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UNITED STATES
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)

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

        Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value
and accompanying Preferred Shares Purchase Rights

        Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 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 Rule 12b-2 of the Act). 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 $122,381,217.

        As of March 4, 2005, 31,947,560 shares of the Registrant's common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
(To the Extent Indicated Herein)

        Portions of the Registrant's Definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Registrant's 2005 Annual Meeting of Stockholders are incorporated by reference into Part III, Items 10, 11, 12, 13 and 14 of this Annual Report on 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 Quidel's future financial results and performance, such that its 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 and other litigation, required patent license fee payments not currently reflected in our costs, seasonality, the length and severity of cold and flu seasons, 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 United States Food and Drug Administration (the "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" in Item 1 of this Annual Report and elsewhere herein and in reports and registration statements that we file with the Securities and Exchange Commission (the "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 to reflect the occurrence of unanticipated or subsequent events.

Part I

Item 1. Business

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

Overview and Recent Developments

        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. We enjoy a worldwide leadership position in the development, manufacturing and marketing of rapid diagnostic solutions at the professional point-of-care ("POC") in infectious diseases and reproductive health. We focus on POC testing solutions specifically developed for the physician office lab and acute care markets globally. We sell our products to professionals for use in physician offices, hospitals, clinical laboratories and wellness screening centers. Our POC testing solutions are designed to provide specialized results that meet two important value criteria:

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Clinical validation: the enabling of rapid patient management decisions leading to improved treatment and outcomes.



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Economic validation: the reduction of overall costs associated with patient testing with emphasis upon critical reimbursement and payor performance criteria.

        In the U.S., we lead the market in several professional POC product categories. This leadership position includes an estimated 60%, 49% and 43% market share in influenza, pregnancy and Group A Strep products, respectively, as of December 31, 2004. We also seek to develop research products through our newly organized and expanded Specialty Products Group (the "SPG"), with future rapid test applications as its primary emphasis. The SPG is currently responsible for more than 100 of our clinical and research products used worldwide in reference laboratories, and in research applications at

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leading universities and biotechnology companies. We believe the products managed by our SPG have a market share in excess of 50% in research markers and products.

        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, primarily in Japan, Europe and Latin America, by channeling products through distributor organizations and sales agents.

        During our fourth quarter ended December 31, 2004, we made the decision to exit and dispose of our urinalysis and ultrasonometer businesses. As of December 31, 2004, our urinalysis and ultrasonometer businesses were reported as discontinued operations under Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." Accordingly, the operations of both businesses have been classified as discontinued operations in the statements of operations and certain related assets and liabilities of the urinalysis business were considered "held for sale" in the balance sheets. All historical financial information for these business operations has been restated as discontinued operations.

        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 thereto, are available, free of charge, on our website, www.quidel.com, as soon as reasonably practicable after such 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.

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 a cost-effective means for improving the quality of care and patient satisfaction. Continuous improvements in technologies 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 further establish our significant global leadership position in POC rapid diagnostics. In order to accomplish this mission, our strategy is to:

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focus on strengthening market and brand leadership in infectious disease and reproductive health by acquiring, developing and introducing clinically and economically superior diagnostic solutions.



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drive growth by establishing dedicated distributor partnerships with aggressive performance metrics and assisted by the expansion of our sales organization to assure exceptional physician satisfaction.



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drive profit through further refinement of industry leading manufacturing efficiencies and productivity improvements. We will seek to focus exclusively on profitable products and markets and create exceptional competency in new product development process management.



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identify and commercialize new markers, products and collaborations in oncology and bone health through the SPG. We believe we can capitalize upon our existing microwell plate platform core competencies and long standing collaborations with key researchers worldwide, which may assist with identifying, developing and producing unique diagnostic and research products targeted at disease state mastery. We characterize this new direction as a dedicated focus on Research to Rapids™. These assays and reagents may be used by customers throughout the

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continuum-of-care in the development of novel therapeutics to the diagnosis of disease and monitoring of therapy. We believe opportunistic near term development is possible in the areas of bone health and oncology.

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complete the full-scale manufacturability feasibility study for our Layered Thin Film™ ("LTF") proprietary technology. Introduce on the platform those products which meet the economic and clinical validation criteria necessary for market leadership in the targeted disease state. Continue parallel pathways for development and acquisition of qualitative and quantitative technology platforms that meet economic and clinical validation criteria for additional targeted disease states.



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establish business development and strategic assessment as a leading core competency, and aggressively pursue licensing, acquisition and partnership opportunities that meet our dedicated focus on Research to Rapids™.

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 $24.0 billion in 2004 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 account for 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.

        Hospitals in the U.S. have progressively sought to reduce the length of patient stays and consequently the proportion of cases seen as outpatients has increased. If the U.S. experience is representative of future trends, emergency departments, and other critical care units such as intensive care units, operating rooms, trauma and cardiac centers, are increasingly becoming the principal centers for the management of moderate and severe acute illness. In the U.S., there were approximately 125 million visits to emergency departments in 2003, representing an increase of approximately 11% above the 2002 figure.

        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 $4.8 billion by 2005 from $4.5 billion in 2004. Two test categories, glucose monitoring for diabetes and pregnancy, currently dominate this market segment.

The Professional POC Market

        POC testing for certain diagnostic parameters has become an accepted adjunct to central laboratory and self-testing. The professional POC market is comprised of two general segments: hospital testing (emergency rooms and bedside) and decentralized testing in non-institutional settings

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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 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.

        Total revenues from the rapid, non-instrument-based professional POC market are estimated at approximately $420 million in 2004 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 Clinical Laboratory Improvement Amendments of 1988 ("CLIA"). In 2004, an estimated 104,000, or 49%, of physician office laboratories, had a CLIA waiver.

Technology

        Our research and development programs are aimed at focusing the technical skills and expertise of our scientists in disciplines of immunoassay, enzymology, biochemistry and microbiology on the development of diagnostic reagents for use in certain critical POC testing markets. We have successfully used the LTF platform to develop a second generation pH and Amines test for the detection of an offending constituent of bacterial origin in vaginal specimens. This test involves simple chemical indicators that produce a visual color reaction. We are working on a more sophisticated application of the LTF technology that makes use of the specificity inherent in antibodies for the detection of a variety of analytes of clinical interest, including infectious diseases and hormones. Along with LTF, we are currently working on a variety of technology platforms and assay configurations that are aimed at allowing us to make the most appropriate match of assay format to customer requirements in terms of sensitivity, accuracy, specificity, cost effectiveness, ease of use and, further, providing the choice of qualitative or quantitative analyte determination.

        Within our SPG's portfolio of products reside our core competencies in the identification, development, marketing and sale of novel diagnostic and research markers for oncology, metabolic bone and inflammatory disease. We believe key products developed and marketed by the SPG already portend high-value POC assays in broader diagnostic markets. Such targets include but are not limited to POC opportunities in osteoporosis and oncology. We retain a stable of proprietary monoclonal antibodies within the SPG in these and other disease states that have shown significant promise in the development of additional new and novel markers with superior diagnostic yields. Some of these monoclonals have already been developed into successfully marketed diagnostic and research tests on a microwell platform as a preliminary step toward future development as POC devices. These microwell kits, related products and core technologies are currently marketed by us directly and through select distributors throughout the world under our Quidel® and Metra® brands. Many of these products are unique in nature and provide researchers and clinicians valuable scientific and diagnostic information.

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Products

        We provide rapid POC and other diagnostic tests under the following brand names: QuickVue®, QuickVue+®, QuickVue Advance®, RapidVue®, BlueTest® and Metra®. Our rapid POC diagnostic tests and our diagnostic and research markers participate in the following medical and wellness categories:

Infectious Diseases

        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 a CLIA waiver in February 2004. Influenza test sales represented approximately 34%, 41% and 21% of our net sales for the years ended December 31, 2004, 2003 and 2002, 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 22%, 19% and 23% of our net sales for the years ended December 31, 2004, 2003 and 2002, 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 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 4%, 3% and 5% of our net sales for the years ended December 31, 2004, 2003 and 2002, respectively.

        Mononucleosis.    Infectious Mononucleosis can be severely debilitating to immune-suppressed groups, including the elderly, if not diagnosed and treated promptly. Net sales of mononucleosis tests represented approximately 2%, 1% and 2% of our net sales for the years ended December 31, 2004, 2003 and 2002, respectively.

Reproductive Health

        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 22%, 19% and 30% of our net sales for the years ended December 31, 2004, 2003 and 2002, respectively.

        Chlamydia.    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,

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Chlamydia can cause sterility. Net sales of chlamydia tests represented approximately 2%, 1% and 2% of our net sales for the years ended December 31, 2004, 2003 and 2002, respectively.

        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 part of the Litmus Concepts, Inc. acquisition and represented approximately 1% of our net sales for each of the years ended December 31, 2004, 2003 and 2002.

Bone Health and Oncology

        Bone Health.    Osteoporosis is a systemic skeletal disease characterized by low bone mass and micro-architectural deterioration of bone tissue, with a consequent increase in bone fragility and susceptibility to fractures. Though the risk for fracture increases exponentially with age, osteoporosis is not an inevitable consequence of aging. The National Osteoporosis Foundation (the "NOF") estimates that 10 million people in the U.S. have osteoporosis, and an additional 34 million are at significantly increased risk due to low bone mass. Osteoporosis is responsible for more than 1.5 million fractures annually in the U.S. Half of women aged 50 years and older will experience a fracture in their remaining lifetime and, according to the NOF, 24% of women suffering a hip fracture will die within the first year. A key set of parameters in the monitoring of osteoporosis, both before and after therapy, are biochemical markers of bone metabolism. As a global leader in the field of bone markers, we produce both clinical and research products for the assessment of osteoporosis and the evaluation of bone resorbtion/formation, which, including our metabolic bone markers, are used by physicians to monitor the effectiveness of therapy in pharmaceutical and related research. Net sales of biochemical bone markers represented approximately 7%, 6% and 7% of our net sales for the years ended December 31, 2004, 2003 and 2002, respectively.

        Oncology.    Accurate early diagnosis of specific cancers is a critical diagnostic need. Through our SPG, we are investigating a series of oncology markers that show promise in early diagnosis, prognosis and therapeutic monitoring. Leading among these candidates is the Metra™ YKL-40 assay, currently used in a wide array of oncology settings. YKL-40 is a low molecular weight serum protein secreted by a variety of cell types. Under normal conditions, serum and plasma levels of YKL-40 are extremely low. In certain, specific diseases and states, including cancer, levels of YKL-40 can increase dramatically. YKL-40 is currently being investigated as a marker for colorectal and ovarian cancers among other targets. Net sales of our YKL-40 products represented approximately $0.1 million in each of the three years ended December 31, 2004, 2003 and 2002. These amounts are reported as part of our bone health product line noted above.

Other Products

        The remaining 6%, 9% and 9% of net sales for the three years ended December 31, 2004, 2003 and 2002 include veterinary products and clinical laboratory and research 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, 2004, 2003 and 2002, we derived approximately 77%, 79% and 74%, respectively, of our 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

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material reduction in supply, demand or pricing of these product families would have a material adverse effect on our business, operating results and financial condition.

        For the years ended December 31, 2004, 2003 and 2002, export sales to unaffiliated customers constituted approximately 29%, 41% and 31%, respectively, of net sales. The export sales were primarily to customers in Japan, Europe and Latin America. 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 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.  We are transferring our second highest-volume product, QuickVue Strep A, onto our new, highly automated manufacturing process that ensures consistent high quality product. We expect to launch the web QuickVue Strep A product during 2005.



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RSV Test.  We are developing an immunoassay test for Respiratory Syncitial Virus ("RSV"). The majority of upper respiratory tract infections in children are caused by viruses and RSV is generally recognized as the most frequent agent responsible for these. The RSV test, which will complement our influenza tests, is expected to be launched in early 2006.



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LTF™ Technology Platforms.  We are extending the scope of our LTF platform to include immunoassay-based applications for a variety of analytes of clinical and diagnostic interest. In addition to our LTF development program, we are working on other candidate technologies and assay formats. We believe this combined approach will enable us to make the most appropriate choices.



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QuickVue Advance pH and Amines Test (Gen. II).  An easier to read test for vaginal pH and amines was cleared by the FDA in 2004 and is expected to be launched in 2005.

Seasonality

        Sales of our Group A strep and influenza products are subject to, and significantly affected by, the seasonal demands of the cold and flu seasons, prevalent during the fall and winter. As a result of these seasonal demands, we typically experience lower sales volume in our second and third quarters of the calendar year, and have higher sales in our first and fourth quarters of the calendar year. For the years ended December 31, 2004, 2003 and 2002, sales in the first and fourth quarters have combined for 65%, 61% and 56%, respectively, of net sales. Historically, our sales of our Group A strep and influenza products have varied from year to year based in large part on the severity and length of the cold and flu season. For the years ended December 31, 2004, 2003 and 2002, sales of our influenza and Group A strep products accounted for 55%, 60% and 44%, respectively, of net sales. Sales of our products vary from year to year and quarter to quarter, and can be influenced significantly if distributors attempt to time the onset of an early cold and flu season, or if they initiate larger orders in anticipation of a more severe cold and flu season. Our influenza product has a two-year shelf life, which may also lead a distributor to initiate their purchases earlier in the flu season. While we believe that the severity and length of the cold and flu season will continue to impact sales of our Group A strep and influenza products, there can be no assurance that our future sales of these products will necessarily follow historical patterns.

Research and Development

        We continue to focus our research and development efforts on three areas: 1) new proprietary product platform development, 2) the creation of improved products and new products for existing

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markets via our SPG, and 3) products developed under collaborations with other companies for new and existing markets. Research and development expenses were approximately $11.3 million, $8.5 million and $6.7 million for the years ended December 31, 2004, 2003 and 2002, respectively. Expenses related to customer-sponsored research activities during the year ended December 31, 2004 were $0.6 million. There were no customer-sponsored research activities during the years ended December 31, 2003 and 2002. As of December 31, 2004 and 2003, we had recorded approximately $1.6 million in deferred revenue related to collaborative development efforts with a Fortune 500 company. We anticipate that we will continue to devote a significant amount of financial resources to product and technology research and development for the foreseeable future.

Marketing and Distribution

        We focus on ensuring market leadership and providing points of differentiation by specializing in the diagnosis and monitoring of selected disease states. In order to support our value proposition as a company that markets the highest quality products in support of better medical outcomes, we are highlighting our Quidel Value Build ("QVB") through the development of new innovations and the communication of new solutions in the field of rapid diagnostic testing. Our QVB includes significant work in understanding the need of the end-use customer, building products that meet those needs, providing proof studies to validate rapid diagnostic testing at the point of care, and leveraging the work of researchers and key opinion leaders studying our tests and technology to help enhance the health and well-being of people around the globe. Our marketing strategy includes ensuring each of our product portfolios is supported by economic and clinical validation that show hospitals, acute care facilities, and POC clinicians that these tests deliver high quality results and offer a significant return on investment.

        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 professional 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. Approximately 66%, 65% and 51% of our net sales for the years ended December 31, 2004, 2003 and 2002, respectively, were derived from sales through our five largest distributors in each of those periods. Even though our distributor mix will likely change from period to period in the future, Cardinal Healthcare Corporation ("Cardinal"), National Distribution Corporation ("NDC"), Sumitomo Seiyaku Biomedical Co., Ltd ("Sumitomo"), Physician Sales and Services Corporation ("PSS") and McKesson Corporation ("McKesson) have historically accounted for a significant portion of our net sales. For the years ended December 31, 2004, 2003 and 2002, Cardinal accounted for approximately 16%, 16% and 21%, respectively, of net sales, NDC accounted for approximately 15%, 7% and 3%, respectively, of net sales, Sumitomo accounted for approximately 13%, 29% and 14%, respectively, of net sales, PSS accounted for approximately 12%, 6% and 2%, respectively, of net sales, while McKesson accounted for approximately 10%, 7% and 11%, respectively, of net sales. Our sales are affected by fluctuations in the buying patterns of these distributors and the corresponding changes in inventory levels maintained by them. Inventory levels held by these distributors may fluctuate significantly from quarter to quarter. We have limited visibility into or control over forces affecting

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changes in distributor inventory levels. 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.

        See Note 7. "Industry and Geographic Information" in the Notes to the Consolidated Financial Statements included in this Annual Report.

Manufacturing

        We have manufacturing operations in San Diego, California and Santa Clara, California. The San Diego facility, our largest manufacturing operation, principally produces our lateral-flow, immunoassay and LTF products. The Santa Clara facility manufactures our microtiter plate products.

        The San Diego facility 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 2004. Many of the lateral-flow and immunoassay products manufactured in our San Diego, California facility are packaged and distributed by a third party, Berkley Industries LLC ("Berkley"). Berkley is located in Southern California and its facility is ISO 9001 certified. Our facility in Santa Clara, California is also ISO 9001 certified and successfully completed a surveillance audit in 2004.

        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 or distributed in the U.S. if the device is deemed to be unsafe.

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

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        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.

Regulation Outside of the United States

        For marketing outside the U.S., we are subject to foreign regulatory requirements governing human clinical testing and marketing approval for our products. These requirements vary by jurisdiction, differ from those in the U.S., and may require us to perform additional pre-clinical or clinical testing regardless of whether FDA approval has been obtained. The amount of time required to obtain necessary approvals may be longer or shorter than that required for FDA approval. In many foreign countries, pricing and reimbursement approvals are also required.

        Our initial focus for obtaining marketing approval outside the U.S. is typically the European Union (the "EU") and Japan. European Union Regulations and Directives generally classify health care products either as medicinal products, medical devices or in vitro diagnostics. The European Conformity ("CE") mark certification requires us to receive International Standards Organization ("ISO") certification for the manufacture of our products. This certification comes only after the development of an all inclusive quality system, which is reviewed for compliance to ISO by a licensed notified body working within the EU. After certification is received, a technical file is developed which attests to the product's compliance with EU directive 78/79/EC for in vitro diagnostic medical devices. Only after this point is the product CE marked. The Japanese regulations require foreign manufacturers to work with an in-country caretaker to register in vitro diagnostic products with the Japanese Ministry of Health, Labor and Welfare. Additional clinical trials are typically required in Japan for registration purposes.

Patents and Trade Secrets

        The healthcare industry has traditionally placed considerable importance on obtaining and maintaining patent and trade secret protection for commercially relevant new technologies, products and processes. We and other companies engaged in research and development of new diagnostic products actively pursue patents for technologies that are considered novel and patentable. However, important factors, many of which are not within our control, can affect whether and to what extent patent protection in the U.S. and in other important markets worldwide is obtained. By way of example, the speed, accuracy and consistency in application of the law in a patent office within any particular jurisdiction is beyond our control and can be unpredictable. The resolution of issues such as these and their effect upon our long-term success is likewise indeterminable. We currently hold over 200 issued patents, which have expiration dates through at least 2019, and have approximately 65 patent applications pending worldwide.

        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

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filing and our patent counsel determines that relevant patent protection can be obtained. No assurance can be given that patents will be issued to us pursuant to our patent applications in the U.S. or abroad or that our 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. In the future, we expect we will require or desire additional licenses from other parties in order to refine our products further and to allow us to develop, manufacture and market commercially viable and/or superior 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 are currently involved in significant patent-related litigation both in the U.S. and Germany. These matters are discussed in detail in "Risk Factors," below, in Item 3, entitled "Legal Proceedings," and in Note 6. "Commitments and Contingencies" in the Notes to the Consolidated Financial Statements included in this Annual Report.

        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 many 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 success will depend on our ability to remain abreast of technological advances, to introduce technologically advanced products, to effectively market our differentiated value products, to maintain our brand strength and to attract and retain experienced 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.

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        There has been a trend toward industry consolidation in our markets over the last few years. We may not be able to compete successfully in an increasingly consolidated industry, and cannot predict with certainty how industry consolidation will affect our competitors or us. We expect this trend toward industry consolidation may continue as companies attempt to strengthen or hold their market positions in an evolving industry and as companies are acquired or are unable to continue operations. 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, 2004, 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 8% of the professional market, respectively, for pregnancy tests; Genzyme Diagnostics Corporation, Becton Dickinson and Company and Wampole Laboratories LLC, representing 14%, 8% and 8% of the professional market, respectively, for Group A strep tests; and Becton Dickinson and Company, Binax and Thermo Biostar Inc., representing 20%, 9% and 6% of the professional market, respectively, for influenza 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, 2004, we had 262 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, 2004 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.

        Caren L. Mason, 51, became our President and Chief Executive Officer on August 20, 2004. She has more than 25 years experience in healthcare. Prior to joining Quidel, Ms. Mason provided consultative services for Eastman Kodak Health Imaging as a result of the sale of MiraMedica, Inc., a digital technology, diagnostic imaging company, to Eastman Kodak. She served as President and CEO for MiraMedica, Inc., from April 2002 through September 2003. From January 2000 through June 2001, Ms. Mason served as CEO of eMed Technologies, Inc. of Lexington, Massachusetts, a digital technology, diagnostic imaging company. Prior to joining eMed Technologies, Ms. Mason served as General Manager of the Women's Healthcare business and as a General Manager in various capacities for the Services business of General Electric Medical Systems from July of 1996 to January of 2000. Ms. Mason's additional healthcare experience includes her tenure with Bayer AG/AGFA from October of 1989 to July of 1996 where she last served as Senior Vice President for the AGFA Technical Imaging Business Group. Ms. Mason began her career in healthcare with American Hospital Supply/Baxter Healthcare and served in sales, marketing and managerial roles from 1977 through 1988. Ms. Mason is a graduate of Indiana University. She has been a member of the Franciscan Sisters of the Poor

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Foundation Board of Governors and has also been a member of the Board of Directors for MediServ/GESCI, eMed Technologies, Inc., MiraMedica, Inc., and currently serves as a member of the Board of Directors of AdvaMed.

        Paul E. Landers, 57, 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 the 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 currently serves as a member of the Board of Directors of Medmarc Mutual Insurance Company. Mr. Landers received his B.A. from the University of Massachusetts and his M.B.A. from Boston College.

        Mark E. Paiz, 43, was our Senior Vice President, Technology and Business Development from April 2003 to July 2004. In July 2004, he was promoted to Chief Operating Officer. From September 2002 to March 2003, Mr. Paiz was our Senior Vice President Supply Chain 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 our Senior Vice President, Product Development and Supply Operations. From June 1998 to August 1999, Mr. Paiz was our 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.

        Dr. Thomas J. Foley, 65, joined Quidel as Chief Technology Officer on November 8, 2004. Dr. Foley was Senior Vice President of Research and Development and Regulatory Affairs at Lifepoint Inc., a clinical diagnostics company, from 1998 to 2004. Prior to 1998, he was Executive Vice President of Research and Development with HiChem/Elan Diagnostics from 1994 to 1997. From 1987 to 1994, Dr. Foley was Vice President of Research and Development at Hycor Biomedical, Inc., a company involved in developing reagents and controls for urinalysis, therapeutic drug monitoring and allergy and autoimmune disease states. Dr. Foley was Vice President of Research and Development at Gilford Instruments from 1983 to 1986 and Worthington Diagnostics from 1981 to 1983. Prior to that Dr. Foley was Manager of Research and Development at Beckman Instruments from 1979 to 1981. Dr. Foley has a Bachelor of Science and a Ph.D in Biochemistry from Trinity College, Dublin.

Risk Factors

Risks Related to Our Business

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 a lawsuit for patent infringement against Inverness Medical Innovations, Inc. ("IMA") and Applied Biotech, Inc. ("ABI") related to fundamental, lateral-flow technology. The suit was filed in the U.S. District Court, Southern District of California (the "Court").

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We are seeking damages as well as permanent and preliminary injunctions against IMA and ABI related to their products that infringe our patented technology. The lawsuit also seeks declaratory relief relating to certain IMA-owned or licensed U.S. patents, and names Inverness Medical Switzerland GmbH and Armkel LLC as defendants, in addition to IMA.

        On March 9, 2004, IMA and ABI filed an answer and counterclaim in response to our February 20, 2004 lawsuit. In their answer, IMA and ABI denied the allegations of infringement and asserted our patent is invalid and unenforceable. In their counterclaim, they allege infringement by us of patents named in our request for declaratory relief. IMA and ABI are seeking damages and preliminary and permanent injunctions against our lateral flow products. Additionally, IMA, ABI and Wampole Laboratories, LLC filed a separate patent infringement complaint against us alleging infringement of a certain lateral flow patent and likewise seeking damages and injunctive relief. Subsequent pleadings have resulted in our adding three additional patents to our request for declaratory relief. Markman hearings have begun in the case with the Court having issued rulings on construction related to two of the patents at issue. The Markman hearing is scheduled to continue in March 2005. Discovery has also begun in the case. No trial date has been set. If injunctive relief is granted to IMA, we would be required to cease manufacturing and selling the products at issue, which products currently represent a substantial majority of our revenues.

        Earlier, on or about February 4, 2004, Inverness Medical Switzerland GmbH filed a lawsuit against us, our German affiliate, Quidel Deutschland GmbH, and our distributor, Progen Biotechnik GmbH, alleging that certain products we and the other parties sell in Germany infringe two Inverness-owned European patents. The suit was filed in District Court in Dusseldorf, Germany. Quidel Deutschland GmbH was served with a copy of this lawsuit on February 17, 2004. In addition to damages, the suit petitions for injunctive relief, requesting we cease and desist manufacturing, selling, marketing and importing various lateral flow products.

        On April 23, 2004, we joined an ongoing opposition proceeding in the European Patent Office (EPO) in Germany challenging the validity of one of the IMA-owned patents asserted against us in the Dusseldorf lawsuit. Following oral hearings in December 2004, the EPO rendered a decision revoking the IMA-owned patent in its entirety. This decision may be appealed.

        On September 22, 2004, we filed a nullity action in the Federal Patent Court in Munich, Germany requesting a declaration of invalidity of the second IMA-owned patent asserted against us in the Dusseldorf lawsuit. Recently, in a nullity action brought by a third party against the same patent, the Federal Patent Court made a preliminary finding that the only independent claim in that patent, claim 1, was not valid as granted. That proceeding is continuing and is scheduled to resume in June 2005.

        These developments in Germany with respect to the two IMA-patents asserted against us in the Dusseldorf lawsuit have resulted in a delay of the infringement action against us in Dusseldorf. Thus, the previously scheduled January 27, 2005 hearing was canceled and currently no hearing date is scheduled in that matter.

        On September 16, 2004, we filed a lawsuit for patent infringement, in the District Court of Mannheim, Germany, against Unipath Diagnostic, GmbH, an affiliate of IMA, seeking damages and injunctive relief related to its lateral flow products. An oral hearing in the matter was conducted on March 4, 2005, with the court deciding to permit submission of additional written arguments by both parties.

        There is not a specific amount or range sought in damages in the lawsuits discussed above. Given the early stage of these actions, we cannot predict the ultimate outcome of any of these matters at this time. As a result, in accordance with Statement of Financial Accounting Standard No. 5 "Accounting

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for Contingencies", we have disclosed the existence of these lawsuits; however, no accrual for potential losses, if any, has been recorded.

        We are also aware of IMA'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 aspects of current lateral flow technology. We believe that we have various defenses to claims that have been made or might be made, but no assurances can be given that we will prevail. Because of our current use of lateral flow technology and the fact that a substantial majority of our current revenues are from products impacted by these disputes, our business would 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 IMA and its affiliates.

        Additionally, as previously disclosed and as separate matters, two other industry participants sent us letters during the third quarter of 2003 and the first quarter of 2004 suggesting that we obtain a license to patents for which they have enforcement rights. We are continuing to assess the relevant intellectual property in light of our own business strategies, new information we have received and the costs and risks associated with defending our position. In this regard, we are currently discussing and evaluating the license requests, which may result in our payment of royalties under royalty-bearing licenses in a future period. Such royalty payments could result in a material increase in our product cost and have a material adverse effect on our profits. Further, no assurance can 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.

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 decreased 15% to $78.7 million for the year ended December 31, 2004, as compared to $92.5 million for the year ended December 31, 2003. For further discussion of this decrease, refer to Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" for "Net Sales" included in this Annual Report.

        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 or if distribution concerns over the intellectual property litigation increase.

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        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 length and 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;



•

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;



•

significant quantities of our product in our distributors' inventories or distribution channels; and



•

changes in distributor buying patterns.

In order to remain competitive and profitable, we must expend considerable resources to introduce new technologies and 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 will be successful, including, without limitation, our strategic efforts relating to: (i) our LTF technology platform and migration of products to that platform and (ii) identifying and commercializing new markers and products in oncology and bone health. The development of new markets also requires a substantial investment of resources, such as new employees, offices and manufacturing facilities. Accordingly, 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:

•

strengthen market and brand leadership in infectious disease and reproductive health;



•

drive growth by establishing dedicated distributor partnerships;



•

drive profit through further refinement of industry leading manufacturing efficiencies;



•

identify and commercialize new markers, products and collaborations in oncology and bone health through our SPG;



•

complete the full-scale manufacturability feasibility study for our LTF immunoassay and continue parallel pathways for development and acquisition of other qualitative and quantitative technology platforms;



•

develop and maintain key relationships with third parties and cooperative collaborations; and



•

aggressively pursue licensing, acquisition and partnership opportunities that meet our dedicated focus on Research to Rapids™.

        As a result of any number of risk factors identified in this Annual Report, no assurance can be given that we will be successful in implementing our operational, growth and other strategic efforts. In addition, the funds for the foregoing 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.

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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. Five of our distributors, which are considered to be among the market leaders, accounted for approximately 66%, 65% and 51% of our net sales for the years ended December 31, 2004, 2003 and 2002, respectively. The loss or termination of our relationship with any of these key distributors could significantly disrupt our business unless suitable alternatives were timely found or lost sales to one distributor are absorbed by another distributor. 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 and adversely affected.

        As an alternative, we could expand our efforts to distribute and market our products directly. This alternative, 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 continue to 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.

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, 2004, our estimated U.S. professional market share for some of our key POC products was 60% in influenza, 49% for pregnancy and 43% for Group A Strep 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 IMA. We also face competition from our distributors since some have created, and others may decide to create, their

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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 over 200 issued patents both in the U.S. and internationally. Additionally, we have approximately 65 patent applications pending throughout the world. Our patents have expiration dates through 2019 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 products 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 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

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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 receive reimbursement for the cost of our products 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 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

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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, such as 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 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.

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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 adversely 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 or other 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 including the risk of currency fluctuations, which could increase our costs or stifle our growth opportunities.

        Our products are sold internationally, primarily to our customers in Japan, Europe and Latin America. We currently sell and market through these and other distributors by channeling products through distributor organizations and sales agents. Sales to foreign customers accounted for 29%, 41% and 31% of our net sales for the years ended December 31, 2004, 2003 and 2002, respectively, and are expected to continue to account for a significant percentage of our net sales. International sales 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 8% increase in the value of the Euro against the U.S. dollar for the year ended December 31, 2004;



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longer payment cycles and greater difficulty in accounts receivable collection;



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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;



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



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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

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reduce our prices, resulting in a lower margin on products sold in these geographical territories. 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.

Evolving regulation of corporate governance and public disclosure may result in additional expenses and continuing uncertainty.

        Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and Nasdaq National Market rules are creating uncertainty for companies such as ours. These new or changed laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, we intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and we may be harmed.

Investor confidence and share value may be adversely impacted if our independent auditors are unable to provide us in future years with the attestation of the adequacy of our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002.

        As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring public companies to include a report of management on our internal controls over financial reporting in our annual reports on Form 10-K that contains an assessment by management of the effectiveness of our internal controls over financial reporting. In addition, our independent auditors must attest to and report on management's assessment of the effectiveness of our internal controls over financial reporting. This requirement first applies to this Annual Report on Form 10-K and the Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting is included under Item 9A hereof. How companies are implementing these new requirements including internal control reforms, if any, to comply with Section 404's requirements, and how independent auditors are applying these new requirements and testing companies' internal controls, remain subject to uncertainty. The requirements of Section 404 of the Sarbanes-Oxley Act of 2002 are ongoing and also apply to future years. We expect that our internal controls will continue to evolve as our business activities change. Although we will continue to diligently and vigorously review our internal controls over financial reporting in order to ensure compliance with the Section 404 requirements, any control system, regardless of how well designed, operated and evaluated, can provide only reasonable, not absolute, assurance that its objectives will be met. If, during any year, our independent auditors are not satisfied with our internal controls over financial reporting or the level at which these controls are documented, designed, operated, tested or assessed, or if the independent auditors interpret the requirements, rules or regulations differently than we do, then they may decline to attest to management's assessment or may issue a report that is qualified. This could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our financial statements, which ultimately could negatively impact the market price of our shares.

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Future changes in financial accounting standards or practices or existing taxation rules or practices may affect our reported results of operations.

        A change in accounting standards or practices or a change in existing taxation rules or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements and taxation rules and varying interpretations of accounting pronouncements and taxation practice have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business. For example, changes have been approved by the Financial Accounting Standards Board, or FASB, that require that we record compensation expense in our statements of income for equity compensation instruments, including employee stock options, using the fair value method. Although there will be no change in our total cash flows, our reported financial results beginning in the third quarter of 2005 will be negatively and materially impacted by this accounting change. Other potential changes in existing taxation rules related to stock options and other forms of equity compensation could also have a significant negative effect on our reported results.

Risks Related to Our Common Stock

Our stock price has been highly volatile, and an investment in our stock could suffer a significant decline in value.

        The market price of our common stock has been highly volatile and has fluctuated substantially in the past. For example, between December 31, 2003 and December 31, 2004, the price of our common stock, as reported on the Nasdaq National Market System, has ranged from a low of $3.00 to a high of $13.98. 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:

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litigation or threat of litigation;



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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;



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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;



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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;



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changes in sales levels, since a significant portion of our costs are fixed costs with the re