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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 000-21873
BIOSITE DIAGNOSTICS INCORPORATED
(Exact name of registrant as specified in its charter)
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Delaware 33-0288606
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11030 Roselle Street 92121
San Diego, California (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (619) 455-4808
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Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.01 par value
Preferred Stock Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. __
The aggregate market value of the voting stock held by non-affiliates
of the registrant, based upon the closing sale price of the Common Stock on
February 28, 1999 as reported on the Nasdaq National Market, was
approximately $84,134,220. Shares of Common Stock held by each executive
officer and director and by each person who owns 10% or more of the
outstanding Common Stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As of February 28, 1999, there were 12,978,031 shares of the Registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the solicitation of proxies for the
Registrant's 1998 Annual Meeting of Stockholders to be held on June 9 1999
is incorporated by reference in Part III, Item 10 (as to directors), 11,
12 and 13 of this Form 10-K.
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BIOSITE DIAGNOSTICS INCORPORATED
FORM 10-K
INDEX
PAGE
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PART I
Item 1. Business..................................................................... 1
Item 2. Properties .................................................................. 29
Item 3. Legal Proceedings ........................................................... 29
Item 4. Submission of Matters to a Vote of Security Holders ......................... N/A
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ....... 30
Item 6. Selected Financial Data...................................................... 31
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................ 32
Item 7a. Quantitative and Qualitative Disclosures About Market Risk................... 39
Item 8. Financial Statements and Supplementary Data ................................. 39
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure.......................................... N/A
PART III
Item 10. Directors and Executive Officers of the Registrant........................... 40
Item 11. Executive Compensation....................................................... 41
Item 12. Security Ownership of Certain Beneficial Owners and Management............... 41
Item 13. Certain Relationships and Related Transactions............................... 41
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............. 42
SIGNATURES ............................................................................. 45
Biosite-Registered Trademark-, Triage-Registered Trademark- and Immediate
Response Diagnostics-Registered Trademark- are registered trademarks of the
Company. Omniclonal-TM-, ExpressTest-SM- and the Company's logo are
trademarks or servicemarks of the Company.
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PART I
ITEM 1. BUSINESS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED IN THIS ANNUAL REPORT ON FORM 10-K ARE FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES, INCLUDING THE TIMELY DEVELOPMENT, INTRODUCTION
AND ACCEPTANCE OF NEW PRODUCTS, DEPENDENCE ON OTHERS, THE IMPACT OF COMPETITIVE
PRODUCTS, PATENT ISSUES, CHANGING MARKET CONDITIONS AND THE OTHER RISKS DETAILED
THROUGHOUT THIS FORM 10-K. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE
PROJECTED. THESE FORWARD-LOOKING STATEMENTS REPRESENT THE COMPANY'S JUDGMENT AS
OF THE DATE OF THE FILING OF THIS FORM 10-K. THE COMPANY DISCLAIMS, HOWEVER, ANY
INTENT OR OBLIGATION TO UPDATE THESE FORWARD-LOOKING STATEMENTS.
BACKGROUND
Biosite Diagnostics Incorporated ("Biosite" or the "Company") develops,
manufactures and markets rapid, accurate and cost-effective diagnostic products
that improve the quality of patient care and simplify the practice of laboratory
medicine. The Company believes that its Immediate Response Diagnostics can have
an important impact on medical decisions, patient care and the cost of medical
treatment. The Company utilizes distributors in the United States and abroad, as
well as a direct sales force, for the distribution of its products to end-users.
The Company has two product platforms that are designed to provide rapid
results through either qualitative visual readings or quantitative meter
readings. These platforms are based upon the Company's proprietary technologies
in the areas of antibody development, signaling chemistry and micro capillary
fluidics. The Company's testing formats are designed to measure single analyte
targets or multiple analytes simultaneously. They also allow for the analysis of
various sample sources, including urine, serum, plasma, whole blood and stool.
The Company's first product, the Triage Panel for Drugs of Abuse ("Triage
DOA Panel"), a small self-contained test capable of detecting a broad spectrum
of commonly overdosed prescription and illicit drugs in approximately 10
minutes, is used by approximately 45% of U.S. hospitals. Since its introduction
in 1992, over 8.1 million Triage DOA Panels have been sold worldwide for use in
hospital emergency department screening, occupational health and workplace
testing. The Company estimates that sales to end-users of the Company's Triage
DOA Panel products in 1998 were approximately $43.5 million, and net sales were
approximately $32.2 million in 1998.
During the first quarter of 1998, the Company received final clearance from
the U.S. Food and Drug Administration ("FDA") to market the Triage Cardiac Panel
and the Triage Meter (together called "Triage Cardiac System") and the Triage C.
DIFFICILE Panel in the United States. The Company began selling the Triage C.
DIFFICILE Panel in March and the Triage Cardiac System in May.
The Triage Cardiac System is Biosite's first product to utilize the
Company's Triage Meter System technology and is designed to deliver precise,
quantitative results in a rapid timeframe. The Triage Cardiac System aids in the
diagnosis of Acute Myocardial Infarction ("AMI") and provide physicians with an
enhanced ability to make treatment decisions in a timely manner. The Triage
Cardiac System quantitatively measures the level of CK-MB, troponin I and
myoglobin from a whole-blood sample using a single test device. As a result of
manufacturing scale-up and capacity constraint issues related to the production
of the Triage Cardiac System, the Company developed a backlog of orders for the
Triage Cardiac System during the third and fourth quarter of 1998. The Company
addressed manufacturing scale-up and capacity constraint issues related to the
production of the Triage Cardiac system and filled the backlog orders during
December 1998 and the first quarter of 1999.
The Triage C. DIFFICILE Panel is a rapid test designed to identify
CLOSTRIDIUM DIFFICILE, an opportunistic pathogen of the intestinal tract that
may thrive as a result of broad spectrum antibiotic treatment.
In October 1998, the Company received final clearance from the FDA to market
the Triage Parasite Panel, the Company's third product launched in 1998. The
Triage Parasite Panel is a rapid test designed to simultaneously detect three
common waterborne parasites, GIARDIA LAMBLIA, CRYPTOSPORIDIUM PARVUM and
ENTAMOEBA HISTOLYTICA/DISPAR, that can cause severe gastrointestinal infections.
Sales of the Triage Parasite Panel were initiated
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in mid-October.
The Company uses the Fisher Healthcare division ("Fisher," formerly the
Curtin Matheson Scientific division) of the Fisher Scientific Company to
distribute its products to the hospital market segment in the United States
and country-specific and regional distributors to market the products in
countries in Europe, Latin America, the Middle East, Asia and Africa.
The Company is developing several additional products for applications
where the Company believes its Immediate Response Diagnostics can play an
important role in improving patient care. Products under development include
tests that are intended to aid in the diagnosis of congestive heart failure
and sepsis or bacteremia, the dosing of certain therapeutic drugs and the
detection of certain bacterial infections.
The Company has entered into agreements with pharmaceutical and diagnostic
companies, including Novartis Pharma AG ("Novartis,") for the development of
a product to monitor the concentrations of the immunosuppressant drug,
cyclosporine; and Scios Inc ("Scios") for the development of a product to be
used in the diagnosis of congestive heart failure; and XOMA Corporation
("Xoma") for the development of a product to be used in the diagnosis of
sepsis or bacteremia. The products covered by these arrangements are under
development and have not generated any revenue from product sales for the
Company.
In March 1999, the Company introduced its Biosite Discovery program, a
collaborative research and diagnostics development program focused on the
identification of new protein markers for acute diseases. The Company will
seek to use its expertise in antibody development to help pharmaceutical and
biotechnology partners accelerate their research programs. In return, Biosite
intends to obtain diagnostic rights to the proteins under study. Biosite will
utilize its proprietary Omniclonal antibody development technology to develop
high affinity antibodies for the characterization and validation of protein
targets. Initially, Biosite will focus on disease target markers in four core
areas: cardiovascular, cerebrovascular, infectious disease and oncology. If
the diagnostic utility of a marker is established, it will then be assessed
for commercialization potential, with high value markers being added to
Biosite's product development pipeline. The Company executed its first
collaborative agreement under the Biosite Discovery program in the
cardiovascular area with Scios in November 1998.
INDUSTRY OVERVIEW
In 1998, the worldwide market for immunoassays exceeded $3.9 billion,
consisting primarily of testing related to infectious disease, endocrinology,
therapeutic drug monitoring, drugs of abuse testing, immunology/allergy,
tumor markers and blood typing. The global market for immunoassays continues
to expand as new disease states are identified, new therapies become
available, and worldwide standards of living and access to health care
improve. Such tests are performed primarily in hospital-based laboratories
and commercial laboratories, which account for approximately 80% of all
diagnostic tests performed annually. In recent years, diagnostic tests that
can be performed nearer to the point of patient care have emerged as an
important tool in disease diagnosis and management.
Immunoassays were first developed based on technology developed in the
1960s. Although early immunoassays offered unprecedented levels of
sensitivity for the detection of low concentration analytes, they suffered
from relatively short shelf-lives, long reaction times, a need for
radioactive labels to detect completed reactions and lack of consistent
results among products from different suppliers. Over time, technological
advances such as the introduction of monoclonal antibodies, enzyme and
fluorescent labels and various solid phase formats shortened immunoassay
reaction times, provided higher specificity and allowed the development of
tests with longer shelf-lives and greater consistency.
These advances also led to the development of immunoassay analyzers, testing
systems utilizing automated liquid handling mechanisms and pipetting systems for
reagent addition. Modern immunoassay analyzers are capable of storing and
selecting multiple reagents for a variety of analytes, including drugs, hormones
and cancer antigens. They also provide accurate and highly sensitive test
results and help to simplify the performance of immunoassays. However,
immunoassay analyzers are large and complex, may have lengthy turnaround times
and require high volumes of sample throughput to justify the investment in
equipment, training, staffing and other costs required to operate and support
the systems. Even those systems with rapid onboard turnaround times require
transport of the
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sample to the testing lab and preparation of the samples to obtain serum or
plasma, which can be time consuming.
In recent years, there has been a continuing shift from the use of such
conventional analyzer systems to more technologically advanced rapid testing
methods that can be performed in minutes by less skilled personnel. Simple,
rapid immunoassays are capable of detecting a single analyte target with a
color change that can be visually interpreted. Formats such as dipsticks,
test tubes and membrane test cartridges have been used to provide fast,
non-instrument read results for conditions where a single analyte target is
present in high concentrations and where a simple yes/no non-numeric answer
is clinically relevant. Rapid color change test formats are widely available
for drugs of abuse, pregnancy, strep throat and ovulation prediction. Until
recently, simple test formats have remained incapable of precise,
multi-analyte detection or highly sensitive, quantitative measurements. As a
result, medical conditions where the detection of one or more analytes is
required or where the precise quantitation of the target analyte is required
have remained the domain of immunoassay analyzers.
The Company believes that there is significant market potential for
advanced rapid diagnostic products. Rapid testing, including point-of-care
testing, helps to reduce overall health care delivery costs and can improve
patient outcomes by providing diagnosis during the patient visit, thereby
minimizing the time to medical intervention and reducing the need for
additional patient follow-up. Patients undergoing emergency procedures can
benefit from more timely and accurate testing results, both to ensure correct
decision making and to avoid unnecessary use of costly inpatient care.
Disease management programs such as therapeutic drug monitoring programs can
benefit from real-time, point-of-care evaluations that enable care-givers to
optimize drug dosing. Quicker diagnosis of infectious agents can also permit
earlier prescription of appropriate medications, potentially shortening the
duration of illness.
TECHNOLOGY
Biosite's Immediate Response Diagnostics technology is based on several
proprietary advances in the biological and physical sciences that make
practical the development and manufacture of rapid, accurate and
cost-effective point-of-care diagnostics. The Company's products integrate
its expertise in several core scientific and engineering disciplines,
including antibody development and engineering, analyte cloning and
synthesis, signaling chemistry and micro capillary fluidics, each of which is
described below. Biosite's research and development program is supported by
75 employees, including 17 Ph.D.s with expertise in the Company's core
technologies. By combining research capabilities in each of these areas,
Biosite is able to create novel single and multi-analyte diagnostics which
overcome the limitations of traditional rapid diagnostic technologies and
seek to address the significant unmet need for effective point-of-care
diagnostic information.
ANTIBODY DEVELOPMENT AND ENGINEERING
Biosite believes that its internal antibody development and engineering
capabilities allow rapid identification and development of antibodies with
optimal specificity, affinity and stability characteristics. The Company
initially utilized hybridoma technology for the selection and production of
its novel antibodies. Three disadvantages of hybridoma technology are the
length of time required to develop antibody candidates, the higher costs
associated with the use of this technology and the need to restart the
antibody development process when unwanted characteristics such as cross
reactivities are discovered. The Company has developed a proprietary process
utilizing phage display of antibodies that enables the selection and
production of antibodies more rapidly and efficiently than is possible using
hybridoma technology. In addition, Biosite has isolated the genes encoding
the antibodies that permit the genetic engineering of antibodies. As a
result, Biosite can alter or add specific amino acids or polypeptides in an
antibody in order to improve the antibody's specificity and to facilitate
purification of the antibody. This technology accelerates the antibody
selection process by rapidly eliminating unwanted cross reactivities
discovered in product development.
ANALYTE CLONING AND SYNTHESIS
The Company has molecular biology capabilities that include the cloning
and identification of specific proteins useful in the development of
immunoassays. Biosite has developed proprietary expression vectors that
enable the production and purification of these proteins for the development
of antibodies and for use as calibrators and controls in its immunoassay
products. In addition, the Company has considerable expertise in synthetic
organic chemistry which allows the synthesis of targets and useful
derivatives. The Company develops products for which the targeted analyte can
be small (i.e., haptens, such as drugs) or large (i.e., proteins, such as
cardiac enzymes). The Company believes that the ability to develop, stabilize
and manufacture the target analyte or its analogues is key to the
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development of highly accurate immunoassays.
COLOR/PHOTOCHEMICAL SIGNALING
Immunoassays require the attachment of a detectable label to an antibody
or target analyte. The Company has developed a variety of labels for the
development of its products. For yes/no tests, a visual label that produces
color is attached to antibodies or analytes through either non-covalent or
covalent chemical methods. For its quantitative products, the Company has
developed novel fluorescent dyes which are attached to antibodies or analytes
using both noncovalent and covalent chemical means. Although fluorescence is
a potentially powerful label for use in immunoassays, its potential has been
limited by the lack of available dyes that are stable and have no sample
interference, and the requirement of a complex instrument for detection. The
Company's novel fluorescent dyes are stable and exhibit properties that
permit their use in complex biological samples such as serum, plasma and
whole blood without interference from the sample. Furthermore, these novel
dyes absorb light at wavelengths where a simple instrument can be used to
excite and detect fluorescence for quantitative measurements.
MICRO CAPILLARY TEST DEVICE TECHNOLOGY
Biosite has developed proprietary technology to design, develop and
manufacture devices containing micro capillaries to control the flow of
fluids in immunoassay processes. The qualitative device format uses micro
capillaries to draw fluids through a membrane that contains immobilized
antibody zones for the detection of specific substances. The quantitative
device format uses several different micro capillary designs to control the
contact of sample with reagents and to control the flow of fluid throughout
the device. When sample is added to the quantitative device, a filter
contained within the device separates blood cells from plasma which is
further directed by capillary forces into a chamber that contains dried
immunoassay reagents. After an incubation time that is determined by another
micro capillary element of the device, the volume of sample that contacted
the reagents flows down a capillary path that brings it into contact with
immobilized antibody zones. The binding of fluorescent reagents at these
zones is detected by an instrument and is related to the concentration of the
substance being tested for in the sample. The Company has also developed the
engineering capability to design unique micro capillary structures in plastic
parts and to fabricate them in commercial scale quantities using injection
molding processes.
SAMPLE HANDLING
The Company has developed proprietary technology relating to sample
handling and preparation, including technology that allows whole blood to be
passively separated into its plasma component or to be passively lysed to
release the target analyte. The Company has also developed technologies for
the handling of stool samples which concentrate and purify the target
analytes or organisms from solid stool materials. In addition, the Triage
Panel platform can be used to assay urine samples.
BIOSITE DISCOVERY PROGRAM
In March 1999, the Company introduced its Biosite Discovery program, a
collaborative research and diagnostics development program focused on the
identification of new protein markers for acute diseases. The Company will
seek to use its expertise in antibody development to help pharmaceutical and
biotechnology partners accelerate their research programs. In return, Biosite
intends to obtain diagnostic rights to the proteins under study. Biosite will
utilize its proprietary Omniclonal antibody development technology to develop
high affinity antibodies for the characterization and validation of protein
targets. The Omniclonal technology combines antibody phage display
capabilities and a highly efficient antibody expression and purification
process. Initially, Biosite will focus on disease target markers in four core
areas: cardiovascular, cerebrovascular, infectious disease and oncology.
Biosite has invested in a high throughput robotic immunoassay analyzer that
is capable of performing an immunoassay for up to 10,000 serum or plasma
samples in a 24-hour period. Biosite intends to use this high throughput
immunoassay system and the Omniclonal antibodies developed for potential
diagnostic markers to detect the markers in a large population of clinical
samples from patients with diseases in our core areas of interest as well as
normal, healthy people. The results of this analysis may establish the
diagnostic sensitivity and specificity of the potential markers for specific
diseases. If the diagnostic utility of a marker is established, it will then
be assessed for commercialization potential, with high value markers being
added to Biosite's product development pipeline. The Company executed its
first collaborative agreement under the Biosite Discovery program in the
cardiovascular area with Scios in November 1998.
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PRODUCT PLATFORMS
The Company has used its core technologies to develop two product
platforms: the Triage Panel and the Triage Meter System. Both of the
Company's product platforms utilize the Company's expertise in antibody
engineering, analyte cloning, signaling chemistry, micro capillary fluidics
and sample handling technologies.
TRIAGE PANEL
The Triage Panel platform is designed for rapid, qualitative screening of
multiple analytes in a small single-use device. The Triage Panel has a visual
(yes/no) display containing simultaneous tests for any combination of
analytes and control standards up to a total of ten. It can be performed in a
simple multi-step process, and is capable of performing tests on both urine
and stool. The Triage DOA Panel, the first product developed on this
platform, tests for up to eight abused drugs analytes in approximately 10
minutes. The Triage C DIFFICILE Panel and the Triage Parasite Panel test for
the detection of microorganisms that cause severe gastrointestinal disease.
The Company is currently developing one other application for this platform,
the Triage Enteric Panel, which would test for the detection of certain
common enteric bacteria responsible for food poisoning.
TRIAGE METER SYSTEM
The Triage Meter System platform is designed to provide rapid quantitative
results for immunoassays in whole blood, serum and plasma. The Triage Meter
System consists of two parts: a small single-use disposable test cartridge
and a proprietary, compact, point-of-care, fluorescent meter. After a blood
sample is applied to the cartridge, the cartridge is inserted into the meter,
which is designed to automatically and simultaneously detect up to six
analytes and display the results on a numerical electronic read-out. The
meter incorporates proprietary software in erasable, programmable, read-only
memory ("EPROM") chips which are intended to be plugged into each meter. The
software may also provide important information regarding the analyte
measured, such as normal or abnormal levels of a marker which could then be
used to initiate therapy or manage patient disease. Studies have validated
that the analyte measuring sensitivity of the Triage Meter System products is
comparable to the sensitivity levels of the conventional immunoassay
analyzers. The Triage Cardiac System is the first of the Company's
commerialized products developed under this platform. The Company is
developing three other applications for this platform: 1) the NeoralChek
System, a product for the monitoring of the concentration of cyclosporine, an
immunosuppressant drug prescribed to prevent organ rejection in organ
transplant recipients. 2) the Triage BNP Assay, a product to be used as an
aid in the diagnosis of congestive heart failure, and 3) the Triage LBP
Assay, a product to assist in the diagnosis of sepsis or bacteremia.
PRODUCT ATTRIBUTES
Although the Company's commercial products and products under development
are based upon the Triage Panel and Triage Meter System platforms and utilize
different technologies, they share common attributes which the Company
believes make them superior to conventional immunoassay analyzers:
- RAPID RESULTS: The Company's products and products under
development are designed to offer complete results in a rapid
timeframe .
- EASE OF USE: The Company's products and products under
development are designed to be simple to use. The Triage DOA
Panel has only three steps while the Triage Meter System
products are expected to require only one assay step.
- HIGH ANALYTICAL ACCURACY: The Company develops and uses high
quality biological and chemical reagents to yield highly
specific, accurate and reproducible analytical results.
- CAPABILITY OF PERFORMING MULTIPLE ANALYSES: The Company's
products and products under development are designed to
measure one or more target analytes simultaneously, including
reagent controls, without sacrificing the quality of the
individual analysis. This simultaneous detection capability
can provide significant time and cost savings compared to
current technologies.
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- RELIABILITY: Biosite's use of internal thresholds, built-in
controls, software lockouts and other controlling mechanisms
are intended to make its current and future products extremely
reliable in any hospital or clinical laboratory setting.
- COST EFFECTIVENESS: The Company's products and products under
development are designed to simplify the performance of highly
complex testing procedures and significantly reduce the cost
of testing, equipment acquisition and maintenance, making them
cost-effective alternatives to conventional immunoassay
analyzers.
PRODUCTS AND PRODUCTS UNDER DEVELOPMENT
The Triage DOA Panel was introduced in 1992 and has been used by hospital
labs and emergency departments to screen for up to eight commonly abused
prescription and illicit drugs or drug classes. During 1998, the Company
began commercialization of three new products, the Triage C. DIFFICILE Panel,
Triage Parasite Panel and Triage Cardiac System.
The Company has four additional products under development (Triage
Enteric Panel, NeoralChek System, Triage BNP System and Triage LBP System)
which apply the Company's Immediate Response Diagnostics technologies to a
variety of other medical testing needs. The Company continues to evaluate
other rapid diagnostic product opportunities that can utilize the Company's
technologies.
The Company intends, where appropriate, to enter into licensing and/or
collaborative arrangements to develop and commercialize additional future
products. The Company may not be able to negotiate license or collaborative
arrangements on favorable terms, if at all, in the future, or that its
current or future licensing or collaborative arrangements will be successful.
TRIAGE PANEL FOR DRUGS OF ABUSE
The Company believes the U.S. market for abused drug testing is
approximately $628 million annually. The U.S. market can be divided into
four major categories:
- MEDICAL TESTING: The medical testing segment represents
testing typically performed in a hospital laboratory. The
results are generally reported to emergency physicians and
psychiatrists. Such tests have the highest need for rapid
turnaround of results, and generally have the highest cost per
result.
- NON-MEDICAL TESTING: The non-medical testing market consists
of testing performed for the workplace, the criminal justice
setting and drug rehabilitation centers. Testing may be
performed on-site or at an occupational health provider, but
generally samples are sent to independent reference
laboratories. The demand for a rapid result varies by type of
industry, but typically is not quite as great as in the
medical segment. Additionally, the cost per result is slightly
reduced.
- REFERENCE LABORATORY TESTING: The reference laboratory
testing market accounts for a significant percentage of the
total drug testing market. The majority of samples come from
the non-medical testing market, although some smaller
hospitals in the medical testing market also send their
samples to reference laboratories. In general, results are
not available for at least 24 hours from the time the specimen
is collected. Despite relatively long turnaround times, the
reference laboratory market has remained substantial because
of its ability to produce results on a low cost per panel
basis and reduce the potential liability associated with
workplace testing.
HOSPITAL/EMERGENCY DEPARTMENT
Drug abuse plays a significant role in emergency medicine cases occurring
annually in the United States, either as a primary cause such as an overdose, or
as a contributing factor such as in the case of an accident. A diagnostic
dilemma confronts physicians when a patient is presented with symptoms that
could either be drug related or non-drug related. A patient brought to a
hospital emergency department in a coma may be under the influence of narcotics
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or sedatives, which may require one type of treatment or intervention.
Conversely, the same patient may have had a stroke or suffered some form of
trauma requiring a completely different type of care. The ability to obtain a
differential diagnosis in a timely manner greatly aids the course of
treatment.
Prior to the introduction of the Triage DOA Panel, drug or toxicology
screening was accomplished by several technologies, primarily automated
immunoassays and Gas Chromatography/Mass Spectroscopy ("GC/MS"). Although
GC/MS is the most specific identification method commercially available, it
is time consuming (requiring an average of approximately three hours per
test), complex and expensive, and is generally reserved for final
confirmation of specimens that have been screened positive by an immunoassay.
Automated immunoassays, although less expensive than those performed by
GC/MS, also require significant amounts of time (approximately one to two
hours) because of the necessity of performing analyses of several drugs
sequentially on each patient specimen. Additionally, in many cases the
equipment required to perform an immunoassay is not accessible on an
immediate or rapid basis.
The Triage DOA Panel is a rapid qualitative urine screen that analyzes a
single test sample for up to eight different illicit and prescription drugs
or drug classes and provides results in approximately 10 minutes. The Triage
DOA Panel is instrument independent, contains built-in controls for accuracy
and is capable of a high degree of specificity. Illicit drugs detected by the
Triage DOA Panel include: Amphetamines/Methamphetamines (speed, crystal),
Cocaine (crack), Opiates (heroin), Phencyclidine (angel dust),
Tetrahydrocannabinol (pot, marijuana), while prescription drugs tested by the
Triage DOA Panel include Barbiturates (Phenobarbital), Benzodiazepines
(Valium, Librium, Halcion), Tricyclic Antidepressants (Elavil, Tofranil) and
Methadone. The Triage DOA Panel is configured to test various combinations of
the foregoing drugs. In February 1995, the Company launched the Triage DOA
Plus TCA Panel, a configuration which includes a test for Tricyclic
Antidepressants ("TCA") which otherwise requires a separate blood test. Since
its introduction in February 1992, the Company has sold over 8.1 million
Triage DOA panels worldwide, and approximately 45% of hospitals in the United
States use the product.
The Company distributes the Triage DOA Panel products in the U.S.
hospital market segment through Fisher. Other country-specific and regional
distributors sell the Triage DOA Panel products in certain countries in
Europe, Latin America, the Middle East, Asia and Africa.
WORKPLACE SCREENING
New hires in major U.S. firms may be screened for drug usage as part of
pre-employment physicals. The majority of these test samples are sent to
centralized reference laboratories that could provide both the initial
immunoassay screening result and the confirmation of presumptive positive
results by an alternate method, such as GC/MS. Testing of government and
certain government regulated employees and contractors must be performed at
SAMHSA certified reference laboratories. Employers that are not government
contractors send their drug screens to their laboratory of choice or perform
on-site testing. Non-SAMHSA testing is estimated to account for over eight
million tests performed annually.
The majority of employers with drug screening programs have chosen not to
implement "on-site" testing in their facilities due to costly personnel and
regulatory burdens on an employer's in-house testing laboratory. These
industrial testers, however, still have a need for rapid results since many
employment decisions hinge on an employee's ability to pass physical and
other examinations that include a test for illegal drugs. Despite this need
for rapid results, there is a 24 to 48 hour wait based on the sample
transportation and testing process used by major reference laboratories.
Therefore, an immunoassay that provides rapid results, such as the Triage DOA
Panel, can get employees back to work quickly and save employers' money.
The Company established the ExpressTest One-Hour Drug Screen service, a
marketing program initiated in conjunction with regional providers of
occupational health services, as a means of expanding the market for the
Triage DOA Panel. The ExpressTest program incorporates the Company's
"near-site" testing strategy, using the Triage ExpressTest Panel (a test for
five illicit drugs or drug classes) to provide the benefits of rapid drug
test results without requiring employers to set up an on-site laboratory.
Participating occupational health clinics provide rapid results to industrial
clients that send prospective employees to them for pre-employment physicals
and drug screens. Biosite's sales force actively supports these selected
occupational health clinics in their marketing of the ExpressTest program to
potential industrial clients in their regional areas.
-7-
THE TRIAGE CARDIAC SYSTEM
The Company has estimated that, in 1998, over six million people in the
United States visited hospital emergency departments with complaints of chest
pain. Of those, approximately 650,000 were diagnosed with AMI and
approximately 800,000 were diagnosed with unstable angina. In total,
approximately 1.9 million of the patients who present with chest pain were
admitted to coronary care units. Of these, approximately 30,000 to 60,000
patients were misdiagnosed as not having an AMI. Additionally, approximately
450,000 of these patients who did not have an AMI were admitted to hospitals
and ultimately released within two days. The Company believes that rapid,
quantitative results for multiple cardiac markers provided at the
point-of-care may have a positive impact on misdiagnosed AMI, and may provide
substantial benefits to patients and savings to the hospital.
AMI is generally caused by the blocking or "occlusion" of an artery
providing oxygen-enriched blood to the heart. Without oxygen, the heart
muscle is destroyed, with prolonged occlusion resulting in additional muscle
damage. The destruction of cells in the heart muscle results in the release
of several markers into the bloodstream, including CK-MB, troponin I and
myoglobin.
Clinicians generally rely on patient history, electrocardiograms and
serial measurement of CK-MB for early diagnosis of AMI. Troponin I and
myoglobin are also emerging as useful adjuncts to CK-MB in the detection of
heart attacks. The Company believes that the concentrations of these three
markers typically peak and fall over different time periods and that
simultaneous measurement of these markers is a more accurate diagnostic
technique for AMI than the measurement of any one single marker. Studies have
shown that serum concentrations of myoglobin are elevated most quickly
post-AMI. Additionally, in patients presenting within 12 hours of AMI symptom
onset, quantitative serial measurement of myoglobin has demonstrated
significantly higher sensitivity in diagnosing AMI than CK-MB. Troponin I has
been shown to maintain an elevated concentration for a longer period of time
than CK-MB and myoglobin.
Several diagnostic tests have recently been developed to quantitatively
measure the blood levels of such markers. Unfortunately, the quantitative
measurement of multiple markers currently requires large, centralized
immunoassay systems that cannot directly analyze whole blood and are not
always available on a rapid basis. Additionally, these systems require
multiple reagent packs, as well as frequent standardization and quality
control. Since turnaround time for such test results is critical, current
immunoassay systems may not satisfy physician needs.
The Company believes that a rapid, point-of-care test capable of
quantitatively measuring multiple markers of an AMI would have a positive
impact on patient care. Accordingly, the Company's Triage Cardiac System is
designed to quantitatively measure the levels of CK-MB, troponin I and
myoglobin in a single test device from a whole-blood sample. The Triage Meter
System is designed to provide quantitative results of these measurements at
or near the point-of-care and may aid in the detection of AMI by providing
point-of-care quantitative results, enabling physicians to make treatment
decisions in a timely manner. The Company utilizes both distributor alliances
and a direct sales force in marketing the Triage Cardiac System.
THE TRIAGE C. DIFFICILE PANEL
CLOSTRIDIUM DIFFICILE ("C. DIFFICILE") is an opportunistic pathogen of
the intestinal tract that may thrive as a result of broad spectrum antibiotic
treatment. The bacteria may be found in asymptomatic carriers or may spread
among immunocompromised hospital patients. Toxins produced by the bacteria
mediate C. difficile-associated disease ("CDAD"), which may include
antibiotic-associated diarrhea and antibiotic-associated pseudo-membranous
colitis. Due to the potential spread of infection, patients identified as
possibly having CDAD are usually placed in isolation until the infection is
controlled. Symptoms of CDAD include diarrhea as well as fluid and weight
loss. It has been estimated over 3.0 million rapid tests for C. DIFFICILE
were performed annually in the United States. This number is expected to
continue to rise due to the expected increase in the number of patients who
are immunocompromised.
Historically, the use of a cytotoxin test, which takes 2 to 48 hours to
produce diagnostic results, was the only means to identify the toxin
associated with C. DIFFICILE. More recently, in response to the need for more
rapid identification of the C. DIFFICILE toxin, several manufacturers have
developed and marketed enzyme-linked immunosorbent assays ("ELISA") that can
be performed in one to two hours. These ELISA test formats are increasingly
used by hospitals testing for the toxin.
-8-
Although the ELISA technology is significantly faster than the cytotoxin
test, it still requires several precisely timed steps as well as multiple
standards every time the test is performed, making it unlikely that the
testing will be done when an individual specimen is sent to the laboratory.
The multiple standards and quality controls required with each run make the
processing of individual specimens expensive. As a result, specimens are
generally only processed in "batch" mode, delaying the diagnostic result, and
limiting the information available to a physician evaluating therapeutic
measures.
The Triage C. DIFFICILE Panel is designed to simplify the laboratory
procedure and improve the turnaround time for a physician to receive a result
by enabling laboratories to complete direct testing for the bacteria, as well
as testing for the toxin in less than 20 minutes. The Triage C. DIFFICILE
Panel is also designed to provide a negative predictive value that is
superior to that of existing immunoassays by coupling the results of direct
organism detection with toxin detection. Since the test is being designed
with built-in controls and standards, it may be performed individually or in
batches, by any laboratory technician, without compromising the quality of
the result. By improving the turnaround time to result, the clinician may
initiate therapy earlier and thus minimize a patient's time in isolation.
Rapid, accurate diagnosis of the bacteria and toxin should enable earlier
treatment, which may reduce length of stay in the hospital and may reduce
cost. The Company utilizes distributor alliances in marketing the Triage C.
DIFFICILE Panel.
THE TRIAGE PARASITE PANEL
Parasitic infection is a common cause of gastrointestinal disease and
diarrhea. Some of the more common parasites responsible for such infection
are GIARDIA LAMBLIA ("GIARDIA"), CRYPTOSPORIDIUM PARVUM ("C. PARVUM"),
ENTAMOEBA HISTOLYTICA and microsporidia species. According to the U.S. Center
for Disease Control and Prevention ("CDC"), intestinal parasitic infection is
a problem in the United States and that the prevalence of GIARDIA may be
increasing.
The most commonly employed method of detecting parasites from stool
samples is by a cumbersome ova and parasite ("O&P") microscopic examination,
typically of three consecutive stool specimens from the patient. The
preparation of the sample by a laboratory technologist involves stool
specimen dilution and the preparation of multiple microscope slides. Each
slide must then be observed via microscope by a technologist trained in the
identification of parasites. The time to diagnose parasitic infection is
prolonged due to the need for microscopic examination of multiple stool
specimens per patient. The prolonged time required to obtain results may
delay the treatment of patients.
It is estimated that in 1998 approximately 1.0 million O&P microscopic
examinations were performed in the United States. Because of the cumbersome
procedures and limited test menu of the current ELISA test formats, these
tests have had limited success in hospitals that perform larger volumes of
tests in batches. Recently, several manufacturers have developed and marketed
ELISA tests for the more rapid identification of two of the more common
parasites, GIARDIA and C. PARVUM.
The Triage Parasite Panel is designed to replace the standard O&P
microscopic detection method for three of the most commonly encountered
parasites: Giardia, C. parvum and Entamoeba histolytica/dispar in a single
test device. Because each test device includes controls, the product may be
used for any volume of tests. The Triage Parasite Panel makes rapid results
(less than 20 minutes) available to hospitals of any size, including
facilities that previously sent such testing to a reference lab. The
sensitivity of the Triage Parasite Panel is comparable to that of the current
O&P microscopic examination, using only a single patient specimen. This
should greatly reduce the collection burden for the patient, and reduce the
amount of labor for the laboratory technician. Additionally, the length of
time physicians spend waiting for results may be reduced. The Company
utilizes distributor alliances in marketing the Triage Parasite Panel. Sales
of the Triage Parasite Panel are expected to be seasonal in nature as
parasitic infections are less prevalent during the colder seasons of the year.
THE TRIAGE ENTERIC PANEL
Gastroenteritis, commonly described as "food poisoning," often occurs
among individuals who have consumed contaminated food or water or have been
exposed to stool contaminated with microorganisms such AS SALMONELLA,
CAMPYLOBACTER JEJUNI/COLI, SHIGELLA and ENTEROHEMORRHAGIC E. COLI. Eight to
24 hours after such exposure, individuals may experience abdominal pain,
nausea and diarrhea. It is estimated that in the United States approximately
3.0 million stool cultures are performed annually for the diagnosis of food
poisoning. Microorganisms
-9-
are often implicated in such cases.
Stool culture, currently the primary method of diagnosing food poisoning,
involves the inoculation of multiple culture plates with stool specimen.
After 24 to 48 hours, culture plates that exhibit bacterial growth are
subjected to biochemical tests that typically take an additional 24 hours. As
a result of the prolonged testing procedure, physicians generally wait 48 to
72 hours for test results.
The Triage Enteric Panel is being developed for identification of the
most common enteric bacteria responsible for food poisoning such as
SALMONELLA, CAMPYLOBACTER JEJUNI/COLI, SHIGELLA and ENTEROHEMORRHAGIC E.
COLI. The Triage Enteric Panel would enable the laboratory technician to
rapidly detect the presence of such enteric bacteria from a stool specimen.
This should greatly reduce the amount of labor required of laboratory
technicians, thereby reducing costs. Additionally, results can be returned to
the physician in a shorter period of time.
The Triage Enteric Panel is in the development stage.
THE NEORALCHEK SYSTEM
Transplants of human organs require suppression of the organ recipient's
immune system. Cyclosporine is the most widely used pharmaceutical for such
purposes, with annual worldwide sales in excess of $1.3 billion. Cyclosporine
is chronically administered to patients who have received an organ
transplant. Over 20,000 patients undergo organ transplantation in the United
States annually. In excess of 200,000 organ recipients worldwide take
immunosuppressant drugs on a daily basis. Novartis is the developer and
leading supplier of cyclosporine, and is involved in several collaborations
in the organ transplant field including health care management,
xenotransplantation, and near-patient testing in an effort to support the use
of organ transplantation.
The blood level of cyclosporine must be monitored to ensure that a
patient receives the appropriate therapeutic dose while minimizing toxicity.
Patients receiving cyclosporine must maintain a minimum concentration of the
drug that enables it to be effective, yet maintain a level that is low enough
not to be toxic. This range is often referred to as the therapeutic window.
Physicians primarily rely on large, centralized laboratories to measure
cyclosporine blood levels. The physician typically does not receive test
results for at least 4 to 48 hours, requiring a call back to the patient if
the dose of the drug needs to be adjusted. A smaller share of cyclosporine
testing is performed by high performance liquid chromatography ("HPLC"). The
current worldwide market for cyclosporine testing by immunoassay is estimated
to be over 5 million tests per year. Patients are monitored frequently in the
immediate post-transplant time frame with reduced, but continued testing,
averaging four times per year, for the remainder of the patient's lifetime.
The NeoralChek System (consisting of the NeoralChek Assay and the Triage
Meter) is designed to enable a physician to easily, rapidly and accurately
measure cyclosporine levels. The NeoralChek System is being developed to
provide a cost-effective means of determining cyclosporine levels on a
real-time basis in order to enable physicians to optimize drug therapy during
a patient's visit. As part of its research and development collaboration with
Novartis, Biosite has obtained licenses to certain technology that makes
rapid analysis of cyclosporine levels possible. See "-- Strategic and
Distribution Arrangements."
The NeoralChek System is in the development stage. If successfully developed
and approved for commercialization, the Company expects Novartis to support
the promotion of the NeoralChek System worldwide. The Company successfully
completed feasibility studies for the NeoralChek System under its antibody
license agreement with Novartis. Additionally, the Company and Novartis
expanded the scope of their collaboration to include the development of a
second version of the NeoralChek System. The attainment of certain milestones
under the expansion of the collaboration resulted in contract revenues of
$1.1 million during 1998. Additional payments to Biosite will be made if
certain milestones are achieved. The Company initiated clinical trials for
both versions of the NeoralChek System in June and July 1998. The clinical
trials were suspended in September 1998 to permit the Company to make
improvements to the NeoralChek System. The clinical trials may resume in the
first half of 1999.
THE TRIAGE BNP SYSTEM
Congestive Heart Failure ("CHF") is a chronic inability of the heart to
maintain an adequate output of blood from one or both ventricles of the heart,
resulting in congestion or swelling of certain veins or organs, and an
inadequate
-10-
blood supply to the body. It is estimated that approximately 400,000 new
cases of CHF occur each year. Current testing methods used in diagnosing CHF
include electrocardiograms, chest x-rays, echocardiography, and the analysis
of blood gases and electrolytes.
The Company has obtained a license to technology and patents developed by
Scios, Inc. for use in developing an assay for the diagnosis of congestive
heart failure by monitoring levels of B-type Natriuretic Peptide ("BNP"), a
hormone made primarily in the ventricles of the heart. Studies suggest that
levels of BNP become elevated in circulating blood plasma during heart
dysfunction associated with congestive heart failure in both symptomatic and
asymtomatic patients.
The Triage BNP System (consisting of the Triage BNP Assay and the Triage
Meter) is designed to enable a physician to easily, rapidly and accurately
measure BNP levels. The Triage BNP System is being developed to provide
physicians with a cost-effective means of determining BNP levels at the
point-of-care and aid in the diagnosis of congestive heart failure and assist
in the differentiation of CHF from other conditions with similar clinical
symptoms. Additionally, by providing physicians with a convenient means of
monitoring BNP levels in CHF patients, the Triage BNP Assay may aid in the
evaluation of the effectiveness of therapies utilized in CHF patient care.
The Company initiated clinical trials for the Triage BNP System in December
1998. The Company may not successfully develop or introduce any products
based upon the Scios-licensed technology.
THE TRIAGE LBP SYSTEM
Sepsis occurs when the bloodstream is infected by gram-negative bacteria.
An inflammatory reaction initiated by these bacteria and their associated
endotoxin can cause widespread damage to blood vessels leading to circulatory
shock, organ failure, gangrene of extremities and death. The complications
associated with sepsis can advance rapidly.
Biosite has obtained a U.S. license to certain technology and patents
developed by XOMA Corporation related to methods of measuring levels of
Lipopolysaccharide Binding Protein ("LBP") in human blood. Studies suggest
that levels of LBP become elevated as a specific response to endotoxin, a
poisonous component of gram-negative bacteria. Biosite is using this
technology to develop a diagnostic test to assist in the diagnosis of sepsis
or bacteremia.
The Triage LBP System (consisting of the Triage LBP Assay and the Triage
Meter) is designed to enable a physician to easily, rapidly and accurately
measure LBP levels. The Triage LBP System is being developed to provide
point-of-care physicians with a cost-effective diagnostic tool that will aid
them in differentiating endotoxin-related complications from other
inflammatory states with similar clinical symptoms. Additionally, the Triage
LBP System may help identify patients that would benefit from treatment with
anti-endotoxin drugs. The Company initiated clinical trials for the Triage
LBP System in December 1998. The Company may not successfully develop or
introduce any products based upon the XOMA licensed technology.
RESEARCH AND DEVELOPMENT
As of December 31, 1998, the Company had 75 employees in research and
development, 17 of which have Ph.D.s. The Company's research and development
organization is dedicated to the discovery and development of new
technologies which can be applied to future products and to the development
of new products with its existing platform technologies.
The Company has a research staff dedicated to the development and
production of antibodies through a variety of techniques. Recombinant
techniques are used to express proteins for use as diagnostic targets. The
Company's staff of chemists and biochemists synthesize drug targets and
compounds for diagnostic use and seek to perfect techniques for coupling
these compounds to biological reagents such as antibodies or labels. The
Company's development engineering staff is involved in the design and
development of new diagnostic device technologies as well as the processes
for their fabrication and interaction with biological and chemical reagents.
The Company's product development group completes final optimization of
assays and the Company's regulatory affairs group controls all in-house and
external clinical studies of the Company's products and prepares applications
to the FDA for pre-market clearance or approval.
-11-
MANUFACTURING
As of December 31, 1998, the Company had 106 employees in manufacturing
involved in reagent production, device assembly, engineering, quality
assurance/quality control and materials management.
Biosite maintains worldwide manufacturing rights to all current and
future products, except for the Triage Meter for which LRE maintains the
manufacturing rights. A key strategy of the Company is to provide high
quality analytical results in an efficient manner. To this end, the Company
invests in the design and development of manufacturing systems and
technologies that can produce a high quality product using controlled,
cost-effective manufacturing processes and equipment. The Triage C. DIFFICILE
and Triage Parasite Panels utilize the same or similar processes and
equipment as the Triage DOA Panel. The Company believes that the experience
it has acquired in manufacturing the Triage DOA Panel will provide benefits
in product quality and cost in manufacturing these new products and the
Triage Enteric Panel under development. During 1997 and 1998, the Company
developed the processes and systems for the manufacturing of its Triage
Cardiac System. As a result of manufacturing scale-up and capacity constraint
issues related to the production of the Triage Cardiac System, the Company
developed a backlog of orders for this product during the third and fourth
quarter of 1998. The Company addressed the manufacturing scale-up issues and
filled the backlog orders during December 1998 and the first quarter of 1999.
The Company expects its manufacturing capacities to be sufficient to
concurrently manufacture these new products and the Triage DOA Panel in the
same facility.
Except for the Triage Meter, all of the Company's products are
manufactured at its facility in San Diego, California. The Triage Meter is
purchased from LRE Relais + Elektronik GmbH ("LRE"), which is located in
Germany. Most of the antibodies used in the manufacture of the products were
developed by Biosite and the cell lines are owned or licensed by Biosite. In
addition, Biosite maintains its own in-house antibody production capability.
All other raw materials required to manufacture the Company's products are
obtained from outside suppliers.
The San Diego facility has received its registration as a diagnostic
product manufacturer from the FDA and from the California State Department of
Health & Services. The Company has also been licensed and certified to
manufacture products using controlled substances by the U.S. Drug Enforcement
Agency. However, there can be no assurance that the Company can continue to
comply with all government requirements and regulations that may lead to the
suspension or revocation of its right to manufacture. See "-- Government
Regulation" and "Risk Factors-- Government Regulation."
The Company has also developed and continues to improve its novel and
sophisticated processes and equipment for the production of its Triage
Cardiac Panel. LRE manufactures and supplies the meters used in the Company's
Triage Meter System platform products. The Company has increased its
manufacturing space at its San Diego facility to accommodate production of
the Triage Cardiac Panel.
SALES AND MARKETING
As of December 31, 1998, the Company has 49 employees in various sales and
marketing functions. The Company distributes its products to hospital
facilities in the United States primarily through Fisher, and in certain
countries in Europe, Latin America, the Middle East, Asia and Africa through
country-specific and regional distributors.
The Company anticipates that it may, if appropriate, enter into
additional distribution agreements with respect to its current products,
products currently under development and products that it develops in the
future, provided such products receive the requisite regulatory clearance or
approvals. The Company may not be able to enter into these or other
distribution agreements on acceptable terms, if at all. If the Company elects
to distribute products directly, it's direct sales, marketing and
distribution efforts may not be successful. A failure to enter into
acceptable distribution agreements or a failure of the Company to
successfully market its products would have a material and adverse effect on
the Company.
STRATEGIC AND DISTRIBUTION ARRANGEMENTS
Biosite's strategy for the research, development, commercialization and
distribution of some of its products entails entering into various arrangements
with corporate partners, licensors, licensees and others, and is dependent upon
the
-12-
success of these parties in performing their responsibilities. There can be
no assurance that these parties will perform their obligations as expected or
that any revenue will be derived from any of the arrangements. Under
Biosite's existing arrangements, Biosite is not obligated to make any
material capital expenditures. If products are successfully developed under
certain of the Company's existing arrangements, royalties will be payable by
the Company on sales of products which incorporate licensed technology.
FISHER HEALTHCARE DIVISION (FORMERLY CURTIN MATHESON SCIENTIFIC DIVISION) OF
FISHER SCIENTIFIC COMPANY
In April 1998, the Company entered into a new distribution agreement (the
"Fisher Agreement") with Fisher which expanded Fisher's role to include the
distribution of the Company's new products and certain potential new products
currently under development. Under the agreement, the Company granted to
Fisher an exclusive right to distribute Triage DOA Panel products, Triage
Micro Panel products, and Triage Cardiac System products to hospitals and
reference laboratories within the United States. Under certain circumstances
in the event that the Company elects to terminate the Fisher Agreement
without cause, the Company is obligated to make a one-time payment to Fisher.
Fisher purchases Biosite products on a monthly basis through firm purchase
orders. Fisher accounted for 81%, 80%, and 86% of Biosite's product sales for
the years ended December 31, 1996, 1997 and 1998, respectively.
LRE RELAIS + ELEKTRONIK GMBH ("LRE")
In September 1994, the Company entered into an agreement with LRE (the
"LRE Agreement") for the development of a hand-held meter to be used in all
Triage Meter System products commercially available or under development,
including the Triage Cardiac System, NeoralChek System, Triage BNP System and
Triage LBP System. Under the terms of the LRE Agreement, LRE developed and
produced the fluorescent meter according to specifications provided by
Biosite. For a total of approximately $1.9 million, the Company paid LRE for
certain development and tooling expenses incurred in the development of the
meter, based upon LRE's successful completion of certain feasibility,
prototype and preproduction milestones. In addition, the agreement specifies
that LRE is to be the Company's exclusive supplier of the Triage Meter during
the term of the LRE Agreement, unless LRE is incapable of satisfying
Biosite's needs or is prohibited from producing such meters for a specific
immunoassay application. Biosite will purchase the Triage Meters from LRE in
Deutsche Marks (or a successor currency to Deutsche Marks) on a quarterly
basis through firm purchase orders on a per device price basis which varies
according to sales volume.
ARKRAY KDK CORPORATION ("KDK")
In February 1995, the Company entered into a development, supply and
distribution agreement with KDK, pursuant to which the parties agreed to
collaborate in the development and marketing of the Triage Cardiac System.
Under the terms of the agreement, KDK is obligated to provide funding of up
to $2.0 million for the Company's development of the Triage Cardiac System,
$1.8 million of which has been paid and the remainder of which is to be paid
based upon the Company's achievement of milestones. In exchange for this
funding, the Company has granted KDK the exclusive right to distribute the
Triage Cardiac System in Japan and in certain countries of Asia, the Middle
East and Pacific Island countries (the "KDK countries"). The Company was
responsible for costs associated with performing clinical trials on and
obtaining regulatory approval of the Triage Cardiac System in the United
States, while KDK is responsible for such costs in Japan and in countries of
Asia, the Middle East and Pacific Island countries. If the Triage Cardiac
System is approved for commercial sale in the KDK countries, KDK will
purchase Triage Cardiac Panels from Biosite in U.S. dollars on a quarterly
basis through firm purchase orders on a per device fixed price basis. KDK
will also purchase the Triage Meters from the Company on a per device fixed
price basis. The distribution agreement provides for minimum annual purchase
quantities. KDK can terminate this agreement at any time.
NOVARTIS PHARMA AG ("NOVARTIS")
In September 1995, the Company entered into two license agreements with
Novartis relating to the Company's development of the NeoralChek System. The
first license is for cyclosporine antibodies and the second license is for
certain antibody-based assays. Under the terms of the agreements, and upon the
Company's successful completion of certain feasibility requirements, the Company
has the right to make, have made, use and sell the NeoralChek System using the
licensed Novartis antibodies and related technologies. The agreements
contemplate that the Company is to be responsible for all costs associated with
the development of the NeoralChek System. Under the two licenses, the
-13-
Company made payments (aggregating approximately $361,000) to Novartis and is
obligated to make additional payments of up to approximately $170,000 to
Novartis based upon the achievement of certain product development
milestones, and to pay royalties on sales of products developed by the
Company using such antibodies or related technologies. In connection with the
agreement, Novartis purchased $1.0 million of five-year 8% convertible
debentures which converted into 92,575 shares of Common Stock of the Company
upon the closing of the Company's initial public offering in February 1997.
In January 1998, as a result of the attainment of one of the milestones (the
successful completion of feasibility studies for the NeoralChek System under
development), the Company received $500,000 from Novartis in exchange for a
convertible debenture. The convertible debenture was immediately converted
into 41,666 shares of common stock of the Company based on the conversion
price of $12.00 per share. The Company is obligated to sell to Novartis an
additional $500,000 five-year 8% convertible debenture upon the attainment of
a milestone. The debenture would be convertible, at the sole option of the
Company, into shares of Biosite Common Stock at $12.00 per share.
Additionally, the Company and Novartis expanded the scope of their
collaboration to include the development of a second version of the
NeoralChek System. The attainment of certain milestones under the expansion
of the collaboration resulted in contract revenues of $1.1 million during
1998. Additional payments to Biosite will be made if certain milestones are
achieved. The Company initiated clinical trials for both versions of the
NeoralChek System in June and July 1998. The clinical trials were suspended
in September 1998 to permit the Company to make improvements to the
NeoralChek System. The clinical trials may resume in the first half of 1999.
PROPRIETARY TECHNOLOGY AND PATENTS
The Company's ability to compete effectively will depend in part on its
ability to develop and maintain proprietary aspects of its technology, and to
operate without infringing the proprietary rights of others or to obtain
licenses to such proprietary rights. Biosite has U.S. and foreign issued
patents and is currently prosecuting patent applications in the United States
and with certain foreign patent offices. There can be no assurance that any
of the Company's pending patent applications will result in the issuance of
any patents, that the Company's patent applications will have priority over
others' applications, or that, if issued, any of the Company's patents will
offer protection against competitors with similar technology. There can be no
assurance that any patents issued to the Company will not be challenged,
invalidated or circumvented in the future or that the rights created
thereunder will provide a competitive advantage.
The Triage DOA Panel, Triage C. DIFFICILE Panel, Triage Parasite Panel,
Triage Cardiac System and products under development may incorporate
technologies that are the subject of patents issued to, and patent
applications filed by, others. The Company has obtained licenses for certain
technologies and is negotiating to obtain licenses for technologies patented
by others. However, there can be no assurance that the Company will be able
to obtain licenses for technology patented by others on commercially
reasonable terms, if at all, that it will be able to develop alternative
approaches if it is unable to obtain licenses or that the Company's current
and future licenses will be adequate for the operation of Biosite's business.
The failure to obtain necessary licenses or to identify and implement
alternative approaches would prevent the Company from commercializing certain
of its products under development and would have a material adverse effect on
the Company's business, financial condition and results of operations.
Litigation may be necessary to enforce any patents issued to the Company
to protect trade secrets or know-how owned by the Company or to determine the
enforceability, scope and validity of the proprietary rights of others. In
March 1996, the Company settled a potential patent infringement claim by
obtaining a license to the contested patent in return for a one-time payment
of $2.2 million. In September 1996, the Company settled a patent infringement
claim filed by Abbott Laboratories and obtained a license to the contested
patent in return for the payment of $5.5 million and the agreement to pay
certain royalties.
In September 1997, Behring Diagnostics, Inc. and Behring Diagnostics,
GmbH filed a patent infringement action against the Company in the U.S.
District Court for the District of Delaware. The patent infringement action
alleged that the Company's Triage DOA Panel products infringed a patent held
by the plaintiffs, which expires in August 2000. The plaintiffs sought to
recover damages of an unspecified amount and to enjoin future sales of the
Triage DOA Panel products by the Company. Biosite answered the complaint,
denying infringement and asserting affirmative defenses that the patent is
invalid and unenforceable. Because of a merger, the identity of the
plaintiffs changed to Dade Behring Inc., Dade Behring Marburg GmbH and Syva
Company (collectively "Dade-Behring"). To avoid protracted litigation and
continued significant legal defense costs, the Company and Dade Behring
executed a settlement agreement in March 1999 that resolved all disputes
outstanding between the companies. Under the terms
-14-
of the settlement agreement, the Company obtained a license to the patent and
will provide Dade-Behring the option to evaluate certain proprietary
antibodies, resulting in a net payment of $1,050,000 to Dade-Behring by
Biosite.
On April 28, 1998, Spectral Diagnostics, Inc. ("Spectral") filed a patent
infringement action against the Company in the U.S. District Court for the
Western District of Wisconsin, alleging that the Company's Triage Cardiac
Panel infringes U.S. patent 5,744,358 which was issued on the date the suit
was filed. Spectral sought a permanent injunction and damages. Spectral also
sought a preliminary injunction that would enjoin the Company from selling
the Triage Cardiac Panel. On July 16, 1998, the Court issued an opinion
denying the motion for a preliminary injunction. Spectral also moved for
partial summary judgment on the issue of infringement. That motion was denied
on July 20, 1998. The established trial date of August 31, 1998 was set aside
while the two companies engaged in negotiations in an attempt to arrive at a
settlement in regards to all disputes outstanding between Biosite and
Spectral. In February 1999, a settlement agreement was executed that resolved
all disputes between the companies without a material adverse financial
impact to Biosite.
The Company also has received correspondence from other parties calling
to the Company's attention the existence of patents that they believe cover
technology which is or may be incorporated in Biosite's products and products
under development. Some of this correspondence has included offers to
negotiate the licensing of the patented technologies. There can be no
assurance that these matters will not result in litigation to determine the
enforceability, scope, and validity of the patents. Litigation, if initiated,
could seek to recover damages as a result of any sales of the products and to
enjoin further sales of such products.
Litigation that could be brought forth by other parties may result in
material expenses to the Company and significant diversion of effort by the
Company's technical and management personnel, regardless of the outcome. The
outcome of litigation is inherently uncertain and there can be no assurance
that a court would not find the third-party claims valid and that the Company
had no successful defense to such claims. An adverse outcome in litigation or
the failure to obtain a necessary license could subject the Company to
significant liability and could prevent the Company from selling the Triage
DOA Panel, Triage C. DIFFICILE Panel, Triage Parasite Panel or the Triage
Cardiac System, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company also relies upon trade secrets, technical know-how and
continuing invention to develop and maintain its competitive position. There
can be no assurance that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
the Company's trade secrets or disclose such technology, or that the Company
can meaningfully protect its trade secrets, or that the Company will be
capable of protecting its rights to its trade secrets.
Others may have filed and in the future are likely to file patent
applications that are similar or identical to those of the Company. To
determine the priority of inventions, the Company may have to participate in
interference proceedings declared by the USPTO that could result in
substantial cost to the Company. No assurance can be given that any patent
application of another will not have priority over patent applications filed
by the Company.
The commercial success of the Company also depends in part on the Company
neither infringing patents or proprietary rights of third parties nor breaching
any licenses that may relate to the Company's technologies and products. The
Company is aware of several third-party patents that may relate to the Company's
technology. There can be no assurance that the Company does not or will not
infringe these patents, or other patents or proprietary rights of third parties.
In addition, the Company has received and may in the future receive notices
claiming infringement from third parties as well as invitations to take licenses
under third party patents. Any legal action against the Company or its
collaborative partners claiming damages and seeking to enjoin commercial
activities relating to the Company's products and processes affected by third
party rights, in addition to subjecting the Company to potential liability for
damages, may require the Company or its collaborative partner to obtain a
license in order to continue to manufacture or market the affected products and
processes. There can be no assurance that the Company or its collaborative
partners would prevail in any such action or that any license (including
licenses proposed by third parties) required under any such patent would be made
available on commercially acceptable terms, if at all. There are a significant
number of U.S. and foreign patents and patent applications in the Company's
areas of interest, and the Company believes that there may be significant
litigation in the industry regarding patent and other intellectual property
rights. If the Company becomes involved in such litigation, it could consume a
substantial portion of the Company's managerial and financial resources, which
could have a material adverse effect on the Company's
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business, financial condition and results of operations.
COMPETITION
The market in which the Company competes is intensely competitive.
Biosite's competitors include health care companies that manufacture rapid
tests, laboratory-based tests and analyzers, as well as clinical reference
laboratories. The majority of diagnostic tests used by physicians and other
health care providers are performed by independent clinical reference
laboratories and hospital-based laboratories. The Company expects that these
laboratories will compete vigorously to maintain their dominance of the
testing market. In order to achieve market acceptance for its products, the
Company will be required to demonstrate that its products provide
cost-effective and time saving alternatives to tests performed by clinical
reference laboratories or traditional hospital-based laboratory procedures.
This will require physicians to change their established means of having
these tests performed. The Company's products may not be able to compete with
the testing services provided by traditional laboratory services. In
addition, companies with a significant presence in the diagnostic market,
such as Abbott Laboratories, Roche Boehringer Mannheim Corporation, Bayer
Diagnostics, Ortho Clinical Diagnostics, a division of Johnson & Johnson, and
Dade Behring, have developed or are developing diagnostic products that do or
will compete with the Company's products. These competitors have
substantially greater financial, technical, research and other resources and
larger, more established marketing, sales, distribution and service
organizations than the Company. Moreover, such competitors offer broader
product lines and have greater name recognition than the Company, and offer
discounts as a competitive tactic. In addition, several smaller companies are
currently making or developing products that compete with or will compete
with those of the Company. The Company's competitors may succeed in
developing or marketing technologies or products that are more effective or
commercially attractive than the Company's current or future products, or
that would render the Company's technologies and products obsolete. Moreover,
the Company may not have the financial resources, technical expertise or
marketing, distribution or support capabilities to compete successfully in
the future. In addition, competitors, many of which have made substantial
investments in competing technologies, may be more effective than the
Company's technologies, or may prevent, limit or interfere with the Company's
ability to make, use or sell its products either in the United States or in
international markets. See " -- Technology" and "-- Products and Products
under Development."
GOVERNMENT REGULATION
The testing, manufacture and sale of the Company's products are subject
to regulation by numerous governmental authorities, principally the FDA and
corresponding state and foreign regulatory agencies. Pursuant to the Federal
Food, Drug, and Cosmetic Act, and the regulations promulgated thereunder, the
FDA regulates the preclinical and clinical testing, manufacture, labeling,
distribution and promotion of medical devices. The Company will not be able
to commence marketing or commercial sales in the United States of new
products under development until it receives clearance or approval from the
FDA, which can be a lengthy, expensive and uncertain process. Noncompliance
with applicable requirements can result in, among other things, fines,
injunctions, civil penalties, recall or seizure of products, total or partial
suspension of production, failure of the government to grant premarket
clearance or premarket approval for devices, withdrawal of marketing
clearances or approvals and criminal prosecution. The FDA also has the
authority to request recall, repair, replacement or refund of the cost of any
device manufactured or distributed by the Company.
In the United States, medical devices are classified into one of three
classes (i.e., Class I, II or III) on the basis of the controls deemed
necessary by the FDA to reasonably ensure their safety and effectiveness.
Class I devices are subject to general controls (e.g., labeling, premarket
notification and adherence to the Quality System Regulation ("QSR") (formerly
Good Manufacturing Practices) and Class II devices are subject to general and
special controls (e.g., performance standards, postmarket surveillance,
patient registries and FDA guidelines). Generally, Class III devices are
those which must receive premarket approval by the FDA to ensure their safety
and effectiveness (e.g., life-sustaining, life-supporting and implantable
devices or new devices which have been found not to be substantially
equivalent to legally marketed devices).
Before a new device can be introduced in the market, the manufacturer must
generally obtain FDA clearance through clearance of a 510(k) notification or
approval of a pre-market approval ("PMA") application. A PMA application must be
filed if a proposed device is a new device not substantially equivalent to a
legally marketed Class I or Class II device, or if it is a preamendment Class
III device for which the FDA has called for PMAs. A PMA application must be
supported by valid scientific evidence to demonstrate the safety and
effectiveness of the device,
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typically including the results of clinical investigations, bench tests,
laboratory and animal studies. The PMA application must also contain a
complete description of the device and its components and a detailed
description of the methods, facilities and controls used to manufacture the
device. In addition, the submission must include the proposed labeling,
advertising literature and any training materials. The PMA approval process
can be expensive, uncertain and lengthy, and a number of devices for which
FDA approval has been sought by other companies have never been approved for
marketing.
Upon receipt of a PMA application, the FDA makes a threshold
determination as to whether the application is sufficiently complete to
permit a substantive review. If the FDA determines that the PMA application
is complete, the FDA will accept the application for filing. Once the
submission is accepted, the FDA begins an in-depth review of the PMA. The FDA
review of a PMA application generally takes one to three years from the date
the application is accepted, but may take significantly longer. The review
time is often significantly extended by FDA requests for additional
information or clarification of information already provided in the
submission. During the review period, it is likely that an advisory
committee, typically a panel of clinicians, will be convened to review and
evaluate the application and provide recommendations to the FDA as to whether
the device should be approved. The FDA is not bound by the recommendation of
the advisory panel. Toward the end of the PMA review process, the FDA
generally will conduct an inspection of the manufacturer's facilities to
ensure that the facilities are in compliance with applicable QSR
requirements. If FDA evaluations of both the PMA application and the
manufacturing facilities are favorable, the FDA may issue either an approval
letter or an approvable letter, which usually contains a number of conditions
that must be met in order to secure final approval of the PMA. When and if
those conditions have been fulfilled to the satisfaction of the FDA, the
agency will issue a PMA approval letter, authorizing commercial marketing of
the device for certain indications. If the FDA's evaluation of the PMA
application or manufacturing facilities is not favorable, the FDA will deny
approval of the PMA application or issue a non-approvable letter. The FDA may
determine that additional clinical investigations must be performed, in which
case the PMA may be delayed for one or more years while additional clinical
investigations are conducted and submitted in an amendment to the PMA.
Modifications to a device that is the subject of an approved PMA, its
labeling or manufacturing process may require approval by the FDA of PMA
supplements or new PMAs. Supplements to an approved PMA often require the
submission of the same type of information required for an initial PMA,
except that the supplement is generally limited to that information needed to
support the proposed change from the product covered by the original PMA.
A 510(k) clearance will be granted if the submitted information
establishes that the proposed device is "substantially equivalent" to a
legally marketed Class I or Class II medical device or to a preamendment
Class III medical device for which the FDA has not called for PMAs. The FDA
recently has been requiring more rigorous demonstration of substantial
equivalence than in the past, including in some cases requiring submission of
clinical data. It generally takes from three to 12 months from submission to
obtain 510(k) premarket clearance but may take longer. The FDA may determine
that a proposed device is not substantially equivalent to a legally marketed
device or that additional information is needed before a substantial
equivalence determination can be made. A "not substantially equivalent"
determination, or a request for additional information, could prevent or
delay the market introduction of new products that fall into this category.
For any devices that are cleared through the 510(k) process, modifications or
enhancements that could significantly affect safety or effectiveness, or
constitute a major change in the intended use of the device, will require new
510(k) submissions.
The Company has made modifications to the Triage DOA Panel since receipt
of initial 510(k) clearance. With respect to several of these modifications,
the Company has filed new 510(k) notices describing the modifications, and
has received FDA clearance of those 510(k) notices. The Company has made
other modifications to the Triage DOA Panel which the Company believes do not
require the submission of new 510(k) notices. There can be no assurance,
however, that the FDA would agree with any of the Company's determinations
not to submit a new 510(k) notice for any of these modifications, or would
not require the Company to submit a new 510(k) notice for any of these
modifications made to the Triage DOA Panel. If the FDA requires the Company
to submit a new 510(k) notice for any device modification, the Company may be
prohibited from marketing the modified the Triage DOA Panel until the 510(k)
notice is cleared by the FDA.
The Company is uncertain of the regulatory path to market that the FDA will
ultimately apply to the Company's products currently in development. Although
the Triage DOA Panel, Triage C. DIFFICILE Panel, Triage Parasite Panel and
Triage Cardiac System received 510(k) clearance, a PMA may be required for the
Triage Neoral, Triage BNP and Triage LBP Assays and other products now in
development. There can be no assurance that the FDA will not
-17-
determine that the Company must adhere to the more costly, lengthy and
uncertain PMA approval process for any of the Company's products in
development.
There can be no assurance that the Company will be able to obtain
necessary regulatory approvals or clearances for its products on a timely
basis, if at all. Delays in receipt of or failure to receive such approvals
or clearances, the loss of previously received approvals or clearances,
limitations on intended use imposed as a condition of such approvals or
clearances, or failure to comply with existing or future regulatory
requirements would have a material adverse effect on the Company's business,
financial condition and results of operations.
Before the manufacturer of a device can submit the device for FDA
approval or clearance, it generally must conduct a clinical investigation of
the device. Although clinical investigations of most devices are subject to
the investigational device exemption ("IDE") requirements, clinical
investigations of in vitro diagnostic ("IVD") tests, such as all of the
Company's products and products under development, are exempt from the IDE
requirements, including the need to obtain the FDA's prior approval, provided
the testing is noninvasive, does not require an invasive sampling procedure
that presents a significant risk, does not intentionally introduce energy
into the subject, and is not used as a diagnostic procedure without
confirmation by another medically established test or procedure. In addition,
the IVD must be labeled for research use only ("RUO") or investigational use
only ("IUO"), and distribution controls must be established to assure that
IVDs distributed for research or clinical investigation are used only for
those purposes.
The Company intends to conduct clinical investigations of its products
under development, which will entail distributing them in the United States
on an IUO basis. There can be no assurance that the FDA would agree that the
Company's IUO distribution of its IVD products under development will meet
the requirements for IDE exemption. Furthermore, failure by the Company or
the recipients of its products under development to maintain compliance with
the IDE exemption requirements could result in enforcement action by the FDA,
including, among other things, the loss of the IDE exemption or the
imposition of other restrictions on the Company's distribution of its
products under development, which would adversely affect the Company's
ability to conduct the clinical investigations necessary to support marketing
clearance or approval.
Any devices manufactured or distributed by the Company pursuant to FDA
clearance or approvals are subject to pervasive and continuing regulation by
FDA and certain state agencies. Manufacturers of medical devices for
marketing in the United States are required to adhere to QSR, which includes
testing, control, documentation, and other quality assurance requirements.
Manufacturers must also comply with Medical Device Reporting ("MDR")
requirements that a manufacturer report to the FDA any incident in which its
product may have caused or contributed to a death or serious injury, or in
which its product malfunctioned and, if the malfunction were to recur, it
would be likely to cause or contribute to a death or serious injury. Labeling
and promotional activities are subject to scrutiny by the FDA and, in certain
circumstances, by the Federal Trade Commission. Current FDA enforcement
policy prohibits the marketing of approved medical devices for unapproved
uses.
The Company is subject to routine inspection by the FDA and certain state
agencies for compliance with QSR requirements, MDR requirements and other
applicable regulations. The recently finalized QSR requirements include the
addition of design controls that will likely increase the cost of compliance.
Changes in existing requirements or adoption of new requirements could have a
material adverse effect on the Company's business, financial condition and
results of operation. There can be no assurance that the Company will not
incur significant costs to comply with laws and regulations in the future or
that laws and regulations will not have a material adverse effect upon the
Company's business, financial condition and results of operations.
The Company also is subject to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of hazardous or
potentially hazardous substances. There can be no assurance that the Company
will not incur significant costs to comply with laws and regulations in the
future or that such laws or regulations will not have a material adverse
effect upon the Company's business, financial condition and results of
operations.
The use of Biosite's products is also affected by the Clinical Laboratory
Improvement Amendments of 1988 ("CLIA") and related federal and state
regulations which provide for regulation of laboratory testing. The scope of
these regulations includes quality control, proficiency testing, personnel
standards and federal inspections. CLIA categorizes tests as "waived,"
"moderately complex" or "highly complex," on the basis of specific criteria.
There can
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be no assurance that any future amendment of CLIA or the promulgation of
additional regulations impacting laboratory testing will not have a material
adverse effect on the Company's ability to market its products or on its
business, financial condition or results of operations.
EMPLOYEES
As of December 31, 1998, Biosite employed 281 individuals. Of these, 21
hold Ph.D.s and 19 hold other advanced degrees. None of the Company's
employees is covered by collective bargaining agreement. The Company believes
that it maintains good relations with its employees.
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RISK FACTORS
DEPENDENCE ON DEVELOPMENT AND INTRODUCTION OF NEW PRODUCTS FOR REVENUE GROWTH
AND PROFITABILITY
Except for the Triage DOA Panel, Triage C. DIFFICILE Panel, Triage
Parasite Panel and Triage Cardiac System, all of the Company's products are
still under development and may not be successfully developed or
commercialized on a timely basis, or at all. If the Company is unable, for
technological or other reasons, to complete the development, introduction or
scale-up of manufacturing for any new product or if any new product is not
approved for marketing or does not achieve a significant level of market
acceptance, the Company's business, financial condition and results of
operations would be materially and adversely affected.
The Company believes that its revenue growth and profitability will
substantially depend upon its ability to complete development of and
successfully introduce these new products. In addition, the successful
development of some of these new products will depend on the development of
new technologies. The Company will be required to undertake time-consuming
and costly development activities and seek regulatory approval for these new
products. The Company may experience difficulties that could delay or prevent
the successful development, introduction and marketing of these new products.
Regulatory clearance or approval of any new products may not be granted by
the U.S. Food and Drug Administration or foreign regulatory authorities on a
timely basis, or at all, and the new products may not be successfully
commercialized. The Company has limited resources to devote to the
development of all its potential products and consequently a delay in the
development of one product may delay the development of other products.
In order to successfully commercialize any new products, the Company will
be required to establish and maintain reliable, cost-efficient, high-volume
manufacturing capacity and a cost effective sales force and administrative
infrastructure and an effective product distribution system for the products.
As a result of manufacturing scale-up and capacity constraint issues related
to the production of the Triage Cardiac System, the Company developed a
backlog of orders for the Triage Cardiac System during the third and fourth
quarter of 1998. See "Business-- Products and Products Under Development,"
"--Manufacturing" and "-- Government Regulation."
LIMITED HISTORY OF PROFITABILITY; POTENTIAL QUARTERLY FLUCTUATIONS IN FUTURE
OPERATING RESULTS
The Company incurred an operating loss during the last five quarters. The
Company may not return to operating profitability on a quarterly or annual
basis in the future. The Company believes that future operating results will
be subject to quarterly fluctuations due to a variety of factors, including
whether and when new products are successfully developed and introduced by
the Company, market acceptance of current or new products, regulatory delays,
product recalls, manufacturing delays or capacity constraints, shipment
problems, seasonal customer demand, the timing of significant orders, changes
in reimbursement policies, competitive pressures on average selling prices,
changes in the mix of products sold and defense and resolution of patent
matters.
Operating results would also be adversely affected by a downturn in the
market for the Company's current and future products, if there are any.
Because the Company is continuing to increase its operating expenses for
supporting its expanded sales and marketing activities, manufacturing
scale-up costs and new product development, the Company's operating results
would be adversely affected if its sales and gross profits did not
correspondingly increase or if its product development efforts are
unsuccessful or subject to delays. The Company's limited operating history
makes accurate prediction of future operating results difficult or
impossible. The Company may not sustain revenue growth or remain profitable
on a quarterly or annual basis and its growth or operating results may not be
consistent with predictions made by securities analysts. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
NEAR-TERM DEPENDENCE OF THE COMPANY ON THE TRIAGE DOA PANEL
To date, sales of the Triage DOA Panel products have accounted for almost
all of the Company's sales. The Company expects its revenue and profitability
will substantially depend on the sale of the Triage DOA Panel products for the
foreseeable future. A reduction in demand for the Triage DOA Panel products
would have a material adverse effect on the Company's business, financial
condition and results of operations. The Company believes that growth in
-20-
sales of the Triage DOA Panel products is slowing as the available U.S.
market becomes saturated. Competitive pressures could also erode the
Company's profit margins for the Triage DOA Panel products. The Company's
continued growth will depend on its ability to successfully commercialize its
new products (the Triage C. DIFFICILE Panel, Triage Parasite Panel and Triage
Cardiac System) and develop and commercialize other products, and to gain
additional acceptance of the Triage DOA Panel products in new market
segments, such as occupational health.
During 1998, the Company received FDA approval to market the Triage C.
DIFFICILE Panel, Triage Parasite Panel and the Triage Cardiac System and
began selling each of the products in March, October and May, respectively.
Sales of these new products represented less than 7% of net sales in 1998.
The Company may not be able to successfully develop and commercialize new
products, including the Triage C. DIFFICILE Panel, Triage Parasite Panel, and
Triage Cardiac System, and the Company may not be able to maintain or expand
its share of the drug-testing market. Technological change or the development
of new or improved diagnostic technologies could result in the Company's
products becoming obsolete or noncompetitive. See "Business -- Products and
Products Under Development."
DEPENDENCE ON KEY DISTRIBUTORS; LIMITED DIRECT SALES EXPERIENCE
The Company relies upon key distributor alliances, such as with Fisher,
to distribute the Triage DOA Panel products, Triage C. DIFFICILE Panel,
Triage Parasite Panel and Triage Cardiac System and may rely upon
distributors to distribute products under development. The Triage DOA Panel
products are currently marketed pursuant to exclusive distribution agreements
in the U.S. hospital market segment by Fisher (which accounted for 86% of
product sales in 1998) and in some countries in Europe, Latin America, the
Middle East, Asia and Africa by country-specific and regional distributors.
The loss or termination of one or more of these distributors could have a
material adverse effect on the Company's sales unless suitable alternatives
can be arranged.
As the Company has launched three new products in 1998 and with the
potential launch of additional products from the Company's development
pipeline, the Company has increased the size of its sales force in the U.S.
and negotiated a new long-term distribution agreement with Fisher. This
long-term distribution agreement expanded Fisher's role to include the
distribution of the Triage Cardiac System, the Triage C. DIFFICILE Panel,
Triage Parasite Panel and some of Biosite's potential new products in the
U.S. medical market.
If any of the Company's distribution or marketing agreements are
terminated and the Company is unable to enter into alternative agreements or
if the Company elects to distribute new products directly, the Company would
have to invest in additional sales and marketing resources, including
additional field sales personnel, which would significantly increase future
selling, general and administrative expenses. The Company has limited
experience in direct sales, marketing and distribution of its products. The
Company's direct sales, marketing and distribution efforts may not be
successful. Further, Biosite may not be able to enter into new distribution
or marketing agreements on satisfactory terms, or at all. A failure to enter
into acceptable distribution agreements or a failure of the Company to
successfully market its products would have a material and adverse effect on
the Company.
INTENSELY COMPETITIVE INDUSTRY; RAPID TECHNOLOGICAL CHANGE
The market in which the Company competes is intensely competitive.
Biosite's competitors include health care companies that manufacture rapid
tests, laboratory-based tests and analyzers, as well as clinical reference
laboratories. Currently, the majority of diagnostic tests used by physicians
and other health care providers are performed by independent clinical
reference laboratories and hospital-based laboratories. The Company expects
that these laboratories will compete vigorously to maintain their dominance
of the testing market. In order to achieve market acceptance for its
products, the Company will be required to demonstrate that its products
provide cost-effective and time saving alternatives to tests performed by
clinical reference laboratories or traditional hospital-based laboratory
procedures. This will require physicians to change their established means of
having such tests performed. The Company's products may not be able to
compete with the testing services provided by traditional laboratory services.
In addition, companies with a significant presence in the diagnostic
market, such as Abbott Laboratories, Roche Boehringer Mannheim Corporation,
Bayer Diagnostics, Ortho Clinical Diagnostics, a division of Johnson &
Johnson, and DADE Behring, have developed or are developing diagnostic
products that do or will compete
-21-
with the Company's products. These competitors have substantially greater
financial, technical, research and other resources and larger, more
established marketing, sales, distribution and service organizations than the
Company. Moreover, these competitors offer broader product lines and have
greater name recognition than the Company, and offer discounts as a
competitive tactic. In addition, several smaller companies are currently
making or developing products that compete with or will compete with those of
the Company. The Company's competitors may succeed in developing or marketing
technologies or products that are more effective or commercially attractive
than the Company's current or future products, or that would render the
Company's technologies and products obsolete. Moreover, the Company may not
have the financial resources, technical expertise or marketing, distribution
or support capabilities to compete successfully in the future. In addition,
competitors, many of which have made substantial investments in competing
technologies, may be more effective than the Company or may prevent, limit or
interfere with the Company's ability to make, use or sell its products either
in the United States or in international markets. See "Business --
Technology," " -- Products and Products Under Development" and "--
Competition."
UNCERTAINTY OF PATENT AND PROPRIETARY TECHNOLOGY PROTECTION; POTENTIAL
INABILITY TO LICENSE TECHNOLOGY FROM THIRD PARTIES
The Company's ability to compete effectively will depend in part on its
ability to develop and maintain proprietary aspects of its technology, and to
operate without infringing the proprietary rights of others or to obtain
licenses to such proprietary rights. Biosite has U.S. and foreign issued
patents and is currently prosecuting patent applications in the United States
and with certain foreign patent offices. The Company's pending patent
applications may not result in the issuance of any patents. Additionally, the
Company's patent applications may not have priority over others'
applications, or, if issued, the Company's patents may not offer protection
against competitors with similar technology. Any patents issued to the
Company may be challenged, invalidated or circumvented in the future and the
rights created thereunder may not provide a competitive advantage.
The Triage DOA Panel, Triage C. DIFFICILE Panel, Triage Parasite Panel,
Triage Cardiac System and products under development may incorporate
technologies that are the subject of patents issued to, and patent
applications filed by, others. The Company has obtained licenses for some
technologies and may negotiate to obtain other licenses for technologies
patented by others. However, the Company may not be able to obtain licenses
for technology patented by others on commercially reasonable terms, or at
all. The Company may not be able to develop alternative approaches if it is
unable to obtain licenses and the Company's current and future licenses may
not be adequate for the operation of it's business. The failure to obtain
necessary licenses or to identify and implement alternative approaches would
prevent the Company from commercializing certain of its products under
development and would have a material adverse effect on the Company's
business, financial condition and results of operations.
Litigation may be necessary to enforce any patents issued to the Company,
to protect trade secrets or know-how owned by the Company or to determine the
enforceability, scope and validity of the proprietary rights of others. In
March 1996, the Company settled a potential patent infringement claim by
obtaining a license to the contested patent in return for a one-time payment
of $2.2 million. In September 1996, the Company settled a patent infringement
claim filed by Abbott Laboratories and obtained a license to the contested
patent in return for the payment of $5.5 million and the agreement to pay
certain royalties.
In September 1997, Behring Diagnostics, Inc. and Behring Diagnostics,
GmbH filed a patent infringement action against the Company in the U.S.
District Court for the District of Delaware. The patent infringement action
alleged that the Company's Triage DOA Panel products infringed a patent held
by the plaintiffs, which expires in August 2000. The plaintiffs sought to
recover damages of an unspecified amount and to enjoin future sales of the
Triage DOA Panel products by the Company. Biosite answered the complaint,
denying infringement and asserting affirmative defenses that the patent is
invalid and unenforceable. Because of a merger, the identity of the
plaintiffs changed to Dade Behring Inc., Dade Behring Marburg GmbH and Syva
Company (collectively "Dade Behring"). To avoid protracted litigation and
continued significant legal defense costs, the Company and Dade Behring
executed a settlement agreement in March 1999 that resolved all disputes
outstanding between the companies. Under the terms of the settlement
agreement, the Company obtained a license to the patent and will provide
Dade Behring the option to evaluate certain proprietary antibodies, resulting
in a net payment of $1,050,000 to Dade-Behring by Biosite. The Company has
charged to defense of patent matters in the accompanying statements of income
the applicable license costs related to years prior to 1998.
On April 28, 1998, Spectral Diagnostics, Inc. ("Spectral") filed a patent
infringement action against the Company in the U.S. District Court for the
Western District of Wisconsin, alleging that the Company's Triage Cardiac
Panel
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infringes U.S. patent 5,744,358 which was issued on the date the suit was
filed. Spectral sought a permanent injunction and damages. Spectral also
sought a preliminary injunction that would enjoin the Company from selling
the Triage Cardiac Panel. On July 16, 1998, the Court issued an opinion
denying the motion for a preliminary injunction. Spectral also moved for
partial summary judgment on the issue of infringement. That motion was denied
on July 20, 1998. The established trial date of August 31, 1998 was set aside
while the two companies engaged in negotiations in an attempt to arrive at a
settlement in regards to all disputes outstanding between Biosite and
Spectral. In February 1999, a settlement agreement was executed that resolved
all disputes between the companies without a material adverse financial
impact to Biosite.
The Company may become subject to additional patent infringement claims
and litigation or interference proceedings conducted in the U.S. Patent and
Trademark Office ("USPTO") to determine the priority of inventions. The
Company also has received correspondence from other parties calling to the
Company's attention the existence of patents that they believe cover
technology which is or may be incorporated in Biosite's products and products
under development. Some of this correspondence has included offers to
negotiate the licensing of the patented technologies. There can be no
assurance that these matters will not result in litigation to determine the
enforceability, scope, and validity of the patents. Litigation, if initiated,
could seek to recover damages as a result of any sales of the products and to
enjoin further sales of such products.
Litigation that could be brought forth by other parties may result in
material expenses to the Company and significant diversion of effort by the
Company's technical and management personnel, regardless of the outcome. The
outcome of litigation is inherently uncertain and there can be no assurance
that a court would not find the third-party claims valid and that the Company
had no successful defense to such claims. An adverse outcome in litigation or
the failure to obtain a necessary license could subject the Company to
significant liability and could prevent the Company from selling the Triage
DOA Panel, Triage C. DIFFICILE Panel, Triage Parasite Panel, the Triage
Cardiac System or other products it may develop, which would have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company also relies upon trade secrets, technical know-how and
continuing invention to develop and maintain its competitive position. Others
may independently develop substantially equivalent proprietary information
and techniques or otherwise gain access to the Company's trade secrets or
disclose such technology, and the Company may not be able to protect its
trade secrets or its rights to its trade secrets.
Others may have filed and in the future are likely to file patent
applications that are similar or identical to those of the Company. To
determine the priority of inventions, the Company may have to participate in
interference proceedings declared by the USPTO that could result in
substantial cost to the Company. Patent applications of others may have
priority over patent applications filed by the Company.
The commercial success of the Company also depends in part on the Company
neither infringing patents or proprietary rights of third parties nor
breaching any licenses that may relate to the Company's technologies and
products. The Company is aware of several third-party patents that may relate
to the Company's technology. There can be no assurance that the Company does
not or will not infringe these patents, or other patents or proprietary
rights of third parties. In addition, the Company has received and may in the
future receive notices claiming infringement from third parties as well as
invitations to take licenses under third party patents. Any legal action
against the Company or its collaborative partners claiming damages and
seeking to enjoin commercial activities relating to the Company's products
and processes affected by third party rights, in addition to subjecting the
Company to potential liability for damages, may require the Company or its
collaborative partner to obtain a license in order to continue to manufacture
or market the affected products and processes. The Company or its
collaborative partners may not prevail in any such action and any license
(including licenses proposed by third parties) required under any such patent
may not be made available on commercially acceptable terms, or at all. There
are a significant number of U.S. and foreign patents and patent applications
in the Company's areas of interest, and the Company believes that there may
be significant litigation in the industry regarding patent and other
intellectual property rights. Litigation concerning patent and other
intellectual property rights could consume a substantial portion of the
Company's managerial and financial resources, which would have a material
adverse effect on the Company's business, financial condition and results of
operations.
GOVERNMENT REGULATION; NO ASSURANCE OF OBTAINING REGULATORY APPROVALS
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The testing, manufacture and sale of the Company's products are subject
to regulation by numerous governmental authorities