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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-K
[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: 0-23678
BioSphere Medical, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 04-3216867
(State or Other
Jurisdiction of
Incorporation (IRS Employer
or Organization) Identification No.)
1050 Hingham St., Rockland, Massachusetts 02370
(Address of Principal Executive Offices) (Zip Code)
(781) 681-7900
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of voting Common Stock held by non-affiliates of
the registrant was $76,630,000 based on the closing price of the shares as
reported by the Nasdaq National Market on March 16, 2002.
Number of shares outstanding of the registrant's Common Stock as of March
16, 2002 was 12,910,495.
Documents incorporated by reference:
Proxy Statement for the 2002 Annual Meeting of Stockholders--Part III.
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PART I
Item 1. BUSINESS
We are pioneering the use of our proprietary bio-engineered acrylic beads,
known as microspheres, for medical applications using embolotherapy techniques
and also to develop potential applications in several non-embolotherapy
applications. We believe microsphere technologies, such as our proprietary
microsphere platform, are enabling the rapid development of a new,
"micro-interventional" market. We expect that micro-interventional devices will
expand the capability of catheter-based interventional technologies and permit
clinicians to treat medical conditions in a more effective and minimally
invasive manner.
Embolotherapy is a minimally invasive procedure in which embolic materials,
such as our microspheres, are delivered through a catheter into the blood
vessels to inhibit blood flow to tumors or vascular defects or to control blood
loss presurgically. Our initial product, Embosphere(R) Microspheres, is
targeted for treatment of hypervascularized tumors and arteriovenous
malformations. Hypervascularized tumors are tumors that have a large number of
blood vessels feeding them and include certain tumors affecting the brain and
spinal cord, tumors in the uterus, known as uterine fibroids, and tumors
associated with primary liver cancer. By selectively blocking the tumor's blood
supply, embolotherapy is designed to cause the tumor to shrink and necrose.
Based on preliminary research, we believe that our microsphere technology
platform can also be adapted to deliver drugs, living tissue or genetic
material to targeted sites.
Our microspheres have a variety of characteristics that we believe make them
preferable to other embolic materials currently used in embolotherapy.
Specifically, we have designed our products to be easier to use and their
delivery to the tumor more targeted and controlled, which we believe will
result in better outcomes for the patient. By improving the practice and
awareness of embolotherapy and the benefits of our products, we believe that
patients who are currently untreated, surgical candidates and patients
considering treatment with other embolics may seek treatment with our
microsphere technology.
We believe that our platform microsphere technology also has several
non-embolotherapy applications, such as tissue bulking, repair and
regeneration. In this context, we are exploring and/or developing microspheres
for use in the treatment of a number of conditions, including stress urinary
incontinence and gastroesophageal reflux disease.
BioSphere Medical, Inc. was originally incorporated as a Delaware
corporation in 1993 under the name BioSepra Inc., as a chromatography media
company. During 1999, we strategically refocused our business on the
development and commercialization of our proprietary microspheres for medical
applications. During 2000, we established two wholly owned subsidiaries to
pursue the development of our microsphere technologies in applications outside
of, and complementary to, embolotherapy. In May 2000, we established Biosphere
Medical Japan, Inc., a Delaware corporation, to develop and commercialize
Embosphere Microspheres and HepaSphere SAP(TM) Microspheres in the Far East. In
December 2000, we established BSMD Ventures, Inc., also a Delaware corporation,
to explore and develop non-embolotherapy applications for our proprietary
microspheres.
INDUSTRY OVERVIEW
Embolotherapy Markets
Embolotherapy has been in use for more than 20 years by interventional
radiologists to mechanically block the flow of blood to treat certain
peripheral tumors and arteriovenous malformations and to control blood loss.
Historically, embolotherapy has been used in various brain-based procedures as
a means of blocking the blood supply to inoperable tumors or to minimize
bleeding within targeted surgical areas. As applications within the brain are
considered among the most medically sensitive and complex, we believe the
continued use of embolotherapy in these high-risk procedures attests to its
overall safety and efficacy. In recent years, interventional radiologists in
the United States, Europe and Japan have begun to expand the scope of
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embolotherapy to include uterine artery embolization and the treatment of
certain cancers, including liver cancer. Moreover, a growing number of affected
people are taking proactive steps in seeking alternative treatments,
particularly as a result of increased general awareness brought about by the
proliferation of medical internet sites.
We refer to the use of embolotherapy as a method of blocking blood flow to
tumors and other malformations as passive embolotherapy. We believe the
potential market for passive embolotherapy continues to expand beyond niche
neurovascular applications into broader medical opportunities, such as uterine
fibroid and liver tumor embolization.
In addition, in a process we refer to as active embolotherapy, we are
pursuing the development of microspheres as well as other technologies designed
to release embedded drugs, live cells, ionizing radiation or genetic material
specifically at a targeted site. We believe that delivering a drug directly to
the tumor site and then releasing it over time may increase the effectiveness
of the drug while decreasing the adverse side effects.
Uterine Fibroids
Uterine fibroids are non-cancerous tumors growing within or on the wall of
the uterus. Their cause is unknown. Most patients with uterine fibroids do not
initially have symptoms and remain untreated until the patient experiences
abnormal bleeding, increased urinary frequency, pain, swelling or fertility
difficulties.
Until now, women suffering from uterine fibroids have had few treatment
options. These existing treatment options include the following:
. Hysterectomy. Hysterectomy is a surgical procedure to remove the uterus.
While hysterectomy has a relatively low complication rate, it requires a
hospital stay of several days, a recovery period of up to six to eight weeks
and results in loss of fertility for women of child-bearing age.
Furthermore, hysterectomies have been tied to adverse psychological effects,
as well as the onset of early menopause.
. Myomectomy. Myomectomy is the surgical removal of the uterine fibroids
without removal of the uterus. It is usually performed on women who wish to
preserve their fertility. In addition to the invasiveness of the procedure,
the most significant disadvantage of myomectomy is a 10 to 30 percent
recurrence rate. Even though a myomectomy has been the only procedure
available to women with severe symptoms from uterine fibroids that wish to
preserve fertility, the recurrence rate and invasiveness have resulted in
resistance from both third party payors and patients. Relatively few
myomectomies are performed in relation to the number of eligible patients.
. Medical Management and "Watchful Waiting." About 95 percent of symptomatic
fibroid patients either receive hormone treatment on a temporary basis to
relieve symptoms or remain untreated and tolerate the symptoms. Even if the
patient receives treatment, once treatment ceases, the uterine fibroids
usually regrow. While hormone treatment temporarily reduces symptoms,
patients often experience side effects associated with the accompanying
hormonal changes. Moreover, women cannot conceive while taking the hormones.
Women with less severe symptoms who are, therefore, not candidates for
hormone treatment, and those seeking to conceive have few satisfactory
options. In these circumstances, physicians usually monitor symptoms and
will administer therapy only if the condition worsens.
The therapies currently available for treating uterine fibroids may have
significant drawbacks including:
. temporary or permanent loss of fertility for women of child-bearing age;
. lengthy recovery periods;
. premature menopause and related symptoms;
. high costs, including costs of medications, surgical procedures, and
frequent and long hospital stays;
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. discomfort and side effects from invasive surgical procedures and
hormone therapy; and
. risk of recurrence of the fibroids.
Another method of treating uterine fibroids, more recently adopted by
physicians, is uterine artery embolization. Though not approved by the FDA for
this specific use, another embolic material commonly used today in uterine
artery embolization is polyvinyl alcohol, or PVA. Polyvinyl alcohol has several
limitations, including:
. Inconvenience and limited effectiveness. Polyvinyl alcohol often clogs in
the catheter, interrupting the procedure and necessitating potentially
hazardous, costly and time-consuming catheter replacement. In addition,
because of its imprecise size and shape, polyvinyl alcohol may not fully
occlude the blood vessel, allowing the blood to circumvent the embolic
material and continue to feed the tumor.
. Limited control. Polyvinyl alcohol often fragments and aggregates, or
clumps, in the blood vessel, causing vessel blockages prior to reaching the
desired site of blood flow occlusion. In addition to catheter problems,
clumping during embolization is clinically problematic. If clumping occurs
at non-targeted sites in the vessel after injection into the artery,
incomplete embolization can occur. In addition, occlusions can block desired
normal blood supply causing undesired necrosis or death of healthy tissue.
. Chronic inflammatory response. Polyvinyl alcohol often stimulates an
inflammatory response by the body that persists for an extended period of
time.
Based upon the shortcomings in existing technologies and therapies we
discussed above, we believe there are significant opportunities in developing
and commercializing alternative embolic treatment products for patients
suffering from uterine fibroids. For example, there are approximately 300,000
hysterectomies performed annually in the United States for uterine fibroids. We
believe that substantially all of these cases could be effectively treated with
our Embosphere Microspheres.
Primary Liver Cancer
Primary liver cancer originates in the liver, rather than traveling to the
liver from another cancer site in the body. Over 70 percent of primary liver
cancers are inoperable and are, therefore, treated primarily with chemotherapy
or radiation. However, due to the destructive nature of both radiation and
chemotherapy, these therapies have traditionally been associated with the
following limitations and side effects:
. Radiation. While radiation therapy can shrink or eliminate certain
individual tumors, its use in treating liver cancer is limited. Since it is
difficult to isolate radiation exposure to the liver tumor, radiation
therapy often results in damage to the surrounding non-tumorous tissue.
. Chemotherapy. Chemotherapy seeks to control cancer by selectively killing
the more-rapidly-dividing cancer cells and is widely used for treating
cancer elsewhere in the body. The use of systemically delivered chemotherapy
agents, however, has shown little benefit in treating liver cancer. Similar
to the limitations of radiation therapy, therapeutic doses of chemotherapy
to the cancerous tissue have a damaging effect on the normal surrounding
tissue.
Other treatments currently under investigation to treat inoperable primary
liver cancer are radio frequency tumor ablation, which seeks to kill the tumor
by means of destructive electrical energy, and embolization. Interventional
radiologists are also currently using chemoembolotherapy to treat liver cancer.
Chemoembolotherapy refers to the delivery of drugs in a mixture that contains
embolic materials to create a higher localized concentration of the drug.
We believe there are significant opportunities in developing and
commercializing alternative embolic products for use in non-operable liver
cancer cases.
4
Non-Embolotherapy Applications
Advances in cell biology are resulting in rapid advances in the fields of
organ and tissue repair, reconstruction and regeneration, which we generally
refer to as tissue engineering. These developments in tissue engineering are
targeted at facilitating the body to heal itself through the delivery of
molecular signals, cells or supporting structures to the appropriate sites in
the body.
In certain conditions, including stress urinary incontinence,
gastroesophageal reflux disease, urinary reflux in infants and certain skin
conditions, the normal anatomic supports are not present in the body. Injecting
fillers into the existing structures to bulk them up, referred to as tissue
bulking, is designed to recreate the missing anatomic supports, thereby
eliminating the condition.
Tissue repair and regeneration involves the development of bioartifical
cells, tissues and supporting matrixes, which are scaffolds that hold the cells
or tissues together. These tissue scaffolds may also be developed from
synthetic polymers. Tissue scaffold products have a number of potential
applications, including cartilage and bone repair as well as organ supplements
or replacements.
OUR BUSINESS STRATEGY
Utilizing our platform microsphere technology, our strategy is to develop
and commercialize innovative embolotherapy products for conditions where
minimally invasive treatments do not currently exist. Because our primary focus
is on embolotherapy, our strategy, with respect to other business
opportunities, is to develop these products through proof of principle and then
seek strategic partnerships to complete the commercialization process. Our
criterion for product selection is that the product must have the potential to
become the global leader in a significant market. The key elements of our
strategy are as follows:
. Continue to advance our microsphere technology for use in current passive
embolotherapy applications. We are focusing the initial implementation of
our microsphere technology on addressing large embolotherapy market
opportunities. We believe that embolotherapy will represent an attractive
alternative to the current treatment options, many of which are invasive
surgical procedures or have other significant drawbacks. We received FDA
clearance in April 2000 for use of Embosphere Microspheres in the
embolization of arteriovenous malformations and hypervascularized tumors in
the United States. We intend, pending FDA clearance or approval, to market
our products for use in embolization of uterine fibroids. We have recently
completed the enrollment of our pivotal Phase II clinical trial to support
an application for marketing clearance or approval from the FDA for the use
of our Embosphere Microspheres in the specific treatment of uterine
fibroids. Our Embosphere Microspheres are also approved in the European
Union, Australia and Canada. In Japan, our Hepasphere SAP Microspheres have
been used experimentally in over 100 patients for liver cancer embolotherapy.
. Develop new embolotherapy platforms, including active microsphere
technologies that advance the scope of embolotherapy into new therapeutic
applications. We believe that there are opportunities to use microspheres as
well as other technologies to advance the scope of embolotherapy into new
therapeutic applications. We are currently pursuing opportunities in the
area of active embolotherapy, which is the use of embolotherapy to deliver
therapeutic agents directly to a target site. Therapeutic agents may include
drugs, ionizing radiation, live cells or genetic material. We believe that
active embolotherapy could, for example, allow blocking of the blood flow to
the tumor site while allowing targeted, more effective delivery of
therapeutic agents. We are currently conducting pre-clinical research on our
Viasphere(TM) Microspheres, which are being designed as precisely-sized
highly hydrophilic microspheres to which living cells, genetic materials or
drugs are attached. We are also conducting pre-clinical research on our
Radiosphere(TM) Microspheres which are similarly designed to deliver
targeted radiation therapy.
5
. Pursue opportunities for microsphere technology in other medical
applications with large target markets and commercialize these opportunities
primarily through strategic alliances and partnerships. We believe that
there are significant opportunities for applying our platform microsphere
technology beyond embolotherapy. These opportunities include configuring our
microspheres to serve as a bulking agent to treat stress urinary
incontinence, gastroesophageal reflux disease and dermal repair, or as a
tissue scaffold for tissue or organ regeneration. We believe that our
microspheres will be an attractive treatment alternative in each of these
markets. We intend to establish strategic alliances or partnerships as the
primary vehicle to commercialize products outside the field of embolotherapy
based on our microspheres.
. Build a broad, value-added ancillary product portfolio to facilitate
embolotherapy procedures. We intend to complement our microsphere product
line by offering value-added ancillary products used in each procedure, such
as specialty catheters, guidewires and other delivery systems. Our ancillary
products will be specifically designed for our targeted procedures and will
be aimed at facilitating ease of use, enhancing clinical performance during
the procedure and providing differentiating benefit to our customers. We
believe that this will enable us to leverage our existing distribution
channels and satisfy more of our physician customer's needs by providing
more complete product solutions for each procedure.
. Build a sales infrastructure consistent with the customer base and the
geographic distribution of the patient population. We intend to market our
products primarily through direct sales efforts in the United States and
through a combination of distributors, field representatives and direct
marketing support in other parts of the world. In the United States, there
are approximately 2,500 to 3,000 interventional radiologists and 200 to 300
interventional neuroradiologists. We believe that we can market effectively
to these groups with a relatively small, targeted sales force. We intend to
tailor our sales infrastructure to the demographics of the patient
population for each of the targeted markets. For example, there are a large
number of primary liver cancer patients in Asia due to the prevalence of
hepatitis. Accordingly, we will likely choose to focus more of our sales
resources in Asia on our Hepasphere SAP Microspheres product than on our
Embosphere Microspheres.
PRODUCTS
Our innovative microsphere technology evolved out of approximately 15 years
of research and development of polymer formulations used in the field of
biological separations and drug purification. In 1999, we made a strategic
decision to focus on microsphere technologies for medical applications. We
believe that our microsphere technology is a platform technology which can be
configured in several different ways to have applications as a pure embolic
material, an embolic material linked to a gene or drug, a bulking agent or a
scaffold for tissue engineering.
The following table summarizes information about our principal products and
products under research and development.
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PRODUCT / PRODUCT
CANDIDATES POTENTIAL MARKETS STATUS TARGET CUSTOMERS
- ------------------------ ------------------------- -------------------------- ---------------------------
EMBOLOTHERAPY
- ---------------------------------------------------------------------------------------------------------
Embosphere(R) Hypervascularized tumors, Marketed in United States, Interventional Radiologist;
Microspheres arteriovenous Canada, Australia and Interventional
malformations European Union Neuroradiologist
Uterine fibroids Marketed in Canada, Interventional Radiologist
Australia and European
Union
Pivotal Phase II clinical
trial in United States
- ---------------------------------------------------------------------------------------------------------
EmboGold(TM) Hypervascularized tumors, Marketed in United States, Interventional Radiologist;
Microspheres arteriovenous Canada, Australia and Interventional
malformations European Union Neuroradiologist
Uterine fibroids Marketed in European Interventional Radiologist
Union, Canada and
Australia
Pivotal Phase II clinical
trial in United States
- ---------------------------------------------------------------------------------------------------------
Hepasphere SAP(TM) Liver cancer Investigational use in Interventional Radiologist
Microspheres human patients in Japan
- ---------------------------------------------------------------------------------------------------------
TempRx(TM) Microspheres Trauma, hemorrhage Research Interventional Radiologist
- ---------------------------------------------------------------------------------------------------------
LiquiDx(TM) Microspheres Abdominal aortic Research Interventional Radiologist
aneurysm graft leaks
Cerebral aneurysm Research Interventional
Neuroradiologist
- ---------------------------------------------------------------------------------------------------------
Radiosphere(TM) Cancer Research Interventional Radiologist
Microspheres
- ---------------------------------------------------------------------------------------------------------
Viasphere(TM) Cancer Research Interventional Radiologist
Microspheres
- ---------------------------------------------------------------------------------------------------------
TISSUE ENGINEERING
- ---------------------------------------------------------------------------------------------------------
MatrX(TM) Microspheres Urinary incontinence Pre-clinical Urologist
Vesicoureteral reflux Pre-clinical Urologist
Facial contour defects Pre-clinical Dermatologist
Gastroesophageal reflux Research Gastroenterologist
disease
- ---------------------------------------------------------------------------------------------------------
GenS2(TM) Microspheres Tissue regeneration Research Orthopedic Surgeon
Dermatologist
- ---------------------------------------------------------------------------------------------------------
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PASSIVE EMBOLOTHERAPY
Embosphere Microspheres
Our initial product, Embosphere Microspheres, is intended for use in passive
embolotherapy to block the blood supply to hypervascularized tumors and
arteriovenous malformations. Embosphere Microspheres have been used in Europe,
the United States, Canada and Australia to treat hypervascularized tumors and
arteriovenous malformations and to presurgically control blood loss. We believe
that if we receive clearance or approval from the FDA specifically for uterine
artery embolization, the principal application of the Embosphere Microspheres
will be for this indication.
Uterine artery embolization is a minimally invasive procedure performed by
interventional radiologists. In this procedure, microspheres are injected
through a small catheter into the blood vessels feeding the fibroid tumor,
preferentially blocking the blood supply to the fibroids, but not to the
surrounding healthy tissues. The goal of the uterine artery embolization
procedure is to eliminate the flow of blood to the uterine fibroid, thereby
alleviating related symptoms, while preserving normal uterine and ovarian
function.
We believe that embolotherapy is a significantly more attractive alternative
in the treatment of uterine fibroids, particularly when compared to the
invasiveness of such surgical procedures as hysterectomy or myomectomy, or even
when compared to hormone therapy and "watchful waiting." Current therapies can
have significant adverse side effects including temporary or permanent loss of
fertility, lengthy recovery periods, high costs, discomfort and risk of
recurrence of fibroids.
Although the effect of uterine artery embolization on continued fertility
has not been established, we believe that uterine artery embolization has the
potential to preserve the fertility of the patient that would otherwise be lost
through hysterectomy or may be compromised by the use of current therapies or
technologies, and to reduce or eliminate the risk of recurrence of the uterine
fibroid tumor and the complications associated with myomectomy. Most uterine
artery embolization procedures can be performed in less than one hour, while
the patient is sedated, but awake. The patient generally stays overnight in the
hospital to manage any discomfort associated with the procedure and typically
returns to everyday activities in three to five days. In contrast, hysterectomy
patients undergo general anesthesia, stay in the hospital for four to five days
and have a recovery period lasting up to six to eight weeks.
Embolotherapy using polyvinyl alcohol has several limitations associated
with its imprecise size and shape, including less effective occlusion of the
blood supply to the tumor, inflammation and untargeted embolization resulting
in the injury of the surrounding normal tissue. Independent studies have
indicated that Embosphere Microspheres have a variety of characteristics that
may make them preferable to polyvinyl alcohol. These include:
. Uniform Spherical Shape/Calibrated Particle Size. We are able to synthesize
beads with uniform sizing and a spherical shape. When embolic materials are
irregularly shaped or sized, as is the case with polyvinyl alcohol,
clinicians find vessel targeting more difficult, and may also experience an
increased incidence in unwanted embolization of blood vessels away from the
site of the tumor.
. Compliant and Resilient Properties. We have developed a soft, elastic
microsphere, that has the capability to compress significantly.
Consequently, clinicians can deliver these beads through microcatheters.
Many clinicians prefer using microcatheters during embolization since such
catheters minimize the frequency of artery or vessel spasm during the
procedure. Vessel spasm can be of particular concern during uterine artery
embolization as it can disrupt the flow of blood. Clinicians rely on blood
flow during embolization to direct the microspheres to the vessel targeted
for occlusion.
. Hydrophilic Properties. As a result of the materials used to manufacture
microspheres, our products are hydrophilic, which means that they absorb
moisture. This characteristic is important in that it prevents the
microspheres from clumping in the catheter and the artery during the
procedure.
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. Non-biodegradability. Our microspheres are composed of a synthetic
three-component polymer that is compatible with the human body. This polymer
is insoluble and non-biodegradable. We believe, therefore, that our
Embosphere Microspheres are an appropriate agent for permanent vessel
occlusion.
. Cell Adhesion. Our Embosphere Microspheres are cross-linked with a cell
adhesion promoter composed of gelatin. This material promotes cell adhesion,
resulting in a more rapid, stable and complete occlusion of the vessel.
. Charged Surface Property. Our microspheres are positively charged, enabling
them to attach to the negatively-charged blood vessel wall. This attachment
to the vessel wall minimizes the potential for the microspheres to migrate
to non-targeted vessels.
Embosphere Microspheres are currently available in six sizes, from 40 to
1,200 microns, based on current customer requirements and targeted
applications. They are designed to precisely fit the blood vessels, resulting
in targeted and controlled occlusion. They can be used with existing,
commercially available catheters and delivery systems. We anticipate that
subsequent generations of Embosphere Microspheres, such as our EmboGold(TM)
Microspheres, will incorporate new product characteristics. These new product
characteristics may include improved cell adhesion properties and an improved
ability for the physician to visualize the product using conventional x-ray or
magnetic resonance imaging during administration. All of these products may
require a new 510(k) approval. In February 2002, we began selling EmboSphere
Microspheres in a new enhanced vial package.
We received CE Mark approval of our Embosphere Microspheres in the European
Union in 1997 and more recently received marketing approval in Australia and
Canada. In April 2000, we received marketing clearance from the FDA for our
Embosphere Microspheres, through a 510(k) notification for hypervascularized
tumors and arteriovenous malformations.
The 510(k) clearance for hypervascularized tumors and arteriovenous
malformations does not specifically cover treating uterine fibroids. For the
treatment of uterine fibroids through embolization, we recently completed
enrollment of a clinical trial under an investigation device exemption to
support an application for clearance or approval from the FDA for this specific
indication. In January 2000, we initiated a Phase I clinical trial of
Embosphere Microspheres for uterine artery embolization. Thirty patients were
enrolled in the multi-center study at Roxborough Memorial Hospital,
Philadelphia, the Miami Cardiac and Vascular Institute, Miami and Georgetown
University Medical Center, Washington, D.C., as of June 2000. These patients
were followed for a period of one year in accordance with the study plan. In
October 2000, we initiated our pivotal Phase II clinical trial of the safety
and efficacy of Embosphere Microspheres for uterine artery embolization, in
which we studied an expanded patient population of 100 patients at seven
clinical sites. These sites included Miami Cardiac and Vascular Institute,
Miami; Roxborough Memorial Hospital, Philadelphia; Piedmont Hospital, Atlanta;
Georgetown University Medical Center, Washington D.C.; Women's Health Center,
Phoenix; Albany Medical Center, Albany; and Beverly Hills Center for Special
Surgery, Beverly Hills. We announced full enrollment of the UAE arm of this
study in September 2001 and, in January 2002, announced full enrollment of the
remaining hysterectomy study arm.
EmboGold(TM) Microspheres
EmboGold Microspheres, an enhanced version of Embosphere Microspheres, were
launched in the US in September 2001 after receiving FDA clearance earlier in
the year. In March 2002, we received CE Mark approval in the European Union.
This product enhancement added color to the spheres for improved visibility
during preparation and injection. EmboGold Microspheres are provided in a
special 20cc syringe and packaged in a sterile Tyvek(R) sealed tray. The
syringe container was designed to provide added convenience in handling and
preparation.
Hepasphere SAP(TM) Microspheres
Through our wholly owned subsidiary, Biosphere Medical Japan, Inc., we are
developing Hepasphere SAP Microspheres for the treatment of primary liver
cancer. Our Hepasphere SAP Microspheres are expandable microspheres for
injection via catheter into the blood vessels feeding the liver cancer tumor.
Once at the tumor
9
site, they are designed to expand by absorbing water from the blood and
effectively block the blood supply to the tumor. Targeted liver embolotherapy
is intended to starve the liver tumor, without damaging the surrounding tissues
or causing any adverse side effects on other parts of the body, such as those
associated with chemotherapy and radiation.
Over 100 primary liver cancer patients have been treated to date with
Hepasphere SAP Microspheres on an investigational basis in Japan. In September
1999, we obtained a worldwide exclusive license to Hepasphere SAP Microspheres
from its Japanese inventor. We plan to apply to the Japanese Ministry of Health
and Welfare for marketing approval within the next 18 to 24 months.
TempRx(TM) Microspheres
We believe that a significant opportunity exists for temporary or resorbing
embolic materials. Currently, embolic materials are frequently used to
temporarily treat internal bleeding from trauma or specific disease and we
believe that this could be a suitable application for temporary embolics. We
believe that there is also a growing interest to use temporary or dissolving
embolics in many current embolization applications, including liver and fibroid
embolization. We are currently conducting research on our TempRx Microspheres
as temporary embolics.
LiquiDx(TM) Microspheres
We are in the research stage of developing liquid embolics, or embolics that
are in a liquid state when injected and, depending on the application,
subsequently convert to a solid gel. Potential applications include treatment
of endovascular graft leaks, aneurisms, and large vessel embolization
applications including pelvic congestion syndrome and varicocele.
ACTIVE EMBOLOTHERAPY
We believe that our microspheres which are being designed to deliver drugs,
radioactive material or genetic materials may have several advantages over
current gene therapy, drug delivery or radiation products, including the direct
delivery to tumor. Our microspheres for active embolotherapy will be designed
to deliver the drug or gene therapy product directly to the tumor, avoiding the
potential side effects associated with high levels of circulating drugs, genes,
or radiation after an intravenous infusion through the blood vessel system.
Direct delivery should permit the use of higher, potentially more effective,
dosage of the product.
Radiosphere(TM) Microspheres
We believe the first step in marketing embolics that can deliver drugs or
agents to treat cancer will be to develop microspheres that are "loaded" with
drugs or agents at the treatment center using currently available equipment and
techniques. We are developing our microsphere technology platform to be
specifically formulated to express a high affinity for certain radioactive
compounds. We believe that these spheres, when loaded, can be injected through
a catheter to deliver radiation treatment directly to the tumor site. We
believe that transvascular targeting of radiation is a potentially superior
method to currently existing radiation treatment modalities because it offers a
conceptually optimum way of uniformly dosing the tissue that is most actively
proliferating while, at the same time, minimizing dosage to non-targeted areas.
We also believe this approach will simplify logistical and handling
requirements for radioactive materials in a hospital setting such as storage
and shelf life. We have completed proof of concept for this technology and we
expect to initiate pre-clinical testing in early 2003.
Viasphere(TM) Microspheres
We are conducting early-stage research on our Viasphere Microspheres, which
are being designed as precisely-sized highly hydrophilic microspheres to which
genetic materials or drugs are attached. We are developing these microspheres
to be injected into the blood vessels feeding the tumor. We expect that once
the flow of blood to the tumor has been occluded, Viasphere Microspheres will
begin delivering concentrated genes or drugs into the tumor.
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Other Embolization Products
We intend to develop and commercialize other embolization products that
include:
. delivery systems for embolic materials, such as specialty catheters and
guidewires,
. procedure-enhancing technologies that are designed to improve the
uniformity of microsphere dispersion during injection, reduce radiation
exposure and optimize efficiency of procedure time and implanted
material, and
. additional embolic materials such as innovative coils, embolics that
solidify upon injection and resorbable embolics to treat aneurisms and
large arteriovenous malformations, as well as for specific tumors based
upon their type or location.
In November 2001, we announced that we had received FDA clearance to market
our EmboCath(TM) Infusion Catheter. The EmboCath Infusion Catheter is a
micro-catheter style catheter that is designed to be used to inject
embolization material in the pelvic and abdominal region and has properties
that we believe optimize the unique design of our hydrophilic and compressible
microspheres.
NON-EMBOLOTHERAPY TECHNOLOGIES
MatrX(TM) Microspheres
Our MatrX Microspheres product, currently in pre-clinical development, are
highly hydrophilic synthetic microspheres designed to cause tissue bulking as a
means to provide anatomic support in disease conditions where this support is
missing. MatrX Microspheres preparations will be designed to be easily
injectable yet large enough to avoid digestion within the body. We anticipate
that the microsphere matrix, once injected, will be rapidly populated by
surrounding cells and provide a stable, mechanically resistant tissue bulking
structure. Potential applications of MatrX Microspheres preparations for tissue
bulking include:
. Stress Urinary Incontinence. Approximately four million adults in the United
States suffer from stress urinary incontinence, which is the involuntary
loss of urine during coughing, laughing, sneezing, jogging, or any other
activity which causes a sufficient increase in pressure within the abdomen.
Stress urinary incontinence is currently treated in a variety of ways, but
the majority of patients are managed with techniques that treat the
symptoms, but do not restore urinary continence. Most curative approaches to
the treatment of urinary incontinence require significant surgical
interventions.
Tissue bulking agents are either biologically derived or synthetic and are
designed to be injected in or near the bladder neck to increase tissue bulk.
While bulking procedures are gaining acceptance, the body typically absorbs
biologically-derived bulking agents, requiring retreatment. Other
limitations include migration of the synthetic agents to other non-affected
parts of the body causing adverse health effects, incompatibility of the
synthetic agents with the human body and difficulty in injecting the agents
into the walls of the urethra. Accordingly, currently available therapies
provide only limited benefit in the treatment of stress urinary incontinence.
We are currently developing our MatrX Microspheres tissue-bulking product,
which is designed to be injected into the urethral wall to reduce or
eliminate the incidence of urinary incontinence. We are conducting
pre-clinical research on the application of our MatrX Microspheres
tissue-bulking product for stress urinary incontinence.
. Vesicoureteral Reflux. Vesicoureteral reflux is a condition in which urine
may backflow from the bladder through the ureter and into the kidneys. This
condition, which can result in urinary tract infections, pain, fever and
discomfort, affects over one percent of children. We are conducting
preclinical research on the application of MatrX Microspheres to bulk the
area of tissue at the junction of the ureter and bladder to increase
backflow resistance.
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. Gastroesophageal Reflux Disease. Gastroesophageal reflux disease occurs when
the stomach contents abnormally flow upward into the esophagus, which can
lead to pain and esophageal ulcers. In many cases, gastroesophageal reflux
disease is attributable to decreased tone of the lower esophageal muscle
tissue or to a congenitally small band of muscle tissue. We are conducting
research on how MatrX Microspheres tissue-bulking product, injected directly
into the esophageal muscle tissue, improves its function.
GenS/2(TM)/ Microspheres Injectable Tissue Scaffold
We are researching the use of GenS/2/ Microspheres injectable tissue
scaffold products for such applications as cartilage repair and other tissue or
organ replacement. Several companies are developing and marketing bioartifical
cells, tissues and supporting scaffoldings that hold the cells or tissues
together. However, the existing tissue scaffoldings are either difficult to
inject into the body, are digested by the body over time or do not adequately
merge into the original tissue. In addition, most procedures still require
surgery to implant the bioartifical tissues.
We believe that our microsphere technology can be formulated into injectable
microsphere scaffolds, which we call GenS/2/ Microspheres, which may overcome
many of the limitations of tissue scaffolds currently commercially available.
We are designing this product to adhere to cells and to be small enough to be
injected, yet large enough to avoid digestion after injection.
Other Non-Strategic Products
In addition to our Embosphere Microspheres products, we sell barium delivery
kits and other ancillary products in the European Union. Barium is purchased
from Guerbet Medical, Inc. and resold for use in gastrointestinal medical
testing. We sell other ancillary devices as medical products for hospital and
physician use. While we generated a significant portion of our revenue in 2001
and 2000 from these non-strategic products, we do not expect these products to
be a significant component of our future sales.
MARKETING AND SALES
We currently market our embolotherapy products through direct sales efforts
in the United States and Canada and through a combination of direct sales,
distributors, field representatives and direct marketing support in the
European Union and other parts of the world. We are in the process of expanding
our sales and marketing presence in the European Union, the United States and
Japan. In January 2002, we entered into an exclusive pan-European distribution
agreement with Terumo Europe N.V., a wholly owned subsidiary of Terumo
Corporation. Terumo is a world leader in developing, manufacturing and
marketing cardiovascular and interventional radiology products, including
microcatheters, guidewires and introducer systems that directly complement our
embolization products. Terumo Europe will use its large direct sales and
marketing team to develop markets and sell our microspheres in the European
markets.
We plan to attend major medical conventions throughout the world pertaining
to our targeted markets and invest in market development, including physician
training and patient outreach. We are working closely with major academic
centers to serve as centers for excellence for physician training, product
evaluation and ongoing research. Many members of our Medical Advisory Board are
associated with these major academic centers.
RESEARCH AND DEVELOPMENT
Our research and development group consists of ten employees and three
consultants. In addition, we have several development agreements with outside
product development contractors and study agreements with several medical
centers.
Our research and development group is focusing on developing our product
technology in three areas:
. continuous improvement of our core technology;
. new embolotherapy materials and platforms;
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. complementary embolotherapy products; and
. new initiatives aimed at leveraging our core technology in new market
areas.
Our core technologies include microsphere technologies, organic and
inorganic polymer and surface chemistries for microsphere design and
development, non-viral DNA transfection technology, and expertise and know-how
in microsphere manufacturing.
During the fiscal years ended December 31, 2001, 2000 and 1999, we spent
approximately $4.76 million, $2.52 million and $968,000, respectively on our
research and development efforts. We expect our research and development
expenses to increase in the future as we seek to increase our research and
development staff and related facilities, enhance our existing products and
develop additional products.
COMPETITION
Passive Embolotherapy
The primary competitive embolotherapy product sold by competitors is
polyvinyl alcohol, or PVA, a product introduced into the market more than 20
years ago. We encounter, and expect to continue to encounter, competition in
the sale of our current and future passive embolotherapy products. Our
principal competitors in the field of passive embolotherapy are Boston
Scientific Corporation, Cook Incorporated and Cordis Corporation, a Johnson &
Johnson company, as well as companies selling or developing non-embolotherapy
solutions for the disease states targeted by us. These competitors have, and
our future competitors are likely to have, greater financial, operational,
sales and marketing resources and more experience in research and development
than we have. We compete primarily on the basis of product performance, ease of
use, degree of targeted embolization control, and quality of patient outcome.
Our future success will depend in large part on our ability to gain market
leadership at the early stage of the development and acceptance of new
procedures, and our ability to continue to develop and bring to market
differentiated products enhancing embolotherapy.
Active Embolotherapy
Although we are not aware of any company selling or marketing active
embolotherapy products, we expect to encounter competition in the future sale
of any active embolotherapy products. We expect that our future competitors in
this area may have greater financial, operational, sales and marketing
resources and more experience in research and development than we have. In
addition, we expect to compete with companies that are developing and marketing
other anticancer therapies and gene therapy drugs. These competitors include
several large pharmaceutical companies along with numerous smaller
biotechnologies. We believe that the principal competitive advantages in the
active embolotherapy market will include the ability to deliver a highly
concentrated dose of gene or drug to the tumor without negatively affecting
other parts of the body, product designs facilitating a minimally invasive
outpatient procedure, and a sales and marketing organization which is able to
support specialized physician groups.
Tissue Bulking and Tissue Engineering
In the field of tissue bulking and tissue engineering, we believe that
competition will come from companies that are currently developing and
marketing tissue bulking, tissue repair and regeneration products. We believe
our principal competitors in the field of tissue engineering are companies such
as Boston Scientific Corporation, CR Bard, Inc., Johnson & Johnson and
Medtronic, Inc. These competitors have, and our future competitors are likely
to have, greater financial, operational, sales and marketing resources and more
experience in research and development than we have. We believe that the
principal competitive advantages in the tissue engineering market will be the
ability to obtain durable effects while reducing the invasiveness of the
procedure.
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GOVERNMENT REGULATION
FDA Regulation. The FDA, and other federal, state, local, and foreign
authorities, regulate our products and manufacturing activities. Pursuant to
the Federal Food, Drug, and Cosmetic Act and the regulations promulgated
thereunder, the FDA regulates the development, clinical testing, manufacture,
packaging, labeling, storage, distribution and promotion of medical devices.
Before a new device can be introduced into the market, the manufacturer must
generally obtain marketing clearance through a 510(k) notification or approval
through a premarket approval application. We generally will be required to
obtain 510(k) clearance or premarket approval prior to commercial distribution
of future products or additional applications of current products. Our proposed
active embolotherapy products will likely be regulated as combination products,
meaning they could be subject to regulation similar to drugs as well as
devices, which may involve more extensive clinical testing and a more rigorous
FDA review process than required for our microspheres and ancillary products,
and other proposed products.
Classification of Medical Devices. In the United States, medical devices
intended for human use are classified into three categories, Class I, II, or
III, on the basis of the controls deemed reasonably necessary by the FDA to
assure their safety and effectiveness. Class I devices are subject to general
controls, for example, labeling, adherence to the FDA's Good Manufacturing
Practice regulations and in some instances, premarket notification under
Section 510(k). Class II devices are subject to general and special controls,
for example, performance standards, postmarket surveillance, patient
registries, and FDA guidelines. Class III is the most stringent regulatory
category for medical devices. Many Class III devices are subject to premarket
approval requirements. Class III devices include, for example, devices which
are life-sustaining, or life-supporting, or new devices which have not been
found substantially equivalent to legally marketed devices.
510(k) Clearance. The FDA will clear a device under section 510(k) if the
submitted information establishes that the proposed device is substantially
equivalent to a legally marketed Class I or II medical device, or to a Class
III medical device for which the FDA has not yet called for a premarket
approval application. Commercial distribution can begin only after the FDA
issues an order finding that the device is substantially equivalent to a device
that is legally marketed and not subject to a premarket approval requirement.
The 510(k) notice may have to be supported by laboratory testing, animal
testing and/or clinical testing. The FDA may determine that a proposed device
is not substantially equivalent to a legally marketed device, in which case a
premarket approval will be required to market the device, unless additional
information can be submitted to support a substantial equivalence
determination, or the FDA, pursuant to a timely request from a 510(k)
submitter, makes a risk-based determination that a not-substantially-equivalent
device can be classified into Class I or II. An FDA request for additional data
could require that clinical studies of the device's safety and effectiveness be
performed. In April 2000, we received 510(k) clearance to market Embosphere
Microspheres for embolization of hypervascularized tumors and arteriovenous
malformations. Our embolotherapy device is classified into Class III by the
FDA, which means that even though we obtained 510(k) clearance to market the
device, the FDA could issue a proposed rule and, subsequently, promulgate a
regulation requiring premarket approval of the device to allow it to remain on
the market or could require premarket approval for new treatment indications
for the device. A requirement for premarket approval will likely require us to
continue costly clinical trials and there is no guarantee that we can provide
the FDA sufficient data for premarket approval in a timely fashion, if at all.
Failure to obtain premarket approval would result in removal of our product
from the United States market.
If human clinical trials of a device are required, and the device presents a
"significant risk," the sponsor, usually the manufacturer or the distributor of
a device, must obtain FDA approval of an investigational device exemption
application prior to commencing human clinical trials. Sponsors of clinical
trials are permitted to charge for devices distributed in the course of a study
provided such charges do not exceed recovery of the costs of manufacture,
research, development and handling, but devices may not be commercialized,
e.g., promoted as safe or effective. The study must comply with the FDA's
investigational device exemption regulations or other regulations. The sponsor
must also obtain approval from one or more institutional review boards.
Investigational device exemption trials are subject to extensive regulation,
and may be placed on hold or terminated by the FDA if, among other reasons,
there is reason to believe the risks do not outweigh the anticipated benefits.
The clinical trial process may take years.
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Premarket Approval. A premarket approval application must be filed and
approved before a device can be marketed if a proposed device is not
substantially equivalent to a legally marketed device or, as discussed above,
if it is a pre-amendments Class III device, i.e., a device in commercial
distribution prior to May 28, 1976, for which the FDA has called for premarket
approvals. A premarket approval application must be supported by valid
scientific evidence, which typically includes extensive data, including
pre-clinical and clinical trial data, to demonstrate the safety and
effectiveness of the device. Obtaining approval can take several years and
approval may be conditioned on, among other things, substantial restrictions on
indications for use and the conduct of postmarket surveillance studies.
The FDA has not formally decided how it will conduct the premarket review
for the use of embolic particles for uterine fibroid embolization. The FDA may
decide to require a premarket approval application or, alternatively, may allow
commercial clearance via a 510(k) notice together with clinical support that
substantiates product safety and efficacy. We have received an investigational
device exemption pursuant to which we are conducting clinical studies to
investigate the safety and efficacy of the Embosphere Microspheres for uterine
artery embolization. We intend to file for marketing clearance under the 510(k)
process unless the FDA requires a premarket approval application.
Drug Regulations: Drug and device approvals require extensive clinical
testing involving multiple phases. The clinical data must demonstrate, from
adequate and well-controlled trials, that the drug or device, as the case may
be, is safe and effective in order to obtain approval. Clinical trials
typically take years to complete. Before initiating such a clinical trial, we
must obtain an investigational new drug exemption, or INDA, from FDA.
Changes in Approved Devices. Device manufacturers must obtain new FDA 510(k)
clearance when there is a major change or modification in the intended use of a
legally marketed device or a change or modification, including product
enhancements, to a legally marketed device that could significantly affect its
safety or effectiveness. Supplements for approved premarket approval devices
are required for device changes, including some manufacturing changes that may
affect safety or effectiveness. For devices marketed pursuant to 510(k)
determinations of substantial equivalence, we must obtain FDA clearance of a
new 510(k) notification prior to marketing the modified device; for devices
marketed with premarket approval, we must obtain FDA approval of a supplement
to the premarket approval prior to marketing the modified device.
Good Manufacturing Practices and Reporting. The Federal Food, Drug, and
Cosmetic Act requires us to comply with Good Manufacturing Practices or Quality
Systems regulations. We must comply with various quality control requirements
pertaining to all aspects of our product design and manufacturing process
including requirements for packaging, labeling and record keeping, including
complaint files. The FDA enforces these requirements through periodic
inspections of medical device manufacturing facilities. In addition, the
Medical Device Reporting regulation obligates us to inform the FDA whenever
information reasonably suggests that one of our devices may have caused or
contributed to death or serious injury, or when one of our devices
malfunctions, if the device would be likely to cause or contribute to a death
or a serious injury in the event the malfunction recurred.
Labeling and Advertising. Labeling and promotional activities are also
subject to scrutiny by the FDA. Among other things, labeling is violative of
the law if it is false or misleading in any respect or it fails to contain
adequate directions for use. Moreover, claims that are outside the labeling
either approved or cleared by the FDA may violate the Federal Food, Drug, and
Cosmetic Act.
Our product promotion is also subject to regulation by the Federal Trade
Commission under the Federal Trade Commission Act, which prohibits unfair
methods of competition and unfair or deceptive acts or practices in or
affecting commerce, as well as unfair or deceptive practices such as the
dissemination of any false advertisement pertaining to medical devices. Under
the Federal Trade Commission's substantiation doctrine, an advertiser is
required to have adequate data for all product claims at the time the claims
are first used in advertising or other promotions.
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Import Requirements. To import a device, the importer must file an entry
notice and bond with the U.S. Customs Department pending an FDA decision on the
product's admissibility. All devices are subject to FDA examination before
release from Customs. Any article that appears to be in violation of the
Federal Food, Drug, and Cosmetic Act may be refused admission and a notice of
detention and hearing may be issued. A product also can be detained without
physical examination if the product has a past history or other information
indicates that it may be violative. A device must have received 510(k)
clearance or be subject to an approved premarket approval application if
required.
Export Requirements. Products for export from Europe and from the United
States are subject to foreign countries' import requirements and the FDA's or
European regulating bodies' exporting requirements. The introduction of our
products in foreign markets may subject them to foreign regulatory clearances,
which may impose additional product standards, packaging and labeling
requirements and import restrictions on devices. Regulatory requirements to
market devices vary from country to country. In addition, each country has its
own tariff regulations, duties, and tax requirements.
In addition to the import requirements of foreign countries, we must also
comply with the United States laws governing the export of products regulated
by the FDA. Devices that have obtained 510(k) clearance or premarket approval
and comply with the law in all other respects may be exported without further
FDA authorization. However, foreign countries often require, among other
things, an FDA certificate for products for export. To obtain this certificate,
the device manufacturer must certify to the FDA that the product has been
granted clearance or approval in the United States and that the manufacturing
facilities appeared to be in compliance with Good Manufacturing Practices
regulations at the time of the last FDA inspection.
Under the FDA Export Reform and Enhancement Act of 1996, an unapproved
device requiring a premarket approval or a device subject to an investigational
device exemption may be exported to any country if the product complies with
the laws of that country and has valid marketing authorization in one of the
following countries or authorities: Australia, Canada, Israel, Japan, New
Zealand, Switzerland, South Africa, the European Union, or a country in the
European Economic Community, or EEC, if the device is marketed in an EEC
country or authorized for general marketing in the EEC. The FDA is authorized
to add countries to this list in the future. Further, a device may be exported
under this provision only if, among other things, it meets the specifications
of the foreign purchaser, complies with the laws of the importing country, is
labeled for export, is manufactured in substantial compliance with Good
Manufacturing Practices regulations or recognized international standards, is
not sold in the United States, and meets other conditions.
Fines and Penalties for Noncompliance. Failure to comply with applicable FDA
regulatory requirements could result in, among other things, premarket
clearance or approval withdrawal, injunctions, product withdrawals, voluntary
or mandatory patient/physician notifications, recalls, warning letters, product
seizures, civil penalties, fines and criminal prosecutions. In addition, the
Federal Trade Commission has a variety of processes and remedies available to
it for enforcement, both administratively and judicially, including compulsory
process, cease and desist orders and injunctions. Federal Trade Commission
enforcement can result in orders requiring, among other things, limits on
advertising, corrective advertising, consumer redress, rescission of contracts
and such other relief as may be deemed necessary. Violation of such orders
could result in substantial financial or other penalties. Any such action by
the FDA or the Federal Trade Commission could materially adversely affect our
ability to successfully market our products.
Medical device laws are also in effect in many countries outside of the
United States. These range from comprehensive device approval requirements for
some or all of our medical device products to simpler requests for product data
or certification. The number and scope of these requirements are increasing.
Sales of medical devices in the European Union are subject to the European
Medical Device Directive. This directive contains requirements for quality
system and product performance guidelines to which all manufacturers must
comply. These guidelines contain quality system guidelines and preproduction
product design verification that closely resemble current FDA guidelines. In
1997, we obtained ISO 9002 international quality systems registration, a
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certification showing that our procedures and manufacturing facilities comply
with standards for quality assurance and manufacturing process control. Our
compliance with this registration has been confirmed since 1997 in semi-annual
surveillance audits. In January 2002, we obtained certification to
EN46001/ISO9001, which along with the manufacturing and quality controls of
ISO9002, also adds design control requirements. The EN46001/ISO 9001
certification and the European Medical Device Directive Certification signifies
compliance with the requirements, enabling us to affix the CE Mark to our
Embosphere Microsphere and our EmboGold Microsphere product. The CE Mark
denotes conformity with European standards for safety and allows certified
devices to be placed on the market in all European Union countries. Medical
devices may not be sold in European Union countries unless they display the CE
Mark.
Failure to comply with applicable federal, state and foreign medical device
laws and regulations would likely have a material adverse effect on our
business. In addition, federal, state and foreign regulations regarding the
manufacture and sale of medical devices are subject to future changes. We
cannot predict what impact, if any, such changes might have on our business,
but such change could have a material impact.
We are subject to various federal, state, local and foreign laws and
regulations relating to the protection of the environment, as well as health
and safety. In the course of our business, we are involved in the handling,
storage and disposal of certain chemicals. The laws and regulations applicable
to our operations include provisions that regulate the discharge of materials
into the environment. Usually these environmental laws and regulations impose
"strict liability," rendering a person liable without regard to negligence or
fault on the part of such person. Such environmental laws and regulations may
expose us to liability for the conduct of, or conditions caused by, others, or
for acts that were in compliance with all applicable laws at the time the acts
were performed. We do not believe that we have been required to expend material
amounts in connection with our efforts to comply with environmental
requirements or that compliance with such requirements will have a material
adverse effect upon our capital expenditures, results of operations or
competitive position. Failure to comply with applicable environmental and
related laws could have a material adverse effect on our business. In addition,
because the requirements imposed by such laws and regulations are frequently
changed, we are unable to predict the cost of compliance with such requirements
in the future, or the effect of such laws on our capital expenditures, results
of operations or competitive position.
PROPRIETARY TECHNOLOGY AND PATENT RIGHTS
We seek to establish and protect our proprietary technologies and products
through a combination of patent, copyright, trademark and trade secrets laws,
as well as confidentiality provisions in our contracts. We have implemented a
patent strategy designed to maximize our intellectual property rights. We are
pursuing patent coverage in the United States and foreign countries to protect
the technology, inventions and improvements that we consider critical to the
development of our products and business.
In January 1998, we entered into an agreement with L'Assistance
Publique-Hopitaux De Paris, referred to as AP-HP, pursuant to which AP-HP has
granted us the exclusive right to use two jointly-owned patents relating to
micospheres. We are required to pay to AP-HP a royalty on the commercial sale
of any products, which incorporate technology covered by the patents. We may
only sublicense these exclusive rights under the agreement with the prior
written consent of AP-HP, which consent cannot be unreasonably withheld. The
rights granted under the contract are for an initial period, which ends on
September 16, 2009, and are renewable by mutual agreement between the parties.
The agreement can be terminated on three months notice by either party if the
other party does not perform one or more of its obligations under the agreement
and fails to cure its nonperformance during the notice period. These
jointly-owned patents will expire in 2014.
In addition, as part of the sale of our former core business to Invitrogen,
Inc., formerly know as Life Technologies, in May 1999, we entered into a
cross-license agreement with Invitrogen. Under that agreement, Invitrogen has
granted to us an exclusive, worldwide, perpetual, royalty-free license to its
technology and patents relating to our core field of development, including any
improvement to that technology made prior to May 2004.
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Under the agreement, we also granted to Invitrogen an exclusive, worldwide,
perpetual, royalty-free license to any improvements to the technology they have
licensed to us, which are useful in Invitrogen's fields of development. Either
party can terminate the agreement, and all licenses granted thereunder on sixty
day's notice in the event of a breach of the agreement by the other party.
In 1999, we entered into an agreement with Dr. Shinichi Hori, pursuant to
which we have an exclusive royalty-bearing license to Japanese patent rights
for our Hepasphere SAP Microsphere product. These patent rights expire in 2012.
There are no United States or other international filings corresponding to this
patent application. We intend to file patent applications directed to
improvement of this inventor's technology. However, present applications may
not issue as patents, and these patents, if issued, may not provide us with
sufficient protection against competitors. Further, we may be required to
obtain additional licenses concerning the Japanese patent application and any
licenses, if obtained, may not be on terms that are acceptable to us.
We were recently granted a United States patent directed to the treatment of
urinary incontinence using microparticles. This patent expires in March 2019.
We have filed two patent applications relating to materials and methods for
active embolotherapy, gene therapy and the treatment of gastroesophageal reflux
disease, urinary incontinence and skin wrinkles. In addition, in July 1999, we
entered into an agreement with the Louis Pasteur University in Strasbourg,
France and Centre National de la Recherche Scientifique pursuant to which we
received exclusive, royalty-bearing worldwide rights to two United States
patents relating to active embolotherapy technology. We have filed a patent
application relating to our material, formulation process and method of use for
our new EmboGold Microspheres.
We have filed four United States patent applications and corresponding
foreign applications relating to the use of embolotherapy for tissue bulking
and the treatment of urinary incontinence, vesicoureteral reflux, dermal
augmentation, skin wrinkles and gastroesophageal reflux disease. We have also
filed patent applications relating to materials and methods for tissue
regeneration.
Our success depends to a significant degree upon our ability to develop
proprietary products and technologies and to obtain patent coverage for these
products and technologies. We intend to continue to file patent applications
covering any newly-developed products and technologies. However, as discussed
above, there can be no guarantee that any of our pending or future filed
applications will be issued as patents. There can be no guarantee that the
United States Patent and Trademark Office or some third party will not initiate
an interference proceeding involving any of our pending applications or issued
patents. Finally, there can be no guarantee that our issued patents or future
issued patents, if any, will provide adequate protection from competition, as
further discussed below.
Patents provide some degree of protection for our proprietary technology.
However, the pursuit and assertion of patent rights, particularly in areas like
medical device development, involve complex legal and factual determinations
and, therefore, are characterized by significant uncertainty. In addition, the
laws governing patent issuance and the scope of patent coverage continue to
evolve, particularly in life sciences. Moreover, the patent rights we possess
or are pursuing generally cover our technologies to varying degrees. As a
result, we cannot assure you that patents will issue from any of our patent
applications or from applications licensed to us or that any of our issued
patents will offer meaningful protection. In addition, our issued patents or
patents licensed to us may be successfully challenged, invalidated,
circumvented or rendered unenforceable so that our patent rights may not create
an effective competitive barrier. Moreover, the laws of some foreign countries
may not protect our proprietary rights to the same extent, as do the laws of
the United States. There can be no assurance that any patents issued to us will
provide a legal basis for establishing an exclusive market for our products or
provide us with any competitive advantages or that the patents of others will
not have an adverse effect on our ability to do business or to continue to use
our technologies freely. In view of these factors, the value of our
intellectual property position is uncertain.
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We may be subject to third parties filing claims asserting that our
technologies or products infringe on their intellectual property. We cannot
predict whether third parties will assert such claims against us or our
licensees or against the licensors of technology licensed to us, or whether
those claims will harm our business. If we are forced to defend against such
claims, regardless of their merit or whether they are resolved in favor of or
against us, our licensees or our licensors, we may face costly litigation and
diversion of management's attention and resources. As a result of such
disputes, we may have to develop, at a substantial cost non-infringing
technology, or enter into licensing agreements. These agreements, if necessary,
may be unavailable on terms acceptable to us, or at all, which could seriously
harm our business or financial condition.
We also rely in part on trade secret protection of our intellectual
property. We attempt to protect our trade secrets by entering into
confidentiality agreements with third parties, employees and consultants. Our
employees also sign agreements requiring that they assign to us their interests
in inventions and original expressions and any corresponding patents and
copyrights arising from their work for us. However, it is possible that these
agreements may be breached, invalidated or rendered unenforceable and if so our
trade secrets could be disclosed to others, including our competitors, and
there may not be an adequate corrective remedy available. Despite the measures
we have taken to protect our intellectual property, parties to our agreements
may breach the confidentiality provisions in our contracts or infringe or
misappropriate our patents, copyrights, trademarks, trade secrets and other
proprietary rights. In addition, third parties may independently discover or
invent competitive technologies or reverse engineer our trade secrets, or other
technology. Therefore, the measures we are taking to protect our proprietary
technology may not be adequate.
EMPLOYEES
As of February 28, 2002, we employed 87 persons. Of these employees, 10 are
primarily engaged in research and development activities, 20 are engaged in
manufacturing, 38 are engaged in sales and marketing, and the remainder are
engaged in finance and administration. Of these 87 persons, 44 are located in
the United States, 41 are located in France and 2 are located in Japan.
Our employees in the United States are not covered by a collective
bargaining agreement. In Europe, our employees are covered by the provisions of
an agreement setting forth national guidelines and standards for labor
relations within our industry. We consider our relations with our employees to
be good.
RISK FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
This Annual Report on Form 10-K contains forward-looking statements. For
this purpose, any statements contained herein that are not statements of
historical fact may be considered to be forward-looking statements. Although
not a complete list of words that might identify forward-looking statements, we
use the words "believes," "anticipates," "plans," "expects," "intends," and
similar expressions to identify forward-looking statements. There are a number
of important factors that could cause our actual results to differ materially
from those indicated by forward-looking statements. Factors that could cause or
contribute to such differences include those discussed below, as well as those
discussed elsewhere in this Form 10-K. We expressly disclaim any obligation to
update or alter our forward-looking statements, whether as a result of new
information, future events or otherwise.
RISK RELATING TO OUR FUTURE PROFITABILITY
Because we have a history of losses and our future profitability is uncertain,
our common stock is a highly speculative investment
We have incurred operating losses since our inception and, as of December
31, 2001, had an accumulated deficit of approximately $54.9 million. We expect
to spend substantial funds to continue research and product testing, to
establish sales, marketing, quality control, regulatory and administrative
capabilities and for other general corporate purposes. We expect to continue
incurring losses for the next fiscal year as we expand our commercialization
efforts.
19
We may never become profitable. If we do become profitable, we may not
remain profitable on a continuing basis. Our failure to become and remain
profitable would depress the market price of our common stock and impair our
ability to raise capital and expand, diversify or continue our operations.
RISKS RELATING TO OUR INDUSTRY, BUSINESS AND STRATEGY
If we do not achieve widespread market acceptance of our Embosphere
Microspheres product, our business prospects will be seriously harmed
Our Embosphere Microspheres are based on new technologies and therapeutic
approaches. In the United States, we only recently began selling our Embosphere
Microspheres product for the embolization of hypervascularized tumors and
arteriovenous malformations. We will require additional FDA approval before we
can market Embosphere Microspheres in the United States for use in the
embolization of uterine fibroids. Our success will depend upon the medical
community, patients and third party payors accepting our Embosphere
Microspheres product as medically useful, cost-effective and safe. In
particular, our success will depend upon obstetrics and gynecology physicians
referring patients to interventional radiologists to receive treatment using
our products in lieu of, or in addition to, receiving other forms of treatment
that the obstetrics and gynecology physicians can otherwise provide directly.
Negative publicity associated with any adverse medical effects attributed to
embolization treatments generally or our product specifically, may create the
market perception that our products are unsafe. For example, patients commonly
experience a day or two of post-procedure abdominal pain or cramping. Other
infrequently occurring complications may include allergic reactions, rashes,
early onset of menopause, infertility and infection that may, in some limited
cases, require a hysterectomy. In addition, Embosphere Microspheres are
designed to remain in the body permanently. As a result, there is some limited
risk that some or all of the Embosphere Microspheres used in a medical
procedure may travel in the blood system beyond the intended site of action and
occlude, or block, other blood vessels, resulting in significant adverse health
effects on the patient or even death. Moreover, to use our Embosphere
Microspheres correctly for a particular medical procedure, physicians must
select and use the proper size and quantity of Embosphere Microspheres. A
physician's selection and use of the wrong size or quantity of Embosphere
Microspheres could have significant adverse health effects on the patient,
including death. It will be necessary for us to spend significant amounts of
money and allocate management resources to educate physicians about the
selection and use of the proper size and quantity of Embosphere Microspheres in
patient therapy. In addition, there is only limited data concerning the
long-term health effects on persons resulting from embolotherapy using our
Embosphere Microspheres.
If we are not able to successfully educate physicians to properly use our
product or if the market determines or concludes that our product is not safe
or effective for any reason, we may be exposed to product liability claims,
product recalls and fines or other penalties or enforcement actions by
regulatory agencies and associated adverse publicity. In addition, we have
provided to our customers a satisfaction guarantee that requires us to accept
the return of any inventory and credit the entire amount of the original order
if a properly trained customer is not satisfied with the performance of our
microspheres. If we experience adverse publicity or are subject to product
liability claims, excessive guarantee claims, recalls, fines and the like, we
will be unable to achieve widespread market acceptance of our Embosphere
Microsphere products and achieve profitability.
We will be required to expend significant resources for research, development,
testing and regulatory approval of our products under development and these
products may not be developed successfully
We are developing and commercializing products for medical applications
using embolotherapy techniques and also seeking to develop potential
applications in several non-embolotherapy applications. Except for our
Embosphere Microspheres product, most of our product candidates are still in
the early stages of research and development. Our products may not provide
greater benefits than current treatments or products, or than treatments or
products under development. All of our products under development will require
significant
20
additional research, development, pre-clinical and/or clinical testing,
regulatory approval and a commitment of significant additional resources prior
to their commercialization. Our potential products may not:
. be developed successfully;
. be proven safe and effective in clinical trials;
. offer therapeutic or other improvements over current treatments and
products;
. meet applicable regulatory standards or receive regulatory approvals;
. be capable of production in commercial quantities at acceptable costs; or
. be successfully marketed.
If we do not develop, obtain marketing approvals and successfully introduce new
products, we may not achieve revenue opportunities
We derived more than a majority of our revenue for the years ended December
31, 2001 and 2000 from the sale of Embosphere Microspheres. In addition,
although we have not received FDA clearance or approval to market our
Embosphere Microspheres for the specific use in the treatment of uterine
fibroids, we believe that a majority of our revenue in the United States for
the years ended December 31, 2001 and 2000 was derived from the sale of
Embosphere Microspheres for use in uterine fibroid embolization. We derived
approximately 19% of our revenue for the years ended December 31, 2001, and 49%
of our revenue for the year ended December 31, 2000 from the sale of
non-strategic products that we do not expect to constitute a significant
portion of our revenue on an ongoing basis. Accordingly, we need to seek and
obtain marketing approval for the use of Embosphere Microspheres for uterine
artery embolization, develop and introduce new applications for our
embolotherapy technology and pursue opportunities for microsphere technology in
other medical applications. If we are not successful in these efforts, we may
not achieve revenue opportunities.
If we experience delays, difficulties or unanticipated costs in establishing
the sales, distribution and marketing capabilities necessary to successfully
commercialize our products, we will have difficulty maintaining and increasing
our sales
We are currently developing sales, distribution and marketing capabilities
in the United States and have only limited sales, distribution and marketing
capabilities in the European Union. It is expensive and time-consuming for us
to develop a global marketing and sales force. Moreover, we may choose or find
it necessary to enter into strategic collaborations to sell, market and
distribute our products. The terms of any collaboration may not be favorable to
us. We may not be able to provide adequate incentive to our sales force or to
establish distribution and marketing collaborations with other companies to
promote our products. We must also market our products in compliance with
federal, state and local laws relating to the providing of incentives and
inducements. Violation of these laws can result in substantial penalties. If we
are unable to successfully motivate and expand our marketing and sales force
and further develop our sales and marketing capabilities, or if our
distributors fail to promote our products, we will have difficulty maintaining
and increasing our sales.
If the strategic redirection of our business is not successful, we may be
unable to achieve growth in our business
In early 1999, we decided to exit the chromatography business, which had
constituted our core business, to focus on the commercialization of
microspheres for use in embolotherapy and other medical applications.
We have restated our historical financial statements to reflect the
discontinuation of our chromatography business. In addition, 73% of 1999
revenue, 49% of 2000 revenue and approximately 19% of revenue in 2001 included
in our consolidated financial statements was derived from the sale of products
we consider to be non-strategic and which we do not expect to constitute a
significant portion of our revenue on an ongoing basis. Our strategic shift
from the chromatography business to the commercialization of microspheres may
not prove to be successful and, consequently, we may be unable to commercially
develop our business and achieve profitability.
21
If we are unable to obtain adequate product liability insurance, then we may
have to pay significant monetary damages in a successful product liability
claim against us
The development and sale of medical devices entails an inherent risk of
product liability. Product liability insurance is generally expensive for
medical device companies such as ours. Although we maintain limited product
liability insurance coverage for our products, it is possible that we will not
be able to obtain further product liability insurance on acceptable terms, if
at all. Insurance we subsequently obtain may not provide us with adequate
coverage against all potential claims. If we are exposed to product liability
claims for which we have insufficient insurance, we may be required to pay
significant damages which would prevent or delay our ability to commercialize
our products.
If we are not able to compete effectively, we may experience decreased demand
for our products, which may result in price reductions
We have many competitors in the United States and abroad, including medical
device and therapeutics companies, universities and other private and public
research institutions. Our success depends upon our ability to develop and
maintain a competitive position in the embolotherapy market. Our key
competitors are Cordis Corporation, a Johnson & Johnson company, Boston
Scientific Corporation and Cook Incorporated. These and many of our other
competitors have greater capabilities, experience and financial resources than
we do. As a result, they may develop products that compete with our Embosphere
Microspheres product more rapidly or at less cost than we can. Currently, the
primary products with which our Embosphere Microspheres compete for some of our
applications are polyvinyl alcohol, polymerizing gels and coils. In addition,
our competitors may develop technologies that render our products obsolete or
otherwise noncompetitive.
We may not be able to improve our products or develop new products or
technologies quickly enough to maintain a competitive position in our market
and continue to commercially develop our business. Moreover, we may not be able
to compete effectively, and competitive pressures may result in less demand for
our products and impair our ability to become profitable.
If we fail to maintain, or in some instances obtain, an adequate level of
reimbursement for our products by third-party payors, there may be no
commercially viable markets for our products
The availability and levels of reimbursement by governmental and other third
party payors affects the market for any medical device. We may not be able to
sell our products profitably if reimbursement is unavailable or limited in
scope or amount. Some insurance companies do not reimburse for embolization
procedures. These third-party payors continually attempt to contain or reduce
the costs of healthcare by challenging the prices that companies such as ours
charge for medical products. In some foreign countries, particularly the
countries of the European Union where our Embosphere Microspheres product is
currently marketed and sold, the pricing of medical devices is subject to
governmental control and the prices charged for our products have in some
instances been reduced as a result of these controls. Additionally, in both the
United States and some foreign jurisdictions, there have been a number of
legislative and regulatory proposals to change the healthcare system. Further
proposals are likely. These proposals, if adopted, could result in less revenue
for us, and could affect our ability to raise capital and market our products.
If we do not retain our senior management, other key employees, scientific
collaborators and advisors, we may not be able to successfully implement our
business strategy
The loss of key members of our management team could harm us. We also depend
on our scientific collaborators and advisors, all of whom have other
commitments that may limit their availability to us. Our success is
substantially dependent on the ability, experience and performance of these
members of our senior management and other key employees, scientific
collaborators and advisors. Because of their ability and experience, if we lose
one or more of these individuals, we may not be able to successfully implement
our business strategy.
22
If we do not attract and retain skilled personnel, we will not be able to
expand our business
Our future success will depend in large part upon our ability to attract and
retain highly skilled scientific, operational, managerial and marketing
personnel, particularly as we expand our activities in clinical trials, the
regulatory approval process and sales and manufacturing. We face significant
competition for these types of persons from other companies, research and
academic institutions, government entities and other organizations.
Consequently, if we are unable to attract and retain skilled personnel, we will
not be able to expand our business.
If we make any acquisitions, we will incur a variety of costs and may never
successfully integrate the acquired business into ours
We may attempt to acquire businesses, technologies, services or products
that we believe are a strategic complement to our business model. We may
encounter operating difficulties and expenditures relating to integrating an
acquired business, technology, service or product. These acquisitions may also
absorb significant management attention that would otherwise be available for
ongoing development of our business. Moreover, we may never realize the
anticipated benefits of any acquisition. We may also make dilutive issuances of
equity securities, incur debt or experience a decrease in the cash available
for our operations, or incur contingent liabilities in connection with any
future acquisitions.
Because Sepracor Inc. and our executive officers and directors own a
significant amount of our common stock, they may be able to exert control over
us
As of January 31, 2002, Sepracor Inc. beneficially owns approximately 25% of
our outstanding common stock. In addition, as of January 31, 2002, our
executive officers and directors beneficially owned, in the aggregate,
approximately 9% of our outstanding common stock, excluding shares owned by
Sepracor which some of our directors and executive officers may be deemed to
beneficially own, but including shares issuable upon exercise of vested options
and warrants. Two of our directors are executive officers of Sepracor. Sepracor
and our executive officers and directors will have substantial control over all
corporate actions requiring stockholder approval irrespective of how our other
stockholders may vote, including:
. the election of directors;
. the amendment of charter documents;
. the approval of mergers and other significant corporate transactions,
including a sale of substantially all of our assets; and
. the defeat of any non-negotiated takeover attempt that might otherwise
benefit the public stockholders.
This ownership concentration could cause the market price of our common
stock to decline. In addition, conflicts of interest between Sepracor and us
may arise, including with respect to competitive business activities and
control of our management and our affairs.
RISKS RELATING TO REGULATORY MATTERS
If we do not obtain the regulatory approvals required to market and sell our
products, then our business will be unsuccessful and the market price of our
stock will substantially decline
We are subject to regulation by government agencies in the United States and
abroad with respect to the manufacture, packaging, labeling, advertising,
promotion, distribution and sale of our products. For example, our products are
subject to approval or clearance by the FDA prior to marketing in the United
States for commercial use. Similar regulations exist in most major foreign
markets, including the European Union and Asia. The process of obtaining
necessary regulatory approvals and clearances will be time-consuming and
expensive for us. If we do not receive required regulatory approval or
clearance to market our products, we will not be able to develop and
commercialize our products and become profitable, and the value of our common
stock will substantially decline.
23
We are focusing our immediate product commercialization efforts on our
Embosphere Microspheres. In April 2000, we obtained clearance from the FDA to
market our Embosphere Microspheres in the United States for the embolization of
hypervascularized tumors and arteriovenous malformations. However, before we
can market Embosphere Microspheres in the United States for use in the
embolization of uterine fibroids, we will require either FDA clearance of a
premarket notification under Section 510(k) of the Federal Food, Drug, and
Cosmetic Act, which we refer to as a 510(k) notification, or the more time
consuming and expensive approval of a premarket approval application. We do not
expect to receive the required clearance or approval for specific labeling for
uterine fibroids until at least the last quarter of 2002, if at all. In order
to obtain FDA clearance or approval to market our product for this indication,
we are conducting clinical trials. We cannot assure you that the data resulting
from this study will be considered by the FDA to be sufficient to permit
clearance or approval. If we do not receive FDA clearance or approval to market
our Embosphere Microspheres in the United States in the treatment of uterine
fibroids, our business will be adversely affected.
If the FDA or other regulatory agencies place restrictions on, or impose
additional approval requirements with respect to, products we are then
marketing, we may incur substantial additional costs and experience delays or
difficulties in continuing to market and sell these products
Even if the FDA grants us approval or clearance with respect to any of our
products, it may place substantial restrictions on the indications for which we
may market the product, which could result in lower revenues. The marketing
claims we are permitted to make in labeling or advertising regarding our
Embosphere Microspheres are limited to those specified in any FDA clearance or
approval. For example, because our products are not specifically approved for
labeling for use for uterine fibroids, we may not promote them for this use.
However, we believe that a majority of our revenue in the United States for the
years ended December 31, 2001 and 2000 was derived from the sale of Embosphere
Microspheres for use in uterine fibroid embolization.
We may in the future make modifications to our Embosphere Microspheres or
their labeling which we determine do not necessitate the filing of a new 510(k)
notification. However, if the FDA does not agree with our determination, it
will require us to make additional 510(k) filings for the modification, and we
may be prohibited from marketing the modified product until we obtain FDA
clearance. Similarly, if we obtain premarket approval, we may not be able to
make product or labeling changes until we get FDA approval.
Further, the FDA has classified our embolotherapy device into Class III,
which means that even though we have obtained clearance under Section 510(k) to
market the device for certain indications, the FDA could in the future
promulgate a regulation requiring premarket approval of the device under
Section 515 of the Federal Food, Drug, and Cosmetic Act to allow it to remain
on the market. We may experience difficulty in providing to the FDA sufficient
data for premarket approval in a timely fashion, if at all. In addition, the
FDA may require us to conduct a postmarket surveillance study which would
require us to track specific elements of patient experience with our Embosphere
Microspheres product after we have begun marketing it. If such a study revealed
previously unknown adverse events or an unexpectedly high rate of adverse
events, the FDA could place further restrictions on our marketing of the
device, or rescind our clearance or approval.
Our products will be subject to continuing FDA requirements relating to
quality control, quality assurance, maintenance of records, documentation,
manufacturing, labeling and promotion of medical devices. We are also required
to submit medical device reports to the FDA to report device-related deaths or
serious injuries, as well as malfunctions, the recurrence of which would be
likely to cause or contribute to a death or serious injury. These reports are
publicly available.
If our clinical trials are not completed successfully, we will not be able to
develop and commercialize our products
Although for planning purposes we forecast the timing of completion of
clinical trials, the actual timing can vary dramatically due to factors such as
delays, scheduling conflicts with participating clinicians and clinical
institutions, the rate of patient accruals and the uncertainties inherent in
the clinical trial process. In addition, we
24
may rely on academic institutions or clinical research organizations to
supervise or monitor some or all aspects of clinical trials involving our
products. Accordingly, we may have less control over the timing and other
aspects of these clinical trials than if we conducted them entirely on our own.
In addition, we will need FDA approval to initiate some clinical trials, and
the trials must be conducted in compliance with FDA regulations. Furthermore,
clinical or regulatory issues may occur that will compel us to temporarily or
permanently suspend our clinical trials. As a result of these factors, we or
third parties may not successfully begin or complete our clinical trials and we
may not make regulatory submissions or receive required regulatory approvals to
commence or continue our clinical trials in the time periods we have
forecasted, if at all. If we or third parties fail to commence or complete, or
experience delays in, any of our planned clinical trials, then we are likely to
incur additional costs and delays in our product development programs, and we
may not be able to successfully develop and commercialize our products. If we
incur costs and delays in our programs or if we do not successfully develop and
commercialize our products, our stock price could decline.
If we fail to comply with regulatory laws and regulations, we will be subject
to enforcement actions, which will affect our ability to market and sell our
products and may harm our reputation
If we fail to comply with applicable federal, state or foreign laws or
regulations, we could be subject to enforcement actions, which could affect our
ability to develop, market and sell our products successfully and could harm
our reputation and lead to less acceptance of our products by the market. These
enforcement actions include:
. product seizures;
. voluntary or mandatory recalls;
. voluntary or mandatory patient or physician notification;
. withdrawal of product clearances or approvals;
. withdrawal of investigational device exemption approval;
. restrictions on, or prohibitions against, marketing our products;
. fines;
. restrictions on importation of our products;
. injunctions;
. civil and criminal penalties; and
. withdrawal of premarket approval or rescission of premarket notification
clearance.
RISKS RELATING TO INTELLECTUAL PROPERTY
If we are unable to obtain patent protection for our products, their
competitive value could decline
We may not obtain meaningful protection for our technology and products with
the patents and patent applications that we own or license relating to our
microsphere technology. In particular, the patent rights we possess or are
pursuing generally cover our technologies to varying degrees, and these rights
may not prevent others from designing products similar to or otherwise
competitive with our Embosphere Microspheres and other products commercialized
by us. For example, our U.S. patent directed to copolymers used to make our
present Embosphere Microspheres expired in June 2001. Two other U.S. patents
and their foreign equivalents are also directed to materials and methods for
performing embolization. To the extent that our competitors are able to design
products competitive with ours without infringing our intellectual property
rights, we may experience less market penetration with our products and,
consequently, we may have decreased revenues.
25
We do not know whether competitors have similar United States patent
applications on file, since United States patent applications filed before
November 28, 2000 or for which no foreign patents will be sought are secret
until issued, and applications filed after November 28, 2000 are published
approximately 18 months after their earliest priority date. Consequently, the
United States Patent and Trademark Office could initiate interference
proceedings involving our owned or licensed United States patent applications
or issued patents. Further, there is a substantial backlog of patent
applications at the United States Patent and Trademark Office, and the approval
or rejection of patent applications may take several years.
We require our employees, consultants and advisors to execute
confidentiality agreements. However, we cannot guarantee that these agreements
will provide us with adequate protection against improper use or disclosure of
confidential information. In addition, in some situations, these agreements may
conflict with, or be subject to, the rights of third parties with whom our
employees, consultants or advisors have prior employment or consulting
relationships. Further, others may independently develop substantially
equivalent proprietary information and techniques, or otherwise gain access to
our trade secrets. Our failure to protect our proprietary information and
techniques may inhibit or limit our ability to exclude certain competitors from
the market.
If we become involved in expensive patent litigation or other proceedings to
enforce our patent rights, we could incur substantial costs and expenses or
substantial liability for damages or be required to stop our product
development and commercialization efforts
In order to protect or enforce our patent rights, we may have to initiate
legal proceedings against third parties, such as infringement suits or
interference proceedings. By initiating legal proceedings to enforce our
intellectual property rights, we may also provoke these third parties to assert
claims against us and, as a result, our patents could be narrowed, invalidated
or rendered unenforceable by a court. Furthermore, we may be sued for
infringing on the intellectual property rights of others. We may find it
necessary, if threatened, to initiate a lawsuit seeking a declaration from a
court regarding the proprietary rights of others. Intellectual property
litigation is costly, and, even if we prevail, could divert management
attention and resources away from our business.
The patent position of companies like ours generally is highly uncertain,
involves complex legal and factual questions, and has recently been the subject
of much litigation. We may not prevail in any patent-related proceeding. If we
do not prevail in any litigation, we could be required to pay damages, stop the
infringing activity, or obtain a license. Any required license might not be
available to us on acceptable terms, or at all. In addition, some licenses may
be nonexclusive, and therefore, our competitors may have access to the same
technology licensed to us. If we fail to obtain a required license or are
unable to design around a patent, we may be prevented from selling some of our
products, which could decrease our revenue.
If any of our licenses to use third-party technologies in our products are
terminated, we may be unable to develop, market or sell our products
We are dependent on various license agreements relating to each of our
current and proposed products that give us rights under intellectual property
rights of third parties. These licenses impose commercialization, sublicensing,
royalty, insurance and other obligations on us. Our failure, or any third
party's failure, to comply with the terms of any of these licenses could result
in us losing our rights to the license, which could result in us being unable
to develop, manufacture or sell products which contain the licensed technology.
RISKS RELATING TO OUR FINANCIAL RESULTS AND NEED FOR FINANCING
We will continue to need additional funds, and if additional capital is not
available, we may have to limit, scale back or cease our operations
We may need to raise additional funds to develop and commercialize our
products successfully. If we cannot raise more funds, we could be required to
reduce our capital expenditures, scale back our product development, reduce our
workforce and license to others products or technologies that we otherwise
would seek
26
to commercialize ourselves. Although we are presently negotiating a credit line
with a bank, we currently have no committed source of capital in the United
States. We may seek additional funding through collaborative arrangements,
borrowing money or the sale of additional equity securities. We may not receive
additional funding on reasonable terms or at all. Any sales of additional
shares of our capital stock are likely to dilute our existing stockholders.
Further, if we issue additional equity securities, the new equity securities
may have rights, preferences or privileges senior to those of existing holders
of our common stock. Alternatively, we may borrow money from commercial
lenders, possibly at high interest rates, which will increase the risk of your
investment in us.
If operating results fluctuate significantly from quarter to quarter, then our
stock price may decline
Our operating results could fluctuate significantly from quarter to quarter.
These fluctuations may be due to several factors including the timing and
volume of customer orders for our Embosphere Microspheres, customer
cancellations and general economic conditions. We also expect that our
operating results will be affected by seasonality, since we expect our revenues
to decline substantially in the third quarter of each year from the first two
quarters of each year because we do a significant percentage of our business in
the European Union, which typically experiences a slowdown of business during
August. Due to these fluctuations, our operating results in some quarters may
not meet the expectations of stock market analysts and investors. In that case,
our stock price would probably decline.
In addition, a large portion of our expenses, including expenses for
facilities, equipment and personnel, are relatively fixed. Accordingly, if our
revenue declines or does not grow as much as we anticipate, we might not be
able to improve our operating margins. In addition, we plan to significantly
increase operating expenses in the next several years. Failure to achieve
anticipated levels of revenue could therefore significantly harm our operating
results for a particular fiscal period.
RISKS RELATING TO THE PRODUCTION AND SUPPLY OF OUR PRODUCTS
If we experience manufacturing delays or interruptions in production, then we
may experience customer dissatisfaction and our reputation could suffer
If we fail to produce enough products at our own manufacturing facility or
at a third-party manufacturing facility, we may be unable to deliver products
to our customers on a timely basis, which could lead to customer
dissatisfaction and could harm our reputation and ability to compete. We
currently produce all of our Embosphere Microspheres products in one
manufacturing facility in France and sub-contract a significant portion of the
final packaging process to an independent contract manufacturer. We would
likely experience significant delays or cessation in producing our products at
either of these facilities if a labor strike, natural disaster, local or
regional conflict or other supply disruption were to occur. If we are unable to
manufacture our products at our facility in France, or package certain of our
products with our contract manufacturer, we may be required to enter into
arrangements with one or more alternative contract manufacturing companies. We
have contingency plans to establish manufacturing in the United States in place
but we could encounter delays or difficulties establishing relationships with
alternate contract manufacturers or in establishing agreements on terms that
are favorable to us. In addition, if we are required to depend on third-party
manufacturers, our profit margins may be lower, which will make it more
difficult for us to achieve profitability.
Also, manufacturers, including us, must adhere to the FDA's current Good
Manufacturing Practices regulations, which are enforced by the FDA through its
facilities inspection program. The manufacturers may not be able to comply or
maintain compliance with Good Manufacturing Practices regulations. If our
manufacturers fail to comply, their non-compliance could significantly delay
our receipt of premarket approval or result in FDA enforcement action,
including an embargo on imported devices. For a premarket approval device, if
we change our manufacturing facility or switch to a third-party manufacturer we
will be required to submit a premarket approval application supplement before
the change is implemented.
27
Because we rely on a limited number of suppliers, we may experience difficulty
in meeting our customers' demands for our products in a timely manner or within
budget
We currently purchase key components of our Embosphere Microspheres from a
variety of outside sources. Some of these components may only be available to
us through a few sources. We generally do not have long-term agreements with
any of our suppliers.
Our reliance on our suppliers exposes us to risks, including:
. the possibility that one or more of our suppliers could terminate their
services at any time without penalty;
. the potential inability of our suppliers to obtain required components;
. the potential delays and expenses of seeking alternative sources of
supply;
. reduced control over pricing, quality and timely delivery due to the
difficulties in switching to alternative suppliers; and
. the possibility that one or more of our suppliers could fail to satisfy
any of the FDA's required current Good Manufacturing Practices
regulations.
Consequently, in the event that our suppliers delay or interrupt the supply
of components for any reason, our ability to produce and supply our products
could be impaired, which could lead to customer dissatisfaction.
RISKS RELATING TO OUR FOREIGN OPERATIONS
If we are unable to meet the operational, legal and financial challenges that
we will encounter in our international operations, we may not be able to grow
our business
Our operations are currently conducted primarily through our French
subsidiary. Furthermore, we currently derive a significant portion of our
revenue from the sale of our Embosphere Microspheres and other products in the
European
Union. We are increasingly subject to a number of challenges, which
specifically relate to our international business activities. Our international
operations may not be successful if we are unable to meet and overcome these
challenges, which would limit the growth of our business. These challenges
include:
. failure of local laws to provide the same degree of protection against
infringement of our intellectual property;
. protectionist laws and business practices that favor local competitors,
which could slow our growth in international markets;
. potentially longer sales cycles to sell products, which could slow our
revenue growth from international sales; and
. potentially longer accounts receivable payment cycles and difficulties
in collecting accounts receivable.
Because we exchange foreign currency received from international sales into
U.S. dollars and are required to make foreign currency payments, we may incur
losses due to fluctuations in foreign currency translations
A significant portion of our business is conducted in the European Union
Euro. We recognize foreign currency gains or losses arising from our operations
in the period incurred. As a result, currency fluctuations between the U.S.
dollar and the currencies in which we do business will cause foreign currency
translation gains and losses, which may cause fluctuations in our future
operating results. We do not currently engage in foreign exchange hedging
transactions to manage our foreign currency exposure.
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RISK RELATING TO OUR STOCK PRICE
Because the market price of our stock is highly volatile, investments in our
stock could rapidly lose their value and we may incur significant costs from
class-action litigation
The market price of our stock is highly volatile. As a result, investments
in our stock could rapidly lose their value. In addition, the stock market
often experiences extreme price and volume fluctuations, which affect the
market price of many medical device companies and which are often unrelated to
the operating performance of these companies.