UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from____________ to ____________.
Commission File Number: 0-19961
ORTHOFIX INTERNATIONAL N.V.
(Exact name of registrant as specified in its charter)
Netherlands Antilles N/A
- ---------------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7 Abraham de Veerstraat
Curacao
Netherlands Antilles N/A
- ---------------------------------------- -----------------------------------
(Address of principal executive offices) (Zip Code)
599-9-4658525
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.10 par value
(Title of Class)
_______________
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for at least 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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ X ] No [ ]
The aggregate market value of registrant's common stock held by non-affiliates,
based upon the closing price of the common stock on the last business day of the
registrant's most recently completed second fiscal quarter, June 30, 2003, as
reported by the Nasdaq National Market, was approximately $178.5 million. Shares
of common stock held by executive officers and directors and persons who own 5%
or more of the outstanding common stock have been excluded since such persons
may be deemed affiliates. This determination of affiliate status is not a
determination for any other purpose.
As of March 5, 2004, 15,050,342 shares of common stock were issued and
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the registrant's Proxy Statement to be filed with the
Commission in connection with the 2004 Annual General Meeting of Shareholders
are incorporated by reference in Part III of this Form 10-K.
Orthofix International N.V.
Table of Contents
Page
PART I........................................................................4
Item 1. Business........................................................4
Item 2. Properties.....................................................28
Item 3. Legal Proceedings..............................................29
Item 4. Submission of Matters to a Vote of Security Holders............30
PART II......................................................................31
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters..........................................31
Item 6. Selected Financial Data........................................33
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................34
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.....44
Item 8. Financial Statements and Supplementary Data....................44
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.....................................44
Item 9A. Controls and Procedures........................................44
PART III.....................................................................45
Item 10. Directors and Executive Officers of the Registrant.............45
Item 11. Executive Compensation.........................................48
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholders..........................48
Item 13. Certain Relationships and Related Transactions.................48
Item 14. Principal Accountant Fees and Services.........................48
PART IV......................................................................49
Item 15. Exhibits, Financial Statement Schedules and Reports on
Form 8-K....................................................49
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Orthofix International N.V.
Forward-Looking Statements
This Form 10-K contains forward-looking statements within the meaning
of Section 21E of the Securities Exchange Act of 1934 relating to our business
and financial outlook, which are based on our current expectations, estimates,
forecasts and projections. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential" or "continue" or
other comparable terminology. These forward-looking statements are not
guarantees of future performance and involve risks, uncertainties, estimates and
assumptions that are difficult to predict. Therefore, actual outcomes and
results may differ materially from those expressed in these forward-looking
statements. You should not place undue reliance on any of these forward-looking
statements. Further, any forward-looking statement speaks only as of the date on
which it is made, and we undertake no obligation to update any such statement to
reflect new information, the occurrence of future events or circumstances or
otherwise.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements to encourage companies to provide
prospective information about their companies without fear of litigation. We
would like to take advantage of the "safe harbor" provisions of the Private
Securities Litigation Reform Act in connection with the forward-looking
statements included in this document.
Factors that could cause actual results to differ materially from those
indicated by the forward-looking statements or that could contribute to such
differences include, but are not limited to, risks relating to the integration
of the businesses of Orthofix and Breg, unanticipated expenditures, changing
relationships with customers, suppliers and strategic partners, risks relating
to the protection of intellectual property, changes to the reimbursement
policies of third parties, changes to governmental regulation of medical
devices, the impact of competitive products, changes to the competitive
environment, the acceptance of new products in the market, conditions of the
orthopedic industry and the economy and the other risks described under Item 1 -
"Business - Risk Factors" in this Form 10-K.
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Orthofix International N.V.
PART I
Item 1. Business
- -----------------
In this Form 10-K, the terms "we", "us", "our", "Orthofix" and "our
company" refer to the combined operations of all of Orthofix International N.V.
and its respective consolidated subsidiaries and affiliates, unless the context
requires otherwise. For purposes of this Form 10-K, the subsidiaries of a person
include all entities that such person controls.
Overview
We are a diversified orthopedic products company offering a broad line
of minimally invasive surgical, as well as non-surgical, products for the spine,
reconstruction and trauma market sectors. Our products are designed to address
the lifelong bone-and-joint health needs of patients of all ages, helping them
achieve a more active and mobile lifestyle. We design, develop, manufacture,
market and distribute medical equipment used principally by musculoskeletal
medical specialists for orthopedic applications. Our main products are external
and internal fixation devices used in fracture treatment, limb lengthening and
bone reconstruction, non-invasive stimulation products used to enhance the
success rate of spinal fusions and to treat non-union fractures, and bracing
products used for ligament injury prevention, pain management and protection of
surgical repair to promote faster healing. Our products also include a device
for enhancing venous circulation, cold therapy, other pain management products,
bone cement and devices for removal of the bone cement used to fix artificial
implants, a bone substitute compound and airway management products.
We have administrative and training facilities in the United States,
the United Kingdom and Italy and manufacturing facilities in the United States,
the United Kingdom, Italy, Mexico and the Seychelles. We directly distribute our
products in the United States, the United Kingdom, Ireland, Italy, Germany,
Switzerland, Austria, France, Belgium, Mexico and Brazil. In several of these
and other markets, we also distribute our products through independent
distributors.
Orthofix International N.V. is a limited liability company, organized
under the laws of the Netherlands Antilles on October 19, 1987. Our principal
executive offices are located at 7 Abraham de Veerstraat, Curacao, Netherlands
Antilles, telephone number: 599-9-465-8525. Our filings with the Securities and
Exchange Commission, including our annual report on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K and amendments to those reports, are
available free of charge on our website as soon as reasonably practicable after
they are filed with, or furnished to, the Securities and Exchange Commission.
Our internet website is located at http://www.orthofix.com.
Important Events in 2003 and 2004
On February 16, 2004, the Company acquired 100% of the common stock of
a Puerto Rican distribution company, Implantes Y Sistemas Medicos, Inc. (ISMI),
for approximately $1.4 million in cash. ISMI distributes Orthofix and other
third party products.
On December 30, 2003, we completed the acquisition of privately held
Breg, Inc. (Breg), a designer, manufacturer and distributor of post-operative
reconstruction and rehabilitative products to hospitals and orthopedic offices.
The purchase price for the acquisition was $150.0 million plus closing
adjustments and transaction costs totaling approximately $6.3 million. Financing
costs were approximately $3.8 million. The acquisition and related costs were
financed with $110.0 million of senior secured bank debt, cash on hand and the
issuance of 731,715 shares of Orthofix common stock.
Breg, based in Vista, California, designs, manufactures and distributes
orthopedic products for post-operative reconstruction and rehabilitative patient
use, including bracing products, cold therapy products and pain therapy
products. Breg generated $61.9 million in net revenues in 2003, approximately
53% of which were attributable to the sale of bracing products, including: (1)
functional braces for prevention of ligament injuries, (2) load-shifting braces
for osteoarthritic pain management, (3) post-operative braces for protecting
surgical repair and
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Orthofix International N.V.
(4) foot and ankle supports that provide an alternative to casting.
Approximately 30% of Breg's 2003 net revenues came from the sale of cold therapy
products used to minimize the pain and swelling following knee, shoulder, elbow
and back injuries or surgery. Approximately 9% of Breg's 2003 net revenues came
from the sale of pain therapy products used for patient control over
post-operative pain management after common sports medicine procedures such as
arthroscopy of the knee and shoulder. Breg sells its products through a network
of domestic and international independent distributors.
Concurrently with the closing of the Breg acquisition, Colgate Medical
Limited (Colgate), a wholly owned subsidiary of Orthofix, entered into a new
senior secured bank facility with a syndicate of financial institutions arranged
by Wachovia Securities. The new senior secured bank facility provides for (1) a
five-year amortizing term loan facility of $110.0 million, the proceeds of which
were used for partial payment of the purchase price of Breg, and (2) a five-year
revolving credit facility of $15.0 million. As of March 12, 2004, we had no
amounts outstanding under the revolving credit facility. Loans under the new
senior secured bank facility bear interest at a rate per annum equal to LIBOR or
prime rate, plus a margin that is adjusted quarterly based on Colgate's leverage
ratio. As of March 12, 2004, the interest rate on the term loan was set at LIBOR
plus 2.75%, or 3.91% per annum.
Orthofix and each of Colgate's direct and indirect subsidiaries,
including Orthofix Inc. and Breg, have guaranteed the obligations of Colgate
under the senior secured bank facility. The obligations of Colgate under the
senior secured bank facility and Colgate's subsidiaries under their guarantees
are secured by the pledge of their respective assets. Certain of Orthofix's
other subsidiaries have also guaranteed the obligations of Colgate under the
senior secured bank facility on a limited recourse basis. The credit agreement
relating to the senior secured bank facility contains certain negative covenants
applicable to Colgate and its subsidiaries, including restrictions on
indebtedness, liens, dividends and mergers or sales of assets. The credit
agreement also contains certain financial covenants, including a fixed charge
coverage ratio, an interest coverage ratio and a leverage ratio applicable to
Colgate, and a leverage ratio applicable to Orthofix. See Item 7 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
On September 2, 2003, we announced that we had submitted to the FDA, as
part of our Pre-Market Approval (PMA) application, the final results of a
clinical trial for the Cervical-Stim(R) bone growth stimulator. The prospective,
randomized, multi-center clinical investigation, led by Kevin Foley, M.D., of
the University of Tennessee, enrolled a total of 323 patients and concluded in
January 2003. The objective of this clinical study was to demonstrate safety and
efficacy of the Cervical-Stim(R) device in high-risk subjects who had undergone
cervical fusion for degenerative conditions. We believe that the results of the
study show that there is a "statistically significant positive effect" in the
patients who receive cervical stimulation via our pulsed electromagnetic field
(PEMF)-based bone growth stimulator, Cervical-Stim(R).
On August 18, 2003, we announced the settlement of a two-year-long
federal investigation by the Office of Inspector General of our billings to
federal and state healthcare programs for the off-label use of our FDA-approved
pulsed electronic magnetic field device. Without admitting any wrongdoing, we
agreed to pay approximately $1.7 million to Tri Care (formerly CHAMPUS) to
settle allegations involving payments to us for bone growth stimulators
prescribed by physicians for patients undergoing surgery on the cervical spine.
We recorded the settlement charge with an after-tax effect of approximately $1.1
million or $.07 per share, in the third quarter of 2003. The Department of
Justice also closed a related concurrent investigation of our billings to other
federal healthcare programs, including Medicare and Medicaid, without taking
further action.
On June 30, 2003, we announced that Ferrer, Freeman and Company, a
Greenwich, Connecticut based venture capital firm, had purchased 100% of
HealthSouth's shares in the OrthoRx joint venture. As a result, Ferrer, Freeman
and Company is now our partner in the OrthoRx joint venture, which was
established in 2001 to serve the fragmented and underserved orthopedic DME
(Durable Medical Equipment) market.
Effective April 2, 2003, our two Italian subsidiaries, DMO S.r.l. and
Orthofix S.r.l, merged into one entity, with Orthofix S.r.l being the surviving
entity.
In January 2003, we announced that we had purchased an equity
interest in Innovative Spinal Technologies (IST), a start-up company focused on
commercializing spinal products. The investment of $1.5 million provides
Orthofix with the ability to participate in spine product research and
development efforts with IST.
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Orthofix International N.V.
This collaboration has already assisted us to create the next generation of
dynamic bracing: Dynamic Adjustable Spine Stabilization (DASS), which will
address the need for controlled bracing of post-surgical rehabilitation
patients.
Effective on January 14, 2003, we completed a Share Purchase Agreement
to acquire the remaining 48% minority interest in our United Kingdom
distribution company, Intavent Orthofix Limited (IOL). We purchased the 48%
interest from Intavent Limited (Intavent) for a cash purchase price of $20.6
million, including transaction costs. IOL distributes Orthofix products, airway
management products and other orthopedic products. Concurrent with the
completion of the Share Purchase Agreement, we completed a Distribution
Agreement with Intavent and a Guarantee Agreement with LMA International S.A.
(LMA) to assure the supply of Laryngeal Mask products in the United Kingdom,
Ireland and Channel Islands for an initial period of seven years. Mr. Robert
Gaines-Cooper, Chairman of Orthofix, is a settlor of a trust, which owns a 30%
interest in Intavent and a 40% interest in LMA. IOL has been, and will continue
to be, a consolidated subsidiary of Orthofix.
On January 7, 2003, we announced that we had entered into an exclusive
distribution agreement with Efratgo Limited to market the Gotfried Percutaneous
Compression Plating (PC.C.P) System, a minimally invasive method of fracture
stabilization and fixation for hip-fracture surgery developed by Y. Gotfried,
M.D. Under this agreement, we paid $1.0 million for the worldwide rights to
market this product for four years. In addition, we will pay a royalty of up to
$5.0 million based on future sales. We have the right to acquire all patents
pertaining to this system for $5.0 million. The royalty fee paid by us during
the four-year licensing period will be applied against the purchase price of the
patents. The major benefits of this new approach to hip-fracture surgery include
(1) a significant reduction of complications due to a less traumatic operative
procedure; (2) reduced blood loss and less pain (important benefits for the
typically fragile and usually elderly patient population who often have other
medical problems); and (3) faster recovery, with patients often being able to
bear weight a few days after the operation, and improved post-operative results.
Business Strategy
Our business strategy is to offer innovative, cost-effective orthopedic
products to the spine, reconstruction and trauma market sectors that are
minimally invasive and that reduce patient suffering and healthcare costs. We
intend to continue to expand applications for our products by utilizing
synergies among our core technologies, including those acquired from the Breg
acquisition. We expect to expand our product offerings through business or
product acquisition and licensing agreements, as well as through our own product
development efforts. We will leverage our sales and distribution network by
selling our products in all markets that are available to them. We will continue
to enhance physician relationships through extensive education efforts and
strengthen contracting and reimbursement relationships through our dedicated
sales and administration staff.
Products
We have two reportable geographic markets (1) the Americas, which
includes our Orthofix Inc. and Breg operations in the United States, as well as
Mexico and Brazil, and (2) International, which includes our direct and
distributor operations in the rest of the world. Our revenues are generally
derived from two primary sources: sales of orthopedic and non-orthopedic
products. Sales of orthopedic products are made into three market sectors, Spine
(39%), Reconstruction (25%) and Trauma (26%), which together accounted for 90%
of our total net sales in 2003. Sales of non-orthopedic products, including
airway management, woman's care and other products, accounted for 10% of our
total net sales in 2003.
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Orthofix International N.V.
The following table identifies our principal products by trade name and
describes their primary applications:
Product Primary Application
------- -------------------
Orthopedic Products
Spine
Spinal-Stim PEMF non-invasive spinal bone growth stimulation
Orthotrac Pneumatic vest used to reduce pressure on the spine
EZ Brace Rigid external brace for spine stabilization
Reconstruction
ExFix External fixation, including the Sheffield Ring,
OASIS and limb-lengthening systems
A-V Impulse System Enhancement of venous circulation, principally used
after orthopedic procedures
Cemex Bone cement
ISKD Internal limb-lengthening device
OSCAR Ultrasonic bone cement removal
BoneSource Bone substitute material
Breg Bracing (1) Bracing products which provide support and
protection of limbs and extremities
Polar Care (1) Cold therapy products to reduce swelling and
accelerate the rehabilitation process
Pain Care (1) Pain therapy products that provide continuous
infusion of local anesthetic into surgical site
post-surgery
Trauma
ExFix External and internal fixation, including DAF,
ProCallus, Xcaliber and nailing systems
Physio-Stim PEMF non-invasive bone growth stimulation
PC.C.P Percutaneous compression plating system for hip
fracture
Non-Orthopedic Products
-----------------------
Laryngeal Mask Maintenance of airway during anesthesia
Other Several non-orthopedic products for which various
Orthofix subsidiaries hold distribution rights
(1) Acquired through the acquisition of Breg on December 30, 2003.
We have proprietary rights over all of the above products with the
exception of the Laryngeal Mask, Cemex, ISKD and PC.C.P. We have the exclusive
distribution rights for the Laryngeal Mask and Cemex in Italy, for the Laryngeal
Mask in the United Kingdom and Ireland and for the ISKD and PC.C.P systems
worldwide.
We have trademarked the following products and services: Orthofix(R),
ProCallus(R), Orthotrac(TM), XCaliber(TM), OASIS(TM), EZBrace(TM),
Spinal-Stim(R), Physio-Stim(R), Breg(R), Polar Care(R), and Pain Care(R).
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Orthofix International N.V.
Net Sales
The following tables display the net sales by geographic destination
and net sales by geographic origination, net of intercompany eliminations, for
each of our geographic markets and by each of our Market Sectors for the three
most recent fiscal years ended December 31, 2003. We provide net sales by
geographic destination and by market sector for information purposes only. We
maintain our books and records by geographic origination.
Geographic Destination:
Year ended December 31,
(In US$ thousands)
2003 2002 2001
----------------------------- ----------------------------- -----------------------------
Percent of Percent of Total Percent of Total
Net Sales Total Net Sales Net Sales Net Sales Net Sales Net Sales
--------- --------------- --------- ---------------- --------- ----------------
Americas $137,861 68% $122,911 69% $113,034 70%
International 65,846 32% 54,684 31% 49,326 30%
--------- --------------- --------- ---------------- --------- ----------------
Total $203,707 100% $177,595 100% $162,360 100%
========= =============== ========= ================ ========= ================
Geographic Origination:
Year ended December 31,
(In US$ thousands)
2003 2002 2001
----------------------------- ----------------------------- -----------------------------
Percent of Percent of Total Percent of Total
Net Sales Total Net Sales Net Sales Net Sales Net Sales Net Sales
--------- --------------- --------- ---------------- --------- ----------------
Americas $116,848 57% $102,850 58% $93,995 58%
International 86,859 43% 74,745 42% 68,365 42%
--------- --------------- --------- ---------------- --------- ----------------
Total $203,707 100% $177,595 100% $162,360 100%
======== =============== ========= ================ ======== ================
Market Sector:
Year ended December 31,
(In US$ thousands)
2003 2002 2001
----------------------------- ----------------------------- -----------------------------
Percent of Percent of Total Percent of Total
Net Sales Total Net Sales Net Sales Net Sales Net Sales Net Sales
--------- --------------- --------- ---------------- --------- ----------------
Orthopedic
Spine $ 79,552 39% $ 69,613 39% $ 63,575 39%
Reconstruction 51,183 25% 43,838 25% 39,752 24%
Trauma 53,706 26% 46,551 26% 42,608 26%
--------- --------------- --------- ---------------- --------- ----------------
Total Orthopedic 184,441 90% 160,002 90% 145,935 89%
Non-Orthopedic 19,266 10% 17,593 10% 16,425 11%
--------- --------------- --------- ---------------- --------- ----------------
Total $203,707 100% $177,595 100% $162,360 100%
======== =============== ========= ================ ========= ================
Prior to completion of the Breg acquisition on December 30, 2003, we
provided for information purposes our net sales by Product Groups. We believe
that it is more meaningful to investors to classify net sales from our products
based on the Market Sector that those products are sold into. We have therefore
classified 2003 net sales by Market Sector and restated corresponding net sales
from earlier periods by Market Sector. The "Product" table on page 7 identifies
the Market Sector into which each of our products has been classified.
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Orthofix International N.V.
Additional financial information regarding our geographic markets can
be found in Note 12 to the Consolidated Financial Statements.
Orthopedic Products
Orthopedic product sales represented 90% of our total net sales in
2003.
Our orthopedic product sales cover three Market Sectors: Spine,
Reconstruction and Trauma.
Spine
Spine product sales represented 39% of our total net sales in 2003.
We believe that back pain is a common health problem for many patients
throughout the world, which often requires surgical or non-surgical intervention
for improvement. Back problems are usually of a degenerative nature and are more
prevalent among the older population. As the population ages, we believe
physicians will see an increasing number of patients with degenerative changes
who wish to have a better quality of life in their senior years than that
experienced by previous generations. Treatment options for spine disorders are
expected to expand dramatically to fill the existing gap between conservative
pain management and invasive surgery, such as spine fusion.
Our spine products are positioned to address the needs of spine
patients at any point within the care cycle, offering non-operative,
pre-operative and post-operative treatments. According to Frost & Sullivan, a
market research firm, the market size for spine products is currently estimated
at $2.4 billion, with a compounded annual growth rate expected to exceed 23%
through the year 2010.
Spinal-Stim
The Spinal-Stim Bone Growth Stimulator (Spinal-Stim) is designed to
enhance the success rate of spinal fusions by stimulating the body's own natural
healing mechanism. This portable device is intended to be used as part of a
post-surgery home treatment program prescribed by a physician.
Spinal-Stim was the first non-invasive spinal fusion stimulator system
commercially available in the United States. Spinal-Stim is designed for
treatment of the lower thoracic and lumbar regions of the spine. Some spine
fusion patients are at greater risk than most patients with non-healing
fractures due to risk factors such as smoking, obesity or multiple levels of
spine fusion. For these patients, bone growth stimulation using Spinal-Stim
Lite, the second generation of the Spinal-Stim product line, has been shown to
increase the probability of fusion, without the need for additional surgery.
More than 120,000 patients have been treated using Spinal-Stim since the product
was introduced in 1990. The device uses proprietary technology to generate a
pulsed electromagnetic field (PEMF) signal from a 9-volt battery. Our FDA
approval to market Spinal-Stim commercially is for both failed fusions and
healing enhancement as an adjunct to spinal fusion surgery. The recommended
minimum daily treatment time for Spinal-Stim is two hours. The attending medical
staff can instruct the patient regarding operation of the product and the
appropriate duration of daily treatments. The overall length of treatment is
determined by the prescribing physician, but we would expect it to be between
three and nine months in duration.
Our stimulation products use a pulsating electric current to enhance
the growth of bone tissue following surgery and are placed externally over the
site to be healed. These products generate a low level of PEMF signals that
induce low pulsating current flow into the living tissues and cells exposed to
the energy field of the products. This pulsating current flow is believed to
change enzyme activities, induce mineralization, enhance vascular penetration
and result in a process resembling normal bone growth at the spinal fusion site.
In addition to the direct sales of this product by our sales force, the
Spinal-Stim Lite is also distributed in the United States by Medtronic Sofamor
Danek Group.
We operate limited guarantee programs for Spinal-Stim to heighten
awareness of the healing enhancement properties of PEMF technology. These
programs provide, in general, for reimbursement of the full price of the device
if radiographic evidence indicates that healing is not occurring at the fusion
site when the device is used in
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Orthofix International N.V.
accordance with the prescribed treatment protocol. Over the multi-year history
of these programs, we have received few claims for reimbursement for which we
carry a nominal financial reserve.
We have submitted to the FDA, as part of our PMA application, the final
results of a clinical trial for a new product, the Cervical-Stim(R) bone growth
stimulator. The objective of this clinical study was to demonstrate the safety
and efficacy of the Cervical-Stim(R) device in high-risk patients who had
undergone cervical spine fusion for degenerative conditions. Without a bone
growth stimulator, the failure rate of cervical fusions can be significant.
Pulsed electromagnetic field stimulation enhances bone healing in the cervical
spine. Application of PEMF stimulation is believed to activate the body's
natural repair mechanism, which is absent or not fully functional in certain
patients, and enhances bony fusion for successful outcomes.
Orthotrac
The Orthotrac pneumatic vest is the first clinically validated,
non-operative treatment device that delivers external, self-administered spinal
"unloading", or upper body weight transfer, resulting in reduced pressure on the
lumbar spine. The Orthotrac pneumatic vest uses patented, pneumatic lifts that
decompress lumbar discs and associated soft tissue structures, and can
significantly improve the quality of life for patients with lower back pain.
Since patients remain mobile and ambulatory during their use of the Orthotrac
pneumatic vest, they may participate more actively in daily activities, physical
therapy and return-to-work programs or prescribed exercise routines.
The Orthotrac pneumatic vest is designed for a patient who is not
responding to conservative care, who is not presently an appropriate surgical
candidate and who has a consistent history of worsening back pain symptoms.
EZ Brace
We manufacture the EZ Brace spine brace for patients, either
post-operative or non-operative, who require rigid external support for spine
stabilization. The product is designed to be a comfortable, easy on off,
external bracing system. EZ Brace is available for mid-and low-back
applications.
Reconstruction
Reconstruction products represented 25% of our total net sales in 2003.
We offer a comprehensive solution package to the highly specialized
limb reconstruction market for correction of deformed limbs, such as length
discrepancies or angular deformities. We believe that our products enable a much
simpler product application and superior performance over alternatives to
correct lower limb deformities. In addition, we introduced in 2002 an internal
lengthening system called the ISKD(TM) which is used when patient's limbs are
unequal in length. The ISKD(TM) is implanted using a minimally invasive
technique and lengthens internally.
Our non-invasive vascular therapy products, primarily used on patients
following orthopedic joint replacement procedures, are designed to reduce
dangerous deep vein thrombosis and post-surgery pain and swelling by improving
venous blood return and improving arterial blood flow. For patients who cannot
walk or are immobilized, these products simulate the effect that would occur
naturally during normal walking or hand flexion with a mechanical method and
without the side effects and complications of pharmacologics.
As a result of our recent acquisition of Breg, we now have a more
well-rounded and complete product line offering within the reconstruction
market. A leading manufacturer of orthopedic bracing and cold therapy products,
Breg possesses strong brand recognition and a high quality reputation.
Functional bracing, load shifting and post-surgery bracing are used for the
protection of surgical repair and promotion of faster healing. Additionally, we
believe that cold therapy and pain therapy products are emerging as a standard
of care with physicians and hospitals.
According to Frost & Sullivan, the market size for reconstruction
products is currently estimated to be $6.2 billion with a compounded annual
growth rate of 9% through 2005.
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Orthofix International N.V.
ExFix
In addition to the treatment of bone fractures, we manufacture and
distribute external fixators that are used to treat congenital bone deformities,
such as limb length discrepancies, or deformities that result from previous
trauma. To serve the highly specialized limb reconstruction market, we developed
the Sheffield fixator. A Sheffield fixator is radiolucent and uses fewer
components than other products for limb reconstruction. In addition, a Sheffield
fixator is more stable and stronger than most competing products - two critical
concerns for a long-term limb reconstruction treatment. We believe other
advantages of a Sheffield fixator over competing products include the rapid
assembly, ease of use and the numerous possibilities for customization for each
individual patient.
The Osteoarthritis Surgical Intervention System, or the OASIS, is
designed for younger patients suffering from the degeneration of the cartilage
and bone of the knee. The OASIS is a minimally invasive system that allows
gradual post-operative adjustment of the affected limb and also helps unload the
damaged cartilage.
A-V Impulse System
We manufacture and distribute the A-V Impulse System line of foot and
hand pumps, a non-invasive method of reducing post-operative pain and swelling
and deep vein thrombosis, or the formation or presence of a blood clot. The A-V
Impulse System consists of an electronic controller attached to a special
inflatable slipper or glove, or to an inflatable bladder within a cast, which
promotes the return of blood to the veins and the inflow of blood to arteries in
the patient's arms and legs. The device operates by intermittently impulsing
veins in the foot or hand, as would occur naturally during normal walking or
hand clenching. Conventionally, in order to reduce the incidence of deep vein
thrombosis, heparin or related pharmacological products have been administered
during and after operations. The A-V Impulse System has been demonstrated to
give prophylactic benefits that are comparable to the forms of pharmacological
treatment but without their adverse side effects, the most serious of which
typically is bleeding. We believe that approximately 85% of the net sales of the
A-V Impulse System are for orthopedic applications, most notably to prevent deep
vein thrombosis following large joint surgeries such as hip or knee
replacements. We believe the remaining net sales of the A-V Impulse System are
to address various venous or circulatory problems of patients. The A-V Impulse
System is distributed in the United States by Kendall Healthcare Products.
Outside the United States, the A-V Impulse System is sold directly by our
distribution subsidiaries in the United Kingdom, Italy and Germany and through
selected distributors in the rest of the world.
Cemex
Cemex, a product of Tecres S.p.A., is a bone cement used by surgeons to
repair hip and knee prostheses once they have been inserted. We have the
exclusive distribution rights for Cemex in Italy.
ISKD (Intramedullary Skeletal Kinetic Distractor)
The Intramedullary Skeletal Kinetic Distractor, or ISKD, system is a
patented, internal limb-lengthening device that uses a magnetic sensor to
monitor limb-lengthening progress on a daily basis. The ISKD system is an
expandable tubular structure that is completely implanted inside the bone to be
lengthened. Only the patient and surgeon need know the bone is being lengthened.
Once implanted, the ISKD system lengthens the patient's bone gradually, and,
after lengthening is completed, the system stabilizes the lengthened bone. This
product received 510(k) clearance from the FDA in 2001 and is being introduced
in the United States and Europe on a controlled basis. We have the exclusive
worldwide distribution rights for this product.
OSCAR (Orthosonics System for Cement Arthroscopy Revision)
We have developed the Orthosonics System for Cement Arthroscopy
Revision, or OSCAR, an ultrasonic device designed to soften and remove the bone
cement used to fix artificial implants within the patient's bone. We believe
that it offers a significant improvement, both in terms of cost and patient
outcomes, over existing bone cement removal techniques. Existing techniques
involve the use of hand chisels and manual or pneumatic hammers and drills,
which generally increase the risk of femoral shaft fracture with greatly
increased patient trauma and significant cost implications. OSCAR has been
demonstrated to greatly reduce femoral fractures and substantially reduce cement
removal times to approximately 15 to 20 minutes.
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Orthofix International N.V.
The product was launched in the United Kingdom in 1994, and selectively
elsewhere in 1995. OSCAR is now well established in the United Kingdom, and we
believe it is gaining support in certain other European countries. We are
expanding distribution of OSCAR in the United States through a network of
independent distributors that currently covers 25 states. A new version of OSCAR
was launched in 2001, which has a built-in endoscopic function for visual
examination of the femoral canal.
BoneSource
We hold an exclusive license from the American Dental Association
Health Foundation, or ADAHF, for technology for BoneSource, a patented
hydroxyapatite cement. The licensed technology combines calcium-phosphate salts
with water to produce a bone substitute that converts to hydroxyapatite, a
mineral component of bone, and promotes new bone growth by resorption, a process
by which hydroxyapatite is converted back into living bone.
BoneSource received 510(k) clearance from the FDA for repair of certain
cranial defects in July 1997. It has also obtained a CE mark, required for a
product to be sold or distributed in the European Union, for certain cranial
symptoms and for use as a bone void filler in certain non-weight bearing
orthopedic symptoms. We have licensed exclusive worldwide marketing rights for
BoneSource to Stryker Corporation, which currently sells the product both in the
United States and Europe.
On April 22, 1998, we entered into agreements with Stryker Corporation
under which Stryker has the right to develop, manufacture, market and pursue
regulatory approvals for BoneSource for additional orthopedic applications. From
the date of the agreements through February 17, 2003, we supplied BoneSource to
Stryker. Stryker currently manufactures BoneSource and pays Orthofix a royalty
on sales of the product.
Breg
On December 30, 2003, we completed the acquisition of Breg, which
we believe is a market leader in the sale of orthopedic post-operative
reconstruction and rehabilitative products to hospitals and orthopedic offices.
We have categorized all of Breg's products as Reconstructive products. Breg's
products are grouped into three product categories: Breg Bracing, Polar Care and
Pain Care.
Breg Bracing
We design, manufacture and market a broad range of rigid knee bracing
products, including ligament braces, post-operative braces and osteoarthritic
braces. The rigid knee brace products are either customized braces or standard
adjustable off-the-shelf braces. Breg braces are endorsed by the Professional
Football Athletic Trainers Society.
Ligament braces provide durable support for moderate to severe knee
ligament instabilities to help patients regain range of motion capability so
that patients may successfully complete rehabilitation and resume their daily
activities. The product line includes premium-customized braces generally
designed for strenuous athletic activity and off-the-shelf braces designed for
use in less rigorous activity. These dual-function custom-fabricated braces
address both ligamentous instability and/or unicompartmental osteoarthritis as
well as patellofemoral pain with or without instability or maltracking of the
patella. We market the ligament product line under the X2 K name.
Post-operative braces limit a patient's range of motion after knee
surgery and protect the repaired ligaments and/or joints from stress and strain.
These braces promote a faster and healthier healing process. The products within
this line provide both immobilization and/or a protected range of motion. The
Breg post-op family of braces, featuring the Quick-Set hinge, offers complete
range of motion control for both flexion and extension, along with a
simple-to-use drop lock mechanism to lock the patient in full extension. The
release lock mechanism allows for easy conversion to full range of motion. The
straps integrated through hinge bars offer greater support and stability. This
hinge bar can be "broken down" for use during later stages of rehabilitation.
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Osteoarthritic braces are used to treat patients suffering from
osteoarthritis. Osteoarthritis (OA) is a form of damage to, or degeneration of,
the articular surface of a joint. This line of customized and off-the-shelf
braces is designed to shift the load going through the knee, providing
additional stability and reducing pain. In some cases, this type of brace may
serve as a cost-efficient alternative to total knee replacement. Breg recently
introduced the CounterForce Plus, our newest bracing technology for patients
suffering from OA. These braces address not only the pain associated with
unicompartmental osteoarthritis but also the stability needs of the patient. The
braces are based on a functional knee brace design that controls both
anterior/posterior and varus/valgus instabilities.
Polar Care
We manufacture, market and sell the leading cold therapy product line,
Polar Care. Breg created the market for cold therapy products in 1991 when it
introduced the Polar Care 500, a cold therapy device used to reduce swelling,
minimize the need for post-operative pain medications and generally accelerate
the rehabilitation process. Today, we believe that cold therapy is emerging as a
standard of care with physicians despite limited reimbursement.
The Polar Care product uses a circulation system to provide constant
fluid flow rates, thereby minimizing temperature fluctuations which can reduce
device effectiveness and create the potential for tissue or nerve damage. The
products consist of a cooler filled with ice and cold water that continuously
provides cold therapy for the relief of pain. Breg's cold therapy line consists
of the Polar Care 500, Polar Care 300, Polar Cub and cold gel packs.
Pain Care
We manufacture, market and sell a leading line of pain therapy
products, Pain Care. This product line includes the Pain Care 3200 and 4200
lines of disposable, pain management infusion pumps. These pain management and
relief systems provide a continuous infusion of local anesthetic dispensed
directly into the surgical site following a surgical procedure. The Pain Care
family provides controlled infusions of a local anesthetic to alleviate and
moderate severe pain experienced following surgery. We believe we maintain a
leading position in this fast growing market
Additionally, Breg offers a line of continuous passive motion (CPM) and
home therapy products to accommodate post-surgical ambulation and recovery from
shoulder, knee and ankle injuries.
Trauma
Trauma products represented 26% of our total net sales in 2003.
Our trauma products are designed to be minimally invasive and are based
on a philosophy of treatment that focuses not only on the broken bone but also
considers the long-term preservation of function and quality of life for the
patient. Our method for fracture reduction protects and preserves proper anatomy
and limb alignment, allowing patients to function naturally and bear weight at
the fracture site very early in the healing cycle, which we believe are
important considerations for a positive outcome.
We believe our trauma products will assist in improving hospitals'
efficiency as the trauma market grows. Knowledge Enterprises 2003, an
independent market research firm, estimates that the size of the trauma market
will be $1.6 billion by 2005 and that the market is currently growing 7-8% per
year.
ExFix
For a fracture to heal properly, without misalignment or rotation, the
bone must be set and fixed in the correct position. The bone must be kept
stable, but not absolutely rigid, in order to alleviate pain, maintain the
correct alignment and initiate the callus formation for proper healing.
Fractures initially should not bear any weight, but, at the appropriate time in
the healing cycle, benefit from gradually increasing micromovement,
weight-bearing and function, which further stimulate the callus.
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In most fracture cases, physicians use casting, the simplest available
non-surgical procedure. We believe, however, that approximately 15-20% of all
fractures require surgical intervention. We initially focused on the production
of external fixation devices for management of fractures that require surgery.
External fixation devices are used to stabilize fractures from outside the skin
with minimal invasion into the body. Our fixation devices use screws that are
inserted into the bone on either side of the fracture site, to which the fixator
body is attached externally. The bone segments are aligned by manipulating the
external device using patented ball joints and, when aligned, are locked in
place for stabilization. Unlike other treatments for fractures, external
fixation allows micromovement at the fracture site, which is beneficial to the
formation of new bone. We believe that it is among the most minimally invasive
and least complex surgical options for fracture management. We market our
external fixation devices in over 70 countries.
In 2001, we introduced XCaliber fixators, a new generation alternative
to our previous external fixators. The XCaliber fixators are made from a
lightweight radiolucent material and are provided in three configurations to
cover long bone fractures, fractures near joints and ankle fractures. The
radiolucency of XCaliber fixators allows X-rays to pass through the device and
provides the surgeon with significantly improved X-ray visualization of the
fracture and alignment. In addition, these three configurations cover a broad
range of fractures with very little inventory. The XCaliber fixators are
provided pre-assembled in sterile kit packaging to decrease time in the
operating room.
In situations that require rapid yet solid stabilization of complex
fractures, we have introduced the Pre-Fix(TM) temporary fixator, which offers a
simpler application technique that is sometimes required in trauma treatments.
We have designed several other additions to our external fixation
product line to address specific types of fractures. These products include:
o fixation devices for pelvic fractures that permit quicker application
in the emergency room;
o an elbow fixator that permits early mobilization of the elbow joint
while fixing the fracture itself; and
o a radiolucent wrist fixator developed to facilitate easy
application, especially for use in the emergency room. This
fixator is provided in sterile-kit packages with all of the
instruments for surgical use.
Internal fixation devices include pins, nails and screws designed to
temporarily stabilize traumatic bone injuries. These devices are used to set and
stabilize fractures and are removed when healing is completed. Our three
principal internal fixation devices include:
o the Orthofix Nailing System, a nailing system for fractures of
the tibia and femur that requires a surgical insertion of a
metal rod into the medullary canal, the central canal of the
bone, to maintain bone stability. The locking screws in the
Orthofix Nailing System can be inserted mechanically and
without the use of an image intensifier, resulting in a simpler
operative technique. The locking screws also help reduce
implant failure rates by providing significantly higher fatigue
resistance than similar competing products. The tibial and
femoral nails are available in all of our markets except the
United States;
o the Magic Pins Fragment Fixation System, an implant for fixing
small fracture fragments, usually used for the treatment of
fractures near the joints; and
o our proprietary XCaliber bone screws, which are designed to be
compatible with our external fixators and reduce inventory for
our customers. Some of these screws are covered with
hydroxyapatite, a mineral component of bone that reduces
superficial inflammation of soft tissue. Other screws in this
proprietary line do not include the hydroxyapatite coating but
offer different
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advantages such as patented thread designs for better adherence in hard
and soft bone. We believe we have a full line of bone screws to meet
the demands of the market.
Physio-Stim
A bone's regenerative power results in most fractures healing naturally
within a few months. In certain situations, however, fractures do not heal or
heal slowly, resulting in non-unions. Traditionally, orthopedists have treated
such fracture conditions surgically, often by means of a bone graft with
fracture fixation devices, such as bone plates, screws or intramedullary rods.
These are examples of "invasive" treatments. In the 1950s, scientists discovered
that, when human bone is broken, it generates an electrical field. This
low-level electrical field activates the body's internal repair mechanism, which
in turn stimulates bone healing. In some patients, this healing process is
impaired or absent and the fracture fragments may not mend properly, resulting
in a non-union. Orthofix's patented bone growth stimulators use a low level of
pulsed electromagnetic field, or PEMF, signals to activate the body's natural
healing processes and have proven successful in treating fracture non-unions.
The stimulation products that we currently market apply bone growth stimulation
without implantation or other surgical procedures.
The technology used in our stimulation products uses a pulsating
electric current to enhance the growth of bone tissue following surgery or bone
fracture. Our stimulation products are placed externally over the site to be
healed. These products generate a low level of PEMF signals that induce low
pulsating current flow into living tissue and cells exposed to the energy field
of the products. This pulsating current flow is believed to change enzyme
activities, induce mineralization, enhance vascular penetration and result in a
process resembling normal bone growth at the spinal fusion or fracture site.
In some patients, such as patients who smoke, the fracture healing
process is impaired or absent and the fracture fragments may not mend properly,
resulting in a non-union. We manufacture our second generation of the
Physio-Stim product line, the Physio-Stim Lite, a bone growth stimulation device
which has proved to be successful in treating many fracture non-unions. Our
patient data shows that 8 out of 10 patients with fracture non-unions that use
Physio-Stim Lite are healed by our product without additional invasive surgical
treatment. The systems offer portability, long-term battery operation,
integrated component design, patient monitoring capabilities and the ability to
cover a large treatment area without factory calibration for specific patient
application. More than 88,000 patients have been treated using Physio-Stim since
the product was introduced in 1986. Physio-Stim uses a proprietary technology to
generate a PEMF signal from a 9-volt battery, thus eliminating the need for
rechargeable battery packs and chargers. The result is a self-contained, very
light and ergonomic device with a three hour per day wear time that we believe
makes the unit significantly easier and more comfortable to use than competing
products. The comprehensive Physio-Stim Lite product line treats all the small
and long bones, with a current redesign for the treatment of the pelvis.
Physio-Stim also features a compliance monitoring system that provides hard copy
printouts of patient files.
We operate limited guarantee programs for Physio-Stim to heighten
awareness of the healing enhancement properties of PEMF technology. This program
provides, in general, for reimbursement for the full price of the device if
radiographic evidence indicates that healing is not occurring at the fracture
site when the device is used in accordance with the prescribed treatment
protocol. Over the multi-year history of this program, we have received few
claims for reimbursement, for which we carry a nominal financial reserve.
PC.C.P (Gotfried Percutaneous Compression Plating System)
The Gotfried Percutaneous Compression Plating, or PC.C.P, System is a
minimally invasive method of fracture stabilization and fixation for
hip-fracture surgery developed by Y. Gotfried, M.D. Under our exclusive
distribution agreement with Efratgo Limited to market the PC.C.P System, we have
the right to license the product worldwide, and the option to purchase the
technology.
There is growing concern about the mortality and complications
associated with hip fractures and their cost to society. Recently published
papers detailing clinical results using currently available systems indicate
that only 40% of patients regain their pre-operative mobility. In contrast, the
PC.C.P System has been shown to increase this percentage to 83% in a clinical
study of 118 patients ranging in age from 58-98 years whose hip-fracture surgery
utilized the PC.C.P System.
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Traditional hip-fracture surgery can require a 5-inch-long incision
down the thigh, but the new PC.C.P System involves two smaller incisions, each
less than one inch long. The PC.C.P System then allows a surgeon to work around
most muscles and tendons rather than cutting through them. Major benefits of
this new approach to hip-fracture surgery include (1) a significant reduction of
complications due to a less traumatic operative procedure; (2) reduced blood
loss and less pain (important benefits for the typically fragile and usually
elderly patient population, who often have other medical problems); and (3)
faster recovery, with patients often being able to bear weight a few days after
the operation, and improved post-operative results.
Non-Orthopedic Products
Non-orthopedic product sales represented 10% of our total net sales in
2003.
Laryngeal Mask
The Laryngeal Mask, a product of The Laryngeal Mask Company, is an
anesthesia medical device used for establishing and maintaining the patient's
airway during an operation. We have exclusive distribution rights for the
Laryngeal Mask in the United Kingdom, Ireland and Italy.
Other
We hold distribution rights for several other non-orthopedic products
including Mentor breast implants in Brazil and women's care products in the
United Kingdom.
Joint Venture
OrthoRx
In 2000, we commenced operation of OrthoRx, a full service durable
medical equipment distribution and billing business. OrthoRx provides to
patients orthopedic durable medical equipment products built around physician
protocols that specify the treatment and product required for each patient. The
business is vendor-neutral, which means that the product requested by the
physician is the exact product given to the patient. OrthoRx arranges supply
agreements for the products specified by the referring physicians.
On January 10, 2002, we established a joint venture, OrthoRx, Inc.
(OrthoRx). The OrthoRx joint venture is headquartered in Plano, Texas, where the
business processes insurance authorizations, maintains inventory levels, and
processes product billing and collections, which is intended to allow individual
OrthoRx service centers to focus on patient interaction and physician follow-up.
The prototype for the joint venture has been operating in St. Louis, Missouri
since November 2000. Initial plans identified 40 potential markets for OrthoRx
service centers. Prior to the formation of the joint venture, the operations of
OrthoRx were included in our financial statements. Sales from the OrthoRx
business were approximately $2.0 million in 2001, $3.1 million in 2002 and $6.8
million in 2003. We initially invested $3.0 million for a 45% share of the joint
venture through a combination of $2.0 million in cash and $1.0 million in
contributed assets. In November 2002 and in 2003, we invested an additional $1.0
million and $1.5 million, respectively, in cash, raising our total investment in
the joint venture to $5.5 million and our ownership stake to 47%. Our current
partner in the joint venture is Ferrer, Freedman, & Co., a Greenwich,
Connecticut based venture capital firm, which purchased 100% of HealthSouth's
shares in the OrthoRx joint venture in June 2003.
Product Development, Patents and Licenses
We maintain a continuous interactive relationship with the main
orthopedic centers in the United States, Europe, Japan and South and Central
America, including research and development centers such as Wake Forest
University in the United States and the University of Verona in Italy. Several
of the products that we market have been developed through these collaborations.
In addition, we regularly receive suggestions for new products from the
scientific and medical community. We also receive a substantial number of
requests for the production of customized items, some of which have resulted in
new products. We believe that our policy of accommodating such requests enhances
our reputation in the medical community.
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Our research and development departments are responsible for new
product development and regularly consult with a group of internal and
designated external experts. The expert group advises these departments on the
long-term scientific planning of research and development and also evaluates our
research programs. Our primary research and development facilities are located
in Verona, Italy; McKinney, Texas; Winston-Salem, North Carolina; Vista,
California; and Andover, United Kingdom.
In 2003, 2002 and 2001, we spent $8.1 million, $7.5 million and $7.0
million, respectively, on research and development.
In January 2002, we agreed to provide approximately $2.0 million to
Orthopedic Research and Education Foundation to fund a four-year study to define
the molecular and cellular mechanism underlying bone-healing in response to
pulsed electromagnetic field (PEMF) technology. This study is being conducted at
the Lerner Research Institute of the Cleveland Clinic Foundation and is entitled
"Optimizing Bone-Healing Using PEMF," which also seeks to identify specific
signal characteristics that are causally related to a bone-healing response to
PEMF technology in order to optimize the PEMF signal.
In January 2003, we announced that we had purchased an equity interest
in IST, a start-up company focused on commercializing spinal products. The
investment of $1.5 million provides us with the ability to participate in spine
product research and development efforts with IST. This collaboration has
already assisted us to create the next generation of dynamic bracing: Dynamic
Adjustable Spine Stabilization (DASS), which will address the need of controlled
bracing for post-surgical rehabilitation patients.
Patents, Trade Secrets and Licenses
We rely on a combination of patents, trade secrets, license agreements
and non-disclosure agreements to protect our proprietary intellectual property.
We own numerous U.S. and foreign patents and have numerous pending patent
applications and license rights regarding patents held by third parties. Our
primary products are patented in all major markets in which they are sold. There
can be no assurance that pending patent applications will result in issued
patents, that patents issued to or licensed by us will not be challenged or
circumvented by competitors or that such patents will be found to be valid or
sufficiently broad to protect our technology or to provide us with any
competitive advantage or protections. Third parties might also obtain patents
that would require licensing by us for the conduct of our business. We rely on
confidentiality agreements with key employees, consultants and other parties to
protect, in part, trade secrets and other proprietary technology that we seek to
protect.
We license certain orthopedic products from third parties. We have
acquired rights under such licenses in exchange for lump-sum payments or
arrangements under which we pay to the licensor a percentage of sales. However,
there is no assurance that these licenses will continue to be made available to
us on terms that are acceptable to us or at all. The terms of our license
agreements vary in length from three years to the life of product patents or the
economic life of the product. These agreements generally provide for royalty
payments and termination rights in the event of a material breach.
We also license certain of our products to others. Pursuant to our
license agreement with Stryker for BoneSource, we manufactured and sold
BoneSource to Stryker through February 17, 2003 and received a royalty based on
Stryker's revenues from BoneSource sales. In 2003, Stryker began manufacturing
of BoneSource and continues to pay us a royalty based on sales of the product.
Government Regulation
Sales of medical devices, including our orthopedic products, are
subject to U.S. and foreign regulatory requirements that regulate the
development, approval, testing, manufacture, labeling, marketing and sale of
medical products, which vary widely from country to country. The amount of time
required to obtain approvals or clearances from regulatory authorities also
differs from country to country.
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Our products are subject to the regulatory powers of the FDA pursuant
to the Medical Device Amendments of 1976 to the Federal Food, Drug and Cosmetics
Act, or the 1976 Amendments, the Safe Medical Devices Act of 1990, and
regulations issued or proposed hereunder. With the exception of our stimulation
products, our products fall into FDA classifications that require less review by
the FDA pursuant to Section 510(k) of the 1976 Amendments than devices that
require pre-market approval applications. Our stimulation products are
classified as Class III by the FDA, and have been approved for commercial
distribution in the United States following the submission of the required
pre-market approval applications.
The medical devices that we develop, manufacture and market are subject
to rigorous regulation by the FDA and numerous other federal, state and foreign
governmental authorities. The process of obtaining regulatory approvals to
market a medical device, particularly from the FDA, can be costly and
time-consuming, and there can be no assurance that such approvals will be
granted on a timely basis, if at all. While we believe that we have obtained all
necessary clearances for the manufacture and sale of our products and that they
are generally in compliance with applicable FDA and other material regulatory
requirements, there can be no assurance that we will be able to continue such
compliance. If the FDA came to believe that we were not in compliance with
applicable law or regulations, it could institute proceedings to detain or seize
our products, issue a recall, impose operating restrictions, enjoin future
violations and assess civil and criminal penalties against us, our officers or
our employees and could recommend criminal prosecution to the Department of
Justice. In addition, the regulatory process may delay the marketing of new
products for lengthy periods and impose substantial additional costs if the FDA
lengthens review times for new devices.
Moreover, foreign governmental authorities have become increasingly
stringent in their regulation of medical devices, and our products may become
subject to more rigorous regulation by foreign governmental authorities in the
future. We cannot predict whether U.S. or foreign government regulations may be
imposed in the future that may have a material adverse effect on our business
and operations. The European Commission, or EC, has harmonized national
regulations for the control of medical devices through European Medical Device
Directives with which manufacturers must comply. Under these new regulations,
manufacturing plants must have received CE certification from a "notified body"
in order to be able to sell products within the member states of the European
Union. Certification allows manufacturers to stamp the products of certified
plants with a "CE" mark. Products covered by the EC regulations that do not bear
the CE mark cannot be sold or distributed within the European Union. We have
received certification for all currently existing manufacturing facilities and
products.
We devote significant time, effort and expense to addressing government
and regulatory requirements applicable to our business. We believe our
operations are in material compliance with applicable law. Our profitability
depends in part upon our ability and our distributors' ability to obtain and
maintain all necessary certificates, permits, approvals and clearances from U.S.
and foreign regulatory authorities and to operate in compliance with applicable
regulations.
Sales, Marketing And Distribution
General Trends
We believe that demographic trends, principally in the form of a better
informed, more active and aging population in the major healthcare markets of
the United States, Western Europe and Japan, and our focus on innovative,
minimally invasive products will continue to have a positive effect on the
demand for our products.
Primary Markets
In 2003, the Americas, including its principal market, the United
States, accounted for 57% of total net sales by geographic origination. After
the acquisition of Breg, we now have approximately 330 direct and distributor
sales representatives dedicated to the domestic market and 150 direct and
distributor sales representatives focused on foreign markets.
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In 2003, International accounted for 43% of total net sales by
geographic origination with 19% derived from the United Kingdom and 8% derived
from Italy. Other than Kendall Healthcare Products, no single international
customer accounted for greater than 2% of total net sales.
We have non-exclusive distribution agreements for the Spinal-Stim Lite
with Medtronic Sofamor Danek Group and for the Physio-Stim Lite with Royce
Medical Company. The A-V Impulse System is distributed in the United States
under an exclusive, long-term distribution agreement with Kendall Healthcare
Products. Kendall Healthcare Products accounted for approximately 10% of our
total net sales in 2003, while sales through Medtronic Sofamor Danek accounted
for approximately 9% of total net sales. Sales to all other customers were
broadly distributed.
Our products sold in the United States are either prescribed by medical
professionals for the care of their patients or sold to hospitals, independent
distributors or other healthcare providers, all of whom may be primarily
reimbursed for the healthcare products provided to patients by third-party
payors, such as government programs, including Medicare and Medicaid, private
insurance plans and managed care programs. Our products are also sold in many
other countries, such as the United Kingdom and Italy, to publicly funded
healthcare systems.
Sales Force and Distribution Network
We have established a broad distribution network within the United
States and across 86 countries via direct representatives and distributors. This
established distribution network provides us with a strong platform to introduce
new products and expand sales of existing products. We distribute our product
lines through approximately 230 direct sales representatives, including 170
field sales representatives in the United States. These sales representatives
undergo extensive training and develop the necessary technical expertise to sell
our products to orthopedic physicians and surgeons, orthopedic shops, hospitals,
surgery centers and others.
By acquiring Breg, we added approximately 46 domestic relationships,
most with independent distributors. These relationships sell primarily to
surgery centers and office environments, which represent new distribution
channels for Orthofix. These clients are served by approximately 160 sales
representatives.
Outside the United States, we employ approximately 60 direct sales
representatives throughout our international sales subsidiaries. We also utilize
50 independent distributors in over 70 countries in Europe, the Far East, the
Middle East and Central and South America. In order to provide support to our
independent distributor network, we have a sales service group consisting of
seven sales and marketing specialists who regularly visit the independent
distributors.
As a result of the Breg transaction, we added Breg's existing 50
international distributor relationships to our own. These Breg relationships are
served by approximately 90 international sales representatives.
Marketing
Until 2000, we primarily sold orthopedic devices outside the United
States and focused our stimulation products sales efforts in the United States.
However, since 2000, we have expanded our offerings of orthopedic devices in the
United States and have since begun to market the Spinal-Stim and Physio-Stim
lines in Europe and Mexico. To facilitate distribution of stimulation products
in the European Union, we obtained a CE mark for our stimulation products in
December 1998.
In general, we seek to market our products principally to medical
professionals who are the decision makers in their patient's treatment. This
focus is designed to complement our product development and marketing strategy,
which seeks to encourage and maintain interactive relationships with the leading
orthopedic, trauma and other surgeons. These relationships facilitate the
introduction of design improvements and create innovative products that meet the
needs of surgeons and patients, thereby expanding the market for our products.
We support our sales force and distributors through specialized
training workshops in which surgeons and sales specialists participate. We also
produce marketing materials, including materials outlining surgical
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Orthofix International N.V.
procedures, for our sales force and distributors in a variety of languages in
printed, video and multimedia formats. To provide additional advanced training
for surgeons, we organize monthly multilingual teaching seminars at our facility
in Verona, Italy. The Verona seminars, which in 2003 were attended by over 880
surgeons from around the world, include a variety of lectures from specialists
as well as demonstrations and hands-on workshops. We also provide sales training
at our training centers in Winston-Salem, North Carolina and McKinney, Texas and
at our recently acquired Breg training center in Vista, California.
Additionally, each year many of our sales representatives and distributors
independently conduct basic courses for surgeons in the application of certain
of our products.
Competition
For external and internal fixation devices, our principal competitors
include Synthes AG, Zimmer, Inc., Stryker Corp., Smith & Nephew plc and EBI
Medical Systems, a subsidiary of Biomet, Inc. OSCAR and BoneSource compete
principally with products produced by Biomet, Inc. and Norian Corporation,
respectively. Our stimulation products compete principally with similar products
marketed by EBI Medical Systems, dj Orthopedics, Inc., and Exogen, Inc., a
subsidiary of Smith & Nephew plc. The principal non-pharmacological products
competing with our A-V Impulse System are manufactured by Huntleigh Technology
PLC and Kinetic Concepts Inc. We have filed an action against Kinetic Concepts
Inc. for patent infringement. For a description of the litigation, see Item 3 -
"Legal Proceedings."
The principal competitors for the newly acquired Breg bracing and cold
therapy products include dj Orthopedics, Inc., Aircast Inc., EBI Medical Systems
and various smaller private companies. For pain therapy products, the principal
competitors are I-Flow Corporation, Stryker Corp. and dj Orthopedics, Inc.
We believe that our competitive position is strong with respect to
product features such as innovation, ease of use, versatility, cost and patient
acceptability. We attempt to avoid competing based solely on price. Overall cost
and medical effectiveness, innovation, reliability, after-sales service and
training are the most prevalent methods of competition in the markets for our
products, and we believe that we compete effectively in these areas,
particularly with respect to cost savings resulting from the reduction of
operating time and the avoidance of a second operative procedure for the removal
of treatment devices.
Manufacturing and Sources of Supply
We generally design, develop, assemble, test and package all our
products, and subcontract the manufacture of a substantial portion of the
component parts. Through subcontracting, we attempt to maintain operating
flexibility in meeting demand while focusing our resources on product
development and marketing and still maintaining quality assurance standards. In
addition to designing, developing, assembling, testing and packaging its
products, Breg, our recently acquired subsidiary, also manufactures a
substantial portion of the component parts used in its products.
Although certain of our key raw materials are obtained from a single
source, we believe that alternate sources for these materials are available.
Adequate raw material inventory supply is maintained to avoid product flow
interruptions. We have not experienced difficulty in obtaining the materials
necessary to meet our production schedule.
Our products are currently manufactured and assembled in the United
States, Italy, the United Kingdom, Mexico and the Seychelles. We are in the
process of transitioning a majority of Breg's manufacturing activities from its
Vista, California facility to the Mexicali, Mexico plant. We expect this
transition to be completed by the end of 2004. We believe that our plants comply
in all material respects with the requirements of the FDA and all relevant
regulatory authorities outside the United States. For a description of the
regulations to which we are subject, see Item 1 - "Business - Government
Regulation." We actively monitor each of our subcontractors in order to maintain
manufacturing and quality standards and product specification conformity.
Our business is generally not seasonal in nature. However, sales
associated with products for elective procedures appear to be influenced by the
somewhat lower level of such procedures performed in the late summer. In
addition, we do not consider backlog of firm orders to be material.
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Orthofix International N.V.
Capital Expenditures
We had capital expenditures in the amount of $5.2 million, $7.1 million
and $6.8 million in 2003, 2002 and 2001, respectively, principally for computer
software and hardware, patents and machinery and equipment, including the
leasehold improvements for a leased facility in McKinney, Texas in 2001. We
currently plan to invest approximately $5.4 million in the Americas, including
approximately $1.9 million in Breg, and approximately $3.7 million in
International in 2004 for a total of approximately $9.1 million to support the
planned expansion of our business. We expect these capital expenditures to be
financed principally with cash generated from operations.
Employees
At December 31, 2003, we had approximately 988 employees worldwide,
including employees gained through the acquisition of Breg, of which
approximately 752 were employed within the Americas unit and approximately 236
were employed within the International unit. Our relations with our Italian
employees, who numbered 61 at December 31, 2003, are governed by the provisions
of a National Collective Labor Agreement setting forth mandatory minimum
standards for labor relations in the metal mechanic workers industry. We are not
a party to any other collective bargaining agreement. We believe that we have
good relations with our employees. Of our approximately 988 employees, 426 were
employed in sales and marketing functions, 175 in general and administrative,
315 in production and 72 in research and development.
21
RISK FACTORS
You should carefully consider the risks described below. These risks
are not the only ones that our company may face. Additional risks not presently
known to us or that we currently consider immaterial may also impair our
business operations. This Form 10-K also contains forward-looking statements
that involve risks and uncertainties. Our actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including the risks faced by us described below or elsewhere in
this Form 10-K.
We depend on our ability to protect our intellectual property and proprietary
rights, but we may not be able to maintain the confidentiality, or assure the
protection, of these assets.
Our success depends, in large part, on our ability to protect our
current and future technologies and products and to defend our intellectual
property rights. If we fail to protect our intellectual property adequately,
competitors may manufacture and market products similar to, or that compete
directly with, ours. Numerous patents covering our technologies have been issued
to us, and we have filed, and expect to continue to file, patent applications
seeking to protect newly developed technologies and products in various
countries, including the United States. Some patent applications in the United
States are maintained in secrecy until the patent is issued. Because the
publication of discoveries tends to follow their actual discovery by several
months, we may not be the first to invent, or file patent applications on, any
of our discoveries. Patents may not be issued with respect to any of our patent
applications and existing or future patents issued to, or licensed by, us may
not provide adequate protection or competitive advantages for our products.
Patents that are issued may be challenged, invalidated or circumvented by our
competitors. Furthermore, our patent rights may not prevent our competitors from
developing, using or commercializing products that are similar or functionally
equivalent to our products.
We also rely on trade secrets, unpatented proprietary expertise and
continuing technological innovation that we seek to protect, in part, by
entering into confidentiality agreements with licensees, suppliers, employees
and consultants. These agreements may be breached and there may not be adequate
remedies in the event of a breach. Disputes may arise concerning the ownership
of intellectual property or the applicability or enforceability of
confidentiality agreements. Moreover, our trade secrets and proprietary
technology may otherwise become known or be independently developed by our
competitors. If patents are not issued with respect to products arising from
research, we may not be able to maintain the confidentiality of information
relating to these products.
Third parties may claim that we infringe on their proprietary rights and may
prevent us from manufacturing and selling certain of our products.
There has been substantial litigation in the medical devices industry
with respect to the manufacture, use and sale of new products. These lawsuits
relate to the validity and infringement of patents or proprietary rights of
third parties. We may be required to defend against charges relating to the
alleged infringement of patent or proprietary rights of third parties. Any such
litigation could:
o require us to incur substantial expense, even if the costs of
our defense are covered by insurance or we are successful in
the litigation;
o require us to divert significant time and effort of our
technical and management personnel;
o result in the loss of our rights to develop or make certain
products; and
o require us to pay substantial monetary damages or royalties in
order to license proprietary rights from third parties or to
satisfy judgments or to settle actual or threatened
litigation.
Although patent and intellectual property disputes within the medical
devices industry have often been settled through licensing or similar
arrangements, costs associated with these arrangements may be substantial and
could include the long-term payment of royalties. Furthermore, the required
licenses may not be made available to us on acceptable terms. Accordingly, an
adverse determination in a judicial or administrative proceeding or a failure
22
Orthofix International N.V.
to obtain necessary licenses could prevent us from manufacturing and selling
some products or increase our costs to market these products.
Reimbursement policies of third parties, cost containment measures and
healthcare reform could adversely affect the demand for our products and limit
our ability to sell our products.
Our products are sold either directly by us to our customers or to our
independent distributors and purchased by hospitals, doctors and other
healthcare providers, who together with us may be reimbursed for the healthcare
services provided to their patients by third-party payors, such as government
programs, including Medicare and Medicaid, private insurance plans and managed
care programs. Third-party payors may deny reimbursement if they determine that
a device used in a procedure was not used in accordance with cost-effective
treatment methods as determined by such third-party payor, was investigational
or was used for an unapproved indication or for other reasons. Also, third-party
payors are increasingly challenging the prices charged for medical products and
services. Limits put on reimbursement could make it more difficult for people to
buy our products and reduce, or possibly eliminate, the demand for our products.
In addition, in the event that governmental authorities enact additional
legislation or adopt regulations that affect third-party coverage and
reimbursement, demand for our products may be reduced with a consequent material
adverse effect on our sales and profitability. It is also possible that the
government's focus on coverage of off-label uses for FDA-approved devices could
lead to changes in coverage policies regarding off-label uses by TriCare,
Medicare and/or Medicaid. There can be no assurance that we or our distributors
will not experience significant reimbursement problems in the future.
Our products are sold in many countries, such as the United Kingdom and
Italy, with publicly funded healthcare systems. The ability of hospitals
supported by such systems to purchase our products is dependent, in part, upon
public budgetary constraints. Any increase in such constraints may have a
material adverse effect on our sales and collection of accounts receivable from
such sales.
We are subject to extensive government regulation that increases our costs and
could prevent us from marketing or selling our products.
The medical devices we manufacture and market are subject to rigorous
regulation by the Food and Drug Administration, or FDA, and numerous other
federal, state and foreign governmental authorities. These authorities regulate
the development, approval, testing, manufacture, labeling, marketing and sale of
medical devices. For a description of these regulations, see Item 1 - "Business
- - Government Regulation."
For example, approval by governmental authorities, including the FDA in
the United States, is generally required before any medical devices may be
marketed in the United States or other countries. The process of obtaining FDA
and other regulatory approvals to develop and market a medical device can be
costly and time-consuming, and is subject to the risk that such approvals will
not be granted on a timely basis or at all. The regulatory process may delay or
prohibit the marketing of new products and impose substantial additional costs
if the FDA lengthens review times for new devices. Moreover, we cannot predict
whether U.S. or foreign government regulations that may have a material adverse
effect on us may be imposed in the future.
Our profitability depends, in part, upon our and our distributors'
ability to obtain and maintain all necessary certificates, permits, approvals
and clearances from U.S. and foreign regulatory authorities and to operate in
compliance with applicable regulations. There can be no assurance that we have
obtained, will obtain or will remain in compliance with, applicable FDA and
other U.S. and foreign material regulatory requirements. If the FDA or other
U.S. or foreign regulatory authority determines that we were not in compliance
with applicable law or regulations, it could institute proceedings to detain or
seize our products, issue a recall, impose operating restrictions, enjoin future
violations and assess civil and criminal penalties against us, our officers or
our employees and could recommend criminal prosecution. Any such consequences
could have a material adverse effect on our business, financial condition or
results of operations.
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Orthofix International N.V.
We are subject to product liability claims that may not be covered by insurance
and could require us to pay substantial sums.
We are subject to an inherent risk of, and adverse publicity associated
with, product liability and other liability claims, whether or not such claims
are valid. We maintain product liability insurance coverage in amounts and scope
that we believe is adequate. There can be no assurance, however, that product
liability or other claims will not exceed our insurance coverage limits or that
such insurance will continue to be available on commercially acceptable terms,
or at all. A successful product liability claim that exceeds our insurance
coverage limits could require us to pay substantial sums and could have a
material adverse effect on us.
New developments by others could make our products or technologies
non-competitive or obsolete.
The orthopedic device industry in which we compete is undergoing, and
is expected to continue to undergo, rapid and significant technological change.
We expect competition to intensify as technological advances are made. New
technologies and products developed by other companies are regularly introduced
into the market, which may render our products or technologies non-competitive
or obsolete.
Recent approval and introduction of Bone Morphogenic Proteins (BMPs) by
Medtronic Sofamor Danek Group have begun to show some market acceptance as a
substitute for autograft bone in spinal fusion surgeries. Our Spinal-Stim
product is FDA-approved for both failed fusions and healing enhancement as an
adjunct to spinal fusion surgery, most typically for multilevel or high-risk
patients. In 2002, Medtronic Sofamor Danek Group conducted clinical studies with
BMPs. Participation of physicians in the clinical studies had an adverse impact
on our stimulation product sales growth in the second half of 2002. Although
product sales growth returned to historic product growth rates in 2003, as
physicians participate in further clinical studies with BMPs, it could have a
further adverse impact on stimulation product sales. Although BMPs are
considered or classified as a bone growth material, they have yet to be
clinically proven to be effective in high-risk patients.
Our ability to market products successfully depends, in part, upon the
acceptance of the products not only by consumers, but also by independent third
parties.
Our ability to market orthopedic products successfully depends, in
part, on the acceptance of the products by independent third parties (including
hospitals, doctors, other healthcare providers and third-party payors) as well
as patients. Unanticipated side effects or unfavorable publicity concerning any
of our products could have an adverse effect on our ability to maintain hospital
approvals or achieve acceptance by prescribing physicians, managed care
providers and other retailers, customers and patients.
The industry in which we operate is highly competitive.
The medical devices industry is fragmented and highly competitive. We
compete with a large number of companies, many of which have significantly
greater financial, manufacturing, marketing, distribution and technical
resources than we do. Many of our competitors may be able to develop products
and processes competitive with, or superior to, our own. Furthermore, we may not
be able to successfully develop or introduce new products that are less costly
or offer better performance than those of our competitors, or offer purchasers
of our products payment and other commercial terms as favorable as those offered
by our competitors. For more information regarding our competitors, see Item 1 -
"Business - Competition."
We depend on our senior management team.
Our success depends upon the skill, experience and performance of
members of our senior management team, who have been critical to the management
of our operations and the implementation of our business strategy. We do not
have key man insurance on our senior management team, and the loss of one or
more key executive officers could have a material adverse effect on our
operations and development.
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Orthofix International N.V.
Termination of our existing relationships with our independent distributors
could have an adverse effect on our business.
We sell our products in many countries through independent
distributors. Each distributor has the exclusive right to sell our products in
its territory and is generally prohibited from selling any products that compete
with ours. The terms of our distribution agreements vary in length from one to
ten years. Under the terms of our distribution agreements, each party has the
right to terminate in the event of a material breach and we generally have the
right to terminate if the distributor does not meet agreed sales targets or
fails to make payment on time. Any termination of our existing relationships
with independent distributors could have an adverse effect on our business
unless and until alternative distribution arrangements are put in place.
We face risks related to foreign currency exchange rates.
Because some of our revenue, operating expenses, assets and liabilities
are denominated in foreign currencies, we are subject to foreign exchange risks
that could adversely affect our operations and reported results. To the extent
that we incur expenses or earn revenue in currencies other than the U.S. dollar,
any change in the values of those foreign currencies relative to the U.S. dollar
could cause our profits to decrease or our products to be less competitive
against those of our competitors. To the extent that our foreign currency and
receivables denominated in foreign currency are greater or less than our
liabilities denominated in foreign currency, we have foreign exchange exposure.
We have substantial activities outside of the United States that are subject to
the impact of foreign exchange rates. The impact of foreign exchange rates on
sales outside of the United States was to increase net sales by $7.6 million in
International for 2003, primarily as the result of a stronger Euro and U.K.
Sterling against the U.S. dollar, and to decrease net sales by $0.5 million in
the Americas for 2003, primarily as a result of a weaker Mexican Peso against
the U.S. dollar. Although we seek to manage our foreign currency exposure by
matching non-dollar revenues and expenses, exchange rate fluctuations could have
a material adverse effect on our results of operations in the future.
We are subject to differing tax rates in several jurisdictions in which we
operate.
We have subsidiaries in several countries. Certain of our subsidiaries
sell products directly to other Orthofix subsidiaries or provide marketing and
support services to other Orthofix subsidiaries. These intercompany sales and
support services involve subsidiaries operating in jurisdictions with differing
tax rates. Tax authorities in such jurisdictions may challenge our treatment of
such intercompany transactions under the residency criteria, transfer pricing
provisions or any other aspects of their respective tax laws. If we are
unsuccessful in defending our treatment of intercompany transactions, we may be
subject to additional tax liability or penalty, which would adversely affect our
profitability.
Provisions of Netherlands Antilles law may have adverse consequences to our
shareholders.
Our corporate affairs are governed by our Articles of Incorporation and
the corporate law of the Netherlands Antilles (CCNA) (Articles 100-144).
Although some of the provisions of the CCNA resemble some of the provisions of
the corporation laws of a number of states in the United States, principles of
law relating to such matters as the validity of corporate procedures, the
fiduciary duties of management and the rights of our shareholders may differ
from those that would apply if Orthofix were incorporated in a jurisdiction
within the United States. For example, there is no statutory right of appraisal
under Netherlands Antilles corporate law nor is there a right for shareholders
of a Netherlands Antilles corporation to sue a corporation derivatively. In
addition, we have been advised by Netherlands Antilles counsel that it is
unlikely that (1) the courts of the Netherlands Antilles would enforce judgments
entered by U.S. courts predicated upon the civil liability provisions of the
U.S. federal securities laws and (2) actions can be brought in the Netherlands
Antilles in relation to liabilities predicated upon the U.S. federal securities
laws.
25
Orthofix International N.V.
Our business is subject to economic, political and other risks associated with
international sales and operations.
Since we sell our products in many different countries, our business is
subject to risks associated with doing business internationally. Net sales
outside the United States represented 35% of our total net sales in 2003. We
anticipate that net sales from international operations will continue to
represent a substantial portion of our total net sales. In addition, a number of
our manufacturing facilities and suppliers are located outside the United
States. Accordingly, our future results could be harmed by a variety of factors,
including:
o changes in foreign currency exchange rates;
o changes in a specific country's or region's political or economic
conditions;
o trade protection measures and import or export licensing requirements
or other restrictive actions by foreign governments;
o consequences from changes in tax laws;
o difficulty in staffing and managing widespread operations;
o differing labor regulations;
o differing protection of intellectual property; and
o unexpected changes in regulatory requirements.
Our subsidiary Colgate Medical Limited's senior secured bank credit facility
contains significant financial and operating restrictions and mandatory
prepayments that may have an adverse effect on our operations and limit our
ability to grow our business.
When we acquired Breg on December 30, 2003, one of our wholly owned
subsidiaries, Colgate Medical Limited, entered into a new senior secured bank
credit facility with a syndicate of financial institutions to finance the
transaction. Orthofix and each of Colgate's direct and indirect subsidiaries,
including Orthofix Inc. and Breg, have guaranteed the obligations of Colgate
under the senior secured bank facility. The senior secured bank facility
provides for (1) a five-year amortizing term loan facility of $110.0 million and
(2) a five-year revolving credit facility of $15.0 million, upon which we had
not drawn as of March 12, 2004.
Further, in addition to scheduled debt repayments, our new senior
secured bank facility requires us to make mandatory prepayments with (a) the
excess cash flow (as defined in the credit agreement) of Colgate and its
subsidiaries in an amount initially equal to 75% of the excess annual cash flow
of Colgate and its subsidiaries, reducing to 50% upon the attainment of a
leverage ratio of less than or equal to 1.50 to 1.00 or less, (b) the net cash
proceeds of any debt issuance by Colgate and its subsidiaries or any equity
issuance by us or Colgate or any of its subsidiaries, (c) the net cash proceeds
of asset dispositions over a minimum threshold or (d) unless reinvested,
insurance proceeds or condemnation awards. These mandatory prepayments could
limit our ability to grow our business.
The credit agreement contains customary negative covenants applicable
to Colgate and its subsidiaries, including restrictions on indebtedness, liens,
dividends and mergers and sales of assets. The credit agreement also contains
certain financial covenants, including a fixed charge coverage ratio, an
interest coverage ratio and a leverage ratio applicable to Colgate and its
subsidiaries on a consolidated basis, and a leverage ratio applicable to
Orthofix and its subsidiaries on a consolidated basis. A breach of any of these
covenants could result in an event of default under the credit agreement, which
could permit acceleration of the debt payments under the facility. See Item 7 -
"Liquidity and Capital Resources."
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Orthofix International N.V.
We may not be able to successfully integrate Breg's operations into our business
and may not achieve the anticipated benefits of the acquisition.
We are in the process of integrating into our company the operations of
Breg. The integration of Breg's operations into our business involves numerous
risks, including:
o difficulties in incorporating Breg's product lines, sales personnel
and marketing operations into our business;
o the diversion of our resources and our management's attention from
other business concerns;
o the loss of key distributors; and
o the loss of key employees.
Our failure to integrate and manage Breg's business successfully could
adversely affect our business and financial performance. In addition, if Breg's
operations and financial results do not meet our expectations, we may not
realize the synergies, operating efficiencies, market position, or revenue
growth we anticipate from the acquisition.
27
Item 2. Properties
- -------------------
The Company's principal facilities are:
Facility Location Square Feet Ownership
- -------- -------- ----------- ---------
Manufacturing, warehousing, distribution and research and McKinney, TX 70,000 Leased
development facility for Stimulation and Bracing Products
and administrative facility for Orthofix Inc.
Research and development, component manufacturing, quality Verona, Italy 38,000 Owned
control and training facility for fixation products and
sales management and administrative facility for Italy
Research and development, training and technology facility Winston-Salem, NC 7,600 Leased
Administrative offices for Orthofix International N.V. and Huntersville, NC 7,300 Leased
Orthofix Inc.
Sales management, distribution and administrative offices Henley, England 1,480 50% Owned
for Orthofix International N.V.
Administrative offices for Orthofix Ltd. Guildford, England 8,000 Leased
Sales management for OSCAR product and administrative South Devon, England 2,500 Leased
offices for Orthosonics Ltd.
Sales management, distribution and administrative offices Andover, England 9,000 Leased
for A-V Impulse product
Sales management, distribution and administrative facility Maidenhead, England 9,000 Leased
for United Kingdom
Sales management, distribution and administrative facility Mexico City, Mexico 3,444 Leased
for Mexico
Sales management, distribution and administrative facility Sao Paulo, Brazil 1,300 Owned
for Brazil
Sales management, distribution and administrative facility Gentilly, France 3,854 Leased
for France
Sales management, distribution and administrative facility Valley, Germany 3,000 Leased
for Germany
Sales management, distribution and administrative facility Steinhausen, Switzerland 1,180 Leased
for Switzerland
Assembly and packaging facility for fixation products Victoria, Mahe, Seychelles 5,597 Leased
Administrative, manufacturing, warehousing, distribution and Vista, California 126,000 Leased
research and development facility for Breg
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Orthofix International N.V.
Manufacturing facility for Breg products Mexicali, Mexico 63,000 Leased
Over the last twelve months, Breg has shifted several labor-intensive
manufacturing operations from its Vista, California plant to its Mexicali,
Mexico facility. We expect that the transition of Breg's manufacturing
operations to Mexico will be completed by the end of 2004. Approximately 21,888
square feet of manufacturing space that is no longer being utilized at the
Vista, California plant has been listed for sublease.
In 2004, we expect to consolidate our U.K. facilities in Henley,
Guildford, and Maidenhead into a single facility. We believe this will bring
greater efficiency and future cost savings to our U.K. and International
operations.
Item 3. Legal Proceedings
- --------------------------
Except as described below, there are no material pending legal
proceedings to which the Company is a party or of which any of its property is
subject.
Earnout and Bonus Litigation
On December 4, 1998, the special committee, or the Review Committee,
established to determine the amount of any contingent contract rights under the
Merger Agreement, dated May 8, 1995, between Orthofix International and American
Medical Electronics (AME) in settlement of all claims of the holders of record
of AME common stock and the options and warrants to acquire such stock as of
August 21, 1995, unanimously determined that Orthofix International would pay to
the AME record holders an earnout of $500,000 plus interest and 12% of the net
recovery received from the resolution in 2000 of a litigation against Biomet,
Inc. and Electro Biology, Inc., up to a maximum of $5,500,000, plus interest.
The Review Committee has not calculated the amount of the capped figure, but
Orthofix International believes it is between $5,000,000 and $5,500,000. An
arbitrator acting under the auspices of the American Arbitration Association, or
AAA, subsequently entered a consent award based on the Review Committee's
determination.
On January 29, 1999, two couples who owned shares of AME common stock
commenced a civil action in Colorado federal court against Orthofix Inc. and the
members of the Review Committee seeking, among other relief, the maximum earnout
and bonus under the Merger Agreement of $18 million plus interest. The
plaintiffs also seek to represent all AME record holders. Clarence Frere, Louise
Frere, Joseph Mooibroek and Marla B. Mooibroek, individually and on behalf of
all others similarly situated v. Orthofix Inc., Arthur Schwalm, Robert
Gaines-Cooper, James Gero, and John and Jane Does One (1) Through Four (4), No.
99-S-445 (D. Colo.). In a related action, commenced on June 2, 1999, the same
plaintiffs filed a motion in the United States District Court for the Southern
District of New York seeking to intervene in the AAA arbitration and vacate the
consent award. Clarence Frere, Louise Frere, Joseph Mooibroek, and Marla B.
Mooibroek, individually and on behalf of all others similarly situated v.
Orthofix Inc., Arthur Schwalm, Robert Gaines-Cooper, James Gero, and John and
Jane Does One (1) Through Four (4), No. 99 Civ. 4049 (S.D.N.Y.). The two actions
have been consolidated in the New York federal court and Orthofix International
has been added as a party.
The New York federal court resolved the two consolidated actions in
favor of the Company and its subsidiary. On July 12, 2002, the New York federal
court denied the plaintiffs' motion to vacate the consent award. On May 21,
2003, the court denied plaintiffs' motion for leave to file a second amended
complaint and dismissed the Earnout and Bonus action in its entirety with
prejudice. Plaintiffs filed an appeal to the United States Court of Appeals for
the Second Circuit. The appeal is fully briefed and was submitted in March 2004.
We are vigorously defending the trial court's decision in favor of the
Company and its subsidiary. We expect the appeal to be heard and decided in the
first half of 2004. We have previously reserved approximately $5.2 million plus
accrued interest for the settlement of this matter.
29
Orthofix International N.V.
KCI Litigation
Novamedix, a subsidiary of the Company, filed an action in federal
court in the Western District of Texas on February 21, 1992 against Kinetic
Concepts Inc (KCI) alleging infringement of the patents relating to Novamedix's
A-V Impulse System product, breach of contract, and unfair competition. In this
action, Novamedix is seeking a permanent injunction enjoining further
infringement by KCI. Novamedix also seeks damages relating to past infringement,
breach of contract, and unfair competition. KCI has filed counterclaims alleging
that Novamedix engaged in inequitable conduct before the United States Patent
and Trademark Office and fraud as to KCI and that Novamedix engaged in common
law and statutory unfair competition against KCI. KCI seeks a declaratory
judgment that the patents are invalid, unenforceable, and not infringed. KCI
also seeks monetary damages, injunctive relief, costs, attorney's fees, and
other unspecified relief. During 2002, the United States Patent and Trademark
Office issued re-examination certificates validating four U.S. vascular patents
owned by us. The U.S. District Court in San Antonio, Texas has restored the
litigation to active status, and has provided a Scheduling Order that will
govern this matter. KCI has sought to add a charge of infringement against
Novamedix under a recently issued KCI patent but that request was denied on a
procedural basis. KCI retains the right to seek enforcement of its patent in a
separate proceeding. A portion of any amounts received will be payable to former
owners of Novamedix under the original purchase agreement. In 2003, discovery
was largely completed and several motions are now pending before the Court on
liability and damage issues.
Item 4. Submission of Matters to a Vote of Security Holders
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There were no matters submitted to a vote of security holders during
the fourth quarter of 2003.
30
Orthofix International N.V.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
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Market for Our Common Stock
Our common stock is traded on the Nasdaq National Market under the
symbol "OFIX." The following table shows the quarterly range of high and low
sales prices for our common stock as reported by Nasdaq for each of the two most
recent fiscal years ended December 31, 2003. As of March 5, 2004 we had
approximately 240 holders of record of our common stock.
High Low
2002 ------ ------
First Quarter $41.49 $32.80
Second Quarter 41.67 33.00
Third Quarter 35.97 24.68
Fourth Quarter 29.37 23.50
2003
First Quarter 30.64 23.69
Second Quarter 34.42 25.68
Third Quarter 37.54 31.81
Fourth Quarter 51.05 36.10
Dividend Policy
We have not paid dividends to holders of our common stock in the past.
We currently intend to retain all of our consolidated earnings to finance credit
agreement obligations resulting from the recently completed Breg acquisition and
to finance the continued growth of our business. We have no present intention to
pay dividends in the foreseeable future.
In the event that we decide to pay a dividend to holders of our common
stock in the future with dividends received from our subsidiaries, we may, based
on prevailing rates of taxation, be required to pay additional withholding and
inc