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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(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, 2001
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 number 1-13165
CRYOLIFE, INC.
(Exact name of registrant as specified in its charter)
Florida 59-2417093
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1655 Roberts Boulevard N.W., Kennesaw, GA 30144
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code (770) 419-3355
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
Common Stock, $.01 par value New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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 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. X 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 stock held by nonaffiliates of the
registrant was approximately $369,802,655 at March 26, 2002 (16,885,966 shares).
The number of common shares outstanding at March 26, 2002 was 19,484,931
(exclusive of treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
Part III: Portions of Registrant's Proxy Statement relating to the Annual
Meeting of Shareholders to be filed not later than April 30,2002.
PART I
ITEM 1. BUSINESS.
OVERVIEW
CryoLife, Inc. ("CryoLife" or the "Company") is the leader in the preservation
of human tissues for cardiovascular, vascular and orthopaedic transplant
applications. Additionally, the Company develops and commercializes implantable
medical devices, including BioGlue(R) Surgical Adhesive, glutaraldehyde-fixed
stentless porcine heart valves, and tissue-engineered SynerGraft(R) porcine
heart valves and bovine vascular grafts. The Company uses its expertise in
biochemistry, cell biology, immunology and protein chemistry and its
understanding of the needs of the cardiovascular, vascular and orthopaedic
surgery medical specialties, to continue expansion of its core preservation
business and to develop or acquire complementary implantable products and
technologies for these surgical specialties. For detailed financial information
on CryoLife's operating segments, see Note 19 of notes to the consolidated
financial statements.
CryoLife processes and distributes for transplantation preserved human
cardiovascular, vascular and orthopaedic tissue. Management believes that
cryopreserved human heart valves and conduits offer specific advantages over
mechanical, synthetic and animal-derived alternatives. Depending on the
alternative, these advantages include a more natural hemodynamic functionality,
the elimination of a long-term need for anti-coagulation drug therapy, a reduced
incidence of reoperation and a reduced risk of catastrophic failure,
thromboembolism (stroke) or calcification. The Company applies its proprietary
SynerGraft technology to enhance the preservation of certain human
cardiovascular and vascular tissues. The Company estimates that it provided in
excess of 70% of the preserved human heart valve tissue implanted in the U.S. in
2001. The Company also provides preservation services for surgical replacements
for the meniscus and the anterior and posterior cruciate ligaments, which are
critical to the proper operation of the human knee, as well as osteochondral
grafts used for the repair of cartilage defects in the knee. The Company
estimates that the potential U.S. market for implantable products targeting
indications addressed by the preserved tissues processed by the Company was in
excess of $1 billion in 2001. The Company seeks to expand the availability of
human tissue through its established relationships with approximately 100 tissue
banks and organ procurement agencies nationwide.
CryoLife has developed implantable biomaterials for use as surgical adhesives
and sealants. The Company's patent protected BioGlue Surgical Adhesive, designed
for cardiovascular, vascular, pulmonary, and general surgical applications, is a
polymer based on a derivative of an animal blood protein and a cross-linking
agent. The Company estimates that the annual worldwide market for surgical
sutures and staples in 2001 was in excess of $2 billion. The Company received a
Conformite Europeene ("CE") Mark (product certification) in 1998 for use of its
BioGlue Surgical Adhesive in vascular applications and began marketing this
product in April 1998 in the European Community ("EC"). In March 1999 the
Company was awarded a second CE Mark allowing the use of BioGlue in pulmonary
indications, including the repair of air leaks in lungs. In December 1999 the
Company received U.S. Food and Drug Administration ("FDA") approval to
distribute BioGlue Surgical Adhesive under a Humanitarian Device Exemption
("HDE") for use as an adjunct in the repair of acute thoracic aortic dissections
and immediately began marketing this product in the U.S. pursuant to the HDE. In
December 2001 the Company received FDA approval for BioGlue as an adjunct to
sutures and staples for use in adult patients in open surgical repair of large
vessels. In February 2002 BioGlue was awarded a third CE Mark for use in general
surgical repair procedures.
CryoLife has developed and markets outside of the U.S. bioprosthetic
cardiovascular and vascular devices for implantation, consisting of
tissue-engineered SynerGraft porcine heart valves, SynerGraft bovine vascular
grafts, and glutaraldehyde-fixed stentless porcine heart valves: the
CryoLife-O'Brien(R) aortic heart valve and the CryoLife-Ross(R) pulmonary heart
valve. The Company has applied its proprietary SynerGraft technology to the
processing of the Company's stentless porcine heart valves and bovine ureters
used as vascular grafts. SynerGraft involves the depopulation of cells from
animal tissue leaving a collagen matrix that has the potential to be repopulated
with the implant recipient's cells. This process is designed to increase
longevity, and to improve the biocompatibility and functionality of such tissue.
In November 2000 the Company received CE Mark approval for its SynerGraft Model
500 heart valve which allowed the Company to begin commercial distribution into
the EC for use in implantation into either the aortic or pulmonary position. In
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April of 2001 the Company received CE Mark approval for its SynerGraft Model 700
heart valve for use in implantation into the pulmonary position. The Company
believes that its porcine heart valves, treated with the SynerGraft technology,
will expand its opportunity to address the broader international and U.S. heart
valve markets, estimated to have been $390 million and $400 million,
respectively, in 2001. In August of 2001 the Company received CE Mark approval
for its SynerGraft Model 100 vascular graft for dialysis access, peripheral
vascular bypass, and vascular patching. The SynerGraft Model 100 vascular graft
is produced from a bovine ureter in lengths between 25 and 50 cm in 5 cm
increments. The SynerGraft Model 100 vascular graft can be stored at room
temperature until use. Glutaraldehyde-fixed porcine heart valves are often
preferred by surgeons for procedures involving elderly patients because they
eliminate the risk of patient non-compliance with long-term anti-coagulation
drug therapy associated with mechanical valves, are less expensive than human
heart valves and their shorter longevity is more appropriately matched with
these patients' life expectancies. Glutaraldehyde-fixed porcine and bovine heart
valves address a worldwide target market estimated to have been $325 million in
2001. Unlike most other available porcine heart valves, the Company's stentless
porcine heart valves do not contain synthetic materials which increase the risk
of endocarditis, a debilitating and potentially fatal infection. The Company's
CryoLife-O'Brien heart valve, currently marketed in the EC and certain other
territories outside the U.S., is a stentless porcine heart valve which contains
a matched composite leaflet design that approximates human heart valve blood
flow characteristics and requires only a single suture. The Company's
CryoLife-Ross pulmonary heart valve is also marketed in the EC and certain
countries outside the U.S. For information regarding international revenues, see
Note 19 of notes to the consolidated financial statements.
The Company formed AuraZyme Pharmaceuticals, Inc. ("AuraZyme") to foster the
commercial development of its Activation Control Technology ("ACT"). The ACT is
a reversible linker technology that has potential uses in the areas of cancer
therapy, fibrin olysis (blood clot dissolving) and other drug delivery
applications. AuraZyme seeks to advance the development of drug delivery
therapies through research and development partnerships, joint ventures and
equity investments. This strategy is designed to allow the Company to continue
development of this technology without incurring additional research and
development expenditures, other than through AuraZyme, and allow the Company to
focus its resources on the commercial development of its BioGlue Surgical
Adhesive, SynerGraft technology and other products under development.
In the U.S., the Company markets its preservation services for human
cardiovascular and vascular tissue and its BioGlue Surgical Adhesive through its
direct technical service representatives, and relies on independent orthopaedic
sales representatives to market its preservation services for human orthopaedic
tissue. Internationally, preserved human tissues, bioprosthetic cardiovascular
and vascular devices, including SynerGraft, and BioGlue Surgical Adhesive are
distributed through independent representatives located throughout Europe, the
Middle East, Canada, South America, Australia and Asia. The Company also uses
direct technical service representatives in the United Kingdom to market its
preservation services and bioprosthetic devices and in Canada to market its
preservation services and implantable medical devices.
GROWTH STRATEGY
The Company's primary objective is to continue its consistent revenue growth and
profitability. The Company's strategy to generate continued growth is based on
increasing the use of cryopreserved tissues as an alternative to mechanical and
synthetic implantable products, developing new markets for existing products and
technologies and developing new products and technologies for new and existing
markets. The Company also selectively considers strategic acquisitions of
complementary technologies and businesses to supplement its internal growth. The
key elements of the Company's business and growth strategy are to:
o Continue Leadership in Preservation of Cardiovascular Tissue. The
Company intends to increase the market penetration of its CryoLife
preserved human heart valves and conduits by (i) expanding awareness
of clinical advantages of cryopreserved human tissues through
continuing educational efforts directed to physicians, prospective
heart valve and conduit recipients and tissue procurement agencies,
(ii) expanding its relationships with the approximately 100 tissue
banks and procurement agencies across the U.S. which recover and send
tissue to the Company for preservation, (iii) expanding its physician
training activities and (iv) expanding its product offerings by
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applying its SynerGraft technology to human heart valves and conduits
for antigen reduction properties with the potential for recipient cell
repopulation.
o Expand Distribution of Preserved Human Vascular Tissue and Orthopaedic
Tissue. Using the same strategy it has successfully employed to expand
its preservation services for cardiovascular tissue, the Company
intends to increase its preservation revenues from human vascular
tissue and orthopaedic tissue by (i) continuing educational efforts
directed to vascular and orthopaedic surgeons about the clinical
advantages of preserved vascular and orthopaedic tissue, (ii)
expanding its relationships with tissue banks and procurement
agencies, (iii) expanding its programs for training physicians in the
use of tissue preserved by the Company and (iv) expanding its product
offerings by applying its SynerGraft technology to human vascular
grafts for antigen reduction properties with the potential for
recipient cell repopulation.
o Broaden Application of Preservation Services. The Company will
continue to collect, monitor and evaluate implant data to (i) develop
expanded uses for the human tissues currently cryopreserved by the
Company and (ii) identify new human tissues as candidates for
preservation. In 1997, the Company began providing cryopreserved human
vascular tissue to be used as dialysis access replacement grafts for
patients undergoing chronic dialysis, and separately, as venous valve
replacements for patients suffering from chronic venous insufficiency.
In 1998 in addition to patellar and Achilles tendons, the Company
began providing cryopreserved posterior and anterior tibialis and
semi-t/gracilis tendons for use in knee repairs, and in 1999 began
providing preserved human osteochondral grafts to repair articular
defects and aortoiliac grafts to replace infected abdominal aortic
grafts. The Company is also investigating the use of cryopreserved
peripheral nerves and other orthopaedic tissues in various surgical
applications.
o Expand Distribution of Biomaterials for Surgical Adhesive and Sealant
Applications. The Company began commercial marketing of its patent
protected BioGlue Surgical Adhesive in the EC through its independent
representatives for vascular and pulmonary applications upon receipt
of a CE Mark in 1998 and 1999, respectively. In December 1999 the
Company received FDA approval to distribute BioGlue Surgical Adhesive
under an HDE for use as an adjunct in the repair of acute thoracic
aortic dissections. In December 2001 the Company received FDA approval
to distribute BioGlue for use as an adjunct to sutures and staples for
use in adult patients in open surgical repair of large vessels. In
February 2002 BioGlue was awarded a third CE Mark for use in general
surgical procedures. The Company has commenced aggressive marketing
programs to promote the FDA approved expanded uses of BioGlue by (i)
contacting the more than 600 hospitals and medical centers in North
America whose Institutional Review Boards ("IRBs") had previously
approved the use of BioGlue for aortic dissections to inform them that
the product is approved for vascular repair and that the HDE
restrictions have been lifted, (ii) contacting those medical centers
that did not have IRB approvals in place for the use of BioGlue for
aortic dissections and (iii) contacting vascular surgeons and
emergency room physicians who perform central and peripheral vascular
repair. In addition to these adhesive and sealant applications of
BioGlue, the Company intends to pursue, either directly or through
strategic alliances, technologies for replacement for spinal disc
nuclei and for delivering bone material for orthopaedic bone repair.
o Develop and Commercialize Bioprosthetic Cardiovascular Devices. The
Company intends to leverage its expertise with stentless human heart
valves to expand commercialization of its stentless porcine heart
valves and to use its stentless porcine heart valves as a platform for
the development and commercialization of the Company's SynerGraft
technology, which is being developed to expand the target market for
the stentless porcine heart valves by minimizing calcification often
associated with porcine tissues and thereby increasing their
longevity. In November 2000 the Company received a CE Mark allowing
for commercial distribution of the Company's tissue-engineered
SynerGraft Model 500 heart valve throughout the EC. In April 2001 the
Company received a CE Mark allowing for commercial distribution of the
Company's tissue-engineered SynerGraft Model 700 heart valve
throughout the EC.
o Develop and Commercialize Bioprosthetic SynerGraft Vascular Devices.
The Company intends to leverage its expertise with human vascular
grafts and bioprosthetic devices as a platform for the development and
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commercialization of its tissue-engineered SynerGraft vascular grafts.
In August of 2001 the Company received CE Mark approval for its
SynerGraft Model 100 vascular graft for dialysis access and peripheral
reconstruction.
o Leverage Existing Capability across Product Lines. The Company intends
to apply its expertise with stentless human heart valves to expand
commercialization of its stentless porcine heart valves and to use its
human allograft preservation expertise and its stentless porcine heart
valves as a platform for the development and commercialization of the
Company's SynerGraft technology.
SERVICES AND PRODUCTS
Preservation of Human Tissue for Transplant
The Company's proprietary and patent protected preservation process involves the
recovery of tissue from deceased human donors by organ procurement
organizations, the timely and controlled delivery of such tissue to the Company,
the screening, dissection, disinfection, and preservation of the tissue by the
Company, the storage and shipment of the cryopreserved tissue and the controlled
thawing of the tissue. Thereafter, the tissue is surgically implanted into a
human recipient.
The transplant of human tissue that has not been preserved must be accomplished
within extremely short time limits (not to exceed eight hours for transplants of
the human heart). Prior to the advent of human tissue cryopreservation, these
time constraints resulted in the inability to use much of the tissue donated for
transplantation. The application of the Company's cryopreservation technologies
to donated tissue expands the amount of human tissue available to physicians for
transplantation. Cryopreservation also expands the treatment options available
to physicians and their patients by offering alternatives to implantable
mechanical, synthetic and animal-derived devices. The tissues presently
cryopreserved by the Company include human heart valves and conduits, vascular
tissue and orthopaedic tissue.
CryoLife maintains and collects extensive clinical data on the use and
effectiveness of implanted human tissues that it has preserved, and shares this
data with implanting physicians and the procurement organizations from which it
receives tissue. The Company also uses this data to help direct its continuing
efforts to improve its preservation services through ongoing research and
development. Its research staff and technical representatives assist physicians
by providing educational materials, seminars and clinics on methods for handling
and implanting the tissue cryopreserved by the Company and the clinical
advantages, indications and applications for those tissues. The Company has
ongoing efforts to train and educate physicians on the indications for and uses
of the human tissues cryopreserved by the Company, as well as its programs
whereby surgeons train other surgeons in best demonstrated techniques. The
Company also assists organ procurement agencies and tissue banks through
training and development of protocols and provides materials to improve their
tissue processing techniques and to increase efficiency and the yield of usable
tissue.
Human Cardiovascular Tissue. The human heart valves and conduits cryopreserved
by the Company are used in reconstructive heart valve replacement surgery.
CryoLife shipped approximately 51,600 cryopreserved human heart valves and
conduits from 1984 through 2001. Revenues from human heart valve and conduit
preservation services accounted for 44%, 39% and 33% of total revenues,
respectively, in 1999, 2000 and 2001. Based on CryoLife's records of documented
implants, management believes that the Company's success in the allograft heart
valve market is due in part to physicians' recognition of the longevity and
natural functionality of the Company's cryopreserved human tissues as compared
to mechanical and porcine heart valve alternatives in certain applications. The
Company currently applies its preservation services to human aortic, pulmonary
and mitral heart valves for implantation by cardiac surgeons. In addition, the
Company provides cryopreserved conduit and patch tissue to surgeons who wish to
perform certain specialized cardiac repair procedures. Each of these human heart
valves, conduits and patches maintains a tissue structure which more closely
resembles and performs like the patient's own tissue than non-human tissue
alternatives.
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In February 2000 the Company began processing and distributing in the U.S.
decellularized cryopreserved human heart valves and conduits utilizing its
SynerGraft technology which effectively removes cells from the heart valve
leaving the collagen matrix intact. The CryoValve(R) SG valve is especially
designed to benefit patients, both children and adults, who have had a minor
immune response to transplanted tissues. Early clinical data indicates that the
new SynerGraft processing method mitigates the increase of PRA (panel reactive
antibodies) experienced by some of the patients who receive allograft heart
valves. The absence of an immunologic response to the decellularized allograft
has the potential of improved long-term function of the allograft heart valves.
Advanced animal studies of both allograft and porcine heart valves that have
been treated with the SynerGraft process show that these valves have the
potential to repopulate themselves in vivo with the patient's own cells.
The Company estimates that the total heart valve and conduit replacement market
in the U.S. in 2001 was approximately $400 million. Management believes that
approximately 107,000 heart valve and conduit surgeries were conducted in the
U.S. in 2001. Of the total number of heart valve and conduit surgeries,
approximately 53,000, or 50%, involved mechanical heart valves, and
approximately 54,000, or 50%, involved tissue heart valves or conduits,
including porcine and cryopreserved human tissues. Approximately 5,200 human
heart valves and conduits cryopreserved by the Company were shipped for
implantation in 2001.
Management believes cryopreserved human heart valves and conduits have
characteristics that make them the preferred replacement for many patients.
Specifically, human heart valves, such as those cryopreserved by the Company,
allow for more normal blood flow and provide higher cardiac output than porcine
and mechanical heart valves. Human heart valves are not as susceptible to
progressive calcification, or hardening, as are glutaraldehyde-fixed porcine
heart valves, and do not require anti-coagulation drug therapy, as do mechanical
valves. The synthetic sewing rings contained in mechanical and stented porcine
valves may harbor bacteria leading to endocarditis. Furthermore, endocarditis is
difficult to treat with antibiotics, and this usually necessitates the surgical
removal of these valves at considerable cost, morbidity and risk of mortality.
Consequently, for many physicians, human heart valves are the preferred
alternative to mechanical and stented porcine valves for patients who have, or
are at risk to contract, endocarditis.
The following table sets forth the characteristics of alternative heart valve
implants that management believes make cryopreserved human heart valves the
preferred replacement for most patients:
PORCINE
CRYOPRESERVED BOVINE
HUMAN STENTED STENTLESS(1) MECHANICAL PERICARDIUM
----- ------- ------------ ---------- -----------
Materials: human tissue glutaraldehyde glutaraldehyde pyrolitic carbon glutaraldehyde
fixed pig tissue fixed pig bi-leaflet and fixed cow tissue
and tissue synthetic and synthetic
synthetic sewing sewing ring sewing ring
ring
Blood Flow Dynamics normal moderate nearly normal high elevation high elevation
elevation
(Required Pressure): (2) (0-5) (10-20) (5-15) (10-25) (10-30)
Mode of Failure: gradual gradual expected to be catastrophic gradual
gradual
Longevity: 15-20 years 10-15 years expected to 15-20 years 10-15 years
exceed
stented porcine
valves
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Increased Risk of
Bleeding or
Thromboembolic Events no occasional occasional yes occasional
(strokes or other
clotting):
Anti-Coagulation Drug
Therapy Required: none short-term short-term chronic short-term
Responsiveness to
Antibiotic high low low low low
Treatment of
Endocarditis:
Average Valve Cost in $7,300 $4,500 $5,500 $4,100(3) $4,500
U.S.:
- --------------------
(1) Limited long-term clinical data is available since stentless porcine heart
valves only recently became commercially available.
(2) Pressure measured in mm/Hg.
(3) Mechanical valves also require chronic anti-coagulation drug therapy at a
cost of approximately $450 per year.
While the clinical benefits of cryopreserved human heart valves discussed above
are relevant to all patients, they are particularly important for (i) pediatric
patients (newborn to 16 years) who are prone to calcification of porcine tissue,
(ii) young or otherwise active patients who face an increased risk of severe
blood loss or even death due to side effects associated with the
anti-coagulation drug therapy required with mechanical valves and (iii) women in
their childbearing years for whom anti-coagulation drug therapy is
contraindicated.
Human Vascular Tissues. The Company cryopreserves human saphenous and
superficial femoral veins and arteries for use in vascular surgeries that
require small diameter conduits (3mm to 6mm), such as coronary bypass surgery
and peripheral vascular reconstructions. Failure to bypass or revascularize an
obstruction in such cases may result in death or the loss of a limb. The Company
believes it offers the only available small diameter conduit product for
below-the-knee vascular reconstruction. The Company also cryopreserves
aortoiliac arteries for the reconstruction of infected abdominal synthetic
grafts. The Company shipped approximately 28,900 human vascular tissues from
1986 through 2001, which includes 6,100 shipments in 2001. Revenues from human
vascular preservation services accounted for 29%, 28% and 28% of total revenues,
respectively, in 1999, 2000 and 2001.
A surgeon's first choice for replacing diseased or damaged vascular tissue is
generally the patient's tissue. However, in cases of advanced vascular disease,
the patient's tissue is often unusable and the surgeon may consider using
synthetic grafts or transplanted human vascular tissue. Small diameter synthetic
vascular grafts are generally not suitable for below-the-knee surgeries because
they have a tendency to occlude since the synthetic materials in these products
attract cellular material from the blood stream which in turn closes off the
vessel to normal blood flow. Cryopreserved vascular tissues tend to remain open
longer and as such are used in indications where synthetics fail. The Company's
cryopreserved human vascular tissues are used for coronary artery bypass
surgeries, peripheral vascular reconstruction, dialysis access graft
replacement, venous valve transplantation and infected abdominal graft
replacement.
In 1986, the Company began a program to cryopreserve saphenous veins for use in
coronary artery bypass surgeries. The Company estimates there were approximately
450,000 to 500,000 coronary artery bypass procedures performed in the U.S. in
2001. The Company estimates that approximately 30% of these are re-operations
which may require the use of preserved vascular tissue.
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In 1989, the Company began a program to cryopreserve long segment saphenous
veins for use in peripheral vascular reconstruction. In cases of peripheral
arteriosclerosis, a cryopreserved saphenous vein can be implanted as a bypass
graft for the diseased artery in order to improve blood flow and maintain a
functional limb. Analysis of the Company's data on file of approximately 425
implants has shown that approximately 72% of patients receiving CryoLife's
preserved vascular tissues in this type of surgical procedure still have the use
of the affected leg four years after surgery. The only alternative for many of
these patients was amputation. The Company estimates that, in 2001,
approximately 125,000 to 150,000 peripheral vascular reconstruction surgeries
were performed in the U.S. in which its cryopreserved human vascular tissues
could have been used.
In 1997, the Company began a program for the preservation of human superficial
femoral veins for use in dialysis access graft replacement as an alternative for
synthetic grafts which have a higher risk of infection and thrombosis than human
tissue. The Company estimates that, in 2001, there were approximately 300,000
end stage renal failure patients receiving dialysis in the U.S. and a majority
of these patients rely on arterial-venous dialysis grafts for vascular access.
Human Orthopaedic Tissue. The Company provides preservation services for
surgical replacements for the meniscus and the anterior and posterior cruciate
ligaments, which are critical to the proper operation of the human knee, as well
as osteochondral grafts used for the repair of cartilage defects in the knee.
CryoLife has shipped approximately 23,300 human connective tissues for the knee
through 2001, which includes 6,700 shipments in 2001. Revenues from human
orthopaedic preservation services accounted for 17%, 21% and 26% of total
revenues, respectively, in 1999, 2000 and 2001.
Human menisci cryopreserved by the Company provide orthopaedic surgeons with an
alternative treatment in cases where a patient's meniscus has been completely
removed. When a patient has a damaged meniscus, the current surgical
alternatives are to repair, partially remove or completely remove the patient's
meniscus, with partial removal being the most common procedure. Meniscal removal
increases the risk of premature knee degeneration and arthritis and typically
results in the need for knee replacement surgery at some point during the
patient's life. Management believes that the Company is the only provider of
cryopreserved meniscal tissue and that there are no synthetic menisci on the
market. The Company estimates that in 2001 in the U.S. approximately 725,000
patients underwent partial or total meniscectomies. The Company believes up to
25% of these patients could become candidates for meniscal replacement within
five years.
Tendons cryopreserved by the Company are used for the reconstruction of the
anterior and posterior cruciate ligaments in cases where the patient's ligaments
are irreparably damaged. Surgeons have traditionally removed a portion of the
patient's patellar tendon from the patient's undamaged knee for use in repairing
a damaged anterior cruciate ligament. Tendons cryopreserved by the Company
provide an alternative to this procedure. Because surgeries using cryopreserved
tissue do not involve the removal of any of the patient's own patellar tendon,
the patient recovery period is typically shorter. The Company estimates that in
2001 approximately 200,000 cruciate ligament reconstruction surgeries were
performed in the U.S.
In 1999 the Company began preserving osteochonral grafts used to aid in the
repair of damaged knee cartilage. The orthopaedic surgical community has
accepted these grafts, which are preserved and maintained in a living state. The
success of transplanted osteochonral grafts is attributed to the presence of
viable chondrocytes (cells of the cartilage), which provide strength and support
of the articular cartilage through transplant of osteochonral grafts onto the
end of the patient's femur. The Company estimates that in 2001 approximately
450,000 articular cartilage repair procedures were performed in the U.S. and
that approximately 10-15% of these repairs will be amenable to fresh
osteochondral (OA) resurfacing replacement within 5 years.
Other Allograft Tissue Research and Development. The Company is engaged in
research and development on other projects for the use of cryopreserved
peripheral nerves and other connective tissues, in various surgical
applications.
Implantable Biomaterials for Use as Surgical Adhesives and Sealants
The effective closure of internal wounds following surgical procedures is
critical to the restoration of the function of tissue and to the ultimate
success of the surgical procedure. Failure to effectively seal surgical wounds
can result in leakage of air in lung surgeries, cerebral spinal fluids in
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neurosurgeries, blood in cardiovascular surgeries and gastrointestinal contents
in abdominal surgeries. Air and fluid leaks resulting from surgical procedures
can lead to significant post-operative morbidity resulting in prolonged
hospitalization, higher levels of post-operative pain and a higher mortality
rate.
Sutures and staples facilitate healing by joining wound edges and allowing the
body to heal naturally. However, because sutures and staples do not have
inherent sealing capabilities, they cannot consistently eliminate air and fluid
leakage at the wound site. This is particularly the case when sutures and
staples are used to close tissues containing air or fluids under pressure, such
as the lobes of the lung, the dural membrane surrounding the brain and spinal
cord, blood vessels and the gastrointestinal tract. In addition, in minimally
invasive surgical procedures, where the physician must operate through small
access devices, it can be difficult and time consuming for the physician to
apply sutures and staples. The Company believes that the use of surgical
adhesives and sealants with or without sutures and staples could enhance the
efficacy of these procedures through more effective and rapid wound closure.
In order to address the inherent limitations of sutures and staples, the Company
has developed and commercialized its BioGlue Surgical Adhesive. The BioGlue
Surgical Adhesive is a polymeric surgical bioadhesive based on a derivative of
an animal blood protein and a cross-linking agent. BioGlue Surgical Adhesive has
a tensile strength that is four to five times that of fibrin sealants. Clinical
applications for BioGlue Surgical Adhesive include cardiovascular, vascular,
pulmonary, and general surgical repair. Other potential applications for BioGlue
Surgical Adhesive include orthopaedic indications, and as a replacement for
spinal disc nuclei. A derivative of the BioGlue technology is BioLastic(TM), an
implantable biomaterial under development which is capable of exchanging oxygen
and carbon dioxide. BioLastic is being developed for use in reinforcing or
patching vascular tissue, repairing air leaks in lungs, and sealing holes in or
replacing dura mater.
The Company estimates that the worldwide market for surgical sutures and staples
in 2001 was in excess of $2 billion. The Company began shipping BioGlue Surgical
Adhesive for distribution in the EC in the second quarter of 1998 for use in
vascular applications and in the first quarter of 1999 for use in pulmonary
applications. In December 1999 the Company began shipping BioGlue Surgical
Adhesive in the U.S. pursuant to an HDE for use as an adjunct in repair of acute
thoracic aortic dissections. In December 2001 the Company received FDA approval
to distribute BioGlue for use as an adjunct to sutures and staples for use in
adult patients in open surgical repair of large vessels. In February 2002 the
Company received a third CE Mark for BioGlue for use in general surgical repair
procedures. Revenues from BioGlue Surgical Adhesive represented 2%, 8% and 12%
of total revenues, respectively, in 1999, 2000 and 2001.
Bioprosthetic Cardiovascular and Vascular Devices
The Company is developing bioprosthetic cardiovascular and vascular devices
based on its experience with cryopreserved human tissue implants. Like human
heart valves, the Company's porcine heart valves are stentless with the valve
opening, or annulus, retaining a more natural flexibility. Stented porcine and
mechanical heart valves are typically fitted with synthetic sewing rings which
are rigid and can impede normal blood flow. Unlike most other available porcine
heart valves, the Company's stentless porcine heart valves do not contain
synthetic materials which increase the risk of endocarditis, a debilitating and
potentially deadly infection. Revenues from bioprosthetic cardiovascular and
vascular devices represented 1% of total revenues in 1999, 2000 and 2001.
Glutaraldehyde-fixed porcine heart valves are often preferred by surgeons for
procedures involving elderly patients because they eliminate the risk of patient
non-compliance with anti-coagulation drug therapy associated with mechanical
valves, they are less expensive than allograft valves and their shorter
longevity is more appropriately matched with these patients' life expectancies.
Glutaraldehyde-fixed porcine and bovine heart valves address a worldwide target
market estimated to have been $325 million in 2001.
The Company's SynerGraft technology involves the removal of cells from the
structure of animal tissue, leaving a collagen matrix that has the potential to
repopulate in vivo with the recipient's own cells. This process is designed to
increase longevity, and more generally to improve the biocompatibility and
functionality of such tissue. The Company believes that its porcine heart
valves, when treated with SynerGraft technology, will expand its opportunity to
9
address the broader international and U.S. heart valve markets, estimated to
have been $390 million and $400 million, respectively, in 2001.
The following table sets forth the bioprosthetic cardiovascular devices
currently marketed by the Company, along with the product features and market
status for each.
STENTLESS PORCINE VALVES FEATURES REGULATORY/MARKET STATUS
SynerGraft 700 depopulated pulmonary valve of currently marketed in Europe for
non- composite leaflet design; no pulmonary valve replacement with
synthetic material; normal regulatory approval under CE Mark
hemodynamics
SynerGraft 500 depopulated valve of aortic currently marketed in Europe for both
composite leaflet design; no aortic and pulmonary valve replacement
synthetic material; normal with regulatory approval under CE Mark
hemodynamics
CryoLife-O'Brien matched composite leaflet design; currently marketed in Europe for
single suture line implantation aortic valve replacement with
technique; no synthetic material; regulatory approval under CE Mark;
normal hemodynamics currently marketed in Canada with
regulatory approval under Therapeutic
Products Programme
CryoLife-Ross pulmonary valve with attached currently marketed in Europe with
conduit; no synthetic material; regulatory approval under CE Mark
normal hemodynamics
The SynerGraft heart valves are depopulated stentless porcine heart valves with
antigen reduction technology. The Company obtained a CE Mark for the SynerGraft
Model 500 heart valve in November 2000 for use in implantation in the aortic and
pulmonary position. The Company obtained a CE Mark for the SynerGraft 700
pulmonary heart valve in April 2001. The SynerGraft technology removes cells
from animal tissues, thereby reducing the transplant recipient's immune response
to the implanted tissue. By removing animal cells from the tissue while
maintaining the underlying structural strength of the porcine heart valve, this
SynerGraft application is designed to provide a platform for a patient's own
cells to potentially repopulate the implant.
The CryoLife-O'Brien aortic valve is a stentless porcine valve with design
features which management believes provide significant advantages over other
stentless porcine heart valves. CryoLife began exclusive worldwide distribution
of this valve in 1992 and acquired all rights to the underlying technology in
1995. The Company's CryoLife-O'Brien aortic heart valve, currently marketed in
the EC and certain other territories outside the U.S., contains a matched
composite leaflet design that approximates human heart valve blood flow
characteristics and requires only a single suture line for surgical
implantation.
The CryoLife-Ross pulmonary valve, the patent for which the Company acquired in
October 1996, is an advanced design stentless porcine heart valve within an
attached conduit of porcine tissue, which mimics the structure of a human heart
valve. The Company began manufacturing and distributing the CryoLife-Ross
pulmonary heart valve, in the EC in September 1998.
10
Single-Use Medical Devices
On October 9, 2000 the Company sold substantially all of the remaining assets of
Ideas for Medicine, Inc. ("IFM") to Horizon Medical Products, Inc. See Note 3 of
Notes to the consolidated financial statements for a more detailed discussion.
SALES, DISTRIBUTION AND MARKETING
Preservation Services
CryoLife markets its preservation services to tissue procurement agencies,
implanting physicians and prospective tissue recipients. The Company works with
tissue banks and organ procurement agencies to ensure consistent and continued
availability of donated human tissue for transplant and educates physicians and
prospective tissue recipients with respect to the benefits of cryopreserved
human tissues.
Procurement of Tissue. Donated human tissue is procured from deceased human
donors by organ procurement agencies and tissue banks. After procurement, the
tissue is packed and shipped, together with certain information about the tissue
and its donor, to the Company in accordance with the Company's protocols. The
tissue is transported to the Company's laboratory facilities via commercial
airlines pursuant to arrangements with qualified courier services. Timely
receipt of procured tissue is important, as tissue that is not received promptly
cannot be cryopreserved successfully. The procurement agency is reimbursed by
the Company, for the costs associated with these procurement services. The
procurement fee and related shipping costs, together with the charges for the
preservation services of the Company, are ultimately paid to the Company by the
hospital with which the implanting physician is associated. The Company has
developed relationships with approximately 100 tissue banks and organ
procurement agencies throughout the U.S. Management believes the establishment
of these relationships is critical for a growing business in the preservation
services industry and that the breadth of these existing relationships provides
the Company a significant advantage over potential new entrants to this market.
The Company employs approximately 20 individuals to work with organ procurement
agencies and tissue banks, seven of whom are employed as procurement relations
managers and are stationed throughout the country. The Company's central office
for procurement relations is staffed 24 hours per day, 365 days per year.
Preservation of Tissue. Upon receiving tissue, a Company technician completes
the documentation control for the tissue prepared by the procurement agency and
gives it a control number. The documentation identifies, among other things,
donor age and cause of death. A trained technician then removes the portion or
portions of the delivered tissue that will be cryopreserved. These procedures
are conducted under aseptic conditions in clean rooms. At the same time,
additional samples are taken from the donated tissue and subjected to the
Company's comprehensive quality assurance program. This program may identify
characteristics which would disqualify the tissue for preservation or
implantation.
Cardiovascular, vascular, and orthopaedic tissue, except osteochondral grafts,
are cryopreserved in a proprietary freezing process conducted according to
strict Company protocols. After the preservation process, the specimens are
transferred to liquid nitrogen freezers for long-term storage at temperatures
below -135(Degree)C. Osteochondral grafts are refrigerated in proprietary
solutions from 2(Degree)C to 8(Degree)C for up to 45 days. The entire
preservation process is rigidly controlled by guidelines established by the
Company.
Distribution of Tissue to Implanting Physicians. After preservation, tissue is
stored by the Company or is delivered directly to hospitals at the implanting
physician's request. Cryopreserved tissue must be transported under stringent
handling conditions and maintained within specific temperature tolerances at all
times. Cryopreserved tissue is packaged for shipment using the Company's
proprietary processes. At the hospital, the tissue is held in a liquid nitrogen
freezer according to Company protocols pending implantation. The Company
provides a detailed protocol for thawing the cryopreserved tissue. The Company
also makes its technical personnel available by phone or in person to answer
questions. After the Company transports the tissue to the hospital, the Company
invoices the institution for its services, the procurement fee and
transportation costs.
11
The Company provides Company-owned liquid nitrogen freezers to certain client
hospitals without charge. The Company has currently installed more than 350 of
these freezers. Participating hospitals generally pay the cost of liquid
nitrogen and regular maintenance. The availability of on-site freezers makes it
easier for a hospital's physicians to utilize the Company's preservation
services by making the cryopreserved tissue more readily available. Because fees
for the Company's preservation services become due upon the delivery of tissue
to the hospital, the use of such on-site freezers also reduces the Company's
working capital needs.
Marketing, Educational and Technical Support. The Company maintains active
relationships with approximately 3,500 cardiovascular, vascular and orthopaedic
surgeons who have active practices implanting cryopreserved human tissues and
markets to a broader group of physicians within these medical specialties.
Because the Company markets its preservation services directly to physicians, an
important aspect of increasing the distribution of the Company's preservation
services is educating physicians on the use of cryopreserved human tissue and on
proper implantation techniques. Trained field support personnel provide support
to implanting institutions and surgeons. The Company currently has over 150
independent technical service representatives and sub-representatives (who deal
primarily with orthopaedic surgeons and who are paid on a commission basis) as
well as 47 persons employed as technical service representatives (who deal
primarily with cardiovascular and vascular surgeons and receive a base salary
with a performance bonus) all of whom provide field support.
The Company sponsors physician training seminars where leading physicians teach
other physicians the proper technique for handling and implanting cryopreserved
human tissue. The Company also produces educational videotapes for physicians
and coordinates live surgery demonstrations at various medical schools. The
Company also coordinates laboratory sessions that utilize animal tissue to
demonstrate the surgical techniques. Members of the Company's Medical Advisory
Board often lead the surgery demonstrations and laboratory sessions. Management
believes that these activities improve the medical community's acceptance of the
cryopreserved human tissue processed by the Company.
To assist procurement agencies and tissue banks, the Company provides
educational materials and training on procurement, dissection, packaging and
shipping techniques. The Company also produces educational videotapes and
coordinates laboratory sessions on procurement techniques for procurement agency
personnel. To supplement its educational activities, the Company employs
in-house technical specialists that provide technical information and assistance
and maintains a staff 24 hours per day, 365 days per year for customer support.
European Distribution
In September 1999 the Company established its European subsidiary, CryoLife
Europa, Ltd. ("Europa"), to provide distribution and technical services to the
Company's network of European representatives, customers and surgeons. In
February 2000 Europa officially opened its headquarters located near London,
England.
BioGlue Surgical Adhesive
The Company markets and distributes its BioGlue Surgical Adhesive in the U.S.
through its existing direct technical representatives. The Company markets and
distributes its BioGlue Surgical Adhesive in international markets, excluding
Japan, through Europa and other existing independent representatives. The
Company's European, Middle East and African sales, marketing and distribution
activities directed through Europa are channeled through 23 independent
distributors located throughout Europe, the Middle East and South Africa.
Marketing efforts are directed almost exclusively toward cardiovascular,
vascular, thoracic and general surgeons, and the Company conducts training
sessions for doctors with respect to the application and administration of
BioGlue Surgical Adhesive.
During 1998, the Company signed a five-year exclusive agreement with Century
Medical, Inc. for the introduction and distribution of BioGlue in Japan. Under
the terms of the agreement, Century Medical will be responsible for applications
and clearances with the Japanese Ministry of Health and Welfare.
Bioprosthetic Cardiovascular Devices
12
The Company markets the CryoLife-O'Brien and CryoLife-Ross stentless porcine
heart valves in Europe, the Middle East and Africa. The CryoLife-O'Brien valve
is also marketed in Canada. The Company commenced marketing the SynerGraft Model
500 and Model 700 heart valves and the SynerGraft Model 100 vascular graft in
Europe during the fourth quarter of 2000, the first quarter of 2001 and the
third quarter of 2001, respectively. Marketing efforts are primarily directed
toward cardiac, thoracic and vascular surgeons and the Company conducts
educational seminars and conferences to train these surgeons and educate them
with respect to the uses and benefits of its porcine stentless heart valves.
RESEARCH AND DEVELOPMENT
The Company uses its expertise in immunology, biochemistry and cell biology, and
its understanding of the needs of the cardiovascular, vascular and orthopaedic
surgery medical specialties, to continue to expand its core preservation
business in the U.S. and to develop or acquire implantable products and
technologies for these specialties. The Company seeks to identify market areas
that can benefit from preserved living tissues and other related technologies,
to develop innovative techniques and products within these areas, to secure
their commercial protection, to establish their efficacy and then to market
these techniques and products. The Company employs approximately 22 people in
its research and development department, including seven PhDs with specialties
in the fields of immunology, molecular biology, protein chemistry, organic
chemistry and vascular biology.
In order to expand the Company's service and product offerings, the Company is
currently in the process of developing or investigating several technologies and
products, including additional applications of its SynerGraft technology, its
Protein Hydrogel ("PH") technology (of which BioGlue is the first PH product to
be introduced) and its ACT. The PHT is based on a bovine protein that mirrors an
array of amino acids that perform complex functions in the human and together
with glutaraldehyde forms a hydrogel, a water based bio-material similar to
human tissue. Materials and implantable replacement devices created with the PHT
have the potential to provide structure, form and function of human body tissue.
Because of its versatility and ease of application, PHT is being developed for
application in the repair of denucleated intervetebral discs and for the
delivery of bone material for orthopaedic bone repair. The Company is also
currently investigating certain drug delivery applications for its ACT, such as
administering antibiotics and attaching chemotherapy drugs to tumors. To the
extent the Company identifies additional applications for these products, the
Company may attempt to license these products to corporate partners for further
development of such applications or seek funding from outside sources to
continue the commercial development of such technologies. The Company's research
and development strategy is to allocate available resources among the Company's
core market areas of preservation services, bioprosthetic cardiovascular devices
and implantable biomaterials, based on the size of the potential market for any
specific product candidate and the estimated development time and cost required
to bring the product to market.
Research on these and other projects is conducted in the Company's research and
development laboratory or at universities or clinics where the Company sponsors
research projects. In 1999, 2000, and 2001, the Company spent approximately $4.4
million, $5.2 million and $4.7 million, respectively, on research and
development activities on new and existing products. These amounts represented
approximately 7%, 7% and 5% of the Company's revenues for those respective
years. The Company's research and development program is overseen by its medical
and scientific advisory boards. The Company's pre-clinical studies are conducted
at universities and other locations outside the Company's facilities by third
parties under contract with the Company. In addition to these efforts, the
Company may, as situations develop, pursue other research and development
activities.
MANUFACTURING AND OPERATIONS
During 2001 the Company completed a 100,000 square foot addition to its
corporate headquarters and laboratory facilities located on a 21.5-acre
campus-style setting in suburban Atlanta, Georgia. The new addition is designed
to accommodate growth and development of the Company's BioGlue Surgical Adhesive
and the SynerGraft family of biologic implantable devices. The total Company
facilities consist of three separate locations totaling approximately 243,000
square feet of leased manufacturing, administrative, laboratory and warehouse
space. Approximately 24,000 square feet are dedicated to forty-five class 10,000
clean rooms. An additional 5,500 square feet are dedicated as class 100,000
13
clean rooms. The extensive clean room environment provides a sterile environment
for tissue dissection, processing, manufacturing and packaging. Some forty
liquid nitrogen storage units maintain cryopreserved tissue at minus 325 degrees
Fahrenheit. Three back-up emergency generators assure continuity of all Company
operations. Additionally, the Company's corporate complex has a 3,600 square
foot Learning Center which includes a 225 seat auditorium and a 1,500 square
foot operating room area, both equipped with closed-circuit and satellite
television broadcast capability allowing live surgery broadcasts from and to
anywhere in the world. The Learning Center provides visiting cardiovascular,
vascular and orthopaedic surgeons with a hands-on training environment for
surgical and implantation techniques for the Company's technology platforms.
Human Tissue Processing
The human tissue processing laboratory is responsible for the processing and
preservation of human cardiovascular, vascular and orthopaedic tissue for
transplant, including the processing of certain SynerGraft treated human heart
valves and conduits and vascular tissues. This laboratory contains approximately
15,600 square feet with a suite of eight clean rooms. Currently there are 59
technicians employed in this area, and the laboratory is staffed for two shifts,
365 days per year. In 2001 the laboratory processed approximately 19,600 human
allografts for distribution and transplant. The current processing level is
estimated to be at about half of total capacity. Increasing this capacity could
be accomplished by increasing employees and expanding to three shifts.
BioGlue Surgical Adhesives
BioGlue Surgical Adhesive is presently manufactured at the Company's
headquarters facility, which has an annual capacity of approximately 2 million
units. This laboratory contains approximately 13,500 square feet, including a
suite of six clean rooms. Currently, there are seven technicians employed in
this area.
Bioprosthetic Cardiovascular and Vascular Devices
The bioprosthesis laboratory, which was relocated to the expanded corporate
headquarters in 2001, is responsible for the manufacturing of the
CryoLife-O'Brien and CryoLife-Ross stentless porcine heart valves, as well as
for the manufacturing the tissue-engineered SynerGraft porcine heart valves and
vascular grafts. This laboratory is approximately 20,000 square feet with a
suite of six clean rooms for tissue processing. Currently, this laboratory
employs 21 technicians.
Other facilities
The Company's pilot production facility and AuraZyme are located in two separate
facilities, located in Marietta, Georgia, that total 31,000 square feet. The
pilot production facility is approximately 20,000 square feet, with about 2,100
square feet of laboratory space and a suite of six clean rooms. The Company
conducts research on its ACT in the AuraZyme laboratory and has four employees
at that location, including two research scientists. This laboratory contains
approximately 11,000 square feet, including 4,000 square feet of laboratory
space and a suite of eight clean rooms.
QUALITY ASSURANCE
The Company's operations encompass the provision of preservation services and
the manufacturing of bioprosthetics and bioadhesives. In all of its facilities,
the Company is subject to regulatory standards for good manufacturing practices,
including current Quality System Regulations, which are FDA regulatory
requirements for medical device manufacturers. The FDA periodically inspects
Company facilities to ensure Company compliance with these regulations. The
Company also operates according to ISO 9001 Quality System Requirements, an
internationally recognized voluntary system of quality management for companies
that design, develop, manufacture, distribute and service products. The Company
maintains a Certification of Approval to the ISO 9001, as well as EN46001 and
ANSI/ISO/ASQC/Q9001, the European and U.S. versions of the international
standard, respectively. This approval is issued by Lloyd's Register Quality
Assurance Limited ("LRQA"). LRQA is a Notified Body officially recognized by the
14
EC to perform assessments of compliance with ISO 9001 and its derivative
standards. LRQA performs semi-annual on-site inspections of the Company's
quality systems.
The Company's quality assurance staff is comprised primarily of experienced
professionals from the medical device and pharmaceutical manufacturing
industries. The quality assurance department, in conjunction with the Company's
research and development and select university research staffs, routinely
evaluates the Company's processes and procedures.
Preservation Services
The Company employs a comprehensive quality assurance program in all of its
tissue processing activities. The Company is subject to Quality System
Regulations, additional FDA regulations and ISO 9001. The Company's quality
assurance program begins with the development and implementation of training
courses for the employees of procurement agencies. To assure uniformity of
procurement practices among the tissue recovery teams, the Company provides
procurement protocols, transport packages and tissue transport liquids to the
donor sites.
Upon receipt by the Company, each tissue is assigned a unique control number
that provides traceability of tissue from procurement through the processing and
preservation processes, and ultimately to the tissue recipient. Blood samples
from each tissue donor are subjected to a variety of tests to screen for
infectious diseases. Samples of some tissues are also sent to independent
laboratories for pathology testing. Following dissection of the tissue to be
cryopreserved, a separate disinfection procedure is begun during which the
dissected tissue is treated with proprietary antibiotic solutions. A trained
technician then removes samples from the disinfected tissue upon which serial
cultures are performed to identify bacterial or fungal growth.
The materials and solutions used by the Company in processing tissue are
pre-screened to determine if they are of desired quality as defined by Company
protocols. Only materials and solutions that meet the Company's requirements are
approved by quality assurance personnel for use in processing. Throughout tissue
processing, detailed records are maintained and reviewed by quality assurance
personnel.
The Company's tissue processing facilities are annually licensed by the States
of Georgia, New York, Florida and California as facilities that process, store
and distribute human tissue for implantation. The regulatory bodies of these
states perform inspections of the facilities to ensure compliance with state law
and regulations. In addition, the Company's human heart valve processing
operations are additionally regulated by the FDA and periodically inspected for
compliance to Quality System Regulations. Other human tissue processed by the
Company is periodically inspected for compliance with the Code of Federal
Regulation ("CFR") Part 1270. CFR 1270 is an FDA regulation which sets forth the
requirements with which the Company must comply in determining the suitability
of human tissue for implantation.
Bioprosthetic and Bioadhesive Manufacturing
The Company employs a comprehensive quality assurance program in all of its
manufacturing activities. The Company is subject to Quality System Regulations,
additional FDA regulations and ISO 9001.
All materials and components utilized in the production of the Company's
products are received and thoroughly inspected by trained quality control
personnel, according to written specifications and standard operating
procedures. Only materials and components found to comply with Company
procedures are accepted by quality control and utilized in production.
All materials, components and resulting sub-assemblies are traced throughout the
manufacturing process to assure that appropriate corrective actions can be
implemented if necessary. Each process is documented along with all inspection
results, including final finished product inspection and acceptance. Records are
maintained as to the consignee of product to facilitate product removals or
corrections, if necessary. All processes in manufacturing are validated by
quality engineers to assure that they are capable of consistently producing
product meeting specifications. The Company maintains a rigorous quality
assurance program of measuring devices used for manufacturing and inspection to
ensure appropriate accuracy and precision.
15
Each manufacturing facility is subject to periodic inspection by the FDA and
LRQA to independently assure the Company's compliance with its systems and
regulatory requirements.
PATENTS, LICENSES AND OTHER PROPRIETARY RIGHTS
The Company relies on a combination of patents, trade secrets, trademarks and
confidentiality agreements to protect its proprietary products, processing
technology and know-how. The Company believes that its patents, trade secrets,
trademarks and technology licensing rights provide it with important competitive
advantages. The Company owns or has licensed rights to 37 U.S. patents and 58
foreign patents, including patents relating to its technology for human
cardiovascular, vascular, and orthopaedic tissue preservation; tissue
revitalization prior to freezing; tissue transport; BioGlue Surgical Adhesive;
ACT; organ storage solution; and packaging. The Company has 20 pending U.S.
patent applications and in excess of 66 pending foreign applications that relate
to areas including heart valve and tissue processing technology and delivery of
bioadhesives for anastomosis and other uses. The Company sold all patents
related to the IFM product line to Horizon in 1998. There can be no assurance
that any patents pending will result in issued patents. The Company also has
exclusive licensing rights for technology relating to light-sensitive enzyme
inhibitors. The remaining duration of the Company's issued patents ranges from 3
to 17 years. The Company has licensed from third parties certain technologies
used in the development of its ACT and other technologies in licenses that call
for the payment of both development milestones and royalties based on product
sales, when and if such products are approved for marketing. The loss of these
licenses could adversely affect the Company's ability to successfully develop
its ACT or other technologies.
There can be no assurance that the claims allowed in any of the Company's
existing or future patents will provide competitive advantages for the Company's
products, processes and technologies or will not be successfully challenged or
circumvented by competitors. To the extent that any of the Company's products
are not patent protected, the Company's business, financial condition and
results of operations could be materially adversely affected. Under current law,
patent applications in the U.S. are maintained in secrecy until patents are
issued and patent applications in foreign countries are maintained in secrecy
for a period after filing. The right to a patent in the U.S. is attributable to
the first to invent, not the first to file a patent application. The Company
cannot be sure that its products or technologies do not infringe patents that
may be granted in the future pursuant to pending patent applications or that its
products do not infringe any patents or proprietary rights of third parties. The
Company may incur substantial legal fees in defending against a patent
infringement claim or in asserting claims against third parties. In the event
that any relevant claims of third-party patents are upheld as valid and
enforceable, the Company could be prevented from selling certain of its products
or could be required to obtain licenses from the owners of such patents or be
required to redesign its products to avoid infringement. There can be no
assurance that such licenses would be available or, if available, would be on
terms acceptable to the Company or that the Company would be successful in any
attempt to redesign its products or processes to avoid infringement. The
Company's failure to obtain these licenses or to redesign its products could
have a material adverse effect on the Company's business, financial condition
and results of operations. Furthermore, the Company is involved in litigation
relating to its SynerGraft technology. An adverse decision in that case could
have a material adverse effect on the Company's business and results of
operations.
The Company has entered into confidentiality agreements with all of its
employees and several of its consultants and third-party vendors to maintain the
confidentiality of trade secrets and proprietary information. There can be no
assurance that the obligations of employees of the Company and third parties
with whom the Company has entered into confidentiality agreements will
effectively prevent disclosure of the Company's confidential information or
provide meaningful protection for the Company's confidential information if
there is unauthorized use or disclosure, or that the Company's trade secrets or
proprietary information will not be independently developed by the Company's
competitors. Litigation may be necessary to defend against claims of
infringement, to enforce patents and trademarks of the Company, or to protect
trade secrets and could result in substantial cost to, and diversion of effort
by, the Company. There can be no assurance that the Company would prevail in any
such litigation. In addition, the laws of some foreign countries do not protect
the Company's proprietary rights to the same extent as do the laws of the U.S.
16
COMPETITION
Cryopreserved Human Tissues and Bioprosthetic Cardiovascular Devices
The Company faces competition from at least one for-profit company and a small
number of non-profit tissue banks that cryopreserve and distribute human tissue,
as well as from companies that market mechanical, porcine and bovine heart
valves for implantation. Many established companies, some with resources greater
than those of the Company, are engaged in manufacturing, marketing and selling
alternatives to cryopreserved human tissue. Management believes that it competes
favorably with other entities that cryopreserve human tissue on the basis of
technology, customer service and quality assurance.
As compared to mechanical, porcine and bovine heart valves, management believes
that the human heart valves cryopreserved by the Company compete on the factors
set forth above, as well as by providing a tissue that is the preferred
replacement alternative with respect to certain medical conditions, such as
pediatric cardiac reconstruction, valve replacements for women in their
child-bearing years and valve replacements for patients with endocarditis.
Although human tissue cryopreserved by the Company is initially higher priced
than are mechanical alternatives, these alternatives typically require that the
patient take anti-coagulation drug therapy for the lifetime of the implant. As a
result of the costs associated with anti-coagulants, mechanical valves are
generally, over the life of the implant, more expensive than tissue
cryopreserved by the Company. Notwithstanding the foregoing, management believes
that, to date, price has not been a significant competitive factor.
Generally, for each procedure that may utilize other human tissue that the
Company cryopreserves, there are alternative treatments. Often, as in the case
of veins and ligaments, these alternatives include the repair, partial removal
or complete removal of the damaged tissue and may utilize other tissues from the
patients themselves or synthetic products. The selection of treatment choices is
made by the attending physician in consultation with the patient. Any newly
developed treatments will also compete with the use of tissue cryopreserved by
the Company.
Human and Stentless Porcine Heart Valves. Alternatives to human heart valves
cryopreserved by the Company include mechanical valves, porcine valves and
valves constructed from bovine pericardium. St. Jude Medical, Inc. is the
leading supplier of mechanical heart valves, and has a marketing and
distribution arrangement with a non-profit tissue bank for supplies of
cryopreserved human heart valves. Edwards Life Sciences, Inc. is the leading
supplier of bovine heart valves. In addition, management believes that at least
three tissue banks offer preservation services for human heart valves in
competition with the Company. The Company presently distributes its stentless
porcine heart valves only outside the U.S. These stentless porcine heart valves
compete with mechanical valves, human heart valves and processed bovine
pericardium. The Company is aware of at least three other companies that offer
stentless porcine heart valves.
Human Vascular Tissue. Synthetic alternatives to veins cryopreserved by the
Company are available primarily in medium and large diameters. Currently,
management believes that there are at least two other providers of cryopreserved
human vascular tissue in competition with the Company. Companies offering either
synthetic or allograft products may enter this market in the future.
Human Orthopaedic Tissue. The Company's competition in the area of orthopaedic
tissue varies according to the tissue involved. When transplant is indicated,
the principal competition for human tissues cryopreserved by the Company are
freeze-dried and fresh frozen human connective tissues. These alternative
allografts are distributed by distributors of Osteotech, Inc. and various tissue
banks, among others. Ligaments and tendons cryopreserved by the Company
constitute the principal treatment options for injuries which require anterior
cruciate ligament repair.
Implantable Biomedical Devices for Use as Surgical Adhesives and Sealants
The Company competes with many domestic and foreign medical device,
pharmaceutical and biopharmaceutical companies. In the surgical adhesive and
surgical sealant area, the Company will compete with existing methodologies,
including traditional wound closure products such as sutures and staples,
marketed by companies such as Johnson & Johnson, United States Surgical
Corporation, Sherwood, Davis & Geck and others. Other products currently being
marketed include fibrin glue sold by Baxter International, Inc., Chemo-Sero
Therapeutic Research Institute, Hoechst AG and others, and management believes
17
other products are under development by Baxter Healthcare International, Inc.,
Bristol-Myers Squibb Company, V.I. Technologies, Inc. and others. Other
competitors in the surgical sealant market include Closure Medical Corporation,
B. Braun GmbH, Focal, Inc., Fusion Medical Technologies Inc. and Cohesion, Inc.
Competitive products may also be under development by other large medical
device, pharmaceutical and biopharmaceutical companies. Many of the Company's
current and potential competitors have substantially greater financial,
technological, research and development, regulatory and clinical, manufacturing,
marketing and sales and personnel resources than the Company.
These competitors may also have greater experience in developing products,
conducting clinical trials, obtaining regulatory approvals, and manufacturing
and marketing such products. Certain of these competitors may obtain patent
protection, approval or clearance by the FDA or foreign countries or product
commercialization earlier than the Company, any of which could materially
adversely affect the Company. Furthermore, if the Company commences significant
commercial sales of its products, it will also be competing with respect to
manufacturing efficiency and marketing capabilities.
Other recently developed technologies or procedures are, or may in the future
be, the basis of competitive products. There can be no assurance that the
Company's current competitors or other parties will not succeed in developing
alternative technologies and products that are more effective, easier to use or
more economical than those which have been or are being developed by the Company
or that would render the Company's technology and products obsolete and
non-competitive in these fields. In such event, the Company's business,
financial condition and results of operations could be materially adversely
affected. See "Risk Factors--Rapid Technological Change."
GOVERNMENT REGULATION
U.S. Federal Regulation
Because human heart valves and BioGlue surgical bioadhesives are, and other
Company products may be, regulated in the future as medical devices, the Company
and these products are subject to the provisions of the Federal Food, Drug and
Cosmetic Act ("FDCA") and implementing regulations. Pursuant to the FDCA, the
FDA regulates the manufacture, distribution, labeling and promotion of medical
devices in the U.S. In addition, various foreign countries in which the
Company's products are or may be distributed impose additional regulatory
requirements.
The FDCA provides that, unless exempted by regulation, medical devices may not
be distributed in the U.S. unless they have been approved or cleared for
marketing by the FDA. There are two review procedures by which medical devices
can receive such approval or clearance. Some products may qualify for clearance
to be marketed under a Section 510(k) ("510(k)") procedure, in which the
manufacturer provides a premarket notification that it intends to begin
marketing the product, and shows that the product is substantially equivalent to
another legally marketed 510(k) product (i.e., that it has the same intended use
and that it is as safe and effective as a legally marketed 510(k) device and
does not raise different questions of safety and effectiveness than does a
legally marketed device). In some cases, the submission must include data from
clinical studies. Marketing may commence when the FDA issues a clearance letter
finding such substantial equivalence.
If the product does not qualify for the 510(k) procedure (either because it is
not substantially equivalent to a legally marketed 510(k) device or because it
is a Class III device required by the FDCA and implementing regulations to have
an approved application for premarket approval, known as a PMA) the FDA must
approve a PMA application before marketing can begin. PMA applications must
demonstrate, among other matters, that the medical device is safe and effective.
A PMA application is typically a complex submission, usually including the
results of human clinical studies, and preparing an application is a detailed
and time-consuming process. Once a PMA application has been submitted, the FDA's
review may be lengthy and may include requests for additional data. By statute
and regulation, the FDA may take 180 days to review a PMA application although
such time may be extended. Furthermore, there can be no assurance that a PMA
application will be reviewed within 180 days or that a PMA application will be
approved by the FDA.
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The FDCA also provides for an investigational device exemption ("IDE") which
authorizes distribution for clinical evaluation of devices that lack a PMA or
510(k). Devices subject to an IDE are subject to various restrictions imposed by
the FDA. The number of patients that may be treated with the device is limited,
as are the number of institutions at which the device may be used. Patients must
give informed consent to be treated with an investigational device. The device
must be labeled that it is for investigational use and may not be advertised, or
otherwise promoted, and the price charged for the device may be limited.
Unexpected adverse experiences must be reported to the FDA.
Under certain circumstances, the FDA may grant a Humanitarian Device Exemption.
HDE's are granted by the FDA in an attempt to encourage the development of
medical devices for use in the treatment of rare conditions that affect small
patient populations. An approval by the FDA exempts such devices from full
compliance with clinical study requirements for premarket approval.
The FDCA requires all medical device manufacturers and distributors to register
with the FDA annually and to provide the FDA with a list of those medical
devices which they distribute commercially. The FDCA also requires manufacturers
of medical devices to comply with labeling requirements and to manufacture
devices in accordance with Quality System Regulations, which require that
companies manufacture their products and maintain their documents in a
prescribed manner with respect to good manufacturing practices, design, document
production, process, labeling and packaging controls, process validation and
other quality control activities. The FDA's medical device reporting regulation
requires that a device manufacturer provide information to the FDA on death or
serious injuries alleged to have been associated with the use of its products,
as well as product malfunctions that would likely cause or contribute to death
or serious injury if the malfunction were to recur. The FDA's medical device
tracking regulation requires the adoption of a method of device tracking by
manufacturers of life-sustaining or implantable products, the failure of which
would be reasonably likely to have serious adverse health consequences, if the
FDA issues an order to do so. The manufacturer must adopt methods to ensure that
such devices can be traced from the manufacturing facility to the ultimate user,
the patient. The FDA further requires that certain medical devices not cleared
for marketing in the U.S. follow certain procedures before they are exported.
The FDA inspects medical device manufacturers and distributors and has authority
to seize noncomplying medical devices, to enjoin and/or to impose civil
penalties on manufacturers and distributors marketing non-complying medical
devices, to criminally prosecute violators and to order recalls in certain
instances.
Human Heart Valves. The Company's human heart valves became subject to
regulation by the FDA in June 1991, when the FDA published a notice stating that
human heart valves were Class III medical devices under the FDCA. The June 1991
notice provided that distribution of human heart valves for transplantation
would violate the FDCA unless they were the subject of an approved PMA or IDE on
or before August 26, 1991.
On October 14, 1994, the FDA announced in the Federal Register that neither an
approved application for PMA nor an IDE is required for processors and
distributors who had marketed heart valve allografts before June 26, 1991. This
action by the FDA has resulted in the allograft heart valves being classified as
Class II Medical Devices and has removed them from clinical trial status. It
also allows the Company to distribute such valves to cardiovascular surgeons
throughout the U.S.
Other Tissue. Other than human and porcine heart valves, BioGlue and SynerGraft
devices, none of the Company's other tissue services or tissue-based products
are currently subject to regulation as medical devices under the FDCA or FDA
regulation. Heart valves are one of a small number of processed human tissues
over which the FDA has asserted medical device jurisdiction. In July 1997, the
FDA published a final rule, which became effective in January 1998, regulating
"human tissue." The rule clarifies and modifies an earlier interim rule and
defines human tissue as any tissue derived from a human body which is (i)
intended for administration to another human for the diagnosis, cure,
mitigation, treatment or prevention of any condition or disease and (ii)
recovered, processed, stored or distributed by methods not intended to change
tissue function or characteristics. The FDA definition excludes, among other
things, tissue that currently is regulated as a human drug, biological product
or medical device and excludes kidney, liver, heart, lung, pancreas or any other
vascularized human organ. In January 2001 the FDA published a final rule to
require establishments that process or produce human tissue and cellular-based
products to register with the agency and list the tissue and cellular products
they process or manufacture. Human tissue is regulated by the FDA in a manner
19
the agency has deemed necessary to protect the public health from the
transmission of HIV infection and hepatitis infection through transplantation of
tissue from donors with or at risk for these diseases. Unlike certain drugs,
biologicals and medical devices, human tissue is not subject to premarket
notification or approval by the FDA. It is likely, moreover, that the FDA will
expand its regulation of processed human tissue in the future. For example, in
November 2000 the FDA published a proposed rule for good tissue manufacturing
practices. Moreover, the FDA may determine that the veins and connective tissue
that are currently processed by the Company are medical devices, or the FDA may
determine to regulate human heart valves as "human tissue" rather than medical
devices, but the FDA has not done so at this time. Complying with FDA regulatory
requirements or obtaining required FDA approvals or clearances may entail
significant time delays and expenses or may not be possible, any of which may
have a material adverse effect on the Company. In addition, the U.S. Congress is
expected to consider legislation that would regulate human tissue for transplant
or the FDA could impose a separate regulatory scheme for human tissue. Such
legislation or regulation could have a material adverse effect on the Company.
Porcine Heart Valves. Porcine heart valves are Class III medical devices, and
FDA approval of a PMA is required prior to commercial distribution of such
valves in the U.S. The porcine heart valves currently marketed by the Company
have not been approved by the FDA for commercial distribution in the U.S. but
may be manufactured in the U.S. and exported to foreign countries if the valves
meet the specifications of the foreign purchaser, do not conflict with the laws
of and are approved by the country to which they will be exported and the FDA
determines that their exportation is not contrary to the public health and
safety.
BioGlue Surgical Adhesive. BioGlue Surgical Adhesive is regulated as a Class III
medical device by the FDA. In December 2001 the Company received FDA approval
for BioGlue as an adjunct to sutures and staples for use in adult patients in
open surgical repair of large vessels. Prior to this approval, the Company
received a HDE in December 1999 for BioGlue Surgical Adhesive for use as an
adjunct in repair of acute thoracic aortic dissections.
Possible Other FDA Regulation. Other products and processes under development by
the Company are likely to be subject to regulation by the FDA. Some may be
classified as medical devices; others may be classified as drugs or biological
products or subject to a regulatory scheme for human tissue that the FDA may
adopt in the future. Regulation of drugs and biological products is
substantially similar to regulation of medical devices. Obtaining FDA approval
to market these products is likely to be a time consuming and expensive process,
and there can be no assurance that any of these products will ever receive FDA
approval, if required, to be marketed.
NOTA Regulation. The Company's activities in processing and transporting human
hearts and certain other organs are also subject to federal regulation under the
National Organ Transplant Act ("NOTA"), which makes it unlawful for any person
to knowingly acquire, receive or otherwise transfer any human organ for valuable
consideration for use in human transplantation if the transfer affects
interstate commerce. NOTA excludes from the definition of "valuable
consideration" reasonable payments associated with the removal, transportation,
implantation, processing, preservation, quality control and storage of a human
organ. The purpose of this statutory provision is to allow for compensation for
legitimate services. The Company believes that to the extent its activities are
subject to NOTA, it meets this statutory provision relating to the
reasonableness of its charges. There can be no assurance, however, that
restrictive interpretations of NOTA will not be adopted in the future that would
call into question one or more aspects of the Company's methods of charging for
its preservation services.
State Licensing Requirements
Some states have enacted statutes and regulations governing the processing,
transportation and storage of human organs and tissue. The activities engaged in
by the Company require it to be licensed as a clinical laboratory and tissue
bank under Georgia, New York, California and Florida law. The Company has such
licenses, and the Company believes it is in compliance with applicable state
laws and regulations relating to clinical laboratories and tissue banks which
store, process and distribute human tissue designed to be used for medical
purposes in human beings. There can be no assurance, however, that more
restrictive state laws or regulations will not be adopted in the future that
could adversely affect the Company's operations. Certain employees of the
Company have obtained other required licenses.
20
Foreign Approval Requirements
Sales of medical devices and biological products outside the U.S. are subject to
foreign regulatory requirements that vary widely from country to country.
Approval of a product by comparable regulatory authorities of foreign countries
must be obtained prior to commercial distribution of the product in those
countries. The time required to obtain foreign approvals may be longer or
shorter than that required for FDA approval. The EC recognizes a single
approval, called a CE Mark, which allows for distribution of an approved product
throughout the EC (15 countries) without additional general applications to each
country. However, individual EC members reserve the right to require additional
data to address particular patient safety issues prior to allowing importation.
France and an increasing number of EC members require such additional data for
products containing material of animal origin. The CE Mark is awarded by third
parties called Notified Bodies. These Notified Bodies are approved and subject
to review by the Competent Authorities of their respective countries. A number
of countries outside of the EC accept the CE Mark in lieu of clinical data
submission as an addendum to that country's application process. The Company has
been issued CE Marks for its CryoLife-O'Brien and CryoLife-Ross porcine heart
valves, BioGlue Surgical Adhesive, and its SynerGraft Model 500 and 700 heart
valves and SynerGraft Model 100 vascular grafts. The Company's porcine heart
valves may be exported to specified developed nations, including countries in
the EC, Australia, Canada, Israel, New Zealand, South Africa and Switzerland if
they comply with the laws of that country and have valid marketing authorization
by the appropriate authority in that country. Beginning in July 1998, CE Mark
Certification was required to market porcine heart valves and other
bioprosthetics in the EC.
ENVIRONMENTAL MATTERS
The Company's tissue processing activities generate some biomedical wastes
consisting primarily of human and animal pathological and biological wastes,
including human and animal tissue and body fluids removed during laboratory
procedures. The biomedical wastes generated by the Company are placed in
appropriately constructed and labeled containers and are segregated from other
wastes generated by the Company. The Company contracts with third parties for
transport, treatment and disposal of biomedical waste. Although the Company
believes it is in compliance with applicable laws and regulations promulgated by
the U.S. Environmental Protection Agency and the Georgia Department of Natural
Resources, Environmental Protection Division, the failure by the Company to
comply fully with any such regulations could result in an imposition of
penalties, fines or sanctions, which could have a material adverse effect on the
Company's business.
EMPLOYEES
At March 21, 2002 the Company had approximately 384 employees. These employees
included 13 persons with PhD degrees. None of the Company's employees is
represented by a labor organization or covered by a collective bargaining
agreement, and the Company has never experienced a work stoppage or interruption
due to labor disputes. Management believes its relations with its employees are
good.
21
RISK FACTORS
DEPENDENCE ON PRESERVATION OF HUMAN TISSUE
A significant portion of the Company's current revenues is derived from the
preservation of human tissues. The success of this business depends upon, among
other factors, the availability of sufficient quantities of tissue from human
donors. Any material reduction in the supply of donated human tissue could
restrict the Company's growth. The Company relies primarily upon the efforts of
third party procurement agencies and tissue banks (most of which are
not-for-profit) and others to educate the public and foster a willingness to
donate tissue. Based on the Company's experience with cardiovascular, vascular
and orthopaedic tissues, management believes that once the use by physicians of
a particular transplantable tissue gains acceptance, demand for that tissue will
exceed the amount of tissue available from human donors. Failure of the Company
to maintain its supply of tissue for preservation could have a material adverse
effect on the Company's business, financial condition and results of operations.
Furthermore, a reduction in the demand for the Company's cryopreserved human
tissue could also have a material adverse effect on the Company's business,
financial condition and results of operations. Such reduction could occur if
competitors' products were perceived as either functionally superior or more
cost effective, if the number of procedures in which cryopreserved tissues are
used declines or if hospitals acquire sufficient inventories of cryopreserved
tissue to allow a reduction in new orders. See "--Intense Competition" and
"--Uncertainties Regarding Future Health Care Reimbursement."
INTENSE COMPETITION
The Company faces competition from other companies that cryopreserve human
tissue, as well as companies that market mechanical valves and synthetic and
animal tissue for implantation and companies that market wound closure products.
Management believes that at least three tissue banks offer preservation services
for human heart valves and many companies offer processed porcine heart valves
and mechanical heart valves. A few companies dominate portions of the mechanical
and porcine heart valve markets, including St. Jude Medical, Inc., Medtronic,
Inc. and Edwards Life Sciences. The Company is aware that several companies have
surgical adhesive products under development. Competitive products may also be
under development by other large medical device, pharmaceutical and
biopharmaceutical companies. Many of the Company's competitors have greater
financial, technical, manufacturing and marketing resources than the Company and
are well established in their markets. There can be no assurance that the
Company's products and services will be able to compete successfully with the
products of these or other companies. Any products developed by the Company that
gain regulatory clearance or approval will have to compete for market acceptance
and market share. Failure of the Company to compete effectively could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Competition."
RAPID TECHNOLOGICAL CHANGE
The technologies underlying the Company's products and services are subject to
rapid and profound technological change. The Company expects competition to
intensify as technical advances in each field are made and become more widely
known. There can be no assurance that others will not develop products or
processes with significant advantages over the products and processes that the
Company offers or is seeking to develop. Any such occurrence could have a
material adverse effect on the Company's business, financial condition and
results of operations.
UNCERTAINTIES REGARDING PRODUCTS IN DEVELOPMENT
The Company's growth and profitability will depend, in part, upon its ability to
complete development of and successfully introduce new products, including
additional applications of its BioGlue and SynerGraft technologies and its ACT.
The Company may be required to undertake time consuming and costly development
activities and seek regulatory clearance or approval for new products. See
"--Extensive Government Regulation." Although the Company has conducted
22
pre-clinical studies on many of its products under development which indicate
that such products may be effective in a particular application, there can be no
assurance that the results obtained from expanded clinical studies will be
consistent with earlier trial results or be sufficient for the Company to obtain
any required regulatory approvals or clearances. There can be no assurance that
the Company will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of new products, that
regulatory clearance or approval of these or any new products will be granted on
a timely basis, if ever, or that the new products will adequately meet the
requirements of the applicable market or achieve market acceptance. The
completion of the development of any of the Company's products remains subject
to all of the risks associated with the commercialization of new products based
on innovative technologies, including unanticipated technical or other problems,
manufacturing difficulties and the possible insufficiency of the funds allocated
for the completion of such development. Consequently, there can be no assurance
that any of the Company's products under development will be successfully
developed or manufactured or, if developed and manufactured, that such products
will meet price or performance objectives, be developed on a timely basis or
prove to be as effective as competing products. The inability to complete
successfully the development of a product or application, or a determination by
the Company, for financial, technical or other reasons, not to complete
development of any product or application, particularly in instances in which
the Company has made significant capital expenditures, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company's porcine heart valve products, including its SynerGraft treated
porcine valves, are currently only offered for sale outside of the U.S. The
Company's porcine heart valves are subject to the risk that the Company may be
unable to obtain regulatory approval necessary to permit commercial distribution
of these products in the U.S.
The Company's research and development efforts are time consuming and expensive
and there can be no assurance that these efforts will lead to commercially
successful products or services. Even the successful commercialization of a new
service or product in the medical industry can be characterized by slow growth
and high costs associated with marketing, under-utilized production capacity and
continuing research, and development and education costs. Generally, the
introduction of new human tissue products requires significant physician
training and years of clinical evidence derived from follow-up studies on human
implant recipients in order to gain acceptance in the medical community.
UNCERTAINTIES REGARDING THE FUNDING OF THE ACT TECHNOLOGY
The ACT is a reversible linker technology that has potential uses in the areas
of cancer therapy, fibrin olysis (blood clot dissolving) and other drug delivery
applications. The Company has formed AuraZyme, a wholly-owned subsidiary, in
order to seek a corporate collaboration or to complete a potential private
placement of equity or equity-oriented securities to fund the commercial
development of the ACT. This strategy is designed to allow the Company to
continue development of this technology without incurring additional research
and development expenditures, other than through AuraZyme. There can be no
guarantee that such funding can be obtained on acceptable terms, if at all. If
such funding is not obtained, the Company may be unable to effectively test and
develop the ACT, and may therefore be unable to determine its effectiveness.
Even if such financing is obtained, there is no guarantee that the ACT will in
fact prove to be effective in the above applications. Failure to obtain the
desired financing, or failure of the ACT to perform as anticipated in future
tests, could have a material adverse effect on our future expansion plans and
could limit future growth.
UNCERTAINTIES REGARDING THE SYNERGRAFT TECHNOLOGY
The Company currently processes porcine, bovine and human tissues with the
SynerGraft process. In animal studies, explanted porcine heart valves have been
shown to repopulate with the hosts' cells. However, should SynerGraft-treated
tissues implanted in humans not repopulate with the human host cells, the
SynerGraft-treated tissues may not have the longevity that the Company currently
expects. This could have a material adverse effect on future expansion plans and
could limit future growth.
23
EXTENSIVE GOVERNMENT REGULATION
Government regulation in the U.S., the EC and other jurisdictions represents a
potentially determinative factor in the success of the Company's efforts to
market and develop its products. See "Business--Government Regulation." The
human heart valves to which the Company applies its preservation services are
currently regulated as Class II medical devices by the FDA and are subject to
significant regulatory requirements, including Quality System Regulations and
recordkeeping requirements. There can be no assurance that changes in regulatory
treatment or the adoption of new statutory or regulatory requirements will not
occur, which could adversely impact the marketing or development of these
products or could adversely affect market demand for these products.
Other allograft tissues processed and distributed by the Company are currently
regulated as "human tissue" under rules promulgated by the FDA pursuant to the
Public Health Services Act. These rules establish requirements for donor testing
and screening of human tissue and recordkeeping relating to these activities and
impose certain registration and product listing requirements on establishments
that process or distribute human tissue or cellular-based products. Although the
Company's other human tissue allografts are not currently regulated as medical
devices, such tissue may in the future become subject to more extensive FDA
regulation, which could include PMA or product licensing requirements.
BioGlue Surgical Adhesive is regulated as a Class III medical device and the
Company believes that its ACT may be regulated as a biologic or drug by the FDA.
The ACT has not been approved for commercial distribution in the U.S. or
elsewhere. Fixed porcine heart valve products are classified as Class III
medical devices. There can be no assurance that the Company will be able to
obtain the FDA approval required to distribute its porcine heart valve products
in the U.S. Distribution of these products within the EC is dependent upon the
Company maintaining its CE Mark and ISO 9001 certifications, of which there can
be no assurance.
Most of the Company's products in development, if successfully developed, will
require regulatory approvals from the FDA and perhaps other regulatory
authorities before they may be commercially distributed. The process of
obtaining required regulatory approvals from the FDA normally involves clinical
trials and the preparation of an extensive PMA application and often takes many
years. The process is expensive and can vary significantly based on the type,
complexity and novelty of the product. There can be no assurance that any
products developed by the Company, independently or in collaboration with
others, will receive the required approvals for manufacturing and marketing.
Delays in obtaining U.S. or foreign approvals could result in substantial
additional cost to the Company and adversely affect the Company's competitive
position. The FDA may also place conditions on product approvals that could
restrict commercial applications of such products. Product marketing approvals
or clearances may be withdrawn if compliance with regulatory standards is not
maintained or if problems occur following initial marketing. Delays imposed by
the governmental clearance process may materially reduce the period during which
the Company has the exclusive right to commercialize patented products. Also,
delays or rejections may be encountered during any stage of the regulatory
approval process based upon the failure of the clinical or other data to
demonstrate compliance with, or upon the failure of the product to meet, the
regulatory agency's requirements for safety, efficacy and quality, and those
requirements may become more stringent due to changes in applicable law,
regulatory agency policy or the adoption of new regulations. Clinical trials may
also be delayed due to unanticipated side effects, inability to locate, recruit
and qualify sufficient numbers of patients, lack of funding, the inability to
locate or recruit clinical investigators, the redesign of clinical trial
programs, the inability to manufacture or acquire sufficient quantities of the
particular product candidate or any other components required for clinical
trials, changes in the Company's or its collaborative partners' development
focus and disclosure of trial results by competitors. Even if regulatory
approval is obtained for any of the Company's products or services, the scope of
the approval may significantly limit the indicated usage for which such products
or services may be marketed.
Products marketed by the Company pursuant to FDA or foreign oversight or
approval are subject to pervasive and continuing regulation. In the U.S.,
devices and biologics must be manufactured in registered establishments (and, in
the case of biologics, licensed establishments) and must be produced in
accordance with Quality System Regulations. Manufacturing facilities and
processes are subject to periodic FDA inspection. For example, the FDA is
currently inspecting our facilities in suburban Atlanta, Georgia. Labeling and
promotional activities are also subject to scrutiny by the FDA and, in certain
instances, by the Federal Trade Commission. The export of devices and biologics
is also subject to regulation and may require FDA approval. From time to time,
the FDA may modify such regulations, imposing additional or different
requirements. Failure to comply with any applicable FDA requirements, which may
be ambiguous, could result in civil and criminal enforcement actions, warnings,
24
citations, product recalls or detentions and other penalties and could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, NOTA prohibits the acquisition or transfer
of human organs for "valuable consideration" for use in human transplantation.
NOTA permits the payment of reasonable expenses associated with the removal,
transportation, processing, preservation, quality control and storage of human
organs. There can be no assurance that restrictive interpretations of NOTA will
not be adopted in the future that will challenge one or more aspects of the
Company's methods of charging for its preservation services. The Company's
laboratory operations are subject to the U.S. Department of Labor, Occupational
Safety and Health Administration and Environmental Protection Agency
requirements for prevention of occupational exposure to infectious agents and
hazardous chemicals and protection of the environment. Some states have enacted
statutes and regulations governing the processing, transportation and storage of
human organs and tissue. While management believes that the Company is presently
in compliance in all material respects with all such applicable statutes and
regulations, there can be no assurance that more restrictive state laws or
regulations will not be adopted in the future that could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business--Government Regulation."
UNCERTAINTIES RELATED TO PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY
The Company owns several patents, patent applications and licenses relating to
its technologies, which it believes provide important competitive advantages.
There can be no assurance that the Company's pending patent applications will
issue as patents or that challenges will not be instituted concerning the
validity or enforceability of any patent owned by the Company, or, if
instituted, that such challenges will not be successful. The cost of litigation
to uphold the validity and prevent infringement of a patent could be
substantial. Furthermore, there can be no assurance that competitors will not
independently develop similar technologies or duplicate the Company's
technologies or design around the patented aspects of the Company's
technologies. There can be no assurance that the Company's proposed technologies
will not infringe patents or other rights owned by others. In addition, under
certain of the Company's license agreements, if the Company fails to meet
certain contractual obligations, including the payment of minimum royalty
amounts, such licenses may become nonexclusive or terminable by the licensor,
which could have a material adverse effect on the Company's business, financial
condition and results of operations. Additionally, the Company protects its
proprietary technologies and processes in part by confidentiality agreements
with its collaborative partners, employees and consultants. There can be no
assurance that these agreements will not be breached, that the Company will have
adequate remedies for any breach or that the Company's trade secrets will not
otherwise become known or independently discovered by competitors, any of which
could have a material adverse effect on the Company's business, financial
condition and results of operations. Furthermore, the Company is involved in
litigation relating to its SynerGraft technology. An adverse decision in that
case could have a material adverse effect on the Company's business and results
of operations.
UNCERTAINTIES REGARDING FUTURE HEALTH CARE REIMBURSEMENT
Even though the Company does not receive payments directly from third-party
health care payors, their reimbursement methods and policies impact demand for
the Company's cryopreserved tissue and other services and products. The
Company's preservation services may be particularly susceptible to third-party
cost containment measures. In particular, the initial cost of a cryopreserved
human heart valve generally exceeds the cost of a mechanical, synthetic or
animal-derived valve. The Company is unable to predict what changes will be made
in the reimbursement methods and policies utilized by third-party health care
payors or their effect on the Company. Changes in the reimbursement methods and
policies utilized by third-party health care payors, including Medicare, with
respect to cryopreserved tissues provided for implant by the Company and other
Company services and products, could have a materia