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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended December 31, 1999, or
Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ___________ to ___________
Commission file number 000-21615
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BOSTON BIOMEDICA, INC.
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(Exact Name of Registrant as Specified in its Charter)
Massachusetts
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(State or other Jurisdiction of -------------------------------
Incorporation or Organization) (I.R.S. Employer
375 West Street, Identification No.)
West Bridgewater, Massachusetts 02379-1040
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(Address of Principal Executive Offices) (zip code)
Registrant's telephone number, including area code (508) 580-1900
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes 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 registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of the voting common stock held by
non-affiliates of the registrant at February 29, 2000 was $49,248,992, based on
the closing price of the common stock as quoted on the Nasdaq National Market on
that date.
As of March 24, 2000 there were 5,441,960 shares of the registrant's
common stock outstanding.
Documents Incorporated by Reference
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Portions of the registrant's definitive proxy statement involving the
election of directors at its 2000 annual meeting, which is expected to be filed
within 120 days after the end of the registrant's fiscal year, are incorporated
by reference into Part III of this report.
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PART I
ITEM 1. BUSINESS
Boston Biomedica, Inc. and its wholly-owned subsidiaries (together,
"the Company"), provide products and services for the detection and treatment of
infectious diseases such as AIDS, Lyme Disease, and Viral Hepatitis. The Company
has four business units, which are comparable to operating segments (the terms
"business units" and "operating segments" are used herein interchangeably):
(1) BBI Diagnostics, an ISO 9001 certified manufacturer of quality
control and other diagnostic products used to increase the
accuracy of in vitro diagnostic tests;
(2) BBI Clinical Laboratories, a leading infectious disease testing
laboratory, specializing in nucleic acid based testing, tick borne
diseases, and blood bank confirmatory testing;
(3) BBI Biotech Research Laboratories, the research and development
arm of the Company which supplements its support for the other BBI
business units with research contracts and repository services
primarily for agencies of the United States government; and
(4) BBI Source Scientific, an ISO 9001 and EN 46001 certified
manufacturer of laboratory and medical instruments.
In addition, the Company is pursuing research and development programs in the
areas of Pressure Cycling Technology ("PCT") and drug discovery, with the goals
of introducing new solutions for improving blood plasma safety, specimen
preparation in nucleic acid testing, and treatment of infectious diseases.
The Company was organized in Massachusetts in 1978, and commenced
significant operations in 1986.
In July 1999, the Company announced a major reorganization and the
formation of a corporate function. Pursuant to this reorganization a Senior
Vice President and General Manager was appointed for each business unit,
reporting to the President & Chief Operating Officer. The responsibility of
the General Manager is to achieve the agreed upon goals and plan of the
business unit. The primary focus of corporate is to oversee the business
units and guide them according to the strategic direction of the Company.
In September 1999, the Company moved its research and development
activities in PCT from leased laboratory space in Woburn, Massachusetts to its
BBI Biotech facility in Gaithersburg, Maryland. This was done to allow the
scientific team working on PCT to have easy and open access to the molecular and
cellular biology capabilities at BBI Biotech, as well as to reduce operating
costs and promote efficiencies.
In October 1999, the Company formed a new, wholly-owned subsidiary,
Panacos Pharmaceuticals, Inc., ("Panacos"), a Delaware corporation. All of the
Company's technology related to its drug discovery and vaccine programs,
consisting primarily of patents and related sponsored research agreements, were
transferred to Panacos effective January 2000. Management intends to sell a
substantial portion of Panacos to third party investors in order to obtain the
substantial amount of capital required to progress to more advanced stages of
drug development including human clinical trials. If successful in raising
capital, the Company plans to become a less than 50% shareholder in Panacos,
give up operational control, and switch to the equity method of accounting for
its investment, as opposed to consolidation accounting.
The Company's strategy is to leverage its scientific capabilities in
microbiology, immunology, virology, and molecular biology to (1) capitalize on
both the emerging end-user market for quality control products, and the
molecular testing market, (2) develop new products and services, (3) enhance
technical leadership, (4) capitalize on complementary business operations, and
(5) pursue strategic acquisitions and alliances.
-2-
Industry Overview
Infectious Disease Test Kits and Testing Methods. Test kits contain in
one compact package all of the materials necessary to run a test for an
infectious disease. These materials include disposable diagnostic components,
instructions, and reaction mixing vessels (generally 96-well plates or test
tubes) that are coated with the relevant infectious disease antigens, antibodies
or other materials. To perform the test typically, either a technician or a
specially designed instrument mixes the solutions from the test kit with human
blood specimens in a specific sequence according to the test kit instructions.
The mixture must then "incubate" for up to 18 hours, during which time a series
of biochemical reactions trigger signals (including color, light or radioactive
count), that indicate the presence or absence and amount of specific markers of
the particular disease in the specimen.
Test kits generally employ one of three methods for infectious disease
testing: microbiology, immunology or molecular biology. Traditional microbiology
tests use a growth medium that enables an organism, if present, to replicate and
be detected visually. Immunology tests detect the antigen or antibody, which is
an indicator (marker) of the pathogen (e.g., virus, bacterium, fungus or
parasite). Molecular diagnostic methods, such as the polymerase chain reaction
("PCR"), test for the presence of nucleic acids (DNA or RNA) that are specific
to a particular pathogen.
Most infectious disease tests currently use microbiological or
immunological methods. However, molecular diagnostic methods are increasingly
being used in research and clinical laboratories worldwide. The Company believes
that the advent of molecular diagnostic methods will complement rather than
diminish the need to test by microbiological and immunological procedures,
because different test methods reveal different information about a disease
state. The Company anticipates that as new test methods become more widespread,
they will account for a larger portion of the Company's business.
Quality Control for In Vitro Diagnostic Test Kits. Customers employ
quality control products in order to develop and use test kits (both infectious
and non-infectious). Quality control products help ensure that test kits detect
the correct analyte ("specificity"), detect it the same way every time
("reproducibility" or "precision"), and detect it at the appropriate levels
("sensitivity"). The major element of this quality control process is the
continuous evaluation of test kits by the testing of carefully characterized
samples that resemble the donor or patient samples routinely used with the test.
Quality control is used in both the infectious and non-infectious disease
markets, although currently it is not as prevalent among end-users of infectious
disease test kits.
The market for quality control products consists of three main customer
groups : (i) manufacturers of test kits, (ii) regulatory agencies that oversee
the manufacture and use of test kits, and (iii) end-users of test kits, such as
hospitals, clinical reference laboratories and blood banks.
Company Products and Services
Overview
Through its business unit BBI Diagnostics, the Company offers a broad
array of "Diagnostic Products," for in vitro diagnostic use, consisting of
Quality Control Panels, Accurun(R) Run Controls and Diagnostic Components, all
used in connection with infectious disease testing. Diagnostic Products are used
throughout the entire test kit life cycle, from initial research and
development, through the regulatory approval process and test kit production, to
training, troubleshooting and routine use by end-users. The Company's Quality
Control Panels, which combine human blood specimens with comprehensive
quantitative data useful for comparative analysis, help ensure that test kits
are as specific, reproducible, and sensitive as possible. The Company's
Accurun(R) Run Controls enable end-users of test kits to confirm the validity of
results by monitoring test performance, thereby minimizing false negative test
results and improving error detection. In addition, the Company provides
Diagnostic Components, which are custom processed human plasma and serum
products, to test kit manufacturers.
-3-
Through its wholly-owned subsidiary, BBI Source Scientific, Inc., ("BBI
Source"), the Company designs, manufactures and markets "Laboratory
Instruments", consisting of readers and washers and other small medical devices.
These instruments are used in hospitals and clinics, and in research,
environmental and food testing laboratories. Utilizing a common hardware
technology platform, these instruments are used in connection with the
performance of an IN VITRO diagnostics test, including reading the test result.
Through another wholly-owned subsidiary, BBI Clinical Laboratories,
Inc. ("BBICL") the Company provides specialty clinical laboratory services that
include both routine and sophisticated infectious disease testing in
microbiology, immunology and molecular biology. BBICL seeks to focus its
laboratory services in those advanced areas of infectious disease testing
requiring special expertise.
BBI Biotech Research Laboratories, Inc., ("BBI Biotech"), another
wholly-owned subsidiary, is the R&D "arm" of the Company, helping to develop new
products and services for the other business units. BBI Biotech seeks to obtain
government grants and other research support wherever possible to help fund the
cost of this R&D. In addition, BBI Biotech provides repository services for the
United States government, and other commercial services for laboratories and
test kit manufacturers.
During each of the last three fiscal years, each of the Company's
operating segments contributed at least 15% of the Company's consolidated
revenue, with the exception of BBI Source in fiscal 1997 and 1999 and the
"Other" segment in fiscal 1999. The Company's Consolidated Financial Statements
set forth in Item 8 of this report provide financial information relating to
each of the Company's operating segments.
Diagnostic Products
The Company manufactures its Diagnostic Products from human plasma and
serum that are obtained from nonprofit and commercial blood centers, primarily
in the United States. The Company has acquired and developed an inventory of
approximately 30,000 individual blood units and specimens (with volumes ranging
from 1 ml to 800 ml) which provides most of the raw material for its products.
Within the Diagnostic Products class are two groups: Quality Control Products,
consisting of QC Panels and Accurun(R) Run Controls, and Diagnostic Components.
Quality Control Panels
Quality Control Panels consist of blood products characterized by the
presence or absence of specific disease markers and a data sheet containing
comprehensive quantitative data useful for comparative analysis. These Quality
Control Panels are designed for measuring overall test kit performance and
laboratory proficiency, as well as for training laboratory professionals. The
Company's data sheets, which contain comprehensive quantitative data useful for
comparative analysis, are an integral part of its Quality Control Panels. These
data sheets are created as the result of extensive testing of proposed panel
components in both the Company's laboratories and at major testing laboratories
on behalf of the Company in the United States and Europe, including national
public health laboratories, research and clinical laboratories and regulatory
agencies. These laboratories are selected based on their expertise in performing
the appropriate tests on a large scale in an actual clinical laboratory setting;
this testing process provides the Company's customers with the benefit that the
Quality Control Panels they purchase from the Company have undergone rigorous
testing in actual clinical laboratory settings. In addition, the Company
provides information on its data sheets on the reactivity of panel components in
all FDA licensed test kits and all leading European test kits for the target
pathogen, as well as for all other appropriate markers of this pathogen. For
example, the Company's HIV panel data sheets include anti-HIV by IFA, ELISA and
western blot; HIV antigen by ELISA; and HIV RNA by several molecular diagnostic
procedures. The Company's data sheets require significant time and scientific
expertise to prepare. The following table describes the types of Quality Control
Panel products currently offered by the Company:
-4-
Quality Control Panels
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Product Line Description Use Customers
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Seroconversion Panels Plasma samples collected from a Compare the clinical Test kit manufacturers and
single individual over a specific sensitivity of competing regulators.
time period showing conversion from manufacturers' test kits,
negative to positive for markers of enabling the user to assess
an infectious disease. the sensitivity of a test in
detecting a developing
antigen/antibody.
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Performance Panels A set of 10 to 50 serum and plasma Determine test kit performance Test kit manufacturers and
samples collected from many different against all expected levels of regulators.
individuals and characterized for the reactivities in the evaluation
presence or absence of a particular of new, modified and improved
disease marker. test methods.
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Sensitivity Panels Precise dilutions of human plasma or Evaluate the low-end Test kit manufacturers.
serum human plasma or serum analytical sensitivity of a
containing a known amount of an test kit.
infectious disease marker as
calibrated against international
standards.
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Qualification Panels Dilutions of human plasma or serum Demonstrate the consistent Clinical reference
manifesting a full range of lot-to-lot performance of test laboratories, blood banks,
reactivities in test kits for a kits, troubleshoot problems, and hospital laboratories.
specific marker. evaluate proficiency, and
train laboratory technicians.
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OEM Panels Custom-designed Qualification Panels Train laboratory personnel on Custom designed with test kit
for regulators and test kit new test kits or equipment. manufacturers and regulators
manufacturers for distribution to as an end-user product or for
customers or for internal use. internal use.
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Verification Panels Verification Panels contain naturally Verify accuracy and ensure Clinical reference
occurring undiluted samples at that reagents perform to laboratories, blood banks,
varying titers. expectation: also used to hospital laboratories.
troubleshoot system problems
and to document problem
resolution.
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The Company first introduced Quality Control Panels in 1987. The
Company currently offers a broad range of Quality Control Panels that address a
variety of needs of manufacturers and regulators of test kits as well as blood
banks, hospitals, clinical laboratories and other end-users. Prices for the
Company's quality control seroconversion, performance and sensitivity panels
range from $450 to $2,000 each, and its qualification, OEM, and verification
panels generally range from $100 to $200 per panel.
-5-
Seroconversion and performance panels are comprised of unique and rare
plasma specimens obtained from individuals during the short period of time when
the markers for a particular disease are converting from negative to positive.
As a result, the quantity of any such panel is limited, so that the Company must
replace these panels as they sell out with another panel comprised of different
specimens from a different individual, equally unique and rare. The Company
believes that its inventory and relationships with blood centers affords it a
competitive advantage in acquiring such plasma for replacement panels and
developing new products to meet market demand. However, the Company cannot be
certain that it will be able to continue to obtain such specimens.
Quality Control Panels currently span the immunologic markers for AIDS
(i.e., HIV), Hepatitis (A, B and C), Lyme Disease and ToRCH (Toxoplasma,
rubella, cytomegalovirus and herpes simplex virus).
Accurun(R) Run Controls
End-users of test kits utilize run controls to confirm the validity of
results by monitoring test performance, thereby minimizing false negative test
results and improving error detection. Run controls consist of one or more
specimens of known reactivity that are tested with donor or patient samples in
an assay to determine whether the assay is performing within the manufacturer's
specifications. Clinical laboratories generally process their patient specimens
in a batch processing mode, and typically include 25 to 100 specimens to be
tested in each batch (a "run"). Large laboratories may perform several runs per
day, while smaller laboratories may perform only a single run each day, or
sometimes only several runs per week. A clinical laboratory using a run control
will place the run control product in a testing well or testtube, normally used
for a specimen, and will test it in the same manner that it tests the donor or
patient specimens. It will then compare the results generated to an acceptable
range for the run control, determined by the user, to measure whether the other,
unknown specimens are being accurately tested. The run control result must be
within the acceptable range to be considered valid. This is often tracked
visually using what is known as a Levey-Jennings chart. Depending upon a
particular laboratory's quality control practices, it may use several Run
Controls on each run or it may simply use a run control in a single run at the
beginning and end of the day.
The Company's AccuChart(TM) tracking and charting software, used as
part of a laboratory's quality assurance program, runs on a personal computer
and is designed to provide the data tracking capability needed to document
laboratory performance.
The Company's Accurun(R) family of products is targeted at the emerging
market of end-users of infectious disease test kits. The Company believes that
it offers the most comprehensive line of run controls in the industry, and that
its Accurun(R) products, in combination with its Quality Control Panel products,
provide an extensive line of products for quality assurance in infectious
disease testing. The Company intends to continue to expand its line of
Accurun(R) products, thereby providing its customers with the convenience and
cost effectiveness of a single supplier for independent run controls.
The Company introduced its first four Accurun(R) Run Control products
in the fourth quarter of 1993 and has since developed and released for sale an
additional 46 Accurun(R) products. Two products have been discontinued, for a
total of 48 Run Controls available as of December 31, 1999. The majority of
these products are available for diagnostic purposes; the others currently are
limited to research use. Current Accurun(R) Run Control products generally range
in price from $5 to $60 per milliliter and are described in the following table.
-6-
ACCURUN(R) RUN CONTROLS
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Product Description Number of Products Primary Customers
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Accurun 1(R) Multi Marker Multi-marker run controls for 12 Blood banks, plasma centers,
Positive Controls diagnostic immunological tests hospitals and clinical labs
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Accurun Immunological Positive Single marker run controls for 23 Hospitals and clinical labs
Controls diagnostic immunological tests
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Accurun Nucleic Acid Positive Single Marker run controls for 5 Research and specialty labs
Controls amplified nucleic acid tests
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Accurun Reference Nucleic Acid Run controls calibrated to the 2 International plasma manufacturers
Controls World Health Organization and blood centers
standard.
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Accurun Negative Controls Negative run controls for 6 All labs
immunological and nucleic acid
testing
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All of the Company's Accurun(R) Run Controls for diagnostic use require
either FDA premarket clearance (a 510(k)) or validation studies (if the products
are exempt from FDA submission requirements under the FDA Modernization Act of
1997), prior to being marketed for diagnostic use. As of March 1, 2000, a total
of 12 products in the Accurun 1(R) line and 18 single analyte Accurun(R)
controls have either received 510(k) clearance or have been validated.
Diagnostic Components
Diagnostic Components are the individual materials supplied to
infectious disease test kit manufacturers and combined (often after further
processing by the manufacturer) with other materials to become the various fluid
components of the manufacturer's test kit. The Company supplies Diagnostic
Components in four product lines: Normal Human Plasma, Normal Human Serum,
Basematrix, and Characterized Disease State Serum and Plasma. Normal Human
Plasma and Serum are both the clear liquid portion of blood which contains
proteins, antibodies, hormones and other substances, except that the Serum
product has had the clotting factors removed. Basematrix, the Company's
proprietary processed serum product that has been chemically converted from
plasma, is designed to be a highly-stable, lower cost substitute for most normal
human serum and plasma applications. Characterized Disease State Serum and
Plasma are collected from specific blood donors pre-selected because of the
presence or absence of a particular disease marker. The Company often customizes
its Diagnostic Components by further processing the raw material to meet the
specifications of the test kit manufacturer. The Company's Diagnostic Components
range in price from $0.25 to $60 per milliliter, with the majority selling
between $0.50 and $5 per milliliter.
-7-
Laboratory Instruments
BBI Source, the Laboratory Instrumentation operating segment,
designs, manufactures and markets laboratory instruments and other small
medical devices used in hospitals and clinics and in research, environmental
and food testing laboratories. These instruments are generally sold on a
private-label or OEM basis for other companies utilizing a common hardware
technology platform. The instruments manufactured by the Company use advanced
optical detection methods (luminescence, fluorescence, reflectance,
photometry), robotics, fluidics, and unique software, all of which are
desired by customers reselling or supplying state-of-the-art instrumentation
systems to laboratories worldwide in various applications.
Most of the Laboratory Instrumentation products currently being offered
have been commercialized since 1985 and were primarily developed in conjunction
with IN VITRO diagnostics test kit manufacturers. BBI Source hopes to attract
development partners for new prototype products. Management believes that these
products address important market segments in biomedical and clinical diagnostic
testing and in environmental monitoring and food testing research. The BBI
Source product line currently includes the following:
MicroChem(R) Photometer. A compact, low-cost, photometer designed for
immunoassay and general chemistry applications.
ChemStat(R) Automated Photometer. A high-speed, automated photometer
with a sample capacity of 95 tubes and a read rate of one sample per second.
This product is suited for high-volume processing.
E/LUMINA(R) II Luminescence Analyzer. A flexible luminometer for both
"flash" and "glow" luminescence methods, this automated system reads up to 114
samples and reports final results.
EXECWASH(R) Washing System. An automated immunoassay washing system
that can be quickly configured by the user to wash different solid-phase assay
formats by a propriety manifold design. The EXEC-WASH is fully compatible with a
variety of other Company products, such as the ChemStat and the E/LUMINA II
Luminescence Analyzer.
Protocol Design Software System. A development tool for researchers and
assay manufacturers, the program operates under Microsoft(R) Windows and serves
as the master programming center for EXEC-WASH systems to create fluid handling
protocols.
Verif-Eye(R) A reflectance reader for rapid, reliable results for use
in research and development or process inspection and verification.
Services
The Company seeks to focus its specialty laboratory services in both
the clinical reference laboratory testing and advanced biomedical research
areas. The Company concentrates its services in those areas of infectious
disease testing which are complementary to its quality control and diagnostic
products businesses.
Specialty Clinical Laboratory Testing
BBICL, the Clinical Laboratory Services operating segment, operates an
independent specialty clinical reference laboratory that performs both routine
and sophisticated infectious disease testing in microbiology, immunology and
molecular biology, with special emphasis in AIDS, Viral Hepatitis, Lyme and
other tick borne diseases, and comfirmatory testing for the blood bank industry.
The Company's specialty clinical laboratory combines traditional microbiology,
advanced immunology, and current molecular diagnostic techniques, such as PCR
and bDNA, to detect and identify microorganisms, their antigens and related
antibodies, and their nucleic acids (i.e., DNA and RNA).
-8-
Specimens are picked up daily from customers, primarily by BBICL's
courier staff, and are brought to the laboratory in New Britain, Connecticut for
testing. There, they are received, accessioned, scheduled, and then tested.
Results are returned to customers by fax, remote printers, data transmission and
hard copy. BBICL emphasizes accuracy and turnaround time along with competitive
pricing as keys to customer satisfaction. Customers include blood banks,
physicians, clinics, hospitals and other clinical/research laboratories.
Contract Research and Services
The BBI Biotech operating segment offers a variety of research services
in molecular biology, cell biology and immunology to governmental agencies,
diagnostic test kit manufacturers and biomedical researchers. Molecular biology
services include DNA extractions and sequencing, recombinant DNA support, probe
labeling and custom nucleic acid amplification assays. Cell biology and
immunology services include sterility testing, virus infectivity assays,
cultivations of virus or bacteria from clinical specimens, preparation of viral
or bacterial antigens and custom western blot assays.
The Company currently provides contract research services under several
contracts and grants. These services are primarily related to infectious disease
diagnostics, in support of the products and services that the Company wishes to
develop. Current contracts include the following: clinical trials support for
candidate HIV vaccines; identification and DNA sequencing of human genes
involved in neurological disorders, development of PCR based assays for
Babesiosis and Transfusion Transmitted Virus, and microtiter plate assays for
HIV-1 genotyping.
Blood Processing and Repository Services
Since 1983, BBI Biotech has provided blood processing and repository
services for the National Cancer Institute ("NCI"), also a part of the National
Institutes of Health ("NIH"). The repository stores over 6,000,000 specimens and
processes or ships up to several thousand specimens per week in support of
various NIH cancer and virus research programs. In 1997, BBI Biotech was awarded
a five-year (including renewal options) NCI repository contract with aggregate
payments of up to $4.8 million. In 1998, BBI Biotech received a six-year $2.9
million repository contract (including five one-year extension options) with the
National Heart, Lung and Blood Institute of the NIH, and in 1999, it received a
seven-year, $9.6 million repository contract with the National Institute of
Allergy and Infectious Disease. To date all renewal options under these
contracts have been approved, although the Company cannot be certain that any
subsequent options will be exercised.
Other Services
Clinical Trials. All four business units conduct clinical trials for
domestic and foreign test kit and device manufacturers. Manufacturers must
collect data for submission to the United States FDA and other countries'
regulatory agencies, and these manufacturers contract with organizations such as
the Company to perform this work. By providing this service, the Company is able
to maintain close contact with test kit and device manufacturers and regulators,
and is able to evaluate new technologies in various stages of development. The
Company believes that the reputation of its laboratory and scientific staff, its
large number of Quality Control Panels, and its inventory of characterized serum
and plasma specimens assist the Company in marketing its clinical trial services
to its customers. The Company has performed clinical trials for a number of
United States and foreign test kit and device manufacturers seeking to obtain
FDA approval for their infectious disease test kits.
Laboratory Instrumentation Services. BBI Source offers services to
design, develop, manufacture and distribute laboratory instruments to companies
seeking to market biomedical products manufactured under government-approved
manufacturing practices. These services range in complexity from consulting to
full system development and distribution.
After-sales Service. BBI Source also provides after-sales service.
Management believes that after-sales service is a major marketing advantage in
many of the Company's markets, since many of the Company's customers do not
maintain their own full service departments. Servi-Trak(R), a proprietary
software program, is a key element of this after-sales service. The Company's
service department is located at BBI Source's facility in Garden Grove,
California. The
-9-
Company utilizes an independent third party contractor located in Giessen,
Germany, to provide a fully functional European service and support center.
Drug Screening Program. As a subcontractor for an NIH AIDS grant held
by the University of North Carolina at Chapel Hill, the Company has established
an anti-HIV drug screening program to test a large number of natural products
(largely plant derivatives) to determine whether they inhibit HIV replication in
an in vitro assay system. These in vitro assays are also offered as a service to
researchers and pharmaceutical companies who wish to test various candidate
anti-viral agents for anti-HIV activity. The drug screening program and in vitro
assays are now offered through the Company's newly formed subsidiary, Panacos
Pharmaceuticals, Inc.
Research and Development
The Company's research and development effort is focused on (i) the
development of new and improved Quality Control Products (Panels and Accurun(R))
for the emerging end-user market and the in vitro diagnostics market, (ii) the
expansion of its infectious disease testing services using PCR and other
amplification assays, (iii) the design and development of new laboratory
instruments and mechanical and optical detection techniques, emphasizing its
Verif-Eye reflectance reader, (iv) the development of pressure cycling
technology ("PCT") for nucleic acid purification and pathogen inactivation, and
(v) the determination of the mechanism of action and performance of initial
toxicity studies on its lead compounds in the Company's drug discovery program
("Panacos"). The Company has 36 full or part-time employees involved in its
research and development effort. As announced in 1998, at the time of its
acquisition of BioSeq, Inc., the Company has significantly increased spending on
research and development both in whole dollars and as a percentage of revenue in
1999 as compared to 1998. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations." The Company's
research scientists work closely with sales, marketing, manufacturing,
regulatory and finance personnel to identify and prioritize the development of
new products and services. Whenever it can, the Company seeks to fund its
research and development activities from grants provided by various agencies and
departments of the United States government. See also "Contract Research and
Services."
Quality Control Products. In the area of Quality Control Products, the
Company's product development activities center on the identification and
characterization of materials for the manufacture of new products and the
replacement of sold-out products. During 1999, the Company introduced 14 new
Seroconversion, Performance, and Qualification Panel products, 43 OEM Panels, as
well as 13 new Accurun(R) Run Controls. The Company is developing new Quality
Control Products for use with both immunological and molecular diagnostic tests
for subtypes and variants of HIV, HCV and HBV, and a variety of controls
targeted for leading instrument platforms. The Company has increased the number
of Quality Control Products it offers from approximately 20 products in 1990 to
more than 200 in 1999.
Infectious Disease Tests. The Company also develops new and improved
infectious disease tests, which the Company believes offer potential for above
average profit, for sale by the Clinical Laboratory Services operating segment.
Current emphasis is on additional PCR and other amplification technology based
tests for infectious disease diagnostics, beyond the Company's current offerings
of assays for the pathogens of AIDS, Lyme Disease, Viral Hepatitis, and Herpes,
and for the direct detection of other infectious agents in blood, tissues and
other bodily fluids.
Laboratory Instruments. The Company's product development activities
related to laboratory instruments are centered on additional configurations of a
"reflectance" reader to produce objective results from rapid in vitro diagnostic
tests. In addition, the Company continues to work on applications for existing
products to broaden their utilization.
Pressure Cycling Technology. BBI BioSeq, a wholly-owned subsidiary of
the Company, owns patent pending technology based on PCT. PCT research is
primarily focused in two areas: (1) nucleic acid extraction and purification
from target pathogens in connection with sample preparation for PCR or other
molecular testing; and (2) pathogen inactivation of blood plasma intended for
transfusion or for further fractionation into transfusion products. See Note 2
to the Company's Notes to Consolidated Financial Statements in Item 8 hereunder
for further details related to the 1998 acquisition of BioSeq, Inc.
-10-
Drug Discovery. In August 1998, the Company hired a Vice President,
Biotheraputics to direct its drug discovery and development efforts. In
collaboration with Dr. K.H. Lee of the School of Pharmacy, University of
North Carolina at Chapel Hill ("UNC"), the Company conducts research relating
to compounds, pharmaceutical compositions, therapeutic methods, and vaccine
preparations, primarily in the HIV field. The Company owns, jointly with UNC,
five United States patents related to this drug discovery program. Two
additional United States patent applications and foreign applications for all
five of the joint patents are pending.
In April 1999, the Company increased its commitment to directly support
the drug discovery program at UNC, in which a full-time, post-doctoral research
scientist and two of Dr. Lee's doctoral students are working to develop
synthetic derivatives of anti-HIV compounds that have been discovered pursuant
to the Company's joint collaboration with UNC. These research scientists are
also working to introduce modifications to these derivatives in an effort to
make them more soluble, less toxic, or otherwise enhance their anti-viral
properties. UNC has licensed to the Company exclusive worldwide rights to the
five patents awarded to the Company and UNC. Two compounds covered under these
patents have exhibited therapeutic indices in in vitro test model systems in
excess of those recorded for AZT under comparable test conditions. Under this
license, the Company will also have the rights to any new anti-HIV compounds or
derivatives developed in the course of this sponsored research, provided the
Company obtains certain regulatory approvals from the FDA.
In October 1999, the Company formed a new, wholly-owned subsidiary,
Panacos Pharmaceuticals, Inc., ("Panacos") a Delaware corporation. All of the
technology, intellectual property, sponsored research agreements, and related
rights from the drug discovery business unit were transferred to Panacos
effective January 2000. Management intends to sell a substantial portion of
Panacos to third party investors in 2000 in order to obtain the substantial
amount of capital required to progress to more advanced stages of drug
development including human clinical trials. If successful in raising capital,
the Company plans to become a less than 50% shareholder in Panacos, relinquish
operational control, and switch to the equity method of accounting for its
investment, as opposed to consolidation accounting.
Sales and Marketing
The Company's sales and marketing efforts are managed on a business
unit basis. Such activities are directed by a Director of Sales and Marketing
for each unit. Overall, the Company employees 35 people in the sales, marketing,
and customer service functions.
The Company's marketing strategy is to focus on the needs of its
customers in the infectious disease testing market throughout the entire test
kit life-cycle, from initial research and development, through the regulatory
approval process and test kit production, to training, troubleshooting and
routine use by end-users such as clinical laboratories, hospitals and blood
banks.
The Company also continues to focus its sales and marketing efforts on
the emerging end-user market for Quality Control Products for infectious disease
test kits. To promote this objective, the Company uses its marketing platform,
known as "Total Quality System" ("TQS"). TQS is a package of Quality Control
Products, including the Company's Accurun(R) Run Controls and AccuChart Quality
Control Software, that is designed to provide test kit end-users with the
products needed in an overall quality assurance program. These products enable
laboratories to evaluate each of the key elements involved in the testing
process: the test kit, laboratory equipment, and laboratory personnel. The
Company believes that TQS effectively addresses the need for end-users to ensure
the accuracy of their test results. The Company intends to continue to expand
its sales and marketing activities with respect to its Accurun(R) line of run
control products. In addition, the Company continues to expand the Accurun
product line to support the high growth nucleic acid testing market, and to
capitalize on the worldwide implementation of new technology to improve the
safety of blood products.
The Company's Diagnostic Products are currently sold through a
combination of telephone, mail, third party distributors and direct sales
efforts. Domestically, Diagnostic Products are sold through a direct sales force
led by a Sales and Marketing director. The sales force consists of two sales
group managers and 12 sales representatives. Internationally, the Company
distributes its Diagnostic Products both directly and through 22 independent
distributors located in Japan, Australia, South America, Southeast Asia, Israel
and Europe. The Company's international sales
-11-
manager oversees the Company's foreign distributors. The Company's Laboratory
Instruments are sold through a direct domestic and international sales force
consisting of one director and one sales representative.
The Company's Specialty Clinical Laboratory Testing services are
marketed primarily through a direct domestic sales force, which consists of nine
sales representatives managed by one regional manager, and a sales and marketing
director. The sales representatives are located throughout the eastern,
mid-western and western United States and are supported internally by a client
services representative.
The Company emphasizes high quality products and services, technical
knowledge, and responsiveness to customer needs in its marketing activities for
both products and services. The Company educates its distributors, customers and
prospective customers about its products through a series of detailed marketing
brochures, technical bulletins and pamphlets, press releases and direct mail
pieces. These materials are supplemented by occasional advertising in industry
publications, technical presentations, and exhibitions at local, national and
international trade shows and expositions. During 1999, the Company introduced a
new product information library on the Company web site (www.bbii.com) allowing
customers, field sales personnel and international distributors immediate access
to detailed product information and marketing literature.
Seasonality
Historically, the Company's results of operations have been subject to
quarterly fluctuations due to a variety of factors, primarily customer
purchasing patterns, driven by end-of-year expenditures, and seasonal demand
during the summer months for certain laboratory testing services. In particular,
the Company's sales of its off-the-shelf Diagnostic Products typically have been
highest in the fourth quarter and lowest in the first quarter of each fiscal
year, whereas OEM product sales may peak in any quarter of the year, depending
on the customer's underlying production cycle for their product. Specialty
Clinical Laboratory Services have generally reached a seasonal peak during the
third quarter, coinciding with the peak incidence of Lyme Disease. Research
Contracts are generally for large dollar amounts spread over one to five-year
periods, and upon completion, frequently do not have renewal phases. As a
result, these contracts can cause large fluctuations in revenue and net income.
In addition to staff dedicated to internal research and development, certain of
the Company's technical staff work on both Contract Research for customers and
Company sponsored research and development. The allocation of certain technical
staff to such projects depends on the volume of Contract Research. As a result,
research and development expenditures fluctuate due to increases or decreases in
contract research performed.
Customers
The Company's customers for Diagnostic Products consist of four major
groups: (1) international diagnostics and pharmaceutical manufacturing
companies, such as Abbott Diagnostics, Behring, Biorad, Chiron, Dade-Behring,
DiaSorin, Fujirebio, Hoffman LaRoche, Ortho Diagnostics (Johnson & Johnson), and
Sanofi Diagnostics. (2) regulatory agencies such as the United States FDA, the
British Public Health Laboratory Service, the French Institut National de la
Transfusion Sanguine, and the German Paul Ehrlich Institute, (3) national and
international proficiency providers such as the College of American Pathologists
and the European Union Concerted Action for Quality Control and (4) end-users of
diagnostic test kits, such as hospital and independent clinical laboratories,
including LabCorp, Quest Diagnostics , public health laboratories and blood
banks, including the American Red Cross, Swiss Red Cross, and United Blood
Services.
The Company's customers for Laboratory Instruments consist of
international diagnostic and pharmaceutical manufacturing companies and are
generally sold on an OEM basis, for use by hospitals, and clinical and research
laboratories. In addition, Laboratory Instruments are sold directly to
environmental and food testing laboratories, and wineries. Customers include
Mast Immuno Systems, Beckman/Hybritech Inc., Vicam, and Toray Fuji Bionics Inc.
The Company's customers for specialty clinical testing services include hospital
and clinical laboratories, physicians, blood banks, researchers and other health
care providers.
-12-
The Company performs specialty testing services for a major state
prison system in connection with a third party laboratory. The Company's
customers for contract research include various agencies of the National
Institutes of Health (NIH) such as the National Institute of Allergies and
Infectious Disease ("NIAIDS"), the National Cancer Institute ("NCI"), and the
National Heart Lung and Blood Institute ("NHLBI").
The Company does not have long-term contracts with its customers for
Diagnostic Products or its Specialty Clinical Testing Services, which are
generally sold pursuant to purchase orders for discrete purchases. Laboratory
Instruments are generally sold on an OEM basis under short-term contracts with
monthly delivery dates. The Company believes that its relationships with
customers are satisfactory.
The Company's Consolidated Financial Statements, including the Notes
thereto, set forth in Item 8 of this report provide information relating to the
Company's foreign and domestic sales.
During the fiscal years 1999, 1998 and 1997, sales to the Company's
three largest customers accounted for an aggregate of approximately 16%, 18% and
20%, respectively, of the Company's net sales, although the customers were not
identical in each period. During the fiscal years 1999, 1998 and 1997, the
combined revenues to all branches of the National Institutes of Health, a United
States Government agency, accounted for approximately 15%, 13% and 13%,
respectively, of total consolidated revenues of the Company. While the Company
believes that the loss of any one of these customers would have an adverse
effect on the Company's results, this risk is partially mitigated by the
diversity of its customer base within the in vitro diagnostics industry and the
different diseases and instrument platforms on which they focus.
Manufacturing and Operations
The Company manufactures and assembles Diagnostic Products at its
facility in West Bridgewater, Massachusetts. Raw materials (primarily plasma and
serum) are acquired from a variety of vendors and through a program of donor
recruitment, screening, management, and plasma/serum collection and
characterization. Laboratory instruments are manufactured and assembled at the
Company's facility in Garden Grove, California. All important raw materials and
sub-assemblies are acquired from a variety of vendors with multiple sources of
supply.
The Company operates its specialty clinical laboratory in New Britain,
Connecticut, its research and development laboratory (including PCT and Panacos
activities) in Gaithersburg, Maryland and a repository facility in Frederick,
Maryland. See "Item 2 -- PROPERTIES."
Competition
The market for the Company's products and services is highly
competitive. Many of the Company's competitors are larger than the Company
and have greater financial, research, manufacturing, and marketing resources.
Important competitive factors for the Company's products include product
quality, price, ease of use, customer service and reputation. In a broader
sense, industry competition is based upon scientific and technical
capability, proprietary know-how, access to adequate capital, the ability to
develop and market products and processes, the ability to attract and retain
qualified personnel, and the availability of patent protection. To the extent
that the Company's products and services do not reflect technological
advances, the Company's ability to compete in its current and future markets
could be adversely affected.
In the area of Quality Control Products, the Company competes in the
United States with NABI (formerly North American Biologicals, Inc.) in run
controls and quality control panel products, with Dade International, Bio-Rad
Laboratories, Inc., and Blackhawk Biosystems Inc. in run controls, and with a
number of smaller, privately-held companies in quality control panels. In
Europe, in addition to the above, the Dutch Red Cross offers several run control
and panel products. The Company believes that all of these competitors currently
offer a less diverse line of panel and run control products than the Company,
although the Company cannot be certain that these companies will not expand
their product lines.
-13-
In the Diagnostic Components area, the Company competes with integrated
plasma collection and processing companies such as Serologicals, Inc. and NABI,
as well as smaller, independent plasma collection centers and brokers of plasma
products. In the Diagnostic Components area, the Company competes on the basis
of quality, breadth of product line, technical expertise and reputation.
The laboratory instrument manufacturing industry is diverse and highly
competitive. The Company believes its technology base, reputation for
reliability, systems integration and service capabilities provide it with a
competitive advantage over its competitors which include: Dynatech Corp,
Kollsman Manufacturing Company, Inc., Bio-Tek Instruments Inc., Rela Inc. (part
of Colorado Medtech, Inc.) and SeaMed, as well as numerous, smaller companies,
such as Awareness Technology Inc.
The Clinical Laboratory Services segment competes with large national
reference laboratories, such as LabCorp of America and Quest Laboratories, as
well as several independent regional laboratories, hospital laboratories,
government contract laboratories and large research institutions. The Company
believes that by focusing on the specialty clinical laboratory testing market,
it is able to offer its customers a higher value-added service for the more
complex diagnostic tests than the larger national reference laboratories.
BBI Biotech competes primarily with BioReliance Corporation and several
universities for research and development contracts and with McKesson
Bioservices, Inc., for repository services.
Intellectual Property
The Company holds as trade secrets current technology used to prepare
Basematrix and other blood-based products. None of the Company's Diagnostic
Components has been patented. The Company relies primarily on a combination of
trade secrets and non-disclosure and confidentiality agreements to establish and
protect its proprietary rights in these products and related technology. The
Company cannot be certain that others will not independently develop or
otherwise acquire the same, similar or more advanced trade secrets and know-how.
BBI Source has also relied on trade secrets and proprietary know-how
for its Laboratory Instruments which it protects in part by entering into
confidentiality agreements with persons or parties deemed appropriate by
management. In addition, the Company currently has six issued United States
patents, covering significant aspects of the Company's core instrument
technology and techniques, as well as several electronic and mechanical designs
employed in the Company's products.
The Company has two United States patents related to its contracts and
services work. Jointly with the Uiversity of North Carolina, at Chapel Hill, the
Company has five additional United States patents relating to compounds,
pharmaceutical compositions, therapeutic methods, and vaccine preparation in
connection with the Company's drug discovery program. Two additional United
States patents and foreign applications for all five of the joint patents are
pending. The Company intends to continue to seek patent protection for
innovations and discoveries arising out of the drug discovery programs.
The Company has fifteen pending patent applications for its Pressure
Cycling Technology. Several of these have been followed up with foreign
applications, and the Company expects to file additional foreign applications in
2000 relating to Pressure Cycling Technology. On March 14, 2000 the Company
received notice from the United States Patent Office that one of its
applications had been approved and the patent related to pressure cycling
control of chemical reactions was issued to the Company.
The Company has no reason to believe that its products and proprietary
methods infringe the proprietary rights of any other party. However, the Company
cannot be certain that other parties will not assert infringement claims in the
future.
BBI(R), Accurun(R), Microchem(R), Chemstat(R), E/LUMINA(R), EXECWASH(R)
and Verif-Eye(R) are registered trademarks of the Company.
Government Regulation
-14-
The manufacture and distribution of medical devices, including products
manufactured by the Company that are intended for in vitro diagnostic use, are
subject to extensive government regulation in the United States and in other
countries.
In the United States, the Food, Drug, and Cosmetic Act ("FDCA")
prohibits the marketing of most in vitro diagnostic products until they have
been cleared or approved by the FDA, a process that is time-consuming,
expensive, and uncertain. In vitro diagnostic products must be the subject of
either a premarket notification clearance (a "510(k)") or an approved premarket
approval application ("PMA"). With respect to devices reviewed through the
510(k) process, a company may not market a device for diagnostic use until an
order is issued by the FDA finding the product to be substantially equivalent to
an existing FDA cleared, and marketed device. A 510(k) submission may involve
the presentation of a substantial volume of data, including clinical data, and
may require a substantial period of review. With respect to devices reviewed
through the PMA process, a company may not market a device until the FDA has
approved a PMA application, which must be supported by extensive data, including
preclinical and clinical trial data, literature, and manufacturing information
to prove the safety and effectiveness of the device.
The Company's Accurun(R) Run Controls, when marketed for blood donor
screening or diagnostic use, have been classified by the FDA as medical devices
that until 1998 required clearance under the 510(k) process. In 1998, new rules
took effect that exempted unassayed controls intended for use in diagnostic
testing from the requirement for a 510(k) submission. BBI may now label these
products "For In Vitro Diagnostic Use" if they are validated according to the
Company's protocols and manufactured according to cGMP (current Good
Manufacturing Practices, which is FDA guidance for manufacturing processes for
medical devices). The FDA still requires 510(k) clearance for assayed controls,
and controls intended for use in blood screening. The FDA could, in addition,
require that some products be reviewed through the PMA process, which generally
involves a longer review period and the submission of more information to FDA.
The Company cannot be certain that it will obtain regulatory approvals on a
timely basis, if at all. Failure to obtain regulatory approvals in a timely
fashion or at all could have a material adverse effect on the Company.
As of March 1, 2000, a total of 13 products in the Accurun 1(R) line
and 18 single analyte Accurun(R) controls have either received 510(k)
clearance or have been validated according to the Company's protocols and are
manufactured according to cGMP. Certain of the Company's Accurun(R) Run
Controls are currently marketed "for research use only." The labeling of
these products limits their use to research. It is possible, however, that
some purchasers of these products may use them for diagnostic purposes
despite the Company's intended use. In these circumstances, the FDA could
allege that these products should have been cleared or approved by the FDA,
or validated prior to marketing, and initiate enforcement action against the
Company, which could have a material adverse effect on the Company. The FDA
has issued a Draft Policy Compliance Guideline, which, if it takes effect as
currently issued, will strictly limit the sale of products labeled "for
research use only." The Company is monitoring this situation, and will adapt
its policies as required.
BBI Source generally obtains 510(k) and CE approval for all laboratory
instrumentation designed and manufactured in its Garden Grove facility.
The Company is registered as a medical device manufacturer with the FDA
for its Diagnostic Products and Laboratory Instruments and files listings of its
products semi-annually. The Company's facilities in West Bridgewater,
Massachusetts for Diagnostic Products and Garden Grove, California for
Laboratory Instruments are FDA Good Manufacturing Practices (FDA/GMP)
facilities. The Company must maintain high standards of quality in
manufacturing, testing and documentation, and implement strict cGMP guidelines
governing reagent and instrument manufacturing.
Once cleared or approved, medical devices are subject to pervasive and
continuing regulation by the FDA, including, but not limited to cGMP regulations
governing testing, control, and documentation; and reporting of adverse
experiences with the use of the device. The FDA monitors ongoing compliance with
cGMP and other applicable regulatory requirements by conducting periodic
inspections. FDA regulations require FDA clearance or approval for certain
changes if they do or could affect the safety and effectiveness of the device,
including, for example, new indications for use, labeling changes or changes in
design or manufacturing methods. In addition, both before and after clearance or
approval, medical devices are subject to certain export and import requirements
under the FDCA. Product
-15-
labeling and promotional activities are subject to scrutiny by the FDA and, in
certain instances, by the Federal Trade Commission. Products may be promoted by
the Company only for their approved use. Failure to comply with these and other
regulatory requirements can result, among other consequences, in failure to
obtain premarket approvals, withdrawal of approvals, total or partial suspension
of product distribution, injunctions, civil penalties, recall or seizures of
products and criminal prosecution.
The Company believes that its Quality Control Panels are not regulated
by the FDA because they are not intended for diagnostic purposes. The Company
believes that its Diagnostic Components, which are components of in vitro
diagnostic products, may be subject to certain regulatory requirements under the
FDCA and other laws administered by the FDA, but do not require that the Company
obtain a premarket approval or clearance. The Company cannot be certain,
however, that the FDA would agree or that the FDA will not adopt a different
interpretation of the FDCA or other laws it administers, which could have a
material adverse effect on the Company.
The Company's Diagnostic Products and Laboratory Instruments business
units are both ISO9001 certified, with registration by TUV Rheinland for the
Diagnostic Products unit and British Standard Institute for the Laboratory
Instruments unit. The Laboratory Instrument group is also certified to EN46001,
a set of supplementary requirements applicable to their products.
Laws and regulations affecting some of the Company's products are in
effect in many of the countries in which the Company markets or intends to
market its products. These requirements vary from country to country. Member
states of the European Economic Area (which is composed of members of the
European Union and the European Free Trade Association) are in the process of
adopting various product and service "Directives" to address essential health,
safety, and environmental requirements associated with the subject products and
services. These "Directives" cover both quality system requirements (ISO Series
9000 Standards and the EN46001 Requirements) and product and marketing related
requirements. In addition, some jurisdictions have requirements related to
marketing of the Company's products. The Company cannot be certain that it will
be able to obtain any regulatory approvals required to market its products on a
timely basis, or at all. Delays in receipt of, or failure to receive such
approvals, or the failure to comply with regulatory requirements in these
countries or states could lead to compliance action, which could have a material
adverse effect on the Company's business, financial condition, or results of
operations.
The Company's service-related business (clinical trials, infectious
disease testing, and contract research) is subject to other national and local
requirements. The Company's facilities are subject to review, inspection,
licensure or accreditation by some states, national professional organizations
(such as the College of American Pathologists), and other national regulatory
agencies (such as the Health Care Financing Administration). Studies to evaluate
the safety or effectiveness of FDA regulated products (primarily human and
animal drugs or biologics) must also be conducted in conformance with relevant
FDA requirements, including Good Laboratory Practice ("GLP") regulations,
investigational new drug or device regulations, Institutional Review Board
("IRB") regulations and informed consent regulations.
The Clinical Laboratory Improvement Amendments of 1988 ("CLIA")
prohibits laboratories from performing in vitro tests for the purpose of
providing information for the diagnosis, prevention or treatment of any disease,
or impairment of, or the assessment of, the health of human beings unless there
is in effect for such laboratories a certificate issued by the US Department of
Health and Human Services ("HHS") applicable to the category of examination or
procedure performed.
The Company currently holds permits issued by HHS (CLIA license),
Centers for Disease Control and Prevention (Importation of Etiological Agents or
Vectors of Human Diseases), the US Department of Agriculture (Importation and
Transportation of Controlled Materials and Organisms and Vectors) and the US
Nuclear Regulatory Commission (in vitro testing with by-product material under
general license, covering the use of certain radioimmunoassay test methods).
The Company is also subject to government regulation under the Clean
Water Act, the Toxic Substances Control Act, the Resource Conservation and
Recovery Act, the Atomic Energy Act, and other national, state and local
restrictions relating to the use and disposal of biohazardous, radioactive and
other hazardous substances and wastes. The Company is
-16-
an exempt small quantity generator of hazardous waste and has a US Environmental
Protection Agency identification number. The Company is also registered with the
US Nuclear Regulatory Commission for use of certain radioactive materials. The
Company is also subject to various state regulatory requirements governing the
handling of and disposal of biohazardous, radioactive and hazardous wastes. The
Company has never been a party to any environmental proceeding.
Internationally, some of the Company's products are subject to
additional regulatory requirements, which vary significantly from country to
country. Each country in which the Company's products and services are offered
must be evaluated independently to determine the country's particular
requirements. In foreign countries, the Company's distributors are generally
responsible for obtaining any required government consents.
Employees
As of December 31, 1999 the Company employed 288 persons, all of whom
were located in the United States. Of these, 107 persons were employed by the
West Bridgewater, Massachusetts company, 78 by the New Britain, Connecticut
company, 70 by the three Gaithersburg, Maryland companies, and 33 by the Garden
Grove, California company. None of the Company's employees is covered by a
collective bargaining agreement. The Company believes that it has a satisfactory
relationship with its employees.
-17-
Executive Officers of the Registrant
The following table sets forth the names, ages and positions of the
current executive officers of the Registrant as of December 31, 1999:
Name Age Position
- ---- --- --------
Richard T. Schumacher 49 Chief Executive Officer and Chairman of the Board
Kevin W. Quinlan 49 President and Chief Operating Officer; and Director
William R. Prather, R.Ph, M.D. 52 Senior Vice President, Finance and Business Development, Treasurer and
Director
Graham P. Allaway, Ph.D. 44 Senior Vice President, Drug Discovery
Patricia E. Garrett, Ph.D. 56 Senior Vice President and General Manager of BBI Clinical Laboratories
Mark M. Manak, Ph.D. 48 Senior Vice President and General Manager of BBI Biotech
David F. Petersen 53 Senior Vice President and General Manager of BBI Source
Richard C. Tilton, Ph.D. 63 Senior Vice President, Science and Technology
Barry M. Warren 52 Senior Vice President and General Manager of BBI Diagnostics
Kathleen W. Benjamin 43 Vice President, Human Resources
Richard D'Allessandro 53 Vice President, Information Technology
Ronald V. DiPaolo, Ph.D. 55 Vice President, Manufacturing
Mr. Schumacher, the Founder of the Company, has been the Chief
Executive Officer and Chairman since 1992 and served as President from 1986 to
August 1999. Mr. Schumacher served as the Director of Infectious Disease
Services for Clinical Science Laboratory, a New England-based medical reference
laboratory, from 1986 to 1988. From 1972 to 1985, Mr. Schumacher was employed by
the Center for Blood Research, a nonprofit medical research institute associated
with Harvard Medical School. Mr. Schumacher received a B.S. in zoology from the
University of New Hampshire.
Mr. Quinlan, a Director of the Company since 1986, has served as
President and Chief Operating Officer since August 1999. From January 1993 to
August 1999, he served as Senior Vice President, Finance, Chief Financial
Officer and Treasurer. From 1990 to December 1992, he was the Chief Financial
Officer of ParcTec, Inc. a New York-based leasing company. Mr. Quinlan served as
Vice President and Assistant Treasurer of American Finance Group, Inc. from 1981
to 1989 and was employed by Coopers & Lybrand from 1975 to 1980. Mr. Quinlan is
a certified public accountant and received a M.S. in accounting from
Northeastern University and a B.S. in economics from the University of New
Hampshire.
Dr. Prather, a Director of the Company since 1999, has been Senior Vice
President, Finance and Business Development since July 1999. From January 1999
to August 1999, Dr. Prather served as Senior Vice President, Business
Development. Prior to joining the Company, Dr. Prather was the Senior Health
Care Analyst for the investment banking firm, Cruttenden Roth, Inc., from 1995
to 1998. From 1992 to 1995 he was the Senior Analyst in Health Care for Manning
and Napier Advisors. Dr. Prather earned a B.S. in Pharmacy and an MD at the
University of Missouri - Kansas City and completed a Clinical Research Geriatric
Fellowship at Harvard Medical School. Dr. Prather is a Director of Primed
International, a medical device company and a member of the Advisory Board of
the Canadian Medical Discovery Fund, Inc., a fund of MDS Capital Corp.
Dr Allaway, has served as Vice President and Senior Vice President,
Drug Discovery since joining the Company in 1998. Prior to that, from 1997 to
1998, he was CEO of Manchester Biotech (UK). From 1990 to 1997, Dr. Allaway
served in various senior management positions including Associate Scientific
Director and Head, Therapeutic Development Group at Progenics Pharmaceuticals,
Inc., in Tarrytown, New York. From 1984 to 1990 Dr. Allaway was a Visiting
Fellow and Visiting Associate at the NIH. Dr. Allaway received an M.A. in
zoology from Oxford University and a Ph.D in virology from the University of
London.
-18-
Dr. Garrett has served as Senior Vice President and General Manager of
BBI Clinical Laboratories since August 1999. From 1988 to August 1999, she
served as Senior Vice President, Regulatory Affairs & Strategic Programs. From
1980 to 1987, Dr. Garrett served as the Technical Director of the Chemistry
Laboratory, Department of Laboratory Medicine at the Lahey Clinic Medical
Center. Dr. Garrett earned her Ph.D. from the University of Colorado and was a
postdoctoral research associate at Harvard University, Oregon State University,
Massachusetts Institute of Technology and the University of British Columbia.
Dr. Manak has served as Senior Vice President and General Manager of
BBI Biotech since August 1999. From 1992 to 1999 he served as Senior Vice
President, Research and Development. From 1980 to 1992, he served as Director of
Molecular Biology and Director of Contracts and Services of Biotech Research
Laboratories. Dr. Manak received his Ph.D. in biochemistry from the University
of Connecticut and completed postdoctoral research work in biochemistry/virology
at Johns Hopkins University.
Mr. Petersen has served as Senior Vice President and General Manager of
BBI Source since August 1999. From May 1998 to August 1999, he was Vice
President, BBI Source Scientific. Mr. Peterson has 25 years of experience in
operations management and materials planning. Before joining the Company in
1988, he was the Manager of Manufacturing for Matrix Instruments from 1985 to
1988 and previously was Manager of Production and Inventory Control for Farr
Company, Inc. from 1977 to 1985. He is certified in production and inventory
management (CPIM) by the American Production and Inventory Control Society
(APICS). He is also an Assistant Professor at California State University
Dominguez Hills, where he instructs upper division courses in manufacturing
techniques and material resource planning. He holds a B.S. in business
management from the University of LaVerne in LaVerne, California.
Dr. Tilton has served as Senior Vice President, Science and Technology
since August 1999. Prior to this time he served as Senior Vice President,
Specialty Laboratory Services since the Company's acquisition of BBI Clinical
Laboratories, Inc. ("BBICL") in 1993 and was one of the founders of BBICL,
serving as its President from 1989 to 1993. Dr. Tilton has 25 years of
experience in university hospital clinical microbiology laboratories and is
board certified in medical and public health microbiology. Dr. Tilton received
his Ph.D. in microbiology from the University of Massachusetts.
Mr. Warren has served as Senior Vice President and General Manager of
BBI Diagnostics since August 1999. From 1993 to 1999, he served as Senior Vice
President, Sales & Marketing. From 1985 to 1993, Mr. Warren served as Group
Director of Marketing of Organon Teknika, a manufacturer of infectious disease
reagents. Mr. Warren received an M.A. in political science from Loyola
University of Chicago and a B.A. from Loyola University.
Ms. Benjamin has served as Vice President, Human Resources since
January 1999. Prior to her promotion to Vice President, Ms. Benjamin served as
Director of Human Resources and Investor Relations from 1997 to 1999. Prior to
joining the Company in 1997 she was employed by Shields Health Care Group, a
provider of Magnetic Resonance Imaging and radiation oncology, serving as their
Director of Operations from 1992 to 1997. Prior to this time she was an
educator. Ms. Benjamin received her B.S., from the College of Life Sciences and
Agriculture at the University of New Hampshire.
Mr. D'Allessandro has served as Vice President, Information Technology
since January 1999. Mr. D'Allessandro joined the Company in 1993 as Director,
Management Information Systems and served in that capacity until his promotion
to Vice President. Mr. D'Allessandro has 30 years of experience in data
processing/information systems technology, with a focus on manufacturing and
biotechnology organizations. Mr. D'Allessandro is APICS certified and received
his B.S. in Management Information Systems from Northeastern University.
Dr. DiPaolo has served as Vice President, Manufacturing since 1997.
From 1993 to 1997, he served as Vice President of Operations. Prior to joining
the Company, from 1986 to 1989, Dr. DiPaolo served as Vice President and General
Manager of the Biomedical Products Division of Collaborative Research, a medical
research products company. From 1975 to 1986, he was employed by DuPont New
England Nuclear, an in vitro test kit manufacturer. Dr. DiPaolo received his
Ph.D. in biochemistry from Massachusetts Institute of Technology and later
completed postdoctoral research at the Eunice Shriver Center in Waltham,
Massachusetts.
-19-
Officers are nominated by the Chief Executive Officer and elected by
the Board of Directors.
ITEM 2. PROPERTIES.
The Company owns its corporate offices and diagnostic products
manufacturing facility for its BBI Diagnostics operating segment, which is
located in a two-story, 32,000 square foot building in West Bridgewater,
Massachusetts. The Company has been renovating and expanding this facility
during the past three years, and believes that upon completion of renovations,
its facility in West Bridgewater will be sufficient to meet its needs for
several years.
The Company leases 41,000 square feet of space in Garden Grove,
California where its BBI Source business unit manufactures laboratory
Instruments. The lease continues until February 1, 2002 and the Company has an
option to renew at market rates.
The Company leases its laboratory facilities in Gaithersburg and
Frederick, Maryland and New Britain, Connecticut. The BBI Biotech segment's
Gaithersburg facility contains 36,500 square feet of custom built laboratory
and office space, and is occupied under a ten-year lease that is due to
expire on October 31, 2007. The Frederick facility contains 36,000 square
feet of primarily repository space and is also occupied by the BBI Biotech
segment, under a seven-year lease that is due to expire on November 30, 2006.
The BBICL business unit occupies the New Britain facility which has 15,000
square feet of usable area, most of which is dedicated to laboratory space.
This lease is due to expire on July 30, 2000; the Company has exercised its
option to renew the lease for an additional five years.
The Company leased approximately 2,500 square feet of laboratory space
in Woburn, Massachusetts through August 1999.
ITEM 3. LEGAL PROCEEDINGS.
There are no material legal proceedings pending against the Company or
its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the fourth quarter of fiscal 1999 to a
vote of security holders of the Company.
-20-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company completed an initial public offering of its Common Stock,
$.01 par value, (the "Common Stock") on October 31, 1996. The Common Stock is
listed on the Nasdaq National Market under the symbol "BBII".
The following table sets forth the high and low closing price, by
quarter, during the two most recent fiscal years:
Common Stock Price
------------------
Fiscal Year Ended December 31, 1999 High Low
----------------------------------- ---- ---
First Quarter $3.375 $2.625
------------- ------ ------
Second Quarter $5.313 $2.750
-------------- ------ ------
Third Quarter $4.562 $3.375
------------- ------ ------
Fourth Quarter $4.438 $2.750
-------------- ------ ------
Fiscal Year Ended December 31, 1998
-----------------------------------
First Quarter $8.063 $5.125
------------- ------ ------
Second Quarter $7.313 $4.500
-------------- ------ ------
Third Quarter $5.125 $2.500
------------- ------ ------
Fourth Quarter $4.375 $2.000
-------------- ------ ------
As of March 24, 2000, there were 20,000,000 shares of Common Stock
authorized of which approximately 5,441,960 shares were outstanding, held of
record by approximately 1,500 stockholders.
The Company has not declared or paid any dividends on its Common Stock.
In accordance with the terms of the Company's loan agreement with its bank,
payment of dividends on Common Stock requires bank approval. The Company does
not expect to recommend the payment of a dividend as it plans to continue to
reinvest profits to expand its business.
In October 1999, MdBio, Inc., an accredited investor, received 29,153
stock units in connection with its award of $175,000 to the Company under a
manufacturing incentive program that MdBio instituted. Each stock unit consists
of one share of our common stock and a warrant to purchase on additional share
of our common stock at an exercise price of $10.00 per share. MdBio's warrants
expire on September 29, 2003.
MdBio's warrants were not registered under the Securities Act of 1933,
as amended, in reliance upon the exemptions from registration set forth in
Sections 3(b) and 4(2) of that act, relating to sales by an issuer not involving
any public offering. The MdBio transaction did not involve a public offering.
-21-
ITEM 6. SELECTED FINANCIAL DATA
The statement of income data for each of the fiscal years in the five
year period ended December 31, 1999, and the balance sheet data as of December
31, 1999, 1998, 1997, 1996, and 1995, have been derived from the consolidated
financial statements of the Company. These data should be read in conjunction
with Item 8--Consolidated Financial Statements and Supplementary Data, and Item
7--Management's Discussion and Analysis of Financial Condition and Results of
Operations appearing elsewhere herein.
Year Ended December 31,
-----------------------------------------------------------------
1999 1998(1) 1997(2) 1996 1995
-------- -------- -------- -------- --------
Consolidated Statement of Income Data: (In thousands, except per share data)
REVENUE:
Products $ 14,057 $ 13,075 $ 11,711 $ 8,470 $ 6,622
Services 15,214 13,006 10,588 7,039 5,649
-------- -------- -------- -------- --------
Total revenue 29,271 26,081 22,299 15,509 12,271
-------- -------- -------- -------- --------
COSTS AND EXPENSES:
Cost of products 7,267 7,180 5,773 4,252 3,564
Cost of services 11,168 8,897 7,239 4,856 4,168
Research and development 3,259 2,461 1,311 797 375
Acquired research and development (3) -- 4,231 -- -- --
Selling and marketing 4,024 3,939 3,241 2,188 1,340
General and administrative 4,442 4,275 3,343 2,401 2,316
-------- -------- -------- -------- --------
Total operating costs and expenses 30,160 30,983 20,907 14,494 11,763
-------- -------- -------- -------- --------
(Loss) income from operations (889) (4,902) 1,392 1,015 508
Interest (expense) income, net (424) (51) 283 (213) (336)
-------- -------- -------- -------- --------
(Loss) income before income taxes and extraordinary item (1,313) (4,953) 1,675 802 172
Benefit from (provision for) income taxes 499 564 (670) (321) (69)
-------- -------- -------- -------- --------
Net (loss) income $ (814) $ (4,389) $ 1,005 $ 481 $ 103
-------- -------- -------- -------- --------
Net (loss) income per share, basic $ (0.17) $ (0.94) $ 0.23 $ 0.17 $ 0.04
Net (loss) income per share, diluted $ (0.17) $ (0.94) $ 0.21 $ 0.14 $ 0.03
Number of shares used to calculate net income per share
Basic 4,670 4,655 4,438 2,916 2,570
Diluted 4,670 4,655 4,780 3,340 3,040
December 31,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Consolidated Balance Sheet Data: (In thousands, except per share data)
Working capital $ 10,053 $ 9,095 $ 9,633 $ 12,836 $ 4,688
Total assets 26,162 24,082 23,650 19,798 9,928
Long term debt, less current maturities 7,146 3,989 26 41 4,216
Total stockholders' equity 13,646 14,069 18,067 16,290 3,187
Dividends -- -- -- -- --
(1) Effective September 30, 1998, the Company acquired all classes of stock of
BioSeq, Inc., a development stage company with no revenue, for a total
purchase price of $4,226,000.
(2) Effective July 1, 1997, the Company acquired the business and net assets of
Source Scientific, Inc. for $1,994,000 which increased 1997 revenue by
$2,608,000.
(3) Consists of $3,381,000 of in-process research and development related to the
BioSeq acquisition, and a charge of $850,000 related to the purchase of
license technology in the first quarter of 1998.
-22-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Overview
The Company generates revenue from products and services provided
primarily to the in vitro diagnostic infectious disease industry. There are two
broad product classes: Diagnostic Products and Laboratory Instruments.
Diagnostic Products consist of three groups: Quality Control Panels, Accurun(R)
Run Controls, and Diagnostic Components. Services consist of Specialty Clinical
Laboratory Testing, Contract Research, Blood Processing and Repository Services,
Clinical Trials, Laboratory Instrumentation Services, After-Sales Service and
Drug Screening.
Historically, the Company's results of operations have been subject to
quarterly fluctuations due to a variety of factors, primarily customer
purchasing patterns, driven by end-of-year expenditures, and seasonal demand
during the summer months for certain laboratory testing services. In particular,
the Company's sales of its off-the-shelf Quality Control Products and Diagnostic
Components typically have been highest in the fourth quarter and lowest in the
first quarter of each fiscal year, whereas OEM product sales may peak in any
quarter of the year, depending on the production cycle of a given project.
Specialty Clinical Laboratory Testing services have generally reached a seasonal
peak during the third quarter, coinciding with the peak incidence of Lyme
Disease. Research Contracts are generally for large dollar amounts spread over
one to five year periods, and upon completion, frequently do not have renewal
phases. As a result these contracts can cause large fluctuations in revenue and
net income. In addition to staff dedicated to internal research and development,
certain of the Company's technical staff work on both contract research for
customers and Company sponsored research and development. The allocation of
certain technical staff to such projects depends on the volume of Contract
Research. As a result, research and development expenditures fluctuate due to
increases or decreases in contract research performed.
With the acquisition of BioSeq, Inc and its pressure cycling technology
in September 1998 as well as the hiring of a Vice President for the Drug
Discovery and Development program and its subsequent formation of a new
subsidiary ("Panacos Pharmaceuticals, Inc."), the Company has significantly
increased its rate of research and development spending on new technologies. In
addition, it has continued to focus on the development of new Quality Control
Products and new tests for its clinical laboratory. Additional sales and support
will be added as needed with the expectation of continued future revenue growth.
The Company does not have any foreign operations. However, the Company
does have significant export sales in Europe, the Pacific Rim countries and
Canada to agents under distribution agreements, as well as directly to test kit
manufacturers. All sales are denominated in US dollars. Export sales for the
years ended December 31, 1999, 1998, and 1997 were $4.0 million, $4.1 million,
and $4.6 million, respectively. The Company expects that export sales will
continue to be a significant source of revenue and gross profit.
-23-
Results of Operations
The following table sets forth for the periods indicated the percentage
of total revenue represented by certain items reflected in the Company's
consolidated statements of operations:
Year Ended December 31
-------------------------------
1999 1998 1997
----- ----- -----
Revenue:
Products 48.0% 50.1% 52.5%
Services 52.0 49.9 47.5
----- ----- -----
Total revenue 100.0 100.0 100.0
Gross profit 37.0 38.4 41.6
Operating expenses:
Research and development 11.1 9.4 5.9
Acquired research and development -- 16.2 --
Selling and marketing 13.7 15.1 14.5
General and administrative 15.2 16.4 15.0
----- ----- -----
Total operating expenses 40.0 57.1 35.4
----- ----- -----
(Loss) income from operations (3.0) (18.8) 6.2
Interest income (expense) (1.5) (0.2) 1.3
----- ----- -----
(Loss) income before income taxes (4.5) (19.0) 7.5
Net (loss) income (2.8) (16.8) 4.5
===== ===== =====
Product gross profit 48.3% 45.1% 50.7%
Services gross profit 26.6% 31.6% 31.6%
Years Ended December 31, 1999 and 1998
Total revenue increased 12.2%, or $3,190,000, to $29,271,000 in 1999 from
$26,081,000 in 1998. The increase in revenue was the result of an increase in
product revenue of 7.5% or $982,000 to $14,057,000 from $13,075,000, and an
increase in service revenue of 17.0% or $2,208,000 to $15,214,000 from
$13,006,000 in 1998. Most of the product increase was attributable to the
following factors. The Diagnostics segment realized a 15.0% increase in
Accurun(R) sales as the Company continued to successfully penetrate the emerging
end-user market. In addition, the increased outsourcing occurring in the in
vitro diagnostics industry has resulted in a 57.8% increase in Basematrix sales.
The Laboratory Instrumentation segment achieved a 12.6% increase in instrument
sales as it refocused its efforts in OEM contract manufacturing. These increases
were partially offset by a 22.7% decrease in Seroconversion Panel sales,
realized by the Diagnostics segment, as the consolidation within the in vitro
diagnostic industry continues to negatively affect demand for these products.
The increase in service revenue was primarily attributable to a 39.2% revenue
increase at the Clinical Laboratory Services segment. The growth in this segment
was led by a 55.1% increase in molecular testing. Also contributing to the
growth in the service revenue was contract research within the BBI Biotech
operating segment. This growth was driven by a 43.9% increase in repository
services and the start of new contracts in the AIDS Vaccine Support arena. These
increases were partially offset by an 88.6% decrease in laboratory
instrumentation services as the Company completed its work on the ABX, Inc.,
contract in the first quarter of 1999. Management feels that the end-user market
will continue to be an area of growth for its Quality Control Products while the
outsourcing within the in vitro diagnostics market will continue to benefit
sales of Diagnostic Components and Laboratory Instrumentation. The Company also
anticipates that new contracts at the BBI Biotech segment and molecular testing
at the Clinical Laboratory segment will also contribute to revenue growth.
Overall gross profit increased 8.3%, or $831,000, to $10,835,000 in
1999 from $10,004,000 in 1998. Product gross profit increased 15.2%, or
$894,000, to $6,789,000 in 1999 from $5,895,000 in 1998 and product gross
margin increased to 48.3% in 1999, from 45.1% in 1998. Services gross profit
decreased $63,000 to $4,046,000 in 1999 from $4,109,000 in 1998 and gross
margin declined to 26.6% in 1999 from 31.6% in 1998. The increase in product
gross
-24-
margin was due entirely to the gross margins realized in the Laboratory
Instrumentation operating segment, which increased from 17.8% in 1998 to 28.1%
in 1999 as the business unit operated at a higher volume, thus realizing better
economies of scale compared with 1998 as overhead costs were spread over a
greater number of units. Product gross margins at the other segments remained
relatively steady. Management anticipates that further utilization increases at
BBI Source will continue to benefit gross margins. The decrease in service gross
margins was realized at all operating segments. The BBI Biotech segment's
service gross margin decreased from 26.8% to 19.8%. BBI Biotech margins were
adversely affected by startup costs associated with new repository contracts in
1999, primarily the acquisition of freezers, which under the terms of the
contract become government property and thus are charged directly to cost of
sales. Also, the Clinical Laboratory Services segment realized service gross
margins of 30.3% in 1999 versus 32.4% in 1998. This decrease is due to increased
competition in the molecular testing arena, which created pricing pressure,
negatively affecting margins. Finally, in early 1999, the Laboratory Instruments
segment realized a decrease in service gross margins from 52.7% to 46.3%, as it
completed the high-margin ABX, Inc., contract in early 1999. The Company feels
that service margins will continue to feel pressure from increased competition
in the clinical testing market. Furthermore as BBI Biotech expands its
repository services, low-margin contracts will account for a greater portion of
its total revenue if the Company is not continually successful in obtaining
higher margin commercial services work.
Research and development costs, exclusive of acquired in-process
research and development, increased 32.4% or $797,000 to $3,259,000 in 1999 from
$2,461,000 in 1998. A significant portion of the increase is attributable to the
operating segment referred to as "Other", which consists of the pressure cycling
technology ("PCT") and Drug Discovery activities. The Company increased its PCT
expenditures by approximately $893,000 as it completed the design, development,
and manufacture of 8 prototype PCT instruments known as "barocylcers". The
Company also made significant progress during 1999 with its patents in the
nucleic acid extraction and pathogen inactivation areas. The Company's increased
expenditures in Drug Discovery by approximately $361,000 resulted in expanded
rights under its agreement with the University of North Carolina, at Chapel
Hill, and significant progress in the prosecution of patents for the compounds.
In addition, the BBI Biotech segment increased its spending to continue its
support of the Diagnostics and Clinical Laboratory Services segments.
There were two accounting charges in 1998, which were classified on the
income statement as acquired in-process research and development. In the first
quarter there was an accounting charge of $850,000 related to the acquisition of
the worldwide exclusive rights to BioSeq, Inc's, immunodiagnostic research and
development technology. In the third quarter, the Company recorded a charge of
$3,381,000 related to in-process technology as a result of the Company's
acquisition of BioSeq, Inc. This allocation of the purchase price was based on
an independent valuation and was expensed, as no alternative future uses exist.
There were no such charges during 1999.
Selling and marketing expenditures remained relatively flat during 1999
as compared to 1998, across all operating segments. Costs increased only 2.2% or
$85,000 to $4,024,000 in 1999 from $3,939,000 in 1998 as the Company effectively
managed costs in this area.
General and administrative costs increased 3.9% or $166,000 to
$4,442,000 in 1999 from $4,276,000 in 1998. This increase is attributable to the
corporate reorganization that was announced in July of 1999. The reorganization
created business units, which are directed by a senior vice president and
general manager. The reorganization resulted in the classification of the
salaries, and other related costs, of two executives in the general and
administrative line of the income statement from other income statement lines,
to more accurately reflect their new responsibilities. General and
administrative costs are expected to increase in 2000, as the reorganization
impact will be felt for the entire fiscal year 2000. In addition, 1999 benefited
as certain general and administrative personnel costs were capitalized as
property and equipment in connection with the implementation of enterprise
resource planning systems at the Diagnostics and Laboratory Instruments
segments. General and administrative costs at the other segments were flat.
As a result of all of the above, the Company experienced an operating
loss of $889,000 versus $4,902,000 in 1998. Excluding the $4,231,000 of acquired
in-process research and development charges realized in 1998, the Company's
operating loss increased by 32.3% or $217,000 to $889,000 in 1999 from $672,000
in 1998. The Diagnostics
-25-
operating segment realized an increase in operating income of approximately
$225,000 or 40.3% and Clinical Laboratory Services operating segments
realized a significant increase in operating income of approximately $522,000
or 389.6%. The Laboratory Instrumentation segment realized a slight
reduction, 8.1%, in its operating loss. These operational improvements were
more than offset by the planned increases in research and development
expenditures, which resulted in significant operating losses in the "Other"
operating segment. Another result of the Company's increased research and
development investment is the $219,000 decrease in operating income realized
by the BBI Biotech operating segment as the business unit realized an
operating loss in 1999 of approximately $152,000 as compared to operating
income in 1998 of approximately $67,000. Management anticipates continued
strength from its Diagnostics and Clinical Laboratory Services segments.
Although the Laboratory Instrumentation segment has realized operating losses
since it was acquired in July 1997, the Company believes that the goodwill
created in connection with the acquisition is realizable as management
believes that the segment will begin to generate operating income by the end
of 2001. The Company will continue to increase its spending in the Other
segment, however, it expects that the impact from this increased spending on
the Company's bottom line will be mitigated by the planned sale of the common
stock of Panacos and the continued funding support in the area of PCT.
The Company had net interest expense of $424,000 in 1999 versus $51,000
in 1998. The Company had used its proceeds from its initial public offering and,
at the end of the second quarter of 1998, began to borrow funds from its
revolving line of credit to continue its infrastructure and research and
development investments. In addition to a higher average borrowing balance in
1999, the Company realized the effects of rising interest rates.
The Company recorded tax benefits at its combined federal and state
statutory rate of 38% for 1999. Although the Company realized consolidated
operating losses for 1999 and 1998 management believes that its valuation
allowance is adequate as the Company plans to return to profitability within six
to twelve months, at which point it will begin to realize benefit from its
federal and state tax assets. The tax benefit rate recognized in 1998 was
adversely affected by the in-process research and development charges discussed
above. The March 1998 technology license transaction resulted in a temporary
difference as the technology license is deductible for tax purposes over a
15-year period, while the September 1998 common stock acquisition resulted in a
permanent difference that is never deductible. See Note 10 to Consolidated
Financial Statements in Item 8 hereunder for further detail.
The Company had a net loss of $814,000 in 1999 versus $4,389,000 in
1998 as a result of the operating loss, the interest expense, and the effective
tax rate described above.
Years Ended December 31, 1998 and 1997
In July 1997 the Company acquired the business of Source Scientific,
Inc. The acquisition was completed by a wholly-owned subsidiary of the Company,
BBI Source Scientific, Inc., ("BBI Source") and was accounted for as an asset
purchase. The income statement for 1997 includes the results of BBI Source for
the last six months of the year, effecting comparability of results with 1998.
Total revenue increased 17.0%, or $3,782,000, to $26,081,000 in 1998
from $22,299,000 in 1997. The increase in revenue was the result of an 11.6%
increase in product revenue of $1,364,000 to $13,075,000 from $11,711,000, and a
22.8% increase in service revenue of $2,418,000 to $13,006,000 from $10,588,000
in 1997. Most of the product increase was attributable to increased sales of
Quality Control Products achieved by the Diagnostics segment. The increase in
such products was led by Accurun(R) which doubled in sales over the prior year.
Also contributing to the increase in product sales was the inclusion of BBI
Source (the Laboratory Instruments segment) for the full year in 1998 versus a
half-year in 1997. The decrease in Quality Control Panel sales at the
Diagnostics segment partially offset the product sales increases, as sales fell
short of expectations due to consolidation in the in vitro diagnostic test kit
industry. The BBI Biotech segment led the increase in service revenue with a
49.8% increase in contract research. Also contributing to the increase in
service revenue was the Clinical Laboratory Testing segment, realizing a 19.5%
increase in revenue.
Overall gross profit increased 7.7%, or $717,000, to $10,004,000 in
1998 from $9,287,000 in 1997. Product gross profit decreased 0.7%, or $43,000,
to $5,895,000 in 1998 from $5,938,000 in 1997 and product gross margin decreased
to 45.1% in 1998 from 50.7%. In 1997 the Diagnostics segment's product gross
margin benefited from significant one-time sale of two "World-Wide Panels,"
which have unusually high gross margins due to their unique characteristics.
These
-26-
panels sold out in the first quarter of 1998, with minimal impact on 1998. The
remaining product gross margin decrease was the result of lower capacity
utilization at the Laboratory Instrumentation segment. Services gross profit
increased 22.7%, or $759,000, to $4,109,000 in 1998 from $3,350,000 in 1997 and
gross margin remained steady at 31.6% in 1998 and 1997. Higher margins generated
by the Contract Services and Laboratory Instrumentation segments offset the
decrease in margins realized by the increased pricing pressure facing the
Clinical Laboratory Testing segment
Research and development expenditures increased 87.7%, or
$1,150,000, to $2,461,000 in 1998 from $1,311,000 in 1997. The increase was
realized across all of the segments. The Laboratory Instrumentation segment
invested in new reflectance technology for its Verif-Eye product line. The
Diagnostics segments also increased its development expenditures,
specifically for development of Accurun(R) molecular and immunological Run
Controls. The Company invested in development of new specialized molecular
assays for use by the Clinical Laboratory Testing segment. Finally, the
Company began the development of PCT as it acquired BioSeq, Inc. (one
component of the Other segment) in September 1998.
There were two accounting charges during the twelve months ended
December 31, 1998, which were classified on the income statement as acquired
in-process research and development. In the first quarter there was an
accounting charge of $850,000 related to the acquisition of the worldwide
exclusive rights to BioSeq Inc's immunodiagnostic research and development
technology. In the third quarter, the Company recorded a charge of $3,381,000
related to in-process technology as a result of the Company's $4,226,000
acquisition of BioSeq, Inc.
Selling and marketing expenses increased 21.5%, or $698,000, to
$3,939,000 in 1998 from $3,241,000 in 1997. The increase was attributable
primarily to inclusion for a full year in 1998 of the expanded TQS sales,
marketing, and technical support staff added to the Diagnostics segment in the
spring of 1997. The Company also expanded its presence at tradeshows, resulting
in higher expenditures in this category.
General and administrative costs increased 27.9%, or $933,000, to
$4,276,000 in 1998 from $3,343,000 in 1997. This increase was attributable
primarily to additional support staff, and increased information systems
consulting and investor relations activities at the Diagnostics segment, which
includes the majority of the corporate functions and officers for both periods.
In addition, the inclusion of the Laboratory Instrumentation segment for a full
year added $412,000 of expense to this category.
As a result of all of the above, the Company experienced an
operating loss of $4,902,000 versus income of $1,392,000 in 1997. This
decrease was primarily a result of the acquired in-process research and
development expense, a higher operating loss at the Laboratory
Instrumentation segment, increased research and development expenditures at
all segments, and lower profitability at its Diagnostics and Clinical
Laboratory Testing operating segments.
The Company had net interest expense of $51,000 in 1998 versus
interest income of $283,000 in 1997. The Company had used the proceeds from
its initial public offering and, at the end of the second quarter of 1998,
began to borrow funds from its revolving line of credit to continue its
infrastructure and research and development investments.
The Company provided taxes at the combined federal and state rate of
38% for 1998 versus 40% in the prior year. The rate decrease was the result of
offsetting the Massachusetts taxable income of the Diagnostics operating segment
with the Massachusetts losses of BBI BioSeq, Inc., This benefit was adversely
impacted by the tax treatment of the acquired in-process technology from BioSeq,
Inc. as the acquisition was structured as a stock purchase. Therefore, the
effective benefit rate for 1998 was approximately 11%.
The Company had a net loss of $4,389,000 in 1998 versus net income
of $1,005,000 in 1997 as a result of the operating loss described above and a
shift to interest expense in 1998 versus interest income in 1997.
-27-
Liquidity and Capital Resources
At December 31, 1999, the Company had cash and cash equivalents of
approximately $315,000 and working capital of $10,053,000. Gross trade
accounts receivable increased $483,000 or 7.2% as a result of a 7.8% increase
in revenues in the fourth quarter of 1999 versus the same period in 1998.
Inventory increased $228,000 or 3.4%, related primarily to work-in-process
for upcoming projects within the Diagnostics segment.
The Company has financed its operations to date through cash flow from
operations, borrowings from banks and the sale of its common stock. The Company
expects its cash flow, working capital, and available borrowings under its
revolving line of credit to meet existing operational needs in 2000. In mid 1999
the Company and its bank agreed to a modified borrowing agreement with revised
financial covenants, which the Company expects will meet existing operational
needs for the foreseeable future. At December 31, 1999 the Company was in
compliance with its financial covenants.
In addition, in March 2000 the Company received a signed term sheet
from a bank for a mortgage of the Company's West Bridgewater, MA facility. The
Company anticipates that it will complete the transaction in the beginning of
the second quarter of 2000. The Company intends to use the $2,500,000 of cash
generated to pay down its existing line of credit.
Net cash used in operations for 1999 was $657,000 as compared to
$1,215,000 in 1998. This decrease in operational use of cash is due to improved
management of working capital, including better utilization of inventory and
more effective management of payables and receivables. The $123,000 increase in
reserve for doubtful accounts partially offset this improvement of operational
cash flow. The Company increased its reserve because there has been a gradual
shift in the Company's customer mix from large, well known, in vitro diagnostics
manufacturers to a more diversified customer matrix, which includes smaller,
less established companies. While the Company has not yet experienced a
significant increase in write-off's as a result of this shift, management feels
that establishing the current level of reserve is prudent.
Cash used in investing activities for 1999, 1998 and 1997 amounted to
$2,731,000, $5,462,000, and $5,396,000, respectively. Substantially all of the
investing activities in 1999 related to additions of property and equip