been approved for
marketing.
Upon receipt of a PMA application, the FDA makes a threshold
determination as to whether the application is sufficiently complete to
permit a substantive review. If the FDA determines that the PMA application
is complete, the FDA will accept the application for filing. Once the
submission is accepted, the FDA begins an in-depth review of the PMA. The FDA
review of a PMA application generally takes one to three years from the date
the application is accepted, but may take significantly longer. The review
time is often significantly extended by FDA requests for additional
information or clarification of information already provided in the
submission. During the review period, it is likely that an advisory
committee, typically a panel of clinicians, will be convened to review and
evaluate the application and provide recommendations to the FDA as to whether
the device should be approved. The FDA is not bound by the recommendation of
the advisory panel. Toward the end of the PMA review process, the FDA
generally will conduct an inspection of the manufacturer's facilities to
ensure that the facilities are in compliance with applicable QSR
requirements. If FDA evaluations of both the PMA application and the
manufacturing facilities are favorable, the FDA may issue either an approval
letter or an approvable letter, which usually contains a number of conditions
that must be met in order to secure final approval of the PMA. When and if
those conditions have been fulfilled to the satisfaction of the FDA, the
agency will issue a PMA approval letter, authorizing commercial marketing of
the device for certain indications. If the FDA's evaluation of the PMA
application or manufacturing facilities is not favorable, the FDA will deny
approval of the PMA application or issue a non-approvable letter. The FDA may
determine that additional clinical investigations must be performed, in which
case the PMA may be delayed for one or more years while additional clinical
investigations are conducted and submitted in an amendment to the PMA.
Modifications to a device that is the subject of an approved PMA, its
labeling or manufacturing process may require approval by the FDA of PMA
supplements or new PMAs. Supplements to an approved PMA often require the
submission of the same type of information required for an initial PMA,
except that the supplement is generally limited to that information needed to
support the proposed change from the product covered by the original PMA.
A 510(k) clearance will be granted if the submitted information
establishes that the proposed device is "substantially equivalent" to a
legally marketed Class I or Class II medical device or to a preamendment
Class III medical device for which the FDA has not called for PMAs. The FDA
recently has been requiring more rigorous demonstration of substantial
equivalence than in the past, including in some cases requiring submission of
clinical data. It generally takes from three to 12 months from submission to
obtain 510(k) premarket clearance but may take longer. The FDA may determine
that a proposed device is not substantially equivalent to a legally marketed
device or that additional information is needed before a substantial
equivalence determination can be made. A "not substantially equivalent"
determination, or a request for additional information, could prevent or
delay the market introduction of new products that fall into this category.
For any devices that are cleared through the 510(k) process, modifications or
enhancements that could significantly affect safety or effectiveness, or
constitute a major change in the intended use of the device, will require new
510(k) submissions.
The Company has made modifications to the Triage DOA Panel since receipt
of initial 510(k) clearance. With respect to several of these modifications,
the Company has filed new 510(k) notices describing the modifications, and
has received FDA clearance of those 510(k) notices. The Company has made
other modifications to the Triage DOA Panel which the Company believes do not
require the submission of new 510(k) notices. There can be no assurance,
however, that the FDA would agree with any of the Company's determinations
not to submit a new 510(k) notice for any of these modifications, or would
not require the Company to submit a new 510(k) notice for any of these
modifications made to the Triage DOA Panel. If the FDA requires the Company
to submit a new 510(k) notice for any device modification, the Company may be
prohibited from marketing the modified the Triage DOA Panel until the 510(k)
notice is cleared by the FDA.
The Company is uncertain of the regulatory path to market that the FDA will
ultimately apply to the Company's products currently in development. Although
the Triage DOA Panel, Triage C. DIFFICILE Panel, Triage Parasite Panel and
Triage Cardiac System received 510(k) clearance, a PMA may be required for the
Triage Neoral, Triage BNP and Triage LBP Assays and other products now in
development. There can be no assurance that the FDA will not
-17-
determine that the Company must adhere to the more costly, lengthy and
uncertain PMA approval process for any of the Company's products in
development.
There can be no assurance that the Company will be able to obtain
necessary regulatory approvals or clearances for its products on a timely
basis, if at all. Delays in receipt of or failure to receive such approvals
or clearances, the loss of previously received approvals or clearances,
limitations on intended use imposed as a condition of such approvals or
clearances, or failure to comply with existing or future regulatory
requirements would have a material adverse effect on the Company's business,
financial condition and results of operations.
Before the manufacturer of a device can submit the device for FDA
approval or clearance, it generally must conduct a clinical investigation of
the device. Although clinical investigations of most devices are subject to
the investigational device exemption ("IDE") requirements, clinical
investigations of in vitro diagnostic ("IVD") tests, such as all of the
Company's products and products under development, are exempt from the IDE
requirements, including the need to obtain the FDA's prior approval, provided
the testing is noninvasive, does not require an invasive sampling procedure
that presents a significant risk, does not intentionally introduce energy
into the subject, and is not used as a diagnostic procedure without
confirmation by another medically established test or procedure. In addition,
the IVD must be labeled for research use only ("RUO") or investigational use
only ("IUO"), and distribution controls must be established to assure that
IVDs distributed for research or clinical investigation are used only for
those purposes.
The Company intends to conduct clinical investigations of its products
under development, which will entail distributing them in the United States
on an IUO basis. There can be no assurance that the FDA would agree that the
Company's IUO distribution of its IVD products under development will meet
the requirements for IDE exemption. Furthermore, failure by the Company or
the recipients of its products under development to maintain compliance with
the IDE exemption requirements could result in enforcement action by the FDA,
including, among other things, the loss of the IDE exemption or the
imposition of other restrictions on the Company's distribution of its
products under development, which would adversely affect the Company's
ability to conduct the clinical investigations necessary to support marketing
clearance or approval.
Any devices manufactured or distributed by the Company pursuant to FDA
clearance or approvals are subject to pervasive and continuing regulation by
FDA and certain state agencies. Manufacturers of medical devices for
marketing in the United States are required to adhere to QSR, which includes
testing, control, documentation, and other quality assurance requirements.
Manufacturers must also comply with Medical Device Reporting ("MDR")
requirements that a manufacturer report to the FDA any incident in which its
product may have caused or contributed to a death or serious injury, or in
which its product malfunctioned and, if the malfunction were to recur, it
would be likely to cause or contribute to a death or serious injury. Labeling
and promotional activities are subject to scrutiny by the FDA and, in certain
circumstances, by the Federal Trade Commission. Current FDA enforcement
policy prohibits the marketing of approved medical devices for unapproved
uses.
The Company is subject to routine inspection by the FDA and certain state
agencies for compliance with QSR requirements, MDR requirements and other
applicable regulations. The recently finalized QSR requirements include the
addition of design controls that will likely increase the cost of compliance.
Changes in existing requirements or adoption of new requirements could have a
material adverse effect on the Company's business, financial condition and
results of operation. There can be no assurance that the Company will not
incur significant costs to comply with laws and regulations in the future or
that laws and regulations will not have a material adverse effect upon the
Company's business, financial condition and results of operations.
The Company also is subject to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of hazardous or
potentially hazardous substances. There can be no assurance that the Company
will not incur significant costs to comply with laws and regulations in the
future or that such laws or regulations will not have a material adverse
effect upon the Company's business, financial condition and results of
operations.
The use of Biosite's products is also affected by the Clinical Laboratory
Improvement Amendments of 1988 ("CLIA") and related federal and state
regulations which provide for regulation of laboratory testing. The scope of
these regulations includes quality control, proficiency testing, personnel
standards and federal inspections. CLIA categorizes tests as "waived,"
"moderately complex" or "highly complex," on the basis of specific criteria.
There can
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be no assurance that any future amendment of CLIA or the promulgation of
additional regulations impacting laboratory testing will not have a material
adverse effect on the Company's ability to market its products or on its
business, financial condition or results of operations.
EMPLOYEES
As of December 31, 1998, Biosite employed 281 individuals. Of these, 21
hold Ph.D.s and 19 hold other advanced degrees. None of the Company's
employees is covered by collective bargaining agreement. The Company believes
that it maintains good relations with its employees.
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RISK FACTORS
DEPENDENCE ON DEVELOPMENT AND INTRODUCTION OF NEW PRODUCTS FOR REVENUE GROWTH
AND PROFITABILITY
Except for the Triage DOA Panel, Triage C. DIFFICILE Panel, Triage
Parasite Panel and Triage Cardiac System, all of the Company's products are
still under development and may not be successfully developed or
commercialized on a timely basis, or at all. If the Company is unable, for
technological or other reasons, to complete the development, introduction or
scale-up of manufacturing for any new product or if any new product is not
approved for marketing or does not achieve a significant level of market
acceptance, the Company's business, financial condition and results of
operations would be materially and adversely affected.
The Company believes that its revenue growth and profitability will
substantially depend upon its ability to complete development of and
successfully introduce these new products. In addition, the successful
development of some of these new products will depend on the development of
new technologies. The Company will be required to undertake time-consuming
and costly development activities and seek regulatory approval for these new
products. The Company may experience difficulties that could delay or prevent
the successful development, introduction and marketing of these new products.
Regulatory clearance or approval of any new products may not be granted by
the U.S. Food and Drug Administration or foreign regulatory authorities on a
timely basis, or at all, and the new products may not be successfully
commercialized. The Company has limited resources to devote to the
development of all its potential products and consequently a delay in the
development of one product may delay the development of other products.
In order to successfully commercialize any new products, the Company will
be required to establish and maintain reliable, cost-efficient, high-volume
manufacturing capacity and a cost effective sales force and administrative
infrastructure and an effective product distribution system for the products.
As a result of manufacturing scale-up and capacity constraint issues related
to the production of the Triage Cardiac System, the Company developed a
backlog of orders for the Triage Cardiac System during the third and fourth
quarter of 1998. See "Business-- Products and Products Under Development,"
"--Manufacturing" and "-- Government Regulation."
LIMITED HISTORY OF PROFITABILITY; POTENTIAL QUARTERLY FLUCTUATIONS IN FUTURE
OPERATING RESULTS
The Company incurred an operating loss during the last five quarters. The
Company may not return to operating profitability on a quarterly or annual
basis in the future. The Company believes that future operating results will
be subject to quarterly fluctuations due to a variety of factors, including
whether and when new products are successfully developed and introduced by
the Company, market acceptance of current or new products, regulatory delays,
product recalls, manufacturing delays or capacity constraints, shipment
problems, seasonal customer demand, the timing of significant orders, changes
in reimbursement policies, competitive pressures on average selling prices,
changes in the mix of products sold and defense and resolution of patent
matters.
Operating results would also be adversely affected by a downturn in the
market for the Company's current and future products, if there are any.
Because the Company is continuing to increase its operating expenses for
supporting its expanded sales and marketing activities, manufacturing
scale-up costs and new product development, the Company's operating results
would be adversely affected if its sales and gross profits did not
correspondingly increase or if its product development efforts are
unsuccessful or subject to delays. The Company's limited operating history
makes accurate prediction of future operating results difficult or
impossible. The Company may not sustain revenue growth or remain profitable
on a quarterly or annual basis and its growth or operating results may not be
consistent with predictions made by securities analysts. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
NEAR-TERM DEPENDENCE OF THE COMPANY ON THE TRIAGE DOA PANEL
To date, sales of the Triage DOA Panel products have accounted for almost
all of the Company's sales. The Company expects its revenue and profitability
will substantially depend on the sale of the Triage DOA Panel products for the
foreseeable future. A reduction in demand for the Triage DOA Panel products
would have a material adverse effect on the Company's business, financial
condition and results of operations. The Company believes that growth in
-20-
sales of the Triage DOA Panel products is slowing as the available U.S.
market becomes saturated. Competitive pressures could also erode the
Company's profit margins for the Triage DOA Panel products. The Company's
continued growth will depend on its ability to successfully commercialize its
new products (the Triage C. DIFFICILE Panel, Triage Parasite Panel and Triage
Cardiac System) and develop and commercialize other products, and to gain
additional acceptance of the Triage DOA Panel products in new market
segments, such as occupational health.
During 1998, the Company received FDA approval to market the Triage C.
DIFFICILE Panel, Triage Parasite Panel and the Triage Cardiac System and
began selling each of the products in March, October and May, respectively.
Sales of these new products represented less than 7% of net sales in 1998.
The Company may not be able to successfully develop and commercialize new
products, including the Triage C. DIFFICILE Panel, Triage Parasite Panel, and
Triage Cardiac System, and the Company may not be able to maintain or expand
its share of the drug-testing market. Technological change or the development
of new or improved diagnostic technologies could result in the Company's
products becoming obsolete or noncompetitive. See "Business -- Products and
Products Under Development."
DEPENDENCE ON KEY DISTRIBUTORS; LIMITED DIRECT SALES EXPERIENCE
The Company relies upon key distributor alliances, such as with Fisher,
to distribute the Triage DOA Panel products, Triage C. DIFFICILE Panel,
Triage Parasite Panel and Triage Cardiac System and may rely upon
distributors to distribute products under development. The Triage DOA Panel
products are currently marketed pursuant to exclusive distribution agreements
in the U.S. hospital market segment by Fisher (which accounted for 86% of
product sales in 1998) and in some countries in Europe, Latin America, the
Middle East, Asia and Africa by country-specific and regional distributors.
The loss or termination of one or more of these distributors could have a
material adverse effect on the Company's sales unless suitable alternatives
can be arranged.
As the Company has launched three new products in 1998 and with the
potential launch of additional products from the Company's development
pipeline, the Company has increased the size of its sales force in the U.S.
and negotiated a new long-term distribution agreement with Fisher. This
long-term distribution agreement expanded Fisher's role to include the
distribution of the Triage Cardiac System, the Triage C. DIFFICILE Panel,
Triage Parasite Panel and some of Biosite's potential new products in the
U.S. medical market.
If any of the Company's distribution or marketing agreements are
terminated and the Company is unable to enter into alternative agreements or
if the Company elects to distribute new products directly, the Company would
have to invest in additional sales and marketing resources, including
additional field sales personnel, which would significantly increase future
selling, general and administrative expenses. The Company has limited
experience in direct sales, marketing and distribution of its products. The
Company's direct sales, marketing and distribution efforts may not be
successful. Further, Biosite may not be able to enter into new distribution
or marketing agreements on satisfactory terms, or at all. A failure to enter
into acceptable distribution agreements or a failure of the Company to
successfully market its products would have a material and adverse effect on
the Company.
INTENSELY COMPETITIVE INDUSTRY; RAPID TECHNOLOGICAL CHANGE
The market in which the Company competes is intensely competitive.
Biosite's competitors include health care companies that manufacture rapid
tests, laboratory-based tests and analyzers, as well as clinical reference
laboratories. Currently, the majority of diagnostic tests used by physicians
and other health care providers are performed by independent clinical
reference laboratories and hospital-based laboratories. The Company expects
that these laboratories will compete vigorously to maintain their dominance
of the testing market. In order to achieve market acceptance for its
products, the Company will be required to demonstrate that its products
provide cost-effective and time saving alternatives to tests performed by
clinical reference laboratories or traditional hospital-based laboratory
procedures. This will require physicians to change their established means of
having such tests performed. The Company's products may not be able to
compete with the testing services provided by traditional laboratory services.
In addition, companies with a significant presence in the diagnostic
market, such as Abbott Laboratories, Roche Boehringer Mannheim Corporation,
Bayer Diagnostics, Ortho Clinical Diagnostics, a division of Johnson &
Johnson, and DADE Behring, have developed or are developing diagnostic
products that do or will compete
-21-
with the Company's products. These competitors have substantially greater
financial, technical, research and other resources and larger, more
established marketing, sales, distribution and service organizations than the
Company. Moreover, these competitors offer broader product lines and have
greater name recognition than the Company, and offer discounts as a
competitive tactic. In addition, several smaller companies are currently
making or developing products that compete with or will compete with those of
the Company. The Company's competitors may succeed in developing or marketing
technologies or products that are more effective or commercially attractive
than the Company's current or future products, or that would render the
Company's technologies and products obsolete. Moreover, the Company may not
have the financial resources, technical expertise or marketing, distribution
or support capabilities to compete successfully in the future. In addition,
competitors, many of which have made substantial investments in competing
technologies, may be more effective than the Company or may prevent, limit or
interfere with the Company's ability to make, use or sell its products either
in the United States or in international markets. See "Business --
Technology," " -- Products and Products Under Development" and "--
Competition."
UNCERTAINTY OF PATENT AND PROPRIETARY TECHNOLOGY PROTECTION; POTENTIAL
INABILITY TO LICENSE TECHNOLOGY FROM THIRD PARTIES
The Company's ability to compete effectively will depend in part on its
ability to develop and maintain proprietary aspects of its technology, and to
operate without infringing the proprietary rights of others or to obtain
licenses to such proprietary rights. Biosite has U.S. and foreign issued
patents and is currently prosecuting patent applications in the United States
and with certain foreign patent offices. The Company's pending patent
applications may not result in the issuance of any patents. Additionally, the
Company's patent applications may not have priority over others'
applications, or, if issued, the Company's patents may not offer protection
against competitors with similar technology. Any patents issued to the
Company may be challenged, invalidated or circumvented in the future and the
rights created thereunder may not provide a competitive advantage.
The Triage DOA Panel, Triage C. DIFFICILE Panel, Triage Parasite Panel,
Triage Cardiac System and products under development may incorporate
technologies that are the subject of patents issued to, and patent
applications filed by, others. The Company has obtained licenses for some
technologies and may negotiate to obtain other licenses for technologies
patented by others. However, the Company may not be able to obtain licenses
for technology patented by others on commercially reasonable terms, or at
all. The Company may not be able to develop alternative approaches if it is
unable to obtain licenses and the Company's current and future licenses may
not be adequate for the operation of it's business. The failure to obtain
necessary licenses or to identify and implement alternative approaches would
prevent the Company from commercializing certain of its products under
development and would have a material adverse effect on the Company's
business, financial condition and results of operations.
Litigation may be necessary to enforce any patents issued to the Company,
to protect trade secrets or know-how owned by the Company or to determine the
enforceability, scope and validity of the proprietary rights of others. In
March 1996, the Company settled a potential patent infringement claim by
obtaining a license to the contested patent in return for a one-time payment
of $2.2 million. In September 1996, the Company settled a patent infringement
claim filed by Abbott Laboratories and obtained a license to the contested
patent in return for the payment of $5.5 million and the agreement to pay
certain royalties.
In September 1997, Behring Diagnostics, Inc. and Behring Diagnostics,
GmbH filed a patent infringement action against the Company in the U.S.
District Court for the District of Delaware. The patent infringement action
alleged that the Company's Triage DOA Panel products infringed a patent held
by the plaintiffs, which expires in August 2000. The plaintiffs sought to
recover damages of an unspecified amount and to enjoin future sales of the
Triage DOA Panel products by the Company. Biosite answered the complaint,
denying infringement and asserting affirmative defenses that the patent is
invalid and unenforceable. Because of a merger, the identity of the
plaintiffs changed to Dade Behring Inc., Dade Behring Marburg GmbH and Syva
Company (collectively "Dade Behring"). To avoid protracted litigation and
continued significant legal defense costs, the Company and Dade Behring
executed a settlement agreement in March 1999 that resolved all disputes
outstanding between the companies. Under the terms of the settlement
agreement, the Company obtained a license to the patent and will provide
Dade Behring the option to evaluate certain proprietary antibodies, resulting
in a net payment of $1,050,000 to Dade-Behring by Biosite. The Company has
charged to defense of patent matters in the accompanying statements of income
the applicable license costs related to years prior to 1998.
On April 28, 1998, Spectral Diagnostics, Inc. ("Spectral") filed a patent
infringement action against the Company in the U.S. District Court for the
Western District of Wisconsin, alleging that the Company's Triage Cardiac
Panel
-22-
infringes U.S. patent 5,744,358 which was issued on the date the suit was
filed. Spectral sought a permanent injunction and damages. Spectral also
sought a preliminary injunction that would enjoin the Company from selling
the Triage Cardiac Panel. On July 16, 1998, the Court issued an opinion
denying the motion for a preliminary injunction. Spectral also moved for
partial summary judgment on the issue of infringement. That motion was denied
on July 20, 1998. The established trial date of August 31, 1998 was set aside
while the two companies engaged in negotiations in an attempt to arrive at a
settlement in regards to all disputes outstanding between Biosite and
Spectral. In February 1999, a settlement agreement was executed that resolved
all disputes between the companies without a material adverse financial
impact to Biosite.
The Company may become subject to additional patent infringement claims
and litigation or interference proceedings conducted in the U.S. Patent and
Trademark Office ("USPTO") to determine the priority of inventions. The
Company also has received correspondence from other parties calling to the
Company's attention the existence of patents that they believe cover
technology which is or may be incorporated in Biosite's products and products
under development. Some of this correspondence has included offers to
negotiate the licensing of the patented technologies. There can be no
assurance that these matters will not result in litigation to determine the
enforceability, scope, and validity of the patents. Litigation, if initiated,
could seek to recover damages as a result of any sales of the products and to
enjoin further sales of such products.
Litigation that could be brought forth by other parties may result in
material expenses to the Company and significant diversion of effort by the
Company's technical and management personnel, regardless of the outcome. The
outcome of litigation is inherently uncertain and there can be no assurance
that a court would not find the third-party claims valid and that the Company
had no successful defense to such claims. An adverse outcome in litigation or
the failure to obtain a necessary license could subject the Company to
significant liability and could prevent the Company from selling the Triage
DOA Panel, Triage C. DIFFICILE Panel, Triage Parasite Panel, the Triage
Cardiac System or other products it may develop, which would have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company also relies upon trade secrets, technical know-how and
continuing invention to develop and maintain its competitive position. Others
may independently develop substantially equivalent proprietary information
and techniques or otherwise gain access to the Company's trade secrets or
disclose such technology, and the Company may not be able to protect its
trade secrets or its rights to its trade secrets.
Others may have filed and in the future are likely to file patent
applications that are similar or identical to those of the Company. To
determine the priority of inventions, the Company may have to participate in
interference proceedings declared by the USPTO that could result in
substantial cost to the Company. Patent applications of others may have
priority over patent applications filed by the Company.
The commercial success of the Company also depends in part on the Company
neither infringing patents or proprietary rights of third parties nor
breaching any licenses that may relate to the Company's technologies and
products. The Company is aware of several third-party patents that may relate
to the Company's technology. There can be no assurance that the Company does
not or will not infringe these patents, or other patents or proprietary
rights of third parties. In addition, the Company has received and may in the
future receive notices claiming infringement from third parties as well as
invitations to take licenses under third party patents. Any legal action
against the Company or its collaborative partners claiming damages and
seeking to enjoin commercial activities relating to the Company's products
and processes affected by third party rights, in addition to subjecting the
Company to potential liability for damages, may require the Company or its
collaborative partner to obtain a license in order to continue to manufacture
or market the affected products and processes. The Company or its
collaborative partners may not prevail in any such action and any license
(including licenses proposed by third parties) required under any such patent
may not be made available on commercially acceptable terms, or at all. There
are a significant number of U.S. and foreign patents and patent applications
in the Company's areas of interest, and the Company believes that there may
be significant litigation in the industry regarding patent and other
intellectual property rights. Litigation concerning patent and other
intellectual property rights could consume a substantial portion of the
Company's managerial and financial resources, which would have a material
adverse effect on the Company's business, financial condition and results of
operations.
GOVERNMENT REGULATION; NO ASSURANCE OF OBTAINING REGULATORY APPROVALS
-23-
The testing, manufacture and sale of the Company's products are subject
to regulation by numerous governmental authorities, principally the FDA and
corresponding state and foreign regulatory agencies. Pursuant to the Federal
Food, Drug and Cosmetic Act, and the regulations promulgated thereunder, the
FDA regulates the preclinical and clinical testing, manufacture, labeling,
distribution and promotion of medical devices. The Company will not be able
to commence marketing or commercial sales in the United States of new
products under development until it receives clearance or approval from the
FDA, which can be a lengthy, expensive and uncertain process. Noncompliance
with applicable requirements can result in, among other things, fines,
injunctions, civil penalties, recall or seizure of products, total or partial
suspension of production, failure of the government to grant premarket
clearance or premarket approval for devices, withdrawal of marketing
clearances or approvals, and criminal prosecution. The FDA also has the
authority to request recall, repair, replacement or refund of the cost of any
device manufactured or distributed by the Company.
Any devices manufactured or distributed by the Company pursuant to FDA
clearance or approvals are subject to pervasive and continuing regulation by
the FDA and certain state agencies. Before a new device can be introduced in
the market, the manufacturer must generally obtain FDA clearance of a 510(k)
notification or FDA approval of a PMA application. The PMA approval process
is more expensive, uncertain and lengthy than the 510(k) clearance process.
The Company is uncertain of the regulatory path to market that the FDA will
ultimately apply to the Company's products currently in development. Although
the Triage DOA Panel, Triage C. DIFFICILE Panel, Triage Parasite Panel and
Triage Cardiac System received 510(k) clearance, a PMA may be required for
the NeoralChek System, the Triage BNP System and Triage LBP System now in
development. There can be no assurance that with respect to any of the
Company's products in development, the FDA will not determine that the
Company must adhere to the more costly, lengthy and uncertain PMA approval
process. Modifications to a device that is the subject of an approved PMA
application, its labeling or manufacturing process may require approval by
the FDA of a PMA supplement or a new PMA application. For any devices that
are cleared through the 510(k) process, modifications or enhancements that
could significantly affect safety or effectiveness, or constitute a major
change in the intended use of the device, will require new 510(k) submissions.
There can be no assurance that the Company will be able to obtain
necessary regulatory approvals or clearances for its products on a timely
basis, if at all, and delays in receipt of or failure to receive such
approvals or clearances, the loss of previously received approvals or
clearances, limitations on intended use imposed as a condition of such
approvals or clearances, or failure to comply with existing or future
regulatory requirements would have a material adverse effect on the Company's
business, financial condition and results of operations.
Before the manufacturer of a device can submit the device for FDA
clearance or approval, it generally must conduct a clinical investigation of
the device. Although clinical investigations of most devices are subject to
the IDE requirements, clinical investigations of IVD tests, such as all of
the Company's products and products under development, are exempt from the
IDE requirements, including the need to obtain the FDA's prior approval,
provided the testing is noninvasive, does not require an invasive sampling
procedure that presents a significant risk, does not intentionally introduce
energy into the subject, and is not used as a diagnostic procedure without
confirmation by another medically established test or procedure. In addition,
the IVD must be labeled for RUO or IUO, and distribution controls must be
established to assure that IVDs distributed for research or clinical
investigation are used only for those purposes.
The Company intends to conduct clinical investigations of its products
under development, which will entail distributing them in the United States
on an IUO basis. There can be no assurance that the FDA would agree that the
Company's IUO distribution of its IVD products under development will meet
the requirements for IDE exemption. Furthermore, failure by the Company or
the recipients of its products under development to maintain compliance with
the IDE exemption requirements could result in enforcement action by the FDA,
including, among other things, the loss of the IDE exemption or the
imposition of other restrictions on the Company's distribution of its
products under development, which would adversely affect the Company's
ability to conduct the clinical investigations necessary to support marketing
clearance or approval.
Manufacturers of medical devices for marketing in the United States are
required to adhere to QSR, which includes testing, control, documentation and
other quality assurance requirements. Manufacturers must also comply with MDR
requirements that a manufacturer report to the FDA any incident in which its
product may have caused or contributed to a death or serious injury, or in which
its product malfunctioned and would be likely to cause or contribute to a death
or serious injury upon recurrence. Labeling and promotional activities are
subject to scrutiny by
-24-
the FDA and, in certain circumstances, by the Federal Trade Commission.
Current FDA enforcement policy prohibits the marketing of approved medical
devices for unapproved uses.
The Company is subject to routine inspection by the FDA and certain state
agencies for compliance with QSR requirements, MDR requirements and other
applicable regulations. The recently finalized QSR requirements include the
addition of design controls, that will likely increase the cost of
compliance. There can be no assurance that the Company will not incur
significant costs to comply with laws and regulations in the future or that
such laws and regulations will not have a material adverse effect upon the
Company's business, financial condition and results of operation.
The use of Biosite's products is also affected by the CLIA and related
federal and state regulations which provide for regulation of laboratory
testing. The scope of these regulations includes quality control, proficiency
testing, personnel standards and federal inspections. CLIA categorizes tests
as "waived," "moderately complex" or "highly complex," on the basis of
specific criteria. There can be no assurance that any future amendment of
CLIA or the promulgation of additional regulations impacting laboratory
testing would not have a material adverse effect on the Company's ability to
market its products or on its business, financial condition and results of
operations.
DEPENDENCE ON OTHERS FOR THE DEVELOPMENT OF NEW PRODUCTS
Biosite's strategy for the research, development, commercialization and
distribution of certain of its products entails entering into various
arrangements with corporate partners, licensors, licensees and others, and is
dependent upon the success of these parties in performing their
responsibilities. These parties may not perform their obligations as expected
and no revenue may be derived from these arrangements.
Biosite has entered into agreements with, among others, Novartis and KDK
for the development and marketing of products. The agreements are subject to
rights of termination and may be terminated. The Company's collaborators may
not abide by their contractual obligations and may discontinue or sell their
current lines of business. The research for which the Company receives or
provides funding may not lead to the development of products. The Company
intends to enter into additional development and marketing agreements. The
Company may not be able to enter into agreements on acceptable terms, or at
all.
The Company is continuing to enhance, with LRE, a hand-held point-of-care
fluorescent meter for use in Triage Meter System products. The meter can be
programmed to run a specific test through the use of changeable proprietary
software which is also under further development by LRE. LRE may not develop
the hardware or software on schedule, or at all, and new software may not be
developed to permit the meter to be used for another Triage Meter System
product. See "Business -- Strategic and Distribution Arrangements."
DEPENDENCE ON SOLE-SOURCE SUPPLIERS
Key components and raw materials used in the manufacture of the Triage
DOA Panel, Triage C. DIFFICILE Panel, Triage Parasite Panel and Triage
Cardiac System are currently provided by single-source vendors. Although the
Company believes that alternative sources for such components and raw
materials are available, any supply interruption in a sole-sourced component
of raw material would have a material adverse effect on the Company's ability
to manufacture these products until a new source of supply is qualified and,
as a result, would have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, an uncorrected
impurity or supplier's variation in a raw material, either unknown to the
Company or incompatible with the Company's Triage DOA Panel, Triage C.
DIFFICILE Panel, Triage Parasite Panel and Triage Cardiac System
manufacturing processes, could have a material adverse effect on the
Company's ability to manufacture products. The Company has under development
products other than the Triage DOA Panel, Triage C. DIFFICILE Panel, Triage
Parasite Panel and Triage Cardiac System which, if developed, may require
that the Company enter into additional supplier arrangements. The Company may
not be able to enter into additional supplier arrangements on commercially
reasonable terms, or at all. Failure to obtain a supplier for the manufacture
of its future products, if any, would have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company expects to rely upon LRE for production of the fluorescent meter
to be used in connection with its Triage Meter System platform products,
including the Triage Cardiac System and others currently under development. The
Company's dependence upon LRE for the manufacture of the meter may adversely
affect the
-25-
Company's profit margins, its ability to develop and manufacture products on
a timely and competitive basis, the timing of market introductions and
subsequent sales of products incorporating the LRE meter. See "Business
- --Strategic and Distribution Arrangements."
LIMITED MANUFACTURING EXPERIENCE; POTENTIAL INABILITY TO SCALE-UP
MANUFACTURING
To be successful, the Company must manufacture its current and future
products in compliance with regulatory requirements, in sufficient quantities
and on a timely basis, while maintaining product quality and acceptable
manufacturing costs. The Company has limited experience manufacturing
products other than the Triage DOA Panel products. To achieve the level of
production necessary for commercialization of Biosite's new products and
products under development, the Company will need to scale-up current
manufacturing capabilities. Significant additional work will be required for
the scaling-up of each new Biosite product prior to commercialization, and
this work may not be completed successfully.
In addition, although the Company expects that some of its new products
and products under development will share production attributes with the
Triage DOA Panel, production of these products may require the development of
new manufacturing technologies and expertise. These products may not be able
to be manufactured by the Company or any other party at a cost or in
quantities to make these products commercially viable. If the Company is
unable to develop or contract for manufacturing capabilities on acceptable
terms for its products under development, the Company's ability to conduct
preclinical and clinical testing will be adversely affected, resulting in the
delay of submission of products for regulatory clearance or approval and
initiation of new development programs, which would have a material adverse
effect on the Company's business, financial condition and results of
operations.
The Company anticipates making significant expenditures to develop high
volume manufacturing capabilities required for each of its new products and
products currently under development, if the products are successfully
developed. Manufacturing and quality control problems may arise as the
Company attempts to scale-up its manufacturing and such scale-up may not be
achieved in a timely manner or at a commercially reasonable cost, or at all.
As a result of manufacturing scale-up and capacity constraint issues related
to the production of the Triage Cardiac System, the Company developed a
backlog of orders for the Triage Cardiac System during the third and fourth
quarter of 1998.
The Company's manufacturing facilities and those of its contract
manufacturers are or will be subject to periodic regulatory inspections by
the FDA and other federal and state regulatory agencies and these facilities
are subject to QSR requirements of the FDA. The Company or its contractors
may not satisfy such regulatory requirements, and any failure to do so would
have a material adverse effect on the Company's business, financial condition
and results of operations.
UNCERTAINTY RELATING TO THIRD PARTY REIMBURSEMENT AND POTENTIAL COST CONSTRAINTS
In the United States, health care providers that purchase the Triage DOA
Panel and other diagnostic products, such as hospitals and physicians,
generally rely on third party payors, principally private health insurance
plans, federal Medicare and state Medicaid, to reimburse all or part of the
cost of the procedure. Such third party payors can affect the pricing or the
relative attractiveness of the Company's products by regulating the maximum
amount of reimbursement provided by such payors for testing services. In
addition, the tests performed by public health departments, corporate
wellness programs and other large volume users in the drug screening market
are generally not subject to reimbursement. Further, certain health care
providers are moving towards a managed care system in which such providers
contract to provide comprehensive health care for a fixed cost per patient.
The Company is unable to predict what changes will be made in the
reimbursement methods utilized by third party payors. The Company could be
adversely affected by changes in reimbursement policies of governmental or
private health care payors, particularly to the extent any such changes
affect reimbursement for procedures in which the Company's products are used.
Third party payors are increasingly scrutinizing and challenging the prices
charged for medical products and services. Decreases in reimbursement amounts
for tests performed using the Company's products may decrease amounts
physicians and other practitioners are able to charge patients, which in turn
may adversely affect the Company's ability to sell its products on a
profitable basis. Failure by physicians and other users to obtain
reimbursement from third party payors, or changes in government and private
third party payors' policies toward reimbursement of tests utilizing the
Company's products could have a material adverse effect on the Company's
business, financial condition or results of operation. Given the efforts to
control and reduce health care costs in the United States in recent years,
there can be no assurance that currently available levels of reimbursement
will continue
-26-
to be available in the future for the Company's existing products or products
under development.
In addition, market acceptance of the Company's products in international
markets is dependent, in part, upon the availability of reimbursement within
prevailing health care payment systems. Reimbursement and health care payment
systems in international markets vary significantly by country, and include
both government sponsored health care and private insurance.
The Company believes that the overall escalating cost of medical products
and services has led to and will continue to lead to increased pressures on
the health care industry, both foreign and domestic, to reduce the cost of
products and services, including products offered by the Company. Third party
reimbursement and coverage may not be available or adequate in either U.S. or
foreign markets, current reimbursement amounts may be decreased in the future
and future legislation, regulation or reimbursement policies of third-party
payors may adversely affect the demand for the Company's products or its
ability to sell its products on a profitable basis.
POSSIBLE FUTURE CAPITAL REQUIREMENTS; UNCERTAINTY OF ADDITIONAL FUNDING
The Company believes that its available cash, cash from operations and
funds from existing credit arrangements will be sufficient to satisfy its
funding needs for at least the next 24 months. Thereafter, if cash generated
from operations is insufficient to satisfy the Company's working capital and
capital expenditure requirements, the Company may be required to sell
additional equity or debt securities or obtain additional credit facilities.
Additional capital, if needed, may not be available on satisfactory terms, or
at all.
Furthermore, any additional equity financing may be dilutive to
stockholders, and debt financing, if available, may include restrictive
covenants. The Company's future liquidity and capital funding requirements
will depend on numerous factors, including the extent to which the Company's
new products and products under development are successfully developed, gain
market acceptance and become and remain competitive, the timing and results
of clinical studies and regulatory actions regarding the Company's potential
products, the costs and timing of further expansion of sales, marketing and
manufacturing activities, facilities expansion needs, and the costs and
timing associated with the enforcement, defense and resolution of patent
matters, including potential licensing of certain technologies patented by
others. The failure by the Company to raise capital on acceptable terms when
needed could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity
and Capital Resources."
POTENTIAL INABILITY TO MANAGE GROWTH; DEPENDENCE ON KEY PERSONNEL
The Company anticipates increased growth in the number of its employees,
the scope of its operating and financial systems and the geographic area of
its operations as new products are developed and commercialized. This growth
will result in an increase in responsibilities for both existing and new
management personnel. The Company's ability to manage growth effectively will
require it to continue to implement and improve its operational, financial
and management information systems and to train, motivate and manage its
employees. The Company may not be able to manage its expansion, and a failure
to do so could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company's future success depends in part on the continued service of
its key technical, sales, marketing and executive personnel, and its ability
to identify and hire additional qualified personnel. Competition for such
personnel is intense and the Company may not be able to retain existing
personnel or identify or hire additional personnel.
PRODUCT LIABILITY EXPOSURE; INADEQUACY OR UNAVAILABILITY OF INSURANCE COVERAGE
The testing, manufacturing and marketing of medical diagnostic devices such
as the Triage DOA Panel, Triage C. DIFFICILE Panel, Triage Parasite Panel and
Triage Cardiac System, as well as the Company's products currently under
development, entail an inherent risk of product liability claims. To date, the
Company has not experienced any material product liability claims, but any such
claims arising in the future could have a material adverse effect on the
Company's business, financial condition and results of operations. Potential
product liability claims may exceed the amount of the Company's insurance
coverage or may be excluded from coverage under the terms of the policy. The
-27-
Company's existing insurance may not be renewed at a cost and level of
coverage comparable to that presently in effect, or at all. In the event that
the Company is held liable for a claim against which it is not indemnified or
for damages exceeding the limits of its insurance coverage, that claim could
have a material adverse effect on the Company's business, financial condition
and result of operations.
IMPACT OF YEAR 2000 ISSUE
The Y2K Issue could have a material adverse impact on the operations of
the Company. Additionally, the systems of other companies on which Biosite's
systems rely may not be timely converted, which may have an adverse effect on
the Company's systems. For example, to the extent that customers would be
unable to order products or pay invoices or suppliers would be unable to
manufacture or deliver product, the Company's operations would be adversely
affected.
-28-
ITEM 2. PROPERTIES
The Company leases approximately 120,000 square feet of space in seven
buildings in the Sorrento Valley area in San Diego under leases that expire
from December 1999 through May 2003. The Company has renewal options for four
buildings through 2000, two of the buildings through 2001 and one building
through 2005. The Company believes these facilities are adequate for its
current needs and that suitable additional or alternative space will be
available in the future on commercially reasonable terms as needed. The
Company's current facilities are used for its administrative offices,
research and development facilities and manufacturing operations. The Company
is negotiating with various parties for the leasing of a new campus corporate
facility to be constructed in San Diego, which would be adequate for its
future needs. The Company does not anticipate relocating its operations to
the new facility prior to January 2001. Relocation to a new facility or
leasing of additional facility space would be expected to result in an
increase in rent upon occupancy.
ITEM 3. LEGAL PROCEEDINGS
In September 1997, Behring Diagnostics, Inc. and Behring Diagnostics,
GmbH filed a patent infringement action against the Company in the U.S.
District Court for the District of Delaware. The patent infringement action
alleged that the Company's Triage DOA Panel products infringed a patent held
by the plaintiffs, which expires in August 2000. The plaintiffs sought to
recover damages of an unspecified amount and to enjoin future sales of the
Triage DOA Panel products by the Company. Biosite answered the complaint,
denying infringement and asserting affirmative defenses that the patent is
invalid and unenforceable. Because of a merger, the identity of the
plaintiffs changed to Dade Behring Inc., Dade Behring Marburg GmbH and Syva
Company (collectively "Dade Behring"). To avoid protracted litigation and
continued significant legal defense costs, the Company and Dade-Behring
executed a settlement agreement in March 1999 that resolved all disputes
outstanding between the companies. Under the terms of the settlement
agreement, the Company obtained a license to the patent and will provide
Dade Behring the option to evaluate certain proprietary antibodies, resulting
in a net payment of $1,050,000 to Dade Behring by Biosite.
On April 28, 1998, Spectral Diagnostics, Inc. ("Spectral") filed a patent
infringement action against the Company in the U.S. District Court for the
Western District of Wisconsin, alleging that the Company's Triage Cardiac
Panel infringes U.S. patent 5,744,358 which was issued on the date the suit
was filed. Spectral sought a permanent injunction and damages. Spectral also
sought a preliminary injunction that would enjoin the Company from selling
the Triage Cardiac Panel. On July 16, 1998, the Court issued an opinion
denying the motion for a preliminary injunction. Spectral also moved for
partial summary judgment on the issue of infringement. That motion was denied
on July 20, 1998. The established trial date of August 31, 1998 was set aside
while the two companies engaged in negotiations in an attempt to arrive at a
settlement in regards to all disputes outstanding between Biosite and
Spectral. In February 1999, a settlement agreement was executed that resolved
all disputes between the companies without a material adverse financial
impact to Biosite.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
-29-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded in the over-the-counter market on the
Nasdaq National Market (the "NNM") under the symbol "BSTE". The following tables
set forth the high and low sale prices, for the Company's common stock as
reported on the NNM for the periods.
1997 HIGH LOW
---- ------------- ---------
First Quarter (commencing on
February 11, 1997)......................... $ 14.125 $ 9.380
Second Quarter............................... $ 9.750 $ 7.000
Third Quarter................................ $ 9.500 $ 7.000
Fourth Quarter............................... $ 11.630 $ 7.880
1998 HIGH LOW
---- ------------- ---------
First Quarter................................ $ 17.750 $ 8.125
Second Quarter............................... $ 16.313 $ 9.250
Third Quarter................................ $ 11.000 $ 3.563
Fourth Quarter............................... $ 12.500 $ 4.250
There were approximately 146 holders of record of common stock as of
February 28, 1999. The Company has not paid any cash dividends to date and
does not anticipate any being paid in the foreseeable future.
-30-
ITEM 6. SELECTED FINANCIAL DATA
(in thousands, except per share data)
Years Ended December 31,
------------------------
1994 1995 1996 1997 1998
---------- ---------- ---------- ---------- ---------
STATEMENT OF INCOME DATA:
Net sales.................................... $16,320 $25,147 $28,206 $31,677 $34,424
Cost of sales................................ 4,416 5,649 5,983 6,926 10,513
------- ------- ------- ------- -------
Gross profit................................. 11,904 19,498 22,223 24,751 23,911
Selling, general and administrative.......... 5,960 7,134 8,623 11,549 15,469
Research and development..................... 3,836 6,553 9,268 11,662 11,167
Defense of patent matters.................... 338 1,217 2,368 331 4,861
------- ------- ------- ------- -------
Total operating expenses..................... 10,134 14,904 20,259 23,542 31,497
Income (loss) from operations................ 1,770 4,594 1,964 1,209 (7,586)
Interest and other income, net............... 649 1,647 1,846 3,435 5,026
Reacquisition of distribution rights........ -- -- -- (3,364) --
------- ------- ------- ------- -------
Income (loss) before benefit (provision) for
income taxes............................... 2,419 6,241 3,810 1,280 (2,560)
Benefit (provision) for income taxes......... (63) 1,667 (261) (82) 1,448
------- ------- -------- -------- -------
Net income (loss)............................ $ 2,356 $ 7,908 $ 3,549 $ 1,198 $(1,113)
------- ------- ------- ------- --------
------- ------- ------- ------- --------
Basic net income (loss) per share............ $ 2.04 $ 6.46 $ 2.48 $ 0.11 $ (0.09)
------- ------- ------- ------- --------
------- ------- ------- ------- --------
Diluted net income (loss) per share.......... $ 0.24 $ 0.79 $ 0.34 $ 0.09 $ (0.09)
------- ------- ------- ------- --------
------- ------- ------- ------- --------
Common and common equivalent shares used in
computing per share amounts(1)
- Basic............................... 1,153 1,225 1,431 11,249 12,939
- Diluted............................. 9,910 10,004 10,392 13,081 12,939
DECEMBER 31,
-----------------------------------------------------
1994 1995 1996 1997 1998
--------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities.... $ 5,916 $ 13,979 $ 9,916 $ 39,257 $ 34,229
Working capital..................................... 7,974 14,428 14,305 46,611 41,214
Total assets........................................ 14,364 27,935 30,089 63,311 65,809
Long-term obligations, less current portion......... 772 2,739 3,253 3,797 4,038
Stockholders' equity................................ 10,512 18,526 22,153 55,090 54,683
- ----------
(1) Computed on the basis described in Note 1 of Notes to Financial Statements.
-31-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE MATTERS DISCUSSED IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS CONTAIN FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE DISCUSSED HERE. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO
SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE
SECTIONS ENTITLED "BUSINESS" AND "RISK FACTORS," AS WELL AS THOSE DISCUSSED
ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K. THE COMPANY DISCLAIMS, ANY INTENT
OR OBLIGATION TO UPDATE THESE FORWARD-LOOKING STATEMENTS.
OVERVIEW
Biosite Diagnostics Incorporated (the "Company") was established in 1988.
The Company has been primarily involved in the research, development,
manufacturing and marketing of rapid diagnostic tests. In 1992, the Company
began commercial sales of the Company's primary product, Triage Panel for
Drugs of Abuse ("Triage DOA Panel"). In 1998, the Company began selling three
additional products, the Triage C. DIFFICILE Panel, the Triage Parasite Panel
and the Triage Cardiac System. The Company markets the products worldwide
primarily through distributors supported by the Company's direct sales force.
In addition to focusing its attention on commercial activities associated
with these products, the Company continues to invest in the research and
development of additional rapid tests to aid in the diagnosis of several
critical diseases or conditions, including congestive heart failure and
certain bacterial infections. The Company also is developing a diagnostic
test to aid in the dosing of immunosuppressant drugs. The principal markets
of the Company are hospital laboratories and emergency departments.
The Company's sales to date have primarily been due to sales of the
Triage DOA Panel product line. The Triage DOA Panel products are marketed
pursuant to exclusive distribution agreements in the U.S. hospital market
segment by Fisher (which accounted for 86% of product sales in 1998) and in
some countries in Europe, Latin America, the Middle East, Asia and Africa by
country-specific and regional distributors. Since the launch of the Triage
DOA Panel in fiscal 1992, the Company experienced continued revenue
growth from its Triage DOA Panel product line. The Company believes that the
growth in sales of Triage DOA Panel products has slowed and may decline as
the available U.S. market becomes saturated and competitive pressures become
more and more prominent in a maturing market.
During 1998, the Company received final clearance from the U.S. Food and
Drug Administration ("FDA") to market the Triage Cardiac Panel and the Triage
Meter (together called "Triage Cardiac System") and the Triage C. DIFFICILE
and Triage Parasite Panels in the United States. The Company began selling
the Triage C. difficile Panel in March and the Triage Cardiac System in May.
Sales of the Triage Parasite Panel were initiated in mid-October.
The Company anticipates that its results of operations may fluctuate for
the foreseeable future due to several factors, including whether and when new
products are successfully developed and introduced by the Company, market
acceptance of current or new products, defense and resolution of patent
matters, regulatory delays, product recalls, manufacturing scale-up issues,
delays, or inefficiencies, shipment problems, seasonal customer demand, the
timing of significant orders, changes in reimbursement policies, competitive
pressures on average selling prices and changes in the mix of products sold.
Operating results would also be adversely affected by a downturn in the
market for the Company's current and future products, order cancellations or
order rescheduling or manufacturing delays. As a result of manufacturing
scale-up and capacity constraint issues related to the production of the
Triage Cardiac System, the Company developed a backlog of orders for the
Triage Cardiac System during the third and fourth quarter of 1998. The
Company addressed the manufacturing scale-up and capacity constraint issues
and filled the backlog orders during December 1998 and the first quarter of
1999. The Company manufactures and ships its other products shortly after
receipt of orders and has not developed a significant backlog for such
products and does not anticipate it will develop a material backlog for such
products in the future.
Because the Company is continuing to increase its operating expenses,
primarily for personnel and activities supporting newly-introduced products and
new product development, the Company's operating results would be adversely
affected if its sales did not correspondingly increase or if its product
development efforts are unsuccessful or are subject to delays. The Company's
limited operating history makes accurate prediction of future operating
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results difficult or impossible. The Company may not sustain revenue growth
or return to profitability on a quarterly or annual basis and its operating
results may not be consistent with predictions made by securities analysts.
RECENT DEVELOPMENTS
NEW PRODUCTS
During the first quarter of 1998, the Company received final clearance
from the U.S. Food and Drug Administration ("FDA") to market the Triage
Cardiac Panel and the Triage Meter (together called "Triage Cardiac System")
and the Triage C. DIFFICILE Panel in the United States. The Triage Cardiac
System is Biosite's first product to utilize the Company's Triage Meter
System technology and is designed to deliver precise, quantitative results in
a rapid timeframe. The Triage Cardiac System may aid in the diagnosis of
Acute Myocardial Infarction ("AMI") and provide physicians with an enhanced
ability to make treatment decisions in a timely manner. Used in conjunction
with the Triage Meter, the Triage Cardiac Panel quantitatively measures, in a
single test device, the level of CK-MB, troponin I and myoglobin from a
whole-blood sample. The Triage C. DIFFICILE Panel is a rapid test designed to
identify CLOSTRIDIUM DIFFICILE, an opportunistic pathogen of the intestinal
tract that may thrive as a result of broad spectrum antibiotic treatment. The
Company began selling the Triage C. DIFFICILE Panel in March and the Triage
Cardiac System in May. The Company addressed manufacturing scale-up and
capacity constraint issues related to the production of the Triage Cardiac
system and filled the backlog orders in December 1998 and the first quarter
of 1999. In October 1998, the Company received final clearance from the FDA to
market the Triage Parasite Panel, the Company's third product launched in
1998. The Triage Parasite Panel is a rapid test designed to simultaneously
detect three common waterborne parasites, GIARDIA LAMBLIA, CRYPTOSPORIDIUM
PARVUM and ENTAMOEBA HISTOLYTICA/DISPAR, that can cause severe
gastrointestinal infections. Sales of the Triage Parasite Panel were
initiated in mid-October.
RESEARCH AND DEVELOPMENT
In January 1998, Novartis finalized its investment of an additional
$500,000 in Biosite in exchange for a convertible debenture as a result of
Biosite's successful completion of the initial feasibility studies for the
NeoralChek System (formerly the "Triage Neoral System"). The convertible
debenture was immediately converted into 41,666 shares of common stock of the
Company based on a conversion price of $12.00 per share. Additionally, the
Company and Novartis expanded the scope of their collaboration to include the
development of a second version of the NeoralChek System. The attainment of
certain milestones under the expansion of the collaboration resulted in
contract revenues of $1.1 million during 1998. Additional payments to Biosite
will be made if additional milestones are achieved. The Company initiated
clinical trials for both versions of the NeoralChek System in June and July
1998. The clinical trials were suspended in September 1998 to permit the
Company to make improvements to the NeoralChek System. The clinical trials
may resume in the first half of 1999. The NeoralChek Systems are designed to
provide a cost-effective means of measuring a patient's level of cyclosporine
on a real-time basis in order to enable physicians to optimize the dosing of
the therapeutic drug during the patient's visit. In December, the Company
initiated clinical trials for the Triage BNP and Triage LBP Systems. The
Triage BNP System may be used in the diagnosis of congestive heart failure
and the Triage LBP System may be used in the diagnosis of sepsis or
bacteremia.
BIOSITE DISCOVERY PROGRAM
In March 1999, the Company introduced its Biosite Discovery program, a
collaborative research and diagnostics development program focused on the
identification of new protein markers for acute diseases. The Company will
seek to use its expertise in antibody development to help pharmaceutical and
biotechnology partners accelerate their research programs. In return, Biosite
intends to obtain diagnostic rights to the proteins under study. Biosite will
utilize its proprietary Omniclonal antibody development technology to develop
high affinity antibodies for the characterization and validation of protein
targets. Initially, Biosite will focus on disease target markers in four core
areas: cardiovascular, cerebrovascular, infectious disease and oncology. If
the diagnostic utility of a marker is established, it will then be assessed
for commercialization potential, with high value markers being added to
Biosite's product development pipeline. The Company executed its first
collaborative agreement under the Biosite Discovery program in the
cardiovascular area with Scios in November 1998.
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PRODUCT DISTRIBUTION AGREEMENTS
As the Company has launched three new products in 1998 and with the
potential launch of additional products from the Company's development
pipeline, the Company has increased the size of its sales force in the U.S.
and negotiated a new long-term distribution agreement with the Fisher
HealthCare Division ("Fisher") of the Fisher Scientific Company, the
Company's distributor of the Triage DOA Panel products in the U.S. hospital
market segment. This long-term distribution agreement expanded Fisher's role
to include the distribution of the Triage Cardiac System, the Triage C.
DIFFICILE Panel, the Triage Parasite Panel and some of the potential new
products in the U.S. medical market.
As a result of a decision by Merck, the Company's former distributor of
Triage DOA in Europe, to refocus away from certain aspects of the human
diagnostic business, the Company terminated agreements with Merck for the
development and distribution of the Triage Cardiac System and the
distribution of the Triage DOA Panel product line in December 1997. During
1998, the Company expended efforts related to transitioning its product
distribution in Europe from E. Merck to a network of regional distributors.
The Company finalized alliances with several European partners, forming a
network of distributors to market its products in some European countries.
The Company anticipates that it may, if appropriate, enter into
additional distribution agreements with respect to its current products,
products currently under development and products that it may develop in the
future, if any of such products receive the requisite regulatory clearance or
approvals. A failure by any of the Company's distribution partners to
successfully market the Company's products may require that the Company
distribute its products on a direct basis. In such circumstances, a failure
of the Company to successfully market its products on a direct basis would
have a material and adverse effect on the Company.
LITIGATION
In September 1997, Behring Diagnostics, Inc. and Behring Diagnostics,
GmbH filed a patent infringement action against the Company in the U.S.
District Court for the District of Delaware. The patent infringement action
alleged that the Company's Triage DOA Panel products infringed a patent held
by the plaintiffs, which expires in August 2000. The plaintiffs sought to
recover damages of an unspecified amount and to enjoin future sales of the
Triage DOA Panel products by the Company. Biosite answered the complaint,
denying infringement and asserting affirmative defenses that the patent is
invalid and unenforceable. Because of a merger, the identity of the
plaintiffs changed to Dade Behring Inc., Dade Behring Marburg GmbH and Syva
Company (collectively "Dade Behring"). To avoid protracted litigation and
continued significant legal defense costs, the Company and Dade-Behring
executed a settlement agreement in March 1999 that resolved all disputes
outstanding between the companies. Under the terms of the settlement
agreement, the Company obtained a license to the patent and will provide
Dade Behring the option to evaluate certain proprietary antibodies, resulting
in a net payment of $1,050,000 to Dade Behring by Biosite.
On April 28, 1998, Spectral Diagnostics, Inc. ("Spectral") filed a patent
infringement action against the Company in the U.S. District Court for the
Western District of Wisconsin, alleging that the Company's Triage Cardiac
Panel infringes U.S. patent 5,744,358 which was issued on the date the suit
was filed. Spectral sought a permanent injunction and damages. Spectral also
sought a preliminary injunction that would enjoin the Company from selling
the Triage Cardiac Panel. On July 16, 1998, the Court issued an opinion
denying the motion for a preliminary injunction. Spectral also moved for
partial summary judgment on the issue of infringement. That motion was denied
on July 20, 1998. The established trial date of August 31, 1998 was set aside
while the two companies engaged in negotiations in an attempt to arrive at a
settlement in regards to all disputes outstanding between Biosite and
Spectral. In February 1999, a settlement agreement was executed that resolved
all disputes between the companies without a material adverse financial
impact to Biosite.
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RESULTS OF OPERATIONS
The following table sets forth operating data as a percentage of net
sales:
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997 1998
----------- ----------- -----------
Net sales..................................... 100% 100% 100%
Cost of sales................................. 21 22 31
--- --- ---
Gross profit.................................. 79 78 69
Operating expenses:
Selling, general and administrative......... 31 36 45
Research and development.................... 33 37 32
Defense of patent matters................... 8 1 14
--- --- ---
Total operating expenses.................. 72 74 91
Income from operations....................... 7 4 (22)
Other income, net............................. 7 11 15
Reacquisition of distribution rights.......... -- (11) --
--- ---- ---
Income before benefit (provision) for income
taxes....................................... 14 4 (7)
Benefit (provision) for income taxes.......... (1) -- 4
---- --- ---
Net income ................................... 13% 4% (3)%
--- --- ----
--- --- ----
YEARS ENDED DECEMBER 31, 1998 AND 1997
NET SALES. Net sales increased 9% to $34.4 million in 1998 from $31.7
million in 1997. The increase was primarily attributable to the introduction
of new products in 1998 and the continued market acceptance of the Company's
higher-priced Triage DOA Plus TCA Panel products. The Triage C. DIFFICILE
Panel and Triage Parasite Panel were launched in March and October,
respectively. The Triage Cardiac system was introduced in May. Net sales for
the products introduced in 1998 totaled approximately $2.3 million. The
Company believes that the growth in sales of the Triage DOA Panel products
has slowed and may begin to decline as the available U.S. market becomes
saturated and competitive pressures become more prominent in a maturing
market.
GROSS PROFIT. Gross profit decreased 3% to $23.9 million in 1998
primarily as a result of experiencing negative gross profits related to the
new products introduced in 1998. The overall gross margin decreased to 69%
for 1998 from 78% for 1997. The gross margins decreased during the year
primarily as a result of the introduction of the Triage C. DIFFICILE and
Parasite Panels and Triage Cardiac System. During 1998, the Company
experienced manufacturing scale-up and capacity constraint issues related to
the Triage Cardiac System that resulted in a backlog of orders during the
fourth quarter. The new products are expected to realize lower or negative
gross margins during the early stages of their commercialization as
incremental manufacturing costs are spread over smaller sales volumes and
manufacturing scale-up, capacity constraint, and efficiency issues are
addressed. The Company also expects that the overall gross margins will
continue to decrease as a result of competitive pricing pressures related to
the maturing Triage DOA product line and the incremental manufacturing costs
associated with new products until economies of scale can be achieved with
such new products and until other manufacturing scale-up issues are addressed.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 34% to $15.5 million in 1998 from $11.5
million in 1997. The 1998 increases resulted primarily from the cost of the
Company's expanded sales force, increased marketing activities associated
with new products and potential new products, and the expansion of
administrative functions to support the Company's expanded operations and
business development activities. Additionally, the Company expended efforts
related to transitioning its product distribution in Europe from E. Merck to
a network of regional distributors.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
decreased 4% to $11.2 million in 1998 from $11.7 million in 1997. Although
manufacturing scale-up and optimization expenses were significantly higher in
1998 than 1997, the timing of clinical trials and other product development
expenses in 1997 resulted in an
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overall decrease in 1998 research and development expenses as compared to
1997. There were significant product development activities associated with
the Triage Cardiac System in the fourth quarter of 1997. The Company expects
that its research and development expenses will increase in 1999, as compared
to 1998 levels. The increased expenditures are expected to primarily relate
to preclinical and clinical studies, product development efforts, the Biosite
Discovery program and manufacturing scale-up activities. The Company
initiated clinical trials for its Triage BNP System and Triage LBP System in
late December and expects such clinical trials to extend through the first
half of 1999 and the cost associated with such clinical trials is expected to
be significant. These potential products are subject to more complex
regulatory approval requirements than the Company's previous products. The
Company also may resume clinical trials for its NeoralChek System during the
first half of 1999. The timing of the increased expenditures and their
magnitude are primarily dependent on the progress and success of the research
and development and the timing of potential product launches.
DEFENSE OF PATENT MATTERS. In 1998, the Company recorded a charge of
approximately $4.9 million associated with the defense and settlement of two
separate patent litigations. Settlement agreements were executed during the
first quarter of 1999 that resolved both matters. In February 1999, a
settlement agreement was executed that resolved all disputes between Spectral
Diagnostics and the Company without a material adverse financial impact to
Biosite. In March 1999, to avoid protracted litigation and continued
significant legal defense costs, the Company and Dade-Behring executed a
settlement agreement that resolved all disputes outstanding between the
companies. Under the terms of this settlement agreement, the Company obtained
a license to the patent and provided Dade-Behring the option to evaluate
certain proprietary antibodies, resulting in a net payment of $1,050,000 to
Dade-Behring by Biosite. The Company has charged to defense of patent matters
in the accompanying statements of income the applicable license costs related
to years prior to 1998 of $604,000.
OTHER INCOME. Contract revenue increased $1.4 million in 1998 from $1.2
million to $2.6 million. In 1998, the Company recognized $1.3 million from
Kyoto Dai-Ichi Kagaku Co., Ltd. ("KDK") related to milestones achieved in the
development of the Triage Cardiac System, $1.1 million from Novartis related
to milestones achieved in the development of the NeoralChek System and
$192,000 related to an SBIR (Small Business Innovation Research) grant from
the U.S. Government for research related to potential microbiology products.
In 1997, the Company recognized $778,000 from Merck related to the
development of the Triage Cardiac System and $400,000 related to milestones
in the development of the NeoralChek System.
BENEFIT (PROVISION) FOR INCOME TAXES. As a result of the pre-tax loss
recorded for 1998 and the estimated tax credits generated in 1998, the
Company recorded a benefit for income taxes of $1.4 million. As of December
31, 1998, the Company had federal research and development, California
research and development, and California manufacturers' credit carryforwards
of approximately $1,552,000, $685,000 and $425,000, respectively. The federal
research and development, California research and development, and California
manufacturers' credit will begin expiring in 2003, 2003, and 2005,
respectively, unless previously utilized. As of December 31, 1998, the
Company has approximately $4.0 million of net deferred tax assets, with no
offsetting valuation allowance as realization of such assets has been
assessed by the Company as more likely than not. The realization of the
deferred tax assets is dependent upon the generation of future taxable income
of approximately $10 million. The Company will continue to assess the
likelihood of realization of such assets; however, if future events occur
which do not make the realization of such assets more likely than not, the
Company will record a valuation allowance against all or a portion of the net
deferred tax assets.
YEARS ENDED DECEMBER 31, 1997 AND 1996
NET SALES. Net sales increased 12% to $31.7 million in 1997 from $28.2
million in 1996. The increase is primarily attributable to the continued
market acceptance of the Company's Triage DOA Plus TCA Panel and Triage
ExpressTest Panel products.
GROSS PROFIT. Gross profit increased 11% to $24.8 million in 1997 as a
result of increased sales of the Triage DOA Panel product line. Gross margins
decreased slightly to 78% from 79% for 1996.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 26% to $11.7 million in 1997 from $9.3 million in 1996. This
increase resulted primarily from the expansion of the Company's research and
development and manufacturing scale-up efforts on its cardiac, microbiology,
and therapeutic drug monitoring assays under development. During 1997, the
Company continued to expend significant efforts on activities related to the
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Triage Cardiac Panel and the Triage C. DIFFICILE Panel, while continuing
research and development activities related to other products under
development and other potential product launches.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 34% to $11.5 million in 1997 from $8.6
million in 1996. The 1997 increases were primarily a result of the costs of
expanding the Company's in-house marketing and administrative functions to
support the Company's expanded operations and public reporting
responsibilities. During 1997, the Company continued to implement certain
marketing programs designed to spur greater sales of its Triage DOA Panel
products in the workplace testing market and secure long-term commitments
from customers in the clinical market. Additionally, preparatory marketing
activities related to the potential launch of new products were initiated.
DEFENSE OF PATENT MATTERS. In 1997, the Company recorded legal costs
associated with the Dade Behring litigation and other patent disputes
totaling approximately $331,000 relating to the defense of such patent
matters.
OTHER INCOME. Interest income increased $1.4 million to $2.1 million in
1997 from $736,000 in 1996. The increases resulted primarily from the higher
average balances of cash, cash equivalents and marketable securities during
1997 as compared to 1996. In February 1997, the Company received net proceeds
from its initial public offering of approximately $29.8 million.
REACQUISITION OF DISTRIBUTION RIGHTS. In 1994, the Company entered into
an agreement with Merck to distribute the Triage Cardiac System in certain
countries in Europe and Latin America and in South Africa. In 1996, Merck
decided to refocus away from certain aspects of the human diagnostics
business. In December 1997, Biosite terminated the development and
distribution agreement with Merck for the Triage Cardiac System, paid Merck
$2.1 million cash and forgave $1.3 million owed to the Company by Merck
related to the development of the Triage Cardiac Panel and the Triage Meter.
BENEFIT (PROVISION) FOR INCOME TAXES. The Company's provision for income
taxes decreased to $82,000 in 1997 from $261,000 in 1996. In 1997, the
Company utilized federal research and development credit carryforwards of
approximately $98,000 to offset taxable income.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations through revenues
from operations, private and public placements of equity securities, debt and
capital lease financing and interest income earned on the net proceeds from
the private placements. Since its inception, the Company has raised over
$21.7 million in net cash proceeds from the private placement of equity
securities and $1.5 million from the issuance of convertible debentures. In
February 1997, the Company raised approximately $29.8 million in net cash
proceeds from its initial public offering of common stock.
During the year ended December 31, 1998, the Company generated $674,000
in cash from operating activities despite significant investment of cash into
its defense of patent matters and new product launch activities such as
manufacturing scale-up tasks, inventory buildup for new products and sales
and marketing activities. Other significant business activities affecting
cash included the purchase of certain license rights to patented technologies
totaling $3.9 million, the expenditure of $3.1 million for capital equipment
and leasehold improvements, the receipt of $2.0 million in proceeds from
equipment financing and payments under equipment financing agreements of $1.5
million.
During the year ended December 31, 1997, the Company generated $1.1
million in cash from operating activities despite significant investment of
cash into potential product launch activities such as manufacturing scale-up
tasks and preparatory marketing activities. Net proceeds from the initial
public offering of $29.8 million were invested primarily in marketable
securities and have been used to fund operating activities, purchase capital
equipment and leasehold improvements and payment of long-term obligations.
Other significant business activities affecting cash included the $2.1
million contract termination fee paid to Merck, the expenditure of $5.2
million for capital equipment and leasehold improvements, the receipt of $3.1
million in proceeds from equipment financing and payments under equipment
financing agreements of $1.2 million.
During the year ended December 31, 1996, the Company generated $2.4 million
in cash from operating activities.
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Cash generated from net sales was reduced primarily by the payment of $2.2
million for a license right accrued as of December 31, 1995 and the payment
of $2.0 million to settle patent litigation with Abbott Laboratories. Cash
generated from operating activities was offset by cash used in investing
activities, primarily the acquisition of license rights from Abbott
Laboratories for $3.5 million. Additionally, other significant business
activities affecting cash included the generation of $3.4 million in cash as
a result of maturing marketable securities which were not reinvested, the
expenditure of $2.0 million for capital equipment and leasehold improvements,
the receipt of $1.6 million in proceeds from equipment financing and payments
under equipment financing agreements of $1.2 million.
The Company's primary short-term needs for capital, which are subject to
change, are for the support of its commercialization efforts related to new
products, defense and resolution of patent matters including potential
licensing of certain technologies patented by others, potential procurement
and enforcement of patents, expansion of its manufacturing capacity for new
products, potential repurchase of the Company's common stock and the
continued advancement of research and development efforts. The Company
executed agreements to license technologies patented by others which call for
cash payments and future royalties based on product sales utilizing the
licensed technologies. The Company may enter into additional licensing
agreements which may include cash payments and future royalties based on
product sales utilizing the licensed technologies. The Company utilizes
credit arrangements with financial institutions to finance the purchase of
capital equipment. As of December 31, 1998, the Company had equipment
financing lines of credit with financial institutions totaling $6.0 million,
of which $4.7 million was available for future borrowing. The $4.0 million
and $2.0 million lines of credit expire on June 30, 1999 and March 31, 1999,
respectively. Additionally, the Company utilizes cash generated from
operating activities to meet its capital requirements.
The Company is evaluating various alternatives in addressing its future
facilities expansion needs. The alternatives being evaluated include
negotiations with various parties for the leasing of additional facility
space and potentially a new campus corporate facility to be constructed in
San Diego, which would be adequate for its foreseeable future needs. If a new
campus corporate facility is constructed to meet future needs, the Company
would not anticipate relocating its operations to the new facility prior to
January 2001. Relocation to a new facility or leasing of additional facility
space would be expected to result in an increase in rent upon occupancy.
The Company believes that its available cash, cash from operations and
funds from existing credit arrangements will be sufficient to satisfy its
funding needs for at least the next 24 months. Thereafter, if cash generated
from operations is insufficient to satisfy the Company's working capital and
capital expenditure requirements, the Company may be required to sell
additional equity or debt securities or obtain additional credit facilities.
There can be no assurance that such additional capital, if needed, will be
available on satisfactory terms, if at all. Furthermore, any additional
equity financing may be dilutive to stockholders, and debt financing, if
available, may include restrictive covenants. The Company's future liquidity
and capital funding requirements will depend on numerous factors, including
the extent to which the Company's new products and products under development
are successfully developed, gain market acceptance and become and remain
competitive, the timing and results of clinical studies and regulatory
actions regarding the Company's potential products, the costs and timing of
further expansion of sales, marketing and manufacturing activities,
facilities expansion needs, and the costs and timing associated with the
enforcement, defense and resolution of patent matters, including potential
licensing of certain technologies patented by others. The failure by the
Company to raise capital on acceptable terms when needed could have a
material adverse effect on the Company's business, financial condition and
results of operations.
IMPACT OF YEAR 2000 ("Y2K") ISSUE
The Company is implementing a plan to ensure its system, software and
facilities infrastructure will function properly with respect to dates in the
year 2000 and thereafter. Key financial, information and operational systems
have been assessed and approximately 90% of them have been verified as being
compliant. The Company is on schedule to have all remaining systems verified
as compliant by June 30, 1999. All key suppliers, distributors, financial
institutions and others with whom it does business have been contacted by the
Company to assess their Y2K readiness, and approximately 60% have stated that
they are compliant or will be compliant before December 31, 1999. The Company
is continuing to communicate with key suppliers, distributors, financial
institutions and others and believes that their readiness will not pose
significant operational problems for the Company, nor have a material adverse
effect on the Company's business. To date the Company has expended less than
$35,000 addressing the Y2K Issue and estimates the total cost of the project
and contingency plans, if necessary, to be under $50,000. The
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Company anticipates that the Company will be in compliance with Y2K
requirements by the end of June 1999.
However, if such modifications and conversions are not made or are not
completed in a timely fashion, the Y2K Issue could have a material adverse
impact on the operations of the Company. Additionally, the systems of other
companies on which Biosite's systems rely may not be timely converted, which
may have an adverse effect on the Company's systems. The most likely worst
case scenario is that customers would be unable to order products or pay
invoices or suppliers would be unable to manufacture or deliver product. This
would result in reduced orders of products and the inability of the Company
to manufacture product.
The Company currently does not have contingency plans in the event it
does not complete all phases of the Y2K program. However, management is
considering contingency plans which involve, among other actions, manual
workarounds, increasing inventories of key components to the manufacturing
process and validating alternate vendors. The Company plans to evaluate the
status of the contingency plans by June 1999 and determine whether such plans
are necessary.
The Triage Meter and related software is the only product that the Company
currently sells which needs evaluation for Y2K readiness, as the other
products do not process or store any date and time data. The Triage Meter and
related software has been tested and shown to properly process and store date
and time data between the 20th and 21st centuries, and the years 1999 and
2000. This processing and storage included calculating, comparing, displaying
and recording sequence operations involving date and time data. Correct
processing of the leap year date and time data has also been demonstrated.
The software functions as intended or expected, regardless of the date.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to changes in interest rates, primarily from its
variable-rate long-term debt arrangements and, to a lesser extent, its
investments in certain available-for-sale marketable securities. Under its
current policies, the Company does not use interest rate derivatives
instruments to manage this exposure to interest rate changes. The Company
does have the option to convert its variable-rate long-term debt arrangements
to fixed-rate debt arrangements for a nominal transaction fee. At December
31, 1998, the Company had variable-rate debt totaling $2,046,000. A
hypothetical 1% adverse move in interest rates along the entire interest rate
yield curve would not materially effect the fair value of the Company's
financial instruments that are exposed to changes in interest rates.
Additionally, the Company's purchases of Triage Meters from LRE are
denominated in German Deutch Marks (DM) and sales of certain products to some
international customers are denominated in the local currency of customers.
The Company has on occasion purchased forward exchange contracts to manage
this exposure to exchange rate changes. As of December 31, 1998, the Company
had no outstanding forward exchange contracts. Total receivables and payables
denominated in foreign currencies at December 31, 1998 were not material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Refer to the Index on Page F-l of the Financial Report included herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
Some information required by Part III is incorporated by reference from
the Company's definitive Proxy Statement to be filed with the Securities and
Exchange Commission in connection with the solicitation of proxies for the
Company's 1999 Annual Meeting of Stockholders (the "Proxy Statement").
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this section with respect to Directors is
incorporated by reference from the information in the section entitled
"Election of Directors" in the Proxy Statement. The executive officers of the
Company, their positions with the Company and ages as of March 31, 1999 are
as follows:
NAME AGE POSITION
-------------------------- --- ----------------------------------------------
Kim D. Blickenstaff 46 President, Chief Executive Officer, Treasurer,
Secretary and Director
Thomas M. Watlington 43 Senior Vice President, Commercial Operations
Kenneth F. Buechler, Ph.D. 45 Vice President, Research
Christopher R. Hibberd 33 Vice President, Business Development
Charles W. Patrick 44 Vice President, Sales
Christopher J. Twomey 39 Vice President, Finance and Chief Financial
Officer
Gunars E. Valkirs, Ph.D. 47 Vice President, Research and Development,
Chief Technical Officer and Director
KIM D. BLICKENSTAFF, a founder of the Company, has been President and
Chief Executive Officer since April 1988. Mr. Blickenstaff also is a director
of Micro Therapeutics Incorporated, Amira Medical and Medi Spectra Inc. Prior
to joining Biosite, he held various positions in finance, operations,
research management, sales management, strategic planning, and marketing with
Baxter Travenol, National Health Laboratories, and Hybritech Incorporated
("Hybritech"). Mr. Blickenstaff holds an M.B.A. from the Graduate School of
Business, Loyola University, Chicago.
THOMAS M. WATLINGTON joined the Company as Senior Vice President in
December 1996. He was formerly Vice President, Marketing for the Diabetes
Care Division for Boehringer Mannheim. From 1982 to December 1996, Mr.
Watlington held various positions in marketing, strategic analysis and
product development with Boehringer Mannheim. Mr. Watlington holds a B.S.
degree from the University of Maryland.
KENNETH F. BUECHLER, PH.D., a founder of Biosite and a co-inventor of
certain of Biosite's proprietary technology, has been Vice President,
Research since January 1994. From April 1988 to January 1994, he was Director
of Chemistry. Prior to forming Biosite, he was a Senior Scientist in the
Diagnostics Research and Development Group at Hybritech. Dr. Buechler holds a
Ph.D. in Biochemistry from Indiana University.
CHRISTOPHER R. HIBBERD joined the Company in June 1997 to head the
Company's business development activities after spending five years with the
Boston Consulting Group ("BCG"). At BCG, Mr. Hibberd was a Manager, leading
client case teams in developing and implementing value-creating strategies
for businesses in a variety of industry sectors. Prior to that, he held
consulting positions at various companies and also was a Development Engineer
for Albright & Wilson Americas from 1987 to 1990. Mr. Hibberd received an
Engineering degree from the University of Toronto, Canada and his M.B.A. from
the University of Western Ontario, Canada.
CHARLES W. PATRICK joined the Company in August 1990 as Vice President,
Sales and Marketing. From 1978 to August 1990, Mr. Patrick held various
positions in sales, sales management and product and marketing management
with Abbott Laboratories. From 1987 to August 1990, he was Group Marketing
Manager for the Abused Drug Business Unit of Abbott, where he managed the
worldwide product launch of Abbott's TDx and ADx bench top testing systems.
Mr. Patrick holds a B.A. from the University of Central Florida.
-40-
CHRISTOPHER J. TWOMEY joined the Company as Director of Finance in March
1990 and was promoted to Vice President of Finance and Chief Financial
Officer in 1993. From 1981 to March 1990, Mr. Twomey was employed at Ernst &
Young LLP, where from October 1985 to March 1990, he served as an Audit
Manager. Mr. Twomey holds a B.A. in Business Economics from the University of
California at Santa Barbara.
GUNARS E. VALKIRS, PH.D., a founder of Biosite and a co-inventor of
certain of its proprietary technology has been a director, Vice President,
Research and Development and Chief Technical Officer since 1988. Prior to
forming Biosite, he was a Scientific Investigator with the Diagnostics
Research & Development Group at Hybritech, where he was the primary inventor
of Hybritech's patented ICON technology. Dr. Valkirs holds a Ph.D. in Physics
from the University of California at San Diego.
Item 405 of Regulation S-K calls for disclosure of any known late filing
or failure by an insider to file a report required by Section 16 of the
Exchange Act. This disclosure is contained in the section entitled "Section
16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement and
is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
information in the section entitled "Compensation of Executive Officers and
Directors" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from
the information in the section entitled "Stock Ownership of Management and
Certain Beneficial Owners" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from
the information in the section entitled "Certain Relationship and Related
Transactions" in the Proxy Statement.
-41-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS
The financial statements of the Company are included herein as required
under Item 8 of this annual report on Form 10-K. See Index on page F-l.
(2) FINANCIAL STATEMENT SCHEDULES
Schedule II Valuation and Qualifying Accounts
The other financial statement schedules have been omitted since they are
either not required, not applicable, or the information is otherwise included.
(3) EXHIBITS
The exhibits listed below are required by Item 601 of Regulation S-K. Each
management contract or compensatory plan or arrangement required to be filed as
an exhibit to this Form 10-K has been identified.
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
3.(i)(1) Restated Certificate of Incorporation, as filed with
the Delaware Secretary of State on February 18, 1997.
3.(i)(4) Certificate of Designation, as filed with the Delaware
Secretary of State on October 23, 1997.
3.(ii)(2) Amended and Restated Bylaws of the Company.
4.1 Form of Common Stock Certificate with rights legend.
10.1(2)(A) Amended and Restated 1989 Stock Plan of Biosite
Diagnostics Incorporated.
10.2(5)(A) Amended and Restated 1996 Stock Incentive Plan of
Biosite Diagnostics Incorporated ("1996 Stock Plan").
10.3(2)(A) Form of Incentive Stock Option Agreement under the 1996
Stock Plan.
10.4(2)(A) Form of Nonstatutory Stock Option Agreement under the
1996 Stock Plan.
10.5(6) Biosite Diagnostics Incorporated Employee Stock
Purchase Plan.
10.6(2)(A) Form of Indemnity Agreement between the Company and
its officers and directors.
10.7(2) Sublease Agreement between the Company and General
Atomics, dated February 17, 1992, as amended on August
10, 1992, January 21, 1993, October 29, 1993, March 1,
1995 and October 1, 1996.
-42-
10.8(2)(+) Antibody License Agreement between the Company and
Sandoz Pharma Ltd. (currently known as Novartis Pharma
AG), dated September 22, 1995, as amended on July 26,
1996.
10.9(2)(+) Easy Assay License Agreement between the Company and
Sandoz Pharma Ltd. (currently known as Novartis Pharma
AG), dated September 22, 1995.
10.11(2)(+) Development, Supply and Distribution Agreement between
the Company and Kyoto Dai-Ichi Kagaku Co., Ltd., dated
as of February 14, 1995.
10.12(2)(+) Development and Supply Agreement between the Company
and LRE Relais + Elektronik GmbH -- Medical Technology,
dated September 23, 1994.
10.19(2) Debenture Purchase Agreement between the Company and
Sandoz Pharma Ltd. (currently known as Novartis Pharma
AG), dated as of September 22, 1995.
10.20(2)(+) Settlement and License Agreement & Agreement of
Dismissal with Prejudice, between the Company and
Abbott Laboratories, dated as of September 6, 1996.
10.21(2) Lease Agreement between the Company and TCEP II
Properties Limited Partnership dated July 26, 1996.
10.22(2) Lease Agreement between the Company and Sorrento West
Limited dated September 21, 1994
10.24(4) Rights Agreement dated as of October 22, 1997 between
the Company and BankBoston, N.A.
10.25(7)(++) Letter Agreement between the Company and Novartis
Pharma AG, dated November 20, 1997.
10.28(8)(++) Distributorship Agreement between the Company and
Fisher Scientific Company L.L.C. dated April 3, 1998.
23.1 Consent of Ernst & Young LLP, independent auditors.
27.1 Financial Data Schedule for year ended December 31,
1998
27.2 Restated Financial Data Schedule for year ended
December 31, 1996
27.3 Restated Financial Data Schedule for quarters ended
March 31, June 30, and September 30, 1997
- ----------
(1) Incorporated by reference to Exhibit 3.(i)3 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996.
(2) Incorporated by reference to the exhibits of the same number to the
Company's Registration Statement on Form S-1, No. 333-17657.
-43-
(3) Incorporated by reference to Exhibit 16.23 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997.
(4) Incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement of Form 8-A, filed on October 28, 1997
(5) Incorporated by reference to Exhibit A to the Company's Definitive
Proxy Statement dated April 16, 1998 and filed with the Securities
and Exchange Commission.
(6) Incorporated by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.
(7) Incorporated by reference to Exhibit 10.25 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
(8) Incorporated by reference to Exhibit 10.28 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.
(A) Indicates management contract or compensatory plan or arrangement.
(+) Confidential treatment has been granted for certain portions of these
exhibits.
(++) Confidential treatment has been requested for certain portions of
these exhibits.
(b) REPORTS ON FORM 8-K
Biosite did not file any report on Form 8-K in the quarter ended December
31, 1998.
-44-
BIOSITE DIAGNOSTICS INCORPORATED
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
of the undersigned, thereunto duly authorized.
BIOSITE DIAGNOSTICS INCORPORATED
/s/ KIM D. BLICKENSTAFF Date: March 31, 1999
- ---------------------------------------
Kim D. Blickenstaff
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the date indicated.
NAME TITLE DATE
- ---- ----- ----
/s/ KIM D. BLICKENSTAFF President, Chief Executive Officer March 31, 1999
---------------------------- (Principal Executive Officer) and
Kim D. Blickenstaff Director
/s/ CHRISTOPHER J. TWOMEY Vice President and Chief Financial March 31, 1999
---------------------------- Officer (Principal Financial Officer
Christopher J. Twomey and Accounting Officer)
/s/ TIMOTHY J. WOLLAEGER Chairman of the Board March 31, 1999
----------------------------
Timothy J. Wollaeger
/s/ ANTHONY DEMARIA Director March 31, 1999
----------------------------
Anthony DeMaria, M.D.
/s/ FREDERICK J. DOTZLER Director March 31, 1999
----------------------------
Frederick J. Dotzler
/s/ HOWARD E. GREENE, JR Director March 31, 1999
----------------------------
Howard E. Greene, Jr
/s/ LONNIE M. SMITH Director March 31, 1999
----------------------------
Lonnie M. Smith
/s/ GUNARS E. VALKIRS Director March 31, 1999
----------------------------
Gunars E. Valkirs, Ph.D.
-45-
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Ernst & Young LLP, Independent Auditors........................ F-2
Balance Sheets at December 31, 1997 and 1998............................. F-3
Statements of Operations for each of the three years in the
period ended December 31, 1998......................................... F-4
Statements of Stockholders' Equity for each of the three
years in the period ended December 31, 1998............................ F-5
Statements of Cash Flows for each of the three years in
the period ended December 31, 1998..................................... F-6
Notes to Financial Statements............................................ F-7
F-1
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Biosite Diagnostics Incorporated
We have audited the accompanying balance sheets of Biosite Diagnostics
Incorporated as of December 31, 1997 and 1998, and the related statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1998. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Biosite Diagnostics
Incorporated at December 31, 1997 and 1998, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1998 in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
ERNST & YOUNG LLP
San Diego, California
February 11, 1999,
except for Note 10, as to which the date is
March 29, 1999
F-2
BIOSITE DIAGNOSTICS INCORPORATED
BALANCE SHEETS
December 31,
1997 1998
--------------- ---------------
Assets
Current assets:
Cash and cash equivalents $ 2,330,274 $ 762,337
Marketable securities, available-for-sale 36,927,167 33,466,841
Accounts receivable 5,282,500 6,573,735
Receivable from stockholder 648,664 --
Inventories 2,169,896 4,364,367
Deferred income taxes 2,310,000 1,666,000
Prepaid expenses and other current assets 1,367,348 1,467,960
------------- -------------
Total current assets 51,035,849 48,301,240
Property, equipment and leasehold improvements, net 7,216,983 7,313,673
Deferred income taxes 338,000 2,360,000
Patents and license rights, net 3,720,035 7,203,433
Deposits and other assets 1,000,341 630,765
------------- -------------
$ 63,311,208 $ 65,809,111
------------- -------------
------------- -------------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 1,420,969 $ 1,503,354
Accrued salaries and other 1,107,476 2,493,735
Accrued costs for defense of patent matters - 1,248,191
Accrued contract payable 563,812 205,928
Current portion of long-term obligations 1,332,200 1,636,265
------------- -------------
Total current liabilities 4,424,457 7,087,473
Long-term obligations 3,796,975 4,038,444
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized; no
shares issued and outstanding at December 31, 1997 and 1998 - -
Common stock, $.01 par value, 25,000,000 shares authorized;
12,864,745, and 12,926,706 shares issued and outstanding at
December 31, 1997 and 1998, respectively 128,647 129,267
Additional paid-in capital 53,684,302 54,250,324
Unrealized net gain on marketable securities, net of related tax
effect of $3,772 and $23,510 at December 31, 1997 and 1998,
respectively 5,658 35,266
Deferred compensation (317,595) (207,845)
Retained earnings 1,588,764 476,182
------------- -------------
Total stockholders' equity 55,089,776 54,683,194
------------- -------------
$ 63,311,208 $ 65,809,111
------------- -------------
------------- -------------
See accompanying notes.
F-3
BIOSITE DIAGNOSTICS INCORPORATED
STATEMENTS OF OPERATIONS
Years Ended December 31,
1996 1997 1998
----------------- ------------------ ------------------
Net sales $ 28,205,974 $ 31,676,630 $ 34,424,461
Cost of sales 5,982,673 6,925,318 10,513,524
----------------- ------------------ ------------------
Gross profit 22,223,301 24,751,312 23,910,937
Operating expenses:
Selling, general and administrative 8,622,577 11,549,734 15,469,717
Research and development 9,268,460 11,661,894 11,166,702
Defense of patent matters 2,368,282 330,537 4,860,857
----------------- ------------------ ------------------
20,259,319 23,542,165 31,497,276
----------------- ------------------ ------------------
Operating income (loss) 1,963,982 1,209,147 (7,586,339)
Other income (expense):
Interest income and other income 744,342 2,190,837 2,395,957
Contract revenue-related parties 1,101,649 777,767 -
Contract revenue-unrelated parties - 466,500 2,629,800
Reacquisition of distribution rights - (3,364,134) -
------------------ -------------------- -------------------
1,845,991 70,970 5,025,757
Income (loss) before benefit (provision) for
income taxes 3,809,973 1,280,117 (2,560,582)
Benefit (provision) for income taxes (261,000) (82,000) 1,448,000
------------------ ------------------- ------------------
Net income (loss) $ 3,548,973 $ 1,198,117 $ (1,112,582)
----------------- ------------------ -------------------
----------------- ------------------ -------------------
Basic net income (loss) per share $ 2.48 $ 0.11 $ (0.09)
----------------- ------------------ -------------------
----------------- ------------------ -------------------
Diluted net income (loss) per share $ .34 $ .09 $ (0.09)
----------------- ------------------ -------------------
----------------- ------------------ -------------------
Shares used in calculating per share amounts -
Basic 1,431,000 11,249,000 12,939,000
----------------- ------------------ ------------------
----------------- ------------------ ------------------
Diluted 10,392,000 13,081,000 12,939,000
----------------- ------------------ ------------------
----------------- ------------------ ------------------
See accompanying notes.
F-4
BIOSITE DIAGNOSTICS INCORPORATED
STATEMENTS OF STOCKHOLDERS' EQUITY
Additional
Preferred Stock Common Stock Paid-in
Shares Amount Shares Amount Capital
----------- ------------- ----------- ----------- --------------
Balance at December 31, 1995 8,328,847 $ 83,288 1,369,595 $ 13,696 $21,570,516
Comprehensive income:
Net income - - - -
Other comprehensive income, net of tax
Change in unrealized net gain (loss) on marketable
securities - - - -
Comprehensive income - - - -
Issuance of common stock under employee stock plans - 103,978 1,040 85,185
Deferred compensation related to issuance of stock options - - - 439,010
Amortization of deferred compensation - - - -
----------- --------- ---------- --------- ------------
Balance at December 31, 1996 8,328,847 83,288 1,473,573 14,736 22,094,711
Comprehensive income:
Net income - - - -
Other comprehensive income, net of tax
Change in unrealized net gain (loss) on
marketable securities - - - -
Comprehensive income - - - -
Issuance of common stock from initial public
offering (IPO), net of offering costs of $3,291,630 - 2,760,000 27,600 29,800,770
Conversion of preferred stock into common
stock in connection with IPO (8,328,847) (83,288) 8,328,847 83,288 -
Conversion of convertible debenture into
common stock in connection with IPO - 92,575 926 1,109,978
Issuance of common stock under employee stock plans - 209,750 2,097 618,896
Amortization of deferred compensation - - - -
Income tax benefit from exercise of stock options - - - 59,947
----------- --------- ---------- --------- ------------
Balance at December 31, 1997 - 12,864,745 128,647 53,684,302
Comprehensive loss:
Net loss - - - -
Other comprehensive income, net of tax
Change in unrealized net gain (loss) on marketable
securities - - - -
Comprehensive loss - - - -
Conversion of convertible debenture into common stock - 41,666 417 499,575
Issuance of common stock under employee stock plans - 142,695 1,427 812,620
Repurchase and retirement of common stock - (122,400) (1,224) (841,173)
Amortization of deferred compensation - - - -
Income tax benefit from exercise of stock options - - - 95,000
----------- --------- ---------- --------- ------------
Balance at December 31, 1998 $ - 12,926,706 $ 129,267 $ 54,250,324
----------- --------- ---------- --------- ------------
----------- --------- ---------- --------- ------------
Accumulated Retained
Other Earnings/ Total
Comprehensive Deferred (Accumulated Stockholders'
Income Compensation Deficit) Equity
------------- -------------- ---------------- --------------
Balance at December 31, 1995 $16,588 $ - $ (3,158,326) $ 18,525,762
Comprehensive income:
Net income - - 3,548,973 3,548,973
Other comprehensive income, net of tax
Change in unrealized net gain (loss) on marketable
securities (19,342) - - (19,342)
--------------
Comprehensive income - - - 3,529,631
--------------
Issuance of common stock under employee stock plans - - - 86,225
Deferred compensation related to issuance of stock options - (439,010) - -
Amortization of deferred compensation - 11,665 - 11,665
--------- ---------- ---------- -------------
Balance at December 31, 1996 (2,754) (427,345) 390,647 22,153,283
Comprehensive income:
Net income - - 1,198,117 1,198,117
Other comprehensive income, net of tax
Change in unrealized net gain (loss) on
marketable securities 8,412 - - 8,412
--------------
Comprehensive income - - - 1,206,529
--------------
Issuance of common stock from initial public
offering (IPO), net of offering costs of $3,291,630 - - - 29,828,370
Conversion of preferred stock into common
stock in connection with IPO - - - -
Conversion of convertible debenture into
common stock in connection with IPO - - - 1,110,904
Issuance of common stock under employee stock plans - - - 620,993
Amortization of deferred compensation - 109,750 - 109,750
Income tax benefit from exercise of stock options - - - 59,947
--------- ---------- ---------- -------------
Balance at December 31, 1997 5,658 (317,595) 1,588,764 55,089,776
Comprehensive loss:
Net loss - - (1,112,582) (1,112,582)
Other comprehensive income, net of tax
Change in unrealized net gain (loss) on marketable
securities 29,608 - - 29,608
--------------
Comprehensive loss - - - (1,082,974)
--------------
Conversion of convertible debenture into common stock - - - 499,992
Issuance of common stock under employee stock plans - - - 814,047
Repurchase and retirement of common stock - - - (842,397)
Amortization of deferred compensation - 109,750 - 109,750
Income tax benefit from exercise of stock options - - - 95,000
--------- ---------- ---------- -------------
Balance at December 31, 1998 $ 35,266 $ (207,845) $ 476,182 $ 54,683,194
--------- ----------- ---------- -------------
--------- ----------- ---------- -------------
See accompanying notes
F-5
BIOSITE DIAGNOSTICS INCORPORATED
STATEMENTS OF CASH FLOWS
Year ended December 31,
1996 1997 1998
------------- -------------- --------------
OPERATING ACTIVITIES:
Net income (loss) $ 3,548,973 $ 1,198,117 $ (1,112,582)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 2,417,816 2,738,230 4,608,081
Amortization of deferred compensation 11,665 109,750 109,750
Deferred income taxes 110,000 (931,000) (1,378,000)
Changes in operating assets and liabilities:
Accounts receivable (806,317) (674,428) (1,291,235)
Receivable from stockholder (728,535) 220,871 648,664
Inventory (43,056) (437,716) (2,194,471)
Prepaid expenses and other current assets (257,486) (688,659) (120,350)
Accounts payable 191,581 452,995 82,385
Accrued liabilities (1,462,967) (860,205) 1,321,558
Deferred revenue from stockholder (615,282) - -
------------- -------------- --------------
Net cash provided by operating activities 2,366,392 1,127,955 673,800
INVESTING ACTIVITIES:
Proceeds from sales and maturities of marketable securities 13,019,169 37,340,473 33,898,842
Purchase of marketable securities (9,654,462) (65,947,956) (30,389,170)
Purchase of property, equipment and leasehold improvements (1,967,143) (5,221,969) (3,091,536)
Patents, license rights, deposits and other assets (4,929,555) 1,108,389 (3,677,057)
------------- -------------- --------------
Net cash used in investing activities (3,531,991) (32,721,063) (3,258,921)
FINANCING ACTIVITIES:
Proceeds from issuance of convertible debenture - - 500,000
Proceeds from issuance of equipment loans payable 1,641,340 3,077,701 1,993,123
Principal payments under long-term obligations (1,228,508) (1,213,543) (1,447,589)
Proceeds from issuance of stock, net 86,225 30,449,363 814,047
Repurchase of common stock, net - - (842,397)
------------- -------------- --------------
Net cash provided by financing activities 499,057 32,313,521 1,017,184
------------- -------------- --------------
Increase (decrease) in cash and cash equivalents (666,542) 720,413 (1,567,937)
Cash and cash equivalents at beginning of year 2,276,403 1,609,861 2,330,274
------------- -------------- --------------
Cash and cash equivalents at end of year $ 1,609,861 $ 2,330,274 $ 762,337
------------- -------------- --------------
------------- -------------- --------------
Supplemental disclosures of cash flow information:
Interest paid $ 280,245 $ 356,694 $ 320,008
------------- -------------- --------------
------------- -------------- --------------
Income taxes paid $ 103,350 $ 1,203,900 $ 5,400
------------- -------------- --------------
------------- -------------- --------------
Supplemental schedule of non-cash investing and financing
activities:
Conversion of convertible debenture into common stock $ - $ 1,110,904 $ 499,992
------------- -------------- --------------
------------- -------------- --------------
Accrued liability for license rights acquired $ - $ - $ 1,050,000
------------- -------------- --------------
------------- -------------- --------------
See accompanying notes.
F-6
BIOSITE DIAGNOSTICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. Organization and Summary of Significant Policies
ORGANIZATION AND BUSINESS ACTIVITY
Biosite Diagnostics Incorporated (the "Company") was established in 1988.
The Company has been primarily involved in the research, development,
manufacturing and marketing of rapid diagnostic tests. In 1992, the Company
began commercial sales of the Company's primary product, Triage Panel for
Drugs of Abuse ("Triage DOA Panel"), and currently markets the product
worldwide primarily through distributors supported by the Company's direct
sales force. In 1998, the Company began selling three additional products,
the Triage C. DIFFICILE Panel, the Triage Parasite Panel and the Triage
Cardiac System. In addition to focusing its attention on commercial
activities associated with these products, the Company continues to invest in
the research and development of additional rapid tests to aid in the
diagnosis of several critical diseases or conditions, including congestive
heart failure and certain bacterial infections. The Company also is
developing a diagnostic test to aid in the dosing of immunosuppressant drugs.
The principal markets of the Company are hospital laboratories and emergency
departments.
During the first quarter of 1998, the Company received final clearance
from the U.S. Food and Drug Administration ("FDA") to market the Triage
Cardiac Panel and the Triage Meter (together called "Triage Cardiac System")
and the Triage C. DIFFICILE Panel in the United States. The Triage Cardiac
System is Biosite's first product to utilize the Company's Triage Meter
System technology and is designed to deliver precise, quantitative results in
a rapid timeframe. The Triage Cardiac System may aid in the diagnosis of
Acute Myocardial Infarction ("AMI") and provide physicians with an enhanced
ability to make treatment decisions in a timely manner. Used in conjunction
with the Triage Meter, the Triage Cardiac Panel quantitatively measures, in a
single test device, the level of CK-MB, troponin I and myoglobin from a
whole-blood sample. The Triage C. DIFFICILE Panel is a rapid test designed to
identify CLOSTRIDIUM DIFFICILE, an opportunistic pathogen of the intestinal
tract that may thrive as a result of broad spectrum antibiotic treatment. The
Company began selling the Triage C. DIFFICILE Panel in March and the Triage
Cardiac System in May. In October 1998, the Company received final clearance
from the FDA to market the Triage Parasite Panel, the Company's third product
launched in 1998. The Triage Parasite Panel is a rapid test designed to
simultaneously detect three common waterborne parasites, GIARDIA LAMBLIA,
CRYPTOSPORIDIUM PARVUM and ENTAMOEBA HISTOLYTICA/DISPAR, that can cause
severe gastrointestinal infections. Sales of the Triage Parasite Panel were
initiated in mid-October.
REVENUE RECOGNITION AND SIGNIFICANT CUSTOMERS
The Company recognizes sales upon shipment. The Company's U.S.
distributor accounted for 81%, 80% and 86% of the product sales in 1996, 1997
and 1998, respectively.
Export sales to international customers amounted to $2,846,000,
$2,982,000 and $2,749,000 in 1996, 1997 and 1998, respectively. Sales to a
stockholder amounted to approximately $2,096,000 and $2,013,000 in 1996 and
1997, respectively. The stockholder disposed of its Biosite common stock
holding in 1998. Trade accounts receivable from the stockholder was
approximately $649,000 at December 31, 1997.
The Company records revenues under collaborative development agreements,
based on the performance criteria of each contract, either as milestones are
earned or on the percentage of completion basis as cost are incurred.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and highly liquid investments
in debt securities with maturities of 90 days or less when purchased.
F-7
BIOSITE DIAGNOSTICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARKETABLE SECURITIES
Financial Accounting Standards Board ("FASB") Statement No. 115, Accounting
for Certain Investments in Debt and Equity Securities, requires that investments
in equity securities that have readily determinable fair values and investments
in debt securities be classified in three categories: held-to-maturity, trading
and available-for-sale. Based on the nature of the assets held by the Company
and management's investment strategy, the Company's investments have been
classified as available-for-sale. Management determines the appropriate
classification of debt securities at the time of purchase and reevaluates such
designation as of each balance sheet date. Securities classified as
available-for-sale are carried at estimated fair value, as determined by quoted
market prices, with unrealized gains and losses, net of tax, reported in a
separate component of stockholders' equity. At December 31, 1998, the Company
had no investments that were classified as trading or held-to-maturity as
defined by the Statement. The amortized cost of debt securities classified as
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization is included in interest income.
Realized gains and losses are included in interest income. The cost of
securities sold is based on the specific identification method. Interest on
securities classified as available-for-sale is included in interest income.
INVENTORIES
Inventories are carried at the lower of cost (first-in, first-out) or
market.
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements are stated at cost.
DEPRECIATION AND AMORTIZATION
Depreciation of property and equipment is computed using the straight-line
method over five years. Amortization of leasehold improvements is computed using
the straight-line method over the shorter of the estimated useful lives of the
assets or the remaining lease term.
PATENTS AND LICENSE RIGHTS
The Company has been issued patents covering its threshold immunoassay and
other related technologies. Capitalized patent costs associated with issued
patents are amortized over five to seventeen years. License rights related to
products for sale are amortized to cost of sales over the life of the license,
not to exceed ten years, using a systematic method based on the estimated
revenues generated from products during such license period.
STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB 25) and related
interpretations in accounting for its stock options. For options granted during
the one-year period prior to the Company's initial public offering of common
stock, the Company recorded and amortizes, over the related vesting periods,
deferred compensation representing the excess of the value for accounting
purposes of the options granted over their aggregate exercise price.
F-8
BIOSITE DIAGNOSTICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
CONCENTRATION OF CREDIT RISK
The Company sells its products primarily to its U.S. distributor. Credit is
extended based on an evaluation of the customer's financial condition, and
generally collateral is not required. Credit losses have been minimal and within
management's expectations.
The Company invests its excess cash in debt instruments of the U.S.
Government, financial institutions and corporations with strong credit ratings.
The Company has established guidelines relative to diversification and
maturities that maintain safety and liquidity. These guidelines are periodically
reviewed and modified to take advantage of trends in yields and interest rates.
The Company has not experienced any significant realized losses on its
marketable securities.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings per Share
("Statement No. 128"). Statement No. 128 applies to entities with publicly
held common stock or potential common stock and is effective for financial
statements issued for periods ending after December 15, 1997. Statement No.
128 replaces APB Opinion 15, Earnings per Share ("EPS"). Statement No. 128
requires dual presentation of basic and diluted earnings per share by
entities with complex capital structures. Basic EPS includes no dilution and
is computed by dividing net income by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential
dilution of securities that could share in the earnings of the Company such
as common stock which may be issuable upon exercise of outstanding common
stock options.
Shares used in calculating basic and diluted net income per share were as
follows:
YEAR ENDED DECEMBER 31,
----------------------------------------------
1996 1997 1998
---------------- -------------- --------------
Shares used in calculating per share amounts - Basic
(Weighted average common shares outstanding) 1,431 11,249 12,939
Effect of common share equivalents:
Assumed conversion of preferred shares 8,329 1,110 -
Assumed conversion of convertible debenture 92 12 -
Net effect of dilutive common stock options using the
treasury stock method 540 699 -
Contingently issuable shares - 11 -
---------------- -------------- --------------
Shares used in calculating per share amounts - Diluted 10,392 13,081 12,939
---------------- -------------- --------------
---------------- -------------- --------------
F-9
BIOSITE DIAGNOSTICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, Reporting Comprehensive Income, which became effective for fiscal years
beginning after December 15, 1997. SFAS No. 130 requires that all components
of comprehensive income, including net income, be reported in the financial
statements in the period in which they are recognized. Comprehensive income
is defined as the change in equity during a period from transactions and
other events and circumstances from non-owner sources. Net income and other
comprehensive income, including foreign currency translation adjustments, and
unrealized gains and losses on investments, shall be reported, net of their
related tax effect, to arrive at comprehensive income. Included in the
Company's statements of equity, other comprehensive income consisting of
unrealized gains and losses on investments are reported. Comprehensive income
or loss was not materially different than net income or loss.
SEGMENT INFORMATION
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, Segment Information, which became effective for fiscal years beginning
after December 15, 1997. SFAS No. 131 amends the requirements for public
enterprises to report financial and descriptive information about its
reportable operating segments. Operating segments, as defined in SFAS No.
131, are components of an enterprise for which separate financial information
is available and is evaluated regularly by the Company in deciding how to
allocate resources and in assessing performance. The financial information is
required to be reported on the basis that is used internally for evaluating
the segment performance. The Company believes it operates in one business and
operating segment and that adoption of this standard did not have a material
impact on the Company's financial statements.
2. Licensing Agreements
The Company has entered into licensing agreements to utilize certain
antibodies and/or technologies in exchange for up-front, annual milestone, or
royalty payments or a combination thereof. Certain of the upfront and annual
payments are creditable towards future royalties payable. Royalties may be
payable at various rates for product sales derived from the licensed
technologies.
The Company purchased license rights for technologies utilized in products
for sale of $3.5 million, $0, and $5.0 million during the years ended
December 31, 1996, 1997 and 1998, respectively. Accumulated amortization of
license rights at December 31, 1996, 1997 and 1998 was approximately $1.8
million, $2.4 million and $4.0 million, respectively
3. Collaborative and Distribution Agreements
In 1997, the Company successfully completed feasibility studies for the
NeoralChek System under its antibody license agreement with Novartis Pharma
AG ("Novartis"). As a result of this milestone achievement, Novartis
invested, in January 1998, an additional $500,000 in Biosite in exchange for
a convertible debenture. The convertible debenture was immediately converted
into 41,666 shares of common stock of the Company based on the IPO price of
$12.00 per share. Additionally, the Company and Novartis entered into an
agreement to expand the scope of the collaborative development of the
NeoralChek System. For the years ended December 31, 1997 and 1998, the
Company recognized contract revenues of $400,000 and $1.1 million,
respectively. The expansion of the collaboration may result in additional
payments to Biosite upon attainment of milestones.
In February 1995, the Company entered into a collaborative development
and distribution agreement that included the Asian marketing rights to the
Triage Cardiac Panel under development. Under this agreement, the Company
will receive up to $2.0 million upon the completion of certain milestones.
Recognition of revenue under this agreement will occur as the milestones are
attained. For the year ended December 31, 1998, the Company recognized
contract revenues of $1.3 million for the completion of certain milestones
under the agreement.
F-10
BIOSITE DIAGNOSTICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In June 1994, the Company entered into a collaborative development
agreement and a distribution agreement with Merck KgaA ("Merck"), a former
stockholder, for the development and marketing of the Triage Cardiac Panel
and under such agreements, Merck was to fund a portion of the development
costs. The Company recognized revenue under this agreement on the percentage
of completion basis as costs were incurred. For the years ended December 31,
1996 and 1997, the Company incurred $2,554,000 and $2,866,000, respectively,
in expenses under this agreement and recognized $1,102,000 and $778,000
respectively, as contract revenue.
As a result of a decision by Merck to refocus away from certain aspects
of the human diagnostic business, in 1997, the Company terminated agreements
with Merck for the development and distribution of the Triage Cardiac System
and the distribution of the Triage DOA Panel product line. Upon termination,
the Company paid a $2.1 million cash payment and forgave approximately $1.3
million owed to the Company by Merck related to the development of the Triage
Cardiac System. Such expenses were charged to reacquisition of distribution
rights in the accompanying statements of operations. During the last half of
1998, the Company finalized alliances with several European partners, forming
a network of distributors to market its products in certain European
countries.
4. Cash, Cash Equivalents and Marketable Securities
The following is a summary of cash, cash equivalents and available-for-sale
marketable securities by balance sheet classification at December 31, 1997:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------ ----------- ------------
Cash and cash equivalents:
Cash $ 1,052,970 $ - $ - $ 1,052,970
Money market fund 285,394 - - 285,394
Commercial paper 991,910 - - 991,910
------------ --------- ---------- -------------
2,330,274 - - 2,330,274
Marketable securities:
Certificates of deposit 2,093,829 - (4) 2,093,825
U.S. Government debt securities 4,010,950 11,070 - 4,022,020
Corporate debt securities 30,812,958 935 (2,571) 30,811,322
------------ --------- ---------- -------------
36,917,737 12,005 (2,575) 36,927,167
------------ --------- ---------- -------------
Total cash, cash equivalents and available-for-sale
marketable securities $ 39,248,011 $ 12,005 $ (2,575) $ 39,257,441
------------ --------- ---------- -------------
------------ --------- ---------- -------------
The following is a summary of cash, cash equivalents and available-for-sale
securities by balance sheet classification at December 31, 1998:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------ ----------- ------------
Cash and cash equivalents:
Cash $ 449,352 $ - $ - $ 449,352
Corporate debt securities 312,985 - - 312,985
------------ --------- ---------- -------------
762,337 - - 762,337
Marketable securities:
Certificate of deposit 2,005,724 1,784 - 2,007,508
U.S. Government debt securities 499,182 1,133 - 500,315
Corporate debt securities 30,903,159 79,836 (23,977) 30,959,018
------------ --------- ---------- -------------
33,408,065 82,753 (23,977) 33,466,841
------------ --------- ---------- -------------
Total cash, cash equivalents and available-for-sale
marketable securities $ 34,170,402 $ 82,753 $ (23,977) $ 34,229,178
------------ --------- ---------- -------------
------------ --------- ---------- -------------
F-11
BIOSITE DIAGNOSTICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The amortized cost and estimated fair value of available-for-sale securities
at December 31, 1998, by contractual maturity, are as follows:
Amortized Estimated
Cost Fair Value
------------- -------------
Marketable securities:
Due in one year or less $ 21,166,327 $ 21,197,915
Due after one year through two years 12,241,738 12,268,926
------------- ------------
$ 33,408,065 $ 33,466,841
------------- ------------
------------- ------------
5. Balance Sheet Information
Inventories consist of the following:
December 31,
1997 1998
------------- -------------
Raw materials $ 779,965 $ 1,405,176
Work in process 1,214,894 2,938,548
Finished goods 175,037 20,643
------------ ------------
$ 2,169,896 $ 4,364,367
------------ ------------
------------ ------------
Property, equipment and leasehold improvements consist of the following:
December 31,
1997 1998
------------- -------------
Machinery and equipment $ 10,655,422 $ 12,936,671
Furniture and fixtures 836,933 986,368
Leasehold improvements 2,564,894 3,225,746
------------- -------------
14,057,249 17,148,785
Less accumulated depreciation and amortization (6,840,266) (9,835,112)
------------- -------------
$ 7,216,983 $ 7,313,673
------------- -------------
------------- -------------
6. Debt and Commitments
Debt consisted of the following:
December 31,
1997 1998
------------------- -------------------
Equipment financing notes, payable $179,901
monthly including interest at 6.59% to 9.65%;
due January 1999 to December 2003; secured by
equipment $ 5,129,175 $ 5,674,709
Less current portion 1,332,200 1,636,265
------------- -------------
Total long-term obligations $ 3,796,975 $ 4,038,444
------------- -------------
------------- -------------
As a result of the attainment of one of the milestones (the successful
completion of feasibility studies for the Triage Neoral System under
development), the Company received $500,000 from Novartis, in January 1998, in
exchange for a convertible debenture. The convertible debenture was immediately
converted into 41,666 shares of common stock of the Company based on the IPO
price of $12.00 per share. The Company is obligated to sell to Novartis an
additional $500,000 five-year 8% convertible debenture upon the attainment of a
certain milestone. The debenture would be convertible, at the sole option of the
Company, into shares of Biosite common stock at $12.00 per share.
F-12
BIOSITE DIAGNOSTICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
As of December 31, 1998, approximate future principal payments of the
equipment financing notes are due as follows: 1999 - $1,636,000; 2000 -
$1,575,000; 2001 - $1,304,000; 2002 - $876,000; and 2003 - $284,000.
Interest charged to expense to arrive at operating income (loss) was
approximately $360,000, $357,000, and $320,000 for the years ended December 31,
1996, 1997, and 1998, respectively.
The Company leases its office, manufacturing and research facilities under
operating leases. The minimum annual rent on the facilities is subject to
increases based on changes in the Consumer Price Index, taxes, insurance and
operating costs, subject to certain minimum and maximum annual increases. The
Company has options to renew certain of the facilities leases for a period of
two years. Included in deposits and other assets in the accompanying balance
sheets is approximately $199,000 and $85,000 of security deposits in conjunction
with operating lease and equipment financing agreements at December 31, 1997 and
1998, respectively.
Approximate annual future minimum operating lease payments as of December 31,
1998 are as follows:
Operating
Year Leases
---- --------------
1999 $1,071,000
2000 1,155,000
2001 230,000
2002 234,000
2003 60,000
---------
Total minimum lease payments $2,750,000
----------
----------
Rent expense for the years ended December 31, 1996, 1997 and 1998 was
approximately $876,000, $1,033,000 and $879,000 respectively. Equipment under
equipment financing notes was approximately $6,478,000 and $8,510,000 at
December 31, 1997, and 1998, respectively. Accumulated depreciation of equipment
under equipment financing at December 31, 1997 and 1998 was approximately
$1,874,000 and $3,607,000, respectively.
7. Stockholders' Equity
INITIAL PUBLIC OFFERING
In February 1997, the Company completed its initial public offering of
2,760,000 shares of common stock (including an exercised underwriters'
over-allotment option for 360,000 shares) at a price of $12.00 per share,
providing the Company with net proceeds of approximately $29.8 million.
Additionally, all outstanding shares of preferred stock were converted into
8,328,847 shares of common stock and an outstanding $1.0 million convertible
debenture and related accrued interest was converted into 92,575 common shares
upon the completion of the IPO.
STOCK PLANS
The Company's 1989 Stock Plan provided for both the direct sale of common
stock and for the grant of options to purchase common stock to employees,
directors, consultants and advisors of the Company. As of December 31, 1998,
144,476 shares have been sold directly under the plan and no shares were
available for future issuance of common stock or grant of options to purchase
common stock under the 1989 Stock Plan.
F-13
BIOSITE DIAGNOSTICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In December 1996, the Company adopted the 1996 Stock Incentive Plan (the
"1996 Stock Plan"). The 1996 Stock Plan replaced the Company's 1989 Stock Plan.
Although all future awards will be made under the 1996 Stock Plan, awards made
under the 1989 Stock Plan will continue to be administered in accordance with
the 1989 Stock Plan. The 1996 Stock Plan provides for awards in the form of
restricted shares, stock units, options or stock appreciation rights or any
combination thereof. As of December 31, 1998, a pool of 1,400,000 shares has
been reserved for issuance under the 1996 Stock Plan. Additionally, any
unpurchased shares of common stock pursuant to unissued, expired or cancelled
options under the 1989 Stock Plan become available for awards under the 1996
Stock Plan.
The options are generally subject to four year vesting and expire ten years
from the date of grant. At December 31, 1998, 108,519 shares were available for
future issuance of common stock or grant of options to purchase common stock
under the 1996 Stock Plan.
Information with respect to the Company's 1989 Stock Plan and 1996 Stock Plan
option activity is as follows:
Weighted
average
exercise
Shares price
-------- ----------
Balance at December 31, 1995 788,255 $ 1.63
Granted at fair value 957,500 $ 6.45
Exercised (103,978) $ 0.83
Cancelled (359,797) $ 7.87
-------- -------
Balance at December 31, 1996 1,281,980 $ 3.46
Granted at fair value 388,400 $ 9.93
Exercised (154,996) $ 1.27
Cancelled (75,661) $ 5.65
------- -------
Balance at December 31, 1997 1,439,723 $ 5.33
Granted at fair value 968,025 $ 12.30
Exercised (71,391) $ 3.06
Cancelled (64,777) $ 9.66
------- -------
Balance at December 31, 1998 2,271,580 $ 8.25
--------- -------
--------- -------
The following is a further breakdown of the options outstanding under the 1989
Stock Plan and 1996 Stock Plan as of December 31, 1998:
Weighted
average Weighted
remaining Weighted average exercise
Range of exercise Options contractual life average exercise Options price of options
price outstanding in years price exercisable exercisable
- ----------------------------------------------------------------------------------------------------------------------
$0.24 - $3.75 535,610 5.71 $ 2.16 470,232 $ 1.99
$5.06 - $7.25 558,676 7.98 $ 5.61 282,341 $ 5.59
$7.88 - $13.25 532,976 8.80 $10.01 159,790 $10.26
$13.88 - $16.31 644,318 9.37 $14.14 103,893 $14.19
- ----------------------------------------------------------------------------------------------------------------------
$0.24 - $16.31 2,271,580 8.03 $ 8.25 1,016,256 $ 5.54
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
F-14
BIOSITE DIAGNOSTICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Adjusted pro forma information regarding net income is required by SFAS 123,
and has been determined as if the Company had accounted for its employee stock
options under the fair value method of that Statement. The fair value for these
options was estimated at the date of grant using the Black-Scholes method for
option pricing with the following weighted-average assumptions for 1996, 1997,
and 1998:
1996 1997 1998
--------------------------------------------------------------
Risk-free interest rate 6% 6% 5.25%
Volatility 55% 55% 83%
Dividend yield 0% 0% 0%
Expected life of options 6 years 6 years 5 years
For purposes of adjusted pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period. The
Company's adjusted pro forma information follows:
Years ended December 31,
1996 1997 1998
---- ---- ----
Adjusted pro forma net income (loss) $ 3,201,956 $ 430,973 $ (3,256,548)
Adjusted pro forma diluted net income (loss)
per share $ 0.31 $ 0.03 $ (0.25)
The pro forma effects on net income for 1996, 1997, and 1998 are not likely
to be representative of the effects on reported net income or loss in future
years. In management's opinion, existing stock option valuation models do not
provide a reliable single measure of the fair value of employee stock options
that have vesting provisions and are not transferable. In addition, option
valuation models require the input of highly subjective assumptions, including
expected stock price volatility. Changes in such subjective input assumptions
can materially affect the fair value estimate of employee stock options.
EMPLOYEE STOCK PURCHASE PLAN
In December 1996, the Company adopted an Employee Stock Purchase Plan
("ESPP") which provides employees the opportunity to purchase common stock at a
discount and pay for such purchases through payroll deductions, subject to
certain limitations. A pool of 350,000 shares of common stock has been reserved
for issuance under the ESPP (subject to anti-dilution provisions). During the
years ended December 31, 1997 and 1998, 54,754 and 71,304 shares, respectively,
were issued under the ESPP. As of December 31, 1998, 223,942 shares of common
stock were available for issuance under the ESPP.
At December 31, 1998, a total of 2,604,041 shares of the Company's common stock
were reserved for future issuances under the Company's stock plans and employee
stock purchase plan.
STOCK REPURCHASE PROGRAM
In September 1998, the Company initiated a common stock repurchase program,
under which it may purchase up to one million shares of its common stock. The
duration of the repurchase program is open-ended. Under the program, Biosite may
purchase shares of its common stock from time to time through open market and
privately negotiated transactions at prices deemed appropriate by its
management. During 1998, the Company repurchased 122,400 shares of its common
stock at a total cost of approximately $842,000.
F-15
BIOSITE DIAGNOSTICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SHAREHOLDERS' RIGHTS PLAN
In October, 1997, the Board of Directors of the Company declared a dividend
distribution of one preferred stock purchase right (a "Right") for each
outstanding share of common stock of Biosite held of record at the close of
business on November 3, 1997. Each Right represents a contingent right to
purchase, under certain circumstances, one-one-thousandth of a share of a new
series of Biosite preferred stock at a price of $50.00 per one one-thousandth of
a share, subject to adjustment. The Rights would be traded independently from
Biosite's common stock and become exercisable under certain circumstances
involving the acquisition or a tender or exchange offer by a person or group for
15% or more of Biosite's common stock. The Rights expire on October 22, 2007,
unless redeemed by the Company's Board of Directors. The Rights can be redeemed
by the Board at a price of $0.01 per Right at any time before the Rights become
exercisable, and in limited circumstances thereafter.
8. Income Taxes
Significant components of the income tax benefit (provision) are as follows:
Years Ended December 31,
1996 1997 1998
------------ ------------- -----------
Current:
Federal $ (146,000) $ (555,000) $ 69,000
State (5,000) (458,000) 1,000
------------ ------------- -----------
(151,000) (1,013,000) 70,000
Deferred:
Federal (304,000) 499,000 1,053,000
State 194,000 432,000 325,000
------------ ------------- -----------
(110,000) 931,000 1,378,000
------------ ------------- -----------
$ (261,000) $ (82,000) $ 1,448,000
------------ ------------- -----------
------------ ------------- -----------
As of December 31, 1998, the Company had federal research and development,
California research and development, and California manufacturers' credit
carryforwards of approximately $1,552,000, $685,000, and $425,000, respectively.
The federal research and development, California research and development, and
California manufacturers' credits will begin expiring in 2003, 2003, and 2005,
respectively, unless previously utilized.
Significant components of the Company's deferred tax assets as of December
31, 1997 and 1998 are shown below.
December 31,
1997 1998
----------- -----------
Deferred tax assets:
Research and development credit $ 1,511,000 $ 1,997,000
Federal and California Alternative Minimum Tax credit 203,000 277,000
California Manufacturers' credit 277,000 276,000
Capitalized research expenses 40,000 21,000
Other 738,000 1,476,000
----------- -----------
Total deferred tax assets 2,769,000 4,047,000
Deferred tax liability:
Tax over book depreciation (121,000) (21,000)
----------- -----------
Net deferred tax assets $ 2,648,000 $ 4,026,000
----------- -----------
----------- -----------
F-16
BIOSITE DIAGNOSTICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
No valuation has been recorded to offset the deferred tax assets as the
Company has determined that it is more likely than not that such assets will be
realized. As of December 31, 1998, the Company has approximately $4.0 million of
net deferred tax assets, with no offsetting valuation allowance as realization
of such assets has been assessed by the Company as more likely than not. The
realization of the deferred tax assets is dependent upon the generation of
future taxable income of approximately $10 million. The Company will continue to
assess the likelihood of realization of such assets; however, if future events
occur which do not make the realization of such assets more likely than not, the
Company will record a valuation allowance against all or a portion of the net
deferred tax assets.
The reconciliation of income tax computed at the federal statutory tax rate
to the benefit (provision) for income taxes is as follows:
December 31,
1996 1997 1998
---------- ---------- ----------
Tax at federal statutory rate 35% 35% 35%
Permanent tax differences 2 (2) (5)
Decrease in valuation allowance for deferred tax assets (29) - -
Tax credits - (30) 31
Other (1) 3 (4)
------ ------ ------
Effective rate 7% 6% 57%
------ ------ ------
------ ------ ------
Pursuant to Internal Revenue Code Section 382, use of the Company's tax
credit carryforwards may be limited if a cumulative change in ownership of more
than 50% occurs within any three year period. However, any annual limitation is
not expected to have a material adverse effect on the Company's ability to
utilize its tax credit carryforwards.
9. Employee Savings Plan
In 1991, the Company implemented a 401(k) program which allows all
qualifying employees to contribute up to a maximum of 20% of their annual
salary, subject to annual limits. The Board of Directors may, at its sole
discretion, approve Company contributions. No such contributions have been
approved or made.
10. Defense of Patent Matters
In September 1997, Behring Diagnostics, Inc. and Behring Diagnostics, GmbH filed
a patent infringement action against the Company in the U.S. District Court for
the District of Delaware. The patent infringement action alleged that the
Company's Triage DOA Panel products infringed a patent held by the plaintiffs,
which expires in August 2000. The plaintiffs sought to recover damages of an
unspecified amount and to enjoin future sales of the Triage DOA Panel products
by the Company. Biosite answered the complaint, denying infringement and
asserting affirmative defenses that the patent is invalid and unenforceable.
Because of a merger, the identity of the plaintiffs changed to Dade Behring
Inc., Dade Behring Marburg GmbH and Syva Company (collectively "Dade Behring").
To avoid protracted litigation and continued significant legal defense costs,
the Company and Dade Behring executed a settlement agreement in March 1999 that
resolved all disputes outstanding between the companies. Under the terms of the
settlement agreement, the Company obtained a license to the patent and will
provide Dade Behring the option to evaluate certain proprietary antibodies,
resulting in a net payment of $1,050,000 to Dade Behring by Biosite. The Company
has charged to defense of patent matters in the accompanying statements of
income the applicable license costs related to years prior to 1998 of $604,000.
F-17
BIOSITE DIAGNOSTICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
On April 28, 1998, Spectral Diagnostics, Inc. ("Spectral") filed a patent
infringement action against the Company in the U.S. District Court for the
Western District of Wisconsin, alleging that the Company's Triage Cardiac Panel
infringes U.S. patent 5,744,358 which was issued on the date the suit was filed.
Spectral sought a permanent injunction and damages. Spectral also sought a
preliminary injunction that would enjoin the Company from selling the Triage
Cardiac Panel. On July 16, 1998, the Court issued an opinion denying the motion
for a preliminary injunction. Spectral also moved for partial summary judgment
on the issue of infringement. That motion was denied on July 20, 1998. The
established trial date of August 31, 1998 was set aside while the two companies
engaged in negotiations in an attempt to arrive at a settlement in regards to
all disputes outstanding between Biosite and Spectral. In February 1999, a
settlement agreement was executed that resolved all disputes between the
companies without a material adverse financial impact to Biosite.
In September 1996, the Company reached a settlement with a competitor with
respect to all claims in a lawsuit filed by the competitor in May 1994. The
complaint alleged that the Company's Triage Panel for Drugs of Abuse product
infringed a patent licensed to the competitor. The Company vigorously defended
the lawsuit. However, to avoid protracted litigation, the Company settled the
patent matter in September 1996, and paid $2.0 million as a settlement of the
litigation and, for an additional $3.5 million and the agreement to pay certain
royalties, obtained a license to certain technology. The Company has charged to
defense of patent matters in the accompanying statements of income the $2.0
million litigation settlement, applicable license costs related to years prior
to 1996 and the related legal defense costs.
Legal defense costs were approximately $17,000, $331,000, and $4,257,000 for
the years ended December 31, 1996, 1997 and 1998, respectively.
F-18
BIOSITE DIAGNOSTICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. Quarterly Information (Unaudited)
The following quarterly information includes all adjustments which management
considers necessary for a fair statement of such information. For interim
quarterly financial statement, the provision for income taxes is estimated using
the best available information for projected results for the entire year
1997
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------------- ------------- ------------- -------------
(in thousands, except per share data)
Net Sales $ 7,533 $ 7,797 $ 8,079 $ 8,268
Gross Profit 5,909 6,184 6,385 6,273
Income (loss) before income taxes 1,527 1,533 1,155 (2,935)
Net Income (Loss) 992 986 889 (1,669)
Net income (loss) per share
- Basic $ 0.15 $ 0.08 $ 0.07 $ (0.13)
- Diluted $ 0.08 $ 0.07 $ 0.07 $ (0.13)
Shares used in calculating per share amounts
- Basic 6,621 12,750 12,803 12,820
- Diluted 11,886 13,440 13,454 12,820
1998
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------------- ------------- ------------- -------------
(in thousands, except per share data)
Net sales $ 7,884 $ 8,711 $ 8,752 $ 9,077
Gross profit 6,129 6,368 5,715 5,699
Income (loss) before income taxes (724) (310) 219 (1,745)
Net income (loss) (500) (374) 455 (693)
Net income (loss) per share
- Basic $ (0.04) $ (0.03) $ 0.04 $ (0.05)
- Diluted $ (0.04) $ (0.03) $ 0.03 $ (0.05)
Shares used in calculating per share amounts
- Basic 12,906 12,938 12,986 12,923
- Diluted 12,906 12,938 13,514 12,923
F-19
SCHEDULE II
BIOSITE DIAGNOSTICS INCORPORATED
VALUATION AND QUALIFYING ACCOUNTS
- --------------------------------------------- ------------------ ---------------------------------- ------------- -------------
COL. A COL. B COL. C COL. D COL. E
- --------------------------------------------- ------------------ ---------------------------------- ------------- -------------
Additions
- --------------------------------------------- ------------------ ---------------------------------- ------------- -------------
Charged to
Balance at Charged to Costs Other Balance at
Description Beginning of and Expenses Accounts- Deductions - End of
Period Describe Describe Period
- --------------------------------------------- ------------------ ----------------- ---------------- ------------- -------------
Year ended December 31, 1998
Allowance for doubtful accounts $ 13,721 $ 4,311 $ - $ - $ 18,032
Reserve for obsolete or excess inventory $ 304,860 $ 540,662 $ - $ 46,878 (2) $ 798,644
Year ended December 31, 1997
Allowance for doubtful accounts $ 4,405 $ 19,555 $ - $ 10,239 (1) $ 13,721
Reserve for obsolete or excess inventory $ 193,736 $ 119,230 $ - $ 8,106 (2) $ 304,860
Year ended December 31, 1996
Allowance for doubtful accounts $ - $ 4,405 $ - $ - $ 4,405
Reserve for obsolete or excess inventory $ 213,322 $ (18,026) (3) $ - $ 1,560 (2) $ 193,736
(1) Uncollectible accounts written off, net of recoveries
(2) Write off of obsolete or excess inventory
(3) Reduction for revised estimate of reserve for excess inventory due to
growth in sales forecast and composition of inventory