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, 2004
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
incorporation or organization) Identification No.)
7 Abraham de Veerstraat
Curacao
Netherlands Antilles N/A
- ------------------------------- -------------------
(Address of principal (Zip Code)
executive offices)
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, 2004, as
reported by the Nasdaq National Market, was approximately $394.7 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 10, 2005, 15,796,473 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 2005 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.........................................................................5
Item 1. Business............................................................5
Item 2. Properties.........................................................28
Item 3. Legal Proceedings..................................................29
Item 4. Submission of Matters to a Vote of Security Holders................30
PART II.......................................................................30
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................................30
Item 6. Selected Financial Data............................................32
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................33
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.........45
Item 8. Financial Statements and Supplementary Data........................45
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................................45
Item 9A. Controls and Procedures...........................................45
PART III......................................................................47
Item 10. Directors and Executive Officers of the Registrant................47
Item 11. Executive Compensation............................................50
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholders...............................50
Item 13. Certain Relationships and Related Transactions....................50
Item 14. Principal Accountant Fees and Services............................50
PART IV......................................................................51
Item 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K....................................................51
3
Forward-Looking Statements
This Form 10-K contains forward-looking statements within the meaning
of Section 21E of the Securities Exchange Act of 1934, as amended, 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.
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, unanticipated expenditures,
changing relationships with customers, suppliers and strategic partners,
unfavorable results in litigation matters, 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, currency
or interest rate fluctuations and the other risks described under Item 1 -
"Business - Risk Factors" in this Form 10-K.
4
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 and airway management products used in anesthesia applications.
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, Brazil, and Puerto Rico. 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. Our SEC filings are
also available on the SEC internet website as part of the EDGAR database
(http://www.sec.gov).
Important Events in 2003 and 2004
On December 28, 2004, we announced that we had received from the U.S.
Food and Drug Administration (FDA) approval to market our Cervical-Stim bone
growth stimulator. Cervical-Stim is the first and only FDA-approved bone growth
stimulator for use as an adjunct to cervical (upper) spine fusion in high-risk
patients. The FDA approval of Cervical-Stim is based upon a PMA (pre-market
approval) application that included the results of a prospective, randomized,
multi-center clinical investigation of Cervical-Stim. The clinical trial
randomized a total of 323 "high-risk" patients who had undergone cervical fusion
surgery for degenerative conditions.
In April 2004, we purchased the intellectual property of the Gotfried
Percutaneous Compression Plating (PC.C.P) System for approximately $4.0 million.
As a result of this new agreement, the previous agreement which included a
license and worldwide marketing rights for this product was terminated.
5
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. 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 $3.6 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 $68.3 million in net revenues in 2004.
Concurrently with the closing of the Breg acquisition, Colgate Medical
Limited (Colgate), a wholly owned subsidiary of Orthofix, entered into a senior
secured bank facility which provides for (1) a five-year amortizing term loan
facility of $110 million, and (2) a five-year revolving credit facility of $15
million. As of March 11, 2005, we had no amounts outstanding under the revolving
credit facility and $76.8 million outstanding under the term loan. Loans under
the 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.
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 assignment or 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 administrative staff.
Products
Our revenues are generally derived from two primary sources: sales of
orthopedic and non-orthopedic products. Sales of orthopedic products are in
three market sectors, Spine (28%), Reconstruction (42%) and Trauma (22%), which
together accounted for 92% of our total net sales in 2004. Sales of
non-orthopedic products, including airway management products for use during
anesthesia, woman's care and other products, accounted for 8% of our total net
sales in 2004.
6
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 lumbar spinal bone
growth stimulation
Cervical-Stim PEMF non-invasive cervical spine 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 to prevent deep vein
thrombosis
Cemex Bone cement
ISKD Internal limb-lengthening device
OSCAR Ultrasonic bone cement removal
Breg Bracing Bracing products which provide support
and protection of limbs and extremities
Polar Care Cold therapy products to reduce swelling
and accelerate the rehabilitation
process
Pain Care Pain therapy products that provide
continuous post-surgery infusion of
local anesthetic into surgical site
Trauma
ExFix External and internal fixation,
including DAF, ProCallus, Xcaliber and
nailing systems
Physio-Stim PEMF long bone 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
We have proprietary rights over all of the above products with
the exception of the Laryngeal Mask, Cemex, and ISKD. 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 worldwide.
We have numerous trademarked products and services including
but not limited to the following: Orthofix(R), ProCallus(R),
Orthotrac(TM), XCaliber(TM), PC.C.P(TM), OASIS(TM), EZBrace(TM),
Spinal-Stim(R), Cervical-Stim(R), Physio-Stim(R), Breg(R), Polar
Care(R), and Pain Care(R).
7
Net Sales
The following tables display the net sales by business segment, net of
intercompany eliminations, and by each of our market sectors for the three most
recent fiscal years ended December 31, 2004. We provide net sales by market
sector for informational purposes only. We maintain our books and records by
business segment.
Business Segment:
----------------
Year ended December 31,
(In US$ thousands)
2004 2003 2002
-------------------------- ----------------------------- ----------------------------
Percent of Percent of Percent of
Total Net Total Net Total Net
Net Sales Sales Net Sales Sales Net Sales Sales
----------- ------------- -------------- ------------- -------------- -------------
Americas Orthofix $125,972 44% $116,848 57% $102,850 58%
Americas Breg 68,294 24% -- -- --
International Orthofix 92,372 32% 86,859 43% 74,745 42%
----------- ------------- -------------- ------------- -------------- -------------
Total $286,638 100% $203,707 100% $177,595 100%
=========== ============= ============== ============= ============== =============
Market Sector:
-------------
Year ended December 31,
(In US$ thousands)
2004 2003 2002
-------------------------- ----------------------------- ----------------------------
Percent of Percent of Percent of
Total Net Total Net Total Net
Net Sales Sales Net Sales Sales Net Sales Sales
----------- ------------- -------------- ------------- -------------- -------------
Orthopedic
Spine $81,375 28% $ 79,552 39% $ 69,613 39%
Reconstruction (1) 120,935 42% 51,183 25% 43,838 25%
Trauma 62,892 22% 53,706 26% 46,551 26%
----------- ------------- -------------- ------------- -------------- -------------
Total Orthopedic 265,202 92% 184,441 90% 160,002 90%
Non-Orthopedic 21,436 8% 19,266 10% 17,593 10%
----------- ------------- -------------- ------------- -------------- -------------
Total $286,638 100% $203,707 100% $177,595 100%
=========== ============= ============== ============= ============== =============
(1) Reconstruction includes Breg, Inc. acquired December 30, 2003.
Additional financial information regarding our geographic markets can
be found in Part II, Item 8, "Financial Statements and Supplementary Data".
Orthopedic Products
Orthopedic product sales represented 92% of our total net sales in
2004.
Our orthopedic product sales cover three market sectors: Spine,
Reconstruction and Trauma.
8
Spine
Spine product sales represented 28% of our total net sales in 2004.
We believe that neck and back pain is a common health problem for many
patients throughout the world, which often requires surgical or non-surgical
intervention for improvement. Neck and 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 to fill the existing gap between
conservative pain management and invasive surgery, such as spine fusion.
Orthofix spine products are positioned to address the needs of spine
patients at any point within the non-invasive care cycle, offering
non-operative, pre-operative and post-operative treatments. Our products
currently address the cervical and lumbar fixation and fusion segment which is
the largest sub-segment of the spine market. According to Healthpoint Capital
Research, this sub-segment is estimated to be approximately $1.8 billion in the
United States and is expected to grow at 8%. Further, the overall spine market,
according to Knowledge Enterprises 2003, a market research firm, is currently
estimated at $2.9 billion, with a compounded annual growth rate expected to be
between 19% and 21% 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 of not fusing following a
spine fusion procedure due to risk factors such as smoking, obesity or because
their surgery involves fusion of multiple levels of vertebra in one procedure.
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
135,000 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. 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 is typically 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 low level 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. Our different
stimulation products each use unique PEMF signals or differing physical
configurations tailored to specific applications. These differing signals and
configurations are proprietary to Orthofix. 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 under a manufacturer's
representative agreement.
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 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.
9
Cervical-Stim
On December 28, 2004, we announced that we had received approval from
the U.S. Food and Drug Administration (FDA) to market our Cervical-Stim bone
growth stimulator. Cervical-Stim is the first and only FDA-approved bone growth
stimulator for use as an adjunct to cervical (upper) spine fusion in high-risk
patients.
The FDA approval of Cervical-Stim is based upon a PMA (pre-market
approval) application that included the results of a prospective, randomized,
multi-center clinical investigation of Cervical-Stim. The clinical trial
randomized a total of 323 "high-risk" patients who had undergone cervical fusion
surgery for degenerative conditions. The trial defined "high risk" as patients
who had at least two risk factors. Results showed that 84% of patients who wore
the device healed and 69% of patients who did not wear the device healed. These
results are clinically significant.
Without a bone growth stimulator, the failure rate of cervical and
lumbar fusions in high risk patients can be significant. Application of PEMF
signals activates the body's natural repair mechanism when it is absent or not
fully functional in certain patients, and consequently enhances bone growth for
successful fusion outcomes. Orthofix is sponsoring independent research at the
Cleveland Clinic, where scientists are conducting "mechanism of action" studies
to identify the influence of PEMF on bone cell proliferation. Results, which
have been submitted to peer review in advance of publication, show that
application of Orthofix's PEMF signal activates specific bone cell membrane
receptors and sets off internal signaling within the bone cell-causing
proliferation. We believe the results of these studies will be
published in 2005.
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 or 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 42% of our total net sales in 2004.
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 existing alternatives
for the correction of lower limb deformities. In addition, we introduced in 2002
an internal lengthening system called the ISKD which is used when patient's
limbs are unequal in length. The ISKD is implanted using a minimally invasive
technique and lengthens internally. In late 2004, we introduced a reconstruction
plate called Eight-Plate Guided Growth System to correct varus and valus
deformity in children.
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
10
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 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, cold therapy products and pain care
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 Knowledge Enterprises 2003, the market size for
reconstruction products is currently estimated to be $6.8 billion with a
compounded annual growth rate between 10% and 12% through 2010.
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 a majority 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
with the remaining net sales of the A-V Impulse System addressing 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
11
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. We have under development a new
ultrasonic product for the larger uncemented hip revision market.
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 44 states. A new version of OSCAR
was launched in 2001, which has a built-in endoscopic function for visual
examination of the femoral canal.
Breg
On December 30, 2003, we completed the acquisition of Breg Inc., which
we believe is a market leader in the sale of orthopedic post-operative
reconstruction and rehabilitative products to hospitals and orthopedic offices.
We include all of Breg's products in our Reconstruction market sector. Breg's
products are grouped primarily into three product categories: Breg Bracing,
Polar Care and Pain Care. Approximately 53% of Breg's net revenues 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
(4) foot and ankle supports that provide an alternative to casting.
Approximately 30% of Breg's 2004 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 2004 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 and related international
subsidiaries. Approximately 8% of Breg's 2004 net revenues came from the sale of
other rehabilitative products.
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 and help stabilize the joint so that patients may
successfully complete rehabilitation and resume their daily activities. The
product line includes premium custom braces generally designed for strenuous
athletic activity and off-the-shelf braces designed for use in less vigorous
activity. All ligament braces are also available with a patellofemoral option to
address tracking and subsequent pain of the patellofemeral joint. We market the
ligament product line under the X2K 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
12
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.
The Breg T-Scope is a premium brace in the post-operative bracing market and has
every feature available offered in our post-operative knee braces, including
telescoping bars, easy application, full range of motion and a drop lock
feature.
Osteoarthritic braces are used to treat patients suffering from
osteoarthritis of the knee. Osteoarthritis ("OA") is a form of damage to, or
degeneration of, the articular surface of a joint. This line of custom 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's CounterForce Plus, our newest bracing technology for patients suffering
from OA, is 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 historically by
insurance companies over the years. Based on the increasing acceptance of cold
therapy, reimbursement by insurance companies is improving.
The Polar Care product uses a circulation system to provide constant
fluid flow rates to ensure safe and effective treatment. The product consists of
a cooler filled with ice and cold water connected to a pad, which is applied to
the affected area of the body; the device provides continuous 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
systems provide a continuous infusion of local anesthetic dispensed directly
into the surgical site following a surgical procedure. The Pain Care family
provides infusions, controlled by the patient, 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.
Other
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 22% of our total net sales in 2004.
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 $2.0 billion in 2005 and that the market is currently growing between 8%
and 10% per year.
13
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.
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 60 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.
Our proprietary XCaliber bone screws 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 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.
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 than 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 nails, screws, and plates designed to
temporarily stabilize traumatic bone injuries. These devices are used to set and
stabilize fractures and are removed when healing is completed. Our 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
14
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 is an implant for fixing
small fracture fragments, usually used for the treatment of
fractures near the joints.
In 2005, we plan to introduce a new line of plates, the Contours VPS,
an internal fixation plating system that allows for anatomically correct
alignment in wrist fractures.
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 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 fracture site.
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 50,000 patients
have been treated using Physio-Stim for long bone non-unions since the product
was introduced in 1986. Physio-Stim uses a proprietary technology to generate a
PEMF signal. 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
compliance. Physio-Stim uses a PEMF signal that is distinct from the Spinal-Stim
product but is also patented and proprietary to Orthofix.
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.
15
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.
In 2002, we entered into an exclusive distribution agreement with
Efratgo Limited to market the PC.C.P System which contained an option to
purchase the technology. In 2004, we purchased the intellectual property of the
PC.C.P System for approximately $4.0 million.
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.
Traditional hip-fracture surgery can require a 5-inch-long incision
down the thigh, but the 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 8% of our total net sales in
2004.
Laryngeal Mask
The Laryngeal Mask, a product of Venner Capital S.A. (formally known as
LMA International S.A.), 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 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. 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. In 2002
and 2003, we invested a total of $5.5 million in the joint venture for an
ownership stake of approximately 47%. In 2004, we elected not to make a further
investment in the joint venture and sold 2.0 million of our 5.5 million shares
to our partner in the joint venture, Ferrer, Freedman, & Co. for $1.3 million.
As of December 31, 2004 our ownership stake in the joint venture was
approximately 22%.
16
Our investment in the joint venture has been reduced to zero
as a result of recording our share of the losses in the joint venture.
Product Development
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 the Cleveland Clinic
Foundation 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, some of which result in Orthofix entering into assignment and license
agreements with physicians and third-parties. 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.
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; Vista, California; and Andover, United
Kingdom.
In 2004, 2003 and 2002, we spent $11.5 million, $8.1 million and $7.5
million, respectively, on research and development. In 2005, we expect to
introduce several new products for the trauma and reconstruction markets as well
as several next generation products as extensions to existing products.
In January 2002, we agreed to provide approximately $2.0 million to the
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. We expect initial results
from these studies to be published in 2005.
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 us with
the ability to participate in spine product research and development efforts
with IST.
Patents, Trade Secrets, Assignments and Licenses
We rely on a combination of patents, trade secrets, as well as
assignment and 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 or assigned 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 assignment to or 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 obtain assignments or licenses of varying durations for certain
orthopedic products from third parties. We have acquired rights under such
assignments or licenses in exchange for lump-sum payments or arrangements under
which we pay to the licensor a percentage of sales. However, while assignments
to us generally are irrevocable, 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
17
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.
Government Regulation
Sales of medical devices, including our orthopedic products, are
subject to U.S. and non-U.S. 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.
Our products are subject to the regulatory powers of the FDA pursuant
to the Medical Device Amendments Act of 1976 to the Federal Food, Drug and
Cosmetics Act, 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 bone growth 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. The FDA also has the ability to
reclassify medical devices from one category of regulatory classification to
another and there can be no assurance that one or more of our products will not
be reclassified.
Moreover, non-U.S. governmental authorities have become increasingly
stringent in their regulation of medical devices, and our products may become
subject to more rigorous regulation by non-U.S. governmental authorities in the
future. We cannot predict whether U.S. or non-U.S. 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.
Our sales and marketing practices are also subject to a number of U.S.
laws regulating healthcare fraud and abuse such as the Anti-Kickback Statute and
the Physician's Self-Referral Law (known as the "Stark Law"), the Civil False
Claims Act and the Health Insurance Portability and Accountability Act as well
as numerous state laws regulating healthcare and insurance. These laws are
enforced by the Office of Inspector General and the United States Department of
Justice along with other federal, state and local agencies. These laws
generally: (1) prohibit the provision of any thing of value in exchange for a
patient referral from a healthcare program, (2) require that claims for payment
submitted to the Government be truthful,(3) prohibit the transmission of
protected healthcare information to persons not authorized to receive that
information, (4) require the provision of certain information to the government,
and (5) require the maintenance of certain government licenses and permits.
We devote significant time, effort and expense to addressing government
and regulatory requirements applicable to our business. We believe our
operations are in compliance with applicable law. We maintain a
18
Healthcare Compliance Committee as recommended by applicable U.S. government
guidelines which meets regularly to address healthcare regulatory policy and
potential employee discipline. Our employees receive healthcare regulatory
compliance training on an ongoing basis. 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 non-U.S.
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 2004, Americas Orthofix including its principal market, the United
States, accounted for 44% of total net sales; Americas Breg accounted for 24% of
total net sales, and International Orthofix accounted for 32% of total net
sales. Other than Kendall Healthcare Products and sales directed to customers
through a Manufacturers' Representative agreement with Medtronic Sofamor Danek
Group, no single customer accounted for greater than 2% of total net sales.
We have a Manufacturer's Representative agreement for the Spinal-Stim
Lite with Medtronic Sofamor Danek Group. As an agent for Orthofix, Medtronic
Sofamor Danek represents our products to their customers on a commission basis.
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 5% of our total net sales in
2004, while sales through Medtronic Sofamor Danek's Manufacturer's
Representative agreement accounted for approximately 7% 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, clinics,
surgery centers, 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, France and
Italy, to publicly funded healthcare systems and private insurance plans.
Sales, Marketing and Distributor Network
We have established a broad distribution network comprised of 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 products through sales and marketing force of
approximately 444 direct sales and marketing representatives. Our products are
also sold through distributors. Worldwide we have approximately 188 independent
distributors who represent our products in approximately 60 countries. The table
below highlights the makeup of our sales, marketing, and distribution network at
December 31, 2004.
Direct
Sales & Marketing Headcount Distributors
--------------------------------------------- -----------------------------------------------
United
States International Total United States International Total
---------- ------------- ------------- --------------- ------------- --------------
Orthofix 263 138 401 33 65 98
Breg 42 1 43 52 38 90
---------- ------------- ------------- --------------- ------------- --------------
Total 305 139 444 85 103 188
========== ============= ============= =============== ============= ==============
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In our largest market, the United States, our sales, marketing and
distributor network is separated between a dedicated spine sales force
addressing the spine market sector, an orthopedic sales force addressing the
reconstruction and trauma market sectors and the Breg sales, marketing and
distributor network which is predominately a distributor network addressing the
reconstruction market sector.
Outside the United States, we employ direct sales representatives
throughout our international sales subsidiaries. We also utilize independent
distributors 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 group of sales and marketing specialists who regularly visit the
independent distributors.
Marketing
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 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 2004 were attended by over 750 surgeons
from around the world, include a variety of lectures from specialists as well as
demonstrations and hands-on workshops. Each year many of our sales
representatives and distributors independently conduct basic courses locally for
surgeons in the application of certain of our products. We also provide sales
training at our training centers in McKinney, Texas and at our Breg training
center in Vista, California. Additionally, we are implementing a web-based sales
training portal to provide continued training to our sales representatives.
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 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 resulting from the non-invasive or minimally invasive nature of
many of our products.
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
20
operating flexibility in meeting demand while focusing our resources on product
development and marketing while still maintaining quality assurance standards.
In addition to designing, developing, assembling, testing, and packaging its
products, Breg, 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. In 2004, we
completed the process of transitioning a majority of Breg's manufacturing
activities from its Vista, California facility to its Mexicali, Mexico plant. 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 laws 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. Certain of
the Breg bracing products experience greater demand in the fall and winter
corresponding with high school and college football schedules and winter sports.
In addition, we do not consider the backlog of firm orders to be material.
Capital Expenditures
We had capital expenditures in the amount of $12.2 million, $5.2
million and $7.1 million in 2004, 2003 and 2002, respectively, principally for
computer software and hardware, patents, licenses, plant and equipment, tooling
and molds. We currently plan to invest approximately $4.1 million in the
Americas Orthofix, approximately $4.9 million in Americas Breg, and
approximately $3.2 million in International Orthofix in 2005 for a total of
approximately $12.2 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, 2004, we had approximately 997 employees
worldwide. Approximately 294 were employed at Americas Breg, 471 were employed
at Americas Orthofix and approximately 232 were employed within International
Orthofix. Our relations with our Italian employees, who numbered 75 at December
31, 2004, 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 997 employees, 444 were employed in sales and marketing
functions, 172 in general and administrative, 356 in production and 25 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 and
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 assignors, 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 orthopedic 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 allegations
relating to the 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
orthopedic medical devices industry have often been settled through assignments,
licensing or similar arrangements, costs associated with these arrangements may
be substantial and could include the long-term payment of royalties.
Furthermore, the required assignments or licenses may not be made available to
us on acceptable terms. Accordingly, an adverse determination in a judicial
22
or administrative proceeding or a failure to obtain necessary assignments or
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 or our independent sales
representatives 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, France, 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.
Management estimates that its revenue by payor type are:
o Independent Distributors 27%
o Third Party Insurance 26%
o International Public Healthcare Systems 18%
o Direct (hospital) 18%
o U.S. Government - Medicare, Medicaid, TriCare 9%
o Self pay 2%
We may be 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, classification, testing, manufacture, labeling,
marketing and sale of medical devices. For a description of these regulations,
see Item 1 - "Business - Government Regulation."
The 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. The FDA also has the ability
to change the regulatory classification of an approved device from a higher to a
lower regulatory classification which could materially adversely impact our
ability to market or sell our device. 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.
23
Our profitability depends, in part, upon the ability of the Company,
our sales representatives, 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.
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 medical 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.
The recent approval and introduction of Bone Morphogenic Proteins
(BMPs) by Medtronic Sofamor Danek Group have shown 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. While BMPs are considered or classified as a bone growth material,
they have yet to be clinically proven to be effective or approved for use in the
high-risk patients such as those who use our Spinal-Stim and our new
Cervical-Stim products. Off-label use or the FDA approval of BMPs could have an
adverse affect on sales of our bone-growth stimulation products in high-risk
patients. Additionally, in 2004, Artificial Disks were introduced into the
market as an alternative to spinal fusions. The proliferation of market
acceptance could have an adverse effect on sales of our products 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."
24
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.
Termination of our existing relationships with our independent sales
representatives or distributors could have an adverse effect on our business.
We sell our products in many countries through independent
distributors. Generally, our independent sales representatives and our
distributors have the exclusive right to sell our products in their respective
territories and are generally prohibited from selling any products that compete
with ours. The terms of these 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
sales representatives or distributors could have an adverse effect on our
business unless and until alternative distribution arrangements are put in
place.
We are party to numerous contractual relationships.
We are party to numerous contracts in the normal course of our
business. The Company has contractual relationships with suppliers, distributors
and agents as well as service providers. In the aggregate, these contractual
relationships are necessary for the Company to operate its business. From time
to time, the Company amends, terminates or negotiates is contracts. The Company
is also periodically subject to, or makes, claims of breach or threats of legal
action arising out of one or more of its contracts which, from time to time, may
result in litigation. At any one time, the Company has a number of negotiations
under way for new or amended commercial agreements. We devote substantial time,
effort and expense to the administration and negotiation of contracts involved
in our business. However, there can be no assurance that these contracts will
continue in effect past their current term or that we will be able to negotiate
satisfactory contracts in the future with current or new business partners.
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 $6.7 million in
International for 2004, primarily as the result of a stronger Euro and U.K.
Pound against the U.S. dollar, and to decrease net sales by $0.2 million in the
Americas for 2004, 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. From time
to time, the Company may examine whether a currency hedge program is appropriate
for the Company's needs and may enter into a currency hedge.
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,
25
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.
We are subject to differing customs and import/export rules in several
jurisdictions in which we operate.
We import and export our products to and from a number of different
countries around the world. These product movements involve subsidiaries and
third-parties operating in jurisdictions with different customs and
import/export rules and regulations. Customs authorities in such jurisdictions
may challenge our treatment of customs and import/export rules relating to
product shipments under aspects of their respective customs laws and treaties.
If we are unsuccessful in defending our treatment of customs and import/export
classifications, we may be subject to additional customs duties, fines or
penalties that could 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 Association 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.
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 2004. 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 or customs 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.
26
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 ("Colgate"), entered into a 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 11, 2005.
Further, in addition to scheduled debt repayments, our 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, (b) the net cash proceeds of any debt issuance by
Colgate and its subsidiaries or any equity issuances, excluding the exercise of
stock options, by any of the credit parties as defined (in the credit agreement)
or (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 reinvest in our business.
The credit agreement contains 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."
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 continuing the process of integrating Breg's operations into our
company. 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
- -------------------
Our 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, distribution and administrative facility
for Italy
Warehousing facility for fixation products Verona, Italy 6,460 Leased
Administrative offices for Orthofix International N.V. and Huntersville, NC 10,084 Leased
Orthofix Inc.
Sales management, distribution and administrative offices South Devon, England 2,500 Leased
Sales management, distribution and administrative offices Andover, England 9,000 Leased
for A-V Impulse and fixation products
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 104,832 Leased
research and development facility for Breg
Manufacturing facility for Breg products Mexicali, Mexico 63,000 Leased
Sales management, distribution and administrative facility Guaynabo, Puerto Rico 4,400 Leased
for Puerto Rico
28
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.
KCI Litigation
Novamedix, a subsidiary of the Company, filed an action 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
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 withdrew several of its counterclaims, but
continues to assert affirmative defenses contending 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 restored the litigation to active status. A
portion of any amounts received by us will be payable to former owners of
Novamedix under the original purchase agreement. This matter is currently in the
pre-trial motions phase.
Triage Litigation
On September 29, 2004, Triage Medical Inc. ("Triage") filed an action
against Orthofix International N.V. in State Court in California. The Company
subsequently removed the case to the federal United States District Court for
the Central District of California. Triage alleges that the Company agreed to
negotiate an acquisition of Triage and to make an unconditional $2.0 million
escrow payment to Triage. Triage contends the Company terminated the acquisition
process and failed to make the escrow payments and, as a result, Triage has been
damaged. We have answered the complaint denying any liability and pleading
certain defenses. We believe this case is without merit and intend to vigorously
defend it.
29
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
There were no matters submitted to a vote of security holders during
the fourth quarter of 2004.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------------------
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, 2004. As of March 10, 2005 we had
approximately 224 holders of record of our common stock.
High Low
------ -------
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
2004
----
First Quarter $55.40 $43.50
Second Quarter 51.48 40.96
Third Quarter 42.00 29.00
Fourth Quarter 40.37 32.00
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
income tax on such amounts received from our subsidiaries.
Recent Sales of Unregistered Securities
Except as described below, there were no securities sold by us during
2004 that were not registered under the Securities Act.
On February 2, 2004, we issued 1,291 shares of our common stock to one
of our warrant holders upon the exercise of 1,291 of our warrants. These
warrants were initially issued by Kinesis Medical, Inc. and originally entitled
the holder of warrants to purchase one share of Kinesis common stock at an
exercise price per share ranging from $1.00 to $2.00. On August 15, 2000, in
conjunction with our asset purchase agreement with Kinesis, each outstanding
Kinesis warrant was converted into 0.05261 Orthofix warrants to purchase shares
of our common stock at a price per share ranging from $19.125 to $38.25, subject
to adjustment as determined by the warrant agreement.
30
The above transactions were exempt from the registration requirements
of the Securities Act pursuant to Section 4(2) and the rules and regulations
promulgated under the Securities Act on the basis that the transactions did not
involve a public offering.
Exchange Controls
Although there are Netherlands Antilles laws that may impose foreign
exchange controls on us and that may affect the payment of dividends, interest
or other payments to nonresident holders of our securities, including the shares
of common stock, we have been granted an exemption from such foreign exchange
control regulations by the Central Bank of the Netherlands Antilles. Other
jurisdictions in which we conduct operations may have various currency or
exchange controls. In addition, we are subject to the risk of changes in
political conditions or economic policies that could result in new or additional
currency or exchange controls or other restrictions being imposed on our
operations. As to our securities, Netherlands Antilles law and our Articles of
Association impose no limitations on the rights of persons who are not residents
in or citizens of the Netherlands Antilles to hold or vote such securities.
Taxation
Under the laws of the Netherlands Antilles as currently in effect, a
holder of shares of common stock who is not a resident of, and during the
taxable year has not engaged in trade or business through a permanent
establishment in, the Netherlands Antilles will not be subject to Netherlands
Antilles income tax on dividends paid with respect to the shares of common stock
or on gains realized during that year on sale or disposal of such shares; the
Netherlands Antilles do not impose a withholding tax on dividends paid by us.
There are no gift or inheritance taxes levied by the Netherlands Antilles when,
at the time of such gift or at the time of death, the relevant holder of common
shares was not domiciled in the Netherlands Antilles. No reciprocal tax treaty
presently exists between the Netherlands Antilles and the United States.
31
Item 6. Selected Financial Data
- --------------------------------
The following selected consolidated financial data for the years ended
December 31, 2004, 2003, 2002, 2001 and 2000 have been derived from our audited
consolidated financial statements. The financial data as of December 31, 2004
and 2003 and for the years ended December 31, 2004, 2003 should be read in
conjunction with, and are qualified in their entirety by, reference to, Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and notes thereto included
elsewhere in this Form 10-K. Our consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States (US GAAP).
Year ended December 31,
--------------------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(In US$ thousands, except margin and per share data)
Consolidated operating results
Net sales......................................... $286,638 $203,707 $177,595 $162,360 $131,782
Gross profit...................................... 207,461 152,617 132,776 119,408 95,993
Gross profit margin............................... 72% 75% 75% 74% 73%
Total operating income............................ 55,000 40,584 42,939 30,499 22,725
Net income(1)..................................... 34,149 24,730 25,913 20,964 44,816
Net income per share of common stock (basic)...... 2.22 1.76 1.96 1.60 3.40
Net income per share of common stock (diluted).... 2.14 1.68 1.76 1.42 3.20
Consolidated financial position As of December 31,
(at year-end)
--