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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2000
OR

Commission File Number 000-21873

BIOSITE DIAGNOSTICS INCORPORATED

(Exact name of registrant as specified in its charter)

Registrant's telephone number, including area code: (858) 455-4808

Securities registered pursuant to Section 12(b) of the Act:
NONE

Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.01 par value

Preferred Stock Purchase Rights
(Title of Class)

   Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes /x/  No / /

   Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

   The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing sale price of the Common Stock on February 28, 2001 as reported on the Nasdaq National Market, was approximately $382,000,000. Shares of Common Stock held by each executive officer and director and by each person who owns 10% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

   As of February 28, 2001, there were 14,158,299 shares of the Registrant's Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Registrant's Proxy Statement to be filed with the Securities and Exchange Commission in connection with the solicitation of proxies for the Registrant's 2001 Annual Meeting of Stockholders to be held on June 14, 2001 is incorporated by reference in Part III, Item 10 (as to directors), 11, 12 and 13 of this Form 10-K.

BIOSITE DIAGNOSTICS INCORPORATED

FORM 10-K

INDEX

Biosite®, Triage®, ExpressTest® and Immediate Response Diagnostics® are registered trademarks of the Company. Omniclonal(tm) and the Company's logo are trademarks or service marks of the Company.

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PART I

Item 1. BUSINESS

    Except for the historical information contained herein, the matters discussed in this Annual Report on Form 10-K are forward-looking statements that involve risks and uncertainties, including the timely development, introduction and acceptance of new products, manufacturing efficiency issues, dependence on others, the impact of competitive products, third-party reimbursement issues, changing market conditions and the other risks detailed throughout this Form 10-K. Actual results may differ materially from those projected. These forward-looking statements represent our judgment as of the date of the filing of this Form 10-K. We disclaim, however, any intent or obligation to update these forward-looking statements.

Background

    Biosite Diagnostics Incorporated was established in 1988. We are a research-based diagnostics company dedicated to the discovery and development of novel protein-based tests that improve a physician's ability to diagnose disease. We combine separate, yet integrated, discovery and diagnostics businesses to access proteomics research, identify proteins with high diagnostic utility, develop and commercialize products and educate the medical community on new approaches to diagnosis. We believe our products, which are aimed primarily at the diagnosis of catastrophic diseases, positively impact medical decisions, improve the quality of patient care and contribute to cost-effective medical treatment.

    Our diagnostics business is a leading provider of rapid tests that aid in the diagnosis of a variety of critical diseases. These tests are sold worldwide primarily for use in emergency departments and hospital laboratories, although we believe that in the future certain tests may have applications in other clinical sites. Our two product platforms are designed to provide rapid results through either qualitative visual readings or quantitative meter readings. These platforms are based upon our proprietary technologies in the areas of antibody development, signaling chemistry and micro-capillary fluidics. Our testing formats are designed to measure single analyte targets or multiple analytes simultaneously. They also allow for the analysis of various sample sources, including urine, serum, plasma, whole-blood and stool. Among the products expected to contribute most significantly to product revenue in the future are the Triage® Drugs of Abuse Panel, the Triage Cardiac System and the Triage BNP Test.

    In 1992, we launched our first product, the Triage Drugs of Abuse Panel, a small, self-contained, qualitative test capable of detecting within urine a broad spectrum of commonly overdosed prescription and illicit drugs within approximately 10 minutes. Results from the Triage Drugs of Abuse Panel enable physicians to differentiate drug overdose from other conditions with similar symptoms. Currently, the Triage Drugs of Abuse Panel is used in approximately 2,000 of U.S. acute care hospitals. Net sales of the Triage Drugs of Abuse Panel were approximately $35.2 million in 2000.

    In 1999, we completed the national launch of our first quantitative product, the Triage Cardiac System. The Triage Cardiac System, comprised of the Triage Cardiac Panel and the Triage Meter, is designed to measure three cardiac proteins, CKMB, myoglobin and Troponin I, within 20 minutes using a whole-blood sample. The Triage Cardiac System aids in the diagnosis of acute myocardial infarction, or AMI, commonly known as heart attack, by enabling physicians to easily and frequently monitor changes in the levels of these proteins, which rise as heart damage occurs. Access to this information provides physicians with an enhanced ability to make treatment decisions in a timely manner. The Triage Cardiac System is in the early stages of market penetration, with approximately 440 customers using the system at year-end 2000. Net worldwide sales of the Triage Cardiac System were $13.2 million in 2000.

    In November 2000, we received FDA approval to market the Triage BNP Test, the first blood test approved in the United States as an aid in the diagnosis of congestive heart failure. The Triage BNP

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Test measures levels of B-type natriuretic peptide, or BNP, a hormone that is elevated in patients suffering from heart failure. Physicians can use measurements of BNP to distinguish heart failure from other diseases with similar symptoms. We believe that BNP may also be useful in evaluating treatment of patients undergoing therapy and we intend to conduct clinical studies to further explore this application. We commenced marketing of the Triage BNP Test in December 2000. Historically, the market has been slow to adopt new protein markers and requires significant validation in the form of published studies. Accordingly, we expect 2001 sales to be less than $3 million. However, we do believe that the long-term growth prospects for this product are significant.

    The principal market for our products is comprised of hospitals, which number approximately 5,000 in the United States. We focus our efforts on larger centers and aim to place our products in emergency departments and other point-of-care locations, as well as in laboratories. In marketing our products we utilize a direct sales team that includes general account executives and cardiovascular account executives, who have extensive experience selling cardiovascular devices or drugs. The Fisher HealthCare division, or Fisher, of the Fisher Scientific Company distributes our products in U.S. hospitals and supports our direct sales force, particularly in smaller hospitals. In international markets, we utilize a network of country-specific and regional distributors.

    In addition to focusing our attention on commercial activities associated with our existing products, we are investing in discovery efforts aimed at finding proteins with high diagnostic utility. We believe such proteins can be patented or licensed with some level of exclusivity and commercialized using our testing platforms. We are targeting our efforts toward acute conditions that currently lack good diagnostic methods. We believe there is a lack of good diagnostic tests for several critical diseases, including stroke and acute coronary syndromes. We believe that the discovery of new protein markers could lead to the development of novel tests that would play an important role in improving patient care by aiding in the rapid diagnosis of acute diseases or conditions where initiation of the most effective treatment is time-sensitive.

    In March 1999, we launched Biosite Discovery, a collaborative research business dedicated to the identification of new protein markers for acute diseases. Through Biosite Discovery, we conduct analyses on both known proteins that may be markers of disease and potential markers accessed from partners in order to determine diagnostic utility. We refer to this process as marker mining. If the diagnostic utility of a marker is established, it will then be assessed for commercialization potential, with high value markers being added to our product development pipeline. To gain access to novel proteins, we primarily leverage our expertise in phage display antibody development, providing pharmaceutical and biotechnology partners with high throughput development of high affinity antibodies for research use and seeking, in exchange, licenses to their protein targets in addition to fees. Under Biosite Discovery, we have executed collaborative agreements with partners in the areas of cardiovascular, cerebrovascular, infectious disease and oncology. Our collaborative partners include the TIMI Group of Brigham and Woman's Hospital, Corixa Corporation, Diadexus L.L.C., Duke University, Eli Lilly, Eos Biotechnology Inc., Johns Hopkins Hospital, Large Scale Biology Corporation, Medarex Inc., Morphosys AG, Scios Inc. and the San Diego VA Medical Center. In 2000, these collaborations generated revenues of $3.3 million.

    In 2000 we entered into an agreement with Medarex, Inc., or Medarex, pursuant to which we are combining our proprietary phage display technology with Medarex's proprietary transgenic mouse technology to offer a process for high throughput development of high affinity fully human antibodies. This process is being provided as a service to biotechnology and pharmaceutical companies, which require high affinity fully human antibodies for use in conducting target validation and, or, characterization experiments. Under the terms of the eight-year agreement, Medarex will provide us with research funding of $3 million per year.

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    When Biosite and Medarex enter into agreements to provide high affinity, fully human antibodies to third-party biotechnology and pharmaceutical customers, we will generally receive a variety of payments and we will also seek exclusive or semi-exclusive diagnostic rights to the protein targets provided to us by biotechnology and pharmaceutical customers. Among the payments we might receive are: up-front technology access fees, antibody development fees upon the delivery of antibodies, annual maintenance fees on targets for which Biosite has produced antibodies for as long as the targets remain in development, milestone fees on targets that reach clinical milestones and royalties should products successfully be commercialized as a result of the collaboration.

    In January 2001, we initiated a technology alliance with Large Scale Biology Corporation, or LSBC, through its wholly-owned proteomics subsidiary. Through this alliance we plan to generate the antibody and protein target components required to produce the first generation of commercial protein chips. Protein chips (also called antibody arrays) are research tools for measuring large numbers of proteins in biological samples and are expected to become the preferred technology for high-volume applications such as clinical research, diagnostics and toxicology.

    Under the collaboration, LSBC, through its wholly-owned proteomics subsidiary expects to provide 2,000-5,000 protein targets from its Human Protein Index™ (HPI™) and other proteomics programs, as well as expressed proteins produced with its proprietary GENEWARE® technology. Biosite, through its Biosite Discovery business, will use its proprietary high throughput Omniclonal™ phage display technology to generate high affinity antibodies to the targets, enabling creation of antibody arrays in a variety of formats, including chips. The companies intend to pursue commercial research opportunities in the protein chip market by making a broad antibody and target package available to partners.

    LSBC and Biosite intend to pursue the protein chip market, with a sharing of rights and returns. Biosite will obtain certain diagnostic licenses to targets and LSBC will retain all other target rights, including uses in proteomics, database creation, and therapeutics. Biosite will receive antibody development fees as well as payments for certain products successfully developed through the joint research efforts. If diagnostic products are successfully developed and commercialized, LSBC will receive milestone payments and royalties.

Industry Overview

Diagnostics

    According to industry reports, the worldwide market for immunoassays was approximately $4.1 billion, consisting primarily of testing related to infectious disease, endocrinology, therapeutic drug monitoring, drugs of abuse testing, and cancer markers. The global market for immunoassays continues to expand as new disease states are identified, new therapies become available, and worldwide standards of living and access to health care improve. In recent years, diagnostic tests that can be performed nearer to the point of patient care have emerged as an important tool in disease diagnosis and management.

    Immunoassays were first developed based on technology developed in the 1960s. Although early immunoassays offered unprecedented levels of sensitivity for the detection of low concentration analytes, they suffered from relatively short shelf-lives, long reaction times, a need for radioactive labels to detect completed reactions and lack of consistent results among products from different suppliers. Over time, technological advances such as the introduction of monoclonal antibodies, enzyme and fluorescent labels and various solid phase formats shortened immunoassay reaction times, provided higher specificity and allowed the development of tests with longer shelf-lives and greater consistency.

    These advances also led to the development of immunoassay analyzers, testing systems utilizing automated liquid handling mechanisms and pipetting systems for reagent addition. Modern immunoassay analyzers are capable of storing and selecting multiple reagents for a variety of analytes,

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including drugs, hormones and cancer antigens. They also provide accurate and highly sensitive test results and help to simplify the performance of immunoassays. However, immunoassay analyzers are large and complex, may have lengthy turnaround times and require high volumes of sample throughput to justify the investment in equipment, training, staffing and other costs required to operate and support the systems. Even those systems with rapid onboard turnaround times require transport of the sample to the testing lab and preparation of the samples to obtain serum or plasma, which can be time consuming.

    In recent years, there has been a continuing shift from the use of such conventional analyzer systems to more technologically advanced rapid testing methods that can be performed in minutes by less skilled personnel. Simple, rapid immunoassays are capable of detecting a single analyte target with a color change that can be visually interpreted. Formats such as dipsticks, test tubes and membrane test cartridges have been used to provide fast, non-instrument read results for conditions where a single analyte target is present in high concentrations and where a simple yes/no non-numeric answer is clinically relevant. Rapid color change test formats are widely available for drugs of abuse, pregnancy, strep throat and ovulation prediction. Until recently, simple test formats have remained incapable of precise, multi-analyte detection or highly sensitive, quantitative measurements. As a result, medical conditions where the detection of one or more analytes is required or where the precise measurement of the target analyte is required have remained the domain of immunoassay analyzers.

    We believe that significant market potential exists for advanced rapid diagnostic products that are capable of precise quantitative measurement of multiple analytes. Rapid testing, including point-of-care testing, may help to reduce overall health care delivery costs and can improve patient outcomes by providing diagnosis in a reduced period of time, thereby minimizing the time to medical intervention. Patients undergoing emergency procedures can benefit from more timely and accurate testing results, both of which ensure correct decision making which could limit unnecessary use of costly inpatient care. Quicker diagnosis of infectious agents can also permit earlier prescription of appropriate medications, potentially shortening the duration of illness.

Discovery

    Biosite Discovery provides antibodies to pharmaceutical and biotechnology companies for research on potential targets. Antibodies have traditionally been a valuable tool in the characterization of protein targets because the antibodies may be used to localize the protein in tissues, to quantify the protein in body fluids, and to modulate the biological activity of the protein by, for example, binding to the protein and blocking its natural function. Antibodies have been traditionally derived from immunization of animals and either the harvest of antiserum containing antibodies or the development of monoclonal antibodies using hybridoma technology. Antisera were generally of limited utility and monoclonal antibody technology is labor intensive and not cost-effective for the validation of large numbers of protein targets. In 1990, the phage display of antibodies was invented and over the past decade it has enabled the development of antibodies with much greater efficiency than the previous methods.

    Several companies, including Cambridge Antibody Technology, Morphosys, and Dyax, have invested significantly in the technology and each employs naïve human antibody libraries to select antibodies for target validation purposes and for the development of therapeutic antibodies. Biosite Discovery differs in its application of phage display technology by using either immunized mice to produce murine antibodies or immunized transgenic mice to produce fully human antibodies. The immunized mice produce high affinity antibodies that can be selected using phage display. Many of our competitors do not use immunized mice, and antibodies that are initially selected from their naïve human antibody libraries are generally of lower affinity.

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    Biosite Discovery employs a collaborative business model that leverages our antibody capabilities to obtain access to diagnostic rights for protein targets. We believe that our model is significantly different from that of our competitors, and we believe that our model is attractive to biotechnology and therapeutic companies.

Technology

    Several proprietary advances in the biological and physical sciences that make practical the development and manufacture of rapid, accurate and cost-effective point-of-care diagnostics form the basis of our Immediate Response Diagnostics® technology. Our products integrate our expertise in several core scientific and engineering disciplines, including antibody development and engineering, analyte cloning and synthesis, signaling chemistry and micro-capillary fluidics, each of which is described below. Our research and development program is supported by 86 employees, including 19 Ph.D.s with expertise in our core technologies. By combining research capabilities in each of these areas, we create novel single and multi-analyte diagnostics that overcome the limitations of traditional rapid diagnostic technologies and seek to address the significant unmet need for effective point-of-care diagnostic information.

Antibody Development

    We believe that our internal antibody development capabilities allow rapid identification and development of antibodies with optimal specificity, affinity and stability characteristics. We initially utilized hybridoma technology for the selection and production of our novel antibodies. However, hybridoma technology has distinct disadvantages that include the length of time required to develop antibody candidates, the higher costs associated with the use of this technology and the need to restart the antibody development process when unwanted characteristics such as cross reactivities are discovered.

    We developed a proprietary process utilizing phage display of antibodies that enables the selection and production of antibodies more rapidly and efficiently than is possible using hybridoma technology. The technology enables the high throughput generation of custom Omniclonal™ antibody libraries containing genes encoding antibodies specific to the target analyte. Omniclonal antibodies produced from such libraries can contain thousands of different antibodies that bind to a target analyte with high affinity. High affinity refers to an antibody's ability to bind tightly to targets, and is a highly desired attribute. Monoclonal antibody candidates can be rapidly selected from an Omniclonal antibody library and produced in quantities sufficient for product development. During the course of product development, unexpected antibody cross reactivities often require additional selection of antibodies to improve the assay specificity. Unlike hybridoma technology, Omniclonal antibody libraries can rapidly provide additional antibody candidates in these circumstances.

Analyte Cloning and Synthesis

    Our molecular biology capabilities include the cloning and identification of specific proteins useful in the development of immunoassays. We developed proprietary expression vectors that enable the production and purification of these proteins for the development of antibodies and for use as calibrators and controls in our immunoassay products. In addition, our considerable expertise in synthetic organic chemistry allows the synthesis of targets and useful derivatives. We develop products where the targeted analyte is small (i.e., haptens, such as drugs) or large (i.e., proteins, such as cardiac enzymes). We believe that the ability to develop, stabilize and manufacture the target analyte or its analogues is key to the development of highly accurate immunoassays.

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Color/Photochemical Signaling

    Immunoassays require the attachment of a detectable label to an antibody or target analyte. We developed a variety of labels for use in our products. For our qualitative tests, a visual label that produces color is attached to antibodies or analytes through either non-covalent or covalent chemical methods to provide yes/no results. For our quantitative products, we developed novel fluorescent dyes that are attached to antibodies or analytes using both noncovalent and covalent chemical means. Although fluorescence is a potentially powerful label for use in immunoassays, its potential has been limited by the lack of available dyes that are stable and have no sample interference, and by the requirement of a complex instrument for detection. Our novel fluorescent dyes are stable and exhibit properties that permit their use in complex biological samples such as serum, plasma and whole-blood without interference from the sample. Furthermore, these novel dyes absorb light at wavelengths where a simple instrument can be used to excite and detect fluorescence for quantitative measurements.

Micro-capillary/Protein Chip Technology

    We developed proprietary technology to design, develop and manufacture protein chips containing micro capillaries to control the flow of fluids in immunoassay processes. The qualitative device format uses micro capillaries to draw fluids through a membrane that contains immobilized antibody zones for the detection of specific substances. The quantitative protein chip format uses several different micro-capillary designs to control the contact of sample with reagents and to control the flow of fluid throughout the protein chip. When a sample is added to the quantitative protein chip, a filter contained within the chip separates blood cells from plasma, which capillary forces then direct into a chamber that contains dried immunoassay reagents. After an incubation time that is determined by another micro-capillary element of the chip, the volume of sample that contacted the reagents flows down a capillary path that brings it into contact with an antibody array. The binding of fluorescent reagents at the protein array is detected by an instrument and is related to the concentration of the substance being tested for in the sample. We also developed the engineering capability to design unique micro-capillary structures in plastic parts and to fabricate them in commercial scale quantities using injection molding processes.

Sample Handling

    We developed proprietary technology relating to sample handling and preparation, including technology that allows whole-blood to be passively separated into its plasma component or to be passively lysed to release the target analyte. We developed technologies for the handling of stool samples that concentrate and purify the target analytes or organisms from solid stool materials. In addition, we developed technologies that can be used to assay urine samples.

Product Platforms

    We have used our core technologies to develop two product platforms: the Triage Panel and the Triage Meter System. Both of our product platforms utilize our expertise in antibody development, analyte cloning, signaling chemistry, micro-capillary fluidics and sample handling technologies.

Triage Panel—Qualitative Platform

    We designed the Triage Panel platform for rapid, qualitative screening of multiple analytes in a small, hand-held single-use device. The Triage Panel has a visual (yes/no) display containing simultaneous tests for any combination of analytes and control standards. It can be performed in a simple multi-step process and is capable of performing tests on both urine and stool. The Triage Drugs of Abuse Panel, the first product developed on this platform, tests for analytes of up to eight abused

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drugs in approximately 10 minutes. The Triage C. difficile Panel and the Triage Parasite Panel, the other products developed on this platform, test for microorganisms that cause severe gastrointestinal disease.

Triage Meter System—Quantitative Platform

    Our Triage Meter System platform is designed to provide rapid quantitative results for immunoassays using whole-blood, serum or plasma. The Triage Meter System consists of two parts: a small, single-use disposable test panel and a proprietary, compact, fluorescent meter that can be used at the point-of-care or in laboratories. After a blood sample is applied to the panel, the panel is inserted into the meter, which is designed to automatically and simultaneously detect multiple analytes and display the numerical results on an electronic read-out. The meter incorporates proprietary software in erasable, programmable, read-only memory (EPROM) chips, which are plugged into the meter. This software allows a meter to be used for performing different tests. The software may also provide important information about the analyte being measured, such as normal or abnormal levels of a marker, which could then be used to diagnose disease or manage patient therapy. Studies have validated that the analyte sensitivity of the Triage Meter System products is clinically comparable to the clinical sensitivity levels of the conventional immunoassay analyzers. The Triage Cardiac System and the Triage BNP System are our first commercialized products developed under this platform. We are developing other applications for this platform.

Product Attributes

    Although our commercial products and products under development are based upon our Triage Panel and Triage Meter System platforms and utilize different technologies, they share common attributes which we believe make them superior to conventional immunoassay analyzers:

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Rapid Results: Our products and products under development are designed to offer complete results in a rapid timeframe.



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Ease of Use: Our products and products under development are designed to be simple to use. The Triage Drugs of Abuse Panel has only three steps while the Triage Meter System products require only one assay step.



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High Analytical Accuracy: We develop and use high quality biological and chemical reagents to yield highly specific, accurate and reproducible analytical results.



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Capability of Performing Multiple Analyses: We design our products and products under development to measure one or more target analytes simultaneously, including reagent controls, without sacrificing the quality of the individual analysis. This simultaneous detection capability can provide significant time and cost savings compared to current technologies.



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Reliability: We use internal thresholds, built-in controls, software lockouts and other control mechanisms that are intended to make our current and future products reliable in any hospital or clinical laboratory setting.



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Cost Effectiveness: We design our products and products under development to simplify the performance of highly complex testing procedures and potentially reduce the cost of patient care, and equipment acquisition and maintenance, making our products cost-effective alternatives to conventional immunoassay analyzers.

Commercialized Products

    We introduced the Triage Drugs of Abuse Panel in 1992. Hospital laboratories and emergency departments use it to screen for up to eight commonly abused prescription and illicit drugs or drug classes. During 1998, we began selling three new products, the Triage C. difficile Panel, the Triage

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Parasite Panel and the Triage Cardiac System (on a limited basis). The Triage BNP System was launched on a limited basis in Europe in December 1999 and on a full-scale basis in the United States in December 2000. We distribute our products in the U.S. hospital market segment through Fisher and internationally through country-specific and regional distributors.

    We have additional products under development which apply our core technologies to a variety of other medical testing needs and we continue to pursue research of new proteins that can be directed toward the expansion of menu options and additional uses of our current products. We continue to evaluate other rapid diagnostic product opportunities that can utilize our technologies.

    We intend, where appropriate, to enter into licensing and/or collaborative arrangements to develop and commercialize additional future products. We may not be able to negotiate license or collaborative arrangements on favorable terms, if at all, in the future. Our current or future licensing or collaborative arrangements may not be successful.

The Triage Drugs of Abuse Panel

    We believe that the U.S. drug screening market totals approximately $725 million annually. Our Triage Drugs of Abuse Panel is marketed primarily in the hospital segment, which accounts for approximately 16% of total drug testing market sales. Within hospitals, medical testing typically occurs in laboratories, although testing may also occur at the point-of-care. Test results are generally reported to emergency physicians and psychiatrists.

    Drug abuse plays a significant role in emergency medicine cases occurring annually in the United States, either as a primary cause such as an overdose, or as a contributing factor such as in the case of an accident. A diagnostic dilemma confronts physicians when patients present with symptoms that could either be drug related or non-drug related. A patient brought to a hospital emergency department in a coma may be under the influence of narcotics or sedatives, which may require one type of treatment or intervention. Conversely, the same patient may have had a stroke or suffered some form of trauma requiring a completely different type of care. The ability to obtain a differential diagnosis in a timely manner greatly aids the course of treatment.

    Prior to the introduction of the Triage Drugs of Abuse Panel, drug or toxicology screening was primarily accomplished using automated immunoassays and Gas Chromatography/Mass Spectroscopy, or GC/MS. Although GC/MS is the most specific identification method commercially available, it is time consuming, requiring an average of approximately three hours per test, complex and expensive, and is generally reserved for final confirmation of specimens that have been screened positive by an immunoassay. Automated immunoassays, although less expensive than those performed by GC/MS, also require significant amounts of time, approximately one to two hours, because of the necessity of performing analyses of several drugs sequentially on each patient specimen. Additionally, in many cases the equipment required to perform an immunoassay is not accessible on an immediate or rapid basis.

    The Triage Drugs of Abuse Panel is a rapid, qualitative urine screen that analyzes a single test sample for up to eight different illicit and prescription drugs or drug classes, and provides results in approximately 10 minutes. The Triage Drugs of Abuse Panel is instrument independent, contains built-in controls for accuracy and is capable of a high degree of specificity.

    Illicit drugs detected by the Triage Drugs of Abuse Panel include:

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Amphetamines/Methamphetamines (ecstasy, speed, crystal)

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Cocaine (crack)

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Opiates (heroin)

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Phencyclidine (angel dust)

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Tetrahydrocannabinol (pot, marijuana)

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    Prescription drugs tested by the Triage Drugs of Abuse Panel include:

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Barbiturates (Phenobarbital)

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Benzodiazepines (Valium, Librium, Halcion)

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Tricyclic Antidepressants (Elavil, Tofranil)

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Methadone.

    The Triage Drugs of Abuse Panel is configured to test various combinations of the above drugs. In February 1995, We launched the Triage Drugs of Abuse Plus TCA Panel, a configuration which includes a test for Tricyclic Antidepressants ("TCA") which otherwise require a separate blood test. Approximately 2,000 of acute care hospitals in the United States use the product.

The Triage Cardiac System

    We estimate that, each year 5 to 6 million people in the United States visit hospital emergency departments with complaints of chest pain. In studies conducted in 1995 and 1996, almost half of all chest pain patients did not receive a definitive diagnosis. We believe that frequent, quantitative, serial measurements of multiple cardiac protein markers may improve a physician's ability to manage, diagnose and treat patients suffering from chest pain.

    The blocking or "occlusion" of an artery that provides oxygen-enriched blood to the heart generally causes heart attack. Without oxygen the heart muscle is destroyed, with prolonged occlusion resulting in additional muscle damage. The destruction of cells in the heart muscle results in the release of several proteins into the bloodstream, including CK-MB, troponin I and myoglobin.

    In diagnosing heart attacks, clinicians generally rely on patient history, physical exam, electrocardiograms and the measurement of cardiac protein markers. CK-MB and troponin I are the most widely used cardiac markers, while myoglobin is also emerging as a useful adjunct in the early detection of heart attacks. Because the concentrations of these three markers typically peak and fall over different time periods, we believe that frequent, simultaneous measurement of these markers is a more accurate diagnostic technique for heart attacks than infrequent measurement of any one single marker. Studies have shown that concentrations of myoglobin are elevated most quickly post-heart attack, therefore, myoglobin is recognized as a good early marker of an event. However, since myoglobin is not cardiac specific, the use of CK-MB and troponin I are necessary to accurately diagnosis a heart attack. In patients with a heart attack, CK-MB and troponin I are detectable several hours after myoglobin elevation. Since troponin I is cardiac specific, an elevated level of this marker is a strong indication of a heart attack.

    Given the temporal patterns of cardiac protein markers, we believe that frequent measurements of multiple cardiac markers provide the best information from which to diagnose a heart attack. Several diagnostic tests have been developed to quantitatively measure the blood levels of such markers. Unfortunately, the quantitative measurement of multiple markers generally requires large, centralized immunoassay systems that cannot directly analyze whole-blood and are not always available on a rapid basis. Since turnaround time is critical to enabling frequent, serial testing of cardiac markers, current immunoassay systems may not satisfy physician needs. Centralized immunoassay systems also require multiple reagent packs, as well as frequent standardization and quality control. Smaller automated systems have recently been developed, however these are not portable, have low throughput and often cannot provide results for three markers in less than 20 minutes.

    The adoption of new protocols for evaluating chest pain patients in the emergency department is not yet widespread and we believe that education of the medical community will be a key factor in penetrating the market. Associations such as the National Academy of Clinical Biochemistry have issued guidelines recommending greater use of cardiac markers in evaluating chest pain in the emergency department. The National Academy of Clinical Biochemistry has recommended the use of at least two markers (an early marker and a specific marker) and has stated that if results cannot be

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obtained from a laboratory within 60 minutes then testing should be performed at the point-of-care. Guidelines such as these have caused more hospitals to explore new protocols incorporating rapid, serial testing of all three markers. We have invested in a significant physician education effort in order to help the medical community better understand the need for and benefits associated with frequent, serial testing of cardiac markers.

    We believe that frequent, serial, quantitative measurement of multiple cardiac markers can have a positive impact on an emergency physician's ability to make medical decisions relative to chest pain patients. Accordingly, our Triage Cardiac System is designed to quantitatively measure the levels of CK-MB, troponin I and myoglobin in a single test device from a whole-blood sample within 20 minutes. We designed the Triage Cardiac System to provide results of these measurements at or near the point-of-care to aid in the detection of heart attack. Providing easy access to measurements of cardiac markers enables physicians to make timely treatment decisions. We utilize distributor alliances and a direct sales force in marketing the Triage Cardiac System.

The Triage BNP System

    Congestive Heart Failure, CHF, is a chronic inability of the heart to maintain an adequate output of blood from one or both ventricles of the heart, resulting in congestion or swelling of certain veins or organs, and an inadequate blood supply to the body. It is estimated that 5 million Americans live with CHF and over 15 million people suffer from CHF worldwide. With approximately 550,000 new cases diagnosed annually, CHF imposes a growing toll on Americans, in terms of disability and mortality, contributing to 260,000 deaths each year. CHF is an important public health problem, in part because survival following diagnosis is poor, with only 50% of the patients surviving longer than 5 years. Survival can be improved with the use of effective therapy such as enzyme inhibitors and receptor blockers. Currently, CHF is the single most frequent cause of hospitalization among the population of Medicare recipients. Readmission is common, occurring in almost half of CHF patients within six months of hospital discharge. CHF ranks among the costliest cardiovascular diseases and the estimated direct and indirect costs attributable to CHF exceeded $42.8 billion in 2000. In 1996, $3.6 billion was paid to Medicare beneficiaries for the disease, according to the Health Care Financing Administration.

    We obtained a semi-exclusive license (worldwide, except Japan, with the right to grant sublicenses on a limited basis) to technology and patents developed by Scios, Inc. for use in developing a test that would provide measurements of B-type Natriuretic Peptide, or BNP, a hormone made primarily in the ventricles of the heart. Studies suggest that levels of BNP become elevated in circulating blood plasma during heart dysfunction associated with CHF in both symptomatic and asymptomatic patients. In November 2000, the test was approved by the FDA as an aid in the diagnosis of CHF.

    We developed the Triage BNP System (consisting of the Triage BNP Test and the Triage Meter) to provide physicians with a cost-effective tool to easily, rapidly and accurately measure BNP levels at the point-of-care and aid in the diagnosis of CHF. Currently, the Triage BNP Test is most applicable for differentiating CHF from other diseases that cause similar symptoms, especially shortness of breath and fatigue. CHF is found predominantly among the elderly, a patient population in which it is not unusual to find individuals with multiple diseases. For this reason, when a patient presents to the emergency department short of breath, a physician must consider several possible causes. Approximately 3 million individuals present to the emergency department with shortness of breath each year. Patient history and symptoms will be evaluated and typically an x-ray would also be administered along with an exam. These subjective methods may detect CHF in patients at the most advanced stages, but are not always effective in patients who are not severely ill. Patients who are suspected of having CHF might receive an echocardiogram, which is used to detect left ventricular dysfunction. Although echocardiogram is the "gold standard" for diagnosis of CHF, the accuracy of the procedure is highly dependent on the expertise of the person administering the test. Additionally, echocardiograms typically cost between $400-800 per procedure and are not always readily available in all hospitals.

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    For those patients suffering from CHF, timely diagnosis is critical to relieving stress on the heart, which can occur as a result of severe congestion, and to initiating treatment that would halt the progression of the disease. Misdiagnosis, or failure to diagnose, could result in improper treatment and or recurring visits to the emergency department. This, in turn, could contribute to emergency department traffic and to the costs of patient treatment, as treatment alternatives become more expensive as CHF progresses.

    Prior to the introduction of our Triage BNP Test, there was no blood test available to aid in the diagnosis of CHF. Clinical studies have demonstrated that BNP is a highly reliable indicator of CHF and that the protein marker is found in increasingly higher levels as disease progression occurs. The test provides physicians with an objective tool for differentiating CHF from the host of other possible diseases that mimic the condition. We believe that the Triage BNP Test may also be applicable for the management of acutely ill patients and we intend to initiate a clinical study in 2001 to explore that possible application.

    We believe that the medical community will require a significant degree of validation in order to achieve widespread acceptance of a new marker for CHF. While significant interest is already apparent, we intend to sponsor multiple clinical studies of varying sizes in order to demonstrate the diagnostic utility of our Triage BNP Test. Additionally, we are investing in other educational programs and resources.

The Triage C. difficile Panel

    Clostridium difficile ("C. difficile") is an opportunistic pathogen of the intestinal tract that may thrive as a result of broad spectrum antibiotic treatment. The bacteria may be found in asymptomatic carriers or may spread among immunocompromised hospital patients. Toxins produced by the bacteria mediate C. difficile-associated disease, which may include antibiotic-associated diarrhea and antibiotic-associated pseudo-membranous colitis. It has been estimated that over 3 million rapid tests for C. difficile are performed annually in the United States. We expect this number to continue to rise due to the expected increase in the number of patients who are immunocompromised.

    We designed the Triage C. difficile Panel to simplify the laboratory procedure and improve the turnaround time for a physician to receive a result by enabling laboratories to complete direct testing for the bacteria, as well as testing for the toxin in less than 20 minutes. We believe the Triage C. difficile Panel provides a negative predictive value that is superior to that of existing immunoassays by coupling the results of direct organism detection with toxin detection. The built-in controls and standards of the Triage C. difficile Panel allow it to perform individually or in batches, by any laboratory technician, without compromising the quality of the result. By improving the turnaround time to result, the clinician may initiate therapy earlier and thus minimize a patient's time in isolation. Rapid, accurate diagnosis of the bacteria and toxin should enable earlier treatment, which may reduce length of stay in the hospital and may reduce costs. We utilize distributor alliances in marketing the Triage C. Difficile Panel.

The Triage Parasite Panel

    Parasitic infection is a common cause of gastrointestinal disease and diarrhea. Some of the more common parasites responsible for such infection are:

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Giardia lamblia ("Giardia")

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Cryptosporidium parvum ("C. parvum")

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Entamoeba histolytica

    According to the U.S. Center for Disease Control and Prevention ("CDC"), intestinal parasitic infection is a problem in the United States and the prevalence of Giardia may be increasing.

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    It is estimated that in 1998, approximately one million ova and parasite ("O&P") microscopic examinations were performed in the United States. Recently, several manufacturers have developed and marketed ELISA tests for the more rapid identification of two of the more common parasites, Giardia and C. parvum. Because of the cumbersome procedures and limited test menu of the current ELISA test formats, these tests have had limited success in hospitals that perform larger volumes of tests in batches.

    The Triage Parasite Panel is designed to replace the standard O&P microscopic detection method for three of the most commonly encountered parasites: Giardia, C. parvum and Entamoeba histolytica/dispar in a single test device. The Triage Parasite Panel delivers results in less than 20 minutes and is available to hospitals of any size, including facilities that previously sent such testing to a reference lab. The sensitivity of the Triage Parasite Panel is comparable to that of the current O&P microscopic examination, using only a single-patient specimen. This should greatly reduce the collection burden for the patient, and reduce the amount of labor for the laboratory technician. Additionally, the length of time physicians spend waiting for results may be reduced. We utilize distributor alliances in marketing the Triage Parasite Panel. Sales of the Triage Parasite Panel are expected to be seasonal in nature as parasitic infections are less prevalent during the colder seasons of the year.

Biosite Discovery

    Within the scientific world, much attention is being focused on the mapping of the human genome and human proteome. We believe that this massive research effort will result in the discovery of a number of novel proteins that may have therapeutic and/or diagnostic applications. The majority of the companies conducting such research today have expressed an interest in the development of therapeutics, however we believe there is opportunity in the development of novel diagnostics and intend to pursue that course through Biosite Discovery.

    Biosite Discovery was launched in 1999 as a collaborative research business dedicated to the identification of new protein markers for acute diseases. Through Biosite Discovery, we conduct analyses on both known proteins that may be markers of disease and potential markers accessed from partners in order to determine diagnostic utility. We refer to this process as marker mining. If the diagnostic utility of a marker is established, it will then be assessed for commercialization potential, with high value markers being added to our product development pipeline. To gain access to novel proteins, we primarily leverage our expertise in phage display antibody development, providing pharmaceutical and biotechnology partners with high throughput development of high affinity antibodies for research use and seeking, in exchange, licenses to their protein targets in addition to fees. Under Biosite Discovery, we have executed collaborative agreements with partners in the areas of cardiovascular, cerebrovascular, infectious disease and oncology. Our collaborative partners include the TIMI Group of Brigham and Woman's Hospital, Corixa Corporation, Diadexus L.L.C., Duke University, Eli Lilly, Eos Biotechnology Inc., Johns Hopkins Hospital, Large Scale Biology Corporation, Medarex Inc., Morphosys AG, Scios Inc. and San Diego VA Medical Center. In 2000, these collaborations generated revenues of $3.3 million.

    Phage display antibody development is the basis for Biosite Discovery's business. Phage display refers to the method by which we generate antibodies. It is a high throughput process that allows the selection and production of large numbers of antibodies in a period of weeks. Our proprietary phage display techniques, which utilize immunized mice, enable us to deliver highly diverse antibodies with high affinity, which means they bind tightly to protein targets. We refer to these antibodies as Omniclonal antibodies. High affinity and high diversity are two qualities of high importance to pharmaceutical and biotechnology companies using antibodies for drug research experiments. We believe that biotechnology and pharmaceutical companies will provide substantial demand for our research antibodies. Furthermore, we believe that Biosite Discovery's capabilities in the area of antibody development are unique within the diagnostics industry.

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    In 2000 we entered into an agreement with Medarex, Inc. in which we are combining our proprietary phage display technology with Medarex's proprietary transgenic mouse technology to offer Trans-Phage Technology^SM, a process for high throughput development of high affinity, fully human antibodies. This process is being provided as a service to biotechnology and pharmaceutical companies, which require high affinity fully human antibodies for research use in conducting target validation and, or, characterization experiments. Under the terms of the eight-year agreement, Medarex will provide Biosite with research funding of $3 million per year.

    When Biosite and Medarex enter into agreements to provide high affinity, fully human antibodies to third-party biotechnology and pharmaceutical customers, we will generally receive a variety of payments and we will also seek exclusive or semi-exclusive diagnostic rights to the protein targets provided to us by biotechnology and pharmaceutical customers. Among the payments we might receive are: up-front technology access fees, antibody development fees upon the delivery of antibodies, annual maintenance fees on targets for which Biosite has produced antibodies for as long as the targets remain in development, milestone fees on drug targets that reach clinical milestones and royalties should products successfully be commercialized as a result of the collaboration.

    We announced our first Trans-Phage Technology customers, Eli Lilly and Eos Biotechnology, in January 2001 and February 2001, respectively. Lilly will provide Biosite with 30-300 targets over three years, and Eos is expected to provide tens of targets over three years. Biosite will receive technology access fees, development fees upon delivery of antibodies for a target, annual target maintenance fees, milestone fees upon the achievement of certain preclinical and clinical milestones, and royalties from products resulting from the joint research efforts.

    In January 2001, we initiated a technology alliance with LSBC, through its wholly-owned proteomics subsidiary. Through this alliance we plan to generate the antibody and protein target components required to produce the first generation of commercial protein chips. Protein chips (also called antibody arrays) are research tools for measuring large numbers of proteins in biological samples and are expected to become the preferred technology for high-volume applications such as clinical research, diagnostics and toxicology.

    Under the collaboration, LSBC, through its wholly-owned proteomics subsidiary expects to provide 2,000-5,000 protein targets from its Human Protein Index™ (HPI™) and other proteomics programs, as well as expressed proteins produced with its proprietary GENEWARE® technology. Biosite, through its Biosite Discovery business, will use its proprietary high throughput Omniclonal™ phage display technology to generate high affinity antibodies to the targets, enabling creation of antibody arrays in a variety of formats, including chips. The companies intend to pursue commercial research opportunities in the protein chip market by making a broad antibody and target package available to partners.

    LSBC and Biosite intend to pursue the protein chip market, with a sharing of rights and returns. Biosite will obtain certain diagnostic licenses to targets and LSBC will retain all other target rights, including uses in proteomics, database creation, and therapeutics. Biosite will receive antibody development fees as well as payments for certain products successfully developed through the joint research efforts. If diagnostic products are successfully developed and commercialized, LSBC will receive milestone payments and royalties.

    In addition to working with targets from external customers, Biosite has undertaken programs to identify proteins that hold the potential to advance care in the areas of stroke and acute coronary syndrome, or ischemic heart disease—the most common cause of death worldwide. Currently, we are analyzing 30 markers for each application. While these markers had previously been identified, they have never been comprehensively analyzed for diagnostic utility. We are generating antibodies to these markers and developing tests that can be conducted on blood samples from Duke University, our clinical collaborator in the area of stroke, and from the TIMI Study Group, an organization that has been at the forefront of clinical research in acute coronary syndromes over the past two decades.

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Competition

Diagnostics

    The market in which we compete is intensely competitive. Our competitors include:

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health care companies

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laboratory-based tests and analyzers

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clinical reference laboratories

    Currently, the majority of diagnostic tests used by physicians and other health care providers are performed by independent clinical reference laboratories and hospital-based laboratories. We expect that these laboratories will compete vigorously to maintain their dominance of the testing market. In order to achieve market acceptance for our products, we will be required to demonstrate that our products provide cost-effective and time saving alternatives to tests performed by clinical reference laboratories or traditional hospital-based laboratory procedures. This will require physicians to change their established means of having such tests performed. Our products may not be able to compete with the testing services provided by traditional laboratory services.

    In addition, companies with a significant presence in the diagnostic market, such as:

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Abbott Laboratories

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Roche Boehringer Mannheim Corporation

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Bayer Diagnostics

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Ortho Clinical Diagnostics, a division of Johnson & Johnson

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Dade Behring

    have developed or are developing diagnostic products that do or will compete with our products. These competitors have substantially greater financial, technical, research and other resources and larger, more established marketing, sales, distribution and service organizations than us. Moreover, these competitors offer broader product lines and have greater name recognition than us, and offer discounts as a competitive tactic. In addition, several smaller companies are currently making or developing products that compete with or will compete with our products. Our competitors may succeed in developing or marketing technologies or products that are more effective or commercially attractive than our products, or that would render our technologies and products obsolete. Moreover, we may not have the financial resources, technical expertise or marketing, distribution or support capabilities to compete successfully in the future. In addition, competitors, many of which have made substantial investments in competing technologies, may be more effective than us or may prevent, limit or interfere with our ability to make, use or sell its products either in the United States or in international markets. See " — Technology" and "— Commercialized Products".

Discovery

    Several companies, including Cambridge Antibody Technology, Morphosys, and Dyax have invested significantly in phage display technology and each generally employs naïve human antibody libraries to select antibodies for target validation purposes and for the development of therapeutic antibodies. Our competitors entered the marketplace before Biosite Discovery and have established a significant presence in the marketplace. Our competitors may succeed in establishing agreements and providing antibodies to biotechnology and pharmaceutical companies and prevent Biosite Discovery from penetrating the marketplace.

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Employees

    As of December 31, 2000, we employed 320 individuals. Of these, 24 hold Ph.D.s and 19 hold other advanced degrees. None of our employees are covered by the collective bargaining agreement. We believe that we maintain good relations with our employees.

Research and Development

    As of December 31, 2000, we employed 86 employees in research and development, 19 that have Ph.D.s. Our research and development organization is dedicated to the discovery and development of new markers and technologies that can be applied to future products and to the development of new products with our existing platform technologies.

    We have a research staff dedicated to the development and production of antibodies through a variety of techniques. Recombinant techniques are used to express proteins for use as diagnostic targets. Our staff of chemists and biochemists synthesize drug targets and compounds for diagnostic use and seek to perfect techniques for coupling these compounds to biological reagents such as antibodies or labels. We developed a proprietary process utilizing phase display antibodies that enables the selection and production of antibodies more rapidly and efficiently than is possible using hybridoma technology. Our development engineering staff is involved in the design and development of new diagnostic device technologies as well as the processes for their fabrication and interaction with biological and chemical reagents. Our product development group completes final optimization of assays and our regulatory affairs group controls all in-house and external clinical studies of our products and prepares applications to the FDA for pre-market clearance or approval.

Manufacturing

    As of December 31, 2000, we had 113 employees in manufacturing involved in reagent production, device assembly, engineering, quality assurance/quality control and materials management.

    We maintain worldwide manufacturing rights to all current and future products, except for the Triage Meter for which LRE maintains the manufacturing rights. We seek to provide high quality analytical results in an efficient manner. To this end, we invest in the design and development of manufacturing systems and technologies that can produce a high quality product using controlled, cost-effective manufacturing processes and equipment. The Triage C. difficile and Triage Parasite Panels utilize the same or similar processes and equipment as the Triage DOA Panel. We believe that the experience we acquired in manufacturing the Triage DOA Panel provided benefits in product quality and cost in manufacturing these new products. We have developed and continue to improve our novel and sophisticated processes and equipment for the manufacturing of our quantitative platform products, the Triage Cardiac Panel and Triage BNP Test. We evaluate potential automation projects, capital expenditures and facility expansion to address potential growth in the manufacturing requirements for current and potential new products.

    Except for the Triage Meter, all of our products are manufactured at our facility in San Diego, California. The Triage Meter is purchased from LRE Relais + Elektronik GmbH, or LRE, which is located in Germany. Most of the antibodies used in the manufacture of our products were developed by us and the cell lines are owned or licensed by us. In addition, we maintain our own in-house antibody production capability. All other raw materials required to manufacture our products are obtained from outside suppliers.

    Our San Diego facility received its registration as a diagnostic product manufacturer from the FDA and from the California State Department of Health & Services in 1991. We have also been licensed and certified to manufacture products using controlled substances by the U.S. Drug Enforcement

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Agency. We may not continue to comply with all government requirements and regulations which may lead to the suspension or revocation of our right to manufacture. See "Government Regulation."

Sales and Marketing

    As of December 31, 2000, we had 61 employees in various sales and marketing functions. We distribute our products to hospital facilities in the United States primarily through Fisher, and internationally through country-specific and regional distributors.

    We anticipate that we may, if appropriate, enter into additional distribution agreements with respect to our current products, products currently under development and products that we develop in the future. We may not be able to enter into these or other distribution agreements on acceptable terms, if at all. If we elect to distribute products directly, our direct sales, marketing and distribution efforts may not be successful. A failure to enter into acceptable distribution agreements or a failure by us to successfully market our products would have a material and adverse effect on us.

Strategic and Distribution Arrangements

    Our strategy for the research, development, commercialization and distribution of some of our products entails entering into various arrangements with corporate partners, licensors, licensees and others, and is dependent upon the success of these parties in performing their responsibilities. These parties may not perform their obligations as expected or that any revenue will be derived from any of the arrangements. Under our existing arrangements, we are not obligated to make any material capital expenditures. If products are successfully developed under some of our existing arrangements, royalties will be payable by us on sales of products which incorporate licensed technology.

Fisher HealthCare Division of Fisher Scientific Company

    In January 2001, we entered into a new distribution agreement, the Fisher Agreement, with Fisher which extended Fisher's role in the distribution of certain of our new products and some potential new products currently under development. Under the agreement, we granted to Fisher a right to distribute certain of our products to hospitals within the United States. Under some circumstances, in the event that we elect to terminate the Fisher Agreement without cause, we will be obligated to make a one-time payment to Fisher. Fisher purchases our products on a monthly basis through firm purchase orders. Fisher accounted for 84%, 83% and 86% of the product sales in 2000, 1999 and 1998, respectively.

LRE Relais + Elektronik GmbH

    In September 1994, we entered into an agreement with LRE, the LRE Agreement, for the development, manufacturing and supply of a hand-held meter to be used in all Triage Meter System products commercially available or under development, including the Triage Cardiac System and the Triage BNP System. Under the terms of the LRE Agreement, LRE developed and produced the fluorescent meter according to specifications provided by us. LRE is our exclusive supplier of the Triage Meter during the term of the LRE Agreement, unless LRE is incapable of satisfying our needs or is prohibited from producing the meters for a specific immunoassay application. We purchase the Triage Meters from LRE in Deutsche Marks, or a successor currency to Deutsche Marks, through firm purchase orders on a per meter price basis which varies according to sales volume.

Biosite Discovery

    In March 1999, we launched Biosite Discovery, a collaborative research business dedicated to the identification of new protein markers for acute diseases. Through Biosite Discovery, we conduct analyses on both known proteins that may be markers of disease and potential markers accessed from

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partners in order to determine diagnostic utility. We refer to this process as marker mining. If the diagnostic utility of a marker is established, it will then be assessed for commercialization potential, with high value markers being added to our product development pipeline. To gain access to novel proteins, we primarily leverage our expertise in phage display antibody development, providing pharmaceutical and biotechnology partners with high throughput development of high affinity antibodies for research use and seeking, in exchange, licenses to their protein targets in addition to fees. Under Biosite Discovery, we have executed collaborative agreements with different partners, including the TIMI Group of Brigham and Woman's Hospital, Corixa Corporation, Diadexus L.L.C., Duke University, Eli Lilly, Eos Biotechnology Inc., Johns Hopkins Hospital, Large Scale Biology Corporation, Medarex Inc., Morphosys AG, Scios Inc. and San Diego VA Medical Center in the areas of cardiovascular, cerebrovascular, infectious disease and oncology.

Proprietary Technology and Patents

    Our ability to compete effectively will depend in part on our ability to develop and maintain proprietary aspects of our technology, and to operate without infringing on the proprietary rights of others or to obtain licenses to such proprietary rights. We have U.S. and foreign issued patents and are currently prosecuting patent applications in the United States and with certain foreign patent offices. Certain of our issued patents covering significant aspects of our core technologies have legal lives expiring between July 2007 and January 2018. There can be no assurance that any of our pending patent applications will result in the issuance of any patents, that our patent applications will have priority over others' applications, or that, if issued, any of our patents will offer protection against competitors with similar technology. There can be no assurance that any patents issued to us will not be challenged, invalidated or circumvented in the future or that the rights created thereunder will provide a competitive advantage.

    Our current products and products under development may incorporate technologies that are the subject of patents issued to, and patent applications filed by, others. We obtained licenses for some technologies and are negotiating to obtain licenses for technologies patented by others. We may not be able to obtain licenses for technology patented by others on commercially reasonable terms, if at all. We may not be able to develop alternative approaches if we are unable to obtain licenses or that our current and future licenses will be adequate for the operation of our business. The failure to obtain necessary licenses or to identify and implement alternative approaches would prevent us from commercializing certain of our products under development and would have a material adverse effect on our business, financial condition and results of operations.

    Litigation may be necessary to enforce any patents issued to us to protect trade secrets or know-how owned by us or to determine the enforceability, scope and validity of the proprietary rights of others. We have settled three patent infringement claims by obtaining licenses to the contested patent in return for up-front payments and/or royalty obligations.

    Litigation that could be brought forth by other parties have in the past and may in the future result in material expenses to us and significant diversion of effort by our technical and management personnel, regardless of the outcome. The outcome of litigation is inherently uncertain and there can be no assurance that a court would not find the third-party claims valid and that we had no successful defense to such claims. An adverse outcome in litigation or the failure to obtain a necessary license could subject us to significant liability and could prevent us from selling any or all of our products, which could have a material adverse effect on our business, financial condition and results of operations.

    We rely upon trade secrets, technical know-how and continuing invention to develop and maintain our competitive position. There can be no assurance that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade

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secrets or disclose such technology, or that we can meaningfully protect our trade secrets, or that we will be capable of protecting our rights to our trade secrets.

    Others may have filed and in the future are likely to file patent applications that are similar or identical to ours. To determine the priority of inventions, we may have to participate in interference proceedings declared by the United States Patent and Trademark Office that could result in substantial cost to us. No assurance can be given that any patent application of others will not have priority over patent applications filed by us.

    Our commercial success also depends in part on us neither infringing patents or proprietary rights of third parties nor breaching any licenses that may relate to our technologies and products. We are aware of several third-party patents that may relate to our technology. There can be no assurance that we do not or will not infringe these patents, or other patents or proprietary rights of third parties. In addition, we have received and may in the future receive notices claiming infringement from third parties as well as invitations to take licenses under third-party patents. Any legal action against us or our collaborative partners claiming damages and seeking to enjoin commercial activities relating to our products and processes affected by third-party rights, in addition to subjecting us to potential liability for damages, may require us or our collaborative partner to obtain a license in order to continue to manufacture or market the affected products and processes. There can be no assurance that we or our collaborative partners would prevail in any such action or that any license (including licenses proposed by third parties) required under any such patent would be made available on commercially acceptable terms, if at all. There are a significant number of U.S. and foreign patents and patent applications in our areas of interest, and we believe that there may be significant litigation in the industry regarding patent and other intellectual property rights. If we become involved in such litigation, it could consume a substantial portion of our managerial and financial resources, which could have a material adverse effect on our business, financial condition and results of operations.

Government Regulation

    The testing, manufacture and sale of our products are subject to regulation by numerous governmental authorities, principally the FDA and corresponding state and foreign regulatory agencies. Pursuant to the Federal Food, Drug and Cosmetic Act the FDA regulates the preclinical and clinical testing, manufacture, labeling, distribution and promotion of medical devices. We will not be able to commence marketing or commercial sales in the United States of new products under development until we receive clearance or approval from the FDA, which can be a lengthy, expensive and uncertain process. Noncompliance with applicable requirements can result in, among other things, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, failure of the government to grant pre-market clearance or pre-market approval for devices, withdrawal of marketing clearances or approvals, and criminal prosecution. The FDA also has the authority to request recall, repair, replacement or refund of the cost of any device manufactured or distributed by us.

    We may not be able to obtain necessary regulatory approvals or clearances for our products on a timely basis, if at all, and delays in receipt of or failure to receive such approvals or clearances, the loss of previously received approvals or clearances, limitations on intended use imposed as a condition of such approvals or clearances, or failure to comply with existing or future regulatory requirements would have a material adverse effect on us.

    We developed the Triage BNP System (consisting of the Triage BNP Test and the Triage Meter) to provide physicians a cost effective tool to easily, rapidly and accurately measure BNP levels at the point-of-care and aid in the diagnosis of CHF. We initiated clinical trials for the Triage BNP Test in December 1998 and filed a pre-market application, known as a class III PMA with the United States Food and Drug Administration (FDA) in December 1999. We also commercialized the Triage BNP System internationally in early 2000. In November 2000 the Triage BNP test was re-categorized as a class II device and approved by the FDA as an aid in the diagnosis of CHF.

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RISK FACTORS

We Have Only a Limited History of Profitability and We May Not Maintain Profitability. In Addition Our Quarterly Results Will Fluctuate.

    We achieved operating profitability in the third and fourth quarters of 1999 and each quarter of 2000. However, we incurred an operating loss during the prior seven quarters. We may not be able to maintain operating profitability on a quarterly or annual basis in the future. We believe that our future operating results will be subject to quarterly fluctuations due to a variety of factors, including:

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whether and when new products are successfully developed and introduced by us

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market acceptance of current or new products

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changes in the mix of products sold

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manufacturing delays or inefficiencies

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competitive pressures on average selling prices

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the timing of significant orders

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research and development efforts

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attainment of milestones under collaborative agreements necessary to earn contract revenues

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seasonal customer demand

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changes in reimbursement policies

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regulatory uncertainties or delays

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product recalls

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shipment problems, and

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costs and timing associated with business development activities, including potential licensing of technologies.

    Operating results would also be adversely affected by a downturn in the market for our products. Because we continue to increase our operating expenses to support our expanded sales and marketing activities, manufacturing operations and new product development, our operating results would be adversely affected if our sales and gross profits did not correspondingly increase or if our product development efforts are unsuccessful or subject to delays. Our limited operating history makes accurate prediction of future operating results difficult or impossible. We may not sustain revenue growth or sustain profitability on a quarterly or annual basis and our growth or operating results may not be consistent with predictions made by securities analysts.

We Are Dependent on the Development and Introduction of New Products for Revenue Growth and Profitability.

    Except for our commercialized products, all of our products are still under development and may not be successfully developed or commercialized on a timely basis, or at all. If we are unable, for technological or other reasons, to complete the development, introduction or scale-up of manufacturing for any new product or if any new product is not approved for marketing or does not achieve a significant level of market acceptance, we will be harmed.

    We believe that our revenue growth and profitability will substantially depend upon our ability to complete development of and successfully introduce these new products as well continue to achieve a growing level of market acceptance of new products such as the Triage Cardiac System and the Triage BNP System. In addition, the successful development of some of these new products will depend on the development of new technologies. We will be required to undertake time-consuming and costly development activities and seek regulatory approval for these new products. We may experience difficulties that could delay or prevent the successful development, introduction and marketing of these new products. Regulatory clearance or approval of any new products may not be granted by the U.S.

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Food and Drug Administration or foreign regulatory authorities on a timely basis, or at all, and the new products may not be successfully commercialized.

    If we fail to establish and maintain:

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reliable, cost-efficient, high volume manufacturing capacity

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a cost-effective sales force and administrative infrastructure, or

•

an effective product distribution system for our products

we may not be able to successfully commercialize new products.

We Are Dependent in the Near Term on Sales of the Triage Drugs of Abuse Panel. A Significant Reduction in Sales of the Triage Drugs of Abuse Panel Would Harm Us.

    Sales of the Triage Drugs of Abuse Panel products accounted for approximately 68% of our product sales in 2000 and 79% of our product sales in 1999. We expect our revenue and profitability to substantially depend on the sale of the Triage Drugs of Abuse Panel products for the foreseeable future. A significant reduction in demand for the Triage Drugs of Abuse Panel products would have a material adverse effect on us. We believe that domestic net sales of the Triage Drugs of Abuse Panel products may decline as the available U.S. market becomes saturated. Competitive pressures could also erode our profit margins for the Triage Drugs of Abuse Panel products. Our continued growth will depend on our ability to

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successfully commercialize our newer products

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develop and commercialize other products, and

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gain additional acceptance of the Triage Drugs of Abuse Panel products in new market segments, such as international markets.

    We may not be able to successfully commercialize new products, including the Triage Cardiac System and Triage BNP System, and we may not be able to maintain or expand our share of the drug-testing market. Technological change or the development of new or improved diagnostic technologies could result in our products becoming obsolete or noncompetitive.

We Are Dependent on Key Distributors and Have Limited Direct Sales Experience. If Our Distributors Terminate Their Relationship With Us or Fail to Adequately Perform, Our Product Sales Will Suffer.

    We rely upon a key distributor alliance with Fisher to distribute our products in the United States and may rely upon distributors to distribute products under development. All of our products are currently marketed pursuant to distribution agreements in the U.S. hospital market segment by Fisher (which accounted for 84% of net sales in 2000 and 83% of net sales in 1999) and internationally by country-specific and regional distributors. The loss or termination of one or more of these distributors could have a material adverse effect on our sales.

    If any of our distribution or marketing agreements are terminated and we are unable to enter into alternative agreements or if we elect to distribute new products directly, we would have to invest in additional sales and marketing resources, including additional field sales personnel, which would significantly increase future selling, general and administrative expenses. We have limited experience in direct sales, marketing and distribution of our products. Our direct sales, marketing and distribution efforts may not be successful. Further, we may not be able to enter into new distribution or marketing agreements on satisfactory terms, or at all. A failure to enter into acceptable distribution agreements or our failure to successfully market our products would have a material and adverse effect on us.

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Competition and Technological Change May Make Our Products Less Attractive or Obsolete.

    The market in which we compete is intensely competitive. Our competitors include:

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companies marketing laboratory-based tests and analyzers, and

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clinical reference laboratories.

    Currently, the majority of diagnostic tests used by physicians and other health care providers are performed by independent clinical reference laboratories and hospital laboratories. We expect that these laboratories will compete vigorously to maintain their dominance of the testing market. In order to achieve market acceptance for our products, we will be required to demonstrate that our products provide cost-effective and time saving alternatives to tests performed by clinical reference laboratories or traditional hospital laboratory procedures. This will require physicians to change their established means of having such tests performed and changed their clinical practices. Our products may not be able to compete with the testing services provided by traditional laboratory services.

    In addition, companies with a significant presence in the diagnostic market, such as:

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Abbott Laboratories

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Dade Behring

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Roche Boehringer Mannheim Corporation

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Bayer Diagnostics, and

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Ortho Clinical Diagnostics, a division of Johnson & Johnson,

have developed or are developing diagnostic products that do or will compete with our products. These competitors have substantially greater financial, technical, research and other resources and larger, more established marketing, sales, distribution and service organizations than us. Moreover, these competitors offer broader product lines and have greater name recognition than us, and offer discounts as a competitive tactic. In addition, several smaller companies are currently making or developing products that compete with or will compete with our products. Our competitors may succeed in developing or marketing technologies or products that are more effective or commercially attractive than our products, or that would render our technologies and products obsolete. Moreover, we may not have the financial resources, technical expertise or marketing, distribution or support capabilities to compete successfully in the future. In addition, competitors, many of which have made substantial investments in competing technologies, may be more effective than us or may prevent, limit or interfere with our ability to make, use or sell our products either in the United States or in international markets.

Our Limited Manufacturing Experience and Our Potential Inability to Scale-Up Manufacturing May Adversely Affect Our Ability to Produce Products.

    We must manufacture our products in compliance with regulatory requirements, in sufficient quantities and on a timely basis, while maintaining product quality and acceptable manufacturing costs. Significant additional work will be required for the scaling-up of each new product prior to commercialization, and this work may not be completed successfully.

    In addition, although we expect some of our newer products and products under development to share production attributes with our existing products, production of these products may require the development of new manufacturing technologies and expertise. These products may not be able to be manufactured by us or any other party at a cost or in quantities to make these products commercially viable. If we are unable to develop or contract for manufacturing capabilities on acceptable terms for our products under development, our ability to conduct pre-clinical and clinical testing will be adversely affected, resulting in the delay of submission of products for regulatory clearance or approval and initiation of new development programs, which would have a material adverse effect on us.

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    Manufacturing and quality control problems have arisen and may arise as we attempt to scale-up our manufacturing and such scale-up may not be achieved in a timely manner or at a commercially reasonable cost, or at all.

    Our manufacturing facilities and those of our contract manufacturers are, or will be, subject to periodic regulatory inspections by the FDA and other federal and state regulatory agencies and these facilities are subject to Quality System Regulations requirements of the FDA. We or our contractors may not satisfy such regulatory requirements, and any failure to do so would have a material adverse effect on us.

We Are Dependent on Sole-Source Suppliers For Our Products. A Supply Interruption Would Harm Us.

    Key components and raw materials used in the manufacture of our products are provided by single-source vendors. Any supply interruption in a sole-sourced component or raw material would have a material adverse effect on our ability to manufacture these products until a new source of supply is qualified and, as a result, would have a material adverse effect on us. In addition, an uncorrected impurity or supplier's variation in a raw material, either unknown to us or incompatible with our manufacturing processes of our products, could have a material adverse effect on our ability to manufacture products. We have under development products which, if developed, may require us to enter into additional supplier arrangements. We may not be able to enter into additional supplier arrangements on commercially reasonable terms, or at all. Failure to obtain a supplier for the manufacture of our future products, if any, would have a material adverse effect on us.

    We rely upon LRE for production of the fluorescent meter used in connection with our Triage Meter System platform products, including the Triage Cardiac System and Triage BNP System and others currently under development. Our dependence upon LRE for the manufacture of the meter may adversely affect

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our profit margins

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our ability to develop and manufacture products on a timely and competitive basis, or

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the timing of market introductions and subsequent sales of products incorporating the LRE meter.

Health Care Reform and Restrictions on Reimbursement May Adversely Affect Our Results.

    In the United States, health care providers that purchase the Triage Drugs of Abuse Panel and other diagnostic products generally rely on third-party payors to reimburse all or part of the cost of the procedure. Third-party payors can affect the pricing or the relative attractiveness of our products by regulating the maximum amount of reimbursement provided by such payors for testing services. In addition, the tests performed by public health departments, corporate wellness programs and other large volume users in the drug screening market are generally not subject to reimbursement. Further, some health care providers are moving towards a managed care system in which providers contract to provide comprehensive health care for a fixed cost per patient. We are unable to predict what changes will be made in the reimbursement methods utilized by third-party payors. We could be adversely affected by changes in reimbursement policies of governmental or private health care payors, particularly to the extent any such changes affect reimbursement for procedures in which our products are used.

    Third-party payors are increasingly scrutinizing and challenging the prices charged for medical products and services. Decreases in reimbursement amounts for tests performed using our products may decrease amounts physicians and other practitioners are able to charge patients, which in turn may adversely affect our ability to sell our products on a profitable basis. Failure by physicians and other users to obtain reimbursement from third-party payors, or changes in government and private third-party payors' policies toward reimbursement of tests utilizing our products could have a material

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adverse effect on us. Given the efforts to control and reduce health care costs in the United States in recent years, there can be no assurance that currently available levels of reimbursement will continue to be available in the future for our existing products or products under development.

    In addition, market acceptance of our products in international markets is dependent, in part, upon the availability of reimbursement within prevailing health care payment systems. Reimbursement and health care payment systems in international markets vary significantly by country, and include both government sponsored health care and private insurance.

    We believe that the overall escalating cost of medical products and services has led to and will continue to lead to increased pressures on the health care industry, both foreign and domestic, to reduce the cost of products and services, including products offered by us. Third-party reimbursement and coverage may not be available or adequate in either U.S. or foreign markets, current reimbursement amounts may be decreased in the future and future legislation, regulation or reimbursement policies of third-party payors may adversely affect the demand for our products or our ability to sell our products on a profitable basis.

Our Patent and Proprietary Technology May Not Provide Us With Any Benefit and the Patents of Others May Prevent Us From Commercializing Our Products.

    Our ability to compete effectively will depend in part on our ability to develop and maintain proprietary aspects of our technology, and to operate without infringing the proprietary rights of others or to obtain licenses to such proprietary rights. Our patent applications may not result in the issuance of any patents. Additionally, our patent applications may not have priority over others' applications, or, if issued, our patents may not offer protection against competitors with similar technology. Any patents issued to us may be challenged, invalidated or circumvented in the future and the rights created thereunder may not provide a competitive advantage.

    Our products may incorporate technologies that are the subject of patents issued to, and patent applications filed by, others. We have obtained licenses for some technologies and may negotiate to obtain other licenses for technologies patented by others. However, we may not be able to obtain licenses for technology patented by others on commercially reasonable terms, or at all. We may not be able to develop alternative approaches if we are unable to obtain licenses and our current and future licenses may not be adequate for the operation of our business. The failure to obtain necessary licenses or to identify and implement alternative approaches would prevent us from commercializing some of our products under development and would have a material adverse effect on us.

    Litigation may be necessary to enforce any patents issued to us, to protect trade secrets or know-how owned by us or to determine the enforceability, scope and validity of the proprietary rights of others. We have already settled a number of patent infringement claims in the past.

The Legal Proceedings to Obtain Patents and Litigation of Third-Party Claims of Intellectual Property Infringement Could Require Us to Spend Substantial Amounts of Money and Could Impair Our Operations.

    We may become subject to additional patent infringement claims and litigation or interference proceedings conducted in the U.S. Patent and Trademark Office, or USPTO, to determine the priority of inventions. We also may receive correspondence from other parties calling to our attention the existence of patents that they believe cover technology that is or may be incorporated in our products and products under development. Some of this correspondence may include offers to negotiate the licensing of the patented technologies. There can be no assurance that these matters would not result in litigation to determine the enforceability, scope, and validity of the patents. Litigation, if initiated, could seek to recover damages as a result of any sales of the products and to enjoin further sales of such products.

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    Litigation that could be brought forth by other parties may result in material expenses to us and significant diversion of effort by our technical and management personnel, regardless of the outcome. The outcome of litigation is inherently uncertain and there can be no assurance that a court would not find the third-party claims valid and that we had no successful defense to such claims. An adverse outcome in litigation or the failure to obtain a necessary license could subject us to significant liability and could prevent us from selling our products, which would have a material adverse effect on us.

    We also rely upon trade secrets, technical know-how and continuing invention to develop and maintain our competitive position. Others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or disclose such technology, and we may not be able to protect our trade secrets or our rights to our trade secrets.

    Others may have filed and in the future are likely to file patent applications that are similar or identical to ours. To determine the priority of inventions, we may have to participate in interference proceedings declared by the USPTO that could result in substantial cost to us. Patent applications of others may have priority over patent applications filed by us.

    Our commercial success depends in part on us neither infringing patents or proprietary rights of third parties nor breaching any licenses that may relate to our technologies and products. We are aware of several third-party patents that may relate to our technology. We may infringe these patents, or other patents or proprietary rights of third parties. In addition, we have received and may in the future receive notices claiming infringement from third parties as well as invitations to take licenses under third-party patents. Any legal action against us or our collaborative partners claiming damages and seeking to enjoin commercial activities relating to our products and processes affected by third-party rights, in addition to subjecting us to potential liability for damages, may require us or our collaborative partner to obtain a license in order to continue to manufacture or market the affected products and processes. We or our collaborative partners may not prevail in any such action and any license (including licenses proposed by third parties) required under any such patent may not be made available on commercially acceptable terms, or at all. There are a significant number of U.S. and foreign patents and patent applications in our areas of interest, and we believe that there may be significant litigation in the industry regarding patent and other intellectual property rights. Litigation concerning patent and other intellectual property rights could consume a substantial portion of our managerial and financial resources, which would have a material adverse effect on us.

We May Need Additional Capital. If Additional Capital is not Available, We May Have to Curtail or Cease Operations.

    If cash generated from operations is insufficient to satisfy our working capital and capital expenditure requirements, we may be required to sell additional equity or debt securities or obtain additional cr