-----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, JpNwgIAJHXKLr4L19MfaGcUw4MxZfTL4VTriyuyVpBnkypsIb8IxWtzRAIj+BdQU 2jyCzzKF7/JQOKcx4NXtVQ== 0000912057-96-021538.txt : 19981229 0000912057-96-021538.hdr.sgml : 19981229 ACCESSION NUMBER: 0000912057-96-021538 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960930 DATE AS OF CHANGE: 19981228 FILER: COMPANY DATA: COMPANY CONFORMED NAME: METRA BIOSYSTEMS INC CENTRAL INDEX KEY: 0000888999 STANDARD INDUSTRIAL CLASSIFICATION: 2835 IRS NUMBER: 330408436 STATE OF INCORPORATION: CA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-26234 FILM NUMBER: 96637069 BUSINESS ADDRESS: STREET 1: 265 N WHISMAN RD CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043 BUSINESS PHONE: 4159039100 MAIL ADDRESS: STREET 1: 265 NORTH WHISMAN RD CITY: MOUNTAIN VIEW STATE: CA ZIP: 940433911 10-K 1 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-K [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended Commission file Number June 30, 1996 0-26234 ---------------------- METRA BIOSYSTEMS, INC. (Exact name of Registrant as specified in its charter) CALIFORNIA 33-0408436 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 265 NORTH WHISMAN ROAD, MOUNTAIN VIEW, CA 94043-3911 (Address of Registrant's principal executive offices) (Zip code) (415) 903-9100 (Registrant's telephone number including area code) Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.001 PAR VALUE PREFERRED SHARE PURCHASE RIGHTS 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. [ x ]Yes [ ] 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 [ x ] At August 30, 1996, there were 12,599,852 shares of Common Stock outstanding. The aggregate market value of the voting stock held by non-affiliates of the registrant was $48,040,834 based upon the closing price of the Common Stock at August 30, 1996 on The Nasdaq National Market. Shares of Common Stock held by each officer and director and each person who owns 5% or more of the outstanding Common Stock have been excluded from this computation in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement of Registrant for the 1996 Annual Meeting of Shareholders are incorporated in Part III of this Form 10-K. METRA BIOSYSTEMS, INC. INDEX PART I. Item 1. Business 3. Item 2. Properties 32. Item 3. Legal Proceedings 32. Item 4. Submission of Matters to a Vote of Security Holders 32. PART II. Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 33. Item 6. Selected Financial Data 34. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation 35. Item 8. Financial Statements and Supplementary Data 41. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 63. PART III. Item 10. Directors and Executive Officers of the Registrant 63. Item 11. Executive Compensation 63. Item 12. Security Ownership of Certain Beneficial Owners and Management 63. Item 13. Certain Relationships and Related Transactions 63. PART IV. Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 64. Signatures 66. 2 INTRODUCTORY STATEMENT EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED IN THIS ANNUAL REPORT ON FORM 10-K, THE MATTERS DISCUSSED HEREIN ARE FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED. THESE RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO, THE RISK THAT THE COMPANY'S PRODUCTS WILL NOT ACHIEVE MARKET ACCEPTANCE, THE COMPANY'S RELIANCE UPON COLLABORATIVE RELATIONSHIPS AND THE INTENSE COMPETITION IN THE MARKET FOR BIOCHEMICAL MARKERS, AS WELL AS THE OTHER RISKS AND UNCERTAINTIES DESCRIBED HEREIN, AS DESCRIBED UNDER THE HEADING "RISK FACTORS" IN THE COMPANY'S PROSPECTUSES DATED APRIL 23, 1996 AND JUNE 30, 1995, RESPECTIVELY, DELIVERED IN CONNECTION WITH THE COMPANY'S PUBLIC OFFERINGS, AND AS DESCRIBED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED JUNE 30, 1995 AND OTHER RISKS INCLUDED FROM TIME TO TIME IN THE COMPANY'S OTHER SEC REPORTS AND PRESS RELEASES, COPIES OF WHICH ARE AVAILABLE FROM THE COMPANY UPON REQUEST. THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENTS CONTAINED HEREIN. PART I ITEM 1. BUSINESS Metra is a leader in developing and commercializing diagnostic products for the detection and management of metabolic bone diseases and disorders. The Company's strategy is to offer a portfolio of diagnostic products that will provide physicians with comprehensive clinical information regarding the metabolism of bone and other connective tissues. The Company has developed and is currently marketing for either research use or clinical use two immunodiagnostic tests to measure bone resorption (loss), two immunodiagnostic tests to measure bone formation and one immunodiagnostic test to measure bone growth disorders. In addition, the Company is currently developing a portable ultrasound device designed to assess bone fragility, a simple bone-resorption test for use in the physicians offices and biochemical markers to detect cartilage disorders. Since August 1995, the Company has received 510(k) clearances for commercial sale of the following immunodiagnostic tests: Alkphase-B in August 1995, Pyrilinks in November 1995 and Pyrilinks-D in December 1995. In addition, the Company has entered into several collaborative arrangements with major pharmaceutical and diagnostic companies, including a worldwide marketing collaboration with Wyeth-Ayerst Laboratories, a division of American Home Products, in November 1995 and, in February 1996, a collaboration with Abbott Laboratories to format the Company's products for Abbott's automated immunoassay systems. BACKGROUND The human body and its major organs are supported and protected by a matrix of connective tissues. Major connective tissue systems in the body include bone, cartilage, tendons and skin. Connective tissues primarily consist of the extracellular matrix, which is composed of a variety of proteins. Connective tissue diseases and disorders usually result from excessive production or breakdown of this extracellular matrix. The body's principal connective tissue systems are bone and cartilage. Although the two systems are distinct, they have a similar underlying biology. Major diseases and disorders affecting bone and cartilage include osteoporosis, Paget's disease, cancers that metastasize to bone, hyperthyroidism, hyperparathyroidism, growth hormone deficiency, rheumatoid arthritis, and osteoarthritis. Many of these diseases and disorders can be disabling, can affect the quality of life, and can eventually lead to death. BONE BIOLOGY Bone is a dynamic tissue that continually regenerates and remodels itself throughout an individual's life. This remodeling process, which consists of bone formation and resorption (loss), is ongoing and is necessary to maintain skeletal integrity. Clinical studies suggest that 3 between 10% and 20% of the adult skeleton is replaced each year by the remodeling process. From childhood to early adulthood, bone formation exceeds resorption, causing bone mass to increase. Typically, after reaching peak bone mass between the ages of 30 and 40, bone resorption begins to exceed formation, and both men and women experience a slow, age-related phase of bone loss, lasting for the rest of their lives. In addition to age-related bone loss, most women also experience an accelerated phase of bone loss for several years following menopause, primarily due to the cessation of estrogen production. Bone remodeling is a complex process involving bone resorption, in which cells called "osteoclasts" excavate small pits throughout the bone, followed by bone formation, in which cells called "osteoblasts" produce and deposit bone collagen to fill the pits excavated by the osteoclasts. The remodeling process takes place continuously throughout the skeleton, at multiple locations and in different phases at the same time. At the beginning of a remodeling cycle at a particular location, osteoclast precursor cells in the bone marrow are recruited and migrate to the targeted area of bone. These cells fuse to form osteoclasts and, over a period of one to three weeks, the osteoclasts erode away bone in the targeted area. The osteoclasts are replaced by osteoblasts during the next phase of the cycle, which then fill in the resorption cavities with mineralized collagen over a period of three to four months to create new bone. The osteoclastic and osteoblastic processes produce fragments of collagen and other proteins, which are released into the bloodstream and eventually appear in other bodily fluids, including urine. In general, the bone resorption and formation processes are tightly coupled and balanced. When this tightly balanced remodeling process becomes unbalanced or exaggerated, bone disease ensues. In addition, there are a number of drugs or medications, including those used to treat patients with endometriosis, asthma, organ transplants, cancer, arthritis, thyroid disorders and patients with renal failure, that can have an adverse side effect of stimulating excessive bone loss. OSTEOPOROSIS The most widespread bone disease is osteoporosis, a disorder characterized by a decrease in bone mass that leads to increased susceptibility to fractures, particularly those of the hip, spine and wrist. There are two major types of osteoporosis. The most common type is primary osteoporosis, which includes post-menopausal osteoporosis, resulting from an estrogen deficiency in women, and senile osteoporosis, an age-related condition primarily affecting men and women over age 75. Secondary osteoporosis occurs as a side effect of medication, or as a consequence of another disease that causes a decrease in bone mass. Osteoporosis is often called the "silent disease" because bone loss itself causes no physical symptoms. In many cases, doctors and patients are not aware of the problem until many bones in the skeletal system have become so weak that a sudden strain, bump or fall causes a fracture. If diagnosed early enough, the rate of bone loss can be reduced using one or a combination of drug therapies. Consequently, diagnosis of bone loss and preventive intervention is important for a physician to develop an effective care plan for the patient. According to the National Osteoporosis Foundation ("NOF"), osteoporosis afflicts over 25 million Americans and over 200 million people worldwide. In the United States, approximately 1.5 million osteoporosis-related fractures occur each year, including more than 250,000 hip fractures, 500,000 vertebral fractures and 240,000 wrist fractures. For Caucasian women, it is estimated that the risk of hip fractures approximates the combined risks of breast, endometrial and ovarian cancers. In addition, approximately one in three women over age 65 will suffer vertebral fractures. By age 75, approximately one-third of all men will also be 4 affected by osteoporosis. Industry studies estimate that the lifetime risk of hip fracture in men approximates the risk of prostate cancer. The World Health Organization estimates that the cost of osteoporosis-related fractures in the United States exceeds $7 billion annually. The most severe osteoporosis-related fracture is that of the hip. Over 95% of osteoporosis-related hip fractures require hospitalization, between 12% and 20% result in fatality from other health complications arising from the fractures and half of the patients who survive are unable to walk unassisted for the rest of their lives. Another 25% are confined to long-term care under supervised conditions. There are several groups of women at high-risk for osteoporosis. The largest of these groups is post-menopausal women. At menopause, the ovaries cease producing estrogen, a hormone with anti-resorptive properties, which results in an increase in the rate of bone loss. In addition, women have 10% to 25% less bone mass at maturity than men, leaving them more susceptible to osteoporosis. Another condition that increases the risk of osteoporosis-related fractures is amenorrhea, the cessation of menstruation not associated with the onset of menopause, which results from the interruption of estrogen production and consequently decreases bone mass. Amenorrhea generally affects women who participate in extremely rigorous exercise regimens or have eating disorders. According to the NOF, certain other risk factors increase an individual's likelihood of developing osteoporosis. These include (i) genetic factors, such as Caucasian or Asian descent, thin frame and/or small bones, and a family history of fractures in elderly women, (ii) lifestyle factors, such as cigarette smoking, excessive use of alcohol or caffeine, chronically low calcium intake, and inactivity, and (iii) drug-induced factors resulting from use of medications for certain conditions, such as arthritis, asthma, endometriosis and thyroid disorders. OTHER BONE-RELATED DISEASES In addition to developing diagnostic tests to assess osteoporosis, assays for a number of other diseases that can adversely affect bone remodeling, including Paget's disease of bone, cancers that metastasize to bone, hyperthyroidism, hyperparathyroidism, osteoarthritis and growth hormone deficiency are also being developed. Unlike osteoporosis, these diseases have physical symptoms that may alert a physician to the possibility of bone loss and, accordingly, the need to monitor the bone remodeling process with diagnostic tests. PAGET'S DISEASE. Paget's disease is a chronic bone disease characterized by the enlargement and softening of bones. This condition is thought to be caused by a localized disruption of normal bone remodeling. Paget's disease is manifested by the presence of an increased number of abnormally enlarged osteoclasts resulting in an increase in bone resorption. In addition, the bone formation process is also increased, resulting in structurally inferior bone, which may increase a patient's risk of fracture. CANCER. Cancers that metastasize to bone adversely affect skeletal metabolism. Approximately 25% of cancer patients will have metastases of their primary tumor to bone. Several common malignancies, including prostate, breast and lung cancers, spread more often to bone than to other tissues. DRUG-RELATED DISEASES. Skeletal degradation can also be a drug-induced side-effect. Many drugs and medications approved to treat other diseases and disorders, including thyroid medications, steroids to treat asthma and arthritis, 5 and drugs to treat infertility and endometriosis, are known to cause increased bone resorption. HYPERTHYROIDISM/HYPERPARATHYROIDISM. Hyperthyroidism is caused by either an excessive functional activity of the thyroid gland or by excessive doses of thyroid hormone. The resulting condition is characterized by an increased metabolic rate. One consequence of an increase in these hormones is an increase in bone remodeling. Hyperparathyroidism is a condition that results from an abnormal increase in the secretion of parathyroid hormone, which increases the breakdown of bone. OSTEOARTHRITIS. Osteoarthritis is characterized by degenerative changes in the bone and cartilage of one or more joints, which can lead to disability, pain and impairment of mobility. GROWTH HORMONE DEFICIENCY. Growth hormone deficiency particularly affects children and is characterized by a very low or absent production of growth hormone which retards normal growth rates of such children. THERAPIES FOR OSTEOPOROSIS During the past several decades, a number of therapies have been developed to address bone diseases and disorders. Most of these are prescribed therapies, including hormone replacement therapy ("HRT"), calcitonins and bisphosphonates, and are focused on preventing further bone loss rather than systemically forming new bone. Other products include supplements that are available over-the-counter, such as calcium and vitamin D. The Company believes the market for drugs to treat osteoporosis will grow as a result of several factors, including worldwide aging of the population, heightened public awareness of osteoporosis, FDA approval of new therapeutics and the development and availability of effective diagnostic tests. HORMONE REPLACEMENT THERAPY. Hormone replacement therapies, such as estrogen and progestin, are the most frequently prescribed drugs given to alleviate symptoms in post-menopausal women. HRT products act to decrease bone loss (are anti-resorptive) and are also approved for preventive treatment of osteoporosis. There are a number of estrogen products currently approved by the FDA and available worldwide for use in preventing or managing osteoporosis, including Wyeth-Ayerst Laboratories' Premarin, Ciba-Geigy Ltd.'s Estraderm, and Bristol-Myers Squibb Company's Estrace. In 1994, total sales of hormone replacement therapies, including oral, transdermal and other formulations, were in excess of $1.5 billion in the United States. CALCITONINS. Calcitonin acts to slow bone resorption and may be a viable substitute for estrogen as an anti-resorptive drug, especially in male patients or in those female patients who cannot tolerate, or choose not to use, hormone replacement therapy. Most formulations, however, are injectible and not as easily administered as oral medications. In the United States, Sandoz Ltd.'s Miacalcin and Rhone-Poulenc Rorer Inc.'s Calcimar are the only FDA-approved calcitonin products. BISPHOSPHONATES. Bisphosphonates have been researched for use in the prevention and treatment of osteoporosis. Fosamax, a bisphosphonate from 6 Merck & Co., Inc. was approved in late 1995 for the treatment of patients with low bone mineral density. Additionally, Didronel, a bisphosphonate from The Procter & Gamble Company, is currently approved for use in treating Paget's disease. Several other bisphosphonates are in various stages of development. OTHERS. Other products used for the prevention of bone loss include vitamin D and calcium supplements. In addition, injectible vitamin D metabolites are a prescribed therapy for preventing bone loss that are widely used in Japan but are not approved in the United States. There are a number of other new therapies under development, including estrogen analogs designed to minimize the side effects of HRT and slow release sodium fluoride, which is believed to increase bone mineral density. OSTEOPOROSIS-RELATED DIAGNOSTICS IMAGING METHODS Several imaging technologies provide varying degrees of sensitivity for the assessment of bone mass. For many years, changes in bone mass have been roughly assessed with traditional x-ray technology, which can reveal a decrease in bone mass only after approximately 30% of the bone has been lost. Newer techniques for measuring bone loss with improved accuracy and precision have been developed that can measure bone mass and bone mineral density ("BMD"). Dual energy x-ray absorptiometry ("DEXA") is the most advanced imaging system currently used to measure BMD. DEXA offers faster image-capture time (approximately 10 minutes) and higher resolution measurements with lower overall radiation doses than early imaging methods. DEXA systems are available for use in partial and whole body scans. Recently, additional technologies, such as ultrasound, have been developed that may be less expensive than DEXA, do not involve radiation and may provide information concerning bone structure and quality. DEXA and ultrasound systems are more precise and accurate than earlier imaging methods, but changes in bone mass occur so slowly relative to the sensitivity and precision limitations of these technologies that these technologies have limitations in assessing the rate of bone loss on a real-time basis. The inability of DEXA and ultrasound to measure the rate of bone loss in real time limits its use in determining treatment efficacy or patient compliance in adhering to treatment regimens. To be effective, these technologies require initial and follow-up measurements which can be compared in order to assess bone loss. Typically the period between measurements can be up to two years to effectively diagnose a differential. This period is one of the many reasons why biochemical markers which detect bone loss are important for effective health care management. However, DEXA and ultrasound measurements can provide a physician with important data regarding a patient's bone characteristics at a given point in time. This data can be helpful in determining which therapeutic regimes are most appropriate in light of the patient's current bone status. 7 TESTS FOR BIOCHEMICAL MARKERS Biochemical markers are substances that are produced by the body that correlate directly or indirectly to disease or bodily function. Biochemical markers have been discovered that can be used to assess the dynamic rates of bone resorption and bone formation, unlike imaging methods, which determine bone mass at a specific point in time. The use of biochemical markers could therefore complement imaging methods in providing a more complete picture of bone metabolism. Several biochemical markers of bone resorption have been discovered over the past few decades. Two such markers are the pyridinium crosslinks, pyridinoline ("Pyd") and deoxypyridinoline ("Dpd"). Pyd and Dpd are modified amino acids that crosslink adjacent collagen molecules thereby providing structural rigidity to bone. During the bone remodeling process, collagen is degraded by osteoclasts and Pyd and Dpd fragments are released into circulation and excreted into bodily fluids, such as blood and urine. The utility of pyridinium crosslinks as an indicator of the rate of bone resorption has been demonstrated with studies of bone biopsy, where the levels of the pyridinium crosslinks in urine directly correlated with the level of osteoclastic activity in bone biopsy samples. In addition to biochemical markers for resorption, markers have been discovered for bone formation. These include certain molecules that are released into the blood as a result of osteoblastic activity, such as alkaline phosphatase and osteocalcin. Several methods exist to measure biochemical markers. An established method to measure pyridinium crosslinks in urine has traditionally been high pressure liquid chromatography ("HPLC"). HPLC is a complex procedure that requires a trained technician and is typically performed in a research laboratory. Although the HPLC method for measuring pyridinium crosslinks is extremely accurate, it is primarily a research tool and is not commonly used for routine clinical testing because it has low throughput, is expensive, and is labor intensive. Immunodiagnostic tests are antibody-based tests that measure biochemical markers used to diagnose, screen or monitor disease progression, patient compliance and drug efficacy. Immunodiagnostic tests have been developed that measure biochemical markers of bone resorption and biochemical markers of bone formation. Urinary Pyd and Dpd crosslinks consist of free crosslinks (approximately 40%), crosslinks linked to one or two amino acids (approximately 40%), crosslinks linked to smaller peptides (approximately 15%) and crosslinks linked to larger peptides (approximately 5%). Immunodiagnostic tests can be used to measure any of these Pyd and Dpd crosslinks. In general, free crosslinks occur in consistent proportion to total crosslinks. This relationship suggests that an increase in the amount of free crosslinks corresponds to an increase in total crosslinks and hence corresponds to an increase in the rate of bone resorption. As a result, immunodiagnostic tests that measure these free crosslinks generally provide similar information, and have a high degree of correlation, to results of the HPLC procedure, but in an easier, less expensive more reliable and reproducible method suitable for routine use by clinical laboratories. In September 1995, Dr. Pierre Delmas, of the INSERM Research Unit in Lyon, France and a member of Metra's Scientific Advisory Board, announced interim investigational data from an ongoing independent and blinded study conducted at the Claude Bernard University, also in Lyon, that supports the clinical utility of measurement of free Dpd. Data from the French "EPIDOS" prospective study of more than 7,500 women over 75 years of age found that the measurement of free Dpd was correlated with increased risk of hip fracture and, therefore, may have the potential to determine individuals at greater risk of this potentially 8 fatal trauma. Women whose hips had fractured possessed elevated Dpd when compared to women in the study of the same age who did not fracture. The investigational study suggests that patients with higher levels of Dpd may have a greater risk of hip fracture. In an additional independent study conducted in Rotterdam, The Netherlands, higher Dpd levels appeared to be associated with a higher risk of hip fracture in independently living subjects. This epidemiological study followed 7,900 individuals, 55 years of age and older, for nearly two and one-half years. CARTILAGE BIOLOGY Cartilage is a compressable tissue which covers the ends of bones and allows them to glide smoothly and freely within a joint. Cartilage is composed primarily of one cell type, the chondrocyte, and an extensive extracellular matrix. The main structural elements of this matrix are large proteoglycan aggregates, responsible for the tissue's elastic properties, and a collagen fiber meshwork, responsible for the tissue's resilience. Joints are classified as either freely mobile, slightly mobile, or fixed. Freely mobile joints, or synovial joints, are enclosed by a joint capsule which is lined by a synovial membrane, or synovium. The synovium is lined by cells, or synoviocytes, which produce a small amount of liquid called synovial fluid that nourishes and lubricates the joint. Cartilage breakdown may be attributed to an autoimmune response in the synovial fluid, and/or a degrative enzymatic process within the cartilage itself, and when the cartilage breaks down, a disease known as arthritis may occur. ARTHRITIS Arthritis is generally characterized by joint pain and swelling. There are more than 100 types of arthritis affecting approximately 40 million people in the United States. The two most prevalent forms of arthritis are osteoarthritis ("OA") and rheumatoid arthritis ("RA"). Although the causes of OA and RA are very different, both diseases result in the common problem of joint destruction. Osteoarthritis is the most common form of arthritis. The prevalence of osteoarthritis among individuals aged 45 to 50 is estimated to be approximately 30%, and approaches a 60% prevalence rate for individuals over 65 years of age. Osteo, or degenerative, arthritis is a disease that is believed to result from the breakdown of cartilage in a specific joint or joints and bone proximate to joints. Osteoarthritis can affect any type of joint, but the disease most commonly occurs in weight bearing joints such as the hips, knees and spine. Rheumatoid arthritis is the second most common form of arthritis. In North America, it is estimated that two million people are afflicted with this condition and in excess of $200 million dollars is spent each year for the care and treatment of the disease. Rheumatoid arthritis can occur at any age, but the onset of the disease typically peaks between ages 35 and 45. This disease is thought to be a systemic autoimmune disorder in which the synovium becomes inflamed, causing hot, tender, and swollen joints. Only the freely mobile joints such as hands, feet and knees are affected by this form of arthritis. As the disease progresses, the cartilage and eventually the bone are destroyed by various autoimmune-mediated enzymatic responses. This process results in continuous pain, progressive deformity, and disability. ARTHRITIS THERAPIES No known treatments can stop or reverse osteoarthritis. Current treatment for OA is primarily focused on reducing pain, minimizing inflammation, and maximizing joint function. Physicians most commonly recommend analgesics such as aspirin or acetaminophen to reduce 9 pain and non-steroidal anti-inflammatory drugs ("NSAIDs") such as ibuprofen to reduce inflammation. In advanced OA, more invasive measures such as injection of steroids into the joint space, arthroscopic surgery, and partial or total joint replacement can be used. For treatment of RA, physicians commonly prescribe NSAIDs in an effort to reduce inflammation. Additionally, doctors often prescribe other non-specific drugs designed to reduce the body's immune response and associated inflammation. The effectiveness of these therapies is variable from patient to patient, and may involve various side effects and complications. There are numerous pharmaceutical companies working to develop more effective therapies to treat OA and RA. During the early stages of arthritis, the patient is not necessarily aware of the progression of the disease until the associated pain and swelling occurs accompanied by reduced joint mobility. In certain patients who are experiencing pain, there may be little correlation between the severity of active disease and the amount of pain. A biochemical marker test integrated into the overall health care of a patient may identify the early stages of arthritis and enable more effective treatments with emerging therapies along with subsequent therapeutic drug monitoring. ARTHRITIS DIAGNOSTICS Many diagnostic tools for OA and RA exists, but none is specific to arthritis or can confirm a diagnosis of either type of disease or accurately assess disease progression. Current diagnosis of arthritis is based on: - Medical history and a physical examination; - Symptoms, i.e., swelling, red and hot joints, nodules under the skin, and stiffness; - X-rays, which are not designed for detection of soft tissue disorders, and which can detect a pattern of visible damage only after multiple exposures; and - In the case of RA, laboratory tests for anemia, low white-blood-cell count, rheumatoid factor ("RF") and erythrocyte sedimentation rate ("ESR"). Anemia can be an accompanying symptom of rheumatoid arthritis but is not caused by or otherwise necessarily correlated to arthritis. RF is present in 85% of people with rheumatoid arthritis, but also does not necessarily indicate rheumatoid arthritis. ESR indicates a systemic inflammatory condition but not necessarily rheumatoid arthritis. MARKET FOR IMMUNODIAGNOSTIC TESTS Diagnostic tests are widely used for both research and routine clinical use. Academic and clinical researchers in universities, teaching hospitals, pharmaceutical companies and government research units, such as the National Institutes of Health, use research products routinely. However, not all research products are introduced for routine clinical use for many reasons, including a lack of clinical utility or cost of obtaining regulatory approval. Immunodiagnostic tests are performed in a variety of technical formats. A common format for research and clinical testing is the microtiter plate system utilizing enzyme immunoassay ("EIA") detection. EIA utilizes an immune reaction, that is, an antibody reacting with an antigen, and the detection of the reaction using enzymes which are attached to the reactants as indicators. EIA's are based on two phenomena: (i) the discriminatory nature of 10 antibodies (proteins that bind specifically to antigens), which have an affinity for specific compounds (i.e. antigens), and (ii) the high catalytic power and specificity of enzymes. Although this technology is considered an established industry standard, this manual format is relatively slow, has low throughput, and requires skilled technicians. Instrument systems have been developed that automate tests to increase throughput and decrease cost per test. Most of the widely used immunodiagnostic tests have been adapted for, and are used on, automated systems. These formats are used in hospitals and clinical laboratories throughout the world. In general, faster and more convenient formats are required and in development for point-of-care use in physicians' offices or for home use. BUSINESS STRATEGY The Company is a leader in developing and commercializing innovative products for the detection and management of metabolic bone diseases and disorders. The Company's general business stategy is comprised of certain key elements: first, the continual development of new diagnostic products to complement the Company's existing products for the detection and management of metabolic bone and connective tissue disorders; second, the establishment of collaborative relationships with corporate partners for co-promotion (medical education and awareness), and co-development of the Company's tests with several diagnostic industry leaders to establish a dominant position in the strategically important clinical laboratory market, where the majority of the testing in the United States is accomplished today by providing tests in either an automated or manual format; and third, the development of distribution capabilities to maximize market share through partnerships with diagnostic companies and the expansion of the Company's direct sales capabilities. The Company's business strategy includes the following components: - DEVELOP PROPRIETARY DIAGNOSTICS AND DISCOVER ADDITIONAL MARKERS. The Company's focus is on the discovery of biochemical markers and the development of proprietary diagnostic tools for major bone, cartilage and other connective tissue diseases. The Company is seeking to develop products that have a high degree of specificity to the disease being measured, and that will achieve wide research acceptance and clinical utility. - OFFER A PORTFOLIO OF DIAGNOSTIC PRODUCTS. The Company believes that no single technology will give physicians a complete picture of the metabolic bone remodeling process. The Company's product strategy is focused on developing a portfolio of tests and complementary diagnostic devices to provide comprehensive clinical information to physicians for targeted diseases. The Company has developed and will continue to develop multiple tests for bone resorption and formation, as well as tests for other connective tissues, and is developing an ultrasound-based diagnostic device in order to provide the physician with information relevant to a patient's overall bone characteristics. - EXPAND CLINICAL UTILITY FOR APPROVED PRODUCTS. The Company has entered into a number of international academic collaborations and pharmaceutical company collaborations, as well as Metra sponsored clinical studies, designed to gather data to submit to the FDA for clearance to market the Company's existing products for broader clinical claims. This work is primarily targeted at application of the Company's technologies in therapeutic drug monitoring, fracture risk assessment, monitoring of metastatic cancers and periodontal disease. 11 - PROVIDE MULTIPLE TEST FORMATS. In order to address the highly fragmented market for its diagnostic tests, the Company has established collaborations to format its products for use with existing laboratory equipment and instrumentation. The Company will seek to adapt its products to work with the installed base of automated and other instrument systems supplied by a number of companies. In the future, Metra expects to offer its products in point-of-care or other rapid-test formats. - INCREASE MARKET EDUCATION AND ADOPTION. The Company develops its products initially as research products and works with the medical and scientific communities to establish and assess initial clinical utility and to obtain feedback prior to pursuing clinical introduction. The Company, together with its collaborative partners, is conducting studies to determine the clinical utility of its research use-only biochemical marker tests. In addition, the Company will continue to pursue collaborative arrangements with pharmaceutical partners that have or are developing therapies for osteoporosis to enhance market awareness of the Company's products. - EXPAND SALES IN INTERNATIONAL MARKETS. The Company sells its products internationally for both research and clinical use. The Company plans to expand its international sales and marketing efforts to third-party payors to establish reimbursement for its products. The Company believes that the use of its products by researchers and physicians will accelerate the determination of clinical utility and market acceptance of its products. The key elements of the Company's strategy are based on a belief that a small percentage of the population at risk for certain bone and connective tissue diseases and disorders, such as osteoporosis, RA and OA, are not diagnosed early enough for preventative treatment to be effective. The Company believes that the historical lack of consistent therapeutic intervention can be traced in part to the limited availability of timely, cost-effective and accurate methods to detect and monitor these diseases. The Company believes that the demand for its products will be driven in part by physicians' need to easily, inexpensively and accurately (i) identify those persons most at risk before significant onset of these diseases, (ii) quantify the parameters of each patient's disease progression, (iii) determine therapeutic dosage and duration of therapy and (iv) monitor the effectiveness of, and compliance with, prescribed therapies. PRODUCTS The Company has developed and is currently marketing for research and clinical use four immunodiagnostic tests to measure bone resorption and formation and one immunodiagnostic test to detect certain pediatric growth disorders. In draft guidelines to pharmaceutical companies developing new osteoporosis drugs, the FDA recommends using a combination of three biochemical markers that together detect both resorption and bone formation to assess efficacy as part of their pre-clinical and clinical testing. These are (i) urinary pyridinium crosslinks, (ii) osteocalcin and (iii) bone-specific alkaline phosphatase. The Company currently offers tests for each of these biochemical markers. The Company's Pyrilinks tests and Alkphase-B test are proprietary and measure specific biochemical markers. Although the Company's other tests such as NovoCalcin and Prolagen-C measure markers that are not proprietary and are available from other companies, these tests allow the Company to offer a more complete line of relevant clinical and research use tests to measure bone metabolism. The following table identifies the Company's products, 12 their application, their year of introduction outside the United States and their current regulatory status.
REGULATORY STATUS --------------------------------------------------------------- PRODUCT NAME DATE MARKER UNITED STATES KEY INTERNATIONAL MARKETS -------------------------- ------ ----------------- ---------------- ----------------------------------------- RESORPTION ---------- Pyrilinks 1994 Pyd & Dpd Clinical use, Germany, Italy, Spain, UK - Clinical & 510(k) cleared Research use November 1995 France, Japan - Research use only Pyrilinks-D 1993 Dpd Clinical use, France, Germany, Italy, Spain, UK - 510(k) cleared Clinical & Research use December 1995 Japan - Research use only FORMATION --------- Alkphase-B 1995 Bone-specific Clinical use, Germany, Italy, Spain, UK -Clinical & alkaline 510(k) cleared Research use phosphatase August 1995 France, Japan - Research use only NovoCalcin 1993 Intact Research use Germany, Italy, Spain, UK - Clinical & osteocalcin only Research use Japan - Research use only GROWTH DISORDERS ---------------- Prolagen-C 1993 CICP Research use only Germany, Italy, Spain, UK -Clinical & Research use France, Japan - Research use only
BONE RESORPTION TESTS The Company's primary tests measure free pyridinium crosslinks, which are well characterized markers of bone resorption. Metra's Pyrilinks and Pyrilinks-D immunoassays are inexpensive, specific tests capable of directly measuring free pyridinium crosslinks (Pyd and Dpd) through simple urine tests. The results of Metra's bone resorption tests have a high correlation co-efficient (greater than 90%) to those derived from HPLC, which is generally accepted as an extremely accurate method for measuring pyridinium crosslinks. The Company estimates that the cost to the patient of its tests is approximately $30 to $80, depending on the mark-up charged by distributors, clinical laboratories and physicians. Pyrilinks Polyclonal, Metra's first immunoassay, was introduced in Europe in 1992 for sale as a research use only product and is a polyclonal antibody test that measures free pyridinium crosslinks. The second generation of the test, Pyrilinks, was introduced in Europe in 1994 and uses a monoclonal antibody to measure free pyridinium crosslinks. The modifications in Pyrilinks reduced manufacturing costs and shortened time for results to a few hours, as compared to overnight for Pyrilinks Polyclonal. The biochemical markers measured by Pyrilinks and Pyrilinks Polyclonal result from the breakdown of collagen found in both bone and cartilage. In November 1995, Metra received 510(k) clearance to market both Pyrilinks Polyclonal and Pyrilinks as quantitative measures of the excretion of pyridinium crosslinks as an indicator of type I collagen resorption, especially bone collagen. Due to the improvements of Pyrilinks over Pyrilinks Polyclonal, the Company is not actively promoting or marketing 13 Pyrilinks Polyclonal and may in the future discontinue manufacture and sale of this product. Pyrilinks-D utilizes a more bone-specific biochemical marker to measure bone resorption, was introduced for research use only in 1993 and received FDA 510(k) clearance for clinical use in December 1995 as an indicator of bone resorption. BONE FORMATION TESTS In addition to tests that measure bone resorption, Metra has developed immunodiagnostic tests that measure bone formation. The Company believes that multiple formation assays are important because increases or decreases in bone formation provide relevant research, diagnostic and therapeutic information. Alkphase-B, Metra's newest bone formation immunodiagnostic test, measures bone-specific alkaline phosphatase. Alkaline phosphatase is found not only in bone but also in the liver, kidney and other organs. Metra believes that Alkphase-B is a significant improvement over other widely available alkaline phosphatase tests because it measures only the alkaline phosphatase generated from bone formation. In August 1995, Metra received 510(k) clearance to market Alkphase-B as an aid in the management of patients diagnosed with Paget's disease. NovoCalcin, an immunoassay introduced in July 1993, is a test to measure intact osteocalcin. Osteocalcin is a small peptide that is produced only by osteoblasts during the formation phase of the bone remodeling process. Up to 20% of osteocalcin is released into circulation during bone formation, and the rest is deposited into the bone matrix and later released by osteoclasts during the process of bone resorption. NovoCalcin can be used to measure bone remodeling or as a specific marker of bone formation. NovoCalcin is marketed as a research and clinical test in certain European countries and as a research test in Japan and the United States. In the United States, the Company believes that PMA approval will be required for clinical use, and the Company has not determined whether it will pursue FDA approval for this product. GROWTH DISORDER TEST In response to the development of new pediatric growth therapies such as human growth hormone, Metra has developed an immunodiagnostic test that is used as an indicator of bone growth, called Prolagen-C, which was launched in November 1993 for research use only. This immunodiagnostic test measures collagen type I carboxyterminal propeptide ("CICP"), a marker for collagen production in serum. Unlike osteocalcin, 100% of newly synthesized CICP is released into circulation in proportion to the amount of new bone formed. The Company believes Prolagen-C may be useful for monitoring the effectiveness of certain pediatric growth disorder therapies. Prolagen-C is marketed as a research and clinical test in certain European countries and as a research test in Japan and the United States. In the United States, the Company believes a PMA approval will be required for clinical use and the Company has not determined whether it will pursue FDA approval for the product. There can be no assurance that the Company will have adequate resources or the clinical data necessary to file required state, federal and international regulatory filings required to further develop and commercialize these resorption, formation and growth disorder products. Even if the Company has the necessary resources and decides to seek regulatory approvals for research and/or clinical sale of these products, there can be no assurance that the Company will obtain approvals in a timely manner, if at all, that reimbursement in adequate amounts will be available, if at all, or that the products, even if approved, will be accepted as effective diagnostic tools by the medical community. 14 RESEARCH AND DEVELOPMENT The Company's research and development efforts are currently focused in four principal areas: (i) discovery and development of biochemical marker tests focused in the area of bone and cartilage diseases, (ii) conducting clinical studies designed to broaden the clinical claims for its existing products; (iii) formatting of Metra's existing tests in alternative formats to address different segments of the diagnostic market; and (iv) development of its recently acquired ultrasound technology. NEW BONE AND CARTILAGE TESTS The Company has entered into a license agreement with NovaDx Inc. to develop and manufacture a microtiter plate assay for the measurement of YKL-40 ("Chondrex"), a novel glycoprotein which has been shown to be significantly elevated in OA and RA patients. The Company believes that YKL-40 may provide the basis for the development of a diagnostic test which can be utilized in the detection and management of OA and RA. In addition, the Company has entered into a collaborative agreement pursuant to which the Company will fund research and development of a new protein found in serum of patients with decreased bone density. The Company is funding internal and third-party research and development efforts designed to identify and develop additional markers for bone and other connective tissue conditions and new immunoassays to measure markers that it believes will have clinical utility. As new immunodiagnostic tests are developed, the Company intends to offer them first to researchers, and, to the extent research in the medical community validates the clinical utility of measuring the relevant markers, to further develop and commercialize products based on existing immunodiagnostic technology formats. The Company currently sponsors research by physicians at research institutions including The Rowett Research Institute in Scotland, the University of Heidelberg in Germany, the University of California at San Francisco and at Cambridge University and St. Thomas Hospital in England. CLINICAL STUDIES The Company is conducting clinical studies designed to gather data to submit to the FDA for clearance to market the Company's existing products for broader clinical claims. The Company is investigating use of its products in applications including therapeutic drug monitoring, fracture risk assessment, and monitoring of metastatic cancers and periodontal disease. ALTERNATIVE TEST FORMATS The Company is reformatting certain of its tests to be run on Abbott Laboratories' installed base of automated diagnostic instruments. The Company has also entered into a collaborative agreement to develop and manufacture its Pyrilinks-D test in a radioimmunoassay format which was launched for clinical use in France in May, 1996. The Company believes that less complicated and capital intensive formats may be more suitable for decentralized testing in physician office laboratories, small clinics, satellite laboratories and for home use. Metra is also reformatting its lead bone resorption product, Pyrilinks-D, for the Cholestech point-of-care analyzer, named the L-D-X for use in the physicians offices. 15 ULTRASOUND TECHNOLOGY In order to offer a broader portfolio of products that will provide physicians with more comprehensive clinical information regarding the metabolism and clinical status of bone, Metra recently acquired Osteo Sciences Corporation, a company developing ultrasound technology based on proprietary algorithms and designs. The Company is developing a portable ultrasound device designed to evaluate certain characteristics of bone that are associated with bone weakness and bone quality. The target market for the device will be physicians' offices or small group practices, which should provide physicians and patients with a convenient and cost effective alternative to the currently available techniques for assessing bone fragility. OTHER PROGRAMS In light of the Company's current focus on developing its ultrasound technology, its decision to further expand its panel of bone immunodiagnostics, and its entry into the cartilage field, the Company has deferred its development efforts relating to Factor BP-3, a blood test for insulin-like growth factor binding protein-3, and osteopoeitin ("OPO"), an osteogenic factor discovered by the Company. As of June 30, 1996, the Company had 25 employees engaged in research and development. Research and development expenses for the fiscal years ended June 30, 1996, 1995, and 1994 were $4.3 million, $3.7 million, and $2.9 million, respectively. There can be no assurance that Metra will be successful in developing new products or that new products developed by the Company will receive necessary government approval or, if approved, will gain market acceptance. Any failure by the Company to successfully develop and introduce new products could have a material adverse effect on the Company's business, financial condition and results of operations. SALES AND MARKETING The Company's products are currently being marketed internationally for both clinical and research use. In the United States, three of the Company's tests have received 510(k) clearance from the FDA for clinical use and two of the Company's tests are being marketed for research use only. The company is currently marketing its products in Japan for research use only and for clinical as well as research use in numerous other European countries, including (but not limited to) Germany, Italy, Spain, and the United Kingdom. The Company's approach is to initially market the tests for research purposes by academic and clinical researchers in universities, teaching hospitals, pharmaceutical companies and government institutions. As regulatory clearances are obtained for clinical use, clinical reference and hospital laboratories are then targeted as customers. The Company's strategy is to sell and market its products through a direct sales force and through distribution alliances with diagnostic product companies. The Company has limited experience in sales, marketing and distribution of its products. The Company currently sells its products directly in the United States and the United Kingdom and through commissioned representatives in Italy. The Company intends to expand its marketing staff and direct sales force, and there can be no assurance that the Company will be able to do so cost-effectively, or that the Company's direct sales and marketing efforts will be successful. The market for the Company's products is fragmented and consists of clinical laboratories, reference laboratories, academic and clinical researchers in universities and physicians, among others. The Company plans to rely on its collaborative partners to help build market awareness and acceptance of the Company's products. There can be no assurance that the Company will be able to enter into 16 new alliances or that its distributors or collaborative partners will be successful in marketing, selling or gaining market acceptance for the Company's products. Outside the United States, the United Kingdom and Italy, the Company sells its products through distributors. The Company's distribution alliances consist of arrangements with over 30 distributors of diagnostic products that have well established distribution channels in the Company's markets, including Hoechst Behring (France), DPC Biermann (Germany), Dade Diagnostics (Australia) and Amersham K.K. (Japan). Product revenues from one customer constituted 12% of total revenues for the year ended June 30, 1996. Product revenues from two distributors constituted 12% and 11%, respectively, of total revenues for the year ended June 30, 1995. The loss of one or more of these distributors or the inability to find new distributors could have a material effect on the Company's business, financial condition and results of operations. International product sales accounted for approximately 78%, 78% and 72% of product revenues for the fiscal years ended June 30, 1996, 1995, and 1994, respectively. The Company expects that such sales will continue to account for a significant portion of the Company's revenues in the future. In order to successfully expand international sales, the Company may need to establish additional foreign operations, hire additional personnel and recruit additional international distributors and commissioned representatives. This will require significant management attention and financial resources and could adversely affect the Company's operating margins. In addition, to the extent that the Company is unable to effect these additions in a timely manner, the Company's growth, if any, in international sales will be limited, and the Company's business, financial condition and results of operations could be materially adversely affected. In addition, there can be no assurance that the Company will be able to maintain or increase international sales of the Company's products. The Company's international revenues are currently denominated in United States dollars. As a result, increases in the value of the United States dollar relative to foreign currencies could make the Company's products more expensive and, therefore, potentially less competitive in those markets. Additional risks inherent in the Company's international business activities generally include unexpected changes in regulatory requirements, tariffs and other trade barriers, longer accounts receivable payment cycles, difficulties in managing international operations, potentially adverse tax consequences including restrictions on the repatriation of earnings, and the burdens of complying with a wide variety of foreign laws. There can be no assurance that such factors will not have a material adverse effect on the Company's future international sales and consequently, the Company's business, financial condition and results of operations. The Company is working with a number of diagnostic companies, including Abbott Laboratories, Bayer Corporation, Ciba Corning Diagnostics, and Diagnostics Products Corporation to format Metra's products for incorporation into these companies' existing installed base of high-speed, automated testing systems. The Company believes these collaborative programs will facilitate the development of cost-effective, disease-specific testing programs for the managed-care market. The Company intends to market directly to third-party payors. The Company believes that educating patients and physicians about the long-term health benefits and cost-effectiveness of diagnosis and treatment of bone diseases and disorders at an early stage is critical to market acceptance for the Company's products. The Company believes that the trend toward management of health care costs in the United States will lead to increased awareness of and emphasis on disease prevention, and as a result, will increase demand for cost-effective diagnostic tests. 17 The Company will need to rely on current and any future collaborative partners to help build market awareness and acceptance of the Company's products. The Company has entered into marketing collaborations with several pharmaceutical companies, including Wyeth-Ayerst Laboratories, to promote patient and physician education, to help identify patients at risk and to monitor drug compliance. The Company, together with its partners, will continue to originate research and clinical studies to demonstrate and explain how the Company's products relate to improvements in early detection, disease management and drug compliance. There can be no assurance that the Company will be able to enter into new alliances or that its distributors or collaborative partners will be successful in marketing, selling or gaining market acceptance for the Company's products. The Company is initiating programs with physicians and consumer advocacy groups to provide a better understanding of metabolic bone diseases such as osteoporosis. The commercial success of the Company's products will depend upon their acceptance by the medical community and third-party payors as clinically useful, cost-effective and safe. The use of pyridinium crosslinks to measure bone loss and the use of markers such as bone-specific alkaline phosphatase to measure bone formation are relatively new technologies. Market acceptance will depend on several factors, including the establishment of clinical utility of these biochemical markers, the receipt of regulatory clearances where required, the development of diagnostic tests that can be processed using commercially available automated systems, the availability of third-party reimbursement, extensive physician education and the approval and commercial acceptance of therapies for the treatment of osteoporosis. In addition, research is in progress to determine whether certain therapies for osteoporosis and other bone diseases diminish the reliability of certain markers measured by the Company's tests. An adverse outcome in this research could limit the market acceptance of the Company's products because it could indicate that they have reduced utility in the management of certain drug therapy regimens. Further, clinical research is in progress to determine the clinical utility of biochemical markers, including the Company's products. Adverse results from such research have in the past and may in the future be made public. Such adverse results could limit the market acceptance of the Company's products. There can be no assurance that the Company's products will gain market acceptance. Failure to achieve market acceptance would have a material adverse effect on the Company's business, financial condition and results of operations. COLLABORATIVE RELATIONSHIPS The Company has entered into collaborative relationships which provide technological, clinical, marketing, financial and other key resources. Important elements of the Company's strategy are (i) to collaborate with corporate partners to develop additional markers and multiple formats for its tests, including automated systems, and eventually rapid tests for point-of-care use in physicians' offices or for home use, and (ii) to develop additional corporate alliances with pharmaceutical partners in order to facilitate the Company's market education and adoption strategy. The revenues from license fees and milestone payments from certain of these relationships have historically accounted for a significant percentage of the Company's revenues. The Company has entered into contractual relationships with the following entities: DEVELOPMENT OF ADDITIONAL MARKERS NOVADX INC. In January 1996, Metra and NovaDx Inc. entered into a development and license agreement pursuant to which Metra received worldwide exclusive rights to manufacture and market Chondrex in manual formats and worldwide co-exclusive rights, with rights to sublicense, to manufacture and market Chondrex in automated formats. Chondrex is a blood test which the Company believes may provide the basis for the development of a diagnostic test which can be utilized in the detection and management of OA and RA. This technology has been licensed to NovaDx by the 18 University of California Regents, is being developed by NovaDx and, if successfully developed, Metra will manufacture, market and distribute the test. This agreement also allows Metra to license additional biochemical markers of joint disease developed by NovaDx. CAMBRIDGE UNIVERSITY AND ST. THOMAS HOSPITAL. In January 1996, Metra, Cambridge University and St. Thomas Hospital in England entered into a development agreement pursuant to which Cambridge University and St. Thomas Hospital agreed to develop a bone-specific biochemical marker based on their discovery of a new protein in serum of patients with decreased bone density. If successfully developed, Metra plans to develop and commercialize this proprietary osteoporosis-specific test in a manual assay format and thereafter may adapt this test for automated immunodiagnostic instruments and physician office formats. MULTIPLE FORMATS CIBA CORNING DIAGNOSTICS CORPORATION ("CCD"). In November 1993, Metra and CCD (a wholly owned subsidiary of Chicon Corporation) entered into a license and supply agreement. Pursuant to the license agreement, CCD will develop tests for bone resorption for its automated ACS:180 system using Metra's pyridinium crosslinks technology. CCD plans to commercialize the test during 1996 in this format, except in Japan. Metra has received license fees and milestone payments and sells reagents to CCD for use in its development program. Metra will receive royalty payments on any sales of CCD's systems, and CCD will purchase reagents from Metra for incorporation into CCD's systems. In June 1990, Metra and Ciba-Geigy entered into a development and license agreement to commercialize Metra's pyridinium crosslinks technology. In connection with entering into this agreement, Ciba-Geigy made an equity investment in the Company and paid Metra license fees and milestone payments. In September 1996 the Company announced the filing of a 510(k) premarket notification with the FDA for clearnace to market the Company's Pyrilinks-D bone resporption technology for clinical use on CCD's ACS 180 automated immunoassay system. DIAGNOSTIC PRODUCTS CORPORATION ("DPC"). In December 1993, Metra and DPC entered into a development and manufacturing agreement pursuant to which DPC will incorporate the Company's pyridinium crosslinks technology into DPC's Immulite automated system used by hospitals and research and clinical laboratories. Metra has rights to market any test developed and will pay royalties on the future sales of such tests. IMMUNODIAGNOSTIC SYSTEMS, INC. ("IDS"). In January 1995, Metra entered into a collaborative agreement with IDS to develop and manufacture a Pyrilinks-D assay in a radioimmunoassay ("RIA") format. IDS will manufacture the RIA test for Metra and will also have rights to sell the RIA test under its own name. . In May, 1996, the RIA test was made available for commercial use. Metra will receive royalty payments on any sales of IDS' RIA products BIOQUANT, INC ("BIOQUANT"). In February 1995, Metra and BioQuant entered into a license and supply agreement pursuant to which BioQuant will evaluate the utility of Metra's pyridinium crosslinks excreted through perspiration with the aim of developing an alternative body fluid testing format. If successful, BioQuant will pay Metra royalties on sales of its products and will purchase Metra's reagents for incorporation into BioQuant's test. Metra has received license fees and sells reagents to BioQuant for use in its development program. 19 BAYER CORPORATION ("BAYER"). In July 1995, Metra and Bayer Corporation entered into a collaborative agreement to commercialize Metra's then available biochemical bone markers internationally, except in Japan. The agreement allows Bayer to market automated central laboratory systems, point-of-care assays, and over-the-counter tests based on Metra's proprietary technologies. In return Metra will receive milestone and royalty payments and will supply Bayer with reagents for each of the assays to be developed by Bayer. ABBOTT LABORATORIES ("ABBOTT"). In February 1996, Metra and Abbott entered into a license, development and supply agreement for the commercialization of Metra's biochemical bone markers worldwide, except in Japan. The agreement grants Abbott the right to develop and market automated tests for metabolic bone and joint diseases based upon Metra's proprietary technologies. Under the agreement, Abbott will provide funding and instruments to Metra for co-development of Metra's existing and future technologies on Abbott's automated systems. Additionally, Metra will receive a revenue stream from royalties and reagent sales to Abbott. CHOLESTECH. In May 1996, the Company entered into a license, development, supply and marketing agreement for the commercialization of Metra's biochemical bone markers worldwide on Cholestech's proprietary point-of- care analyzer, the L-D-X. Under the terms of the agreement, Cholestech will be responsible for developing an immunoassay cassette incorporating the Pyrilinks-D assay and obtaining all regulatory clearances prior to marketing. Cholestech will market the test through its existing US distributor network and will work together with Metra to market the system internationally. Upon entering the agreement, Metra made a small equity investment in Cholestech, with additional equity investments to be made by Metra based upon the achievement of certain product development milestones. MARKET EDUCATION AND ADOPTION SUMITOMO PHARMACEUTICALS LTD. In March 1993, Metra and Sumitomo entered into a co-development agreement to develop new biomedical products for the detection and management of bone and other connective tissue diseases for the Japanese market. In February 1995, Metra announced a research and development collaboration with Sumitomo for the Company's bone-specific alkaline phosphatase test. Sumitomo is responsible for all Japanese regulatory filings for both of these agreements and Metra is responsible for the research and development of these products. Metra receives license fees, milestone payments and royalties and will supply products to Sumitomo for distribution in Japan. WYETH-AYERST LABORATORIES ("WYETH-AYERST"). In November 1995, Metra and Wyeth-Ayerst entered into a marketing collaboration, pursuant to which Metra and Wyeth-Ayerst will promote education of the scientific and health aspects of bone disorders with the purpose of increasing awareness and treatment. AMERSHAM INTERNATIONAL PLC ("AMERSHAM"). In September 1996, the Company and Amersham entered into a distribution agreement through which Amersham received co-exclusive rights to market Metra's bone metabolism assays to the research community in the United States, United Kingdom, Eire, Denmark and Italy. Since 1993, Amersham K.K. (a subsidiary of Amersham) has distributed the Company's assays for research use in Japan. 20 The Company depends on most of these partners to develop and sell the Company's tests in the partners' formats or based on their proprietary systems. In particular, the Company will need to rely on collaborative partners to adapt the Company's products to high-volume automated instruments such as those sold by Abbott, Bayer, CCD and DPC. Substantially all of the Company's collaborative agreements are non-exclusive, and therefore such partners are free to enter into similar agreements with third parties, including the Company's competitors. In addition, the Company has not developed physician office or home-use adaptations of its products, and there can be no assurance that the Company or its collaborative partners will either develop such formats and sell the Company's tests on their formats, or obtain any required regulatory approvals. In addition, the Company has entered into a marketing collaboration with Wyeth-Ayerst Laboratories. The amount and timing of resources that Wyeth-Ayerst Laboratories or any other partner devotes to these activities is not within the control of the Company. In addition, several of these agreements may be terminated by the partner without cause. There can be no assurance that any of these partners will perform its contractual obligations or that it will not terminate its agreement. The failure to adapt the Company's products to different formats and instruments or otherwise to commercialize or co-promote such products, could have a material adverse effect on the Company's business, financial condition and results of operations. The Company expects to enter into additional collaborative agreements in the future to develop, commercialize and sell current and future products. There can be no assurance that the Company will be able to negotiate acceptable agreements in the future, or that such new agreements or existing agreements will be successful. In addition, there can be no assurance that the Company's collaborative partners will not pursue alternative competing technologies. MANUFACTURING The Company's manufacturing operations are fully integrated and consist of antibody production, reagent purification, reagent and microtiter plate processing, filling, labeling, packaging and distribution. The Company has limited experience in manufacturing its products. To date, the Company's manufacturing activities have consisted primarily of manufacturing limited quantities of its immunoassays. If the Company experiences significant demand for its products, the Company will have to manufacture its products in commercial quantities in compliance with regulatory requirements at acceptable costs, and expend significant capital resources to develop large-scale manufacturing capabilities. If the Company is unable to develop large-scale manufacturing capabilities, the Company's competitive position and financial condition would be adversely affected. Failure to increase production volumes, if required, in a cost-effective manner or lower than anticipated yields or production constraints encountered as a result of changes in the manufacturing process could result in shipment delays as well as increased manufacturing costs, which could have a material adverse effect on the Company's business, financial condition and results of operations. The majority of raw materials and purchased components used to manufacture the Company's products are readily available. However, certain of these materials are obtained from a sole supplier or a limited group of suppliers. In particular, the anti-osteocalcin antibody used in the Company's NovoCalcin test is currently available only from Haematologic Technologies, Inc. and the transducers incorporated in the Company's ultrasound product under development may only be available from a single manufacturer. In the event that the supply of anti-osteocalcin antibodies or, if the development of the ultrasound product is completed, the supply of the transducers, is interrupted for any reason, products from alternative suppliers are unlikely to be immediately available in sufficient volume to meet the Company's production needs, if at all. The Company does not maintain long-term agreements with any of its suppliers. The reliance on sole or limited suppliers and the failure to maintain long-term 21 agreements with suppliers involves several risks, including the inability to obtain an adequate supply of required raw materials and components and reduced control over pricing, quality and timely delivery. Although the Company attempts to minimize its supply risks by maintaining an inventory of raw materials and continuously evaluating other sources, any interruption in supply could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's business, financial condition and results of operations would be adversely affected by the inability to obtain working capital, satisfactory manufacturing facilities, equipment and qualified manufacturing personnel. In addition, the Company's manufacturing facilities and its operations are subject to periodic inspections conducted by the FDA and equivalent inspections conducted by State of California officials, and its operations undergo current good manufacturing practices compliance inspections conducted by the FDA and equivalent inspections conducted by state officials. Because the Company has received FDA clearance to market certain of its products for clinical use, the Company expects that its facilities will be inspected by the FDA and by state authorities. Failure to comply with applicable regulatory requirements can result in, among other things, fines, suspension or withdrawal of clearances or of approvals, seizures or recalls of products, operation restrictions and criminal prosecutions. Furthermore, changes in existing regulations or adoption of new regulations could prevent the Company from obtaining, or affect the timing of, future clearances or approvals. There can be no assurance that the Company will be able to obtain necessary regulatory clearances or approvals on a timely basis or at all. Delays in receipt of or failure to receive such clearances or approvals or loss of previously received clearances or approvals could have a material adverse effect on the Company's business, financial condition and results of operations. In September 1996, the Company received ISO 9001 certification for its quality management systems. The Company's certification is officially recognized by European and North American authorities and is accepted worldwide. The Company faces an inherent risk of exposure to product liability claims in the event that the use of its products is alleged to have resulted in adverse effects to a patient. The Company maintains a general insurance policy which includes coverage for product liability claims. The policy is limited to a maximum of $1.0 million per product liability claim and an annual aggregate policy limit of $1.0 million. There can be no assurance that liability claims will not exceed the coverage limits of such policy or that such insurance will continue to be available on commercially reasonable terms or at all. Consequently, a product liability claim or other claim with respect to uninsured liabilities or in excess of insured liabilities could have a material adverse effect on the Company's business, financial condition and results of operations. COMPETITION Competition in the market for products that diagnose and monitor bone and other connective tissue diseases and disorders is intense and expected to increase. The Company currently competes with other medical technology companies, biotechnology companies, pharmaceutical companies and research and academic institutions, both in the United States and abroad. Metra believes that its most significant competitors in the area of biochemical markers include Bio-Rad Laboratories, a life sciences company; DSL, a diagnostic company that in 1996 received 510(k) clearance from the FDA to market Osteometer's bone resorption product in the United States; IncStar, a diagnostic company; Corning Nichols Institute, a research laboratory and diagnostic company; Orion, a diagnostic and pharmaceutical company in Finland; Osteometer, a diagnostic company in Denmark; Hybritech, a division of Beckman 22 Instruments, a diagnostic company that in 1996 received 510(k) clearance from the FDA to market its test for bone-specific alkaline phosphatase for the management of osteoporotic patients; and Ostex International, Inc., a diagnostic company that in 1995 received 510(k) clearance from the FDA to market an immunoassay for in vitro (clinical) diagnostic use. In addition, the Company will compete with companies that measure the same biochemical markers as Metra using different testing methods. The most established of these are companies manufacturing HPLC assays, including Corning Nichols Institute and Bio-Rad Laboratories. The Company believes that although the HPLC method for measuring pyridinium crosslinks is extremely accurate, it is primarily a research tool and is unsuitable for routine clinical use because it has low throughput, is expensive and labor intensive, and requires skilled technicians. There can be no assurance, however, that competitors have not developed, or are not developing, less expensive, more clinically useful HPLC products. In addition, as the Company licenses its technology to diagnostic companies for use in alternative formats, tests sold by these licensees will compete with the Company's products. Certain diseases and disorders targeted by the Company's products can also be diagnosed and monitored using existing imaging technologies, such as DEXA. Although DEXA may be considered more expensive and less convenient than tests for biochemical markers for routine diagnosis and monitoring of connective tissue diseases and disorders, there can be no assurance that competitors have not developed, or are not developing, less expensive, more clinically convenient imaging devices. The Company believes that, at least in their present forms, current imaging systems and tests for biochemical markers should be complementary tools because Metra's tests can identify a patient's rate of bone loss, as compared to imaging analysis, which measures a patient's existing bone mass. The market for the Company's ultrasound product under development is expected to be highly competitive and subject to rapid technological change and evolving industry requirements and standards. The Company believes that these trends will continue into the foreseeable future. The Company's ultrasound-based diagnostic product currently under development could experience competition from companies with DEXA products, companies with biochemical markers, and makers of ultrasound systems. Several companies, including Aloka Company Ltd., Hitachi Instruments, Inc., Hologic, Inc., Lunar Corporation, Norland Medical Systems and Osteometer MediTech AS have developed systems to measure bone density which could compete with the Company's ultrasound product under development. The Company believes that competition in the field of bone densitometry is based upon price, precision, speed of measurement, patient radiation dose, size and ease of operation, product versatility, product reliability and quality of service. There can be no assurance that the Company's product, if commercialized, will compete effectively with respect to these criteria. Several companies, including Hologic, Inc., IGEA S.r.l., McCue PLC, Lunar Corporation, Myriad Ultrasound Systems, Ltd., and Osteometer MediTech AS, have developed ultrasound systems to assess bone fragility. All of these companies have had substantially more experience than the Company in developing and marketing their systems. The Company believes that competition in the field of ultrasound systems is based on price, precision, speed of measurement, size and ease of operation, product reliability and quality of service. No ultrasound bone analyzer has been approved for commercial sale in the United States. If the Company's competitors obtain FDA clearance or approval for ultrasound bone analyzers in the United States before the Company, it could have a material adverse effect on the Company's ability to introduce its ultrasound device (if developed), which in turn could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, other companies have developed ultrasound technology for uses unrelated to measurement of bone characteristics. There can be no assurance that such companies will 23 not successfully adapt their technology to the bone field, and obtain significant market share. The entry of such companies into the market for the Company's ultrasound product under development could have a material adverse effect on its business, financial condition and results of operations. Many of the Company's competitors have substantially greater financial, technical and human resources than the Company. In addition, many of these competitors have substantially greater experience than the Company in research and development, undertaking clinical trials, obtaining regulatory approvals and third-party reimbursement and manufacturing, marketing and selling diagnostic products. Smaller companies may also prove to be significant competitors, particularly through collaborative arrangements with larger companies. Furthermore, academic institutions, governmental agencies, and other public and private research organizations conduct research, seek patent protection and establish collaborative arrangements for product development and marketing and therefore could become significant competitors. A number of diagnostic tests and procedures for measure of bone metabolism and other connective tissue diseases and disorders currently exist and others are in development by other companies. These products, as well as products that may be developed in the future, may be available for sale prior to the Company's products, or at a lower cost, or with better technical characteristics, rendering the Company's products less competitive or obsolete. In addition, as the Company licenses its technology to diagnostic companies for use in alternative formats, tests sold by these licensees will compete with the Company's products. Any product that the Company succeeds in developing and for which it gains regulatory approval must then compete for market acceptance and market share. There can be no assurance that competitors' products will not be found more competitive, either for general use or in specific applications such as patients with particular medical conditions, or those who are receiving certain therapies. The Company believes that for all of its immunoassay products important competitive factors include the relative speed with which companies can develop products, establish clinical utility, complete the clinical testing and regulatory approval processes, obtain reimbursement and supply commercial quantities of the product to the market. The Company's inability to compete favorably with respect to any of these factors could have a material adverse effect on its business, financial condition and results of operations. PATENTS, PROPRIETARY RIGHTS AND RELATED LITIGATION RISKS The Company's success will depend in part on its ability to obtain patent protection for its products and processes, to preserve its trade secrets and to operate without infringing the proprietary rights of third parties. The Company owns five United States patents, 15 pending United States patent applications, and corresponding foreign patent applications, all in the area of medical diagnostics. The Company is the exclusive licensee from The Rowett Research Institute in Scotland of patents and patent applications directed to certain diagnostic methods of detecting metabolic bone disorders, including a United States patent, six pending United States patent applications, two European Patent Office patents, a related Australian patent, a related Canadian patent and ten related foreign patent applications. The Company pays The Rowett Research Institute royalties upon sales of the Company's Pyrilinks products. The Company's ability to protect its proprietary position is in part dependent on the issuance of patents on current and future applications. The Company currently has applications pending in the United States, Europe, Japan, Canada and Australia. The validity and breadth of claims covered in medical technology patents involve complex legal and factual questions, and 24 therefore, are highly uncertain. Patent applications covering the technology underlying the Company's products that have received 510(k) clearances from the FDA have not been issued (other than a European patent covering the technology underlying the Company's Pyrilinks products), and no assurance can be given that such and other pending patent applications or any future patent applications will be issued, that the scope of any patent protection will exclude competitors or provide competitive advantages to the Company, that any of the Company's patents will be held valid if subsequently challenged or that others will not claim rights in or ownership to the patents and other proprietary rights held by the Company. The failure of the Company to obtain issuances of patents that cover the technology underlying the Company's products that have received 510(k) clearances from the FDA, or any other outstanding patent applications, could have a material adverse effect on the Company's business, financial condition and results of operations. Furthermore, there can be no assurance that others have not developed or will not develop similar products, duplicate any of the Company's products or design around the Company's patents. In addition, others may hold or receive patents or file patent applications that contain claims having a scope that covers products developed by the Company. In the event that any relevant claims of third-party patents are upheld as valid and enforceable, the Company could be prevented from practicing the subject matter claimed in such patents or could be required to obtain licenses from the patent owners of each of such patents or to redesign its products or processes to avoid infringement. There can be no assurance that such licenses would be available or, if available, would be on terms acceptable to the Company or that the Company would be successful in any attempt to redesign its products or processes to avoid infringement. The Company also relies upon unpatented trade secrets to protect its proprietary technology, and no assurance can be given that others will not independently develop or otherwise acquire substantially equivalent techniques or otherwise gain access to the Company's proprietary technology or that the Company can ultimately protect meaningful rights to such unpatented proprietary technology. There has been substantial litigation regarding patent and other intellectual property rights in the medical device industry. Litigation, which would result in substantial cost to and diversion of effort by the Company, may be necessary to enforce patents issued to the Company, to protect trade secrets or know-how owned by the Company, to defend the Company against claimed infringement of the rights of others or to determine the ownership, scope or validity of the proprietary rights of the Company and others. An adverse determination in any such litigation could subject the Company to significant liability to third parties, could require the Company to seek licenses from third parties, which licenses may not be available or, if available, may not be on terms acceptable to the Company, and ultimately could prevent the Company from manufacturing, selling or using its products, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. Metra also relies on trade secrets and proprietary know-how in its manufacturing processes. The Company requires each of its employees, consultants and advisors to execute a confidentiality agreement upon the commencement of any employment, consulting or advisory relationship with the Company. Each agreement provides that all confidential information developed or made known to the individual during the course of the relationship will be kept confidential and not disclosed to third parties except in specified circumstances. In the case of employees, the agreements provide that all inventions conceived of by an individual shall be the exclusive property of the Company, other than inventions unrelated to the Company and developed entirely on the employee's own time. There can be no assurance, however, that these agreements will provide meaningful protection or adequate remedies for misappropriation of the Company's trade secrets in the event of unauthorized use or disclosure of such information. 25 REIMBURSEMENT The Company's ability to successfully commercialize its products depends in part on the availability of, and the Company's ability to obtain, adequate levels of third-party reimbursement for use of its diagnostic tests. Although the Company's products are available for clinical use in certain European countries, reimbursement is currently available in only certain of those countries. In the United States, the Company has received FDA clearance for Alkphase-B, Pyrilinks and Pyrilinks-D. Reimbursement for the Company's FDA cleared tests is determined by CPT codes and may vary by state. Reimbursement under a specific CPT code is available for Alkphase-B, and the Company has been informed that a specific CPT code to enable reimbursement in the United States for its bone resorption tests, Pyrilinks and Pyrilinks-D, will be published in January 1997. In the United States, the cost of medical care is funded, in substantial part, by government insurance programs, such as Medicare and Medicaid, and private and corporate health insurance plans. Third-party payors may deny reimbursement if they determine that a prescribed device has not received appropriate FDA or other governmental regulatory clearances, is not used in accordance with cost-effective treatment methods as determined by the payor, or is experimental, unnecessary or inappropriate. The Company's ability to commercialize its products successfully will depend in part on the extent to which appropriate reimbursement levels for the cost of such products and related treatment are obtained from government authorities, private health insurers and other organizations, such as health maintenance and organizations ("HMOs"). Third-party payors are increasingly challenging the prices charged for medical products and services. Also, the trend towards managed health care in the United States and the concurrent growth of organizations such as HMOs, which could control or significantly influence the purchase of health care services and products, as well as legislative proposals to reform health care or reduce government insurance programs, may all result in lower prices for the Company's products. The cost containment measures that health care providers are instituting and the impact of any health care reform could have an adverse effect on the Company's ability to sell its products and may have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that reimbursement in the United States or foreign countries will be available for any of the Company's products, or if available, will not be decreased in the future, or that reimbursement amounts will not reduce the demand for, or the price of, the Company's products. The unavailability of third-party reimbursement or the inadequacy of the reimbursement for medical procedures using the Company's tests could have a material adverse effect on the Company's business, financial condition and results of operations. Moreover, the Company is unable to forecast what additional legislation or regulation, if any, relating to the health care industry or third-party coverage and reimbursement may be enacted in the future or what effect such legislation or regulation would have on the Company's business. GOVERNMENT REGULATION The manufacturing, testing, labeling, distribution, marketing, advertising and promotion of the Company's products are subject to extensive and rigorous regulation by the FDA and, to varying degrees of regulation, by state and foreign regulatory agencies. The Company's products are regulated by the FDA under the Federal Food, Drug and Cosmetic Act (the "Act"), as amended by the Medical Device Amendments of 1976 and the Safe Medical Devices Act of 1990, among other laws. Under the Act, the FDA regulates the clinical testing, manufacturing, labeling, distribution, sale, advertising and promotion of medical devices in the United States. In addition, various foreign countries in which the Company's products are or may be sold, including, Germany, France, Japan and Canada, impose local regulatory 26 requirements. The testing for, preparation of and subsequent FDA and foreign regulatory review of required applications is expensive, lengthy and uncertain. Failure to comply with FDA and similar foreign requirements could result in civil monetary penalties or criminal sanctions, restrictions on or injunction against marketing of the Company's products, as well as seizure or recall of the Company's products, or other regulatory action. There can be no assurance that the Company will be able to obtain necessary regulatory approvals or clearances on a timely basis or at all, and delays in receipt of or failure to receive such approvals or clearances, the loss or limitation of previously received approvals or clearances, adoption of future regulations which may further restrict the production or sales of the Company's products, 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. The Act, among other things, classifies medical devices into three categories over which the FDA maintains increasing levels of regulation: Class I (general controls), II (special controls) and III (premarket approval). Although most devices new to the marketplace after May 1976 are automatically classified as Class III, the Company believes that the majority of Metra's products will ultimately be classified as Class I or II devices and hence, not subject to the requirement of premarket approval by the FDA. Prior to marketing any of these devices, the Company is required to submit a 510(k) premarket notification to the FDA and await the FDA's determination that the product may be marketed. In any 510(k) premarket notification the Company must, among other things, demonstrate the product to be marketed is substantially equivalent in performance, formula, design and intended use to a legally marketed Class I or Class II predicate device or to a Class III device for which the FDA has not required premarket approval. Test data from clinical trials may be required to demonstrate substantial equivalence and that the products are safe and effective, which may delay the 510(k) premarket notification review period. Following submission of a 510(k) premarket notification, a company may not market the device for clinical use until an order is issued by the FDA finding the product to be substantially equivalent. The FDA has no specific time limit by which it must respond to a 510(k) premarket notification. The FDA may agree that the product is substantially equivalent to a predicate device and allow the product to be marketed in the United States. The FDA, however, may (i) determine that the new device is not substantially equivalent and require a premarket approval application ("PMA"), or (ii) require further information, such as additional test data, including data from clinical studies, before it is able to make a determination regarding substantial equivalence. By requesting additional information the FDA can further delay market introduction of a Company's products. In August 1995, Metra received FDA clearance of its 510(k) premarket notification for Alkphase-B for use as an aid in the management of patients diagnosed with Paget's disease. In November 1995, Metra received FDA clearance of its 510(k) premarket notification for Pyrilinks Polyclonal and Pyrilinks as measures of type I collagen degradation, especially bone collagen. In December 1995, Metra received FDA clearance of its 510(k) premarket notification for Pyrilinks-D as a measure of bone resorption. There can be no assurance that the FDA will act favorably or quickly in its review of the Company's future 510(k) submissions, if any, and significant difficulties and costs may be encountered by the Company in its efforts to obtain FDA clearance that could delay or preclude the Company from selling its products in the United States. Furthermore, there can be no assurance that the FDA will not request additional data, require that the Company conduct further clinical studies or require a PMA, causing the Company to incur further cost and delay. In addition, there can be no assurance that the FDA will not limit the intended use of the Company's products as a condition of 510(k) clearance or PMA approval. Further, if a 27 company wishes to propose modifications to a product after FDA clearance of a 510(k) premarket notification or approval of a PMA, including changes in indications or other significant modifications to labeling or manufacturing, additional clearances or approvals will be required from the FDA. Failure to receive or delays in receipt of FDA clearances or approvals, including the need for extensive clinical trials or additional data as a prerequisite to approval, or any FDA limitations on the intended use of the Company's products, could have a material adverse effect on the Company's business, financial condition and results of operations. If the FDA indicates that a PMA is required for any of the Company's products, the application will require the results of extensive clinical studies, manufacturing information and likely review by a panel of experts outside the FDA. Clinical studies would need to be conducted in accordance with FDA requirements. Failure to comply with FDA requirements could result in the FDA's refusal to accept the data or the imposition of regulatory sanctions. FDA review of a PMA application can take significantly longer than that for a 510(k) premarket notification. There can be no assurance that the Company will be able to meet the FDA's PMA requirements or that any necessary approvals will be received. Failure to obtain necessary regulatory approvals, the restriction, suspension or revocation of regulatory approvals, if obtained, or any other failure to comply with regulatory requirements could have a material adverse effect on the Company's business, financial condition and results of operations. The Act and California laws also require the Company to be licensed and to manufacture its products in compliance with current good manufacturing practices ("GMP") regulations. These regulations require that the Company manufacture its products and maintain related documentation in a prescribed manner with respect to manufacturing, testing and control activities. The Company is also required to comply with various FDA requirements for labeling and marketing, and the FDA prohibits a device, whether or not cleared under a 510(k) premarket notification or approved under a PMA, from being marketed for unapproved clinical uses. If the FDA believes that a company is not in compliance with the regulations, it can institute proceedings to detain or seize a product, issue a recall, prohibit marketing and sales of the company's products and assess civil and criminal penalties against the company, its officers or its employees. There can be no assurance that Metra will receive marketing clearance or approval for any of its future products or that its manufacturing facility will satisfy GMP or California manufacturing requirements. The Company's facilities and manufacturing processes have been periodically inspected by the State of California and other agencies, but remain subject to audit from time to time. The Company believes that it is in substantial compliance with all applicable federal and state regulations. Nevertheless, there can be no assurance that the FDA or a state agency will agree with the Company's position, or that its GMP compliance will not be challenged at some subsequent point in time. Enforcement of the GMP regulations has increased significantly in the last several years and the FDA has publicly stated that compliance will be more strictly scrutinized. In the event that the Company is determined to be in noncompliance with FDA regulations, to the extent that the Company is unable to convince the FDA or state agency of the adequacy of its compliance, the FDA or state agency has the power to assert penalties or remedies, including injunction or temporary suspension of shipment until compliance is achieved. Noncompliance may also lead to a recall of product. Such penalties or remedies could have a materially adverse effect on the Company's business, financial condition and results of operations. In addition, the manufacture, sale or use of the Company's products are also subject to regulation by other federal entities, such as the Occupational Safety and Health Agency and the Environmental Protection Agency, and by various state agencies, including the California Environmental Protection Agency. Federal and state regulations regarding the manufacture, sale or use of the Company's products are subject to future change, which changes could have a material adverse effect on the Company's business, financial condition and results of operations. 28 Distribution of the Company's products outside the United States is subject to FDA export and extensive foreign government regulation. These regulations, including the requirements for approvals or clearance to market, the time required for regulatory review and the sanctions imposed for violations, vary from country to country. There can be no assurance that the Company will obtain regulatory approvals in such countries or that it will not be required to incur significant costs in obtaining or maintaining its foreign regulatory approvals. In addition, the export by the Company of certain of its products which have not yet been cleared for domestic commercial distribution may be subject to FDA export restrictions. Failure to obtain necessary regulatory approvals, the restriction, suspension or revocation of existing approvals or any other failure to comply with regulatory requirements outside the United States could have a material adverse effect on the Company's business, financial condition and results of operations. Any of Metra's customers using its diagnostic devices for clinical use in the United States may also be regulated under the Clinical Laboratory Improvement Amendments of 1988 ("CLIA"). CLIA is intended to ensure the quality and reliability of all medical testing in laboratories in the U.S. by requiring that any health care facility in which testing is performed meet specified standards in the areas of personnel qualification, administration, participation in proficiency testing, patient test management, quality control, quality assurance and inspections. The regulations have established three levels of regulatory control based on test complexity _ "waived," "moderately complex" and "highly complex". Metra's Alkphase-B test is categorized as a highly complex test for clinical use in the United States, and the Company believes that its other tests will also be categorized as highly complex. Laboratories that perform either moderately or highly complex tests must meet certain standards with the major difference in requirements being quality control and personnel standards. Personnel requirements for highly complex tests are more rigorous than those for moderately complex tests, requiring that personnel have more education and experience than personnel conducting moderately complex tests. Under the CLIA regulations, all laboratories performing high or moderately complex tests are required to obtain either a registration certificate or certification of accreditation from the Health Care Financial Administration ("HCFA"). As a result of the CLIA requirements, physician office laboratories and small volume test sites may be dissuaded from initiating, continuing or expanding patient testing, particularly if the tests are classified as moderately or highly complex tests. There can be no assurance that the CLIA regulations and future administrative interpretations of CLIA will not have an adverse impact on the potential market for the Company's products. EMPLOYEES As of June 30, 1996, the Company had 86 full-time employees, 25 of whom were engaged in, or directly supported, the Company's research and development activities, 23 of whom were in domestic and international sales and marketing, 25 of whom were in manufacturing, and 13 of whom were in administration. The Company also employs several part-time employees and uses outside consultants. The Company considers relations with its employees to be good. None of the Company's employees is covered by a collective bargaining agreement. FACILITIES Metra currently leases approximately 31,000 square feet of laboratory and office space at two facilities in Mountain View, California. The Company leases these facilities under operating leases which last through May 2001, each with a renewal option that, if exercised, would extend the term of the lease through May 2003. In addition, the Company leases approximately 4,000 square feet of office space in Beaverton, Oregon under an 29 operating lease which lasts until July 7, 1997. The Company believes that its existing facilities will be sufficient for its operational purposes through 1998. EXECUTIVE OFFICERS OF THE COMPANY The following table sets forth certain information with respect to the executive officers and certain other officers of the Company as of June 30, 1996: NAME AGE POSITION ---- --- -------- George W. Dunbar, Jr. 50 President, Chief Executive Officer and Director Kurt E. Amundson 44 Vice President and Chief Financial Officer Colette Z. Andrea* 43 Vice President, Marketing & Sales Ronald T. Steckel 43 Senior Vice President John F. Coombes 52 Vice President International Victor Liu, Ph.D 50 Vice President, Research and Development Donald P. Wood 44 Sr. Director, Operations Debby R. Dean 40 Sr. Director, Human Resources and Administration Robert P. Hesley 31 Director of Business Development *Ms. Andrea resigned from her position with the Company effective September 18, 1996. The officers of the Company are appointed by the Board of Directors and serve at the discretion of the Board. There are no family relationships among the directors or officers of the Company. MR. DUNBAR joined the Company as President, Chief Executive Officer and Director in July 1991. Prior to joining the Company, he was the Vice President of Licensing and Business Development of The Ares-Serono Group ("Ares-Serono"), a Swiss health care company that markets pharmaceutical, diagnostic and veterinary products worldwide, from 1988 until 1991, where he established a licensing and acquisition group for its health care divisions. From 1974 until 1987, he held various senior management positions with Amersham International ("Amersham"), a health care and life sciences company, where he most recently served as Vice President for its Life Sciences business in North America. Mr. Dunbar also served as Amersham's General Manager of Pacific Rim markets and Eastern Regional operations and, prior to that, he managed the international marketing of Amersham's medical and industrial radioisotopes. Mr. Dunbar also serves as a director of Metra Biosystems (U.K.) Ltd., the Company's wholly owned subsidiary, and DepoTech Corporation, a life-sciences company. Mr. Dunbar holds a B.S. in electrical engineering and an M.B.A. from Auburn University and sits on the Auburn School of Business M.B.A. Advisory Committee. MR. AMUNDSON joined the Company as Vice President and Chief Financial Officer in January 1996. From 1994 until 1996, Mr. Amundson was Vice President and Chief Financial Officer of Shaman Pharmaceuticals, Inc., a biopharmaceutical company ("Shaman"). Prior to his employment with Shaman, he was Chief Financial Officer at Abaxis, Inc., a biomedical instrumentation company. From 1986 to 1991, Mr. Amundson was Vice President, Finance at Proxim, Inc., a maker of wireless network products. Mr. Amundson is a Certified Public Accountant and received a B.A. in Graphic Communication from California Polytechnic University, San Luis Obispo. MS. ANDREA joined the Company as Vice President, Marketing and Clinical Affairs, in September 1994. From 1993 until 1994, Ms. Andrea was Senior Vice President for the Deltakos Division of Thomas Ferguson Associates ("Deltakos"), an advertising firm, where she 30 was involved in strategic planning and product development. Prior to her employment with Deltakos, Ms. Andrea worked for Wyeth-Ayerst Laboratories, from 1988 to 1993, in various positions including Product Manager, Senior Product Manager and Group Product Director, where she repositioned and relaunched several products and was responsible for the marketing of the Norplant System. Ms. Andrea holds a B.S. in medical technology from Rutgers University and an M.B.A. from Saint Joseph's University. MR. STECKEL joined the company as Vice President, Development and Operations, in March 1992. He was promoted to Senior Vice President in August 1996. From 1990 until 1992, he was Vice President of Operations of Leeco Diagnostics, a medical diagnostics company, where he was responsible for manufacturing, quality assurance, materials management and facilities. Prior to his employment at Leeco, Mr. Steckel worked for Ares-Serono from 1986 to 1990, in various positions including Director, Corporate Projects and Vice President, Operations of Serono Baker Diagnostics ("Serono"). At Serono, Mr. Steckel managed the successful launches of immunoassay analysers and hemotology instruments to the international marketplace. Mr. Steckel holds a B.S. in biology from Blackburn University and an M.B.A. from Lake Forest College. MR. COOMBES joined the Company in November 1993 as Director of European Sales. Mr. Coombes was promoted to Vice President International in August 1996 after serving as Director - European Operations and Managing Director of Metra Biosystems (U.K) from November 1994 to August 1996. From 1992 to 1993, Mr. Coombes was European Sales Manager of T Cell Diagnostics, a division of T Cell Sciences, a biotechnology company. Prior to his employment at T Cell Diagnostics, Mr. Coombes established Digen Limited, a distributor for Gene Trak Systems. From 1989 to 1991, Mr. Coombes was Director of European Operations for Gene Trak Systems, a human diagnostics, food industry and industrial biotechnology company. Mr. Coombes received an Ordinary National Diploma in chemistry from Bromsgrove College in Worcestershire, England and Higher National Diplomas in chemistry and analytical chemistry from Lanchester Polytechnic in Coventry, England. DR. LIU joined the Company as Sr. Director of Development in October 1995. He was appointed to Sr. Director of Research and Development in January 1996. He was promoted to Vice President Research & Development in August 1996. From 1992 until 1995, Dr. Liu was Vice President of Research and Development for Chem Trak, Inc., a manufacturer of over-the-counter diagnostic products. From 1988 to 1992, Dr. Liu worked as an independent consultant focusing on assisting companies transition from research to product commercialization. Dr. Liu received a Ph.D. in Biochemistry and Immunology from Indiana University. MR. WOOD joined the Company as Sr. Director, Materials and Manufacturing in October 1995. From 1980 to 1995, Mr. Wood worked at Biochem ImmunoSystems Inc., a subsidiary of BioChem Pharma Inc., a medical diagnostics company manufacturing immunoassay and hematology instrumentation and related reagents and kits. He received a B.S. in Business Administration from Bloomsburg University. MS. DEAN joined the Company as Sr. Director of Human Resources and Administration in September 1995. From 1992 to 1995, Ms. Dean worked at DNX Corporation, a biopharmaceutical company, in the positions of Vice President, Corporate Administration & Communications and Director, Human Resources. Prior to DNX, Ms. Dean worked with Baker Instruments (acquired by Ares-Serono), from 1988 to 1992 as Director, Human Resources of their Diagnostics Division. Ms. Dean received an M.B.A. from Lehigh University. 31 MR. HESLEY joined the Company in April 1991 as Development Associate. He was promoted to Manager of Business Development in 1994, and Director of Business Development in 1995. Prior to joining the Company, Mr. Hesley was employed by Monoclonal Antibodies, Inc., a manufacturer of over-the-counter diagnostic products, where he was a Development Associate. Mr. Hesley received a B.S. in molecular biology from San Jose State University. ITEM 2. PROPERTIES Metra currently leases approximately 31,000 square feet of laboratory and office space at two facilities in Mountain View, California. The Company leases these facilities under operating leases which last through May 2001, each with a renewal option that, if exercised, would extend the term of the lease through May 2003. In addition, the Company leases approximately 4,000 square feet of office space in Beaverton, Oregon under an operating lease which lasts until July 7, 1997. The Company believes that its existing facilities will be sufficient for its operational purposes through 1998. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. 32 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Beginning July 1, 1995, the Company's Common Stock has traded on The Nasdaq National Market under the symbol MTRA. Prior to such date, there was no established public trading market for the Company's Common Stock. The range of reported high and low bid quotations for the shares of the Company's Common Stock, as reported by The Nasdaq National Market, are set forth below for the periods indicated: Fiscal 1996 High Low ----------- ---- --- 1st Quarter $21.75 $12.38 2nd Quarter $21.88 $16.75 3rd Quarter $18.25 $13.50 4th Quarter $14.50 $ 4.50 The above quotations represent prices quoted between dealers, do not include retail markup, markdown or commissions and may not represent actual transactions. On September 20, 1996 the closing stock price was $5.75. HOLDERS As of September 20, 1996, the Company had approximately 207 shareholders of record, including several holders who are nominees for an undetermined number of beneficial owners. DIVIDENDS The Company has never declared or paid any cash dividends or made any other cash distribution on its Common Stock, and the Company anticipates that in the foreseeable future it will follow a policy of retaining any earnings for use in its business. Any future determination as to declaration and payment of dividends will be made at the discretion of the Board of Directors. 33 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA Presented below is the selected consolidated financial data for the years ended June 30, 1996, 1995, 1994, 1993, and 1992. (in thousands, except per share amounts)
1996 1995 1994 1993 1992 -------- -------- -------- ------- ------- CONSOLIDATED STATEMENT OF OPERATIONS DATA: Product sales $ 4,413 $ 2,552 $ 1,439 $ 617 $ - Partner revenue 2,057 744 2,032 2,062 630 -------- -------- -------- ------- ------- Total revenues 6,470 3,296 3,471 2,679 630 -------- -------- -------- ------- ------- Operating expenses: Cost of product sales 3,276 1,987 1,466 1,171 - Research and development 4,308 3,717 2,899 3,213 2,665 Sales and marketing 7,725 2,881 1,366 930 359 General and administrative 3,070 1,851 1,480 1,035 1,051 Acquired in process research and development 11,291 - - - - -------- -------- -------- ------- ------- Total operating expenses 29,670 10,436 7,211 6,349 4,075 -------- -------- -------- ------- ------- Loss from operations (23,200) (7,140) (3,740) (3,670) (3,445) Other income, net 1,801 337 165 87 106 -------- -------- -------- ------- ------- Net loss $(21,399) $ (6,803) $ (3,575) $(3,583) $(3,339) -------- -------- -------- ------- ------- -------- -------- -------- ------- ------- Net loss per share $ (2.04) $ (1.08) $ (0.69) $ (0.87) $ (1.09) Weighted average shares outstanding 10,515 6,303 5,156 4,119 3,070
JUNE 30, ------------------------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- -------- ------- ------- CONSOLIDATED BALANCE SHEET DATA: Working capital $44,231 $ 2,759 $ 9,803 $2,749 $6,491 Total assets 60,193 7,400 12,807 4,431 7,977 Long-term portion of capital lease obligations 1,367 40 93 293 314 Redeemable preferred stock - 23,260 23,260 11,616 11,616 Accumulated deficit (39,889) (18,490) (11,687) (8,112) (4,529) Total shareholders' equity (deficit) 54,424 (17,856) (11,650) (8,092) (4,515)
34 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Since its commencement of operations in March 1990, Metra has been engaged in the development and commercialization of diagnostic products for the detection and management of metabolic bone diseases and disorders. The Company has developed and is currently marketing for research and clinical use four immunodiagnostic tests to measure bone resorption (loss) and formation and one immunodiagnostic test to detect certain pediatric growth disorders. In the United States, three of these tests have received 510(k) clearance from the FDA for clinical use and two of these tests are being marketed for research use only. The Company is currently marketing its products in Japan for research use only and for research as well as clinical use in numerous other countries, including Germany, Italy, Spain and the United Kingdom. The Company's principal sources of revenue are product sales and partner revenues. Product sales are principally derived from sales of the Company's bone resorption and formation tests for research and clinical use. Partner revenues result from certain collaborative relationships and primarily consist of milestone payments and licensing fees received from these partners and revenues from sales to these partners of proprietary reagents for use with their test formats. The Company's revenues from product sales have historically resulted from international sales for clinical and research use and from sales in the United States for research use. In November and December of 1995, the Company received 510(k) clearance from the FDA for its Pyrilinks and Pyrilinks-D products. Revenues from clinical sales in the United States will be dependent, in part, upon the rate at which the Company can increase awareness and acceptance of its products among clinicians. The Company commenced its marketing efforts in the United States upon receiving 510(k) clearance, and does not anticipate significant revenues from clinical sales of its products in the United States unless and until the results of its marketing efforts are realized. As a result of the significantly increased sales and marketing activities in the United States following receipt of the FDA clearances, the Company expects expenses associated with such activities to increase in future periods. There can be no assurance that the Company can successfully increase market awareness or acceptance of the Company's products in a timely manner or at all, and failure to do so would have a material adverse effect on the Company's business, financial condition and results of operations. Historically, the Company's quarterly revenues have fluctuated significantly. Partner revenues have fluctuated primarily as a result of the timing of milestone payments received from corporate collaborations. Product sales have fluctuated primarily as a result of the introduction of new products, seasonal variations in demand, the rate of acceptance of the Company's products, and variations in the timing and volume of distributor purchases. The Company expects that its revenues will fluctuate as a result of these and other factors. Such fluctuations may result in the Company failing to meet securities analysts' expectations, which could have a material adverse effect upon the market price of the Company's Common Stock. In June 1996 the Company announced that for the fourth quarter of 1996 and for fiscal 1997 its product sales would not meet securities analysts' expectations. Subsequent to this announcement, the market price of the Company's Common Stock dropped from $11.00 to $7.00 on the first full day of trading after the announcement. The Company expects that international sales will continue to account for a significant portion of its revenues in the future. Also, the Company expects to incur increased costs related to sales and marketing, clinical studies, manufacturing, research and development, general and administrative expenses and expansion of its facilities. As a result, the Company expects its results from operations will vary significantly from quarter to quarter and from year to year and will depend on, among other things, gaining regulatory clearances in the United States, Japan and elsewhere, the rate of acceptance of the Company's products in the marketplace, the availability of reimbursement, the timing of fees and milestone payments from its partners in collaborative relationships, the execution of new collaborative relationships, costs associated with the development of the Company's products and costs associated with and the financial impact of acquisitions, including the Company's recent acquisition of Osteo Sciences Corporation ("Osteo"). Effective January 31, 1996, the Company completed the acquisition of Osteo, a company engaged in the development of a portable ultrasound product designed to assess bone fragility. The acquisition was accounted for as a purchase. As a result of the acquisition, the Company took a one time charge to 35 operations in the quarter ending March 31, 1996 related to acquired in-process research and development of approximately $11,291,000. This charge was primarily composed of the purchase price of approximately $10,017,000, with the balance related to costs and expenses associated with the acquisition, the fair value of liabilities assumed including reserves for future costs related to the acquisition, less the fair value of tangible assets acquired. Prior to the acquisition, research and development expenses constituted a significant percentage of the operating expenses incurred by Osteo. The Company intends to continue the research and development activities related to ultrasound technology at levels which exceed the level historically performed by Osteo. As a result, the Company expects that its research and development expenses will increase from the levels experienced prior to the acquisition. The Company's gross margin is affected by a number of factors, including product mix, product pricing, the extent of diagnostic test sales compared to reagent sales and royalty revenue, the percentage of direct sales compared to distributor sales and manufacturing costs, including overhead and material costs. Due to seasonal factors such as customer and distributor vacations, the Company expects reduced product sales during the summer months, particularly in Europe. As a result of this seasonal effect, the Company's revenues could be lower in the quarters ending June 30 and September 30 than in the other quarters. The manufacturing, testing, labeling, distribution, marketing, advertising and promotion of the Company's products are subject to extensive and rigorous government regulation in the United States and other countries. The Company can only commence marketing its products for clinical use after regulatory requirements are satisfied, thus, the Company's future product sales and profitability are uncertain. There can be no assurance that additional regulatory approvals will be obtained in a timely manner, if at all, and significant difficulties and costs that may be encountered by the Company in its efforts to obtain additional regulatory approvals could delay or affect the Company's ability to sell its products for clinical use in the United States or internationally. Inability to obtain regulatory approvals or any other failure to comply with the regulatory requirements could have a material adverse effect on the Company's business, financial condition and results of operations. The Company has limited experience in manufacturing its products and relies on key sources of supply for certain ingredients and other product components. If the Company experiences significant demand for its products, the Company will have to expend significant capital resources to develop large-scale manufacturing capabilities. Metra has established corporate partner relationships with a number of companies, including Sumitomo Pharmaceuticals Co., Ltd., Ciba Corning Diagnostics Corporation (a subsidiary of Chiron Corporation), Bayer Corporation, Diagnostic Products Corporation, and Abbott Laboratories. The Company expects to continue to rely on current and future collaborative relationships to develop products and to provide milestone, royalty and reagent-sales revenues. There can be no assurance that the Company will be able to negotiate acceptable agreements in the future, that such new agreements or existing agreements will be successful, or that the other parties to the agreements will not terminate such agreements or pursue alternative technologies. Competition in the market for the Company's diagnostic products from other medical technology companies, biotechnology companies, pharmaceutical companies and research and academic institutions both in the United States and abroad is intense and is expected to increase. Many of the Company's competitors have substantially greater financial, technical and human resources than the Company. In addition, many of these competitors have significantly greater experience than the Company in research and development, manufacturing, marketing and selling diagnostic products, undertaking clinical trials and obtaining regulatory approvals and third-party reimbursement. Developments involving competitors, including introduction of new diagnostic products and receipt of regulatory approvals, could have a material adverse effect on the Company's business, financial condition and results of operations. There has been substantial litigation regarding patent and other intellectual property rights in the medical device industry. Litigation, which would result in substantial cost to and diversion of effort by the Company, may be necessary to enforce patents issued to the Company, to protect trade secrets or know-how owned by the Company, to defend the Company against claimed infringement of the rights of others or to determine the ownership, scope or validity of the proprietary rights of the Company and others. An adverse determination in any such litigation could subject the Company to significant liability to third parties, could require the Company to seek licenses from third parties, which licenses may not be available or, if available, 36 may not be on terms acceptable to the Company, and ultimately could prevent the Company from manufacturing, selling or using its products, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's ability to successfully commercialize its products depends in part on the availability of, and the Company's ability to obtain, adequate levels of third-party reimbursement for clinical use of its diagnostic tests. Although the Company's products are available for clinical use in certain European countries, reimbursement is currently available in only certain of those countries. In the United States, reimbursement is not available for research use only products. Reimbursement for the Company's FDA cleared tests is determined by CPT codes and may vary by state. In addition, reimbursement under a specific CPT Code is not currently available for the Company's Pyrilinks and Pyrilinks-D products. There can be no assurance that reimbursement in the United States or foreign countries will be available for any of the Company's products, or if available, will not be decreased in the future, or that reimbursement amounts will not reduce the demand for, or the price of, the Company's products. The unavailability of third-party reimbursement or the inadequacy of reimbursement for medical procedures using Metra's tests could have a material adverse effect on the Company's business, financial condition and results of operations. RESULTS OF OPERATIONS FISCAL YEARS ENDED JUNE 30, 1996 AND 1995 Total revenues for the fiscal year ended June 30, 1996 increased to $6,470,000 from $3,296,000 for the year ended June 30, 1995. The increase in total revenues resulted from the growing market acceptance of the Company's products coupled with increased partner revenues due to product approvals and associated milestone payments. Product sales for the year ended June 30, 1996 increased to $4,413,000 from $2,552,000 for the year ended June 30, 1995. The increase in product sales was due to broader acceptance of the Company's bone resorption tests for clinical use internationally and in the United States. The Company's bone resorption products were cleared for marketing by the FDA in late calendar 1995. International product sales accounted for 78% of product revenues for both the fiscal years ended June 30, 1996 and 1995. Partner revenues for the fiscal year ended June 30, 1996 increased to $2,057,000 from $744,000 for the fiscal year ended June 30, 1995. This increase resulted primarily from an increase in non-recurring milestone payments from corporate partners, earned upon receipt of FDA clearance of Pyrilinks (November 1995) and Pyrilinks-D (December 1995), and to a lesser extent an increase in reagent sales to collaborative partners. Cost of product sales for the fiscal year ended June 30, 1996 increased to $3,276,000 from $1,987,000 for the fiscal year ended June 30, 1995, reflecting the increased volume of products sold and associated production costs. Research and development expenses for the fiscal year ended June 30, 1996 increased to $4,308,000 from $3,717,000 for the fiscal year ended June 30, 1995. This increase resulted from the increased costs of the Company's internal product development programs, external collaborative efforts and the on-going research costs of the Ultrasound program which was acquired in January 1996 (Osteo Sciences Corporation). The Company expects to increase its research and development expenditures during the next several years to continue to enhance and expand its product lines. Sales and marketing expenses for the fiscal year ended June 30, 1996 increased to $7,725,000 from $2,881,000 for the fiscal year ended June 30, 1995. The increase is due to increased staffing in domestic and international locations, the costs of additional marketing programs being implemented to support the clinical launch of the Company's products in the United States following recent clearance by the FDA, and the addition of a direct sales force in the United States. Sales and marketing expenditures are expected to increase significantly in the next several years as additional marketing programs and sales and marketing staff are added to support the expansion of the sales operations domestically and internationally. General and administrative expenses for the fiscal year ended June 30, 1996 increased to $3,070,000 from $1,851,000 for the fiscal year ended June 30, 1995, due to increased personnel costs and additional expenses 37 associated with being a public company. The Company expects to increase its general and administrative expenditures during the next several years to support the Company's growth, when and if such growth occurs. Acquired in-process research and development costs for the fiscal year ended June 30, 1996 resulted from a one-time charge of $11,291,000. This charge was primarily composed of the purchase price of approximately $10,017,000, with the balance related to costs and expenses associated with the acquisition, the fair value of liabilities assumed including reserves for future costs related to the acquisition, less the fair value of tangible assets acquired. Net other income for the fiscal year ended June 30, 1996 increased to $1,801,000 from $337,000 for the fiscal year ended June 30, 1995 primarily as a result of the investment of the proceeds from the Company's initial public offering in July 1995 and the Company's follow-on offering in April 1996. FISCAL YEARS ENDED JUNE 30, 1995 AND 1994 Total revenues for the fiscal year ended June 30, 1995 decreased to $3.3 million from $3.5 million for the year ended June 30, 1994. This decrease in total revenues reflects a decrease in partner revenues, which was offset in part by an increase in product sales. Product sales for the fiscal year ended June 30, 1995 increased to $2.6 million from $1.4 million for the year ended June 30, 1994. This increase in product sales was due to broader acceptance of the Company's bone resorption tests for research purposes and for clinical use internationally and, to a lesser extent, the introduction in January 1995 of a new product, Alkphase-B. International sales accounted for 78% and 72% of product revenues for the fiscal years ended June 30, 1995 and 1994, respectively. Partner revenues for the fiscal year ended June 30, 1995 decreased to $744,000 from $2.0 million for the year ended June 30, 1994. This decrease resulted from a decline of $1.4 million in non-recurring licensing fees and milestone payments due to the timing of contracts with collaborative partners. The decline was partially offset by an increase of $113,000 in reagent sales to collaborative partners. Cost of product sales for the fiscal year ended June 30, 1995 increased to $2.0 million from $1.5 million for the year ended June 30, 1994, reflecting primarily an increase in both the volume of products sold and, to a lesser extent, the cost of maintaining and expanding the Company's manufacturing operations and an increase in the reserve for inventory with a risk of expiration. Research and development expenses for the fiscal year ended June 30, 1995 increased to $3.7 million from $2.9 million for the year ended June 30, 1994, due primarily to costs associated with additional clinical studies and, to a lesser extent, to additional costs associated with the Company's research and development program. Sales and marketing expenses for the fiscal year ended June 30, 1995 increased to $2.9 million from $1.4 million for the year ended June 30, 1994, due to increased costs associated with providing training and support to distributors, clinicians, physicians and other customers in international markets and due to increased staffing. General and administrative expenses for the fiscal year ended June 30, 1995 increased to $1.9 million from $1.5 million for the year ended June 30, 1994, due to increased facilities expenses and personnel costs. General and administrative expenses for the year ended June 30, 1995 included $388,000 in compensation expense associated with stock option grants. Net other income for the fiscal year ended June 30, 1995 increased to $337,000 from $165,000 for the year ended June 30, 1994, primarily as a result of the timing of receipt of cash from issuances of redeemable preferred stock by the Company and the associated interest income received on the investment of proceeds. FISCAL YEARS ENDED JUNE 30, 1994 AND 1993 Total revenues for fiscal 1994 increased to $3.5 million from $2.7 million for fiscal 1993. This increase in total revenues primarily reflects increased product sales for research use. 38 Product sales for fiscal 1994 increased to $1.4 million from $617,000 in fiscal 1993. This increase in product sales was due to the introduction during fiscal 1994 of three new products, Pyrilinks-D, Pyrilinks and Prolagen-C, and broader acceptance of two products that were introduced in fiscal 1993, Pyrilinks and NovoCalcin, both for research purposes and for clinical use in certain foreign countries. International sales accounted for 72% and 68% of product revenues for the fiscal years ended June 30, 1994 and 1993, respectively. Partner revenues for fiscal 1994 decreased to $2.0 million from $2.1 million for fiscal 1993. In fiscal 1994 these revenues included $1.8 million of licensing fees and milestone payments as well as $215,000 in reagent sales. In fiscal 1993, all partner revenues consisted of licensing fees and milestone payments. Revenues from two partners, Ciba Corning Diagnostics Corporation and Hybritech, Inc., constituted 16% and 13% of total revenues for fiscal 1994. Cost of product sales for fiscal 1994 increased to $1.5 million from $1.2 million for fiscal 1993, reflecting primarily an increase in both the volume of products sold and, to a lesser extent, the cost of maintaining and expanding the Company's manufacturing operations. Research and development expenses for fiscal 1994 decreased to $2.9 million from $3.2 million for fiscal 1993. This decrease was due to a decrease in clinical studies expenses to $172,000 for fiscal 1994 from $677,000 for fiscal 1993. The increased clinical studies expenses in fiscal 1993 were incurred in connection with the Company's initial FDA filing for Pyrilinks. Excluding clinical studies expenses, research and development expenses for fiscal 1994 increased to $2.7 million from $2.5 million for fiscal 1993. Sales and marketing expenses for fiscal 1994 increased to $1.4 million from $930,000 for fiscal 1993, due to increased costs associated with providing training and support to distributors, clinicians, physicians and other customers in international markets and to increased staffing. General and administrative expenses for fiscal 1994 increased to $1.5 million from $1.0 million for fiscal 1993 due to increased staffing expenses. Net other income for fiscal 1994 increased to $165,000 from $87,000 for fiscal 1993. This increase resulted primarily from the timing of receipt of cash from issuances of Redeemable Preferred Stock by the Company. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations from inception primarily through the sale of preferred and common stock, payments related to collaborative research and development agreements, sales of the Company's diagnostic products for research and clinical use and, to a lesser extent, through equipment financing. In July 1995, the Company completed its initial public offering of 3,450,000 shares of common stock. All preferred stock was automatically converted into shares of common stock upon closing of the offering. The cash proceeds from the Company's initial public offering, net of underwriters discounts were $32,085,000. Total additional expenses associated with the offering were $727,000, resulting in net proceeds from the offering of $31,358,000. In April, 1996, the Company had a follow-on offering of 2,300,000 shares of common stock. The cash proceeds from the Company's follow-on offering dated April 22, 1996, net of underwriters' discounts were $29,187,000. Total additional expenses associated with the follow-on offering were $450,000, resulting in net proceeds to the Company from the follow-on offering of $28,737,000. As of June 30, 1996, Metra had $19,217,000 in cash and cash equivalents and $33,030,000 in investment securities for total cash resources of $52,247,000. During the fiscal year ended June 30, 1996 the Company's use of cash in operating activities was $10,730,000 compared to $5,830,000 for the fiscal year ended June 30, 1995. The increase in cash used in operating activities was primarily due to the increased net loss, higher accounts receivable and inventory balances and an increase in prepaid expenses. These increases are in support of the Company's product launch of certain key products in the United States in fiscal 1996, and to a lesser extent, increased sales of products internationally. Net cash used in investing activities was $35,081,000 and was primarily due to the purchase of investment securities with a portion of the proceeds of the initial public offering and the follow-on offering and the costs of expansion of the Company's facilities. 39 The Company has historically utilized leasing arrangements to finance capital purchases. In December 1995, the Company entered into two new leasing arrangements to finance $2,750,000 of equipment and building improvements. As of June 30, 1996, $1,922,000 of the available lease lines were utilized and outstanding in conjunction with these leases. The leases are both classified as capital leases and expire in fiscal year 2000. Both leasing agreements include negative covenants which require an irrevocable letter of credit in the event of non-compliance of the covenants. The Company's future capital requirements depend upon, among other things, the costs of research and development programs, the funding of clinical and regulatory related studies, the expansion of marketing and selling activities, costs involved in filing, prosecuting and enforcing patent claims, and the time and costs associated with obtaining regulatory approvals for future products. Funds may also be used for investments in, or acquisitions of, complementary businesses, products or technologies, in expanding the Company's manufacturing capacity or in improving its existing facilities. Although the Company believes that its current cash, cash equivalents and investment securities will be sufficient to meet the Company's operating expenses and capital requirements through fiscal 1998, the Company's future liquidity and capital requirements will depend on numerous factors, including regulatory actions by the FDA and other international regulatory bodies, market acceptance of its products, expansion of the Company's marketing and sales activities and the cost of intellectual property protection. The Company may, however, seek additional equity or debt financing to fund further expansion of its manufacturing capacity, or to fund other projects or acquisitions. The timing and amount of such capital requirements cannot be precisely determined at this time and will depend on a number of factors, including demand for the Company's products, product mix changes, industry conditions and competitive factors. There can be no assurance that if it becomes necessary to raise additional capital, that such capital will be available on acceptable terms, if at all. 40 ITEM 8. FINANCIAL STATEMENTS INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Metra Biosystems, Inc.: We have audited the accompanying consolidated balance sheets of Metra Biosystems, Inc. and subsidiaries (the Company) as of June 30, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity (deficit), and cash flows for each of the years in the three-year period ended June 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Metra Biosystems, Inc. and subsidiaries as of June 30, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 1996, in conformity with generally accepted accounting principles. As discussed in note 1 to the consolidated financial statements, the Company changed its method of accounting for investments to adopt the provisions of the Financial Accounting Standards Board's (FASB) Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," effective July 1, 1994. KPMG Peat Marwick LLP San Francisco, California July 18, 1996 41 METRA BIOSYSTEMS, INC. AND SUBSIDIARIES Consolidated Balance Sheets June 30, 1996 and 1995 (in thousands, except share and per share amounts)
ASSETS 1996 1995 ---- ---- Current assets: Cash and cash equivalents $ 19,217 $ 2,317 Securities available-for-sale, at market 26,283 1,000 Accounts receivable, net of allowance for doubtful accounts of $101 and $33 at June 30, 1996 and 1995, respectively 1,266 518 Interest receivable 578 42 Inventories 1,040 638 Prepaid expenses and other current assets 249 200 --------- -------- Total current assets 48,633 4,715 Property and equipment, net 4,314 1,898 Securities available-for-sale, at market 6,747 - Other assets 499 787 --------- -------- $ 60,193 $ 7,400 --------- -------- --------- -------- LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Current portion of capital lease obligations $ 407 $ 52 Accounts payable trade 2,185 1,055 Accrued expenses 1,810 849 --------- -------- Total current liabilities 4,402 1,956 Long-term portion of capital lease obligations 1,367 40 --------- -------- Total liabilities 5,769 1,996 Mandatorily redeemable convertible preferred stock; $.001 par value; 9,333,333 shares authorized; no shares and 5,324,685 shares issued and outstanding at June 30, 1996 and 1995, respectively; liquidation preference of $23,797 - 23,260 Commitments and contingencies Shareholders' equity (deficit): Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued or outstanding - - Common stock, $0.001 par value, 50,000,000 shares authorized; 12,598,768 and 874,095 shares issued and outstanding at June 30, 1996 and 1995, respectively 13 1 Additional paid-in capital 94,539 990 Notes receivable from shareholders (90) (169) Deferred compensation (79) (187) Unrealized loss on securities available for sale (83) (1) Cumulative translation adjustment 13 - Accumulated deficit (39,889) (18,490) --------- -------- Total shareholders' equity (deficit) 54,424 (17,856) --------- -------- $ 60,193 $ 7,400 --------- -------- --------- --------
See accompanying notes to consolidated financial statements. 42 METRA BIOSYSTEMS, INC. AND SUBSIDIARIES Consolidated Statements of Operations Years ended June 30, 1996, 1995, and 1994 (in thousands, except per share amounts)
1996 1995 1994 --------- -------- -------- Revenues: Product sales $ 4,413 $ 2,552 $ 1,439 Partner revenue 2,057 744 2,032 --------- -------- -------- Total revenues 6,470 3,296 3,471 --------- -------- -------- Operating expenses: Cost of product sales 3,276 1,987 1,466 Research and development 4,308 3,717 2,899 Sales and marketing 7,725 2,881 1,366 General and administrative 3,070 1,851 1,480 Acquired in-process research and development 11,291 - - --------- -------- -------- Total operating expenses 29,670 10,436 7,211 Loss from operations (23,200) (7,140) (3,740) --------- -------- -------- Interest income 1,947 367 220 Interest expense (106) (30) (55) Other miscellaneous expense (40) - - --------- -------- -------- Net other income 1,801 337 165 --------- -------- -------- Net loss $ (21,399) $ (6,803) $ (3,575) --------- -------- -------- --------- -------- -------- Net loss per share $ (2.04) $ (1.08) $ (0.69) --------- -------- -------- --------- -------- -------- Weighted average shares used to compute net loss per share 10,515 6,303 5,156 --------- -------- -------- --------- -------- --------
See accompanying notes to consolidated financial statements. 43 METRA BIOSYSTEMS, INC. AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity (Deficit) Years ended June 30, 1996, 1995, and 1994 (in thousands, except share amounts)
Unrealized Notes loss on Common stock Additional receivable securities ----------------- paid-in from Deferred available- Shares Amount capital shareholders compensation for-sale ------ ------ ---------- ------------ ------------ -------------- Balances as of June 30, 1993 519,589 $ 1 $ 42 $ (23) $ - $ - Issuance of common stock under stock option plan 225,199 - 57 (36) - - Repurchase of common stock (15,278) - (4) - - - Net loss - - - - - - ---------- ---- ------- ------ ------ ------ Balances as of June 30, 1994 729,510 1 95 (59) - - Issuance of common stock under stock option plan 111,253 - 120 (110) - - Issuance of common stock under agreement for licensed technology 33,332 - 200 - - - Deferred compensation related to granting of stock options - - 575 - (575) - Amortization of deferred compensation - - - - 388 - Unrealized loss on securities available-for-sale - - - - - (1) Net loss - - - - - - ---------- ---- ------- ------ ------ ------ Balances as of June 30, 1995 874,095 1 990 (169) (187) (1) Issuance of common stock under stock option plan 79,813 - 85 79 - - Issuance of common stock related to acquisition of Osteo 541,072 1 10,000 - - - Conversion of preferred stock into common stock 5,324,685 5 23,255 - - - Conversion of warrants into common stock 9,989 - - - - - Issuance of common stock under Employee Stock Purchase Plan 19,114 - 120 - - - Issuance of common stock related to public offerings 5,750,000 6 60,089 - - - Amortization of deferred compensation - - - - 108 - Translation adjustment - - - - - - Unrealized loss on securities available-for-sale - - - - - (82) Net loss - - - - - - ---------- ---- ------- ------ ------ ------ Balances as of June 30, 1996 12,598,768 $ 13 $94,539 $ (90) $ (79) $ (83) ---------- ---- ------- ------ ------ ------ ---------- ---- ------- ------ ------ ------ Total Cumulative shareholders' translation Accumulated equity adjustment deficit (deficit) ----------- ----------- ------------- Balances as of June 30, 1993 $ - $ (8,112) $ (8,092) Issuance of common stock under stock option plan - - 21 Repurchase of common stock - - (4) Net loss - (3,575) (3,575) -------- --------- -------- Balances as of June 30, 1994 - (11,687) (11,650) Issuance of common stock under stock option plan - - 10 Issuance of common stock under agreement for licensed technology - - 200 Deferred compensation related to granting of stock options - - - Amortization of deferred compensation - - 388 Unrealized loss on securities available-for-sale - - (1) Net loss - (6,803) (6,803) -------- --------- -------- Balances as of June 30, 1995 - (18,490) (17,856) Issuance of common stock under stock option plan - - 164 Issuance of common stock related to acquisition of Osteo - - 10,001 Conversion of preferred stock into common stock - - 23,260 Conversion of warrants into common stock - - - Issuance of common stock under Employee Stock Purchase Plan - - 120 Issuance of common stock related to public offerings - - 60,095 Amortization of deferred compensation - - 108 Translation adjustment 13 - 13 Unrealized loss on securities available-for-sale - - (82) Net loss - (21,399) (21,399) -------- --------- -------- Balances as of June 30, 1996 $ 13 $(39,889) $54,424 -------- --------- -------- -------- --------- --------
See accompanying notes to consolidated financial statements. 44 METRA BIOSYSTEMS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended June 30, 1996, 1995, and 1994 (in thousands)
1996 1995 1994 --------- --------- ---------- Cash flows from operating activities: Net loss $(21,399) $ (6,803) $ (3,575) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 610 543 434 Inventory reserve 66 172 13 Compensation expenses paid in stock 108 588 - Forgiveness of notes receivable from officers 29 57 38 Loss on disposition of property and equipment 19 16 - Write-off of in-process research and development 11,291 - - Changes in operating assets and liabilities: Trade accounts and interest receivable (1,284) (187) (271) Inventories (468) (439) (305) Other current assets and other assets (1,046) (777) (119) Accounts payable and accrued expenses 1,344 1,000 440 --------- --------- ---------- Net cash used in operating activities (10,730) (5,830) (3,345) Cash flows from investing activities: Purchases of investment securities (46,837) (1,571) - Maturities of investment securities 14,725 2,109 - Purchases of temporary investments - - (2,428) Maturities and sales of temporary investments - - 889 Purchases of property and equipment (3,048) (657) (1,200) Proceeds from sale of property and equipment - 15 - Notes receivable from officers - (170) (36) Repayment of notes receivable from officers 79 - - --------- --------- ---------- Net cash used in investing activities (35,081) (274) (2,775) Cash flows from financing activities: Proceeds from sales of mandatorily redeemable convertible preferred stock, net of offering costs - - 11,644 Proceeds from capital lease financing 1,922 - - Repayment of capital lease obligations (240) (201) (150) Proceeds from sales of common stock 61,029 120 57 Repurchase of common stock - - (4) --------- --------- ---------- Net cash provided by (used in) financing activities 62,711 (81) 11,547 Net increase (decrease) in cash and cash equivalents 16,900 (6,185) 5,427 --------- --------- ---------- Cash and cash equivalents at beginning of year $ 2,317 $ 8,502 $ 3,075 --------- --------- ---------- --------- --------- ---------- Cash and cash equivalents at end of year $ 19,217 $ 2,317 $ 8,502 --------- --------- ---------- --------- --------- ---------- Supplemental disclosure of cash flow information: Cash paid during the year for interest $ 106 $ 30 $ 55 Supplemental disclosure of noncash investing and financing activities: Assets acquired from purchase of Osteo Sciences Corporation $ (605) $ - $ - Liabilities assumed from purchase of Osteo Sciences Corporation $ 686 - -
See accompanying notes to consolidated financial statements. 45 METRA BIOSYSTEMS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 1996 and 1995 (1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) THE COMPANY Metra Biosystems, Inc. ("Metra" or the "Company") was incorporated on March 21, 1990. Since the commencement of operations the Company has been engaged in the development and commercialization of diagnostic products for the detection and management of metabolic bone diseases and disorders. In December 1993, the Company incorporated a wholly-owned subsidiary, Metra Biosystems (U.K.) Ltd., that is responsible for the commercialization of Metra's products in Europe. In October 1995, the Company opened a branch office of Metra Biosystems (U.K.) Ltd., Metra Biosystems (Italy) Ltd., that is responsible for the commercialization of Metra's products in Italy. In July 1995, the Company consummated its initial public offering of its common stock resulting in the issuance of 3,450,000 shares of common stock to the public at $10.00 per share. Net proceeds received from the offering were approximately $31,358,000. In April 1996, the Company issued another 2,300,000 shares of common stock in a follow-on offering at $13.50 per share. Net proceeds received from this second offering were approximately $28,737,000. (b) DEVELOPMENTAL STAGE ENTERPRISE For the year ended June 30, 1994, the Company was considered to be in the development stage and was engaged principally in research and development activities. As of June 30, 1995, the Company was no longer considered to be a developmental stage enterprise as principal operations had commenced. (c) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The operations of Osteo Sciences Corporation are included in the Company's results of operations beginning February 1, 1996. (d) CASH AND CASH EQUIVALENTS The Company considers all highly liquid debt instruments purchased with an original maturity of less than 90 days to be cash equivalents. (e) INVENTORIES Inventories are stated at the lower of cost or market, with cost determined on a first-in, first-out basis. (f) PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the respective assets, generally three to five years. Assets under capital leases and leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful lives of the related assets. 46 METRA BIOSYSTEMS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued June 30, 1996 and 1995 (g) INTANGIBLE ASSETS Included in other assets for the year ended June 30, 1995 were intangible assets consisting primarily of licensed technology. Intangible assets have been amortized on a straight-line basis over the estimated useful lives of the assets, primarily eight years. The Company assesses the recoverability of intangible assets by determining whether the amortization of the asset's balance over its remaining life can be recovered through projected undiscounted future cash flows. Intangible assets are expensed if the Company determines that the amortization of the asset's balance will not be recovered through projected future cash flows. Intangible assets related to acquired in-process research and development are expensed when incurred. (h) PARTNER REVENUE Partner revenue consists principally of milestone payments, licensing fees and proceeds from sales of reagents to collaborative partners for research purposes. (i) INCOME TAXES The Company accounts for income taxes under the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." SFAS No. 109 requires an asset and liability approach for the financial reporting of income taxes. Under SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (j) MARKETING COSTS All costs related to marketing and advertising the Company's products are expensed in the period incurred. (k) FOREIGN CURRENCY Foreign currency transactions and financial statements are translated into U.S. dollars at current rates, except that revenue, costs and expenses are translated at average rates during each reporting period. Gains and losses resulting from foreign currency transactions and intercompany balances expected to be paid in the foreseeable future are included in results of operations. Gains and losses resulting from translation of financial statements are excluded from results of operations and are reflected as a cumulative translation adjustment, which is reported as part of shareholders' equity (deficit). Translation and transaction gains and losses for the years ended June 30, 1996, 1995 and 1994 were insignificant. (l) STOCK SPLIT In April 1995, the Company's Board of Directors approved a one-for-six reverse split of the Company's common and preferred stock. All references in the accompanying financial statements to the number of shares of common stock and per share amounts have been retroactively restated to reflect this stock split. 47 METRA BIOSYSTEMS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued June 30, 1996 and 1995 (m) REVENUE RECOGNITION Revenue from development contracts is recognized as the relevant technical milestones are attained. Revenue from product sales is recognized upon product shipment when title passes to the buyer. (n) NET LOSS PER SHARE Except as noted below, net loss per share is computed using the weighted average number of shares of common stock outstanding. Common equivalent shares from stock options and warrants are excluded from the computation as their effect is anti-dilutive, except that, pursuant to the Securities and Exchange Commission Staff Accounting Bulletin No. 83, common stock issued for consideration below the Company's initial public offering (IPO) price and stock options granted with exercise prices below the IPO price during the 12-month period preceding the date of the initial filing of the Registration Statement, even when anti-dilutive, have been included in the calculation of common equivalent shares for periods prior to the closing of the Company's IPO, using the treasury stock method based on the initial public offering price, as if they were outstanding for all periods presented. Furthermore, pursuant to Securities and Exchange Commission staff policy, common equivalent shares from convertible preferred stock and warrants that were converted upon the completion of the Company's IPO are included (using the as if-converted method) for periods prior to the closing of the Company's IPO. (o) MAJOR CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially expose the Company to concentrations of credit risk consist primarily of trade accounts receivable. As of June 30, 1996, approximately 14% of recorded trade receivables were concentrated with one customer. As of June 30, 1995, approximately 22% of recorded trade receivables were concentrated with two customers. To reduce credit risk, the Company performs ongoing credit evaluations of its customers' financial condition. The Company does not generally require collateral on credit sales to its customers. The Company earns revenues primarily through product sales through distributors and through collaborative agreements with partners. Revenues from one corporate partner constituted 16%, 13% and 29% of total revenues for the years ended June 30, 1996, 1995 and 1994, respectively. Revenues from two corporate collaborators constituted 16% and 13%, respectively, of total revenues for the year ended June 30, 1994. Product revenues from two distributors constituted 12% and 11%, respectively, of total revenues for the year ended June 30, 1995. Product revenues from one customer constituted 12% of total revenues for the year ended June 30, 1996. (p) USE OF ESTIMATES The Company's management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and revenues and expenses and the disclosure of contingent liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (q) RECLASSIFICATIONS Certain reclassifications have been made to the 1995 and 1994 financial statements to conform to the 1996 presentation. 48 METRA BIOSYSTEMS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued June 30, 1996 and 1995 (2) FINANCIAL INSTRUMENTS (a) MARKETABLE SECURITIES In accordance with the requirements of SFAS 115, the Company has classified its investments in certain debt and equity securities as "available-for-sale." Such investments are recorded at fair value, as determined by quoted market values as of June 30, 1996 and 1995, with unrealized gains and losses, deemed by the Company as temporary in nature, reported as a separate component of shareholders' equity (deficit). There were no sales of investments during 1996, 1995 or 1994. Available-for-sale securities consisted of the following at June 30:
1996 1995 ------------------------------------------ ------------------------------------------- Adjusted Unrealized Unrealized Fair Adjusted Unrealized Unrealized Fair Cost Gains Losses Value Cost Gains Losses Value -------- ---------- ---------- ------- -------- ---------- ---------- ------- (in thousands) U.S. Government securities $ 8,527 $ - $ (11) $ 8,516 $ - $ - $ - $ - Mortgage-backed securities 12,148 1 (17) 12,132 - - - - Corporate debt securities 12,188 - (14) 12,174 1,001 - (1) 1,000 ------- ---- ----- ------- ------ ----- ------ ------ 32,863 1 (42) 32,822 1,001 - (1) 1,000 Marketable equity securities 250 - (42) 208 - - - - ------- ---- ----- ------- ------ ----- ------ ------ $33,113 $ 1 $ (84) $33,030 $1,001 $ - $ (1) $1,000 ------- ---- ----- ------- ------ ----- ------ ------ ------- ---- ----- ------- ------ ----- ------ ------
The cost and estimated fair value of securities available-for-sale as of June 30, 1996, by contractual maturity, consisted of the following:
Adjusted Fair cost value -------- ------- (in thousands) Due in one year or less $ 14,412 $ 14,359 Due in one to three years 6,552 6,539 -------- -------- 20,964 20,898 Mortgage-backed securities 12,149 12,132 -------- -------- $ 33,113 $ 33,030 -------- -------- -------- --------
(b) OTHER FINANCIAL INSTRUMENTS The carrying amounts and fair values of the Company's financial instruments, other than those accounted for in accordance with SFAS 115, approximate their fair values for all periods presented 49 METRA BIOSYSTEMS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued June 30, 1996 and 1995 (3) INVENTORIES Inventories consist of the following: June 30, ------------------------- 1996 1995 -------- ---------- (in thousands) Raw materials $ 216 $ 149 Finished goods 824 489 ------- ------ $ 1,040 $ 638 ------- ------ ------- ------ (4) PROPERTY AND EQUIPMENT A summary of property and equipment, net follows: June 30, ------------------------- 1996 1995 -------- ---------- (in thousands) Machinery and equipment $ 3,014 $ 2,193 Furniture and fixtures 164 149 Leasehold improvements 2,987 436 Construction in progress - 300 ------- ------- 6,165 3,078 Less accumulated depreciation and amortization (1,851) (1,180) ------- ------- $ 4,314 $ 1,898 ------- ------- ------- ------- Included in property and equipment is approximately $2,063,000, $250,000 and $671,000 of equipment recorded under capital lease agreements at June 30, 1996, 1995 and 1994, respectively. Accumulated amortization related to this equipment was approximately $367,000, $164,000 and $426,000 as of June 30, 1996, 1995, and 1994, respectively. During the years ended June 30, 1996 and 1995, the Company retired fully depreciated property and equipment having a historical cost of $247,000 and $17,000, respectively. (5) OTHER CURRENT AND NON-CURRENT ASSETS (a) EMPLOYEE NOTES RECEIVABLE Included in other current assets are $34,000 and $29,000 of employee notes receivable at June 30, 1996, and 1995, respectively. Included in other assets are $74,000 and $37,000 of employee notes receivable at June 30, 1996 and 1995, respectively. 50 METRA BIOSYSTEMS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued June 30, 1996 and 1995 (b) INTANGIBLE ASSETS At June 30, 1995, intangible asset balances, which consisted primarily of licensed technology, were $103,000, with $47,000 of accumulated amortization. Amortization expense for the years ended June 30, 1996, 1995 and 1994 was $56,000, $10,000 and $123,000, respectively. Included in amortization expense for the year ended June 30, 1996 was the write-off of certain intangible assets with a net value of $48,000 that were considered to no longer have continuing value. (6) ACCRUED EXPENSES A summary of accrued expenses follows: June 30, ------------------------- 1996 1995 -------- ------- (in thousands) Promotional and educational marketing expenses $ 422 $ - Payroll-related 363 219 Initial public offering costs - 203 Other 1,025 427 ------ ------ $1,810 $ 849 ------ ------ ------ ------ (7) LEASE COMMITMENTS The Company leases certain equipment and its facilities under leases classified as capital and operating leases, respectively. These leases expire at various dates through 2001. Future minimum lease payments relating to these non-cancelable leases are as follows: Capital Operating leases leases --------- ---------- Year ended June 30: (in thousands) ------------------ 1997 $ 577 $ 371 1998 531 317 1999 531 311 2000 533 311 2001 - 285 ------- ------- Total minimum lease payments 2,172 $ 1,595 ------- ------- ------- Less amount representing interest (398) ------- Present value of minimum lease payments 1,774 ------- Less current portion of capital lease obligations (407) ------- Long-term portion of capital lease obligations $ 1,367 ------- ------- 51 METRA BIOSYSTEMS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued June 30, 1996 and 1995 In December 1995, the Company entered into two new leasing arrangements to finance a $2,750,000 equipment lease facility of which $1,922,000 was utilized as of June 30, 1996. At June 30, 1995 the Company had utilized $250,000 of a $750,000 equipment lease facility. In connection with this lease facility, the Company issued a warrant to the lessor to purchase 14,150 shares of Series C mandatorily redeemable convertible preferred stock at $2.94 per share. The warrant was exercised in July, 1995 in connection with the Company's IPO and the preferred shares were converted into common shares. The lease agreement requires that security deposits of approximately $28,000 be made if cash and short-term investment balances fall below $2,500,000 and an additional $21,000 if cash balances fall below $1,500,000. Interest expense related to capital leases was $106,000, $30,000 and $55,000 for the years ended June 30, 1996, 1995 and 1994, respectively. Rent expense for the years ended June 30, 1996, 1995, and 1994 was approximately $322,000, $169,000 and $377,000, respectively. (8) MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK Prior to the Company's IPO, the Company was authorized to issue 9,333,333 shares of $0.001 par value preferred stock. As of June 30, 1995, 32,424 shares had not been designated. Upon the closing of the Company's initial public offering in July 1995, 5,324,685 shares of preferred stock were automatically converted into an equal number of shares of common stock. A summary of preferred stock as of June 30, 1995 follows:
(in thousands) Series A; 92,592 shares designated, issued, and outstanding $ 28 Series B; 1,134,256 shares designated; 1,134,256 shares issued and outstanding, net of offering costs of $11,000 2,438 Series C; 278,779 shares designated; 264,628 shares issued and outstanding, net of offering cost of $9,000 771 Series D; 1,874,988 shares designated; 1,874,988 shares issued and outstanding, net of offering costs of $34,000 8,404 Series D-1; 1,874,988 shares designated; none issued or outstanding - Series E; 2,022,653 shares designated; 1,958,221 shares issued and outstanding, net of offering costs of $482,000 11,619 Series E-1; 2,022,653 shares designated; none issued or outstanding - ------- $23,260 ------- -------
The rights, preferences, and privileges of holders of the mandatorily redeemable preferred shareholders (the Preferred Shareholders) were as follows: Preferred Shareholders were entitled to non-cumulative dividends, if declared by the Board of Directors, payable in preference to common stock dividends. No such dividends were declared. Preferred Shareholders had a liquidation preference to common shareholders. Each share of preferred stock was convertible at any time into common stock, with automatic conversion upon an initial public offering in excess of $7,500,000 at a minimum price of not less than $10.00 per share. Each share of preferred stock voted equally with shares of common stock on an "if converted" basis. The rights, preferences, and privileges of the Preferred Shareholders were protected by certain anti-dilution provisions. 52 METRA BIOSYSTEMS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued June 30, 1996 and 1995 (9) SHAREHOLDERS' EQUITY (DEFICIT) (a) COMMON STOCK The Company is authorized to issue 50,000,000 shares of $0.001 par value common stock. Since inception, 289,165 shares of common stock have been issued to certain individuals under stock purchase agreements that permit the Company to repurchase, at the original issuance price, a portion of such shares in the event an individual shareholder ceases to be associated with the Company. The shares subject to repurchase generally expire on a pro-rata basis over a four-year period. As of June 30, 1996 and 1995, there were approximately 51,563 and 85,522 shares, respectively, subject to repurchase. (b) PREFERRED STOCK Effective upon the closing of the Company's IPO, which occurred in July 1995, the Board of Directors received the authority to issue up to 5,000,000 shares of $0.001 par value preferred stock, to determine the powers, preferences and rights and the qualifications, limitations or restrictions granted to or imposed upon any unissued series of undesignated preferred stock and to fix the number of shares constituting any series and the designation of such series, without any further vote or action by the Company's shareholders. No shares were issued or outstanding at June 30, 1996. (10) STOCK OPTION PLANS (a) 1990 INCENTIVE STOCK PLAN The Company has reserved 700,000 shares for issuance under its 1990 Incentive Stock Plan (the Stock Plan) which provides for stock options to be granted to employees (including consultants, officers, and directors). The term of a stock option may not exceed 10 years. Options granted to each employee under the Stock Plan generally become exercisable at the rate of 12.5% of the total number of shares subject to the options after the six month period from the date of grant, and approximately 2% each month thereafter subject to continued service to the Company. The exercise price of all incentive stock options granted under the Stock Plan must be at least equal to the fair market value of the common stock of the Company on the date of grant. The exercise price of all nonstatutory stock options must equal at least 85% of the fair market value of the common stock on the date of grant. The exercise price of any incentive stock option granted to an optionee who owns stock possessing more than 10% of the voting power of all classes of stock of the Company's outstanding capital stock must equal at least 110% of the fair market value of the common stock on the date of grant. Payment of the exercise price may be made in cash, promissory notes, common stock of the Company owned by the optionee for more than six months or other consideration as determined by the Board of Directors or a committee of the Board. The Company has recorded deferred compensation of $575,000 related to certain of the Company's common stock options granted for the year ended June 30, 1995 under the Stock Plan. This amount is being amortized over the relevant period of benefit. For the years ended June 30, 1996 and 1995, $108,000 and $388,000, respectively, was amortized 53 METRA BIOSYSTEMS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued June 30, 1996 and 1995 The following table summarizes option activity under the 1990 Incentive Stock Plan:
Options Total Price available options per for grant outstanding share --------- ----------- ------------- Balances as of June 30, 1993 146,647 323,778 $0.03 - $0.48 Options authorized 166,667 - - Options granted (78,318) 78,318 0.48 - 1.20 Options exercised, net of repurchases - (209,921) 0.24 - 0.48 Options canceled 27,493 (27,493) 0.24 - 0.48 -------- -------- Balances as of June 30, 1994 262,489 164,682 0.03 - 1.20 Options granted (272,707) 272,707 1.20 - 9.00 Options exercised - (111,253) 0.48 - 1.20 Options canceled 24,477 (24,477) 0.48 - 1.20 -------- -------- Balances as of June 30, 1995 14,259 301,659 0.03 - 9.00 Options exercised - (77,386) 0.03 - 9.00 Options canceled 35,516 (35,516) 0.48 - 9.00 -------- -------- Balances as of June 30, 1996 49,775 188,757 $0.03 - $9.00 -------- -------- -------- --------
At June 30, 1996, 1995, and 1994, options for 103,569, 119,169, and 70,086 shares, respectively, had vested. Also, see note 18. Upon adoption of the Company's 1995 Stock Option Plan, the Company's Board of Directors determined to make no further grants under the 1990 Incentive Stock Plan. (b) 1995 STOCK OPTION PLAN The Company's 1995 Stock Option Plan (the 1995 Option Plan) was adopted by the Board of Directors in April 1995 and was approved by the Company's shareholders in June 1995. An aggregate of 1,000,000 shares of the Company's common stock are reserved for issuance under the 1995 Option Plan. The 1995 Option Plan provides for the granting to employees (including officers and employee directors) of incentive stock options and for the granting to employees and consultants of nonstatutory stock options. The 1995 Option Plan may be administered by the Board of Directors or a committee of the Board (the Administrator). The Administrator determines the terms of options granted under the 1995 Option Plan, including the number of shares subject to the option, exercise price, term and exercisability. The exercise price of all incentive stock options granted under the 1995 Option Plan must be at least equal to the fair market value of the common stock of the Company on the date of grant. The exercise price of any incentive stock option granted to an optionee who owns stock representing more than 10% of the voting power of the Company's outstanding capital stock must equal at least 110% of the fair market value of the common stock on the date of grant. Payment of the exercise price may be made in cash, promissory notes or other consideration as determined by the Administrator. The Administrator determines the term of options. With respect to any participant who owns stock possessing more than 10% of the voting power of all classes of stock of the Company, the maximum term of the option must not exceed five years. The term of all other options may not exceed ten years. If not terminated earlier, the 1995 Option Plan will terminate in 2005. The Administrator has the authority to amend or terminate the 1995 Option Plan as long as such action does not adversely affect any outstanding option. 54 METRA BIOSYSTEMS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued June 30, 1996 and 1995 The following table summarizes option activity under the 1995 Stock Option Plan:
Options Total Price available options per for grant outstanding share --------- ----------- -------------- Balances as of June 30, 1995 - - - Options authorized 1,000,000 - - Options granted (937,733) 937,733 $ 6.50 - $20.88 Options exercised - (2,427) 12.00 - 14.50 Options canceled 314,013 (314,013) 12.00 - 20.88 --------- -------- Balances as of June 30, 1996 376,280 621,293 $ 6.50 - $19.81 --------- -------- --------- --------
At June 30, 1996, options for 35,820 shares had vested. Also, see note 18. (c) 1995 DIRECTOR STOCK OPTION PLAN The 1995 Director Stock Option Plan (the Directors' Plan) was adopted by the Board of Directors in April 1995 and was approved by the Company's shareholders in June 1995. A total of 200,000 shares of common stock has been reserved for issuance under the Directors' Plan. The Directors' Plan provides for the grant of nonstatutory stock options to nonemployee directors of the Company. The Directors' Plan provides that each person who is a nonemployee director of the Company on the date of the Company's IPO and each person who first becomes a nonemployee director of the Company after the date of the Company's IPO shall be granted a nonstatutory stock option to purchase 10,000 shares of common stock (the First Option) on the effective date of the Company's IPO or on the date on which the optionee first becomes a nonemployee director of the Company. Thereafter, on the date of each annual meeting of the Company's shareholders at which such director is elected, each such nonemployee director shall be granted an additional option to purchase 5,000 shares of common stock (a Subsequent Option) if, on such date, he or she shall have served on the Company's Board of Directors for at least six months. The Directors' Plan provides that the First Option shall become exercisable in installments as to 25% of the total number of shares subject to the First Option on each of the first, second, third and fourth anniversaries of the date of grant of the First Option; each Subsequent Option shall become exercisable in full on the first anniversary of the date of grant of that Subsequent Option. The exercise price of all stock options granted under the Directors' Plan shall be equal to the fair market value of a share of the Company's common stock on the date of grant of the option. Options granted under the Directors' Plan have a term of ten years. In connection with the Company's IPO becoming effective on June 30, 1995, options to purchase 70,000 shares of common stock at an exercise price of $10.00 per share were granted under the Directors' Plan. 55 METRA BIOSYSTEMS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued June 30, 1996 and 1995 (d) 1995 EMPLOYEE STOCK PURCHASE PLAN The Company's 1995 Employee Stock Purchase Plan (the Purchase Plan) was adopted by the Board of Directors in April 1995 and was approved by the shareholders in June 1995. A total of 200,000 shares of common stock has been reserved for issuance under the Purchase Plan. The Purchase Plan will be implemented by two six-month offering periods each year. The Purchase Plan will be administered by the Board of Directors or by a committee appointed by the Board. Employees (including officers and employee directors) of the Company, or of any majority owned subsidiary designated by the Board, are eligible to participate if they are customarily employed by the Company or any such subsidiary for at least 20 hours per week and more than five months per year. The Purchase Plan permits eligible employees to purchase common stock through payroll deductions, which may not exceed 5% of an employee's compensation, at a price equal to the lower of 85% of the fair market value of the Company's common stock at the beginning or end of the offering period. Common stock purchased under the Purchase Plan must be held for a period of six months before it may be sold. Employees may end their participation in the offering at any time during the offering period, and participation ends automatically on termination of employment with the Company. As of June 30, 1996, 19,114 shares had been purchased under the Purchase Plan. (e) FUTURE ADOPTION OF NEW ACCOUNTING STANDARD The Financial Accounting Standards Board recently issued SFAS No. 123, Accounting for Stock-Based Compensation. This statement establishes financial accounting and reporting standards for stock-based employee compensation plans, including employee stock purchase plans and stock option plans. Adoption of SFAS No. 123 is required for fiscal years beginning after December 15, 1995. Management plans to remain on APB No. 25, Accounting for Stock Issued to Employees, for purposes of measurement of compensation expense. Therefore, adoption of SFAS No. 123 will not have a material effect on the Company's consolidated results of operations. (f) NOTES RECEIVABLE FROM SHAREHOLDERS At June 30, 1996, the Company had two notes receivable outstanding from shareholders totaling $90,000 for purchases of common stock at an interest rate of 7.60%. At June 30, 1995, the Company had five notes receivable outstanding from shareholders totaling $169,000 for purchases of common stock at interest rates ranging from 5.47% to 7.60%. Full payment of principal and accrued interest on the notes is due four years from the date of purchase of the common stock. (11) DEVELOPMENT AND LICENSE AGREEMENTS The Company has a significant number of development and license agreements. Revenues earned from milestone and licensing fees under development and license agreements were $1,670,000, $414,000 and $1,817,000 for the years ended June 30, 1996, 1995 and 1994, respectively. No royalty payments have been received by the Company. Other partner revenues were earned for sales of reagents to customers. Development and license agreements which involve significant financial commitments include the following: 56 METRA BIOSYSTEMS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued June 30, 1996 and 1995 SUMITOMO PHARMACEUTICALS CO., LTD. In March 1993, the Company entered into a research and development agreement with Sumitomo Pharmaceuticals Co., Ltd. (Sumitomo). Under the terms of the agreement, the Company will update existing, and develop new, diagnostic assay kits for the detection and management of bone and other connective tissue diseases. The distribution and marketing rights for these kits in Japan will be held by Sumitomo. Under certain circumstances, Sumitomo will also have the right to acquire marketing and distribution rights in certain Asian markets. Under the agreement, the Company will also manufacture and supply the products at formula prices which are subject to periodic renegotiation. The term of the agreement is for an initial ten-year period with options to extend the term upon mutual consent. Sumitomo has the right to terminate the agreement upon six months written notice. Payments for certain ongoing costs of research and development incurred by the Company are payable to the Company under the agreement upon the achievement of certain milestones and regulatory approvals. In June 1994 and February 1995, the Company entered into two additional agreements with Sumitomo, granting Sumitomo certain additional marketing and distribution rights. These agreements call for Sumitomo to pay the Company certain amounts upon the achievement of certain milestones and regulatory approvals. DIAGNOSTIC PRODUCTS CORPORATION In December 1993, the Company entered into a three-year agreement with automatic one-year renewal periods unless terminated by either party with Diagnostic Products Corporation (DPC) under which DPC received a license to format the Company's assays for use on DPC's Immulite automated testing systems. The agreement calls for DPC to manufacture the licensed products and for the Company to purchase the licensed products from DPC and sell and distribute them to users of Immulite systems. Provided that DPC places a specific minimum number of Immulite units worldwide, the Company is required to purchase a specific minimum number of product kits from DPC during the first three years following commercialization of the product. The Company's minimum purchase commitments could equal $2,031,000 provided DPC achieves certain milestones. The Company is also obligated to pay DPC a royalty on future sales of the product kits. 57 METRA BIOSYSTEMS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued June 30, 1996 and 1995 OTHER In May 1990, the Company licensed certain technology from The Rowett Research Institute (Rowett) in exchange for 25,000 shares of common stock, an obligation to pay royalties on a percentage of net sales for a period of 10 years and an obligation to issue additional common stock upon attainment of certain milestones. In February 1994, the first milestone was attained in the United Kingdom. Accordingly, in September 1994, the Company issued 16,666 shares of common stock to Rowett valued at $3.00 per share. In May, 1995, the other milestone was attained and the Company issued the second 16,666 shares of common stock to Rowett valued at $9.00 per share. (12) OWNERSHIP IN MEDICAL DEVICE COMPANY In June 1994, the Company entered into a collaborative agreement with Norian Corporation, creating a new company, Orquest, Inc. Orquest intends to commercialize novel collagen matrix technology to promote bone and cartilage regeneration to be utilized in skeletal reconstruction and traumatic fracture repair. In exchange for certain technology rights having no book basis, the Company owned approximately 4.23% and 7.85% of Orquest at June 30, 1996 and 1995, respectively. The Company accounts for this investment using the cost method. 58 METRA BIOSYSTEMS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued June 30, 1996 and 1995 (13) INCOME TAXES As discussed in note 1, the Company adopted SFAS No. 109 effective as of July 1, 1993 on a prospective basis. The cumulative effect of this change in accounting for income taxes did not have a significant effect on the consolidated financial statements. Due to the operating losses incurred since inception, income tax expense for all periods has consisted only of minimum state taxes. Income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of 34% of pretax losses as a result of the following: June 30, ----------------------------------- 1996 1995 1994 -------- -------- -------- Computed "expected" tax benefit $ (7,276) $ (2,313) $ (1,216) Losses and credits for which no benefit has been recognized 3,139 1,988 1,202 Purchased research and development 3,839 - - Change in the beginning of the year valuation allowance, including use of net operating loss carryforwards and foreign losses 280 315 7 Other 18 10 7 -------- -------- -------- $ - $ - $ - -------- -------- -------- -------- -------- -------- 59 METRA BIOSYSTEMS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued June 30, 1996 and 1995 The tax effect of temporary differences that give rise to significant portions of the Company's deferred tax assets and liabilities is presented below: Year ended June 30, ----------------------------------- 1996 1995 1994 -------- -------- -------- (in thousands) Deferred tax assets: Employee benefit reserves, including accrued vacation $ 64 $ 62 $ 39 Other operating reserves 173 119 44 Amortization of deferred compensation 199 156 - Inventory capitalization 162 31 91 Start-up and other capitalization 140 193 105 Patent and licensed technology amortization 113 129 59 Charitable contribution 19 13 1 Net operating loss carryover 10,090 6,055 4,055 Research credit 631 514 403 -------- -------- -------- Total gross deferred tax assets 11,591 7,272 4,797 -------- -------- -------- Less valuation allowance (11,569) (7,214) (4,683) -------- -------- -------- Net deferred tax assets 22 58 114 -------- -------- -------- Deferred tax liabilities: Federal depreciation in excess of books 22 58 114 -------- -------- -------- Net deferred tax asset $ - $ - $ - -------- -------- -------- -------- -------- -------- The valuation allowance for deferred tax assets as of July 1, 1994 was $4,683,000. The net change in the valuation allowance for the years ended June 30, 1996 and 1995 was an increase of $4,355,000 and $2,531,000, respectively. Management believes significant uncertainty exists regarding the ability to realize the Company's deferred tax assets and accordingly, a valuation allowance has been established. When realized, approximately $231,000 of deferred tax assets will be credited to paid-in-capital. As of June 30, 1996, 1995 and 1994, the Company had federal tax net operating loss carryforwards of approximately $27,193,000, $17,607,000 and $11,204,000, respectively, which expire in 2004 through 2010. The Company also had foreign loss carryforwards of $806,000 at June 30, 1996 which extend indefinitely. The Company also has federal research credit carryforwards of approximately $436,000, $436,000 and $314,000 at June 30, 1996, 1995 and 1994, respectively, which will expire in 2004 through 2010. State tax net operating loss carryforwards were approximately $13,206,000, $8,545,000 and $5,393,000 and research and development credit carryforwards were $295,000, $250,046 and $174,000 at June 30, 1996, 1995 and 1994, respectively. The state losses expire in 1997 through 2001 and the credits expire in 2004 through 2011. The Company's ability to utilize federal and state net operating loss carryforwards and research credits is subject to annual limitations under certain provisions of the Internal Revenue Code. 60 METRA BIOSYSTEMS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued June 30, 1996 and 1995 (14) EMPLOYEE BENEFITS The Company has a deferred savings 401(k) plan for its employees. The Company may make matching contributions to the plan at its discretion. To date, no contributions have been made by the Company to the plan. (15) INDUSTRY AND GEOGRAPHIC INFORMATION The Company markets its products in the United States and in foreign countries through its sales personnel, dealers, and distributors. Export sales account for a significant portion of the Company's product sales which are summarized by geographic area as follows: Year ended June 30, ----------------------------------- 1996 1995 1994 -------- -------- -------- (in thousands) United States $ 987 $ 569 $ 403 Export sales: Europe 2,279 1,231 649 Pacific Rim 917 624 331 Other international 230 128 56 -------- -------- -------- Total export sale 3,426 1,983 1,036 -------- -------- -------- Total product sales $ 4,413 $ 2,552 $ 1,439 -------- -------- -------- -------- -------- -------- (16) ACQUISITION OF OSTEO SCIENCES CORPORATION On January 31, 1996, the Company purchased Osteo Sciences Corporation ("Osteo") in a tax free exchange which resulted in shareholders of Osteo exchanging all of their shares of preferred and common stock for shares of the Company's common stock. The Company issued 541,072 shares of common stock to Osteo shareholders valued at approximately $9,672,000 and assumed options to purchase 19,343 shares of the Company's common stock valued at approximately $345,000. The transaction was recorded using the purchase method of accounting and resulted in the Company incurring a one-time charge of $11,291,000 for acquired in-process research and development. The operations of Osteo were included in the Company's results of operations beginning February 1, 1996. 61 METRA BIOSYSTEMS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued June 30, 1996 and 1995 The following pro forma information does not purport to be indicative of what would have occurred had the acquisition been made as of those dates or of results which may occur in the future. The pro forma information does not include the write-offs of purchased in-process research and development of $11,291,000. The following table shows pro forma results of operations assuming the acquisition of Osteo had been consummated at the beginning of the period presented: Year ended June 30, ---------------------- 1996 1995 -------- -------- (in thousands, except per share amount) Total Revenues $ 6,470 $ 3,296 -------- -------- -------- -------- Net loss before nonrecurring charges $(10,480) $ (7,492) -------- -------- -------- -------- Net loss per share before nonrecurring charges $ (0.97) $ (1.09) -------- -------- -------- -------- Shares used in calculation of per share amounts 10,787 6,844 -------- -------- -------- -------- (17) SUBSEQUENT EVENT (UNAUDITED) On August 21, 1996, the Company's Board of Directors approved an option exchange, subject to election by the option holders, whereby options to purchase 588,465 shares of the Company's common stock at prices ranging from $6.50 to $15.50 per share were canceled and reissued at $5.00 per share which was the fair market value of the Company's common stock on that date. The new options will generally vest over four years beginning August 21, 1996. 62 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding Registrant's directors will be set forth under the caption "Election of Directors - Nominees" in Registrant's proxy statement for use in connection with the 1996 Annual Meeting of Shareholders ("1996 Proxy Statement") and is incorporated herein by reference. The 1996 Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of the Registrant's fiscal year. Information regarding Registrant's executive and other officers is set forth in this Form 10-K in Part I, Item 1. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference into this Form 10-K from the information set forth under the caption "Compensation of Executive Officers" in the 1996 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The caption "Common Stock Ownership of Certain Beneficial Owners and Management" in the information required by this item is incorporated by reference into this Form 10-K from the information set forth under the 1996 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference into this Form 10-K from the information set forth under the caption "Certain Relationships and Related Transactions" in the 1996 Proxy Statement. 63 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) CERTAIN DOCUMENTS FILED AS PART OF THE FORM 10-K 1. Financial Statements Page -------------------- ---- Consolidated Balance Sheets 42 Consolidated Statements of Operations 43 Consolidated Statements of Shareholders' Equity (Deficit) 44 Consolidated Statements of Cash Flows 45 Independent Auditors Report 41 2. Financial Statement Schedules ----------------------------- SCHEDULE II. VALUATION ACCOUNTS Provision Balance at charged beginnning to Accounts Balance at of year operations written off end of year - - ------------------------------------------------------------------------------- ALLOWANCE FOR DOUBTFUL ACCOUNTS: Year ended June 30, 1994 $ 5,000 $14,400 $(1,015) $ 18,385 Year ended June 30, 1995 18,385 22,000 (7,197) 33,188 Year ended June 30, 1996 33,188 70,500 (3,000) 100,688 INVENTORY RESERVES: Year ended June 30, 1994 $ 78,744 $ 42,951 $ (29,999) $ 91,696 Year ended June 30, 1995 91,696 236,597 (64,248) 264,045 Year ended June 30, 1996 264,045 177,979 (112,105) 329,919 Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. (b) REPORTS ON FORM 8-K During the fourth quarter of 1996, the Company reported the signing of the Agreement and Plan of Reorganization among the Company, Osteo Acquisition Corporation and Osteo Sciences Corporation on Form 8-K under Item 5, Other Events. The date of the event reported was January 31, 1996. 64 (c) EXHIBITS EXHIBIT DESCRIPTION OF DOCUMENT NUMBER - - ----------------------------------------------------------------------------- Articles of Incorporation of Registrant. 3.1* Form of Amended and Restated Articles of Incorporation of Registrant. 3.2* Bylaws of Registrant. 3.3* Rights Agreement among the Registrant and certain security holders of the Registrant, dated as of January 11, 1994. 4.2* Form of Indemnification Agreement. 10.1* 1990 Incentive Stock Plan. 10.2* Forms of agreements under 1990 Incentive Stock Plan. 10.2a* 1995 Stock Option Plan. 10.3* Form of Option Agreement under 1995 Stock Option Plan. 10.3a* 1995 Employee Stock Purchase Plan. 10.4* Form of Subscription Agreement under 1995 Employee Stock Purchase Plan. 10.4a* 1995 Directors' Stock Option Plan. 10.5* Form of Option Agreement under 1995 Directors' Stock Option Plan. 10.5a* Industrial Real Estate Lease (Single-Tenant Facility) and Lease Addendum, dated November 1, 1993, between the Registrant and State Teachers Retirement System, and First Amendment, dated as of July 26, 1994, thereto. 10.6+* License Agreement between the Registrant and The Rowett Research Institute, dated as of April 30, 1990. 10.7+* License Agreement between the Registrant and Collagen Corporation, dated as of June 30, 1990. 10.8+* Distribution and License Agreement between the Registrant and Haematologic Technologies, Inc., dated as of September 1, 1992. 10.9+* Product Research and Development Agreement between the Registrant and Sumitomo Pharmaceuticals Co., Ltd., dated as of March 29, 1993. 10.10+* License Agreement between the Registrant and Celtrix Pharmaceuticals, Inc., dated as of July 28, 1993. 10.11+* License, Supply and Development Agreement between the Registrant and Hybritech Incorporated, dated as of September 15, 1993. 10.12+* Development and License Agreement between the Registrant and Ciba-Geigy Limited, dated as of June 26, 1990, as amended by the Agreement between Registrant and Ciba-Geigy Limited, dated as of November 5, 1993. 10.13+* License, Supply and Development Agreement between the Registrant and Ciba Corning Diagnostics Corp., dated as of November 5, 1993. 10.14+* OEM Agreement between the Registrant and Diagnostic Products Corporation, dated December 22, 1993. 10.15+* Product Research and Development Agreement between the Registrant and Sumitomo Pharmaceuticals Co., Ltd., dated as of June 29, 1994. 10.16+* IDS OEM Agreement between the Registrant and Immunodiagnostic Systems Ltd., dated as of January 19, 1995. 10.17+* License Agreement between the Registrant and BioQuant, Inc., dated as of February 15, 1995. 10.18+* Product Research and Development Agreement between the Registrant and Sumitomo Pharmaceuticals Co., Ltd., dated as of February 28, 1995. 10.19+* International Distributor Agreement between the Registrant and Amersham K.K., dated as of April 8, 1993. 10.20+* International Distributor Agreement between the Registrant and DPC Biermann GmbH, dated as of January 1, 1995. 10.21+* Series D Preferred Stock Purchase Agreement, dated as of January 17, 1992, among the Registrant and certain Investors listed on Exhibit A thereto. 10.22* Series E Preferred Stock Purchase Agreement, dated as of January 11, 1994, among the Registrant and certain Investors listed on Exhibit A thereto. 10.23* Letter Agreement, dated as of May 24, 1991, between the Registrant and George W. Dunbar, Jr. 10.24* Letter Agreement, dated as of February 1, 1992, between the Registrant and Ronald T. Steckel. 10.25* Promissory Note, dated as of September 11, 1991, executed by George W. Dunbar, Jr. and Lucy H. Dunbar in favor of the Registrant. 10.26* Promissory Note, dated as of June 24, 1992, executed by Ronald T. Steckel and Laurie A. Steckel in favor of the Registrant. 10.27* Promissory Note, dated as of July 16, 1992, executed by Ronald T. Steckel in favor of the Registrant. 10.28* Promissory Note, dated as of July 18, 1993, executed by George W. Dunbar, Jr. in favor of the Registrant. 10.29* Promissory Note, dated as of November 1, 1994, executed by Colette Z. Andrea in favor of the Registrant. 10.30* Promissory Note, dated as of December 30, 1994, executed by George W. Dunbar, Jr. in favor of the Registrant. 10.31* Promissory Note, dated as of December 30, 1994, executed by Colette Z. Andrea in favor of the Registrant. 10.32* Promissory Note, dated as of December 30, 1994, executed by Ronald T. Steckel in favor of the Registrant. 10.33* License and Supply Agreement between the Registrant and Bayer Corporation dated as of July 26, 1995. 10.34+* Computation of Earnings Per Share. 11.1 List of Subsidiaries of the Registrant. 22.1* Consent of KPMG Peat Marwick LLP, Independent Auditors. 23.1 Financial Data Schedule. 27.1 * Incorporated by reference to identically numbered exhibits filed with the Company's Registration Statement (No. 33-92452) filed on May 18, 1995, or with Amendments No. 1 or Amendment No. 2 thereto, which became effective on June 30, 1995. + Confidential treatment granted as to a portion of this Exhibit. 65 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. METRA BIOSYSTEMS, INC. By: GEORGE W. DUNBAR, JR. Date: September 27, 1996 President and Chief Executive Officer KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints George W. Dunbar and Kurt E. Amundson and each of them, his attorneys-in-fact and agents, each with the power of substitution and resubstitution, for him in any and all capacities, to sign any and all amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully as to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or either of them, or their or his substitute or substitutes, may do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE TITLE DATE - - ------------------------------------------------------------------------------------------------- GEORGE W. DUNBAR, JR. President and Chief Executive Officer September 27, 1996 - - ---------------------------- (Principal Executive Officer) George W. Dunbar, Jr. KURT E. AMUNDSON Vice President and Chief Financial Officer September 27, 1996 - - ---------------------------- (Principal Financial and Accounting Officer) Kurt E. Amundson CLAUDE D. ARNAUD, M.D. Director September 27, 1996 - - ---------------------------- Claude D. Arnaud, M.D. JOHN L. CASTELLO Director September 27, 1996 - - ---------------------------- John L. Castello MARY LAKE POLAN, M.D., PH.D. Director September 27, 1996 - - ---------------------------- Mary Lake Polan, M.D., Ph.D. LEONARD D. SCHAEFFER Director September 27, 1996 - - ---------------------------- Leonard D. Schaeffer COSTA G. SEVASTOPOULOS, PH.D. Director September 27, 1996 - - ---------------------------- Costa G. Sevastopoulos, Ph.D. CRAIG C. TAYLOR Director September 27, 1996 - - ---------------------------- Craig C. Taylor SAMUEL URCIS Director September 27, 1996 - - ---------------------------- Samuel Urcis
66 EXHIBIT INDEX EXHIBIT DESCRIPTION OF DOCUMENT NUMBER - - ----------------------------------------------------------------------------- Articles of Incorporation of Registrant. 3.1* Form of Amended and Restated Articles of Incorporation of Registrant. 3.2* Bylaws of Registrant. 3.3* Rights Agreement among the Registrant and certain security holders of the Registrant, dated as of January 11, 1994. 4.2* Form of Indemnification Agreement. 10.1* 1990 Incentive Stock Plan. 10.2* Forms of agreements under 1990 Incentive Stock Plan. 10.2a* 1995 Stock Option Plan. 10.3* Form of Option Agreement under 1995 Stock Option Plan. 10.3a* 1995 Employee Stock Purchase Plan. 10.4* Form of Subscription Agreement under 1995 Employee Stock Purchase Plan. 10.4a* 1995 Directors' Stock Option Plan. 10.5* Form of Option Agreement under 1995 Directors' Stock Option Plan. 10.5a* Industrial Real Estate Lease (Single-Tenant Facility) and Lease Addendum, dated November 1, 1993, between the Registrant and State Teachers Retirement System, and First Amendment, dated as of July 26, 1994, thereto. 10.6+* License Agreement between the Registrant and The Rowett Research Institute, dated as of April 30, 1990. 10.7+* License Agreement between the Registrant and Collagen Corporation, dated as of June 30, 1990. 10.8+* Distribution and License Agreement between the Registrant and Haematologic Technologies, Inc., dated as of September 1, 1992. 10.9+* Product Research and Development Agreement between the Registrant and Sumitomo Pharmaceuticals Co., Ltd., dated as of March 29, 1993. 10.10+* License Agreement between the Registrant and Celtrix Pharmaceuticals, Inc., dated as of July 28, 1993. 10.11+* License, Supply and Development Agreement between the Registrant and Hybritech Incorporated, dated as of September 15, 1993. 10.12+* Development and License Agreement between the Registrant and Ciba-Geigy Limited, dated as of June 26, 1990, as amended by the Agreement between Registrant and Ciba-Geigy Limited, dated as of November 5, 1993. 10.13+* License, Supply and Development Agreement between the Registrant and Ciba Corning Diagnostics Corp., dated as of November 5, 1993. 10.14+* OEM Agreement between the Registrant and Diagnostic Products Corporation, dated December 22, 1993. 10.15+* Product Research and Development Agreement between the Registrant and Sumitomo Pharmaceuticals Co., Ltd., dated as of June 29, 1994. 10.16+* IDS OEM Agreement between the Registrant and Immunodiagnostic Systems Ltd., dated as of January 19, 1995. 10.17+* License Agreement between the Registrant and BioQuant, Inc., dated as of February 15, 1995. 10.18+* Product Research and Development Agreement between the Registrant and Sumitomo Pharmaceuticals Co., Ltd., dated as of February 28, 1995. 10.19+* International Distributor Agreement between the Registrant and Amersham K.K., dated as of April 8, 1993. 10.20+* International Distributor Agreement between the Registrant and DPC Biermann GmbH, dated as of January 1, 1995. 10.21+* Series D Preferred Stock Purchase Agreement, dated as of January 17, 1992, among the Registrant and certain Investors listed on Exhibit A thereto. 10.22* Series E Preferred Stock Purchase Agreement, dated as of January 11, 1994, among the Registrant and certain Investors listed on Exhibit A thereto. 10.23* Letter Agreement, dated as of May 24, 1991, between the Registrant and George W. Dunbar, Jr. 10.24* Letter Agreement, dated as of February 1, 1992, between the Registrant and Ronald T. Steckel. 10.25* Promissory Note, dated as of September 11, 1991, executed by George W. Dunbar, Jr. and Lucy H. Dunbar in favor of the Registrant. 10.26* Promissory Note, dated as of June 24, 1992, executed by Ronald T. Steckel and Laurie A. Steckel in favor of the Registrant. 10.27* Promissory Note, dated as of July 16, 1992, executed by Ronald T. Steckel in favor of the Registrant. 10.28* Promissory Note, dated as of July 18, 1993, executed by George W. Dunbar, Jr. in favor of the Registrant. 10.29* Promissory Note, dated as of November 1, 1994, executed by Colette Z. Andrea in favor of the Registrant. 10.30* Promissory Note, dated as of December 30, 1994, executed by George W. Dunbar, Jr. in favor of the Registrant. 10.31* Promissory Note, dated as of December 30, 1994, executed by Colette Z. Andrea in favor of the Registrant. 10.32* Promissory Note, dated as of December 30, 1994, executed by Ronald T. Steckel in favor of the Registrant. 10.33* License and Supply Agreement between the Registrant and Bayer Corporation dated as of July 26, 1995. 10.34+* Computation of Earnings Per Share. 11.1 List of Subsidiaries of the Registrant. 22.1* Consent of KPMG Peat Marwick LLP, Independent Auditors. 23.1 Financial Data Schedule. 27.1 * Incorporated by reference to identically numbered exhibits filed with the Company's Registration Statement (No. 33-92452) filed on May 18, 1995, or with Amendments No. 1 or Amendment No. 2 thereto, which became effective on June 30, 1995. + Confidential treatment granted as to a portion of this Exhibit. EX-11.1 2 EXHIBIT 11.1 Exhibit 11.1 COMPUTATION OF NET LOSS PER SHARE YEAR ENDED JUNE 30, ---------------------------------------------- 1996 1995 1994 ---- ---- ---- Net Loss $(21,399,049) $(6,802,600) $(3,575,217) Weighted average shares used to compute net loss per share Weighted average number of shares outstanding: Mandatorily redeemable convertible preferred stock -- 5,324,685 4,200,816 Common 10,515,094 738,024 714,656 Number of common equivalents as a result of convertible warrants outstanding using the treasury stock method -- 9,989 9,989 Number of common shares issued and stock options granted in accordance with Staff Accounting Bulletin 83 -- 230,169 230,169 ------------ ----------- --------- Total 10,515,094 6,302,867 5,155,630 ------------ ----------- --------- ------------ ----------- --------- Net loss per share $(2.04) $(1.08) $(0.69) ------- ------ ------ ------- ------ ------ The calculation includes the shares of mandatorily redeemable convertible preferred stock (Series A, Series B, Series C, Series D and Series E) and a convertible warrant as if they had converted to common stock on their respective original dates of issuance, because such shares automatically convert to common stock upon the closing of the initial public offering of the Company's common stock. EX-23.1 3 EXHIBIT 23.1 EXHIBIT 23.1 ACCOUNTANTS' CONSENT AND REPORT ON SCHEDULE The Board of Directors and Shareholders Metra Biosystems, Inc.: The audits referred to in our report dated July 18, 1996, included the related financial statement schedule as of June 30, 1996, 1995 and June 30, 1994, and for each of the years in the three-year period ended June 30, 1996 included in the registration statement. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We consent to incorporation by reference in the registration statement on Form S-8 of Metra Biosystems, Inc. of our report dated July 18, 1996, relating to the consolidated balance sheets of Metra Biosystems, Inc. and subsidiaries as of June 30, 1996 and 1995 and the related consolidated statements of operations, shareholders' equity (deficit) and cash flows for each of the years in the three-year period ended June 30, 1996, which report appears in the June 30, 1996 annual report on Form 10-K of Metra Biosystems, Inc. Our report refers to a change in accounting for investments effective July 1, 1994. KPMG Peat Marwick LLP San Francisco, California September 27, 1996 EX-27 4 EXHIBIT 27 - FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE METRA BIOSYSTEMS, INC. ANNUAL REPORT ON FORM 10K FOR THE PERIOD ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR JUN-30-1996 JUL-01-1995 JUN-30-1996 19,217 33,030 1,367 101 1,040 48,633 6,165 1,851 60,193 4,402 0 0 0 13 54,411 60,193 4,413 6,470 3,276 29,670 0 0 0 (21,399) 0 (21,399) 0 0 0 (21,399) (2.04) (2.04)
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