Document/Exhibit Description Pages Size
1: 10-K Form 10-K for Digene Corp 83 401K
2: EX-10.37 Stock Purchase Agreement Dated as of June 30,1998 37 128K
3: EX-21 Subsidiaries of the Registrant 1 4K
4: EX-23.1 Consent of Ernst & Young LLP 1 6K
5: EX-27 Financial Data Schedule 1 6K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________to _________
Commission file number 0-28194
DIGENE CORPORATION
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(Exact name of registrant as specified in its charter)
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Delaware 52-1536128
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State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
9000 Virginia Manor Road
Beltsville, Maryland 20705
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (301) 470-6500
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share
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(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 (section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ ]
Based upon the last sale price of the registrant's Common Stock on
September 11, 1998, the aggregate market value of the 9,241,627 outstanding
shares of voting stock held by non-affiliates of the registrant was $63,536,186.
As of September 11, 1998, 14,302,278 shares of the registrant's
Common Stock were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference in
this Report on Form 10-K:
1) The registrant's definitive Proxy Statement for its Annual
Meeting of Stockholders to be filed not later than 120 days
after the close of the fiscal year (incorporated into Part
III).
TABLE OF CONTENTS
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PAGE
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PART I
ITEM 1. BUSINESS.............................................................................. 1
ITEM 2. PROPERTIES............................................................................ 37
ITEM 3. LEGAL PROCEEDINGS..................................................................... 37
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................... 37
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS................................................................... 40
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.................................................. 43
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................................. 44
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................ 50
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................................... 51
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE................................................... 72
PART III
ITEMS 10-13*......................................................................................... 72
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON
FORM 8-K.............................................................................. 72
SIGNATURES........................................................................................... 76
* Incorporated by reference to the Registrant's definitive Proxy Statement.
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PART I
ITEM 1. BUSINESS
THE COMPANY
Digene Corporation ("Digene" or the "Company") was incorporated under
Delaware law in 1987. Digene develops, manufactures, and markets proprietary DNA
and RNA testing systems for the screening, monitoring and diagnosis of human
diseases. The Company's products are designed to help improve clinical outcomes
and reduce the overall cost of disease management. The Company's core business
is focused in the areas of women's health and blood virus testing. All of the
Company's products and proposed products are DNA and RNA probe-based tests,
hardware, and accessories incorporating Digene's proprietary Hybrid Capture(R)
technology which is sensitive, rapid, accurate, objective, non-invasive, and
easy to use, and can be utilized in virtually any laboratory setting without the
necessity of sophisticated technology.
Digene is commercializing its Hybrid Capture technology in areas where
detection and monitoring can be directly linked to therapeutic action, where
early detection is crucial to cure, and where diagnostic applications transition
to screening for routine preventative healthcare. Additionally, the Company
intends to develop new products to further enhance its core technology and to
provide opportunities for growth and profitability.
The Company is developing a wide range of Hybrid Capture tests to detect
the presence of human papillomavirus ("HPV"), certain other sexually transmitted
diseases ("sexually transmitted diseases" or "STDs") such as chlamydia
trachomatis ("chlamydia") and neisseria gonorrhea ("gonorrhea"), and certain
blood viruses such as human immunodeficiency virus ("HIV"), cytomegalovirus
("CMV"), and hepatitis B virus ("HBV"). The Company's lead product, the Hybrid
Capture HPV DNA test, which is the only Company product that has been approved
by the U.S. Food and Drug Administration ("FDA"), detects the presence of HPV,
the cause of essentially all cervical cancer, which is the second most common
cancer among women worldwide.
The key elements of the Company's business strategy include: (i)
establishing HPV testing as the new standard of care for cervical cancer
screening by working closely with clinical reference laboratories, third-party
payors, and health care providers; (ii) leveraging its core technology and
expertise to develop a wide range of DNA and RNA diagnostic and monitoring tests
relating to women's health and blood viruses; (iii) capitalizing on near term
revenue opportunities; (iv) leveraging existing customers and distribution
channels; and (v) pursuing strategic alliances to increase market acceptance of
its products and to expand global marketing and distribution efforts.
BACKGROUND: WOMEN'S HEALTH AND BLOOD VIRUSES
WOMEN'S HEALTH
The Company has initially focused on two major women's health issues,
cervical cancer and sexually transmitted diseases. Cervical cancer is the second
most common cancer among women worldwide. Although the Pap smear has
successfully reduced deaths caused by cervical cancer in the United States, it
does not detect HPV, a STD which is the primary cause of cervical cancer. The
Pap smear is a subjective, labor intensive test that has limited sensitivity and
diagnostic accuracy leading to equivocal test results and false negative
diagnoses, which results in over-treatment or under-diagnosis and significant
costs to the healthcare system.
Sexually transmitted diseases, in addition to HPV, are also a serious
women's health problem, with more than 300 million cases worldwide in women and
men. Women are five times more likely than men to have a sexually transmitted
disease. Although treatments are available for most sexually transmitted
diseases, many people remain undiagnosed. If undetected and left untreated in
women, STDs, such as chlamydia and gonorrhea, have potentially serious and
costly consequences, including infertility and pelvic inflammatory disease
("PID").
Cervical Cancer
Cervical cancer is the second most common cancer among women worldwide,
with approximately 440,000 new cases reported annually. If detected in the
precancerous stage, virtually all cases of cervical cancer are preventable. The
treatment of cervical cancer after it reaches the invasive stage may require
chemotherapy, radiation treatment or surgery, including hysterectomy. These
forms of treatment are difficult and expensive, and are often unsuccessful.
HPV Infection and Cervical Cancer
HPV is the cause of essentially all cervical cancer. Studies have
demonstrated that at least 93% of cervical cancers and high-grade cervical
lesions contain one or more cancer-causing types of HPV. Moreover, a recent
prospective study conducted by the National Cancer Institute ("NCI") on 21,000
women with a history of normal Pap smears found that approximately 80% of those
who tested positive for cancer-causing types of HPV developed clinically
significant cervical lesions within four years.
Pap Smear Testing
To enable the early detection of cervical cancer, gynecologists typically
recommend annual screening examinations. The standard screening method in the
United States and in other major industrialized countries is the Pap smear test,
in which a sample of cervical cells is examined under a microscope. Pap smears
have been the principal means of cervical cancer screening in the United States
since the 1940s. More than 50 million Pap smears are performed annually in the
United States, and the Company believes that an equivalent number are performed
in the rest of the world. Each Pap smear is classified according to the Bethesda
System for Reporting Cervical/Vaginal Cytologic
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Diagnoses into one of five categories: (1) Negative; (2) Atypical Squamous Cells
of Undetermined Significance ("ASCUS"); (3) Low Grade Squamous Intraepithelial
Lesions ("LSIL"); (4) High Grade Squamous Intraepithelial Lesions ("HSIL"); and
(5) Carcinoma. For purposes of this report, negative Pap smear results are
referred to as "normal;" ASCUS, as "equivocal;" and LSIL, HSIL, and Carcinoma,
as "abnormal." An equivocal classification is given to Pap smear results that
cannot be definitely classified as either normal or abnormal.
Follow-up testing and treatment is based on the classification of the Pap
smear result. Women with normal Pap smears typically require no follow-up beyond
continuation with annual Pap smear testing. In general, women with abnormal Pap
smears undergo a colposcopic examination (visual examination of the cervix with
the aid of a colposcope). Most of these women also undergo biopsy at the time of
colposcopy, and many go on to have any suspected lesions ablated (physically
removed with a scalpel or cauterizing instrument). Many women with equivocal Pap
smears are treated as if they have abnormal Pap smears, even though only an
estimated 25% to 35% of these women actually have cervical disease.
Chlamydia Trachomatis and Neisseria Gonorrhea
Chlamydia is the most common sexually transmitted disease in the United
States, and is a major health problem worldwide, with approximately 89 million
new cases reported annually. Genital chlamydia infection, if left untreated, has
serious potential consequences, such as infertility, ectopic pregnancy,
cervicitis, and PID. Gonorrhea, which affects 62 million people worldwide, is
the second most common sexually transmitted disease in the United States and may
result in severe genital complications in both women and men if left untreated.
If properly detected, both chlamydia and gonorrhea are easily treatable with low
cost antibiotic therapy. However, routine and broad-based screening for
chlamydia and gonorrhea have been limited by the insufficient sensitivity of
some culture methods, the invasive and cumbersome specimen collection methods
frequently employed, and the time and cost associated with performing these
tests.
BLOOD VIRUSES AND VIRAL LOAD MONITORING
Blood viruses, such as HIV, CMV, and HBV, are leading causes of morbidity
and death, and until recently, were untreatable. Over the last several years,
antiviral therapies have been developed for these diseases. To maximize the
effectiveness of these expensive and toxic therapies, physicians rely on viral
load monitoring to quantify the amount of virus in a patient's system. By
precisely measuring viral loads in their patients and identifying non-responding
patients early in treatment, physicians are able to better tailor antiviral
therapies for their patients, including more precisely monitoring responses to
different therapies, recognizing when a patient develops viral resistance, and
measuring how quickly the infection will progress to chronic disease.
3
Human Immunodeficiency Virus
Development of antiviral treatments for HIV is an area of intense research
and development. The availability of more numerous and more potent drugs to
inhibit HIV replication has permitted the design of therapeutic strategies
involving combinations of antiviral drugs that accomplish prolonged suppression
of HIV to undetectable levels. However, the Company believes that approximately
25% of these patients have exhibited some level of resistance to these antiviral
combinations, thereby necessitating continual re-evaluation of the effectiveness
of the combination therapy. Measurement of viral load has been shown to be a
powerful predictor of the effectiveness of potential therapeutic agents, as well
as to monitor an individual's risk of progression to acquired immune deficiency
syndrome ("AIDS") or death. Recent National Institutes of Health treatment
guidelines for AIDS patients recommend the measurement of HIV viral load at the
time of diagnosis and at least every three to four months thereafter.
Currently there is only one FDA approved test capable of monitoring HIV
viral load. However, clinical reference laboratories frequently rely on
internally developed HIV tests or commercially produced tests designed for
research purposes to measure HIV viral load. The Company believes that the
currently available HIV tests are technically complex to perform and, as a
result, may produce unreliable and nonreproducible results. Additionally, these
tests are unable to detect the critical subtypes of the HIV virus which can
cause false negative diagnosis and result in the failure to appropriately treat
infected patients.
Cytomegalovirus
CMV is a systemic infection that can cause complications in several sites
in the body, including the retina, gastrointestinal tract, lungs, liver, and
central nervous system. CMV is the most common viral opportunistic infection in
transplant patients and in AIDS patients. An estimated $1 billion is spent
annually in the United States on the prevention and treatment of CMV-related
diseases. The drugs available to treat CMV infection are both toxic and
expensive, and ideally, should be administered only when active CMV infection
has been definitively identified.
While tests exist to detect the presence of CMV, all of these tests suffer
from significant limitations. Conventional tissue culture methods have a low
level of sensitivity, can require up to 28 days to produce results, and are
labor intensive. Rapid culture methods can provide results within one or two
days, but have a low level of sensitivity. Although antigen tests can detect
active CMV infection and are highly sensitive, they are technically complex,
labor intensive, and have limited reliability. Antibody tests, which are
currently used to detect viruses such as HIV, are of limited utility in
detecting CMV, since most healthy adults have antibodies against CMV.
Additionally, current tests do not allow viral quantification, and therefore,
effective monitoring of CMV infection.
4
Hepatitis B Virus
HBV is the fifth most common cause of death from disease worldwide, causing
an estimated one million deaths annually, and is the second most common chronic
infectious disease worldwide. The World Health Organization ("WHO") estimates
that more than two billion people are infected with HBV, including an estimated
350 million people who are chronically infected. HBV is 100 times more
contagious than the HIV virus and it is transmitted through blood transfusions,
contaminated needles, sexual contact, and vertical transmission (from mother to
child). Currently, the only approved drug for the treatment of hepatitis B is
alpha interferon, which is only effective in approximately 25% to 40% of the
infected patients. However, new therapies are being developed, including several
nucleoside analogues, such a lamivudine and famciclovir, which have demonstrated
great promise for the treatment of patients with chronic hepatitis B. HBV viral
load monitoring is required to measure the effectiveness of HBV antiviral
therapy and drug resistance.
Antigen tests also have significant limitations in the diagnosis of HBV
infection and the monitoring of HBV therapeutic response. Since antigen tests
can only detect the levels of HBV antigens, they are not capable of measuring
viral load, and cannot adequately monitor therapeutic response. In addition,
certain mutant strains of HBV do not produce antigens and therefore cannot be
detected by antigen tests, resulting in false negative diagnoses. Similarly, in
Asia, where HBV is endemic, many patients have immunotolerance and do not
generate HBV antibodies, and cannot be diagnosed or monitored with antigen
tests.
Currently available HBV DNA tests lack the sensitivity and range of
quantitation for use with the new therapeutic approaches under development.
These first generation tests are adequate for monitoring alpha interferon
therapy, but because their limited sensitivity is inadequate (typically not less
than 50,000 viral genome copies per milliliter), they cannot be used to confirm
the complete suppression of HBV virus in serum. As with current HIV treatment
guidelines, the new HBV therapeutic approaches are designed to eliminate the HBV
virus from a patient's blood. Consequently, new tests are required to measure
viral load over a very broad range.
THE DIGENE SOLUTION
Digene develops, manufactures and markets proprietary DNA and RNA detection
systems, based on its Hybrid Capture technology, for the screening, monitoring,
and diagnosis of HPV and other STDs, including chlamydia and gonorrhea, and
blood viruses including HIV, CMV, and HBV. The Company's products are designed
to improve clinical outcomes by providing more rapid, accurate, and objective
detection of disease and reduce the overall cost of disease management. The
Company believes its Hybrid Capture technology platform is a significant
improvement over existing technologies because of its specificity, speed, ease
of use, accuracy, and ability to quantify viral load. In addition, the Company
believes its detection system can be reliably used in virtually any laboratory
setting without the necessity of sophisticated technology or highly trained lab
technicians.
5
Women's Health
Digene manufactures and markets the only FDA-approved test for detection of
cancer-causing types of HPV. The Company's HPV test, which has been approved by
the FDA for the follow-up treatment of women with equivocal Pap smears and has
received approval to be marketed in selected European and South American
countries, including Germany, the United Kingdom, and Brazil, allows physicians
to identify women who are most at risk of having or developing cervical disease
and cervical cancer. The Company is also developing Hybrid Capture tests for the
diagnosis of chlamydia and gonorrhea. These tests have been designed to deliver
superior sensitivity compared to traditional culture techniques and are well
suited for use in moderate to high volume laboratory environments. In addition,
the Company's chlamydia and gonorrhea tests can be performed using the same
sample required for HPV detection. The Company believes that the key benefits
provided by its Hybrid Capture technology for the screening, monitoring, and
diagnosis of HPV and other STDs include the following:
Replace or Enhance Pap Smear-based Screening. The Company believes that its
HPV test is a significant improvement over traditional methods of screening for
cervical cancer based on the Pap smear. The Digene HPV test could provide more
accurate, timely, and cost-effective detection of cervical cancer and cervical
cancer precursors when combined in screening programs with the Pap smear, or
when used as a stand-alone test.
Provides Accurate, Easily Interpreted Results. Clinical studies conducted
by the Company indicate that the Company's HPV test is highly sensitive and
highly specific for the detection of cervical disease. Such clinical studies
indicated that Digene's HPV test is capable of detecting cervical disease in up
to 92% of the cases in which cervical disease is present. This represents a
significant improvement over the Pap smear's estimated sensitivity of 60% to
80%. The results generated by the Company's HPV test are objective, providing a
clear determination of the presence of cancer-causing types of HPV, thereby
reducing the need for highly trained cytotechnologists.
Enables Cost-Effective Follow-up Screening of Equivocal Pap Smears.
Digene's HPV test enables clinicians to, in effect, classify equivocal Pap
smears as either normal or abnormal. The Company's test detects and measures the
presence of cancer-causing types of HPV, thereby allowing the clinician to
identify women who are most at risk of having or developing cervical disease and
cervical cancer. The Company believes that the use of its HPV test for the
follow-up screening of women with equivocal Pap smears will improve the ability
to accurately screen for cervical cancer and reduce the need for costly and
invasive follow-up procedures, such as colposcopy and biopsy.
Under Digene's recommended follow-up protocol, women with equivocal Pap
smears undergo the Company's HPV test to determine the presence of
cancer-causing HPV types. Only those patients testing positive for
cancer-causing types of HPV undergo colposcopy and biopsy, while those testing
negative require no immediate follow-up beyond routine Pap smear testing. The
Company's test may be performed on clinical samples taken at the same time as
the Pap smear and stored until needed, thus eliminating the need for a return
visit to the physician's office.
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Reduces Likelihood of False Negatives. The high level of sensitivity of the
Company's HPV test should increase the possibility that precancerous cervical
lesions will be detected. Studies indicate that when used in conjunction with
Pap smear testing, the Company's HPV test can detect 95% to 100% of high grade
lesions and virtually all instances of cervical cancer. The Company believes
that by reducing the number of false negatives, many cases of precancerous
cervical disease will be detected at earlier stages, when the available
therapies are more effective and the survival rates are higher.
Predicts Development of Disease. The Company believes that testing for the
presence of cancer-causing types of HPV has considerable predictive value. In
one study, approximately 80% of women with a history of normal Pap smears who
tested positive for cancer-causing types of HPV developed clinically significant
cervical lesions within four years.
Reducing Laboratory Costs by Linking STD Testing to HPV Detection. Digene
believes that the ability to test for chlamydia and gonorrhea from the same
patient sample used for Digene's HPV test will provide a marketing advantage by
reducing laboratory costs and providing greater convenience to physicians and
patients. The chlamydia and gonorrhea tests are designed to deliver superior
sensitivity as compared to traditional culture methods. Preliminary results of
clinical studies on women have indicated that the Company's chlamydia test is
capable of detecting disease in up to 98% of the cases in which the disease is
present, while the Company's gonorrhea test is capable of detecting disease in
up to 92% of the cases in which it is present. In addition, because these tests
are based on a 96-well microtiter plate format, the Company believes they are
ideally suited for moderate to high volume testing. Additionally, unlike
traditional culture-based tests, these tests can be performed using urine
samples.
Blood Viruses
The Company is currently developing Hybrid Capture detection systems for
HIV, CMV, and HBV. The Company's tests for these viruses are designed to provide
highly sensitive, accurate, reproducible, and reliable measurement of viral
load. Similar to its tests for detection of HPV and other STDs, the Company's
blood virus tests are easier to use than current tests and do not require
expensive or sophisticated laboratory equipment or highly trained lab
technicians to generate timely and reliable results.
Digene's Hybrid Capture blood virus tests have been designed to provide
rapid and accurate measurement of viral load to enable physicians to reliably
monitor baseline infection levels on an ongoing basis. As a result, the Company
believes that physicians using the Company's tests will be able to make more
informed treatment decisions regarding the timing and effectiveness of antiviral
therapy for the treatment of HIV, CMV, and HBV. The Company believes that the
major benefits provided by its Hybrid Capture technology for detection of blood
viruses include the following:
Accurate detection of HIV Subtypes. Currently available HIV RNA tests are
unable to detect critical subtypes of the HIV virus, including certain subtype B
and subtype O strains. Consequently, current HIV tests cause false negatives,
which can result in infected patients remaining untreated. The Company's Hybrid
Capture technology can detect 92% of the HIV genome, which allows more
7
accurate detection of critical subtypes of HIV. As a result, the Company
believes that its HIV RNA test will reduce the number of false negatives and
allow earlier detection of the virus, thereby allowing anti-viral therapy to be
initiated at an earlier stage. In addition, the Company believes that its HIV
test is a significant improvement over currently available tests because of its
specificity, rapid processing time, improved accuracy, and ability to quantify
viral load.
Positive Identification of Active CMV Infection. The Company believes that
its CMV test can more accurately measure and differentiate active from latent
CMV infection in transplant, AIDS, and other immunocompromised patients. In
clinical trials, the Hybrid Capture CMV test accurately detected CMV infection
in 97% of the cases in which it was determined by alternate methods to be
present. The Company believes that its test will improve patient management by
ensuring that costly and toxic CMV therapies are only administered when active
CMV infection is definitively present.
Improved HBV Detection and Monitoring. The Company has designed its HBV
test to measure the effectiveness of new nucleoside analogue therapies to
completely suppress the HBV virus. The Company's test is capable of detecting
viral levels across a broad range of HBV genomes, from approximately 5,000 to
one billion viral genome copies per milliliter. The Company believes that its
test is more sensitive than currently used antigen tests and will therefore
reduce the number of false negative results, resulting in a significant
improvement in the standard of care.
STRATEGY
The Company's principal objective is to establish its proprietary Hybrid
Capture detection systems as a standard of care in the areas of women's health
and blood virus testing. The key components of the Company's strategy are as
follows:
Establish HPV Testing as the New Standard of Care. The Company is focused
on establishing its HPV test as the new standard of care for cervical cancer
screening. The Company is working closely with clinical reference laboratories,
third-party payors, health care providers, and their affiliated physicians who
influence the introduction and acceptance of new technologies. The Company has
supported and participated in more than a dozen major multi-center trials,
involving more than 75,000 patients, including an ongoing 7,300 patient NCI
study designed to establish the clinical utility and the cost-effectiveness of
HPV screening of women with equivocal or low-grade Pap smears.
The Company believes that adoption of the Company's HPV test by
government-sponsored screening programs and managed care organizations is
critical for establishing the Company's HPV test as the new standard of care for
cervical cancer screening. Accordingly, the Company is working with a number of
organizations to demonstrate the utility and cost-effectiveness of the Company's
HPV test and to raise public awareness of the benefits of HPV testing. In the
United Kingdom, the Company is working with the Imperial Cancer Research Fund
("ICRF") which is directing a 12,000-women screening study for the detection and
prevention of cervical cancer using Digene's HPV test, with the Hybrid
Capture(R) II technology. The ICRF is one of the world's leading organizations
dedicated to the defeat of all forms of cancer. This extensive study will
constitute one of the largest screening trials in the United Kingdom and is
Digene's first large population study of HPV testing as a primary screen
for
8
cervical cancer. In a pilot study conducted by the ICRF, HPV DNA testing
detected pre-cancerous abnormalities in approximately 95% of cases compared to
approximately 75% for the Pap smear. In the Netherlands, the Company has
acquired Viropath B.V. ("Viropath"), a Dutch company developing products and
services for cervical cancer screening using tests in HPV. The founders of
Viropath have been instrumental in recently initiating a 40,000 women trial,
sponsored by the Dutch government, to evaluate the utility of HPV testing as a
primary screening test for cervical cancer in the Netherlands. In the United
States, preliminary studies of a large clinical study conducted with Kaiser
Permanente indicate that the Company's HPV test, based on its Hybrid Capture II
technology, identified 90% of women with high grade cervical disease from a
population of patients with equivocal Pap smears, compared to approximately 75%
for the Pap smear. The Company is also participating in a National Cervical
Cancer Public Education Campaign to educate women and physicians about the link
between HPV and cervical cancer, and recent improvements in cervical cancer
screening technology. The Company believes that these activities combined with
its other marketing sales activities will help more rapidly establish HPV
testing as the standard of care in the United States, Europe, and other parts of
the world.
Leveraging Core Technology to Develop New Proprietary Detection Systems.
The Company intends to continue to leverage its Hybrid Capture technology
platform to develop additional tests. The Company has already used the expertise
it gained in the development of its Hybrid Capture HPV test to create and
commercialize a portfolio of DNA and RNA test systems for screening, diagnosis,
and monitoring of sexually transmitted diseases and blood viruses.
Capitalize on Near Term Revenue Opportunities. The Company currently has
launched in the U.S. and international markets five tests for the detection of
HPV, chlamydia and gonorrhea, CMV, and HBV. In particular, the Company believes
that its HPV test represents an immediate market opportunity. Currently, the
Company is marketing its HPV test in the United States as a follow-up test for
women with equivocal Pap smears. Internationally, the Company is also marketing
its HPV test as a primary screen either in conjunction with or separate from the
Pap smear. In August 1997, the Company launched its chlamydia and gonorrhea
tests internationally. The Company believes that these tests will generate
near-term revenue since they can be performed using the same sample collected
for HPV testing. In December 1997, the Company launched its HIV test in Europe.
Leverage Existing Customers and Distribution Channels. The Company
currently sells its detection systems to more than 700 clinical laboratories
through a global sales and marketing organization. The Company intends to
leverage its existing distribution channels as well as its reputation for
developing high quality, ultra sensitive, detection systems to accelerate the
adoption of its cervical cancer, sexually transmitted disease, and blood virus
tests.
Pursue Strategic Alliances. The Company intends to continue to pursue
strategic alliances with other manufacturers of medical diagnostic products,
pharmaceutical companies, and clinical reference laboratories in order to
increase market acceptance of its products and to expand its marketing efforts.
The Company currently is working with Cytyc Corporation ("Cytyc") to develop
methods and protocols for testing for HPV directly from specimens collected for
Pap smears, which enables physicians to obtain cervical cancer screening,
cytology, and virology test results from a single patient
9
specimen. The new single sample approach, approved by the FDA in September 1997,
facilitates the use of the Digene HPV test with the Cytyc ThinPrep Pap test to
eliminate the need for a return office visit and second sampling of the patient
to confirm disease. The Company is pursuing other co-marketing and distribution
agreements with clinical testing laboratories and pharmaceutical companies for
the co-promotion of the Company's women's health and blood virus tests. For
example, the Company is working with LabCorp of America ("LabCorp"), the largest
reference laboratory in the United States, whereby LabCorp will promote Digene's
HPV test to its physician clients. The Company believes these marketing efforts
will encourage physicians to request the Company's women's health tests as a
regular part of their cervical cancer screening protocol and blood virus tests
as a regular part of their patient monitoring protocol.
PRODUCTS
Digene's Hybrid Capture detection system, which is the basis for all of the
Company's DNA and RNA testing systems, is a rapid, accurate, easy-to-use,
ultra-sensitive technology which can be used in virtually any laboratory
setting with standard laboratory equipment. The Company believes that its
Hybrid Capture system is a significant improvement over other detection
technologies because of its specificity, rapid processing time, improved
accuracy, and ability to quantify viral load. The Company has developed two
versions of its Hybrid Capture technology, the Hybrid Capture I ("HC I") and
Hybrid Capture II ("HC II") systems. The HC I system, the Company's first
generation DNA hybrid detection system, which is currently being used at more
than 600 sites worldwide, tests samples individually in polystyrene tubes and
has been approved by the FDA for the follow-up screening of HPV in women with
equivocal Pap smears. The HC II system, which has not been approved by the FDA,
uses a 96-well microtiter plate format which permits simultaneous screening of
multiple samples from a single plate and is designed to be more efficient, less
expensive, and easier to use than the HC I system.
The Company is using its Hybrid Capture technology platform to develop and
commercialize a wide range of DNA and RNA testing systems for the screening,
monitoring, and diagnosis of HPV, other STDs such as chlamydia and gonorrhea,
and blood viruses such as HIV, CMV, and HBV. The following table summarizes the
Company's DNA and RNA testing systems:
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[Enlarge/Download Table]
STATUS(1)
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POTENTIAL
OUTSIDE WORLDWIDE
TARGET UNITED STATES UNITED STATES MARKET
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HPV HPV HC I test approved for follow- HPV HC I test marketed for 10 million(2)
up screening of women with screening of women in conjunction
equivocal Pap smears with Pap smear
PMA supplement for HPV HC II HPV HC II test marketed for primary 150 million(2)
test for follow-up screening of screening of women
women with equivocal Pap smears
submitted in September 1997 Launched in March 1997
Chlamydia and 510(k) notification for chlamydia Launched in August 1997 89 million(3)
Gonorrhea and gonorrhea HC II tests submitted (Chlamydia)
in April 1998 62 million(3)
(Gonorrhea)
HIV Expect to begin clinical trials in Launched in December 1997 21 million(4)
1999 on HIV HC II test
CMV 510(k) notification submitted in Launched in March 1997 1 million(6)
December 1997 for CMV HC I tests(5)
HBV HBV HC I test available for HBV HC I test marketed and 300 million(7)
research use only distributed
Launch of HBV HC II test
in May 1998
--------------------
(1) As described herein, certain of the Company's products have not received
marketing approvals from the FDA or certain foreign authorities. There can
be no assurance that any such products will receive approvals on a timely
basis, if at all.
(2) Represents estimated number of equivocal Pap smears diagnosed annually and
the total number of Pap smears performed annually.
(3) Represents estimated number of new cases worldwide on an annual basis.
(4) Represents estimated number of cases worldwide.
(5) 501(k) notification withdrawn in July 1997. The Company compiled
additional data and submitted another 501(k) notification in December 1997.
(6) Represents estimated number of cases worldwide of active CMV infection.
(7) Represents estimated number of cases worldwide of chronic HBV infection.
11
Digene HPV Test
Digene manufactures and markets the only test approved by the FDA to detect
cancer-causing types of HPV. Clinical studies indicate that the Company's HPV HC
I test is capable of detecting cervical disease in up to 92% of the cases in
which cervical disease is present.
The Company holds issued patents relating to the detection of four HPV
types and has licenses to issued patents and patent applications covering eight
additional HPV types. The Company's HPV HC I test for the follow-up screening of
women with equivocal Pap smears utilizes DNA sequences for seven of these HPV
types. The Company's next generation HPV test, based on its HC II technology,
utilizes DNA sequences for eighteen HPV types. Preliminary studies indicate that
the HC II test is capable of detecting cervical disease in up to 95% of those
cases in which cervical disease is present.
Currently, the Company's HPV HC I test is being marketed and distributed in
the United States for the follow-up screening of women with equivocal Pap
smears. The Company submitted a premarket approval "(PMA") supplement to the FDA
for its HPV HC II test in September 1997. In March 1997, the Company launched
its HPV HC II test internationally. Outside the United States the Company is
marketing its HPV HC II test for the primary screening of women either alone or
in conjunction with the Pap smear. The Company plans to begin to market its HPV
HC II test in the United States for the follow-up screening of women in
conjunction with Pap smears after it receives the necessary approval from the
FDA. There can be no assurance that the FDA will grant clearance for the
Company's HPV HC II test in a timely manner, if at all, or will not require the
submission of additional clinical data or an original PMA application.
Digene Chlamydia and Gonorrhea Tests
The Company is developing its chlamydia and gonorrhea tests, which utilize
the Company's HC II technology, to provide clinicians with an accurate, timely,
and non-invasive means of diagnosing these STDs. The Digene Chlamydia and
Gonorrhea HC II tests will be uniquely positioned since they are the only STD
detection systems which can be run from the same patient sample as the HPV
tests, thereby reducing the number of specimens collected, and lowering overall
costs associated with sample processing. These tests can be used either together
or individually in conjunction with the HPV test. The tests detect the presence
of both chlamydia and gonorrhea in women from cervical swabs, as well as in men
through the collection of urine samples. Preliminary clinical studies on women
have indicated that Digene's Chlamydia HC II test is capable of detecting
chlamydia in up to 98% of the cases in which the disease is present, while the
Gonorrhea HC II test is capable of detecting gonorrhea in up to 92% of the cases
in which it is present.
The Company submitted 510(k) applications for its Chlamydia/Gonorrhea HC II
tests to the FDA in April 1998 and launched the tests outside the United States
in August 1997. There can be no assurance that the FDA will grant clearance on
the 510(k) applications submitted for the Company's chlamydia/gonorrhea tests in
a timely manner, if at all, or will not require the submission of additional
clinical data or a PMA application.
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Digene HIV Test
Digene is currently developing its HIV HC II test based on Hybrid Capture
II technology for HIV viral load monitoring. The HIV HC II test has been shown
in independent studies to provide highly sensitive, accurate, reproducible, and
reliable measurements of HIV viral load. The Company's HIV HC II test is the
only system which can detect 92% of the HIV genome, which allows accurate
detection of critical subtypes of HIV, including subtype B and O strains. The
HIV HC II test was launched outside the United States in December 1997.
Digene CMV Test
Digene's CMV HC I test allows qualitative detection of virus to accurately
differentiate active from latent CMV infection for transplant and AIDS/HIV
patients. The Company plans to target use of its CMV HC I test to (i) accurately
identify AIDS patients at risk of CMV end organ disease, and who would benefit
from preemptive therapy, and (ii) select transplant patients at risk of CMV
infection and needing protective therapy. The Company expects to position its
CMV and HIV tests together for improved patient management in HIV/AIDS related
disease.
Digene conducted clinical trials of its CMV tests in the United States and
Canada at The Cleveland Clinic, Mount Sinai Hospital (Toronto), and Mount Zion
UCSF (San Francisco), the results of which enabled the Company to submit a
510(k) application to the FDA in December 1997. The trials demonstrated that the
CMV HC I test is capable of detecting CMV infection in up to 97% of the cases in
which it was determined by alternate methods to be present. There can be no
assurance that the FDA will grant clearance in a timely manner, if at all, or
will not require the submission of additional clinical data or a PMA
application. The Company has been marketing and distributing its CMV HC I test
outside the United States since March 1997.
Digene HBV Test
Digene is developing a next generation HBV HC II test for improved
therapeutic monitoring of patients with HBV infection. The test is expected to
detect viral levels across a broad range of HBV genomes. Initial tests indicate
that the Company's HBV DNA test can detect approximately 5,000 to one billion
viral genome copies per milliliter. In addition, the HBV HC II test is designed
to replace antigen-based monitoring methods because it is able to detect
patients who have HBV infection but do not have HBV antigens. The Company
believes the HBV HC II test will be effective for determining disease prognosis,
helping to direct therapy, and monitoring efficacy of therapy.
The HBV HC I test is currently marketed and distributed as a diagnostic
test outside the United States. The Company launched its HBV HC II test as a
diagnostic test and a viral load monitoring test outside the United States in
May 1998.
13
MARKETING AND SALES
The Company's marketing and sales strategy is to achieve broad market
acceptance of the Hybrid Capture system in the areas of women's health and blood
virus testing. The Company has more than 700 customers for its Hybrid Capture
products on a worldwide basis.
United States Market
The Company currently markets its products in the United States and Canada
to substantially all major clinical reference and hospital laboratories through
a ten-person direct sales force supported by technical and customer service
representatives.
The Company has active marketing programs directed at the managed care
market and the fee-for-service market. The Company's managed care strategy is to
work with the nation's leading managed care organizations to demonstrate the
cost-effectiveness and clinical benefits of the Digene HPV test in a managed
care setting. As part of this effort, the Company is working with Kaiser
Permanente on a study involving 46,000 women which the Company believes will
demonstrate the clinical utility and cost effectiveness of the Company's HPV
test in a managed care setting. Preliminary findings of the Kaiser Permanente
study indicate that the Company's HPV test based on its HC II technology
identified 90% of women with high-grade cervical disease from a population of
patients with equivocal Pap smears. The preliminary results further indicate
that use of the Company's HPV test could reduce the referral rate for colposcopy
of patients with equivocal Pap smears by 61%, reducing laboratory tests and
doctors office procedures and significantly reducing costs in overall cervical
cancer screening. The Company has a dedicated managed care sales team which is
communicating the results of the Kaiser Permanente study and other studies to
managed care providers and the national reference laboratories who service these
institutions.
In the fee-for-service market, the Company intends to create demand through
joint marketing programs with clinical reference laboratories and through
co-marketing arrangements with other strategic partners. For example, the
Company is currently marketing its HPV test together with Cytyc's ThinPrep(R)
System, a sample preparation system which allows for the automated preparation
of cervical cell specimens. The collaboration with Cytyc is designed to provide
physicians with a cost-effective and practical procedure for better management
of those patients with equivocal Pap smears. The new single sample approach,
approved by the FDA in September 1997, facilitates the use of the Digene HPV
test with the Cytyc ThinPrepRPap test to eliminate the need for a return office
visit and second sampling of the patient to confirm disease. Additionally, the
Company has recently formed an alliance with LabCorp, the largest reference
laboratory in the United States, whereby LabCorp will promote Digene's HPV test
to its physician clients.
Revenues from product sales in the United States were $2,948,000,
$3,882,000, and $4,632,000 in fiscal 1996, 1997, and 1998, respectively.
14
International Markets
On July 1, 1998, the Company acquired all of the outstanding capital stock
of Viropath, a Dutch company developing products and services for cervical
cancer screening using tests for HPV. In addition, two/three of the founders of
Viropath became consultants to the Company in the field of cervical disease
diagnostics and screening for HPV. The Company expects to work closely with
these consultants to accelerate the establishment of the Company's global
cervical cancer screening business.
Since 1997, the Company has marketed its products in Europe, and has
distributed its products in Europe, Eastern Europe, Africa, the Middle East, and
Singapore under certain marketing and distribution agreements with International
Murex Technologies Corporation ("Murex"). On April 17, 1998, Abbott Laboratories
("Abbott") and Murex entered into an agreement pursuant to which Abbott acquired
all of the outstanding shares of Murex's common stock. The Company and Abbott
are operating in good faith under the existing distribution and marketing
agreements. See "Business Distribution Arrangements."
In Europe, the Company's women's health products are sold primarily through
a direct European sales force that Digene has established with Abbott. Abbott
also serves as a European distributor of the Company's blood virus products. In
Asia and South America, the Company's products are sold through a network of
distributors. In Brazil, the Company's products are sold through the Company's
majority owned subsidiary, Digene do Brazil LTDA.
The Company expects to tailor its marketing efforts to the circumstances of
each country to encourage local authorities and industry opinion leaders to
accept HPV testing as the standard of care for cervical cancer screening. The
Company is working closely with EUROGIN (the European Research Organization on
Genital Infection and Neoplasia), the ICRF of the United Kingdom and other
leading research groups to accelerate the implementation of HPV testing by
focusing opinion leaders, clinicians and public health officials on the benefits
of HPV testing.
Revenues from export sales were $3,759,000, $5,979,000 and $7,367,000 in
fiscal 1996, 1997 and 1998, respectively. See "Notes 1, 2, 3, and 7 to the
Consolidated Financial Statements".
TECHNOLOGY
The Company's Hybrid Capture technology offers a rapid, accurate,
easy-to-use detection system that can be performed in any laboratory setting
with standard laboratory equipment. The Company's Hybrid Capture technology uses
RNA probes to bind specific DNA sequences, which creates DNA:RNA hybrids that
can be detected with chemiluminescent materials. To perform a test using the
Hybrid Capture system, the test sample is mixed with RNA probes. Complementary
DNA sequences in the sample immediately bind to the RNA, creating DNA:RNA
hybrids. The DNA:RNA hybrids are then captured on the surface of a specially
coated polystyrene tube. All remaining DNA and specimen contaminants are removed
by washing the tube. Captured hybrids are then reacted with the Company's
proprietary signal amplification system, which uses antibodies to detect any
DNA:RNA hybrids bound to the tube. If DNA:RNA hybrids from the specimen are
present on the surface of the tube, light is
15
emitted, signaling a positive test result. The amount of DNA present in the
sample can be rapidly and accurately quantified using standard laboratory
luminometers. The entire test can be completed in four to six hours.
The Company believes that its Hybrid Capture system is a significant
improvement over other existing technologies because of its specificity,
shortened processing time, ease of use, greater accuracy, and ability to
quantify viral and bacterial load. The Company is also using its Hybrid Capture
technology as a platform to develop a wide range of DNA diagnostic and
monitoring tests for blood viruses, sexually transmitted diseases, and
opportunistic infections.
RESEARCH AND DEVELOPMENT
The Company's research and development efforts are designed to expand the
Company's core technology portfolio in the area of probe and amplification
diagnostics and monitoring. The Company plans to increase its core technology
and expertise in molecular diagnostics for probe-based detection for infectious
diseases and cancers.
The Company's principal research and development program relates to the
improvement of the sensitivity, ease of interpretation, and improved
productivity of its Hybrid Capture technology. In an effort to automate its
Hybrid Capture technology in order to further simplify and shorten test
processing, the Company has developed a second generation Hybrid Capture system,
HC II, based on a 96-well microtiter plate format, as a replacement for its
polystyrene tube-based HC I format. In addition, the Company intends to develop
a fully automated next generation Hybrid Capture III delivery platform to
incorporate direct DNA and RNA detection technologies. The Company is also
developing a proprietary target amplification system to couple with the Hybrid
Capture technology that may permit enhanced clinical sensitivity for detecting
particular viruses and bacteria.
At June 30, 1998, the Company had 45 employees engaged in research and
development. Company-sponsored research and development expenditures in fiscal
1996, 1997, and 1998 were approximately $2,048,000, $3,505,000, and $5,250,000,
respectively. In addition to Company-sponsored research and development, the
Company performs research and development through contracts with third parties.
MANUFACTURING
Manufacturing of the Company's products involves the combination of more
than 200 biological reagents, inorganic and organic reagents, and kit components
(such as vials and packaging material) into finished test kits. Biological
reagents include DNA and RNA probes, antibodies, and detection reagents. These
reagents are manufactured in the Company's manufacturing facility in Beltsville,
Maryland. Kit components, inorganic and organic reagents, and other reagents and
materials that are classified as low-complexity components are generally
purchased from outside vendors and processed into finished reagents and test
products. The Company believes it has sufficient manufacturing capacity to
expand production for the foreseeable future. The Company has established a
quality control program, including a set of standard manufacturing and
documentation procedures intended to ensure
16
that, where required, the Company's products are manufactured in accordance with
quality service regulations ("QSRs").
COMPETITION
The medical diagnostics and biotechnology industries are subject to intense
competition. The Company's competitors in the United States and abroad for DNA
and RNA diagnostic probes include Roche Diagnostics, Chiron Corporation, and
Gen-Probe Incorporated. The Company also competes with Abbott, except in Europe,
the Middle East, and Africa, where the Company and Abbott operate together under
certain sales and distribution arrangements. Other companies, including large
pharmaceutical and biotechnology companies, may enter the market for DNA and RNA
probe diagnostics. Additionally, for certain of the Company's tests, the Company
competes against existing screening, monitoring, and diagnostic technologies,
including the Pap smear, tissue culture, and antigen-based diagnostic
methodologies. Such existing and potential competitors may be in the process of
seeking FDA or foreign regulatory approval for their respective products or may
also enjoy substantial advantages over the Company in terms of research and
development expertise, experience in conducting clinical trials, experience in
regulatory matters, manufacturing efficiency, name recognition, sales and
marketing expertise and distribution channels. In addition, many of these
companies may have established third-party reimbursement for their products.
Accordingly, there can be no assurance that the Company will be able to compete
effectively against such existing or potential competitors. In marketing its HPV
tests for the follow-up screening of women with equivocal Pap smears in the
United States, the Company competes with well-established follow-up procedures,
such as Pap smear re-testing, colposcopy, and biopsy, which are widely accepted
and have a long history of use. Additionally, in the event the Company is able
to obtain FDA and applicable foreign approvals to market its HPV tests for
primary cervical cancer screening either in conjunction with or separate from
the Pap smear, it will compete against the Pap smear, which is widely accepted
as an inexpensive and, with regular use, adequate screening test for cervical
cancer. Additionally, technological advancements designed to improve quality
control over sample collection and preservation, and to reduce the Pap smear
test's susceptibility to human error, may serve to increase physician reliance
on the Pap smear and solidify its market acceptance. Further, if marketed as an
adjunct to the Pap smear test for primary screening in the United States, the
Company's HPV tests may be seen as adding unnecessary expense to the accepted
cervical cancer screening methodology. Consequently, there is no assurance that
the Company's HPV tests will be able to attain market acceptance as a primary
screening test on a timely basis, or at all. The Company faces competition from
a variety of technologies in the blood virus area. There are several advanced
technologies commercially available for the detection and viral load measurement
of HIV and HBV. Additionally, there are several emerging DNA probe amplification
technologies to detect CMV being developed by competitors. There can be no
assurance that the Company's tests for CMV, HIV, or HBV will be able to gain
market acceptance on a timely basis, or at all. There can be no assurance that
the Company will be able to compete successfully against existing or future
competitors or that competition will not have a material adverse effect on the
Company's business, financial condition, and results of operations.
17
The Company believes the primary competitive factors in the market for DNA
and RNA probe diagnostics are clinical performance and reliability, ease of use,
cost, proprietary position, regulatory approvals, and availability of
reimbursement.
GOVERNMENT REGULATION
The medical devices to be marketed and manufactured by the Company are
subject to extensive regulation by the FDA and, in some instances, by foreign
governments. Pursuant to Federal Food, Drug and Cosmetic Act, as amended, and
the regulations promulgated thereunder (the "FDC Act"), the FDA regulates the
clinical testing, manufacture, labeling, distribution, and promotion of medical
devices. Noncompliance with applicable requirements can result in, among other
things, fines, injunctions, civil penalties, recalls or seizures of products,
total or partial suspension of production, failure of the government to grant
premarket clearance or premarket approval for devices, withdrawal of marketing
approvals, and criminal prosecution. The FDA also has the authority to request
repair, replacement, or refund of the cost of any device manufactured or
distributed by the Company.
In the United States, medical devices and diagnostics are classified into
one of three classes (class I, II or III), on the basis of the controls deemed
necessary by the FDA to reasonably assure their safety and effectiveness. Under
FDA regulations, class I devices are subject to general controls (for example,
labeling, premarket notification and adherence to QSR), and class II devices are
subject to general and special controls (for example, performance standards,
postmarket surveillance, patient registries and FDA guidelines). Generally,
class III devices are those which must receive a PMA by the FDA to ensure their
safety and effectiveness (for example, life-sustaining, life-supporting and
implantable devices, or new devices which have not been found substantially
equivalent to legally marketed devices).
Before a new device can be introduced into the market, the manufacturer
generally must obtain marketing clearance through the filing of either a 510(k)
notification or a PMA application. 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 II medical device or to a class III
medical device for which the FDA has not called for a PMA. It generally takes
from four to twelve months from submission to obtain a 510(k) clearance, but it
may take longer. The FDA may determine that a proposed device is not
substantially equivalent to a legally marketed device or that additional
information or data is needed before a substantial equivalence determination can
be made, either of which could delay market introduction of a new product. A
request for additional data may require that clinical studies of the device's
safety and effectiveness be performed. Additionally, modifications or
enhancements that could significantly affect the safety or effectiveness of the
device or that constitute a major change to the intended use of the device will
require new 510(k) submissions.
A PMA application must be filed if a proposed device is not substantially
equivalent to a legally marketed class I or class II device or if it is a class
III device for which the FDA has called for a PMA. A PMA application must be
supported by valid scientific evidence, including preclinical and clinical trial
data, to demonstrate the safety and effectiveness of the device. The PMA
application must also
18
contain the results of all relevant bench tests, laboratory and animal studies,
a complete description of the device and its components, a detailed description
of the methods, facilities and controls used to manufacture the device in
addition to device labeling and advertising literature.
If a PMA application is accepted for filing, the FDA begins an in-depth
review of the submission. FDA review of a PMA application generally takes one to
two years from the date the PMA application is accepted for filing, but may take
significantly longer. The PMA review process includes an inspection of the
manufacturer's facilities to ensure that the facilities are in compliance with
the applicable QSR requirements. In addition, an advisory committee made up of
clinicians and/or other appropriate experts is typically convened to evaluate
the application and make recommendations to the FDA as to whether the device
should be approved. The PMA 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.
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 a PMA often require the submission of
the same type of information required for an initial PMA to support the proposed
change.
Although clinical investigations of most devices are subject to the
investigational device exemption ("IDE") requirements, clinical investigations
of in vitro diagnostic ("IVDs") tests are exempt from the IDE requirements,
including FDA approval of investigations, provided the testing meets certain
exemption criteria. IVD manufacturers must also establish distribution controls
to assure that IVDs distributed for the purpose of conducting clinical
investigations are used only for that purpose. Pursuant to current FDA policy,
manufacturers of IVDs labeled for investigational use only ("IUO") or research
use only ("RUO") are encouraged by the FDA to establish a certification program
under which investigational IVDs are distributed to or utilized only by
individuals, laboratories, or health care facilities that have provided the
manufacturer with a written certification of compliance indicating that the IUO
or RUO product will be restricted in use and will, among other things, meet
institutional review board and informed consent requirements.
Export of products subject to the 510(k) notification requirements, but not
yet cleared to market, are permitted with FDA authorization provided certain
requirements are met. Unapproved products subject to the PMA requirements must
be approved by the FDA for export. To obtain FDA export approval certain
requirements must be met and information must be provided to the FDA, including,
with some exceptions, documentation demonstrating that the product is approved
for import into the country to which it is to be exported and, in some
instances, safety data for the devices. There can be no assurance that the FDA
will grant export approval when such approval is necessary or that countries to
which the devices are to be exported will approve the devices for import.
Failure on the part of the Company to obtain export approvals when required,
could significantly delay and impair the Company's ability to export its devices
and could have a material adverse effect on the Company.
In April of 1995, the Company obtained a PMA approval for its HPV test to
detect the presence of HPV in women with equivocal Pap smears. In August of
1997, the Company obtained FDA approval
19
of a PMA supplement for the use of the HPV test using the Cytyc sample
collection system. In September of 1997, the Company submitted a PMA supplement
to obtain market approval for its HC II HPV test to detect the presence of HPV
in women with equivocal Pap smears; improvements were made to this test
including higher sensitivity and use of a format that enables higher volume
testing. The Company is currently responding to questions from the FDA on the HC
II HPV PMA supplement, and expects to submit responses to the FDA in September
1998. There can be no assurance that the response the Company submits will be
adequate to support the use of the HC II HPV test. In addition, there can be no
assurance that the FDA will grant approval of the PMA supplement for the HC II
HPV test in a timely manner, if at all. The Company also intends to submit a PMA
supplement with the FDA to obtain market approval for use of its HC II HPV Test
as a primary cervical cancer screening test either in conjunction with or
separate from Pap smear testing. The Company anticipates that a substantial
amount of clinical data will be required to support the PMA supplement. There
can be no assurance that the data the Company submits will be adequate to
support the use of the HC II HPV Test as a primary cervical cancer screening
test in the United States. Moreover, there can be no assurance that the FDA will
grant approval of a PMA supplement for the use of the HC II HPV Test as a
primary cervical cancer screening test in a timely manner, if at all, or that
the FDA will not require submission of additional information, data or an
original PMA application. Failure to obtain FDA approval for the HC II HPV test
improvement or the use of the HC II HPV test as a primary cervical cancer
screening test could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company submitted a 510(k) notification for its CMV test in December
1996. After changing certain reagents used in the test and following discussions
with the FDA, the Company decided to withdraw the original 510(k) notification
and a second 510(k) notification was submitted in March 1997. Upon review of the
second 510(k), the FDA determined that additional data would be needed and the
submission was withdrawn on that basis that it would take the Company more than
30 days to collect the necessary data. The Company submitted another 510(k)
notification for the CMV Test in December 1997 after collecting the necessary
data; the 510(k) notification has been under review since that time. There can
be no assurance that the FDA will grant clearance in a timely manner, if at all,
or that the FDA will not require the submission of additional data or find the
product not substantially equivalent and require the submission of a PMA
application.
The Company submitted three 510(k) notifications for each of its tests for
chlamydia and gonorrhea in April 1998. Upon review of the 510(k) notification
for the chlamydia Test, the FDA determined that additional data would be needed
and the submission was withdrawn on the basis that it would take the Company
more than 30 days to collect the necessary data. The 510(k) notification for the
gonorrhea Test and the combination chlamydia/gonorrhea test were placed on hold
pending resolution of issues related to the chlamydia Test. The Company plans to
submit another 510(k) notification for the chlamydia Test by late 1998 or early
1999 after collecting the necessary data. The Company understands that the FDA
may seek an advisory committee review and recommendation concerning the safety
and effectiveness of the chlamydia and gonorrhea tests. There can be no
assurance that the FDA will grant clearance of these 510(k) notifications in a
timely manner, if at all, or that the FDA will not require the submission of
additional data or find the products not substantially equivalent and require
the submission of a PMA application.
20
The Company is developing tests for HIV and HBV which are class III devices
that will necessitate the collection of extensive clinical data and the eventual
submission and approval of a PMA application. There can be no assurance that the
Company will be able to collect adequate data to support a PMA application for
either the HIV Test or HBV Test or that when a PMA application is submitted, FDA
approval would be granted in a timely manner, if at all.
The Company intends to export the HPV Test as a primary cervical cancer
screening test prior to obtaining FDA approval for this use in the United
States. The Company also intends to export the HIV Test and HBV Test for
clinical use abroad prior to pursuing FDA approval in the United States.
Exportation of the HPV Test as a primary cervical cancer screening test and
exports of the HIV Test and HBV Test can be undertaken without prior FDA
approval provided, among other things, that the marketing of these tests are not
contrary to the laws of the country to which they are intended for import, they
are manufactured in substantial conformance with the QSRs and the Company has
valid marketing authorization by any member country of the European Union,
Australia, Canada, Israel, Japan, New Zealand, Switzerland, or South Africa. FDA
approval must be obtained for exports of products subject to the PMA
requirements if these export conditions are not met. The Company must also
provide the FDA with simple notification indicating the products to be exported
and the countries to which they will be exported. There can be no assurance that
the Company will be able to obtain valid marketing authorization for either test
from one of the listed countries or that the FDA would grant specific export
approval. Failure of the Company to obtain valid marketing authorization from
one of the listed countries or otherwise meet the FDA export approval
requirements, could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company has developed viral and bacterial tests that it distributes in
the United States on a RUO basis. Failure of the Company or recipients of the
Company's RUO devices to comply with the regulatory limitations on the
distribution and use of RUO devices could result in enforcement action by the
FDA that would adversely affect the Company's ability to distribute the tests
prior to obtaining FDA clearance or approval for them.
Any products manufactured or distributed by the Company pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA, including recordkeeping requirements and reporting of adverse
experiences with the use of the device. Device manufacturers are required to
register their establishments and list their devices with the FDA and are
subject to periodic inspections by the FDA and certain state agencies. The FDC
Act requires devices to be manufactured in accordance with QSRs, which impose
certain procedural and documentation requirements upon the Company with respect
to manufacturing and quality assurance activities.
The FDA actively enforces regulations prohibiting the promotion of devices
for unapproved uses and the promotion of devices for which premarket clearance
or approval has not been obtained. Failure to comply with these requirements can
result in regulatory enforcement action by the FDA and possible limitations on
the promotion of the Company's products.
The Company and its products are subject to a variety of state laws and
regulations in those states and localities where its products are or will be
marketed. Any applicable state or local regulations may
21
hinder the Company's ability to market its products in those states or
localities. Manufacturers are also 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 be required to incur significant costs to comply with such
laws and regulations now or in the future or that such laws or regulations will
not have a material adverse effect upon the Company.
The introduction of the Company's developmental stage test products in
foreign markets will also subject the Company to foreign regulatory clearances,
which may impose additional substantial costs and burdens. International sales
of medical devices are subject to the regulatory requirements of each country.
The regulatory review process varies from country to country and many countries
also impose product standards, packaging requirements, labeling requirements and
import restrictions on devices. In addition, each country has its own tariff
regulations, duties, and tax requirements.
The approval by the FDA and foreign government authorities is unpredictable
and uncertain, and no assurance can be given that the necessary approvals or
clearances will be granted on a timely basis or at all. Delays in receipt of, or
a failure to receive, such approvals or clearances could have a material adverse
effect on the business, financial condition, and results of operations of the
Company.
Changes in existing requirements or adoption of new requirements or
policies could adversely affect the ability of the Company to comply with
regulatory requirements. Failure to comply with regulatory requirements could
have a material adverse effect on the Company's business, financial condition,
and results of operations. There can be no assurance that the Company will not
be required to incur significant costs to comply with laws and regulations in
the future or that laws or regulations will not have a material adverse effect
upon the Company's business, financial condition, and results of operations.
The FDC Act requires devices to be manufactured in accordance with QSRs
which impose certain procedural and documentation requirements upon the Company
with respect to manufacturing and quality assurance activities. Noncompliance
with QSRs can result in, among other things, fines, injunctions, civil
penalties, recalls or seizures of products, total or partial suspension of
production, failure of the government to grant premarket clearance or premarket
approval for devices, withdrawal of marketing approvals, and criminal
prosecutions. The FDA also has proposed changes to the QSRs which, if finalized,
would likely increase the cost of compliance with the requirements. Any failure
by the Company to comply with QSR requirements could have a material adverse
effect on the Company's business, financial condition, and results of
operations.
The Company must comply with similar registration requirements of foreign
governments and with import and export regulations when distributing its
products to foreign nations. Each foreign country's regulatory requirements for
product approval and distribution are unique and may require the expenditure of
substantial time, money and effort. The regulation of medical devices in a
number of such jurisdictions, particularly in the European Union, continues to
develop and there can be no assurance that new laws or regulations will not have
a material adverse effect on the Company's business, financial condition and
results of operations. Noncompliance with state, local, federal, or
22
foreign regulatory requirements can result in fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production, delay or denial or withdrawal of premarket clearance or approval of
devices and criminal prosecution. See "Business - Government Regulation."
LICENSES, PATENTS, AND PROPRIETARY INFORMATION
The Company's success will depend in part on its ability to obtain and
maintain patent protection for its technologies, products and processes,
preserve its trade secrets, and operate without infringing the proprietary
rights of other parties. Because of the substantial length of time and expense
associated with bringing new products through development to the marketplace,
the biotechnology industry places considerable importance on obtaining and
maintaining patent and trade secret protection for new technologies, products
and processes. Despite these precautions, it may be possible for unauthorized
third parties to utilize the Company's technology or to obtain and use
information that the Company regards as proprietary. The laws of some countries
do not protect the Company's proprietary rights in its technologies, products
and processes to the same extent as do the laws of the United States.
The Company holds four issued U.S. patents relating to HPV types 35, 43,
44, and 56. These patents expire in 2007. The Company has also filed
corresponding foreign patent applications in certain countries. The patents
relating to HPV types 35, 43, and 56 have been licensed to Institut Pasteur (see
Cross License discussion below). In addition, the Company is the exclusive,
worldwide licensee of (i) a U.S. patent application and certain corresponding
foreign patents and patent applications relating to HPV type 52 and a U.S.
patent and certain corresponding foreign patents relating to the use of the L1
gene sequence to detect specific HPV types (see Georgetown License discussion
below) as well as (ii) certain trade secrets relating to HPV type 58 (see Kanebo
License discussion below).
Through a cross license with Institut Pasteur (the "Cross License"), the
Company has obtained a worldwide license to U.S. patents and patent applications
and corresponding foreign patent applications relating to HPV types 39 and 42
and foreign patents and applications relating to HPV type 33. In return, the
Company has granted to Institut Pasteur a worldwide license to its three U.S.
patents and corresponding foreign patents and applications relating to HPV types
35, 43, and 56. The Company has granted Institut Pasteur the right to extend the
scope of the Cross License to include the U.S. patent and corresponding patent
applications relating to HPV type 44 at such time as Institut Pasteur shall have
discovered and developed an additional HPV type which is equivalent in value to
HPV type 44. In return for such an extension, the Company will receive a license
to the new HPV type discovered and developed by Institut Pasteur. The Cross
License is co-exclusive, except that Institut Pasteur has sublicensed its rights
to Beckman Instruments, Diagnostic Pasteur, and their affiliates, and the
Company has sublicensed its rights on a non-exclusive basis to Toray Fuji
Bionics, and its affiliates, for use outside North America and certain countries
in Western Europe. See "Business -- Competition." There can be no assurance that
a sublicensee will not use its rights under the Cross License to develop
additional products or services that compete with the Company's products. The
Company believes that the Cross License terminates on the last to expire of the
underlying patent rights. Any prior termination of the Cross License could have
a material adverse effect on the Company's business, financial condition, and
results of operations.
23
Through a license with Georgetown University (the "Georgetown License"),
the Company has obtained exclusive, worldwide rights to a U.S. patent
application and corresponding foreign patents and patent applications relating
to HPV type 52 and to a U.S. patent and corresponding foreign patents relating
to the use of the L1 gene sequence to detect specific HPV types. Unless
terminated earlier, the Georgetown License will terminate upon the last to
expire of the licensed patent rights. All of the issued foreign patents relating
to HPV type 52 and the L1 related patent will expire in 2008. The Company is
obligated to make certain royalty payments to Georgetown University based on the
percentage of net sales of products incorporating the licensed technologies.
Through a license with Kanebo, Ltd. (the "Kanebo License"), the Company has
obtained exclusive, worldwide rights (except for Japan where Kanebo, Ltd.
retained the right to grant a non-exclusive sublicense to Toray Industries,
Inc.) to a foreign patent application relating to HPV type 58. Unless terminated
earlier, the Kanebo License expires on the later to occur of January 1, 2010 or
the expiration of any patent relating to HPV type 58. The Company is obligated
to make certain royalty payments to Kanebo, Ltd. based on a percentage of net
sales of products incorporating or using HPV type 58. The Company will be
required to obtain FDA approval in order to utilize HPV type 58 as part of its
HPV test, and there can be no assurance that the Company will be successful in
obtaining the required FDA approval. See "Business - Government Regulation."
The Company has filed a U.S. patent application relating to certain aspects
of its Hybrid Capture technology. The Company has also filed U.S. patent
applications in the areas of direct DNA probe labeling, signal amplification and
biotin-avidin probe chemistry and its continuous amplification reaction ("CAR")
amplification method. The inventions claimed by these applications may be used
in the Company's DNA probes and any patents that issue from such applications
may provide some ancillary protection for certain aspects of the Company's
products. Under current law, patent applications in the United States are
maintained in secrecy until patents are issued and patent applications in
foreign countries are maintained in secrecy for a period of time after filing.
There can be no assurance that a U.S. patent or any foreign patents relating to
the Company's Hybrid Capture technology will be issued to the Company on a
timely basis, or at all.
The Company has received inquiries regarding possible patent infringements
relating to, among other things, certain aspects of its Hybrid Capture
technology. The Company believes that the patents of others to which these
inquiries relate are either not infringed by the Company's Hybrid Capture
technology or are invalid. However, there can be no assurance that the Company
will not be subject to further claims that its technology, including its Hybrid
Capture technology, or its products infringe the patents or proprietary rights
of third parties. The defense of any such claims, if made, could be time
consuming and expensive, even if the outcome is favorable. An adverse outcome
could subject the Company to significant liabilities to third parties, require
the Company to obtain licenses from third parties, or require the Company to
cease sales of related products. No assurance can be given that any licenses
required under any such third party patents or proprietary rights would be made
available or commercially reasonable terms, if at all.
No assurance can be given that the U.S. Patent and Trademark Office or any
foreign patent office will grant patent protection for the subject matter of any
pending patent applications, or that present or
24
future patents will provide commercially significant protection to the Company's
present or future technologies, products, or processes. Furthermore, no
assurance can be given that others will not independently develop substantially
equivalent proprietary information not covered by patents to which the Company
owns rights or obtain access to the Company's know-how or that others will not
be issued patents that may prevent the sale of one or more of the Company's
products, or require licensing and the payment of significant fees or royalties
by the Company to third parties in order to enable the Company to conduct its
business. There can be no assurance that such licenses would be available or, if
available, would be on terms acceptable to the Company or that the Company would
be successful in any attempt to redesign its products or processes to avoid
infringement. The Company's failure to obtain these licenses or to redesign its
products or processes would have a material adverse effect on the Company's
business, financial condition, and results of operations. Legal standards
relating to the scope of claims and the validity of patents in the biotechnology
field are still evolving, and no assurance can be given as to the degree of
protection any patents issued to or licensed by the Company will not be
infringed by the products of others. Defense and prosecution of patent claims
can be expensive and time consuming, regardless of whether the outcome is
favorable to the Company, and can result in the diversion of substantial
resources from the Company's other activities. An adverse outcome could subject
the Company to significant liabilities to third parties, require the Company to
obtain licenses from third parties, or require the Company to cease any related
research and development activities or product sales. In addition, the laws of
certain countries may not protect the Company's intellectual property.
The Company's success is also dependent upon the skill, knowledge, and
experience of its scientific and technical personnel. To help protect its
rights, the Company requires all employees, consultants, advisors, and
collaborators to enter into confidentiality agreements that prohibit the
disclosure of confidential information to anyone outside the Company and require
disclosure and, in most cases, assignment to the Company of their ideas,
developments, discoveries, and inventions. There can be no assurance, however,
that these agreements will provide adequate protection for the Company's trade
secrets, know-how, or other proprietary information in the event of any
unauthorized use or disclosure.
DISTRIBUTION ARRANGEMENTS
As discussed, Murex was acquired by Abbott on April 17, 1998 and the
Company and Abbott are working in good faith under existing distribution and
marketing agreements. See "Business - International Markets." In August 1997,
the Company entered into a distribution agreement (the "1997 Distribution
Agreement") with Abbott's predecessor granting it the exclusive right to
distribute the Company's HIV, CMV, and HBV HC II tests in most of Europe,
Eastern Europe, Africa, the Middle East, and Singapore. Pursuant to the 1997
Distribution Agreement, Abbott has agreed to use its reasonable efforts to
distribute and support the products, to maintain a qualified sales force, to
provide technical support for the products, to comply with the Company's
packaging and delivery requirements, and to assist the Company in protecting its
proprietary rights in the products. The Company is required to use reasonable
efforts to deliver products ordered by Abbott, to provide current promotional
materials and to assist Abbott in making sales presentations. The 1997
Distribution Agreement has an initial term of four years and seven months,
subject to automatic renewal for successive one-year terms. Two years after the
effective date of the 1997 Distribution Agreement,
25
however, the Company will have the right to terminate the 1997 Distribution
Agreement with respect to particular countries, subject to Abbott's right to
continue such products within any such country on a co-exclusive basis during a
"wind-down" period of six months.
In February 1997, the Company entered into two agreements (the "Agency
Agreement" and the "Customer Transfer Agreement," collectively the "1997
Agreements") with Abbott's predecessor to create a Digene-direct European sales
operation for the Company's women's health business. Under the 1997 Agreements,
the Company has begun marketing its HPV tests directly in Europe using Abbott's
distribution infrastructure. The 1997 Agreements provide for a transition period
during which the administrative infrastructure will be agreed to and
established. During this transition period, the Company is recording its
transactions consistent with a prior distribution agreement with Abbott's
predecessor. Prior to February 1, 1997, Abbott's predecessor had been acting as
the exclusive distributor in certain designated non-US territories for the
Company's HPV test and other of the Company's products. Under the 1997
Agreements, Abbott will act as the exclusive agent for the Company in designated
European and Eastern European countries for a period of five years during which
Abbott will receive selling service fees and a percentage of the Company's HPV
revenues in the designated territory. No other Digene products (except the
Company's women's health products) exclusively distributed by Abbott in Europe
and Eastern Europe will be affected by the 1997 Agreements.
THIRD-PARTY REIMBURSEMENT
Hospitals, physicians, and other health care providers rely on third-party
payors, such as government entities, managed care organizations, and private
insurance plans, to reimburse the costs and fees associated with the use of
diagnostic tests. Successful sales of the Company's tests in the United States
and other markets will depend, in part, on the availability of adequate
reimbursement from third-party payors such as government entities, managed care
organizations, and private insurance plans. There is significant uncertainty
concerning third-party reimbursement for the use of any medical test
incorporating new technology. Reimbursement by a third-party payor may depend on
a number of factors, including the payor's determination that the use of the
Company's tests are clinically useful and cost-effective, not experimental or
investigational, medically necessary and appropriate for the specific patient.
Since reimbursement approval is required from each payor individually, seeking
such approvals is a time consuming and costly process which requires the Company
to provide scientific and clinical support for the use of the Company's tests
for their approved indications to each payor separately. There can be no
assurance that third-party reimbursement will be consistently available for the
Company's tests for their approved indications or any of the Company's other
products that may be developed or that such third-party reimbursement will be
adequate. Federal and state governmental agencies are increasingly considering
limiting health care expenditures. For example, the United States Congress is
currently considering various proposals to significantly reduce Medicaid and
Medicare expenditures. Such proposals, if enacted, could have a material adverse
effect on the Company's business, financial condition and results of operations.
Outside the United States, the Company relies on a network of distributors
to establish reimbursement from third-party payors in their respective
territories. The Company's distributors have
26
established reimbursement for the HPV test in Germany, the Czech Republic, and
Brazil. Accordingly, the establishment of reimbursement from third-party payors
in such countries is outside the Company's control. Health care reimbursement
systems vary from country to country and, accordingly, there can be no assurance
that third-party reimbursement will be made available for the Company's products
under any other reimbursement system.
Third-party payors are increasingly limiting reimbursement coverage for
medical diagnostic products and in many instances are exerting significant
pressure on medical suppliers to lower their prices. Lack of or inadequate
reimbursement by governmental and other third-party payors for the Company's
products could have a material adverse effect on the Company's business,
financial condition, and results of operations.
PRODUCT LIABILITY
The Company's business is subject to product liability risks inherent in
the testing, manufacturing and marketing of the Company's HPV test for its
approved indications and other products developed by the Company. There can be
no assurance that product liability claims will not be asserted against the
Company, its collaborators or licensees. The Company currently maintains product
liability insurance coverage with a combined single limit of $5,000,000. There
can be no assurance, however, that this coverage will be adequate to protect the
Company against future product liability claims or that product liability
insurance will be available to the Company in the future on commercially
reasonable terms, if at all. Furthermore, there can be no assurance that the
Company will be able to avoid significant product liability claims and the
attendant adverse publicity. Consequently, a product liability claim or other
claim with respect to uninsured or underinsured liabilities could have a
material adverse effect on the Company's business, financial condition, and
results of operations.
EMPLOYEES
At September 2, 1998, the Company employed 137 persons, including 39 in
research and development, 42 in manufacturing, including quality assurance, 30
in sales and marketing, and 26 in accounting, finance, administration and
regulatory affairs. The Company is not subject to any collective bargaining
agreements and believes that its relationship with its employees is good.
27
ADDITIONAL CONSIDERATIONS
HISTORY OF OPERATING LOSSES; UNCERTAINTY OF PROFITABILITY; FLUCTUATIONS IN
QUARTERLY RESULTS
The Company has incurred substantial operating losses since inception and,
at June 30, 1998, had an accumulated deficit of approximately $39.4 million.
Such losses have resulted principally from expenses associated with the
Company's research and development programs, including preclinical studies,
clinical trials, and regulatory submissions for the Company's women's health and
blood virus products, the scale-up of the Company's manufacturing facilities,
and the expansion of the Company's sales and marketing activities in the United
States and abroad. The Company expects such operating losses to continue for the
foreseeable future as it continues its product development efforts, seeks FDA
and foreign approvals of its women's health and blood virus products, expands
its manufacturing capabilities, and further expands its sales and marketing
activities. In order to achieve profitability, the Company must successfully
manufacture, market, and sell its women's health and blood virus products in the
United States and abroad. The markets targeted by the Company are heavily
regulated and are characterized by an increasing number of entrants, intense
competition and a high rate of failure. There can be no assurance that the
Company will ever be able to successfully commercialize its products or that
profitability will ever be achieved. The Company's quarterly operating results
have fluctuated significantly in the past and the Company believes that they may
continue to fluctuate significantly in the future with lower product revenues in
the first and second fiscal quarters as compared with the third and fourth
fiscal quarters, primarily attributable to the lower demand for certain women's
health-related medical procedures during the summer months and the December
holiday season in the United States and Europe. In addition, the Company's
quarterly operating results, as well as annual results, may fluctuate from
period to period due to the degree of market acceptance of the Company's
products, competition, the timing of regulatory approvals and other regulatory
announcements, the volume and timing of orders from and shipments to
distributors, variations in the Company's distribution channels, the timing of
new product announcements and introductions by the Company and its competitors,
product obsolescence resulting from new product introductions and other factors,
many of which are outside the Company's control. Due to one or more of these
factors, in one or more future quarters the Company's results of operations may
fall below the expectations of securities analysts and investors. In that event,
the market price of the Company's Common Stock could be materially and adversely
affected.
UNCERTAINTY OF MARKET ACCEPTANCE
The Company's success depends, in part, upon the acceptance by the
worldwide medical community, including third-party payors, clinical
laboratories, and health care providers, of the Company's Hybrid Capture
technology as a clinically useful and cost-effective method for detecting,
screening and monitoring HPV, chlamydia, gonorrhea, HIV, CMV, and HBV. There can
be no assurance that the worldwide medical community will accept the use of the
Company's technology. Market acceptance of the Company's products based on its
HC II technology will depend on the Company's ability to arrange for the
distribution to its customers of luminometers with the capability to analyze the
results from such products. The Company has identified a manufacturer for such
luminometers and is currently arranging for the manufacture and distribution of
luminometers to its
28
customers. No assurance can be given that the Company's efforts will be
successful. Failure to arrange for the manufacture or distribution of such
luminometers on a timely basis, or any related delays, could delay or prevent
market acceptance of the Company's HC II products or increase the costs related
to the distribution of such luminometers, any of which could have a material
adverse effect on the Company's business, financial condition, and results of
operations. Furthermore, the Company's growth and success will depend upon
market acceptance by the medical community of the Company's HPV tests for the
follow-up screening of women with equivocal Pap smears as a clinically useful
and cost-effective alternative to well-established follow-up procedures, such as
Pap smear re-testing, colposcopy and biopsy, which are widely accepted and have
a long history of use. There can be no assurance that HPV testing, in general,
or the Company's HPV tests, in particular, will achieve market acceptance in the
United States on a timely basis, or at all. Additionally, there can be no
assurance that the Company's products will be accepted in any markets outside
the United States due to the influence of established medical practices, lack of
education about women's health and blood viruses, and other social and economic
factors beyond the Company's control. Failure of the Company's technology or
products to achieve market acceptance would have a material adverse effect on
the Company's business, financial condition, and results of operations.
RISKS INHERENT IN INTERNATIONAL TRANSACTIONS
The Company sells its products both in the United States and abroad.
International sales and operations may be limited or disrupted by the imposition
of government controls, export license requirements, economic and political
instability, price controls, trade restrictions, changes in tariffs, and
difficulties with foreign distributors. Foreign countries often establish
product standards different from those of the United States and any inability to
obtain or maintain international approvals on a timely basis could have a
material adverse effect on the Company's international business operations.
Additionally, the Company's business, financial condition, and results of
operations may be materially and adversely affected by fluctuations in currency
exchange rates as well as increases in duty rates and difficulties in obtaining
required licenses and permits. There can be no assurance that the Company will
be able to successfully commercialize any of its products in any foreign market.
In addition, the laws of some countries do not protect the Company's proprietary
rights to the same extent as those of the United States.
The Company markets its women's health and blood virus products abroad
using both a direct sales force and a network of distributors. For the Company's
products being sold through distributors, such distributors are responsible for
obtaining regulatory approvals and establishing reimbursement from third-party
payors in their respective territories. Generally, the extent and complexity of
regulation of medical products are increasing worldwide, with regulation in some
countries already nearly as exhaustive as that in the United States. The Company
anticipates that this trend will continue, and that the cost and time required
to obtain approval to market in any given country will increase, with no
assurance that such approval will be obtained. The Company's inability to obtain
approval to market its products internationally would have a material adverse
effect on the Company's business, financial condition, and results of
operations.
29
LIMITED SALES AND MARKETING EXPERIENCE
The Company has limited sales and marketing experience, and no assurance
can be given that the Company will be able successfully to establish and
maintain a significant sales and marketing organization or that the Company's
direct sales force will succeed in promoting the Company's products to
third-party payors, clinical laboratories, health care providers, and government
entities worldwide. In addition, due to limited market awareness of the
Company's products, the Company believes that the marketing effort may be a
lengthy process, requiring the Company to educate the worldwide medical
community regarding both the clinical utility and cost-effectiveness of HPV
testing, in general, and the Company's HPV tests, in particular, and the
efficacy, clinical utility, and cost-effectiveness of the Company's blood virus
products in detecting the presence of blood viruses and monitoring the
effectiveness of particular antiviral therapies. The Company intends to use a
direct sales force as well as a network of distributors to market and sell its
HPV tests in the United States and abroad. There can be no assurance that the
Company will be able to recruit and retain skilled sales, marketing, service, or
support personnel, that agreements with foreign distributors will be available
on terms commercially reasonable to the Company, or at all, or that the
Company's sales and marketing efforts will be successful. Failure to
successfully establish and maintain a significant sales and marketing effort,
whether directly or through third parties, would have a material adverse effect
on the Company's business, financial condition, and results of operations. The
Company's marketing success in the United States and abroad also will depend on
whether it can obtain required approvals for marketing, successfully demonstrate
the clinical utility and cost-effectiveness of its products, further develop a
direct sales capability, and establish arrangements with distributors and
marketing partners. Failure by the Company to successfully sell and market its
products would have a material adverse effect on the Company's business,
financial condition, and results of operations.
DEPENDENCE ON THIRD-PARTY REIMBURSEMENT
Sales of the Company's products in the United States and other markets will
depend, in part, on the availability of adequate reimbursement from third-party
payors such as government entities, managed care organizations, and private
insurance plans. There is significant uncertainty concerning third-party
reimbursement for the use of any medical test incorporating new technology.
Reimbursement by a third-party payor may depend on a number of factors,
including the payor's determination that the use of the Company's products is
clinically useful and cost-effective, not experimental or investigational, and
medically necessary and appropriate for the specific patient. Since
reimbursement approval is required from each payor individually, seeking such
approvals is a time consuming and costly process which requires the Company to
provide scientific and clinical support for the use of each of the Company's
products to each payor separately. There can be no assurance that third-party
reimbursement will be consistently available for the Company's products or that
such third-party reimbursement will be adequate. Federal and state government
agencies are increasingly considering limiting health care expenditures. For
example, the United States Congress is currently considering various proposals
to significantly reduce Medicaid and Medicare expenditures. Such proposals, if
enacted, could have a material adverse effect on the Company's business,
financial condition, and results of operations. In addition, third-party payors
are increasingly limiting reimbursement coverage for medical diagnostic products
and in many instances are exerting pressure on medical suppliers to
30
lower their prices. Outside the United States, the Company relies on a network
of distributors distributing certain of the Company's products to establish
reimbursement from third-party payors in their respective territories.
Accordingly, the establishment of reimbursement for certain of the Company's
products from third-party payors in such countries is outside the Company's
control. Health care reimbursement systems vary from country to country and,
accordingly, there can be no assurance that third-party reimbursement will be
available for the Company's products under any other reimbursement system. Lack
of or inadequate reimbursement by government and other third-party payors for
the Company's products would have a material adverse effect on the Company's
business, financial condition, and results of operations.
LIMITED MANUFACTURING EXPERIENCE; UNCERTAINTIES REGARDING MANUFACTURING AND
OPERATIONS SCALE-UP
The Company has limited commercial-scale manufacturing experience and
capabilities and it is anticipated that the Company will be required to further
scale-up its manufacturing capabilities. Due to the Company's recent and
expected future growth, in March 1998 the Company entered into a long-term lease
for a site in Gaithersburg, Maryland on which two buildings will be constructed.
The Company will relocate its operations to this new facility upon the
expiration of its current leases. The integration of the Company's manufacturing
operations into the new facility may result in inefficiencies and delays.
Specifically, companies often encounter difficulties in scaling up
manufacturing, including problems involving production yield, quality control
and assurance, and shortages of qualified personnel. In addition, the Company's
new or expanded manufacturing facilities will be subject to QSRs, international
quality standards and other regulatory requirements. Difficulties encountered by
the Company in expansion of manufacturing or the failure by the Company to
establish and maintain its facilities in accordance with QSRs, international
quality standards or other regulatory requirements could result in a delay or
termination of manufacturing, which could have a material adverse effect on the
Company's business, financial condition, and results of operations.
Additionally, ongoing sales of the Company's HC II products will be dependent,
in part, upon the Company's ability to provide service and support to users of
luminometers and related software and equipment. The Company's inability to
successfully develop necessary service and support capabilities could have a
material adverse effect on the Company's business, financial condition, and
results of operations.
DEPENDENCE ON EUROPEAN DISTRIBUTOR
For the fiscal year ended June 30, 1998, approximately 42% of the Company's
total revenues resulted from transactions with Abbott. The Company has
established a direct European sales operation for its women's health products
whereby, pursuant to an agreement, the Company markets such products directly
using Abbott's sales and marketing infrastructure. In addition, the Company has
a co-exclusive distribution agreement with Abbott for sales of its other
products in Europe, the Middle East, Africa, and parts of Asia. Consequently,
the Company expects that sales to Abbott will continue to constitute a
significant portion of total revenues for the foreseeable future. The loss of
Abbott's sales and marketing infrastructure, a significant decrease in product
shipments to or an inability to collect receivables from Abbott, or any other
adverse change in the Company's relationship with Abbott could
31
have a material adverse effect on the Company's business, financial condition,
and results of operations.
UNCERTAINTY REGARDING PATENTS AND PROPRIETARY RIGHTS
The Company's success will depend, in part, on its ability, and the ability
of its collaborators or licensors, to obtain protection for its products and
technologies under United States and foreign patent laws, to preserve its trade
secrets, and to operate without infringing the proprietary rights of third
parties. Because of the substantial length of time and expense associated with
bringing new products through development to the marketplace, the medical
diagnostics and biotechnology industries place considerable importance on
obtaining, and maintaining, patent and trade secret protection for new
technologies, products, and processes.
The Company has obtained rights to certain patents and patent applications
and may, in the future, obtain, or seek rights from third parties to additional
patents and patent applications. There can be no assurance that patent
applications relating to the Company's products or technologies will result in
patents being issued, that any issued patents will afford adequate protection to
the Company, or that such patents will not be challenged, invalidated,
infringed, or circumvented. Furthermore, there can be no assurance that others
have not developed, or will not develop, similar products or technologies that
will compete with those of the Company without infringing upon the Company's
intellectual property rights.
Legal standards relating to the scope of claims and the validity of patents
in the medical diagnostics and biotechnology industries are uncertain and still
evolving, and no assurance can be given as to the degree of protection that will
be afforded any patents issued to, or licensed by, the Company. There can be no
assurance that, if challenged by others in litigation, any patents assigned to
or licensed by the Company will not be found invalid. Furthermore, there can be
no assurance that the Company's activities would not infringe patents owned by
others. Defense and prosecution of patent matters can be expensive and
time-consuming and, regardless of whether the outcome is favorable to the
Company, can result in the diversion of substantial financial, management, and
other resources. An adverse outcome could subject the Company to significant
liability to third parties, require the Company to obtain licenses from third
parties, or require the Company to cease any related research and development
activities and product sales. No assurance can be given that any licenses
required under any such patents or proprietary rights would be made available on
terms acceptable to the Company, if at all. Moreover, the laws of certain
countries may not protect the Company's proprietary rights to the same extent as
United States law.
The Company has received inquiries regarding possible patent infringements
relating to, among other things, certain aspects of its Hybrid Capture
technology. The Company believes that the patents of others to which these
inquiries relate are either not infringed by the Company's Hybrid Capture
technology or are invalid. The Company currently is in discussions with a third
party regarding a license to a pending United States patent application which
might cover one of the HPV types utilized with its HPV HC II test. Should a
license prove necessary, the failure of the Company to successfully negotiate
such a license on commercially reasonable terms, or at all, may require the
Company to
32
redesign its HPV HC II test to exclude this HPV type. Such exclusion could
result in delays in any approval of the Company's HPV HC II test for marketing
and could have a material adverse effect on the Company's business, financial
condition, and results of operations. There can be no assurance that the Company
will not be subject to further claims that its technology, including its Hybrid
Capture technology, or its products, infringe the patents or proprietary rights
of third parties.
The Company's success also is dependent upon the skill, knowledge, and
experience of its scientific and technical personnel. To help protect its
rights, the Company requires all employees, consultants, advisors, and
collaborators to enter into confidentiality agreements that prohibit the
disclosure of confidential information to anyone outside the Company and require
disclosure, and in most cases, assignment to the Company of their ideas,
developments, discoveries, and inventions. There can be no assurance, however,
that these agreements will provide adequate protection for the Company's trade
secrets, know-how, or other proprietary information in the event of any
unauthorized use or disclosure.
DEPENDENCE ON SINGLE SOURCE SUPPLIERS
Certain key components of the Company's products are currently provided to
the Company, on a purchase-order basis, by single sources. The Company does not
have long-term supply contracts with any of such suppliers nor has the Company
arranged for alternative supply sources. In the event that the Company is unable
to obtain sufficient quantities of such components on commercially reasonable
terms, or in a timely manner, the Company would not be able to manufacture its
products on a timely and cost-competitive basis which would have a material
adverse effect on the Company's business, financial condition, and results of
operations. In addition, if any of the components of the Company's products are
no longer available in the marketplace, the Company may be forced to further
develop its technology to incorporate alternate components. The incorporation of
new components into the Company's products may require the Company to seek
necessary approvals from the FDA or appropriate foreign regulatory agencies
prior to commercialization. There can be no assurance that such development
would be successful or that, if developed by the Company or licensed from third
parties, such alternative components would receive requisite regulatory approval
on a timely basis, or at all.
The success of the Company's products based on its HC II technology will
depend, in part, on the Company's ability to arrange for the distribution to its
customers of luminometers and related software and equipment with the capability
to analyze the results of its tests. The luminometers currently are manufactured
for the Company by a single supplier. Although the Company believes that such
luminometers could be acquired from alternative sources, such sources may be
more expensive than the Company's current supplier and may require substantial
lead time. Consequently, the failure of the Company's supplier to produce
luminometers in accordance with specifications, in accordance with applicable
regulations and on a timely basis, could significantly inhibit the Company's
ability to market its HC II products and have a material adverse effect on the
Company's business, financial condition and results of operations.
33
UNCERTAINTIES RELATING TO PRODUCT DEVELOPMENT
There can be no assurance that the Company's new product development
efforts will result in any commercially viable or successful products. The
Company has a number of product candidates in various early stages of
development. These product candidates will require substantial additional
investment, laboratory development, clinical testing, and regulatory approval
prior to their commercialization. The Company's inability to successfully
develop these product candidates or achieve market acceptance of such products
could have a material adverse effect on the Company's business, financial
condition, and results of operations.
ATTRACTION AND RETENTION OF KEY PERSONNEL
The Company is highly dependent on the principal members of its management
team, the loss of whose services might impede achievement of the Company's
strategic objectives. The Company's success will depend on its ability to retain
key employees and to attract additional qualified employees. Competition for
such personnel is intense, and there can be no assurance that the Company will
be able to retain existing personnel and to attract, assimilate or retain
additional highly qualified employees in the future. If the Company is unable to
hire and retain personnel in key positions, such inability would have a material
adverse effect on the Company's business, financial condition, and results of
operations.
ENVIRONMENTAL REGULATION
The Company is subject to a variety of local, state and federal government
regulations relating to the storage, discharge, handling, emission, generation,
manufacture and disposal of toxic, infectious or other hazardous substances used
to manufacture the Company's products. Any failure by the Company to control the
use, disposal, removal or storage of hazardous chemicals or toxic substances
could subject the Company to significant liabilities, which could have a
material adverse effect on the Company's business, financial condition, and
results of operations.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the shares of Common Stock, like that of the common
stock of many other medical diagnostics and biotechnology companies, has been
and is likely to remain highly volatile. Factors such as announcements of
technological innovations or new products by the Company or its competitors,
clinical trial results relating to or regulatory approvals or disapprovals of
the Company's or competitors' product candidates, government regulation, health
care legislation, developments or disputes concerning patent or other
proprietary rights of the Company or its competitors, including litigation,
fluctuations in the Company's operating results and market conditions for health
care stocks and biotechnology stocks in general could have a significant impact
on the future price of the Common Stock. In addition, the stock market has
experienced from time to time extreme price and volume fluctuations that may be
unrelated to the operating performance of particular companies. Since the
Company's initial public offering of Common Stock on May 22, 1996, the average
daily trading
34
volume in the Common Stock as reported on the Nasdaq National Market has been
relatively low. There can be no assurance that a more active trading market will
develop in the future.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING
The Company has incurred negative cash flows from operations since its
inception, and has expended, and expects to continue to expend in the future,
substantial funds to complete its planned product development efforts, expand
its sales and marketing activities, and expand its manufacturing capabilities.
The Company expects that its existing capital resources will be adequate to fund
the Company's operations through calendar 1999. No assurance can be given that
there will be no change in the Company that would consume a significant amount
of its available resources before that time. The Company's future capital
requirements and the adequacy of available funds will depend on numerous
factors, including the successful commercialization of its products, progress in
its product development efforts, the magnitude and scope of such efforts,
progress with preclinical studies and clinical trials, progress with regulatory
affairs activities, the cost and timing of expansion of manufacturing
capabilities, the expansion of the Company's direct European sales operations,
the development and maintenance of effective sales and marketing activities, the
cost of filing, prosecuting, defending and enforcing patent claims and other
intellectual property rights, competing technological and market developments,
and the development of strategic alliances for the marketing of its products. To
the extent that funds generated from the Company's operations, together with its
existing capital resources, are insufficient to meet current or planned
operating requirements, the Company will be required to obtain additional funds
through equity or debt financing, strategic alliances with corporate partners
and others, or through other sources. The Company does not have any committed
sources of additional financing, and there can be no assurance that additional
funding, if necessary, will be available on acceptable terms, if at all. If
adequate funds are not available, the Company may be required to delay,
scale-back or eliminate certain aspects of its operations or attempt to obtain
funds through arrangements with collaborative partners or others that may
require the Company to relinquish rights to certain of its technologies, product
candidates, products or potential markets. If adequate funds are not available,
the Company's business, financial condition, and results of operations will be
materially and adversely effected.
CONTROL BY MANAGEMENT
As of September 11, 1998, the Company's President and Executive Vice
President beneficially own an aggregate of approximately 37.4% of the Company's
outstanding shares of Common Stock. As a result, these officers, acting
together, effectively control the election of directors and matters requiring
approval by the Company's stockholders.
ANTITAKEOVER CONSIDERATIONS
The Company's Board of Directors has the authority, without further action
by the stockholders, to issue from time to time, up to 1,000,000 shares of
Preferred Stock in one or more classes or series, and to fix the rights and
preferences of such Preferred Stock. The Company's Certificate of Incorporation
also provides for staggered terms for members of the Board of Directors. The
Company is subject to
35
provisions of Delaware corporate law which, subject to certain exceptions, will
prohibit the Company from engaging in any "business combination" with a person
who, together with affiliates and associates, owns 15% or more of the Company's
Common Stock (an "Interested Stockholder") for a period of three years following
the date that such person became an Interested Stockholder, unless the business
combination is approved in a prescribed manner. Additionally, the Bylaws of the
Company establish an advance notice procedure for stockholder proposals and for
nominating candidates for election as directors. These provisions of Delaware
law and of the Company's Certificate of Incorporation and Bylaws may have the
effect of delaying, deterring or preventing a change in control of the Company,
may discourage bids for the Common Stock at a premium over market price and may
adversely affect the market price, and the voting and other rights of the
holders, of the Common Stock.
36
ITEM 2. PROPERTIES
Due to the Company's recent and expected future growth, on March 2, 1998,
the Company entered into a lease for two buildings, under construction, in
Gaithersburg, Maryland, comprising a total of approximately 90,000 square-feet.
The Company intends to relocate its operation to this new facility upon the
expiration of its current leases. The lease on the new facility, which is
expected to be completed in the fall of 1999, will expire 10 years from the date
which is three business days after the day the new facility is substantially
completed.
The Company's executive office and manufacturing facility is located in
Beltsville, Maryland. The lease on this 19,780 square-foot facility expires upon
completion of the new facility, as both the existing Beltsville facility and the
new Gaithersburg facility are owned by the same corporation. In addition, the
Company has a 9,286 square-foot research and development facility in Silver
Spring, Maryland. The lease on this facility will terminate on September 30,
1999, subject to renewal at the Company's option.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings and is not
aware of any threatened litigation that could have a material adverse effect on
the Company's business, financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
37
EXECUTIVE OFFICERS OF THE REGISTRANT
[Enlarge/Download Table]
NAME AGE POSITIONS WITH THE COMPANY
------------------------------ ----- ------------------------------------------------------
Evan Jones.................................. 41 President, Chief Executive Officer and Chairman of the
Board (1)
Charles M. Fleischman....................... 40 Executive Vice President, Chief Operating Officer,
Chief Financial Officer and Director (2)
Jeanmarie Curley............................ 38 Vice President, Manufacturing (3)
Robert McG. Lilley.......................... 53 Vice President, Sales and Marketing (4)
Attila T. Lorincz, Ph.D..................... 43 Vice President, Research and Development, and
Scientific Director (5)
William J. Payne, Jr., Ph.D. ............... 48 Vice President, Development (6)
Donna Marie Seyfried ....................... 40 Vice President, Business Development (7)
Joseph P. Slattery ......................... 33 Vice President, Finance and Controller (8)
----------
(1) Mr. Jones has served as President, Chief Executive Officer and a
director since Armonk Partners acquired a controlling interest in the Company in
July 1990, and has served as Chairman of the Board since September 1995.
(2) Mr. Fleischman has served as Executive Vice President and a
director since Armonk Partners acquired a controlling interest in the Company in
July 1990, and has served as Chief Operating Officer since September 1995 and
Chief Financial Officer since March 1996.
(3) Ms. Curley has served as Vice President, Manufacturing since
April 1998. From December 1990 to April 1998, she was Director of Manufacturing.
(4) Mr. Lilley has served as Vice President, Sales & Marketing,
since July 1998, and as General Manager for Digene Europe since March 1997.
From September 1994 to February 1997, Mr. Lilley was General Manager for
Europe, Middle East & Africa for Alltel Healthcare Information Services. From
1987 to February 1994, Mr. Lilley was Managing Director for Technicon Data
Systems (TDS) Europe.
(5) Dr. Lorincz has served as Vice President, Research and
Development, and Scientific Director since December 1990. His research career
includes postdoctoral fellowships at the University of California. He also
serves on a number of advisory committees and is an Adjunct Associate Professor
in the Georgetown University Medical School Department of Pathology.
(6) Dr. Payne has served as Vice President, Development since July
1997. From August 1995 to July 1997, he was Vice President, Research and
Development in the IVD Medical Diagnostic division of Sigma Diagnostics. From
July 1993 to July 1995, Dr. Payne served as Director of Research and Development
in the IVD Diagnostic Medical division of Sanofi Diagnostic Pasteur.
(7) Ms. Seyfried has served as Vice President, Business Development
since October 1996. Ms. Seyfried served as Senior Director, Business Development
of The Perkin-Elmer Corporation from March 1993 to September 1996.
38
(8) Mr. Slattery has served as Vice President, Finance and Controller
since April 1998 and as Controller since February 1996. From March 1995 to
February 1996, Mr. Slattery was Director, Business Management, for I-NET, Inc.,
a computer services company. From April 1994 to March 1995, he was the Managing
Principal of Payne, Slattery and Company, a management consulting firm. From
October 1992 to April 1994, Mr. Slattery was Treasurer and Vice President,
Finance and Accounting, for Telos Corporation, a computer hardware and services
company.
39
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Since the Company's initial public offering of Common Stock on May 22,
1996, the Company's Common Stock has been traded on the Nasdaq National Market
under the symbol "DIGE." The following table sets forth, for the fiscal quarters
indicated, the high and low bid prices for the Common Stock, as reported by the
Nasdaq National Market:
[Enlarge/Download Table]
High Low
---- ---
1999
----
First quarter (through September 11, 1998).............................. 11 6 23/32
1998
----
Fourth quarter.......................................................... 11 3/16 7 3/8
Third quarter........................................................... 11 3/8 6 5/8
Second quarter.......................................................... 13 3/8 8 1/4
First quarter........................................................... 15 1/4 12
1997
----
Fourth quarter.......................................................... 13 3/4 9 1/4
Third quarter........................................................... 13 3/4 10 1/4
Second quarter.......................................................... 13 3/8 5
First quarter........................................................... 8 1/2 5
On September 11, 1998, the closing sale price for the Common Stock, as
reported by the Nasdaq National Market was $6 7/8. As of September 11, 1998, the
Company's Common Stock was held by 173 holders of record.
The Company has never paid dividends on its Common Stock and does not
anticipate paying any cash dividends on its Common Stock in the foreseeable
future.
(a) Recent Sales of Unregistered Securities
Except as hereinafter set forth, there have been no sales of unregistered
securities by the Company within the past three years.
From September 1995 through December 1995, 158,250 shares of Series 1994
Redeemable Convertible Preferred Stock were sold to certain existing
stockholders and certain new investors at a price per share of $4.00. During the
period May 1994 through April 1996, 1,000,000 shares of Series
40
1994 Redeemable Convertible Preferred Stock were sold to Murex at a price of
$3.00 per share under the terms of a Stock Purchase Agreement.
In connection with sales of Series 1994 Redeemable Convertible Preferred
Stock, the Company granted each purchaser warrants to purchase Common Stock up
to an amount equal to 41.67% of their investment in Series 1994 Redeemable
Convertible Preferred Stock at a price per-share escalating from $4.20 in May
1994 to $6.65 in February 1996. In April 1996, pursuant to the exercise of such
warrants, the Company issued 70,436 shares of Common Stock for $6.65 per share,
to certain existing stockholders. (Amounts in this paragraph are adjusted to
reflect a one-for-.714 reverse split of the Common Stock effected in connection
with the Company's initial public offering.)
In each of the transactions described above, the securities were not
registered under the Securities Act in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act.
Since July 1, 1995, in transactions which were exempt from registration
pursuant to Section 4(2) of the Securities Act and Rule 701 promulgated under
the Securities Act, the Company has issued options to certain employees,
directors, consultants, and others to purchase an aggregate of 98,084 shares of
the Company's Common Stock at prices per share ranging from $2.10 to $5.60.
Between July 1, 1995 and September 11, 1998, 13 of such employees, consultants
and others exercised options to purchase an aggregate of 19,277 shares at an
aggregate price of $72,898.61.
41
(b) Use of proceeds from Registered Securities
[Enlarge/Download Table]
Effective date of the registration for which the
use of proceeds information is being disclosed: May 21, 1996
SEC file number assigned to the registration statement: 0-28194
Offering commencement date: May 22, 1996
(Offering was not terminated before the sale of
all securities registered)
Names of managing underwriters: UBS Securities LLC
Montgomery Securities
Title of security: Common Stock, par value $.01 per share
[Download Table]
Amount sold 3,000,000
Aggregate offering price of amount sold $ 34,500,000
DIRECT OR INDIRECT PAYMENTS TO OTHERS FOR:
-----------------------------------------
Underwriting discounts and commissions $ 2,415,000
Other expenses $ 1,180,000
--------------
TOTAL EXPENSES $ 3,595,000
NET OFFERING PROCEEDS TO THE ISSUER $ 30,905,000
DIRECT OR INDIRECT PAYMENTS TO OTHERS FOR:
-----------------------------------------
Construction of plant, building and facilities $ 327,000
Purchases and installations of machinery and equipment $ 3,183,000
Repayment of indebtedness $ 2,931,000
Working capital $ 17,936,000
Temporary investments
---------------------
Option Market Preferred Stock $ 500,000
Corporate Bonds $ 3,030,000
Other purposes
--------------
Payments re: Murex Agency Agreement $ 2,998,000
--------------
TOTAL $ 30,905,000
42
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below with respect
to the Company's Consolidated Statements of Operations for the fiscal years
ended June 30, 1996, 1997 and 1998 and with respect to the Company's
Consolidated Balance Sheets at June 30, 1997 and 1998 are derived from the
audited Consolidated Financial Statements of the Company which are included
elsewhere in this report and are qualified by reference to such Consolidated
Financial Statements and the related Notes thereto. Consolidated Statements of
Operations data for the fiscal years ended June 30, 1994 and 1995 and
Consolidated Balance Sheet data at June 30, 1994, 1995 and 1996 are derived from
Consolidated Financial Statements of the Company not included herein. The
selected consolidated financial data set forth below is qualified in its
entirety by, and should be read in conjunction with the Consolidated Financial
Statements, the related Notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
report.
[Enlarge/Download Table]
Fiscal Year Ended
June 30,
---------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(in thousands, except per share loss)
Consolidated Statement of Operations Data:
Revenues:
Product Sales $ 4,767 $ 5,413 $ 6,359 $ 9,434 $ 11,980
Research and development contracts 527 749 381 626 29
------- ------- ------- ------- --------
Total revenues 5,294 6,162 6,740 10,060 12,009
Costs and expenses:
Cost of product sales 2,464 2,652 2,895 3,441 3,848
Research and development 1,103 1,856 2,430 4,131 5,285
Selling and marketing 1,398 1,375 2,095 5,236 10,057
General and administrative 1,191 1,245 1,792 4,412 5,690
Amortization of intangible assets 265 330 248 241 386
------- ------- ------- ------- --------
Loss from operations (1,127) (1,296) (2,720) (7,401) (13,257)
Other income (expense) (13) 14 40 (36) (83)
Interest expense (306) (277) (207) (84) (164)
Interest income 13 45 252 1,527 1,378
------- ------- ------- ------- --------
Loss from operations before income taxes (1,433) (1,514) (2,635) (5,994) (12,126)
Provision for income taxes -- -- -- -- 48
------- ------- ------- ------- --------
Net loss before cumulative effect of a
change in accounting principle (1,433) (1,514) (2,635) (5,994) (12,174)
Cumulative effect of a change in
accounting principle(1) -- -- -- -- (1,915)
------- ------- ------- ------- --------
Net loss $(1,433) $(1,514) $(2,635) $(5,994) $(14,089)
======= ======= ======= ======= ========
Basic and diluted net loss per share(1) $ (3.91) $ (4.11) $ (1.71) $ (0.53) $ (1.06)
======= ======= ======= ======= ========
Weighted average shares outstanding(1) 366 368 1,545 11,394 13,236
[Enlarge/Download Table]
At June 30,
-----------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(in thousands)
Consolidated Balance Sheet Data:
Working capital $ 2,195 $ 2,107 $ 29,616 $21,299 $28,428
Total assets 4,307 4,485 33,174 30,207 35,440
Long-term debt, less current maturities 3,005 2,812 152 553 --
Redeemable Convertible Preferred Stock 11,768 13,115 -- -- --
Accumulated deficit (15,184) (16,698) (19,333) (25,327) (39,416)
Total stockholders' equity (deficit) (11,490) (13,004) 30,119 24,266 31,099
---------------
(1) Computed on the basis described in Note 2 of Notes to Consolidated
Financial Statements.
43
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Consolidated
Financial Statements and the related Notes thereto included elsewhere in this
report. Statements regarding the Company's expectations as to financial results
and other aspects of its business set forth herein or otherwise made in writing
or orally by the Company may constitute forward looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Although the
Company believes that its expectations are based on reasonable assumptions
within the bounds of its knowledge of its business and operations, there can be
no assurance that actual results will not differ materially from its
expectations. Factors that might cause or contribute to such differences
include, but are not limited to, uncertainty of future profitability,
uncertainty of clinical trial results, uncertainty of market acceptance, risks
inherent in international transactions, limited sales and marketing experience,
dependence on third-party reimbursement, competition, dependence on European
distributor, extent of government regulations, delay in or failure to obtain
regulatory approvals, uncertainty regarding patents and proprietary rights, and
the inability to obtain requisite additional financing.
OVERVIEW
Digene develops, manufactures, and markets proprietary DNA and RNA tests,
based on its Hybrid Capture technology, for the detection, screening, and
monitoring of HPV, other STDs including chlamydia and gonorrhea, and blood
viruses including HIV, CMV, and HBV. Currently, the Company is marketing its HPV
test in the United States for the follow-up screening of women with equivocal
Pap smears and the Company is marketing its HPV tests internationally as a
primary screen to be used either in conjunction with or separate from the Pap
smear. Internationally, the Company launched its HBV test in 1992, its CMV test
in March 1997, and its HIV test in December 1997. In addition, the Company
introduced its chlamydia and gonorrhea tests internationally in August 1997.
Other than the Company's HPV tests, the Company's products currently are
available in the United States for research use only. The Company expects that
sales of its HPV tests will account for a substantial portion of the Company's
revenues for at least the next two years. In addition, the Company expects that
international sales will account for a significant portion of its revenues for
at least the next two years.
The Company currently markets its products in the United States through a
direct sales force supported by technical and customer service representatives.
In Europe, the Company's women's health products are marketed primarily through
a direct sales force that Digene has established with Abbott, which also serves
as a distributor of the Company's blood virus products in certain European,
Middle Eastern, and African markets. The Company's products are also sold
through a network of distributors in Asia and South America, and in Brazil
through the Company's majority owned subsidiary.
The Company has incurred substantial operating losses since inception,
resulting principally from expenses associated with the Company's research and
development programs, including preclinical studies, clinical trials and
regulatory submissions for the Company's women's health and blood virus
products, the scale-up of the Company's manufacturing facilities, and the
expansion of the Company's sales and marketing activities in the United States
and abroad. The Company expects such operating
44
losses to continue for the foreseeable future as it continues its product
development efforts, seeks FDA and foreign approvals of its women's health and
blood virus products, expands its manufacturing capabilities and further expands
its sales and marketing activities. In March 1998, the Company entered into a
lease for a new facility to which the Company intends to relocate its existing
operations upon completion of construction scheduled for the fall of 1999.
This new facility will result in increased operating expenses. During the next
two years, the Company also intends to make a significant investment in
luminometers and related software and equipment, which will be provided to
clinical laboratories to assist in the Company's launch of the HPV HC II test,
primarily in Europe.
The Company's quarterly operating results have fluctuated significantly in
the past and the Company believes that they may continue to fluctuate
significantly in the future with lower product revenues in the first and second
fiscal quarters as compared with the third and fourth fiscal quarters, primarily
attributable to the lower demand for certain women's health-related medical
procedures during the summer months and the December holiday season in the
United States and Europe. In addition, the Company's quarterly operating
results, as well as annual results, may fluctuate from period to period due to
the degree of market acceptance of the Company's products, competition, the
timing of regulatory approvals and other regulatory announcements, the volume
and timing of orders from and shipments to distributors, variations in the
Company's distribution channels, the timing of new product announcements and
introductions by the Company and its competitors, product obsolescence resulting
from new product introductions and other factors, many of which are outside the
Company's control. Due to one or more of these factors, in one or more future
quarters the Company's results of operations may fall below the expectations of
securities analysts and investors. In that event, the market price of the
Company's Common Stock could be materially and adversely affected.
RESULTS OF OPERATIONS
Comparison of Fiscal Year Ended June 30, 1998 to Fiscal Year Ended June 30, 1997
Product sales increased to $11,980,000 in fiscal 1998 from $9,434,000 in
fiscal 1997. The increase was due primarily to increased sales of the Company's
Hybrid Capture tests, primarily HPV, partially offset by lower sales of
equipment and non-core products. The Company anticipates that sales of its HPV
tests will account for a substantial portion of its product sales for at least
the next two years.
Research and development contract revenues decreased to $29,000 in fiscal
1998 from $626,000 in fiscal 1997 due primarily to substantial completion of
contract activities during fiscal 1998. The Company anticipates that research
and development contract revenues will increase substantially from the fiscal
1998 amount as a result of new contracts, both signed and currently under
negotiation.
Cost of product sales increased to $3,848,000 in fiscal 1998 from
$3,441,000 in fiscal 1997 due to increased sales volume. Gross margin on product
sales increased to 67.9% in fiscal 1998 from 63.5% in fiscal 1997. This increase
was due primarily to sales of higher margin Hybrid Capture tests and increases
in overhead absorption and unit pricing. The Company expects gross margins to
increase moderately in the future due to improved overhead absorption and
manufacturing efficiencies.
Research and development expenses increased to $5,285,000 in fiscal 1998
from $4,131,000 in fiscal 1997 due to the hiring of additional research and
development personnel and increases in clinical trial activity related to the
development of its blood virus and STD tests and to the further development
45
of the Company's Hybrid Capture technology. The Company expects research and
development expense to increase for the next few years.
Selling and marketing expenses increased to $10,057,000 in fiscal 1998
from $5,236,000 in fiscal 1997 due to substantial increases in sales and
marketing programs, the hiring of additional selling and marketing personnel,
and other selling costs incurred under the Company's international distribution
agreements. The Company expects selling and marketing expenses to continue to
increase over the next few years as it expands its advertising and promotional
activities and increases its sales and marketing force.
General and administrative expenses increased to $5,690,000 in fiscal 1998
from $4,412,000 in fiscal 1997, due to the hiring of additional administrative
personnel, and costs associated with the Company's expansion into the Europe and
Brazil markets. The Company expects general and administrative expenses to
increase moderately over the next few years.
Amortization of intangible assets increased to $386,000 in fiscal 1998
from $241,000 in fiscal 1997. The Company expects amortization of intangible
assets to decrease significantly in the next fiscal year as a result of the
write-off of start-up costs associated with the Company's activities in Europe
during fiscal 1998.
Interest expense increased to $164,000 in fiscal 1998 from $84,000 in
fiscal 1997 due primarily to debt incurred in February 1997 as a result of the
Company's expansion into the European market.
Interest income decreased to $1,378,000 in fiscal 1998 from $1,527,000 in
fiscal 1997 due primarily to lower average cash and cash equivalents balances as
a result of negative cash flows from operations, partially offset by investment
of the net proceeds from the Company's public offering of Common Stock,
completed in October 1997.
The $1,915,000 cumulative effect of change in accounting principle is a
result of the early adoption of Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities". The write-off of the unamortized balance of
capitalized costs incurred in connection with the acquisition of Murex's HPV
customer lists related to the Company's 1997 agreements with Murex to establish
a Digene-direct European sales operation for the Company's women's health
products.
Comparison of Fiscal Year Ended June 30, 1997 to Fiscal Year Ended
June 30, 1996
Product sales increased to $9,434,000 in fiscal 1997 from $6,359,000 in
fiscal 1996. The increase was due primarily to increased sales of the Company's
HPV tests.
Research and development contract revenues increased to $626,000 in fiscal
1997 from $381,000 in fiscal 1996 due primarily to revenues recorded under a new
contract.
Cost of product sales increased to $3,441,000 in fiscal 1997 from
$2,895,000 in fiscal 1996 due to increased sales volume. Gross margin on product
sales increased to 63.5% in fiscal 1997 from 54.4% in fiscal 1996. This increase
was due primarily to sales of higher margin HPV tests and increases in overhead
absorption and unit pricing.
46
Research and development expenses increased to $4,131,000 in fiscal 1997
from $2,430,000 in fiscal 1996 due to the hiring of additional research and
development personnel and increases in clinical trial activity related to the
development of its blood virus and STD tests and to the further development of
the Company's Hybrid Capture II technology.
Selling and marketing expenses increased to $5,236,000 in fiscal 1997 from
$2,095,000 in fiscal 1996 due to substantial increases in sales and marketing
programs and to the hiring of additional selling and marketing personnel, as
well as to other selling costs, incurred under the Company's international
distribution agreements.
General and administrative expenses increased to $4,412,000 in fiscal 1997
from $1,792,000 in fiscal 1996, due to the hiring of additional administrative
personnel, set-up costs associated with the Company's expansion into the
European market, and the related expenses incurred to support the Company's
requirements as a publicly traded company. In addition, general and
administrative expenses increased as a result of the formation of Digene do
Brasil, a majority-owned subsidiary.
Amortization of intangible assets decreased to $241,000 in fiscal 1997
from $248,000 in fiscal 1996. The decrease was due to full amortization
associated with an acquisition, offset by an increase associated with
amortization of startup costs incurred in expanding the Company's activities in
Europe.
Interest expense decreased to $84,000 in fiscal 1997 from $207,000 in
fiscal 1996 as a result of reductions in debt pursuant to the terms of those
debt agreements.
Interest income increased to $1,527,000 in fiscal 1997 from $252,000 in
fiscal 1996 due primarily to the investment of the net proceeds from the
Company's initial public offering, completed in May 1996.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company's expenses have significantly exceeded its
revenues, resulting in an accumulated deficit of approximately $39.4 million at
June 30, 1998. The Company has funded its operations primarily through the sale
of equity securities. At June 30, 1998, the Company had cash, cash equivalents
and short-term investments aggregating approximately $25,512,000. Short-term
investments of $75,000 are restricted under a collateral agreement related to
leasehold improvements. Net cash used in the Company's operating activities was
$11,099,000 for the fiscal year ended June 30, 1998.
Capital expenditures increased to $2,481,000 in fiscal 1998 from $971,000
in fiscal 1997, due primarily to the acquisition of equipment placed at customer
sites to run the Company's tests. In March 1998, the Company entered into a
lease agreement that will relocate the Company's research and development
facility and its office and manufacturing facility into one location in
Gaithersburg, Maryland commencing in the fall of 1999. The integration of the
Company's operations into a new facility may result in inefficiencies and
delays. Specifically, among other things, the Company may encounter difficulties
in scaling up manufacturing, including problems involving production yield,
quality control and assurance, and shortages of qualified personnel. During the
next year, the Company also intends to continue to make a significant investment
in luminometers, software and
47
related equipment, which will be provided to clinical laboratories to assist in
the acceptance of the Company's tests.
The Company does not have any bank financing arrangements. The Company's
indebtedness consists of notes payable in the principal amount of $537,000
related to its expansion into the European market and notes payable in the
principal amount of $15,000 related to leasehold improvements.
The Company anticipates that working capital requirements will increase
significantly for the foreseeable future due to increased accounts receivable as
a result of direct sales to European customers, which have a longer collection
cycle than sales to distributors.
The Company has incurred negative cash flows from operations since its
inception, and has expended, and expects to continue to expend in the future,
substantial funds to complete its planned product development efforts, expand
its sales and marketing activities and expand its manufacturing capabilities.
The Company expects that its existing capital resources will be adequate to fund
the Company's operations through calendar 1999. No assurances can be given that
there will be no changes in the Company that would consume a significant amount
of its available resources more rapidly than presently anticipated. The
Company's future capital requirements and the adequacy of available funds will
depend on numerous factors, including the successful commercialization of its
products, progress in its product development efforts and the magnitude and
scope of such efforts, progress with preclinical studies and clinical trials,
progress in its regulatory affairs activities, the cost and timing of expansion
of manufacturing capabilities, the expansion of the Company's direct European
sales operations, the development and maintenance of effective sales and
marketing activities, the cost of filing, prosecuting, defending and enforcing
patent claims and other intellectual property rights, competing technological
and market developments, and the development of strategic alliances for the
marketing of its products. To the extent that the Company's existing capital
resources and funds generated from the Company's operations are insufficient to
meet current or planned operating requirements, the Company will be required to
obtain additional funds through equity or debt financing, strategic alliances
with corporate partners and others, or through other sources. The Company does
not have any committed sources of additional financing, and there can be no
assurance that additional funding, if necessary, will be available on
acceptable terms, if at all. If adequate funds are not available, the Company
may be required to delay, scale back or eliminate certain aspects of its
operations or attempt to obtain funds through arrangements with collaborative
partners or others that may require the Company to relinquish rights to certain
of its technologies, product candidates, products or potential markets. If
adequate funds are not available, the Company's business, financial condition
and results of operations will be materially and adversely effected.
On July 1, 1998, the Company purchased all of the outstanding capital
stock of Viropath B.V., a company with limited liability registered at
Amsterdam, The Netherlands, for total consideration of 181,884 shares of Common
Stock. The Company granted options to purchase an aggregate of 50,000 shares of
its Common Stock to the three Viropath individual shareholders in connection
with their execution of consulting agreements with the Company. In addition, the
Company is obligated to pay royalties, not to exceed $1,000,000, on future sales
of Viropath's licensed HPV products in the field of cervical cancer testing.
48
YEAR 2000 COMPLIANCE
The Company is working to resolve the potential impact of the year
2000 on the ability of the Company's computerized information programs and
systems and certain manufacturing and other equipment to accurately process
information that may be date-sensitive. Any of the Company's technology that
recognize a date using "00" as the year 1900 rather than the year 2000 could
result in errors or system failures.
The Company has substantially completed an assessment of its
computer programs and telephone systems and has identified those programs and
systems that are presently not year 2000 compliant. The Company is in the
process of assessing its manufacturing and other equipment, as well as
communicating with significant vendors and customers to determine their
respective states of readiness. The Company expects to complete this assessment
in early 1999.
In connection with the planned relocation of the Company's business
to a new facility in Gaithersburg, Maryland in September 1999, the Company
expects to replace most of its programs, systems and manufacturing and other
equipment with new programs, systems and equipment which the suppliers will
certify to be year 2000 compliant. By the summer of 1999 the Company plans to
upgrade, to the extent necessary, any of its existing programs, systems and
equipment that will be transferred to the new facility. If the relocation is
significantly delayed, which the Company does not presently anticipate, the
Company expects to expand the upgrade and replacement phase to include the
necessary upgrade and replacement of programs, systems and equipment which are
located at its existing facilities but which the Company does not plan to use
at the new facility. The cost of these contingent upgrades and replacements is
presently unknown.
The Company plans to begin testing any upgraded or replaced
programs, systems and equipment when the new facility is sufficiently complete
to enable testing, which is expected to provide adequate time to complete all
testing and to implement any necessary contingency plans. Based on information
developed to date as a result of its assessment efforts, the Company does not
anticipate that the cost of upgrading or replacing its programs, systems and
equipment will be material to the Company. If the Company and third parties
upon which it relies are unable to address the year 2000 issue in a timely and
successful manner, the Company's business could be materially adversely
affected.
49
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
50
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Digene Corporation
We have audited the accompanying consolidated balance sheets of Digene
Corporation as of June 30, 1997 and 1998, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for
each of the three years in the period ended June 30, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Digene
Corporation at June 30, 1997 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1998, in conformity with generally accepted accounting principles.
As discussed in Note 2 of Notes to Consolidated Financial Statements, in 1998
the Company changed its method of accounting for costs related to start-up
activities.
/s/Ernst & Young LLP
Vienna, Virginia
August 17, 1998
51
DIGENE CORPORATION
CONSOLIDATED BALANCE SHEETS
[Enlarge/Download Table]
JUNE 30,
--------------------------------
1997 1998
--------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents $ 8,452,864 $18,330,803
Short-term investments 11,061,283 7,181,572
Accounts receivable, less allowance of approximately
$61,000 and $209,000 at June 30, 1997 and 1998, 1,767,682 3,072,224
respectively
Due from related party 1,952,460 -
Inventories (Note 4) 2,425,167 3,557,289
Prepaid expenses and other current assets 446,368 560,706
------------ ------------
Total current assets 26,105,824 32,702,594
Property and equipment, net (Note 5) 1,214,548 2,627,244
Intangible assets, net (Notes 2 and 6) 2,308,641 12,784
Deposits 134,564 96,916
------------ ------------
Total assets $29,763,577 $35,439,538
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $2,093,893 $2,424,245
Accrued expenses 772,037 542,064
Accrued payroll 602,555 755,490
Current maturities of long-term debt (Note 8) 1,338,220 552,717
------------ ------------
Total current liabilities 4,806,705 4,274,516
Long-term debt, less current maturities (Note 8) 552,733 -
Accrued rent (Note 9) 100,618 54,340
Deferred rent 37,318 11,980
Commitments (Notes 9, 10 and 16)
Stockholders' equity:
Preferred stock, $0.01 per value, 1,000,000 shares
authorized, no shares issued and outstanding
Common stock, $0.01 par value, 50,000,000 shares
authorized, 11,579,530 and 14,117,308 shares issued and
outstanding at June 30, 1997 and 1998, respectively 115,795 141,173
Additional paid-in capital 49,477,621 70,373,310
Accumulated deficit (25,327,213) (39,415,781)
------------ ------------
Total stockholders' equity 24,266,203 31,098,702
------------ ------------
Total liabilities and stockholders' equity $29,763,577 $35,439,538
============ ============
See accompanying notes.
52
DIGENE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
[Enlarge/Download Table]
YEAR ENDED JUNE 30,
-------------------------------------------------
1996 1997 1998
-------------- ----------------- ----------------
Revenues:
Product sales $ 6,359,062 $ 9,434,183 $ 11,980,445
Research and development contracts 381,425 626,096 28,500
----------- ----------- ------------
Total revenues 6,740,487 10,060,279 12,008,945
Costs and expenses:
Cost of product sales 2,894,731 3,440,963 3,847,725
Research and development 2,429,711 4,131,090 5,284,761
Selling and marketing 2,094,696 5,236,246 10,057,596
General and administrative 1,792,426 4,411,899 5,689,783
Amortization of intangible assets 248,435 240,902 385,679
----------- ----------- ------------
Loss from operations (2,719,512) (7,400,821) (13,256,599)
Other income (expense):
Other income (expense) 40,072 (36,825) (83,047)
Interest expense (207,349) (83,777) (163,625)
Interest income 251,776 1,526,967 1,377,665
----------- ----------- ------------
Loss from operations before income taxes (2,635,013) (5,994,456) (12,125,606)
Provision for income taxes - - 48,463
----------- ----------- ------------
Net loss before cumulative effect of a
change in accounting principle (2,635,013) (5,994,456) (12,174,069)
Cumulative effect of a change in accounting - - (1,914,499)
principle
----------- ----------- ------------
Net loss $(2,635,013) $(5,994,456) $(14,088,568)
=========== =========== ============
Basic and diluted net loss per share $ (1.71) $ (0.53) $ (1.06)
=========== =========== ============
Weighted average shares outstanding 1,545,247 11,393,978 13,235,901
=========== =========== ============
See accompanying notes.
53
DIGENE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
[Enlarge/Download Table]
ADDITIONAL TOTAL
COMMON STOCK PAID-IN ACCUMULATED STOCKHOLDERS'
----------------------
EQUITY
SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
---------------------- -------------- ------------------------------
Balance at June 30, 1995 368,356 $ 3,684 $ 3,690,025 $(16,697,744) $(13,004,035)
Issuance of Common Stock, net of
offering costs of $3,768,678 3,000,000 30,000 30,701,322 - 30,731,322
Exercise of Common Stock warrants 70,436 704 467,695 - 468,399
Exercise of Common Stock options 40,510 405 25,261 - 25,666
Conversion of Redeemable
Convertible Preferred Stock 7,824,403 78,244 14,454,698 - 14,532,942
Net loss - - - (2,635,013) (2,635,013)
---------- -------- ----------- ------------ ------------
Balance at June 30, 1996 11,303,705 113,037 49,339,001 (19,332,757) 30,119,281
Exercise of Common Stock options 275,825 2,758 138,620 - 141,378
Net loss - - - (5,994,456) (5,994,456)
---------- -------- ----------- ------------ ------------
Balance at June 30, 1997 11,579,530 115,795 49,477,621 (25,327,213) 24,266,203
Issuance of Common Stock, net of
offering costs of $1,845,585 2,250,000 22,500 20,631,915 - 20,654,415
Exercise of Common Stock options 287,778 2,878 263,774 - 266,652
Net loss - - - (14,088,568) (14,088,568)
---------- -------- ----------- ------------ ------------
Balance at June 30, 1998 14,117,308 $141,173 $70,373,310 $(39,415,781) $ 31,098,702
========== ======== =========== ============ ============
See accompanying notes.
54
DIGENE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
[Enlarge/Download Table]
YEAR ENDED JUNE 30,
-------------------------------------------------
1996 1997 1998
-------------- ---------------- ---------------
OPERATING ACTIVITIES
Net loss $(2,635,013) $(5,994,456) $(14,088,568)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization of property
and equipment 356,680 461,603 1,068,211
Amortization of intangible assets 248,435 240,902 385,679
Cumulative effect of a change in - - 1,914,499
accounting principle
Start-up expenses - 833,179 -
Changes in operating assets and
liabilities:
Accounts receivable (115,801) (921,955) (1,304,542)
Due from related party (382,087) (1,172,141) 1,952,460
Inventories (817,018) (618,834) (1,132,122)
Prepaid expenses and other current assets (228,276) (146,933) (114,338)
Deposits (52,022) (22,102) 37,648
Accounts payable 1,402,113 241,476 330,352
Accrued expenses (59,937) 250,179 (229,973)
Accrued payroll 145,226 395,794 152,935
Accrued rent (33,869) (49,289) (46,278)
Deferred rent (16,796) (24,696) (25,338)
----------- ------------ ------------
Net cash (used in) provided by operating (2,188,365) (6,527,273) (11,099,375)
activities
INVESTING ACTIVITIES
Purchases of short-term investments (4,392,978) (15,045,827) (14,634,204)
Sales of short-term investments - 8,452,522 18,513,915
Capital expenditures (329,661) (971,111) (2,480,907)
Acquisition of customer lists - (1,000,000) -
Additions to goodwill and intangible assets (10,528) (3,363) (4,321)
----------- ------------ ------------
Net cash used in investing activities (4,733,167) (8,567,779) 1,394,483
FINANCING ACTIVITIES
Net proceeds from issuance of Redeemable
Convertible Preferred Stock 1,418,000 - -
Net proceeds from issuance of Common Stock 30,731,322 - 20,654,415
Exercise of Common Stock warrants 468,399 - -
Exercise of Common Stock options 25,666 141,378 266,652
Principal repayments on debt (2,756,796) (700,787) (1,338,236)
----------- ------------ ------------
Net cash provided by (used in) financing 29,886,591 (559,409) 19,582,831
activities
----------- ------------ ------------
Net increase (decrease) in cash and cash
equivalents 22,965,059 (15,654,461) 9,877,939
Cash and cash equivalents at beginning of year 1,142,266 24,107,325 8,452,864
=========== ============ ============
Cash and cash equivalents at end of year $24,107,325 $ 8,452,864 $ 18,330,803
=========== ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 313,000 $ 17,000 $ 206,000
=========== ============ ============
See accompanying notes.
55
DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS
Digene Corporation (the "Company") was incorporated in the state of Delaware in
1987. The Company develops, manufactures and markets proprietary DNA and RNA
tests for the detection, screening and monitoring of human diseases. The
Company's products are designed to help improve clinical outcomes and reduce the
overall cost of disease management. The Company's lead product, the Hybrid
Capture HPV DNA Test, is the only FDA-approved test for the detection of human
papillomavirus ("HPV"), the cause of essentially all cervical cancer. In
addition, Digene has developed and launched tests internationally for the
detection and viral load monitoring of major blood viruses, including human
immunodeficiency virus, cytomegalovirus and hepatitis B virus, and tests for the
detection of two of the most common sexually transmitted diseases, chlamydia
trachomatis and neisseria gonorrhea.
On June 28, 1996, Digene Corporation entered into a joint venture agreement with
a Brazilian national to establish Digene do Brasil LTDA, a majority-owned
subsidiary of Digene Corporation.
On October 29, 1997, the Company established a wholly-owned subsidiary, Digene
B.V., for the distribution of the Company's products in the Europe.
On March 3, 1998, the Company established a wholly-owned subsidiary, Digene
Europe, for the marketing of the Company's products in the Europe.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MANAGEMENT ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of Digene Corporation
and its subsidiaries. All significant intercompany transactions have been
eliminated in consolidation.
RECLASSIFICATION
Certain 1996 and 1997 balances have been reclassified to conform with the 1998
presentation.
CASH AND CASH EQUIVALENTS
Cash equivalents, which are stated at cost, consist of highly liquid investments
with original maturities of three months or less.
SHORT-TERM INVESTMENTS
The Company classifies its short-term investments as available-for-sale.
Investments in securities that are classified as available-for-sale and have
readily determinable fair values are measured at fair market value in the
consolidated balance sheets. As of June 30, 1997 and 1998, short-term
investments are stated at cost, which approximates market.
56
DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK
The Company performs ongoing credit evaluations of its customers' financial
condition and generally does not require collateral. The Company maintains
reserves for credit losses, and such losses have been within management's
expectations.
IMPAIRMENT OF LONG-LIVED ASSETS
In the event that facts and circumstances indicate that long-lived assets or
other assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset would be compared to the asset's carrying amount
to determine if a write-down is required. If a write-down is required, the
Company would prepare a discounted cash flow analysis to determine the amount of
the write-down.
REVENUE RECOGNITION
Revenue from product sales is recognized upon shipment of goods. Revenue from
research and development contracts is recognized as research and development
activities are performed. Cash received in advance of services being performed
is deferred until the related revenue has been earned.
SIGNIFICANT CUSTOMERS
For the years ended June 30, 1996, 1997 and 1998, the Company generated 43%,
42%, and 42%, respectively, of total revenues from a single customer. Export
sales accounted for approximately 56%, 59% and 61% of total revenues for the
years ended June 30, 1996, 1997 and 1998, respectively.
Export sales consist of the following:
[Download Table]
YEAR ENDED JUNE 30,
----------------------------------------------
1996 1997 1998
------------- ---------------- ---------------
Europe $3,019,004 $4,342,175 $4,938,758
South America 221,131 881,048 1,619,334
Pacific Rim 301,067 592,480 674,817
Other 217,717 162,815 134,331
---------- ---------- ----------
Total export sales $3,758,919 $5,978,518 $7,367,240
========== ========== ==========
FOREIGN CURRENCY VALUATION
The local currency is the functional currency for most of the Company's
international subsidiaries and, as such, assets and liabilities are translated
into U.S. dollars at year-end exchange rates. Income and expense items are
translated at average exchange rates during the year. Translation adjustments
resulting from changes in exchange rates are not considered material and have
been recognized in the Consolidated Statements of Operations.
57
DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT
The Company expenses its research and development costs as incurred.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising costs amounted
to approximately $93,000, $188,000 and $215,000 during fiscal 1996, 1997 and
1998, respectively.
INCOME TAXES
The Company provides for income taxes in accordance with the liability method.
Under this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
NET LOSS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"). SFAS No.
128 replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants and
convertible securities, except as required by Staff Accounting Bulletin No. 98
("SAB 98"). The definition of diluted earnings per share is very similar to the
previous definition of fully diluted earnings per share. All net loss
per share amounts for all periods have been presented, and where appropriate,
restated to conform to the SFAS No. 128 requirements.
In February 1998, the Securities and Exchange Commission ("SEC") issued SAB 98
which changes the SEC staff's guidance on cheap stock in initial public offering
filings and the subsequent reporting of cheap stock. As a result of SAB 98, the
Company restated its 1996 net loss per share of $1.30 as presented in its Form
10-K for the year ended June 30, 1996.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). SFAS No. 123 allows companies to account for
stock-based compensation under the provisions of SFAS No. 123 or under the
provisions of Accounting Principles Board Opinion No. 25 ("APB No. 25"), but
requires pro forma disclosures in the footnotes to the financial statements as
if the measurement provisions of SFAS No. 123 had been adopted. The Company
accounts for its stock-based compensation in accordance with the intrinsic value
method of APB No. 25. As such, the adoption of SFAS No. 123 did not impact the
financial condition or the results of operations of the Company.
58
DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CHANGE IN ACCOUNTING PRINCIPLE
In April 1998, the Accounting Standards Executive Committee ("AcSEC") of the
American Institute of Certified Public Accountants issued Statement of Position
98-5, "Reporting the Costs of Start-up Activities" ("SOP 98-5"), which requires
that costs related to start-up activities be expensed as incurred. Prior to
1998, the Company capitalized $2,497,172 for the acquisition of Murex's HPV
customer lists related to the Agreements (See Note 3) to establish a
Digene-direct European sales operation for the Company's women's health
products. Effective April 1, 1998, the Company elected early adoption of SOP
98-5. The effect of adoption of SOP 98-5 was to increase net loss by $1,914,499
to expense costs that had been capitalized prior to 1998.
RECENT PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"), which establishes standards for reporting the components of
comprehensive income and requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
included in a financial statement that is displayed with the same prominence as
other financial statements. Comprehensive income includes net income as well as
certain non-owners items that are reported directly within a separate component
of stockholders' equity. The provisions of SFAS No. 130 are effective for fiscal
years beginning after December 15, 1997. These disclosure requirements will not
have a material impact on the Company's consolidated financial position or
results of operations.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"), which is required to be
adopted for fiscal years beginning after December 15, 1997. SFAS No. 131 changes
the way public companies report segment information in annual financial
statements and also requires those companies to report selected segment
information in interim financial reports to shareholders. SFAS No. 131
supersedes Statement of Financial Accounting Standards No. 14, "Financial
Reporting for Segments of a Business Enterprise". The impact of SFAS No. 131 on
the disclosure for segment information on the financial statements is not
expected to be material.
In March 1998, AcSEC issued Statement of Position 98-1 ("SOP 98-1"), "Accounting
for the Costs of Computer Software Developed For or Obtained for Internal Use".
SOP 98-1 is effective for fiscal years beginning after December 15, 1998. SOP
98-1 will require the capitalization of certain costs incurred after the date of
adoption in connection with developing or obtaining software for internal use.
The Company currently expenses such costs as incurred. The Company has not yet
assessed what the impact of SOP 98-1 will be on the Company's future earnings or
financial position.
59
DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. TRANSACTIONS WITH A RELATED PARTY
Distribution Agreements
In May 1992, the Company and International Murex Technologies Corporation
(together with its affiliates, "Murex") entered into a Distribution Agreement
("Distribution Agreement"), whereby the Company granted to Murex the exclusive
right to distribute the Company's HBV DNA tests (for the detection of the
hepatitis B virus) in specified countries in the European Community and the
co-exclusive right (meaning that the Company may also distribute its products)
to distribute the Company's HBV DNA test in Africa. The agreement was amended in
May 1993 to expand Murex's exclusive right to also include certain countries in
Eastern Europe and in the Middle East.
In February 1996, the Company and Murex entered into the 1996 Distribution
Agreement granting Murex the exclusive right to distribute certain of the
Company's Hybrid Capture I ("HC I") products, including its Hybrid Capture human
papillomavirus DNA test, in most of Europe, Africa and certain countries in the
Middle East. The 1996 Distribution Agreement had a five-year term, subject to
automatic renewal for successive one-year terms. The Company had the right to
terminate the 1996 Distribution Agreement with respect to particular countries,
subject to Murex's right to continue to distribute products within any such
country on a co-exclusive basis during a "wind-down" period of up to two years.
In August 1997, the Company and Murex entered into the 1997 Distribution
Agreement, which replaced the 1996 Distribution Agreement, whereby the Company
granted to Murex the exclusive right to distribute the Company's HIV RNA Hybrid
Capture II, CMV DNA, and HBV DNA Hybrid Capture II assays in specified countries
in Europe, Africa, Asia, and the Middle East.
Development and License Agreements
In April 1993, the Company entered into a Development and License Agreement (the
"1993 Agreement") with International Murex Technologies Limited ("IMTC"). Under
the terms of the 1993 Agreement, IMTC funded certain of the Company's DNA probe
product development programs on a dollar for dollar cost reimbursement basis.
IMTC and the Company hold a co-exclusive license to market the products
developed under the 1993 Agreement.
In May 1994, the Company entered into an additional Development and License
Agreement (the "1994 Agreement") with IMTC. Under the terms of the 1994
Agreement, IMTC purchased 333,333 shares of the Company's Redeemable Convertible
Preferred Stock and placed $2 million in escrow to purchase 666,667 additional
shares of the Company's Redeemable Convertible Preferred Stock, over the term of
the 1994 agreement. Generally, amounts released from escrow were used to fund
mutually approved research and development projects on a dollar for dollar cost
reimbursement basis. As funding was released from escrow, shares of the
Company's Redeemable Convertible Preferred Stock were issued. During the years
ended June 30, 1995 and 1996, $1,215,000 and $785,000, respectively, were
released from the escrow and accordingly, the Company issued 405,000 and 261,667
shares, respectively, of Redeemable Convertible Preferred Stock. In connection
with the Company's initial public offering, all shares of Redeemable Convertible
Preferred Stock were converted to Common Stock (see Note 11). IMTC holds a
license that is co-exclusive (with the Company) to market products developed
under the 1994 Agreement.
60
DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. TRANSACTIONS WITH A RELATED PARTY (CONTINUED)
Agency Agreement and Customer Transfer Agreement
Effective February 1, 1997, the Company entered into two agreements (the "Agency
Agreement" and the "Customer Transfer Agreement", collectively the "Agreements")
with Murex Diagnostics Corporation ("MDC"), to create a Digene-direct European
sales operation for the Company's women's health products. Under the Agreements,
the Company sells its Hybrid Capture human papillomavirus ("HPV") DNA tests
directly in Europe using Murex's distribution infrastructure. Murex acts as the
exclusive agent for the Company in designated European and Eastern European
countries (the "Territory") for a period of five years during which Murex will
receive selling service fees and a percentage of the Company's HPV revenues in
the Territory.
The Agreements provide for a transition period during which the administrative
infrastructure will be agreed to and established. During this transition period,
the Company is recording its transactions, for purposes of title transfer,
consistent with the Distribution Agreement with Murex. Furthermore, the 1997
Distribution Agreement still remains in effect to cover the distribution of the
Company's products in areas outside the Territory. Prior to February 1, 1997,
pursuant to the 1996 Distribution Agreement, Murex had been acting as the
exclusive European distributor in designated non-US territories for the
Company's HPV test and other of the Company's products.
In connection with the Agreements, the Company acquired Murex's HPV customer
lists for approximately $2,500,000 in exchange for promissory notes in the
aggregate amount of $1,702,750 and cash of $1,000,000. The non-cash portion of
this transaction related to the issuance of debt and the associated imputed
interest has been excluded from the Consolidated Statements of Cash Flows. The
unsecured notes payable to Murex are noninterest-bearing and have been
discounted at 10.00% over the eleven month term of the notes. In accordance with
the Agency Agreement, the Company agreed to pay to Murex costs of approximately
$853,000 over eleven months, which costs have been expensed. Digene has agreed
to reimburse Murex for all costs incurred for selling and marketing expenses.
All other Digene products (except the Company's women's health products)
exclusively distributed by Murex in Europe and Eastern Europe will not be
affected by the Agreements.
Acquisition of Related Party
On April 17, 1998, Abbott Laboratories ("Abbott") and Murex entered into an
agreement pursuant to which Abbott acquired all of the outstanding shares of
Murex's common stock. The Company is in discussion with Abbott regarding the
distribution of Digene's products.
61
DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. INVENTORIES
Inventories are stated at the lower of cost or market on a first-in, first-out
basis.
Inventories consist of the following:
[Download Table]
JUNE 30,
1997 1998
--------------- --------------
Finished goods $ 748,072 $1,341,391
Work in process 1,254,495 1,773,977
Raw materials 761,100 780,421
---------- ----------
2,763,667 3,895,789
Obsolescence reserve (338,500) (338,500)
---------- ----------
$2,425,167 $3,557,289
========== ==========
5. PROPERTY AND EQUIPMENT
Property and equipment, including leasehold improvements, are stated at cost and
depreciated or amortized using the straight-line method over the estimated
useful lives of three to five years. Leasehold improvements are amortized over
the lesser of the related lease term or the useful life.
Property and equipment consist of the following:
[Download Table]
JUNE 30,
1997 1998
-------------- --------------
Furniture, fixtures and office equipment $ 1,048,854 $ 1,324,978
Machinery and equipment 1,807,448 3,911,642
Leasehold improvements 830,175 930,764
----------- -----------
3,686,477 6,167,384
Accumulated depreciation and amortization (2,471,929) (3,540,140)
----------- -----------
$ 1,214,548 $ 2,627,244
=========== ===========
6. INTANGIBLE ASSETS
Patents application costs are expensed as incurred. Noncompetition agreements
are amortized on a straight-line basis over their respective terms, generally
two to six years. Goodwill, which resulted from the acquisition of the Molecular
Diagnostics Division of Life Technologies, Inc. ("LTI") in December 1990, was
amortized using the straight-line method over five years ending in December
1995.
62
DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INTANGIBLE ASSETS (CONTINUED)
Intangible assets consist of the following:
[Download Table]
JUNE 30,
1997 1998
--------------- ----------------
Noncompetition agreements $ 1,087,349 $ 1,087,349
Murex customer lists 2,497,172 -
Goodwill and other intangibles 184,240 178,561
----------- -----------
3,768,761 1,265,910
Accumulated amortization (1,460,120) (1,253,126)
----------- -----------
$ 2,308,641 $ 12,784
=========== ===========
The Murex customer lists were written off during 1998 (See Note 2 - Change in
Accounting Principle).
7. INCOME TAXES
Significant components of the provision for income taxes of operations
consist of the following:
[Download Table]
YEAR ENDED JUNE 30,
1996 1997 1998
------------ ------------ ------------
Current:
Federal $ - $ - $ -
State - - -
Foreign - - 48,463
------------ ------------ ------------
Total current - - 48,463
Deferred:
Federal - - -
State - - -
Foreign - - -
------------ ------------ ------------
Total deferred - - -
------------ ------------ ------------
Total provision for income $ - $ - 48,463
taxes ============ ============ ============
There is no net tax benefit recorded for the change in accounting principle
because such benefit creates a deferred tax asset which the Company has fully
reserved.
The components of income (loss) from operations before income taxes are as
follows:
[Download Table]
YEAR ENDED JUNE 30,
1996 1997 1998
------------- ------------- -------------
United States $(2,606,924) $(5,923,876) $ (9,971,255)
Foreign (28,089) (70,580) (2,154,351)
------------- ------------- ------------
$(2,635,013) $(5,994,456) $(12,125,606)
============= ============= =============
63
7. INCOME TAXES (CONTINUED)
The following is a summary of the items which caused recorded income taxes
attributable to continuing operations to differ from taxes computed using the
statutory federal income tax rate for the years ended June 30, 1996, 1997, and
1998:
[Download Table]
JUNE 30,
1996 1997 1998
---------------- -------------- --------------
Tax benefit at statutory rate $ (922,000) $(2,098,000) $(4,244,000)
Effect of:
State income tax, net (132,000) (300,000) (606,000)
Foreign tax - - 48,463
Options (50,000) (1,142,000) (1,005,000)
Other 14,000 (49,000) 114,000
Foreign losses not used - - 861,000
Valuation allowance 1,090,000 3,589,000 4,880,000
---------- ----------- -----------
Provision (benefit) for income $ - $ - $ 48,463
taxes ========== =========== ===========
The Company's net deferred tax assets are as follows:
[Download Table]
JUNE 30,
1997 1998
-------------- ---------------
Net operating loss carryforwards $ 7,959,000 $ 12,636,000
Research and development credits 443,000 828,000
Patent costs, net 669,000 577,000
Research and developmental deferral, net 1,567,000 1,346,000
Murex customer lists 50,000 899,000
Other 681,000 812,000
------------ ------------
Deferred tax assets 11,369,000 17,098,000
Valuation allowance (11,369,000) (17,098,000)
------------ ------------
Net deferred tax assets $ - $ -
============ ============
Due to the Company's net operating loss carryforwards, the Company did not
recognize a tax provision for the years ended June 30, 1996 and 1997. The
Company recognized a tax provision of $48,463 for the year ended June 30, 1998.
At June 30, 1998, the Company had tax net operating loss carryforwards for
income tax purposes of approximately $31.5 million. Approximately $5.5 million
of the net operating loss carryforwards is attributable to exercised stock
options, the benefit of which, when realized, will directly increase additional
paid-in capital. At June 30, 1998, the Company also had research and development
credit carryforwards of approximately $828,000. In 1990, the Company experienced
a change in ownership pursuant to Section 382 of the Internal Revenue Code,
which will cause the utilization of pre-change losses and credits to be limited.
Subject to this limitation, the Company's net operating loss carryforwards and
tax credits expire, if unused, at various dates from 2003 through 2013.
Realization of total deferred tax assets is contingent upon the generation of
future taxable income. Due to the uncertainty of realization of these tax
benefits, the Company has provided a valuation allowance for the full amount of
its deferred tax assets.
64
DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. LONG-TERM DEBT
Long-term debt consists of the following:
[Download Table]
JUNE 30,
1997 1998
------------- --------------
Notes payable to Murex (See Note 3), net
of unamortized discount $ 1,762,033 $ 537,424
Amounts due to former stockholders, net of
unamortized discount 85,007 -
Note payable to lessor 43,913 15,293
----------- ---------
1,890,953 552,717
Current maturities of long-term debt (1,338,220) (552,717)
----------- ---------
Long-term debt, less current maturities $ 552,733 $ -
=========== =========
The unsecured notes payable to Murex arose in conjunction with the Company's
acquisition of Murex's HPV customer list (See Note 3), are noninterest-bearing
and have been discounted at 10.00%. Payments are due in ten installments through
December 1998. During 1997 and 1998, the Company made payments totaling $577,864
and $1,224,608, respectively, and incurred interest expense of $76,107 and
$128,830, respectively. At June 30, 1998, there was no accrued interest related
to these notes.
Amounts due to former stockholders, related to repurchases of Common Stock
during 1991, are noninterest-bearing, but have been discounted at 8.74%. Payment
was due in seven equal annual installments beginning July 1991 and was completed
in July 1997.
The note payable to lessor represents the financing of a portion of leasehold
improvements made by the lessor under terms of the lease agreement for the
Company's research and development facility (See Note 9). The note, in the
original principal amount of $200,000, is repayable through December 1998 in 114
equal monthly installments of $2,616 in principal plus interest at 9%. A $75,000
certificate of deposit held by the Company is assigned to the lessor as
collateral for the lease obligation.
9. LEASE COMMITMENTS
The Company occupies a facility serving as its research and development
facility. The lease agreement for this facility terminates on December 31, 1998,
but provides for a five-year renewal at the Company's option. Under the lease
agreement, no rent was due during the period of construction and the initial
period of occupancy. The total minimum lease obligation is being expensed over
the term of the lease obligation on a straight-line basis, with expense in
excess of cash outlays recorded as deferred rent. The lessor agreed to make
approximately $372,000 of improvements to the facility at the Company's expense,
paid for in cash of $172,000 and a note payable for $200,000 (See Note 8). The
minimum annual base rentals are subject to an annual increase of 30% of the
increase in the Consumer Price Index. During July 1998, the Company amended this
lease agreement to extend the lease term through September 30, 1999.
65
DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. LEASE COMMITMENTS (CONTINUED)
Due to the Company's recent and expected future growth, on March 2, 1998, the
Company entered into a lease for two buildings, under construction, in
Gaithersburg, Maryland, comprising a total of approximately 90,000 square-feet.
The Company intends to relocate its operation to this new facility upon the
expiration of its current leases. The lease on the new facility, which is
expected to be completed in the fall of 1999, will expire 10 years from the date
which is three business days after the day the new facility is substantially
completed. The Company has two consecutive rights to extend the term of the
lease for five years each.
The Company's executive office and manufacturing facility is located in
Beltsville, Maryland. The lease on this facility expires upon the completion of
the new facility, as both the existing Beltsville facility and the new
Gaithersburg facility are owned by the same corporation. In addition, the
Company has a research and development facility in Silver Spring, Maryland. The
lease on this facility will terminate on September 30, 1999, subject to renewal
at the Company's option.
Future minimum rental commitments under these and other operating lease
agreements, including the agreements mentioned above, are as follows as of June
30, 1998:
[Download Table]
1999 $ 642,688
2000 1,221,069
2001 1,429,864
2002 1,455,741
2003 1,483,469
Thereafter 10,145,643
------------
$ 16,378,474
============
Rent expense under these leases was $363,691, $449,449 and $763,126 for the
years ended June 30, 1996, 1997 and 1998, respectively.
Remaining lease payments, net of anticipated sublease income of approximately
$380,000, for facilities vacated as a result of relocation and consolidation
were accrued in fiscal 1992. The remaining accrual at June 30, 1998 is $54,340.
10. EMPLOYMENT AGREEMENTS
The Company has executed employment agreements with certain key executives under
which the Company is required to pay the following base salaries over the next
four years:
[Download Table]
1999 $ 867,084
2000 489,374
2001 177,500
2002 8,342
-----------
$ 1,542,300
===========
66
DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. REDEEMABLE CONVERTIBLE PREFERRED STOCK
Immediately upon completion of the initial public offering (the "IPO") of the
Company's Common Stock in May 1996, all outstanding shares of 1990, 1991, and
1994 Series Preferred Stock converted into shares of Common Stock on a 1 for
0.714 basis.
12. COMMON STOCK
On April 15, 1996, the holders of Common Stock purchase warrants elected to
purchase 70,436 shares of Common Stock at an exercise price of $6.65 per share.
As a result of this warrant exercise, the Company received net proceeds of
$468,399. The remaining unexercised warrants expired on April 15, 1996.
On May 6, 1996, the Company's shareholders approved a 0.714 for 1 reverse stock
split of the Company's Common Stock, which became effective on May 20, 1996. All
references in the accompanying financial statements to the number of shares of
Common Stock and per-share amounts have been restated to reflect the split.
On May 21, 1996, the Company issued 3,000,000 shares of Common Stock in the IPO,
which generated net proceeds of approximately $30,700,000.
On October 20, 1997, the Company issued 2,250,000 shares of Common Stock in a
public offering, which generated net proceeds of approximately $20,654,000.
13. COMMON STOCK OPTIONS
In March 1996, the Company adopted the Digene Corporation Omnibus Plan (the
"Omnibus Plan"). Pursuant to the Omnibus Plan, officers or other employees of
the Company may receive options to purchase Common Stock. The Omnibus Plan is
administered by the Compensation Committee. 2,000,000 shares have been reserved
for issuance under the Omnibus Plan.
In October 1996, the Company adopted the Digene Corporation Directors' Stock
Option Plan (the "Directors' Plan"). Pursuant to the Directors' Plan, directors
of the Company may receive options to purchase Common Stock. The Directors' Plan
is administered by the Board of Directors. 500,000 shares have been reserved for
issuance under the Directors' Plan.
In September 1997, the Company adopted the Digene Corporation 1997 Stock Option
Plan (the "1997 Stock Option Plan"). Pursuant to the 1997 Stock Option Plan,
consultants and other non-employees of the Company may receive options to
purchase Common Stock. The 1997 Stock Option Plan is administered by the Board
of Directors. 500,000 shares have been reserved for issuance under the 1997
Stock Option Plan.
Prior to March 1996, the Company had adopted Stock Option Plans (the "Option
Plans") under which 2,622,821 shares of Common Stock were reserved for issuance
upon exercise of options granted to employees, officers and consultants of the
Company. The Option Plans provide for grants of stock options to employees
(including officers and employee directors), directors and consultants of the
Company. The Option Plans were previously administered
67
DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. COMMON STOCK OPTIONS (CONTINUED)
by the Board of Directors and presently are being administered by the
Compensation Committee, which determines recipients and types of awards to be
granted, including the exercise price, number of shares subject to the award and
the exercisability thereof. The Company does not intend to grant further options
under these Option Plans. The terms of all stock options granted may not exceed
ten years. The exercise price of options granted, as determined by the
Compensation Committee, approximates fair value.
Common stock options activity is as follows:
[Enlarge/Download Table]
YEARS ENDED JUNE 30,
---------------------------------------------------------------------------------
1996 1997 1998
WEIGHTED- WEIGHTED- WEIGHTED-AVERAGE
AVERAGE AVERAGE EXERCISE
EXERCISE EXERCISE PRICE
SHARES PRICE SHARES PRICE SHARES
---------- ----------- ----------- ----------- ----------- ----------------
Outstanding at
beginning of year 1,753,211 $1.19 2,660,582 $ 4.14 2,812,333 $ 5.43
Options granted 987,033 8.86 460,000 10.14 486,500 11.69
Options exercised (40,510) .55 (275,825) .52 (287,778) .93
Options canceled or
expired (39,152) 2.30 (32,424) 8.66 (298,893) 11.15
--------- --------- ---------
Outstanding at end of
year 2,660,582 4.14 2,812,333 5.43 2,712,162 6.42
========= ========= =========
Options exercisable at
year-end 1,393,787 1.88 1,288,218 2.53 1,131,492 1.81
========= ========= =========
The following table summarizes information about fixed-price stock options
outstanding at June 30, 1998:
[Enlarge/Download Table]
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
NUMBER AVERAGE NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
EXERCISE AT JUNE 30, CONTRACTUAL EXERCISE AT JUNE 30, EXERCISE
PRICES 1998 LIFE PRICE 1998 PRICE
--------------- -------------- ------------- ---------------- ------------ ----------------
$0.00 - $2.00 672,988 2.5 $ 0.94 672,988 $ 0.94
$2.01 - $5.00 447,074 2.5 2.32 388,015 2.22
$5.01 - $8.00 109,969 7.0 6.21 37,157 5.81
$8.01 - $11.00 1,244,131 8.0 9.61 33,332 10.00
$11.01 -$13.25 238,000 8.5 13.02 - -
--------- ---------
2,712,162 5.8 6.42 1,131,492 1.81
========= =========
During fiscal 1997, the Company adopted the disclosure-only provisions of SFAS
No. 123. Had compensation cost for the Company's stock option plans been
determined based upon the fair value at the grant date for awards under the
plans consistent with the methodology prescribed under SFAS No. 123, the
Company's net loss in fiscal 1996, 1997 and 1998 would have been approximately
$3,607,000, $7,594,000 and $16,574,000, or $1.78, $0.67 and $1.25 per share,
respectively. The effect of applying SFAS No. 123 on 1996, 1997 and 1998 pro
forma net loss as stated above is not necessarily representative of the effects
on reported net loss for future years due to, among other things, (1) the
vesting period of the stock options and the (2) fair value of additional stock
options in future years.
68
DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. COMMON STOCK OPTIONS (CONTINUED)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing fair value model with the following
weighted-average assumptions used for grants:
[Download Table]
YEARS ENDED JUNE 30,
------------------------------------
1996 1997 1998
Dividend yield 0.00% 0.00% 0.00%
Expected volatility 73% 73% 73%
Risk-free interest rate 5.875% 6.5% 6.5%
Expected life of the option term (in years) 6.6 6.6 5.5
The weighted average fair values of the options granted during the years ended
June 30, 1996, 1997 and 1998 were $9.20, $10.08 and $11.69, respectively.
14. NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net income
(loss) per share:
[Download Table]
YEARS ENDED JUNE 30,
1996 1997 1998
------------- ------------- --------------
Numerator:
Net loss $(2,635,013) $(5,994,456) $(14,088,568)
=========== =========== ============
Denominator:
Denominator for basic earnings per
share--weighted-average shares 1,545,247 11,393,978 13,235,901
=========== =========== ============
Denominator for diluted earnings
per share--weighted-average shares 1,545,247 11,393,978 13,235,901
=========== =========== ============
Basic net loss per share $ (1.71) $ (0.53) $ (1.06)
=========== =========== ============
Diluted net loss per share $ (1.71) $ (0.53) $ (1.06)
=========== =========== ============
69
DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. NET LOSS PER SHARE (CONTINUED)
The following table sets forth the computation of basic and diluted net income
(loss) per share:
[Download Table]
YEARS ENDED JUNE 30,
1996 1997 1998
------------ -------------- --------------
Basic loss per common share
Continuing operations $ (1.71) $ (0.53) $ (0.92)
Cumulative effect of a change
in accounting principle (0.00) (0.00) (0.14)
---------- ----------- -----------
Net loss $ (1.71) $ (0.53) $ (1.06)
========== =========== ===========
Diluted loss per common share
Continuing operations $ (1.71) $ (0.53) $ (0.92)
Cumulative effect of a change
in accounting principle (0.00) (0.00) (0.14)
---------- ----------- -----------
Net loss $ (1.71) $ (0.53) $ (1.06)
========== =========== ===========
Weighted average number of common
shares outstanding:
Basic 1,545,247 11,393,978 13,235,901
========== =========== ===========
Diluted 1,545,247 11,393,978 13,235,901
========== =========== ===========
15. RETIREMENT PLAN
Effective January 1, 1994, the Company adopted a 401(k) Profit Sharing Plan (the
"Plan"), which was modified during May 1998. The Plan, which covers all
employees who have completed ninety days of service, stipulates that employees
may elect an amount between 1% and 15% of their total compensation to contribute
to the Plan. Employee contributions are subject to Internal Revenue Service
limitations. All employees who have completed 1,000 hours of service during the
plan year and are employed by the Company on the last day of the plan year are
eligible to share in discretionary Company contributions. Employees vest in
employer contributions over five years. No contributions were made by the
Company during the years ended June 30, 1996, 1997 and 1998.
16. OTHER COMMITMENTS AND CONTINGENCIES
The Company's access to various probes, diagnostic techniques and a key product
component were acquired under agreements requiring the Company to pay future
royalties up to 4.0% of applicable future net sales on certain products. During
fiscal 1996, 1997 and 1998, total royalties amounted to $324,925, $396,665 and
$769,930, respectively.
During 1998, two former employees filed suits against the Company claiming
breach of employment contract and various other claims. The Company intends to
vigorously defend each of these lawsuits, but their respective outcomes cannot
be predicted. The Company's management believes that any adverse outcome against
the Company will not have a material effect on the Company's consolidated
financial position and results of operations.
70
DIGENE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. OTHER COMMITMENTS AND CONTINGENCIES (CONTINUED)
During 1998, the Company executed a firm purchase commitment with a vendor to
supply $450,000 of equipment. As of June 30, 1998, the Company has recorded a
prepaid expense of $112,500 related to this obligation.
17. SUBSEQUENT EVENTS
On July 1, 1998, the Company issued 181,884 shares of its Common Stock, par
value $0.01 per share, as consideration for its purchase of all of the
outstanding capital stock (the "Shares") of Viropath B.V., a company with
limited liability, registered at Amsterdam, The Netherlands ("Viropath"). The
181,884 shares of the Company's Common Stock were recorded at $8.247 per share,
in accordance with the Stock Purchase Agreement, and resulted in total
consideration of approximately $1,500,000. These shares will be held in escrow
for a period of one year following the closing date. Upon the one year
anniversary of the closing date, seventy percent of the shares will be released
from escrow and the remaining thirty percent will be released following a six
month period. In addition, the Company is obligated to pay royalties on future
sales of Viropath's licensed products, not to exceed $1,000,000. The
acquisition was accounted for using the purchase method of accounting. The
purchase price will be allocated to the fair value of the assets acquired and
liabilities assumed. The historical operations of Viropath, compared to the
historical operations of the Company, are not significant.
In addition, the Company granted options to purchase an aggregate of 50,000
shares of its Common Stock to the three Viropath individual shareholders in
connection with their execution of consulting agreements with the Registrant.
The options will become exercisable in equal installments on each of June 30,
1999, 2000, 2001, 2002 and 2003 at an exercise price of $9.75 per share. The
options expire on June 29, 2008.
71
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
No change of accountants and/or disagreements on any matter of
accounting principles or financial statement disclosures have occurred within
the last two years.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Directors. The information with respect to directors
required by this item is incorporated herein by
reference to the Registrant's definitive Proxy Statement
for its Annual Meeting of Stockholders, scheduled to be
held on October 29, 1998, which shall be filed with the
Securities and Exchange Commission within 120 days from
the end of the Registrant's fiscal year (the "1998 Proxy
Statement").
(b) Executive Officers. The information with respect to
executive officers required by this item is set forth in
Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this item is incorporated herein by
reference to the 1998 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this item is incorporated herein by
reference to the 1998 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by
reference to the 1998 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON
FORM 8-K
(a) 1. Financial Statements of the Company
Consolidated Financial Statements of the Registrant and Report of
Independent Accountants thereon
Consolidated Balance Sheets as of June 30, 1998 and 1997
Consolidated Statements of Operations for the fiscal years ended
June 30, 1998, 1997, and 1996
Consolidated Statements of Stockholders' Equity (Deficit) for the
fiscal years ended June 30, 1998, 1997, and 1996
Consolidated Statements of Cash Flows for the fiscal years ended
June 30, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts and Reserves
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable and
therefore have been omitted.
72
3. Exhibits
The following exhibits are incorporated in this report by reference or
included and submitted with this report, as indicated. Except as otherwise
noted, the exhibit has previously been filed as an exhibit to the Company's
Registration Statement on Form S-1, File No. 333-2968 (the "Registration
Statement"), and is incorporated herein by reference. The exhibit numbers shown
below for exhibits incorporated by reference correspond to those shown in the
Registration Statement.
3.1 Amended and Restated Certificate of Incorporation of the Company.
3.2 Amended and Restated Bylaws of the Company.
4.1 Specimen Common Stock Certificate.
10.1 1987 Stock Option Plan.
10.2 1989 Special Employee Stock Option Plan.
10.3 1990 Stock Option Plan.
10.4 1991-A Stock Option Plan.
10.5 1991-B Stock Option Plan.
10.6 1996 Omnibus Plan.
10.7 Employment Agreement dated as of May 1, 1996 between the Company
and Evan Jones, as amended.
10.8 Employment Agreement dated as of May 1, 1996 between the Company
and Charles M. Fleischman, as amended.
10.9 Employment Agreement dated February 1, 1991, as amended, between
the Company and Attila T. Lorincz, Ph.D.
10.10 Letter Agreement dated May 1, 1992 among the Company, Joseph
Migliara, Harris Kaplan, Migliara/Kaplan Associates and Valley
Partners.
10.11 Lease Agreement dated January 13, 1988 between the Company and
West Farm Associates Limited Partnership.
10.12 Lease Agreement dated June 20, 1991 between the Company and
Murkirk Manor Associates Limited Partnership
10.13 Distribution Agreement dated May 19, 1992 between the Company and
International Murex Technologies Corporation, as amended, May 26,
1993.
10.14 License Agreement dated September 1, 1995 between the Company and
Institut Pasteur.
10.15 Cross-License Agreement dated April 1, 1990 among Life
Technologies, Inc. and Institut Pasteur.
10.16 License Agreement dated December 1, 1983 between Bethesda
Research Laboratories, a division of Life Technologies, Inc. and
Georgetown University.
10.17 Stock Purchase Agreement dated September 26, 1988 between the
Company and Mitsubishi PetroChemical Company, Limited.
10.18 License Agreement dated December 19, 1990 between the Company and
Life Technologies, Inc.
10.19 Stock Purchase Agreement dated May 31, 1994 between the Company
and International Murex Technologies Limited ("IMTL").
10.20 Escrow Agreement dated May 31, 1994 among the Company, IMTL and
Reid & Priest, as Escrow Agent.
10.21 Development and License Agreement dated April 14, 1993 between
the Company and International Murex Technologies Corporation
("IMTC").
73
10.22 Development and License Agreement dated May 31, 1994 between the
Company and IMTC.
10.23 Common Stock Purchase Warrant of IMTL.
10.24 Form of Common Stock Purchase Warrant.
10.25 Stockholders' Agreement dated May 31, 1994 among the Company,
IMTL and Armonk Partners.
10.26 Registration Rights Agreement dated as of May 24, 1996 between
the Company, Armonk Partners, Murex Diagnostics Corporation and
Certain other Stockholders.
10.27 Distribution Agreement dated as of February 28, 1996 between the
Company and Murex Biotech Limited (confidential treatment has
been requested for certain portions of this agreement).
10.28 License Agreement dated September 27, 1995 between the Company
and Kanebo, Ltd.
10.29 Employment Agreement dated as of January 9, 1997 between the
Company and Steven A. Owings (Incorporated by reference to
Exhibit 10 of the Registrant's Current Report on Form 8-K dated
January 22, 1997)
10.30** Agency and Sales Representation Agreement between the Company and
Murex dated as of February 1, 1997 (Incorporated by reference to
Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997)
10.31** Customer Transfer Agreement between the Company and Murex dated
as of February 1, 1997 (Incorporated by reference to Exhibit 10.2
of the Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1997)
10.32 First Amendment to the Distribution Agreement between the Company
and Murex dated as of February 1, 1997 (Incorporated by reference
to Exhibit 10.3 of the Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997)
10.33 Employment Agreement dated as of September 3, 1996 between the
Company and Donna Marie Seyfried (Incorporated by reference to
Exhibit 10 of the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996)
10.34 Director's Stock Option Plan
10.35 Employment Agreement dated as of July 11, 1997 between the
Company and William J. Payne
10.36 1997 Stock Option Plan (Incorporated by reference to Exhibit 99
of the Registrant's Registration Statement on Form S-3, dated
November 24, 1997)
10.37* Stock Purchase Agreement dated as of June 30, 1998 by and among
the Company and Stichting Researchfonds Pathologie, Ewald C.R.M.
Keijser, Christophorus J.L.M. Meijer and Jan M. M. Walboomers.
10.38 Lease dated as of March 2, 1998 by and between the Company and
ARE - Metropoliton Grove I, LLC (Incorporated by reference to
Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998.)
21* Subsidiaries of the Registrant.
23.1* Consent of Ernst & Young LLP, Independent Auditors
27* Financial Data Schedule.
----------
74
* Filed herewith.
** Confidential status has been granted for certain portions thereof
pursuant to a Commission Order granted June 3, 1997. Such provisions have
been filed separately with the Commission.
(b) Reports on Form 8-K.
Current Report on Form 8-K dated July 1, 1998, reporting under Item 9 the
issuance of 181,884 shares of the Registrant's Common Stock as
consideration for the purchase of all of the outstanding capital stock of
Viropath B.V. from three Dutch individuals and one Dutch foundation.
75
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DIGENE CORPORATION
September 28, 1998 By: /s/ EVAN JONES
----------------------------
Evan Jones
President and Chief
Executive Officer
We, the undersigned directors and officers of Digene Corporation, do
hereby constitute and appoint each of Evan Jones and Charles M. Fleischman, each
with full power of substitution, our true and lawful attorney-in-fact and agent
to do any and all acts and things in our names and in our behalf in our
capacities stated below, which acts and things either of them may deem necessary
or advisable to enable Digene Corporation to comply with the Securities Exchange
Act of 1934, as amended, any rules, regulations and requirements of the
Securities and Exchange Commission, in connection with this Annual Report on
Form 10-K, including specifically, but not limited to, power and authority to
sign for any or all of us in our names, in the capacities stated below, any and
all amendments (including post-effective amendments) hereto; and we do hereby
ratify and confirm all that they shall do or cause to be done by virtue hereof).
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
[Download Table]
SIGNATURE TITLE DATE
/s/ EVAN JONES President and Chief Executive September 28, 1998
-------------------------------- Officer (principal executive
Evan Jones officer) and Chairman
/s/ CHARLES M. FLEISCHMAN Executive Vice President, September 28, 1998
-------------------------------- Chief Operating Officer,
Charles M. Fleischman Chief Financial Officer and
Director (principal financial
officer)
76
[Download Table]
/s/ JOSEPH P. SLATTERY Vice President, Finance and September 28, 1998
-------------------------------- Controller (principal
Joseph P. Slattery accounting officer)
/s/ WAYNE T. HOCKMEYER Director September 28, 1998
--------------------------------
Wayne T. Hockmeyer
/s/ JOHN H. LANDON Director September 28, 1998
--------------------------------
John H. Landon
/s/ JOSEPH M. MIGLIARA Director September 28, 1998
--------------------------------
Joseph M. Migliara
/s/ JOHN J. WHITEHEAD Director September 28, 1998
--------------------------------
John J. Whitehead
77
EXHIBIT INDEX
[Enlarge/Download Table]
Exhibit No. Description
----------- ----------------------------------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation of the Company.
3.2 Amended and Restated Bylaws of the Company.
4.1 Specimen Common Stock certificate.
10.1 1987 Stock Option Plan.
10.2 1989 Special Employee Stock Option Plan.
10.3 1990 Stock Option Plan.
10.4 1991-A Stock Option Plan.
10.5 1991-B Stock Option Plan.
10.6 1996 Omnibus Plan.
10.7 Employment Agreement dated as of May 1, 1996 between the
Company and Evan Jones, as amended.
10.8 Employment Agreement dated as of May 1, 1996 between the
Company and Charles M. Fleischman, as amended.
10.9 Employment Agreement dated February 1, 1991, as amended, between the Company and
Attila T. Lorincz, Ph.D.
10.10 Letter Agreement dated May 1, 1992 among the Company, Joseph
Migliara, Harris Kaplan, Migliara/Kaplan Associates and
Valley Partners.
10.11 Lease Agreement dated January 13, 1988 between the Company
and West Farm Associates Limited Partnership.
10.12 Lease Agreement dated June 20, 1991 between the Company and Murkirk Manor
Associates Limited Partnership
10.13 Distribution Agreement dated May 19, 1992 between the
Company and International Murex Technologies Corporation, as
amended, May 26, 1993.
10.14 License Agreement dated September 1, 1995 between the Company and Institut Pasteur.
10.15 Cross-License Agreement dated April 1, 1990 among Life Technologies, Inc. and Institut
Pasteur.
10.16 License Agreement dated December 1, 1983 between Bethesda Research Laboratories, a
division of Life Technologies, Inc. and Georgetown University.
10.17 Stock Purchase Agreement dated September 26, 1988 between
the Company and Mitsubishi PetroChemical Company, Limited.
10.18 License Agreement dated December 19, 1990 between the
Company and Life Technologies, Inc.
10.19 Stock Purchase Agreement dated May 31, 1994 between the
Company and International Murex Technologies Limited
("IMTL").
10.20 Escrow Agreement dated May 31, 1994 among the Company, IMTL
and Reid & Priest, as Escrow Agent.
10.21 Development and License Agreement dated April 14, 1993
between the Company and International Murex Technologies
Corporation ("IMTC").
10.22 Development and License Agreement dated May 31, 1994 between
the Company and IMTC.
10.23 Common Stock Purchase Warrant of IMTL.
10.24 Form of Common Stock Purchase Warrant.
10.25 Stockholders' Agreement dated May 31, 1994 among the
Company, IMTL and Armonk Partners.
78
[Download Table]
10.26 Registration Rights Agreement dated as of May 24, 1996
between the Company, Armonk Partners, Murex Diagnostics
Corporation and Certain other Stockholders.
10.27 Distribution Agreement dated as of February 28, 1996 between
the Company and Murex Biotech Limited (confidential
treatment has been requested for certain portions of this
agreement).
10.28 License Agreement dated September 27, 1995 between the
Company and Kanebo, Ltd. 10.29 Employment Agreement dated as
of January 9, 1997 between the Company and Steven A.
Ownings (Incorporated by reference to Exhibit 10 of the
Registrant's Current Report 8-K dated January 22, 1997)
10.30** Agency and Sales Representation Agreement between the
Company and Murex dated as of February 1, 1997 (Incorporated
by reference to Exhibit 10.1 of the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1997)
10.31** Customer Transfer Agreement between the Company and Murex
dated as of February 1, 1997 (Incorporated by reference to
Exhibit 10.2 of the Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1997)
10.32 First Amendment to the Distribution Agreement between the
Company and Murex dated as of February 1, 1997 (Incorporated
by reference to Exhibit 10.3 of the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1997)
10.33 Employment Agreement dated as of September 3, 1996 between
the Company and Donna Marie Seyfried (Incorporated by
reference to Exhibit 10 of the Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1996)
10.34 Director's Stock Option Plan
10.35 Employment Agreement dated as of July 11, 1997 between the
Company and William J. Payne
10.36 1997 Stock Option Plan (Incorporated by reference to Exhibit
99 of the Registrant's Registration Statement on Form S-3,
dated November 24, 1997)
10.37* Stock Purchase Agreement dated as of June 30, 1998 by and
among the Company and Stichting Researchfonds Pathologie,
Ewald C.R.M. Keijser, Christophorus J. L. J. Meijer and
Jan M.M. Walboomers.
10.38 Lease dated as of March 2, 1998 by and between the Company
and ARE - Metropoliton Grove I, LLC (Incorporated by
reference to Exhibit 10.1 of the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998.)
21* Subsidiaries of the Registrant.
23.1* Consent of Ernst & Young LLP, Independent Auditors
27* Financial Data Schedule.
----------
* Filed herewith.
** Confidential status has been granted for certain portions
thereof pursuant to a Commission Order granted June 3, 1997.
Such provisions have been filed separately with the Commission.
79
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Digene Corporation
We have audited the consolidated financial statements of Digene Corporation as
of June 30, 1997 and 1998 and for each of the three years in the period ended
June 30, 1998 and have issued our report thereon dated August 17, 1998 (included
elsewhere in this report). Our audits also included the financial statement
schedule listed in Item 14(a) of this report. The schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
/s/ Ernst & Young LLP
Vienna, Virginia
August 17, 1998
80
DIGENE CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
[Enlarge/Download Table]
BALANCE AT BALANCE
BEGINNING OF AT END
CLASSIFICATION PERIOD ADDITIONS DEDUCTIONS PERIOD
-------------- ------------ ----------------------------- -------
Allowance for doubtful accts:
Year ended June 30, 1996 $ 51 $ 10 -- $ 61
Year ended June 30, 1997 61 -- -- 61
Year ended June 30, 1998 61 150 (2) (1) 209
Reserve for inventory obsolescence:
Year ended June 30, 1996 $135 $115 -- $250
Year ended June 30, 1997 250 89 -- 339
Year ended June 30, 1998 339 -- -- 339
(1) Write-off of accounts receivable
81
Dates Referenced Herein and Documents Incorporated by Reference
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