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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

(Mark One)

For the quarterly period ended June 30, 2002

OR

For the transition period from            to            

Commission file number 000-21873

BIOSITE INCORPORATED
(Exact name of Registrant as specified in its charter)

11030 Roselle Street
San Diego, California, 92121
(Address of principal executive offices)

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

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

        The number of shares of the Registrant's Common Stock, $0.01 par value, outstanding at July 31, 2002 was 14,767,444.

BIOSITE INCORPORATED
FORM 10-Q
INDEX

        Biosite®, Triage®, Omniclonal® and Immediate Response Diagnostics® are registered trademarks of the Company. The Company's logo is also a trademark or service mark of the Company.

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BIOSITE INCORPORATED
Condensed Balance Sheets
(in thousands, except par value)

Note: The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

See accompanying notes.

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BIOSITE INCORPORATED
Condensed Statements of Income (Unaudited)
(in thousands, except per share amounts)

See accompanying notes.

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BIOSITE INCORPORATED
Condensed Statements of Cash Flows (Unaudited)
(in thousands)

See accompanying notes.

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BIOSITE INCORPORATED
Notes to Condensed Financial Statements (Unaudited)

1. BASIS OF PRESENTATION

        The accompanying unaudited condensed financial statements have been prepared in accordance with both generally accepted accounting principles for interim financial information, and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying financial statements reflect all adjustments (consisting of normal recurring accruals) that are, in the opinion of management, considered necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year. We have experienced significant quarterly fluctuations in our operating results and we expect that these fluctuations in sales, expenses and operating results may continue.

        The financial statements and related disclosures have been prepared with the presumption that users of the interim financial information have read or have access to the audited financial statements for the preceding fiscal year. Accordingly, these financial statements should be read in conjunction with the audited financial statements and the related notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2001.

2. EARNINGS PER SHARE

        At June 30, 2002, we have 14,753,451 common shares and 4,132,425 common stock options outstanding. Earnings per share, EPS, is computed in accordance with the Financial Accounting Standards Board's Statement No. 128, Earnings per share, FAS 128. FAS 128 requires dual presentation of basic and diluted earnings per share. Basic EPS includes no dilution and is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of securities that could share in our earnings, such as common stock equivalents which may be issuable upon exercise of outstanding common stock options. Common stock equivalents are not considered in loss years as the effect is antidilutive.

        Shares used in calculating basic and diluted earnings per share were as follows (in thousands):

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3. BALANCE SHEET INFORMATION

        Net inventories consist of the following (in thousands):

4. COMPREHENSIVE INCOME

        Financial Accounting Standards Board's Statement No. 130, Comprehensive Income, FAS 130, establishes rules for the reporting and display of comprehensive income and its components. FAS 130 requires the change in net unrealized gains or losses on marketable securities be included in comprehensive income. As adjusted, our comprehensive income is as follows (in thousands):

5. RECENT ACCOUNTING PRONOUNCEMENTS

        In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 142, Goodwill and Other Intangibles Assets, FAS 142. Under FAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed annually, or more frequently if impairment indicators arise, for impairment. Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives, but with no maximum life. The amortization provisions of FAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, the Company is required to adopt FAS 142 effective January 1, 2002. The adoption of FAS 142 had no impact on our financial statements.

        In October 2001, the FASB issued Statements of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, FAS 144, which establishes one accounting model to be used for long-lived assets to be disposed of by sale and broadens the presentation of discontinued operations to include more disposal transactions. FAS 144 supercedes the Financial Accounting Standards Board's Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30. FAS 144 is effective for fiscal years beginning after December 15, 2001. The adoption of FAS 144 had no impact on our financial statements.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

        The matters discussed in this Management's Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements that involve risks and uncertainties, including the timely development, introduction and acceptance of new products, dependence on others, the impact of competitive products, the enforcement, defense and resolution of license and patent disputes, changing market conditions and the other risks detailed under "Factors that May Affect Results" and throughout our Annual Report on Form 10-K for the year ended December 31, 2001. Actual results may differ materially from those projected. These forward-looking statements represent our judgment as of the date of the filing of this Form 10-Q and our Form 10-K, respectively. We disclaim any intent or obligation to update these forward-looking statements.

Overview

        We were established in 1988. We 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 debilitating and life-threatening diseases and conditions. We combine 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 diagnostic approaches that improve health care outcomes.

        Our diagnostics business is a leading provider of rapid tests that aid in the diagnosis of a variety of critical diseases and conditions. These tests are sold worldwide primarily for use in hospitals. Our two product platforms are designed to provide rapid results through either qualitative visual readings or 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 sales in the future are the Triage® Drugs of Abuse Panel, the Triage Cardiac Panel and the Triage BNP Test.

        The principal market for our products is comprised of hospitals, which number approximately 5,000 in the United States. We 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 of the Fisher Scientific Company, Fisher, distributes our products in U.S. hospitals and supports our direct sales force. In international markets we utilize a network of country-specific and regional distributors.

        In March 1999, we launched Biosite Discovery, a collaborative research program dedicated to the identification of new protein markers for acute diseases. Through Biosite Discovery, we conduct analyses on both known disease markers and potential markers accessed from pharmaceutical and biotechnology companies in order to determine their diagnostic utility. We refer to this process as marker mining. If the diagnostic utility of a marker is established, it is then 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 companies 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 agreements with different clinical and collaborative partners, including Amgen Inc., the TIMI Group of Brigham and Woman's Hospital, Duke University, Eli Lilly and Company, Eos Biotechnology Inc., Johns Hopkins Hospital, Large Scale Biology Corporation, Medarex, Inc. and the San Diego VA Medical Center in the

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areas of cardiovascular, cerebrovascular, infectious disease and oncology. Among the payments we might receive under the agreements are: up-front technology access fees, research funding, 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 by our partners, milestone fees on drug targets that reach certain development milestones and royalties should products successfully be commercialized as a result of the collaboration. Also under Biosite Discovery, we've executed several license or cross-license agreements with companies such as BioInvent International, Morphosys AG, Dyax Corp. and others.

        Our product sales to date have primarily resulted from sales of the Triage Drugs of Abuse Panel product line. Sales of Triage Drugs of Abuse Panel products represented approximately 42% of our product sales in the first half of 2002 and 59% of our product sales during the full year 2001. We believe that domestic sales of the Triage Drugs of Abuse Panel products may decline as the available U.S. market becomes saturated and competitive pressures become more prominent in a maturing market. Our cardiovascular products, consisting of the Triage Cardiac Panel, Triage BNP Test and Triage meter, are becoming a greater proportion of our product sales as a result primarily of their own sales growth.

        All of our products are marketed by Fisher, pursuant to a distribution agreement, in the U.S. hospital market segment. Product sales to Fisher represented 85% of our product sales in the first half of 2002 and 85% of our product sales during 2001. Fisher reported to us that end-user sales of our products by Fisher were $42.2 million during the first half of 2002, and $62.1 million during the full year 2001. Fisher's end-user sales are not directly comparable to our product sales because the timing of shipments from Biosite to Fisher may not match the timing of shipments from Fisher to the end-user hospitals and due to changes in the quantities of our products Fisher purchases and stocks in its inventory. Internationally, our products are distributed by country-specific and regional distributors.

        We have reported quarterly operating profits since the third quarter of 1999, after incurring quarterly operating losses during the prior seven quarters. Our operating results may fluctuate on a quarterly or annual basis in the future and our growth or operating results may not be consistent with predictions made by securities analysts. We may not be able to maintain profitability in the future.

        We believe that our future operating results will be subject to quarterly fluctuations due to a variety of factors, including:

•

market acceptance of current or new products



•

changes in the mix of products sold



•

the timing and variability of significant orders



•

seasonal or unanticipated changes in customer demand



•

manufacturing capacity constraints, delays or inefficiencies



•

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



•

research and development efforts, including clinical trials and new product scale-up activities



•

enforcement, defense and resolution of license and patent disputes



•

ability to execute, enforce and maintain license and collaborative agreements necessary to earn contract revenues



•

attainment of milestones under collaborative agreements necessary to earn contract revenues



•

competitive pressures on average selling prices

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•

competition, including the introduction of products competitive with our Triage BNP Test, from diagnostic companies with greater financial capital and resources



•

changes in reimbursement policies



•

regulatory uncertainties or delays



•

product recalls



•

shipment problems, and



•

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, Biosite Discovery and new product development, our operating results would be adversely affected if our sales and gross profits did not correspondingly increase or if our Biosite Discovery or 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.

Recent Developments

License and patent disputes

        Our dispute with XOMA Ltd. and its affiliates, XOMA, pertains to patents that were licensed to us in 1998 and 1999. In May 2001, XOMA claimed that we were in breach of its license agreements and subsequently purported to terminate the licenses, which led to continuing litigation between the two companies. We maintain that we are in full compliance with the license agreements and have not breached our obligations, and therefore there is no basis for termination.

New Antibody Expression Technology

        In February 2002, we announced that we had designed our own novel antibody expression technology that is fundamentally different than that at the center of our dispute with XOMA. Our Biosite Discovery group has already implemented our new technology for the development of new antibodies and we expect that prior to December 31, 2002, all recombinant antibodies used in our diagnostics products except the Triage Parasite Panel will be produced using our new technology. Manufacturing priorities and capacity demands may result in a delay in conversion of the recombinant antibodies used in the Triage Parasite Panel until 2003. As a result, we believe we are now protected both by the current licenses, which we believe were not validly terminated by XOMA, and our new processes. XOMA has asserted that this new technology also infringes XOMA patents, and has added such allegations to the pending litigation. We responded by denying infringement and by asserting our defenses.

New Products—Triage TOX Drug Screen

        In January 2002, we received FDA clearance to market the Triage TOX Drug Screen within the U.S. The Triage TOX Drug Screen is a qualitative test that enables hospital physicians to quickly and conveniently perform toxicology screening of urine for eight classes of commonly abused drugs in approximately fifteen minutes. Based on the Triage MeterPlus platform, the test can be used at the point-of-care as an aid in identifying patients with drug overdose.

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        In June 2002, we extended the menu of our Triage Drugs of Abuse Panel to include propoxyphene. Sold under the brand name Darvon®, propoxyphene is usually prescribed for relief of mild to moderate pain. Darvon can produce psychological and physical dependence like other narcotics.

New Corporate Headquarters

        We are currently in escrow to purchase 34.7 acres of land in San Diego for the relocation of our corporate headquarters, which would be adequate for our foreseeable future needs. The estimated purchase price of the land is $28.1 million. As of June 30, 2002 we had deposited $1.0 million in escrow. There are various contingencies that remain before the close of escrow, including the construction of an access road that must be complete by January 31, 2003, subject to allowable delays. Upon the close of escrow, expected to occur by the end of April 2003, we intend to pursue financing a portion of the land purchase price and the subsequent buildings construction costs through construction and long term debt financing. The new headquarters will provide us with up to 800,000 square feet and will be constructed in phases as needed. The first phase will provide us with approximately 200,000 square feet of space. The total land and construction cost of the first phase is estimated to be $70.0 million. We expect the first phase of construction to be completed in 2004. We may decide to seek additional capital to fund this new facility. If a new corporate facility were to be constructed to meet our future facility needs, we would not anticipate expanding our operations to the new facility prior to 2004. Expanding into a new facility would be expected to result in both cash expenditures for the purchase of the land and construction costs that would be reimbursed from loan proceeds if we are successful in obtaining financing, and an increase in occupancy costs.

Critical Accounting Policies Involving Management Assumptions and Estimates

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying financial statements and related footnotes. In preparing these financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. We do not believe there is a great likelihood that materially different amounts would be reported related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.

        Revenue Recognition.    We recognize product sales upon shipment unless there are significant post-delivery obligations or collection is not considered probable at the time of shipment. Generally, we do not have any significant post-delivery obligations associated with our product sales. We accrue for warranty costs and other allowances at the time of shipment based on historical experience, trends and estimates.

        Our collaborative development agreements generally contain specific payments for specific activities or elements of the agreements. Among the payments we might receive under the agreements are: up-front technology access fees, research funding, 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 by our partners, milestone fees on drug targets that reach certain development milestones and royalties should products successfully be commercialized as a result of the collaboration. Up-front technology access fees are recognized over the term of the agreement or ongoing research period, as applicable, unless the Company has no further continuing performance obligations related to the fees. Research funding is recognized over the applicable research period on a straight-line basis, which approximates the underlying performance. Milestone payments, such as antibody development fees and clinical milestones, are recognized when earned, as the milestone events are substantive and their achievability is not reasonably assured at the inception of the agreement.

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Contract revenues that are based on the performance of and collection by our collaborative partners or their partners are deferred until such performance is complete and collection is probable. We believe that each payment element of these agreements represents the fair value of the element at the date of the agreement.

        The Securities and Exchange Commission's Staff Accounting Bulletin No. 101, Revenue Recognition, SAB No. 101, provides guidance on the application of generally accepted accounting principles to selected revenue recognition issues. We believe that our revenue recognition policy is appropriate and in accordance with generally accepted accounting principles and SAB No. 101.

        Inventories and Related Allowance for Obsolete and Excess Inventory.    Net inventories are valued at the lower of the first-in, first-out (FIFO) cost or market value and have been reduced by an allowance for excess and obsolete inventories. We utilize a standard cost system to track our inventories on a part-by-part, full absorption cost basis. Adjustments are made to the standard labor and standard overhead costs to approximate actual labor and actual overhead costs on a FIFO cost basis. The estimated allowance for excess and obsolete inventories is based on management's review of inventories on hand compared to estimated future usage and sales and assumptions about the likelihood of obsolescence.

        Intangible and Other Long-Lived Assets.    At June 30, 2002, we had approximately $31.3 million of long-lived assets, including $15.5 million of property, plant and equipment and $8.6 million of capitalized patents and license rights. Property, plant and equipment, intangible and certain other long-lived assets are amortized over their useful lives. Useful lives are based on management's estimates of the period that the assets will generate revenue directly or indirectly. License rights related to products for sale are amortized to cost of sales over the life of the license, not to exceed ten years, using a systematic method based on the estimated revenues generated from products during the shorter of the license period or ten years from the inception of the license. The estimated revenues used as the base by which we amortize the license rights only includes estimated sales for products we are currently selling and does not include any estimated product sales expected to be realized during the license amortization term from products still in development today. Our intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

        Deferred Income Taxes.    As of June 30, 2002, we have approximately $5.5 million of deferred tax assets, consisting primarily of research and development credits. No valuation allowance has been recorded to offset the deferred tax assets as we have determined that it is more likely than not that these assets will be realized. We will continue to assess the likelihood of realization of such assets; however, if future events occur which do not make the realization of such assets more likely than not, we will record a valuation allowance against all or a portion of the net deferred tax assets. Examples of future events that may occur which would make the realization of such assets not likely would be a lack of taxable income resulting from poor operating results or rising tax deductions generated from disqualifying dispositions of stock issued under our stock plans.

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        Litigation.    Our dispute with XOMA pertains to patents that were licensed to us in 1998 and 1999. In May 2001, XOMA claimed that we were in breach of its license agreements and subsequently purported to terminate the licenses, which led to continuing litigation between the two companies. We maintain that we are in full compliance with the license agreements and have not breached our obligations, and therefore there is no basis for termination and therefore no impairment of the carrying amount of these licenses. The range of possible outcomes from these proceedings could include judgments in our favor, judgments against us or settlements that might or might not have a material adverse impact on our business. As of June 30, 2002, we have approximately $1.0 million of capitalized license rights related to the patent licenses from XOMA. The carrying amounts of the XOMA license rights are affected whenever events or changes in circumstances indicate that the carrying amount of the license rights may not be recoverable. Such events or circumstances might include judgments against us or settlements.

Results of Operations

        Product Sales.    Product sales by product family were as follows (in thousands):

        Product sales for the three and six months ended June 30, 2002 were $23.1 million and $40.9 million, respectively, representing increases of 51% and 39%, respectively, compared to $15.3 million and $29.5 million, respectively, for the same periods of 2001. The increases in total product sales, as compared to the same periods of 2001, were primarily attributable to the growth in net sales of our Triage BNP Test, one of our cardiovascular diagnostic products, of $7.6 million and $11.6 million, respectively.

        Net sales of our cardiovascular products, consisting of our Triage Cardiac Panel, Triage BNP Test and the Triage Meter, totaled approximately $13.3 million and $21.4 million, respectively, for the three and six months ended June 30, 2002, as compared to $5.1 million and $9.8 million, respectively, for the same periods of 2001. The net sales growth of our cardiovascular products for the three and six months ended June 30, 2002 was primarily due to growth in sales volume of our Triage BNP Test and the Triage meter. The Triage BNP Test was launched in the U.S. in December 2000.

        The Triage BNP Test is currently the only FDA cleared test for use as an aid in the diagnosis of congestive heart failure. Other companies have certain diagnostic rights to the protein or have another product under development that may compete against our Triage BNP Test and we anticipate competition from these companies in the future. These competitors may succeed in developing or marketing products that are more effective or commercially attractive than the Triage BNP Test. Moreover, we may not have the financial resources, technical expertise or marketing, distribution or support capabilities to compete successfully against these companies and other competitors in the future. Due to the continued acceleration in customer demand for the Triage BNP Test, distributor inventory levels of some of our products were below targeted stocking levels at June 30, 2002. We are expanding our manufacturing capacity through added production shifts and through the implementation

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of additional automated manufacturing equipment. Product sales in future quarters will be impacted as Biosite and our distributors attempt to adjust distributor inventories to targeted stocking levels.

        Net sales of our qualitative products, consisting of the Triage Drugs of Abuse Panel, Triage TOX Drug Screen, Triage C. difficile Panel and Triage Parasite Panel were approximately $9.8 million and $19.6 million, respectively, for the three and six months ended June 30, 2002, as compared to $10.3 million and $19.8 million, respectively, for the same periods of 2001. The decline in our qualitative products for the three months ended June 30, 2002, as compared to the same period of 2001, was primarily related to a decrease in the average net sales price of the Triage Drugs of Abuse Panel. The decline in our qualitative products for the six months ended June 30, 2002, as compared to the same period of 2001, was primarily related to a decrease in the sales volume of the Triage Drugs of Abuse Panel offset by an increase in sales volume of our microbiology products. We believe that the domestic sales of the Triage Drugs of Abuse Panel products may decline as the available U.S. market becomes saturated and competitive pressures become more prominent in a maturing market.

        Contract Revenues.    Contract revenues consist of revenues associated with our research and development and licensing arrangements, including license fees, milestone revenues, royalties, research funding and antibody fees. Contract revenues for the three and six months ended June 30, 2002 were $1.8 million and $2.7 million, respectively, compared to $877,000 and $1.8 million, respectively, for the same periods of 2001. Contract revenues recognized during the three and six months ended June 30, 2002 consisted primarily of license fees, research funding and antibody fees. In June 2000, we entered into an alliance with Medarex Inc. Under the terms of the agreement, we receive research funding of $3.0 million per year over eight years from Medarex, along with research fees and, if any products are generated through the collaboration, milestone payments and royalties. We recognized $750,000 during each quarter of 2002 and 2001 of research funding from the alliance with Medarex. Other contract revenues recognized during the three and six months ended June 30, 2002 and 2001 included license fees, antibody fees, and amortization of up-front technology access fees. The increase in contract revenues during the second quarter of 2002 resulted primarily from the grant of a non-exclusive license from Biosite to a company for certain proprietary technology.

        Biosite Discovery activities are performed and its costs are incurred by certain of our research and development teams. These Biosite Discovery research and development resources concurrently focus on programs for our partners, which generated our contract revenue, and on internal research and development programs. Costs of the research and development resources performing collaborative and internal Biosite Discovery activities were approximately $1.3 million and $2.5 million for the three and six months ended June 30, 2002, respectively, and are included in research and development expenses. Costs of the research and development resources performing collaborative and internal Biosite Discovery activities were approximately $1.0 million and $2.0 million for the three and six months ended June 30, 2001, respectively. Although we continue to conduct business with existing and potential partners, our dispute with XOMA has interfered with certain activities with existing and potential partners.

        Cost of Sales and Gross Profit From Product Sales.    Gross profit from product sales for the three and six months ended June 30, 2002 were $16.0 million and $28.0 million, respectively, representing increases of 45% and 35%, compared to $11.0 million and $20.8 million, respectively, for the same periods of 2001. Gross profits increased primarily due to an overall increase in product sales. The overall gross margin for the three and six months ended June 30, 2002 was 69%, compared to 72% and 71%, respectively, for the same periods of 2001. The decrease in the overall gross margin was primarily as a result of the changing mix of net sales of our products that have different gross margins and manufacturing inefficiencies. Our cardiovascular products have lower gross margins than our Triage Drugs of Abuse Panel. Sales of our cardiovascular products represented 57% and 52% of our product sales for the three and six months ended June 30, 2002, respectively, compared to 33% for the same periods in 2001.

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        Our newer products are expected to continue to realize lower gross margins than the Triage Drugs of Abuse Panel during the early stages of their commercialization as incremental manufacturing costs are spread over smaller sales volumes and efficiency issues are addressed. We also expect that although our gross profits may continue to grow, our overall gross margins may continue to decrease as a result of competitive pricing pressures related to the maturing Triage Drugs of Abuse product line and the changing mix of net sales of products with different gross margins.

        Selling, General and Administrative Expenses (SG&A expenses).    SG&A expenses for the three and six months ended June 30, 2002 were $7.9 million and $13.9 million, respectively, representing increas