VITAL
SIGNS, INC. In this Annual Report,
references to “Vital Signs,” “the Company,” “we,” “us,” and “our” refer to
Vital Signs, Inc. and its subsidiaries. Actar®, Actar D-FibTM,
Babysafe™, Breas®, Breas HA50™, Breas PV403™, Breas SC20™, Broselow®,
Broselow-Hinkle™, Broselow-Luten™, C-CO2™, Code Blue II™, Color
Coding Kids®, CUFF-ABLE™, enFlow®, iMask™, iSleep by Breas®, InfusaScan®,
INFUSABLE®, Limb-q™, Misty OX®, Pedi Blue II™, RediTubeTM,
SteeLiteTM, SURE-LOK™, TurboHeater™, Vital Seal™, Vital View™, Vital
View II ™, Vivo 30™, Vivo 40™ and Vivo by Breas® are Company trademarks. The
Company also has several registered and unregistered color scheme trademarks
related to the Broselow product line. All other trademarks used in this Annual
Report are the property of their respective owners.
Fiscal year in this Annual Report means the twelve months ended on September 30th. Unless the context expressly indicates a contrary intention, all references to years in this Annual Report are to fiscal years. -1- Vital Signs, Inc. was initially incorporated in New York in 1972 and reincorporated in New Jersey in 1988. The Company’s principal executive office is located at 20 Campus Road, Totowa, New Jersey 07512; the telephone number at this location is (973) 790-1330. The Company and markets Vital
Signs is a leading designer, manufacturer, and marketer of airway management
products for the anesthesia, respiratory/critical care, interventional
cardiology/radiology, and sleep disorder markets. The Company sells its
products in over 73 countries worldwide. The Company offers one of the broadest
single-patient-use anesthesia and respiratory/critical care product lines in
the industry and has developed numerous innovative products that are now
considered industry standards. In addition, the Company sells therapeutic
products for patients suffering from sleep disorders and provides sleep
disorder diagnoses at sleep laboratories and Company-operated centers. The
Company provides technology services to FDA-regulated companies.
In response to rising health-care costs, managed care companies and other third-party payors in the Company’s anesthesia and respiratory/critical care businesses are placing pressure on health care providers to reduce costs. Although this could hamper a health-care provider’s revenue growth, the Company believes that these cost-reduction efforts have increased the market preference for the Company’s single-patient-use medical products because these products improve health care professionals’ productivity, minimize transfer of infections and disease, reduce overall provider costs, and improve patient care. As a result of the following factors, the Company believes that single-patient-use medical products have become the products of choice in the United States anesthesia and respiratory/critical care markets.
The
Company categorizes its product and service offerings within five business
segments: anesthesia, respiratory/critical care, sleep disorder, interventional
cardiology/radiology and pharmaceutical technology services. (See Note 20) Anesthesia Anesthesia products were the Company’s first line of business over 30 years ago and continue to be its leading source of revenue. The Company’s single-patient-use anesthesia products and systems deliver oxygen and anesthesia from a gas source, such as an anesthesia machine, to a patient’s pulmonary system. These products also remove anesthetic gases, carbon dioxide, and expiratory oxygen from a patient and link a patient to various monitors. The principal anesthesia products consist of face masks, breathing circuits, and general anesthesia products. The breadth of the Company’s product offerings provides an advantage of selling customized circuits comprised of multiple products that are compatible with the anesthesia equipment manufactured by most companies. The Company also manufactures a wide range of accessories and components for use with its -2- anesthesia products, including heat/moisture exchangers, bacterial/viral filters, anesthesia breathing bags (including latex-free bags), airways, and temperature-monitoring devices. The Company’s primary anesthesia products and systems include:
-3-
For fiscal 2007, 2006 and 2005, the anesthesia segment contributed 36.4%, 36.5%, and 35.1%, respectively, on net revenue. Respiratory/critical care
The
Company’s primary respiratory products are arterial blood gas (ABG) syringes
and kits, manual resuscitators, and single-use blood pressure cuffs. The
Company also distributes critical care equipment kits and modules that are
color-coded so emergency room workers can quickly and accurately determine the
proper equipment size to use with pediatric patients. In addition, the
Company manufactures a wide range of accessories and components for use with
its respiratory/critical care products and systems, including bacterial/viral
filters and heat and moisture exchangers. The Company’s primary respiratory/critical care products and systems include:
-4-
-5-
For fiscal 2007, 2006, and 2005, the respiratory/critical care segment contributed 22.6%, 22.1%, and 22.0%, respectively, of net revenue. Sleep disorder
The
Company believes it is the only firm that both operates sleep centers to
diagnose obstructive sleep apnea as well as manufactures and sells products
designed to treat the condition. The Company offers sleep diagnostic
services exclusively in the United States through its Sleep Services of America
subsidiary. The Sleep Services of America subsidiary was created in January 2002
as a result of the merger with the sleep diagnostic service business of The
Johns Hopkins Health System Corporation. As of September 30, 2007, the Company operated 101 accounts, primarily
inclusive of 72 sleep diagnosis laboratories and centers and 22 hospital
locations serviced with mobile PSG equipment in nine states in the United
States and Washington D.C. The Company’s Sleep Services of America
business is accredited by the Joint Commission on Accreditation of Healthcare
Organizations in ambulatory healthcare. At these sleep laboratories and centers, which typically accommodate two or three patients per night, the Company conducts sleep studies to determine whether patients suffer from sleep disorders and, if so, the severity of their condition. If a patient is determined to suffer from obstructive sleep apnea, the Company offers the patient and their referring physician a comprehensive sleep program. This program includes a patient consult, diagnosis, titration procedure (this is the process of determining the optimal pressure to prescribe for the CPAP device), and therapeutic intervention, thus providing a one-stop-shop approach to service a patient’s needs.
OSA diagnosis requires monitoring a patient during sleep. During overnight testing, which usually takes place in a clinical setting, respiratory parameters and sleep patterns are monitored along with other vital signs, providing information about the quality of an individual’s sleep. A report by Frost & Sullivan indicated that by 2003, there were approximately 2,800 sleep laboratories and centers in the United States. The Company believes this represents a significant expansion over the number of such laboratories and centers that previously existed in the United States. CPAP
therapy is the primary method for treating obstructive sleep apnea, partly
because it is less invasive and more cost-effective than surgery. Unlike
surgery, which may only result in reduced snoring, CPAP therapy actually
reduces or eliminates the occurrence of obstructive sleep apnea. During CPAP
therapy, a patient sleeps with a nasal or facial mask connected by a tube to a
small portable airflow generator that delivers room air at a predetermined
continuous positive pressure. The continuous air -6- pressure acts as a pneumatic splint to keep the patient’s upper airway open and unobstructed. As a result, the cycle of airway closures, which leads to the disruption of sleep and other symptoms that characterize obstructive sleep apnea, is prevented or dramatically reduced. CPAP is generally not a cure but a therapy for managing the chronic condition of obstructive sleep apnea, and therefore, must be used on a daily basis as long as treatment is required. Patient compliance has been a major factor in the efficacy of CPAP treatment. Recent CPAP product innovations have improved patient comfort and compliance compared with earlier generations of CPAP units.
The Company’s ability to sell its sleep disorder and personal ventilation products in Company sleep laboratories and centers is restricted by strict federal regulations that prohibit the medical facility from diverging from a physician’s prescription. If a physician prescribes a sleep disorder or personal ventilation -7- product by name other than a Company product at a Company sleep laboratory or center, the Company is prohibited by federal regulations from substituting its own product. For fiscal 2007, 2006, and 2005, sleep disorder and personal ventilation products and services accounted for 23.8%, 21.2%, and 21.0%, respectively, of net revenue. Interventional Cardiology/Radiology
The Company’s interventional cardiology/radiology business provides vascular access and vascular device delivery and serves a substantial number of medical device companies on an ongoing manufacturing and R&D project basis. The business operates as a high-end OEM that designs, develops, and manufactures precision devices that facilitate access to the cardiovascular system by medical professionals in the electrophysiology, cardiology, radiology, critical care, and anesthesia markets. The products include percutaneous-valved introducers, peelaway-valved introducers, guiding sheaths, and device delivery sheaths. Other products include guide wires, needles, over-the-needle catheters, hemostasis valves, obturators, dilators, slicers, transvalvular insertion tools, and contamination shields. Generally, the business makes finished sterile medical devices and bulk non-sterile products based on customer specifications. However, the business can also design, develop, and manufacture proprietary finished medical devices that are distributed by customers under their private label. As an OEM, the business depends on its customers for distribution of the medical devices produced by the Company. It is a highly-competitive business that can have major technology shifts. While the Company expects the business to grow over the next few years, the actual growth will vary depending on the customer base. Products are sold to other health care product providers either as a component of a kit or as a finished product. Customers include Johnson & Johnson, Bard, and Boston Scientific. For
fiscal 2007, 2006, and 2005, interventional cardiology/radiology segment
contributed 14.0%, 12.6%, and 13.2%, respectively, of net revenue. Pharmaceutical technology services Pharmaceutical, diagnostic, biotechnology, and medical device companies are regulated by the United States Food and Drug Administration or FDA. The FDA’s regulatory framework covers virtually every aspect of these companies’ operations and mandates that these companies maintain highly-detailed records to demonstrate compliance with complex requirements. FDA enforcement of its requirements has increased significantly in recent years, and the FDA has publicly stated that compliance will be more strictly scrutinized. The FDA may invoke extensive enforcement powers against companies that fail to comply with FDA regulations. These companies may be delayed or prevented from commercializing new products or product enhancements and may have existing products removed from the market. The tasks of developing FDA compliance programs and monitoring their performance are complex and time-consuming. The Company believes that many FDA-regulated companies do not maintain the internal staff necessary to meet FDA requirements scrutiny, and these companies require consultants to help them become and remain compliant. FDA-regulated companies are under ongoing scrutiny with regard to the quality and compliance of critical computer systems and will continue to require external help to develop and implement these systems. For more than 20 years, the Company has provided regulatory consulting services to clients, helping them develop and validate systems and processes for their manufacturing, IT infrastructure, research and development, facilities, laboratory, and quality assurance departments. In 2002, with the acquisition of Stelex, the Company expanded these services to include computer systems compliance. In addition, the Company developed and currently markets proprietary software products used in conjunction with the Company’s services to help clients comply with FDA regulations. The Company delivers these technology services to FDA-regulated companies primarily in the pharmaceutical sector, as well as to medical device, -8- diagnostic, and biotechnology companies. Clients include some of the largest pharmaceutical companies in the world.
Sales, marketing, and distribution United States of America Anesthesia and respiratory/critical care. The Company markets anesthesia and respiratory/critical care products primarily to hospitals and other health-care providers. Hospitals and other health care providers determine the channel through which they receive Vital Signs’ products, either directly from the Company or through a distributor of their choice. At September 30, 2007 and 2006, the United States sales force consisted of 53 and 55 sales representatives as well as seven and six regional sales managers, respectively. The Company trains its sales force in the need, use, application, and advantages of its products.
Sleep disorder. Sales of sleep therapeutic and personal ventilation equipment in the United States has been minimal to date, due partly to the time required to obtain necessary FDA clearances and also to the dominant position that the Company’s competitors have in the home-supply dealer channel. The Company’s principal means of selling sleep disorder and personal ventilation products is through the introduction of those products to patients visiting the Company’s sleep laboratories and centers. The primary focus is to increase the patient volumes at existing laboratories and centers and negotiate contracts with new sleep laboratories and centers. The Company differentiates itself from its competitors by providing hospitals with a range of marketing options from direct marketing to an al la carte selection of services that increases the number of beds or improves existing-bed utilization.
Pharmaceutical technology services. Sales are through a direct sales force of ten and nine at September 30, 2007 and 2006, respectively. The pharmaceutical technology services sales team in the United States and Puerto Rico sells FDA-compliance services to pharmaceutical companies, diagnostic and biotechnology companies, and medical device manufacturers. International sales The Company sells products in over 73 countries worldwide. For fiscal 2007, 2006, and 2005, international sales were approximately 24.6%, 23.7%, and 24.2%, respectively, of net revenues. -9-
Sales
in Asia, Latin America, Canada, India and Europe/Middle East are supervised by
six regional managers whose responsibilities include, but are not limited to,
the identification, qualification, appointment and continued training and
support of local, territory-specific distributors. The Company sells sleep disorder and personal ventilation products through Breas’ direct sales force to home health care distributors in France, Germany, Scandinavia, Spain, and the United Kingdom, and through an independent distribution network in other countries. At September 30, 2007, Breas’ direct sales force consisted of 27 professionals. See “Management’s discussion and analysis of financial condition and results of operations” for additional information concerning international sales. Research and development
The Company incorporates technical, manufacturing, operations, sales and marketing, and clinical expertise within its research and development processes. The research and development staff works with health care providers to respond to customer product needs and with Company sales and marketing teams to anticipate industry trends. The Company has successfully reduced new product development costs by utilizing its manufacturing capabilities to rapidly produce quantities of prototype products suitable for trial use and sale. Manufacturing and quality control
The Company’s manufacturing processes and systems provide quality products, react quickly to changes in demand, and generate manufacturing efficiencies. These capabilities allow the Company to contain costs, control quality, and maintain security of proprietary processes. The Company continually evaluates its manufacturing processes, with the objective of increasing automation, streamlining production, and enhancing efficiency to achieve cost savings and improve quality.
-10- Key supplier relationships
As of August 2007, Respironics sold all of its tooling, equipment, know-how and intellectual property for manufacturing air-filled cushion masks to the Company, agreed to continue manufacturing masks during the transition process, and agreed to cooperate with the startup of the Company’s Chinese joint venture. The joint venture is ramping up mask production and is currently supplying 40% of the Company’s mask needs. If
the Company becomes unable to fully transition the face mask manufacture to the
joint venture or if the supply of face masks would be interrupted, the Company
would be required to find alternative suppliers. The Company believes that alternative face mask suppliers exist; however, there is
no assurance that, in the event of a face mask supply
interruption, the Company could maintain a delivery of face masks in a quantity
and at a cost that would not have a material adverse effect on the Company’s
business and operating results. Intellectual property The Company primarily relies upon trade secrets and continuing technological innovations to develop and maintain its competitive position and seeks patent protection for inventions that provide its products a competitive advantage. When determined appropriate, the Company has enforced and plans to continue to enforce and defend its patent rights. In an effort to protect trade secrets, the Company requires certain employees, consultants, and advisors to execute confidentiality, proprietary information, and invention assignment agreements upon commencement of employment or consulting relationships.
Regulation Medical device regulation
-11-
From time to time the Company may take recall actions with respect to particular lots of a specific product. Such actions are recorded in Company records and are available to the FDA during inspections. The Company also may file notices with the FDA describing such actions.
Most
Vital Signs products are either Class I or Class II. If the Company were to
develop any Class III medical devices, the time, effort, and expense required
to obtain the necessary approvals would be substantial. International sales of medical devices are subject to foreign government regulations, which vary substantially from country to country. The time required to obtain approval by a foreign country may be longer or shorter than that required for FDA clearance, and the requirements may differ significantly. The European Union has adopted legislation and Medical Device Directives that regulate the design, manufacture, clinical trials, labeling, and adverse event reporting for medical devices. This regulation establishes a Competent Authority in each member state to monitor and ensure compliance with the Directive. Each Competent Authority, in turn, then nominates a Notified Body to oversee the conformity assessment procedures set forth in the Directive, under which manufacturers demonstrate that their devices comply with the requirements of the Directive and are entitled to bear the “CE” marking. “CE” is an abbreviation for Conformité Européene, or European Conformity, and the CE marking, when placed on a product, indicates compliance with the requirements of the applicable directive. Only medical devices properly bearing the CE marking may be commercially distributed throughout the European Union. The Company has approval to affix the CE marking on all of its major product lines. As new products are introduced, the Company intends to gain approval for CE marking. While no additional pre-market approvals in individual European Union countries are required prior to marketing of a device bearing the CE mark, practical complications with respect to marketing introduction may occur. For example, different labeling requirements among EU countries exist. Over the last several years numerous countries, such as Australia, China, Japan, and India have imposed new regulations on the registration of medical devices which in some instances have significantly lengthened the registration process. Non-compliance with foreign regulations may carry the same or increased risks, liabilities, and exposures as non-compliance with FDA requirements. Foreign regulatory authorities also have the authority to require the Company to repair, replace, or refund the cost of any device that the Company manufactures or distributes. -12- Health care regulation
Sleep diagnostic service providers are subject to regulation by United States federal and state authorities aimed at combating fraud and abuse in the health care industry. The federal government has enacted statutes and corresponding regulations addressing, among other things, kickbacks, self-referral, the submission of false claims for reimbursement, and the failure to follow physician prescriptions. Many states have enacted similar statutes. The federal laws apply in any case where the Company may provide a product or service that is reimbursable under the Medicare or Medicaid programs, or where the Company is requesting reimbursement from Medicare or Medicaid. The Company’s ability to sell its Breas products in Company sleep laboratories and centers is restricted by federal regulations that prohibit the Company from diverging from a physician’s prescription. If a physician prescribes a CPAP product by name other than a Breas product, at one of the Company’s sleep laboratories and centers, the Company is prohibited from substituting a Breas product. The federal government is authorized to impose criminal, civil, and administrative penalties on a health-care provider who files a false claim for reimbursement from Medicare or Medicaid. Even where a claim has not been submitted to Medicare or Medicaid, criminal penalties may be imposed against the provider if the government can show that the claims constitute mail fraud or wire fraud. The government has increasingly been applying penalties in a broadening range of circumstances, for example, in instances where reimbursement has been made or sought for medically unnecessary services or for services that fall below clinical standards for quality care. The federal anti-kickback law prohibits the offering, solicitation, payment or receipt of anything of value which is intended to induce the referral of Medicare or Medicaid patients, or to induce the ordering of items or services that are reimbursable under those programs. The federal anti-kickback law has been interpreted to apply where one purpose of an arrangement is to induce referrals, even if it is not the primary purpose of the arrangement. Arrangements that meet certain so-called “safe harbors” are deemed not to violate the federal anti-kickback law, but the failure of a particular arrangement to meet a safe harbor also does not necessarily mean that such an arrangement is illegal. The federal self-referral law, commonly referred to as the Stark Law, prohibits a physician from referring a patient to another health care provider for certain designated health products and services reimbursable by Medicare or Medicaid if the referring physician has a financial relationship with that provider. “Financial relationship” has been broadly defined in the applicable regulations to include both direct and indirect relationships, and includes both ownership interests and compensation as forms of financial relationships. As with the federal anti-kickback law’s safe harbors, the Stark Law and its regulations exclude certain arrangements from the general prohibition, provided that specific criteria applicable to each arrangement are met. The penalties for violating these federal laws include criminal sanctions and fines, potential treble damages, and civil and administrative penalties, which may include, but not be limited to, exclusion from the Medicare and Medicaid programs, and the repayment to the federal government of any reimbursement that the provider received in violation of the law. Many states have enacted laws similar to the federal fraud and abuse laws. There is a great degree of variability among these states in terms of the applicability and requirements of each of their laws. For instance, some states’ laws are applicable only to services or products reimbursable under Medicaid, while others apply to all health care services regardless of the source of payment. By way of further example, some states do not prohibit referrals to a provider with which the referring physician has a financial relationship, but only require that the patient be informed of the relationship before the referral is made.
-13- Privacy regulation Some of the Company’s business activities require that it collect and/or use information about individuals and their medical conditions. As a result, the Company is subject to regulation by both United States and foreign authorities to protect individual privacy by requiring confidentiality of patient information. In 1996, the United States Congress enacted the Health Insurance Portability and Accountability Act, which mandated, among other things, the promulgation of regulations to address the privacy of health information and to reduce many of the costs and administrative burdens of the health care industry. These regulations have been developed by the United States Department of Health and Human Services and address three general areas: standardization of electronic transactions, security of health information systems, and privacy of protected health information. Collectively, these regulations are intended to establish federal standards concerning the use, disclosure, and protection of health information which, by its nature, can be linked to specific individuals. In addition to limited access to protected health information of Company employees, the Company’s Sleep Services of America subsidiary collects protected health information of its clients. The Health Insurance Portability and Accountability Act also establishes civil and criminal fines and penalties for the improper use and disclosure of individually identifiable health information. The regulations continue to evolve as the United States Department of Health and Human Services continues to receive public comment and revise certain of the regulations, most notably those addressing privacy. There is no meaningful history of enforcement efforts by the federal government at this time. It is, therefore, not possible to ascertain the likelihood of enforcement efforts in connection with the Health Insurance Portability and Accountability Act regulations or the potential fines and penalties that may result from the violation thereof. Foreign governments are increasingly addressing concerns related to the privacy of information collected about their citizens with laws and regulations designed to protect the confidentiality of such information. Third party reimbursement The cost of medical care in the United States and many other countries is funded substantially by government and private insurance programs. Although the Company does not generally receive payment for its products or services directly from these payors (other than in connection with the Company’s sleep diagnostic services), the Company’s continued success is dependent upon the ability of patients, hospitals, and home care distributors to obtain adequate reimbursement for Company products and sleep services. In most major markets, Vital Signs products are purchased primarily by hospitals and medical centers that are generally either government funded, invoice third-party payors directly, or invoice patients that receive reimbursement from third-party payors. Other than direct hospital sales (and the Company’s sleep diagnostic services and resulting sales of CPAP equipment), the Company’s remaining sales are to distributors and manufacturers of other medical products that then sell to these customers. Sleep-diagnostic services provided in Company sleep laboratories and centers to patients are generally covered by private insurance. In those instances, the patient is responsible for their co-payment portion of the fee, and the Company invoices the patient’s insurance company for the balance. The Company contracts with hospitals on a “fee for service” basis, and the hospital assumes the billing risk. In the United States, third-party payors include Medicare, Medicaid, and private health insurance providers. These payors may deny reimbursement if they determine that a device has not received appropriate FDA clearance, is not used in accordance with approved applications, or is experimental, medically unnecessary, or inappropriate. Third-party payors are also increasingly challenging prices charged for medical products and services, and certain private insurers have initiated reimbursement systems designed to reduce health care costs. The trend towards managed health care and the growth of health maintenance organizations that control and significantly influence health care service and product purchases, as well as ongoing legislative proposals to reform health care, may all result in lower prices for the Company’s products and services. The Company cannot assure that its products and services will be considered cost-effective by third-party payors, reimbursement will be available or continue to be available, -14- or that payors’ reimbursement policies will not adversely affect the Company’s ability to sell its products and services on a profitable basis, if at all. Competition
The
Company competes on a product-by-product bases with various companies, many of
which have greater financial and marketing resources, broader business
segments, or both. The Company’s primary competitors in each of its product and
service categories include the following entities and their affiliates:
-15- Employees
Website The Company maintains a website at www.vital-signs.com that provides proxy statements, press releases, and SEC reports on Forms 3, 4, 5, 8-K, 10-K, and 10-Q (and any amendments to those reports) that are filed with the SEC. These reports and other materials are made available as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. Press releases are also issued via electronic transmission to provide access to Company financial and product news. In addition, the Company provides notification of and access to voice and Internet broadcasts of its quarterly and annual results. -16- The reader should carefully consider the risks described below and all other information contained in this Annual Report. If any of the following risks, as well as other risks and uncertainties that are not yet identified or that the Company currently thinks are immaterial, actually occur, the Company’s business, financial condition, and results of operations could be materially and adversely affected. In that event, the trading price of the Company’s shares could decline, and shareholders may lose all or a substantial part of their investment. Risks related to the Company’s industry Public and private sector health care organizations continue to exert substantial cost containment pressures that could adversely impact the Company’s selling prices and profitability.
The time and expense needed to obtain regulatory approval and respond to changes in regulatory requirements could adversely affect the Company’s ability to commercially distribute its products and services and generate sales revenue.
The
FDA regulates the pre-clinical and clinical testing, manufacturing, labeling,
distribution, and promotion of medical devices. It can take several years to
receive the appropriate clearances from the FDA, and the Company cannot assure
that it will always obtain such clearances. If the Company decides to develop
any products that are categorized by the FDA as Class III medical devices, the
time, effort and expense required to obtain the necessary clearances will
increase significantly. In addition, the products that the Company manufactures
or distributes pursuant to FDA clearances are subject to pervasive and
continuing regulations by the FDA. Non-compliance with applicable requirements
can result in, among other things, warning letters, fines, injunctions, civil
penalties, recalls or seizures of products, total or partial suspension of
production, failure of the government to grant pre-market clearance for
devices, withdrawal of marketing clearances, and criminal prosecution. The FDA
also has the authority to require the Company to repair, replace, or refund the
cost of any device that it manufactures or distributes. International sales of medical devices are subject to foreign government regulations, which vary substantially from country to country. The time required to obtain approval by a foreign country may be longer or shorter than that required for FDA clearance, and the requirements may differ significantly. Over the last several years several countries, such as Australia, China, Japan, and India have imposed new regulations on the registration of medical devices which in some instances have significantly lengthened the registration process. Non-compliance with foreign regulations may carry the same or increased risks, liabilities, and exposures as non-compliance with FDA requirements. Foreign regulatory authorities also have the authority to require the Company to repair, replace, or refund the cost of any device that the Company manufactures or distributes. -17- Certain business activities require that the Company collect and/or use information about individuals and their medical conditions. As a result, the Company is subject to complex regulations by both United States and foreign authorities to protect individual privacy by requiring that the Company maintain the confidentiality of patient information. Implementation and compliance with these regulations are costly. Even after receiving FDA and foreign regulatory clearance or approval, the Company’s products may be subject to product recalls, which may harm the Company. The FDA and similar governmental authorities in other countries have the authority to make a mandatory recall or order the market removal of the Company’s products in the event of material deficiencies or defects in medical device design, manufacture, or labeling. Any recall of Company products may materially adversely affect the Company’s profitability, divert managerial resources, and harm the Company’s reputation. The Company may lose significant customers as a result of substantial consolidation within the health care industry. Over the past several years, the health care industry, including many of the Company’s customers, has undergone significant consolidation, and the Company expects this trend to continue. The Company is subject to risks and uncertainties that result from mergers and acquisitions involving its customers. If, as a result of such mergers or combinations, the Company’s customers lose control of the purchasing function, decide to use one of the Company’s competitors or reduce their orders for Company products, the Company’s revenues may be materially adversely affected. Government and private insurance plans may not reimburse the Company’s customers for the Company’s products, which could result in reductions in sales or selling prices for Company products. The cost of medical care in the United States and many other countries is funded substantially by government and private insurance programs. If such funding becomes limited or unavailable to the Company’s customers, the Company’s business may be adversely affected. Although the Company does not generally receive payment for its products or services directly from these payors other than for its sleep diagnostic services, the Company’s continued success is dependent upon the ability of patients or the Company’s customers to obtain adequate reimbursement for Company products and services. In most major markets, Company products are purchased primarily by hospitals which in turn bill third-party payors or bill patients directly who then seek reimbursement from third-party payors. In the United States, third-party payors include Medicare, Medicaid, and private health insurance providers. These payors may deny reimbursement if they determine that a device has not received appropriate FDA clearance, is not used in accordance with approved indications, or is experimental, unnecessary, or deemed to be inappropriate treatment for the patient. Third-party payors are also increasingly challenging prices charged for medical products and services. The Company cannot assure that its products will be considered cost-effective by third-party payors, reimbursement will be available, or that payors’ reimbursement policies will not adversely affect the Company’s ability to sell its products on a profitable basis, if at all. Health care reimbursement systems vary from country to country and, accordingly, the Company cannot assure that third-party reimbursement available under one system will be available for procedures utilizing Company products under any other reimbursement system. Lack of, or inadequate reimbursement by, government and other third-party payors for Company products would have a material adverse effect on the Company’s business, financial condition, and results of operations. Health care reform proposals are gaining substantial support in the United States Congress and state legislatures and could impact the profitability of the Company’s business. The United States health care industry is subject to several reform proposals, including more stringent regulations. It is uncertain whether and when such proposals would become legal requirements affecting the Company’s business, but the Company cannot assure that any such changes will not have a material adverse effect on the Company’s business. Changes in the law or new interpretations of existing laws may have a dramatic effect on the costs associated with doing business and the amount of reimbursement the Company’s customers receive from both government and third-party payors. Federal, state and local -18- government representatives will, in all likelihood, continue to review and assess alternative regulations and payment methodologies. Health care legislation and regulation by state legislatures regarding licensure requirements for healthcare professionals could impact the profitability of the Company’s business. Several states in which the Company’s Sleep Services of America business operates have taken steps to improve licensure requirements for polysomnographic sleep technicians that monitor patients during sleep diagnostic procedures. As licensing requirements are imposed, the pool of qualified personnel tends to shrink leading to a drive for higher salaries. The Company cannot assure that these changes in the pool of available qualified employees will not have an impact on the Company’s ability to maintain its profit margins at historic levels.
The
Company is subject to numerous environmental, health and safety laws and
regulations, including those governing the use and disposal of hazardous
materials. The Company incurs expenses to comply with such laws and regulations
and any violation of these laws and regulations could have a material adverse
effect on the Company’s business, financial condition, and results of
operations. Risks related to the Company’s business The markets for the Company’s products and services are highly competitive, and the Company competes against substantially larger companies. Competition among medical device companies is intense. If the Company is unable to compete effectively with existing or future competitors, it may be prevented from retaining the Company’s existing customers or from attracting new customers, which could materially impair the Company’s business. There are a number of companies that currently offer, or are in the process of developing, products that compete with products that the Company offers. The Company cannot assure that some of these competitors will not succeed in | ||||
Vital Signs, Inc - Recent Material Event |