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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
Commission File No. 0-23678
BIOSPHERE MEDICAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
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DELAWARE 04-3216867
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
111 LOCKE DRIVE, MARLBOROUGH, MASSACHUSETTS 01752
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (508) 357-7500
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.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 /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of voting Common Stock held by non-affiliates of
the registrant was $132,729,835, based on the last reported sale price of the
Common Stock on the OTC: Bulletin Board on March 15, 2000.
Number of shares outstanding of the registrant's class of Common Stock as of
March 15, 2000 was 9,236,622.
DOCUMENTS INCORPORATED BY REFERENCE:
Proxy Statement for the 2000 Annual Meeting of Stockholders--Part III.
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PART I
ITEM 1. BUSINESS
We are pioneering the use of our proprietary bioengineered acrylic beads,
known as microspheres, for medical applications including embolotherapy and a
broad range of tissue engineering applications. Our initial applications for
these microspheres are in embolotherapy. Embolotherapy is a minimally invasive
procedure in which embolic materials, such as our microspheres, are delivered
through a catheter into the blood vessels to inhibit blood flow to tumors or
vascular defects or to control blood loss presurgically. We intend that our
first products will target the treatment of hypervascularized tumors, which are
tumors that have a large number of blood vessels feeding them. Hypervascularized
tumors include certain tumors affecting the brain and spinal cord, tumors in the
uterus, known as uterine fibroids, and tumors associated with primary liver
cancer. By selectively blocking the tumor's blood supply, embolotherapy is
designed to cause the tumor to shrink. We believe that our microsphere
technology platform may also be used to develop products to deliver drugs to
targeted sites.
Our microspheres have a variety of characteristics that we believe make them
preferable to other embolic materials currently used in embolotherapy. These
characteristics are designed to make our product easier to use and its delivery
to the tumor more targeted and controlled, which we believe will result in
better procedural outcomes for the patient. By improving the practice of
embolotherapy, we believe that currently untreated patients and patients who are
seeking treatment with existing embolotherapy or more invasive surgical
procedures may seek treatment with our product.
We believe that our platform microsphere technology also has broad medical
applications in tissue engineering, such as tissue bulking, repair and
regeneration. In this context, we are exploring and/or developing microspheres
for use in the treatment of a number of conditions, including stress urinary
incontinence, facial wrinkles and gastroesophageal reflux disease. We are
exploring the use of microspheres for treatment in certain bone conditions and
tissue and bone regeneration.
INDUSTRY OVERVIEW
EMBOLOTHERAPY MARKETS
Embolotherapy has been used for more than 20 years by interventional
radiologists to treat certain peripheral tumors, arteriovenous malformations and
to control blood loss. Interventional neuroradiologists practice embolotherapy
for procedures in the brain in order to block the blood supply to inoperable
tumors or to block the blood supply to the tumor region to minimize bleeding
during surgery. Applications in the brain are important medically and we believe
demonstrate the safety and efficacy of embolotherapy in high-risk procedures. In
recent years, interventional radiologists in the United States, Europe and Japan
have begun to expand the scope of embolotherapy to include uterine artery
embolization and the treatment of certain cancers, including liver cancer. In
addition, affected people have become more proactive in seeking treatment
alternatives, particularly with the general awareness and use of Internet
medical sites. As a result, the potential market for embolotherapy has expanded
considerably from niche neurological applications to broader medical
opportunities.
Passive embolotherapy refers to the use of microspheres to mechanically
block the flow of blood to tumors, vascular defects and hemorrhage sites. We are
also researching the development of microspheres which have drugs or genes
embedded into them which will be designed to be released from the microspheres
at the targeted site, a process we refer to as active embolotherapy.
UTERINE FIBROIDS
Uterine fibroids are non-cancerous tumors growing in or on the uterus. Their
cause is unknown. Most patients with uterine fibroids do not initially have
symptoms and remain untreated until the patient experiences abnormal bleeding,
urinary frequency, pain, swelling or difficulty with fertility.
Until now, women suffering from uterine fibroids have had few treatment
options. These existing treatment options include the following:
- HYSTERECTOMY: Hysterectomy is a surgical procedure to remove the uterus.
While hysterectomy has a relatively low complication rate, it requires a
hospital stay of four to five days, and recovery period of five to six
weeks, and results in loss of fertility for women of child-bearing age.
This frequently has adverse psychological effects on the patient, and can
lead to early menopause.
- MYOMECTOMY: Myomectomy is the surgical removal of the uterine fibroids
without removal of the uterus. It is usually performed on women who wish
to preserve their fertility. In addition to the invasiveness of the
procedure, the most significant disadvantage of the myomectomy is a 20 to
40 percent recurrence rate. Even though myomectomy has been the only
available procedure for a woman with severe symptoms from uterine fibroids
who wish to preserve fertility, the recurrence rate and invasiveness have
resulted in resistance from both third party payors and patients for the
procedure. Relatively few myomectomies are performed in relation to the
number of eligible patients.
- MEDICAL MANAGEMENT AND "WATCHFUL WAITING:" About 95 percent of symptomatic
fibroid patients either receive hormone treatment on a temporary basis to
relieve symptoms or remain untreated and tolerate the symptoms. Even if
the patient receives treatment, once treatment ceases the uterine fibroids
usually regrow. While hormone treatment temporarily reduces symptoms,
patients often experience side effects associated with the accompanying
hormonal changes. Additionally, women cannot conceive while taking the
hormones. Women with less severe symptoms who are, therefore, not
candidates for hormone treatment, and those seeking to conceive have few
satisfactory options. In these circumstances, physicians usually monitor
symptoms and will administer therapy only if the condition worsens.
The therapies currently available for treating uterine fibroids may have
significant drawbacks including:
- temporary or permanent loss of fertility for women of child-bearing age,
- lengthy recovery periods,
- premature menopause and related symptoms,
- high costs, including costs of medications, surgical procedures, and
frequent and long hospital stays,
- discomfort and side effects from invasive surgical procedures and hormone
therapy, and/or
- risk of recurrence of the fibroids.
Another method of treatment for uterine fibroids, more recently adopted, is
uterine artery embolization. The embolic material most commonly used today in
uterine artery embolization is polyvinyl alcohol, or PVA. Polyvinyl alcohol has
several limitations, including:
- INCONVENIENCE AND LIMITED EFFECTIVENESS. Polyvinyl alcohol often clogs in
the catheter and the blood vessel, resulting in less than optimal
occlusions of the blood supply to targeted tumors as well as undesired
necrosis, or death, of the surrounding tissues. Because of its imprecise
size and shape, polyvinyl alcohol may not fully occlude the blood vessel,
allowing the blood to circumvent the embolic material and continue to feed
the tumor.
- LIMITED CONTROL. Polyvinyl alcohol often fragments and aggregates, or
clumps, in the blood vessel, causing vessel blockages prior to reaching
the desired site of blood flow occlusion. Clumping during embolization is
problematic for two reasons. First, if clumping occurs in the catheter
during the procedure, more frequent catheter flushing or catheter
replacement may be required, adding to the length and cost of the
procedure. Second, if clumping occurs at non-targeted sites in the vessel
after
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injection into the artery, incomplete embolization can occur. In addition,
occlusions can block normal desired blood supply to the tissues.
- CHRONIC INFLAMMATORY RESPONSE. Polyvinyl alcohol often stimulates an
inflammatory response by the body that persists for an extended period of
time.
As a result, we believe there is a significant need for a new treatment
option for patients with uterine fibroids which addresses the shortcomings of
current therapies.
PRIMARY LIVER CANCER
Primary liver cancer refers to liver cancer originating in the liver, rather
than traveling to the liver from another cancer site in the body. Over
70 percent of primary liver cancers are inoperable and are treated primarily
with radiation or chemotherapy:
- RADIATION: While radiation therapy can shrink or eliminate certain
individual tumors, it is seldom used to treat liver cancer. Since it is
difficult to isolate radiation exposure to the liver tumor, radiation
therapy often results in damage to the surrounding non-tumorous tissue.
Radiation injury can also damage the natural anti-tumor defenses of the
body,
- CHEMOTHERAPY: Chemotherapy seeks to control cancer by selectively killing
the more-rapidly-dividing cancer cells and is widely used for treating
cancer elsewhere in the body. The use of systemically delivered
chemotherapy agents, however, has shown little benefit in treating liver
cancer. Similar to the limitations of radiation therapy, therapeutic doses
of chemotherapy to the cancerous tissue have a damaging effect on the
normal surrounding tissue.
Other treatments currently under investigation to treat primary liver cancer
are tumor ablation, which seeks to kill the tumor by means of destructive
electrical energy, and embolization using polyvinyl alcohol. Interventional
radiologists are also currently using chemoembolotherapy to treat liver cancer.
Chemoembolotherapy refers to the delivery of drugs in a mixture that contains
embolic materials to create a higher localized concentration of the drug.
TISSUE ENGINEERING MARKETS
Advances in cell biology are resulting in rapid advances in the fields of
organ repair and tissue repair, reconstruction and regeneration, which we
generally refer to as tissue engineering. These developments in tissue
engineering are targeted at persuading the body to heal itself through the
delivery of molecular signals, cells and supporting structures to the
appropriate sites in the body.
In certain conditions including stress urinary incontinence,
gastroesophageal reflux disease, urinary reflux in infants and certain skin
conditions, the normal anatomic supports are not present in the body. By
injecting fillers into the existing structures to bulk them up, referred to as
tissue bulking, the missing anatomic supports are recreated, thereby eliminating
the condition.
Tissue repair and regeneration involves the development of bioartifical
cells, tissues and supporting matrixes, which are scaffolds that hold the cells
or tissues together. These tissue scaffolds may also be developed from synthetic
polymers. Tissue scaffold products have a number of potential applications,
including cartilage and bone repair and organ replacement.
PRODUCTS
Our innovative microsphere technology evolved out of approximately 15 years
of research and development of polymer formulations used in the field of
biological separations and drug purification. In 1999, we made a strategic
decision to focus exclusively on microsphere technologies for medical
applications. We believe that our microsphere technology is a platform
technology which can be configured in
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several different ways to have applications as a pure embolic material, an
embolic material linked to a gene or drug, a bulking agent and a scaffold for
tissue engineering.
PASSIVE EMBOLOTHERAPY
EMBOSPHERE MICROSPHERES
Our initial product, Embosphere Microspheres, is intended for use in passive
embolotherapy to block the blood supply to hypervascularized tumors and
arteriovenous malformations. Embosphere Microspheres have been used in Europe in
hypervascularized tumors, arteriovenous malformations and to presurgically
control blood loss. We believe that, pending FDA clearance or approval the
principal application of the Embosphere Microspheres will be as an alternative
therapy for uterine fibroids.
Uterine artery embolization is a minimally invasive procedure performed by
interventional radiologists. In this procedure, microspheres are injected
through a small catheter into the blood vessels feeding the fibroid tumor,
preferentially blocking the blood supply to the fibroids, but not to the
surrounding healthy tissues. The goal of the uterine artery embolization
procedure is to eliminate the flow of blood to the uterine fibroid, thereby
alleviating related symptoms, while preserving normal uterine and ovarian
function.
We believe that embolotherapy is attractive relative to current therapy
alternatives for uterine fibroids, which include invasive surgical procedures,
such as hysterectomy and myomectomy, hormone therapy and "watchful waiting."
Current therapies can have significant drawbacks including temporary or
permanent loss of fertility, lengthy recovery periods, high costs, discomfort,
side effects and risk of recurrence of fibroids.
Although the effect of uterine artery embolization on future fertility has
not been established, we believe that uterine artery embolization has the
potential to preserve the fertility of the patient that would be lost through
hysterectomy or may be compromised by the use of current therapies or
technologies and to eliminate the risk of recurrence of the uterine fibroid
tumor and the complications associated with myomectomy. Most uterine artery
embolization procedures can be performed in under one hour, and the patient is
sedated but awake. The patient generally stays overnight in the hospital and
typically returns to everyday activities within the next few days. In contrast,
hysterectomy patients undergo general anesthesia, stay in the hospital for four
to five days and have a five to six week recovery period.
Current embolotherapy using polyvinyl alcohol also has several limitations
associated with its imprecise size and shape, including less effective occlusion
of the blood supply to the tumor, inflammation and untargeted embolization
resulting in the injury of the surrounding normal tissue. Independent studies
have indicated that Embosphere Microspheres have a variety of characteristics
that may make them preferable to polyvinyl alcohol. These include:
- PERFECT SPHERICAL SHAPE/CALIBRATED PARTICLE SIZE. We are able to
synthesize beads with uniform sizing and a spherical shape. When beads are
irregularly shaped or sized, as is the case with polyvinyl alcohol,
clinicians find vessel targeting more difficult, and the possibility of
unwanted embolization of blood vessels away from the site of the tumor may
increase.
- COMPLIANT AND RESILIENT PROPERTIES. We have developed a soft, elastic
microsphere which has the capability to compress to up to 30 to
50 percent of its original shape. Consequently, clinicians can deliver
these beads through microcatheters. Many clinicians prefer using
microcatheters during embolization as small catheters minimize the
frequency of artery or vessel spasm during the procedure. Vessel spasm can
be of particular concern during uterine artery embolization as it can
disrupt the flow of blood. Clinicians rely on blood flow during
embolization to direct the microspheres to the vessel targeted for
occlusion.
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- HYDROPHILIC PROPERTIES. Based on the choice of materials used to
manufacture microspheres, our products are hydrophylic, which means that
they absorb moisture. This characteristic is important in that it prevents
the microspheres from clumping in the catheter and the artery during the
procedure.
- NON-BIODEGRADABILITY. Our microspheres are composed of a synthetic
three-component polymer which is compatible with the human body. This
polymer does not dissolve in any solvent, is non-biodegradable and
resistant to absorption or digestion by the body. We believe, therefore,
that our Embosphere Microspheres are an appropriate agent for permanent
vessel occlusion.
- CELL ADHESION. Our Embosphere Microspheres are crosslinked with a cell
adhesion promoter composed of gelatin. This material promotes cell
adhesion, resulting in a more rapid, stable and complete occlusion of the
vessel.
- CHARGED SURFACE PROPERTY. Our microspheres are positively charged,
enabling them to attach to the negatively-charged blood vessel wall. This
attachment to the vessel wall minimizes the potential for the microspheres
to migrate to non-targeted vessels.
Embosphere Microspheres are currently available in a range of product sizes,
from 40 to 1,200 microns, based on current customer requirements and targeted
applications. They are designed to precisely fit the blood vessels, resulting in
targeted and controlled occlusion. They can be used with existing, commercially
available catheters and delivery systems. We anticipate that subsequent
generations of Embosphere Microspheres will incorporate new product
characteristics, such as improved cell adhesion properties and an improved
ability for the physician to visualize the product on x-rays during
administration.
We received CE Mark approval of our Embosphere Microspheres in the European
Union in 1997 and more recently received marketing approval in Australia and
Canada. In May 1999, we filed a 510(k) premarket notification to obtain
marketing clearance from the FDA for our Embosphere Microspheres for
hypervascularized tumors, atriovenous malformations and control of hemorrhage.
The 510(k) notification did not include an indication for use in treating
uterine fibroids. We have commenced clinical trials under an Investigation
Device Exemption to support an application for clearance or approval from the
FDA for this specific indication.
HEPASPHERE MICROSPHERES
We are developing HepaSphere Microspheres, which are expandable microspheres
for injection via catheter in the blood vessels feeding the liver cancer tumor.
Once inside the tumor, they are designed to expand by absorbing water from the
blood and effectively plug the blood supply to the tumor. Liver embolotherapy is
intended to starve the liver tumor, without damaging the surrounding tissues or
causing any side effects on other parts of the body, such as those associated
with chemotherapy and radiation.
Over 100 primary liver cancer patients have been treated to date with
HepaSphere Microspheres on an investigational basis in Japan. In
September 1999, we obtained a worldwide exclusive license to HepaSphere
Microspheres from its Japanese inventor. We plan to apply to the Japanese
Ministry of Health and Welfare for marketing approval within the next
24 months.
ACTIVE EMBOLOTHERAPY
VIASPHERE MICROSPHERES
We are conducting research on our Viasphere Microspheres, which will be
precisely-sized highly hydrophilic microspheres to which are attached genetic
materials or drugs. These microspheres are being designed to be injected into
the blood vessels feeding the tumor. We expect that once the flow of blood to
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the tumor has been occluded, Viasphere Microspheres will start delivering
concentrated genes or drugs into the tumor.
We believe that our Viasphere Microspheres may have several advantages over
current gene therapy or drug delivery products, including the following:
- DIRECT DELIVERY TO TUMOR: Our Viasphere Microspheres will be designed to
deliver the drug or gene therapy product directly to the tumor, avoiding
the potential side effects associated with high levels of circulating
drugs or genes after an intravenous infusion through the blood vessel
system. Direct delivery should permit the use of higher, potentially more
effective, dosages of the product.
- NON-VIRAL: By using our Viasphere Microspheres, the physician may be able
to avoid the risk associated with viruses which are currently used in the
delivery of drug or gene therapy products to increase the likelihood of
killing the cancer cells.
We are currently conducting early-stage research on the development of our
Viasphere Microspheres.
OTHER EMBOLIZATION PRODUCTS
In addition, we intend to seek to develop and commercialize other
embolization products that include:
- delivery systems for embolic materials, such as specialty catheters and
guidewires,
- new procedure enhancing technologies that are designed to improve the
uniformity of microsphere dispersion during injection, reduce radiation
exposure and optimize efficiency of procedure time and implanted material,
and
- additional embolic materials such as innovative coils, embolics that
solidify upon injection and resorbable embolics to treat aneurysms and
large arteriovenous malformations, as well as for specific tumors based
upon their type or location.
TISSUE ENGINEERING
MATRX
Our MatrX product, currently under preclinical development, will include
highly hydrophilic synthetic microspheres that will be designed to cause tissue
bulking as a means to provide anatomic support in disease conditions where this
support is missing. MatrX preparations will be designed to be easily injectable
yet large enough to avoid digestion by the body. Once injected, we anticipate
that the microsphere matrix will be rapidly populated by surrounding cells and
provide a stable, mechanically resistant tissue bulking effect. Potential
applications of MatrX preparations for tissue bulking include:
- STRESS URINARY INCONTINENCE: Approximately four million adults in the U.S.
suffer from stress urinary incontinence, which is the involuntary loss of
urine during coughing, laughing, sneezing, jogging, or any other activity
which causes a sufficient increase in pressure within the abdomen. Stress
urinary incontinence is currently treated in a variety of ways, but the
majority of patients are managed with techniques that treat the symptoms,
but do not restore urinary continence. Most curative approaches to the
treatment of urinary incontinence require significant surgical
interventions.
Tissue bulking agents are either biologically derived or synthetic and are
designed to be injected in or near the bladder neck to increase tissue
bulk. While bulking procedures are gaining acceptance,
biologically-derived bulking agents are typically absorbed by the body,
requiring retreatment. Other limitations include migration of the
synthetic agents to other non-affected parts of the body causing adverse
health effects, incompatibility of the synthetic agents with the human
body, and difficulty in injecting the agents into the walls of the
urethra. Accordingly, current available therapies provide only limited
benefit in the treatment of stress urinary incontinence.
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We are currently developing our MatrX tissue bulking product, which is
designed to be injected into the urethral wall to reduce or eliminate the
incidence of urinary incontinence. We are conducting preclinical research
on the application of our MatrX tissue bulking product for stress urinary
incontinence.
- VESICOURETERAL REFLUX: Vesicoureteral reflux is a condition in which urine
may backflow from the bladder through the ureters and into the kidneys.
This condition affects over one percent of newborn children. MatrX would
be used to bulk the area of tissue at the junction of the ureter and
bladder to increase backflow resistance.
- DERMAL AUGMENTATION: Dermal augmentation refers to a procedure to inflate
an area beneath the skin to correct facial contour defects. MatrX
preparations are being designed to be injected under the skin with a
hypodermic needle to provide a bulking effect to erase facial wrinkles or
facial contour defects.
- GASTROESOPHAGEAL REFLUX DISEASE: In many cases, gastroesophageal reflux
disease is attributable to decreased tone of the lower esophageal muscle
tissue or to a congenitally small band of muscle tissue. We are conducting
research relating to the use of our MatrX tissue bulking product under
development to be injected into the muscle tissue to improve its function.
GENS(2) INJECTABLE TISSUE SCAFFOLD
We are seeking to design our GenS(2) injectable tissue scaffold product,
which is in the research phase, for such applications as cartilage and bone
repair and other tissue or organ replacement. Several companies are developing
and marketing bioartifical cells, tissues and supporting scaffoldings which hold
the cells or tissues together. However, the existing tissue scaffoldings are
either difficult to inject into the body, are digested by the body over time, or
do not adequately merge into the original tissue. In addition, most procedures
still require surgery to place the bioartifical tissues.
We believe that our microsphere technology can be formulated into injectable
microsphere scaffolds, which we call GenS(2), which may overcome many of the
limitations of tissue scaffolds currently commercially available. We are
designing this product to adhere to cells and to be small enough to be injected,
yet large enough after injection to avoid digestion.
OTHER NON-STRATEGIC PRODUCTS
In addition to our Embosphere Microsphere products, we sell barium and other
ancillary products. Barium is purchased from Guerbet Medical, Inc. and resold
for use in gastrointestinal medical tests. We sell other ancillary devices as
complimentary medical products for hospital and physician use. We generated a
significant portion of our revenue in 1999 from these non-strategic products. We
do not expect these products to be a significant component of our future sales.
MARKETING AND SALES
We intend to market our embolotheraphy products primarily through direct
sales efforts in the United States once we receive the required marketing
clearance or approval from the FDA, and through a combination of distributors,
field representatives and direct marketing support in other parts of the world.
We intend to build a direct sales force in the United States.
In Europe, we market our products through a vice-president of sales and
marketing, four field representatives in France, three in-house sales support
people, and distributors in markets outside of France. We are in the process of
expanding our sales and marketing management team in Europe, the United States
and Japan.
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We plan to attend major medical conventions pertaining to our targeted
markets and invest in market development, including physician training and
patient outreach. We are working closely with major academic centers to serve as
centers for excellence for physician training, product evaluation and ongoing
research. Many members of our Medical Advisory Board are associated with these
major academic centers.
RESEARCH AND DEVELOPMENT
Our research and development group consists of four direct employees and
four consultants. In addition, we have several development agreements with
outside product development contractors and study agreements with several
medical centers.
Our research and development group is developing our product technology in
three areas:
- continuous improvement of our core technology,
- complementary embolotherapy products, and
- new initiatives aimed at leveraging our core technology in new market
areas.
Our core technologies include patented and proprietary microsphere
technologies, licenses in the medical field for patented organic and inorganic
polymer and surface chemistries for microsphere design and development, a
license in the medical field for non-viral DNA transfection technology, and
expertise and know-how in microsphere manufacturing.
During the fiscal years ended December 31, 1997, 1998 and 1999, we spent
approximately $34,000, $34,000 and $968,000 on our research and development
efforts. We expect our research and development expenses to increase in the
future as we seek to increase our research and development staff, enhance our
existing products and develop additional products.
COMPETITION
PASSIVE EMBOLOTHERAPY
The primary competitive embolotherapy product sold by competitors is
polyvinyl alcohol, or PVA, a product introduced into the market more than
20 years ago. We encounter, and expect to continue to encounter, competition in
the sale of our current and future passive embolotherapy products. Our principal
competitors in the field of embolotherapy are Boston Scientific Corporation,
Johnson & Johnson, and Nycomed S.A., as well as companies selling or developing
non-embolotherapy solutions for the disease states targeted by us. These
competitors have, and our future competitors are likely to have, greater
financial, operational, sales and marketing resources and more experience in
research and development than we have. We compete primarily on the basis of
product performance, ease of use, degree of embolization control, and quality of
patient outcomes. Our future success will depend in large part on our ability to
gain market leadership at the early stage of the development and acceptance of
new procedures, and our ability to continue to develop and bring to market
differentiated products enhancing embolotherapy.
ACTIVE EMBOLOTHERAPY
Although we are not aware of any company selling or marketing active
embolotherapy products, we expect to encounter competition in the future sale of
any active embolotherapy products. We expect that our future competitors in this
area may have greater financial, operational, sales and marketing resources and
more experience in research and development than we have. In addition, we expect
to compete with companies which are developing and marketing other anticancer
therapies and gene therapy drugs. These competitors include several large
pharmaceutical companies. We believe that the principal competitive factors in
the active embolotherapy market will include the ability to deliver a highly
concentrated dose of
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gene or drug to the tumor without effects on other parts of the body, product
designs facilitating a minimally invasive outpatient procedure, and a sales and
marketing organization which is able to support interventional radiologists.
TISSUE ENGINEERING
In the field of tissue engineering, we believe that competition will come
from companies that are currently developing and marketing tissue bulking and
tissue repair and regeneration products. We believe our principal competitors in
the field of tissue engineering are companies such as Inamed Corporation and
Johnson & Johnson. These competitors have, and our future competitors are likely
to have, greater financial, operational, sales and marketing resources and more
experience in research and development than we have. We believe that the
principal competitive factors in the tissue engineering market will be the
ability to obtain durable effects while reducing the invasiveness of the
procedure.
GOVERNMENT REGULATION
FDA REGULATION. The FDA, and other federal, state, local, and foreign
authorities, regulate our products and manufacturing activities. Pursuant to the
Federal Food, Drug, and Cosmetic Act and the regulations promulgated thereunder,
the FDA regulates the development, clinical testing, manufacture, packaging,
labeling, storage, distribution and promotion of medical devices. Before a new
device can be introduced into the market, the manufacturer must generally obtain
marketing clearance through a 510(k) notification or approval through a
Premarket Approval. We generally will be required to obtain 510(k) clearance or
premarket approval prior to commercial distribution of future products or future
applications of current products. Our proposed active embolotherapy products
will likely be regulated as combination products, meaning they could be subject
to regulation as drugs or biological products, which may involve more extensive
clinical testing and rigorous premarket approval beyond that required for our
microspheres and ancillary products, and other proposed products.
CLASSIFICATION OF MEDICAL DEVICES. In the United States, medical devices
intended for human use are classified into three categories, Class I, II, or
III, on the basis of the controls deemed reasonably necessary by the FDA to
assure their safety and effectiveness. Class I devices are subject to general
controls, for example, labeling, premarket notification under Section 510(k),
unless exempt, and adherence to the FDA's Good Manufacturing Practice
regulations. Class II devices are subject to general and special controls, for
example, performance standards, postmarket surveillance, patient registries, and
FDA guidelines. Class III is the most stringent regulatory category for medical
devices. Class III devices are those which are subject to premarket approval
requirements and are intended to require, or must require, an FDA approval of
their safety and effectiveness prior to marketing. Class III devices include,
for example, devices which are life-sustaining, life-supporting or implantable
devices, or new devices which have not been found substantially equivalent to
legally marketed devices.
510(K) CLEARANCE. The FDA will clear a device under section 510(k) if the
submitted information establishes that the proposed device is "substantially
equivalent" to a legally marketed Class I or II medical device, or to a
Class III medical device for which the FDA has not yet called for a Premarket
Approval application. Commercial distribution can begin only after the FDA
issues an order that the device is substantially equivalent to a device that is
legally marketed and not subject to a Premarket Approval requirement. The FDA
may determine that a proposed device is not substantially equivalent to a
legally marketed device, in which case a Premarket Approval will be required to
market the device, unless additional information can be submitted to support a
substantial equivalence determination, or the FDA, pursuant to a request from a
timely 510(k) submitter, makes a risk based determination that a not
substantially equivalent device can be classified into Class I or II. An FDA
request for additional data could require that clinical studies of the device's
safety and effectiveness be performed. We have submitted a premarket
notification, or 510(k) notification, to the FDA for Embosphere Microspheres for
embolization of hypervascularized tumors, arteriovenous malformations, and
hemorrhage control. Clearance, if
9
obtained, may be conditioned on labeling restrictions and our conducting a
lengthy postmarket surveillance study. The predicate devices are Class III
devices. Further, our embolotherapy device is classified into Class III by the
FDA, which means that even if we obtain 510(k) clearance to market the device,
the FDA could promulgate a regulation requiring PMA approval of the device to
allow it to remain on the market. A requirement for PMA approval will likely
require us to conduct costly clinical trials and there is no guarantee that we
can provide the FDA sufficient data for PMA approval in a timely fashion, if at
all. Failure to obtain PMA approval would result in removal of our product from
the United States market.
PREMARKET APPROVAL. A Premarket Approval application must be filed and
approved before a device can be marketed if a proposed device is not
substantially equivalent to a legally marketed device or, as discussed above, if
it is a pre-amendments Class III device, i.e., a device in commercial
distribution prior to May 28, 1976, for which the FDA has called for Premarket
Approvals. A Premarket Approval application must be supported by valid
scientific evidence, which typically includes extensive data, including
pre-clinical and clinical trial data, to demonstrate the safety and
effectiveness of the device. Obtaining approval can take several years and
approval may be conditioned on, among other things, substantial restrictions on
indications for use and the conduct of postmarket surveillance studies.
Notwithstanding the 510(k) and Premarket Approval pathways to the marketplace,
if human clinical trials of a device are required, and the device presents a
"significant risk," the sponsor, usually the manufacturer or the distributor of
a device, must obtain FDA approval of an Investigational Device Exemption
application prior to commencing human clinical trials. Sponsors of clinical
trials are permitted to charge for devices distributed in the course of a study
provided such charges do not exceed recovery of the costs of manufacture,
research, development and handling, but devices may not be commercialized, i.e.,
promoted as safe or effective, sold for profit or used beyond legitimate
research needs.
On October 4, 1999, the Obstetrics and Gynecology Devices Panel of the
Medical Devices Advisory Committee met to discuss requirements for clinical
studies to support submissions for clearances or approvals for products for
uterine artery embolization and other products used in the treatment of uterine
fibroids. The FDA has not formally classified the use of embolic particles for
this indication and may decide to require a PMA or, alternatively, may allow
commercial clearance via a 510(k) together with clinical support that
substantiates product safety and efficacy. See Premarket Approval above. We have
received an Investigational Devices Exemption, or IDE, which allows us to
commence a clinical study to investigate the safety and feasibility of the
Embospheres Microspheres for uterine artery embolization. IDE trials typically
proceed in three phases, are subject to extensive regulation, and may be placed
on hold or terminated by the FDA if, among other reasons, there is reason to
believe the risks do not outweigh the anticipated benefits. The IDE process may
take many years. We hope to expand this initial study into a pivotal phase
subsequent to accrual and follow-up of thirty patients. Expansion will require
FDA approval.
CHANGES IN APPROVED DEVICES. Device manufacturers must obtain new FDA
510(k) clearance when there is a major change or modification in the intended
use of a legally marketed device or a change or modification, including product
enhancements, and, in some case, manufacturing changes, to a legally marketed
device that could significantly affect its safety or effectiveness. Supplements
for approved Premarket Approval devices are required for device changes,
including some manufacturing changes, that affect safety or effectiveness. For
devices marketed pursuant to 510(k) determinations of substantial equivalence,
we must obtain FDA clearance of a new 510(k) notification prior to marketing the
modified device; for devices marketed with Premarket Approval, we must obtain
FDA approval of a supplement to the Premarket Approval prior to marketing the
modified device.
GOOD MANUFACTURING PRACTICES AND REPORTING. The Federal Food, Drug, and
Cosmetic Act requires us to comply with Good Manufacturing Practices or Quality
Systems regulations. We must comply with various quality control requirements
pertaining to all aspects of our product design and manufacturing process
including requirements for packaging, labeling and record keeping, including
complaint files. The FDA enforces these requirements through periodic
inspections of medical device manufacturing facilities.
10
In addition, the Medical Device Reporting regulation obligates us to inform the
FDA whenever information reasonably suggests that one of our devices may have
caused or contributed to death or serious injury, or when one of our devices
malfunctions and, if the malfunction were to recur, the device would be likely
to cause or contribute to a death or a serious injury.
LABELING AND ADVERTISING. Labeling and promotional activities are also
subject to scrutiny by the FDA. Among other things, labeling is violative of the
law if it is false or misleading in any respect or it fails to contain adequate
directions for use. Moreover, any labeling claims that exceed the
representations either approved or cleared by the FDA will violate the Federal
Food, Drug, and Cosmetic Act.
Our product advertising is also subject to regulation by the Federal Trade
Commission under the Federal Trade Commission Act, which prohibits unfair
methods of competition and unfair or deceptive acts or practices in or affecting
commerce, as well as unfair or deceptive practices such as the dissemination of
any false advertisement pertaining to medical devices. Under the Federal Trade
Commission's "substantiation doctrine," an advertiser is required to have a
"reasonable basis" for all product claims at the time the claims are first used
in advertising or other promotions.
IMPORT REQUIREMENTS. Imported products must meet the same marketing
standards as domestic goods. The only exception is a product imported for
export. In this case, a product that would otherwise be refused entry can be
imported under certain conditions; specifically, the importer must declare that
the item is intended for incorporation or further processing by the initial
owner or consignee into a device that will be exported. The initial consignee or
owner must maintain records identifying the use of the article, and submit a
report regarding its disposition upon agency request. If an article is not
incorporated or further processed into a device, it must be destroyed or
exported.
To import a device, the importer must file an entry notice and bond with
Customs pending an FDA decision on the product's admissibility. All devices are
subject to FDA examination before release from Customs. Any article that appears
to be in violation of the Federal Food, Drug, and Cosmetic Act will be refused
admission and a notice of detention and hearing will be issued. A product also
can be detained without physical examination if the product has a past history
or other information indicates that it may be violative. Foreign firms must
register and list before their products may be imported, and a device must have
a cleared 510(k) or approved PMA if required.
EXPORT REQUIREMENTS. Products for export from the United States are subject
to foreign countries' import requirements and the FDA's exporting requirements.
The introduction of our products in foreign markets may subject them to foreign
regulatory clearances, which may impose additional product standards, packaging
and labeling requirements and import restrictions on devices. Regulatory
requirements to market devices vary from country to country. In addition, each
country has its own tariff regulations, duties, and tax requirements.
In addition to the import requirements of foreign countries, we must also
comply with the United States laws governing the export of products regulated by
the FDA. Devices that have obtained 510(k) clearance or Premarket Approval and
comply with the law in all other respects may be exported without further FDA
authorization. However, foreign countries often require, among other things, an
FDA certificate for products for export, also known as a CPE. To obtain this
certificate, the device manufacturer must certify to the FDA that the product
has been granted clearance or approval in the United States and that the
manufacturing facilities appeared to be in compliance with Good Manufacturing
Practices regulations at the time of the last FDA inspection.
Under the FDA Export Reform and Enhancement Act of 1996, an unapproved
Class III device, a device subject to an Investigational Device Exemption, or a
banned device may be exported to any country if the product complies with the
laws of that country and has valid marketing authorization in one of the
following countries or authorities: Australia, Canada, Israel, Japan, New
Zealand, Switzerland, South Africa, the European Union, or a country in the
European Economic Community, or EEC, if the device is marketed in an EEC country
or authorized for general marketing in the EEC. The FDA is authorized to
11
add countries to this list in the future. Further, a device may be exported
under this provision only if, among other things, it is not adulterated, accords
to the specifications of the foreign purchaser, complies with the laws of the
importing country, is labeled for export, is manufactured in substantial
compliance with Good Manufacturing Practices regulations or recognized
international standards, is not sold in the United States, and meets other
conditions.
Another pathway to export an unapproved Class III device for which a
Premarket Approval would be required to market the product in the United States
is to satisfy the following requirements:
- the device accords to the specifications of the foreign purchaser,
- the device is not in conflict with the laws of the country to which it is
intended for export,
- the device is labeled that it is intended for export,
- the device is not sold or offered for sale in domestic commerce, and
- the FDA determines that the exportation of the device is not contrary to
the public health and has the approval of the country to which it is
intended for export. Compliance with these requirements will permit export
to countries where marketing authorization from a listed country or
authority is not obtained.
FINES AND PENALTIES FOR NONCOMPLIANCE. Our failure to comply with
applicable FDA regulatory requirements could result in, among other things,
Premarket Approval withdrawal, rescission of a 510(k) clearance, injunctions,
product withdrawals, voluntary or mandatory patient/physician notifications,
recalls, product seizures, civil penalties, fines and criminal prosecutions. In
addition, the Federal Trade Commission has a variety of processes and remedies
available to it for enforcement, both administratively and judicially, including
compulsory process, cease and desist orders and injunctions. Federal Trade
Commission enforcement can result in orders requiring, among other things,
limits on advertising, corrective advertising, consumer redress, divestiture of
assets, rescission of contracts and such other relief as may be deemed
necessary. Violation of such orders could result in substantial financial or
other penalties. Any such action by the FDA or the Federal Trade Commission
could materially adversely affect our ability to successfully market our
products.
Medical device laws are also in effect in many countries outside of the
United States. These range from comprehensive device approval requirements for
some or all of our medical device products to simpler requests for product data
or certification. The number and scope of these requirements are increasing.
Sales of medical devices in Europe are subject to the European Medical Device
Directive. This directive contains requirements for quality system and product
performance guidelines to which all manufacturers must comply. These guidelines
contain quality system guidelines and preproduction product design verification
that closely resemble current FDA guidelines. In 1997, we obtained ISO
9002/EN46001 international quality systems registration, a certification showing
that our procedures and manufacturing facilities comply with standards for
quality assurance and manufacturing process control. Our compliance with this
registration has been confirmed since 1997 in semi-annual surveillance audits.
The ISO 9002 certification, along with the EN 46001, the European Medical Device
Directive certification, signifies compliance with the requirements enabling us
to affix the CE Mark to our Embosphere Microsphere product. The CE Mark denotes
conformity with European standards for safety and allows certified devices to be
placed on the market in all European Union countries. After June 1998, medical
devices may not be sold in European Union countries unless they display the CE
Mark.
Failure to comply with applicable federal, state and foreign medical device
laws and regulations would likely have a material adverse effect on our
business. In addition, federal, state and foreign regulations regarding the
manufacture and sale of medical devices are subject to future changes. We cannot
predict what impact, if any, such changes might have on our business, but such
change could have a material impact.
We are subject to various federal, state and local laws and regulations
relating to the protection of the environment. In the course of our business, we
are involved in the handling, storage and disposal of certain
12
chemicals. The laws and regulations applicable to our operations include
provisions that regulate the discharge of materials into the environment.
Usually these environmental laws and regulations impose "strict liability,"
rendering a person liable without regard to negligence or fault on the part of
such person. Such environmental laws and regulations may expose us to liability
for the conduct of, or conditions caused by, others, or for acts that were in
compliance with all applicable laws at the time the checks were performed. We do
not believe that we have been required to expend material amounts in connection
with our efforts to comply with environmental requirements or that compliance
with such requirements will have a material adverse effect upon our capital
expenditures, results of operations or competitive position. Because the
requirements imposed by such laws and regulations are frequently changed, we are
unable to predict the cost of compliance with such requirements in the future,
or the effect of such laws on our capital expenditures, results of operations or
competitive position.
PROPRIETARY TECHNOLOGY AND PATENT RIGHTS
To establish and protect our proprietary technologies and products, we rely
on a combination of patent, copyright, trademark and trade secrets laws, as well
as confidentiality provisions in our contracts. We have implemented a patent
strategy designed to maximize our intellectual property rights. We are pursuing
patent coverage in the United States and foreign countries to protect the
technology, inventions and improvements that we consider important to the
development of our products and business.
In connection with our acquisition of a 51% interest in Biosphere Medical
S.A., in April 1999 we assigned to Biosphere Medical S.A. our interest in
several United States and foreign patents and patent applications, including two
United States patents relating to microspheres, which we jointly owned with
L'Assistance Publique-Hopitaux De Paris, referred to as AP-HP. In January 1998,
Biosphere Medical S.A. entered into an agreement with AP-HP pursuant to which
AP-HP has granted to Biosphere Medical S.A. the exclusive right to use the
jointly-owned patents. Biosphere Medical S.A. is required to pay to AP-HP a
royalty on the sale of any products which incorporate embospheres which are
covered by the patents. Biosphere Medical S.A. may sublicense its exclusive
rights under the agreement with the prior written consent of AP-HP. The rights
granted to Biosphere Medical S.A. under the contract are for an initial period
which ends on September 16, 2009, and are renewable on the agreement of
Biosphere Medical S.A. and AP-HP. The agreement can be terminated on three
months notice by either party if the other party does not perform one or more of
its obligations under the agreement and fails to cure its nonperformance during
the notice period. These jointly-owned patents will expire in 2014.
In addition, as part of the sale of our former core business to Life
Technologies in May 1999, we entered into a cross-license agreement with Life
Technologies. Under that agreement, Life Technologies has granted to us an
exclusive, worldwide, perpetual, royalty-free license to its technology and
patents relating to our core field of development, including any improvement to
that technology made prior to May 2004. The patents licensed to us by Life
Technologies include a United States composition-of-matter patent relating to
various compounds containing trisacryl monomer, which is used in our Embosphere
Microspheres. This patent expires in 2001. Under the agreement, we also granted
to Life Technologies an exclusive, worldwide, perpetual, royalty-free license to
any improvements to the technology they have licensed to us which are useful in
Life Technologies' fields of development. The agreement, and all licenses
granted thereunder, can be terminated by either party on sixty day's notice in
the event of a breach of the agreement by the other party.
In 1999, we entered into an agreement with Dr. Shinichi Hori, pursuant to
which we have an exclusive royalty-bearing license to a Japanese
composition-of-matter patent relating to our HepaSphere Microsphere product.
This patent expires in 2012. There are no United States or other international
filings corresponding to this patent.
We have filed two United States method-of-use patent applications relating
to materials and methods for active embolotherapy. In addition, in July 1999, we
entered into an agreement with the Louis Pasteur University in Strasbourg,
France and Centre National de la Recherche Scientifique pursuant to which we
13
received exclusive, royalty-bearing worldwide rights to three United States
patents relating to active embolotherapy technology.
We have filed three United States patent applications relating to tissue
bulking and the treatment of urinary incontinence, dermal augmentation, skin
wrinkles and gastroesophegeal reflux disease. We have also filed a United States
patent application relating to materials and methods for tissue regeneration.
Our success depends to a significant degree upon our ability to develop
proprietary products and technologies and to obtain patent coverage for the
products and technologies. We intend to continue to file patent applications
covering any newly-developed products and technologies. However, as discussed
above, there can be no guarantee that any of our pending or future filed
application will be issued as patents. There can be no guarantee that the United
States Patent and Trademark Office or some third party will not initiate an
interference proceeding involving any of our pending applications or issued
patents. Finally, there can be no guarantee that our issued patents or future
issued patents, if any, will provide adequate protection from competition, as
further discussed below.
Patents provide some degree of protection for our proprietary technology.
However, the pursuit and assertion of patent rights, particularly in areas like
medical device development, involve complex legal and factual determinations
and, therefore, are characterized by significant uncertainty. In addition, the
laws governing patentability and the scope of patent coverage continue to
evolve, particularly in life sciences. As a result, we cannot assure you that
patents will issue from any of our patent applications or from applications
licensed to us or that any of our issued patents will offer meaningful
protection. In addition, our issued patents or patents licensed to us may be
successfully challenged, invalidated, circumvented or rendered unenforceable so
that our patent rights might not create an effective competitive barrier.
Moreover, the laws of some foreign countries may not protect our proprietary
rights to the same extent as do the laws of the United States. There can be no
assurance that any patents issued to us will provide a legal basis for
establishing an exclusive market for our products or provide us with any
competitive advantages or that the patents of others will not have an adverse
effect on our ability to do business or to continue to use our technologies
freely. In view of these factors, our intellectual property positions bear some
degree of uncertainty.
We also rely in part on trade secret protection of our intellectual
property. We attempt to protect our trade secrets by entering into
confidentiality agreements with third parties, employees and consultants. Our
employees also sign agreements requiring that they assign to us their interests
in inventions and original expressions and any corresponding patents and
copyrights arising from their work for us. However, it is possible that these
agreements may be breached, invalidated or rendered unenforceable and if so our
trade secrets could be disclosed to others, including our competitors, and there
may not be an adequate corrective remedy available. Despite the measures we have
taken to protect our intellectual property, we cannot assure you that parties to
our agreements will not breach the confidentiality provisions in our contracts
or infringe or misappropriate our patents, copyrights, trademarks, trade secrets
and other proprietary rights. In addition, we cannot assure you that third
parties will not independently discover or invent competing technologies or
reverse engineer our trade secrets, or other technology. Therefore, the measures
we are taking to protect our proprietary technology may not be adequate.
Although we are not a party to any legal proceedings, in the future, third
parties may file claims asserting that our technologies or products infringe on
their intellectual property. We cannot predict whether third parties will assert
such claims against us or our licensees or against the licensors of technology
licensed to us, or whether those claims will harm our business. If we are forced
to defend against such claims, whether they are with or without any merit,
whether they are resolved in favor of or against us, our licensees or our
licensors, we may face costly litigation and diversion of management's attention
and resources. As a result of such disputes, we may have to develop at a
substantial cost non-infringing technology, or enter into licensing agreements.
These agreements, if necessary, may be unavailable on terms acceptable to us, or
at all, which could seriously harm our business or financial condition.
14
EMPLOYEES
As of March 1, 2000, we employed 39 persons. Of these employees, four are
primarily engaged in research and development activities, 14 are engaged in
manufacturing, six are engaged in sales and marketing and the remainder are
engaged in administration and accounting. Of these 39 persons, eight are located
in the United States and 31 are located in France.
Our employees in the United States are not covered by a collective
bargaining agreement. In Europe, our employees are covered by the provisions of
an agreement setting forth national guidelines and standards for labor relations
in the metal industry, and which also governs the medical device industry. We
consider our relations with our employees to be good.
RISK FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
This Annual Report on Form 10-K contains forward-looking statements. For
this purpose, any statements contained herein that are not statements of
historical fact may be considered to be forward-looking statements. Although not
a complete list of words that might identify forward-looking statements, we use
the words "believes," "anticipates," "plans," "expects," "intends," and similar
expressions to identify forward-looking statements. There are a number of
important factors that could cause our actual results to differ materially from
those indicated by forward-looking statements. Factors that could cause or
contribute to such differences include those discussed below, as well as those
discussed elsewhere in this Form 10-K.
OUR IMMEDIATE PRODUCT COMMERCIALIZATION EFFORTS ARE FOCUSED ON OUR EMBOSPHERE
MICROSPHERES, FOR WHICH WE HAVE RECEIVED ONLY LIMITED REGULATORY APPROVALS
OUTSIDE THE UNITED STATES TO DATE; WE HAVE NOT RECEIVED REGULATORY APPROVAL OR
CLEARANCE TO MARKET ANY OTHER PRODUCTS.
Our immediate product commercialization efforts are focused on our
Embosphere Microspheres. To date, this product has received regulatory approval
for marketing in Europe, Australia and Canada for use in the treatment of
arteriovenous malformations, hypervascularized tumors and control of blood loss.
In May 1999, we filed a 510(k) notification with the U.S. Food and Drug
Administration, or FDA, for marketing the use of our Embosphere Microspheres for
the embolization of hypervascularized tumors and arteriovenous malformations,
but not for the treatment of uterine fibroids. Clearance of this 510(k)
notification is pending, and we cannot assure you as to when this notification
will be cleared, if at all. Either a separate 510(k) notification or a premarket
approval will be required from the FDA with respect to the marketing in the
United States of Embosphere Microspheres for use in the embolization of uterine
fibroids. In either case, clinical studies will be required. The regulatory
approval process with respect to premarket approval can take years. We do not
have regulatory approvals or clearances to market any other product in any
country, other than approvals to market our Embosphere Microspheres in Europe,
Australia and Canada. If we do not receive required regulatory approval or
clearance to market our Embosphere Microspheres in the United States (including
an approval or clearance in the treatment of uterine fibroids) or for any other
product, or if required approvals or clearances are not received on a timely
basis, our business will be materially adversely affected. See
"Business--Government Regulation" for a more detailed discussion on the
regulatory approval process and regulatory compliance requirements.
IF THE MARKET IS NOT RECEPTIVE TO OUR EMBOSPHERE MICROSPHERES PRODUCT, WE WILL
BE MATERIALLY ADVERSELY AFFECTED.
We only recently began selling our Embosphere Microspheres product in Europe
and have not yet received regulatory approval or clearance for marketing our
Embosphere Microspheres in the United States. We cannot predict whether our
Embosphere Microspheres will be accepted in the market. The commercial success
of our Embosphere Microspheres product will depend upon its acceptance by the
medical community and third party payors as clinically useful, cost effective
and safe. Our Embosphere Microspheres are based upon new technologies and
therapeutic approaches. As a result, it may be difficult
15
for us to achieve market acceptance of this product. In particular, our success
will depend upon obstetrics and gynecology physicians referring patients to
interventional radiologists to receive treatment using our products in lieu of
or in addition to receiving other forms of treatment which the obstetrics and
gynecology physicians can provide directly. However, unless and until we receive
the required regulatory approvals and clearances to market our Embosphere
Microspheres in the United States for uterine fibroids, we cannot label or
market our Embosphere Microspheres in the United States for uterine fibroids.
While we have begun clinical testing under an Investigational Device Exemption
in order to apply for clearance or approval from the FDA for this specific
indication, we cannot assure you that we will receive any required approval or
clearance on a timely basis, if at all. In addition, market acceptance of this
product may be adversely affected by negative publicity associated with any
adverse medical effects attributed to embolization treatments generally or our
product. If we fail to achieve market acceptance of this product, we will be
materially adversely affected.
IF OUR EMBOSPHERE MICROSPHERES PRODUCT DOES NOT PROVE TO BE SAFE OR EFFECTIVE
THEN WE MAY BE REQUIRED TO WITHDRAW IT FROM THE MARKET.
We may not discover all potential problems with our Embosphere Microspheres
product even after completing our testing or even after its use in the market.
For example, Embosphere Microspheres are designed to remain in the body
permanently. As a result, there may be some risk that some or all of the
Embosphere Microspheres used in a medical procedure may travel in the blood
system beyond the intended site of action and occlude, or block, other blood
vessels, resulting in significant adverse health effects on the patient or even
death. There is limited data concerning the long-term health effects on persons
resulting from embolotherapy using our Embosphere Microspheres. If our product
is found not to be safe or effective for any reason, we may be required to
withdraw it from the market or we could incur fines or other penalties, which
would have a material adverse effect on us.
OUR BUSINESS POTENTIALLY EXPOSES US TO SUBSTANTIAL PRODUCT LIABILITY CLAIMS,
WHICH MAY RESULT IN LARGE MONETARY AWARDS AGAINST US AND NEGATIVE PUBLICITY; IN
ADDITION, WE COULD BE SUBJECT TO PRODUCT RECALLS.
Our business exposes us to the risk of product liability claims, product
recalls and fines or other penalties and associated adverse publicity that are
inherent in the testing, manufacturing, marketing and sale of medical device
products. We currently carry liability insurance with only limited coverage. We
cannot predict our ability to maintain our current insurance coverage or to
secure greater or broader product liability insurance coverage on acceptable
terms or at reasonable costs when we need it. A successful product liability
claim against us could require us to pay a substantial monetary award and
subject us to negative publicity. Even if we maintain insurance coverage, our
liability for damages could exceed the amount of coverage. In addition, a
product recall could generate substantial negative publicity about our products
and company and inhibit or prevent commercialization of other product
candidates.
WE HAVE A HISTORY OF LOSSES AND OUR FUTURE PROFITABILITY IS UNCERTAIN.
We have incurred operating losses since our inception and, as of
December 31, 1999, had an accumulated deficit of approximately $36.1 million,
including discontinued operations. We expect to spend substantial funds to
continue research and product testing, to establish sales, marketing, quality
control, regulatory and administrative capabilities, and for other general
corporate purposes. We expect to incur increasing losses over the next several
years as we expand our commercialization efforts.
We cannot predict the size or duration of any future losses. We cannot be
certain that we will ever become profitable or that, if we do become profitable,
we will remain profitable on a continuing basis. Failure to become and remain
profitable would depress the market price of our common stock and impair our
ability to raise capital and continue our operations.
16
WE HAVE RECENTLY UNDERTAKEN A STRATEGIC REDIRECTION OF OUR BUSINESS AND THERE
CAN BE NO ASSURANCE THAT OUR STRATEGIC SHIFT WILL PROVE TO BE SUCCESSFUL.
In early 1999, we decided to exit the chromatography business, which had
constituted our core business, to focus on the commercialization of microspheres
for use in embolotherapy and other applications. Consistent with this decision,
in February 1999 we acquired a 51% ownership interest in Biosphere Medical S.A.,
with an option to acquire the remaining 49% interest at a later date. In
May 1999, we sold substantially all of our assets relating to the chromatography
business and changed our name to BioSphere Medical, Inc. We have restated our
historical financial statements to reflect the discontinuation of our
chromotography business. In addition, over 70% of 1999 revenue included in our
restated financial statements is derived from the sale of products we consider
to be nonstrategic and which we do not expect to constitute a significant
portion of our revenue on an ongoing basis. We have no assurance that our
decision to exit the chromatography business and focus on the commercialization
of microspheres will prove to be successful.
WE MAY EXPERIENCE DELAYS, DIFFICULTIES OR UNANTICIPATED COSTS IN ESTABLISHING
THE SALES AND DISTRIBUTION CAPABILITIES NECESSARY TO GAIN MARKET ACCEPTANCE FOR
OUR PRODUCTS.
We currently lack sales, distribution and marketing capabilities in the
United States and have only limited sales, distribution and marketing
capabilities in Europe. To market our products directly, we must develop an
effective marketing and sales force with technical expertise and a supporting
distribution capability. Developing a marketing and sales force is expensive and
time-consuming and could delay a product launch. Moreover, we may choose or find
it necessary to enter into strategic partnerships to sell, market and distribute
our products. The terms of any partnership may not be favorable to us. We
currently rely on distributors to sell our products outside of France. We may
not be able to provide adequate incentive to these distributors to promote our
products. Our inability to successfully employ qualified marketing and sales
personnel and develop our sales and marketing capabilities, or the failure of
our distributors to promote our products would harm our business.
WE WILL INCUR SUBSTANTIAL COSTS TO EDUCATE PHYSICIANS ABOUT USING OUR PRODUCT
CORRECTLY.
To use our Embosphere Microspheres correctly for a particular medical
procedure, physicians must select and use the proper size and quantity of
Embosphere Microspheres. A physician's selection and use of the wrong size or
quantity of Embosphere Microspheres could have significant adverse health
effects on the patient, including death. It will be necessary for us to incur
substantial costs to educate physicians about the selection and use of the
proper size and quantity of Embosphere Microspheres in patient therapy. This
will involve spending significant amounts of money and allocating management
resources to this effort. If we are not able to successfully educate physicians
to properly use our product then we could be subject to substantial product
liability claims and we will not achieve widespread market acceptance or
significant product revenue.
WE HAVE ONLY ONE MANUFACTURING FACILITY, AND IF WE EXPERIENCE MANUFACTURING
DELAYS OR INTERRUPTIONS IN PRODUCTION, OUR BUSINESS WOULD BE ADVERSELY AFFECTED.
We currently produce all of our Embosphere Microsphere products in one
manufacturing facility in France. We would likely experience significant delays
or cessation in production of our products at this facility if a labor strike,
natural disaster, local or regional conflict or other supply disruption were to
occur. Moreover, we lease our manufacturing facility pursuant to an at-will
tenancy, and we could be required to relocate upon minimal advance notice. If we
are unable to manufacture our products at our facility in France, we may be
required to enter into arrangements with one or more contract manufacturing
companies. We do not currently have contingency plans in place and, if required,
we could encounter delays or difficulties establishing relationships with
contract manufacturers or in establishing agreements on terms that are favorable
to us. Also, in the same way that we must, third party manufacturers must adhere
to FDA's current good manufacturing practices, or GMP, regulations which are
enforced by the
17
FDA through its facilities inspection program. We cannot assure you that third
party manufacturers will be able to comply or maintain compliance with GMP
regulations. Any failure to comply could significantly delay a 510(k) clearance
or premarket approval. For a premarket approval device, if we change our
manufacturing facility or switch to a third-party manufacturer we will be
required to submit a premarket approval application supplement. For a 510(k)
product, a change in our manufacturing location would require us to change our
registration with the FDA. If we fail to produce enough products at our own
manufacturing facility or at a third-party manufacturing facility, we may be
unable to deliver products to our customers on a timely basis, which could lead
to customer dissatisfaction and could harm our reputation and ability to
compete. In addition, if we are required to depend on third-party manufacturers,
our profit margins may be adversely affected.
BECAUSE WE HAVE LIMITED SOURCES OF PRODUCTION AND SUPPLY, OUR ABILITY TO PRODUCE
AND SUPPLY OUR PRODUCTS COULD BE IMPAIRED.
Certain key components of our Embosphere Microspheres are currently
purchased from a limited number of outside sources and may only be available
through a few sources. We generally do not have long-term agreements with any of
our suppliers.
Our reliance on our suppliers exposes us to risks including:
- the possibility that one or more of our suppliers could terminate their
services at any time without penalty,
- the potential inability of our suppliers to obtain required components,
- the potential delays and expenses of seeking alternative sources of supply
or manufacturing services,
- reduced control over pricing, quality and timely delivery due to the
difficulties in switching to alternative suppliers, and
- the possibility that one or more of our suppliers could fail to satisfy
any of the FDA's required current good manufacturing practices
regulations.
Consequently, in the event that components from our suppliers are delayed or
interrupted for any reason, our ability to produce and supply our products could
be impaired.
THE INTELLECTUAL PROPERTY RIGHTS WE RELY UPON TO PROTECT THE TECHNOLOGY
UNDERLYING OUR PRODUCTS MAY NOT BE ADEQUATE, WHICH COULD ENABLE THIRD PARTIES TO
USE OUR TECHNOLOGY, OR VERY SIMILAR TECHNOLOGY, AND COULD REDUCE OUR ABILITY TO
COMPETE IN THE MARKET.
Our success will depend in part on our ability to obtain, protect and
enforce patents on our technology and to protect our trade secrets. Any patents
we own or license may not afford meaningful protection for our technology and
products. Others may challenge our patents and, as a result, our patents could
be narrowed, invalidated or rendered unenforceable. In addition, our current and
future patent applications may not result in the issuance of patents in the
United States or foreign countries. We cannot determine whether competitors have
similar patent applications on file, since filed patent applications are secret
until issued. The United States Patent and Trademark Office could initiate
interference proceedings involving our United States patent applications, issued
patents or patents that we license from third parties. Competitors may develop
products similar to ours which are not covered by our patents. Further, there is
a substantial backlog of patent applications at the United States Patent and
Trademark Office, and the approval or rejection of patent applications may take
several years.
We require our employees, consultants and advisors to execute
confidentiality agreements. However, we cannot guarantee that these agreements
will provide us with adequate protection against improper use or disclosure of
confidential information. In addition, in some situations, these agreements may
conflict with, or be subject to, the rights of third parties with whom our
employees, consultants or advisors have prior employment or consulting
relationships. Further, others may independently develop substantially
18
equivalent proprietary information and techniques, or otherwise gain access to
our trade secrets. Our failure to protect our proprietary information and
techniques may inhibit or limit our ability to exclude certain competitors from
the market.
WE MAY BE INVOLVED IN LAWSUITS TO PROTECT OR ENFORCE OUR INTELLECTUAL PROPERTY
RIGHTS. IF WE LOSE, WE MAY LOSE THE BENEFIT OF SOME OF OUR INTELLECTUAL PROPERTY
RIGHTS, THE LOSS OF WHICH MAY INHIBIT OR ELIMINATE OUR ABILITY TO EXCLUDE
CERTAIN COMPETITORS FROM THE MARKET.
In order to protect or enforce our patent rights, we may have to initiate
legal proceedings against third parties, such as infringement suits or
interference proceedings. By initiating legal proceedings to enforce our
intellectual property rights, we may also provoke these third parties to assert
claims against us. Furthermore, we may be sued for infringing on the
intellectual property rights of others, and we may find it necessary, if
threatened, to initiate a lawsuit seeking a declaration from a court regarding
the proprietary rights of others. Intellectual property litigation is costly,
and, even if we prevail, the cost of such litigation could adversely affect us.
In addition, litigation is time consuming and could divert management attention
and resources away from our business.
Our license agreement with L'Assistance Publique-Hopitaux De Paris, a French
hospital with which we jointly own certain patents, may require us to seek their
participation in any legal proceedings we initiate against third parties to
protect or enforce our rights under the jointly-owned patents. If we are not
able to obtain the cooperation of AP-HP in any infringement claim we may be
required to bring, then our ability to pursue such claim and protect our patent
rights could be harmed, which would have a material adverse effect on our
ability to market and sell our products and achieve profitability.
The patent position of companies like ours generally is highly uncertain,
involves complex legal and factual questions, and has recently been the subject
of much litigation. No consistent policy has emerged from the U.S. Patent and
Trademark Office or the courts regarding the breadth of claims allowed or the
degree of protection afforded under patents like those we own, have licensed,
may license or file in the future. As a result, we may not prevail in any
patent-related proceeding. If we do not prevail in any litigation, in addition
to any damages we might have to pay, we could be required to stop the infringing
activity or obtain a license. Any required license may not be available to us on
acceptable terms, or at all. In addition, some licenses may be nonexclusive, and
therefore, our competitors may have access to the same technology licensed to
us. If we fail to obtain a required license or are unable to design around a
patent, we may be unable to sell some of our products, which could have a
material adverse affect on us.
OUR RIGHT TO USE CERTAIN TECHNOLOGIES IS DEPENDENT ON LICENSES WHICH COULD BE
TERMINATED OR LOST.
We are a party to various license agreements that give us rights under
certain intellectual property rights of third parties. These licenses impose
various commercialization, sublicensing, royalty, insurance and other
obligations on us. Our failure to comply with our obligations under any license
could have a material adverse effect on our business, financial condition and
results of operations.
OUR BUSINESS IS SUBJECT TO AN EXTENSIVE AND POTENTIALLY COSTLY GOVERNMENTAL
APPROVAL PROCESS; WE HAVE NOT YET OBTAINED APPROVAL OR CLEARANCE TO MARKET OUR
PRODUCTS IN THE UNITED STATES.
The manufacture, packaging, labeling, advertising, promotion, distribution
and sale of our products are subject to governmental regulation by national and
local government agencies in the United States and abroad. Our products are
subject to approval or clearance by the FDA prior to marketing for commercial
use. We have not yet received any required approvals or clearances in the United
States. The process of obtaining necessary FDA approvals and clearances can be
time-consuming, expensive and uncertain. Further, approval or clearance may
place substantial restrictions on the indications for which the product may be
marketed or to whom it may be marketed. In addition, we may be required by the
FDA to conduct a postmarket surveillance study on our embolotherapy device, if
cleared. If such a study revealed an unexpected rate of type of adverse events,
the FDA could place further restrictions on the marketing of the device, or
rescind its clearance. Also some changes to legally marketed devices require new
regulatory
19
submissions, for example, a change in intended use or a change that affects
safety or effectiveness. Assuming we receive 510(k) clearance for our Embosphere
Microspheres, we may in the future make certain enhancements to our Embosphere
Microspheres which we determine do not necessitate the filing of a new 510(k)
notification. However, if the FDA does not agree with our determination, it will
require us to file a new 510(k) notification or a premarket approval or a
premarket approval supplement, for a premarket approval application product, for
the modification and we would be prohibited from marketing the modified product
until we obtained FDA clearance or approval. The nature of marketing claims we
will be permitted to make in labeling or advertising regarding our Embosphere
Microspheres is limited to those specified in any FDA clearance or approval and
claims beyond those cleared or approved will constitute a violation of the
Federal Food, Drug and Cosmetic Act.
Further, our embolotherapy device is classified into Class III by the FDA,
which means that even if we obtain 510(k) clearance to market the device, the
FDA could promulgate a regulation requiring PMA approval of the device to allow
it to remain on the market. A requirement for PMA approval will likely require
us to conduct costly clinical trials and there is no guarantee that we can
provide the FDA sufficient data for PMA approval in a timely fashion, if at all.
Failure to obtain PMA approval would result in removal of our product from the
United States market.
Legally marketed products are subject to continuing FDA requirements
relating to quality control and quality assurance, maintenance of records and
documentation and labeling and promotion of medical devices. We are also
required to submit medical device reports to the FDA to report device-related
deaths, serious injuries and malfunctions, the recurrence of which would be
likely to cause or contribute to a death or serious injury. These reports are
publicly available and, therefore, can become a basis for private tort suits,
including class actions. Our inability to obtain required regulatory approval or
clearance on a timely or acceptable basis could harm our business. In addition,
failure to comply with applicable regulatory requirements could subject us to
enforcement action, including product seizures, recalls, withdrawals of
clearances or approvals, restrictions on or injunctions against marketing our
products or products based on our technology, and civil and criminal penalties.
Medical device laws and regulations are also in effect in many countries
outside the United States. These range from comprehensive device approval
requirements for some or all of our medical device products to requests for
product data or certifications. The number and scope of these requirements are
increasing. Failure to comply with applicable federal, state and foreign medical
device laws and regulations may harm our business, financial condition and
results of operations.
WE ARE SUBJECT TO RULES REGARDING LABELING AND ADVERTISING AND VIOLATION OF
THOSE RULES COULD ADVERSELY AFFECT OUR BUSINESS.
The federal, state and foreign laws and regulations regarding the
manufacture and sale of our products are subject to future changes, as are
administrative interpretations of regulatory agencies. If we fail to comply with
applicable federal, state or foreign laws or regulations, we could be subject to
enforcement actions, including product seizures, voluntary or mandatory recalls,
voluntary or mandatory patient or physician notification, seizure of our
products, withdrawal of product clearances or approvals, withdrawal of IDE
approvals, restrictions on or injunctions against marketing our products, fines,
injunctions, and civil and criminal penalties. In addition, if we fail to comply
with any applicable FDA requirements, the FDA could withdraw premarket approval
or rescind premarket notification clearance. The FDA also has the authority to
request repair, replacement or refund of the purchase price of any devices
manufactured or sold by us. Any of these sanctions may have a material adverse
effect on our business, financial condition and results of operations, and could
materially adversely affect our ability to successfully market our products.
20
IT MAY TAKE LONGER THAN WE EXPECT TO COMPLETE CLINICAL TRIALS, MAKE REGULATORY
SUBMISSIONS AND RECEIVE REGULATORY APPROVALS.
Although for planning purposes we forecast the timing of completion of
clinical trials, regulatory submissions and regulatory approvals, the actual
timing of these events can vary dramatically due to factors such as delays,
scheduling conflicts with participating clinicians and clinical institutions,
the rate of patient accruals and the uncertainties inherent in the regulatory
approval process. Clinical trials involving our product candidates may not
commence or be completed and we may not make regulatory submissions or receive
regulatory approvals as forecasted.
We have limited experience in conducting clinical trials and in obtaining
regulatory approvals. In certain circumstances we rely on academic institutions
or clinical research organizations to conduct, supervise or monitor some or all
aspects of clinical trials involving our products. As a result, we will have
less control over the timing and other aspects of these clinical trials than if
we conducted them entirely on our own although we remain responsible for their
regulatory compliance and the accuracy of the data. These trials may not
commence or be completed as we expect and may not will be conducted
successfully. Failure to commence or complete, or delays in, any of our planned
clinical trials, regulatory submissions or regulatory approvals could undermine
investors' confidence in our ability to develop products, which would likely
cause our stock price to decrease.
WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY, WHICH COULD RESULT IN DECREASED
DEMAND FOR OUR PRODUCTS AND PRICE REDUCTIONS.
Medical devices and therapeutics are rapidly evolving fields in which
scientific and technological developments are expected to continue at a rapid
pace. We have many competitors in the United States and abroad, including
medical device and therapeutics companies, universities and other private and
public research institutions. Our success depends upon our ability to develop
and maintain a competitive position in the product categories and technologies
on which we focus. Many of our competitors have greater capabilities, experience
and financial resources than we do. Competition is intense and is expected to
increase as new products enter the market and new technologies become available.
Our competitors may:
- develop technologies and products that are more effective than ours,
- develop technologies that render our products obsolete or otherwise
noncompetitive,
- obtain regulatory approval for products more rapidly or effectively than
we can, and/or
- obtain patent protection or other intellectual property rights that would
block our ability to develop competitive products.
We may not be able to improve our products or develop new products or
technologies quickly enough to maintain a competitive position in our market and
continue to grow our business. Moreover, we may not be able to compete
effectively, and competitive pressures may adversely affect demand for our
products or our profitability.
WE MAY NOT BE ABLE TO MEET THE OPERATIONAL, LEGAL AND FINANCIAL CHALLENGES THAT
WE WILL ENCOUNTER IN OUR INTERNATIONAL OPERATIONS, WHICH MAY LIMIT THE GROWTH OF
OUR BUSINESS.
Our operations are currently conducted primarily through our French
subsidiary. Furthermore, we currently derive substantially all of our revenue
from the sale of our Embosphere Microspheres and other products in Europe. We
are increasingly subject to a number of challenges which specifically relate to
our international business activities. These challenges include:
- failure of local laws to provide the same degree of protection against
infringement of our intellectual property,
21
- protectionist laws and business practices that favor local competitors,
which could slow our growth in international markets,
- potentially longer sales cycles to sell products, which could slow our
revenue growth from international sales, and
- potentially longer accounts receivable payment cycles and difficulties in
collecting accounts receivable.
Our international operations may not be successful if we are unable to meet
and overcome these challenges, which would limit the growth of our business.
WE MAY LOSE MONEY WHEN WE EXCHANGE FOREIGN CURRENCY RECEIVED FROM INTERNATIONAL
SALES INTO U.S. DOLLARS OR MAKE FOREIGN CURRENCY PAYMENTS.
Most of our business is conducted in currencies other than the U.S. dollar.
We recognize foreign currency gains or losses arising from our operations in the
period incurred. As result, currency fluctuations between the U.S. dollar and
the currencies in which we do business will cause foreign currency translation
gains and losses. We cannot predict the effects of exchange rate fluctuations
upon our future operating results because of the number of currencies involved,
the variability of currency exposure and the potential volatility of currency
exchange rates. We do not currently engage in foreign exchange hedging
transactions to manage our foreign currency exposure.
IF WE FAIL TO OBTAIN AN ADEQUATE LEVEL OF REIMBURSEMENT FOR OUR PRODUCTS BY
THIRD PARTY PAYORS, THERE MAY BE NO COMMERCIALLY VIABLE MARKETS FOR OUR
PRODUCTS.
The availability and levels of reimbursement by governmental and other third
party payors affects the market for any medical device. These third party payors
continually attempt to contain or reduce the costs of healthcare by challenging
the prices charged for medical products. Additionally, in both the United States
and certain foreign jurisdictions, there have been a number of legislative and
regulatory proposals to change the healthcare system. Further proposals are
likely. These proposals, if adopted, could affect our ability to market our
products. Also, in certain foreign countries, particularly the countries of the
European Union where our Embosphere Microspheres product is currently marketed
and sold, the pricing of medical devices is subject to governmental control and
the price charged for our products have in some instances been reduced as a
result of these controls. We may not be able to sell our products profitably if
reimbursement is unavailable or limited in scope or amount.
OUR PRODUCTS ARE TESTED IN LABORATORY ANIMALS, AND THIS FORM OF TESTING MAY BE
CURTAILED BY SOCIAL FACTORS AND REGULATORY CHANGES.
Our research and development efforts often involve the controlled use of
laboratory animals. Opposition to this practice by activist groups may interfere
with the use of animal testing. Negative publicity generated by activist groups
may harm companies using this practice, including us. In addition, physical
force and demonstrations may occur against us which could delay the testing of
our products. Lobbying efforts by activist groups and other groups and
individuals against the use of animals in testing is ongoing, and may result in
changes in laws, regulations or accepted clinical procedures that would restrict
the use of animals in testing. In the event of a change in laws, regulations or
accepted clinical procedures, delays in our product development will likely
result until we find other methods for effective testing. In addition,
preclinical testing in animals and in vitro is subject to Good Laboratory
Practices regulations. Failure to comply with Good Laboratory Practices
regulations could result in the inability to rely on data obtained in such
testing to support proposed trials in humans and/or to support applications for
marketing clearances or approvals.
22
WE DEPEND GREATLY ON THE INTELLECTUAL CAPABILITIES AND EXPERIENCE OF OUR KEY
EXECUTIVES AND SCIENTISTS, AND THE LOSS OF ANY OF THEM COULD ADVERSELY AFFECT
OUR ABILITY TO DEVELOP OUR PRODUCT CANDIDATES.
The loss of Jean-Marie Vogel, our Chairman, John M. Carnuccio, our President
and Chief Executive Officer, Jonathan McGrath, our Vice-President Worldwide
Research and Development or other key members of our staff could harm us. We
also depend on our scientific collaborators and advisors, all of whom have other
commitments that may limit their availability to us. In addition, we believe
that our future success will depend in large part upon our ability to attract
and retain highly skilled scientific, managerial and marketing personnel,
particularly as we expand our activities in clinical trials, the regulatory
approval process and sales and manufacturing. We face significant competition
for this type of personnel from other companies, research and academic
institutions, government entities and other organizations. We cannot predict our
success in hiring or retaining the personnel we require for continued growth.
IF WE MAKE ANY ACQUISITIONS, WE WILL INCUR A VARIETY OF COSTS AND MAY NEVER
REALIZE THE ANTICIPATED BENEFITS.
If appropriate opportunities become available, we may attempt to acquire
businesses, technologies, services or products that we believe are a strategic
fit with our business. If we undertake this or any other acquisition, the
process of integrating an acquired business, technology, service or product may
result in operating difficulties and expenditures and may absorb significant
management attention that would otherwise be available for ongoing development
of our business. Moreover, we may never realize the anticipated benefits of any
acquisition. Future acquisitions could result in potentially dilutive issuances
of equity securities, the incurrence of debt or a decrease in the cash available
for our operations, contingent liabilities and/or amortization expenses related
to goodwill and other intangible assets, which could adversely affect our
results of operations and financial condition.
We currently own 51% of the outstanding capital stock of Biosphere Medical,
S.A. and are in the process of negotiating the acquisition of an additional 34%
of Biosphere Medical S.A. We have the right to acquire the remaining 15% of
Biosphere Medical S.A. between December 31, 2003 and December 31, 2004. In
addition, the holder of the remaining outstanding capital stock of Biosphere
Medical S.A. has a "put" option to require us to purchase any shares then owned
by it between December 31, 2003 until December 31, 2004 at a price not less than
FF6,000,000 ($980,000 as of December 31, 1999).] The amount payable by us in the
event the "put" option is exercised will be determined by reference to worldwide
Embosphere Microspheres revenues and Biosphere Medical S.A. revenues and is not
subject to a cap. If we are compelled by the minority stockholder to acquire the
minority interest at a future date, we could be required to make a significant
cash payment, which could result in the incurrence of debt or a decrease in the
cash available for our operations.
IF WE FAIL TO MANAGE OUR GROWTH, OUR BUSINESS COULD BE IMPAIRED.
We expect to experience growth in the number of our employees and the scope
of our operating and financial systems. This growth has resulted in an increase
in responsibilities for both existing and new management personnel. Our ability
to manage growth effectively will require us to continue to implement and
improve our operational, financial and management information systems and to
recruit, train, motivate and manage our employees. We may not be able to manage
our growth and expansion, which would impair our business.
WE WILL CONTINUE TO NEED SUBSTANTIAL FUNDS, AND IF ADDITIONAL CAPITAL IS NOT
AVAILABLE, WE MAY HAVE TO CURTAIL OR CEASE OPERATIONS.
We will need to raise funds to successfully develop and commercialize our
products. Other than a $2.0 million credit line with a bank, we have no
committed source of capital. If we cannot raise funds, we could be required to
reduce our capital expenditures, scale back our product development, reduce our
workforce and license to others products or technologies that we otherwise would
seek to commercialize ourselves. We may not receive funding on reasonable terms
or at all. If we raise money by selling additional
23
capital stock, these sales of our capital stock are likely to dilute our
existing stockholders. Further, if we issue additional equity securities, the
new equity securities may have rights, preferences or privileges senior to those
of existing holders of our common stock. Alternatively, we may borrow money from
commercial lenders, possibly at high interest rates.
OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY FROM QUARTER TO QUARTER, WHICH
COULD CAUSE A DECLINE IN OUR STOCK PRICE.
Our operating results could fluctuate significantly from quarter to quarter.
We expect to continue to experience significant fluctuations as a result of a
variety of factors, many of which are outside of our control. The following
factors could affect our operating results:
- market acceptance of our products,
- the timing and scope of regulatory approvals or denials,
- the timing of revenue generated from product sales,
- the introduction and marketing of new products,
- changes in demand for our products,
- availability of the components used in our products, and
- general and medical device industry-specific business and economic
conditions.
In addition, a large portion of our expenses, including expenses for
facilities, equipment and personnel, are relatively fixed. Accordingly, if
revenues decline or do not grow as anticipated, we might not be able to improve
our operating margins. In addition, we plan to significantly increase operating
expenses in the next several years. Failure to achieve anticipated levels of
revenues could therefore significantly harm our operating results for a
particular fiscal period.
Due to the possibility of fluctuations in our revenues and expenses, we
believe that quarter-to-quarter comparisons of our operating results are not a
good indication of our future performance. Our operating results in some
quarters may not meet the expectations of stock market analysts and investors.
In that case, our stock price would probably decline.
24
ITEM 2. PROPERTIES
Our facilities are located in Marlborough, Massachusetts and Louvres,
France. Effective April 1, 2000, we intend to relocate our Marlborough office to
Rockland, Massachusetts where we will lease approximately 8,000 square feet of
office and laboratory space pursuant to a lease for a term of five years. At our
facility in France, we lease approximately 10,000 square feet of office,
laboratory and manufacturing space. Approximately 7,000 square feet in our
facility in France are used for manufacturing operations, and the balance is
used for research and development and administration.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company,
through solicitation of proxies or otherwise, during the last quarter of the
year ended December 31, 1999.
EXECUTIVE OFFICERS
The executive officers of BioSphere, their respective ages as of
December 31, 1999 and their positions with BioSphere are as follows:
NAME AGE POSITION
- ---- -------- ----------------------------------------
John M. Carnuccio....................... 46 Chief Executive Officer, President and
Director
Jonathan R. McGrath..................... 45 Vice President, Worldwide Research and
Development
Robert M. Palladino..................... 45 Vice President and Chief Financial
Officer
Robert T. Phelps........................ 43 Vice President, Sales and Business
Development
Jean-Marie Vogel........................ 49 Chairman and Director
JOHN M. CARNUCCIO, age 46, has served as a director of BioSphere since
June 1999. From January 1999 until May 1999, Mr. Carnuccio served as Executive
Vice President of BioSphere and President of the Medical Products Business of
BioSphere. In May 1999, he was appointed President and Chief Executive Officer
of BioSphere. From 1979 to January 1999, Mr. Carnuccio served in a number of
capacities at Boston Scientific Corporation, a medical device company, most
recently as Vice President, Market Development, Interventional Gynecology, from
April 1998 to January 1999 and as Vice President and General Manager,
Microvasive Urology Division from 1992 to April 1998.
JONATHAN R. MCGRATH, age 45, has served as the Vice President, Worldwide
Research and Development since August of 1999. From 1995 to 1998, Mr. McGrath
was the Vice President of Research and Development at Urologix, a urological
device company. From 1990 to 1995, Mr. McGrath was the Vice President of
Research and Development at Schneider/Pfizer, a cardiovascular device company.
From 1987 to 1990, Mr. McGrath was the Vice President of Product Development &
Operations at Harbor Medical, a surgical device company. From 1980 to 1987,
Mr. McGrath held various positions at Boston Scientific Corporation, most
recently as the Director of Metals Product Development.
ROBERT M. PALLADINO, age 45, has served as Chief Financial Officer and Vice
President since December of 1999. From March 1999 to December 1999,
Mr. Palladino served as Vice President and Chief Financial Officer of
Coretek, Inc. a fiber optics manufacturer. From 1995 to 1999, he served as Vice
President of
25
Finance at C.P. Clare Corporation, a multinational electronics firm. He also
served as assistant treasurer at the Kendall Company, a health care manufacturer
from 1991 to 1995.
ROBERT T. PHELPS, age 43, has served as the Vice President, U.S. Sales and
Business Development since August of 1999. From 1993 to 1998, Mr. Phelps was the
Vice President of Sales, Orthopedic Division at Johnson & Johnson, a
pharmaceutical company. From 1990 to 1993, Mr. Phelps was the Group Controller,
Orthopedics Division at Johnson & Johnson.
JEAN-MARIE VOGEL, age 49, served as President, Chief Executive Officer and a
director of BioSphere from September 1994 until May 1999. In May 1999, he was
appointed Chairman. From January 1994 to September 1994, Mr. Vogel served as
Executive Vice President and Chief Operating Officer of BioSphere. From 1992 to
1993, Mr. Vogel served as President of the European Operations of Cuno, Inc., a
supplier of filtration processes, equipment and devices used in the production
of biological drugs and food products. From 1977 to 1992, Mr. Vogel served in
various capacities with Millipore Corporation, a manufacturer of membrane
filtration-based products, in its international operations with experience in
Asia, Latin America, the former Soviet Union, the Middle East and Australia,
including as Vice President and General Manager of Millipore's Asian operations.
Mr. Vogel is a French citizen.
26
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Common Stock of the Company traded on the Nasdaq National Market under
the symbol BSEP from March 25, 1994 through January 13, 1999, at which time it
moved to NASD's OTC: Bulletin Board. On January 14, 1999, the Common Stock of
the Company began trading on the OTC: Bulletin Board. On May 17, 1999, the
Company changed its symbol to BSMD to reflect the new business of BioSphere
Medical, Inc. On March 15, 2000, the last reported sale price of the Company's
Common Stock on the OTC: Bulletin Board was $35.00. On March 15, 2000, the
Company had approximately 1,139 stockholders of record. The following table sets
forth for the periods indicated the high and low sales prices per share of the
Common Stock as reported by the Nasdaq National Market for the last two fiscal
years.
1999
-------------------
HIGH LOW
-------- --------
First Quarter............................................... $1.125 $0.688
Second Quarter.............................................. $1.313 $0.703
Third Quarter............................................... $2.156 $0.750
Fourth Quarter.............................................. $6.375 $ 1.50
1998
-------------------
HIGH LOW
-------- --------
First Quarter............................................... $2.875 $1.25
Second Quarter.............................................. $2.625 $1.50
Third Quarter............................................... $ 1.50 $0.50
Fourth Quarter.............................................. $1.063 $0.25
The Company has never paid dividends on its Common Stock. The Company
currently intends to reinvest its earnings, if any, for use in the business and
does not expect to pay cash dividends in the foreseeable future.
27
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our financial statements and related notes to
those statements and other financial information included elsewhere in this
Annual Report on Form 10-K.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA: 1995 1996 1997 1998 1999
- ----------------------------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenue:
Product sales.............................. $250 $97 $117 $155 $2,263
License fees............................... -- 25 35 47 3
----------- ----------- ----------- ----------- -----------
Total revenue............................ 250 122 152 202 2,266
----------- ----------- ----------- ----------- -----------
Cost and expenses:
Cost of product sales...................... 84 43 72 95 1,404
Research and development................... 42 39 34 34 968
Selling, general and administrative........ 1,307 1,505 1,195 1,364 4,003
----------- ----------- ----------- ----------- -----------
Total cost and expenses.................. 1,433 1,587 1,301 1,493 6,375
----------- ----------- ----------- ----------- -----------
Loss from operations......................... (1,183) (1,465) (1,149) (1,291) (4,109)
Other income (expense):
Interest income............................ 76 37 32 30 234
Interest expense........................... (381) (214) (72) (222) (134)
Other income............................... -- -- -- -- 15
----------- ----------- ----------- ----------- -----------
Loss from continuing operations.............. $(1,488) $(1,642) $(1,189) $(1,483) $(3,994)
Loss from discontinued operations............ (11,187) (478) (2,615) (330) (539)
----------- ----------- ----------- ----------- -----------
Net loss..................................... $(12,675) $(2,120) $(3,804) $(1,813) $(4,533)
=========== =========== =========== =========== ===========
BASIC AND DILUTED NET LOSS PER COMMON SHARE:
- ---------------------------------------------
Loss from continuing operations.............. $(0.21) $(0.21) $(0.14) $(0.17) $(0.47)
Loss from discontinued operations............ (1.60) (0.06) (0.31) (0.04) (0.06)
Net loss per common share.................... (1.81) (0.27) (0.45) (0.21) (0.53)
Weighted average number of common shares
outstanding................................ 7,004 7,832 8,423 8,437 8,456
AS OF DECEMBER 31,
-------------------------------------------------------------------
BALANCE SHEET DATA: 1995 1996 1997 1998 1999
- ------------------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
Cash and cash equivalents.................... $2,079 $4,502 $2,370 $2,235 $5,368
Working capital.............................. (1,511) 3,648 3,835 2,552 4,490
Total assets................................. 15,876 16,312 12,787 12,664 7,496
Minority interest............................ -- -- -- -- 945
Long-term debt and capital leases............ -- 245 164 82 --
Shareholders' equity......................... 10,672 14,329 10,716 9,136 4,588
28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS TOGETHER WITH OUR FINANCIAL STATEMENTS AND RELATED
NOTES APPEARING ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K.
OVERVIEW
We are pioneering the use of our proprietary bioengineered acrylic beads,
known as microspheres, for medical applications including embolotherapy and a
broad range of tissue engineering applications.
We were formed as BioSepra Inc., a wholly-owned subsidiary of Sepracor Inc.
in December 1993. In 1994, we completed our initial public offering. As of
March 15, 2000 Sepracor owns approximately 59% of our outstanding common stock.
From our inception to May 1999, our core business was focused on the
commercialization of proprietary microsphere beads and instruments used in the
design, production and purification of pharmaceuticals.
In early 1999, we decided to focus on the commercialization of microspheres
for use in embolotherapy and other medical applications. Consistent with this
decision, in February 1999, we acquired a 51% ownership interest in Biosphere
Medical S.A., our majority-owned French subsidiary, with an option to acquire
the remaining 49% interest at later dates. In May 1999, we sold substantially
all of our assets relating to our former core business and changed our name to
BioSphere Medical, Inc. We have restated our historical financial statements to
present the operations of our former core business as a discontinued operation.
In 1999, we hired a new senior management team with expertise in the medical
device area.
We received CE Mark approval of our Embosphere Microsphere product in the
European Union in 1997 and more recently received marketing approval in
Australia and Canada. In May 1999, we filed a 510(k) premarket notification to
obtain marketing clearance from the FDA for our Embosphere Microspheres for
hypervascularized tumors and arteriovenous malformations, which are abnormal
connections in certain blood vessels. The 510(k) notification did not include an
indication for use in treating uterine fibroids. We have commenced clinical
testing under an Investigational Device Exemption in order to apply for
clearance or approval from the FDA for this specific indication. We expect to
file for marketing approval in Japan for our HepaSphere Microspheres product for
the treatment of primary liver cancer in the next 24 months. Based on the number
of vials of our Embosphere Microspheres product that we have sold to date, we
estimate that 5,000 patients have been treated with our Embosphere Microspheres
product outside of the United States.
Our revenue is currently generated from product sales in Europe of our
Embosphere Microspheres, and from the sale of barium and other ancillary devices
manufactured by us or by third parties. We recognize revenue upon shipment of
these products to our distributors and customers. Our products are sold by a
direct sales force in France and Canada and by distr