Available Information. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports and other filings are available on our website at www.datascope.com.
We have adopted a written Corporate Business Conduct Policy (including Code of Ethics) that applies to all our employees. The Business Conduct Policy is posted on our website under the “Corporate Governance” caption. We intend to disclose any amendments to, or waivers from, the Business Conduct Policy on our website. In addition, the Company’s audit committee charter, compensation committee charter and nominations and corporate governance committee charter are also posted on the Company’s website. A copy of any of these documents is available, free of charge, upon written request sent to Datascope Corp., 14 Philips Parkway, Montvale, New Jersey 07645, Attention: Secretary.
Information included on our website is not deemed to be incorporated into this Annual Report on Form 10-K.
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Glossary. We have prepared the glossary below to help you understand our business.
Angioplasty is the reconstruction of blood vessels, usually damaged by atherosclerosis. If the arteries in question are in the heart, a coronary bypass operation may be recommended. However, the nonsurgical method of balloon angioplasty is often employed, especially when only one vessel is blocked.
Balloon Angioplasty , also known as percutaneous transluminal coronary angioplasty (PTCA), is a nonsurgical method of clearing coronary and other arteries blocked by atherosclerotic plaque, fibrous and fatty deposits on the walls of arteries. A catheter with a balloon- like tip is threaded up from the arm or groin through the artery until it reaches the blocked area. The balloon is then inflated, flattening the plaque and increasing the diameter of the blood vessel opening. The arterial passage is thus widened or dilated. Balloon angioplasty has evolved to include direct coronary stenting in greater than 70% of angioplasty procedures to prevent recoil or abrupt closure of the artery post dilatation.
French (Fr.) , or French Scale, a system used to indicate the outer diameter of catheters. Each unit is approximately 1/3 mm.
Hemostasis is the stopping of bleeding, either by physiological properties of coagulation and vasoconstriction or by surgical or mechanical means.
Manual Compression is the stopping of bleeding by physical pressure placed specifically on a venous or arterial access site. With relation to our interventional products, manual compression is typically applied to the femoral artery.
Mechanical Thrombectomy is the process of removing clots within arteriovenous (AV) grafts or AV fistulas (an abnormal connection created surgically between an artery and a vein) on chronic hemodialysis patients who are typically being treated for end stage renal disease.
Percutaneously is via a passage through the skin by needle puncture, including introduction of wires or catheters.
Stenting is a medical procedure that uses tiny mesh tubes to support artery walls to keep the vessels open.
Vascular Access is the means of entering the vasculature percutaneously in order to place a variety of catheters. Vascular Access can be either venous or arterial in nature and can occur at various points of the body. The most typical vascular access points are femoral (groin), subclavian (upper chest), internal and external jugular (neck), brachial and radial (arm).
Vasoconstriction , causing narrowing of the blood vessels.
Major Product Lines. Our four major product lines are Patient Monitoring, Cardiac Assist, Interventional Products and Vascular Grafts. The following table shows the percentage of sales by major product line as a percentage of total sales for the last three years:
| Fiscal Year Ended June 30, |
||||||||||
| 2006 | 2005 | 2004 | ||||||||
Patient Monitoring |
43 | % | 43 | % | 42 | % | ||||
Cardiac Assist |
43 | % | 39 | % | 38 | % | ||||
Interventional Products |
6 | % | 8 | % | 11 | % | ||||
Vascular Grafts |
8 | % | 10 | % | 9 | % |
Below is a more detailed description of our major product lines:
Patient Monitoring. We manufacture and market a broad line of physiological monitors and monitoring systems designed to provide for patient safety and management of patient care. Our monitoring solutions were developed for the demands of today’s health care environment and many can be integrated with our Panorama™ Patient Monitoring Network. They range from automated blood pressure monitoring devices to intensive care unit monitoring systems. They are used in operating rooms, emergency departments, critical care units, post-anesthesia units and recovery rooms, intensive care units and labor and delivery
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rooms. As part of our operating room business, we offer the Anestar® Plus and Anestar® S Anesthesia Delivery Systems, which are designed for use with our Gas Module SE™ airway gas monitor, and our Passport 2® and Spectrum® multi-parameter patient monitors.
Our line of patient monitoring products and their significant features are as follows:
Patient Monitors
Our line of stand-alone bedside patient monitors consists of the Spectrum, Passport 2, Trio™, Accutorr® Plus (with AccuNet™) and Duo™.
Spectrum, a powerful, portable bedside monitor, has the features required for monitoring critical patients: more waveforms, diagnostic 12-Lead ECG, multiple invasive blood pressures, a comprehensive calculations package and cardiac output, all bundled into one easy- to-use monitor. Other key features include smart functions such as auto-configuring waveforms, auto-adjustable large numerics and a bright 12.1" color display.
Passport 2 is a portable, bedside monitor with color or monochrome display and 6 waveforms. Our unique Navigator™ control knob and dedicated function keys provide exceptional ease-of-use. Other key features include a specialized graph trend of heart rate, respiration and pulse oximetry for neonatal applications and convenient portability.
Trio is a portable and configurable lightweight, compact monitor with applications for a wide variety of hospital and outpatient areas. Its features include an ergonomically designed fold-away handle and built-in bed rail hook, and an 8.4" high resolution color display with 4 waveforms. Standard parameters include 3- or 5-lead ECG, NIBP, SpO 2 , respiration and temperature and full graphic and list trends of all monitored parameters with event markers.
Accutorr Plus is our first non-invasive blood pressure monitor with an integrated patient database that automatically records up to 100 patient measurements. Accutorr Plus measures pulse oximetry, temperature and heart rate. In August 2006, we launched AccuNet, our wireless software system which, when combined with the Accutorr Plus portable monitor, provides hospital staff with real-time health status updates by transmitting clinical data, via secure encryption, to a patient’s electronic record. The Accutorr Plus with AccuNet minimizes paperwork, reduces cost and decreases potential error from manual data transfers by automatically recording and charting a patient’s vital signs data. This powerful tool enables healthcare professionals, including off-site physicians and clinicians, to access a patient’s record at any location via PDA, pager, mobile phone or the Internet.
Duo is an easy to use portable, compact and lightweight blood pressure and pulse oximetry monitor designed for lower-acuity areas of a hospital. Duo provides accurate blood pressure and pulse rate readings while being easy to use and convenient to transport from patient to patient. The Duo features a touch button user interface and requires no menus.
Spectrum and Passport 2 both provide anesthetic gas analysis through our own Gas Module SE and telemetry or hardwire communication to our PatientNet Central Station and Panorama Patient Monitoring Network. All of our monitors, with the exception of the Duo, provide a choice of Masimo SET® 1 or Nellcor® 2 OxiMax® 2 pulse oximetry.
Gas Module SE delivers state-of-the-art gas monitoring and analysis capabilities for our Spectrum and Passport 2 monitors. The Gas Module SE is a breath-by-breath gas analyzer, designed to meet the comprehensive anesthesia monitoring requirements of virtually every hospital and freestanding surgical center — whatever its size, specialty, or patient base. Gas Module SE interfaces with the controls and displays of the Passport 2 monitor for use in the growing out-patient surgery market and with the controls and displays of the Spectrum or Passport 2 monitors for use in main hospital operating rooms.
1
Masimo SET is a registered trademark of Masimo Corporation.
2
Nellcor and OxiMax are registered trademarks of Nellcor.
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Central Monitoring Systems
Panorama Patient Monitoring Network |
The Panorama Patient Monitoring Network, introduced in July 2004, is our new platform for central monitoring of vital signs information. The Panorama is an integrated family of patient monitoring products that enables hospitals to seamlessly share information on all patients via one network. Significant features of the Panorama include monitoring of up to 16 patients on a single central station using dual displays, or up to 12 patients on a single display, and the Panorama ViewStation for remote display of patient data from any central station. In addition, Panorama supports hardwired and wireless patient monitoring on the same central station and stores all monitored parameters including continuous 12-lead ECG data, 1,000 events, 3,000 trends, and up to 72 hours of full disclosure. The monitoring network continues to evolve with the planned addition of interactive remote viewing workstations, hospital information systems interface and increased system capacity.
Anesthesia Delivery Systems
Anestar Plus Anesthesia Delivery System |
The Anestar Plus has a unique integrated breathing system comprising the absorber, ventilator bellows, and a warmed aluminum manifold. This manifold, coupled with a ventilator, offers many high-tech features, such as automatic compliance compensation, pressure- controlled ventilation, and an easy-to-use touch screen interface.
Integration reduces the number of potential leak sites and contributes to the accuracy of ventilation by maintaining a virtually leak-free environment within the breathing system. The warmed aluminum block eliminates rainout, providing patients with improved airway climatization.
A variety of ventilation modes allow precise ventilation for a wide variety of patients, including patients with pulmonary complications.
The Anestar is compatible with our Passport 2 and Spectrum monitors, and Gas Module SE.
Anestar S Anesthesia Delivery System
The Anestar S brings the same advanced features and functionality that are incorporated into the Anestar to Outpatient Surgery Centers and Operating Rooms with space constraints with its a small footprint and thoughtful ergonomic design.
Significant Developments
In the last few years, we have expanded our line of patient monitoring products and achieved the following regulatory and marketing milestones:
•
AccuNet software solution was launched in August 2006
•
Panorama ViewStation distribution began in the first quarter of fiscal 2006
•
Duo Monitor distribution began in the third quarter of fiscal 2005
•
Acquired rights to manufacture Anestar Plus and Anestar S Anesthesia Delivery Systems in the second quarter of fiscal 2005
•
New arrhythmia analysis package introduced in January 2005
•
Panorama Patient Monitoring Network distribution began in the first quarter of fiscal 2005
•
Trio received Food and Drug Administration (FDA) 510(k) clearance in February 2004
•
OxiMax, Nellcor’s newest patented SpO 2 technology, was introduced in high-end Accutorr Plus models in the third quarter of fiscal 2004
•
Anestar S Anesthesia Delivery System distribution began in September 2003
•
Cardiac output, calculations and pulmonary artery wedge pressure addition to Spectrum received FDA 510(k) clearance in September 2003
•
Spectrum United States and international distribution began in the third quarter of fiscal 2003
•
Trio began international distribution in the third quarter of fiscal 2003
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| • | View 12 ECG Analysis Module for the Passport 2 began United States distribution in the first quarter of fiscal 2003 |
View 12 ECG Analysis Module received FDA 510(k) clearance to market in the first quarter of fiscal 2003
•
Anestar Anesthesia Delivery System began distribution in January 2002
Markets, Sales and Competition. Our patient monitors are used in hospital operating rooms, emergency rooms, critical care units, post-anesthesia care units and recovery rooms, intensive care units and labor and delivery rooms. The Passport 2 provides a portable and cost effective monitoring solution for a wide range of departments, from emergency rooms and post-anesthesia care units to operating rooms and intensive care units. The Spectrum builds on the Passport 2’s portability and ease of use with added features that make it a robust monitoring solution for higher acuity departments such as intensive care units, operating rooms and coronary care units. The Trio is targeted towards markets such as subacute care facilities, surgery centers, and GI/ Endoscopy and general patient areas.
The Panorama network strengthens our product offerings across departments with innovative and unique features such as storage of 12-lead ECG data and the ability to mix hardwired and WMTS wireless devices on the same central station. Lastly, with the addition of our Anestar Plus and Anestar S anesthesia delivery systems, we offer a complete operating room solution that brings advanced features and functionality to outpatient surgery centers and operating rooms with space constraints.
We also have a significant presence in the hospital automated blood pressure monitoring market. The Accutorr Plus monitor is used across hospital departments to monitor blood pressure, pulse oximetry and temperature for patients who do not require continuous ECG monitoring. It offers trending functions and an optional recorder module to enable tracking of patient data over time. The Duo monitor is our latest entry into the automated blood pressure monitoring market. The Duo is targeted at the low end of the market, and is designed for customers who require spot-checking of blood pressure and pulse oximetry, but do not require trending capabilities.
A number of companies, some of which are substantially larger than us, manufacture and market products that compete with our patient monitoring and anesthesia delivery system products. Our major competitors in patient monitoring are Philips Medical, GE Healthcare, Spacelabs Medical, Nihon Kohden and Welch Allyn Medical Products. Our major anesthesia delivery system competitors are GE Healthcare through its Datex-Ohmeda unit and Draeger Medical.
Cardiac Assist. We are a leader and pioneer in intra-aortic balloon (IAB) counterpulsation therapy and products including IAB pumps and catheters. Counterpulsation therapy is used to support and stabilize heart function. This therapy increases the heart’s output and the supply of oxygen-rich blood to the heart’s coronary arteries while reducing the heart muscle’s workload and its oxygen demand.
Our line of cardiac assist products includes intra-aortic balloon pumps, intra-aortic balloon catheters as well as endoscopic vessel harvesting devices for vein and artery harvest.
The intra-aortic balloon system is used for the treatment of high-risk cardiac conditions resulting from ischemic heart disease and heart failure. Patients experiencing acute coronary syndromes such as acute myocardial infarction, cardiogenic shock and unstable angina may require IAB therapy to support and stabilize their cardiac status. IAB therapy is also used for high-risk patients who require revascularization procedures such as percutaneous coronary interventions or coronary artery bypass procedures including both on-pump and off- pump techniques. These products and therapy may be used before or during coronary artery bypass grafting or percutaneous coronary interventions for hemodynamic support.
We produce a line of disposable intra-aortic balloon catheters that serve as the pumping device within the patient’s aorta. We introduced the first balloon catheter capable of percutaneous insertion. This innovation eliminated the need for surgical insertion. As a result, the market for cardiac assist products expanded from open-heart surgery to interventional cardiology.
In January 2006, we acquired the ClearGlide® endoscopic vessel harvesting (EVH) product line from the CardioVations division of Ethicon, a Johnson & Johnson company. EVH devices enable less-invasive techniques for the harvesting of suitable vessels for use in conjunction with coronary artery bypass grafting.
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Our line of cardiac assist products and their significant features are as follows:
Intra-Aortic Balloon Pumps (IABPs)
We manufacture and market the CS100® and System 98XT Intra-Aortic Balloon Pumps. The CS100 automatic IABP, launched in August 2003, includes IntelliSync™ automated arrhythmia tracking and timing algorithms which represent a generational leap in IABP technology. Other features of the CS100 include automated trigger selection for easier and continuous patient support, automatic “Beat to Beat” timing adjustments based on the patient’s physiologic landmarks and faster pneumatics to support the most challenging arrhythmic patients.
The System 98XT IABP incorporates the CardioSync® 2 software with improved algorithms to provide enhanced counterpulsation therapy. Other features of the System 98XT include faster pneumatics and reduced required user intervention.
Significant Developments
In the last few years, we have expanded our product line of intra-aortic balloon pumps and achieved the following regulatory and marketing milestones:
•
CS100 approval to distribute in Japan received in August 2004
| • | CS100 United States and European market introduction in August 2003 |
| • | System 98XT United States and European market introduction in December 2000 |
Intra-Aortic Balloon Catheters (IABs)
We manufacture a broad line of disposable IAB catheters for use with intra-aortic balloon pumps in support of counterpulsation therapy.
Linear™ 7.5 Fr.
In January 2005, we launched our Linear 7.5 French (Fr.) IAB catheter. Linear 7.5 Fr., with our new Durathane balloon material and improved 7.5 Fr. introducer sheath, offers easier insertion, improved abrasion and fatigue properties and, we believe, provides an improved solution for smaller adults, women, diabetics and patients with peripheral vascular disease. Linear 7.5 Fr. is available in 25cc, 34cc and 40cc balloon volumes.
Fidelity®
In February 2002, we launched our Fidelity IAB catheter. We believe that Fidelity provides superior performance to all other 8 Fr. catheters in the market. Fidelity also offers the largest central lumen (0.030”) for consistent, clear arterial waveforms which results in better delivery of counterpulsation therapy for the patient and easier patient management for the healthcare provider. A new polymer design enables Fidelity to insert easily and navigate tortuous anatomies. Once inserted, physicians have the longest insertable length available on the market to ensure optimal balloon placement. Fidelity is available in 25cc, 34cc and 40cc balloon volumes.
In addition, we manufacture a complete line of intra-aortic balloon catheters to accommodate counterpulsation therapy in both the adult and pediatric population. We manufacture catheters for pediatric patients in the 2.5cc, 5cc, 7cc, 12cc and 20cc volumes. Our 9.5 Fr. intra- aortic balloon catheters are available in 25cc, 34cc and 40cc volumes. A 50cc volume is also available for patients who are taller than 6 feet.
In June 2004, we introduced the first and only needle-free securement device for IAB catheters, the StatLock® 3 , which secures the IAB catheter to the patient without the danger of accidental needlesticks or suture wound complications. We estimate that more than 25% of our U.S. customers are utilizing this device.
3
StatLock is a registered trademark of Venetec International, Inc.
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Clinical Support. We provide the following clinical and educational services to our customers:
•
Telemedicine via our PC-IABP products which offers remote pump monitoring, allowing the healthcare provider continuous access and instantaneous troubleshooting from highly trained technicians
| • | 24 hour, 7 day clinical support |
| • | On-site training and education for all personnel involved with patient care; over 30,000 clinicians are trained by our clinical staff annually |
| • | Comprehensive educational materials for hospital staff, patient and family |
| • | Consultative services to help hospitals maximize the goals of counterpulsation therapy within the hospital network |
| • | The Benchmark® Registry — a comprehensive registry database to assist hospitals worldwide in tracking and comparing outcomes of counterpulsation therapy administered to their patients. This enables our customers to demonstrate and measure the clinical benefits of
the therapy. We believe that we are the only supplier offering a comprehensive, centralized repository of global IABP information |
Endoscopic Vessel Harvesting (EVH)
Endoscopic vessel harvesting devices enable less-invasive techniques for the harvesting of suitable vessels for use in conjunction with coronary artery bypass grafting which have been steadily replacing traditional open vessel harvesting techniques since the early 1990s. EVH allows surgeons to avoid problems associated with the traditional “open” vessel harvesting techniques which include significant pain and discomfort for the patient during the recovery period and post incision scars that run the full length of the patient’s leg or forearm. The large incisions resulting from the “open” technique are associated with high rates of wound complications including dehiscence, hematoma and infection, all of which are avoided through the use of EVH.
Our EVH product line consists of the ClearGlide procedural kits for saphenous vein and radial artery harvesting. The major components of these procedural kits are:
The ClearGlide Optical Vessel Dissector is a dissecting device with an optically clear blunt dissecting tip which allows videoscopic visualization and creates a cavity for instrument passage during insertion, tunneling, and dissection. The device consists of a handle, a shaft and a transparent angled blunt tip that creates an operative working space around the vein and its side branches and allows for smooth, atraumatic dissection on anterior and lateral surfaces.
The ClearGlide Ultra Retractor elevates the skin to maintain an operative working space for insertion and passage of dissecting and ligating instruments. It consists of a handle, covered cannula and a transparent blunt tip spoon that dissects tissue and creates a working space within which instruments are positioned, passed and used to manipulate tissue; and permits the user to visualize the tissue beyond the tip during insertion, tunneling, dissection, and retraction.
The ClearGlide Precision Bipolar Device is used in conjunction with the ClearGlide Ultra Retractor to provide controlled coagulation and cutting in one step, minimizing instrument exchanges to accelerate EVH procedure time.
The ClearGlide Artery Kit includes the Ethicon Harmonic Scalpel® shear that allows for fast, safe cutting and coagulation of the side branches of the radial artery. Use during radial artery harvesting procedures results in low vessel trauma and spasm as well as reduced blood loss versus other cutting and coagulation methods. Additional kit components include a vessel dissector which is used to ensure that the target vessel is free of all connective tissue and side branch vessels prior to ligation and extraction and endoscopic scissors used to divide and cut tissue. Finally, two tie Endoloop® ligature enables the surgeon to ligate the target vessel without making additional incisions, thus establishing the ClearGlide kit as the only true single incision procedure kit in the EVH market.
Markets, Sales and Competition. Our counterpulsation products are sold primarily to major hospitals with open-heart surgery and balloon angioplasty facilities and community hospitals with cardiac catheterization laboratories. These products have been sold, to a growing degree, to the broader range of
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community hospitals, where counterpulsation therapy is used for temporary support to the patient’s heart prior to transport to a major hospital center where definitive procedures, such as balloon angioplasty or open-heart surgery, can be conducted. Our main competitor for counterpulsation products is Arrow International, Inc. Our EVH products are sold to hospitals performing coronary artery bypass grafting procedures. This user base is consistent with our counterpulsation user base and our existing direct sales force handles both product lines. Clinical support and training for our EVH products is provided by our team of Procedural Specialists who support our sales activities. Our main competitor for EVH products is Boston Scientific.
Interventional Products. Our primary products are used to seal arterial puncture wounds after angiography and other interventional procedures that rely upon access to the body through the femoral artery. We participate in three distinct vascular closure applications primarily used in cardiology: collagen-based products, suture-based products and manual compression assist products.
Our line of interventional products is discussed below:
Vascular Closure Products
We design and currently manufacture the following vascular closure products: collagen-based products and manual compression assist products.
Collagen-Based Products
Our VasoSeal® and Elite™ brand vascular closure products assure fast and reliable arterial hemostasis after common percutaneous cardiology and radiology procedures, such as balloon angioplasty, arterial stenting and diagnostic angiography.
We manufacture and market vascular closure devices under five brand names: VasoSeal® VHD, VasoSeal ES®, VasoSeal Low Profile, Elite and On-Site™. These products seal femoral arterial punctures quickly and efficiently. Unlike many other vascular closure products these closure devices work extravascularly, outside of the artery. This method of arterial closure provides doctors with an effective alternative to the many competitive closure products that work by placing, and leaving behind within the artery, permanent foreign objects such as sutures or anchors. Interventional Products’ vascular closure devices provide clinical advantages such as reduced time to hemostasis, quicker patient ambulation and faster discharge following certain percutaneous procedures. In addition, these devices can provide cost savings to the hospital and increased patient satisfaction versus the technique of manual compression routinely used to achieve arterial hemostasis.
VasoSeal VHD
We manufacture and market the VasoSeal VHD extravascular closure device, the first device of its kind to be approved in the United States. Prior to the introduction of VasoSeal VHD in 1995, the only way to seal femoral arterial puncture wounds was to apply significant pressure by hand over the arterial puncture site and to wait for the blood in the tract to clot naturally. This process is called “manual compression.” Manual compression can take 20 minutes or more to accomplish even in the best of circumstances. But oftentimes, especially if a patient has been administered anti-clotting drugs prior to their percutaneous procedure, the patient has to wait many minutes, or even hours, for the effect of the anti-clotting drugs to diminish before manual compression can be successfully administered on their puncture site.
The VasoSeal VHD comes with a measuring device that tells the doctor the depth of a patient’s artery from the skin surface. The doctor then uses the VasoSeal VHD to deploy a soft collagen plug directly over the puncture site outside of the artery. VasoSeal VHD produces hemostasis in two ways. First, the collagen plug provides a mechanical barrier that stops blood from flowing up the puncture tract. Second, the collagen in the device’s plug interacts with the patient’s own blood to attract platelets and stimulate the formation of fibrin, thus simulating the body’s own, natural clotting process. By design, and unlike other vascular closure devices on the market, VasoSeal VHD does not leave a foreign object inside of a patient’s artery after deployment. In addition, and unlike manual compression, VasoSeal VHD permits the immediate removal of
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the procedural sheath used in many cardiology and radiology procedures, even when anti-clotting drugs have been administered to a patient.
VasoSeal ES
The VasoSeal ES device, introduced in Europe in 1998 and in the United States in 1999, retains the proprietary, extravascular technology of our original VasoSeal VHD product. Additionally, VasoSeal ES features a “one-size-fits-all” (5 to 8 Fr.) design that eliminates the physician’s need to measure skin-to-artery distance and the hospital’s need to stock multiple sizes of the device. These features are made possible by VasoSeal ES’s unique locator technology that is capable of easily and precisely locating the arterial puncture site below the skin’s surface.
VasoSeal ES is the first vascular closure device to have been found safe and effective in patients with peripheral vascular disease (PVD). As many as 30% of all patients undergoing percutaneous cardiology and radiology procedures have PVD.
VasoSeal Low Profile
VasoSeal Low Profile is a smaller version of VasoSeal VHD and is available in five kit sizes. This device meets the needs of hospitals that have been increasing their use of smaller diameter access sheaths in their percutaneous procedures to minimize vascular trauma. VasoSeal Low Profile is approved for sealing 5 Fr. or smaller puncture sites.
Elite
Elite, the newest VasoSeal product, utilizes a unique, proprietary sponge collagen technology to produce hemostasis. Elite’s new sponge collagen is deployed into a patient’s tissue tract, just above the femoral artery, in a compressed form. Upon exposure to blood, the compressed sponge collagen plug expands in seconds to produce an effective mechanical blockade above the femoral artery.
Elite uses the same one-size-fits-all location system as VasoSeal ES. However, the body design of Elite is substantially different than that of VasoSeal ES. The Elite body design was developed after years of studying the ergonomics of the earlier generation VasoSeal devices and the different ways physicians deploy these devices. From this research, we developed the unique and effective body design for Elite. The new Elite body was designed specifically to minimize variations in physician deployment methods, variations that could compromise the precise placement of VasoSeal’s collagen plug. The new body design of the Elite maximizes the device’s potential for producing rapid, secure and consistent mechanical hemostasis.
Elite provides physicians with the same rapid and reliable mechanical closure capabilities of the competitive closure devices that leave foreign objects behind in patient arteries. Yet, like the rest of the VasoSeal line, Elite achieves its goals while protecting and preserving the common femoral artery from unnecessary intrusions and left-behind artifacts.
Elite is designed to serve as the only vascular closure device a hospital should need to stock. It can be utilized for both diagnostic and interventional procedures and with a broad variety of 5 to 8 Fr. sheaths. Like VasoSeal ES, Elite has been proven safe and effective in diverse patient populations, including those with PVD.
On-Site
On-Site, our newest collagen-based femoral closure device, was released in the United States and European markets during the third quarter of fiscal 2006. On-Site is a precision closure device designed to allow a single operator to deliver a collagen plug in a unique, simple and precise manner to ensure placement precisely on top of the arteriotomy. In the past, certain anatomic challenges such as scarring from previous arterial punctures, or even movement by the patient during deployment of a closure device, could affect the placement and security of the closure mechanism. The On-Site device eliminates this risk by means of a unique over-the-wire (“Locator Wire”) locking mechanism. This mechanism allows the device to be quickly deployed by a single operator with consistent results. The On-Site Locator Wire technology acts as a platform for precise delivery of the collagen plug by means of a disc, attached to a wire, that is temporarily inserted
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into the artery. The disc provides temporary mechanical blockage to the arteriotomy, which prevents blood loss, while the collagen delivery device locks onto the wire to ensure precise placement of the collagen plug on top of the arteriotomy. After the collagen plug is deployed, the On-Site locator disc is collapsed and the wire/disc assembly is removed leaving only the extravascular collagen plug in place.
On-Site is indicated for closing arterial punctures in both diagnostic and interventional procedures involving sheath sizes up to 6 Fr. It can be used with patients who have PVD and, like all of our vascular closure devices, it leaves no foreign body behind in the artery.
Significant Developments — Vascular Closure Products
In the last few years, we have expanded our line of vascular closure products and achieved the following regulatory and marketing milestones:
United States, FDA Approvals, Major Products:
•
On-Site launched in the U.S. and European markets in the third quarter of fiscal 2006
| • | On-Site Pre-Market Approval (PMA) Supplement approved in May 2005 |
| • | Elite PMA Supplement approved in August 2002 |
| • | VasoSeal Low Profile PMA Supplement approved in June 2002 |
| • | VasoSeal VHD granted PMA in September 1995 |
United States, FDA Additional VasoSeal Approvals:
•
Modified Hold Technique deployment method in March 2002
| • | Reduced time to discharge claim in diagnostic angiography patients in September 2001 |
CE Mark Approvals (Europe):
•
On-Site approved in December 2005
| • | Elite approved in 2002 |
| • | VasoSeal Low Profile approved in 2002 |
Japan:
•
VasoSeal VHD cleared for reimbursement for certain interventional procedures by the Ministry of Health in January 2000
Canada:
•
VasoSeal VHD Medical Device License granted for prior approvals in 2000
Markets, Sales and Competition. Our VasoSeal and On-Site products are sold to interventional cardiology as well as radiology labs, both in hospitals and independent diagnostic facilities. The current global market for collagen-based vascular closure devices is approximately $350 million annually. A number of companies, some of which are substantially larger than us, manufacture and market products that compete with the VasoSeal VHD, VasoSeal Low Profile, VasoSeal ES, Elite and On-Site devices. Our competitors in this market are St. Jude Medical (Angio-Seal™) and Vascular Solutions, Inc. (Duett).
Manual Compression Assist Product
Safeguard™
Safeguard is a manual compression assist product used to ensure maintenance of hemostasis. It is typically used on the femoral arterial site but may also be used in brachial, radial and subclavian vessels on cardiac, dialysis and/or critical care patients. Safeguard affixes to the site with an adhesive backing and offers hands-free consistent compression through inflation of a bulb with a syringe. Safeguard 24cm was introduced in the second quarter of fiscal 2004. A second product, Safeguard 12cm was launched in March 2005.
Advantages of Safeguard
| • | Maintains pressure during patient recovery and maximizes valuable staff resources |
| • | Innovative design makes Safeguard easy to apply and simple to use |
| • | Provides direct visualization of the site and allows for immediate pressure adjustments |
| • | Enhanced patient comfort: Safeguard is flexible and conformable; it does not restrict patient mobility and no ancillary equipment or straps are required |
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Significant Developments — Safeguard
Safeguard has achieved the following milestones:
•
A multi-centered clinical study to document and quantify the clinical advantages of the Safeguard device for use on femoral puncture sites was initiated in the fourth quarter of fiscal 2006. Study results are expected to be available in the first quarter of fiscal 2007.
| • | Safeguard 12cm received the CE Mark in June 2005. |
| • | Determined to be a Class I, exempt product within the FDA regulations. |
| • | Safeguard 24cm received the CE Mark in October 2003. |
Markets, Sales and Competition. We estimate the market for non-invasive compression assist devices to be approximately $60-80 million annually. Safeguard competes with other non-invasive devices such as FemoStop (Radi) and topical hemostatic patches. A number of companies, some of which are larger than us, manufacture and market competitive products. Among them are Abbott Laboratories, Medtronic, Vascular Solutions and Marine Polymer Technologies.
Suture-Based Product
In May 2004, we acquired certain assets and technology from X-Site Medical, LLC (X-Site), a privately held company. The acquired assets include all technology related to X-Site’s lead product, a suture-based vascular closure device for achieving hemostasis after coronary catheterization procedures.
In a controlled clinical study of approximately 393 patients (approximately 260 of whom received X-Site), the X-Site® device was shown to be easy to use and demonstrated an excellent safety profile. The device has received FDA approval and will increase our presence in the vascular closure market. The addition of the X-Site product represents a logical expansion in the area of hemostasis management, and reflects our strategy of providing new and innovative products to each market segment of the vascular closure category.
The X-Site product was launched on a limited basis in the second quarter of fiscal 2006. Based on market feedback from the limited launch of the X-Site vascular closure device, which revealed a strong market preference for a pre-tied knot as an integral part of the device, we deferred the full market launch of our X-Site vascular closure device. We expect to receive the CE mark (product approval that permits the marketing of medical devices in the European Union) for the retooled X-Site suture-based closure device in time to launch in the European market in the third quarter of fiscal 2007. We estimate that the timing of FDA regulatory approval, which lags CE mark approval, could allow for the U.S. launch of the new X-Site in the fourth quarter of fiscal 2007.
Markets, Sales and Competition. The X-Site product will compete in the vascular closure market as described earlier, in which suture-mediated devices represent over $100 million in sales. To date, Abbott Laboratories, which markets the Perclose product, is the dominant competitor in this segment. The X-Site product will be marketed by the Interventional Products direct sales force, which currently sells other vascular closure devices.
Interventional Radiology
Our Interventional Products division sells two products into the dialysis access segment of the interventional radiology market. The first product is ProLumen™, a mechanical thrombectomy device designed to break up clots in arteriovenous grafts in patients who are on chronic hemodialysis. ProLumen received FDA 510(k) clearance in February 2004 and was launched in March 2004. Our second product for the dialysis access market is ProGuide™, an over-the-wire chronic dialysis catheter. Chronic dialysis catheters connect a patient experiencing end stage renal disease to a dialysis machine. Chronic dialysis catheters allow for needle-free access for the dialysis procedure. ProGuide received FDA 510(k) clearance in September 2004 and was launched in the U.S. in May 2005. Because ProGuide is an over- the-wire catheter that does not require the use of a delivery sheath to facilitate placement, it has the potential to reduce the risk of air embolism while providing ease of placement both of which are very important to the physician. ProGuide also delivers high flow rates with low recirculation, thereby offering a superior level of patient care.
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Markets, Sales and Competition. ProLumen and ProGuide are primarily marketed to interventional radiologists and vascular surgeons. The market for mechanical thrombectomy devices is approximately $15-20 million annually. A number of companies manufacture and market products that compete with ProLumen. Our main competitors are Arrow International and Possis Medical, Inc. The market for chronic dialysis catheters is approximately $130 million annually. Companies who manufacture products that compete with ProGuide are: Medcomp, C.R. Bard, Angiodynamics, Boston Scientific, Kendall (Tyco), Arrow International and Spire.
Clinical Education and Support — Interventional Products. We offer health care providers the following services in connection with our interventional products:
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On-site training and education of all personnel involved with product deployment and post-deployment patient care to assure successful device outcome
| • | 24 hour, 7 days a week clinical support |
| • | Comprehensive educational materials and programs for staff |
| • | Patient information guides to educate the patient on appropriate post-care regimens |
| • | Consultative services to help facilities identify and maximize the goals and objectives of vascular sealing |
InterVascular (Vascular Grafts and Patches). Our InterVascular, Inc. subsidiary designs, manufactures and distributes a proprietary line of knitted and woven polyester vascular grafts and patches for reconstructive vascular and cardiovascular surgery. Vascular grafts are used to replace or bypass diseased arteries. InterVascular is actively broadening its line of vascular surgery products.
Our vascular graft products and their significant features are as follows:
Our vascular grafts, marketed under the InterGard® brand, include knitted collagen coated grafts for use in most vascular applications for reconstruction of abdominal aorta and peripheral arteries; and woven products designed primarily for use in thoracic aortic repair and open-heart surgery.
InterGard® Silver is the world’s first antimicrobial vascular graft specifically designed to prevent post-operative graft-related infection by using the broad spectrum, anti-microbial properties of silver, which is released from the surface of the graft into surrounding tissues following implantation. Vascular graft infection, which occurs in 2% to 5% of cases, typically lengthens the hospital stay of a patient by up to 50 days, which results in an increase in treatment cost of approximately $85,000.
InterGard UltraThin is an innovative vascular graft designed to improve outcomes of peripheral bypass procedures. With a wall thickness of 0.35mm, InterGard UltraThin is the thinnest knitted polyester collagen coated graft on the market.
InterGard Heparin is a heparin bonded, collagen coated graft for replacement and bypass of peripheral arteries. Occlusion of a peripheral graft following surgery is the most frequent cause of graft failure. InterGard Heparin is designed to address the issue of occlusion and improve long term patency of the graft by allowing the properties of heparin to be available locally on the graft surface for several weeks following implantation. Three year results of a multicentric prospective randomized study have shown that use of InterGard Heparin has 25% better patency and 65% fewer amputations compared to ePTFE, a synthetic material frequently used for peripheral artery bypass or repair.
Our line of vascular patches, the InterVascular HemaPatch and HemaCarotid Patch products, offer the vascular surgeon a complete range of knitted, collagen coated patches in a wide range of sizes for repair of carotid and peripheral arteries. HemaPatches are available in the Silver configuration and HemaCarotid patches are also manufactured in the UltraThin configuration, with and without Heparin.
Significant Developments
In the last few years, we have expanded our line of vascular graft products and achieved the following regulatory and marketing milestones:
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InterGard Thoracic Aortic Root Graft was introduced in Europe in May 2006.
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•
Effective February 2006, InterVascular is the exclusive distributor of Vascular Innovations Stent Grafts (AUF and Extender Cuff), in all worldwide markets exclusive of Japan and the United States. The Vascular Innovations Stent Grafts are unique innovative products that address major abdominal aortic aneurysm issues (migration, endoleak type 1, complex anatomy and rupture).
| • | HemaPatch Silver was introduced in Europe in March 2004. |
| • | HemaCarotid Patch Heparin was introduced in Europe in March 2004. |
| • | InterGard Heparin UltraThin graft was introduced in the United States in fiscal 2003. |
| • | Aortic Arch and HemaBridge (specialty grafts for thoracic aorta repair and replacement) received FDA clearance in March 2002. |
| • | InterGard Heparin received FDA clearance in January 2001. |
Markets, Sales and Competition. Effective May 1, 2005, W.L. Gore & Associates Inc. (Gore) became the exclusive distributor of InterVascular’s full line of polyester grafts and patches in the United States. The decision to enter into a relationship with Gore was based on Gore’s strong presence in the U.S. vascular graft market. InterVascular’s products are sold by Gore’s U.S. Vascular Surgery Sales Team and co-branded under the InterVascular and Gore names.
In Europe the InterVascular product line continues to be marketed by direct sales representatives and exclusive distributors. In other international markets the InterVascular product line continues to be sold by its distributor network.
Our vascular graft products are sold to vascular and cardiothoracic surgeons. A number of companies, some of which are substantially larger than us, manufacture and market products that compete with our vascular graft products. Our major competitors are Boston Scientific, Vascutek, a Terumo company, W.L. Gore, and Impra, a subsidiary of C.R. Bard, Inc.
Life Science Research Products. In 1998, we entered the life science research market by forming a new subsidiary, Genisphere Inc. Genisphere has developed reagents based on a new, proprietary class of DNA molecules known as 3DNA®, or Three Dimensional Nucleic Acid. A reagent is a biologically or chemically active substance. Genisphere’s reagents are used to detect and measure other biological substances. Our 3DNA-based reagents have been shown to provide greater sensitivity in nucleic acid and protein detection assays than it is possible to achieve using conventional detection methods.
Based on our current market entry strategy, our life science research products will be designed primarily for use in newly developed kinds of detection assays. In these new markets, adoption of new technologies, such as 3DNA technology, occurs much faster and potential customers are more highly concentrated and easier to reach, when compared to the mature blot market, which was our initial target market. Our first products for these new markets were detection kits designed to improve the reliability and sensitivity of microarray experiments. We have also recently begun selling proprietary products that increase the size of nucleic acid samples, and other proprietary products that increase the sensitivity of a wide range of protein assays.
A number of companies, some of which are substantially larger than us, manufacture and market products that compete with our life science research products. Our major competitors include Agilent Technologies, GE Healthcare and Applied Biosystems.
Research and Development
We invested approximately $37.3 million or 10.0% of sales in 2006, $36.2 million or 10.3% of sales in 2005 and $32.5 million or 9.5% of sales in 2004 on research and development of new products and improvement of our existing products. We have established relationships with several teaching hospitals for the purpose of clinically evaluating our new products. We also have consulting arrangements with physicians and scientists in the areas of research, product development and clinical evaluation.
Marketing
Our products are sold primarily through direct sales representatives in the U.S. and a combination of direct sales representatives and independent distributors in international markets. Our largest geographic
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markets are the United States, Europe and Japan. Our worldwide direct sales organization employs approximately 365 people and consists of sales representatives, sales managers, clinical education specialists and sales support personnel. We have a worldwide clinical education staff, most of whom are critical care and catheterization lab nurses. They conduct seminars and provide in-service training to nurses and physicians. Our sales are broadly distributed and no customer accounted for more than 10% of our total sales in fiscal years 2006, 2005 or 2004. Our primary customers include physicians, hospitals and other medical institutions.
We provide service and equipment maintenance to purchasers of our products under warranty. After the warranty expires, we provide service and maintenance on a contract basis. We employ service representatives in the United States and Europe and maintain service facilities in the United States, the Netherlands, France, Germany, Belgium and the United Kingdom. We conduct regional service seminars throughout the United States for our customers and their biomedical engineers and service technicians.
International sales as a percentage of our total sales were 38% in 2006, 38% in 2005 and 35% in 2004. We have subsidiaries in the United Kingdom, France, Germany, Italy, Belgium and the Netherlands. Because a portion of our international sales are made in foreign currencies, we bear the risk of adverse changes in exchange rates for such sales. Please see Notes 1, 2 and 10 to the Consolidated Financial Statements for additional information with respect to our international operations and foreign currency exposures.
Competition
We believe that customers, primarily hospitals and other medical institutions, choose among competing products on the basis of product performance, features, price and service. In general, we believe price has become an important factor in hospital purchasing decisions because of pressure to cut costs. These pressures on hospitals result from Federal and state regulations that limit reimbursement for services provided to Medicare and Medicaid patients. There are also cost containment pressures on healthcare systems outside the United States, particularly in certain European countries. Many companies, some of which are substantially larger than us, are engaged in manufacturing competing products.
Seasonality
Typically, our net sales are lower in the first and second quarters and higher in the third and fourth quarters. Lower net sales in the first quarter result from patient tendencies to defer, if possible, hospital procedures during the summer months and from the seasonality of the United States and European markets, where summer vacation schedules normally result in fewer hospital procedures. Lower net sales in the second quarter result from holidays in the United States and other markets and patient tendencies to defer, if possible, hospital procedures during these holiday seasons. Independent distributors may randomly place large orders that can distort the net sales pattern just described. In addition, new product introductions, regulatory approvals and product recalls can impact the typical sales patterns.
Suppliers
Our products are made of components which we manufacture or which are usually available from existing and alternate sources of supply. Some of our products are manufactured through agreements with unaffiliated companies. We purchase certain components from single or preferred sources of supply. Our use of single or preferred sources of supply increases our exposure to price increases and production delays. In addition, certain of our suppliers have been contemplating, and in a few cases have begun, reducing or eliminating sales of their products to medical device manufacturers like us due to product liability concerns. We are not able to predict whether or not additional suppliers will withhold their products from medical device manufacturers, including us.
Intellectual Property
Intellectual property rights are important to our business. We also rely upon trade secrets, manufacturing know-how, continuing technology innovations and licensing opportunities to maintain and improve our competitive position. Our policy is to file patent applications in the United States and foreign countries where
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rights are available and where we believe it is commercially advantageous to do so. We hold a number of United States and foreign patents. In addition, we also have filed a number of patent applications that are currently pending.
Employees |
At the end of fiscal 2006, we had approximately 1,300 employees worldwide. None of our employees are represented by a labor union. We believe our relationship with our employees is good.
Orders Backlog
At June 30, 2006, we had a total backlog of unshipped customer orders of $22.0 million, primarily for patient monitoring products. Substantially all of the backlog will be delivered in fiscal 2007. The total backlog at June 30, 2005 was $26.8 million. The decrease in the backlog at June 30, 2006 compared to the same period last year was due to the Panorama shipment delay in the fourth quarter of fiscal 2005.
Regulation
Our medical devices are subject to regulation by the FDA. In some cases, they are also subject to regulation by state and foreign governments. The Medical Device Amendment of 1976 and the Safe Medical Devices Act of 1990 (the “Act”) , which are amendments to the Federal Food, Drug and Cosmetics Act of 1938, require manufacturers of medical devices to comply with certain controls that regulate the composition, labeling, testing, manufacturing and distribution of medical devices. FDA regulations known as “Current Good Manufacturing Practices for Medical Devices” provide standards for the design, manufacture, packaging, labeling, storage, installation and servicing of medical devices. Our manufacturing and assembling facilities are subject to routine FDA inspections. The FDA can also conduct investigations and evaluations of our products at its own initiative or in response to customer complaints or reports of malfunctions. The FDA also has the authority to require manufacturers to recall or correct marketed products which it believes do not comply with the requirements of these laws.
Under the Act, all medical devices are classified as Class I, Class II or Class III devices. In addition to the above requirements, Class II devices must comply with pre-market notification, or 510(k), regulations and, in some cases, with performance standards or special controls established by the FDA. Subject to certain exceptions, a Class III device must receive pre-market approval from the FDA before it can be commercially distributed in the United States. Our principal products are designated as Class II and Class III devices.
We also receive inquiries from the FDA and other agencies. Sometimes, we may disagree with positions of members of the staffs of those agencies. To date, the resolutions of such disagreements with the staffs of the FDA and other agencies have not resulted in material cost to us.
Our international business is subject to medical device laws in countries outside the United States. Most major markets for medical devices outside the United States require clearance, approval or compliance with certain standards before a product can be commercially marketed. The applicable laws range from extensive device approval requirements in some countries for all or some of our products, to requests for data or certifications in other countries. Generally, international regulatory requirements are increasing. In the European Union, the regulatory systems have been consolidated, and approval to market in all European Union countries (represented by the CE Mark) can be obtained through one agency. In some cases, we rely on our non-U.S. distributors to obtain registration and approval for our products in a particular foreign jurisdiction.
The United States Medicare-Medicaid Anti-kickback law, as well as many state laws, prohibit payments of any kind that are intended to induce a referral for any item payable under Medicare, Medicaid or any other governmental healthcare programs. Many foreign countries also have similar laws. We subscribe to the AdvaMed Code (AdvaMed is a U.S. medical device industry trade association) which limits certain marketing and other practices in our relationship with product purchasers. We also adhere to a similar code in Europe.
We are also subject to certain Federal, state and local environmental regulations. The cost of complying with these regulations has not been, and we do not expect them to be, material to our operations.
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We are also affected by laws and regulations concerning the reimbursement of our customers’ costs incurred in purchasing our medical devices and products. Healthcare providers that purchase our medical devices and products generally rely on third-party payors, including the Centers for Medicare and Medicaid Services (CMS) which administers Medicaid and Medicare, and other types of insurance programs, to reimburse all or part of the cost of such devices. The laws and regulations in this area are constantly changing, and we are unable to predict whether, and the extent to which, we may be affected in the future by legislative or regulatory developments relating to the reimbursement of our medical devices and products.
Item 1A.
Risk Factors.
In addition to the other information presented in this Form 10-K, the following risk factors should be considered in evaluating our business. The following discussion of risk factors contains “forward-looking statements,” as discussed in Item 1. Our business and financial condition could be materially adversely affected by any of these risks, and our future operating results may differ materially from the results described in this report due to the risks and uncertainties related to our business and our industry, including those discussed below. The risks described below are not the only risks we face. Please note that additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business, financial condition or results of operations.
Our markets are highly competitive and we face rapid technological changes in the medical device industry, which may impact the growth of our business.
Our future growth is dependent upon our ability to market our products effectively in a strong competitive environment and respond to rapidly changing technology and alternative products/treatments. The medical device market is intensely competitive and we encounter significant competition from various medical device companies in each market in which our products are sold. Our competitors range from small start-up companies to companies which are larger than we are and have significantly greater resources and broader product offerings. We expect competition will continue to intensify as the medical device industry consolidates and new competitors, products and treatments are brought into the market. In addition, we face competition from alternative therapies primarily in our Cardiac Assist, Interventional Products and InterVascular businesses.
Our customers consider many factors when choosing suppliers, including product reliability, clinical outcomes, product availability, price and services provided by the manufacturer. Market share can shift as a result of technological innovation and other business factors. We may experience decreasing prices for the products and services we offer due to pricing pressure experienced by our customers from managed care organizations and other third-party payors, increased market power of our competitors as the medical device industry consolidates and increased competition among medical device companies. If the prices for our products and services decrease and we are unable to reduce our expenses, our results of operations will be adversely affected.
Our future growth is dependent upon the development of new products, which requires significant research and development (“R&D”), clinical trials and regulatory approval, and therefore may not result in commercially viable products.
Our future growth is dependent upon the development of new products, which requires that significant resources be devoted to research and development activities, clinical trials and obtaining regulatory approval. In order to develop new products and improve current product offerings, we focus our research and development programs largely on the development of next-generation and new technology offerings. We have continued to increase our investments in R&D over the past few years and anticipate that we will continue to increase R&D spending in the future. If we are unable to develop and launch new products as anticipated, or if our R&D efforts do not achieve technical feasibility, our ability to maintain or expand our market position may be adversely impacted.
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Failure to successfully select, negotiate and integrate acquired technologies, products or businesses could adversely affect our business.
As part of our strategy to develop and identify new products and technologies, we have made acquisitions and investments in recent years, including our acquisition of the ClearGlide endoscopic vessel harvesting product in January 2006 and the X-Site suture-based vascular closure device in May 2004.
The success of any acquisition or investment that we may undertake will depend on a number of factors, including:
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our ability to identify suitable opportunities for acquisition or investment
| • | our ability to finance any future acquisition or investment on terms acceptable to us |
| • | litigation related to acquired technologies |
| • | our ability to integrate the acquired business or technology successfully with our existing business |
| • | the presence or absence of adequate internal controls and/or significant fraud in the financial systems of acquired companies |
| • | adverse developments arising out of investigations by governmental entities of the business practices of acquired companies |
| • | any decrease in customer loyalty and product orders caused by dissatisfaction with our combined product lines and sales and marketing practices, including price increases |
If we are unsuccessful in our acquisitions or investments, we may be unable to continue to grow our business significantly or may need to record asset impairment charges in the future.
We are subject to widespread government regulation which may delay the approval of our products or result in the recall of previously approved products.
We are subject to compliance with numerous Federal, state and international government regulations regarding design, manufacturing, labeling, packaging, storage, distribution, installation and service of medical devices. Our products, development activities and manufacturing processes are subject to extensive and rigorous regulation by the FDA pursuant to the Federal Food, Drug, and Cosmetic Act (the “FDC Act”), by comparable agencies in foreign countries, and by other regulatory agencies and governing bodies. Under the FDC Act, medical devices must receive FDA clearance or approval before they can be commercially marketed in the United States. In addition, most major markets for medical devices outside the U.S. require clearance, approval or compliance with certain standards before a product can be commercially marketed. Under the Safe Medical Device Act of 1990, all medical devices are classified as Class I, Class II or Class III devices. In addition to the above requirements, Class II devices must comply with pre-market notification, or 510(k), regulations and with performance standards or special controls established by the FDA. Subject to certain exceptions, a Class III device must receive pre-market approval from the FDA before it can be commercially distributed in the United States. Our principal products are designated as Class II and Class III devices. The process of obtaining marketing approval or clearance from the FDA for new products, or with respect to enhancements or modifications to existing products, could:
•
take a significant period of time
| • | require the expenditure of substantial resources |
| • | involve rigorous pre-clinical and clinical testing |
| • | require changes to the products |
| • | result in limitations on the indicated uses of the products |
As a device manufacturer, we are subject to periodic inspection by the FDA for compliance with the FDA’s Quality System Regulation requirements, which require manufacturers of medical devices to adhere to certain regulations, including testing, quality control and documentation procedures. In addition, the Federal Medical Device Reporting regulations require us to provide information to the FDA whenever there is evidence that reasonably suggests that a device may have caused or contributed to a death or serious injury or that it malfunctioned in a way that could cause or contribute to a death or serious injury. Compliance with applicable regulatory requirements is subject to continual review and is rigorously monitored through periodic inspections by the FDA. In the European Community, we are required to maintain certain ISO certifications
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in order to sell our products and must undergo periodic inspections by notified bodies to obtain and maintain these certifications.
Even after products have received marketing approval or clearance, product approvals and clearances by the FDA can be withdrawn due to failure to comply with regulatory standards or the occurrence of unforeseen problems following initial approval. There can be no assurance that we will receive the required clearances from the FDA for new products or modifications to existing products on a timely basis or that any FDA approval will not be subsequently withdrawn. The failure to receive product approval clearance on a timely basis, suspensions of regulatory clearances, seizures or recalls of products or the withdrawal of product approval by the FDA could have a material adverse effect on our business, financial condition or results of operations because we would not be able to sell unapproved or recalled products and we may incur significant costs related to product recalls.
Cost containment pressures and legislative or regulatory reforms may decrease the demand for our products and the prices that customers are willing to pay for our products.
Our future growth is dependent upon health care cost containment and third party/government reimbursement policies including the impact of hospital buying groups and industry consolidation. Healthcare costs have significantly risen over the past decade. There have been and may continue to be proposals by legislators, regulators and third-party payors to control these costs. Certain reform proposals and other policy changes, if passed, could impose limitations on the prices we will be able to charge for our products, or the amounts of reimbursement available for our products from governmental agencies or third-party payors. These limitations could have a material adverse effect on our financial position and results of operations because our sales revenue would be reduced.
Since we derive a significant portion of our revenues from international operations, changes in international economic or regulatory conditions could have a material impact on the results of our operations.
Our products are currently marketed around the world, with our largest geographic markets outside of the United States being Europe and Japan. Our operations in countries outside the United States accounted for 38% of our sales in fiscal 2006. We intend to continue to pursue growth opportunities in international markets which subjects us to risks generally associated with international operations, such as: unexpected changes in regulatory requirements; tariffs, customs, duties and other trade barriers; difficulties in staffing and managing foreign operations; differing labor regulations; longer payment cycles; problems in collecting accounts receivable; risks arising from a specific country’s or region’s political or economic conditions, including the possibility of terrorist actions; fluctuations in currency exchange rates; foreign exchange controls that restrict or prohibit repatriation of funds; export and import restrictions or prohibitions; delays from customs brokers or government agencies; changes in foreign medical reimbursement policies and programs; differing protection of intellectual property; and potentially adverse tax consequences resulting from operating in multiple jurisdictions with different tax laws. Any one or more of these risks could materially adversely impact the success of our international operations.
Reduction or interruption in supply of components and materials used to manufacture our products, resulting from events such as damage to any of our manufacturing facilities or the loss of any of our sole-source suppliers, and the inability to develop alternative sources of supply, could impair our ability to meet sales demand and adversely affect our manufacturing operations and related product sales.
Reduction or interruption in the supply of components and materials used to manufacture our products, reliance on third party manufacturers for certain products, and damage to any of our manufacturing facilities, which could temporarily impair our ability to meet sales demand, may adversely affect our manufacturing and distribution operations and related product sales. If an event occurred that resulted in damage to one or more of our facilities, we may be unable to manufacture the relevant products at previous levels or at all. In addition, we purchase many of the components and raw materials used in manufacturing our products from numerous suppliers. For reasons of quality assurance, sole source availability or cost effectiveness, certain components and raw materials are available only from a sole supplier. Due to the FDA’s stringent regulations
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and requirements regarding the manufacture of our products, we may not be able to quickly establish additional or replacement sources for certain components or materials. The reduction or interruption in supply, and an inability to develop alternative sources for such supply, could adversely affect our ability to manufacture our products in a timely or cost effective manner.
A loss of key personnel or our inability to attract and retain additional personnel may adversely affect our business. |
Our future growth is dependent upon our reliance on key employees, including executive officers, management, sales and technical employees involved in R&D. The talent and drive of our employees is an important factor in the success of our business. Our sales, technical and other key personnel play an integral role in developing, marketing and selling of new and existing products. If we are unable to recruit, hire, develop and retain talented employees and key management we may not be able to meet our business objectives.
If we are unable to protect our intellectual property successfully our business could be adversely effected.
Intellectual property rights are important to our business and our ability to compete effectively with other companies is dependent upon the proprietary nature of our technologies. We also rely upon trade secrets, manufacturing know-how, continuing technology innovations and licensing opportunities to maintain and improve our competitive position. Our policy is to file patent applications in the U.S. and foreign countries where rights are available and where we believe it is commercially advantageous to do so. We hold a number of U.S. and foreign patents. In addition, we also have filed a number of patent applications that are currently pending. Pending or future patent applications may not result in issued patents, current or future patents issued to or licensed by us may be challenged, invalidated or circumvented and the rights granted thereunder may not provide a competitive advantage to us or prevent competitors from entering markets which we currently serve. In addition, we may have to take legal action in the future to protect our trade secrets or know-how or to defend them against claimed infringement of the rights of others. Any legal action of that type could be costly and time consuming to us and there is no assurance that any lawsuit will be successful. The invalidation of key patents or proprietary rights which we own or an unsuccessful outcome in lawsuits to protect our intellectual property could increase the competitive pressures that we face and therefore have a material adverse effect on our financial condition and results of operations.
Pending and future litigation and any resulting settlement awards may be costly and impact our ability to obtain cost-effective third-party insurance coverage in the future.
We are a defendant in various proceedings, legal actions and claims arising in the normal course of business, including product liability and other matters. Such matters are subject to many uncertainties and outcomes are not predictable with assurance. To mitigate losses arising from unfavorable outcomes related to product liability and general liability matters, we purchase third-party insurance coverage subject to deductibles and loss limitations. We may incur significant legal expenses regardless of whether we are found to be liable. In addition, such product liability settlements may negatively impact our ability to obtain cost-effective third-party insurance coverage in future periods.
Item 1B. Unresolved Staff Comments.
None.
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