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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 27, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER: 0-26126
SEROLOGICALS CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 58-2142225
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
780 PARK NORTH BLVD., STE. 110 30021
ATLANTA, GEORGIA (Zip Code)
(Address of principal
executive offices)
(404) 296-5595
(Registrant Telephone Number Including Area Code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF EACH CLASS
Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past (90) days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K / /
The aggregate market value of the shares of common stock held by
non-affiliates (based upon the closing sale price on The Nasdaq Stock Market) on
March 15, 1999 was approximately $381,140,000. As of March 15, 1999, there were
24,645,282 shares of Common Stock, $0.01 par value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the definitive proxy statement for the Annual Meeting of
Stockholders (which will be filed pursuant to Regulation 14A within 120 days of
the close of the Registrant's fiscal year ended December 27, 1998) shall be
deemed to be incorporated by reference in Part III.
TABLE OF CONTENTS
PART I.
Item 1. Business.................................................................... 4
Item 2. Properties.................................................................. 16
Item 3. Legal Proceedings........................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders......................... 16
Item 4a. Executive Officers and Key Employees of the Registrant...................... 17
PART II.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters... 19
Item 6. Selected Financial Data..................................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................. 21
Item 7a. Quantitative and Qualitative Disclosures about Market Risk.................. 31
Item 8. Financial Statements and Supplementary Data................................. 31
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.................................................................. 31
PART III.
Item 10. Directors and Executive Officers of the Registrant.......................... 31
Item 11. Executive Compensation...................................................... 31
Item 12. Security Ownership of Certain Beneficial Owners and Management.............. 31
Item 13. Certain Relationships and Related Transactions.............................. 31
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............. 32
SIGNATURES............................................................................. 35
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PART I.
THIS ANNUAL REPORT ON FORM 10-K CONTAINS CERTAIN "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995, WHICH GENERALLY CAN BE IDENTIFIED BY THE USE OF FORWARD LOOKING
TERMINOLOGY SUCH AS "MAY," "WILL," "EXPECT," "INTEND," "ESTIMATE," "ANTICIPATE,"
"BELIEVE" OR "CONTINUE" OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR
SIMILAR TERMINOLOGY, AND/OR WHICH INCLUDE WITHOUT LIMITATION, STATEMENTS
REGARDING THE FOLLOWING:
- SEROLOGICALS CORPORATION'S (AND ITS SUBSIDIARIES, COLLECTIVELY, THE
"COMPANY") INTERNAL AND EXTERNAL GROWTH STRATEGIES, INCLUDING THE
COMPANY'S ABILITY TO CREATE ECONOMIES OF SCALE THROUGH ITS ABILITY TO
COMPLETE ACQUISITIONS AND ITS LONG TERM GROWTH PROSPECTS;
- THE IMPACT OF COMPETITION, INCLUDING INCREASED COMPETITION FOR ANTI-D
ANTIBODIES;
- THE EFFECT OF THE COMPANY'S EXPANDED MONOCLONAL MANUFACTURING FACILITIES;
- CERTAIN TRENDS IN THE INDUSTRY, INCLUDING INCREASED DEMAND FOR AND A
LIMITED SUPPLY OF ANTIBODIES AND ANTIBODY-BASED PRODUCTS IN GENERAL;
INCREASED REGULATORY SCRUTINY BY THE FOOD AND DRUG ADMINISTRATION ("FDA"),
IN PARTICULAR, TEAM BIOLOGICS, ITS EFFECT ON DONORS AND CUSTOMERS AND THE
COMPANY'S ABILITY TO RESPOND; CHANGING CUSTOMER SPECIFICATIONS AND
EVOLVING INDUSTRY AND CUSTOMER STANDARDS AND CUSTOMER DEMAND FOR HIGHER
QUALITY AND VALUE ADDED SERVICES;
- THE IMPACT OF THE YEAR 2000 ISSUE, THE ABILITY OF THE COMPANY TO ACHIEVE
YEAR 2000 COMPLIANCE IN A TIMELY AND EFFECTIVE MANNER AND THE RELATED COST
TO ACHIEVE SUCH COMPLIANCE;
- THE IMPACT OF THE NEW BIOLOGIC LICENSE (BLA) REGULATIONS;
- THE IMPACT OF THE POTENTIAL LOSS OF DONORS DUE TO THE IMPOSITION OF NEW
BLOOD SAFETY MEASURES;
- INCREASED DEMAND FOR ANTI-D, AND THE COMPANY'S ADVANTAGE REGARDING ITS
ON-GOING ABILITY TO CONTINUE TO PRODUCE ADEQUATE QUANTITIES OF ITS
PROPRIETARY ANTI-D VACCINES;
- INCREASED DEMAND FOR ITS LINE OF EX-CYTE-REGISTERED TRADEMARK- AND BOVINE
ALBUMIN PRODUCT LINES;
- THE IMPACT OF DELAYED OR REDUCED SALES TO CERTAIN CUSTOMERS ON THE COMPANY
AND ITS OPERATIONS;
- CERTAIN POTENTIAL PRODUCT AND SERVICE DEVELOPMENT EFFORTS THE COMPANY MAY
PURSUE OR WHICH ARE CURRENTLY UNDERWAY;
- THE EXPECTED LEVEL OF CAPITAL EXPENDITURES IN 1999 AND THE SUFFICIENCY OF
CAPITAL AND LIQUIDITY TO MEET WORKING CAPITAL, CAPITAL EXPENDITURE AND
OTHER ANTICIPATED CASH REQUIREMENTS OVER THE NEXT TWELVE MONTHS AND
AVAILABILITY OF CAPITAL RESOURCES FOR USE IN THE COMPANY'S ACQUISITION
STRATEGY; AND
- THE RENEWAL OF CERTAIN AGREEMENTS, INCLUDING LEASES COVERING ITS DONOR
CENTERS AND THE AUTOMATIC RENEWAL OF CERTAIN LONG-TERM CUSTOMER CONTRACTS.
THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES
AND OTHER FACTORS WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY,
INCLUDING BUT NOT LIMITED TO:
- THE COMPANY'S ABILITY TO ATTRACT AND RETAIN QUALIFIED DONORS;
- THE COMPANY'S ABILITY TO MAINTAIN AND EXPAND ITS CUSTOMER BASE;
- THE COMPANY'S ABILITY TO GENERATE SUFFICIENT CASH FLOWS TO SUPPORT ITS
INTERNAL AND EXTERNAL GROWTH STRATEGIES;
- THE COMPANY'S ABILITY TO IDENTIFY AND CONSUMMATE SUITABLE ACQUISITIONS IN
THE FUTURE AND TO INTEGRATE AND MANAGE THEM;
- THE COMPANY'S ABILITY TO COMPLETE THE EXPANSION OF ITS PROTEIN
FRACTIONATION FACILITY IN KANKAKEE, ILLINOIS ON SCHEDULE AND TO IMPLEMENT
SUCCESSFULLY NEW PROCESSES AND TECHNOLOGIES;
- CHANGES IN LAWS AND REGULATIONS THAT COULD AFFECT THE COMPANY'S ABILITY TO
OBTAIN ADDITIONAL AND MAINTAIN EXISTING REGULATORY LICENSES AND APPROVALS;
- THE EFFECT OF COMPETITION FOR CUSTOMERS, DONORS OR OTHERWISE;
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- THE EFFECT OF REGULATORY SCRUTINY;
- POTENTIAL FUTURE TECHNOLOGIES THAT COULD LESSEN OR ELIMINATE THE NEED FOR
ANTIBODIES AND OTHER PLASMA-BASED PRODUCTS;
- CHANGES IN INDUSTRY TRENDS, CUSTOMER SPECIFICATIONS, MARKET DEMAND AND
POTENTIAL FOREIGN RESTRICTIONS OF THE IMPORTATION OF THE COMPANY'S
PRODUCTS THAT COULD IMPACT INTERNAL AND EXTERNAL GROWTH, EARNINGS AND
MARKET SHARE;
- THE COMPANY'S DEPENDENCE ON A FEW MAJOR CUSTOMERS AND SUPPLIERS AND ITS
ABILITY TO MAINTAIN FAVORABLE SUPPLIER AGREEMENTS AND RELATIONSHIPS WITH
THEM; AND
- THE COMPANY'S SUBSTANTIAL RELIANCE ON TWO PRODUCTS, ANTI-D AND
NON-SPECIALTY ANTIBODIES DERIVED FROM SOURCE PLASMA.
ITEM 1. BUSINESS
The Company is a leading worldwide provider of specialty human antibodies
and other blood-related products and services to major healthcare companies. The
Company's services, including donor recruitment, donor management and clinical
testing services, enable the Company to provide value-added specialty antibodies
that are used as the active ingredients in therapeutic products for the
treatment and management of such medical indications as Rh incompatibility in
newborns, rabies and hepatitis and in diagnostic products such as blood typing
reagents and diagnostic test kits. In addition, the Company collects source
plasma containing non-specialty antibodies from which a number of products,
primarily intravenous immune globulin (IVIG), a product containing a broad
spectrum of antibodies used in the treatment of a wide variety of medical
indications, are derived. As of March 15, 1999, the Company conducted its
operations through a national network of 64 donor centers and through
laboratories located in the United States and the United Kingdom. The Company
also operates two monoclonal antibody manufacturing facilities in Scotland.
Furthermore, the Company operates a clinical trial site dedicated to the
management and performance of clinical trials for the pharmaceutical and
biotechnology industries. On December 29, 1998, subsequent to year end, the
Company purchased substantially all of the domestic assets of Pentex Blood
Proteins ("Pentex"), a unit of Bayer Corporation. Located in Kankakee, Illinois,
Pentex supplies a broad line of purified animal and human blood proteins to the
diagnostic and biopharmaceutical industries.
INDUSTRY OVERVIEW
The human blood products and services industry encompasses a number of
markets, with products ranging from whole blood, which is used for direct
transfusions, to blood components, such as source plasma, specialty and
non-specialty antibodies found in source plasma and other specialty biologic
components. Source plasma, the clear liquid portion of blood characterized by
non-specific concentrations of antibodies, is used to manufacture many products
that treat a variety of medical indications. Antibodies are soluble components
contained in plasma which are produced by the immune system to fight specific
diseases. Other derivative products of source plasma include albumin, used to
treat shock and burn patients, and clotting factors such as Factor VIII
Concentrate and Factor IX Concentrate, used primarily by hemophiliac patients.
The industry is generally divided into two distinct sectors. The largest
sector of the industry is comprised of non-profit organizations, such as the
American Red Cross and community blood banks, which supply whole blood and other
transfusible products to hospitals. Conversely, the commercial sector of the
industry is focused primarily on supplying source plasma, specialty and
non-specialty antibodies and specialty biologic components to healthcare
companies which further process these components into therapeutic and diagnostic
products.
The therapeutic segment of the commercial sector includes products
consisting of specialty antibodies and cells, as well as non-specific, or
non-specialty, antibodies and source plasma. Specialty antibodies are typically
used to manufacture products for treating persons exposed to, or at risk of,
contracting a specific
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disease. Specialty antibodies used for therapeutic purposes range from those
used to treat medical indications such as tetanus and rabies, which the Company
believes generally sell for approximately $90 to $110 per liter, to high-end
products such as anti-D, an antibody used to treat Rh incompatibility in
newborns and anti-hepatitis, which the Company believes generally sell for
approximately $400 to $600 per liter. By comparison, the average industry gross
price of source plasma, from which IVIG and other products are derived, is
approximately $85 to $90 per liter.
Antibodies, both human sourced as well as those in monoclonal form, are also
used to make diagnostic products used to screen patients for prior exposure to a
specific disease or to determine blood type. Polyclonal and monoclonal
antibodies used in diagnostic products such as blood typing reagents and
diagnostic test kits generally sell for $0.95 per milliliter to $6.50 per
milliliter, with some rare antibodies selling for as high as $20.00 per
milliliter.
The Company believes that there are a number of factors increasing the
demand for antibodies and antibody-based products in general. In the treatment
of certain diseases such as rabies and Rh incompatibility in newborns,
antibody-based products are recognized as the only generally accepted treatment
or prevention for such diseases. In addition, medical and scientific advances
are increasing the demand for antibodies for new indications and improved
therapies. For example, while there are only six FDA-approved uses for IVIG, the
Company believes there are approximately 60 medical conditions for which it is
currently being used or clinically examined as a treatment. The Company also
believes that cost containment in healthcare is spurring the demand for
alternatives to antibiotics and vaccines, such as the use of antibody-based
products for disease management. Additionally, increasing regulation and
concerns relating to blood safety are causing demand for a broader array of
antibody-based diagnostic tests used to evaluate blood samples. The demand for
more diverse diagnostic tests is also increasing as world population migration
is spreading diseases, which were once confined to specific geographic areas.
The Company also believes that the aging of the U.S. population is increasing
the demand for antibody-based products that are as efficacious as, but less
toxic than, many alternative treatment regimens. Recently, the industry has been
experiencing critical shortages of certain end products, most notably IVIG.
The Company believes that there are a number of factors that are limiting
the supply of commercially available human antibodies. The supply of antibodies
has been adversely affected by the more rigorous screening procedures required
by regulatory authorities, in particular the FDA and certain German regulatory
bodies, industry trade organizations and manufacturers of the various end
products. These procedures, which include a more extensive investigation into a
donor's background, new tests to detect the presence of disease-causing
organisms and other limitations on donors such as age restrictions, have
disqualified numerous potential donors and discouraged other donors who may be
reluctant to undergo the screening procedures. Furthermore, the Company believes
that, owing in part to the general strength of the national economy, the
financial incentives provided to donors may be less attractive as compensation
for their time, further decreasing the pool of potential donors. Also, as
customers require increasingly higher concentrations of specialty antibodies,
the qualified pool of donors is further reduced. These customer requirements
have resulted in an increasing need to boost the concentration of specialty
antibodies in donors through vaccination or immunization. Furthermore, the
length of time required to be granted regulatory licenses for antibody
collection sites (donor centers), testing facilities and biological products is
significant.
The Company believes that in addition to the factors discussed above, this
shortage has been caused by several company specific manufacturing, regulatory
or other issues facing the manufacturers of this product, as well as by recalls
of product manufactured with antibodies obtained from donors who are
subsequently discovered to have had Creutzfeld-Jakob disease ("CJD"). See
"Government and Industry Regulation" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations-Overview".
In addition to the demand and supply factors discussed above, the industry
continues to experience a number of other trends. One such trend is the movement
by healthcare companies towards obtaining
5
antibodies and other biologic products and services from a fewer number of
suppliers who can supply a wider array of products and services. The resulting
enhanced relationships between healthcare companies and these suppliers have
resulted in an increased tendency of some major healthcare companies to
outsource essential complex regulatory, testing and specialized manufacturing
activities. For example, during 1998, the Company commenced laboratory testing
services on the majority of the non-specialty antibodies sold to its largest
customer, a service that was previously performed by the customer. In addition,
the increased regulatory environment, as well as the increasing preference of
customers for value-added services, requires suppliers to have a high level of
expertise and capital resources. Primarily as a result of these trends, the
industry has been undergoing a consolidation for several years.
OPERATIONS
As of March 15, 1999, the Company conducted its operations through a
national network of 64 donor centers and through laboratories located in the
United States and the United Kingdom. The Company also operates two monoclonal
production facilities in Scotland, a purified blood proteins fractionation
facility in Kankakee, IL and a clinical trial site.
DONOR RECRUITMENT. The Company obtains the significant majority of its
specialty antibodies from donors with high concentrations of the antibodies
sought. The Company maintains an active communications network with medical
professionals and healthcare organizations nationwide to assist in identifying
these donors. The majority of the Company's 17 specialty donor centers are
strategically located on or near medical campuses, enhancing the Company's
ability to source specialty antibodies from medical community referrals. In
addition, the Company is able to identify and react rapidly to disease outbreaks
in order to recruit suitable donors for specialty antibodies created by such
specific diseases. The Company actively seeks to maintain and replenish its
donor base for its specialty therapeutic and diagnostic products and maintains
an ongoing program to recruit donors and make medical professionals aware of its
capabilities and needs.
One trend that the Company has experienced recently is an increased
difficulty in recruiting and retaining donors of non-specialty antibodies. The
Company believes that owing in part to the general strength of the national
economy, the financial incentives provided to these donors may be less
attractive as compensation for their time. While the Company is currently
pursuing various alternatives to increase production at its non-specialty donor
centers, there can be no assurance that such efforts will be successful, or that
any adverse effect from these trends will not be material.
DONOR SCREENING AND PRODUCT COLLECTION. Each donor candidate undergoes a
process that includes an explanation of the donation procedure and how the
antibodies they are donating are subsequently used, extensive physiological and
biological screening, a physical examination and the collection of test samples.
In addition, donors of specialty antibodies undergo further qualification
profiling. Once a candidate is accepted as a donor, the Company may collect
antibodies from the donor at its donor centers through an FDA-approved
collection procedure known as plasmapheresis, which lasts between 40 and 60
minutes and is very similar to donating blood. However, since red blood cells
are returned to the donor by means of centrifugation, individuals may donate as
frequently as twice per week. Each donation is quarantined at the donor center
while test samples are sent to the Company's central laboratory, or in some
cases, its customers' laboratories, for FDA-mandated viral marker screening
tests (e.g., hepatitis, HIV, etc.) and in the case of specialty antibodies,
characterization (i.e., special analytical tests to identify and measure the
quality and concentration of the targeted antibodies). Furthermore, voluntary
industry standards require that each first time donor's ("Applicant Donor")
donation be quarantined until such time that a second donation is received from
the Applicant Donor and appropriate test results are obtained on both donations.
If a second donation is not received from the Applicant Donor within six months,
the initial donation must be destroyed. Once these two donations and their test
results are complete and acceptable, the Applicant Donor becomes a "qualified
donor" and all future donations are generally available for immediate shipment
once the mandated tests have been completed.
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PRODUCT CHARACTERIZATION. The Company characterizes the specialty
antibodies it collects to ensure that the concentration of antibodies meets
customer specifications. The Company maintains extensive data on each of its
donors for both regulatory compliance and quality assurance. This database
enhances the Company's donor tracking and monitoring capabilities, which help
assure the quality of the antibodies for its customers. The ability to
accurately characterize and trace the source of antibodies adds value to the
products for the customer by replacing steps the customer might otherwise have
to perform.
DONOR MANAGEMENT. Through communication and incentive programs and an
emphasis on customer service, the Company encourages full and continuing
participation by its donors. As an integral part of donor management, the
Company's staff continually communicates with donors to reinforce their
commitment. The Company has personnel and programs designed to make each visit
to the donor center a smooth, comfortable and safe experience. The Company's
expertise in donor management has enabled it to retain many donors for years of
repeated, regular donations, thereby enhancing the Company's profitability. The
Company's specialty donors typically donate once or twice per week, with many
having continued as donors for ten years or greater. A significant portion of
the Company's rare specialty antibody donors have entered into contracts with
the Company pursuant to which they have agreed to donate exclusively to the
Company for a three-year period.
IMMUNIZATION. In response to customer demands for higher quality products,
the Company's specialty donor centers are actively involved in the immunization
of the majority their specialty antibody donors. In addition, certain of the
Company's non-specialty donor centers are licensed to immunize donors for
certain specialty antibodies. Immunization is the use of FDA-approved vaccines
to stimulate the development or heighten the concentration of already existing
specialty antibodies in the donor. Although vaccines to conduct immunization for
several of the Company's products are commercially available, the Company
believes it has a competitive advantage through its existing inventory of, and
ongoing ability to produce, its own proprietary FDA-approved vaccine to produce
anti-D antibodies in donors. In some cases, antibody-producing white cells are
also collected from immunized donors and used to develop monoclonal products for
diagnostic use.
MONOCLONAL ANTIBODY PRODUCTION. In addition to collecting antibodies from
its donors, the Company, through its Serologicals, Ltd. subsidiary, formerly
known as Bioscot, Ltd. ("Bioscot"), produces monoclonal, or cloned, antibodies
from over 45 cell lines. The Company's FDA-licensed monoclonal manufacturing
facilities in Edinburgh and Livingston, Scotland produce monoclonal antibodies
from cells derived through the Company's donor network or acquired from other
laboratories. Currently, all monoclonal antibodies manufactured by the Company
are used in diagnostic products such as blood typing reagents. Through this
monoclonal manufacturing capability, the Company has been able to introduce
additional, second generation, human monoclonal products and also begin to sell
finished products outside the United States, such as its value-added line of OEM
and branded blood typing reagents. In 1998, the operations of Bioscot
represented the majority of the business conducted by the Diagnostic Products
segment.
BLOOD PROTEIN FRACTIONATION. As a result of its acquisition of Pentex
subsequent to year end, the Company, through its manufacturing facility in
Kankakee, IL, isolates specific proteins contained primarily in animal sera or
plasma through specialized manufacturing processes known as protein
fractionation. The Company utilizes core technologies such as organic solvent
precipitation, heat shock, molecular and microporous filtration, ion-exchange
chromatography and salt precipitation to isolate and purify major plasma protein
classes (e.g., albumin, gamma globulin, transferrin, lipoproteins and clotting
factors). The resulting blood protein product line is sold worldwide in over 25
countries, primarily to healthcare companies that manufacture blood typing or
other diagnostic reagents, as well as to biopharmaceutical companies for use in
tissue culture media.
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PRODUCTS
Through its value-added services, the Company provides antibodies that serve
as the active ingredients in certain therapeutic and diagnostic products
manufactured by major healthcare companies. The Company's customers generally
further process these products. The Company also sells certain antibodies for
blood typing reagents directly to end-users. In 1998, the Company derived
approximately 83% of its net sales from the Therapeutic Products segment, a
substantial majority of which related to anti-D and non-specialty antibodies,
and approximately 16% of its net sales from its Diagnostic Products segment, the
majority of which related to blood typing reagents and antibodies used in
diagnostic test kits. The remaining sales were generated by miscellaneous
products and services. Subsequent to year end, the Company, through its
acquisition of Pentex, commenced selling a line of animal protein products for
use in diagnostic reagents and as tissue media components for use in
biopharmaceutical therapeutic products.
Therapeutic Products
Therapeutic end products produced by the Company's customers for which it
supplies the majority of its antibodies include the following
SPECIALTY ANTIBODIES
ANTI-D IMMUNE GLOBULIN ("ANTI-D"). Since 1968, anti-D immune globulin, also
known as Rh immune globulin, has been prescribed by obstetricians to prevent Rh
incompatibility in newborns ("RhHDN"). This sometimes-fatal condition affecting
Rh positive infants born to Rh-negative women is due to the incompatibility of
the blood of an Rh-negative mother and her Rh-positive child. Anti-D immune
globulin is also used in the treatment of Idiopathic Thrombocytopenic Purpura
("ITP") in immunocompromised patients. ITP, which is common in HIV positive
patients, is a disease that is characterized by destruction of the patient's
platelets, which, if untreated, can result in internal hemorrhaging and
ultimately, death. This condition is estimated to affect up to 100,000
Americans.
The Company believes that demand for anti-D antibodies used in the treatment
of RhHDN has generally followed the birth rate of developed countries. The
Company believes that, on a longer-term basis, worldwide demand for anti-D
antibodies could increase as its use as a treatment for ITP becomes more widely
accepted.
ANTI-RABIES IMMUNE GLOBULIN ("ANTI-RABIES"). Anti-rabies immune globulin
therapy is prescribed for individuals suspected of recent exposure to the rabies
virus. Rabies is commonly transmitted by infectious saliva from the bite of a
rabid animal. Anti-rabies is administered as promptly as possible after exposure
and consists of antibodies directed against the live virus particles with which
the patient may be infected. In the post-exposure treatment regimen, anti-rabies
is administered in conjunction with a rabies vaccine, which is used to provide
the patient with an additional active immunity to the rabies virus.
ANTI-HEPATITIS IMMUNE GLOBULIN ("ANTI-HBS"). The traditional use for
anti-HBs is for the prevention of hepatitis in individuals who are at risk of
contracting, or have had recent exposure to, the hepatitis B virus. In addition,
anti-HBs is used for intensive treatment of liver transplant patients.
NON-SPECIALTY ANTIBODIES
INTRAVENOUS IMMUNE GLOBULIN ("IVIG"). IVIG is derived from source plasma and
is comprised of a broad spectrum of antibodies. IVIG is used in the treatment of
many medical indications, primarily for patients with suppressed immune systems,
to help build the body's defense against exposure to life threatening diseases.
OTHER. The Company has on occasion supplied antibodies used in the
treatment of respiratory syncytial virus, a virus affecting the respiratory
tract, and cytomegalovirus, a herpes virus for which individuals with
compromised immune systems are most at risk.
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Diagnostic Products
The primary products produced and sold by the Diagnostic Products segment
include the following:
ANTIBODIES FOR BLOOD TYPING REAGENTS. Blood typing reagents are used by
blood banks and hospital transfusion services worldwide to assure compatibility
between the recipient and the donor's blood type. Historically, blood typing
reagents were made primarily from human sourced, or polyclonal, antibodies. More
recently, monoclonal antibodies have been developed to provide certain high
quality antibodies on a consistent basis, and many of these are now FDA approved
for diagnostic purposes. The Company currently provides over 80 different
antibodies used in the production of blood typing reagents that the Company
believes provide it with a competitive advantage in this market due to the
desire of customers to buy an entire panel of different antibodies for blood
typing reagents from one manufacturer. While the majority of these antibodies
are in monoclonal form, the Company continues to collect human-sourced
polyclonal antibodies that are used in diagnostic products.
CLINICAL DIAGNOSTIC ANTIBODIES. Through its expertise in donor recruiting,
the Company is able to locate and recruit donors who can provide antibodies and
other biological specimens that are known to be positive or negative for a
specific disease or infection. The Company provides these biological specimens
for use in clinical diagnostic test kit controls. The diseases for which the
Company sources clinical diagnostic antibodies include, among others, CMV,
rheumatoid arthritis, toxoplasmosis, hepatitis and HIV. The Company's recruiting
capability is complemented by extensive in-house experience in the laboratory
disciplines of immunohematology, immunology, serology and clinical chemistry to
characterize human specimens to meet manufacturers' requirements.
ANIMAL BLOOD PROTEINS. Through its acquisition of Pentex subsequent to its
fiscal year end, the Company provides a wide range of approximately 90 distinct
animal protein products derived from five different animal species. These
products, such as bovine serum albumin (BSA), are primarily supplied to
healthcare companies for use in diagnostic reagents. One of the primary uses of
bovine albumin is to enhance the detection of blood group antibodies, a
characteristic essential for the safe transfusion of whole blood. The Company
also provides a line of highly purified animal proteins known as tissue culture
media components that are used by biopharmaceutical companies as nutrient
additives in cell culture media. Examples of these media components are Bovine
EX-CYTE-Registered Trademark-, Growth Enhancement Media Supplement, produced
through a patented manufacturing process, and transferrin. Many of the
recombinant proteins currently used as therapeutic products are genetically
engineered in mammalian cells. In order for these cells to grow and produce,
they require nourishment that can be found from such sources as Bovine EX-CYTE,
which is rich in cholesterol, phospholipids and essential fatty acids, and
transferrin, a protein that provides the cells with the iron required for proper
cellular respiration to occur.
In order to meet current and expected demand for its line of EX-CYTE and
bovine albumin product lines, the Company is undergoing a significant, 17,000
square foot expansion of its protein fractionation facility in Kankakee,
Illinois. Demand for the acquired EX-CYTE product line has increased
significantly in recent years as the success rate of genetically engineered
proteins and other biotechnology products has increased. Furthermore, the Pentex
brand of bovine albumin has also seen recent growth, generally following the
growth rate of immunodiagnostic products.
PRODUCT AND SERVICE DEVELOPMENT
PRODUCTS
The Company is engaged in a number of near-term development projects
designed to enhance its existing product lines. These projects include the
development of more efficacious donor immunization protocols to increase yields
and the development of more efficient techniques for the manufacture of both
polyclonal and monoclonal antibodies. The Company is also exploring the
opportunity of providing monoclonal antibodies for use in diagnostic test kit
controls using the same approach that led to the Company's ability to
commercialize monoclonal antibodies for use in blood typing reagents.
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On a longer-term basis, the Company is evaluating several alternatives for
the development of a therapeutic monoclonal anti-D product. Monoclonal
production techniques eliminate the need for fractionation of the product and
may give the Company the ability to market more value-added finished therapeutic
products directly to end-users. While the Company is no longer actively
developing its own proprietary therapeutic anti-D product, it continues to
monitor the therapeutic monoclonal anti-D market and is pursuing strategic
alternatives, including future collaborations or partnerships with existing
research projects, to bring such a product to market.
Through its acquisition of Pentex, the Company is also involved in the
development of new process technologies and products that it believes will
ultimately add value to its blood proteins business. These technologies and
projects include developing scale-up technologies for the manufacture of bovine
serum albumin, protease-free; process improvement of the procedure used to
control the polymerization of bovine serum albumin; increasing capacity to
manufacture bovine and human transferrins; and further purification of Bovine
EX-CYTE into its critical components.
SERVICES
During 1998, the Company purchased a site specializing in the management and
performance of clinical trials for the pharmaceutical and biotechnology
industries. While the Company believes its expertise in regulatory and protocol
compliance, quality assurance, data management and donor recruitment enables it
to provide value-added clinical trial related services to the pharmaceutical and
biotechnology industries, it does not intend to pursue additional, individual
site acquisitions at this time. However, the Company is exploring introducing
these services at its existing donor centers or entering the market through a
multi-site acquisition.
The Company has also identified and investigated several potential niche
service offerings including, but not limited to, the collection of or therapy
involving therapeutic apheresis or plasma exchange and autologous blood and cell
collections. The Company believes it can take advantage of its existing
regulatory and donor center infrastructure to provide a lower-cost, value-added
setting for these services.
The Company believes a number of these and several other specialty service
areas also represent external growth opportunities where it can further leverage
its infrastructure and expertise. These include, but are not limited to, the
consolidation of existing therapeutic apheresis, cell salvage and other
transfusion related services which the Company believes currently are all highly
fragmented and emerging segments of the healthcare services industry.
There can be no assurance that the Company will be successful in the
implementation of any of its product or service initiatives.
MARKETING AND CUSTOMERS
The Company markets its products to over 200 customers worldwide, including
several major healthcare companies. However, in 1996, 1997 and 1998, sales to
the Company's top ten customers accounted for approximately 87%, 84% and 84%,
respectively, of total net sales. One of the Company's customers, Bayer
Corporation ("Bayer"), accounted for approximately 56%, 47% and 40% of the
Company's net sales in 1996, 1997 and 1998, respectively, while another
customer, Centeon Pharma GmbH, accounted for approximately 15%, 11% and 14% of
net sales in 1996, 1997 and 1998, respectively. During 1997, sales to Alpha
Therapeutic Corporation accounted for approximately 12% of net sales. During
1996, 1997 and 1998, no other single customer of the Company accounted for
greater than 10% of net sales. In 1996, 1997 and 1998, the Company's domestic
sales represented approximately 68%, 74% and 63%, respectively, of net sales.
THERAPEUTIC PRODUCTS
The majority of the Company's therapeutic products are sold through its own
sales force and, in limited markets, through independent brokers, to major
biological product manufacturers. The majority of
10
the Company's specialty antibodies for therapeutic use are sold pursuant to
annual purchase orders, with prices generally negotiated annually. The Company
is a party to four five-year supply contracts with Bayer for the sale of
non-specialty antibodies produced at a number of its non-specialty donor
centers. Such contracts, three of which expire in 1999 and one in 2002,
accounted for approximately 24% of the Company's net sales in 1998. After their
initial terms, the contracts are subject to automatic one-year renewals. At its
option, Bayer may also purchase any production in excess of the stipulated
minimums at the related donor centers. Targeted amounts to be purchased by Bayer
are subject to up to 20% reductions in any given year; however, the Company is
eligible to sell any excess production to other customers. The contracts are
subject to the maintenance of certain quality criteria, certain termination
events and production incentives. In addition, under certain of the contracts,
either Bayer or the Company can reduce, by up to 10%, the quantity supplied upon
notification. Early termination or the inability of the Company to renew the
agreements beyond their initial terms could have a material adverse effect on
the Company.
In connection with the Company's acquisition of Nations Biologics, Inc. and
its affiliates (the "Nations Group") in 1997, the Company acquired several
supply contracts with Alpha Therapeutics Corporation for the sale of
non-specialty antibodies collected at certain of the donor centers previously
operated by the Nations Group. The contracts vary in term, price and volume
levels, but are generally similar to the Company's other supply contracts for
non-specialty antibodies.
DIAGNOSTIC PRODUCTS
The Company's monoclonal and polyclonal antibodies are sold to more than 100
manufacturers or suppliers of blood typing reagents and independent brokers.
While a significant amount of the Company's monoclonal antibody sales are made
pursuant to supply agreements, the majority are regarded as spot sales. The
polyclonal blood typing reagent market can be characterized as a spot market
with limited advance sales and commitments to purchase typically made orally
after the customer receives a sample. Due to the technical nature of the
product, monoclonal antibodies used to manufacture blood typing reagents require
a highly trained and technical sales staff. The Company's sales and technical
support staff for this product is located in Scotland. The capabilities of the
Company's facilities and staff allow for the marketing of monoclonal antibodies
for blood typing in many forms, from unfinished product to finished, vialed and
branded product.
In 1998, the Company's clinical diagnostic antibodies were sold to more than
60 customers in 10 countries. Clinical diagnostic antibodies are primarily sold
to manufacturers of diagnostic test kits for incorporation as controls or for
use in product development projects. The Company maintains a separate sales
group dedicated to this product line due to the large number of customers
requiring personalized treatment and the special product knowledge required. The
Company is a "Preferred Provider" and sells a significant portion of its
clinical diagnostic antibodies pursuant to a supply contract with a customer
that expires in December 1999.
As a result of its acquisition of Pentex, the Company sells its line of
blood proteins products worldwide to over 200 customers in 25 countries. These
customers are generally healthcare companies that manufacture diagnostic
reagents or biopharmaceuticals. The Company's marketing strategy involves
identifying candidate customers, maintaining intimate knowledge of next
generation projects of these companies and creating working relationships with
the research teams of such companies. The Company believes that by competing at
the earliest development stages, it increases its potential for being a sole
source provider and learns more about the needs of developing technologies.
ACQUISITIONS
The commercial sector of the blood products and services industry is
undergoing a consolidation driven largely by the rising cost and complexity
related to increased regulatory compliance requirements. A
11
significant component of the Company's business strategy has and continues to
include acquisitions which enable the Company to participate in the
consolidation of the industry and to add complementary products and services
which will expand the Company's current product and service portfolio.
A significant factor in the Company's growth has been the acquisition of
donor centers. The Company intends to pursue the acquisition of selective donor
centers throughout the United States in order to expand its antibody-sourcing
network. The Company believes that acquiring additional donor center operations
will allow it to leverage its selling, general and administrative costs over a
greater volume of production, thereby creating economies of scale. In addition,
the Company believes that these acquisitions will enable the Company to leverage
its core competencies and infrastructure to allow the acquired businesses to
provide, on an incremental basis, additional higher-margin specialty products
and services that the Company offers. During 1998, the Company acquired the
assets of four non-specialty donor centers, as well as a site that manages and
performs clinical trials for the pharmaceutical and biotechnology industries.
The Company also intends to pursue acquisitions of businesses that provide
services and products that are complementary to its existing businesses, such as
the acquisition, subsequent to year end, of Pentex. However, there can be no
assurance that the Company will be able to complete suitable acquisitions in the
future or successfully integrate any such acquisitions into its existing
operations.
QUALITY ASSURANCE
The Company maintains quality assurance programs designed to assure the
efficacy and safety of its products and compliance with the requirements of
regulatory authorities, industry trade associations and its customers. Through
the Company's Quality Assurance Program, an internally maintained regulatory
compliance program, the Company conducts periodic audits of each facility to
monitor staff adherence to regulations and protocols. These audits are designed
to ensure adherence to Company procedures and effectiveness of staff training
efforts. The Company subscribes to the Quality Plasma Program ("QPP"), which is
a donor center certification program administered by the American Blood
Resources Association ("ABRA"), an industry trade organization. ABRA certifies
only those facilities that meet its standards and provide the highest quality
products. Most of the Company's customers require their suppliers to be QPP
certified. All of the Company's donor center facilities are currently QPP
certified.
COMPETITION
The Company is engaged in the business of providing antibodies, which is a
competitive and continually changing field. The Company competes for customers
with other antibody suppliers on the basis of price, reliability and quality of
product, breadth of product line and the ability to provide value-added
services. While the Company believes that its proprietary anti-D vaccination
protocol and extensive donor base of individuals with high concentrations of
pre-existing anti-D antibodies provides it a competitive advantage and allows it
to offer a premium product in terms of quality, the Company expects increased
competition in the future for its anti-D antibodies from other independent
collection companies. The Company believes that further increases in the
production of anti-D antibodies by other suppliers could have an adverse effect
on the Company through decreased orders for its product or lower selling prices
per unit.
In certain markets, the Company competes for donors by means of financial
incentives which the Company offers for the donation of the antibodies it
collects, by providing donor services, by implementing programs designed to
attract and retain donors through education as to the uses for collected
antibodies, by encouraging groups to have their members become antibody donors
and by improving the attractiveness of the Company's donor centers. Certain of
the Company's specialty antibodies are derived from donors with rare antibody
characteristics, resulting in increased competition for such donors. If the
Company is unable to maintain and expand its donor base, its business and future
prospects may be adversely affected.
12
Furthermore, several companies are attempting to develop and market products
to treat diseases based upon technology that may lessen or eliminate the need
for certain antibodies or other plasma-based products. Such products, if
successfully developed and marketed, could adversely affect the demand for
antibodies and other plasma-based products.
There can be no assurance that competition for customers, donors, end
products or otherwise will not adversely affect the Company.
The Company believes it takes on average 10-12 months to obtain FDA approval
for a non-specialty donor center, and takes up to 18 months to obtain the
necessary regulatory approvals in order to begin shipping product from a
specialty donor center which immunizes its donors. In addition to these
regulatory requirements, once the center is operational, a stable donor base
must be established and maintained as repeat donors are critical to success for
both quality control and profitability. A significant volume of donated
antibodies and sophisticated screening and immunization procedures also are
necessary in order to provide the diversity and quality of antibody products
demanded by the market.
GOVERNMENT AND INDUSTRY REGULATION
GENERAL. The Company's activities are subject to significant regulation by
numerous governmental authorities in the U.S. and internationally. These
regulatory authorities govern the collection, testing, manufacturing, safety,
efficacy, labeling, storage, record keeping, transportation, approval,
advertising and promotion of the Company's products, as well as the hiring and
training of its employees. The Company believes it is in substantial compliance
with all relevant laws and regulations.
The Company is subject to extensive FDA regulation. Excluding one recently
opened location, all of the Company's donor centers and the Company's monoclonal
manufacturing facilities hold FDA establishment licenses and the Company's
specialty donor centers have numerous supplements to the source plasma product
license, permitting the production and sale of specialty antibodies and the
immunization of donors. The Company is also licensed to immunize donors at
certain of its primarily non-specialty donor centers.
During 1998, the FDA issued proposals to create a single license for
biologic products (BLA), replacing the current establishment licenses and
product licenses, with the goal of reducing unnecessary burdens for the industry
without diminishing public health protection. Under these regulations, the FDA
issues a single license to manufacturers of multiple biological products, such
as specialty antibodies and product derived from immunized donors. While the
application process has not yet been unified under a single application, the
regulations are now in effect for the issuing of licenses, and the Company's
non-specialty donor centers are now operating under a single license. The
Company is currently seeking approval for a recently opened specialty donor
center; when approved, it and the Company's remaining 16 specialty donor centers
will be covered under a single license. The Company is unable to determine the
impact of these new guidelines, including, for example, how enforcement actions
such as suspension or revocation of licenses will affect other donor centers
under a single license when and if compliance issues arise. However, if
enforcement action were to be taken against all donor centers under a BLA for
the actions of a single donor center, the Company could be materially adversely
affected. The Company also believes that other collectors might attempt to enter
the specialty antibody market, as they will generally be allowed to immunize
donors at historically non-specialty donor centers during the application
process. However, the Company believes that its extensive experience in
immunization will be a competitive advantage, as it expects the difficulty of
the application and approval process to increase.
New facilities, products and operating procedures at each location must
undergo approval processes through the FDA. Significant changes to existing
facilities, products or operating procedures must also undergo FDA review prior
to implementation. The Company's FDA-licensed antibody collection and testing
operations in the United States and its monoclonal manufacturing facilities in
the U.K. are required to adhere to FDA current Good Manufacturing Practices
(cGMP) and are routinely inspected by the FDA.
13
Furthermore, the Company's protein fractionation site is an FDA-registered
facility. Donor centers must meet detailed standards for, among other things,
the screening of donors, obtaining informed consent from donors, the collection
of antibodies, training of personnel and the testing, handling and disposal of
biologic products. If the FDA believes that a facility is not in compliance with
applicable laws and regulations, generally as a result of an on-site inspection,
it typically issues a deficiency notice known as a Form 483 and, subsequently, a
warning letter if such deficiencies are not adequately responded to or addressed
in an appropriate and timely manner. An inadequate response to a warning letter
could ultimately result in the detainment or seizure of products, issuance of a
recall, enjoinment of future operations and the assessment of civil and criminal
penalties against the Company, its officers or its employees. In addition,
approvals or licenses could be temporarily suspended or revoked in certain
circumstances. Failure to comply with regulatory requirements or a significant
adverse regulatory action could have a material adverse effect on the Company.
Due in part to a new approach by the FDA known as "Team Biologics", there
has been an increasing level of regulatory scrutiny in the biologics industry
resulting in more detailed and frequent inspections, and what the Company
believes are a greater number of observations cited per inspection, deficiency
notices and warning letters. On occasion, the Company has received notifications
and warning letters from the FDA of possible deficiencies in the Company's
compliance with FDA requirements. To date, the Company believes that it has
adequately addressed or corrected such deficiencies. See "Government and
Industry Regulation" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Overview".
The Company is also subject to additional inspections by customer quality
assurance auditors, ABRA auditors, the Health Care Financing Administration
("HCFA") and state health departments. HCFA regulates and certifies all clinical
testing performed at each donor center and the Company's central testing
laboratory under the Clinical Laboratories Improvement Act of 1988. The
Company's central testing laboratory in Atlanta, Georgia is licensed by the FDA
and the State of Georgia.
Outside the United States, sales of the Company's products are subject to
additional regulatory requirements, which vary widely from country to country.
In particular, much of Company's domestic operations are subject to inspection
and approval by various German regulatory bodies, as a significant portion of
its products, including those sold to domestic affiliates of German companies,
are ultimately further manufactured or sold in Germany. These regulations, while
similar in scope to those promulgated by the FDA, are often more restrictive. In
the United Kingdom, the Company is subject to the U.K. Health and Safety at Work
Act, which regulates the safety precautions required of manufacturers in the
United Kingdom, and to various other regulations covering the use of genetically
engineered organisms in laboratory and manufacturing processes. In certain
countries, the Company's customers are subject to regulatory requirements that
require additional inspection and approval of the Company's facilities prior to
the shipment of products to such countries. Changes in existing federal, state
or foreign laws or regulations could have an adverse effect on the Company's
business.
The Company is also subject to numerous industry and customer-mandated
standards. Industry groups such as ABRA and the Company's customers continually
evaluate their practices and procedures regarding new information or public
concerns over diseases which may be transmitted from donors through their blood
or blood components. Based upon such evaluation, a certain portion of the
population may be prohibited from donating in the future, or certain new testing
and screening procedures may be required to be performed with respect to certain
donors. The Company is also subject to routine inspections of its facilities by
its customers, whose approval must generally be obtained for each donor center
prior to shipping product.
One specific concern currently facing the industry is CJD, an often fatal
disease occurring sporadically in the world at an incidence of about one per
million population per year and which has been reportedly linked in some cases
to bovine spongiform encephalopathy, also known as "mad cow disease". However,
14
no evidence currently exists that CJD can be transmitted by blood and plasma
products and the risk, if any, is believed to be small and at present only
theoretical. While no acceptable testing or screening procedure currently exists
to detect CJD, it has generally been found to have a higher incidence in the
older population. In response to this concern and at the request of several of
its customers, the Company has ceased collecting certain antibodies from donors
over the age of 59 at certain of its donor centers.
Another relatively new standard voluntarily adopted by the industry relates
to the acceptance of new donors. In an effort to further minimize the potential
that infected plasma could enter the manufacturing process undetected, all first
time donors' plasma is excluded from shipment and further manufacture unless a
second, negative set of test results is also obtained on a second donation
within six months, essentially precluding one-time donations. Also, in order to
further shorten the "window period" during which time a donor is potentially
infectious but is not detected as such by current screening tests that measure
antibody response to the viruses, certain of the Company's therapeutic customers
have implemented a testing method, Nucleic Acid Amplification ("NAT"), sometimes
known as Polymerase Chain Reaction ("PCR") technology. PCR/NAT testing is a
method used to detect the presence of genetic material of problem viruses before
antibodies against those viruses can be formed. While the test is not yet
required or approved by the FDA, the Company's customers have begun testing all
source plasma for hepatitis C and, in some cases, hepatitis B and HIV, as a
further measure of safety.
Although the Company does not believe that the potential loss of donors
resulting from these new standards will have a material impact on its operating
results, there is no assurance that the long-term impact of these standards, or
the imposition of other blood safety measures, will not have a material adverse
effect on future operations.
PRODUCT APPROVALS. Before new specialty antibody collection activities can
be initiated at any donor center, separate approvals for each type of specialty
antibody to be collected must be obtained from the FDA. There can be no
assurance that difficulties or delays will not arise in connection with
applications for approval to conduct expanded antibody collection activities.
Federal, state and foreign laws and regulations regarding the manufacture
and sale of blood products are subject to future change. The Company cannot
predict what impact, if any, such change might have on its business. However,
such changes could have a material impact on the Company's business.
OTHER. The Company is also subject to government regulations enforced under
the Environmental Protection Act, the Clean Air Act, the Clean Water Act, the
National Environmental Policy Act, the Toxic Substances Control Act, the
Resource Conservation and Recovery Act, the Medical Waste Tracking Act, and
other national, state or local restrictions. The Company is also subject to
workplace safety regulations under the Occupational Safety and Health Act
(OSHA). The Company believes that it is in substantial compliance with all
applicable regulations.
THIRD PARTY REIMBURSEMENT
In both domestic and foreign markets, sales by the Company's customers may
depend in part on the availability of reimbursement from third-party payors such
as government health administration authorities, private health insurers and
other similar organizations. Third-party payors are increasingly challenging the
price and cost-effectiveness of medical products and services. There can be no
assurance that pricing pressures which may be experienced by the Company's
customers will not adversely affect the Company because of a determination that
these products are not cost effective or because of inadequate third-party
reimbursement levels to such customers. Moreover, the Company's profitability
may be directly affected by the availability of third party reimbursement for
any finished monoclonal product it seeks to sell.
15
EMPLOYEES
As of March 15, 1999, the Company employed 1,175 persons, 1,094 of whom were
located in the United States and 81 of whom were located in the United Kingdom.
Of the Company's U.S.-based employees, 33 that were hired in connection with the
acquisition of Pentex are members of a collective bargaining unit. The Company
believes that its relationship with its employees is generally satisfactory.
PRODUCT LIABILITY AND INSURANCE
The sourcing, processing and sale of the Company's products involve a risk
of product and professional liability claims. The Company has obtained product
liability insurance in an amount of $3.0 million per incident and $3.0 million
in the aggregate per annum for each of the Company's facilities on an occurrence
basis and professional liability insurance in the same amounts on a claims made
basis. The Company also has a $5.0 million excess liability umbrella insurance
policy. There can be no assurance that the coverage limits of the Company's
insurance policies and/or any rights of indemnification and contribution that
the Company may have will offset potential claims. A successful claim against
the Company in excess of insurance coverage and not subject to indemnification
could have a material adverse effect on the Company.
ITEM 2. PROPERTIES
The Company's 64 donor centers and its clinical trial site are located in 22
states and the District of Columbia, principally in the South, Southwest,
Midwest and Northwest United States. The donor centers range in size from
approximately 1,000 to 10,000 square feet and are generally leased with
five-year terms. A majority of these leases contain renewal options which permit
the Company to renew the leases for a five-year period at the then fair rental
value. The Company believes that in the normal course of its business, it will
be able to renew its existing leases or relocate its operations subject to
regulatory approval. See Item 1, "Business-Operations."
The Company's central testing laboratory and international headquarters are
located in Atlanta, GA; its monoclonal research and development laboratories and
the Company's FDA licensed monoclonal antibody manufacturing facilities are
located in Edinburgh, Scotland (large scale monoclonal production) and
Livingston, Scotland (vialing and labeling). All of these facilities are leased
with terms expiring through 2021.
The Company's owned blood protein fractionation facility, acquired in the
Pentex transaction, is a 44,000 square foot facility located on five acres in
Kankakee, Illinois. In order to meet current and expected demand for certain of
its products, the facility is currently undergoing a 17,000 square foot
expansion, which it expects to have completed during the fourth quarter of 1999.
ITEM 3. LEGAL PROCEEDINGS
In connection with a dispute relating to the "earn-out" provisions in a
stock and asset purchase agreement entered into by the Company and certain of
its subsidiaries with Nations Biologics, Inc., affiliated entities and the other
sellers named therein (the "Sellers"), dated March 6, 1997, pursuant to which
the Company acquired 16 donor centers (the "Purchase Agreement"), the Sellers in
November 1998 commenced an action titled DECATUR PLASMA, INC. ET AL. V.
SEROLOGICALS CORPORATION ET AL, in federal district court in the Northern
District of Georgia. The complaint asserted a claim for breach of contract,
alleging that the Sellers were entitled to an "earn-out" payment in addition to
the consideration already received by the Sellers in connection with the
transaction. The Company notified the Sellers that it denied the allegations and
intended to defend the action vigorously and potentially to assert counterclaims
against the Sellers. Subsequently, the Company filed a motion to dimiss the
complaint, and no answer was filed or discovery taken. During the pendency of
the motion to dismiss, the parties agreed to voluntarily dismiss the
16
action and to exchange releases pursuant to a settlement. In accordance with the
settlement, no earn-out or other consideration beyond the initial purchase price
is being paid to the Sellers.
The Company is also a party to litigation in the ordinary course of
business. The Company does not believe that such litigation is likely to have a
material adverse effect on its financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders in the fourth quarter
of the fiscal year ended December 27, 1998.
ITEM 4A. EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE REGISTRANT
The following table sets forth the names, ages and all positions and offices
with the Company held by the Company's present executive officers. Unless
otherwise indicated below, each person has held the office indicated for more
than five years:
NAME AGE POSITIONS AND OFFICES PRESENTLY HELD
- ----------------------------------------------------- --- -----------------------------------------------------
Harold J. Tenoso, Ph.D............................... 60 President, Chief Executive Officer and Director
Terry Dobson......................................... 53 Vice President, International Development
Charles P. Harrison.................................. 51 Vice President, Therapeutic Business Unit
P. Ann Hoppe......................................... 59 Vice President, Regulatory Affairs
Timm M. Hurst........................................ 57 Vice President, Sales and Marketing
Russell H. Plumb..................................... 40 Vice President, Finance and Administration,
Chief Financial Officer and Treasurer
Toby L. Simon, M.D................................... 54 Vice President, Medical and Scientific Affairs
Keith J. Thompson.................................... 41 Vice President, Diagnostic Operations
HAROLD J. TENOSO, PH.D. has served as President and Chief Executive Officer
of the Company since March 1993 and as a director since August 1993. From 1984
until April 1993, he served in various capacities at UNIMED, Inc., a publicly
held pharmaceutical company, including as Chief Executive Officer from January
1989 to April 1992, chairman from January 1991 to April 1992 and consultant from
May 1992 to April 1993.
TERRY DOBSON has served as Vice President, International Development of the
Company since January 1995. Mr. Dobson was Managing Director of Bioscot from
January 1990 to January 1995. Prior to joining the Company upon the Company's
acquisition of Bioscot, Mr. Dobson served as the Business Manager, FDA
Responsible Head and a director of Bioscot.
CHARLES P. HARRISON has served as Vice President, Therapeutics Business Unit
since January 1999. Previously, he served as Vice President, Healthcare Services
from February 1996 until December 1998. Prior to joining the Company he was the
President, Chief Executive Officer, Chief Financial Officer and a director of
Creative Products Resource, Inc., a drug delivery firm from January 1993 until
January 1996. Prior to that time, he was the President, Chief Financial Officer
and a director of UNIMED, Inc., a publicly held pharmaceutical company, from May
1986 until May 1992 and a consultant from May 1992 until April 1993. Mr.
Harrison is presently a director of Creative Products Resource, Inc.
P. ANN HOPPE has served as Vice President, Regulatory Affairs since March
1997. From September 1994 until she joined the Company, Ms. Hoppe served as
President, Hoppe Regulatory Consulting, a private consulting firm servicing the
blood and blood products industries. From 1974 until September 1994, Ms. Hoppe
served in various capacities with the FDA, most recently as Assistant Director,
Office of Blood
17
Research and Review, Center for Biologics Evaluation and Research from September
1993 until September 1994 and Director, Division of Blood Collection and
Processing, from October 1990 until September 1993.
TIMM M. HURST, has served as Vice President, Sales and Marketing of the
Company since May 1998 and was a Vice President from May 1997 until May 1998.
From April 1994 until May 1997, Mr. Hurst served as Vice President, Sales and
Marketing of the Company and from 1984 until April 1994, as Vice President in
charge of disease state products, technical services and administration of the
Company. Prior to joining the Company, Mr. Hurst was the Director of Sales and
Marketing for Blood Products of Delmed, Inc. Mr. Hurst is a member of AABB.
RUSSELL H. PLUMB has served as Vice President, Finance and Administration,
Chief Financial Officer and Treasurer since joining the Company in April 1994.
Prior to joining the Company, he was a Senior Manager in the Corporate Finance
Group at Ernst & Young from April 1991 to April 1994. Prior to joining Ernst and
Young, he was a Managing Director for Tunstall Consulting, a business advisory
firm, from October 1987 to July 1990.
TOBY L. SIMON, M.D. has served as Vice President, Medical and Scientific
Affairs since March 1997. From March 1990 until joining the Company, Dr. Simon
served in various capacities with Blood Systems, Inc., an organization of blood
and plasma centers ("BSI"), and its research affiliate, Blood Systems Foundation
("BSF"), most recently as President of BSF from March 1995 until March 1997 and
President and Chief Executive Officer of BSI from March 1991 until March 1995.
Dr. Simon is certified in internal medicine and hematology by the American Board
of Internal Medicine and in blood banking by the American Board of Pathology.
KEITH J. THOMPSON has served as Vice President, Diagnostic Operations since
January 1998. Prior to his appointment as Vice President, Mr. Thompson served in
various capacities at Bioscot since 1985, including as Managing Director from
January 1995 until December 1997 and as Operations Director from November 1992
until December 1994.
In addition, the following individuals serve as key employees of the
Company:
JAMES F. SOWINSKI, 49, has served as Vice President of the Company since May
1997. From 1988 until May 1997, Mr. Sowinski served as Vice President,
Operations of the Company. Mr. Sowinski joined the Company in 1977 as a donor
center Executive Director and Responsible Head.
M. DWAIN WILCOX, 31, has served as Vice President, Information Systems since
joining the Company in October 1998. Prior to joining the Company, Mr. Wilcox
held several positions at Lanier Worldwide, a subsidiary of Harris Corporation,
most recently as Director, Systems Integration from June 1996 until October 1998
and Program Manager, System Integration from November 1993 until June 1996.
18
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's common stock was initially offered to the public on June 15,
1995 at a price of $5.11 per share and trades on the Nasdaq Stock Market
("Nasdaq") under the symbol "SERO."
The Company declared a three-for-two split of its common stock effective
August 14, 1998 for shareholders of record on July 31, 1998. All price and share
amounts herein are adjusted to reflect the effect of such split.
On March 15, 1999, the closing price of the common stock was $16.00 per
share. As of March 15, 1999, there were 102 holders of record and approximately
3,300 beneficial holders of the Company's common stock.
The Company has not paid any cash dividends on its common stock to date. The
payment of cash dividends, if any, in the future is within the discretion of the
Board of Directors and will depend on the Company's earnings, its capital
requirements and financial condition. It is the present intention of the Board
of Directors to retain all earnings, if any, for use in the Company's business
operations and, accordingly, the Board of Directors does not expect to declare
or pay any cash dividends in the foreseeable future. In addition, under the
Company's Second Amended and Restated Credit Agreement dated as of October 16,
1997, with NationsBank, N.A., there are limitations on the Company's ability to
pay cash dividends.
The following table sets forth the high and low sale prices for the
Company's common stock for the periods indicated as reported by Nasdaq.
HIGH LOW
--------- ---------
Year Ended December 27, 1998
Quarter Ended
March 29............................................................... $ 19.58 $ 15.42
June 28................................................................ 22.50 16.67
September 27........................................................... 26.00 16.75
December 27............................................................ 30.38 18.00
Year Ended December 28, 1997
Quarter Ended
March 30............................................................... $ 15.72 $ 10.08
June 29................................................................ 14.67 9.17
September 28........................................................... 15.67 12.59
December 28............................................................ 17.33 12.00
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data have been derived from the
Consolidated Financial Statements of the Company. These data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements of the
Company and notes thereto included elsewhere in this Form 10-K. The statements
of operations data and balance sheet data as of and for the years ended December
31, 1994 and 1995, December 29, 1996,
19
December 28, 1997 and December 27, 1998 have been derived from the audited
Consolidated Financial Statements of the Company.
1994 1995 1996 1997 1998
--------- --------- --------- --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales................................................. $ 30,100 $ 52,124 $ 65,571 $ 97,534 $ 123,072
Costs and Expenses
Cost of sales........................................... 16,796 31,525 38,752 62,065 81,242
Selling, general and administrative expenses............ 6,290 8,216 9,394 12,222 13,545
Product development expenses............................ 829 1,974 2,242 2,000 1,403
Other expense, net...................................... 12 1,328 1,847 2,713 2,696
Interest expense (income), net.......................... 407 2,116 220 (532) (846)
--------- --------- --------- --------- ----------
Income before income taxes and extraordinary loss......... 5,766 6,965 13,116 19,066 25,032
Provision for income taxes................................ 2,227 2,499 4,866 7,064 8,687
--------- --------- --------- --------- ----------
Income before extraordinary loss.......................... 3,539 4,466 8,250 12,002 16,345
Extraordinary loss on early retirement of debt, net of
income taxes............................................ (103) (1,823) (14) -- --
--------- --------- --------- --------- ----------
NET INCOME................................................ 3,436 2,643 8,236 12,002 16,345
Accretion of common stock put warrants.................... (186) (46) -- -- --
--------- --------- --------- --------- ----------
NET INCOME available for common stockholders.............. $ 3,250 $ 2,597 $ 8,236 $ 12,002 $ 16,345
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
NET INCOME PER COMMON SHARE--BASIC:
Income before extraordinary loss........................ $ 0.36 $ 0.27 $ 0.41 $ 0.54 $ 0.68
Extraordinary loss...................................... (0.01) (0.11) -- -- --
--------- --------- --------- --------- ----------
Net income.............................................. $ 0.35 $ 0.16 $ 0.41 $ 0.54 $ 0.68
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
NET INCOME PER COMMON SHARE-- DILUTED:
Income before extraordinary loss........................ $ 0.24 $ 0.26 $ 0.38 $ 0.51 $ 0.63
Extraordinary loss...................................... (0.01) (0.11) -- -- --
--------- --------- --------- --------- ----------
Net income.............................................. $ 0.23 $ 0.15 $ 0.38 $ 0.51 $ 0.63
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING:
Basic................................................. 9,296 16,160 20,210 22,249 24,001
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
Diluted (1)........................................... 14,063 17,204 21,482 23,789 25,942
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
BALANCE SHEET DATA:
Working capital......................................... $ 6,060 $ 6,174 $ 20,705 $ 37,425 $ 56,164
Total assets............................................ 50,135 50,234 80,837 123,492 147,331
Long-term debt, less current maturities................. 32,708 6,751 147 4,446 878
Stockholders' equity.................................... 6,842 36,577 67,804 103,285 129,009
- ------------------------
(1) The dilutive effect of stock options and warrants has been calculated
according to the treasury stock method using the IPO price of $5.11 per
share for all periods presented prior to June 14, 1995.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is a leading worldwide provider of specialty human antibodies
and related services to major healthcare companies. The Company also collects
source plasma containing non-specialty antibodies used in the manufacture of a
number of products, primarily intravenous immune globulin (IVIG), a product
containing a broad spectrum of antibodies used in the treatment of a wide
variety of medical indications. As of March 15, 1999, the Company operated 64
donor centers, 17 of which specialize in specialty antibody collections and 47
of which primarily collect source plasma. Through the Company's Serologicals,
Ltd. subsidiary, formerly known as Bioscot, Ltd. ("Bioscot"), it also operates
two FDA-licensed monoclonal antibody manufacturing facilities in Scotland. For
management purposes, the operations of the Company's subsidiaries are organized
into two primary operating segments, Therapeutic Products and Diagnostic
Products. These segments are based primarily on the differing nature of the
ultimate end use of the Company's products, the differing production and other
value-added processes performed by the Company with respect to the products and,
to a lesser extent, the differing customer bases to which each reportable
segment sells its products.
The activities of the Therapeutic Products segment primarily include the
collection and sale of human antibodies that are used as the active ingredients
in therapeutic products for the treatment and management of diseases such as Rh
incompatibility in newborns, hepatitis and rabies. The activities of the
Diagnostic Products segment primarily include the Company's manufacture and sale
of monoclonal antibodies and the sale of certain human-sourced, polyclonal
antibodies, which are used in diagnostic products such as blood typing reagents
and diagnostic test kits.
Increasing regulatory scrutiny continues to be a significant factor shaping
the biologics industry, resulting in more detailed and frequent Food and Drug
Administration (FDA) inspections of the Company's and its customers' operations,
a potentially greater number of observations, deficiency notices and warning
letters per inspection, and more product recalls and temporary or permanent
closures of facilities. One factor contributing to this trend is the FDA's
implementation of a new approach to inspections of donor centers and laboratory
testing and manufacturing facilities, including the Company's customers',
entitled "Team Biologics". Under this new approach, substantially all such
inspections are performed by highly trained field investigators who are focusing
more extensively on the FDA's current good manufacturing practices (cGMP) and
quality systems. This approach was first applied to the plasma fractionators and
subsequently to other biologic product areas, including to date certain of the
Company's facilities. Several large fractionators, including certain of the
Company's customers, have been affected in varying degrees, from complete
shutdowns of manufacturing facilities to operating under a consent decree to
bring their facilities into compliance. Furthermore, the Company believes
certain manufacturers are currently experiencing a longer than anticipated FDA
approval process of new, relocated or expanded manufacturing and laboratory
testing facilities. Specifically, during 1998 the Company's largest customer
ceased performing laboratory testing services on the non-specialty antibodies it
purchased from the Company, due to difficulties in the validation of its
relocated laboratory testing facility. The Company has since transferred the
majority of the mandatory viral marker testing of the product sold to this
customer to its own central laboratory located in Atlanta, Georgia. Also during
1998, the Company was notified that another of its customers, which has been
operating under a consent decree, had suspended certain operations following an
FDA inspection. As the majority of the Company's sales to this customer are made
to its European affiliate whose manufacturing facilities were not impacted by
this suspension, the Company believes that the impact on its results of
operations and financial condition will not be material.
On occasion, the Company has received notifications and warning letters from
the FDA related to possible deficiencies in the Company's compliance with FDA
requirements. To date, the Company believes that it has adequately addressed or
corrected such deficiencies and that it is in substantial compliance with all
relevant laws and regulations. However, as all of the Company's operations have
not yet been fully
21
subjected to Team Biologics inspections, it is unable to determine what impact,
if any, such inspections will have on the Company and its operations when they
occur.
Another trend the industry is currently experiencing is the continuing
imposition of more rigorous donor screening standards by the FDA and certain
regulatory bodies in foreign countries, in particular, those governing the
manufacture of plasma-based products in Germany. The Company's customers and
certain industry trade organizations are also imposing stricter standards. Such
new standards, including donor age restrictions, the elimination of one-time and
certain other infrequent donors and the introduction of new testing techniques
have reduced the pool of, and increased the competition for, potential donors.
Furthermore, the Company believes that, owing in part to the general strength of
the national economy, the financial incentives provided to donors may be less
attractive as compensation for their time, further decreasing the pool of
potential donors. Conversely, current demand for many of the antibodies the
Company offers has increased for a variety of reasons, including increased
demand for the end products into which they are manufactured, expanded use of
the various end products and increased manufacturing capacity of certain
fractionators as they are able to bring their facilities into compliance. These
factors have led to recent and, in some cases, critical shortages of various
plasma-based products, most notably IVIG.
While the Company believes it has been adversely impacted by the factors
described above, including lower than anticipated collections of non-specialty
antibodies and the, increased collection costs thereof, it believes that the
current supply and demand factors affecting the industry may serve to enhance
the pricing of non-specialty antibodies in the future and the Company's
long-term prospects. While the Company is currently pursuing various
alternatives to increase production at its non-specialty donor centers, there
can be no assurance that such efforts will be successful, or that any further
impact related to these factors will not have a material adverse effect on the
Company or its operations.
RECENT DEVELOPMENTS
On December 29, 1998, the Company purchased substantially all of the
domestic assets of the Pentex Blood Proteins unit of Bayer Corporation
("Pentex") for $27.5 million cash at closing. Pursuant to the same transaction,
the Company entered into an agreement to purchase certain foreign assets of
Pentex for $1.5 million; the Company anticipates consummating this portion of
the acquisition in the second quarter of 1999. Pentex provides a full range of
over 100 distinct animal protein products derived from five different animal
species. These products, such as bovine serum albumin (BSA), are primarily
supplied to healthcare companies for use in diagnostic reagents. The Company
also provides a line of highly purified animal proteins known as tissue culture
media components that are used by biopharmaceutical companies as nutrient
additives in cell culture media. One example of these media components is Bovine
EX-CYTE-Registered Trademark-, Growth Enhancement Media Supplement, that is
produced through a patented manufacturing process. The Company will account for
the acquisition as a purchase in accordance with Accounting Principles Board
Opinion Number 16.
RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the Consolidated
Financial Statements and Notes thereto. The following table sets forth certain
consolidated operating data of the Company as a percentage of net sales for the
fiscal years indicated below.
1996 1997 1998
--------- --------- ---------
Net sales............................................................ 100.0% 100.0% 100.0%
Gross profit......................................................... 40.9% 36.4% 34.0%
Selling, general and administrative expenses......................... 14.3% 12.5% 11.0%
Product development expenses......................................... 3.4% 2.1% 1.1%
Net income........................................................... 12.6% 12.3% 13.3%
22
YEARS ENDED DECEMBER 27, 1998 AND DECEMBER 28, 1997
NET SALES
CONSOLIDATED
Consolidated net sales increased 26.2%, or approximately $25.5 million, from
$97.5 million in 1997 to $123.1 million in 1998. Of this increase, approximately
$17.0 million was attributable to increased sales from existing operations,
while the remainder, or approximately $8.5 million, was attributable to
acquisitions completed during 1997 and 1998.
THERAPEUTIC PRODUCTS
Net sales of Therapeutic Products increased approximately $22.9 million, or
28.9%, from $79.2 million in 1997 to $102.1 million in 1998. Of this increase,
approximately $16.5 million was from increased sales of antibodies from existing
operations, most significantly anti-D, and to a lesser extent, non-specialty
antibodies. The increase in sales of anti-D antibodies was a result of both
pricing and volume increases, while the increase in sales of non-specialty
antibodies was due in large part to an increase in the percentage of the product
sold on a "gross" pricing basis, for which the increased selling price is
reflective of the Company's provision of laboratory testing services and certain
donor supplies that were previously borne by the customer on a net basis. The
remainder of the increase, or approximately $6.3 million, was the result of
acquisitions completed during 1997 and 1998. The majority of the sales
attributable to the acquisitions was of non-specialty antibodies. Total net
sales of specialty antibodies increased approximately $11.0 million, or 31.8%,
from $34.7 million in 1997 to $45.7 million in the current year, while total net
sales of non-specialty antibodies increased approximately $11.9 million, or
26.6%, from $44.6 million in 1997 to $56.4 million in 1998.
DIAGNOSTIC PRODUCTS
Net sales of Diagnostic Products increased approximately $1.8 million, or
10.0%, from $18.3 million in 1997 to $20.1 million in the current year. Of the
increase, $492,000 was primarily the result of increased sales of antibodies
used in blood typing reagents, which were offset by marginal decreases in
certain other diagnostic products. The remainder of the increase, or $1.4
million, was attributable to an acquisition completed during 1997. Total net
sales of monoclonal antibodies increased $430,000, or 3.6%, from $11.8 million
in 1997 to $12.3 million in 1998. The remaining net sales, primarily
human-sourced antibodies used in blood typing reagents and diagnostic test kits,
increased approximately $1.4 million, or 22.0%, from $6.4 million in the prior
year to $7.8 million in 1998.
GROSS PROFIT
CONSOLIDATED
Consolidated gross profit increased 17.9%, or approximately $6.4 million,
from $35.5 million in 1997 to $41.8 million in the current year. Of this
increase, approximately $5.1 million was the result of increased sales from
existing operations, while approximately $1.3 million was attributable to
acquisitions completed during 1997 and 1998. Gross profit as a percentage of net
sales ("gross margin") decreased from 36.4% in 1997 to 34.0% in the current
year, largely as a result of lower than anticipated production at many of the
Company's primarily non-specialty donor centers, resulting in decreased fixed
cost absorption and lower gross profit per unit, and a changing pricing mix of
non-specialty antibody sales.
THERAPEUTIC PRODUCTS
Gross profit from Therapeutic Products increased approximately $4.2 million,
or 16.5%, from $25.4 million in 1997 to $29.6 million in the current year. This
increase was due to additional gross profit from existing operations, primarily
a result of increased sales of anti-D, offset by lower gross profit on
23
several product lines, most notably non-specialty antibodies, and higher
depreciation expense. Gross margin decreased from 32.0% in 1997 to 29.0% in
1998, primarily as a result of the level of non-specialty antibody production.
Gross margin was also impacted by the increase in the percentage of
non-specialty antibodies sold on a gross basis, as there was relatively
insignificant gross profit attributed to the additional revenue.
DIAGNOSTIC PRODUCTS
Gross profit from Diagnostic Products increased approximately $2.2 million,
or 21.7%, from $10.1 million in 1997 to $12.3 million in 1998. The majority of
this increase was attributable to increased sales from existing operations, most
notably monoclonal and polyclonal antibodies used in blood typing reagents and
increased margins on antibodies sold for use in diagnostic test kits. Gross
margin for the Diagnostic Products segment increased from 55.2% to 61.1%,
primarily as a result of a favorable sales mix within the segment's products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Consolidated selling, general and administrative expenses increased 10.8%,
or $1.3 million, from $12.2 million in 1997 to $13.5 million in the current
year. The increase was primarily due to a general increase in corporate
overhead, in particular expenditures for information systems and related
personnel, as well as legal, accounting and other expenses related to the
Company's acquisition activities. Selling, general and administrative expenses,
as a percentage of consolidated net sales, decreased from 12.5% in 1997 to 11.0%
in the current year, due to the higher average selling price for non-specialty
antibodies, which required only minimally higher general and administrative
expenses. The Company also continued to effectively leverage its general
corporate infrastructure.
PRODUCT DEVELOPMENT EXPENSES
Consolidated product development expenses decreased $597,000, or 29.9%, from
$2.0 million in 1997 to $1.4 million in the current year. The decrease was
primarily due to a decreased emphasis on the development of a monoclonal anti-D
product.
OTHER EXPENSE, NET
Consolidated other expense, net, which primarily consists of amortization of
goodwill and other intangible assets and gains and losses from foreign currency
translations, was essentially unchanged from the prior year.
INTEREST INCOME, NET
Consolidated interest income, net increased $314,000, or 59.0%, from
$532,000 in 1997 to $846,000 in 1998. The increase was primarily attributable to
higher average cash and cash equivalent balances during the year and lower
average borrowings outstanding during the year, offset by lower average interest
rates earned on invested cash balances.
PROVISION FOR INCOME TAXES
The provision for income taxes as a percentage of income before income taxes
decreased from 37.1% in 1997 to 34.7% in 1998. The decrease was primarily the
result of the favorable impact of a number of foreign, state and local tax
planning initiatives adopted by the Company.
24
YEARS ENDED DECEMBER 28, 1997 AND DECEMBER 29, 1996
NET SALES
CONSOLIDATED
Consolidated net sales increased approximately $32.0 million, or 48.7%, from
$65.6 million in 1996 to $97.5 million in 1997. Of the increase, approximately
$19.2 million was the result of acquisitions completed during 1997 and the
full-year effect of acquisitions completed during 1996. The remainder of the
increase, or approximately $12.8 million, resulted from increased sales from
existing operations.
THERAPEUTIC PRODUCTS
Net sales of Therapeutic Products increased $28.3 million, or 55.7%, from
$50.9 million in 1996 to $79.2 million in 1997. Of this increase, approximately
$19.2 was the result of acquisitions completed during 1997, the full-year effect
of acquisitions completed in 1996 and increased sales from the businesses
acquired. The remainder of the increase, or approximately $9.2 million, was from
increased sales of antibodies from existing operations, primarily anti-D and, to
a lesser extent, anti-hepatitis and non-specialty antibodies. Net sales of
specialty antibodies increased $7.1 million, or 25.6%, from $27.6 million in
1996 to $34.7 million in 1997, while net sales of non-specialty antibodies
increased approximately $21.3 million, or 91.5%, from $23.3 million in 1996 to
$44.6 million in 1997.
DIAGNOSTIC PRODUCTS
Net sales of Diagnostic Products increased approximately $3.8 million, or
26.1%, from $14.5 million in 1996 to $18.3 million in 1997. The increase in net
sales was attributable to additional sales from existing operations, primarily
monoclonal antibodies used for blood typing reagents and antibodies used in
diagnostic test kits. Total net sales of monoclonal antibodies increased $1.8
million, or 17.7%, from $10.1 million in 1996 to $11.8 million in 1997. The
remaining net sales of the segment, primarily human-sourced antibodies used in
blood typing reagents and diagnostic test kits, increased approximately $2.0
million, or 44.5%, from $4.4 million in 1996 to $6.4 million in 1997.
GROSS PROFIT
CONSOLIDATED
Consolidated gross profit increased approximately $8.7 million, or 32.3%,
from $26.8 million in 1996 to $35.5 million during 1997. The majority of the
increase, or approximately $6.4 million, was attributable to additional sales
of, and higher margins on, specialty antibodies, in particular anti-D and
monoclonal antibodies, and to a lesser extent, additional sales of non-specialty
antibodies. The remainder of the increase, or approximately $2.2 million,
related to acquisitions completed during 1997 and 1996. Gross margin decreased
from 40.9% in 1996 to 36.4% in 1997, primarily attributable to an increase in
net sales of relatively lower-margin non-specialty antibodies as a percentage of
total net sales from approximately 35% in 1996 to 46% in 1997 and higher
depreciation expense, offset in part by an increase in sales of certain higher
margin clinical diagnostic products.
THERAPEUTIC PRODUCTS
Gross profit from Therapeutic Products increased approximately $7.4 million,
or 41.3%, from $18.0 million in 1996 to $25.4 million in 1997. Of this increase,
$6.7 million was primarily due to increased sales of specialty antibodies, most
significantly anti-D, while the remainder of the increase, or approximately
$992,000 was due to acquisitions completed in 1997 and 1996, offset by
additional depreciation expense. Gross margin decreased from 35.3% in 1996 to
32.0% in 1997, primarily attributable to an increase in net sales of relatively
lower-margin non-specialty antibodies as a percentage of total net sales
25
from approximately 46% in 1996 to 56% in 1997, as well as a decrease in gross
margins on non-specialty products.
DIAGNOSTIC PRODUCTS
Gross profit from Diagnostic Products increased approximately $1.3 million,
or 14.7%, from $8.8 million in 1996 to $10.1 million in 1997, primarily due to
increased sales of monoclonal and polyclonal antibodies used in blood typing
reagents and, to a lesser extent, increased margins on antibodies sold for use
in diagnostic test kits. Gross margin decreased from 59.9% in 1996 to 55.2% in
1997, primarily as a result of product mix within monoclonal products and
additional depreciation expense.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Consolidated selling, general and administrative expenses increased
approximately $2.8 million, or 30.1%, from $9.4 million in 1996 to $12.2 million
in 1997. The increase was primarily attributable to a larger information
systems, regulatory and general corporate infrastructure needed to support the
Company's acquisitions and internal growth. However, selling, general and
administrative expenses, as a percentage of net sales, decreased from 14.3% to
12.5% as the Company continued to effectively leverage its corporate
infrastructure.
PRODUCT DEVELOPMENT EXPENSE
Consolidated product development expenses decreased $242,000, or 10.8%, from
$2.2 million in 1996 to $2.0 million in 1997, due primarily to a reduction in
expenditures relating to the development of a therapeutic monoclonal anti-D
product. As a result, product development expenses as a percentage of net sales
decreased from 3.4% in 1996 to 2.1% in 1997.
OTHER EXPENSE, NET
Consolidated other expense net increased $867,000, or 46.9%, from
approximately $1.8 million in 1996 to $2.7 million in 1997, substantially all
due to the amortization of goodwill and other intangible assets resulting from
acquisitions completed during 1997 and 1996.
INTEREST EXPENSE (INCOME), NET
Consolidated interest expense (income), net, decreased $752,000, from net
interest expense of $220,000 in 1996 to net interest income of $532,000 in 1997.
The change was primarily a result of higher cash balances during the year and
the September 1997 receipt of approximately $17.5 million in net proceeds from a
private placement of the Company's common stock, offset in part by the
additional interest expense attributable to convertible notes issued in
acquisitions.
26
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth certain indicators of consolidated financial
condition and liquidity of the Company as of the following fiscal year ends:
1996 1997 1998
--------- --------- ---------
Cash and cash equivalents.................................... $ 21,232 $ 31,812 $ 34,940
Working capital.............................................. 20,705 37,425 56,164
Long-term debt and capital lease obligations................. 3,714 6,798 5,284
Stockholders' equity......................................... 67,804 103,285 129,009
Total debt to equity ratio................................... 5.5% 6.6% 4.1%
The Company has three principal sources of near-term liquidity: (i) existing
cash and cash equivalents; (ii) cash generated by operations, and (iii)
borrowing capacity under the Revolver (as defined below). Subsequent to year
end, the Company utilized $27.5 million of cash on hand for the acquisition of
Pentex. Management believes the Corporation's liquidity and capital resources
are sufficient to meet its working capital, capital expenditure and other
anticipated cash requirements over the next twelve months and may be available
for use in its acquisition strategy. However, the Company anticipates that
future acquisition and growth opportunities may require supplementary funding,
including the issuance of equity or debt securities.
During 1998, the Company's sales to one customer, Bayer Corporation,
accounted for approximately 40% of its total sales. Sales of therapeutic
specialty antibodies to Bayer Corporation are generally made pursuant to annual
purchase orders while the sale of therapeutic non-specialty antibodies are
generally made pursuant to four five-year supply contracts. The revenues and
cash flows generated from these supply contracts are significant; early
termination, material revisions in the supply requirements or other terms of
these contracts or the inability of the Company to renew these contracts beyond
their original terms could adversely affect the Company's ability to meet its
financial obligations in the short term.
Net cash provided by operating activities in 1998 was $9.8 million as
compared to $12.3 million in the prior year, a decrease of $2.5 million. This
decrease was primarily attributable to an increased investment in working
capital of approximately $7.7 million versus the prior year, offset by increased
net income of $4.3 million and $719,000 of additional non-cash depreciation and
amortization expense. The increased investment in working capital was primarily
due to an increase in accounts receivable of $11.5 million in 1998 as compared
to an increase of $4.1 million in 1997, primarily resulting from additional
sales volume and the timing of such sales. In addition, the Company's net sales
to foreign countries, which generally have longer payment terms than domestic
sales, increased 80%, or $20.3 million, from $25.2 million in 1997 to $45.5
million in the current year.
Net cash used in investing activities in 1998 was $12.2 million as compared
to $20.9 million in the previous year. Investing activities in 1998 consisted
primarily of the acquisition of four donor centers and a clinical trial site for
aggregate consideration of approximately $5.5 million (net of cash acquired) and
$5.2 million in capital expenditures. Additionally, net cash used in investing
activities in 1998 is net of the receipt of approximately $878,000 in cash for
the final post closing adjustments relating to the acquisition of the Nations
Group. Investing activities in 1997 consisted primarily of the acquisitions of
the Nations Group and two specialty donor centers for aggregate consideration of
approximately $15.7 million (net of cash acquired) and capital expenditures of
approximately $4.4 million.
Capital expenditures relate primarily to the Company's facilities, related
equipment and information systems. Capital expenditures made in 1997 were
primarily funded through cash flow from operations. The significant expenditures
of 1998 included continuing upgrading and expansion of the Company's information
systems, in particular, its wide area network and development of a donor center
operating system (DCOS); expansion of the Company's international headquarters
in Atlanta, Georgia; and certain donor center capital expenditures, such as
storage freezer upgrades and replacements.
27
During 1999, the Company anticipates making capital expenditures of
approximately $18 million to $20 million, approximately $11-$13 million of which
relates to the expansion of the protein fractionation facility acquired in the
Pentex acquisition. The remaining expenditures are primarily for the Company's
information system, including the development of DCOS, and the remodeling or
relocation of a number of the Company's donor centers.
Net cash provided by financing activities in 1998 was approximately $5.5
million as compared to $19.2 million in the prior year. Financing activities in
1998 primarily consisted of proceeds from the exercise of stock options.
Financing activities in 1997 consisted primarily of a private placement sale of
1,425,000 shares of the Company's common stock in September 1997 that resulted
in net proceeds to the Company of approximately $17.5 million.
Total long-term debt and capital lease obligations were $5.3 million at
December 27, 1998, a decrease of $1.5 million from December 28, 1997. This
decrease was primarily due to the conversion of a $1.3 million principal portion
of a convertible note into 106,608 shares of the Company's common stock.
The Company has a revolving credit facility with a commercial bank (the
"Revolver"), which provides for total borrowing capacity of $35 million, of
which $30 million may be used for acquisitions. The Company anticipates using
the proceeds from the Revolver primarily to fund acquisitions. There were no
amounts outstanding under the Revolver at December 27, 1998.
YEAR 2000
The Year 2000 issue results from computer-based systems that use two digits
rather than four to define the applicable year. If not corrected, many computer
applications could fail or create erroneous results after December 31, 1999, or
before, to the extent a system references future dates. The Year 2000 issue is
believed to affect the majority of all companies and organizations worldwide,
including the Company.
In response to increasing regulatory scrutiny and to improve customer
service and increase its operating performance and efficiency, the Company has
undertaken a number of significant information system initiatives. These
initiatives include the installation of a new laboratory system during 1997 and
the development of DCOS, the first phase of which the Company anticipates
implementing during 1999. An ancillary benefit of these initiatives is that the
resulting systems are Year 2000 compliant. The Company has completed the
evaluation of all other owned and leased information systems, including those
scheduled to be replaced by DCOS. The Company has determined that, with the
exception of one information system used to track inventory for a product line
representing less than 4% of consolidated net sales in 1998, its systems are
Year 2000 compliant. The Company intends to upgrade its non-compliant system by
June 30, 1999. The Company also intends to validate the Year 2000 compliance of
those systems critical to its operations, which it expects to complete by
September 30, 1999.
The Company is also analyzing all other systems that are material to its
operations that could contain date-sensitive embedded technology, such as its
automated plasmapheresis machines and plasma storage freezers. This analysis is
substantially complete, and to date, has not revealed compliance issues of any
significance. Finally, the Company is analyzing the Year 2000 issue as it
relates to its customers, suppliers, financial institutions and other third
parties with which it has a material relationship and what, if any, impact that
could have on the Company.
While the Company currently markets its products to over 200 customers
worldwide, approximately 84% of the Company's net sales during 1998 were made to
its top ten customers. Furthermore, certain plasmapheresis and other supplies
critical to its operations are purchased from a limited number of suppliers. As
a result of these concentrated risks, the inability of any of the Company's
major suppliers to provide it with critical supplies, or any prolonged delay or
other disruption in the manufacturing, laboratory testing or other processes of
the Company's customers, could have a material adverse effect on
28
the Company. The Company is currently communicating with its significant
customers, suppliers and other third parties to determine the status of their
Year 2000 compliance. While the process is not complete, none of the responses
received to date suggests that any significant customer, supplier or other third
party expects the Year 2000 issue to cause an interruption in its operations
which would have a material adverse impact on the Company. However, because
these suppliers, customers and other third parties are exposed to the risk of
failure not only of their own systems, but of other third parties, the ultimate
effect of the Year 2000 issue is subject to a high degree of uncertainty.
Furthermore, due to the inherent lack of control over these third parties, the
Company is able to give no assurance as to the current readiness or success of
these parties' Year 2000 compliance.
Based on the information known to date, the Company believes that the most
likely worst-case Year 2000 scenario would entail an interruption in its
business, including disruption in the collection or manufacturing of antibodies
due to the inability to obtain critical supplies, and loss of revenue due to the
inability of the Company's customers to further manufacture the Company's
products or to provide the required laboratory testing services. The Company
could also be significantly affected by the failure of infrastructure services
such as electricity and telephone service. While the Company is unable to
quantify the effect of such a scenario, it could potentially have a material
adverse impact on the Company's results of operations, liquidity or financial
condition.
Based on the analysis the Company has completed to date, it expects that the
cost of its Year 2000 compliance program will be approximately $200,000. The
Company believes that it will be able to achieve compliance of its systems by
the end of 1999 and does not currently anticipate any material disruption of its
operations as the result of any failure by the Company to be in compliance. The
Company is currently in the process of developing a contingency plan to address
the potential noncompliance of material third parties, which it expects to
complete by the third or fourth quarter of 1999.
MARKET RISK
The Company is exposed to market risk from changes in foreign currency
exchange rates and, to a lesser extent, interest rates, which could affect its
future results of operations and financial condition. The Company manages its
exposure to these risks through its regular operating and financing activities.
FOREIGN CURRENCY EXCHANGE RATES
The Company's foreign-based operations are conducted primarily through its
Bioscot subsidiary located in the United Kingdom. In 1996, 1997 and 1998,
foreign-based operations accounted for approximately 15%, 14% and 10% of net
sales and approximately 17%, 15%, and 21% of income from operations,
respectively.
The functional currency of Bioscot is the British pound sterling.
Fluctuations in foreign exchange rates can impact operating results, including
net revenues and expenses, when translations of the subsidiary financial
statements are made in accordance with SFAS No. 52, "Foreign Currency
Translation." Furthermore, the Company transacts business in various foreign
currencies, subjecting it to exposure from movements in the exchange rates of
those countries. However, a large portion of the Company's sales to foreign
countries is denominated in U.S. currency, thus mitigating a significant portion
of this risk. It has not been the Company's practice to hedge its assets and
liabilities in the U.K. or its intercompany transactions and, accordingly, has
not used derivatives or other off-balance sheet items to manage any significant
foreign currency exchange risk. In 1996, 1997 and 1998, the Company recorded
foreign currency transaction gains (losses) of approximately $46,000, ($10,000)
and ($76,000), respectively.
INTEREST RATES
The Company's outstanding indebtedness as of December 27, 1998 is comprised
primarily of two convertible notes payable with a total outstanding balance of
approximately $5.3 million. The Company
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also has borrowing capacity under the Revolver, which as of December 27, 1998
had no amounts outstanding. The convertible notes bear interest at fixed rates
of 4.0% and 4.5% and the interest rate on the Revolver fluctuates, at the
Company's option, with the prime lending rate or the London Interbank Offer
Rate. Based on these factors, the Company does not believe it has a material
exposure to fluctuations in interest rates.
OUTLOOK
The Company's strategy is to continue to expand its specialty and
non-specialty antibody business and to take advantage of emerging opportunities
relating to the provision of other biologic products and services, such as the
recent acquisition of Pentex. The key elements of this strategy include (i)
expanding its core business by increasing its donor base and broadening the
range of antibodies it sources and the services it provides; (ii) pursuing
selective acquisitions to capitalize on opportunities in consolidating
therapeutic and diagnostic industries; (iii) expanding customer relationships by
providing additional services, allowing the Company to become more deeply
involved in its customers' product development, regulatory compliance and
quality assurance programs; (iv) seeking to increase the quality of antibodies
and production efficiencies; and (v) utilizing its existing donor center network
and expertise in biologic product development, manufacturing techniques and
regulatory compliance to capitalize on emerging opportunities in other specialty
biologic based products and services. However, there can be no assurance that
the Company will be successful in achieving any or all of the elements of its
strategy.
External growth through acquisitions has been and continues to be a
significant component of the Company's strategic plan. The Company's strategy
includes acquisitions of selected donor centers, as well as businesses that
provide services and products that are complementary to its existing business.
The Company believes that these acquisitions will enable it to leverage its core
competencies and its general and administrative infrastructure, thereby creating
economies of scale. However, there can be no assurance that the Company will be
able to complete suitable acquisitions in