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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED COMMISSION FILE NO. 0-26224
DECEMBER 31, 2001
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 51-0317849
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
311 ENTERPRISE DRIVE
PLAINSBORO, NEW JERSEY 08536
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(ADDRESS OF PRINCIPAL (ZIP CODE)
EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (609) 275-0500
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(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 the registrant's voting stock held by
non-affiliates of the registrant as of March 15, 2002 was approximately $504
million.
The number of shares of the registrant's Common Stock outstanding as of March
15, 2002 was 26,268,003.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's definitive proxy statement relating to its
scheduled May 21, 2002 Annual Meeting of Stockholders are incorporated by
reference in Part III of this report.
PART I
ITEM 1. BUSINESS
The terms we, our, us, Company and Integra refer to Integra LifeSciences
Holdings Corporation and its subsidiaries unless the context suggests otherwise.
Integra is a global, diversified medical device company that develops,
manufactures, and markets medical devices, implants and biomaterials primarily
for use in neurosurgery, orthopedics and soft tissue repair. Our business is
divided into two divisions: Integra NeuroSciences(TM) and Integra
LifeSciences(TM).
Integra was founded in 1989 and over the next decade developed technologies and
built a product portfolio directed toward tissue regeneration. In 1999, we
entered into the neurosurgery market through an acquisition and the launch of
our DuraGen(TM) Dural Graft Matrix product for the repair of the dura mater.
Since that time, Integra NeuroSciences has grown to comprise more than 74% of
our total revenues, which increased to $93.4 million in 2001, an average growth
rate of 47% per annum over the period 1999 to 2001. The growth in our overall
business has been accelerated through six acquisitions, the introduction of six
significant new products, and the expansion of the Integra NeuroSciences' direct
sales force.
INTEGRA NEUROSCIENCES DIVISION
Our Integra NeuroSciences division is a leading provider of implants, devices,
and systems used in neurosurgery, neurotrauma, and related critical care and is
a distributor of disposables and supplies used in the diagnosis and monitoring
of neurological disorders.
We market the majority of these products directly to neurosurgeons and critical
care units, which comprise a focused group of hospital-based practitioners. As a
result, we believe we are able to access this market through a cost-effective
direct sales and marketing infrastructure in the United States and Europe and
through a distribution network elsewhere. Integra NeuroSciences' direct selling
effort in the United States and Europe currently includes more than 80 people
and is comprised of direct salespeople (called neurospecialists) and their
management, and a team of clinical educators who educate and train both the
neurospecialists and our customers in the use of our products. The United States
sales force is led by a national sales manager and seven regional managers. We
are planning to increase the number of domestic neurospecialists from 44 to 63
in 2002. We believe the expansion of our sales force allows for smaller, more
focused territories, better coverage of our customers, greater participation in
trade shows and more extensive marketing efforts.
INTEGRA LIFESCIENCES DIVISION
Our Integra LifeSciences division develops and manufactures a variety of medical
products and devices, including products based on our proprietary tissue
regeneration technology that are used to treat soft tissue and orthopedic
conditions. For the majority of the products manufactured by the Integra
LifeSciences division, we have partnered with market leaders for the development
and marketing efforts related to these products. These non-neurosurgical
products address large, diverse markets, and we believe that they can be
promoted more-cost effectively through leveraging marketing partners than
through developing a sales infrastructure ourselves. This strategy allows us to
achieve our growth objectives cost-effectively while enabling us to focus our
management efforts on developing new products. We have strategic alliances with
Ethicon, a division of Johnson & Johnson, the Genetics Institute division of
Wyeth (formerly American Home Products Corporation), Medtronic Sofamor Danek,
and Sulzer Dental.
Geographic financial information about our segments, including product sales and
long-lived assets, is set forth in our financial statements under Notes to
Consolidated Financial Statements, Note 13 - Division and Geographic
Information.
2
STRATEGY
Our goal is to become a global leader in the development, manufacturing and
marketing of medical devices, implants and biomaterials in the markets in which
we compete. Key elements of our strategy include the following:
EXPAND INTEGRA NEUROSCIENCES' MARKET PRESENCE. Through acquisitions and internal
growth, we have rapidly grown Integra NeuroSciences into a leading provider of
products used in the diagnosis, monitoring and treatment of chronic diseases and
acute injuries involving the brain, spine and nervous system. We believe that
additional growth potential in the Integra NeuroSciences division exists
through:
o expanding our product portfolio and market reach through additional
acquisitions;
o increasing the penetration of our existing products into closely related
markets, such as the ear, nose and throat (ENT), neurology, and spine
markets;
o continuing the development and promotion of innovative new products, such as
the NeuraGen(TM)Nerve Guide and the LICOX(R)Brain Tissue Oxygen Monitoring
System; and
o increasing the market share of existing product lines.
ADDITIONAL STRATEGIC ACQUISITIONS. Since March 1999 we have completed six
acquisitions focused primarily in the Integra NeuroSciences division. We are
seeking additional acquisitions in this market and in other specialty medical
technology markets characterized by high margins, fragmented competition and
focused target customers.
CONTINUE TO FORM STRATEGIC ALLIANCES FOR INTEGRA LIFESCIENCES' PRODUCTS. We have
collaborated with well-known medical device companies to develop and market the
majority of our non-neurosurgical product lines in the Integra LifeSciences
division. Significant ongoing strategic alliances include those with Ethicon to
market our INTEGRA(R) Dermal Regeneration Template and Genetics Institute and
Medtronic Sofamor Danek to develop products for use in orthopedics. We intend to
pursue additional strategic alliances selectively.
CONTINUE TO DEVELOP NEW AND INNOVATIVE MEDICAL PRODUCTS. As evidenced by our
development of the INTEGRA(R) Dermal Regeneration Template, Biomend(R) and
Biomend(R) Extend Absorbable Collagen Matrix, DuraGen(R) Dural Graft Matrix and
the NeuraGen(TM) Nerve Guide, we have a leading proprietary absorbable implant
franchise. We currently are developing a variety of innovative neurosurgical and
other medical products, including a new class of absorbable biomaterials for the
orthopedic implant market. In addition, we are seeking expanded applications for
our existing products.
BUSINESS DIVISIONS
[INTEGRA NEUROSCIENCES LOGO]
OVERVIEW
The products sold by the Integra NeuroSciences' division include medical
devices, implants, systems and instruments used in the diagnosis, monitoring and
treatment of chronic diseases and acute injuries involving the brain, spine and
nervous system, and disposable medical supplies, such as electrodes, for
neurological testing. These products are used primarily by neurosurgeons and
nurses in the intensive care unit and the operating room and by neurologists in
hospital and out-patient settings. Additionally, we sell products used by
cardiovascular surgeons to divert blood to vital organs, such as the brain,
during surgical procedures involving blood vessels. According to industry
sources and our estimates, the aggregate size of the market addressed by our
Integra NeuroSciences products exceeds $400 million and is expected to grow at
an annual rate of 6-8%.
3
Our Integra NeuroSciences division offers one of the most comprehensive product
lines serving the neuro intensive care unit and operating room. We have
established market positions in intracranial monitoring, dural repair, tumor
ablation, neurosurgical shunting, specialty neurosurgical instrumentation,
carotid shunting, and central nervous system diagnostic and monitoring supplies,
and are developing a market position in peripheral nerve repair. Integra
NeuroSciences' products can be segmented by use into the following functional
areas: i) the neuro intensive care unit, ii) the neurosurgical operating room,
and iii) all other. The table below provides a summary of Integra NeuroSciences'
products:
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PRODUCT LINES APPLICATION
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NEURO INTENSIVE CARE UNIT
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Camino(R) and Ventrix(R) fiber Access, drainage and continuous
optic-based intracranial monitoring monitoring of intracranial pressure,
systems, LICOX(R) oxygen monitoring oxygen and temperature following injury
systems, Integra Systems of CSF or neurosurgical procedures
Drainage and Cranial Access
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NEUROSURGICAL OPERATING ROOM
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DuraGen(R)Dural Graft Matrix Graft to close brain and spine membrane
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NeuraGen(TM)Nerve Guide Repair of peripheral nerves
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Selector(R)Integra Ultrasonic Use of ultrasonic energy to
Aspirator; Dissectron(R)Ultrasonic ablate tumors
Aspirator
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Heyer-Schulte(R)neurosurgical shunts Specifically designed for the
management of hydrocephalus, a chronic
condition involving excess
cerebrospinal fluid in the brain
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Redmond(TM)-Ruggles(TM)neurosurgical Specialized surgical instruments for
and spinal instruments; Neuro use in brain or spinal surgery
Navigational(R)flexible endoscopes
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Helitene(R)Absorbable Fibrillar Control of bleeding
Hemostatic Agent
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ALL OTHER
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Integra NeuroSupplies(TM) Disposables and supplies used in the
diagnosis and monitoring of
neurological, ENT and pulmonary
disorders
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Sundt(TM)and other carotid shunts For shunting blood during surgical
procedures involving blood vessels
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4
MARKETS AND PRODUCTS
NEURO INTENSIVE CARE UNIT
THE MONITORING OF BRAIN PARAMETERS. Intracranial monitors are used by
neurosurgeons in diagnosing and treating cases of severe head trauma and other
diseases. There are approximately 400,000 cases of head trauma each year in the
United States, of which the portion that requires monitoring and intervention
represents a market of approximately $40 million.
Integra NeuroSciences sells the Camino(R) and Ventrix(R) lines of intracranial
pressure and temperature monitoring systems and the LICOX(R) Brain Tissue Oxygen
Monitoring System. Integra NeuroSciences currently has over 3,000 intracranial
monitors installed worldwide. The Camino(R) and Ventrix(R) systems measure the
intracranial pressure and temperature in the brain and ventricles, and the
LICOX(R) system allows for continuous qualitative regional monitoring of
dissolved oxygen in cerebral tissues. Core technologies underlying the brain
parameter monitoring product line include the design and manufacture of the
disposable catheters used in the monitoring systems, pressure transducer
technology, optical detection/fiber optic transmission technology, sensor
characterization and calibration technology and monitor design.
EXTERNAL DRAINAGE AND CRANIAL ACCESS. External drainage systems and cranial
access kits are used by neurosurgeons to gain access to the cranial cavity and
to drain excess cerebrospinal fluid from the ventricles of the brain into an
external container. Integra NeuroSciences manufactures and markets a broad line
of cranial access kits and ventricular and lumbar external drainage systems
under the Integra CSF Drainage and Cranial Access Systems brand name.
NEUROSURGICAL OPERATING ROOM
REPAIR OF THE DURA MATER. The dura mater is the thick membrane that contains the
cerebrospinal fluid within the brain and the spine. The dura mater often must be
penetrated during brain surgery and is often damaged during spinal surgery. In
either case, surgeons often close or repair the dura mater with a graft. The
graft may consist of tissue taken from elsewhere in the patient's body, or it
may be one of the dural substitute products currently on the market which are
made of synthetic materials, processed human cadaver, or bovine pericardium. The
worldwide market for dural repair, including cranial and spinal applications, is
estimated to be $200 million.
The DuraGen(R) Dural Graft Matrix is an absorbable collagen matrix indicated for
the repair of the dura mater surrounding the brain and spine. We believe that
the other methods for repairing the dura mater suffer from shortcomings
addressed by the DuraGen(R) Dural Graft Matrix. Our DuraGen(R) product has been
shown in clinical trials to be an effective means for closing the dura mater
without the need for suturing, which allows the neurosurgeon to conclude the
operation more efficiently. In addition, because the DuraGen(R) product is
ultimately absorbed by the body and replaced with new natural tissue, the
patient avoids some of the risks associated with a permanent implant inside the
cranium or spinal cavity.
REPAIR OF PERIPHERAL NERVES. Peripheral nerves may become severed through
traumatic accidents or surgical injuries, often resulting in the permanent loss
of motor and sensory function. Although severed peripheral nerves regenerate
spontaneously, they do not establish functional connections unless the nerve
stumps are surgically reconnected. We estimate the market for the repair of
severed peripheral nerves is $40 million.
The NeuraGen(TM) Nerve Guide is an absorbable implant for the repair of severed
peripheral nerves. The NeuraGen(TM) product is a collagen tube designed to
provide a protective environment for the regenerating nerve and to provide a
conduit through which regenerating nerves can bridge the gap caused by the
injury. The NeuraGen(TM) Nerve Guide offers a rapid method for rejoining severed
peripheral nerves.
We received FDA 510(k) clearance for the NeuraGen(TM) product in June 2001 and
launched the product in the United States in October 2001. In addition to
targeting the neurosurgical operating room, we are also marketing the
NeuraGen(TM) product to the non-hospital and private practice-based neurologist
customer base served by our Integra NeuroSupplies business and to hand surgeons.
5
NEUROSURGICAL SYSTEMS FOR TUMOR ABLATION. More than 145,000 primary and
metastatic brain tumors are diagnosed annually in the United States. Our
Selector(R) Integra Ultrasonic Aspirator and Dissectron(R) Ultrasonic Surgical
Aspirator systems address the market for the surgical destruction and removal of
malignant and non-malignant tumors and other tissue.
The Selector(R) Integra Ultrasonic Aspirator and Dissectron(R) Ultrasonic
Surgical Aspirator use very high frequency sound waves to pulverize cancer
tumors and allow the surgeon to remove the damaged tumor tissue by aspiration.
Unlike other surgical techniques, ultrasonic surgery selectively dissects and
fragments soft tissue leaving fibrous tissues such as nerves and blood vessels
intact. Ultrasonic aspiration facilitates the removal of unwanted tissue
adjacent or attached to vital structures. The Dissectron(R) product is not sold
in the United States.
HYDROCEPHALUS MANAGEMENT. Hydrocephalus is an incurable condition resulting from
an imbalance between the amount of cerebrospinal fluid produced by the brain and
the rate at which cerebrospinal fluid is absorbed by the body. This condition
causes the ventricles of the brain to enlarge and the pressure inside the head
to increase. Hydrocephalus often is present at birth, but may also result from
head trauma, spina bifida, intraventricular hemorrhage, intracranial tumors and
cysts. The most common method of treatment of hydrocephalus is the insertion of
a shunt into the ventricular system of the brain to divert the flow of
cerebrospinal fluid out of the brain. A pressure valve then maintains the
cerebrospinal fluid at normal levels within the ventricles.
According to the Hydrocephalus Association, hydrocephalus affects approximately
one in 500 children born in the United States. We estimate that approximately
80% of total cerebrospinal fluid shunt sales address birth-related
hydrocephalus, with the remaining 20% addressing surgical procedures involving
excess cerebrospinal fluid due to head trauma. Based on industry sources, we
believe that the total United States market for hydrocephalus management,
including monitoring, shunting and drainage, is approximately $70 million. Of
that amount, it is estimated that a little more than half consists of sales of
monitoring products, and the balance consists of sales of shunts and drains for
the management of hydrocephalus.
Our Heyer-Schulte(R) line of hydrocephalus management shunting products includes
the Novus(R), LPV(R) and Pudenz(TM) shunts, ventricular, peritoneal and cardiac
catheters, physician-specified hydrocephalus management shunt kits, Ommaya(R)
cerebrospinal fluid reservoirs and Spetzler(R) lumbar and syringo-peritoneal
shunts.
We believe that the use of shunts containing programmable valves has increased
in recent years. Programmable valves allow the neurosurgeon to adjust the
pressure settings of a shunt while it is implanted in the patient. Shunts that
do not incorporate programmable valve technology must be removed from the
patient for subsequent pressure adjustments, a process that requires an
additional surgical procedure. Because we do not market hydrocephalus management
shunts with programmable valves, we believe that future domestic sales of the
Heyer-Schulte(R) product line may be negatively affected by the increasing use
of programmable valves.
NEUROSURGICAL AND SPINAL INSTRUMENTATION. We provide neurosurgeons and spine
surgeons with a full line of specialty hand-held spinal and neurosurgical
instruments sold under the Redmond(TM) and Ruggles(TM) brand names and a line of
disposable neuroendoscopy products sold under the Neuro Navigational(R) brand
name.
The Redmond(TM)-Ruggles(TM) products include retractors, kerrisons, dissectors,
and curettes. Major product segments include spinal instruments, microsurgical
neuro instruments, and products customized by Integra NeuroSciences and sold
through other companies and distributors. Specialty surgical steel fabricators
in Germany manufacture most of the Redmond(TM) and Ruggles(TM) products to
Integra's specifications. The Neuro Navigational(R) product line consists of
fiber optic instruments used to facilitate minimally invasive neurosurgery,
including third ventriculostomies, which are increasingly substituted for shunt
placement for patients who meet the criteria.
SURGICAL HEMOSTATIC AGENTS. Hemostatic agents are used to control bleeding. Our
Helitene(R) Absorbable Fibrillar Collagen Hemostatic Agent has been marketed for
surgical applications for over 15 years. In June 2001, the FDA approved a
premarket approval (PMA) application supplement removing the labeling exclusion
for neurosurgical uses of the Helitene(R) product. Helitene(R) is a
collagen-based hemostatic agent in fibrillar form that effectively controls
bleeding within two to five minutes when applied directly to the bleeding site
and is designed to be totally absorbable if left in the body after hemostasis.
6
ALL OTHER
NEUROLOGICAL SUPPLIES. With the acquisition of NeuroSupplies, Inc. in December
2001, we expanded into the neurological supplies market. We distribute a wide
variety of disposables and supplies, including surface electrodes, needle
electrodes, recording transducers and stimulators, and respiratory sensors, that
are used in the diagnosis and monitoring of neurological disorders. These
products are designed to monitor and perform tests of the nervous system and
brain, including electromyography (EMG), evoked potential (EP) and
electroencephalography (EEG) tests, and to test sleep disorders.
These products are sold primarily through a catalog to more than 6,000
neurologists, hospitals, sleep clinics, and other physicians under the Integra
NeuroSupplies(TM) name. Neurologists are the referring physicians for Integra's
existing neurosurgeon customers. We expect that our sales and marketing
infrastructure will be able to deepen the penetration of Integra NeuroSupplies'
products into hospitals, Integra NeuroSciences' principal call point. We also
believe that Integra NeuroSupplies' non-hospital and private practice-based
customers may be receptive to certain of our existing products, including the
NeuraGen(TM) and Helitene(R) products and our line of external ventricular
drainage products.
HEMODYNAMIC SHUNTS. Our Sundt(TM) and other carotid shunts are used to divert
blood to vital organs, such as the brain, during surgical procedures involving
blood vessels. These products are used by vascular surgeons and neurosurgeons
and are now sold direct in the United States through the Integra NeuroSciences
sales force.
[INTEGRA LIFESCIENCES LOGO]
OVERVIEW
The Integra LifeSciences division develops and manufactures implants and other
medical devices that are used primarily for the treatment of defects, diseases
and injuries involving soft tissue and bone and for infection control. Many of
the current products of Integra LifeSciences are built on our expertise in
absorbable collagen products.
The Integra LifeSciences division is responsible for all of our products outside
the neurosurgical market. Because these non-neurosurgical products address
large, diverse markets, Integra LifeSciences' marketing, research and
development programs are generally constructed around strategic alliances with
leading medical device companies. We believe that these products can be more
cost effectively promoted through leveraging marketing partners than through
developing a sales infrastructure ourselves. According to industry sources and
our estimates, the aggregate size of the markets addressed by Integra
LifeSciences' products exceeds $1 billion.
Integra LifeSciences has established a reputation for being a value-added and
dependable contract development and manufacturing partner. Integra LifeSciences
has developed an expertise in the development, manufacture and supply of a
variety of absorbable materials. Integra LifeSciences can also provide
experienced personnel to support product quality and regulatory review efforts.
7
Although the Integra LifeSciences products serve a wide variety of markets, they
can be segmented into two general groups: i) tissue repair products and ii)
other medical devices. The table below provides a summary of our Integra
LifeSciences products, their application, and marketing/development partner:
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PRODUCT LINES APPLICATION MARKETING/DEVELOPMENT
PARTNER
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TISSUE REPAIR PRODUCTS
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INTEGRA(R)Dermal Regenerate dermis and Ethicon, Inc., a division
Regeneration Template repair skin defects of Johnson & Johnson, and
Century Medical, Inc. in
Japan
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BioMend(R)and Used in guided tissue Sulzer Dental, a division
BioMend(R)Extend regeneration in of Sulzer Medica Ltd.
Absorbable Collagen periodontal surgery
Membrane
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Orthopedic Biomaterials:
Absorbable Collagen Fracture management/ Genetics Institute
Sponge and other matrices enabling spinal fusion division of Wyeth;
for use with bone Medtronic Sofamor Danek
morphogenetic protein (FDA Panel recommendation
(rhBMP-2) received in January 2002)
Tyrosine polycarbonates Fixation or alignment of Bionx Implants, Inc.
for fixation devices fractures (development program)
such as absorbable screws,
plates, pins, wedges
and nails
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OTHER MEDICAL DEVICES
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Infection Control:
VitaCuff(R) Provides protection Arrow International, Inc.,
against infection arising Bard Access Systems, Inc.,
from long-term catheters Tyco International
BioPatch(R)(1) Anti-microbial wound Ethicon, Inc.
dressing
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CollaCote(R), Used to control bleeding Sulzer Dental
CollaTape(R) and in dental surgery
CollaPlug(R) absorbable
wound dressings
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Instat(R)(1) and Control of bleeding Ethicon and various
Helistat(R) Absorbable distributors
Collagen Hemostats
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Spembly Medical Allow surgeon to use low Various distributors
cryosurgery products temperature to more
easily extract diseased
tissue
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(1) BioPatch and Instat are registered trademarks of Johnson & Johnson.
8
MARKETS AND PRODUCTS
TISSUE REPAIR PRODUCTS
SKIN REPLACEMENT. Integra LifeSciences' skin replacement products address the
market need created by severe burns and chronic wounds. We estimate that the
worldwide market for use of skin replacement products, such as the INTEGRA(R)
Dermal Regeneration Template, in the treatment of severe burns is approximately
$75 million. However, the potential market for the use of INTEGRA(R) Dermal
Regeneration Template for reconstructive surgery and the treatment of chronic
wounds is much larger. We estimate this market to be in excess of $1 billion.
INTEGRA(R) Dermal Regeneration Template is designed to enable the human body to
regenerate functional dermal tissue. The product was approved by the FDA under a
premarket approval application for the post-excisional treatment of
life-threatening full-thickness or deep partial-thickness thermal injury where
sufficient autograft is not available at the time of excision or not desirable
due to the physiological condition of the patient. The INTEGRA(R) Dermal
Regeneration Template is sold exclusively by the Ethicon division of Johnson &
Johnson worldwide, except in Japan. Century Medical, Inc. has rights to
distribute the product in Japan.
Through our strategic alliance with Ethicon, we are seeking to obtain broader
indications for this product, including approval for use in reconstructive
surgery and treatment of chronic wounds.
GUIDED TISSUE REGENERATION IN PERIODONTAL SURGERY. Our BioMend(R) Absorbable
Collagen Membrane is used for guided tissue regeneration in periodontal surgery.
The BioMend(R) membrane is inserted between the gum and the tooth after surgical
treatment of periodontal disease, preventing the gum tissue from interfering
with the regeneration of the periodontal ligament that holds the tooth in place.
The BioMend(R) product is intended to be absorbed after approximately four to
seven weeks, avoiding the requirement for additional surgical procedures to
remove a non-absorbable membrane. BioMend(R) Extend has the same indication for
use as BioMend(R), except that it absorbs in approximately 16 weeks. The
BioMend(R) and BioMend(R) Extend Absorbable Collagen Membranes are sold through
the Sulzer Dental division of Sulzer Medica.
ORTHOPEDIC BIOMATERIALS. We sell or are developing the following new absorbable
materials for the orthopedic implant market:
- Absorbable Collagen Sponges and other matrices for use in
developing bone regeneration implants; and
- Tyrosine-derived polycarbonates designed to enhance the rate and
quality of healing and tissue regeneration when implanted in bone.
BONE REGENERATION. Integra LifeSciences supplies the Genetics Institute division
of Wyeth with Absorbable Collagen Sponges for use in developing bone
regeneration implants. Since 1994, we have supplied Absorbable Collagen Sponges
for use with Genetics Institute's recombinant human bone morphogenic protein-2
(rhBMP-2). Recombinant human BMP-2 is a manufactured version of human protein
naturally present in very small quantities in the body. Genetics Institute is
developing rhBMP-2 for clinical evaluation in several areas of bone repair and
augmentation, including orthopedic, oral and maxillofacial surgery applications.
Spine applications are being developed through a related collaboration with
Medtronic Sofamor Danek in North America. On January 10, 2002, the Orthopedic
and Rehabilitation Devices Panel of the United States Food and Drug
Administration (FDA) unanimously recommended for approval, with conditions,
Medtronic Sofamor Danek's InFUSE(TM) Bone Graft used with the LT-CAGE(TM) Lumbar
Tapered Fusion Device for use in spinal fusion procedures. The InFUSE Bone Graft
uses rhBMP-2 applied to an Absorbable Collagen Sponge supplied by Integra in
place of a painful secondary procedure to harvest small pieces of bone from the
patient's own hip (autograft). When used with the LT-CAGE Lumbar Tapered Fusion
Device, the InFUSE Bone Graft will be indicated to treat certain types of spinal
degenerative disc disease, a common cause of low back pain. The FDA panel
conditions for approval included three additional post-approval studies in the
areas of antibody response during pregnancy, dosing and tumorogenicity.
9
Genetics Institute has filed a pre-market approval application with the FDA
seeking approval for the use of rhBMP-2 in conjunction with our Absorbable
Collagen Sponge for use in the treatment of acute long-bone fractures requiring
open surgical management. In June 2001, Genetics Institute announced that it had
received a non-approvable letter from the FDA regarding its pre-market approval
application for the treatment of long-bone fractures, which may delay or
ultimately prevent the approval of rhBMP-2 for those uses. The non-approvable
letter focuses on the design of the pivotal clinical study and the
interpretation of the clinical data submitted by Genetics Institute.
Additionally, we also receive development funding and other payments from
Medtronic Sofamor Danek related to the development of additional matrices for
various applications.
TYROSINE POLYCARBONATES FOR ORTHOPEDIC IMPLANTS. We are continuing to develop
additional biomaterial technologies that enhance the rate and quality of healing
and tissue regeneration with synthetic biodegradable scaffolds that support cell
attachment and growth. We are developing a new class of absorbable
polycarbonates created through the polymerization of tyrosine, a naturally
occurring amino acid. A well-defined and commercially scaleable manufacturing
process prepares these materials. Device fabrication by traditional techniques
such as compression molding and extrusion is readily achieved. We believe that
this new biomaterial will be useful in promoting full bone healing when
implanted in damaged sites. This material is currently being developed for
orthopedic and tissue engineering applications where strength and bone
compatibility are critical issues for success of healing. No medical device
containing the material has yet been approved for sale.
Integra is continuing and has concluded several materials transfer and research
collaborations for tyrosine-derived polycarbonates. These collaborations, which
include evaluation for use in orthopedic, craniomaxillofacial, spinal and drug
delivery applications, have progressed through animal studies. To date no human
studies have been undertaken.
We produced a Device Master File for the polymer technology and filed it with
the FDA in April 2001. Information contained in the Device Master File may be
used by Integra's strategic partners for Premarket Approval Applications,
Investigational Device Exemptions, and 510(k) Premarket Notification
submissions, as more fully described below under "Government Regulation".
OTHER MEDICAL DEVICES
Other current products of Integra LifeSciences include the VitaCuff(R) catheter
access infection control device (sold to Bard Access Systems, Inc., Arrow
International, Inc. and Tyco International Ltd.), the BioPatch(R) anti-microbial
wound dressing (sold to Ethicon), and a wide range of absorbable collagen
products for hemostasis (sold to Sulzer Dental for use in periodontal surgery
under the names CollaCote(R), CollaTape(R) and CollaPlug(R), through various
other distributors under the Helistat(R) Absorbable Collagen Hemostatic Agent
name and through Ethicon under the Instat(R) Absorbable Collagen Hemostat name).
Finally, our Spembly Medical cryosurgery products allow surgeons to use low
temperatures to more easily extract diseased tissue in ophthalmic, general,
gynecological, urological and cardiac applications.
STRATEGIC ALLIANCES
We use distribution alliances to market the majority of our Integra LifeSciences
products. We have also entered into collaborative agreements relating to
research and development programs involving our technology. These arrangements
are described below.
ETHICON. The Ethicon division of Johnson & Johnson distributes the INTEGRA(R)
Dermal Regeneration Template throughout the world, except in Japan. As part of
this strategic alliance, Ethicon has agreed to pay for clinical trials to
support applications to the FDA for broader indications beyond the severe burn
market, including the treatment of chronic wounds. We cannot be certain that
these clinical trials will be completed, or that INTEGRA(R) Dermal Regeneration
Template will receive the approvals necessary to permit Ethicon to promote it
for those indications. Ethicon is responsible for marketing and selling the
product, has agreed to make significant minimum product purchases, and is
providing $2 million of annual funding for research, development and certain
clinical trials through
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2004 and thereafter different amounts based on a percentage of net sales. In
addition, Ethicon is obligated to make contingent payments to Integra
LifeSciences in the event of certain clinical developments and to assist in the
expansion of our manufacturing capacity as Ethicon achieves certain sales
targets. The aggregate amount of available contingent payments, if all
conditions for each payment are satisfied, is $38 million. Of that amount, $25
million depends upon the achievement of specified sales targets and $13 million
depends upon the achievement of certain clinical and regulatory events, such as
regulatory submissions and approvals for new intended uses for INTEGRA(R) Dermal
Regeneration Template. To date, we have received $750,000 in clinical and
regulatory payments and no payments for the expansion of manufacturing capacity.
We expect to receive an additional $500,000 clinical and regulatory payment in
the first quarter of 2002. Based upon current clinical and regulatory plans and
our estimates of future sales growth, we do not expect to receive more than $2
million of such contingent payments from Ethicon before 2004. Under the
agreement, we are obligated to manufacture the product and are responsible for
continued research and development. The initial term of the ten-year agreement
expires in 2009, and Ethicon may at its option extend the agreement for an
additional ten years. Ethicon may terminate the agreement prior to the end of
the initial term by giving notice one year in advance of termination. Depending
upon the reasons for any termination, Ethicon may be obligated to make
significant payments to us.
CENTURY MEDICAL, INC. Century Medical Inc., a subsidiary of ITOCHU Corporation,
has obtained exclusive importation and sales rights for INTEGRA(R) Dermal
Regeneration Template, the DuraGen(R) Dural Graft Matrix and the NeuraGen(TM)
Nerve Guide in Japan. Under the related sales and importation agreements,
Century Medical is conducting clinical trials at its own expense to obtain
Japanese regulatory approvals for the sale of INTEGRA(R) Dermal Regeneration
Template and the DuraGen(R) Dural Graft Matrix in Japan.
The agreements with Century Medical will terminate seven years after we and
Century Medical obtain approval from Japanese regulators to sell the applicable
product in Japan. We do not receive any royalties under the agreement, but we
did receive an initial non-refundable payment of $1 million from Century Medical
in 1998.
GENETICS INSTITUTE AND MEDTRONIC SOFAMOR DANEK. Integra LifeSciences has several
programs oriented toward the orthopedic market. These programs include the
alliances with Genetics Institute and Medtronic Sofamor Danek for the
development of collagen and other absorbable matrices to be used in conjunction
with Genetics Institute's recombinant human bone morphogenetic protein-2 in a
variety of bone regeneration applications. Our agreement with Genetics Institute
requires us to supply Absorbable Collagen Sponges at specified prices to
Genetics Institute, including those that Genetics Institute sells to Medtronic
Sofamor Danek with rhBMP-2 for use in Medtronic Sofamor Danek's InFUSE(TM)
product. In addition, we will receive a royalty equal to a percentage of
Genetics Institute's sales of surgical kits combining rhBMP-2 and our Absorbable
Collagen Sponges. The agreement terminates in 2004, but may be extended for
successive five-year terms at the option of Genetics Institute. The agreement
does not provide for milestones or other contingent payments, but Genetics
Institute pays us to assist with regulatory affairs and research.
SULZER DENTAL. Sulzer Medica Ltd.'s dental division, Sulzer Dental, has marketed
and sold BioMend(R) since 1995, BioMend(R) Extend since 1999, and CollaCote(R),
CollaPlug(R) and CollaTape(R) since 1992 under a distribution agreement. Under
that agreement, Sulzer Dental purchases products for the dental market from us
at specified prices and in minimum quantities. The initial term of our agreement
with Sulzer Dental ends at the end of 2004, and the agreement may be extended at
the option of Sulzer Dental for an additional five years.
RESEARCH STRATEGY
Our research programs focus on developing new products based our biomaterials,
peptide chemistry and collagen engineering technologies and our expertise in
fiber optics. A portion of these research and development activities are funded
by government grants and contract development revenues from strategic alliance
partners. We spent approximately $8.0 million, $7.5 million, and $8.9 million in
2001, 2000, and 1999, respectively, on research and development activities.
Research and development activities funded by government grants and contract
development revenues amounted to $3.9 million, $2.8 million, and $1.6 million in
2001, 2000, and 1999, respectively.
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We have either acquired or secured the proprietary rights to several important
technological and scientific platforms, including collagen matrix technology,
peptide technology, biomaterials technology, and expertise in fiber optics and
intracranial monitoring. These technologies provide support for our critical
applications in neurosciences and tissue regeneration and additional
opportunities for generating near-term and long-term revenues from medical
applications. We have been able to identify and bring together critical platform
technology components from which we work to develop products for both tissue
regeneration and neurosciences applications. These efforts have led to the
successful development of new products, such as the NeuraGen(TM) Nerve Guide and
DuraGen(R) Dural Graft Matrix.
GOVERNMENT REGULATION
As a manufacturer of medical devices, we are subject to extensive regulation by
the FDA and, in some jurisdictions, by state and foreign governmental
authorities. These regulations govern the introduction of new medical devices,
the observance of certain standards with respect to the design, manufacture,
testing, labeling and promotion of the devices, the maintenance of certain
records, the ability to track devices, the reporting of potential product
defects, the export of devices and other matters. We believe that we are in
substantial compliance with these governmental regulations.
From time to time, we have recalled certain of our products. Since the beginning
of 1998, we have voluntarily recalled products, and we have never involuntarily
recalled a product. We have recalled defective components or devices supplied by
other vendors, kits assembled by us that included incorrect combinations of
products and defective devices manufactured by us. None of these recalls
resulted in significant direct expense to us or significant disruption of
customer or supplier relationships. However, a future voluntary or involuntary
recall of one of our major products, particularly if it involved a potential or
actual risk to patients, would have an adverse financial impact on us, as a
result both of direct expenses and disrupted customer relationships.
Our medical devices introduced in the United States market are required by the
FDA, as a condition of marketing, to secure a Pre-market Notification clearance
pursuant to Section 510(k) of the Federal Food, Drug and Cosmetic Act, an
approved Pre-market Approval application or a supplemental pre-market approval
application. Alternatively, we may seek United States market clearance through a
Product Development Protocol approved by the FDA. Establishing and completing a
Product Development Protocol, or obtaining a pre-market approval application or
supplemental pre-market approval application, can take up to several years and
can involve preclinical studies and clinical testing. In order to perform
clinical testing in the United States on an unapproved product, we are also
required to obtain an Investigational Device Exemption from the FDA. In addition
to requiring clearance for new products, FDA rules may require a filing and FDA
approval, usually through a pre-market approval application supplement or a
510(k) Premarket Notification clearance, prior to marketing products that are
modifications of existing products or new indications for existing products.
While the FDA Modernization Act of 1997, when fully implemented, is expected to
inject more predictability into the product review process, streamline
post-market surveillance, and promote the global harmonization of regulatory
procedures, the process of obtaining the clearances can be onerous and costly.
We cannot assure that all the necessary approvals, including approval for
product improvements and new products, will be granted on a timely basis, if at
all. Delays in receipt of, or failure to receive, the approvals could have a
material adverse effect on our business. Moreover, after clearance is given, if
the product is shown to be hazardous or defective, the FDA and foreign
regulatory agencies have the power to withdraw the clearance or require us to
change the device, its manufacturing process or its labeling, to supply
additional proof of its safety and effectiveness or to recall, repair, replace
or refund the cost of the medical device. 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, these changes
might have on its business. However, the changes could have a material impact on
our business.
We have received or acquired more than 130 pre-market notification clearances,
four approved pre-market approval applications and 47 supplemental premarket
approval applications. We have one premarket notification application pending,
but expect to file new applications during the next year to cover new products
and variations on existing products. We have one supplemental pre-market
approval application pending for a proposed change in the approved uses for the
INTEGRA(R) Dermal Regeneration Template.
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We are also required to register with the FDA as a device manufacturer. As such,
we are subject to periodic inspection by the FDA for compliance with the FDA's
Quality Systems Regulations. These regulations require that we manufacture our
products and maintain our documents in a prescribed manner with respect to
design, manufacturing, testing and control activities. Further, we are required
to comply with various FDA requirements for labeling and promotion. The Medical
Device Reporting regulations require that we provide information to the FDA
whenever there is evidence to reasonably suggest that one of our devices may
have caused or contributed to a death or serious injury or, if a malfunction
were to recur, could cause or contribute to a death or serious injury. In
addition, the FDA prohibits us from promoting a medical device before marketing
clearance has been received or promoting an approved device for unapproved
indications. If the FDA believes that a company is not in compliance with
applicable regulations, it can institute proceedings to detain or seize
products, issue a warning letter, issue a recall order, impose operating
restrictions, enjoin future violations and assess civil penalties against that
company, its officers or its employees and can recommend criminal prosecution to
the Department of Justice. These actions could have a material impact on our
business. Other regulatory agencies may have similar powers.
Medical device laws also are in effect in many of the countries outside the
United States in which we do business. These laws range from comprehensive
device approval and quality system requirements for some or all of the our
medical device products to simpler requests for product data or certifications.
The number and scope of these requirements are increasing. In June 1998, the
European Union Medical Device Directive became effective, and all medical
devices must meet the Medical Device Directive standards and receive CE Mark
certification. CE Mark certification requires a comprehensive Quality System
program, and submission of data on a product to the Notified Body in Europe. The
Medical Device Directive, the ISO 9000 series of standards, and EN46001 are
recognized international quality standards that are designed to ensure that we
develop and manufacture quality medical devices. Each of our facilities is
audited on an annual basis by a recognized Notified Body (an organization
designated by the national governments of the European Union member states to
make independent judgments about whether or not a product complies with the
protection requirements established by each CE marking directive) to verify our
compliance with these standards. In 2001, each of our facilities was audited,
and we have maintained our certification to these standards.
In addition, we are required to notify the FDA if we export specified medical
devices manufactured in the United States that have not been approved by the FDA
for distribution in the United States. We are also required to maintain certain
records relating to exports and make the records available to the FDA for
inspection, if required. We do not currently export medical devices manufactured
in the United States that have not been approved by the FDA, although we have in
the past.
OTHER UNITED STATES REGULATORY REQUIREMENTS
In addition to the regulatory framework for product approvals, we are and may be
subject to regulation under federal and state laws, including requirements
regarding occupational health and safety; laboratory practices; and the use,
handling and disposal of toxic or hazardous substances. We may also be subject
to other present and possible future local, state, federal and foreign
regulations.
Our research, development and manufacturing processes involve the controlled use
of certain hazardous materials. We are subject to federal, state and local laws
and regulations governing the use, manufacture, storage, handling and disposal
of these materials and certain waste products. Although we believe that our
safety procedures for handling and disposing of these materials comply with the
standards prescribed by the controlling laws and regulations, the risk of
accidental contamination or injury from these materials cannot be completely
eliminated. In the event of this type of an accident, we could be held liable
for any damages that result and any liability could exceed our resources.
Although we believe that we are in compliance in all material respects with
applicable environmental laws and regulations, we cannot guarantee that we will
not incur significant costs to comply with environmental laws and regulations in
the future, nor that our operations, business or assets will not be materially
adversely affected by current or future environmental laws or regulations.
13
PATENTS AND INTELLECTUAL PROPERTY
We pursue a policy of seeking patent protection of our technology, products and
product improvements both in the United States and in selected foreign
countries. When determined appropriate, we have enforced and plan to continue to
enforce and defend our patent rights. In general, however, we do not rely on our
patent estate to provide us with any significant competitive advantages. We rely
upon trade secrets and continuing technological innovations to develop and
maintain our competitive position. In an effort to protect our trade secrets, we
have a policy of requiring our employees, consultants and advisors to execute
proprietary information and invention assignment agreements upon commencement of
employment or consulting relationships with us. These agreements provide that
all confidential information developed or made known to the individual during
the course of their relationship with us must be kept confidential, except in
specified circumstances.
BioMend(R), Camino(R), CollaCote(R), CollaPlug(R), CollaStat(TM), CollaTape(R),
Dissectron(R), DuraGen(R), Helistat(R), Helitene(R), Heyer-Schulte(R),
INTEGRA(R) Dermal Regeneration Template, Integra LifeSciences(TM), Integra
NeuroSciences(TM), Integra NeuroSupplies(TM), LICOX(R), NeuraGen(TM),
NeuroNavigational(R), Novus(R), LPV(R), Ommaya(R), Pudenz(TM), Redmond(TM),
Ruggles(TM), Selector(R), Spetzler(R), Sundt(TM), Ventrix(R), VitaCuff(R) are
some of the trademarks of Integra and its Subsidiaries. All other brand names,
trademarks and service marks appearing in this report are the property of their
respective holders.
COMPETITION
The largest competitors of Integra NeuroSciences in the neurosurgery markets are
the PS Medical division of Medtronic, Inc., the Codman division of Johnson &
Johnson, and the Valleylab and Radionics divisions of Tyco International Ltd. In
addition, various of the Integra NeuroSciences product lines compete with
smaller specialized companies or larger companies that do not otherwise focus on
neurosurgery. The products of Integra LifeSciences face diverse and broad
competition, depending on the market addressed by the product. In addition,
certain companies are known to be competing particularly in the area of skin
substitution or regeneration, including Organogenesis and Advanced Tissue
Sciences. Finally, in certain cases our products compete primarily against
medical practices that treat a condition without using a medical device, rather
than any particular product (such as autograft tissue as a substitute for
INTEGRA(R) Dermal Regeneration Template). Depending on the product line, we
compete on the basis of our products' features, strength of our sales
organization or marketing partner, sophistication of our technology, and cost
effectiveness of our solution to the customer's medical requirements.
EMPLOYEES
At December 31, 2001, we had approximately 600 permanent employees engaged in
production and production support (including warehouse, engineering, and
facilities personnel), quality assurance/quality control, research and
development, regulatory and clinical affairs, sales/marketing and administration
and finance. None of our current employees are subject to a collective
bargaining agreement.
Many of our employees, including those holding senior positions in our
regulatory, operations, research and development, and sales and marketing
departments, were recruited from large pharmaceutical or medical technology
companies. Our neurospecialists and regional sales managers attend in-depth
product training meetings throughout the year, and our clinical development team
consists of medical professionals who specialize in specific therapeutic areas
that our Integra NeuroSciences products serve. We believe that our clinical
development team differentiates us from our competition, as their knowledge and
experience as medical professionals allows them to more effectively educate and
train both our neurospecialists and the customers who use our products. This
team is especially valuable in communicating the clinical benefits of new
products.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have made statements in this report, including statements under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business", which constitute forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward-looking statements are subject to a number
of risks, uncertainties and assumptions about Integra, including, among other
things:
o general economic and business conditions, both nationally and in our
international markets;
o our expectations and estimates concerning future financial performance,
financing plans and the impact of competition;
o anticipated trends in our business;
o existing and future regulations affecting our business;
o our ability to obtain additional debt and equity financing to fund capital
expenditures and working capital requirements and acquisitions;
o our ability to complete acquisitions and integrate operations
post-acquisition; and
o other risk factors described in the section entitled "Risk Factors" in this
report.
You can identify these forward-looking statements by forward-looking words such
as believe, may, could, will, estimate, continue, anticipate, intend, seek,
plan, expect, should, would and similar expressions in this report.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks and uncertainties, the forward-looking events and
circumstances discussed in this report may not occur and actual results could
differ materially from those anticipated or implied in the forward-looking
statements.
15
RISK FACTORS
We believe that the following important factors, among others, have affected,
and in the future could affect, our business, financial condition, and results
of operations and could cause the our future results to differ materially from
our historical results and those expressed in any forward-looking statements
made by us. Such factors are not meant to represent an exhaustive list of the
risks and uncertainties associated with our business. These and other factors
may affect our future results and our stock price, particularly on a quarterly
basis.
WE HAVE A HISTORY OF INCURRING OPERATING LOSSES.
To date, we have experienced significant operating losses in funding the
research, development, manufacturing and marketing of our products and may
continue to incur operating losses. As of December 31, 2001, we had an
accumulated deficit of $79.6 million. The year 2001 was the first full year that
we experienced profitability. Profitability in the future depends in part upon
our ability, either independently or in collaboration with others, to
successfully manufacture and market our products and services. We cannot assure
you that we can sustain profitability on an ongoing basis.
OUR OPERATING RESULTS MAY FLUCTUATE.
Our operating results may fluctuate from time to time, which could affect the
value of your shares. Our operating results have fluctuated in the past and can
be expected to fluctuate from time to time in the future. Some of the factors
that may cause these fluctuations include:
o the impact of acquisitions;
o the timing of significant customer orders;
o market acceptance of our existing products, as well as products in
development;
o the timing of regulatory approvals;
o the timing of payments received and the recognition of those payments as
revenue under collaborative arrangements and strategic alliances;
o our ability to manufacture our products efficiently; and
o the timing of our research and development expenditures.
WE MAY BE UNABLE TO RAISE ADDITIONAL FINANCING NECESSARY TO CONDUCT OUR
BUSINESS, MAKE PAYMENTS WHEN DUE OR REFINANCE OUR DEBT.
As of December 31, 2001, we had cash, cash equivalents and investments of
approximately $131.0 million and short-term debt of approximately $3.6 million.
However, we may need to raise additional funds in the future in order to
implement our business plan, to conduct research and development, to fund
marketing programs or to acquire complementary businesses, technologies or
services. If we raise additional funds by issuing equity securities, you may
experience significant dilution of your ownership interest, and these securities
may have rights senior to those of the holders of our preferred or common stock.
If we cannot obtain additional financing when required on acceptable terms, we
may be unable to fund our expansion, develop or enhance our products and
services, take advantage of business opportunities or respond to competitive
pressures.
THE INDUSTRY AND MARKET SEGMENTS IN WHICH WE OPERATE ARE HIGHLY COMPETITIVE, AND
WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY WITH OTHER COMPANIES.
In general, the medical technology industry is characterized by intense
competition. We compete with established pharmaceutical and medical technology
companies. Competition also comes from early stage companies that have
alternative technological solutions for our primary clinical targets, as well as
universities, research institutions and other non-profit entities. Many of our
competitors have access to greater financial, technical, research and
development, marketing, manufacturing, sales, distribution services and other
resources than we do. Further, our competitors may be more effective at
implementing their technologies to develop commercial products.
Our competitive position will depend on our ability to achieve market acceptance
for our products, implement production and marketing plans, secure regulatory
approval for products under development, obtain patent protection
16
and secure adequate capital resources. We may need to develop new applications
for our products to remain competitive. Technological advances by one or more of
our current or future competitors could render our present or future products
obsolete or uneconomical. Our future success will depend upon our ability to
compete effectively against current technology as well as to respond effectively
to technological advances. We cannot assure you that competitive pressures will
not adversely affect our profitability.
The largest competitors of Integra NeuroSciences in the neurosurgery markets are
the PS Medical division of Medtronic, Inc., the Codman division of Johnson &
Johnson, and the Valleylab and Radionics divisions of Tyco International Ltd. In
addition, various of the Integra NeuroSciences product lines compete with
smaller specialized companies or larger companies that do not otherwise focus on
neurosurgery. The products of Integra LifeSciences face diverse and broad
competition, depending on the market addressed by the product. In addition,
certain companies are known to be competing in the area of skin substitution or
regeneration, including Organogenesis and Advanced Tissue Sciences. Finally, in
certain cases our products compete primarily against medical practices that
treat a condition without using a device, rather than any particular product,
such as autograft tissue as a substitute for INTEGRA(R) Dermal Regeneration
Template.
OUR CURRENT STRATEGY INVOLVES GROWTH THROUGH ACQUISITIONS, WHICH REQUIRES US TO
INCUR SUBSTANTIAL COSTS AND POTENTIAL LIABILITIES FOR WHICH WE MAY NEVER REALIZE
THE ANTICIPATED BENEFITS.
In addition to internal growth, our current strategy involves growth through
acquisitions. Since the beginning of 2000, we have acquired five different
businesses for a total of $29.3 million.
We cannot assure you that we will be able to continue to implement our growth
strategy, or that this strategy will ultimately be successful. A significant
portion of our growth in revenues has resulted from, and is expected to continue
to result from, the acquisition of businesses complementary to our own. We
engage in evaluations of potential acquisitions and are in various stages of
discussion regarding possible acquisitions, certain of which, if consummated,
could be significant to us. Any potential acquisitions may result in significant
transaction expenses, increased interest and amortization expense, increased
depreciation expense and increased operating expense, any of which could have a
material adverse effect on our operating results. As we grow by acquisitions, we
must be able to integrate and manage the new businesses to realize economies of
scale and control costs. In addition, acquisitions involve other risks,
including diversion of management resources otherwise available for ongoing
development of our business and risks associated with entering new markets with
which our marketing and sales force has limited experience or where experienced
distribution alliances are not available. Our future profitability will depend
in part upon our ability to further develop our resources to adapt to the
particulars of those new products or business areas and to identify and enter
into satisfactory distribution networks. We may not be able to identify suitable
acquisition candidates in the future, obtain acceptable financing or consummate
any future acquisitions. If we cannot integrate acquired operations, manage the
cost of providing our products or price our products appropriately, our
profitability would suffer. In addition, as a result of our acquisitions of
other healthcare businesses, we may be subject to the risk of unanticipated
business uncertainties or legal liabilities relating to those acquired
businesses for which the sellers of the acquired businesses may not indemnify
us. Future acquisitions may also result in potentially dilutive issuances of
equity securities.
TO MARKET OUR PRODUCTS UNDER DEVELOPMENT WE WILL FIRST NEED TO OBTAIN REGULATORY
APPROVAL. FURTHER, IF WE FAIL TO COMPLY WITH THE EXTENSIVE GOVERNMENTAL
REGULATIONS THAT AFFECT OUR BUSINESS, WE COULD BE SUBJECT TO PENALTIES AND COULD
BE PRECLUDED FROM MARKETING OUR PRODUCTS.
Our research and development activities and the manufacturing, labeling,
distribution and marketing of our existing and future products are subject to
regulation by numerous governmental agencies in the United States and in other
countries. The FDA and comparable agencies in other countries impose mandatory
procedures and standards for the conduct of clinical trials and the production
and marketing of products for diagnostic and human therapeutic use.
Our products under development are subject to FDA approval or clearance prior to
marketing for commercial use. The process of obtaining necessary FDA approvals
or clearances can take years and is expensive and full of uncertainties. Our
inability to obtain required regulatory approval on a timely or acceptable basis
could harm our business. Further, approval or clearance may place substantial
restrictions on the indications for which the product may be marketed or to whom
it may be marketed. To gain approval for the use of a product for clinical
indications
17
other than those for which the product was initially approved or cleared or for
significant changes to the product, further studies, including clinical trials
and FDA approvals, may be required. In addition, for products with an approved
pre-market approval application, the FDA requires post-approval reporting and
may require post-approval surveillance programs to monitor the product's safety
and effectiveness. Results of post-approval programs may limit or expand the
further marketing of the product.
We believe that the most significant risk of our recent applications to the FDA
relates to the regulatory classification of certain of our new products or
proposed new uses for existing products. In the filing of each application, we
make a legal judgment about the appropriate form and content of the application.
If the FDA disagrees with our judgment in any particular case and, for example,
requires us to file a pre-market approval application rather than allowing us to
market for approved uses while we seek broader approvals or requires extensive
additional clinical data, the time and expense required to obtain the required
approval might be significantly increased or might not be granted. For example,
we have filed, and expect to file, a series of post-approval supplements for the
INTEGRA(R) Dermal Regeneration Template seeking approval to promote the product
for new uses. It is possible that the FDA will require additional clinical
information to support these applications or that the FDA will reject our
applications entirely.
Approved products are subject to continuing FDA requirements relating to quality
control and quality assurance, maintenance of records, reporting of adverse
events, and documentation, and labeling and promotion of medical devices.
The FDA and foreign regulatory authorities require that our products be
manufactured according to rigorous standards. These regulatory requirements may
significantly increase our production or purchasing costs and may even prevent
us from making or obtaining our products in amounts sufficient to meet market
demand. If we, or a third-party manufacturer, change our approved manufacturing
process, the FDA may require a new approval before that process may be used.
Failure to develop our manufacturing capability may mean that even if we develop
promising new products, we may not be able to produce them profitably, as a
result of delays and additional capital investment costs. Manufacturing
facilities, both international and domestic, are also subject to inspections by
or under the authority of the FDA. In addition, failure to comply with
applicable regulatory requirements could subject us to enforcement action,
including product seizures, recalls, withdrawal of clearances or approvals,
restrictions on or injunctions against marketing our product or products based
on our technology, and civil and criminal penalties. We have voluntarily
recalled various products in the last four years, but none of our recalls have
resulted in significant expense. There have been no involuntary recalls of our
products. See "Business -- Government Regulation".
CERTAIN OF OUR PRODUCTS CONTAIN MATERIALS DERIVED FROM ANIMAL SOURCES, AND MAY
AS A RESULT BECOME SUBJECT TO ADDITIONAL REGULATION.
Certain of our products, including the DuraGen(R) Dural Graft Matrix and the
INTEGRA(R) Dermal Regeneration Template, contain material derived from animal
tissue. Products, including food as well as pharmaceuticals and medical devices,
that contain materials derived from animal sources are increasingly subject to
scrutiny in the press and by regulatory authorities. The authorities are
concerned about the potential for the transmission of disease from animals to
humans via those materials. This public scrutiny has been particularly acute in
Japan and Western Europe with respect to products derived from cattle, because
of concern that materials infected with the agent that causes bovine spongiform
encephalopathy, otherwise known as BSE or mad cow disease, may, if ingested or
implanted, cause a variant of the human Creutzfeldt-Jakob Disease, an ultimately
fatal disease with no known cure.
We take great care to provide that our products are safe, and free of agents
that can cause disease. In particular, the collagen used in the manufacture of
our products is derived only from the achilles tendon of cattle from the United
States, where no cases of BSE have been reported. Scientists and regulatory
authorities classify the achilles tendon as having a negligible risk of
containing the agent that causes BSE (an improperly folded protein known as a
prion) compared with other parts of the body. Additionally, we use processes in
the manufacturing of our products that are believed to inactivate prions.
Nevertheless, products that contain materials derived from animals, including
our products, may become subject to additional regulation, or even be banned in
certain countries, because of concern over the potential for prion transmission.
Accordingly, new regulation, or a ban of our products, could have a significant
adverse effect on our current business or our ability to expand our business.
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LACK OF MARKET ACCEPTANCE FOR OUR PRODUCTS OR MARKET PREFERENCE FOR TECHNOLOGIES
WHICH COMPETE WITH OUR PRODUCTS WOULD REDUCE OUR REVENUES AND PROFITABILITY.
We cannot be certain that our current products, or any other products that we
develop or market, will achieve or maintain market acceptance. Certain of the
medical indications that can be treated by our devices can also be treated by
other medical devices or by medical practices that do not include a device. The
medical community widely accepts many alternative treatments, and certain of
these other treatments have a long history of use. For example, the use of
autograft tissue is a well-established means for repairing the dermis, and it
may interfere with the widespread acceptance in the market for INTEGRA(R) Dermal
Regeneration Template.
We cannot be certain that our devices and procedures will be able to replace
those established treatments or that either physicians or the medical community
in general will accept and utilize our devices or any other medical products
that we may develop. For example, we cannot be certain that the NeuraGen(TM)
Nerve Guide will be accepted by the medical community over conventional
microsurgical techniques for connecting severed peripheral nerves.
In addition, our future success depends, in part, on our ability to develop
additional products. Even if we determine that a product candidate has medical
benefits, the cost of commercializing that product candidate may be too high to
justify development. Competitors may develop products that are more effective,
cost less, or are ready for commercial introduction before our products. If we
are unable to develop additional, commercially viable products, our future
prospects could be adversely affected.
Market acceptance of our products depends on many factors, including our ability
to convince prospective collaborators and customers that our technology is an
attractive alternative to other technologies, to manufacture products in
sufficient quantities and at an acceptable cost, and to supply and service
sufficient quantities of our products directly or through our strategic
alliances. In addition, limited funding available for product and technology
acquisitions by our customers, as well as internal obstacles to customer
approvals of purchases of our products, could harm our technology. The industry
is subject to rapid and continuous change arising from, among other things,
consolidation and technological improvements. One or more of these factors may
vary unpredictably, which could materially adversely affect our competitive
position. We may not be able to adjust our contemplated plan of development to
meet changing market demands.
OUR BUSINESS DEPENDS SIGNIFICANTLY ON KEY RELATIONSHIPS WITH THIRD PARTIES WHICH
WE MAY NOT BE ABLE TO ESTABLISH AND MAINTAIN.
Our revenue stream and our business strategy depend in part on our entering into
and maintaining collaborative or alliance agreements with third parties
concerning product marketing as well as research and development programs. Our
most important strategic alliances are our agreement with Ethicon, Inc., a
division of Johnson & Johnson, relating to INTEGRA(R) Dermal Regeneration
Template, and our agreement with the Genetics Institute division of Wyeth for
the development of collagen matrices to be used in conjunction with Genetics
Institute's recombinant bone protein, a protein that stimulates the growth of
bone in humans. Termination of either of these alliances would have an adverse
effect on our revenues and would reduce our expectations for the growth of our
Integra LifeSciences division.
Our ability to enter into agreements with collaborators depends in part on
convincing them that our technology can help achieve and accelerate their goals
and strategies. This may require substantial time, effort and expense on our
part with no guarantee that a strategic relationship will result. We may not be
able to establish or maintain these relationships on commercially acceptable
terms. Our future agreements may not ultimately be successful. Even if we enter
into collaborative or alliance agreements, our collaborators could terminate
these agreements, or those agreements could expire before meaningful
developmental milestones are reached. The termination or expiration of any of
these relationships could have a material adverse effect on our business.
Much of the revenue that we may receive under these collaborations will depend
upon our collaborators' ability to successfully introduce, market and sell new
products derived from our products. Our success depends in part upon the
performance by these collaborators of their responsibilities under these
agreements.
19
Some collaborators may not perform their obligations as we expect. Some of the
companies we currently have alliances with or are targeting as potential allies
offer products competitive with our products or may develop competitive
production technologies or competitive products outside of their collaborations
with us that could have a material adverse effect on our competitive position.
In addition, our role in the collaborations is mostly limited to the production
aspects.
As a result, we may also be dependent on collaborators for other aspects of the
development, preclinical and clinical testing, regulatory approval, sales,
marketing and distribution of our products. If our current or future
collaborators do not effectively market our products or develop additional
products based on our technology, our sales and other revenues could
significantly be reduced.
Finally, we have received and may continue to receive payments from
collaborators that may not be immediately recognized as revenue and therefore
may not contribute to reported profits until further conditions are satisfied.
OUR INTELLECTUAL PROPERTY RIGHTS MAY NOT PROVIDE MEANINGFUL COMMERCIAL
PROTECTION FOR OUR PRODUCTS, WHICH COULD ENABLE THIRD PARTIES TO USE OUR
TECHNOLOGY OR VERY SIMILAR TECHNOLOGY AND COULD REDUCE OUR ABILITY TO COMPETE IN
THE MARKET.
Our ability to compete effectively will depend, in part, on our ability to
maintain the proprietary nature of our technologies and manufacturing processes,
which includes the ability to obtain, protect and enforce patents on our
technology and to protect our trade secrets. We own or have licensed patents
that cover significant aspects of many of our product lines. However, you should
not rely on our patents to provide us with any significant competitive
advantage. Others may challenge our patents and, as a result, our patents could
be narrowed, invalidated or rendered unenforceable. Competitors may develop
products similar to ours which our patents do not cover. In addition, our
current and future patent applications may not result in the issuance of patents
in the United States or foreign countries. Further, there is a substantial
backlog of patent applications at the U.S. Patent and Trademark Office, and the
approval or rejection of patent applications may take several years.
OUR COMPETITIVE POSITION IS DEPENDENT IN PART UPON UNPATENTED TRADE SECRETS,
WHICH WE MAY NOT BE ABLE TO PROTECT.
Our competitive position is also dependent upon unpatented trade secrets. Trade
secrets are difficult to protect. We cannot assure you that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to our trade secrets, that those trade
secrets will not be disclosed, or that we can effectively protect our rights to
unpatented trade secrets.
In an effort to protect our trade secrets, we have a policy of requiring our
employees, consultants and advisors to execute proprietary information and
invention assignment agreements upon commencement of employment or consulting
relationships with us. These agreements provide that all confidential
information developed or made known to the individual during the course of their
relationship with us must be kept confidential, except in specified
circumstances. We cannot assure you, however, that these agreements will provide
meaningful protection for our trade secrets or other proprietary information in
the event of the unauthorized use or disclosure of confidential information.
OUR SUCCESS WILL DEPEND PARTLY ON OUR ABILITY TO OPERATE WITHOUT INFRINGING OR
MISAPPROPRIATING THE PROPRIETARY RIGHTS OF OTHERS.
We may be sued for infringing the intellectual property rights of others. In
addition, we may find it necessary, if threatened, to initiate a lawsuit seeking
a declaration from a court that we do not infringe the proprietary rights of
others or that these rights are invalid or unenforceable. If we do not prevail
in any litigation, in addition to any damages we might have to pay, we would be
required to stop the infringing activity or obtain a license. Any required
license may not be available to us on acceptable terms, or at all. In addition,
some licenses may be nonexclusive, and, therefore, our competitors may have
access to the same technology licensed to us. If we fail to obtain a required
license or are unable to design around a patent, we may be unable to sell some
of our products, which could have a material adverse effect on our revenues and
profitability.
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IT MAY BE DIFFICULT TO REPLACE SOME OF OUR SUPPLIERS.
Outside vendors, some of whom are sole-source suppliers, provide key components
and raw materials used in the manufacture of our products. Although we believe
that alternative sources for these components and raw materials are available,
any supply interruption in a limited or sole source component or raw material
could harm our ability to manufacture our products until a new source of supply
is identified and qualified. In addition, an uncorrected defect or supplier's
variation in a component or raw material, either unknown to us or incompatible
with our manufacturing process, could harm our ability to manufacture products.
We may not be able to find a sufficient alternative supplier in a reasonable
time period, or on commercially reasonable terms, if at all, and our ability to
produce and supply our products could be impaired. We believe that these factors
are most likely to affect our Camino(R) and Ventrix(R) lines of intra-cranial
pressure monitors and catheters, which are assembled using many different
electronic parts from numerous suppliers. While we are not dependent on
sole-source suppliers, if we were suddenly unable to purchase products from one
or more of these companies, we would need time to qualify a replacement, and the
production of any affected products could be disrupted. While it is our policy
to maintain sufficient inventory of components so that our production will not
be significantly disrupted even if a particular component or material is not
available for a period of time, we remain at risk that we will not be able to
qualify new components or materials quickly enough to prevent a disruption if
one or more of our suppliers ceases production of important components or
materials.
IF ANY OF OUR MANUFACTURING FACILITIES WERE DAMAGED AND/OR OUR MANUFACTURING
PROCESSES INTERRUPTED, WE COULD EXPERIENCE LOST REVENUES AND OUR BUSINESS COULD
BE SERIOUSLY HARMED.
We manufacture our products in a limited number of facilities. Damage to our
manufacturing, development or research facilities due to fire, natural disaster,
power loss, communications failure, unauthorized entry or other events could
cause us to cease development and manufacturing of some or all of our products.
In particular, our San Diego, California facility that manufactures our
Camino(R) and Ventrix(R) product line is as susceptible to earthquake damage and
power losses from electrical shortages as are other businesses in the Southern
California area. Our silicone manufacturing plant in Anasco, Puerto Rico is
vulnerable to hurricane damage. Although we maintain property damage and
business interruption insurance coverage on these facilities, we may not be able
to renew or obtain such insurance in the future on acceptable terms with
adequate coverage or at reasonable costs.
WE MAY BE INVOLVED IN LAWSUITS TO PROTECT OR ENFORCE OUR INTELLECTUAL PROPERTY
RIGHTS, WHICH MAY BE EXPENSIVE.
In order to protect or enforce our intellectual property rights, we may have to
initiate legal proceedings against third parties, such as infringement suits or
interference proceedings. Intellectual property litigation is costly, and, even
if we prevail, the cost of that litigation could affect our profitability. In
addition, litigation is time consuming and could divert management attention and
resources away from our business. We may also provoke these third parties to
assert claims against us.
WE ARE EXPOSED TO A VARIETY OF RISKS RELATING TO OUR INTERNATIONAL SALES AND
OPERATIONS, INCLUDING FLUCTUATIONS IN EXCHANGE RATES, LOCAL ECONOMIC CONDITIONS,
AND DELAYS IN COLLECTION OF ACCOUNTS RECEIVABLE.
We generate significant sales outside the United States, a substantial portion
of which are U.S. dollar-denominated transactions conducted with customers who
generate revenue in currencies other than the U.S. dollar. As a result, currency
fluctuations between the U.S. dollar and the currencies in which those customers
do business may have an impact on the demand for our products in foreign
countries where the U.S. dollar has increased compared to the local currency. We
cannot predict the effects of exchange rate fluctuations upon our future
operating results because of the number of currencies involved, the variability
of currency exposure and the potential volatility of currency exchange rates.
Because we have operating subsidiaries based in Europe and we generate certain
revenues and incur certain operating expenses in British Pounds and the Euro, we
will experience currency exchange risk with respect to those foreign currency
denominated revenues or expenses. Although product sales in these currencies
amounted to approximately 8% of our total product sales for the year ended
December 31, 2001, we expect that the amount of sales denominated in the British
Pound and Euro will increase as a percentage of total sales because of recent
21
acquisitions of European companies and our decision to sell directly, rather
than through distributors, in major European countries.
Our sales to foreign markets may be affected by local economic conditions.
Relationships with customers and effective terms of sale frequently vary by
country, often with longer-term receivables than are typical in the United
States.
CHANGES IN THE HEALTH CARE INDUSTRY MAY REQUIRE US TO DECREASE THE SELLING PRICE
FOR OUR PRODUCTS OR COULD RESULT IN A REDUCTION IN THE SIZE OF THE MARKET FOR
OUR PRODUCTS, AND LIMIT THE MEANS BY WHICH WE MAY DISCOUNT OUR PRODUCTS, EACH OF
WHICH COULD HAVE A NEGATIVE IMPACT ON OUR FINANCIAL PERFORMANCE.
Trends toward managed care, health care cost containment, and other changes in
government and private sector initiatives in the United States and other
countries in which we do business are placing increased emphasis on the delivery
of more cost-effective medical therapies that could adversely affect the sale
and/or the prices of our products. For example:
o major third-party payors of hospital services, including Medicare, Medicaid
and private health care insurers, have substantially revised their payment
methodologies, which has resulted in stricter standards for reimbursement
of hospital charges for certain medical procedures;
o Medicare, Medicaid and private health care insurer cutbacks could create
downward price pressure;
o numerous legislative proposals have been considered that would result in
major reforms in the U.S. health care system that could have an adverse
effect on our business;
o there has been a consolidation among health care facilities and purchasers
of medical devices in the United States who prefer to limit the number of
suppliers from whom they purchase medical products, and these entities may
decide to stop purchasing our products or demand discounts on our prices;
o there is economic pressure to contain health care costs in international
markets;
o there are proposed and existing laws and regulations in domestic and
international markets regulating pricing and profitability of companies in
the health care industry; and
o there have been initiatives by third-party payors to challenge the prices
charged for medical products which could affect our ability to sell
products on a competitive basis.
Both the pressure to reduce prices for our products in response to these trends
and the decrease in the size of the market as a result of these trends could
adversely affect our levels of revenues and profitability of sales.
In addition, there are laws and regulations that regulate the means by which
companies in the health care industry may compete by discounting the prices of
their products. Although we exercise care in structuring our customer discount
arrangements to comply with those laws and regulations, we cannot assure you
that:
o government officials charged with responsibility for enforcing those laws
will not assert that these customer discount arrangements are in violation of
those laws or regulations, or
o government regulators or courts will interpret those laws or regulations in a
manner consistent with our interpretation.
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WE MAY HAVE SIGNIFICANT PRODUCT LIABILITY EXPOSURE, AND OUR INSURANCE MAY NOT
COVER ALL POTENTIAL CLAIMS.
We face an inherent business risk of exposure to product liability and other
claims in the event that our technologies or products are alleged to have caused
harm. We may not be able to obtain insurance for the potential liability on
acceptable terms with adequate coverage or at reasonable costs. Any potential
product liability claims could exceed the amount of our insurance coverage or
may be excluded from coverage under the terms of the policy. Our insurance may
not be renewed at a cost and level of coverage comparable to that then in
effect.
WE ARE SUBJECT TO OTHER REGULATORY REQUIREMENTS RELATING TO OCCUPATIONAL HEALTH
AND SAFETY AND THE USE OF HAZARDOUS SUBSTANCES WHICH MAY IMPOSE SIGNIFICANT
COMPLIANCE COSTS ON US.
We are subject to regulation under federal and state laws regarding occupational
health and safety, laboratory practices, and the use, handling and disposal of
toxic or hazardous substances. Our research, development and manufacturing
processes involve the controlled use of certain hazardous materials. Although we
believe that our safety procedures for handling and disposing of those materials
comply with the standards prescribed by the applicable laws and regulations, the
risk of accidental contamination or injury from these materials cannot be
completely eliminated. In the event of such an accident, we could be held liable
for any damages that result and any related liability could exceed the limits or
fall outside the coverage of our insurance and could exceed our resources. We
may not be able to maintain insurance on acceptable terms or at all. We may
incur significant costs to comply with environmental laws and regulations in the
future. We may also be subject to other present and possible future local,
state, federal and foreign regulations.
THE LOSS OF KEY PERSONNEL COULD HARM OUR BUSINESS.
We believe our success depends on the contributions of a number of our key
personnel, including Stuart M. Essig, our President and Chief Executive Officer.
If we lose the services of key personnel, those losses could materially harm our
business. We maintain key person life insurance on Mr. Essig. In addition,
recruiting and retaining qualified personnel will be critical to our success.
There is a shortage in the industry of qualified management and scientific
personnel, and competition for these individuals is intense. We cannot assure
you that we will be able to attract additional personnel and retain existing
personnel.
OUR STOCK PRICE MAY CONTINUE TO BE HIGHLY VOLATILE AND YOU MAY NOT BE ABLE TO
RESELL YOUR SHARES AT OR ABOVE THE PRICE YOU PAID FOR THEM.
The stock market in general, and the stock prices of medical device companies,
biotechnology companies and other technology-based companies in particular, have
experienced significant volatility that often has been unrelated to the
operating performance of and beyond the control of any specific public
companies. The market price of our common stock has fluctuated widely in the
past and is likely to continue to fluctuate in the future. See Market for
Registrant's Common Equity and Related Stockholder Matters. Factors that may
have a significant impact on the market price of our common stock include:
o our actual financial results differing from guidance provided by management;
o our actual financial results differing from that expected by securities
analysts;
o future announcements concerning us or our competitors, including the
announcement of acquisitions;
o changes in the prospects of our business partners or suppliers;
o developments regarding our patents or other proprietary rights or those of
our competitors;
o quality deficiencies in our products;
o competitive developments, including technological innovations by us or our
competitors;
o government regulation, including the FDA's review of our products and
developments;
o changes in recommendations of securities analysts and rumors that may be
circulated about us or our competitors;
o public perception of risks associated with our operations;
o conditions or trends in the medical device and biotechnology industries;
o additions or departures of key personnel; and
23
o sales of our common stock.
Any of these factors could immediately, significantly and adversely affect the
trading price of our common stock.
OUR MAJOR STOCKHOLDERS COULD MAKE DECISIONS ADVERSE TO YOUR INTERESTS.
Our directors and executive officers and affiliates of certain directors own or
control more than one-third of our outstanding voting securities and would
generally have significant influence over the election of all directors, the
outcome of corporate actions requiring stockholder approval, and otherwise
influence the business. The ability of the board of directors to issue preferred
stock, while providing flexibility in connection with financing, acquisitions
and other corporate purposes, could have the effect of discouraging, deferring
or preventing a change in control or an unsolicited acquisition proposal, since
the issuance of preferred stock could be used to dilute the share ownership of a
person or entity seeking to obtain control of us. This significant influence
could preclude any unsolicited acquisition of Integra and consequently adversely
affect the market price of the common stock. Furthermore, we are subject to
Section 203 of the Delaware General Corporation Law, which could have the effect
of delaying or preventing a change of control.
ITEM 2. PROPERTIES
Our principal executive offices are located in Plainsboro, New Jersey. Principal
manufacturing and research facilities are located in Plainsboro, New Jersey, San
Diego, California, Anasco, Puerto Rico, Andover, England and Mielkendorf,
Germany. Our primary distribution centers are located in Cranbury, New Jersey
and Andover, England. In addition, we lease several smaller facilities to
support additional administrative, assembly, and distribution operations. Our
total office manufacturing and research space approximates 190,000 square feet
with lease payments of approximately $130,000 per month. All of our
manufacturing facilities make at least one of our Integra NeuroSciences
products, and our Integra LifeSciences products are manufactured in the
Plainsboro, Anasco and Andover facilities. All of our facilities are leased. The
lease agreement for our manufacturing facility in San Diego expires in June
2003. We believe that we will be able to renew this lease on acceptable terms.
All of our manufacturing and distribution facilities are registered with the
FDA. Our facilities are subject to FDA inspection to assure compliance with
Quality System Regulations. We believe that our manufacturing facilities are in
substantial compliance with Quality System Regulations, suitable for their
intended purposes and have capacities adequate for current and projected needs
for existing products. Some capacity of the plants is being converted, with any
needed modification, to meet the current and projected requirements of existing
and future products.
ITEM 3. LEGAL PROCEEDINGS
In July 1996, we filed a patent infringement lawsuit in the United States
District Court for the Southern District of California (the "Court") against
Merck KGaA, a German corporation, Scripps Research Institute, a California
nonprofit corporation, and David A. Cheresh, Ph.D., a research scientist with
Scripps, seeking damages and injunctive relief. The complaint charged, among
other things, that the defendant Merck KGaA willfully and deliberately induced,
and continues to willfully and deliberately induce, defendants Scripps Research
Institute and Dr. Cheresh to infringe certain of our patents. These patents are
part of a group of patents granted to The Burnham Institute and licensed by us
that are based on the interaction between a family of cell surface proteins
called integrins and the arginine-glycine-aspartic acid ("RGD") peptide sequence
found in many extracellular matrix proteins. The defendants filed a countersuit
asking for an award of defendants' reasonable attorney fees.
This case went to trial in February 2000, and in March 2000, a jury returned a
unanimous verdict for Integra, finding that Merck KGaA had willfully infringed
and induced the infringement of our patents, and awarded us $15,000,000 in
damages. The Court dismissed Scripps and Dr. Cheresh from the case.
In October, 2000, the Court entered judgment in Integra's favor and against
Merck KGaA in the case. In entering the judgment, the Court also granted us
pre-judgment interest of approximately $1,350,000, bringing the total amount to
approximately $16,350,000, plus post-judgment interest. Merck KGaA filed various
post-trial motions requesting a
24
judgment as a matter of law notwithstanding the verdict or a new trial, in each
case regarding infringement, invalidity and damages. In September 2001, the
Court entered orders in favor of Integra and against Merck KGaA on the final
post-judgment motions in the case, and denied Merck KGaA's motions for judgment
as a matter of law and for a new trial.
Merck KGaA and Integra have each appealed various decisions of the Court. We
expect the court of appeals to hear arguments in the appeal during 2002 and to
issue its opinion during 2003. Post-judgment interest continues to accrue at the
rate of approximately $20,000 per week. Integra has not recorded any gain in
connection with this favorable judgment.
We are also subject to other claims and lawsuits in the ordinary course of our
business, including claims by employees or former employees and with respect to
our products. In our opinion, these other claims are either adequately covered
by insurance or otherwise indemnified, and are not expected, individually or in
the aggregate, to result in a material adverse effect on our financial
condition. Our financial statements do not reflect any material amounts related
to possible unfavorable outcomes of the matters above or others. However, it is
possible that our results of operations, financial position and cash flows in a
particular period could be materially affected by these contingencies.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
ADDITIONAL INFORMATION:
The following information is furnished in this Part I pursuant to Instruction 3
to Item 401(b) of Regulation S-K.
EXECUTIVE OFFICERS
The executive officers of Integra are elected annually and serve at the
discretion of the Board of Directors. The only family relationship between any
of the executive officers and our Board of Directors is that Mr. Holtz is the
nephew of Richard E. Caruso, Ph.D., who is Chairman of the Board of Directors.
The following information indicates the position and age of our executive
officers as of the date of this report and their previous business experience.
NAME AGE POSITION
Stuart M. Essig ................. 40 President, Chief Executive Officer
and Director
John B. Henneman, III............ 40 Senior Vice President, Chief
Administrative Officer and Secretary
David B. Holtz................... 35 Senior Vice President, Finance
and Treasurer
Donald R. Nociolo ............... 39 Senior Vice President, Operations
Judith E. O'Grady................ 51 Senior Vice President, Regulatory,
Quality Assurance and Clinical Affairs
Michael D. Pierschbacher, Ph.D... 50 Senior Vice President Research and
Development, Director of the Corporate
Research Center
Deborah A. Leonetti.............. 46 Vice President, Marketing
Robert D. Paltridge ............. 44 Vice President, Sales
25
STUART M. ESSIG has served as President and Chief Executive Officer and a
director of Integra since December 1997. Before joining Integra, Mr. Essig
supervised the medical technology practice at Goldman, Sachs & Co. as a managing
director. Mr. Essig had ten years of broad health care experience at Goldman
Sachs serving as a senior merger and acquisitions advisor to a broad range of
domestic and international medical technology, pharmaceutical and biotechnology
clients. Mr. Essig received an A.B. degree from the Woodrow Wilson School of
Public and International Affairs at Princeton University and an MBA and a Ph.D.
degree in Financial Economics from the University of Chicago, Graduate School of
Business. Mr. Essig also serves on the Board of Directors of Vital Signs
Incorporated and St. Jude Medical Corporation.
JOHN B. HENNEMAN, III is Integra's Senior Vice President, Chief Administrative
Officer and Secretary, and is responsible for the law department, regulatory
affairs, business development, human resources and investor relations. Mr.
Henneman was our General Counsel from September 1998 until September 2000. Prior
to joining Integra in August 1998, Mr. Henneman served Neuromedical Systems,
Inc., a public company developer and manufacturer of in vitro diagnostic
equipment, in various capacities for more than four years. From 1994 until June
1997, Mr. Henneman was Vice President of Corporate Development, General Counsel
and Secretary. From June 1997 through November 1997, he served in the additional
capacity of interim Co-Chief Executive Officer and from December 1997 to August
1998 Mr. Henneman was Executive Vice President, US Operations, and Chief Legal
Officer. In March 1999, Neuromedical Systems, Inc. filed a petition under
Chapter 11 of the federal bankruptcy laws. Mr. Henneman practiced law in the
Corporate Department of Latham & Watkins (Chicago, Illinois) from 1986 to 1994.
Mr. Henneman received his A.B. (Politics) from Princeton University and his J.D.
from the University of Michigan Law School.
DAVID B. HOLTZ joined Integra as Controller in 1993 and has served as Vice
President, Finance and Treasurer since March 1997 and was promoted to Senior
Vice President, Finance and Treasurer in February 2001. His responsibilities
include managing all financial reporting, accounting and information systems
functions. Before joining Integra, Mr. Holtz was an associate with Coopers &
Lybrand, L.L.P. in Philadelphia and Cono Leasing Corporation, a private leasing
company. He received a BS degree in Business Administration from Susquehanna
University and has been certified as a public accountant.
DONALD R. NOCIOLO joined Integra as Director of Manufacturing in 1994 and has
served as Vice President, Operations since March 1997 and was promoted to Senior
Vice President of Operations in May 2000. His responsibilities include managing
all manufacturing and distribution operations in the United States. Mr. Nociolo
has over fifteen years experience working in engineering and manufacturing
management in the medical device industry. Six of those years were spent working
at Ethicon, Inc., a division of Johnson & Johnson. Mr. Nociolo received a BS
degree in Industrial Engineering from Rutgers University and an MBA in
Industrial Management from Fairleigh Dickinson University.
JUDITH E. O'GRADY Senior Vice President of Regulatory Affairs, Quality Assurance
and Clinical Affairs, has served Integra since 1985. Ms. O'Grady has worked in
the areas of medical devices and collagen technology for over 20 years. Prior to
joining Integra, Ms. O'Grady worked for Colla-Tec, Inc., a Marion Merrell Dow
Company. During her career she has held positions with Surgikos, a Johnson &
Johnson company, and was on the faculty of Boston University College of Nursing
and Medical School. Ms. O'Grady led the team that obtained the FDA approval for
INTEGRA(R) Dermal Regeneration Template, the first regenerative product approved
by the FDA, and has led teams responsible for more than 500 FDA and
international submissions. She received her BS degree from Marquette University
and MSN in Nursing from Boston University.
MICHAEL D. PIERSCHBACHER, PH.D. joined Integra in October 1995 as Senior Vice
President, Research and Development. In May 1998 he was named Senior Vice
President and Director of the Corporate Research Center. From June 1987 to
September 1995, Dr. Pierschbacher served as Senior Vice President and Scientific
Director of Telios Pharmaceuticals, Inc. ("Telios") which was acquired by us in
1995. He was a co-founder of Telios in May 1987 and is the co-discoverer and
developer of Telios' matrix peptide technology. Before joining Telios as a
full-time employee in October 1988, he was a staff scientist at the Burnham
Institute for five years and remained on staff there in an adjunct capacity
until the end of 1997. He received his post-doctoral training at Scripps
Clinical and Research Foundation and at the Burnham Institute. Dr. Pierschbacher
received his Ph.D. in Biochemistry from the University of Missouri.
26
DEBORAH A. LEONETTI joined Integra in May of 1997 as Director of Marketing and
was promoted to Vice President of Marketing in April 1999. Her responsibilities
include worldwide strategic marketing for all Integra products. From September
1989 through May 1997, Ms. Leonetti worked for Cabot Medical, which was later
acquired by Circon Corporation, and held positions in sales, sales training, and
marketing. Prior to her experience at Cabot-Circon, Ms. Leonetti completed
fifteen years of clinical practice as a registered nurse at St. Christopher's
Hospital for Children in Philadelphia. She received her Nursing degree from St.
Joseph's Hospital School of Nursing and La Salle University.
ROBERT D. PALTRIDGE joined Integra as National Sales Director in February 1995
and has served as Vice President, North American Sales since September 1997. He
was promoted to Vice President, Direct Sales in October 2001. His
responsibilities include managing the direct sales activities of Integra
NeuroSciences products in the United States, the United Kingdom, France, and
Germany and managing distributor sales in Canada. Mr. Paltridge has 19 years of
sales and sales management experience in the medical device industry. Before
joining Integra, he was National Sales Manager at Strato Medical, a division of
Pfizer, Inc. He received a BS degree in Business Administration from Rutgers
University.
27
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Integra's Common Stock trades on The Nasdaq National Market under the symbol
IART. The following table represents the high and low sales prices for our
Common Stock for each quarter for the last two years:
HIGH LOW
2001
Fourth Quarter $ 31.030 $ 22.770
Third Quarter $ 32.150 $ 18.800
Second Quarter $ 22.450 $ 11.400
First Quarter $ 18.313 $ 9.875
2000
Fourth Quarter $ 16.125 $ 9.688
Third Quarter $ 15.000 $ 9.438
Second Quarter $ 12.625 $ 6.688
First Quarter $ 19.875 $ 5.875
The closing price for the Common Stock on March 15, 2002 was $28.80. For
purposes of calculating the aggregate market value of the shares of voting stock
of Integra held by non-affiliates, as shown on the cover page of this report, it
has been assumed that all the outstanding shares were held by non-affiliates
except for the shares held by our directors and executive officers and
stockholders owning 10% or more of outstanding shares. However, this should not
be deemed to constitute an admission that all such persons are, in fact,
affiliates of Integra. Further information concerning ownership of the Integra's
voting stock by executive officers, directors and principal stockholders will be
included in the our definitive proxy statement to be filed with the Securities
and Exchange Commission.
We do not currently pay any cash dividends on our Common Stock and do not
anticipate paying as such dividends in the foreseeable future.
The number of stockholders of record as of March 15, 2002 was approximately 375,
which includes stockholders whose shares were held in nominee name. The number
of beneficial stockholders at that date was over 5,000.
RECENT SALES OF UNREGISTERED SECURITIES
In March and December 2001, respectively, we sold 240,000 and 300,000 shares of
Common Stock to affiliates of Soros Private Equity Partners LLC through Soros'
exercise of stock purchase warrants in a transaction exempt from registration
under Section 4(2) of the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder (the "Securities Act"). Proceeds from these
sales of Common Stock were $916,800 and $2,700,000, respectively.
In June 2001, we issued 2,617,800 shares of Common Stock to affiliates of Soros
Private Equity Partners LLC upon their conversion of all 100,000 shares of
Series B Preferred Stock owned by them in a transaction exempt from registration
under Section 4(2) of the Securities Act. The holders of this Common Stock have
registration rights.
In December 2001, we issued 10,000 shares of Common Stock to the seller of
NeuroSupplies, Inc. as partial consideration for our acquisition of
NeuroSupplies, Inc. in a transaction exempt from registration under Section 4(2)
of the Securities Act.
28
ITEM 6. SELECTED FINANCIAL DATA
The information set forth below should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and our
consolidated financial statements and related notes included elsewhere in this
report. We have acquired numerous businesses and product lines during the
previous four years. As a result of these acquisitions, the consolidated
financial results and balance sheet data for certain of the periods presented
above may not be directly comparable.
Years Ended December 31,
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Operating Results:
Total revenue ......................................... 93,442 71,649 42,876 17,561 14,848
Total operating costs and expenses (1) ................ 79,156 83,370 55,256 31,741 33,759
-------- -------- -------- -------- --------
Operating income (loss) ............................... 14,286 (11,721) (12,380) (14,180) (