-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K4ezi0LuUWWahV6U+JFo1u2cSGtuRMkefa/GNUtRz1zRmQ8a0dTCCyObW9PrpAti BWkkkjogrrzYOajlBBrdHQ== 0000912057-00-021006.txt : 20000503 0000912057-00-021006.hdr.sgml : 20000503 ACCESSION NUMBER: 0000912057-00-021006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000502 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BIOSITE DIAGNOSTICS INC CENTRAL INDEX KEY: 0000834306 STANDARD INDUSTRIAL CLASSIFICATION: IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES [2835] IRS NUMBER: 330288606 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21873 FILM NUMBER: 616875 BUSINESS ADDRESS: STREET 1: 11030 ROSELLE ST CITY: SAN DIEGO STATE: CA ZIP: 92121 BUSINESS PHONE: 6194554808 MAIL ADDRESS: STREET 1: 11030 ROSELLE ST CITY: SAN DIEGO STATE: CA ZIP: 92121 10-Q 1 10-Q COVER ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2000 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 000-21873 BIOSITE DIAGNOSTICS INCORPORATED (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Delaware 33-0288606 [State or other jurisdiction [I.R.S. Employer Identification No.] of incorporation or organization] 11030 Roselle Street San Diego, California 92121 [Address of principal executive offices] [Zip Code] Registrant's telephone number, including area code: (858) 455-4808 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 / / The number of shares of the Registrant's Common Stock, $0.01 par value, outstanding at April 28, 2000 was 13,684,571. ================================================================================ BIOSITE DIAGNOSTICS INCORPORATED FORM 10-Q INDEX
PAGE ---- PART I. FINANCIAL INFORMATION...............................................1 ITEM 1. FINANCIAL STATEMENTS................................................1 CONDENSED BALANCE SHEETS...................................................1 CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED).............................2 CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED).............................3 NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)........................4 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................................................6 ITEM 2A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.........10 PART II. OTHER INFORMATION.................................................20 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...................................20 SIGNATURES..................................................................21
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS BIOSITE DIAGNOSTICS INCORPORATED CONDENSED BALANCE SHEETS
MARCH 31, DECEMBER 31, 2000 1999 ----------- ----------- (Unaudited) (Note) ASSETS Current assets: Cash and cash equivalents ................... $ 6,032,283 $ 4,594,217 Marketable securities, available-for-sale.... 27,793,421 27,677,307 Accounts receivable, net .................... 6,552,688 6,192,161 Inventories, net ............................ 6,633,069 6,058,856 Other current assets ........................ 2,692,068 2,649,607 ---------- --------- Total current assets ..................... 49,703,529 47,172,148 Property, equipment and leasehold improvements, net ........................... 10,247,831 9,936,429 Patents and license rights, net .............. 7,902,104 7,555,771 Other assets ................................. 3,308,195 3,483,632 ---------- --------- $71,161,659 $68,147,980 =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ............................ $ 1,222,013 $ 1,831,282 Accrued salaries and other .................. 3,403,574 3,423,541 Current portion of long-term obligations .... 2,086,850 1,939,372 --------- -------------- Total current liabilities ................ 6,712,437 7,194,195 Long-term obligations ........................ 4,493,148 4,068,814 Commitments and contingencies Stockholders' equity: Preferred stock, $.01 par value, 5,000,000 shares authorized, none issued and outstanding at March 31, 2000 and December 31, 1999 .......................... - - Common stock, $.01 par value, 25,000,000 shares authorized; 13,575,203 and 13,141,302 shares issued and outstanding at March 31, 2000 and December 31, 1999, respectively ............................... 135,752 131,413 Additional paid-in capital .................. 57,158,398 55,398,048 Unrealized net gain (loss) on marketable securities, net of related tax effect ...... (172,289) (131,416) Deferred compensation ....................... (69,546) (93,086) Retained Earnings ........................... 2,903,759 1,580,012 ---------- -------------- Total stockholders' equity ............... 59,956,074 56,884,971 ---------- ------------- $71,161,659 $68,147,980 =========== ============
Note: The balance sheet at December 31, 1999 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See accompanying notes. -1- BIOSITE DIAGNOSTICS INCORPORATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ---------------------------- 2000 1999 --------- -------- Net sales ............... $12,198,062 $ 9,447,721 Cost of sales ........... 3,837,153 3,741,917 ---------- ---------- Gross profit ............ 8,360,909 5,705,804 Operating expenses: Selling, general and administrative ....... 4,384,755 4,945,059 Research and development .......... 3,165,232 3,045,235 ---------- ---------- 7,549,987 7,990,294 ---------- ---------- Operating income (loss) ................. 810,922 (2,284,490) Other income: Interest and other income ................ 499,985 498,548 Contract revenue ....... 714,840 -- ---------- ---------- Income (loss) before benefit (provision) for income taxes .......... 2,025,747 (1,785,942) Benefit (provision) for income taxes .......... (702,000) 729,000 ---------- ---------- Net income (loss) ....... $ 1,323,747 $(1,056,942) ========== ========== Net income (loss) per share - Basic ................ $ 0.10 $ (0.08) ========== ========== - Diluted .............. $ 0.09 $ (0.08) ========== ========== Shares used in calculating per share amounts - Basic ................ 13,237,000 12,973,000 ========== ========== - Diluted .............. 14,840,000 12,973,000 ========== ==========
See accompanying notes. -2- BIOSITE DIAGNOSTICS INCORPORATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ---------------------------- 2000 1999 ------------ ----------- OPERATING ACTIVITIES Net cash provided by (used in) operating activities ............................... $ 788,411 $ (505,148) INVESTING ACTIVITIES Proceeds from sales and maturities of marketable securities .................. 3,854,299 9,716,659 Purchase of marketable securities ........ (4,038,536) (6,355,101) Purchase of property, equipment and leasehold improvements ................. (1,118,046) (456,840) Patents, license rights, deposits and other assets ........................... (384,563) (1,588,457) ----------- ----------- Net cash used in investing activities .... (1,686,846) 1,316,261 FINANCING ACTIVITIES Proceeds from issuance of financing obligations ............................ 1,058,712 326,121 Principal payments under financing obligations ............................ (486,900) (424,213) Proceeds from issuance of common stock, net .................................... 1,764,689 282,388 ----------- ----------- Net cash provided by financing activities ............................. 2,336,501 184,296 ----------- ----------- Increase in cash and cash equivalents ...... 1,438,066 995,409 Cash and cash equivalents at beginning of period ................................. 4,594,217 762,337 ----------- ----------- Cash and cash equivalents at end of period ................................. $ 6,032,283 $ 1,757,746 =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid ............................ $ 125,113 $ 110,241 =========== =========== Income taxes paid ........................ $ -- $ -- =========== ===========
See accompanying notes. -3- BIOSITE DIAGNOSTICS INCORPORATED NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited condensed financial statements have been prepared in accordance with both generally accepted accounting principles for interim financial information, and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying financial statements reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, considered necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year. We have experienced significant quarterly fluctuations in our operating results and we expect that these fluctuations in sales, expenses and operating results may continue. The financial statements and related disclosures have been prepared with the presumption that users of the interim financial information have read or have access to the audited financial statements for the preceding fiscal year. Accordingly, these financial statements should be read in conjunction with the audited financial statements and the related notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 1999. 2. EARNINGS PER SHARE Earnings per Share, EPS, is computed in accordance with Statement of Financial Accounting Standards No. 128, Earnings per Share, FAS 128. FAS 128 requires dual presentation of basic and diluted earnings per share. Basic EPS includes no dilution and is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of securities that could share in our earnings, such as common stock equivalents which may be issuable upon exercise of outstanding common stock options. Common stock equivalents are not considered in loss years as the effect is antidilutive. Shares used in calculating basic and diluted earnings per share were as follows (in thousands):
THREE MONTHS ENDED MARCH 31, -------------------- 2000 1999 -------------------- Weighted average common shares outstanding - Shares used in calculating per share amounts - Basic ... 13,237 12,973 Net effect of dilutive common share equivalents using the treasury stock method .................................. 1,603 -- --------------------- ares used in calculating per share amounts - Diluted ....................... 14,840 12,973 ====================
-4- 3. BALANCE SHEET INFORMATION Net inventories consist of the following:
MARCH 31, DECEMBER 31, 2000 1999 ---------- ----------- Raw materials.............. $ 2,315,778 $ 2,088,530 Work-in-process............ 3,186,766 3,058,179 Finished goods............. 1,130,525 912,147 --------- --------- $ 6,633,069 $ 6,058,856 ========= =========
4. COMPREHENSIVE INCOME Financial Accounting Standards Board's Statement No. 130, Comprehensive Income, FAS 130, establishes rules for the reporting and display of comprehensive income and its components. FAS 130 requires the change in net unrealized gains or losses on marketable securities be included in comprehensive income. As adjusted, our comprehensive income is as follows:
THREE MONTHS ENDED MARCH 31, ------------------------ 2000 1999 ------------------------ Net income (loss) ................... $ 1,323,747 $(1,056,942) Change in unrealized net gain (loss) on marketable securities, net of tax ........... (40,873) 27,426 ------------------------ Comprehensive income (loss) ......... 1,282,874 $(1,029,516) ========================
-5- PART I. FINANCIAL INFORMATION ITEM 2. 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, including the timely development, introduction and acceptance of new products, manufacturing efficiency issues, dependence on others, the impact of competitive products, third party reimbursement issues, changing market conditions and the other risks detailed under "Factors that May Affect Results" and throughout our Annual Report on Form 10-K for the year ended December 31, 1999. Actual results may differ materially from those projected. These forward-looking statements represent our judgment as of the date of the filing of this Form 10-Q and our Form 10-K, respectively. We disclaim any intent or obligation to update these forward-looking statements. OVERVIEW We were established in 1988. We develop, manufacture and market rapid, accurate and cost-effective diagnostic products that improve the quality of patient care and simplify the practice of laboratory medicine. Our two product platforms are designed to provide rapid results through either qualitative visual readings or quantitative meter readings. In 1992, we launched our first qualitative platform product, the Triage (-Registered Trademark-) Panel for Drugs of Abuse. In 1998, we began selling two additional qualitative platform products, the Triage C. DIFFICILE Panel and the Triage Parasite Panel. Also, in 1998, we launched our first quantitative platform product, the Triage Cardiac System. We followed these product launches with the introduction of our second quantitative platform product, the Triage BNP System, in certain international countries in December 1999. We market our products worldwide primarily through distributors supported by our direct sales force. Our principal markets are hospital laboratories, emergency departments and other point-of-care locations. In addition to focusing our attention on commercial activities associated with these products, we continue to invest in the research and development of additional rapid tests designed to aid in the diagnosis of several critical diseases or conditions in four core areas: cardiovascular, cerebrovascular, infectious diseases and oncology. In March 1999, we introduced our Biosite Discovery program, a collaborative research and diagnostics development program focused on the identification of new protein markers for acute diseases. In addition to our internal diagnostic marker discovery programs, we use our expertise in antibody development to help pharmaceutical and biotechnology partners accelerate their research programs. We utilize our proprietary Omniclonal(-TM-) antibody development technology to develop high affinity antibodies for our customers' use in characterizing and validating protein targets. The Omniclonal technology combines antibody phage display capabilities and a highly efficient antibody expression and purification process. In return, we have obtained and seek to continue to obtain diagnostic rights to the proteins under study. Initially, we are focusing on disease target markers in our 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 our product development pipeline. We have executed collaborative agreements under the Biosite Discovery program with several partners in the areas of cardiovascular, cerebrovascular, infectious disease and oncology. Our product sales to date have primarily been attributed to sales of the Triage Drugs of Abuse Panel product line. The Triage Drugs of Abuse Panel products are marketed pursuant to exclusive distribution agreements in the U.S. hospital market segment by Fisher Healthcare, "Fisher", which accounted for 83% of product sales in 1999 and 85% in the first quarter of 2000, and internationally by country-specific and regional distributors. Since the launch of the Triage Drugs of Abuse Panel in fiscal 1992, we experienced continued annual revenue growth from our Triage Drugs of Abuse Panel product line. We believe that the domestic sales of the Triage Drugs of Abuse Panel products may decline as the available U.S. market becomes saturated and competitive pressures become more and more prominent in a maturing market. We returned to operating profitability during the third and fourth quarters of 1999 and the first quarter of 2000. However, we incurred an operating loss during the prior seven quarters. We may not be able to maintain operating -6- profitability on a quarterly or annual basis in the future and our operating results may not be consistent with predictions made by securities analysts. We anticipate that our 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 us - market acceptance of current or new products - manufacturing inefficiencies - progress of research and development projects including clinical trials and regulatory delays - seasonal customer demand, the timing or cancellation of significant orders, product recalls and shipment problems - changes in reimbursement policies - competitive pressures on average selling prices - changes in the mix of products sold. Operating results would also be adversely affected by a downturn in the market for our current and future products. We continue to increase our operating expenses, primarily for personnel, capital equipment and activities supporting newly introduced products and product development. Our operating results would be adversely affected if our net sales or gross profit did not correspondingly increase or if our product development efforts were unsuccessful or are subject to delays. Our limited operating history makes accurate prediction of future operating results difficult or impossible. We may not sustain revenue growth or maintain profitability on a quarterly or annual basis. RECENT DEVELOPMENTS NEW PRODUCTS In December 1999, we began initial shipments of our second quantitative platform product, the Triage BNP System, to certain international customers. The Triage BNP System is a rapid, quantitative diagnostic test that may aid in the diagnosis of congestive heart failure, CHF, and therefore potentially enable earlier therapeutic intervention. Additionally, we filed a pre-market approval application, PMA, with the FDA, seeking approval to market the Triage BNP Test in the United States. At the present time, in the United States, there is no blood test available to aid in diagnosing CHF. On March 24, 2000, the FDA Clinical Chemistry and Clinical Toxicology Device Panel, Advisory Panel, voted 6-3 to recommend non-approval of our PMA for the Triage BNP Test. In voting, the Advisory Panel indicated the need for additional data. Despite this outcome, we continue to believe in the potential utility, safety and effectiveness of the Triage BNP Test. In order to remedy the deficiencies of the current PMA submission, we intend to gather data from additional female CHF patients to ensure that our CHF patient population adequately mirrors the known sex distribution for the disease. Also, to better demonstrate the sensitivity and specificity of our test in different age groups, we will accumulate data from a control group of healthy individuals that is representative of the age distribution among the diseased population. We are also considering submitting additional data from studies that may validate the utility of our test. We anticipate submitting an amendment to our PMA by October 2000. We will continue to market the Triage BNP System internationally. -7- RESULTS OF OPERATIONS The following table sets forth certain operating data as a percentage of net sales:
THREE MONTHS ENDED MARCH 31, 2000 1999 ---- ---- Net sales ......................... 100% 100% Cost of sale....................... 31 40 --- --- Gross profit ...................... 69 60 Operating Expenses: Selling, general and administrative ................. 36 52 Research and development.......... 26 32 --- --- Total operating expenses .......... 62 84 Income (loss) from operations ..... 7 (24) Interest and other income, net..... 10 5 --- --- Income (loss) before benefit (provision) for income taxes .... 17 (19) Benefit (provision) for income taxes ............................ (6) 8 --- --- Net income (loss) .................. 11% 11% === ===
NET SALES. Net sales increased 29% to $12.2 million for the first quarter of 2000 from $9.4 million for the first quarter of 1999. The increase in net sales was primarily attributable to the growth in net sales of our Triage Cardiac System, one of our quantitative platform products. Our quantitative platform product sales for the first quarter of 2000 were approximately $3.1 million, as compared to $1.1 million for the same period of 1999. This product's net sales growth was primarily due to growth in our customer base and greater product utilization. Additionally, the first quarter's net sales included approximately $507,000 associated with the initial stocking of Triage Cardiac Panel by Fisher, our U.S. distributor. Fisher began shipping the product to its customers from its regional locations in April. Prior to that, we were drop-shipping the product directly to their customers. Net sales of our qualitative platform products, consisting of the Triage Drugs of Abuse Panel and Triage Microbiology Panels were approximately $9.1 for the first quarter of 2000, as compared to $8.3 million for the same period of 1999. Net sales of the Triage Drugs of Abuse Panel for the first quarter of 2000 were 7% higher than net sales of the product for same period of 1999. We believe that the domestic sales of the Triage Drugs of Abuse Panel products may decline as the available U.S. market becomes saturated and competitive pressures become more prominent in a maturing market. GROSS PROFIT. Gross profit increased 47% to $8.4 million for the first quarter of 2000 from $5.7 million for the first quarter of 1999. The overall gross margin increased to 69% for the first quarter of 2000 from 60% for the same period in 1999, primarily as a result of greater efficiencies achieved in the manufacturing of the Triage Cardiac Panel. Our newer products, which continued to experience lower gross margins than the Triage Drugs of Abuse Panel, were produced with greater efficiency during the first quarter of 2000 than the first quarter of 1999. During the first quarter of 1999, we experienced significant inefficiencies related to the production of the Triage Cardiac Panel, which adversely affected gross profits related to that product. Our newer products are expected to continue to realize lower gross margins than the Triage Drugs of Abuse Panel during the early stages of their commercialization as incremental manufacturing costs are spread over smaller sales volumes, efficiency issues are addressed, and meter quality issues are resolved with our supplier. We also expect that the overall gross margins will continue to decrease as a result of competitive pricing pressures related to the maturing Triage Drugs of Abuse product line and the changing mix of net sales of products with different gross margins. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative, SG&A, expenses decreased 11% to $4.4 million for the first quarter of 2000 from $4.9 million for the first quarter of 1999. The decrease in SG&A expenses were primarily associated with certain administrative costs incurred during the first quarter of 1999 that were not repeated during the first quarter of 2000. SG&A expenses for the first quarter of 1999 included administrative costs associated with the reorganization of our manufacturing operations totaling approximately $300,000 and costs related to a business development opportunity that we decided to forego totaling approximately $425,000. The decrease in SG&A expenses related to these isolated costs were offset by increases in SG&A expenses associated with supporting our expanded product lines and commercial operations. We expect selling, general and administrative costs in 2000 to be significantly higher than in 1999, as we continue to expand our overall operations, including sales and marketing activities for our broader product lines, business development activities and administrative support functions. The timing of such increased expenditures and their magnitude are primarily dependent on the commercial success and sales growth of our newer products and the progress of business development activities. -8- RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased 4% to $3.2 million for the first quarter of 2000 from $3.0 million for the first quarter of 1999. During the first quarter of 2000, our research and development resources were focused primarily on the development, clinical studies, potential improvements to our existing products and research activities associated with the Biosite Discovery Program. We expect that our research and development expenses will increase in 2000, as compared to 1999 levels. The increased expenditures are expected to primarily relate to pre-clinical and clinical studies, product development efforts, the Biosite Discovery program and manufacturing scale-up activities. Some of our potential products are subject to more complex regulatory approval requirements than our previous products. The costs associated with the clinical trials, especially those related to the Triage BNP test are expected to be significant. We expect to incur significant expenses in the second and third quarters of 2000 related to the gathering the additional data needed for our amendment to our PMA for the Triage BNP test. The timing of the other 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. OTHER INCOME. Interest and other income was approximately $500,000 for the first quarter of 2000, consistent with the same period in 1999. Contract revenues of approximately $715,000 were recognized during the first quarter of 2000 and related primarily to the licensing of technology under collaborative research and development agreements. We also recognized an $187,000 milestone payment from Kyoto Dai-Ichi Kagaku C., Ltd. ("KDK") related to the launch of Triage Cardiac System in their territory. There were no contract revenues recognized during the first quarter of 1999. BENEFIT (PROVISION) FOR INCOME TAXES. As a result of the pre-tax income and the estimated tax credits to be generated in 2000, we recorded a provision for income taxes of $702,000 for the first quarter of 2000. For the same period in 1999, we recorded a benefit for income taxes of $729,000. We will continue to assess the likelihood of realization of our tax credits and other net deferred tax assets. If future events occur which do not make the realization of such assets more likely than not, a valuation allowance will be established against all or a portion of the net deferred tax assets. LIQUIDITY AND CAPITAL RESOURCES We have financed our operations through revenues from operations, private and public placements of equity securities, debt and capital lease financing, cash received under collaborative agreements and interest income. At March 31, 2000, the Company had cash, cash equivalents and marketable securities of approximately $33.8 million compared to $32.3 million at December 31, 1999. The increase in cash, cash equivalents and marketable securities during the first quarter of 2000 is largely attributable to cash generated from operating activities and proceeds from the issuance of common stock under our employee stock plans. These significant sources of cash were offset by cash expenditures for leasehold improvements and capital equipment. Cash generated from operating activities totaled $788,000 for the first quarter of 2000, compared to the use of $505,000 for same period of 1999. Other significant sources of cash for the first quarter of 2000 included the receipt of $1.1 million in proceeds from equipment financing and $1.8 million in proceeds from the issuance of common stock under our employee stock plans. Significant uses of cash for the first quarter of 2000 included the purchase of leasehold improvement and capital equipment of approximately $1.1 million. The decrease in cash, cash equivalents and marketable securities during the first quarter of 1999 was largely attributable to the net payment of $1,050,000 made to Dade Behring as part of the settlement of litigation between Dade Behring and Biosite in March 1999. Other significant uses of cash during the first quarter of 1999 included deposits and purchases of equipment and leasehold improvements totaling approximately $1 million. Proceeds from the sale of marketable securities that were not reinvested in other marketable securities totaled approximately $3.4 million and were used to meet the cash requirements of the Company during the first quarter of 1999. Our primary short-term needs for capital, which are subject to change, are for the support of our commercialization efforts related to new products, expansion of our manufacturing capacity and efficiency for new products, potential licensing of technologies patented by others, potential procurement and enforcement of patents and the continued advancement of research and development efforts. We executed agreements to license technologies patented by others that call for cash payments and future royalties based on product sales utilizing the licensed technologies. We may enter into additional licensing agreements that may include up-front and annual cash payments and future royalties based on product sales utilizing the licensed technologies. We utilized and may continue to utilize credit arrangements with financial institutions to finance the purchase of capital equipment. Additionally, we may utilize cash generated from operating activities, if any, to meet our capital requirements. -9- We are evaluating various alternatives in addressing our future facilities expansion needs. The alternatives being evaluated include negotiations with various parties for the leasing of additional facility space, which would be adequate for our foreseeable future needs. Leasing of additional facility space would be expected to result in an increase in rent upon occupancy. We believe that our available cash, cash from operations and funds from existing credit arrangements will be sufficient to satisfy our funding needs for at least the next 24 months. Thereafter, if cash generated from operations is insufficient to satisfy our working capital and capital expenditure requirements, we 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, if at all. Furthermore, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may include restrictive covenants. Our future liquidity and capital funding requirements will depend on numerous factors, including: - the extent to which our new products and products under development are successfully developed, gain market acceptance and become and remain competitive - the costs and timing of further expansion of sales, marketing and manufacturing activities, facilities expansion needs - the timing and results of clinical studies and regulatory actions regarding our potential products - changes in third-party reimbursement policies - the costs and timing associated with business development activities, including potential licensing of technologies patented by others. Our failure to raise capital on acceptable terms, when needed, could have a material adverse effect on our business. ITEM 2A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to changes in interest rates, primarily from our variable-rate long-term debt arrangements and, to a lesser extent, our investments in available-for-sale marketable securities. Under our current policies, we do not use interest rate derivatives instruments to manage this exposure to interest rate changes. We do have the option to convert our variable-rate long-term debt arrangements to fixed-rate debt arrangements for a nominal transaction fee. At March 31, 2000, we had variable-rate debt totaling approximately $1.4 million. A hypothetical 1% adverse move in interest rates along the entire interest rate yield curve would not materially effect the fair value of our financial instruments that are exposed to changes in interest rates. Additionally, our purchases of Triage Meters from LRE Technology Partner GmbH ("LRE") are denominated in German Deutsche Marks (DM) and sales of some products to some international customers are denominated in the local currency of customers. We have on occasion purchased forward exchange contracts to manage this exposure to exchange rate changes. As of March 31, 2000, we had no outstanding forward exchange contracts. Total receivables and payables denominated in foreign currencies at March 31, 2000 were not material. -10- FACTORS THAT MAY AFFECT RESULTS This report includes forward-looking statements about our business and results of operations which are subject to risks and uncertainties that could cause our actual results to vary materially from that indicated from such forward-looking statements. Factors that could cause or contribute to such differences include those discussed below, as well as those discussed elsewhere in the Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 1999. The factors discussed below should be read in conjunction with the risk factors discussed in our Annual Report on Form 10-K, which are incorporated by reference. WE HAVE ONLY A LIMITED HISTORY OF PROFITABILITY AND WE MAY NOT MAINTAIN PROFITABILITY. IN ADDITION OUR QUARTERLY RESULTS WILL FLUCTUATE. We achieved operating profitability in the third and fourth quarters of 1999 and the first quarter of 2000. However, we incurred an operating loss during the prior seven quarters. We may not be able to maintain operating profitability on a quarterly or annual basis in the future. We believe that our 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 us - market acceptance of current or new products - changes in the mix of products sold - manufacturing delays or inefficiencies - competitive pressures on average selling prices - the timing of significant orders - research and development efforts - seasonal customer demand - changes in reimbursement policies - regulatory uncertainties or delays - product recalls - shipment problems - costs and timing associated with business development activities, including potential licensing of technologies. Operating results would also be adversely affected by a downturn in the market for our products. Because we continue to increase our operating expenses to support our expanded sales and marketing activities, manufacturing operations and new product development, our operating results would be adversely affected if our sales and gross profits did not correspondingly increase or if our product development efforts are unsuccessful or subject to delays. Our limited operating history makes accurate prediction of future operating results difficult or impossible. We may not sustain revenue growth or sustain profitability on a quarterly or annual basis and our growth or operating results may not be consistent with predictions made by securities analysts. WE ARE DEPENDENT ON THE DEVELOPMENT AND INTRODUCTION OF NEW PRODUCTS FOR REVENUE GROWTH AND PROFITABILITY. Except for our commercialized products, all of our products are still under development and may not be successfully developed or commercialized on a timely basis, or at all. If we are 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, we will be harmed. We believe that our revenue growth and profitability will substantially depend upon our ability to complete development of and successfully introduce these new products as well continue to achieve a growing level of market acceptance of new products such as the Triage Cardiac System and the Triage BNP System. In addition, the successful development of some of these new products will depend on the development of new technologies. We will be required to undertake time-consuming and costly development activities and seek regulatory approval for these new products. We 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. In December 1999, we filed a PMA with FDA seeking approval to market the Triage BNP Test in the United States. At the present time, in the United States, there is no blood test available to aid in diagnosing CHF. On March 24, 2000, the FDA Clinical Chemistry and Clinical Toxicology Device Panel, Advisory Panel, recommended non-approval of our -11- PMA for the Triage BNP Test. In voting, the Advisory Panel indicated the need for additional data. While we anticipate submitting an amendment to our PMA application by October 2000 if we develop the additional data requested by the FDA, we may not be able to submit an amendment or, even if submitted, an amendment may not satisfy the FDA. We have limited resources to devote to the development of our potential products and thus the delay in the development of the Triage BNP Test may delay the development of other products. If we fail to establish and maintain: - reliable, cost-efficient, high volume manufacturing capacity - a cost-effective sales force and administrative infrastructure - an effective product distribution system for our products we may not be able to successfully commercialize new products. OUR LIMITED MANUFACTURING EXPERIENCE AND OUR POTENTIAL INABILITY TO SCALE-UP MANUFACTURING MAY ADVERSELY AFFECT OUR ABILITY TO PRODUCE PRODUCTS. We must manufacture our products in compliance with regulatory requirements, in sufficient quantities and on a timely basis, while maintaining product quality and acceptable manufacturing costs. Significant additional work will be required for the scaling-up of each new product prior to commercialization, and this work may not be completed successfully. In addition, although we expect some of our newer products and products under development to share production attributes with our existing products, production of these products may require the development of new manufacturing technologies and expertise. These products may not be able to be manufactured by us or any other party at a cost or in quantities to make these products commercially viable. If we are unable to develop or contract for manufacturing capabilities on acceptable terms for our products under development, our ability to conduct pre-clinical 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 us. Manufacturing and quality control problems have arisen and may arise as we attempt to scale-up our manufacturing and such scale-up may not be achieved in a timely manner or at a commercially reasonable cost, or at all. Our manufacturing facilities and those of our 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 Quality System Regulations requirements of the FDA. We or our contractors may not satisfy such regulatory requirements, and any failure to do so would have a material adverse effect on us. WE ARE DEPENDENT ON SOLE-SOURCE SUPPLIERS FOR OUR PRODUCTS. A SUPPLY INTERRUPTION WOULD HARM US. Key components and raw materials used in the manufacture of our products are provided by single-source vendors. Any supply interruption in a sole-sourced component or raw material would have a material adverse effect on our ability to manufacture these products until a new source of supply is qualified and, as a result, would have a material adverse effect on us. In addition, an uncorrected impurity or supplier's variation in a raw material, either unknown to us or incompatible with our manufacturing processes of our products, could have a material adverse effect on our ability to manufacture products. We have under development products which, if developed, may require us to enter into additional supplier arrangements. We 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 our future products, if any, would have a material adverse effect on us. We rely upon LRE for production of the fluorescent meter used in connection with our Triage Meter System platform products, including the Triage Cardiac System and Triage BNP System and others currently under development. Our dependence upon LRE for the manufacture of the meter may adversely affect - our profit margins - our 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. -12- WE ARE DEPENDENT IN THE NEAR TERM ON SALES OF THE TRIAGE DRUGS OF ABUSE PANEL. A SIGNIFICANT REDUCTION IN SALES OF THE TRIAGE DRUGS OF ABUSE PANEL WOULD HARM US. Sales of the Triage Drugs of Abuse Panel products accounted for approximately 83% of our sales in 1999 and 69% of our sales in the first quarter of 2000. We expect our revenue and profitability to substantially depend on the sale of the Triage Drugs of Abuse Panel products for the foreseeable future. A significant reduction in demand for the Triage Drugs of Abuse Panel products would have a material adverse effect on us. We believe that domestic net sales of the Triage Drugs of Abuse Panel products may decline as the available U.S. market becomes saturated. Competitive pressures could also erode our profit margins for the Triage Drugs of Abuse Panel products. Our continued growth will depend on: - our ability to successfully commercialize our newer products - develop and commercialize other products - gain additional acceptance of the Triage Drugs of Abuse Panel products in new market segments, such as international markets. Sales of our newer products represented less than 22% of net sales during 1999 and less than 31% during the first quarter of 2000. We may not be able to successfully commercialize new products, including our four newer products that we have launched in the last two years, and we may not be able to maintain or expand our share of the drug-testing market. Technological change or the development of new or improved diagnostic technologies could result in our products becoming obsolete or noncompetitive. WE ARE DEPENDENT ON KEY DISTRIBUTORS AND HAVE LIMITED DIRECT SALES EXPERIENCE. IF OUR DISTRIBUTORS TERMINATE THEIR RELATIONSHIP WITH US OR FAIL TO ADEQUATELY PERFORM, OUR PRODUCT SALES WILL SUFFER. We rely upon a key distributor alliance with Fisher to distribute our products in the United States and may rely upon distributors to distribute products under development. The Triage Drugs of Abuse Panel products are currently marketed pursuant to exclusive distribution agreements in the U.S. hospital market segment by Fisher (which accounted for 83% of net sales in 1999 and 85% of net sales in Q1 2000) and internationally by country-specific and regional distributors. The loss or termination of one or more of these distributors would have a material adverse effect on our sales. If any of our distribution or marketing agreements are terminated and we are unable to enter into alternative agreements or if we elect to distribute new products directly, we 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. We have limited experience in direct sales, marketing and distribution of our products. Our direct sales, marketing and distribution efforts may not be successful. Further, we 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 our failure to successfully market our products would have a material and adverse effect on us. COMPETITION AND TECHNOLOGICAL CHANGE MAY MAKE OUR PRODUCTS LESS ATTRACTIVE OR OBSOLETE. The market in which we compete is intensely competitive. Our competitors include: - health care companies - laboratory-based tests and analyzers - 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 laboratories. We expect that these laboratories will compete vigorously to maintain their dominance of the testing market. In order to achieve market acceptance for our products, we will be required to demonstrate that our products provide cost-effective and time saving alternatives to tests performed by clinical reference laboratories or traditional hospital laboratory procedures. This will require physicians to change their established means of having such tests performed. Our 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 -13- - Bayer Diagnostics - Ortho Clinical Diagnostics, a division of Johnson & Johnson - Dade Behring have developed or are developing diagnostic products that do or will compete with our products. These competitors have substantially greater financial, technical, research and other resources and larger, more established marketing, sales, distribution and service organizations than us. Moreover, these competitors offer broader product lines and have greater name recognition than us, 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 our products. Our competitors may succeed in developing or marketing technologies or products that are more effective or commercially attractive than our products, or that would render our technologies and products obsolete. Moreover, we 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 us or may prevent, limit or interfere with our ability to make, use or sell our products either in the United States or in international markets. HEALTH CARE REFORM AND RESTRICTIONS ON REIMBURSEMENT MAY ADVERSELY AFFECT OUR RESULTS. In the United States, health care providers that purchase the Triage Drugs of Abuse Panel and other diagnostic products generally rely on third-party payors to reimburse all or part of the cost of the procedure. Third-party payors can affect the pricing or the relative attractiveness of our 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, some health care providers are moving towards a managed care system in which providers contract to provide comprehensive health care for a fixed cost per patient. We are unable to predict what changes will be made in the reimbursement methods utilized by third-party payors. We 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 our 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 our products may decrease amounts physicians and other practitioners are able to charge patients, which in turn may adversely affect our ability to sell our 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 our products could have a material adverse effect on us. 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 to be available in the future for our existing products or products under development. In addition, market acceptance of our 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. We believe 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 us. 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 our products or our ability to sell our products on a profitable basis. OUR PATENT AND PROPRIETARY TECHNOLOGY MAY NOT PROVIDE US WITH ANY BENEFIT AND THE PATENTS OF OTHERS MAY PREVENT US FROM COMMERCIALIZING OUR PRODUCTS. Our ability to compete effectively will depend in part on our ability to develop and maintain proprietary aspects of our technology, and to operate without infringing the proprietary rights of others or to obtain licenses to such proprietary rights. Our patent applications may not result in the issuance of any patents. Additionally, our patent applications may not have priority over others' applications, or, if issued, our patents may not offer protection against competitors with similar technology. Any patents issued to us may be challenged, invalidated or circumvented in the future and the rights created thereunder may not provide a competitive advantage. -14- Our products may incorporate technologies that are the subject of patents issued to, and patent applications filed by, others. We have obtained licenses for some technologies and may negotiate to obtain other licenses for technologies patented by others. However, we may not be able to obtain licenses for technology patented by others on commercially reasonable terms, or at all. We may not be able to develop alternative approaches if we are unable to obtain licenses and our current and future licenses may not be adequate for the operation of our business. The failure to obtain necessary licenses or to identify and implement alternative approaches would prevent us from commercializing some of our products under development and would have a material adverse effect on us. Litigation may be necessary to enforce any patents issued to us, to protect trade secrets or know-how owned by us or to determine the enforceability, scope and validity of the proprietary rights of others. We settled a number of patent infringement claims prior to 1999. THE LEGAL PROCEEDINGS TO OBTAIN PATENTS AND LITIGATION OF THIRD-PARTY CLAIMS OF INTELLECTUAL PROPERTY INFRINGEMENT COULD REQUIRE US TO SPEND SUBSTANTIAL AMOUNTS OF MONEY AND COULD IMPAIR OUR OPERATIONS. We 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. We also have received correspondence from other parties calling to our attention the existence of patents that they believe cover technology which is or may be incorporated in our 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 us and significant diversion of effort by our 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 we had no successful defense to such claims. An adverse outcome in litigation or the failure to obtain a necessary license could subject us to significant liability and could prevent us from selling our products, which would have a material adverse effect on us. We also rely upon trade secrets, technical know-how and continuing invention to develop and maintain our competitive position. Others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or disclose such technology, and we may not be able to protect our trade secrets or our rights to our trade secrets. Others may have filed and in the future are likely to file patent applications that are similar or identical to ours. To determine the priority of inventions, we may have to participate in interference proceedings declared by the USPTO that could result in substantial cost to us. Patent applications of others may have priority over patent applications filed by us. Our commercial success depends in part on us neither infringing patents or proprietary rights of third parties nor breaching any licenses that may relate to our technologies and products. We are aware of several third-party patents that may relate to our technology. We may infringe these patents, or other patents or proprietary rights of third parties. In addition, we have 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 us or our collaborative partners claiming damages and seeking to enjoin commercial activities relating to our products and processes affected by third-party rights, in addition to subjecting us to potential liability for damages, may require us or our collaborative partner to obtain a license in order to continue to manufacture or market the affected products and processes. We or our 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 our areas of interest, and we believe 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 our managerial and financial resources, which would have a material adverse effect on us. WE MAY NEED ADDITIONAL CAPITAL. IF ADDITIONAL CAPITAL IS NOT AVAILABLE, WE MAY HAVE TO CURTAIL OR CEASE OPERATIONS. -15- If cash generated from operations is insufficient to satisfy our working capital and capital expenditure requirements, we 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. Our future liquidity and capital funding requirements will depend on numerous factors, including: - the extent to which our new products and products under development are successfully developed, gain market acceptance and become and remain competitive - the costs and timing of further expansion of sales, marketing and manufacturing activities, facilities expansion needs - the timing and results of clinical studies and regulatory actions regarding our potential products - changes in third-party reimbursement policies - the costs and timing associated with business development activities, including potential licensing of technologies patented by others. The failure by us to raise capital on acceptable terms when needed would cause us to have to scale back our operations, reduce our work force and license to others products we would otherwise seek to develop or commercialize ourselves. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." THE REGULATORY APPROVAL PROCESS IS EXPENSIVE, TIME CONSUMING AND UNCERTAIN WHICH MAY PREVENT US FROM OBTAINING REQUIRED APPROVALS OR HAVE APPROVALS RESCINDED FOR THE COMMERCIALIZATION OF OUR PRODUCTS. The testing, manufacture and sale of our 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. We will not be able to commence marketing or commercial sales in the United States of new products under development until we receive 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 pre-market clearance or pre-market approval for devices, withdrawal of marketing clearances or approvals and criminal prosecution. The FDA also has the authority to request recall, repair, replace or refund of the cost of any device manufactured or distributed by us. 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, pre-market notification and adherence to the Quality System Regulation, QSR, 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 pre-market 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 pre-amendment 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, 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 -16- 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 pre-amendment 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) pre-market 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. We have made modifications to the Triage Drugs of Abuse Panel since receipt of initial 510(k) clearance. With respect to several of these modifications, we filed new 510(k) notices describing the modifications, and have received FDA clearance of those 510(k) notices. We made other modifications to the Triage Drugs of Abuse Panel which we believe do not require the submission of new 510(k) notices. There can be no assurance, however, that the FDA would agree with any of our determinations not to submit a new 510(k) notice for any of these modifications, or would not require us to submit a new 510(k) notice for any of these modifications made to the Triage Drugs of Abuse Panel. If the FDA requires the Company to submit a new 510(k) notice for any device modification, we may be prohibited from marketing the modified the Triage Drugs of Abuse Panel until the 510(k) notice is cleared by the FDA. We are uncertain of the regulatory path to market that the FDA will ultimately apply to our products currently in development. Although the Triage Drugs of Abuse Panel, Triage C. difficile Panel, Triage Parasite Panel and Triage Cardiac Panel received 510(k) clearance, a PMA is required for Triage BNP Test and may be required for the other products now in development. There can be no assurance that the FDA will not determine that we must adhere to the more costly, lengthy and uncertain PMA approval process for any of our products in development. In December 1999, we filed a PMA with the FDA, seeking approval to market the Triage BNP Test in the United States. At the present time, in the United States, there is no blood test available to aid in diagnosing CHF. On March 24, 2000, the FDA Clinical Chemistry and Clinical Toxicology Device Panel, Advisory Panel, voted 6-3 to recommend non-approval of our PMA for the Triage BNP Test. In voting, the Advisory Panel indicated the need for additional data. Despite this outcome, we continue to believe in the potential utility, safety and effectiveness of the Triage BNP Test. In order to remedy the deficiencies of the current PMA submission, we intend to gather data from additional female CHF patients to ensure that our CHF patient population adequately mirrors the known sex distribution for the disease. Also, to better demonstrate the sensitivity and specificity of our test in different age groups, we will accumulate data from a control group of healthy individuals that is representative of the age distribution among the diseased population. We are also considering submitting additional data from studies that may validate the utility of our test. We anticipate submitting an amendment to our PMA application by October 2000. In April 2000, the FDA conducted an audit of our manufacturing facility. No citations or observations resulted from this audit. We may not be able to obtain necessary regulatory approvals or clearances for our 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 -17- 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 our 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. We intend to conduct clinical investigations of our 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 our IUO distribution of our IVD products under development will meet the requirements for IDE exemption. Furthermore, failure by us or the recipients of our 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 our distribution of our products under development, which would adversely affect our ability to conduct the clinical investigations necessary to support marketing clearance or approval. Any devices manufactured or distributed by us 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. We are 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 our business, financial condition and results of operation. There can be no assurance that we 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 our business, financial condition and results of operations. We are also subject to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control and disposal of hazardous or potentially hazardous substances. There can be no assurance that we 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 our business, financial condition and results of operations. The use of our 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 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 our ability to market our products or on our business, financial condition or results of operations. WE ARE DEPENDENT ON OTHERS FOR THE DEVELOPMENT OF PRODUCTS. THE FAILURE OF OUR COLLABORATIONS TO SUCCESSFULLY DEVELOP PRODUCTS WOULD HARM OUR BUSINESS. Our strategy for the research, development, commercialization and distribution of some of our products entails entering into various arrangements with third parties. We are or will be 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. -18- We entered into agreements with partners for the development and marketing of products. The agreements are subject to rights of termination and may be terminated. Our collaborators may not abide by their contractual obligations and may discontinue or sell their current lines of business. The research for which we receive or provide funding may not lead to the development of products. We intend to enter into additional development and marketing agreements. We may not be able to enter into agreements on acceptable terms, or at all. We are 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 that is also under further improvements by LRE. LRE may not improve the hardware or software on schedule, or at all, and new software that permits the meter to be used for another Triage Meter System product may not be further improved. WE MAY NOT BE ABLE TO MANAGE OUR GROWTH. We anticipate increased growth in the number of our employees, the scope of our operating and financial systems and the geographic area of our operations as new products are developed and commercialized. This growth will result in an increase in responsibilities for both existing and new management personnel. Our ability to manage growth effectively will require us to continue to implement and improve our operational, financial and management information systems and to train, motivate and manage our employees. We may not be able to manage our expansion, and a failure to do so could have a material adverse effect on us. IF WE LOSE OUR KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN ADDITIONAL PERSONNEL, WE MAY NOT BE ABLE TO PURSUE COLLABORATIONS OR DEVELOP OUR OWN PRODUCTS. Our future success depends in part on the continued service of our key technical, sales, marketing and executive personnel, and our ability to identify, hire and retain qualified personnel. Competition for such personnel is intense and we may not be able to retain existing personnel or identify or hire additional personnel. WE MAY HAVE SIGNIFICANT PRODUCT LIABILITY EXPOSURE. The testing, manufacturing and marketing of medical diagnostic devices entails an inherent risk of product liability claims. Potential product liability claims may exceed the amount of our insurance coverage or may be excluded from coverage under the terms of the policy. Our 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 we are held liable for a claim against which we are not indemnified or for damages exceeding the limits of our insurance coverage, that claim could exceed our total assets. -19- PART II. OTHER INFORMATION. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27.1 Financial Data Schedule (b) Reports on Form 8-K. None -20- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: May 2, 2000 BIOSITE DIAGNOSTICS INCORPORATED By: /s/ CHRISTOPHER J. TWOMEY ------------------------------ Christopher J. Twomey Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer) -21- EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------ ----------- 27.1 Financial Data Schedule
-22-
EX-27.1 2 EXHIBIT 27.1
5 THE REGISTRANT'S FINANCIAL STATEMENTS AS OF AND FOR THE QUARTER ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S 1999 ANNUAL REPORT ON FORM 10-K. 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 6,032 27,793 6,553 0 6,633 49,704 23,803 (13,555) 71,162 6,712 4,493 0 0 136 57,158 71,162 12,198 13,413 3,837 7,550 0 0 0 2,026 702 1,324 0 0 0 1,324 .10 .09
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