SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
----- OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
-- or --
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
----- OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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0-25250
COMMISSION FILE NUMBER
OSTEX INTERNATIONAL, INC.
EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER
STATE OF WASHINGTON
STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION
91-1450247
I.R.S. EMPLOYER IDENTIFICATION NUMBER
2203 AIRPORT WAY SOUTH, SUITE 400, SEATTLE, WASHINGTON 98134
206-292-8082
ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES
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Securities registered pursuant to Section 12(b) of the Act:
(none) (none)
TITLE OF CLASS EACH EXCHANGE ON WHICH REGISTERED
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
TITLE OF CLASS
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Indicate by checkmark 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), Yes [ X ]
and (2) has been subject to such filing requirements for
the past 90 days. No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
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The aggregate market value of the voting and non-voting stock held by
non-affiliates of the registrant was approximately $23,308,000 on March 17,
1998, based on the per-share closing price of $2.28 on the Nasdaq Stock Market.
The number of shares of Common Stock outstanding as of March 27,
1998 was 12,696,250.
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DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Registrant's Annual Report to Shareholders for the fiscal
year ended December 31, 1997 is incorporated by reference into Part I, Part II
and Part III of this Form 10-K.
(2) Portions of the Registrant's Proxy Statement for the Registrant's
Annual Shareholders Meeting to be held Monday, May 18, 1998, to be filed
pursuant to Regulation 14A is incorporated by reference into Part III of this
Form 10-K.
OSTEX INTERNATIONAL, INC.
INDEX TO FORM 10-K
PART I
PAGE
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ITEM 1 - BUSINESS 2
ITEM 1A - RISK FACTORS 4
ITEM 1B - EXECUTIVE OFFICERS OF THE REGISTRANT 8
ITEM 2 - PROPERTIES 9
ITEM 3 - LEGAL PROCEEDINGS 9
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 9
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS 10
ITEM 6 - SELECTED FINANCIAL DATA 10
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 10
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 10
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 11
ITEM 11 - EXECUTIVE COMPENSATION 11
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 11
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 11
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K 12
SIGNATURES 16
For the purpose of this Form 10-K, the following capitalized terms shall have
the following meanings:
"Company" or "Ostex" shall mean Ostex International, Inc., a Washington
corporation;
"Annual Report to Shareholders" shall mean the annual report to
shareholders of Ostex International, Inc. for the year ended December 31,
1997; and
"Proxy Statement" shall mean the proxy statement for the 1998
shareholders meeting of Ostex International, Inc. to be held Monday, May 18,
1998, to be filed with the Securities and Exchange Commission (the "Commission")
pursuant to Regulation 14A.
PART I
ITEM 1. BUSINESS
Ostex was incorporated in the State of Washington in 1989. The Company is
engaged in the discovery and commercialization of products associated with
osteoporosis and other collagen-related diseases. The Company believes that its
lead product, the OSTEOMARK -registered trademark- test, incorporates
breakthrough technology in the area of bone resorption measurement. Ostex
has formed collaborative relationships with leading diagnostic and
pharmaceutical companies to aid in the commercialization of Osteomark. As of
December 31, 1997, the Company had 56 employees.
Osteoporosis is a significant health problem. According to the National
Osteoporosis Foundation (the "NOF"), osteoporosis afflicts approximately 28
million people in the U.S. alone. Additionally millions of people are at risk of
skeletal degradation associated with Paget's disease of bone, cancer that
metastasizes to bone, hyperparathyroidism (overactivity of the parathyroid
gland, characterized by a reduction of bone mass) and renal osteodystrophy. In
spite of the serious human and economic consequences of these diseases
(according to the NOF, the direct healthcare and indirect lost productivity
costs of osteoporosis exceed $10 billion annually in the U.S. alone), medical
intervention usually commences only after pain, immobility, fractures, or other
symptoms have appeared. The Company expects the osteoporosis therapeutic market
will increase significantly. The Company also believes new therapeutic products
are under development for osteoporosis, some of which are in late-stage clinical
trials, and that the Osteomark test can be used to effectively predict a
patient's response to osteoporosis therapy and monitor existing therapies and
other therapies which may be developed.
The Company is the exclusive licensee of the Osteomark technology, known
clinically as the NTx assay, which is a urine test that can aid in healthcare
decision-making at early menopause and beyond. The Osteomark assay is a
non-invasive diagnostic test which quantitatively indicates the level of
bone resorption. Individuals who are losing bone collagen at accelerated
rates may indicate a condition which typically results in osteoporosis. The
Company believes that early identification of high levels of bone resorption
provides the opportunity to predict skeletal response (bone mineral density) to
hormonal resorptive therapy in postmenopausal women and helps prevent the onset
of osteoporosis. The Company also believes that the Osteomark assay aids
clinicians in monitoring the effects of antiresorptive therapies in
postmenopausal women, as well as in older patients who have already lost
significant bone mass.
On May 8, 1995, the Company's Osteomark assay became commercially
available in the United States as a urinary assay that provides a quantitative
measure of the excretion of cross-linked N-telopeptides of Type I collagen (NTx)
as an indicator of human bone resorption, and in July 1996 the Company received
expanded claims from the Food and Drug Administration (the "FDA") for the assay.
The 1996 claims allow that an Osteomark test measurement, if taken prior to the
initiation of hormonal antiresorptive therapy, can be utilized to predict a
patient's response to that therapy, in terms of its effect on bone
mineral density. Additionally, the claims allow that the test can be used for
therapeutic monitoring of antiresorptive therapies in postmenopausal women, as
well as individuals diagnosed with osteoporosis and Paget's disease, and for
therapeutic monitoring of estrogen-suppressing therapies. In March 1998 the
claims were further expanded by allowing that, in addition to the 1996 claims,
an Osteomark test measurement can identify the probability for a decrease in
bone mineral density in postmenopausal women taking calcium supplements
relative to those treated with antiresorptive therapy.
The Company is manufacturing and marketing the Osteomark assay initially
in an Enzyme-linked Immunosorbent Assay ("ELISA") format for testing urine
samples. Worldwide promotion of the Osteomark test kits is also supported by
Johnson & Johnson Clinical Diagnostics, Inc. ("Johnson & Johnson"). In 1995 the
Company entered into research, development, license and supply agreements with
Johnson & Johnson. These agreements grant Johnson & Johnson a license to
manufacture, sell and distribute certain products using Ostex's bone resorption
technology. Currently, Johnson & Johnson distributes in the United States and
certain foreign countries the Osteomark assay in the existing microtiter plate
format and is adapting the urine assay for use with its automated analyzer. The
companies intend to adapt the serum assay for use on high-speed, high volume,
automated instruments typically used in large clinical laboratories. Ostex will
receive royalties on Johnson & Johnson's sales of products incorporating the
Ostex technology.
Under the Johnson & Johnson license agreement, the Company has the right
to license its technology for use on automated instruments to one other company
in addition to Johnson & Johnson. The Company is currently evaluating other
potential collaborators to adapt the Osteomark assay to other high-speed
automated instruments.
In the year ended December 31, 1997, the Company's largest customer,
Johnson & Johnson, accounted for approximately 24% of the Company's product
sales and research testing services. The termination of the Company's
relationship with Johnson & Johnson could have a material adverse effect on the
Company's results of operations.
Ostex has also entered into a research and development agreement and a
license agreement with Mochida Pharmaceutical Co., Ltd. ("Mochida"), a Japanese
pharmaceutical company, for the commercialization of the Osteomark assay in
Japan. Under the research and development agreement, Mochida has an option to
license the NTx serum assay and has paid Ostex $3,350,000 in development fees to
date. Future payments of $750,000 under the agreement are contingent upon
Mochida's decision to exercise its option. Under the license agreement, Ostex
granted Mochida exclusive marketing and distribution rights to certain Ostex
products in Japan. Since 1992, Mochida has paid Ostex $2,500,000 in licensing
fees for the Osteomark assay. In January 1998 Mochida launched the Osteomark
assay in Japan for the management of patients with hyperparathyroidism and for
patients with metastatic bone tumors. Ostex will to sell Mochida the critical
reagents to be assembled into finished products in Japan by Mochida.
The Company also plans to develop the Osteomark assay in other formats,
including formats suitable for use in the physician's office. The Company has
entered into agreements with Hologic, Inc. ("Hologic"), a worldwide leader in
X-ray and ultrasound bone densitometers used to measure bone density to assist
in the diagnosis and monitoring of osteoporosis and other bone diseases, and
Metrika, Inc. ("Metrika"), a diagnostic device company, to develop physician
office "point-of-care" Osteomark assay devices.
The Company and Metrika are developing a point-of-care NTx test as
an indicator of bone resorption which uses a hand-held, fully disposable
device that computes NTx values and displays them digitally. Additionally, Ostex
and Hologic are developing a low-cost point-of-care NTx test for bone resorption
based on the Osteomark assay pursuant to a joint development agreement. Under
this agreement, the companies, working with Serex, Inc. ("Serex"), will develop
and market a point-of-care Osteomark test, utilizing Serex's strip-test
technology and a hand-held, battery-operated meter that computes NTx values upon
insertion of the strip. Ostex believes that the joint product will reduce the
cost and simplify the process of obtaining patient results.
OSTEOMARK and OSTEX are registered United States trademarks of Ostex
International, Inc. The Company has also registered its OSTEOMARK trademark in
42 other countries. Additional trademark applications are pending.
The Company's collagen resorption assay technology is covered by 17 U. S.
patents, 2 European patents, 2 Australian patents, and patents in Canada,
Ireland, Spain, Hong Kong, and Singapore. The European patents are in opposition
proceedings before the European Patent Office. Additional patent applications
are pending in Japan and elsewhere.
The Company's research and development expenditures, all of which were
funded by the Company, totaled $4,470,000, $3,163,000, and $3,200,000, in 1997,
1996, and 1995, respectively.
The Company's foreign product sales, all to non-affiliates, totaled
$652,000, $370,000, $528,000, in 1997, 1996 and 1995, respectively.
Foreign sales were primarily to Europe and Japan.
The Company is in the latter stages of adapting the Osteomark assay to
a serum format. The Company believes that the use of a serum NTx test provides a
number of advantages to testing laboratories, including the elimination of the
requirement to normalize NTx values to creatinine concentration and to
ultimately perform NTx testing on random access, automated analyzers. Ostex
plans to initiate clinical studies of its serum NTx test in an ELISA format
during the second quarter of 1998.
The Company is developing an assay for Type II collagen degradation.
This type of collagen is a primary constituent of joint cartilage.
Osteoarthritis, a degenerative disease of joint cartilage, affects over 15
million people in the United states alone. The disease first appears in a
limited number of joints. The first symptom, joint pain, occurs after
substantial cartilage damage has taken place. Eventually, pain and tenderness
increase and the joint motion becomes diminished. The Ostex Type II collagen
assay under development has been designed to allow reliable monitoring of joint
cartilage changes for validating the effectiveness of drugs under development
and for identifying patients with early-stage disease. In addition, similar to
the Osteomark assay used in connection with osteoporosis, the Company believes
that the Type II assay will aid in the clinical management of osteoarthritis
patients by monitoring the effectiveness of therapy.
Ostex is investigating the use of its NTx test in cancer patient
management. Independent researchers have shown that the level of bone resorption
increases significantly when cancer metastasizes to bone. A patient's NTx level
may be useful to identify cancer patients with high bone turnover who might
warrant a bone scan to confirm the stage (degree of spread) of the disease.
The American Cancer Society estimated that over 200,000 new cases of
prostate cancer would be diagnosed in 1997, with 60%-80% progressing to bone
metastases.
Ostex is also in the early stages of developing an assay for measuring
Type III collagen degradation. Type III collagen is a significant constituent of
blood vessels such as coronary arteries. Measuring degradation of this type of
collagen may be useful in identifying cardiovascular disease.
ITEM 1A. RISK FACTORS
When used in this discussion, the words "believes," "intends,"
anticipates," "plans to" and "expects" and similar expressions are intended to
qualify as forward-looking statements. Such statements are subject to certain
risks and uncertainties and there are a number of important factors that could
cause actual results to differ materially from those projected. These factors
include, among others, the factors described under "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Other Factors that
May Affect Operating Results" in the Company's Annual Report to Shareholders
(which discussion has been incorporated herein by reference) and the risk
factors set forth below. Readers are cautioned not to place undue reliance on
such forward-looking statements, which speak only as of the date hereof. The
Company undertakes no obligation to release publicly the results of any
revisions to such forward-looking statements that may be made to reflect events
or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
UNCERTAINTY OF MARKET ACCEPTANCE
The Company's lead product, the Osteomark assay, became commercially
available in May 1995 in the United States and sales of this product have
increased over time. However, there can be no assurance that the Company's
Osteomark assay or any of its other products will gain acceptance from the
medical community, clinical or hospital laboratories, physicians or patients as
readily as other forms of diagnosis or any newly developed diagnostic. There can
be no assurance that the Company will be able to develop significant market
share for its products, or any market share at all. Inability of the Company to
achieve market acceptance for its products would have a material adverse effect
on the Company's business, financial condition and results of operation.
DEPENDENCE ON CORE TECHNOLOGY; UNCERTAINTY OF ADAPTATION TO DIFFERENT FORMATS
The Company currently relies exclusively upon its core technology for the
development of diagnostic products associated with osteoporosis and other
collagen-related diseases. There can be no assurance that competitors of the
Company will not be successful in developing new or more efficient or
cost-effective diagnostics that are more readily accepted than the Company's
products. The Company is in the process of undertaking ongoing and significant
additional research and development to adapt its core technology to serum
testing and to different formats, instruments and other delivery platforms that
currently exist or may be developed. In particular, additional research and
development will be required to adapt its core technology to high-speed,
high-volume automated instruments typically used in large clinical laboratories
or companies through which the Company may seek to expand the market for its
products. There can be no assurance that the Company will be successful in
adapting and further developing its core technology to meet such needs. The
Company is developing physician office adaptations of its core technology. There
can be no assurance that the Company or its development partners will either
successfully develop or obtain required regulatory approval for a cost-effective
instrument for physician office use. In addition, technological changes or
medical advancements could diminish or eliminate the commercial viability of the
Osteomark assay or future products based upon the Company's core technology. The
failure to adapt the Company's core technology to different formats, instruments
and other delivery platforms, or otherwise to commercialize such core
technology, would have a material adverse effect on the Company's business,
financial condition and results of operation.
RELIANCE ON COLLABORATIVE AGREEMENTS AND CERTAIN RELATIONSHIPS
The Company has entered into collaborative or co-promotional agreements
with several partners, including, among others, Johnson & Johnson, Mochida,
Hologic, Wyeth-Ayerst Laboratories,and Metrika and intends to appoint a second
international distributor for its NTx test on automated instruments. The level
of each partner's involvement and support and the amount and timing of resources
that these collaborators devote to these activities are not within the control
of the Company and can significantly impact the Company's ability to achieve its
objectives. There can be no assurance that these collaborators will perform
their contractual obligations as expected or that the Company will derive any
additional revenue from such arrangements. Moreover, the agreements may be
terminated under certain circumstances. The Company expects to rely on these and
additional agreements to develop and commercialize its future products. There
can be no assurance that the Company will be able to negotiate acceptable
collaborative agreements in the future or that such new agreements or existing
agreements will be successful. In addition, there can be no assurance that the
parties to the agreements will not pursue alternative technologies.
In the year ended December 31, 1997, the Company's largest customer,
Johnson & Johnson, accounted for approximately 24% of the Company's product
sales and research testing services. The termination of the Company's
relationship with Johnson & Johnson could have a material adverse effect on the
Company's results of operations.
LIMITED SALES AND MARKETING EXPERIENCE
The Company has limited experience in sales, marketing and distribution.
To market any of its products directly, the Company must develop and implement a
substantial marketing and sales effort with technical expertise and supporting
distribution capability. The Company intends to continue to market and sell its
products in the U.S. through national distributors and its own limited sales
force and to market and sell its products in other markets through distributors
or collaborative arrangements. There can be no assurance that the Company will
be able to establish effective sales and distribution capabilities or that it or
its collaborators will be successful in gaining market acceptance for the
Company's products or that the Company will achieve or maintain significant
market share for its products.
DEPENDENCE ON LICENSED PATENTS AND PROPRIETARY RIGHTS
The Company's success depends, in large part, on its current and future
patent position relating to its core technology. The Company's patent position
involves complex legal and factual questions. The Company is the exclusive
licensee of certain patents within and outside of the U.S. relating to the
Company's core technology. The Company is dependent upon the Washington Research
Foundation (the "WRF") for the filing and prosecution of patents and patent
applications licensed to the Company. Claims made under patent applications may
be denied or significantly narrowed, and issued patents may not provide
significant commercial protection to the Company. There is no assurance that the
Company's patents will not be successfully challenged or circumvented by others.
The Company could incur substantial costs in proceedings before the U.S. Patent
Office, including interference proceedings. These proceedings could also result
in adverse decisions as to the patentability of the Company's licensed or
assigned inventions. There can be no assurance that the Company's products do
not or will not infringe on the patent or proprietary rights of others. The
Company may be required to obtain additional licenses to the patents or other
proprietary rights of others. The Company may also require licenses from the
inventors of certain processes, technologies and delivery formats in order to
successfully market certain products. There can be no assurance that any such
licenses would be made available on terms acceptable to the Company, if at all.
If the Company needs and cannot or does not obtain such licenses, it could
encounter delays in product introductions while it attempts to circumvent such
patents or the development, manufacture, or sale of products requiring such
licenses could be precluded. The Company believes there will continue to be
significant litigation in the industry regarding patent and other intellectual
property rights.
The Company is aware of competitors that are developing products that may
be covered by claims made in patents or patent applications of the Company.
Because certain foreign patents are subject to third-party opposition following
the date of grant of such patents, there can be no assurance that claims of the
Company's foreign patents, once granted, will survive such opposition without
cancellation or significant modification. Because U.S. applications are
confidential until a patent issues, the Company cannot be assured that its
patent claims have priority in the U.S. or will be entitled to patent
protection.
The Company also relies on trade secrets and other unpatented proprietary
technology. No assurance can be given that the Company can meaningfully protect
its rights in such unpatented technology or that others will not independently
develop substantially equivalent products and processes or otherwise gain access
to the Company's technology. The Company seeks to protect its trade secrets and
proprietary know-how, in part, with confidentiality agreements with its
employees and consultants. There can be no assurance that these agreements will
not be breached, that the Company will have adequate remedies for any breach, or
that the Company's trade secrets will not otherwise become known or be
independently developed by competitors. In addition, protracted and costly
litigation may be necessary to enforce and determine the scope and validity of
the Company's proprietary rights.
LENGTHY REGULATORY PROCESSES AND UNCERTAINTY OF REGULATORY APPROVALS
The process of obtaining FDA and other required regulatory clearance can
be lengthy and expensive. The time required for FDA approvals is uncertain, and
often depends on the type, complexity and novelty of the product. There can be
no assurance that the FDA will act favorably or quickly in its review of any
submission by the Company, and significant difficulties or costs may be
encountered by the Company in its efforts to obtain FDA clearance that could
delay or preclude the Company from marketing its products. Furthermore, there
can be no assurance that the FDA will not request the development of additional
data following original submissions, causing the Company to incur further cost
and delay. Nor can there be any assurance that the FDA will not restrict the
intended use of a submitted product as a condition for clearance.
If the FDA concludes that a device is not substantially equivalent to
another legally marketed device, submission of a pre-market approval application
("PMA") will be required. If the FDA indicates that a PMA is required for any
product of the Company, the application will require submission of results of
clinical studies and manufacturing information, and likely a review by a panel
of experts outside of the FDA. Clinical studies would need to be conducted in
accordance with FDA requirements. The failure to comply would result in the
FDA's refusal to accept the data or the imposition of regulatory sanctions. FDA
review of a PMA application can take significantly longer than that for a 510(k)
"device" premarket notification procedure to demonstrate "substantial
equivalence" to a legally marketed product. Further, if a company wishes to
propose modifications to a product subsequent to FDA approval of a PMA
application, including changes in indications or other significant modifications
to labeling, or modifications to the manufacturing process, or if a company
wishes to change its manufacturing facility, a PMA supplement must first be
submitted to the FDA for its review and approval.
EXTENSIVE CONTINUING GOVERNMENT REGULATION
The research, development, manufacturing and marketing of the Company's
products are subject to extensive continuing regulation by numerous governmental
authorities in the U.S. and certain other countries, and the Company, its
products, and its manufacturing facilities are subject to continual review and
periodic inspection. The regulatory standards for manufacturing are applied
stringently by the FDA. Discovery of previously unknown problems with a product,
manufacturer, or facility may result in restrictions on such product or
manufacturer or facility, including warning letters, fines, suspensions of
regulatory approvals, product recalls, operating restrictions, delays in
obtaining new product approvals, withdrawal of the product from the market, and
criminal prosecution. Other violations of FDA requirements can result in similar
penalties. The Company is also subject to numerous environmental, health and
workplace safety laws and regulations, including those governing laboratory
procedures, exposure to blood-borne pathogens, and the handling of biohazardous
materials. Any violation of, and the cost of compliance with, these laws and
regulations could adversely impact the Company's operations. The Company is
unable to predict the extent or likelihood of adverse government regulation that
might arise from future U.S. or foreign government action.
LIMITED MANUFACTURING EXPERIENCE
The Company is developing adaptations of its core technology for use in
physicians' offices and depends upon the efforts of collaborators for this
development. Such adaptations have not been completed and there can be no
assurance that, if developed, such adaptations could be manufactured in a
commercially viable manner. Unless the Company develops additional in-house
manufacturing capability for such products, it will be dependent upon outside
sources for the manufacture of such products. There can be no assurance that the
Company's reliance on others for the manufacture of its products will not result
in problems with product supply. Interruptions in the availability of products
could delay or prevent the development and commercial marketing of the Company's
products.
HISTORY OF LOSSES AND LIMITED OPERATING HISTORY
The Company has a limited operating history and had a retained deficit
through December 31, 1997 of $24,128,000. For the year-end December 31, 1997,
the Company had a net loss of $2,264,000 ($8,464,000, excluding a non-recurring
receipt of $6,200,000 from the settlement of a dispute with Boehringer Mannheim
GmbH. The Company expects to incur additional substantial costs as it continues
with its operations, marketing efforts, research and development activities, and
clinical trials. The Company expects to continue to incur losses in future
periods and the Company is unable to predict when, if at all, it will achieve
profitability.
FUTURE CAPITAL NEEDS AND UNCERTAINTY OF ADDITIONAL FINANCING
The Company will continue to require substantial funds for research and
development, general and administration, and the marketing of its products. The
amount of the Company's future capital requirements will depend on many factors,
including the status of the development of its products, the time and costs
involved in obtaining regulatory approvals, the costs involved in filing,
prosecuting and enforcing patent claims, competing technological and market
developments, the ability of the Company to maintain existing collaborative and
licensing arrangements, and the ability of the Company to establish new
collaborative and licensing arrangements. The Company expects that its existing
capital resources will be sufficient to fund the Company's activities through
1999. However, the Company may be required to seek additional financing before
the end of 1999. There can be no assurance that additional funds, whether
through additional financings, collaborative arrangements with corporate
sponsors or other sources, will be available, if at all, in a timely manner or
on terms acceptable to the Company. If adequate funds are not available, the
Company may be required to delay, scale back or eliminate one or more of its
programs or obtain funds through arrangements that are unfavorable to the
Company.
INTENSE COMPETITIVE ENVIRONMENT
Competition from biotechnology companies, diagnostic companies,
pharmaceutical companies and research and academic institutions is intense. A
number of diagnostic tests and procedures, and other non-invasive tests for
osteoporosis and other bone disorders currently exist and others are in
development, and the manufacturers of these tests will continue to improve them.
In addition, the diagnostic industry is subject to rapid technological change.
There can be no assurance that the Company's competitors will not succeed in
developing products that are more effective than those which have been or are
being developed by the Company or which would render the Company's core
technology obsolete or non-competitive. Many of the Company's competitors have
substantially greater financial, technical and human resources than the Company.
In addition, many of these competitors have significantly greater experience and
resources than the Company in undertaking clinical trials and other regulatory
approval procedures as well as in marketing and achieving manufacturing
efficiencies. There are also small companies, academic institutions,
governmental agencies and other research organizations that are conducting
research in the area of osteoporosis and other collagen-related diseases. These
entities may also market commercial products either on their own or through
collaborative efforts. The Company's competitors may develop technologies and
products that are available for sale prior to the Company's products or at a
lower cost or with better technical characteristics rendering the Company's
products less competitive.
DEPENDENCE ON THERAPEUTICS DEVELOPED BY OTHERS
Acceptance of and demand for the diagnostic products that the Company is
developing will be affected by the need perceived by physicians to diagnose
bone, cartilage and connective tissue disorders for the purposes of treatment.
There are currently a limited number of therapies that are effective in
preventing osteoporosis or other bone, cartilage or connective tissue disorders,
or in treating these disorders once diagnosed. In the event new therapies do not
receive regulatory approval or experience delayed market acceptance, the Company
could be adversely affected. Unfavorable publicity concerning a product of the
Company or therapeutic products for osteoporosis could also have an adverse
effect on the Company's ability to obtain regulatory approvals or to achieve
market acceptance.
UNCERTAINTY OF HEALTHCARE REIMBURSEMENT
The Company's ability to commercialize its products will depend in part
on the extent to which reimbursement for the cost of such products and related
treatment will be available from third-party payors, such as government health
administration authorities, private health coverage insurers and other
organizations. The status of the scope of healthcare programs worldwide is
uncertain and there can be no assurance that adequate third-party coverage will
be available for the Company to maintain price levels sufficient for realization
of an appropriate return on its investment in product development. Third-party
payors are increasingly challenging the price and cost effectiveness of medical
products and services. If the Company succeeds in bringing one or more products
to the market, there can be no assurance that these products will be considered
cost effective and that reimbursement to the consumer will be available or
sufficient to allow the Company to sell its products on a competitive basis.
VOLATILITY OF STOCK PRICE
The volatility of the Company's stock price has been significant since it
first became publicly traded in January 1995. The stock market may experience
significant price and volume fluctuations unrelated to the operating performance
of particular companies. Factors such as any loss of key management, the results
of the Company's clinical trials or those of its competitors, adverse regulatory
actions or decisions, evidence regarding the safety or efficacy of the Company's
products or those of its competitors, announcements of technological innovations
or new products by the Company or its competitors, governmental regulation,
developments with respect to patents or other proprietary rights, product or
patent litigation or public concern as to the safety of products developed by
the Company may have a volatile effect on the market price of the Company's
Common Stock.
ITEM 1B. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their ages are as follows:
NAME AGE POSITION
- ----- --- --------
Thomas A. Bologna 49 President and Chief Executive Officer
Thomas F. Broderick 49 Vice President, Patent and General Counsel
Donna J. DeLong 49 Vice President, Marketing
Robert M. Littauer 49 Senior Vice President, Finance and
Administration and Secretary
Nancy J.S. Mallinak 36 Vice President, Regulatory and Clinical
Affairs
William K. Strelke 44 Vice President, Sales
There were no family relationships between any executive officers of the
Company.
THOMAS A. BOLOGNA joined the Company in July 1997 as the President and
Chief Executive Officer and as a member of the Board of Directors. From January
1996 until July 1997 Mr. Bologna was a principal in Healthcare Venture
Associates, a consulting firm. From January 1994 to January 1996 Mr. Bologna was
President and Chief Executive Officer for Scriptgen Pharmaceuticals, Inc., a
biotechnology company with proprietary drug screening technology that is
developing orally active drugs to regulate gene expression, and from July 1987
to January 1994 Mr. Bologna was the Chairman of the Board of Directors and
President and Chief Executive Officer of Gen-Probe Incorporated, a biotechnology
company commercializing genetic-probe-based technology for diagnostic and
therapeutic applications.
THOMAS F. BRODERICK was named the Vice President, Patent and General
Counsel in November 1997. Mr. Broderick was Vice President, Intellectual
Property from March 1997 to November 1997 and was Patent Counsel for the Company
from April 1996 to March 1997. From 1989 to March 1996, Mr. Broderick was a
partner at the patent law firm of Christensen, O'Connor, Johnson & Kindness in
Seattle, Washington.
DONNA DELONG joined the Company in February 1998 as Vice President,
Marketing. From May 1996 to February 1998, Ms. DeLong was Senior Director of
Marketing at Chiron Diagnostics, a division of Chiron Corporation, a healthcare
company; from October 1993 to April of 1996, Ms. DeLong was the Director of
Marketing at Neopath Inc., a medical diagnostics company; and from May 1990 to
October 1993 Ms. DeLong was the Director of Marketing at Sanofi Diagnostics
Pasteur, a medical diagnostics company.
ROBERT M. LITTAUER joined the Company in September 1996 as Senior Vice
President, Finance and Administration, and was appointed the Corporate Secretary
in November 1997. From 1987 to September 1996, Mr. Littauer was Senior Vice
President, Chief Financial Officer and Treasurer of NeoRx Corporation, a
biotechnology company developing therapeutic products for cancer and
cardiovascular diseases.
NANCY J.S. MALLINAK was named Vice President, Regulatory and Clinical
Affairs of the Company in February 1997. Ms. Mallinak was Director, Regulatory
and Clinical Affairs for the Company from June 1995 to February 1997 and was
Manager, Regulatory and Clinical Affairs for the Company from December 1992 to
June 1995. From June 1989 to December 1992, Ms. Mallinak was Manager, Clinical
Product Development in the Diagnostics Group of Baxter International, Inc., a
general healthcare company.
WILLIAM K. STRELKE was named Vice President, Sales in November 1997. Mr
Strelke was Vice President, Sales and Marketing for the Company from October
1994 to November 1997, and was the Director of Sales and Marketing for the
Company from January 1994 to October 1994. Prior to joining Ostex, Mr. Strelke
served from March 1993 to January 1994 at Mitchell International, Inc., a
healthcare facility design and construction consulting company, where he was
Vice President and Regional Director. From January 1983 to March 1993, Mr.
Strelke held various positions with responsibility for sales and distribution
management with the Scientific Products Division of Baxter International
(previously American Hospital Supply Corporation), a general healthcare company.
ITEM 2. PROPERTIES
The Company's research laboratories, manufacturing operations, and
administrative offices are located in Seattle, Washington. The Company leases
approximately 32,000 square feet of space in Seattle under a lease that will
expire in 2005. The Seattle facility has adequate capacity for the Company's
present needs.
ITEM 3. LEGAL PROCEEDINGS
Information regarding Legal Proceedings is incorporated herein by
reference to note 11 in the "Notes to Financial Statements" on pages 32 and 33
of the Annual Report to Shareholders.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders during the fourth
quarter ended December 31, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Information regarding the Common Stock trading activity for 1997 and 1996
is incorporated herein by reference to the "Shareholder Information - Price
Range of Common Stock" on page 36 of the Annual Report to Shareholders, which is
included as Exhibit 13.0 to this Annual Report on Form 10-K.
As of March 17, 1998, there were 12,696,250 shares of Common Stock
outstanding held of record by approximately 154 shareholders. The Company
believes there are approximately 3,600 additional owners of Common Stock who own
shares held in street name.
The Company has never paid cash dividends and has no present intention of
paying dividends in the foreseeable future.
TRANSFER AGENT AND REGISTRAR - The transfer agent and registrar for the
Common Stock is ChaseMellon Shareholder Services, L.L.C., Seattle, Washington.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated herein by reference
to "Selected Financial Data" on page 20 of the Annual Report to Shareholders,
which is included as Exhibit 13.0 to this Annual Report on Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this item is incorporated herein by reference
to pages 21-23 of the Annual Report to Shareholders, which is included as
Exhibit 13.0 to this Annual Report on Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated herein by reference
to the Financial Statements and "Notes to Financial Statements" on pages 24-33,
and "Report of Independent Public Accountants" on page 34, of the Annual Report
to Shareholders, which is included as Exhibit 13.0 to this Annual Report on Form
10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
a. Directors
The information contained in the section entitled "Election of Directors
and Director Information" of the Proxy Statement is incorporated herein by
reference in response to this item.
b. Executive Officers of the Registrant
Information required by this item is contained in Part I of this Annual
Report on Form 10-K in the section entitled "Executive Officers of the
Registrant."
c. Compliance With Section 16(a)
Information contained in the section entitled "Compliance with Section
16(a) of the Exchange Act" of the Proxy Statement is incorporated herein by
reference in response to this item.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the section entitled "Executive
Compensation" of the Proxy Statement is incorporated herein by reference in
response to this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the section entitled "Security Ownership of
Certain Beneficial Owners and Management" of the Proxy Statement is incorporated
herein by reference in response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the section entitled "Compensation Committee
Interlocks and Insider Participation" of the Proxy Statement is incorporated
herein by reference in response to this item.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBITS
The information contained in the Financial Statements and "Notes to
Financial Statements" are located on pages 24-33 of the Annual Report to
Shareholders and are listed below. This information is included as Exhibit 13.0
to this Annual Report on Form 10-K.
Page within
FINANCIAL STATEMENTS ANNUAL REPORT
-------------------- -------------
Balance Sheets 24
Statements of Operations 25
Statements of Cash Flows 26
Statements of Shareholders' Equity 27
Notes to Financial Statements 28
Report of Independent Public Accountants 34
(B) REPORTS ON FORM 8-K
None
(C) EXHIBIT INDEX (13)
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
(8) 3.1 Articles of Incorporation, as amended,
dated January 1997
(1) 3.2 Bylaws, as amended
(1) 4.1 Specimen Common Stock Certificate
(1) 10.1A Amended and Restated Stock Option Plan
(1) 10.1B Form of Employee Stock Option Agreement
(1) 10.1C Form of Director's Stock Option Agreement
(9) 10.2 Amended and Restated Directors' Nonqualified Stock
Option Plan dated July 16, 1997
(9) 10.3 Amended and Restated 1994 Stock Option Plan
Agreements with Hologic, Inc.
(3)(12)10.4A Co-Promotion and Sales Representation Agreement
dated January 14, 1997
(3)(12)10.4B Joint Development, License and Supply Agreement
dated January 14, 1997
(1) 10.5 Form of Indemnification Agreement with officers
and directors
Agreement with Thomas A. Bologna
10.7 Executive Employment Agreement dated July 16, 1997
Agreements with Mochida Pharmaceutical Co., Ltd.
(1)10.12A Research and Development Agreement dated August
1992
(1)10.12B Osteomark License Agreement Dated August 1992
(3)10.12D Second Amendment to Osteomark License Agreement
dated December 24, 1997
Agreements with the Washington Research Foundation
(1)10.13A Restated Exclusive License Agreement effective
June 19, 1992 (Urinary Assay for Measuring Bone
Resorption)
(1)10.13B Amendment to Restated Exclusive License Agreement
effective January 1, 1993
(1)10.13C Second Amendment effective June 2, 1994
(1) 10.14 Exclusive License Agreement dated February 10,
1994 (O-CSF)
Agreements with the University of Washington
(3)(12)10.15A Research Agreement dated July 1, 1996 (Molecular
Markers of Connective Tissue Degradation)
(3)(12)10.15B Research Agreement dated October 1, 1996 (Role
of O-CSF in Osteoclast Regulation)
(1)10.16A Know-How Transfer and Consulting Agreement dated
September 18, 1989 with David R. Eyre, Ph.D.
(1)10.16B Extension and Amendment dated May 1, 1992
(1) 10.19 Osteomark EIA Exclusive Distribution License
Agreement dated March 28, 1994 with Technogenetics
S.R.L. (division of Recordati Pharmaceutical)
(1) 10.20 Osteomark EIA Distribution License Agreement dated
July 12, 1994 with BRAHMS Diagnostic (formerly
Henning Berlin GmbH)
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
(1)10.23 Osteomark Agreement dated February 12, 1993, as
amended May 10, 1994, with Nichols Institute
Reference Laboratory
(1)10.25 License Agreement dated July 8, 1994 with
Endrocrine Sciences
(1)10.26 License Agreement dated August 1994 with
Pacific Biometrics, Inc.
Lease Agreements
(4)10.27A Lease Agreement dated October 2, 1995, with David
A. Sabey and Sandra L. Sabey
(8)10.27B First Amendment of Lease dated October 15, 1996,
with the City of Seattle, successor-in-interest
to David A. Sabey and Sandra L. Sabey
Agreements with Johnson & Johnson Clinical
Diagnostics, Inc.
(5)10.28A Distribution Agreement dated June 7, 1995
(5)10.28B Research, Development, License and Supply
Agreement dated June 7, 1995
(4)10.29 Clinical Laboratory Services License and Supply
Agreement dated October 25, 1995, with SmithKline
Beecham Clinical Laboratories, Inc.
10.30 Promotion Agreement dated September 30, 1997 with
Wyeth-Ayerst Laboratories
(6)10.31 Agreement with Laboratory Corporation of Americao
Holdings (LabCorp), dated January 11, 1996
(7)10.32 Joint Development, License and Co-Marketing
Agreement dated April 10, 1997 with Metrika, Inc.
(10)10.33 Form of CS First Boston Corporation Warrant
(11)10.34 Form of Invemed Associates, Inc. Warrant
(2)10.35 Shareholder Rights Agreement dated January 21, 1997
13.0 Selected Financial Data, Management's Discussion and
Analysis of Financial Condition and Results of
Operations, Financial Statements and Notes to the
Financial Statements from the Company's Annual Report
to Shareholders for the year ended December 31, 1997
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule
- -----------------------------
(1) Incorporated herein by reference from Item 16(a) of Registrant's
Form S-1 Registration Statement as declared effective January 24, 1995
(No. 33-86118).
(2) Incorporated herein by reference to exhibit number 4.5 filed with Form
8-A with the Commission in January 1997.
(3) Confidential treatment requested. Exhibit omits information that
has been filed separately with the Commission.
(4) Incorporated herein by reference to exhibit of the same number filed
with Form 10-K with the Commission for the year ended December 31, 1995.
(5) Incorporated herein by reference to exhibit of the same number filed
with Form 10-Q with the Commission for the quarter ended June 30, 1995.
(6) Incorporated herein by reference to exhibit of the same number filed
with Form 10-Q with the Commission for the quarter ended March 31, 1996.
(7) Incorporated herein by reference to exhibit of the same number filed
with Form 10-Q with the Commission for the quarter ended September 30, 1997.
(8) Incorporated herein by reference to exhibit of the same number filed
with Form 10-K with the Commission for the year ended December 31, 1996.
(9) Incorporated herein by reference to exhibit of the same number filed
with Form S-8 with the Commission on January 13, 1998.
(10) Incorporated herein by reference to exhibit number 1.1A filed with the
Registrant's Form S-1 Registration Statement as declared effective
January 24, 1995 (No. 33-86118).
(11) Incorporated herein by reference to exhibit number 1.1B filed with the
Registrant's Form S-1 Registration Statement as declared effective
January 24, 1995 (No. 33-86118).
(12) Incorporated herein by reference to exhibits of the same number filed
with Form 10-K with the Commission for the year ended December 31, 1996,
and as amended with Form 10-K/A on October 17, 1997.
(13) Copies of exhibits may be obtained at prescribed rates from the Public
Reference Section of the Commission at 450 5th Street NW, Room 1024, Washington,
D.C. 20549, or through the Commission's Edgar system located on the internet at
www.sec.gov.
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 on March 27, 1998.
OSTEX INTERNATIONAL, INC.
By /S/ THOMAS A BOLOGNA
------------------------
Thomas A. Bologna
President and Chief
Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE CAPACITIES DATE
--------- ---------- ----
/S/THOMAS A. BOLOGNA President and
- ------------------------ Chief Executive Officer March 27, 1998
Thomas A. Bologna (principal executive officer)
/S/ ROBERT M. LITTAUER Senior Vice President, Finance
- ------------------------ and Administration and Secretary March 27, 1998
Robert M. Littauer (principal financial and principal
accounting officer)
/S/ THOMAS J. CABLE Chairman of the Board
- ------------------------ of Directors March 27, 1998
Thomas J. Cable
/S/ ELISABETH L. EVANS
- ------------------------ March 27, 1998
Elisabeth L. Evans Director
/S/ DAVID R. EYRE Director March 27, 1998
- ------------------------
David R. Eyre
/S/ FREDRIC J. FELDMAN
- ------------------------ Director March 27, 1998
Fredric J. Feldman
/S/ GREGORY D. PHELPS
- ------------------------ Director March 27, 1998
Gregory D. Phelps
- ------------------------ Director March 27, 1998
Gilbert S. Omenn
/S/ JOHN H. TRIMMER Director March 27, 1998
- ------------------------
John H. Trimmer