| QUIDEL CORP /DE/ Item 1A Risk Factors Risks Related to Our Business Our operating results may fluctuate adversely as a result of many factors that are outside our control |
| Fluctuations in our operating results, for any reason, could cause our growth or operating results to fall below the expectations of investors and securities analysts |
| For the year ended December 31, 2005, net sales increased 17prca to dlra88dtta7 million from dlra76dtta1 million for the year ended December 31, 2004 |
| For further discussion of this increase, refer to Item 7 |
| “Management’s Discussion and Analysis of Financial Condition and Results of Operation” included in this Annual Report |
| Our sales estimates for future periods are based on estimated end-user demand for our products |
| Sales to our distribution partners would fall short of expectations if distributor inventories increase because of less than estimated end-user consumption |
| Other factors that are beyond our control and that could affect our operating results in the future include: · seasonal fluctuations in our sales of Group A Strep and influenza tests, which are generally highest in fall and winter, thus resulting in generally lower operating results in the second and third calendar quarters and higher operating results in the first and fourth calendar quarters; · timing of onset, the length, and severity of the cold and flu seasons; · recent media attention focused on a potential influenza pandemic and the related potential impact on humans from avian flu, as well as the uncertainty surrounding the detection of H5N1 in human specimens; · changes in the level of competition, such as would occur if one of our larger and better financed competitors introduced a new or lower priced product to compete with one of our products; · changes in economic conditions in our domestic and international markets, such as economic downturns, reduced consumer demand, inflation and currency fluctuations; · changes in sales levels, since a significant portion of our costs are fixed costs with the result that relatively higher sales could likely increase profitability but relatively lower sales would not reduce costs by the same proportion, and hence could cause operating losses; · lower than anticipated market penetration of our new products; · significant quantities of our product in our distributors’ inventories or distribution channels; and · changes in distributor buying patterns |
| We are involved in pending, and may become involved in future, intellectual property infringement disputes, which are costly and could limit or eliminate our ability to use certain of our core technologies in the future and sell our products |
| As previously disclosed, beginning in February 2004, a number of legal proceedings were initiated by us and/or Inverness Medical Innovations Inc |
| (“IMA”) and/or their affiliates in Germany and the US raising, among other items, issues of patent infringement, patent enforceability and patent invalidity relative to fundamental, lateral-flow technology |
| In legal proceedings in the US, in addition to IMA, Applied Biotech, Inc |
| (“Applied”), Armkel LLC (now “Church & Dwight”), Wampole Laboratories LLC (“Wampole”), Inverness Medical Switzerland GmbH (“IMA Switzerland”) and Unipath Diagnostics GmbH (“Unipath”) were parties also involved in the legal proceeding |
| 17 ______________________________________________________________________ In April 2005, we entered into an agreement with IMA settling all domestic and international actions involving us, IMA, and IMA’s affiliates (Applied, Wampole, IMA Switzerland and Unipath) |
| Under the terms of the settlement agreement, we and IMA agreed to cross-license, and to cause their affiliates to cross-license, the parties’ respective lateral flow patent portfolios and to dismiss, and to cause their affiliates to dismiss, the parties’ respective cases |
| We agreed to make a net payment to IMA of dlra17dtta0 million and to pay net royalties of 8dtta5prca on future sales of our current lateral flow products and future lateral flow products that utilize or incorporate any inventions claimed in the valid and enforceable claims of IMA lateral flow patents |
| Our declaratory relief action against Church & Dwight has not been settled, nor has Church & Dwight’s claim for patent infringement, which seeks damages against us for over-the-counter sales and preliminary and permanent injunctions in the over-the-counter market |
| There is not a specific amount or range sought in damages in the Church & Dwight lawsuit discussed above |
| Given the early stage of the action, we cannot predict the ultimate outcome of this matter at this time |
| As a result, in accordance with SFAS Nodtta 5 “Accounting for Contingencies”, we have disclosed the existence of this lawsuit; however, no accrual for potential losses, if any, has been recorded |
| Additionally, one other industry participant has sent us correspondence requesting that we obtain a license to patents for which it has alleged enforcement rights |
| We are continuing to assess the relevant intellectual property in light of our own business strategies and the costs and risks associated with defending our position |
| In this regard, we continue to evaluate the license request, which may result in our payment of royalties under royalty-bearing licenses in a future period |
| Such royalty payments could result in a material increase in our product costs and have a material adverse effect on our profits |
| Further, no assurance can be given that we would be able to obtain any license to third-party intellectual property under commercially reasonable terms, if at all |
| We are also involved in other litigation matters from time to time in the ordinary course of business |
| Management believes that any and all such other actions, in the aggregate, will not have a material adverse effect on us |
| We also maintain insurance, including coverage for product liability claims, in amounts which management believes appropriate given the nature of our business |
| As a more general matter, our involvement in litigation, as may arise from time to time, to determine rights in proprietary technology could adversely affect our net sales and business because: · the pendency of any litigation may of itself cause our distributors to reduce purchases of our products; · it may consume a substantial portion of managerial and financial resources; · its outcome would be uncertain and a court may find the third-party patent claims valid and infringed by our products; · an adverse outcome could subject us to significant liability in the form of past royalty payments, penalties, special and punitive damages, and/or future royalty payments significantly affecting our future earnings; · failure to obtain a necessary license upon an adverse outcome could prevent us from selling our current products or other products we may develop; and · a court could award a preliminary and/or permanent injunction which would prevent us from selling our current or future products |
| 18 ______________________________________________________________________ To remain competitive, we must continue to develop or obtain proprietary technology rights; otherwise, other companies may increase their market share by selling products that compete with our products |
| Our competitive position is heavily dependent on obtaining and protecting our own proprietary technology or obtaining licenses from others |
| Our ability to compete successfully in the diagnostic market depends on continued development and introduction of new proprietary technology and the improvement of existing technology |
| If we cannot continue to obtain and protect proprietary technology, our net sales and gross profits could be adversely affected |
| Moreover, our current and future licenses may not be adequate for the operation of our business |
| We have issued patents both in the US and internationally, with expiration dates ranging from the present through approximately 2022 |
| Additionally, we have patent applications pending throughout the world |
| These pending patent applications may not result in the issuance of any patents, or if issued, may not have priority over others’ applications or may not offer protection against competitors with similar technology |
| Moreover, any patents issued to us may be challenged, invalidated or circumvented in the future |
| In addition to the US, we have patents issued in various other countries including, for example, Australia, Canada, Japan and various European countries, including, France, Germany, Italy, Spain and the United Kingdom |
| Third parties can make, use and sell products covered by our patents in any country in which we do not have patent protection |
| We also license the right to use our products to our customers under label licenses that are for research purposes only |
| These licenses could be contested and, because we cannot monitor all potential unauthorized uses of our products around the world, we might not be aware of an unauthorized use and might not be able to enforce the license restrictions in a cost-effective manner |
| Also, we may not be able to obtain licenses for technology patented by others and required to produce our products on commercially reasonable terms |
| In order to remain competitive and profitable, we must expend considerable resources to introduce new technologies and products and develop new markets |
| Our failure to successfully introduce new technologies, new products and develop new markets could have a material adverse effect on our business and prospects |
| We devote a significant amount of financial resources to researching and developing new technologies, new products and new markets |
| The development, manufacture and sale of diagnostic products require a significant investment of resources |
| Moreover, no assurances can be given that our efforts to develop new technologies or products will be successful, including, without limitation, our strategic efforts relating to: (i) our LTF technology platform and migration of products to that platform and (ii) identifying and commercializing new markers and products in oncology and bone health |
| The development of new markets also requires a substantial investment of resources, such as new employees, offices and manufacturing facilities |
| Accordingly, we are likely to incur increased operating expenses as a result of our increased investment in sales and marketing activities, manufacturing scale-up and new product development associated with our efforts to: · provide clinicians with validated, value-based proof which encompasses the clinical efficacy and economic efficiency of our rapid POC tests for the professional market; · strengthen market and brand leadership in infectious disease and reproductive health; · drive growth by establishing dedicated distributor partnerships; · drive profit through further refinement of industry leading manufacturing efficiencies; · identify and commercialize new markers, products and collaborations in oncology and bone health through our SPG; 19 ______________________________________________________________________ · complete the full-scale manufacturability feasibility study for our LTF immunoassay and continue parallel pathways for development and acquisition of other qualitative and quantitative technology platforms; · develop and maintain key relationships with third parties and cooperative collaborations; and · aggressively pursue licensing, acquisition and partnership opportunities that meet our dedicated focus on Research to Rapids |
| As a result of any number of risk factors identified in this Annual Report, no assurance can be given that we will be successful in implementing our operational, growth and other strategic efforts |
| In addition, the funds for the foregoing projects have in the past come primarily from our business operations and a working capital line of credit |
| If our business slows and we become less profitable, and as a result have less money available to fund research and development, we will have to decide at that time which programs to cut, and by how much |
| Similarly, if adequate financial, personnel, equipment or other resources are not available, we may be required to delay or scale back our strategic efforts |
| Our operations will be adversely affected if our net sales and gross profits do not correspondingly increase or if our product and market development efforts are unsuccessful or delayed |
| Furthermore, our failure to successfully introduce new products and develop new markets could have a material adverse effect on our business and prospects |
| We rely on a limited number of key distributors which account for a substantial majority of our net sales |
| The loss of any key distributor or an unsuccessful effort to directly distribute our products could lead to reduced sales |
| Although we have distributor relationships with approximately 80 distributors, the market is dominated by a small group of these distributors |
| Four of our distributors, which are considered to be among the market leaders, collectively accounted for approximately 64prca, 56prca and 58prca of our net sales for the years ended December 31, 2005, 2004 and 2003, respectively |
| The loss or termination of our relationship with any of these key distributors could significantly disrupt our business unless suitable alternatives were timely found or lost sales to one distributor are absorbed by another distributor |
| Finding a suitable alternative may pose challenges in our industry’s competitive environment, and another suitable distributor may not be found on satisfactory terms |
| For instance, some distributors already have exclusive arrangements with our competitors, and others do not have the same level of penetration into our target markets as our existing distributors |
| If net sales to these or any of our other significant distributors were to decrease in any material amount in the future, our business, operating results and financial condition could be materially and adversely affected |
| As an alternative, we could expand our efforts to distribute and market our products directly |
| This alternative, however, would require substantial investment in additional sales and marketing resources, including hiring additional field sales personnel, which would significantly increase our future selling, general and administrative expenses |
| In addition, because we do not have experience in direct distribution and marketing, our direct distribution efforts may not be successful |
| If we were to make the substantial investment to directly distribute and market our products and were unsuccessful, our net sales and profits could be materially and adversely affected |
| We may not achieve market acceptance of our products among physicians and other healthcare providers, and this would have a negative effect on future sales growth |
| A large part of our business is based on the sale of rapid POC diagnostic tests that physicians and other healthcare providers can administer in their own facilities without sending samples to laboratories |
| Clinical reference laboratories and hospital-based laboratories are significant competitors for our products and provide a majority of the diagnostic tests used by physicians and other healthcare providers |
| Our future sales depend on, among other matters, capture of sales from these laboratories by achieving market acceptance of POC testing from physicians and other healthcare providers |
| If we do not capture sales at 20 ______________________________________________________________________ the levels we have budgeted for, our net sales will not grow as much as we hope and the costs we have incurred will be disproportionate to our sales levels |
| We expect that clinical reference and hospital-based laboratories will continue to compete vigorously against our POC diagnostic products in order to maintain and expand their existing dominance of the overall diagnostic testing market |
| Moreover, even if we can demonstrate that our products are more cost-effective or save time, physicians and other healthcare providers may resist changing to POC tests |
| Our failure to achieve market acceptance from physicians and healthcare providers with respect to the use of our POC diagnostic products would have a negative effect on our future sales growth |
| Intense competition with other manufacturers of POC diagnostic products may reduce our sales |
| In addition to competition from laboratories, our POC diagnostic tests compete with similar products made by our competitors |
| As of December 31, 2005, our estimated US professional market share for our key POC products was 66prca in influenza, 50prca for pregnancy and 46prca for Group A Strep tests |
| There are, however, a large number of multinational and regional competitors making investments in competing technologies and products, including several large pharmaceutical and diversified healthcare companies |
| These competitors include Beckman, Fisher, Wampole, Becton, Genzyme, IMA, Binax, Remel, and Thermo |
| We also face competition from our distributors since some have created, and others may decide to create, their own products to compete with ours |
| A number of our competitors have a potential competitive advantage because they have substantially greater financial, technical, research and other resources, and larger, more established marketing, sales, distribution and service organizations than we have |
| Moreover, some competitors offer broader product lines and have greater name recognition than we have |
| If our competitors’ products are more effective than ours or acquire market share from our products through more effective marketing or competitive pricing, our net sales and profits could be materially and adversely affected |
| Competition also has the effect of limiting the prices we can charge for our products |
| Our products are highly regulated by various governmental agencies |
| Any changes to the existing laws and regulations may adversely impact our ability to manufacture and market our products |
| The testing, manufacture and sale of our products are subject to regulation by numerous governmental authorities in the US, principally the FDA and corresponding state and foreign regulatory agencies |
| The FDA regulates most of our products, which are all Class I or II devices |
| The US Department of Agriculture regulates our veterinary products |
| Our future performance depends on, among other matters, our estimates as to when and at what cost we will receive regulatory approval for new products |
| Regulatory approval can be a lengthy, expensive and uncertain process, making the timing and costs of approvals difficult to predict |
| Our net sales would be negatively affected by delays in the receipt of, or failure to receive, approvals or clearances, the loss of previously received approvals or clearances or the placement of limits on the marketing and use of our products |
| Furthermore, in the ordinary course of business, we must frequently make subjective judgments with respect to compliance with applicable laws and regulations |
| If regulators subsequently disagree with the manner in which we have sought to comply with these regulations, we could be subjected to substantial civil and criminal penalties, as well as product recall, seizure or injunction with respect to the sale of our products |
| The assessment of any civil and criminal penalties against us could severely impair our reputation within the industry and any limitation on our ability to manufacture and market our products could have a material adverse effect on our business |
| We are subject to numerous government regulations in addition to FDA regulation, and compliance with changes could increase our costs |
| In addition to FDA and other regulations described previously, numerous laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control and disposal of hazardous or potentially hazardous substances impact our business operations |
| If these 21 ______________________________________________________________________ laws change or laws regulating any of our businesses are added, the costs of compliance with these laws could substantially increase our costs |
| Compliance with any future modifications of these laws or laws regulating the manufacture and marketing of our products could result in substantial costs and loss of sales or customers |
| Because of the number and extent of the laws and regulations affecting our industry, and the number of governmental agencies whose actions could affect our operations, it is impossible to reliably predict the full nature and impact of future legislation or regulatory developments relating to our industry |
| To the extent the costs and procedures associated with meeting new requirements are substantial, our business and results of operations could be adversely affected |
| We use hazardous materials in our business that may result in unexpected and substantial claims against us relating to handling, storage or disposal |
| Our research and development and manufacturing activities involve the controlled use of hazardous materials, including but not limited to chemicals and biological materials such as dimethyl sulfate, sodium nitrite, acetaldehyde, acrylamide, potassium bromate and radionuclides |
| Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of hazardous materials |
| These regulations include federal statutes popularly known as CERCLA, RCRA and the Clean Water Act |
| Compliance with these laws and regulations is already expensive |
| If any governmental authorities were to impose new environmental regulations requiring compliance in addition to that required by existing regulations, these future environmental regulations could impair our research, development or production efforts by imposing additional, and possibly substantial, costs on our business |
| In addition, because of the nature of the penalties provided for in some of these environmental regulations, we could be required to pay sizeable fines, penalties or damages in the event of noncompliance with environmental laws |
| Any environmental violation or remediation requirement could also partially or completely shut down our research and manufacturing facilities and operations, which would have a material adverse effect on our business |
| The risk of accidental contamination or injury from these hazardous materials cannot be completely eliminated and exposure of individuals to these materials could result in substantial fines, penalties or damages as well |
| Our net sales could be affected by third-party reimbursement policies and potential cost constraints |
| The end-users of our products are primarily physicians and other healthcare providers |
| Use of our products would be adversely impacted if physicians do not receive adequate reimbursement for the cost of our products by their patients’ healthcare insurers or payors |
| Our net sales could also be adversely affected by changes or trends in reimbursement policies of these governmental or private healthcare payors |
| In the US, healthcare providers such as hospitals and physicians who purchase diagnostic products generally rely on third-party payors, principally private health insurance plans, federal Medicare and state Medicaid, to reimburse all or part of the cost of the procedure |
| We believe that the overall escalating cost of medical products and services has led to, and will continue to lead to, increased pressures on the healthcare industry, both foreign and domestic, to reduce the cost of products and services |
| Given the efforts to control and reduce healthcare costs in the US in recent years, currently available levels of reimbursement may not continue to be available in the future for our existing products or products under development |
| Third-party reimbursement and coverage may not be available or adequate in either US or foreign markets, current reimbursement amounts may be decreased in the future and future legislation, regulation or reimbursement policies of third-party payors may reduce the demand for our products or adversely impact our ability to sell our products on a profitable basis |
| Unexpected increases in demand for our products could require us to spend considerable resources to meet the demand or harm our customer relationships if we are unable to meet demand |
| If we experience unexpected increases in the demand for our products, we may be required to expend additional capital resources to meet these demands |
| These capital resources could involve the cost of new machinery or even the cost of new manufacturing facilities |
| This would increase our capital costs, which 22 ______________________________________________________________________ could adversely affect our earnings and cash resources |
| If we are unable to develop necessary manufacturing capabilities in a timely manner, our net sales could be adversely affected |
| Failure to cost-effectively increase production volumes, if required, or lower than anticipated yields or production problems encountered as a result of changes that we may make in our manufacturing processes to meet increased demand, could result in shipment delays as well as increased manufacturing costs, which could also have a material adverse effect on our net sales and profitability |
| Unexpected increases in demand for our products could also require us to obtain additional raw materials in order to manufacture products to meet the demand |
| Some raw materials require significant ordering lead time and some are currently obtained from a sole supplier or a limited group of suppliers |
| We have long-term supply agreements with many of these suppliers, but these long-term agreements involve risks for us, such as our potential inability to obtain an adequate supply of raw materials and components and our reduced control over pricing, quality and timely delivery |
| It is also possible that one or more of these suppliers may become unwilling or unable to deliver materials to us |
| Any shortfall in our supply of raw materials and components, and our inability to obtain alternative sources for this supply, could have a material adverse effect on our net sales or cost of sales and related profits |
| Our inability to meet customer demand for our products, whether as a result of manufacturing problems or supply shortfalls, could harm our customer relationships and impair our reputation within the industry |
| If one or more of our products proves to be defective, we could be subject to claims of liability that could adversely affect our business |
| A defect in the design or manufacture of our products could have a material adverse effect on our reputation in the industry and subject us to claims of liability for injuries and otherwise |
| Any substantial underinsured loss resulting from such a claim would have a material adverse effect on our profitability and the damage to our reputation in the industry could have a material adverse effect on our business |
| We are exposed to business risk which, if not covered by insurance, could have an adverse effect on our profits |
| Claims may be made against us for types of damages, or for amounts of damages, that are not covered by our insurance |
| For example, although we currently carry product liability insurance for liability losses, there is a risk that product liability or other claims may exceed the amount of our insurance coverage or may be excluded from coverage under the terms of our policy |
| Also, if we are held liable, our existing insurance may not be renewed at the same cost and level of coverage as currently in effect, or may not be renewed at all |
| If we are held liable for a claim against which we are not insured or for damages exceeding the limits of our insurance coverage, whether arising out of product liability matters or from some other matter, that claim could have a material adverse effect on our results of operations and profitability |
| If we are not able to manage our growth strategy and if we experience difficulties integrating companies or technologies we may acquire after the acquisition, our earnings may be adversely affected |
| Our business strategy contemplates further growth in the scope of operating and financial systems and the area of our operations, including further expansion outside the US, as new products are developed and commercialized |
| We may experience difficulties integrating our own operations with those of companies or technologies that we may acquire, and as a result we may not realize our anticipated benefits and cost savings within our expected time frame, or at all |
| Because we have a relatively small executive staff, future growth may also divert management’s attention from other aspects of our business, and will place a strain on existing management and our operational, financial and management information systems |
| Furthermore, we may expand into markets in which we have less experience or incur higher costs |
| Should we encounter difficulties in managing these tasks, our growth strategy may suffer and our net sales and gross profits could be adversely affected |
| 23 ______________________________________________________________________ Our business could be negatively affected by the loss of or the inability to hire key personnel |
| Our future success depends in part on our ability to retain our key technical, sales, marketing and executive personnel and our ability to identify and hire additional qualified personnel |
| Competition for these personnel is intense, both in the industry in which we operate and also in San Diego and Santa Clara where our headquarters and the majority of our operations are located |
| Further, we expect to grow our operations, and our needs for additional management and other key personnel are expected to increase |
| If we are not able to retain existing key personnel, or identify and hire additional qualified personnel to meet expected growth, our business could be adversely impacted |
| We face risks relating to our international sales, including inherent economic, political and regulatory risks, which could increase our costs, cause interruptions in our current business operations and/or stifle our growth opportunities |
| Our products are sold internationally, primarily to our customers in Japan and Europe |
| We currently sell and market our products by channeling products through distributor organizations and sales agents |
| Sales to foreign customers accounted for 26prca, 29prca and 41prca of our net sales for the years ended December 31, 2005, 2004 and 2003, respectively |
| International sales are subject to inherent economic, political and regulatory risks, which could increase our operating costs, cause interruptions in our current business operations and impede our international growth |
| These foreign risks include, among others: · compliance with new and changing registration requirements, our inability to benefit from registration for our product, inasmuch as registration may be controlled by a distributor, and tariffs or other barriers as we continue to expand into new countries and geographic regions; · exposure to currency exchange fluctuations, such as the 13prca and 14prca decrease in value of the Euro and Yen, respectively, against the US dollar for the year ended December 31, 2005; · longer payment cycles and greater difficulty in accounts receivable collection; · reduced protection for, and enforcement of, intellectual property rights; · political and economic instability in some of the regions where we currently sell our products or that we may expand into in the future; · potentially adverse tax consequences; and · diversion of our products to the US from products sold into international markets at lower prices |
| Currently, all of our international sales are negotiated for and paid in US dollars |
| Nonetheless, these sales are subject to currency risks, since changes in the values of foreign currencies relative to the value of the US dollar can render our products comparatively more expensive |
| These exchange rate fluctuations could negatively impact international sales of our products and our anticipated foreign operations, as could changes in the general economic conditions in those markets |
| In order to maintain a competitive price for our products in Europe and Japan, we may have to provide discounts or otherwise effectively reduce our prices, resulting in a lower margin on products sold in these geographical territories |
| Continued change in the values of the Euro, the Japanese Yen and other foreign currencies could have a negative impact on our business, financial condition and results of operations |
| We do not currently hedge against exchange rate fluctuations, which means that we will be fully exposed to exchange rate changes |
| Evolving regulation of corporate governance and public disclosure may result in additional expenses and continuing uncertainty |
| Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, recent SEC regulations and Nasdaq Stock Market Inc |
| rules and regulations, are creating significant expenses and uncertainty for companies such as ours |
| These recent or 24 ______________________________________________________________________ changed laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies |
| This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices |
| We are committed to maintaining high standards of corporate governance and public disclosure |
| As a result, we intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management and Board of Directors time and attention from revenue-generating activities and operational oversight to compliance activities |
| If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies, regulatory authorities or others may initiate legal proceedings against us and we may be adversely impacted |
| Investor confidence and share value may be adversely impacted if we and/or our independent registered public accounting firm conclude that our internal controls over financial reporting are not effective |
| As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring public companies to include a report of management on our internal controls over financial reporting in our Annual Reports on Form 10-K that contains an assessment by management of the effectiveness of our internal controls over financial reporting |
| In addition, our independent registered public accounting firm must attest to and report on management’s assessment as well as to the effectiveness of our internal controls over financial reporting |
| How companies are implementing these recent requirements, including internal control reforms, if any, to comply with Section 404’s requirements, and how independent registered public accounting firms are applying these recent requirements and testing companies’ internal controls, remain subject to uncertainty |
| The requirements of Section 404 of the Sarbanes-Oxley Act of 2002 are ongoing |
| We expect that our internal controls will continue to evolve as our business activities change |
| Although we seek to diligently and vigorously review our internal controls over financial reporting in an effort to ensure compliance with the Section 404 requirements, any control system, regardless of how well designed, operated and evaluated, can provide only reasonable, not absolute, assurance that its objectives will be met |
| If, during any year, our independent registered public accounting firm is not satisfied with our internal controls over financial reporting or the level at which these controls are documented, designed, operated, tested or assessed, or if the independent registered public accounting firm interprets the requirements, rules or regulations differently than we do, then it may decline to attest to management’s assessment or may issue a report that is qualified |
| This could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our financial statements and effectiveness of our internal controls, which ultimately could negatively impact the market price of our shares |
| Future changes in financial accounting standards or practices or existing taxation rules or practices may affect our reported results of operations |
| A change in accounting standards or practices or a change in existing taxation rules or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective |
| New accounting pronouncements and taxation rules and varying interpretations of accounting pronouncements and taxation practices have occurred and may occur in the future |
| Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business |
| For example, changes have been approved by the Financial Accounting Standards Board, or FASB, that require that we record compensation expense in our statements of operations for equity compensation instruments, including employee and director stock options, using the fair value method |
| Although there will be no change in our total cash flows, our reported financial results beginning in the first quarter of 2006 will be negatively and materially impacted by this accounting change |
| Other potential changes in existing taxation rules related to stock options and other forms of equity compensation could also have a significant negative effect on our reported results |
| 25 ______________________________________________________________________ Risks Related to Our Common Stock Our stock price has been highly volatile, and an investment in our stock could suffer a significant decline in value |
| The market price of our common stock has been highly volatile and has fluctuated substantially in the past |
| For example, between December 31, 2004 and December 31, 2005, the closing price of our common stock, as reported on the Nasdaq National Market System, has ranged from a low of dlra3dtta55 to a high of dlra15dtta51 |
| We expect our common stock to continue to be subject to wide fluctuations in price in response to various factors, many of which are beyond our control, including: · seasonal fluctuations in our sales of Group A Strep and influenza tests, which are generally highest in fall and winter, thus resulting in generally lower operating results in the second and third calendar quarters and higher operating results in the first and fourth calendar quarters; · recent media attention focused on a potential influenza pandemic and the related potential impact on humans from avian flu, as well as the uncertainty surrounding the detection of H5N1 in human specimens; · changes in the level of competition, such as would occur if one of our larger and better financed competitors introduced a new or lower priced product to compete with one of our products; · changes in economic conditions in our domestic and international markets, such as economic downturns, reduced consumer demand, inflation and currency fluctuations, particularly as we expand into markets outside Japan and Western Europe where economic conditions may differ from those prevailing at given times among developed nations; · changes in sales levels, since a significant portion of our costs are fixed costs with the result that relatively higher sales could likely increase profitability but relatively lower sales would not reduce costs by the same proportion, and hence could cause operating losses; · declines in orders from major distributors as a result of lower than expected end-user demand, whether as a result of a light cold and flu season or otherwise; · lower than anticipated sales of our new products; · our failure to achieve, or changes in, financial estimates by securities analysts and comments or opinions about us by securities analysts or major stockholders; · additions or departures of our key personnel; · litigation or threat of litigation; · sales of our common stock and limited daily trading volume; and · economic and other external factors, disasters or crises |
| In addition, the stock market in general, and the Nasdaq National Market System and the market for technology companies in particular, have experienced significant price and volume fluctuations that, at times, have been unrelated or disproportionate to the operating performance of the relevant companies |
| In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted |
| A securities class action suit against us could result in substantial costs, potential liabilities and the diversion of management’s attention and resources |
| 26 ______________________________________________________________________ Future sales by existing stockholders could depress the market price of our common stock |
| Sales of our common stock in the public market, or the perception that such sales could occur, could negatively impact the market price of our common stock |
| As of December 31, 2005: · approximately 33dtta8 million shares of our common stock had been issued in registered offerings and 33dtta2 million are freely tradable in the public markets, and 0dtta6 million relate to restricted shares; · approximately 2dtta5 million shares of our common stock were issuable upon exercise of outstanding stock options under our various equity incentive plans at a weighted average exercise price of dlra5dtta09, for stock options; and · we had in effect registration statements under the Securities Act of 1933 registering approximately 4dtta3 million shares of common stock reserved under our equity incentive plan |
| In addition, there were 213cmam077 shares reserved under our employee stock purchase plan |
| We are unable to estimate the number of shares of our common stock that may actually be resold in the public market since this will depend on the market price for our common stock, the individual circumstances of the sellers and other factors |
| We also have a number of institutional stockholders that own significant blocks of our common stock |
| If one or more of these stockholders were to sell large portions of their holdings in a relatively short time, for liquidity or other reasons, the prevailing market price of our common stock could be negatively affected |
| Anti-takeover devices may prevent a sale, or changes in the management, of the Company |
| We have in place several anti-takeover devices, including a stockholder rights plan, that may have the effect of delaying or preventing a sale, or changes in the management, of the Company |
| For example, our bylaws require stockholders to give written notice of any proposal or director nomination to us within a specified period of time prior to any stockholder meeting |
| We may also issue shares of preferred stock without stockholder approval and on terms that our Board of Directors may determine in the future |
| The issuance of preferred stock could have the effect of making it more difficult for a third party to acquire a majority of our outstanding stock, and the holders of such preferred stock could have voting, dividend, liquidation, and other rights superior to those of holders of our common stock |
| We do not pay dividends and this may negatively affect the price of our stock |
| We have not paid dividends on our common stock and do not anticipate paying dividends on our common stock in the foreseeable future |
| The future price of our common stock may be adversely impacted because we have not paid and do not anticipate paying dividends |