UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2004

or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to
Commission file number 000-50674

ANIMAS CORPORATION

Registrant’s telephone number, including area code: (610) 644-8990

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
(Title of class)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K o.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o No þ.

The aggregate market value of voting common stock held by non-affiliates of the registrant as of June 30, 2004 was: $205,800,680

The number of shares outstanding of the registrant’s common stock as of March 24, 2005 was: 20,543,571

DOCUMENTS INCORPORATED BY REFERENCE

Items 10,11,12,13 and 14 of Part III of this Form 10-K incorporate information by reference from the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after close of the fiscal year covered by this annual report.

Table of Contents

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PART I

This Annual Report on Form 10-K and the documents incorporated by reference herein contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. When used in this report and the documents incorporated herein by reference, the words “anticipate,” “believe,” “estimate,” “may,” “expect,” “intend,” and similar expressions are generally intended to identify forward-looking statements.

These and other risks and uncertainties that could affect our actual results are discussed in this report and in our other filings with the Securities and Exchange Commission, particularly the section of this Form 10-K entitled “Risk Factors.” Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, events, levels of activity, performance, or achievements. We do not assume responsibility for the accuracy and completeness of the forward-looking statements other than as required by applicable law.

We do not undertake any duty to update after the date of this report any of the forward-looking statements in this report to conform them to actual results.

Item 1.	Business

Overview

We design, develop, manufacture, and sell external insulin pumps for people with diabetes. We were incorporated in Delaware in July 1996 and introduced our first generation pump in July 2000. We believe that we are the second largest supplier of pumps to the United States market in terms of new pump placements. We began shipping our third generation pump, the IR 1200, in April of 2004. We believe that the IR 1200 is the smallest full-featured insulin pump on the market. The IR 1200 has a large display, long battery life, precise insulin delivery, and enhanced waterproof integrity. In February of 2005, we began to ship the IR 1250. The IR 1250 utilizes the IR 1200 platform but includes additional software which incorporates a food database of up to 500 items and tunes for alerts. We also provide ancillary supplies on an ongoing basis for patients using our pumps, including insulin cartridges, infusion sets, batteries, and various accessories. We provide extensive education programs and services to people with diabetes.

From the introduction of the R1000, in July 2000, through December 31, 2004, we recorded over $95.5 million of revenue in pumps and $41.5 million of revenue in ancillary supplies. For the years ended December 31, 2004, 2003, and 2002, our net revenues were $67.9 million, $34.1 million, and $23.6 million, respectively.

We estimate that the size of the insulin pump and ancillary supplies market was over $540 million in the United States and over $780 million worldwide in 2004 and that the United States market has grown at a compound annual rate of over 20% during the past four years. We believe that approximately 250,000 people in the United States are using insulin pumps and that there is an estimated domestic market potential of over 1 million users. Given the increasing focus on intensive diabetes management and the opportunity to continue penetrating the potential user base, we believe that the insulin pump market is positioned for sustained growth.

We have approximately 125 full-time sales and clinical personnel located throughout the United States. Our approximate 55 person direct sales force promotes our pump in the United States to healthcare professionals who advise patients on monitoring and managing their diabetes and to patients who express interest in pump therapy. Our approximate 70 full-time equivalent diabetes educators, or clinical managers, train and provide clinical support to patients. We believe that our ratio of clinical to sales personnel is higher than our primary competitors, which we believe helps us maintain a higher level of customer service and clinical support than our principal competitors. Our sales force and clinical managers also participate in many local community diabetes education programs and meetings and sponsor a number of courses both to educate the community in diabetes management generally and to increase awareness of pump therapy specifically.

We intend to introduce at frequent intervals innovative and new insulin pumps and related products enabling patients to better manage their diabetes and enjoy a better quality of life. These planned new products are intended to allow us to maintain our competitive position in the marketplace. They will generally supplant, in part or in whole, earlier product offerings. We are also developing a continuous glucose sensor.

Market Opportunity

Diabetes is a chronic, life-threatening disease for which there is no known cure. It is the sixth leading cause of death by disease in the

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United States. In the United States, diabetes was believed to cost over $132 billion in both direct and indirect costs in 2002. Only a small fraction of those costs represents medications, devices, and supplies to treat the disease. The vast majority of the costs are associated with complications of diabetes, stemming, in large part, from poor management of the disease.

Diabetes is a disease in which the body cannot adequately regulate blood glucose levels. Glucose supplies the body’s tissue with energy. Glucose levels in the blood must be maintained within a specific concentration range to permit optimal cellular function and health. Insulin is a hormone, secreted by the pancreas, which regulates cellular metabolism of glucose. In people with diabetes, the body does not produce sufficient levels of insulin, or fails to utilize insulin effectively, which causes blood glucose levels to fall outside normal ranges. Failure to control blood glucose levels within normal ranges leads to severe complications over time, including blindness, kidney disease, nervous system disease, amputations, stroke, cardiovascular disease, and death.

More than 200 million people worldwide have diabetes. In the United States, there are more than 18 million people with diabetes, with about 13 million of these people diagnosed. The number of people in the United States diagnosed with diabetes has increased significantly in the last decade, primarily due to the aging of the population, inappropriate diet, and increasingly sedentary lifestyle. It is estimated that there are approximately 4 million patients with insulin-requiring diabetes in the United States.

Diabetes is typically classified as type 1 or type 2. Type 1 diabetes is characterized by near-complete absence of insulin secretion by the body. Although the onset of type 1 diabetes can occur at any age, it frequently is diagnosed during childhood or adolescence. Individuals with type 1 diabetes require daily insulin injections or insulin pump therapy to survive. We believe that there are 10 million people with type 1 diabetes worldwide, approximately 1.2 million of whom are in the United States.

Type 2 diabetes, the most common form of the disease, is characterized by insulin resistance (the body’s inability to properly utilize insulin) and/or defects in insulin secretion (the body’s inability to produce enough insulin). Initially, many patients with type 2 diabetes attempt to manage their diabetes by diet, exercise, and oral drugs. As their disease advances, they progress to multiple drug therapy, often including insulin. Many people with type 2 diabetes will eventually become insulin requiring, particularly as the insulin secretion defect advances. We estimate that there are more than 150 million people worldwide and about 17 million people in the United States with type 2 diabetes. Type 2 diabetes historically has occurred in later adulthood. However, largely due to inappropriate diet and sedentary lifestyle, type 2 diabetes is increasing in incidence among the younger population. Many healthcare professionals believe that this increase in the younger population will be a public healthcare problem of substantial magnitude in future years if this trend continues and if such afflicted patients are not aggressively treated.

Diabetes Therapy

Diabetes Management Challenges. Diabetes is frustrating and difficult to manage for patients, and can be significantly debilitating. Many of the debilitating effects stem from either hypoglycemia (low blood sugar levels) or hyperglycemia (high blood sugar levels). The blood sugars in people with diabetes tend to fluctuate from very high levels to very low levels over the course of a day. Blood sugar levels can be affected by carbohydrate and fat content of meals, exercise, stress, illness or impending illness, hormonal releases, variability in insulin absorption, and changes in the effects of insulin on the body. Excursions of high and low blood glucose levels can be frequent, unpredictable, and unsettling. Many “corrections,” consisting of the administration of additional insulin or ingestion of additional carbohydrates, are needed throughout the day in order to maintain blood glucose within normal ranges, a state that is nearly impossible to maintain without multiple daily injections or use of an insulin pump. Over-corrections are common and contribute to a “roller coaster” effect experienced routinely by many patients with diabetes. A range of factors can render diabetes overwhelming to patients and their families, including the time spent in managing diabetes, the swings in blood sugar and their effects on the feeling of well being, and the fear of hypoglycemia. The rate of reported depression is significantly higher for people with diabetes than those without it.

Emergence of Intensive Management. Before the mid 1990s, conventional treatment for patients with type 1 diabetes consisted of administering one to two shots of insulin per day and eating meals of fixed carbohydrate loads at fixed times every day. Conventional treatment for patients with type 2 diabetes consisted of dietary management, exercise, and oral drugs, if necessary. Insulin was viewed as treatment of last resort for patients with type 2 diabetes and was typically prescribed only in the most advanced stages of the disease.

In the 1990s, two landmark trials demonstrated the importance of intensive therapy. First, in 1993, the Diabetes Control and Complications Trial (DCCT), conducted by the National Institutes of Health, demonstrated that complications of diabetes in people with type 1 diabetes could be delayed and the severity of complications reduced for those under intensive management of blood glucose levels or intensive therapy as opposed to conventional therapy. The intensive management regimen in the trial consisted of prescribed diet and/or exercise, three or more insulin injections per day or insulin pump therapy, frequent blood sugar measurements, and the adjustment of insulin and diet according to blood glucose levels.

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The regimen of patients under conventional management consisted of one to two insulin injections and one to two blood sugar tests per day. The trial showed that intensive therapy reduced the risk of complications in patients with type 1 diabetes by 76% for eye disease, 50% for kidney disease, and 60% for nerve disease. In 1998, a second trial, the United Kingdom Prospective Diabetes Study (UKPDS) Group, UK, demonstrated that intensive therapy significantly reduced the risk of these same microvascular complications associated with diabetes in patients with type 2 diabetes.

Today, the goal of intensive management is to achieve near-normal blood glucose levels without risking hypoglycemia. Many healthcare professionals believe that the more the insulin administration mimics a normal pancreas (“more physiologic”), the better the blood glucose control. We believe that many type 1 patients manage their diabetes intensively. A significantly smaller percentage of patients with type 2 diabetes practice intensive management. Recent guidelines, including those published by the American Diabetes Association, suggest aggressive treatment for patients with type 2 diabetes. It is now becoming more accepted that insulin should be taken earlier, even as first line therapy for some patients with type 2 diabetes.

Current Diabetes Management. There are four primary types of insulin therapy practiced today: conventional therapy; multiple daily injection (“MDI”) therapy using traditional insulins; MDI therapy using the newer (analog) insulins; and insulin pump therapy. Both the MDI therapies and the pump therapy are considered intensive management.

Patients with insulin-requiring diabetes need a continuous supply of insulin, known as basal insulin, to provide for “background” metabolic needs. In addition to basal insulin, such patients also require supplemental insulin, known as bolus insulin (also called mealtime or prandial insulin), to compensate for carbohydrates ingested or a high blood sugar level. “Basal-bolus” therapy is defined as patients receiving a basal or background infusion of insulin either via a pump or a long-acting insulin (such as Lantus) as well as receiving bolus insulin before meals or snacks.

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The following table shows the four primary methods of insulin therapy and selected advantages and disadvantages associated with each.

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Benefits of Insulin Pump Therapy

Insulin pumps provide a number of key benefits:

	•	Better Blood Glucose Control and Significant Improvement in Quality of Life. Pumps allow optimal tailoring of basal insulin release to meet the specific and varying basal needs of patients throughout the day. With injection therapy, there is no mechanism to adjust the basal insulin release. Pumps also provide greater consistency in basal insulin absorption due to the significantly smaller basal infusions and the use of rapid-acting as opposed to long-acting insulin. In addition, pumps allow patients to compensate for meals, correct high blood glucose levels, and control post-prandial blood glucose levels more optimally through use of boluses, either regular or extended. Extended boluses compensate for extended and delayed digestion, which can result from fatty meals or gastroparesis. Gastroparesis is a condition of “delayed digestion” found in over 20% of people with diabetes.
	•	Increase Flexibility of Lifestyle. Pumps give patients flexibility with respect to eating and exercise. With injections, patients must eat whether they are hungry or not to compensate for peaking insulin, a falling blood sugar, or exercise. With pumps, patients may, in general, handle these same circumstances without being forced to eat by temporarily reducing their basal insulin.
	•	Discreet, Easy, and Less Painful Insulin Administration. Pumps allow patients to administer insulin in an extremely discreet manner and with minimal pain. With injection therapy, patients need to pull out syringes and vials a minimum of twice a day and up to six to eight times per day. Because it is easier and less painful to bolus with a pump than with injections, patients on pumps tend to be more consistent about bolusing than those on injections.

As a result of these benefits, pump patients, in our experience, express a high level of satisfaction and enthusiasm about the therapy. Notably, healthcare professionals with diabetes have adopted pump therapy at a greater than 50% rate, far above the average rate in the population.

Barriers to Faster Insulin Pump Therapy Adoption

     For Provider

	•	Cost of a Pump-start. A “pump-start” typically requires between 8 and 20 hours of a provider’s time between training the patient prior to initiation of pump therapy and “following” the patient after initiation. Third party reimbursement, for a pump-start averages below $250. Few providers can afford to underwrite the cost. Our competitors typically limit their role in the pump-start to providing training in pump operation, which accounts for less than 20% of the time involved in a pump-start.
	•	Concern of Additional Non-reimbursed Work. Some providers worry that they will receive telephone calls, particularly after-hours calls, from patients on pumps. These come at a significant cost for providers, who typically are not reimbursed for telephone consultation.
	•	Underestimation of Patients. Some providers have the misperception that only the most highly educated and motivated patients can manage intensive therapy, and, in particular, pump therapy.
	•	Lack of Awareness. We estimate that over 75% of all diabetes is treated by primary care physicians (“PCPs”). PCPs typically receive little or no training in diabetes or insulin therapy during residency. A 2003 industry study showed that some PCPs are afraid of prescribing insulin (particularly mealtime insulin) and resist prescribing it to their type 2 patients for as long as possible. As such, PCPs have not historically advocated intensive therapy.

     For Patients

	•	Lack of Awareness. Many patients still have not heard about intensive management or pump therapy. Even patients who have heard of intensive management or pump therapy often lack an understanding of the benefits of these therapies because they have not been properly educated.
	•	Misconceptions. Some patients worry that being attached to a medical device represents a constant reminder of their

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		disease and is intrusive to their daily lives. Other patients worry about their ability to manage the pump, and some others have body image issues associated with a pump.
	•	Cost. Some patients cannot afford the co-pay associated with the purchase of a pump or the ongoing ancillary supplies or do not have medical insurance.

The Animas Solution

Our products enable people with diabetes to easily and accurately manage their blood glucose levels while maintaining a more flexible lifestyle. Through superior technology and service, we believe that we significantly address the major barriers to pump therapy.

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Superior Technology. We believe that our newest product, the IR 1250, is the smallest full-featured pump on the market. The IR 1250 has a large display, long battery life, precise insulin delivery, and enhanced waterproof integrity.

	•	The thin profile and small size of the IR 1250, with a footprint smaller than a business card, make the pump less intrusive.
	•	The large screen and intuitive user interface make pump therapy less intimidating to patients and easier to teach and use.
	•	The precise insulin delivery allows for optimal tailoring of basal insulin release to meet the specific and varying basal needs of patients throughout the day.
	•	The sturdy construction, enhanced waterproof integrity, and long battery life make the pump compatible with patient lifestyles.

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Excellent Service. We facilitate pump therapy for physicians and patients through our educational, clinical, and customer support. Our programs, including our Bridging the Gap program, provide patient education and clinical support customized to meet the needs of healthcare providers and patients.

     For Providers

	•	Bridging the Gap. Many providers do not have sufficient resources to conduct a pump-start. Our approximate 70 clinical managers, coupled with our network of per-diem certified diabetes educators, “bridge the gap” between the provider’s resources and the resources necessary to do a pump- start.
	•	Customer Support. Our 24/7 customer support function, staffed with healthcare professionals and others highly knowledgeable about pump therapy, relieves providers of costly telephone consultations and inconvenient after-hours calls.
	•	Leadership in Education Programs. We sponsor a number of courses and seminars for healthcare professionals and those in training to increase their awareness of intensive management and pump therapy.

     For Patients

	•	Customer Support. Our knowledgeable staff is available to answer questions and provide solutions on a 24/7 basis.
	•	Bridging the Gap. We seek to ensure patients’ success with pump therapy by proper training and follow-up for the first month of a pump-start.
	•	Leadership in Education Programs. We sponsor a number of courses, seminars, and other community events for patients on a national, regional, and local basis to increase their awareness of intensive management and pump therapy.

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Convenient Reimbursement. Our Patient Administration group handles the reimbursement of a pump and ancillary supplies on behalf of patients. We also offer various programs for patients demonstrating financial need to help with out-of-pocket expenses.

Our Strategy

Our strategic objective is to be a leading provider of innovative insulin pumps and related products to allow better and easier management of diabetes. Through our superior technology and excellent service, we believe we can grow our customer base and increase our recurring net revenues from pumps and ancillary supplies. To achieve this objective, we are pursuing the following business strategies:

	•	introduce at frequent intervals new and innovative insulin pumps and related products enabling patients to better manage their diabetes and enjoy a better quality of life;
	•	expand the market for pump therapy and increase our market share by making pump therapy easier for both providers and patients;
	•	capture sales of ancillary supplies through high patient retention;
	•	increase international presence by expanding our network of local distributors and offering products with multilingual capabilities; and
	•	enhance future profitability through gross margin improvement and organizational efficiency.

Our Products

Our external insulin pumps provide patients with an easy, comfortable, and flexible means of infusing insulin. Our pumps are pager-size devices which can be concealed in your clothes or on a belt. The pump delivers insulin through an infusion set, with a small, flexible cannula that is placed just beneath the skin. By delivering a rapid-acting insulin, the pump mimics the insulin delivery of a healthy, working pancreas for more predictable and tighter blood sugar control. For the years ended December 31, 2004, 2003, and 2002, our pump net revenues were $47.2 million, $21.2 million, and $17.8 million, respectively. Patients typically change their infusion sets and cartridge approximately every three days. These disposables provide us with a recurring source of net revenues following pump sales. For the years ended December 31, 2004, 2003, and 2002, our ancillary supplies net revenues were $20.7 million, $12.9 million, and $5.8 million, respectively.

     IR 1250 Insulin Pump. The IR 1250 utilizes the IR 1200 platform, but has additional memory and software. All attributes ascribed to the IR 1200 below also apply to the IR 1250. We introduced the IR 1250 in February 2005 in the United States. Since launch of the IR 1250 in February, we are mostly selling the IR 1250 pump in the United States, but we are continuing to offer the IR 1000 and IR 1200 pumps outside the United States. The additional features of the IR 1250 over the IR 1200 are as follows:

	•	Personalization Features. The IR 1250 stores personal information in the pump, including important contact information, allows patients to personalize basal program names for easy recognition and stores sick day tips from their healthcare team to help control their diabetes.
	•	CarbSmart. With the IR 1250 and ezManager Plus, patients can upload the nutritional values of 500 food items from the CalorieKing® database which contains more than 5,000 foods and count the number of carbohydrates for up to nine food items for any one meal.
	•	Program Pump Settings. The IR 1250 can be easily programmed through personal computers.
	•	Customize Audio Notification. The IR 1250 allows patients to choose their own tunes or choose from popular music for most pump alert sounds.

     IR 1200 Insulin Pump. The IR 1200 pumps (and its successor-generation pump, the IR 1250 pumps) weigh approximately 3.2 ounces and are the smallest full-featured pumps on the market. The IR 1200 is 25% smaller than its predecessor product, the IR 1000.

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We received FDA clearance for the IR 1200 in October 2003 and began shipping the IR 1200 in April 2004. We manufacture the IR 1200/1250 pumps, as well as the IR 1000, at our plant in West Chester, Pennsylvania. The IR 1200 has the following features:

	•	Size and Aesthetics. The IR 1200 is small, thin, and sleek with various attractive metallic colors. Many patients, when otherwise not influenced by their healthcare provider, select a pump on the basis of aesthetics and size. Our pump’s small size and thin profile make it more discreet and less intrusive whether worn inside clothing, on a belt, or in a pocket.
	•	Precision Dosing. The IR 1200 allows basal insulin to be dosed in extremely small increments of one quarter of a microliter, which is half the size provided by our nearest competitor. Dosing this precise cannot be achieved using a syringe, insulin pen, or a competing pump. Precision dosing may be particularly beneficial to children, adolescents, and lean adults.
	•	Superior User Interface. The IR 1200 has a large screen and our menu driven operation makes insulin dose-related calculations significantly easier. An intuitive user interface reduces the time it takes to teach patients how to use our pump, making pump therapy less intimidating to patients and secondary caregivers such as school nurses, grandparents, and others operating the pump.
	•	Long Battery Life. The IR 1200 uses a AA lithium or alkaline battery, while the other full-featured pumps on the market use a AAA alkaline battery. Our battery typically provides approximately six to eight weeks of battery life, while the AAA alkaline provides from several days to 2 weeks under similar conditions.
	•	Advanced Diagnostics and Safety Features. The IR 1200 detects a variety of conditions including occlusions (blockages) in the infusion set and malfunctions in the electronics, microprocessor, or mechanical systems. These features provide additional safety measures and increase patient confidence in using our pump.
	•	Enhanced Waterproof Integrity. The IR 1200 has triple hermetically-sealed housings: one each for the battery, the cartridge, and the electronics. This triple hermetically-sealed housing design protects against pump damage even if the waterproof integrity is compromised through patient error. This can be particularly important for pediatric patients and active adults. Most of the pumps sold today are not waterproof.

     R1000/ IR 1000 Pump. Our initial product, the R1000 insulin pump, received FDA clearance and was introduced to the market in 2000. Our second generation product, the IR 1000, received FDA clearance and was introduced to the market in 2002. The IR 1000 uses the same platform as the R1000, and provides infrared (IR) download of pump history and an improved user interface. We will continue to offer the IR 1000 internationally and to patients who are insulin-resistant and/or prefer the greater insulin capacity of the IR 1000 (300 units) versus the IR 1200 (200 units). We believe that the IR 1000 enjoys a reputation of being a durable, reliable pump with an excellent safety record.

     Ancillary Supplies. Ancillary supplies represented a significant portion of our net revenues in 2004. We provide disposable cartridges and infusion sets to patients. Our cartridge for the IR 1000, the IR 1200, and the IR 1250 is proprietary to us and is made by a contract manufacturer. We currently obtain infusion sets from third parties. We also sell pump batteries and a variety of clothing supplies and other accessories.

     ezManager/ezManager Plus. Our ezManager/ezManager Plus software package assists patients and their healthcare team with diabetes management. We received FDA clearance for the second generation ezManager Plus in June 2003. ezManager has two integrated software applications, one for PalmOS-based handhelds and one for desktop (PC) computers. The PalmOS application allows users to quickly calculate their carbohydrate intake based on a list of consumed foods and record numerous logs relevant to their diabetes. It also makes corrective recommendations, based on the user’s input.

     GlucoWatch Biographer/AutoSensor. The GlucoWatch Biographer, a product developed by Cygnus, Inc, (“Cygnus”) and obtained by Animas in our asset purchase of Cygnus, in March 2005, is a non-invasive continuous glucose monitor, worn on the patient’s wrist, which provides blood glucose readings every twenty minutes. It utilizes an electric field to extract sodium ions. Other small molecules, including glucose, contained in interstitial fluid are swept through the skin with the sodium ions. The GlucoWatch Biographer also contains a glucose-oxidase electrochemical sensor to measure the glucose extracted through the skin. The GlucoWatch Biographer has a disposable item, the AutoSensor that contains the electrodes used for extraction as well the electro-chemical sensor. The second -generation GlucoWatch (G2) Biographer has a two hour warm-up time upon inserting a new AutoSensor, at which time the patient typically calibrates the device using a fingerstick blood glucose reading, and a wear-time of 13 hours.

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Products Under Development

     Next Generation Insulin Pumps. Our research and development team is working on several future generations of insulin pumps, including the IR 1275 and the IR 1500, in order to maintain a competitive advantage. We intend to introduce, at frequent intervals, new and innovative insulin pumps enabling patients to better manage their diabetes and enjoy a better quality of life. Our next generation insulin pumps are still in the development stage, requiring additional engineering and market development. Accordingly, we have not yet applied for FDA 510(k) clearance for any of our next generation pumps. Upon submitting 510(k) applications to the FDA and receiving 510(k) clearances from the FDA, we will be in the position to market the next generation pumps. We anticipate launching the IR 1275 either late in 2005 or early 2006 and the IR 1500 in the latter part of 2006.

     ezSet Infusion System. We are developing our ezSet Infusion System, which will consist of the ezSet Infusion Set and the ezSet Inserter. The ezSet Infusion Set will provide greater comfort, security, ease of insertion, and flexibility than currently available infusion sets. The ezSet Inserter will be a small, lightweight, and stylish device that will provide quick and relatively painless catheter insertion. The ezSet Infusion System is in the development stage, requiring additional production and market development. We have received 510(k) clearances for earlier designs of our ezSet Infusion Set and Inserter. We anticipate the launch of the ezSet Infusion System in the middle part of 2005. We do not anticipate a significant conversion of existing patients (as of launch date) to this set and expect that the majority of our customers who use this set will be new customers.

     Micro-Pump. In October 2004, we acquired an exclusive worldwide license to the micro-pump and micro-needle technology from Debiotech, SA (“Debiotech”) for the fields of insulin administration and glucose sensing. Benefits of the micro-pump technology include a significant reduction in device size, greater accuracy, faster occlusion detection, and greater precision. This technology also lends itself to marketability as a disposable pump. We have defined several possible product configurations and are in the process of determining the optimal configuration prior to initiating a detailed design project. We anticipate launch of our micro-pump based on the Debiotech technology in 2007.

     Micro-Needles. The micro-needle offers the possibility of significantly less invasive means for infusing insulin and extracting interstitial fluid for blood glucose measurement. Our infusion set development efforts, in particular our MicroSet utilizes the micro-needle technology and holds promises for less pain, reduced inflammatory response, and better insulin absorption. At this time, we do not know when, if at all, our micro-needle technology will be commercially available.

     Improved Cygnus Technology. The GlucoWatch Biographer suffers from several flaws that hamper market acceptance: excessive skips, excessive warm-up time, limited wear-time, susceptibility to interference by perspiration, skin irritation, excessive bulkiness, and inaccuracy. It has been postulated that most, if not all, of these drawbacks, can be significantly mitigated, with modifications to the device. Some of these modifications have been prototyped and limited testing indicates at least partial success in some of these areas of improvement. We are evaluating the commercial and technical feasibility of implementing such improvements, but have not yet formulated a plan for improvement, if any.

     MicroWatch. The MicroWatch is a potential product combining the electrochemical sensor technology developed under Cygnus with the micro-needle technology licensed under the Debiotech agreement. Substituting the reverse electro-iontophoresis extraction with micro-needle technology offers the possibility of a future generation sensor with improved accuracy and less skin irritation. At this time, we do not know when, if at all, this technology will be commercially available.

     Animas Long-term Implantable Continuous Glucose Sensor. Since our inception, we have been developing an implantable continuous glucose sensor. Our sensor is a long-term implantable device with no percutaneous (through the skin) wires. Measurements from the implantable sensor are transmitted by telemetry to an external display unit that can be worn on the patient’s wrist or carried. Our sensor measures the near infrared spectra of venous blood at certain discrete wavelengths. By applying a universal algorithm to the measured spectra, blood glucose concentration can be determined. Although, we have had some promising preclinical results to date, there is a significant amount of development work remaining and we cannot accurately foresee when we will submit our pre-market approval (“PMA”) for this product and/or when this product may be commercially available.

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Sales, Clinical Support and Service

United States. We emphasize service and believe it has been in the past, and will continue to be so in the future, key to our success in this market. We currently have a national sales and support team of over 100 employees. Our sales force consists of approximately 55 sales representatives or territory managers. Our territory managers market primarily to endocrinologists, certified diabetes educators, and internal medicine physicians focused on diabetes. We primarily sell our products directly to patients through a referral by a healthcare provider or through a patient lead generated by one of our promotional activities. We also sell to durable medical equipment suppliers and distributors who, in turn, sell directly to the patient. For the years ended December 31, 2004, 2003, and 2002, our domestic net revenues were $63.0 million, $31.7 million, and $23.0 million, respectively. During the year ended December 31, 2004, approximately 14% of our domestic pump sales were sold through distributors.

In addition to our sales force, we have approximately 70 full-time equivalents clinical managers. Our clinical managers are all certified diabetes educators, with either a registered nursing or a registered dietician license. The primary responsibility of our clinical

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managers is to educate patients and provide clinical support to patients, as requested by the healthcare provider.

We have a several person sales force whose primary job function is to seek and maintain managed care contracts. We have over 400 contracts signed with third party payors, including most of the large national payors. On behalf of the patient, we obtain authorization and receive reimbursement by a patient’s insurance provider(s) for our pump and disposable supplies with an internal staff of approximately 60 people. Even if we are not contracted with a particular payor, we can obtain authorization, in most instances, on a single-case negotiation basis. In some instances, when we are not a contracted provider, we may refer a pump order (subject to approval by the patient) to a distributor who is a contracted provider. It is important from a patient satisfaction perspective that we handle the reimbursement process efficiently and promptly. Healthcare providers demand that pump suppliers obtain authorization promptly and efficiently for their patients, This insurance process can be labor-intensive and complex.

To our knowledge, only one of our competitors has similar standing with third-party payors and has a similar infrastructure in house to efficiently process such orders. We believe that having both the infrastructure and contract capability provides us a competitive advantage over those competitors without such infrastructure or contract capability as it increases the likelihood of a pump being approved rapidly and with minimal disturbance to the healthcare provider. Our proprietary information technology system helps us perform these tasks efficiently.

Our sales of ancillary supplies, primarily infusion sets, cartridges, and batteries, are handled over the telephone. We call or send messages to patients to remind them to reorder their ancillary supplies. Our customer service focus, as well as our supply reminder program, drives our high patient retention rate. A patient, on the average, buys $1,300 per year of ancillary supplies and replaces his or her pump every three to five years.

Our marketing programs create awareness of our business and educate healthcare professionals and people with diabetes on the benefits of intensive therapy, methods of achieving better glucose control, and various aspects of pump therapy. To further generate awareness and penetrate the market, our sales, marketing, and clinical organization provide a wide range of education programs, support materials, and events at the national, regional, and local levels. These programs include public relations efforts, product training, conference and trade show attendance, seminars sponsored by us or others, educational courses, and educational and promotional literature.

We are fully committed to ensuring that each patient receives sufficient education and clinical support to enjoy the maximum benefits of pump therapy. To successfully start on a pump, a patient must master pump operation, diabetes management skills, and carbohydrate-counting skills. In addition, a healthcare professional must set and fine-tune the insulin dosing, a process that typically spans about four weeks. The total time required for a pump-start averages between training and dosing runs from 8 to 20 hours. Third party reimbursement for a pump-start covers only a small fraction of the true cost. Furthermore, many providers, including large teaching hospitals, do not have the resources to provide the clinical support to manage a pump-start. Our Bridging the Gap program provides custom patient education and clinical support, which complements the provider’s efforts to successfully train and manage each patient. Historically, the norm within the pump industry has been only to provide pump-operation training.

We believe that we are in a unique position in the industry in our ability to provide a Bridging the Gap-type program due to the existence and structure of clinical manager organization. While our competitors also employ clinical managers, we believe that we employ more clinical managers than our closest principal competitor, in relation to the number of territory managers (sales representatives). In addition, in contrast to our competitors, our clinical managers do not have sales responsibilities and do not report into our sales organization.

Upon completion of the operational training on our pump, our clinical managers follow up with each patient to ensure that the patient is comfortable with pump therapy. Follow-up occurs regularly during the first few months of being placed on our pump and quarterly thereafter to make sure the patient is doing well. To our knowledge, our competitors do not have any similar program and this program provides us a significant competitive advantage. We also believe we are unique in the industry in our ability to provide exceptional service on a 24/7 basis because of the structure of our clinical manager organization, coupled with our pump support group, that responds to patients’ questions. By ensuring that each patient is fully trained on pump operation and properly followed, we believe that we reduce the number of calls into our help-line. Furthermore, because we are staffed primarily with clinical personnel, highly knowledgeable about pump therapy, we can provide a better level of service than our competitors.

We believe that our focus on patient education and customer service has been a very important element in allowing us to both gain

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market share and grow the market.

International. We sell our products internationally through distributors focused primarily on the diabetes market. These distributors have established relationships with healthcare professionals and developed distribution channels. Under the terms of our arrangements with our distributors, they have responsibility for sales, marketing, and customer service in their respective territories. We may terminate the arrangement if, among other reasons, specified minimum purchase requirements for their respective territories are not reached. The arrangements generally contain terms from one to three years and contain automatic extension provisions. In certain select countries, we are negotiating or have already negotiated the right, but not the obligation, to buy our distributors’ business at some time in the future.

We obtained regulatory approval to market our R1000, IR 1000 and the IR 1200 in Canada in March 2001, July 2002 and September 2004, respectively. In June 2004, we upgraded our certification, under the Medical Device Directive, to ISO 9001-2000 and ISO 13485-2000, through BSI, Management Systems. This allows us to continue to CE mark and commercially distribute our products throughout the European Union. CE is an abbreviation for “Conformite Europeene” or European Compliance. Subsequent to affixing the CE mark, we need to obtain, in many countries, an additional approval in order to have the pump reimbursed by the government-paid insurance programs.

We are presently selling our pump products through distributors in Australia, Austria, Canada, the Czech Republic, France, Finland, Greece, Germany, Hungary, the Republic of Ireland, Israel, Italy, New Zealand, Spain, Sweden and the United Kingdom. For the years ended December 31, 2004, 2003, and 2002, our foreign net revenues were $4.9 million, $2.4 million, and $592,000, respectively.

We believe that our pump’s multilingual capability and easy to use interface provide us with a significant competitive advantage, particularly in the international marketplace.

Medical Advisory Board

We have established a medical advisory board, consisting of individuals with recognized expertise in fields relating to diabetes treatment. Our members advise us concerning long-term product planning, research and development, and marketing. Members of our medical advisory board meet formally and informally with us. Our medical advisory board meets once or twice per year and each member’s time commitment per year is eight hours. Each member is required to attend medical advisory board meetings and to be available to answer questions. Each member received a grant of 1,333 options to purchase our common stock at the beginning of his or her two year term. Several members of our medical advisory board are employed by academic institutions and may have commitments to, or agreements with, other entities that may limit their availability to us. Members of our medical advisory board may also serve as consultants to other medical product companies.

Information Technology

Our ACcessIT System is a company-wide database. Designed on client-server architecture, this application tracks all sales contacts, including clinicians’ information, actual and potential patient information, insurance verification, and order data processing. Two modules of ACcessIT allow us to store all the contractual data and billing information in one integrated system that facilitates the collection process. The same system handles our customer service and quality assurance needs such as call tracking, complaint registration, and returned goods authorizations. ACcessIT gives employees quick and accurate information that empowers them to do their job more efficiently and in much less time than with comparable systems.

Manufacturing and Quality Assurance

Our manufacturing facility is currently located in our headquarters in West Chester, Pennsylvania. We have approximately 105 employees in production, material control, manufacturing, quality, engineering, and shipping and receiving.

Our pump is assembled and tested in our West Chester facility. We purchase most of our components, some subassemblies, and various services used in the manufacture of our insulin pumps from outside vendors. These outside vendors generally produce their items to our specifications and in many instances to our designs. A contract manufacturer located outside the United States manufactures our insulin cartridge. We purchase our infusion sets from original equipment manufacturer suppliers.

Our Quality Assurance Department audits our vendors for conformance to our specifications, policies, and procedures and inspects and tests our products at various steps in the manufacturing cycle. This process facilitates compliance with the stringent specifications for our products.

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We rely on single sources for some important parts, including hybrid circuits, integrated circuits, and various products and components. We also have a sole source subcontract arrangement for sterilization services. We have never experienced disruption of such services and we have contingency plans in place. For example, we have established secondary source suppliers in certain circumstances and we create safety stocks to address changes in market demand. Arrangements for additional or replacement suppliers for some of these parts cannot be accomplished quickly and our business could be harmed by such delays.

Certain processes, as required by the FDA and other regulatory bodies, utilized in the manufacture and test of our products have been verified and validated. As a medical device manufacturer, our manufacturing facility and the facilities of our cartridge manufacturer and sterilizer are subject to periodic inspection by the FDA and certain corresponding state and international agencies.

Intellectual Property

We rely on a combination of copyright, patent, trademark, trade secret, and other intellectual property laws, nondisclosure agreements, and other measures to protect our proprietary rights. As of December 31, 2004, we had obtained 6 issued United States patents, and had 4 additional United States patent applications pending. We believe it will take up to five years, and possibly longer, for these United States patent applications to result in issued patents. Our issued patents expire between July 2016 and July 2020. The issued and allowed patents cover, among other things:

	•	the operation, components, design, and subsystems of our insulin pump;
	•	some novel aspects of our cartridge;
	•	some novel aspects of our infusion set;
	•	some novel aspects to our ezManager software; and
	•	the operation, components, design, and subsystems of our implantable glucose sensor.

In addition, we have obtained 2 foreign patents and have filed 12 foreign patent applications in 5 foreign patent offices seeking rights corresponding to aspects of our issued United States patents and pending United States patent applications.

We obtained exclusive worldwide license rights for diabetes from Debiotech of Lausanne, Switzerland. These license rights relate to 13 distinct United States patents specific to MEMS (Micro Electro-Mechanical Systems) pump technologies. The agreement with Debiotech also includes the licensing of future Debiotech patents related to the same technologies. The 13 United States patents licensed have expiration dates between April 2010 and August 2018. These patents also benefit from patent protection in numerous European countries, Canada and Japan. With the Debiotech licensing agreement, we also obtained worldwide license rights to a particular micro-needle technology which is currently filed as both a United States patent application and a PCT (Patent Cooperation Treaty) application.

With the Cygnus acquisition, we acquired 37 distinct United States patents all related to continuous glucose monitoring. These 37 patents have expiration dates between April 2018 and November 2024. We also acquired the rights to 22 United States patent applications and the rights of transfer from Cygnus to Animas the license of 5 United States patents assigned to the regents of the University of California. These 5 United States patents are specific to continuous glucose monitoring and they have expiration dates between January 2011 and March 2024. The 42 patents referenced in this paragraph also benefit from patent protection in numerous European countries, Canada and Japan.

As of December 31, 2004, we had registered the trademarks “ANIMAS” and “EZ MANAGER” with the United States Patent and Trademark Office on the Principal Register. We are in the process of filing a Community Trademark application for “ANIMAS” mark in the European Union countries, as well as filing a customs recordation of the “EZ MANAGER” mark.

We have applied with the United States Patent and Trademark Office to register the trademark “EZ SET” and have submitted a request for an extension of time to file a statement of use. On February 15, 2004, we submitted trademark applications to the United States Patent and Trademark Office to register the marks Micro-Pump, MicroSet, and MicroWatch. With the Cygnus acquisition, we acquired approximately 16 marks which have been registered in the United States Patent and Trademark Office, as well as in various countries.

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Research and Development

Our research and development efforts focus on developing future generation pumps, infusion sets, and continuous glucose sensing. Our research and development staff consists of approximately 35 people, including 2 who hold Ph.D. degrees. Our research and development staff has extensive experience in the medical device industry, including insulin pumps, infusion sets, surgical lasers, optoelectronics in medical applications, biosensors, hearing aids, pacemakers, and implantable defibrillators. We expect research and development expenses to continue to increase as we seek to enhance our existing product portfolio and develop additional products. We incurred research and development expenses of $20.8 million in 2004 (including the write-off of purchased in-process research and development of $14.5 million), $5.2 million in 2003 and $3.9 million in 2002.

Competition

The medical device industry is subject to intense competition. We have five principal competitors:

	•	Medtronic MiniMed, a division of Medtronic Inc.;
	•	Roche Disetronic, a division of Roche Diagnostics;
	•	Smiths Medical MD, Inc. (formerly known as Deltec, Inc.), a subsidiary of Smiths Group plc;
	•	Nipro Medical Corporation, a subsidiary of Nipro Corporation; and
	•	Sooil Development Co., Ltd.

Some of our competitors are large, well capitalized companies with significantly greater resources for product development and marketing. Medtronic MiniMed (“Medtronic”) has the leading market share of the insulin pump market in the United States. Roche Disetronic has the leading market share of the insulin pump market in Europe. Roche Disetronic is currently prohibited by the FDA from selling its infusion pumps in the United States. We anticipate that Roche Disetronic will reenter the United States market in the second quarter of 2005.

Continuous monitoring or sensing is a very competitive field. We believe our acquisition of certain Cygnus assets has strengthened our intellectual property portfolio in continuous glucose sensing and has also provided us with a strong core-technology in electrochemical sensors.

To date, the FDA has approved, for adjunctive use only, two companies’ continuous glucose monitors or sensors, those developed by Cygnus and now owned by Animas, and those developed and owned by Medtronic. Unlike the current finger-stick blood glucose meters, devices labeled for adjunctive use should not be used for non-therapeutic use. We believe that this labeling is a significant limitation for wide-spread clinical use and wide-spread reimbursement.

The GlucoWatch Biographer, formerly owned by Cygnus and now owned by Animas (see Products Under Development for a complete description) is a non-invasive continuous glucose meter worn on the patient’s wrist. It provides continuous blood glucose readings, for adjunctive use only; provides readings of blood glucose, updated every 20 minutes of blood glucose; and in addition contains both a hyperglycemic and hypoglycemic alarm. The GlucoWatch Biographer is the only device currently approved by the FDA and sold in the US market that provides real-time blood glucose readings. The second-generation GlucoWatch (G2) Biographer can be worn for 13 hours and requires a two-hour warm-up time. Cygnus, since the initial PMA was approved in 2001, has received various supplemental approvals, by the FDA, extending the age group from adults down to children aged 8 and older, allowing use with a topical ointment to reduce skin irritation, reducing the frequency of skipped readings, making the device less sensitive to perspiration, and reducing the warm-up time. The third generation GlucoWatch (G3) Biographer has been approved by the FDA, but not yet commercialized.

The Medtronic CGMS system was approved by the FDA in 1999 and is the only system presently being sold by Medtronic. Although Medtronic’s next generation product, the Guardian, received FDA approval in February 2004, it is not yet known when the Guardian System will become available commercially. Both the CGMS and the Guardian rely on a needle catheter containing a glucose-oxidase electrochemical sensor to measure blood glucose that has to be changed every three days. The Medtronic CGMS, a holter-type device, does not provide patients real-time blood glucose measured values, but rather it stores these values. The healthcare professional can download these values to obtain trending information. The CGMS requires four calibrations a day and retrospectively calibrates blood glucose readings. The Guardian System has, we believe, similar labeling to the GlucoWatch Biographer; that is, as an adjunctive use device that provides hypoglycemia alarms and blood glucose trending information. The Guardian requires at least two finger-stick tests of blood glucose a day to calibrate it. We also believe that Medtronic hopes to obtain approval from the FDA for the Guardian to transmit blood glucose readings via RF telemetry to their models 522/722 pumps.

A number of companies, in addition to Medtronic, are developing next-generation real-time continuous glucose monitoring or sensing devices and technologies. Progress on this front is difficult to assess, but we know that at least one other company, Abbott, has submitted a real-time continuous monitor for non-adjunctive use. It is unknown when, if ever, any continuous monitor or sensor, will be approved as a substitute for current glucose monitors or sensors.

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We believe that the principal competitive factors in our market include: technological superiority and leadership; strong acceptance by healthcare professionals and patients; high reliability, safety, and ease of use; intensive customer focus and service; comprehensive patient education; effective marketing and distribution; speed of product innovation; and agreements between third party payors and competitive brands.

Government Regulation

Our products are medical devices subject to extensive and ongoing regulation by the Food and Drug Administration (or “FDA”) and other regulatory bodies. FDA regulations govern product design and development, product testing, product manufacturing, product labeling, product storage, pre-market clearance or approval, advertising and promotion, product sales and distribution, and complaint handling, including providing reports to the FDA if a device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if it were to recur.

FDA’s Pre-market Clearance and Approval Requirements. Unless an exemption applies, each medical device we wish to commercially distribute in the United States will require either a PMA or 510(k) clearance from the FDA. We have obtained 510(k) clearance for each of our insulin pumps. We expect that our long-term implantable continuous glucose sensor under development, as well as our MicroWatch will require a PMA.

	•	PMA. Devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices, or devices deemed not substantially equivalent to a previously cleared 510(k) device are placed in class III, requiring a PMA. A PMA application must be supported by extensive data, including technical, preclinical, clinical trials, manufacturing, and labeling to demonstrate to the FDA’s satisfaction the safety and effectiveness of the device. After a PMA application is complete, the FDA begins an in-depth review of the submitted information, which generally takes between one and three years, but may take significantly longer. The Medical Device User Fee and Modernization Act (MDUFMA) provides a non-binding performance goal for PMA review by the FDA of 180 days in exchange for a designated application fee paid by the sponsor that may be several hundred thousand dollars.
	•	510(k) Clearance. To obtain 510(k) clearance for any of our products (or for certain modifications to devices that have received 510K clearance), we must submit a pre-market notification demonstrating that the proposed device is substantially equivalent to a previously cleared 510(k) device or a device that was in commercial distribution before May 28, 1976 for which the FDA has not yet called for the submission of a PMA application. The FDA’s 510(k) clearance pathway usually takes from three to six months from the date the application is completed, but can take significantly longer. The MDUFMA provides a non-binding performance goal for 510(k) review by the FDA of 75 days if more information is requested, and 90 days for final decisions in exchange for a designated application fee of several thousand dollars.

Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include any of the following sanctions: fines, injunctions, and civil or criminal penalties; recall or seizure of our products; operating restrictions, partial suspension, or total shutdown of production; refusing our request for 510(k) clearance or a PMA of new products; and withdrawing 510(k) clearance or PMAs that are already granted.

We are subject to announced and unannounced inspections by the FDA, and these inspections may include the manufacturing facilities of our subcontractors.

The FDA recently last inspected our facility for QSR compliance in October 2004. The audit resulted in a Form 483 citation. A Form FDA 483 consists of observations by an FDA investigator and does not constitute a final determination by the FDA regarding QSR compliance.

The observations include allegations that we have not ensured that an adequate and effective quality system has been fully

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implemented and maintained at all levels of our organization. Specifically, the FDA investigator observed instances in which we have not documented, evaluated, reported and trended complaints in a timely manner.

In November 2004, we sent the FDA a written response indicating the corrective actions that we have taken, and that we will take, in response to the FDA’s observations. We received a Warning Letter, dated February 24, 2005, from the FDA, stemming from the October inspection. We responded to the FDA within the requisite 15-day time period, but have not yet received a response from the agency regarding the suitability of our responses.

The FDA is likely to conduct a reinspection of our facility to verify that we have corrected the alleged deviations. Although we believe that these corrective actions will adequately address the FDA observations, we cannot assure you that the FDA will agree or that it will find our written statement of completed and proposed corrective actions adequate, that upon reinspection the FDA will agree that corrective actions have been implemented adequately, or that the FDA will refrain from enforcement action based upon the current or future inspectional findings. The enforcement actions the FDA could take against us include issuance of a public warning letter, product recall or seizure, complete or partial shut down of our manufacturing operations, and the imposition of criminal and civil fines or penalties.

International sales of medical devices are subject to foreign government regulations, which may 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 approval, and the requirements may differ. There is a trend towards harmonization of quality system standards amongst the European Union, United States, Canada, and various other industrialized countries.

The primary regulatory environment in Europe is that of the European Union, which consists presently of 25 countries encompassing most of the major countries in Europe. Other countries, such as Switzerland, have voluntarily adopted laws and regulations that mirror those of the European Union with respect to medical devices. The European Union has adopted numerous directives and standards regulating the design, manufacture, clinical trials, labeling, and adverse event reporting for medical devices. Devices that comply with the requirements of a relevant directive will be entitled to bear the CE conformity marking, indicating that the device conforms to the essential requirements of the applicable directives and, accordingly, can be commercially distributed throughout Europe. The method of assessing conformity varies depending on the class of the product, but normally involves a combination of self-assessment by the manufacturer and a third party assessment by a “Notified Body.” This third party assessment may consist of an audit of the manufacturer’s quality system and specific testing of the manufacturer’s product. Additionally, the European Union requires that the user guides of product imported into any European Union country must be in the native language(s) of each such country.

Outside of the European Union, regulatory approval needs to be sought on a country-by-country basis in order for use to market our products. In late 2004, we began distribution of the IR 1200 in Canada, Israel, France, Spain, Austria, Germany, United Kingdom, New Zealand, and Australia, upon receipt of regulatory approval of such country and/or satisfaction of regulatory requirements. We also expect to seek future distribution of the IR 1200 in the Czech Republic, Finland, Italy, and Hungary.

Licensure. Several states require that durable medical equipment (“DME”) providers be licensed in order to sell products to patients in that state. Certain of these states require that DME providers maintain an in-state location. Although we believe we are in compliance with all applicable state regulations regarding licensure requirements, if we were found to be noncompliant, we could lose our licensure in that state, which could prohibit us from selling our products to patients in that state. In addition, we are subject to certain state laws regarding professional licensure. We believe that our certified diabetes educators are in compliance with all such state laws. If our educators or we were to be found non-compliant in a given state, we may need to modify our approach to providing education, clinical support, and customer service.

Fee-splitting; Corporate Practice of Medicine. The laws of many states in which we maintain operations prohibit unlicensed persons or business entities, including corporations, from employing physicians and other health professionals or engaging in certain financial arrangements, such as splitting professional fees with non-physicians. These laws and their interpretations vary from state to state and are enforced by state courts and regulatory authorities, each with broad discretion. Possible sanctions for violations of these restrictions include loss of a licensure, civil and criminal penalties, and rescission of business arrangements that may violate these restrictions. We exercise care to structure our arrangements with healthcare providers to comply with the relevant state laws, and believe our current arrangements substantially comply with applicable laws. Government officials charged with responsibility for enforcing these laws may assert that we, or transactions in which we are involved, are in violation of such laws. Furthermore, such laws ultimately may be interpreted by the courts in a manner inconsistent with our interpretations.

Federal Anti-Kickback and Self-referral Laws. The Federal Anti-Kickback Statute prohibits the knowing and willful offer, payment, solicitation, or receipt of any form of remuneration in return for, or to induce:

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	•	the referral of a person;
	•	the furnishing or arranging for the furnishing of items or services reimbursable under Medicare, Medicaid or other governmental programs; or
	•	the purchase, lease, or order of, or the arrangement or recommendation of the purchasing, leasing, or ordering of any item or service reimbursable under Medicare, Medicaid, or other governmental programs.

We generally provide the training and clinical services to patients necessary for appropriate use of our products. In a small percentage of the pumps that we sell, the providers provide the training and clinical services on our behalf and are reimbursed for these services at fair-market value. Although we believe that these arrangements do not violate the law, regulatory authorities may determine otherwise, especially as enforcement of this law historically has been a high priority for the federal government. Noncompliance with the federal anti-kickback legislation can result in exclusion from Medicare, Medicaid, or other governmental programs, restrictions on our ability to operate in certain jurisdictions, as well as civil and criminal penalties, any of which could have an adverse effect on our business and results of operations.

Federal law also includes a provision commonly known as the “Stark Law,” which prohibits a physician from referring Medicare or Medicaid patients to an entity providing “designated health services,” including a company that furnishes durable medical equipment, in which the physician has an ownership or investment interest or with which the physician has entered into a compensation arrangement. Violation of the Stark Law could result in denial of payment, disgorgement of reimbursements received under a noncompliant arrangement, civil penalties, and exclusion from Medicare, Medicaid, or other governmental programs. Although we believe that we have structured our provider arrangements to comply with current Stark Law requirements, these arrangements may not expressly meet the requirements for applicable exceptions from the law.

Additionally, as some of these laws are still evolving, we lack definitive guidance as to the application of certain key aspects of these laws as they relate to our arrangements with providers with respect to patient training. We cannot predict the final form that these regulations will take or the effect that the final regulations will have on us. As a result, our provider arrangements may ultimately be found to be not in compliance with applicable federal law.

Federal False Claims Act. The Federal False Claims Act provides, in part, that the federal government may bring a lawsuit against any person whom it believes has knowingly presented, or caused to be presented, a false or fraudulent request for payment from the federal government, or who has made a false statement or used a false record to get a claim approved. In addition, amendments in 1986 to the Federal False Claims Act have made it easier for private parties to bring “qui tam” whistleblower lawsuits against companies. Penalties include fines ranging from $5,500 to $11,000 for each false claim, plus three times the amount of damages that the federal government sustained because of the act of that person. We believe that we are conforming to this law.

Civil Monetary Penalties Law. The Federal Civil Monetary Penalties Law prohibits the offering or transferring of remuneration to a Medicare or Medicaid beneficiary that the person knows or should know is likely to influence the beneficiary’s selection of a particular supplier of Medicare or Medicaid payable items or services. Noncompliance can result in civil money penalties of up to $10,000 for each wrongful act, assessment of three times the amount claimed for each item or service and exclusion from the Federal healthcare programs. We believe that our arrangements comply with the requirements of the Federal Civil Monetary Penalties Law.

State Fraud and Abuse Provisions. Many states have also adopted some form of anti-kickback and anti-referral laws and false claims act. We believe that we are conforming to such laws. Nevertheless, a determination of liability under such laws could result in fines and penalties and restrictions on our ability to operate in these jurisdictions.

Administrative Simplification of the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”). HIPAA mandated the adoption of standards for the exchange of electronic health information in an effort to encourage overall administrative simplification and enhance the effectiveness and efficiency of the healthcare industry. Ensuring privacy and security of patient information is one of the key factors driving the legislation.

In August 2000, the Department of Health and Human Services (“DHHS”) issued final regulations establishing electronic data transmission standards that healthcare providers must use when submitting or receiving certain healthcare data electronically. All affected entities, including us, were required to comply with these regulations by October 16, 2003.

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In December 2000, DHHS issued final regulations concerning the privacy of healthcare information, which were subsequently clarified in August 2002. These regulations regulate the use and disclosure of individuals’ healthcare information, whether communicated electronically, on paper, or verbally. All affected entities, including us, were required to comply with these regulations by April 2003. The regulations also provide patients with significant new rights related to understanding and controlling how their health information is used or disclosed.

In February 2003, DHHS issued final regulations concerning the security of electronic healthcare information and data. These regulations mandate the use of certain administrative, physical, and technical safeguards to protect the confidentiality of electronic healthcare information. Most affected entities, including us, are required to comply with these regulations by April 20, 2005.

In April 2003, DHHS issued interim final regulations related to the enforcement and imposition of penalties on entities that violate HIPAA standards. These regulations are the first installment of enforcement regulations which, when issued in complete form, will set forth procedural and substantive requirements for the enforcement and imposition of penalties under HIPAA. Sanctions include criminal penalties and civil sanctions.

We have established a plan and engaged the resources necessary to comply with HIPAA. At this time, we believe our operations are currently conducted in substantial compliance with those HIPAA regulations that are currently in effect. Based on the existing HIPAA regulations, we believe that the cost of our compliance with HIPAA will not have a material adverse effect on our business, financial condition, or results of operations.

Third Party Reimbursement

In the United States, our products are generally purchased directly by patients, distributors and, in some cases, military hospitals or managed care organizations. In many cases, on behalf of the patients, we bill third party payors, including private insurance companies, health maintenance organizations, preferred provider organizations, other managed care providers, Medicare, and, to a limited extent, Medicaid. Under the Medicaid program, states generally reimburse for approved procedures on a reasonable cost or fee schedule basis. Currently, some states reimburse our products under the Medicaid program. Medicare provides a 15-month rental on insulin pumps and a fixed utilization of pump supplies.

We maintain an insurance assistance department consisting of approximately 60 people to simplify and expedite claims processing and to assist patients in obtaining third party reimbursement. We believe that over 95% of the net revenues from our insulin pumps and ancillary supplies are reimbursed by third party payors, subject to applicable deductible and co-payment amounts. Our business is affected by the reimbursement practices of third party payors. Many patients defer purchasing discretionary durable medical equipment, such as our insulin pumps, until they have satisfied their insurance deductibles which typically occur in the latter half of the calendar year.

Third party payors may decline to reimburse for procedures, supplies, or services determined not to be “medically necessary” or “reasonable.” In certain situations, some payors have declined to reimburse for a particular patient because such patient failed to meet the criteria. We try to deter and reverse such decisions through education and have expanded our insurance assistance efforts toward this end. Although our efforts are usually successful, such reimbursement may become less likely in the future as pressure increases for lower healthcare costs and particularly near-term costs.

There is widespread concern that healthcare market initiatives in the United States may lead third party payors to decline or further limit reimbursement. The extent to which third party payors may determine that use of our products will save costs or will at least be cost effective is highly uncertain, and it is possible, especially for diabetes, that they will merely focus on the lower initial costs associated with injection therapy or will otherwise limit reimbursement for insulin pumps or other products we develop. Because of uncertainties regarding the possible healthcare reform measures that could be proposed in the future and initiatives to reduce costs by private payors, we cannot predict whether reimbursement for our products will be affected or, if affected, the extent of any effect. The unavailability of third party coverage or the inadequacy of reimbursement for our products would adversely affect our business and operating results.

Employees

As of December 31, 2004, we had 348 full-time equivalents, including 107 in field sales and sales administration, 8 in marketing, 77 in clinical, 66 in operations and manufacturing, 34 in engineering and research and development, 16 in quality assurance, and 40 in general and administrative functions. None of our employees is represented by a collective bargaining agreement and we have never experienced any work stoppage. We believe that our employee relations are good.

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WHERE YOU CAN FIND MORE INFORMATION

We are subject to the information and periodic reporting requirements of the Exchange Act, and, in accordance with such requirements, are required to file periodic reports, proxy statements, and other information with the SEC. These periodic reports, proxy statements, and other information are available for inspection and copying without charge at the public reference facilities maintained by the SEC in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and copies may be obtained from the SEC upon payment of the prescribed fee. Information on the operation of the public reference facilities may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding registrants that file electronically with the SEC. The address of the site is http://www.sec.gov. You may also request copies of these filings, at no cost, by telephone at (610) 644-8990 or by mail to: Animas Corporation, 200 Lawrence Drive, West Chester, Pennsylvania 19380, Attention: Investor Relations or by accessing our website at http://www.animascorp.com.

Copies of our corporate governance policies, charters of our committees and our Code of Business Conduct and Ethics can be obtained free of charge by accessing our website.