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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1997
OR
[ ]TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 000-21873
BIOSITE DIAGNOSTICS INCORPORATED
(Exact name of registrant as specified in its charter)
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Delaware 33-0288606
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11030 Roselle Street 92121
San Diego, California (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (619) 455-4808
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Securities registered
pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.01 par value
Preferred Stock Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
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The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing sale price of the Common Stock on
February 28, 1998 as reported on the Nasdaq National Market, was approximately
$69,140,000. Shares of Common Stock held by each executive officer and director
and by each person who owns 10% or more of the outstanding Common Stock have
been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of February 28, 1998, there were 12,876,016 shares of the
Registrant's Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the solicitation of proxies for the Registrant's
1998 Annual Meeting of Stockholders to be held on May 21, 1998 is incorporated
by reference in Part III, Item 10 (as to directors), 11, 12 and 13 of this
Form 10-K.
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BIOSITE DIAGNOSTICS INCORPORATED
FORM 10-K
INDEX
PAGE
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PART I
Item 1. Business................................................. 1
Item 2. Properties .............................................. 28
Item 3. Legal Proceedings ....................................... 29
Item 4. Submission of Matters to a Vote of Security Holders ..... N/A
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters ..................................... 30
Item 6. Selected Financial Data.................................. 31
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 32
Item 8. Financial Statements and Supplementary Data ............. 38
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure...................... N/A
PART III
Item 10. Directors and Executive Officers of the Registrant....... 39
Item 11. Executive Compensation................................... 40
Item 12. Security Ownership of Certain Beneficial Owners and
Management............................................... 40
Item 13. Certain Relationships and Related Transactions........... 40
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K................................................. 41
SIGNATURES ........................................................... 44
Biosite(R) and Triage (R) are registered trademarks of the Company. Immediate
Response Diagnostics(TM), Express-TestSM , and the Company's logo are
servicemarks or trademarks of the Company.
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PART I
ITEM 1. BUSINESS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED IN THIS ANNUAL REPORT ON FORM 10-K ARE FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES, INCLUDING THE TIMELY DEVELOPMENT, INTRODUCTION
AND ACCEPTANCE OF NEW PRODUCTS, DEPENDENCE ON OTHERS, THE IMPACT OF COMPETITIVE
PRODUCTS, PATENT ISSUES, CHANGING MARKET CONDITIONS AND THE OTHER RISKS DETAILED
THROUGHOUT THIS FORM 10-K. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE
PROJECTED. THESE FORWARD-LOOKING STATEMENTS REPRESENT THE COMPANY'S JUDGMENT AS
OF THE DATE OF THE FILING OF THIS FORM 10-K. THE COMPANY DISCLAIMS, HOWEVER, ANY
INTENT OR OBLIGATION TO UPDATE THESE FORWARD-LOOKING STATEMENTS.
BACKGROUND
Biosite Diagnostics Incorporated ("Biosite" or the "Company") develops,
manufactures and markets rapid, accurate and cost-effective diagnostic products
that improve the quality of patient care and simplify the practice of laboratory
medicine. The Company believes that its Immediate Response Diagnostics can have
an important impact on medical decisions, patient care and the cost of medical
treatment. The Company's first product, the Triage Panel for Drugs of Abuse
("Triage DOA Panel"), a small self-contained test capable of detecting a broad
spectrum of commonly overdosed prescription and illicit drugs in approximately
10 minutes, is used by over 45% of U.S. hospitals. Since its introduction in
1992, over 6.4 million Triage DOA Panels have been sold worldwide for use in
hospital emergency department screening, occupational health and workplace
testing. The Company estimates that sales to end-users of the Company's Triage
DOA Panel products in 1997 were approximately $47 million, and net sales of
approximately $31.7 million in 1997. The Company utilizes distributors in the
United States and abroad, as well as a direct sales force, for the distribution
of Triage DOA Panel to end-users.
In January 1998, the Company received final clearance from the U.S. Food
and Drug Administration ("FDA") to market the Triage Cardiac Panel and the
Triage Meter in the United States. The Triage Cardiac Panel may aid in the
diagnosis of Acute Myocardial Infarction (AMI) and provide physicians with an
enhanced ability to make treatment decisions in a timely manner. Used in
conjunction with the Triage Meter, the Triage Cardiac Panel is a rapid
diagnostic product that quantitatively measures, in a single test device, the
level of creatinine kinase MB ("CK-MB"), troponin I and myoglobin from a
whole-blood sample. Prior to the launch of the Triage Cardiac Panel, the Company
will need to complete an internal validation of the manufacturing processes of
the new products, in compliance with FDA standards.
In March 1998, the Company received final clearance from the FDA to market
the Triage C. DIFFICILE Panel, a new rapid test designed to identify CLOSTRIDIUM
DIFFICILE, an opportunistic pathogen of the intestinal tract that may thrive as
a result of broad spectrum antibiotic treatment. Prior to the launch of the
Triage C. DIFFICILE Panel, the Company will need to complete an internal
validation of the manufacturing processes of the new products, in compliance
with FDA standards.
The Company is developing several additional products for applications
where the Company believes its Immediate Response Diagnostics can play an
important role in improving patient care. Products under development include
tests that are intended to aid in the diagnosis of congestive heart failure and
sepsis, the dosing of certain therapeutic drugs and the detection of certain
bacterial and parasitic infections.
The Company has two product platforms that are designed to provide rapid
results through either qualitative visual readings or quantitative meter
readings. These platforms are based upon the Company's proprietary technologies
in the areas of reagent development, signaling chemistry and micro capillary
fluidics. The Company's testing formats are designed to measure single or
multiple analyte targets simultaneously, and to allow for the analysis of
various sample sources, including urine, serum, plasma, whole blood and stool.
The Company has entered into agreements with pharmaceutical and diagnostic
companies, including Novartis Pharma AG ("Novartis,") for the development of a
product to monitor the concentrations of the immunosuppressant drug,
cyclosporine; and Kyoto Dai-ichi Kagaku Co., Ltd. ("KDK") for the development of
the Triage Cardiac Panel to be used in the diagnosis of heart attacks; and LRE
Relais + Electronik GmbH ("LRE") for the development of the Triage Meter; and
Scios Inc
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("Scios") for the development of a product to be used in the diagnosis of
congestive heart failure; and XOMA Corporation ("Xoma") for the development
of a product to be used in the diagnosis of sepsis. The Triage Cardiac Panel
and Triage Meter (together called "Triage Cardiac System") have been approved
for marketing by the FDA while the other products covered by such
arrangements are currently under development and none of the products have
generated revenue for the Company.
The Company uses the Fisher Healthcare division ("Fisher," formerly the
Curtin Matheson Scientific division) of the Fisher Scientific Company to
distribute the Triage DOA Panel to hospital-based laboratories and emergency
departments in the United States and Merck KGaA ("Merck") to distribute the
Triage DOA Panel in certain countries in Europe, Latin America, the Middle East,
Asia and Africa.
As a result of a decision by Merck to refocus away from certain aspects of
the human diagnostic business, the Company terminated its agreement with Merck
for the Triage DOA Panel product line, effective December 1998. The Company is
evaluating product distribution alternatives for the international markets,
including, among other things, alliances with other distribution partners and
the establishment of a direct sales force in certain European countries.
INDUSTRY OVERVIEW
In 1995, the worldwide market for immunoassays exceeded $5.1 billion,
consisting primarily of testing related to infectious disease, endocrinology,
therapeutic drug monitoring, drugs of abuse testing, immunology/allergy, tumor
markers and blood typing. The global market for immunoassays continues to expand
as new disease states are identified, new therapies become available, and
worldwide standards of living and access to health care improve. Such tests are
performed primarily in hospital-based laboratories and commercial laboratories,
which account for approximately 80% of all diagnostic tests performed annually.
In recent years, diagnostic tests that can be performed nearer to the point of
patient care have emerged as an important tool in disease diagnosis and
management. It has been estimated that the market for point-of-care tests,
primarily hospitals and physician office/satellite facilities, will grow at
approximately 27% annually through the year 2000.
Immunoassays were first developed based on technology developed in the
1960s. Although early immunoassays offered unprecedented levels of sensitivity
for the detection of low concentration analytes, they suffered from relatively
short shelf-lives, long reaction times, a need for radioactive labels to detect
completed reactions and lack of consistent results among products from different
suppliers. Over time, technological advances such as the introduction of
monoclonal antibodies, enzyme and fluorescent labels and various solid phase
formats shortened immunoassay reaction times, provided higher specificity and
allowed the development of tests with longer shelf-lives and greater
consistency.
These advances also led to the development of immunoassay analyzers,
testing systems utilizing automated liquid handling mechanisms and pipetting
systems for reagent addition. Modern immunoassay analyzers are capable of
storing and selecting multiple reagents for a variety of analytes, including
drugs, hormones and cancer antigens. They also provide accurate and highly
sensitive test results and help to simplify the performance of immunoassays.
However, immunoassay analyzers are large and complex, have lengthy turnaround
times and require high volumes of sample throughput to justify the investment in
equipment, training, staffing and other costs required to operate and support
the systems.
In recent years, there has been a continuing shift from the use of such
conventional analyzer systems to more technologically advanced point-of-care
tests that can be performed in minutes by less highly trained personnel. Simple,
rapid immunoassays are capable of detecting a single analyte target with a color
change that can be visually interpreted. Formats such as dipsticks, test tubes
and membrane test cartridges have been used to provide fast, non-instrument
read-dependent results for conditions where a single analyte target is present
in high concentrations and where a simple yes/no non-numeric answer is
clinically relevant. Rapid color change test formats are widely available for
pregnancy, strep throat and ovulation prediction. Until recently, simple test
formats have remained incapable of precise, multi-analyte detection or highly
sensitive, quantitative measurements. As a result, medical conditions where the
detection of one or more analytes is required or where the precise quantitation
of the target analyte is required have remained the domain of immunoassay
analyzers.
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The Company believes that there is significant market potential for
advanced point-of-care diagnostic products. Point-of-care testing helps to
reduce overall health care delivery costs and can improve patient outcomes by
providing diagnosis during the patient visit, thereby minimizing the time to
medical intervention and reducing the need for additional patient follow-up.
Patients undergoing emergency procedures can benefit from more timely and
accurate testing results, both to ensure correct decision making and to avoid
unnecessary use of costly inpatient care. Disease management programs such as
therapeutic drug monitoring programs can benefit from real-time, point-of-care
evaluations that enable care-givers to optimize drug dosing. Quicker diagnosis
of infectious agents can also permit earlier prescription of appropriate
medications, potentially shortening the duration of illness.
TECHNOLOGY
Biosite's Immediate Response Diagnostics technology is based on several
proprietary advances in the biological and physical sciences that make practical
the development and manufacture of rapid, accurate and cost-effective
point-of-care diagnostics. The Company's products integrate its expertise in
several core scientific and engineering disciplines, including antibody
development and engineering, analyte cloning and synthesis, signaling chemistry
and micro capillary fluidics, each of which is described below. Biosite's
research and development program is supported by 72 employees, including 16
Ph.D.s with expertise in the Company's core technologies. By combining research
capabilities in each of these areas, Biosite is able to create novel single and
multi-analyte diagnostics which overcome the limitations of traditional rapid
diagnostic technologies and seek to address the significant unmet need for
effective point-of-care diagnostic information.
ANTIBODY DEVELOPMENT AND ENGINEERING
Biosite believes that its internal antibody development and engineering
capabilities allow rapid identification and development of antibodies with
optimal specificity, affinity and stability characteristics. The Company
initially utilized hybridoma technology for the selection and production of its
novel antibodies. Two disadvantages of hybridoma technology are the length of
time required to develop antibody candidates and the need to restart the
antibody development process when unwanted characteristics such as cross
reactivities are discovered. The Company has developed a proprietary process
that enables the selection and production of antibodies more rapidly and
efficiently than is possible using hybridoma technology. In addition, Biosite
has isolated the genes encoding the antibodies that permit the genetic
engineering of antibodies. As a result, Biosite can alter or add specific amino
acids or polypeptides in an antibody in order to improve the antibody's
specificity and to facilitate purification of the antibody. This technology
accelerates the antibody selection process by rapidly eliminating unwanted cross
reactivities discovered in product development.
ANALYTE CLONING AND SYNTHESIS
The Company has molecular biology capabilities that include the cloning and
identification of specific proteins useful in the development of immunoassays.
Biosite has developed proprietary expression vectors that enable the production
and purification of these proteins for the development of antibodies and for use
as calibrators and controls in its immunoassay products. In addition, the
Company has considerable expertise in synthetic organic chemistry which allows
the synthesis of targets and useful derivatives. The Company develops products
for which the targeted analyte can be small (I.E., haptens, such as drugs) or
large (I.E., proteins, such as cardiac enzymes). The Company believes that the
ability to develop, stabilize and manufacture the target analyte or its
analogues is key to the development of highly accurate immunoassays.
COLOR/PHOTOCHEMICAL SIGNALING
Immunoassays require the attachment of a detectable label to an antibody or
target analyte. The Company has developed a variety of labels for the
development of its products. For yes/no tests, a visual label that produces
color is attached to antibodies or analytes through either non-covalent or
covalent chemical methods. For its quantitative products, the Company has
developed novel fluorescent dyes which are attached to antibodies or analytes
using both noncovalent and covalent chemical means. Although fluorescence is a
potentially powerful label for use in immunoassays, its potential has been
limited by the lack of available dyes that are stable and have no sample
interference, and the requirement of a complex instrument for detection. The
Company's novel fluorescent dyes are stable and exhibit properties that permit
their use in complex biological samples such as serum, plasma and whole
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blood without interference from the sample. Furthermore, these novel dyes
absorb light at wavelengths where a simple instrument can be used to excite
and detect fluorescence for quantitative measurements.
MICRO CAPILLARY TEST DEVICE TECHNOLOGY
Biosite has developed proprietary technology to design, develop and
manufacture devices containing micro capillaries to control the flow of fluids
in immunoassay processes. The qualitative device format uses micro capillaries
to draw fluids through a membrane that contains immobilized antibody zones for
the detection of specific substances. The quantitative device format uses
several different micro capillary designs to control the contact of sample with
reagents and to control the flow of fluid throughout the device. When sample is
added to the quantitative device, a filter contained within the device separates
blood cells from plasma which is further directed by capillary forces into a
chamber that contains dried immunoassay reagents. After an incubation time that
is determined by another micro capillary element of the device, the volume of
sample that contacted the reagents flows down a capillary path that brings it
into contact with immobilized antibody zones. The binding of fluorescent
reagents at these zones is detected by an instrument and is related to the
concentration of the substance being tested for in the sample. The Company has
also developed the engineering capability to design unique micro capillary
structures in plastic parts and to fabricate them in commercial scale quantities
using injection molding processes.
SAMPLE HANDLING
The Company has developed proprietary technology relating to sample
handling and preparation, including technology that allows whole blood to be
passively separated into its plasma component or to be passively lysed to
release the target analyte. The Company has also developed technologies for the
handling of stool samples which concentrate and purify the target analytes or
organisms from solid stool materials. In addition, the Triage Panel platform can
be used to assay urine samples.
PRODUCT PLATFORMS
The Company has used its core technologies to develop two product
platforms: the Triage Panel and the Triage Meter System. Both of the Company's
product platforms utilize the Company's expertise in antibody engineering,
analyte cloning, signaling chemistry, micro capillary fluidics and sample
handling technologies.
TRIAGE PANEL
The Triage Panel platform is designed for rapid, qualitative screening of
multiple analytes in a small single-use hand-held device. The Triage Panel has a
visual (yes/no) display containing simultaneous tests for up to eight analytes
and two control standards. It can be performed in a simple multi-step process,
and is capable of performing tests on both urine and stool. The Triage DOA
Panel, the first product developed on this platform, tests for up to eight drugs
of abuse in approximately 10 minutes. The Company has received FDA approval to
market its Triage C DIFFICILE Panel. Triage Panel products under development
include two other tests for the detection of microorganisms that cause severe
gastrointestinal disease.
TRIAGE METER
The Triage Meter platform is designed to provide rapid quantitative results
for immunoassays in whole blood, serum and plasma. The Triage Meter System
consists of two parts: a small single-use disposable test cartridge and a
proprietary, compact, point-of-care, fluorescent meter. After a blood sample is
applied to the cartridge, the cartridge is inserted into the meter, which is
designed to automatically and simultaneously detect up to six analytes and
display the results on a numerical electronic read-out. The meter incorporates
proprietary software in erasable, programmable, read-only memory ("EPROM") chips
which are intended to be plugged into each meter. These EPROM chips enable the
meter to perform multiple types of tests and automatically determine which test
is being run. In addition, the EPROM chips are designed to automatically
calibrate the meter on a lot specific basis. The software may also provide
important information regarding the analyte measured, such as normal or abnormal
levels of a marker which could then be used to initiate therapy or manage
patient disease. The Company believes that the analyte measuring sensitivity of
the Triage Meter System products under development will approximate the
sensitivity levels of the conventional immunoassay analyzers. The Company has
received FDA approval to market its Triage Cardiac Panel and is currently
developing three other applications for this platform: 1) the Triage Neoral
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Assay, a product for the monitoring of the concentration of cyclosporine, an
immunosuppressant drug prescribed to prevent organ rejection in organ transplant
recipients. 2) the Triage BNP Assay, a product to be used in the diagnosis of
congestive heart failure, and 3) the Triage LBP Assay, a product to assist in
the diagnosis of sepsis.
PRODUCT ATTRIBUTES
Although the current products and products under development are based upon
the Triage Panel and Triage Meter System platforms and utilize different
technologies, they share common attributes which the Company believes make them
superior to conventional immunoassay analyzers:
- RAPID RESULTS: The Triage DOA Panel, Triage C. DIFFICILE Panel, Triage
Cardiac System and the Company's products under development are designed
to offer complete results in a STAT timeframe, and to have room
temperature stability, making them immediately available for use.
- EASE OF USE: The Triage DOA Panel, Triage C. DIFFICILE Panel, Triage
Cardiac System and the Company's products under development are
designed to be simple to use. The Triage DOA Panel has only three
steps while the Triage Meter System products are expected to require
only one assay step.
- HIGH ANALYTICAL ACCURACY: The Company develops and uses high quality
biological and chemical reagents to yield highly specific, accurate
and reproducible analytical results.
- CAPABILITY OF PERFORMING MULTIPLE ANALYSES: The Triage DOA Panel, Triage
C. DIFFICILE Panel, Triage Cardiac System and the Company's products
under development are designed to measure one or more target analytes
simultaneously, including reagent controls, without sacrificing the
quality of the individual analysis. This simultaneous detection
capability can provide significant time and cost savings compared to
current technologies.
- RELIABILITY: Biosite's use of internal thresholds, built-in controls,
software lockouts and other controlling mechanisms are intended to
make its current and future products extremely reliable in any
hospital or clinical laboratory setting.
- COST EFFECTIVENESS: The Triage DOA Panel, Triage C. DIFFICILE Panel,
Triage Cardiac System and the Company's products under development are
designed to simplify the performance of highly complex testing
procedures and significantly reduce the cost of testing equipment
acquisition and maintenance, making them cost-effective alternatives
to conventional immunoassay analyzers.
PRODUCTS AND PRODUCTS UNDER DEVELOPMENT
The Triage DOA Panel was introduced in 1992 and has been used by hospital
emergency departments to screen for up to eight commonly abused prescription and
illicit drugs or drug classes. The Company has received FDA approval to market
two new products, the Triage Cardiac System and Triage C. DIFFICILE Panel. The
Company will need to complete an internal validation of the manufacturing
processes of the new products, in compliance with FDA standards, prior to the
sale of the new products.
The Company is developing five additional products (Triage Parasite Panel,
Triage Enteric Panel, Triage Neoral Assay, Triage BNP Assay and Triage LBP
Assay) which apply the Company's Immediate Response Diagnostics technologies to
a variety of other medical testing needs. The Company continues to evaluate
other rapid diagnostic product opportunities that can utilize the Company's
technologies.
The Company intends, where appropriate, to enter into licensing and/or
collaborative arrangements to develop and commercialize additional future
products. There can be no assurance that the Company will be able to negotiate
license or collaborative arrangements on favorable terms, if at all, in the
future, or that its current or future licensing or collaborative arrangements
will be successful.
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TRIAGE PANEL FOR DRUGS OF ABUSE
The Company believes the U.S. market for abused drug testing is
approximately $628 million annually. The U.S. market can be divided into three
major categories:
- MEDICAL TESTING: The medical testing segment represents testing typically
performed in a hospital laboratory. The results are generally reported
to emergency physicians and psychiatrists. Such tests have the highest
need for rapid turnaround of results, and generally have the highest
cost per result.
- NON-MEDICAL TESTING: The non-medical testing market consists of testing
performed for the workplace, the criminal justice setting and drug
rehabilitation centers. Testing may be performed on-site or at an
occupational health provider, but generally samples are sent to
independent reference laboratories. The demand for a rapid result
varies by type of industry, but typically is not quite as great as in
the medical segment. Additionally, the cost per result is slightly
reduced.
- REFERENCE LABORATORY TESTING: The reference laboratory testing market
accounts for approximately 40% of the total drug testing market. The
majority of samples come from the non-medical testing market, although
some smaller hospitals in the medical testing market also send their
samples to reference laboratories. In general, results are not
available for at least 24 hours from the time the specimen is
collected. Despite relatively long turnaround times, the reference
laboratory market has remained substantial because of its ability to
produce results on a low cost per panel basis and reduce the potential
liability associated with workplace testing.
EMERGENCY DEPARTMENT SCREENING
Emergency physicians have indicated that drug abuse plays a role in 5% to
10% of the emergency medicine cases occurring annually in the United States,
either as a primary cause such as an overdose, or as a contributing factor such
as in the case of an accident. A diagnostic dilemma confronts physicians when a
patient is presented with symptoms that could either be drug related or non-drug
related. A patient brought to a hospital emergency department in a coma may be
under the influence of narcotics or sedatives, which may require one type of
treatment or intervention. Conversely, the same patient may have had a stroke or
suffered some form of trauma requiring a completely different type of care. The
ability to obtain a differential diagnosis in a timely manner greatly aids the
course of treatment.
Prior to the introduction of the Triage DOA Panel, drug or toxicology
screening was accomplished by several technologies, primarily Gas
Chromatography/Mass Spectroscopy ("GC/MS") and automated immunoassays. Although
GC/MS is the most specific identification method commercially available, it is
time consuming (requiring an average of approximately three hours per test),
complex and expensive, and is generally reserved for final confirmation of
specimens that have been screened positive by an immunoassay. Automated
immunoassays, although less expensive than those performed by GC/MS, also
require significant amounts of time (approximately one to two hours) because of
the necessity of performing analyses of several drugs sequentially on each
patient specimen. Additionally, in many cases the equipment required to perform
an immunoassay is not accessible on an immediate or STAT basis.
The Triage DOA Panel is a rapid qualitative urine screen that analyzes a
single test sample for up to eight different illicit and prescription drugs or
drug classes and provides results in approximately 10 minutes. The Triage DOA
Panel is instrument independent, contains built-in controls for accuracy and is
capable of a high degree of specificity. Illicit drugs detected by the Triage
DOA Panel include: Amphetamines/Methamphetamines (speed, crystal), Cocaine
(crack), Opiates (heroin), Phencyclidine (angel dust), Tetrahydrocannabinol
(pot, marijuana), while prescription drugs tested by the Triage DOA Panel
include Barbiturates (Phenobarbital), Benzodiazepines (Valium, Librium,
Halcion), Tricyclic Antidepressants (Elavil, Tofranil) and Methadone. The Triage
DOA Panel is configured to test various combinations of the foregoing drugs. In
February 1995, the Company launched the Triage DOA Plus TCA Panel, a
configuration which includes a test for Tricyclic Antidepressants ("TCA") which
otherwise require a separate blood test. Since its introduction in February
1992, the Company has sold over 6.4 million Triage DOA panels worldwide, and
over 45% of hospitals in the United States use the product.
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The Company distributes the Triage DOA Panel products in the U.S. hospital
market segment through Fisher. Merck is the exclusive distributor of the Triage
DOA Panel products in certain countries in Europe, Latin America, the Middle
East, Asia and Africa. However, as a result of a decision by Merck to refocus
away from certain aspects of the human diagnostic business, effective December
1998, the Company terminated its agreement with Merck regarding certain
international distribution rights for the Triage DOA product line. The Company
is evaluating product distribution alternatives for the international markets,
including, among other things, alliances with other distribution partners and
the establishment of a direct sales force in certain European countries.
WORKPLACE SCREENING
It is estimated that in 1997 over 76% of new hires in major U.S. firms were
screened for drug usage as part of pre-employment physicals. The majority of
these test samples were sent to centralized reference laboratories that could
provide both the initial immunoassay screening result and the confirmation of
presumptive positive results by an alternate method, such as GC/MS. Testing of
government and certain government regulated employees and contractors must be
performed at SAMHSA certified reference laboratories. Employers that are not
government contractors send their drug screens to their laboratory of choice or
perform on-site testing. Non-SAMHSA testing is estimated to account for over
eight million tests performed annually.
The majority of employers with drug screening programs have chosen not to
implement "on-site" testing in their facilities due to costly personnel and
regulatory burdens on an employer's in-house testing laboratory. These
industrial testers, however, still have a need for rapid results since many
employment decisions hinge on an employee's ability to pass physical and other
examinations that include a test for illegal drugs. Despite this need for rapid
results, there is a 24 to 48 hour wait based on the sample transportation and
testing process used by major reference laboratories. Additionally, it is
estimated that approximately 90% of all employee tests have negative results.
Therefore, an immunoassay that provides rapid results, such as the Triage DOA
Panel, can get employees back to work quickly and save employers' money.
In January 1996, the Company established the ExpressTest One-Hour Drug
Screen service, a marketing program initiated in conjunction with regional
providers of occupational health services, as a means of expanding the market
for the Triage DOA Panel. The ExpressTest program incorporates the Company's
"near-site" testing strategy, using the Triage Intervention Panel (a test for
five illicit drugs or drug classes) to provide the benefits of rapid drug test
results without requiring employers to set up an on-site laboratory.
Participating occupational health clinics provide rapid results to industrial
clients that send prospective employees to them for pre-employment physicals and
drug screens. Biosite's sales force actively supports these selected
occupational health clinics in their marketing of the ExpressTest program to
potential industrial clients in their regional areas.
THE TRIAGE CARDIAC PANEL
In 1992, over six million people in the United States visited hospital
emergency departments exhibiting symptoms of a heart attack. Of those,
approximately 650,000 were diagnosed with AMI and approximately 800,000 were
diagnosed with unstable angina. In total, approximately 1.9 million of the
patients who present with chest pain were admitted to coronary care units. Of
these, approximately 30,000 to 60,000 patients were misdiagnosed as not having
an AMI. Additionally, approximately 500,000 of these patients who did not have
an AMI were admitted to hospitals and ultimately released within two days. The
Company believes that rapid, quantitative results for multiple cardiac markers
provided at the point-of-care may have a positive impact on misdiagnosed AMI,
and may provide substantial benefits to patients and savings to the hospital.
AMI is generally caused by the blocking or "occlusion" of an artery
providing oxygen-enriched blood to the heart. Without oxygen, the heart muscle
is destroyed, with prolonged occlusion resulting in additional muscle damage.
The destruction of cells in the heart muscle results in the release of several
markers into the bloodstream, including CK-MB, troponin I and myoglobin.
Clinicians generally rely on patient history, electrocardiograms and serial
measurement of CK-MB for early diagnosis of AMI. Troponin I and myoglobin are
also emerging as useful adjuncts to CK-MB in the detection of heart attacks. The
Company believes that the concentrations of these three markers typically peak
and fall over different time periods and that simultaneous measurement of these
markers is a more accurate diagnostic technique for AMI than the measurement of
any one single marker. Studies have shown that serum concentrations of myoglobin
are
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elevated most quickly post-AMI. Additionally, in patients presenting within
12 hours of AMI symptom onset, quantitative serial measurement of myoglobin
has demonstrated significantly higher sensitivity in diagnosing AMI than
CK-MB. Troponin I has been shown to maintain an elevated concentration for a
longer period of time than CK-MB and myoglobin.
Several diagnostic tests have recently been developed to quantitatively
measure the blood levels of such markers. Unfortunately, the measurement of
multiple markers currently requires large, centralized immunoassay systems that
cannot directly analyze whole blood and are not always available on a STAT
basis. Additionally, these systems require multiple reagent packs, as well as
frequent standardization and quality control. Since turnaround time for such
test results is critical, current immunoassay systems may not satisfy physician
needs.
The Company believes that a rapid, point-of-care test capable of
quantitatively measuring multiple markers of an AMI would have a positive impact
on patient care. Accordingly, the Company's Triage Cardiac Panel is designed to
quantitatively measure the level of CK-MB, troponin I and myoglobin in a single
test device from a whole-blood sample. The hand-held Triage Meter is designed to
provide quantitative results of such measurements at or near the point-of-care.
The Triage Cardiac System may aid in the detection of AMI by providing
point-of-care quantitative results, enabling physicians to make treatment
decisions in a timely manner.
In January 1998, the Company received final clearance from the FDA to
market the Triage Cardiac Panel and the Triage Meter in the United States. Prior
to the actual launch of the Triage Cardiac System, the Company will need to
complete an internal validation of the manufacturing processes of the new
products, in compliance with FDA standards. The Company anticipates utilizing
both distributor alliances and a direct sales force in marketing the Triage
Cardiac System.
THE TRIAGE C. DIFFICILE PANEL
CLOSTRIDIUM DIFFICILE ("C. DIFFICILE") is an opportunistic pathogen of the
intestinal tract that may thrive as a result of broad spectrum antibiotic
treatment. The bacteria may be found in asymptomatic carriers or may spread
among immunocompromised hospital patients. Toxins produced by the bacteria
mediate C. DIFFICILE-associated disease ("CDAD"), which may include
antibiotic-associated diarrhea and antibiotic-associated pseudo-membranous
colitis. Due to the potential spread of infection, patients identified as
possibly having CDAD are usually placed in isolation until the infection is
controlled. Symptoms of CDAD include diarrhea as well as fluid and weight loss.
It has been estimated that in 1997, over three million rapid tests for C.
DIFFICILE were performed in the United States. This number is expected to
continue to rise due to the expected increase in the number of patients who are
immunocompromised.
Historically, the use of a cytotoxin test, which takes 48 to 72 hours to
produce diagnostic results, was the only means to identify the toxin associated
with C. DIFFICILE. More recently, in response to the need for more rapid
identification of the C. DIFFICILE toxin, several manufacturers have developed
and marketed enzyme-linked immunosorbent assays ("ELISA") that can be performed
in one to two hours. These ELISA test formats are increasingly used by hospitals
testing for the toxin.
Although the ELISA technology has been a great improvement over the
cytotoxin test, it still requires several precisely timed steps as well as
multiple standards every time the test is performed, making it unlikely that the
testing will be done when an individual specimen is sent to the laboratory. The
multiple standards and quality controls required with each run make the
processing of individual specimens expensive. As a result, specimens are
generally only processed in "batch" mode, delaying the diagnostic result, and
limiting the information available to a physician evaluating therapeutic
measures.
The Triage C. DIFFICILE Panel is designed to simplify the laboratory
procedure and improve the turnaround time for a physician to receive a result by
enabling laboratories to complete testing for the bacteria and toxin in less
than 15 minutes. Since the test is being designed with built-in controls and
standards, it may be performed individually or in batches, by any laboratory
technician, without compromising the quality of the result. By improving the
turnaround time to result, the clinician may initiate therapy earlier and thus
minimize a patient's time in isolation. Rapid, accurate diagnosis of the
bacteria and toxin should enable earlier treatment, which may reduce length of
stay in the hospital and may reduce cost.
-8-
In March 1998, the Company received final clearance from the FDA, to market
the Triage C. difficile Panel. Prior to the launch of the Triage C. difficile
Panel, the Company will need to complete an internal validation of the
manufacturing processes of the new products, in compliance with FDA standards.
THE TRIAGE PARASITE PANEL
Parasitic infection is a common cause of gastrointestinal disease and
diarrhea. Some of the more common parasites responsible for such infection are
GIARDIA LAMBLIA ("GIARDIA"), CRYPTOSPORIDIUM PARVUM ("C. PARVUM"), ENTAMOEBA
HISTOLYTICA and microsporidia species. According to the U.S. Center for Disease
Control and Prevention ("CDC"), more than 900,000 people in the United States
become ill each year from waterborne parasites. Additionally, with the increase
in world travel, it is probable that the number of cases diagnosed in the United
States will rise. Further, parasites frequently infect immunocompromised
patients, especially HIV infected patients, which has led to an increase in the
incidence of infection by microsporidia species.
The most commonly employed method of detecting parasites from stool samples
is by manual ova and parasite ("O&P") microscopic examination, typically of
three consecutive stool specimens from the patient. The preparation of the
sample by a laboratory technologist involves stool specimen dilution and the
preparation of multiple microscope slides. Each slide must then be observed via
microscope by a technologist trained in the identification of parasites. The
time to diagnose parasitic infection is prolonged due to the need for manual
microscopic examination of multiple stool specimens per patient. The prolonged
time required to obtain results may delay the treatment of patients, and
ultimately increase the cost of health care for such patients.
It is estimated that in 1997 over six million O&P microscopic examinations
were performed in the United States. Because of the cumbersome procedures and
limited test menu of the current ELISA test formats, these tests have had
limited success in hospitals that perform larger volumes of tests in batches.
Recently, several manufacturers have developed and marketed ELISA tests for the
more rapid identification of two of the more common parasites GIARDIA and C.
PARVUM.
The Triage Parasite Panel is designed to replace the standard O&P
microscopic detection method for three of the most commonly encountered
parasites: GIARDIA, C. PARVUM and ENTAMOEBA HISTOLYTICA in a single test device.
Future versions of the Triage Parasite Panel may include a test for
microsporidia species. Because each test device includes controls, the product
may be used for any volume of tests. If successfully developed and approved for
marketing, the Triage Parasite Panel may make rapid results (less than 15
minutes) available to hospitals of any size, including facilities that
previously sent such testing to a reference lab. The Company expects that the
sensitivity of the Triage Parasite Panel will be comparable to that of the
current O&P microscopic examination, using only a single patient specimen. This
should greatly reduce the collection burden for the patient, and reduce the
amount of labor for the laboratory technician, thereby reducing costs.
Additionally, the length of time physicians spend waiting for results may be
reduced.
The Triage Parasite Panel is in the late stages of preclinical development.
THE TRIAGE ENTERIC PANEL
Gastroenteritis, commonly described as "food poisoning," often occurs among
individuals who have consumed contaminated foods or been exposed to stool
contaminated with microorganisms such as SALMONELLA, CAMPYLOBACTER JEJUNI/COLI,
SHIGELLA and ENTEROHEMORRHAGIC E. COLI. Eight to 24 hours after such exposure,
individuals may experience abdominal pain, nausea and diarrhea. It is estimated
that in the United States over 14 million stool cultures are performed annually
for the diagnosis of food poisoning. Microorganisms are often implicated in such
cases. According to the CDC, there are over six million cases of foodborne
disease annually in the United States.
Stool culture, currently the primary method of diagnosing food poisoning,
involves the inoculation of multiple culture plates with stool specimen. After
24 to 48 hours, culture plates that exhibit bacterial growth are subjected to
biochemical tests that typically take an additional 24 hours. As a result of
such a prolonged testing procedure, physicians generally wait 48 to 72 hours for
test results.
The Triage Enteric Panel is being developed for identification of the most
common enteric bacteria responsible for food poisoning such as SALMONELLA,
CAMPYLOBACTER JEJUNI/COLI, SHIGELLA AND ENTEROHEMORRHAGIC E.
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COLI. The Triage Enteric Panel would enable the laboratory technician to
rapidly detect the presence of such enteric bacteria from a stool specimen.
This should greatly reduce the amount of labor required of laboratory
technicians, thereby reducing costs. Additionally, results can be returned to
the physician in a shorter period of time.
The Triage Enteric Panel is in the development stage.
THE TRIAGE NEORAL SYSTEM
Transplants of human organs generally require suppression of the organ
recipient's immune system. Cyclosporine is the most widely used pharmaceutical
for such purposes, with annual worldwide sales in excess of $1.0 billion.
Cyclosporine is chronically administered to patients who have received an organ
transplant. Over 18,000 patients undergo organ transplantation in the United
States annually. In excess of 200,000 organ recipients worldwide take
immunosuppressant drugs on a daily basis. Novartis is the developer and leading
supplier of cyclosporine, and is involved in several collaborations in the organ
transplant field including health care management, xenotransplantation, and
near-patient testing in an effort to support the use of organ transplantation.
The blood level of cyclosporine must be monitored to ensure that a patient
receives the appropriate therapeutic dose while minimizing toxicity. Patients
receiving cyclosporine must maintain a minimum concentration of the drug that
enables it to be effective, yet maintain a level that is low enough not to be
toxic. This range is often referred to as the therapeutic window. Physicians
primarily rely on large, centralized laboratories to measure cyclosporine blood
levels. The physician typically does not receive test results for at least 24 to
48 hours, requiring a call back to the patient if the dose of the drug needs to
be adjusted. A smaller share of cyclosporine testing is performed by high
performance liquid chromatography ("HPLC"). The current worldwide market for
cyclosporine testing by immunoassay is estimated to be over 4.0 million tests
per year. Patients are monitored frequently in the immediate post-transplant
time frame with reduced, but continued testing, averaging four times per year,
for the remainder of the patient's lifetime.
The Triage Neoral System (consisting of the Triage Neoral Assay and the
Triage Meter) is designed to enable a physician to easily, rapidly and
accurately measure cyclosporine levels. The Triage Neoral System is being
developed to provide a cost-effective means of determining cyclosporine levels
on a real-time basis in order to enable physicians to optimize drug therapy
during a patient's visit. As part of its research and development collaboration
with Novartis, Biosite has obtained licenses to certain technology that makes
rapid analysis of cyclosporine levels possible. See "-- Strategic and
Distribution Arrangements."
The Triage Neoral System is in the preclinical development stage. If
successfully developed and approved for marketing, the Company expects Novartis
to support the promotion of the Triage Neoral System worldwide. The Company
successfully completed feasibility studies for the Neoral Assay under its
antibody license agreement with Novartis. Additionally, the Company and Novartis
entered into an agreement to expand the scope of the collaborative development
of the Triage Neoral System. The expansion of the collaboration may result in
payments to Biosite upon attainment of certain milestones.
The Triage Neoral System is in the preclinical development stage.
THE TRIAGE BNP SYSTEM
Congestive Heart Failure ("CHF") is a chronic inability of the heart to
maintain an adequate output of blood from one or both ventricles of the heart,
resulting in congestion or swelling of certain veins or organs, and an
inadequate blood supply to the body. Current testing methods used in diagnosing
CHF include electrocardiograms, chest x-rays, echocardiography, and the analysis
of blood gases and electrolytes.
The Company has obtained a license to certain technology and patents
developed by Scios, Inc. for use in developing an assay for the diagnosis of
congestive heart failure by monitoring levels of B-type Natriuretic Peptide
("BNP"), a hormone made primarily in the ventricles of the heart. Studies
suggest that levels of BNP become elevated in circulating blood plasma during
heart dysfunction associated with congestive heart failure in both symptomatic
and asymtomatic patients.
-10-
The Triage BNP System (consisting of the Triage BNP Assay and the Triage
Meter) is designed to enable a physician to easily, rapidly and accurately
measure BNP levels. The Triage BNP System is being developed to provide
physicians with a cost-effective means of determining BNP levels at the
point-of-care and aid in the diagnosis of congestive heart failure and assist in
the differentiation of CHF from other conditions with similar clinical symptoms.
Additionally, by providing physicians with a convenient means of monitoring BNP
levels in CHF patients, the Triage BNP Assay may aid in the evaluation of the
effectiveness of therapies utilized in CHF patient care. The Company might not
develop or introduce any products based upon the Scios-licensed technology.
The Triage BNP System is in the development stage.
THE TRIAGE LBP SYSTEM
Sepsis, or endotoxemia, occurs when the bloodstream is infected by
gram-negative bacteria. An inflammatory reaction initiated by these bacteria and
their associated endotoxin can cause widespread damage to blood vessels leading
to circulatory shock, organ failure, gangrene of extremities and death. The
complications associated with sepsis can advance quickly.
Biosite has obtained a U.S. license to certain technology and patents
developed by XOMA Corporation related to methods of measuring levels of
Lipopolysaccharide Binding Protein ("LBP") in human blood. Studies suggest that
levels of LBP become elevated as a specific response to endotoxin, a poisonous
component of gram-negative bacteria. Biosite is using this technology to develop
a diagnostic test to assist in the diagnosis of sepsis or endotoxemia.
The Triage LBP System (consisting of the Triage LBP Assay and the Triage
Meter) is designed to enable a physician to easily, rapidly and accurately
measure LBP levels. The Triage LBP System is being develop to provide
point-of-care physicians with a cost-effective diagnostic tool that will aid
them in differentiating endotoxin-related complications from other inflammatory
states with similar clinical symptoms. Additionally, the Triage LBP system may
help identify patients that would benefit from treatment with anti-endotoxin
drugs. The Company might not develop or introduce any products based upon the
XOMA licensed technology.
The Triage LBP Assay is in the development stage.
RESEARCH AND DEVELOPMENT
As of December 31, 1997, the Company had 72 employees in research and
development, 16 of which have Ph.D.s. The Company's research and development
organization is dedicated to the discovery and development of new technologies
which can be applied to future products and to the development of new products
with its existing platform technologies.
The Company has a research staff dedicated to the development and
production of antibodies through a variety of techniques. Recombinant techniques
are used to express proteins for use as diagnostic targets. The Company's staff
of chemists and biochemists synthesize drug targets and compounds for use as
diagnostic and seek to perfect techniques for coupling these compounds to
biological reagents such as antibodies. The Company's development engineering
staff is involved in the design and development of new diagnostic device
technologies as well as the processes for their fabrication and interaction with
biological and chemical reagents. The Company's product development group
completes final optimization of assays and the Company's regulatory affairs
group controls all in-house and external clinical studies of the Company's
products and prepares applications to the FDA for pre-market clearance or
approval.
MANUFACTURING
As of December 31, 1997, the Company had 63 employees in manufacturing
involved in reagent production, device assembly, engineering, quality
assurance/quality control and materials management.
Biosite maintains worldwide manufacturing rights to all current and future
products, except for the Triage Meter for which LRE maintains the manufacturing
rights. A key strategy of the Company is to provide high quality analytical
results in an efficient manner. To this end, the Company invests in the design
and development of
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manufacturing systems and technologies that can produce a high quality
product using controlled, cost-effective manufacturing processes and
equipment. The Triage C. DIFFICILE, Triage Parasite, and Triage Enteric
Panels, are being developed to utilize the same or similar processes and
equipment as the Triage DOA Panel. The Company believes that the experience
it has acquired in manufacturing the Triage DOA Panel will provide benefits
in product quality and cost in manufacturing for its products under
development. The Company expects its manufacturing capacities to be
sufficient to concurrently manufacture such potential products and the Triage
DOA Panel in the same facility.
All raw materials required to manufacture the Triage DOA Panel are obtained
from outside suppliers. Most of the antibodies used in the manufacture of the
Triage DOA Panel were developed by Biosite and the cell lines are owned or
licensed by Biosite. In addition, Biosite maintains its own in-house antibody
production capability.
The Company manufactures the Triage DOA Panel at its facility in San Diego,
California. The facility has received its registration as a diagnostic product
manufacturer from the FDA and from the California Department of Health Services.
The Company has also been licensed and certified to manufacture products using
controlled substances by the U.S. Drug Enforcement Agency. There can be no
assurance that the Company can continue to comply with all government
requirements and regulations which may lead to the suspension or revocation of
its right to manufacture. See "-- Government Regulation" and "Risk
Factors-Government Regulation."
The Company has also developed novel and sophisticated processes and
equipment for the production of its Triage Cardiac Panel and Triage Neoral
Assay. LRE will manufacture and supply the meter used in conjunction with the
Company's Triage Meter System platform products. The Company has increased its
manufacturing space at its San Diego facility to accommodate production of the
Triage Cardiac Panel.
SALES AND MARKETING
As of December 31, 1997, the Company has 38 employees in various sales and
marketing functions. The Company distributes its Triage DOA Panel to hospital
facilities in the United States through Fisher, and in certain countries in
Europe, Latin America, the Middle East, Asia and Africa through Merck.
As a result of a decision by Merck to refocus away from certain aspects of
the human diagnostic business, the Company terminated its agreement with Merck
regarding certain international distribution rights for the Triage DOA product
line. The Company is evaluating product distribution alternatives for the
international markets, including, among other things, alliances with other
distribution partners and the establishment of a direct sales force in certain
European countries.
With the potential launch of new products from the Company's development
pipeline, the Company is evaluating distribution alternatives for its current
products and potential new products. As a result, the Company has increased the
size of its sales force in the U.S. and is negotiating a new long-term
distribution alliance with Fisher. The long-term distribution arrangement with
Fisher would expand their role to include the distribution of the Triage Cardiac
System, the Triage C. DIFFICILE Panel and certain of the potential new products
in the U.S. medical market.
The Company anticipates that it may, if appropriate, enter into additional
distribution agreements with respect to its products currently under development
and products that it develops in the future, provided such products receive the
requisite regulatory clearance or approvals. The Company may not be able to
enter into these or other distribution agreements on acceptable terms, if at
all. If the Company elects to distribute products directly, it's direct sales,
marketing and distribution efforts may not be successful. A failure to enter
into acceptable distribution agreements or a failure of the Company to
successfully market its products would have a material and adverse effect on the
Company.
STRATEGIC AND DISTRIBUTION ARRANGEMENTS
Biosite's strategy for the research, development, commercialization and
distribution of certain of its products entails entering into various
arrangements with corporate partners, licensors, licensees and others, and is
dependent upon the success of these parties in performing their
responsibilities. There can be no assurance that such parties will perform their
obligations as expected or that any revenue will be derived from such
arrangements. Under Biosite's existing arrangements, Biosite is not obligated to
make any material capital expenditures. If products are successfully
-12-
developed under certain of the Company's existing arrangements, royalties
will be payable by the Company on sales of products which incorporate
licensed technology.
FISHER HEALTHCARE DIVISION (FORMERLY CURTIN MATHESON SCIENTIFIC DIVISION)
OF FISHER SCIENTIFIC COMPANY
In November 1991, the Company entered into a distribution agreement (the
"Fisher Agreement") with Fisher pursuant to which the Company granted to Fisher
an exclusive right to distribute Triage DOA Panel products to hospitals and
reference laboratories within the United States. Under certain circumstances,
the Company is obligated to make a one-time payment to Fisher in the event that
the Company elects to terminate the Fisher Agreement without cause or to engage
in a merger, reorganization or transfer or sale of substantially all of its
stock or assets to which the Fisher Agreement relates, provided that Fisher
gives timely notice of objection to such merger, reorganization or transfer or
sale of stock or assets. Fisher purchases Triage DOA Panel products on a monthly
basis through firm purchase orders on a per device fixed price basis. Fisher
accounted for 88%, 81%, and 80% of Biosite's product sales for the years ended
December 31, 1995, 1996 and 1997, respectively. With the potential launch of new
products from the Company's development pipeline, the Company is evaluating
distribution alternatives for its current products and potential new products.
As a result, the Company has increased the size of its sales force in the U.S.
and is negotiating a new long-term distribution alliance with Fisher. The
long-term distribution arrangement with Fisher would expand their role to
include the distribution of the Triage Cardiac System, the Triage C. DIFFICILE
Panel and certain of the Company's potential new products in the U.S. medical
market.
MERCK KGAA ("MERCK")
In July 1992, the Company entered into a distribution agreement with Merck,
pursuant to which the Company granted to Merck an exclusive right to market and
distribute the Triage DOA Panel products in certain countries in Europe, Latin
America, the Middle East, Asia and Africa. Merck purchases the Triage DOA Panel
products in U.S. dollars on a quarterly basis through firm purchase orders based
on per device fixed prices. The distribution agreement provides for minimum
annual purchase quantities. Merck accounted for $1.3 million, $2.1 million, and
$2.0 million of Biosite's product sales for the years ended December 31, 1995,
1996 and 1997, respectively. The Company terminated this agreement with Merck,
effective December 1998.
In June 1994, the Company entered into a collaborative development
agreement and a distribution agreement with Merck, for the development and
marketing of the Triage Cardiac System. Under such agreements, Merck was to fund
a portion of the development costs. As a result of a decision by Merck to
refocus away from certain aspects of the human diagnostic business, the Company
and Merck terminated the development and distribution agreements for the Triage
Cardiac System in December 1997. The Company paid a $2.1 million cash payment to
Merck and forgave approximately $1.3 million owed to the Company by Merck
related to the development of the Triage Cardiac Panel and the Triage Meter.
The Company is evaluating product distribution alternatives for the
international markets, including, among other things, alliances with other
distribution partners and the establishment of a direct sales force in certain
European countries.
LRE RELAIS + ELEKTRONIK GMBH
In September 1994, the Company entered into an agreement with LRE (the "LRE
Agreement") for the development of a hand-held meter to be used in all Triage
Meter System products currently under development, including the Triage Cardiac
System and the Triage Neoral System. Under the terms of the LRE Agreement, LRE
is obligated to develop and produce the fluorescent meter according to
specifications provided by Biosite. In return, the Company agreed to compensate
LRE for certain development and tooling expenses incurred in connection
therewith, based upon LRE's successful completion of certain feasibility,
prototype and preproduction milestones. Under the terms of the LRE Agreement,
the Company's obligations for development expenses and costs are not to exceed
approximately $1.9 million. As of December 31, 1997, the Company had paid or
accrued expenses and costs under the LRE Agreement of approximately $1.9
million. In addition, the agreement specifies that LRE is to be the Company's
exclusive supplier of the Triage Meter during the term of the LRE Agreement,
unless LRE is incapable of satisfying Biosite's needs or is prohibited from
producing such meters for a specific immunoassay application. Biosite
-13-
will purchase the Triage Meters from LRE in Deutsche Marks (or a successor
currency to Deutsche Marks) on a quarterly basis through firm purchase orders
on a per device price basis which varies according to sales volume. Biosite
has the right to designate third parties, who can purchase Triage Meters
directly from LRE.
ARKRAY KDK CORPORATION
In February 1995, the Company entered into a development, supply and
distribution agreement with KDK, pursuant to which the parties agreed to
collaborate in the development and marketing of the Triage Cardiac System. Under
the terms of the agreement, KDK is obligated to provide funding of up to $2.0
million for the Company's development of the Triage Cardiac System, $500,000 of
which has been paid and the remainder of which is to be paid based upon the
Company's achievement of milestones. In exchange for this funding, the Company
has granted KDK the exclusive right to distribute the Triage Cardiac System in
Japan and in certain countries of Asia, the Middle East and Pacific Island
countries (the "KDK countries"). The Company was responsible for costs
associated with performing clinical trials on and obtaining regulatory approval
of the Triage Cardiac System in the United States, while KDK is responsible for
such costs in Japan and in countries of Asia, the Middle East and Pacific Island
countries. If the Triage Cardiac System is approved for commercial sale in the
KDK countries, KDK will purchase Triage Cardiac Panels from Biosite in U.S.
dollars on a quarterly basis through firm purchase orders on a per device fixed
price basis. KDK will also purchase the Triage Meters from the Company on a per
device fixed price basis. The distribution agreement provides for minimum annual
purchase quantities. KDK can terminate this agreement at any time.
NOVARTIS PHARMA AG
In September 1995, the Company entered into two license agreements with
Novartis relating to the Company's development of the Triage Neoral Assay . The
first license is for cyclosporine antibodies and the second license is for
certain antibody-based assays. Under the terms of the agreements, and upon the
Company's successful completion of certain feasibility requirements, the Company
has the right to make, have made, use and sell the Triage Neoral Assay using the
licensed Novartis antibodies and related technologies. The agreements
contemplate that the Company is to be responsible for all costs associated with
the development of the Triage Neoral Assay. Under the two licenses, the Company
made payments (aggregating approximately $361,000) to Novartis and is obligated
to make additional payments of up to approximately $170,000 to Novartis based
upon the achievement of certain product development milestones, and to pay
royalties on sales of products developed by the Company using such antibodies or
related technologies. In connection with the agreement, Novartis purchased $1.0
million of five-year 8% convertible debentures which converted into 92,575
shares of Common Stock of the Company upon the closing of the Company's initial
public offering in February 1997. In January 1998, as a result of the attainment
of one of the milestones (the successful completion of feasibility studies for
the Neoral Assay under development), the Company received $500,000 from Novartis
in exchange for a convertible debenture. The convertible debenture was
immediately converted into 41,666 shares of common stock of the Company based on
the IPO price of $12.00 per share. The Company is obligated to sell to Novartis
an additional $500,000 five-year 8% convertible debenture upon the attainment of
a milestone. The debenture would be convertible, at the sole option of the
Company, into shares of Biosite Common Stock at $12.00 per share. Additionally,
the Company and Novartis entered into an agreement to expand the scope of the
collaborative development of the Neoral Assay. The expansion of the
collaboration may result in payments to Biosite upon attainment of certain
milestones.
-14-
PROPRIETARY TECHNOLOGY AND PATENTS
The Company's ability to compete effectively will depend in part on its
ability to develop and maintain proprietary aspects of its technology, and to
operate without infringing the proprietary rights of others or to obtain
licenses to such proprietary rights. Biosite has U.S. and foreign issued patents
and is currently prosecuting patent applications in the United States and with
certain foreign patent offices. There can be no assurance that any of the
Company's pending patent applications will result in the issuance of any
patents, that the Company's patent applications will have priority over others'
applications, or that, if issued, any of the Company's patents will offer
protection against competitors with similar technology. There can be no
assurance that any patents issued to the Company will not be challenged,
invalidated or circumvented in the future or that the rights created thereunder
will provide a competitive advantage.
The Triage DOA Panel, Triage C. DIFFICILE Panel, Triage Cardiac System and
products under development may incorporate technologies that are the subject of
patents issued to, and patent applications filed by, others. The Company has
obtained licenses for certain technologies and is negotiating to obtain licenses
for technologies patented by others. However, there can be no assurance that the
Company will be able to obtain licenses for technology patented by others on
commercially reasonable terms, if at all, that it will be able to develop
alternative approaches if it is unable to obtain licenses or that the Company's
current and future licenses will be adequate for the operation of Biosite's
business. The failure to obtain necessary licenses or to identify and implement
alternative approaches would prevent the Company from commercializing certain of
its products under development and would have a material adverse effect on the
Company's business, financial condition and results of operations.
Litigation may be necessary to enforce any patents issued to the Company,
to protect trade secrets or know-how owned by the Company or to determine the
enforceability, scope and validity of the proprietary rights of others. In March
1996, the Company settled a potential patent infringement claim by obtaining a
license to the contested patent in return for a one-time payment of $2.2
million. In September 1996, the Company settled a patent infringement claim
filed by Abbott Laboratories and obtained a license to the contested patent in
return for the payment of $5.5 million and the agreement to pay certain
royalties. In September 1997, the Company was named in a lawsuit filed by
Behring Diagnostics GmbH and Behring Diagnostics, Inc. ("Behring") alleging that
the Company's Triage DOA Panel products infringe a patent held by the
plaintiffs, which expires in August, 2000. The plaintiffs seek to recover
damages of an unspecified amount and to enjoin future sales of the Triage DOA
Panel products by the Company. The Company has reviewed the cited patent and
believes it has meritorious defenses. The Company intends to vigorously defend
its position, and may incur significant legal costs in executing its defense. In
January 1998, the Company amended its answer to the claims of the Behring
lawsuit to include antitrust counterclaims against Behring. The Company has
sought an injunction requiring Dade International Inc. to divest itself of its
recent acquisition of Behring Diagnostics, Inc. and Behring Diagnostics GmbH,
treble monetary damages and attorney fees. If the Company's Triage DOA Panel
products were found to infringe such patent, and if an acceptable license was
not available, the Company would be materially and adversely affected. The
Company's Triage Meter platform, including the Triage Cardiac System is not the
subject of the patent infringement claims as filed. The Company may become
subject to additional patent infringement claims and litigation or interference
proceedings conducted in the U.S. Patent and Trademark Office ("USPTO") to
determine the priority of inventions.
The Company has received a letter from Spectral Diagnostics, Inc.
("Spectral"), a manufacturer of rapid-format cardiac-diagnostic panels,
informing the Company that Spectral holds U.S. patents covering a kit for
diagnosing and distinguishing chest pain. This letter stated that Spectral has
not yet determined its position with respect to the licensing of its technology.
Spectral subsequently informed the Company that it received a notice of
allowance from the USPTO with respect to another patent application and the
Company has learned that another patent relating to methods and diagnostic kits
for the diagnosis of chest pain has been issued to Spectral. The Company has
asked Spectral for a clarification of its position, but Spectral has refused to
state whether it will or will not allege infringement of its patents by the
Triage Cardiac Panel once that product is launched. The Company is continuing it
s review of the issued patents cited in this letter and is evaluating their
potential impact on the Triage Cardiac System. Spectral may initiate litigation
alleging that the Triage Cardiac Panel infringes claims under their patents. The
litigation, if initiated, could seek to recover damages as a result of any sales
of the product and to enjoin further sales.
The Company also has received correspondence from other parties calling to
the Company's attention the
-15-
existence of certain patents for which they believe Biosite's products and
products under development may incorporate technologies that are the subject
of such patents. Such correspondence has in certain instances included offers
to negotiate the licensing of the patented technologies. There can be no
assurance that such matters will not result in litigation to determine the
enforceability, scope, and validity of the patents. Litigation, if initiated,
could seek to recover damages as a result of any sales of the products and to
enjoin further sales of such products.
The Behring litigation and any other litigation that could be brought forth
by other parties may result in material expenses to the Company and significant
diversion of effort by the Company's technical and management personnel,
regardless of the outcome. The outcome of litigation is inherently uncertain and
there can be no assurance that a court would not find the third-party claims
valid and that the Company had no successful defense to such claims. An adverse
outcome in litigation or the failure to obtain a necessary license could subject
the Company to significant liability and could prevent the Company from selling
the Triage DOA Panel, Triage C. DIFFICILE Panel or the Triage Cardiac System,
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company also relies upon trade secrets, technical know-how and
continuing invention to develop and maintain its competitive position. There can
be no assurance that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
the Company's trade secrets or disclose such technology, or that the Company can
meaningfully protect its trade secrets, or that the Company will be capable of
protecting its rights to its trade secrets.
Others may have filed and in the future are likely to file patent
applications that are similar or identical to those of the Company. To determine
the priority of inventions, the Company may have to participate in interference
proceedings declared by the USPTO that could result in substantial cost to the
Company. No assurance can be given that any patent application of another will
not have priority over patent applications filed by the Company.
The commercial success of the Company also depends in part on the Company
neither infringing patents or proprietary rights of third parties nor breaching
any licenses that may relate to the Company's technologies and products. The
Company is aware of several third-party patents that may relate to the Company's
technology. There can be no assurance that the Company does not or will not
infringe these patents, or other patents or proprietary rights of third parties.
In addition, the Company has received and may in the future receive notices
claiming infringement from third parties as well as invitations to take licenses
under third party patents. Any legal action against the Company or its
collaborative partners claiming damages and seeking to enjoin commercial
activities relating to the Company's products and processes affected by third
party rights, in addition to subjecting the Company to potential liability for
damages, may require the Company or its collaborative partner to obtain a
license in order to continue to manufacture or market the affected products and
processes. There can be no assurance that the Company or its collaborative
partners would prevail in any such action or that any license (including
licenses proposed by third parties) required under any such patent would be made
available on commercially acceptable terms, if at all. There are a significant
number of U.S. and foreign patents and patent applications in the Company's
areas of interest, and the Company believes that there may be significant
litigation in the industry regarding patent and other intellectual property
rights. If the Company becomes involved in such litigation, it could consume a
substantial portion of the Company's managerial and financial resources, which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
COMPETITION
The market in which the Company competes is intensely competitive.
Biosite's competitors include health care companies that manufacture
laboratory-based tests and analyzers, as well as clinical reference
laboratories. Currently, the majority of diagnostic tests used by physicians and
other health care providers are performed by independent clinical reference
laboratories and hospital-based laboratories. The Company expects that these
laboratories will compete vigorously to maintain their dominance of the testing
market. In order to achieve market acceptance for its products, the Company will
be required to demonstrate that its products provide cost-effective and time
saving alternatives to tests performed by clinical reference laboratories or
traditional hospital-based laboratory procedures. This will require physicians
to change their established means of having such tests performed. There can be
no assurance that the Company's products will be able to compete with the
testing services provided by traditional laboratory services. In addition,
companies with a significant presence in the diagnostic market, such as Abbott
Laboratories, Roche Boehringer Mannheim Corporation, Chiron Diagnostics,
Clinical Diagnostic Systems, a division
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of Johnson & Johnson and DADE Behring Marburg GmbH, have developed or are
developing diagnostic products that do or will compete with the Company's
products. These competitors have substantially greater financial, technical,
research and other resources and larger, more established marketing, sales,
distribution and service organizations than the Company. Moreover, such
competitors offer broader product lines and have greater name recognition
than the Company, and offer discounts as a competitive tactic. In addition,
several smaller companies are currently making or developing products that
compete with or will compete with those of the Company. There can be no
assurance that the Company's competitors will not succeed in developing or
marketing technologies or products that are more effective or commercially
attractive than the Company's current or future products, or that would
render the Company's technologies and products obsolete. Moreover, there can
be no assurance that the Company will have the financial resources, technical
expertise or marketing, distribution or support capabilities to compete
successfully in the future. In addition, there can be no assurance that
competitors, many of which have made substantial investments in competing
technologies that may be more effective than the Company's technologies, will
not prevent, limit or interfere with the Company's ability to make, use or
sell its products either in the United States or in international markets.
See " --Technology" and "-- Products and Products under Development."
GOVERNMENT REGULATION
The testing, manufacture and sale of the Company's products are subject to
regulation by numerous governmental authorities, principally the FDA and
corresponding state and foreign regulatory agencies. Pursuant to the Federal
Food, Drug, and Cosmetic Act, and the regulations promulgated thereunder, the
FDA regulates the preclinical and clinical testing, manufacture, labeling,
distribution and promotion of medical devices. The Company will not be able to
commence marketing or commercial sales in the United States of new products
under development until it receives clearance or approval from the FDA, which
can be a lengthy, expensive and uncertain process. Noncompliance with applicable
requirements can result in, among other things, fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production, failure of the government to grant premarket clearance or premarket
approval for devices, withdrawal of marketing clearances or approvals and
criminal prosecution. The FDA also has the authority to request recall, repair,
replacement or refund of the cost of any device manufactured or distributed by
the Company.
In the United States, medical devices are classified into one of three
classes (I.E., 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 devices
are subject to general controls (E.G., labeling, premarket notification and
adherence to the Quality System Regulation ("QSR") (formerly Good Manufacturing
Practices) and Class II devices are subject to general and special controls
(E.G., performance standards, postmarket surveillance, patient registries and
FDA guidelines). Generally, Class III devices are those which must receive
premarket approval by the FDA to ensure their safety and effectiveness (E.G.,
life-sustaining, life-supporting and implantable devices or new devices which
have been found not to be substantially equivalent to legally marketed devices).
Before a new device can be introduced in the market, the manufacturer must
generally obtain FDA clearance through clearance of a 510(k) notification or
approval of a pre-market approval ("PMA") application. A PMA application must be
filed if a proposed device is a new device not substantially equivalent to a
legally marketed Class I or Class II device, or if it is a preamendment Class
III device for which the FDA has called for PMAs. A PMA 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 PMA application
must also contain a complete description of the device and its components and a
detailed description of the methods, facilities and controls used to manufacture
the device. In addition, the submission must include the proposed labeling,
advertising literature and any training materials. The PMA approval process can
be expensive, uncertain and lengthy, and a number of devices for which FDA
approval has been sought by other companies have never been approved for
marketing.
Upon receipt of a PMA application, the FDA makes a threshold determination
as to whether the application is sufficiently complete to permit a substantive
review. If the FDA determines that the PMA application is complete, the FDA will
accept the application for filing. Once the submission is accepted, the FDA
begins an in-depth review of the PMA. The FDA review of a PMA application
generally takes one to three years from the date the application is accepted,
but may take significantly longer. The review time is often significantly
extended by FDA requests for additional information or clarification of
information already provided in the submission. During the review period, it is
likely that an advisory committee, typically a panel of clinicians, will be
convened to review and evaluate the
-17-
application and provide recommendations to the FDA as to whether the device
should be approved. The FDA is not bound by the recommendation of the
advisory panel. Toward the end of the PMA review process, the FDA generally
will conduct an inspection of the manufacturer's facilities to ensure that
the facilities are in compliance with applicable QSR requirements. If FDA
evaluations of both the PMA application and the manufacturing facilities are
favorable, the FDA may issue either an approval letter or an approvable
letter, which usually contains a number of conditions that must be met in
order to secure final approval of the PMA. When and if those conditions have
been fulfilled to the satisfaction of the FDA, the agency will issue a PMA
approval letter, authorizing commercial marketing of the device for certain
indications. If the FDA's evaluation of the PMA application or manufacturing
facilities is not favorable, the FDA will deny approval of the PMA
application or issue a non-approvable letter. The FDA may determine that
additional clinical investigations must be performed, in which case the PMA
may be delayed for one or more years while additional clinical investigations
are conducted and submitted in an amendment to the PMA. Modifications to a
device that is the subject of an approved PMA, its labeling or manufacturing
process may require approval by the FDA of PMA supplements or new PMAs.
Supplements to an approved PMA often require the submission of the same type
of information required for an initial PMA, except that the supplement is
generally limited to that information needed to support the proposed change
from the product covered by the original PMA.
A 510(k) clearance will be granted if the submitted information establishes
that the proposed device is "substantially equivalent" to a legally marketed
Class I or Class II medical device or to a preamendment Class III medical device
for which the FDA has not called for PMAs. The FDA recently has been requiring
more rigorous demonstration of substantial equivalence than in the past,
including in some cases requiring submission of clinical data. It generally
takes from three to 12 months from submission to obtain 510(k) premarket
clearance but may take longer. The FDA may determine that a proposed device is
not substantially equivalent to a legally marketed device or that additional
information is needed before a substantial equivalence determination can be
made. A "not substantially equivalent" determination, or a request for
additional information, could prevent or delay the market introduction of new
products that fall into this category. For any devices that are cleared through
the 510(k) process, 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 510(k) submissions.
The Company has made modifications to the Triage DOA Panel since receipt of
initial 510(k) clearance. With respect to several of these modifications, the
Company has filed new 510(k) notices describing the modifications, and has
received FDA clearance of those 510(k) notices. The Company has made other
modifications to the Triage DOA Panel which the Company believes do not require
the submission of new 510(k) notices. There can be no assurance, however, that
the FDA would agree with any of the Company's determinations not to submit a new
510(k) notice for any of these modifications, or would not require the Company
to submit a new 510(k) notice for any of these modifications made to the Triage
DOA Panel. If the FDA requires the Company to submit a new 510(k) notice for any
device modification, the Company may be prohibited from marketing the modified
the Triage DOA Panel until the 510(k) notice is cleared by the FDA.
The Company is uncertain of the regulatory path to market that the FDA will
ultimately apply to the Company's products currently in development. Although
the Triage DOA Panel, Triage C. DIFFICILE Panel and Triage Cardiac System
received 510(k) clearance, a PMA may be required for the Triage Neoral, Triage
BNP and Triage LBP Assays and other products now in development. There can be no
assurance that the FDA will not determine that the Company must adhere to the
more costly, lengthy and uncertain PMA approval process for any of the Company's
products in development.
There can be no assurance that the Company will be able to obtain necessary
regulatory approvals or clearances for its products on a timely basis, if at
all. Delays in receipt of or failure to receive such approvals or clearances,
the loss of previously received approvals or clearances, limitations on intended
use imposed as a condition of such approvals or clearances, or failure to comply
with existing or future regulatory requirements would have a material adverse
effect on the Company's business, financial condition and results of operations.
Before the manufacturer of a device can submit the device for FDA approval
or clearance, it generally must conduct a clinical investigation of the device.
Although clinical investigations of most devices are subject to the
investigational device exemption ("IDE") requirements, clinical investigations
of IN VITRO diagnostic ("IVD") tests, such as all of the Company's products and
products under development, are exempt from the IDE requirements, including the
need to obtain the FDA's prior approval, provided the testing is noninvasive,
does not require an
-18-
invasive sampling procedure that presents a significant risk, does not
intentionally introduce energy into the subject, and is not used as a
diagnostic procedure without confirmation by another medically established
test or procedure. In addition, the IVD must be labeled for research use only
("RUO") or investigational use only ("IUO"), and distribution controls must
be established to assure that IVDs distributed for research or clinical
investigation are used only for those purposes.
The Company intends to conduct clinical investigations of its products
under development, which will entail distributing them in the United States on
an IUO basis. There can be no assurance that the FDA would agree that the
Company's IUO distribution of its IVD products under development will meet the
requirements for IDE exemption. Furthermore, failure by the Company or the
recipients of its products under development to maintain compliance with the IDE
exemption requirements could result in enforcement action by the FDA, including,
among other things, the loss of the IDE exemption or the imposition of other
restrictions on the Company's distribution of its products under development,
which would adversely affect the Company's ability to conduct the clinical
investigations necessary to support marketing clearance or approval.
Any devices manufactured or distributed by the Company pursuant to FDA
clearance or approvals are subject to pervasive and continuing regulation by FDA
and certain state agencies. Manufacturers of medical devices for marketing in
the United States are required to adhere to QSR, which includes testing,
control, documentation, and other quality assurance requirements. Manufacturers
must also comply with Medical Device Reporting ("MDR") requirements that a
manufacturer report to the FDA any incident in which its product may have caused
or contributed to a death or serious injury, or in which its product
malfunctioned and, if the malfunction were to recur, it would be likely to cause
or contribute to a death or serious injury. Labeling and promotional activities
are 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.
The Company is subject to routine inspection by the FDA and certain state
agencies for compliance with QSR requirements, MDR requirements and other
applicable regulations. The recently finalized QSR requirements include the
addition of design controls that will likely increase the cost of compliance.
Changes in existing requirements or adoption of new requirements could have a
material adverse effect on the Company's business, financial condition and
results of operation. There can be no assurance that the Company will not incur
significant costs to comply with laws and regulations in the future or that laws
and regulations will not have a material adverse effect upon the Company's
business, financial condition and results of operations.
The Company also is subject to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of hazardous or
potentially hazardous substances. There can be no assurance that the Company
will not incur significant costs to comply with laws and regulations in the
future or that such laws or regulations will not have a material adverse effect
upon the Company's business, financial condition and results of operations.
The use of Biosite's products is also affected by the Clinical Laboratory
Improvement Amendments of 1988 ("CLIA") and related federal and state
regulations which provide for regulation of laboratory testing. The scope of
these regulations includes quality control, proficiency testing, personnel
standards and federal inspections. CLIA categorizes tests as "waived,"
"moderately complex" or "highly complex," on the basis of specific criteria.
There can be no assurance that any future amendment of CLIA or the promulgation
of additional regulations impacting laboratory testing will not have a material
adverse effect on the Company's ability to market its products or on its
business, financial condition or results of operations.
EMPLOYEES
As of December 31, 1997, Biosite employed 216 individuals. Of these, 19
hold Ph.D.s and 16 hold other advanced degrees. None of the Company's employees
is covered by collective bargaining agreement. The Company believes that it
maintains good relations with its employees.
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RISK FACTORS
DEPENDENCE ON DEVELOPMENT AND INTRODUCTION OF NEW PRODUCTS FOR REVENUE GROWTH
AND PROFITABILITY
Except for the Triage DOA Panel, Triage C. DIFFICILE Panel, and Triage
Cardiac System, all of the Company's products are still under development, and
there can be no assurance that such products will be successfully developed or
commercialized on a timely basis, if at all. The Company will need to complete
an internal validation of the manufacturing processes of the Triage C. DIFFICILE
Panel, and Triage Cardiac Panel, in compliance with FDA standards, prior to
their sale.
The Company believes that its revenue growth and profitability will
substantially depend upon its ability to complete development of and
successfully introduce these new products. In addition, the successful
development of some of these new products will depend on the development of new
technologies, including the Triage Meter (a fluorescent meter) and assay
devices. The Company will be required to undertake time-consuming and costly
development activities and seek regulatory approval for these new products.
There can be no assurance that the Company will not experience difficulties that
could delay or prevent the successful development, introduction and marketing of
these new products, that regulatory clearance or approval of any new products
will be granted by the U.S. Food and Drug Administration or foreign regulatory
authorities on a timely basis, if at all, or that the new products will be
successfully commercialized. The Company has limited resources to devote to the
development of all its potential products and consequently a delay in the
development of one product may delay the development of other products. In order
to successfully commercialize any new products, the Company will be required to
establish and maintain reliable, cost-efficient, high-volume manufacturing
capacity and a cost effective sales force and administrative infrastructure and
an effective product distribution system for such products. If the Company is
unable, for technological or other reasons, to complete the development,
introduction or scale-up of manufacturing for any new product or if any new
product is not approved for marketing or does not achieve a significant level of
market acceptance, the Company's business, financial condition and results of
operations would be materially and adversely affected. See "Business-- Products
and Products Under Development," "-- Manufacturing" and "-- Government
Regulation."
LIMITED HISTORY OF PROFITABILITY; POTENTIAL QUARTERLY FLUCTUATIONS IN FUTURE
OPERATING RESULTS
The Company first achieved profitability in fiscal 1994 and prior to that
time incurred significant operating losses. The Company experienced operating
profits on a quarterly basis in 1995. However, the Company incurred an operating
loss for the first quarter of 1996 and then returned to operating profitability
for the remaining quarters of 1996 and into 1997. The Company incurred an
operating loss for the fourth quarter of 1997. There can be no assurance that
the Company will return to profitability on a quarterly or annual basis in the
future. The Company believes that future operating results will be subject to
quarterly fluctuations due to a variety of factors, including whether and when
new products are successfully developed and introduced by the Company, market
acceptance of current or new products, regulatory delays, product recalls,
manufacturing delays, shipment problems, seasonal customer demand, the timing of
significant orders, changes in reimbursement policies, competitive pressures on
average selling prices, changes in the mix of products sold and patent
litigation and conflicts. Operating results would also be adversely affected by
a downturn in the market for the Company's current and future products, if there
are any, order cancellations or order rescheduling. Because the Company is
continuing to increase its operating expenses for personnel, including the
expansion of its sales force, manufacturing scale-up costs and new product
development, the Company's operating results would be adversely affected if its
sales did not correspondingly increase or if its product development efforts are
unsuccessful or subject to delays. The Company's limited operating history makes
accurate prediction of future operating results difficult or impossible.
Although the Company has experienced growth in recent years, there can be no
assurance that, in the future, the Company will sustain revenue growth or remain
profitable on a quarterly or annual basis or that its growth will be consistent
with predictions made by securities analysts. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
NEAR-TERM DEPENDENCE OF THE COMPANY ON THE TRIAGE DOA PANEL
Sales of the Triage DOA Panel have to date accounted for all of the
Company's sales. The Company expects
-20-
its revenue and profitability will substantially depend on the sale of the
Triage DOA Panel for the foreseeable future. A reduction in demand for the
Triage DOA Panel would have a material adverse effect on the Company's
business, financial condition and results of operations. The Company believes
that growth in sales of the Triage DOA Panel will slow as the available U.S.
market becomes saturated. Competitive pressures could also erode the
Company's profit margins for the Triage DOA Panel. The Company's continued
growth will depend on its ability to successfully develop and commercialize
other products, including the Triage C. DIFFICILE Panel, and Triage Cardiac
System, and to gain additional acceptance of the Triage DOA Panel in new
market segments, such as occupational health.
The Company has received FDA approval to market the Triage C. DIFFICILE
Panel, and Triage Cardiac System. However, it must complete an internal
validation of the manufacturing processes for the new products, in compliance
with FDA standards, prior to their sale.
There can be no assurance that the Company will be able to successfully
develop and commercialize new products, including the Triage C. DIFFICILE Panel,
and Triage Cardiac System, or that the Company will be able to maintain or
expand its share of the drug testing market. Technological change or the
development of new or improved diagnostic technologies could result in the
Company's products becoming obsolete or noncompetitive. See "Business --
Products and Products Under Development."
DEPENDENCE ON KEY DISTRIBUTORS; LIMITED DIRECT SALES EXPERIENCE
The Company relies upon key distributor alliances with Fisher and Merck to
distribute the Triage DOA Panel and may rely upon distributors to distribute
products under development. The Triage DOA Panel is currently marketed pursuant
to exclusive distribution agreements in the U.S. hospital market segment by
Fisher (which accounted for 80% of product sales in 1997) and in certain
countries in Europe, Latin America, the Middle East, Asia and Africa by Merck.
The loss or termination of either of these distributors could have a material
adverse effect on the Company's sales unless suitable alternatives can be
arranged.
As a result of a decision by Merck to refocus away from certain aspects of
the human diagnostic business, the Company terminated the development and
distribution agreement for the Triage Cardiac Panel with Merck in December 1997.
Upon termination, the Company paid a $2.1 million cash payment and forgave
approximately $1.3 million owed to the Company by Merck related to the
development of the Triage Cardiac Panel and Triage Meter. Additionally,
effective December 1998, the Company terminated its agreement with Merck
regarding international distribution rights for the Triage DOA Panel product
line. The Company is evaluating product distribution alternatives for the
international markets, including, among other things, alliances with other
distribution partners and the establishment of a direct sales force in certain
European countries.
With the potential launch of new products from the Company's development
pipeline, the Company is evaluating distribution alternatives for its current
products and potential new products. As a result, the Company has increased the
size of its sales force in the U.S. and is negotiating a new long-term
distribution alliance with the Fisher. The long-term distribution arrangement
with Fisher would expand its role to include the distribution of the Triage
Cardiac System, the Triage C. DIFFICILE Panel and certain of the potential new
products in the U.S. medical market.
There can be no assurance that the Company will be able to enter into these
or other distribution agreements on acceptable terms, if at all. If the Company
elects to distribute products directly, there can be no assurance that the
Company's direct sales, marketing and distribution efforts would be successful.
A failure to enter into acceptable distribution agreements or a failure of the
Company to successfully market its products would have a material and adverse
effect on the Company.
If any of the Company's distribution or marketing agreements are terminated
and the Company is unable to enter into replacement agreements or if the Company
elects to distribute new products directly, the Company would have to invest in
additional sales and marketing resources, including additional field sales
personnel, which would significantly increase future sales and marketing
expenses. The Company currently has limited experience in direct sales,
marketing and distribution of its products. There can be no assurance that the
Company's direct sales, marketing and distribution efforts would be successful
or that revenue from such efforts would exceed expenses. Further, there can be
no assurance that Biosite would be able to enter into new distribution or
marketing agreements on satisfactory terms, if at all, or if the Company elects
to distribute potential new products directly that the
-21-
Company's direct sales, marketing and distribution efforts would be
successful. See "Business -- Strategic and Distribution Arrangements."
The Company anticipates that it may, if appropriate, enter into additional
distribution agreements with respect to its products currently under development
and products that it develops in the future, if any of such products receive the
requisite regulatory clearance or approvals. There can be no assurance that the
Company will be able to enter into such agreements on acceptable terms, if at
all.
INTENSELY COMPETITIVE INDUSTRY; RAPID TECHNOLOGICAL CHANGE
The market in which the Company competes is intensely competitive.
Biosite's competitors include health care companies that manufacture
laboratory-based tests and analyzers, as well as clinical reference
laboratories. Currently, the majority of diagnostic tests used by physicians and
other health care providers are performed by independent clinical reference
laboratories and hospital-based laboratories. The Company expects that these
laboratories will compete vigorously to maintain their dominance of the testing
market. In order to achieve market acceptance for its products, the Company will
be required to demonstrate that its products provide cost-effective and time
saving alternatives to tests performed by clinical reference laboratories or
traditional hospital-based laboratory procedures. This will require physicians
to change their established means of having such tests performed. There can be
no assurance that the Company's products will be able to compete with the
testing services provided by traditional laboratory services. In addition,
companies with a significant presence in the diagnostic market, such as Abbott
Laboratories, Roche Boehringer Mannheim Corporation, Chiron Diagnostics,
Clinical Diagnostic Systems, a division of Johnson & Johnson, and DADE Behring
Marburg Gmbh, have developed or are developing diagnostic products that do or
will compete with the Company's products. These competitors have substantially
greater financial, technical, research and other resources and larger, more
established marketing, sales, distribution and service organizations than the
Company. Moreover, such competitors offer broader product lines and have greater
name recognition than the Company, and offer discounts as a competitive tactic.
In addition, several smaller companies are currently making or developing
products that compete with or will compete with those of the Company. There can
be no assurance that the Company's competitors will not succeed in developing or
marketing technologies or products that are more effective or commercially
attractive than the Company's current or future products, or that would render
the Company's technologies and products obsolete. Moreover, there can be no
assurance that the Company will have the financial resources, technical
expertise or marketing, distribution or support capabilities to compete
successfully in the future. In addition, there can be no assurance that
competitors, many of which have made substantial investments in competing
technologies that may be more effective than the Company's technologies, will
not prevent, limit or interfere with the Company's ability to make, use or sell
its products either in the United States or in international markets. See
"Business -- Technology," " -- Products and Products Under Development" and
"-- Competition."
UNCERTAINTY OF PATENT AND PROPRIETARY TECHNOLOGY PROTECTION; POTENTIAL
INABILITY TO LICENSE TECHNOLOGY FROM THIRD PARTIES
The Company's ability to compete effectively will depend in part on its
ability to develop and maintain proprietary aspects of its technology, and to
operate without infringing the proprietary rights of others or to obtain
licenses to such proprietary rights. Biosite has U.S. and foreign issued patents
and is currently prosecuting patent applications in the United States and with
certain foreign patent offices. There can be no assurance that any of the
Company's pending patent applications will result in the issuance of any
patents, that the Company's patent applications will have priority over others'
applications, or that, if issued, any of the Company's patents will offer
protection against competitors with similar technology. There can be no
assurance that any patents issued to the Company will not be challenged,
invalidated or circumvented in the future or that the rights created thereunder
will provide a competitive advantage.
The Triage DOA Panel, Triage C. DIFFICILE Panel, Triage Cardiac System and
products under development may incorporate technologies that are the subject of
patents issued to, and patent applications filed by, others. The Company has
obtained licenses for certain technologies and is negotiating to obtain licenses
for technologies patented by others. However, there can be no assurance that the
Company will be able to obtain licenses for technology patented by others on
commercially reasonable terms, if at all, that it will be able to develop
alternative approaches if it is unable to obtain licenses or that the Company's
current and future licenses will be adequate for the operation of Biosite's
business. The failure to obtain necessary licenses or to identify and implement
alternative approaches would prevent the Company from commercializing certain of
its products under development and would have a material
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adverse effect on the Company's business, financial condition and results of
operations.
Litigation may be necessary to enforce any patents issued to the Company,
to protect trade secrets or know-how owned by the Company or to determine the
enforceability, scope and validity of the proprietary rights of others. In March
1996, the Company settled a potential patent infringement claim by obtaining a
license to the contested patent in return for a one-time payment of $2.2
million. In September 1996, the Company settled a patent infringement claim
filed by Abbott Laboratories and obtained a license to the contested patent in
return for the payment of $5.5 million and the agreement to pay certain
royalties. In September 1997, the Company was named in a lawsuit filed by
Behring Diagnostics GmbH and Behring Diagnostics, Inc. ("Behring") alleging that
the Company's Triage DOA Panel products infringe a patent held by the
plaintiffs, which expires in August, 2000. The plaintiffs seek to recover
damages of an unspecified amount and to enjoin future sales of the Triage DOA
Panel products by the Company. The Company has reviewed the cited patent and
believes it has meritorious defenses. The Company intends to vigorously defend
its position, and may incur significant legal costs in executing its defense. In
January 1998, the Company amended its answer to the claims of the Behring
lawsuit to include antitrust counterclaims against Behring. The Company has
sought an injunction requiring Dade International Inc. to divest itself of its
recent acquisition of Behring Diagnostics, Inc. and Behring Diagnostics GmbH,
treble monetary damages and attorney fees. If the Company's Triage DOA Panel
products were found to infringe such patent, and if an acceptable license was
not available, the Company would be materially and adversely affected. The
Company's Triage Meter platform, including the Triage Cardiac System is not the
subject of the patent infringement claims as filed. The Company may become
subject to additional patent infringement claims and litigation or interference
proceedings conducted in the U.S. Patent and Trademark Office ("USPTO") to
determine the priority of inventions.
The Company has received a letter from Spectral Diagnostics, Inc.
("Spectral"), a manufacturer of rapid-format cardiac-diagnostic panels,
informing the Company that Spectral holds U.S. patents covering a kit for
diagnosing and distinguishing chest pain. This letter stated that Spectral has
not yet determined its position with respect to the licensing of its technology.
Spectral subsequently informed the Company that it received a notice of
allowance from the USPTO with respect to another patent application and the
Company has learned that another patent relating to methods and diagnostic kits
for the diagnosis of chest pain has been issued to Spectral. The Company has
asked Spectral for a clarification of its position, but Spectral has refused to
state whether it will or will not allege infringement of its patents by the
Triage Cardiac Panel once that product is launched. The Company is continuing it
s review of the issued patents cited in this letter and is evaluating their
potential impact on the Triage Cardiac System. Spectral may initiate litigation
alleging that the Triage Cardiac Panel infringes claims under their patents. The
litigation, if initiated, could seek to recover damages as a result of any sales
of the product and to enjoin further sales.
The Company also has received correspondence from other parties calling to
the Company's attention the existence of certain patents for which they believe
Biosite's products and products under development may incorporate technologies
that are the subject of such patents. Such correspondence has in certain
instances included offers to negotiate the licensing of the patented
technologies. There can be no assurance that such matters will not result in
litigation to determine the enforceability, scope, and validity of the patents.
Litigation, if initiated, could seek to recover damages as a result of any sales
of the products and to enjoin further sales of such products.
The Behring litigation and any other litigation that could be brought forth
by other parties may result in material expenses to the Company and significant
diversion of effort by the Company's technical and management personnel,
regardless of the outcome. The outcome of litigation is inherently uncertain and
there can be no assurance that a court would not find the third-party claims
valid and that the Company had no successful defense to such claims. An adverse
outcome in litigation or the failure to obtain a necessary license could subject
the Company to significant liability and could prevent the Company from selling
the Triage DOA Panel, Triage C. DIFFICILE Panel or the Triage Cardiac System,
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company also relies upon trade secrets, technical know-how and
continuing invention to develop and maintain its competitive position. There can
be no assurance that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
the Company's trade secrets or disclose such technology, or that the Company can
meaningfully protect its trade secrets, or that the Company will be capable