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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Commission File Number: 0-10961

QUIDEL CORPORATION
(Exact name of Registrant as specified in its charter)

        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

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

        Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ý    No o

        The aggregate market value of the common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, as of the last business day of the Registrant's most recently completed second fiscal quarter was $153,365,010.

        As of March 4, 2004, 31,373,887 shares of the Registrant's common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
(To the Extent Indicated Herein)

        Portions of the Registrant's Proxy Statement to be filed with the Securities and Exchange Commission in connection with the solicitation of proxies for the Registrant's 2004 Annual Meeting of Stockholders to be held on May 26, 2004 are incorporated by reference into Part III, Items 10, 11, 12, 13 and 14 of this Form 10-K.

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A Warning About Forward-Looking Statements

        This Annual Report on Form 10-K contains forward-looking statements within the meaning of the federal securities laws that involve material risks and uncertainties. Many possible events or factors could affect our future financial results and performance, such that our actual results and performance may differ materially. As such, no forward-looking statement can be guaranteed. Differences in operating results may arise as a result of a number of factors including, without limitation, intellectual property, product liability, environmental or other litigation, seasonality, adverse changes in the competitive and economic conditions in domestic and international markets, actions of our major distributors, manufacturing and production delays or difficulties, adverse actions or delays in product reviews by the U.S. Food and Drug Administration ("FDA"), and the lower acceptance of our new products than forecast. Forward-looking statements typically are identified by the use of terms such as "may," "will," "should," "might," "expect," "anticipate," "estimate" and similar words, although some forward-looking statements are expressed differently. The risks described under "Risk Factors" and in other sections of this Annual Report and in other reports and registration statements that we file with the Securities and Exchange Commission ("SEC") from time to time should be carefully considered. You are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date of this Annual Report. We undertake no obligation to publicly release the results of any revision of the forward-looking statements.

Part I Item 1. Business

        All references to "we," "our," and "us" in this Annual Report refer to Quidel Corporation and its subsidiaries.

Overview

        We are a worldwide leader in developing, manufacturing and marketing point-of-care ("POC") rapid diagnostic tests for the detection and management of a variety of medical conditions and illnesses. Our current product areas include pregnancy, infectious diseases, autoimmune diseases, osteoporosis and urinalysis. In the U.S., we lead the market in several POC product categories for sales through medical product distributors. This leadership position includes an estimated 51%, 49% and 45% market share for the POC market in pregnancy, influenza and Group A Strep products, respectively, as of December 31, 2003. Our products provide healthcare professionals with accurate and cost-effective diagnostic information at the POC. We sell our products to professionals for use in physician offices, hospitals, clinical laboratories and wellness screening centers. We focus our products substantially on women's and family health in areas such as reproduction, infectious diseases, general health screening and diseases associated with the elderly.

        We commenced our operations in 1979 and launched our first products, dipstick-based pregnancy tests, in 1984. Our product base and technology platforms have expanded through internal development and acquisitions of other products and technologies. The current product areas are pregnancy, infectious diseases, autoimmune diseases, osteoporosis and urinalysis, primarily for professional and research use.

        We market our products in the U.S. through a network of national and regional distributors, supported by a direct sales force. In the rest of the world, we sell and market through distributors in Asia-Pacific, Europe, the Middle East, Africa and Latin America and in other international locations by channeling products through distributor organizations and sales agents.

        We are a corporation, incorporated in the State of Delaware. Our executive offices are located at 10165 McKellar Court, San Diego, California 92121, and our telephone number is (858) 552-1100. This Annual Report, and each of our other periodic and current reports, including any amendments, are available, free of charge, on our website, www.quidel.com, as soon as reasonably practicable after such

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material is electronically filed with, or furnished to, the SEC. The information contained on our website is not incorporated by reference into this Annual Report and should not be considered part of this Annual Report. In addition, the SEC website contains reports, proxy and information statements, and other information about us at www.sec.gov.

Recent Developments

Intellectual Property Litigation

        On February 20, 2004, we filed a lawsuit (the "Action") in the U.S. District Court, Southern District of California against Inverness Medical Innovations, Inc., Inverness Medical Switzerland GmbH, and Applied Biotech, Inc. (collectively "Inverness"), as well as against Armkel LLC, for infringement of our U.S. Patent No. 4,943,522 (the "522 Patent"), which relates to lateral-flow technology, and for declaratory relief. We are seeking damages and injunctive relief against Inverness products that infringe our patented technology. Our claim for declaratory relief relates to nine Inverness-owned and Inverness-licensed patents (U.S. Patent Nos. 6,485,982: 5,989,921; 5,714,389; 6,352,862; 6,228,660; 6,187,598; 5,656,503; 5,622,871; and 5,602,040), and requests the Court to conclude that our lateral-flow products do not infringe these patents, and that the patents are invalid and unenforceable.

        On March 9, 2004, Inverness and a related party filed, in the U.S. District Court, Southern District of California, denials of our allegations of infringement in the Action, allegations that our 522 Patent is invalid and unenforceable, as well as counterclaims for patent infringement against us. On March 12, 2004, Armkel LLC filed, in the U.S. District Court, Southern District of California, an answer to our request for declaratory relief and counterclaims for patent infringement against us. The counterclaims by Inverness and the related parties and by Armkel LLC allege that our immunoassay test products, including our tests for influenza, pregnancy, strep, and H pylori, infringe eight of the nine Inverness patents that we identified in the Action. In addition, Inverness Medical Switzerland GmbH, Wampole Laboratories, LLC, and Applied BioTech, Inc. filed a separate complaint against us alleging that our immunoassay test devices also infringe a ninth patent owned by Inverness, U.S. Patent No. 6,534,320. The relief requested in these claims and counterclaims against us includes damages and preliminary and permanent injunctive relief to the effect that if this relief is granted, we would be required to cease and desist from manufacturing, selling, marketing, using, and inducing others to use products that represent a substantial majority of our revenues.

        On February 17, 2004, our German affiliate Quidel Deutschland GmbH was provided with a copy of a lawsuit that Inverness Medical Switzerland GmbH, another Inverness subsidiary, and Preymed had apparently filed on or about February 4, 2004 in District Court in Düsseldorf, Germany, which names us, Quidel Deutschland GmbH, and our distributor, Progen Biotechnik GmbH, as defendants. The lawsuit alleges that we and the other defendants are infringing two Inverness-owned European patents, EP 0 291 194 and EP 0 560 411, and is directed at our lateral flow test devices, including our tests for pregnancy, strep, H pylori, and Chlamydia. The suit seeks injunctive relief, an accounting, damages and annulment. If the Court grants injunctive relief, we will be required to cease and desist from manufacturing, selling, marketing, using, and importing our lateral flow products in Germany.

Product Announcements

        In September 2003, our QuickVue® Influenza A+B test received regulatory clearance from the FDA, allowing for this test to be sold in the U.S. The test received approval from the Japanese Ministry of Health and Welfare in January 2004. In February 2004, we announced that our new QuickVue(R) Influenza A+B test had been granted a waiver under the Clinical Laboratory Improvement Amendments of 1988 ("CLIA") from the FDA. The test provides physicians with a fast, accurate, easy-to-use method for aiding in the differential diagnosis of acute influenza type A or B. The

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QuickVue Influenza A+B test is a companion to the currently marketed, CLIA-waived QuickVue Influenza test, which has been available worldwide since 2001.

Restructuring

        In April 2003, we announced and implemented a restructuring plan (the "Restructuring Plan"). The Restructuring Plan was primarily driven by manufacturing automation in our San Diego facility, completion of certain research and development projects, implementation of our BaaN enterprise resource planning system in our Santa Clara facility, and the transition of our foreign sales and support offices to independent distributors. The Restructuring Plan included a workforce reduction of 63 positions (18% of our total workforce at such time) and closure of our sales and support offices in Heidelberg, Germany and Milan, Italy. We recorded a restructuring charge of approximately $2.2 million during 2003. The significant components of the restructuring charge were $1.3 million for employee severance costs, $0.5 million for contractual lease and commercial contract terminations, $0.3 million for professional fees, and $0.1 million for impairment charges related to assets that were deemed obsolete due to restructuring activities. As of December 31, 2003, $1.8 million of the restructuring charge had been paid and $0.4 million is included in other accrued liabilities in the accompanying consolidated balance sheet.

Diagnostic Test Kit Industry Overview

The Overall Market for In Vitro Diagnostics

        The worldwide market for in vitro diagnostic, or IVD, products is estimated at approximately $23.0 billion in 2003 and is segmented by the particular test discipline. The largest segments are immunodiagnostics testing and instrument-based clinical chemistry, which account for approximately 31% and 21% of the total IVD market, respectively. Geographically, approximately 40% of total IVD revenues are generated in the U.S., while Europe, Japan and the rest of the world account for approximately 33%, 14% and 13%, respectively.

        Customers for IVD products are primarily large centralized laboratories, independent reference laboratories or hospital-based facilities. In the U.S., these central laboratories represent approximately 75% of the revenues generated by IVD products.

        The centralized diagnostic testing process typically involves obtaining a specimen sample of blood, urine or other fluid from the patient and sending the sample from the healthcare provider's office or hospital unit to a central laboratory. In a typical visit to the physician's office, after the patient's test specimen is collected, the patient is usually sent home and receives the results of the test several hours or days later. The result of this process is that the patient may leave the physician's office without confirmation of the diagnosis and the opportunity to begin more effective immediate care.

        The following three basic factors have caused centralized diagnostic testing (as opposed to POC testing) to dominate the overall diagnostic testing market: 1) technical requirements for accurate testing often require sophisticated and expensive equipment; 2) the cost to run a test on large scale instruments is low; and 3) governmental regulations affecting all laboratories, regardless of size, require compliance to complex regulations and licensing requirements.

        The over-the-counter market for IVD self-testing has not been materially affected by these trends. The worldwide over-the-counter market is estimated to grow to $4.5 billion by 2004. Two test categories, glucose monitoring for diabetes and pregnancy, currently dominate this market segment.

The POC Market

        POC testing for certain diagnostic parameters has become an accepted adjunct to central laboratory and self-testing. The POC market is comprised of two general segments: hospital testing

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(emergency rooms and bedside) and decentralized testing in non-institutional settings such as physicians' offices. Hospital POC testing is accepted and growing and is generally an extension of the hospital's central laboratory. Larger segments of rapid turnaround POC diagnostics include tests for urinalysis and pregnancy.

        Out-of-hospital testing sites consist of physicians' office laboratories, nursing homes, pharmacies and other non-institutional, ambulatory settings in which healthcare providers perform diagnostic tests. This decentralized POC market encompasses a large variety of IVD products ranging from moderate-sized instrumented diagnostic systems serving larger group practices to single-use, disposable tests for smaller practice physicians' offices. We believe POC testing out-of-hospital is increasing due to its clinical benefit and cost-effectiveness.

        Current total revenues from the rapid non-instrument-based POC market are estimated at approximately $345 million in 2003 in the U.S. The growth in POC testing in the U.S. is in part due to evolving technological improvements creating high quality tests with laboratory accuracy and POC ease-of-use, which are capable of being granted a waiver under the CLIA, and therefore available to an estimated 101,000 physician office laboratories.

Business Strategy

        We believe that the trend among healthcare providers to adopt POC testing is increasing, and demographic changes, reimbursement policies and the availability of clinically valuable tests will increase growth in this diagnostic category. More and more employers, health plans and payors are recognizing that POC testing is the most cost-effective means for improving the quality of care and patient satisfaction. Continuous improvements in technology are resulting in a growing number of new diagnostic tests that combine high levels of accuracy with rapid, easy-to-use product formats. It is our mission to establish and maintain a significant global leadership position in out-of-hospital POC rapid diagnostics. In order to accomplish this mission, we have defined the following strategic goals:

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Improve profit margins through changing product mix, increased volume and more efficient manufacturing operations;



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Commercialize the Layered Thin Film™ ("LTF") proprietary technology acquired in our Litmus Concepts Inc. ("Litmus") acquisition;



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Expand the new product pipeline from internal research and development;



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Pursue licensing and acquisition opportunities when financially and strategically attractive;



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Leverage the marketing and distribution strength of the QuickVue brand in the U.S., and maximize worldwide sales through current and newly identified sales channels in Europe, Asia and the rest of world;



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Gain worldwide market share leadership position with our QuickVue Influenza test products;



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Expand international sales through external alliances, collaborations and sales focus; and



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Expand development and marketing collaborations with large pharmaceutical and other healthcare companies.

Technology

        We incorporate immunoassay technology, enzymology, biochemistry and LTF technology into specially designed and engineered rapid diagnostic products. We have developed, licensed or acquired four delivery system formats: dipsticks, lateral-flow cassettes, microwell plate tests and LTF technology. Some of the tests are based on immunoassay technologies and differ in terms of speed, ease-of-use and sensitivity, while other tests are based on enzymatic or basic chemistry reactions. The immunoassay

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approach uses antibodies that bind to specific antigens, such as those on viruses, bacteria, hormones, drugs and other antibodies. The unique ability of antibodies to bind specifically to antigens of interest allows antibodies to be used in a wide range of diagnostic applications. The LTF technology uses chemical or enzymatic reactions to indicate the presence or absence of specific infectious agents or ambient chemistry conditions. These test systems provide rapid, clear color endpoints for easy direct visual interpretation of the test results without the need for instrumentation.

Products

        We provide rapid POC diagnostic tests under the following brand names: QuickVue®, QuickVue+®, QuickVue® Advance®, RapidVue®, BlueTest®, Metra™, QUS-2®, UrinQuick® and Semi-Q®. Our rapid POC diagnostic tests, biochemical bone markers and ultrasonometer participate in the following medical and wellness categories:

        Influenza.    This diagnostic test was developed through a funded collaboration with GlaxoSmithKline plc, as an aid in the diagnosis and treatment of influenza at the POC. The test is a rapid, qualitative test for the detection of influenza type A and B viral antigens, the two most common types of the influenza virus. The test received FDA clearance in September 1999, with commercialization beginning in December 1999. The FDA granted us the first CLIA waiver for an influenza test in October 2000. Our second generation test, the QuickVue Influenza A+B, which allows for the differential diagnosis of influenza type A and type B, received FDA clearance in September 2003 and CLIA waiver in February 2004. Influenza test sales represented approximately 40%, 20% and 11% of our net sales for the years ended December 31, 2003, 2002 and 2001, respectively.

        Group A Strep.    Each year millions of people in the U.S. are tested for Group A Strep infections, commonly referred to as "strep throat." Group A Streptococci are bacteria that typically cause illnesses such as tonsillitis and pharyngitis which, if left untreated, can progress to secondary complications. Our initial Strep A test, the QuickVue® In-line® Strep A test, was the first rapid Strep A test to be granted a CLIA waiver, and we launched additional product offerings with the QuickVue® + Strep A and the QuickVue® Dipstick Strep A tests in 1996 and 2001, respectively. Net sales of Group A Strep products represented approximately 19%, 22% and 26% of our net sales for the years ended December 31, 2003, 2002 and 2001, respectively.

        Pregnancy.    The early detection of pregnancy enables the physician and patient to institute proper care, helping to promote the health of both the woman and the developing embryo. Pregnancy test sales, including tests sold to physicians and other healthcare organizations, represented approximately 18%, 29% and 35% of our net sales for the years ended December 31, 2003, 2002 and 2001, respectively.

        Metabolic bone markers.    According to the National Osteoporosis Foundation, osteoporosis afflicts over 28 million Americans and over 200 million people worldwide. Osteoporosis is a disorder characterized by a decrease in bone mass that leads to increased risk of fracture. One parameter for diagnosing and monitoring bone health is to measure the metabolic process of bone turnover (resorption and formation) or "rate" of change. Metabolic bone markers are used by physicians to monitor the effectiveness of therapy and are extensively used in pharmaceutical research. Net sales of metabolic bone markers represented approximately 6%, 7% and 7% of our net sales for the years ended December 31, 2003, 2002 and 2001, respectively.

        Helicobacter pylori ("H. pylori").    This is the bacterium believed to be associated with approximately 80% of the five million people diagnosed with peptic ulcers in the U.S. H. pylori is implicated in chronic gastritis and is recognized by the World Health Organization as a Class 1 carcinogen that may increase a person's risk of developing stomach cancer. Once the H. pylori infection

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is detected, antibiotic therapy is administered to eradicate the organism and promote a cure of the ulcer condition. Our rapid test is a serological test that measures antibodies circulating in the blood caused by the H. pylori bacteria. Our initial H. pylori test was the first rapid H. pylori test to be granted a CLIA waiver. We launched our second generation CLIA-waived test in August 2000. H. pylori tests accounted for approximately 3%, 4% and 6% of our net sales for the years ended December 31, 2003, 2002 and 2001, respectively.

        Other infectious disease products, including Chlamydia and Mononucleosis.    Chlamydia trachomatis is responsible for the most widespread sexually transmitted disease in the U.S. Over one-half of infected women do not have symptoms and, if left untreated, Chlamydia can cause sterility in these women. Infectious Mononucleosis can be severely debilitating to immune-suppressed groups, including the elderly, if not diagnosed and treated promptly. These infectious disease products represented approximately 3%, 3% and 4% of our net sales for the years ended December 31, 2003, 2002 and 2001, respectively.

        Urinalysis.    Urinalysis testing using chemical test strips is one of the single most widely ordered diagnostic tests in the world. The total worldwide market is estimated at approximately $430 million, and the products are used by nearly every healthcare provider customer segment. We acquired our urine test strip product line from Dade Behring Marburg GmbH ("Dade") in 1999 and initially, we launched into the visual-read (non-instrument based) urine testing segment which represents an estimated $40 million overall market in the U.S. In November 2002, we launched our UrinQuick® instrument featuring advanced software capabilities and patented transport and optic systems, making the instrument user-friendly for laboratory personnel through every aspect of operation. With the UrinQuick instrument, physician office laboratories can now analyze entire batches of urine strips more easily and less expensively, detecting the presence of ten important health markers that assist in the diagnosis of diabetes, liver and kidney disease, urinary tract infections and other ailments. Sales of the urine test strip products represented 2%, 3% and 3% of our net sales for the years ended December 31, 2003, 2002 and 2001, respectively.

        QUS-2®.    Another parameter critical to assessing bone health is the measurement of the density of bone. Imaging technologies provide this information referred to as the "state" of bone health. The QUS-2 is a portable ultrasonometer that scans the heel of the foot as an aid in the diagnosis of osteoporosis. We believe the "state and rate" assessment provides the most complete picture of bone health available in the POC market. Sales of our QUS-2 product represented approximately 1% of our net sales for each of the years ended December 31, 2003, 2002 and 2001.

        Bacterial vaginosis.    Each year millions of women seek treatment of genital infections generally known as infectious vaginitis. One of the most common forms of infectious vaginitis is bacterial vaginosis ("BV"), a condition which, if left untreated, can lead to serious clinical complications, including pre-term births, pelvic inflammatory disease, infections following gynecological surgeries and an increased risk of contracting HIV. Two products for the clinical evaluation of infectious vaginitis, a test for pH and amines, and a test for Gardnerella vaginalis, were launched in July 2002 utilizing our LTF™ technology. They represent our first rapid diagnostic tests for infectious vaginitis. These tests were acquired in the Litmus acquisition and represented approximately 1% of our net sales for each of the years ended December 31, 2003, 2002 and 2001.

        Other Products.    The remaining 7%, 8% and 6% of net sales for the years ended December 31, 2003, 2002 and 2001, respectively, include veterinary products, products produced under outside contract and collaboration, and clinical laboratory tests used in the measurement of circulating immune complexes.

        We derive a significant portion of our net sales from three products. For the years ended December 31, 2003, 2002 and 2001, we derived approximately 77%, 71% and 72%, respectively, of our

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net sales from sales of our influenza, Group A Strep and pregnancy tests. We expect that these three product families will continue to account for a substantial portion of our total net sales and any material reduction in supply, demand or pricing would have a material adverse effect on our business, operating results and financial condition.

        For the years ended December 31, 2003, 2002 and 2001, export sales to unaffiliated customers constituted approximately 42%, 33% and 26%, respectively, of net sales. The export sales were primarily to customers in Japan, Germany, Italy, the United Kingdom, Poland and France. We market our products in the U.S. through a network of national and regional distributors, supported by a direct sales force. In the rest of the world, we sell and market through distributors in Asia-Pacific, Europe, the Middle East, Africa and Latin America and in other international locations by channeling products through distributor organizations and sales agents. We expect that export sales will continue to represent a significant portion of our net sales in the foreseeable future.

Products Under Development

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Strep A web.    After having successfully implemented our new, highly automated, web-based technology with the launch of two new QuickVue pregnancy tests, we are seeking to transfer our second highest-volume product, QuickVue Strep A, onto the same manufacturing technology. The cutting-edge manufacturing technology and process controls ensure consistent high quality and consistency, both within each lot, and lot after lot. This high level of performance is expected to give our customers continuous satisfaction and a high level of confidence in the results obtained, contrary to similar products that are hand built in small quantities, in hard to control environments. We expect to launch the web QuickVue Strep A product during 2004.



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Flu A+B differentiated.    To continue our successful penetration into the highly competitive influenza diagnostic market in Japan and into the U.S. hospital market, we have developed a new version of our two step rapid flu dipstick test. This new test will allow our customers to differentiate between influenza type A and type B. The test received approval from the Japanese Ministry of Health and Welfare in January 2004. The assay is intended to facilitate our penetration into the clinical laboratory market, thus complementing our successful penetration of the physician office market. The product was launched in the first quarter of 2004.



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Strep A Rub 'N Read.    A rapid test for the detection of Group A Strep infection is currently under development utilizing the LTF™ technology. Group A Strep infection is the most significant cause of pharyngitis in children. The test is currently expected to proceed to clinical trials in 2004.



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LTF™ Immunoassay Platform.    In addition to the specific product development programs using LTF™ enzymatic and chemical reaction technology described above, we are also working on the development of a new immunoassay platform that will incorporate significant innovations in the LTF™ technology. We expect that the new platform will be highly proprietary in nature. It is anticipated that this platform will provide the high-throughput, high-flexibility and low-cost manufacturing originally envisioned with the acquisition of Litmus.



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QuickVue Advance pH and Amines Test (Gen. II).    An easier to read test for vaginal pH and amines was completed in 2003 and filed for clearance with the FDA. The test is expected to be launched in 2004.

Seasonality

        Sales levels for several products are significantly affected by seasonal demand trends. Group A Strep and influenza tests, for example, are used primarily in the fall and winter. As a result of these

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demand trends, we generally experience lower sales volume in our second and third quarters of the calendar year, and have higher sales volume in our first and fourth quarters of the calendar year.

Research and Development

        We continue to focus our research and development efforts on three areas: 1) the creation of improved products and new products for existing markets, 2) new proprietary product platform development, and 3) products developed under collaborations with other companies for new and existing markets. Research and development expenses were approximately $8.5 million, $6.7 million and $6.2 million for the years ended December 31, 2003, 2002 and 2001, respectively. There were no customer-sponsored research activities during the years ended December 31, 2003, 2002 and 2001. As of December 31, 2003, we recorded approximately $1.6 million in deferred revenue related to collaborative development efforts with a major consumer products company. We anticipate that we will continue to devote a significant amount of financial resources to product and technology development and research for the foreseeable future.

Marketing and Distribution

        In contrast to the central laboratory market, the U.S. POC market is highly fragmented, with many small or medium-sized customers. We have designed our business strategy around serving the needs of this market segment. To reach these customers, a network of national and regional distributors are utilized and supported by our sales force. We have developed priority status with several of the major distributors in the U.S., resulting in many of our products being the preferred products offered by these distributors.

        Internationally, the use of rapid POC diagnostic tests, the acceptance of testing outside the central laboratory, the regulatory requirements to sell POC tests, and consumer interest in over-the-counter and self-test products differ considerably from the U.S. Our international sales are lower than domestic sales as a percentage of our total business. Part of this difference is due to the POC market being more developed in the U.S. relative to the overall IVD market in other countries.

        We derive a significant portion of our net sales from a relatively small number of distributors. While we expect that our dependence on a few key distributors will continue in the future, our product sales are not completely dependent on these relationships and we believe that the loss of sales to any one distributor may be absorbed by another distributor. Approximately 51%, 45% and 43% of our net sales for the years ended December 31, 2003, 2002 and 2001, respectively, were derived from sales through our three largest distributors in each of those periods. Even though our distributor mix will likely change from period to period in the future, Sumitomo Seiyaku Biomedical Co., Ltd ("Sumitomo"), Cardinal Health Corporation ("Cardinal") and McKesson Corporation ("McKesson) have historically accounted for a significant portion of our net sales. For the years ended December 31, 2003, 2002 and 2001, Sumitomo accounted for approximately 28%, 15% and 7%, respectively, of net sales, Cardinal accounted for approximately 15%, 19% and 23%, respectively, of net sales, while McKesson accounted for approximately 7%, 11% and 12%, respectively, of net sales. If net sales to these or any of our other significant distributors were to decrease in any material amount in the future, our business, operating results and financial condition could be materially adversely affected.

Manufacturing

        We have manufacturing operations in San Diego, California; Santa Clara, California; and Marburg, Germany. The San Diego facility, our largest manufacturing operation, principally produces the lateral-flow, immunoassay products. The Santa Clara facility manufactures microtiter plate products and produces the LTF™ products. Previously, our urine test strip products were manufactured on a contract

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basis by Dade in Marburg, Germany; however, in December 2001, we assumed responsibility for manufacturing these products in Marburg, Germany.

        Our principal manufacturing facility is located in San Diego, California and consists of laboratories devoted to tissue culture, cell culture, protein purification and immunochemistry, and production areas dedicated to manufacturing and assembly. In the manufacturing process, biological and chemical supplies and equipment are used, which are generally available from several competing suppliers. In 2000, this facility received International Organization for Standardization ("ISO") 9001 certification for its quality management systems and successfully achieved a recertification in 2003. Many of the lateral-flow and immunoassay products manufactured in our San Diego, California facility are packaged and distributed by a third party, Berkeley Industries LLC ("Berkeley"). Berkeley is located in Southern California and its facility, which packages and distributes our products, is ISO 9001 certified.

        The facility in Santa Clara, California is the current location of the LTF™ manufacturing operation. This proprietary production system is a highly automated technology that allows the deposition of multiple reagents in specific patterns in either two or three dimensions for specific, rapid diagnostic products. The sophistication of the process allows for high unit volume through-put as well as change-over flexibility to accommodate a broad range of product configurations. This facility is ISO 9001 certified and successfully completed a surveillance audit in 2003.

        Our UrinQuick® instrument is manufactured by and purchased from LRE Technology Partner GmbH ("LRE"), a German company. The instrument was developed by LRE for us and the tooling, manufacturing equipment, processes and manufacturing documentation, intellectual property and patents are owned by us. LRE's manufacturing facility is also ISO 9001 certified.

        We seek to conduct all of our manufacturing in compliance with the FDA Quality System Regulations ("QSR") (formerly Good Manufacturing Practices) governing the manufacture of medical devices. The manufacturing facilities have been registered with the federal FDA and the Department of Health Services of the State of California ("State FDA"), and have passed routine federal and state inspections confirming compliance with the QSR regulatory requirements.

        In certain instances, we rely on a single source or a limited group of suppliers for certain components of our products. Although we seek to reduce our dependence on sole or limited source suppliers, the partial or complete loss of these sources could have a material adverse effect on our results of operations, and could damage customer relationships due to the complexity of the products they supply and the significant amount of time required to qualify new suppliers.

        The manufacture of medical diagnostic products is difficult, particularly with respect to the stability and consistency of complex biological components. Because of these complexities, manufacturing difficulties occasionally occur that delay the introduction or supply of products and result in unanticipated manufacturing costs.

Government Regulation

        The testing, manufacture and commercialization of our products are subject to regulation by numerous governmental authorities, principally the FDA and corresponding state and foreign regulatory agencies. Pursuant to the U.S. Federal Food, Drug, and Cosmetic Act and the regulations promulgated thereunder, the FDA regulates the preclinical and clinical testing, manufacture, labeling, distribution and promotion of medical devices. Noncompliance with applicable requirements can result in, among other matters, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, failure of the FDA to grant premarket clearance or premarket approval for devices, withdrawal of marketing clearances or approvals and criminal prosecution. The FDA also has the authority to request a recall, repair, replacement or refund of the cost of any device manufactured

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or distributed in the U.S. if the device is deemed to be unsafe. We had no product recalls, field corrections or market withdrawals in 2003.

        In the U.S., devices are classified into one of three classes (Class I, II or III) on the basis of the controls deemed necessary by the FDA to reasonably ensure their safety and effectiveness. Class I and II devices are subject to general controls including, but not limited to, performance standards, premarket notification ("510(k)") and postmarket surveillance. Class III devices generally pose the highest risk to the patient and are typically subject to premarket approval to ensure their safety and effectiveness. Our products are all Class I or II.

        Prior to commercialization in the U.S. market, manufacturers must obtain FDA clearance through a premarket notification or premarket approval process, which can be a lengthy, expensive and uncertain process. The FDA has been requiring more rigorous demonstration of product performance as part of the 510(k) process, including submission of extensive clinical data. It generally takes from two to six months to obtain clearance, but may take longer. For example, the FDA may determine that additional information is needed before a clearance determination can be made which could prevent or delay the introduction of new products into the market. A premarket approval application must be supported by valid scientific evidence to demonstrate the safety and effectiveness of the device, typically including the results of clinical investigations, bench tests, laboratory and animal studies. The premarket approval process can be expensive, uncertain and lengthy. It generally takes from six to 18 months to obtain approval, but may take longer. In addition, modifications or enhancements that could significantly affect safety or effectiveness, or constitute a major change in the intended use of the device, will require new submissions to the FDA, and there can be no assurance that the FDA will grant approval.

        The use of our products in the U.S. is also regulated under CLIA. These regulations establish national quality standards for most laboratories which perform testing on human specimens to ensure reliability of test results regardless of where the test is performed. On January 24, 2003, the Centers for Medicare & Medicaid Services ("CMS") issued a new rule under CLIA for non-waived test systems, which became effective April 24, 2003. It is unclear at this time what impact this new rule will have on clinical laboratories that now use our non-waived products, whether this new regulation will be considered burdensome by some users of our products, or whether there will be any adverse impact on us with implementation of the new regulations.

        We may not be able to obtain the necessary regulatory premarket approvals or clearances for our products on a timely basis, if at all. Delays in receipt of or failure to receive such approvals or clearances, or failure to comply with existing or future regulatory requirements, would have a material adverse effect on our business, financial condition and results of operations.

        Any devices we manufacture or distribute pursuant to FDA clearance or approvals are subject to continuing regulation by the FDA and certain state agencies, including adherence to FDA Quality System Regulations, relating to the testing, control, documentation and other quality assurance requirements. We must also comply with Medical Device Reporting ("MDR") requirements mandating reporting to the FDA of any incident in which a product may have caused or contributed to a death or serious injury, or in which a product malfunctioned and, if the malfunction were to recur, would be likely to cause or contribute to a death or serious injury. Labeling and promotional activities are also subject to scrutiny by the FDA and, in certain circumstances, by the Federal Trade Commission. Current FDA enforcement policy prohibits the marketing of approved medical devices for unapproved uses.

        We are subject to routine inspection by the FDA and other state agencies for compliance with applicable federal, state and local regulations. Changes in existing requirements or adoption of new requirements could have a material adverse effect on our business, financial condition and results of operations. We may also incur significant costs in complying with any applicable laws and regulations in

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the future, resulting in a material adverse effect on our business, financial condition and results of operations.

        Our research and development and manufacturing activities involve the controlled use of hazardous materials, including but not limited to biological materials and chemicals such as dimethyl sulfate, sodium nitrite, acetaldehyde, acrylamide, potassium bromate and radionuclides. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of hazardous materials. These regulations include federal statutes popularly known as CERCLA, RCRA and the Clean Water Act. Compliance with these laws and regulations is expensive. If any governmental authorities were to impose new environmental regulations requiring compliance in addition to that required by existing regulations, these future environmental regulations could impose substantial costs on our business. In addition, because of the nature of the penalties provided for in some of these environmental regulations, we could be required to pay substantial fines, penalties or damages in the event of noncompliance with environmental laws or the exposure of individuals to hazardous materials. Any environmental violation or remediation requirement could also partially or completely shut down our research and manufacturing facilities and operations, which would have a material adverse effect on our business.

Patents and Trade Secrets

        The healthcare industry has traditionally placed considerable importance on obtaining and maintaining patent and trade secret protection for significant new technologies, products and processes. We and other companies engaged in research and development of new diagnostic products using advanced biomedical technologies are actively pursuing patents for technologies that are considered novel and patentable. However, important legal issues remain to be resolved as to the extent and scope of available patent protection in the U.S. and in other important markets worldwide. The resolution of these issues and their effect upon our long-term success and other biotechnology firms is currently indeterminable. We currently hold 230 patents and have approximately 44 more pending.

        It has been our policy to file for patent protection in the U.S. and other countries with significant markets, such as Western European countries and Japan, if the economics are deemed to justify such filing and our patent counsel determines that a strong patent position can be obtained. No assurance can be given that patents will be issued to us pursuant to our patent applications in the U.S. and abroad or that a patent portfolio will provide us with a meaningful level of commercial protection.

        A large number of individuals and commercial enterprises seek patent protection for technologies, products and processes in fields in or related to our areas of product development. To the extent such efforts are successful, we may be required to obtain licenses in order to exploit certain of our product strategies and avoid a material adverse effect on our business. Licenses may not be available to us at all or, if so available, may not be available on acceptable terms.

        We are aware of certain patents issued to various developers of diagnostic products with potential applicability to our diagnostic technology. We have licensed certain rights from certain companies, such as Becton, Dickinson and Company, to assist with the manufacturing of certain products.

        On February 20, 2004, we filed the Action in the U.S. District Court, Southern District of California against Inverness, as well as against Armkel LLC, for infringement of our 522 Patent, which relates to lateral-flow technology, and for declaratory relief. We are seeking damages and injunctive relief against Inverness products that infringe our patented technology. Our claim for declaratory relief relates to nine Inverness-owned and Inverness-licensed patents (U.S. Patent Nos. 6,485,982: 5,989,921; 5,714,389; 6,352,862; 6,228,660; 6,187,598; 5,656,503; 5,622,871; and 5,602,040), and requests the Court to conclude that our lateral-flow products do not infringe these patents, and that the patents are invalid and unenforceable.

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        On March 9, 2004, Inverness and a related party filed, in the U.S. District Court, Southern District of California, denials of our allegations of infringement in the Action, allegations that our "522 Patent is invalid and unenforceable, as well as counterclaims for patent infringement against us. On March 12, 2004, Armkel LLC filed, in the U.S. District Court, Southern District of California, an answer to our request for declaratory relief and counterclaims for patent infringement against us. The counterclaims by Inverness and the related parties and by Armkel LLC allege that our immunoassay test products, including our tests for influenza, pregnancy, strep, and H pylori, infringe eight of the nine Inverness patents that we identified in the Action. In addition, Inverness Medical Switzerland GmbH, Wampole Laboratories, LLC, and Applied BioTech, Inc. filed a separate complaint against us alleging that our immunoassay test devices also infringe a ninth patent owned by Inverness, U.S. Patent No. 6,534,320. The relief requested in these claims and counterclaims against us includes damages and preliminary and permanent injunctive relief to the effect that if this relief is granted, we would be required to cease and desist from manufacturing, selling, marketing, using, and inducing others to use products that represent a substantial majority of our revenues.

        On February 17, 2004, our German affiliate Quidel Deutschland GmbH was provided with a copy of a lawsuit that Inverness Medical Switzerland GmbH, another Inverness subsidiary, and Preymed had apparently filed on or about February 4, 2004 in District Court in Düsseldorf, Germany, which names us, Quidel Deutschland GmbH, and our distributor, Progen Biotechnik GmbH, as defendants. The lawsuit alleges that we and the other defendants are infringing two Inverness-owned European patents, EP 0 291 194 and EP 0 560 411, and is directed at our lateral flow test devices, including our tests for pregnancy, strep, H pylori, and Chlamydia. The suit seeks injunctive relief, an accounting, damages and annulment. If the Court grants injunctive relief, we will be required to cease and desist from manufacturing, selling, marketing, using, and importing our lateral flow products in Germany. There can be no assurance that we will prevail during this or any other patent infringement claim. These, or other infringement claims could have a material adverse effect upon our business, financial condition and results of operations. See "Risk Factors."

        We currently have certain licenses from third parties and in the future may require additional licenses from other parties in order to refine our products further and to allow us to develop, manufacture and market commercially viable products effectively. There can be no assurance that such licenses will be obtainable on commercially reasonable terms, if at all, that any patents underlying such licenses will be valid and enforceable, or that the proprietary nature of any patented technology underlying such licenses will remain proprietary.

        We seek to protect our trade secrets and nonproprietary technology by entering into confidentiality agreements with employees and third parties (such as potential licensees, customers, joint ventures and consultants). In addition, we have taken certain security measures in our laboratories and offices. Despite such efforts, no assurance can be given that the confidentiality of our proprietary information can be maintained. Also, to the extent that consultants or contracting parties apply technical or scientific information independently developed by them to our projects, disputes may arise as to the proprietary rights to such data.

        Under most of our distribution agreements, we have agreed to indemnify the distributors against costs and liabilities arising out of any patent infringement claims and other intellectual property claims asserted by a third party relating to products sold under those agreements.

Competition

        Competition in the development and marketing of diagnostic products is intense, and diagnostic technologies have been subject to rapid change. We believe that some of the most significant competitive factors in the rapid diagnostic market include convenience, price and product performance as well as the distribution, advertising, promotion and brand name recognition of the marketer. Our

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success will depend on our ability to remain abreast of technological advances, to introduce technologically advanced products, and to attract and retain experienced technical personnel, who are in great demand. The majority of diagnostic tests requested by physicians and other healthcare providers are performed by independent clinical reference laboratories. We expect that these laboratories will continue to 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 physicians cost-effective and time-saving alternatives to tests performed in the clinical reference laboratory. This requires that physicians change the way that they are used to handling diagnostic testing.

        Many of our current and prospective competitors, including several large pharmaceutical and diversified healthcare companies, have substantially greater financial, marketing and other resources than we have. As of December 31, 2003, our competition in our largest product areas, including their estimated U.S. market share of competitive products, is as follows: Beckman Coulter Primary Care Diagnostics and Fisher Scientific Corporation, representing 24% and 9% of the market, respectively, for pregnancy tests; Genzyme Diagnostics Corporation, Becton, Dickinson and Company and Beckman Coulter Primary Care Diagnostics, representing 15%, 11% and 10% of the market, respectively, for Group A Strep tests; Becton, Dickinson and Company and Thermo Biostar Inc., representing 37% and 8% of the market, respectively, for influenza tests; and Bayer Group and Roche Holding LTD., Basel, representing 74% and 20% of the market, respectively, for urinalysis tests. Our competitors may succeed in developing or marketing technologies or products that are more effective or commercially attractive than our current or future 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, many competitors have made substantial investments in competing technologies that may be more effective than our technologies, or that may prevent, limit or interfere with our ability to make, use or sell our products either in the U.S. or in international markets.

Human Resources

        As of December 31, 2003, we had 280 employees, none of whom are represented by a labor union. We have experienced no work stoppages and believe that our employee relations are good.

Executive Officers of Quidel Corporation

        The names, ages and positions of all executive officers as of December 31, 2003 are listed below, followed by a brief account of their business experience during the past five years or more. Officers are normally appointed annually by the Board of Directors at a meeting of the Board of Directors immediately following the Annual Meeting of Stockholders. There are no family relationships among these officers, nor any arrangements or understandings between any officer and any other person pursuant to which an officer was selected. None of these officers has been involved in any court or administrative proceeding within the past five years adversely reflecting on the officer's ability or integrity.

        S. Wayne Kay, 53, became our Chief Executive Officer on August 8, 2001. Mr. Kay has also served as our President and Chief Operating Officer since January 1, 2001. Mr. Kay served as Senior Vice President of Neoforma.com, a healthcare e-commerce company, from December 13, 1999 until January 2001. From 1994 to 1999, Mr. Kay served as President and Chief Executive Officer of the Health Industry Distributors Association. Mr. Kay served as President and Chief Executive Officer of Enzymatics, Inc., a medical device company, from 1989 to 1994. Additionally, Mr. Kay worked at SmithKline Beecham, a pharmaceutical company, from 1973 through 1989, where he became the President of SmithKline Diagnostics.

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        Paul E. Landers, 56, has been our Vice President and Chief Financial Officer since September 2001. In March 2003, he was promoted to Senior Vice President, Finance and Administration, and Chief Financial Officer. Prior to joining us, Mr. Landers was Chief Financial Officer and a Director of International Isotopes Inc., a public contract manufacturer of radiopharmaceuticals and radiochemicals for industrial and healthcare applications, from 2000 to 2001. Previously, Mr. Landers was Chief Financial Officer of Aavid Thermalloy LLC, a leading provider of thermal management solutions, from 1994 to 2000. Mr. Landers received his B.A. from the University of Massachusetts and his M.B.A. from Boston College.

        Mark E. Paiz, 42, was our Senior Vice President, Supply Chain and Business Development from September 2002 to March 2003. In March 2003, he was promoted to Senior Vice President, Technology and Business Development. From March 2001 to September 2002, Mr. Paiz was Senior Vice President, Information Technology and Supply Chain Management. From August 1999 to March 2001, Mr. Paiz was Senior Vice President, Product Development and Supply Operations. From June 1998 to August 1999, Mr. Paiz was Vice President, Operations. Mr. Paiz joined us in December 1997 as Senior Director, Manufacturing. From 1995 to 1997, Mr. Paiz served as Director of Research and Development and Project Manager at Medtronic Interventional Vascular. From 1992 to 1995, he served as a manager at Hybritech, Inc. with various responsibilities including quality engineering, materials management, supplier development and inspection. Mr. Paiz received his B.S. degree in Engineering from the University of Colorado and his M.B.A. from West Coast University.

        Matthew T. Heindel, 46, has been our Senior Vice President, Worldwide Sales and Marketing since September 2003. Mr. Heindel was most recently Vice President, Sales and Marketing at Prism Enterprises, Inc., a manufacturer of obstetric, gynecology and neonatal products for the healthcare and retail industries, from 2000 to 2003. Previously, Mr. Heindel was Vice President, International Sales and Marketing at McGaw, Inc. (now B. Braun Medical Inc.), a medical products company, and held varying positions from 1982 through 1998. Mr. Heindel received his B.S. in Psychology from California State College University, Bakersfield.

Risk Factors

We are involved in pending, and may become involved in future, intellectual property infringement disputes, which are costly and could limit or eliminate our ability to use certain of our core technologies in the future and sell our products.

        There are a large number of patents and patent applications in our product areas, and we believe, based on experience and published reports, that additional patents may issue to third parties relating to our product areas, and that litigation in our industry regarding patent and other intellectual property rights is prevalent and will continue.

        On February 20, 2004, we filed the Action in the U.S. District Court, Southern District of California against Inverness, as well as against Armkel LLC, for infringement of our 522 Patent, which relates to lateral-flow technology, and for declaratory relief. We are seeking damages and injunctive relief against Inverness products that infringe our patented technology. Our claim for declaratory relief relates to nine Inverness-owned and Inverness-licensed patents (U.S. Patent Nos. 6,485,982: 5,989,921; 5,714,389; 6,352,862; 6,228,660; 6,187,598; 5,656,503; 5,622,871; and 5,602,040), and requests the Court to conclude that our lateral-flow products do not infringe these patents, and that the patents are invalid and unenforceable.

        On March 9, 2004, Inverness and a related party filed, in the U.S. District Court, Southern District of California, denials of our allegations of infringement in the Action, allegations that our "522 Patent is invalid and unenforceable, as well as counterclaims for patent infringement against us. On March 12, 2004, Armkel LLC filed, in the U.S. District Court, Southern District of California, an answer to our request for declaratory relief and counterclaims for patent infringement against us. The counterclaims

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by Inverness and the related parties and by Armkel LLC allege that our immunoassay test products, including our tests for influenza, pregnancy, strep, and H pylori, infringe eight of the nine Inverness patents that we identified in the Action. In addition, Inverness Medical Switzerland GmbH, Wampole Laboratories, LLC, and Applied BioTech, Inc. filed a separate complaint against us alleging that our immunoassay test devices also infringe a ninth patent owned by Inverness, U.S. Patent No. 6,534,320. The relief requested in these claims and counterclaims against us includes damages and preliminary and permanent injunctive relief to the effect that if this relief is granted, we would be required to cease and desist from manufacturing, selling, marketing, using, and inducing others to use products that represent a substantial majority of our revenues.

        On February 17, 2004, our German affiliate Quidel Deutschland GmbH was provided with a copy of a lawsuit that Inverness Medical Switzerland GmbH, another Inverness subsidiary, and Preymed had apparently filed on or about February 4, 2004 in District Court in Düsseldorf, Germany, which names us, Quidel Deutschland GmbH, and our distributor, Progen Biotechnik GmbH, as defendants. The lawsuit alleges that we and the other defendants are infringing two Inverness-owned European patents, EP 0 291 194 and EP 0 560 411, and is directed at our lateral flow test devices, including our tests for pregnancy, strep, H pylori, and Chlamydia. The suit seeks injunctive relief, an accounting, damages and annulment. If the Court grants injunctive relief, we will be required to cease and desist from manufacturing, selling, marketing, using, and importing our lateral flow products in Germany.

        We are also aware of Inverness's active participation in suing other third parties for patent infringement on the basis that it allegedly owns, or has an exclusive license to, patent rights covering key aspects of current lateral flow technology. We believe that we have various defenses to any claim that has been made or might be made, but no assurances can be given that we will prevail. Because of our current dependence on lateral flow technology and the fact that a substantial majority of our revenues are from products impacted by these disputes, our business would clearly be materially and adversely affected if we are unable to successfully prosecute and/or defend against any such patent infringement allegations or to obtain a commercially reasonable license from Inverness.

        In addition, and as separate matters, two other industry participants have sent us letters during the third quarter of 2003 and the first quarter of 2004 suggesting that we obtain a sublicense to patents for which they are a licensee, with royalty amounts to be negotiated. We do not currently believe we will be required to pay royalties to these industry participants or other owners of intellectual property with a resulting material increase in our product cost, and an adverse effect on our profits; however no assurance be given that we would be able to obtain any license to third-party intellectual property under commercially reasonable terms, if at all.

        As a more general matter, our involvement in litigation to determine rights in proprietary technology could adversely affect our net sales and business because:

•

as is common with major litigation, it would likely consume a substantial portion of managerial and financial resources;



•

its outcome would be uncertain and a court may find the third-party patent claims valid and infringed by our products;



•

an adverse outcome could subject us to significant liability in the form of past royalty payments, penalties, special and punitive damages, or future royalty payments significantly affecting our future earnings;



•

failure to obtain a necessary license upon an adverse outcome could prevent us from selling our current products or other products we may develop; and



•

a court could award a preliminary and/or permanent injunction which would prevent us from selling our current or future products.

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Our operating results may fluctuate adversely as a result of many factors that are outside our control.

        Fluctuations in our operating results, for any reason, that decrease sales or profitability could cause our growth or operating results to fall below the expectations of investors and securities analysts. For example, total revenues increased 25% to $95.1 million for the year ended December 31, 2003, as compared to $76.3 million for the year ended December 31, 2002. While we experienced increases during the year ended December 31, 2003 from our influenza and Group A Strep products, net sales for the year ended 2002 was adversely impacted by overall decreased product sales due to unexpected changes in certain distributor buying patterns. Our sales estimates for future periods are closely based on estimated end-user demand for our products. Sales to our distribution partners would fall short of expectations if distributor inventories increase because of less than estimated end-user consumption.

        Other factors that are beyond our control and that could affect our operating results in the future include:

•

seasonal fluctuations in our sales of Group A Strep and influenza tests, which are generally highest in fall and winter, thus resulting in generally lower operating results in the second and third calendar quarters and higher operating results in the first and fourth calendar quarters;



•

the mildness or severity of the influenza and strep seasons;



•

changes in the level of competition, such as would occur if one of our larger and better financed competitors introduced a new or lower priced product to compete with one of our products;



•

changes in economic conditions in our domestic and international markets, such as economic downturns, reduced consumer demand, inflation and currency fluctuations, particularly as we expand into markets outside Western Europe where economic conditions may differ from those prevailing at given times among developed nations;



•

changes in sales levels, since a significant portion of our costs are fixed costs with the result that relatively higher sales could likely increase profitability but relatively lower sales would not reduce costs by the same proportion, and hence could cause operating losses; and



•

changes in distributor buying patterns.

In order to remain competitive and profitable, we must expend considerable resources to introduce new products and develop new markets. Our failure to successfully introduce new technologies, new products and develop new markets could have a material adverse effect on our business and prospects.

        We devote a significant amount of financial resources to researching and developing new technologies, new products and new markets. The development, manufacture and sale of diagnostic products require a significant investment of resources. Moreover, no assurances can be given that our efforts to develop new technologies or products, including our efforts relating to the LTF technology platform and migration of products to that platform, will be successful. The development of new markets also requires a substantial investment of resources, such as new employees, offices and manufacturing facilities. As a result, we are likely to incur increased operating expenses as a result of our increased investment in sales and marketing activities, manufacturing scale-up and new product development associated with our efforts to:

•

expand our business line;



•

expand the LTF™ technology platform menu of analytes;



•

develop products with higher margins internally, or in collaborations with the external pharmaceutical community and other third parties; and



•

expand our business geographically.

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        The funds for these projects have in the past come primarily from our business operations and a working capital line of credit. If our business slows and we become less profitable, and as a result have less money available to fund research and development, we will have to decide at that time which programs to cut, and by how much. Similarly, if adequate financial, personnel, equipment or real estate resources are not available, we may be required to delay or scale back market developments. Our operations will be adversely affected if our net sales and gross profits do not correspondingly increase or if our product and market development efforts are unsuccessful or delayed. Furthermore, our failure to successfully introduce new products and develop new markets could have a material adverse effect on our business and prospects.

We rely on a limited number of key distributors which account for over half of our net sales. The loss of any key distributor or an unsuccessful effort to directly distribute our products could lead to reduced sales.

        Although we have distribution agreements with approximately 80 distributors, the market is dominated by a small group of these distributors. Three of our distributors, which are considered to be among the market leaders, accounted for approximately 51%, 45% and 43% of our net sales for the years ended December 31, 2003, 2002 and 2001, respectively. The loss or termination of our relationship with any of these key distributors could significantly disrupt our business unless suitable alternatives can be timely found. Finding a suitable alternative may pose challenges in our industry's competitive environment, and another suitable distributor may not be found on satisfactory terms. For instance, some distributors already have exclusive arrangements with our competitors, and others do not have the same level of penetration into our target markets as our existing distributors. If net sales to these or any of our other significant distributors were to decrease in any material amount in the future, our business, operating results and financial condition could be materially adversely affected.

        As an alternative, we could expand our efforts to distribute and market our products directly. This, however, would require substantial investment in additional sales and marketing resources, including hiring additional field sales personnel, which would significantly increase our future selling, general and administrative expenses. In addition, because we do not have experience in direct distribution and marketing, our direct distribution efforts may not be successful. If we were to make the substantial investment to directly distribute and market our products and were unsuccessful, our net sales and profits could be materially and adversely affected.

We may not achieve market acceptance of our products among physicians and other healthcare providers, and this would have a negative effect on future sales growth.

        A large part of our business is based on the sale of rapid POC diagnostic tests that physicians and other healthcare providers can administer in their own facilities without sending samples to laboratories. Clinical reference laboratories and hospital-based laboratories are significant competitors for our products and provide a majority of the diagnostic tests used by physicians and other healthcare providers. Our future sales depend on, among other matters, capture of sales from these laboratories by achieving market acceptance of POC testing from physicians and other healthcare providers. If we do not capture sales at the levels we have budgeted for, our net sales may not grow as much as we hope and the costs we have incurred will be disproportionate to our sales levels. We expect that these laboratories will compete vigorously against our POC diagnostic products in order to maintain and expand their existing dominance of the overall diagnostic testing market. Moreover, even if we can demonstrate that our products are more cost-effective or save time, physicians and other healthcare providers may resist changing to POC tests. Our failure to achieve market acceptance from physicians and healthcare providers with respect to the use of our POC diagnostic products would have a negative effect on our future sales growth.

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Intense competition with other manufacturers of POC diagnostic products may reduce our sales.

        In addition to competition from laboratories, our POC diagnostic tests compete with similar products made by our competitors. As of December 31, 2003, our estimated U.S. market share for some of our key POC products was 51% in pregnancy, 45% in Group A Strep and 49% for influenza tests. There are, however, a large number of multinational and regional competitors making investments in competing technologies and products, including several large pharmaceutical and diversified healthcare companies. These competitors include Beckman Coulter Primary Care Diagnostics, Becton, Dickinson and Company, Genzyme Diagnostics Corporation and Inverness. We also face competition from our distributors since some have created, and others may decide to create, their own products to compete with ours. A number of our competitors have a potential competitive advantage because they have substantially greater financial, technical, research and other resources, and larger, more established marketing, sales, distribution and service organizations than we have. Moreover, some competitors offer broader product lines and have greater name recognition than we have. If our competitors' products are more effective than ours, or acquire market share from our products through more effective marketing or competitive pricing, our net sales could be adversely affected. Competition also has the effect of limiting the prices we can charge for our products.

To remain competitive, we must continue to develop or obtain proprietary technology rights; otherwise, other companies may increase their market share by selling products that compete with our products.

        Our competitive position is heavily dependent on obtaining and protecting our own proprietary technology or obtaining licenses from others. Our ability to compete successfully in the diagnostic market depends on continued development and introduction of new proprietary technology and the improvement of existing technology. If we cannot continue to obtain and protect proprietary technology, our net sales and gross profits could be adversely affected. Moreover, our current and future licenses may not be adequate for the operation of our business.

        Our ability to obtain patents and licenses, and their benefits, is uncertain. We have 230 issued patents and approximately 44 patent applications pending. Our patents have expiration dates ranging from 2004 to 2020 and our pending patent applications may not result in the issuance of any patents, or if issued, the patents may not have priority over others' applications or may not offer protection against competitors with similar technology. Moreover, any patents issued to us may be challenged, invalidated or circumvented in the future. In addition to the U.S., we have patents issued in Australia, Austria, Belgium, Canada, France, Germany, Italy, Japan, Korea, Lithuania, The Netherlands, Norway, Spain, South Africa, Sweden, Switzerland and the United Kingdom. Therefore, third parties can make, use and sell products covered by our patents in any country in which we do not have patent protection. We license the right to use our products to our customers under label licenses that are for research purposes only. These licenses could be contested and, because we cannot monitor all potential unauthorized uses of our products around the world, we might not be aware of an unauthorized use and might not be able to enforce the license restrictions in a cost-effective manner. Also, we may not be able to obtain licenses for technology patented by others and required to produce our or on commercially reasonable terms.

Our products are highly regulated by various governmental agencies. Any changes to the existing laws and regulations may adversely impact our ability to manufacture and market our products.

        The testing, manufacture and sale of our products are subject to regulation by numerous governmental authorities in the U.S., principally the FDA and corresponding state and foreign regulatory agencies. The FDA regulates most of our products, which are all Class I or II devices. The U.S. Department of Agriculture regulates our veterinary products. Our future performance depends on, among other matters, our estimates as to when and at what cost we will receive regulatory approval for new products. Regulatory approval can be a lengthy, expensive and uncertain process, making the

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timing and costs of approvals difficult to predict. Our net sales would be negatively affected by delays in the receipt of, or failure to receive, approvals or clearances, the loss of previously received approvals or clearances or the placement of limits on the use of our products.

        Furthermore, in the ordinary course of business, we must frequently make subjective judgments with respect to compliance with applicable laws and regulations. If regulators subsequently disagree with the manner in which we have sought to comply with these regulations, we could be subjected to substantial civil and criminal penalties, as well as product recall, seizure or injunction with respect to the sale of our products. The assessment of any civil and criminal penalties against us could severely impair our reputation within the industry and any limitation on our ability to manufacture and market our products could have a material adverse effect on our business.

We are subject to numerous government regulations in addition to FDA regulation, and compliance with changes could increase our costs.

        In addition to the FDA and other regulations described previously, numerous laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control and disposal of hazardous or potentially hazardous substances impact our business operations. If these laws change or laws regulating any of our businesses are added, the costs of compliance with these laws could substantially increase our costs. Compliance with any future modifications of these laws or laws regulating the manufacture and marketing of our products could result in substantial costs and loss of sales or customers. Because of the number and extent of the laws and regulations affecting our industry, and the number of governmental agencies whose actions could affect our operations, it is impossible to reliably predict the full nature and impact of future legislation or regulatory developments relating to our industry. To the extent the costs and procedures associated with meeting new requirements are substantial, our business and results of operations could be adversely affected.

We use hazardous materials in our business that may result in unexpected and substantial claims against us relating to handling, storage or disposal.

        Our research and development and manufacturing activities involve the controlled use of hazardous materials, including but not limited to chemicals and biological materials such as dimethyl sulfate, sodium nitrite, acetaldehyde, acrylamide, potassium bromate and radionuclides. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of hazardous materials. These regulations include federal statutes popularly known as CERCLA, RCRA and the Clean Water Act. Compliance with these laws and regulations is already expensive. If any governmental authorities were to impose new environmental regulations requiring compliance in addition to that required by existing regulations, these future environmental regulations could impair our research, development or production efforts by imposing additional, and possibly substantial, costs on our business. In addition, because of the nature of the penalties provided for in some of these environmental regulations, we could be required to pay sizeable fines, penalties or damages in the event of noncompliance with environmental laws. Any environmental violation or remediation requirement could also partially or completely shut down our research and manufacturing facilities and operations, which would have a material adverse effect on our business. The risk of accidental contamination or injury from these hazardous materials cannot be completely eliminated and exposure of individuals to these materials could result in substantial fines, penalties or damages as well.

Our net sales could be affected by third-party reimbursement policies and potential cost constraints.

        The end-users of our products are primarily physicians and other healthcare providers. Use of our products would be adversely impacted if physicians do not get reimbursed for the cost by their patients' healthcare insurers or payors. Our net sales could also be adversely affected by changes in reimbursement policies of these governmental or private healthcare payors. In the U.S., healthcare

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providers such as hospitals and physicians who purchase diagnostic products generally rely on third-party payors, principally private health insurance plans, federal Medicare and state Medicaid, to reimburse all or part of the cost of the procedure. 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 healthcare industry, both foreign and domestic, to reduce the cost of products and services. Given the efforts to control and reduce healthcare costs in the U.S. in recent years, currently available levels of reimbursement may not continue to be available in the future for our existing products or products under development. 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 reduce the demand for our products or our ability to sell our products on a profitable basis.

Unexpected increases in demand for our products could require us to spend considerable resources to meet the demand or harm our customer relationships if we are unable to meet demand.

        If we experience unexpected increases in the demand for our products, we may be required to expend additional capital resources to meet these demands. These capital resources could involve the cost of new machinery or even the cost of new manufacturing facilities. This would increase our capital costs, which could adversely affect our earnings. If we are unable to develop necessary manufacturing capabilities in a timely manner, our net sales could be adversely affected. Failure to cost-effectively increase production volumes, if required, or lower than anticipated yields or production problems encountered as a result of changes that we may make in our manufacturing processes to meet increased demand, could result in shipment delays as well as increased manufacturing costs, which could also have a material adverse effect on our net sales and profitability.

        Unexpected increases in demand for our products could also require us to obtain additional raw materials in order to manufacture products to meet the demand. Some raw materials require significant ordering lead time and some are currently obtained from a sole supplier or a limited group of suppliers. We have long-term supply agreements with these suppliers, but these long-term agreements involve risks for us: our potential inability to obtain an adequate supply of raw materials and components and our reduced control over pricing, quality and timely delivery. It is also possible that one or more of these suppliers may become unwilling or unable to deliver materials to us. Any shortfall in our supply of raw materials and components, and our inability to obtain alternative sources for this supply, could have a material adverse effect on our net sales or cost of sales.

        Our inability to meet customer demand for our products, whether as a result of manufacturing problems or supply shortfalls, could harm our customer relationships and impair our reputation within the industry. This, in turn, could have a material adverse effect on our business and prospects.

If one of our products proves to be defective, we could be subject to claims of liability that could adversely affect our business.

        A defect in the design or manufacture of our products could have a material adverse effect on our reputation in the industry and subject us to claims of liability for injuries and otherwise. Any substantial underinsured loss resulting from such a claim would have a material adverse effect on our profitability and the damage to our reputation in the industry could have a material adverse effect on our business.

If we are not able to manage our growth strategy and if we experience difficulties integrating companies we may acquire or technologies after the acquisition, our earnings may be adversely affected.

        Our business strategy contemplates further growth in the scope of operating and financial systems and the geographic area of our operations, including further expansion outside the U.S., as new

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products are developed and commercialized. We may experience difficulties integrating our own operations with those of companies or technologies that we may acquire, and as a result we may not realize our anticipated benefits and cost savings within our expected time frame, or at all. Because we have a relatively small executive staff, future growth may also divert management's attention from other aspects of our business, and will place a strain on existing management and our operational, financial and management information systems. Furthermore, we may expand into markets in which we have less experience or incur higher costs. Should we encounter difficulties in managing these tasks, our growth strategy may suffer and our net sales and gross profits could be adversely affected.

Our business could be negatively affected by the loss of key personnel or our inability to hire qualified personnel.

        Our future success depends in part on our ability to retain our key technical, sales, marketing and executive personnel and our ability to identify and hire additional qualified personnel. Competition for these personnel is intense, both in the industry in which we operate and also in San Diego and Santa Clara where our headquarters and the majority of our operations are located. In addition, we expect to further grow our operations, and our needs for additional management and other key personnel may increase. If we are not able to retain existing key personnel, or identify and hire additional qualified personnel to meet expected growth, our business could be negatively impacted.

We are exposed to business risks which, if not covered by insurance, could have an adverse effect on our profits.

        Claims may be made against us for types of damages, or for amounts of damages, that are not covered by our insurance. For example, although we currently carry product liability insurance for liability losses, there is a risk that product liability claims may exceed the amount of our insurance coverage or may be excluded from coverage under the terms of our policy. Also, if we are held liable, our existing insurance may not be renewed at the same cost and level of coverage as currently in effect, or may not be renewed at all. If we are held liable for a claim against which we are not insured or for damages exceeding the limits of our insurance coverage, whether arising out of product liability matters or from some other matter, that claim could have a material adverse effect on our results of operations and profitability.

We face risks relating to our international sales and foreign operation, including the risk of currency fluctuations, which could increase our costs or stifle our growth opportunities.

        Our products are sold internationally, primarily to customers in Japan and Europe, including Germany, Italy and Poland. We currently sell and market through distributors in Asia-Pacific, Europe, the Middle East, Africa and Latin America and in other international locations by channeling products through distributor organizations and sales agents. Sales to foreign customers accounted for approximately 42%, 33% and 26% of our net sales for the years ended December 31, 2003, 2002 and 2001, respectively, and are expected to continue to account for a significant percentage of our net sales. We also manufacture our urinalysis products in Marburg, Germany. International sales and manufacturing operations are subject to inherent economic, political and regulatory risks, which could increase our operating costs, result in shipment delays and impede our international growth. These foreign risks include:

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exposure to currency exchange fluctuations, such as the 20% increase in the value of the Euro against the U.S. dollar for the year ended December 31, 2003;



•

longer payment cycles and greater difficulty in accounts receivable collection;



•

compliance with new and changing registration requirements, tariffs or other barriers as we continue to expand into new countries and geographic regions;

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•

reduced protection for, and enforcement of, intellectual property rights, particularly as we seek to expand our international business beyond Europe and Japan;



•

political and economic instability in some of the regions that we may expand into in the future; and



•

potentially adverse tax consequences.

        Even that portion of our international sales which is negotiated for and paid in U.S. dollars is subject to currency risks, since changes in the values of foreign currencies relative to the value of the U.S. dollar can render our products comparatively more expensive. These exchange rate fluctuations could negatively impact international sales of our products and our anticipated foreign operations, as could changes in the general economic conditions in those markets. In order to maintain a competitive price for our products in Europe and Japan, we may have to provide discounts or otherwise effectively reduce our prices, resulting in a lower margin on products sold in these geographical territories. During 2002, Economic Monetary Union countries in Europe adopted the Euro as their single currency. Continued change in the values of the Euro and other foreign currencies could have a negative impact on our business, financial condition and results of operations. We do not currently hedge against exchange rate fluctuations, which means that we will be fully exposed to exchange rate losses.

Our stock price has been highly volatile, and an investment in our stock could suffer a significant decline in value, adversely affecting the value of those shares.

        The market price of our common stock has been highly volatile and has fluctuated substantially in the past. For example, between December 31, 2002 and December 31, 2003, the price of our common stock, as reported on the Nasdaq National Market System, has ranged from a low of $2.75 to a high of $11.81. We expect our common stock to continue to be subject to wide fluctuations in price in response to various factors, many of which are beyond our control, including:

•

litigation or threat of litigation;



•

seasonal fluctuations in our sales of Group A Strep and influenza tests, which are generally highest in fall and winter, thus resulting in generally lower operating results in the second and third calendar quarters and higher operating results in the first and fourth calendar quarters;



•

changes in the level of competition, such as would occur if one of our larger and better financed competitors introduced a new or lower priced product to compete with one of our products;



•

changes in economic conditions in our domestic and international markets, such as economic downturns, reduced consumer demand, inflation and currency fluctuations, particularly as we expand into markets outside Western Europe where economic conditions may differ from those prevailing at given times among developed nations;



•

changes in sales levels, since a significant portion of our costs are fixed costs with the result that relatively higher sales could likely increase profitability but relatively lower sales would not reduce costs by the same proportion, and hence could cause operating losses;



•

declines in orders from major distributors as a result of lower than expected end-user demand;



•

our failure to achieve, or changes in, financial estimates by securities analysts and comments or opinions about us by securities analysts or major stockholders;



•

additions or departures of our key personnel;



•

sales of our common stock and limited daily trading volume; and



•

economic and other external factors, disasters or crises.

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        In addition, the stock market in general, and the Nasdaq National Market System and the market for technology companies in particular, have experienced significant price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the relevant companies. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted. A securities class action suit against us could result in substantial costs, potential liabilities and the diversion of management's attention and resources.

Future sales by existing stockholders could depress the market price of our common stock and make it more difficult for us to sell stock in the future.

        Sales of our common stock in the public market, or the perception that such sales could occur, could negatively impact the market price of our common stock. As of December 31, 2003:

•

Approximately 30.4 million shares of our common stock had been issued in registered offerings and are freely tradable in the public markets.



•

In addition, approximately 4.5 million shares of our common stock were issuable upon exercise of stock options outstanding as of December 31, 2003 under our various stock option plans at a weighted average exercise price of $4.51 per share.



•

We had in effect registration statements under the Securities Act of 1933 registering approximately 5.3 million shares of common stock reserved under our employee stock option and purchase plans.

        We are unable to estimate the number of shares of our common stock that may actually be resold in the public market since this will depend on the market price for our common stock, the individual circumstances of the sellers and other factors. We also have a number of institutional stockholders that own significant blocks of our common stock. If one or more of these stockholders sell large portions of their holdings in a relatively short time, for liquidity or other reasons, the prevailing market price of our common stock could be negatively affected.

Item 2. Properties

        Our executive, administrative, manufacturing and research and development operation is located in San Diego, California. We lease a 73,000 square-foot facility used primarily for manufacturing and research and development in San Diego, California, which expires in 2014. For our European operations, we have leases for approximately 2,000 square feet in both Marburg and Sterzhausen, Germany, for the manufacturing and storage, respectively, of our urinalysis products, which expire in 2006 and 2004, respectively. In addition, we lease approximately 24,000 square feet of manufacturing, laboratory and office space in Santa Clara, California, which expires in 2009.

        We believe that our facilities are adequate for our current and planned level of business, and we currently do not anticipate any material difficulty in renewing any of our leases as they expire or securing replacement facilities, in each case on commercially reasonable terms.

Item 3. Legal Proceedings

        On February 20, 2004, we filed the Action in the U.S. District Court, Southern District of California against Inverness, as well as against Armkel LLC, for infringement of our 522 Patent, which relates to lateral-flow technology, and for declaratory relief. We are seeking damages and injunctive relief against Inverness products that infringe our patented technology. Our claim for declaratory relief relates to nine Inverness-owned and Inverness-licensed patents (U.S. Patent Nos. 6,485,982: 5,989,921; 5,714,389; 6,352,862; 6,228,660; 6,187,598; 5,656,503; 5,622,871; and 5,602,040), and requests the Court to conclude that our lateral-flow products do not infringe these patents, and that the patents are invalid and unenforceable.

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        On March 9, 2004, Inverness and a related party filed, in the U.S. District Court, Southern District of California, denials of our allegations of infringement in the Action, allegations that our "522 Patent is invalid and unenforceable, as well as counterclaims for patent infringement against us. On March 12, 2004, Armkel LLC filed, in the U.S. District Court, Southern District of California, an answer to our request for declaratory relief and counterclaims for patent infringement against us. The counterclaims by Inverness and the related parties and by Armkel LLC allege that our immunoassay test products, including our tests for influenza, pregnancy, strep, and H pylori, infringe eight of the nine Inverness patents that we identified in the Action. In addition, Inverness Medical Switzerland GmbH, Wampole Laboratories, LLC, and Applied BioTech, Inc. filed a separate complaint against us alleging that our immunoassay test devices also infringe a ninth patent owned by Inverness, U.S. Patent No. 6,534,320. The relief requested in these claims and counterclaims against us includes damages and preliminary and permanent injunctive relief to the effect that if this relief is granted, we would be required to cease and desist from manufacturing, selling, marketing, using, and inducing others to use products that represent a substantial majority of our revenues.

        On February 17, 2004, our German affiliate Quidel Deutschland GmbH was provided with a copy of a lawsuit that Inverness Medical Switzerland GmbH, another Inverness subsidiary, and Preymed had apparently filed on or about February 4, 2004 in District Court in Düsseldorf, Germany, which names us, Quidel Deutschland GmbH, and our distributor, Progen Biotechnik GmbH, as defendants. The lawsuit alleges that we and the other defendants are infringing two Inverness-owned European patents, EP 0 291 194 and EP 0 560 411, and is directed at our lateral flow test devices, including our tests for pregnancy, strep, H pylori, and Chlamydia. The suit seeks injunctive relief, an accounting, damages and annulment. If the Court grants injunctive relief, we will be required to cease and desist from manufacturing, selling, marketing, using, and importing our lateral flow products in Germany.

        We are also involved in other litigation matters from time to time in the ordinary course of business. Management believes that any and all such other actions, in the aggregate, will not have a material adverse effect on us. We also maintain insurance, including coverage for product liability claims, in amounts which management believes appropriate given the nature of our business.

Item 4. Submission of Matters to a Vote of Security Holders

        There were no matters submitted to a vote of security holders during the fourth quarter of 2003.

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Part II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities

COMMON STOCK PRICE RANGE

        Our common stock is traded on the Nasdaq National Market System under the symbol "QDEL." The following table sets forth the range of high and low closing prices for the our common stock for the periods indicated since January 1, 2002.