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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
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: 0-22885
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TRIPATH IMAGING, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 56-1995728
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
780 PLANTATION DRIVE, BURLINGTON, NORTH CAROLINA 27215
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(336) 222-9707
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
(TITLE OF EACH CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 30, 2001 was: $213,769,375.
There were 34,203,100 shares of the registrant's Common Stock outstanding
as of March 30, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement of the Registrant for the
Registrant's 2001 Annual Meeting of Shareholders to be held on May 24, 2001,
which definitive proxy statement will be filed with the Securities and Exchange
Commission not later than 120 days after the registrant's fiscal year of
December 31, 2000, are incorporated by reference into Part III of this Form
10-K.
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PART I
ITEM 1. BUSINESS
The discussion included in this section, as well as elsewhere in the Annual
Report on Form 10-K, may contain forward-looking statements based on current
expectations of the Company's management. Such statements are subject to risks
and uncertainties that could cause actual results to differ from those
projected. See "Factors Affecting Future Operating Results" attached hereto as
Exhibit 99.1 and incorporated by reference into this Form 10-K. Readers are
cautioned not to place undue reliance on the forward-looking statements, which
speak only as the date hereof. The Company undertakes no obligation to publicly
release the result of any revisions to these forward-looking statements that may
be made to reflect events or circumstances occurring after the date hereof or to
reflect the occurrence of unanticipated events.
NOTE REGARDING TRADEMARKS
AutoCyte(R), AutoCyte Quic(R), AutoPap(R), CytoRich(R), ImageTiter(R),
NeoPath(R), PAPMAP(R), and PAPNET(R) are registered trademarks of, and AutoCyte
PREP(TM), Slide Wizard(TM), PREPAP(TM) and TriPath Imaging(TM) are trademarks
of, TriPath Imaging, Inc.
THE COMPANY
TriPath Imaging, Inc. ("TriPath Imaging" or "the Company") develops,
manufactures, and markets proprietary products for cancer cell diagnosis,
cytology, and histopathology. "Cytology" concerns the study of the structure and
function of cells, and "histopathology" concerns the study of microscopic
changes in diseased tissues. The Company holds in excess of 100 patents that,
cumulatively, form a body of intellectual property that spans the entire breadth
of image analysis and display in cytology and histopathology. TriPath Imaging
manufactures and sells products developed from its proprietary technologies and
intellectual property. These include U.S. Food and Drug Administration ("FDA" or
"Agency") approved products designed to automate the screening for cancer of the
uterine cervix, including the AutoCyte PREP System ("PREP") and the AutoPap
Primary Screening System ("AutoPap"). In addition, we have developed the
extended Slide Wizard line of products, the modules for which include an
FDA-approved method for automating measurement of antinuclear antibodies as well
as research applications in histopathology, LINK, a system for the transmission
and interpretation of tissue specimens via remote telecommunication, or
"telepathology," and the AutoCyte Image Management and Archiving System, or
AIMS, a software based storage and retrieval system for microscopic images.
TriPath Imaging was created in September 1999 through the merger of
AutoCyte, Inc. and NeoPath, Inc. and the acquisition of the technology and
intellectual property of Neuromedical Systems, Inc. ("NSI"). TriPath Imaging was
created to leverage the complementary nature of the products, technologies, and
intellectual property developed by its predecessor companies, all of whom were
early pioneers in the application of computerized image processing and analysis
to detect the often subtle cellular abnormalities associated with cancer and its
precursors. The three predecessor companies crafted their original business
models to meet the needs defined by the limitations of the conventional Pap
smear test for cancer of the uterine cervix:
- AutoCyte was founded in November 1996 through the acquisition of the
cytology and pathology automation business conducted by Roche Image
Analysis Systems, Inc. ("RIAS"). AutoCyte developed "PREP," a
liquid-based sample collection and slide preparation system. PREP
addresses errors in cell sample collection and slide preparation, reduces
the complexity of interpretation by providing a homogeneous, more
representative and standardized thin-layer of stained cells and provides
a liquid medium for adjunctive laboratory testing of the specimen. The
product was approved by the FDA in June 1999.
- NeoPath developed the AutoPap system to facilitate the primary
interpretation of Pap smears. Using proprietary technology, the AutoPap
is designed to distinguish between normal Pap smears and those
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that have the highest likelihood of abnormality. In May 1998, the AutoPap
was approved by the FDA as the first, and only, fully automated device
for primary screening of conventional Pap smear slides.
- Both AutoCyte and NSI developed interactive computerized screening
systems that relied upon the identification and display of cells
demonstrating a higher probability of abnormality.
TriPath Imaging generates PREP revenue from either the sale or rental of
PREP systems and from the sale of the related test kits, comprised of
proprietary reagents and other disposables. Additionally, the Company generates
revenue from service contracts on PREP systems. For system sales, customers
purchase the PREP instrument and make separate purchases of test kits. The
Company also offers an Integrated Purchase Option ("IPO") program where the PREP
instrument is placed at the customer's site, free of charge, and the customer
pays a higher "per-test" price for the reagents and disposables. Under this
program, the Company records revenue for the instrument sale, which is actually
sold to a third-party financial institution. The financial institution is repaid
with part of the proceeds of the reagents and disposables sold. For system
rentals, actually called a "reagent rental," a PREP instrument is placed at a
customer site, free of charge, and the customer commits to purchase an agreed
upon number of test kits over the life of the agreement. Each PREP system placed
typically provides a recurring revenue stream as customers process the test kits
sold by the Company. For system rentals, customers pay a fixed monthly fee for
the equipment and make separate purchases of test kits.
TriPath Imaging currently generates AutoPap-related revenue from the direct
sale of AutoPap systems and from placing AutoPap systems under fee-per-use
contracts. In the latter cases, fee-per-use revenue commences in the month a
system is initially placed in commercial use at a customer site and consists of
per-slide monthly billings, fixed rental billings or certain fee-per-use
contracts that require minimum payments. Domestic customers may also elect to
purchase the AutoPap instrument under the IPO program. Additionally, the Company
generates revenue from service contracts on AutoPap systems.
TriPath Imaging generates revenue from either the sale, or rental, of its
extended Slide Wizard(TM) line of products. Additionally, the Company generates
revenue from service contracts on these products. For system sales, customers
purchase the products through distributors in countries where such relationships
exist. Where distributor arrangements do not exist, the Company sells these
products directly to the customer.
TriPath Imaging markets its products to domestic and foreign clinical
laboratories through direct sales activities in the United States, and primarily
through distributors in international markets. In the fourth quarter of 2000,
the Company significantly expanded its marketing and sales activities to
accelerate the commercialization of its core business in several ways.
Additional laboratory sales representatives were hired to increase contact
potential for the laboratory customer marketplace. Through an alliance with
Nelson Professional Sales ("NPS"), the Company engaged the physician market
directly for the first time by adding physician-directed representatives, on a
contract basis, to augment TriPath Imaging's direct sales efforts. To further
educate and reinforce the benefits of TriPath Imaging products, a long-term
partnership with a third-party physician/peer selling organization was initiated
and will carry through into 2002.
TriPath Imaging believes that its proprietary technology and intellectual
property will provide a unique platform for an array of applications in cell
pathology. The Company believes that combining the AutoPap and PREP will create
a unique and integrated system that is currently not otherwise available from
any other single vendor. On September 30, 1999, the Company submitted a
supplement to the FDA for the screening of PREP slides using the AutoPap. In
December 2000, the Company submitted new clinical data to the FDA to support its
applications to expand the claims for the AutoPap and PREP to include the
screening of PREP thin-layer preparations on the AutoPap and to automate the
initial steps in the PREP laboratory slide preparation process through the
introduction of the PREPMATE accessory. PREPMATE is an automated front-end
processor that reduces the number of manual preparation steps required for the
PREP system. As a result of ongoing discussions with the FDA regarding the
Company's submissions, the Company believes that it will have various options in
connection with the pending premarket approval application supplement regarding
use of the AutoPap system to screen PREP thin-layer slides. Among these are to
accept limitations in the Company's proposed product labeling or to collect
additional data to support the current labeling proposal. The Company is
evaluating its options and considering the best course of action. The FDA
approval process is discussed further below under "Clinical Trials and
Regulatory Status--Supplement to AutoPap Primary Screening PMA." If FDA approval
is obtained, the Company will seek to achieve broad market acceptance for the
system integrating PREP and AutoPap for cervical cancer screening. There can be
no assurance, however, when, if ever, such approval will be obtained. The
Company believes that, in the long run, its proprietary technology and
intellectual property will provide a unique platform for an array of
applications in cell pathology.
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PROPRIETARY TECHNOLOGY AND INTELLECTUAL PROPERTY
Previously, the complex biologic structural, or morphologic, changes that
reflect disease were considered too subtle for identification and interpretation
by computer or other automated apparatus. The conventional wisdom was that cell
and tissue diagnosis is an intrinsically qualitative process that requires
subjective visual judgment. However, as the science of image processing and
analysis has matured, it has become increasingly accepted that these
"subjective" signals can be redefined in terms of mathematical algorithms. These
algorithms, in turn, provide the basis for computerization and an automated
solution.
The merger of AutoCyte and NeoPath and the acquisition of the intellectual
property and technology of NSI resulted in the development of a significant body
of intellectual property. The portfolio was further enhanced by TriPath
Imaging's acquisition of the intellectual property associated with Cell Analysis
Systems (CAS) from Becton Dickinson and Company in September 1999. TriPath
Imaging's current portfolio of 104 issued or allowed United States patents
comprehends each step in the image analysis process as applied to cytopathology
and histopathology, including:
- Image collection;
- Image segmentation;
- Object feature extraction and measurement;
- Object classification;
- Slide classification;
- High speed data processing and computational hardware; and
- Dynamic system quality assurance and reliability assessment.
TriPath Imaging believes that its intellectual property provides a strong
foundation for the development and defense of imaging products. The Company also
believes that recent advances in genomics, biology, and informatics are
providing new opportunities to leverage TriPath Imaging's proprietary
technology.
To date, TriPath Imaging has leveraged its technology assets through the
development of an integrated solution for cervical cancer screening and other
products for the histopathology laboratory.
OVERVIEW OF THE CERVICAL CANCER SCREENING MARKET
Cervical Cancer
Cancer of the uterine cervix, or cervical cancer, is the second most common
form of cancer among women worldwide, with approximately 500,000 new cases
reported each year. In the United States alone, it is projected that doctors
will diagnose approximately 13,000 new cases of invasive cervical cancer and
that approximately 4,500 women will die of cervical cancer in 2001.
Almost all deaths due to cervical cancer can be prevented through
early-stage detection and treatment. Cervical cancer is preceded by curable
pre-cancerous lesions that progress without symptoms over a period of years
until they become invasive, penetrating the cervical epithelium (cellular
covering) and entering the bloodstream or lymph system. Treatment of early-stage
noninvasive cervical cancer may be accomplished through various low-risk and
low-cost procedures designed to remove the abnormal cells. Once the cancer
reaches the invasive stage, however, the patient's chances for recovery are
diminished, and more radical treatment, such as a hysterectomy and chemotherapy
or radiation therapy, is typically required. These procedures are costly and may
expose the patient to substantial physical morbidity and psychological stress.
Because treatment of cervical cancer at an early stage is almost always
successful, early detection is critical to medical management of the disease.
Thus, regular cervical screening examinations are recommended in the United
States and many foreign countries. The conventional Pap smear is currently the
most widely used screening test for cervical cancer. It is estimated that
clinical laboratories in the United States perform over 55 million conventional
Pap smears annually. The Company believes that annual test volume
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outside of the United States is in excess of 80 million. Of the 55 million
annual Pap smear tests performed in the United States, industry sources estimate
that about 2.5 million, or 5%, are diagnosed with pre-cancerous conditions or
cancer.
In the United States, although widespread and regular use of the
conventional Pap smear has contributed to a greater than 70% decrease in
mortality, the mortality rate from the disease has remained fairly constant
since 1970. The Company believes that there are practical limitations to the
conventional Pap smear test which contribute to an estimated $5.0 billion of
annual costs associated with the treatment of advanced precancerous and
cancerous cervical disease. Additional costs are also incurred by third-party
payors due to repeat testing, and by clinical laboratories due to litigation
associated with inaccurate diagnoses.
The Conventional Pap Smear Test Process
The conventional Pap smear test was developed by Dr. George N. Papanicolaou
in the 1940's. The Pap smear serves as a screening procedure for the early
detection of precancerous and cancerous conditions of the uterine cervix by
identifying abnormalities that may progress to cervical cancer.
The conventional Pap smear process involves the science of cytology, which
includes the microscopic evaluation and interpretation of pre-cancerous,
malignant and morphological changes in cells. The process begins with the
collection of cervical cells during a gynecologic examination. To obtain a Pap
smear, a clinician uses a sampling device to scrape the surface of a woman's
uterine cervix to collect a sample of cervical cells. This sample is manually
smeared onto a microscope slide and the sampling device is discarded. The sample
is then sprayed with a fixative agent within a few seconds to prevent damage to
the cell specimen from air drying, creating what is known as a conventional Pap
smear.
After the Pap smear slide is made, the sample and patient information are
sent to a clinical laboratory for further processing, screening and diagnosis.
At the clinical laboratory, a technician stains the Pap smear sample to
highlight important cellular features and then seals it with a protective cover
slip. The slide containing the Pap smear sample is then given to a
cytotechnologist, a trained analyst responsible for reviewing samples at a
laboratory. Review of the Pap smear generally takes about five to ten minutes
for each Pap smear slide, which also includes completing related paper work.
The cytotechnologist reviews the Pap smear slide with a microscope to
determine whether the sample is adequate for evaluation and to assess the
presence of abnormal cells. In determining slide adequacy, cytotechnologists
classify each slide into one of three categories: (i) satisfactory for
evaluation, (ii) satisfactory but limited by certain characteristics ("SBLB") or
(iii) unsatisfactory for evaluation. The percentage of unsatisfactory and SBLB
slides varies widely among laboratories. In the United States, approximately 1%
to 2% of all conventional Pap smear slides are classified as unsatisfactory and
as many as 20% to 30% are classified as SBLB. Frequent reasons for
unsatisfactory or SBLB classifications include excess blood or mucus or the
presence of inflammatory cells, all of which obscure the diagnostic cells of
interest, or results in too few cells per slide.
After determining whether the sample is adequate for evaluation, the
cytotechnologist manually screens the slide with a microscope to differentiate
diseased or abnormal cells from normal cells based on size, shape and structural
details of the cells and their nuclei. In the United States, each conventional
Pap smear slide is then typically classified according to the Bethesda System
for Reporting Cervical/Vaginal Cytological Diagnoses (the "Bethesda System"), a
five point classification system that assigns a rating for cervical cytology
slides ranging from negative to carcinoma. The following table summarizes the
Bethesda System
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classification and other characteristics of all conventional Pap smear slides
prepared annually in the United States:
APPROXIMATE PRECANCEROUS/ CLINICAL
BETHESDA SYSTEM CLASSIFICATION INCIDENCE INTERPRETATION CANCEROUS ACTION
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Negative 92% Normal Not Cancerous Continued Regular
Testing
Atypical Squamous Cells of 5% Equivocal Undetermined Repeat Testing/
Undetermined Significance/Atypical Colposcopy/Biopsy
Glandular Cells of Undetermined
Significance ("ASCUS/AGUS")
Low-grade Squamous 2% Abnormal Precancerous Colposcopy/Biopsy
Intraepithelial Lesion ("LSIL")
High-grade Squamous G1% Abnormal Precancerous Colposcopy/Biopsy
Intraepithelial Lesion ("HSIL")
Carcinoma G1% Abnormal Cancerous Colposcopy/Biopsy
Any slide classified as other than normal under the Bethesda System is
considered abnormal and may be pre-cancerous or cancerous. Abnormalities may
indicate various conditions ranging from atypical squamous cells of undetermined
significance ("ASCUS") and atypical glandular cells of undetermined significance
("AGUS"), both commonly referred to as "atypia," and low-grade squamous
intraepithelial lesions ("LSIL") to high-grade squamous intraepithelial lesions
("HSIL") and cancer.
ASCUS/AGUS slides contain abnormal cells that cannot be fully explained on
the basis of inflammatory or reactive processes, yet lack certain criteria for a
specific abnormal diagnosis. ASCUS/AGUS slides are generally not considered
precancerous. LSIL slides represent the lowest-grade precancerous state, with
cells characterized as exhibiting mild to moderate dysplasia or evidencing signs
of Human Papilloma Virus ("HPV"). Dysplasia is a condition characterized by
abnormally differentiated cells that could either progress to a precancerous
state or regress to a normal state. HSIL slides contain precancerous cells
characterized as exhibiting more serious dysplasia. All ASCUS/AGUS and abnormal
slides are referred to a pathologist for further review and final diagnosis.
Typically, about 90% to 95% of all Pap smears are classified as normal. In the
remaining cases where the cytotechnologist detects a suspicious condition, a
senior cytotechnologist then reviews the slide. Ultimately, slides confirmed to
have signs of precancerous conditions or cancer are referred to a
cytopathologist who carefully reviews the Pap smear and makes a final diagnosis.
A woman whose Pap smear indicates the presence of high-grade lesions or
cancer will typically receive a colposcopic examination, and if necessary, a
biopsy. Treatment of early-stage noninvasive cervical cancer, which is
relatively curable, often consists of epithelial treatment in which the
cancerous tissue is removed, for example, by electrocautery. Once the cancer
reaches an invasive stage, the patient's chances for recovery decline. These
cases typically require treatment such as radiation therapy, surgery or
chemotherapy.
Limitations of the Conventional Pap Smear Test Process
Each Pap smear slide sample typically contains 50,000 to 300,000 cervical
cells, and the process of manually screening and interpreting a conventional Pap
smear requires intense visual examination of the slide sample through a
microscope. Errors often occur during the review process because it is difficult
to properly evaluate and categorize subtle changes in the size and/or shape of
cells and their nuclei.
Pap smears have a highly variable false-negative rate, which is the
percentage of abnormal smears that are misclassified as normal. False-negative
rates of the conventional Pap smear vary widely among laboratories, ranging from
5% to 55%, depending on such factors as the skill and experience of the
practitioner who collects the sample and prepares the slide, and the level of
training of the cytotechnologist and pathologist who review the slide. Studies
suggest that approximately 60% of all false negative diagnoses are the result of
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inadequacies in sample collection and slide preparation; approximately 40% are
attributable to detection and interpretation errors.
A study published in the American Journal of Clinical Pathology reported
that, with a conventional Pap smear, as much as 80% of the sample taken from a
patient may not be transferred to the slide and remains on the discarded
collection device. In addition to the problem of cell transfer, the conventional
Pap smear slide preparation process produces inconsistent and non-uniform slides
with extreme variability in quality, often making examination difficult.
Furthermore, the batch staining done by the laboratory technicians may result in
cross-contamination among slide samples. TriPath Imaging estimates that annual
costs to the United States health care system of repeat testing due to
unsatisfactory slides and slides that are SBLB are $50 million and $750 million,
respectively.
When using the conventional Pap smear process, a physician cannot perform
additional testing using the original patient sample. If additional testing is
required, the patient must return to the physician's office to provide a second
sample. TriPath Imaging believes that the ability to access the remaining
cellular material from the original patient sample would allow more cost
effective patient management for inconclusive Pap smear tests.
Physical and mental stress escalates with the number of Pap smear slides
that a cytotechnologist examines, which increases the risk of false-negatives.
For this reason, federal regulations promulgated under the Clinical Laboratory
Improvement Amendments of 1988 ("CLIA") require cytology laboratories to:
- re-screen 10% of the slides that are initially classified as negative;
- limit the number of slides screened by a cytotechnologist per day to 100;
and
- perform proficiency testing and quality control by testing
cytotechnologists in order to assure a minimum level of competence and
expertise.
In addition to these federal regulations, certain states have also adopted
regulations further limiting the number of slides that may be manually examined
per day by a cytotechnologist. It has become significantly more expensive for
laboratories to perform conventional Pap smear screening due to these
regulations.
THE TRIPATH IMAGING SOLUTION
TriPath Imaging develops sample preparation and screening systems for
cervical cancer intended to address the limitations inherent in the conventional
Pap smear process and the lack of automation in large clinical labs. PREP is a
proprietary, automated, liquid-based cytology sample collection and slide
preparation system that produces slides with a standardized thin layer of
stained cervical cells. AutoPap utilizes proprietary technology to distinguish
between normal conventional Pap smears and those that have the highest
likelihood of abnormality. The Company has applied for FDA approval for AutoPap
screening of PREP slides thereby further enhancing its application to include
both conventional and liquid-based Pap smears. The Company continues to conduct
clinical trials in support of the integration of the AutoPap system with PREP
slides. There can be no assurance, however, that such FDA approval will be
obtained or the timing of any such approval. The Company's extended Slide Wizard
product line (formerly known as Pathology Workstation), further integrates
TriPath Imaging's product offerings. The Slide Wizard product line delivers
image management, data handling, and prognostic tools for cell diagnosis,
cytopathology and histopathology.
PRODUCTS
The AutoCyte PREP System
The Company's PREP system consists of a proprietary preservative fluid and
reagents, plastic disposables and automated equipment for preparing a thin-layer
of cervical cells on a microscope slide. The PREP slide process begins with the
clinician collecting a patient's cervical sample using a conventional collection
device, in this case a cervical brush with a breakaway head. The clinician then
immediately places, and leaves, the collection device in a vial containing the
Company's proprietary CytoRich preservative fluid, thereby retaining all of the
cells from the collection device. The sample is then thoroughly mixed, resulting
in a randomized cell suspension, which is then removed from the vial and layered
onto a proprietary liquid density reagent in a
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plastic centrifuge tube using the Company's patented disaggregation syringe
device. Batch centrifugation is then conducted on the cell suspension to remove
excess blood, inflammatory cells and other debris from the sample.
Once centrifugation is completed, the lab technician places the tube
containing the separated diagnostic cells onto an automated pipetting system.
This pipetting system then distributes the cervical cells in a thin-layer on the
microscope slide and discretely stains the slide for subsequent analysis. A PREP
slide typically contains approximately 50,000 to 160,000 diagnostic cells that
are distributed uniformly over a 13-mm diameter circle. PREP is currently
capable of preparing and discretely staining approximately 48 thin-layer slides
in approximately one hour.
TriPath Imaging has also developed an automated accessory to the PREP
system called PREPMATE that reduces the number of manual preparation steps
required on the PREP system. PREPMATE is intended to reduce the time required to
prepare samples for processing on the PREP instrument. Data supporting the
PREPMATE automated accessory were submitted to the FDA in November 2000. The FDA
has not yet approved PREPMATE for use in the U.S., and there can be no assurance
that the PREPMATE will be approved by the FDA in a timely manner, or at all.
PREP Advantages vs. the Conventional Pap Smear Process
The Company believes that PREP offers the following advantages over the
conventional Pap smear process:
- More Complete Sample Collection. Because the clinician places the
collection device directly into the PREP vial, the entire patient sample
is contained in the Company's proprietary preservative fluid. As a
result, the subsample on the thin-layer preparation is more
representative of the entire patient specimen. Using the conventional Pap
smear process, as much as 80% of the cervical sample can be inadvertently
discarded after smearing the sample onto the slide.
- Improved Sample Quality. By eliminating variations in preparation
techniques and the fixative spraying step from the sample collection
process, PREP virtually eliminates air-drying, generates a more complete
fixation and provides a more standardized preparation process in a
controlled, laboratory environment. The more uniform cell sample
distribution also reduces cell clumping and obscuring from debris. The
Company believes that PREP's thin-layer slides provide cytotechnologists
with samples that are clearer, more representative and easier to diagnose
than conventional Pap smear slides.
- Improved Cytotechnologist Productivity. In the Company's clinical
studies, some laboratories using PREP experienced a greater than 50%
increase in cytotechnologist screening productivity. The impact on
cytotechnologist efficiency is important to clinical laboratories because
of the growing shortage of qualified cytotechnologists in recent years
and the need to create and maintain a desirable working environment for
cytology professionals.
- Automated and Discrete Staining Function. PREP includes a discrete, or
individual, slide staining function performed by a computer-controlled
robotic pipetting station. Unlike conventional Pap smear slides that are
often manually stained in a batch process using common reservoirs of
staining reagents, PREP staining reagents are directly applied to
individual slides. As a result, staining reagents are not shared among
slides. The Company believes this should reduce the risk of
cross-contamination among cell samples which can lead to inaccurate
diagnoses.
- Multiple Testing Capability. Because the Company's proprietary CytoRich
preservative system enables the patient sample to be preserved for
several months, it permits, if necessary, preparation of several slides
from a single sample. The Company believes that the ability to perform
additional slide-based tests using a single sample, together with the
improved quality of the slide itself, will reduce re-testing expenses
typically associated with inconclusive Pap smear tests. The residual
patient sample may also be used for other diagnostic protocols such as
HPV testing, infectious disease testing and
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application of specific tumor markers. Such testing of the residual
sample is under investigation and will require FDA approval when, and if,
determined to be viable.
PREP Advantages vs. Other Thin-Layer Sample Preparation Systems
The Company believes that PREP offers the following advantages over other
thin-layer devices:
- Improved Sample Quality. The PREP sample is processed through a series
of proprietary liquid-based reagents and centrifuge separation techniques
designed to "enrich" the sample with a high concentration of diagnostic
cells. The only other currently FDA-approved thin-layer device relies on
membrane filtration. The Company believes that its cell enrichment
process more effectively controls the incidence of infectious agents,
mucus, inflammatory cells and other debris that may reduce the
performance of membrane filtration systems. The Company believes that, in
populations with high rates of gynecological infection, PREP's cell
enrichment process will result in a more representative slide sample that
should ultimately lead to a reduction in uncertain or incorrect
diagnoses.
- Higher Throughput. PREP has the capacity to produce approximately 48
thin-layer slide preparations in approximately one hour, using a
hands-off robotic system. The Company believes the throughput capability
of the PREP to be the highest of any thin-layer product on the market
today.
- Improved Cytotechnologist Productivity. The cell circle on a PREP slide
is smaller than the cell circle on other available thin-layer devices,
yet the number of diagnostic cells is approximately equal. The Company
believes that the smaller cell circle, coupled with a lower incidence of
infectious agents, mucus, inflammatory cells and other debris, should
result in faster, more efficient screening by cytology professionals.
- Familiarity with Sample Preparation Approach. The PREP centrifugation
and robotic liquid handling techniques are similar to procedures already
in use in clinical laboratories.
- Automated and Discrete Staining Function. Unlike other thin-layer
devices that rely on batch staining using common reservoirs of staining
reagents, PREP staining reagents are applied directly to individual
slides. Discrete staining offers several benefits, including reduced risk
of cross-contamination among cell samples, less degradation of the
staining solution, less staining time and lower costs.
AutoPap Primary Screening System
The FDA approved the AutoPap system in May 1998. The AutoPap uses visual
intelligence algorithms to improve accuracy in the primary screening of
conventional Pap smear slides. As approved by the FDA, the AutoPap identifies up
to 25% of slides as "within normal limits" and requiring no further review
(sometimes referred to as "sort rate" or "no further review rate").
Cytotechnologists then manually screen the remaining slides with the assistance
of the AutoPap ranked review report. This ranked review report shows the
relative scores of the processed slides. At least 15% of the highest-ranking
slides that are classified normal by manual review then undergo quality control
rescreening. Outside the United States, the Company believes that AutoPap will
be used to identify up to 50% of slides "within normal limits."
AutoPap works with a range of staining procedures used on conventionally
prepared Pap smear slides. AutoPap analyzes a Pap smear in about the same time
as a cytotechnologist. It holds 288 Pap smear slides at a time, is easy to load
and unload, and can operate continuously, with minimal intervention, for up to
24 hours per day. TriPath Imaging provides each clinical laboratory with on-site
training, system documentation, a comprehensive quality assurance program, and
ongoing customer and technical support.
On September 30, 1999, the Company submitted additional clinical study data
to supplement its existing premarket approval application, or "PMA," for the
AutoPap system to obtain approval from the FDA to use AutoPap to screen slides
prepared using PREP. Additional data was submitted to the FDA in December 2000
to address questions from the FDA. As a result of ongoing discussions with the
FDA regarding the Company's submissions, the Company believes that it will have
various options in connection with the pending PMA supplement regarding use of
the AutoPap system to screen PREP thin-layer slides. Among these are to accept
limitations in the Company's proposed product labeling or to collect additional
data to support the current labeling proposal. The Company is evaluating its
options and considering the best course of action. The FDA approval process is
discussed further below under "Clinical Trials and Regulatory Status--Supplement
to AutoPap Primary Screening PMA."
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AutoPap Advantages Over Conventional Pap Smear Screening
TriPath Imaging believes that clinical analysis of Pap smears is the
largest remaining, non-automated clinical laboratory procedure. Clinical
laboratories rely on the manual screening of Pap smear slides as performed by
cytotechnologists.
The AutoPap is the only instrument approved by the FDA to process Pap
smears without human review. In addition, in recent years the medical community
has increasingly focused on improving the quality of women's healthcare. TriPath
Imaging believes that AutoPap will allow laboratories to better detect pre-
cancerous cervical conditions and cervical cancer, thereby improving the
standard of care for their female patients. Earlier detection and treatment
should lower risks of morbidity and mortality.
Clinical studies have shown that the AutoPap-assisted practice identifies
significantly more abnormal slides as compared to current practice. The Company
believes that this difference is statistically significant in favor of the
AutoPap-assisted practice. In addition, the Company believes that the
AutoPap-assisted practice is better able to correctly identify normal slides as
compared to current practice.
Laboratories face significant liability related to accurately identifying
abnormal Pap smears. TriPath Imaging believes that laboratories using of AutoPap
will substantially improve their quality of practice, and have the potential to
reduce exposure to liability resulting from false negative results.
Laboratories are seeing a significant decrease in qualified, available
cytotechnologists for screening Pap smears. By reducing the number of Pap smears
requiring cytotechnologist review, the AutoPap alleviates a significant part of
this capacity issue while increasing overall lab accuracy. Similarly, a
laboratory may utilize the AutoPap to increase its Pap screening volume while
maintaining its current work force level.
The AutoPap GS
In the fourth quarter of 2000, TriPath Imaging launched the AutoPap GS for
use outside the United States. In the U.S., clinical trials will begin in the
second quarter of 2001. Upon completion of these studies, the Company will
submit a PMA supplement to the FDA seeking domestic approval of AutoPap GS. The
AutoPap GS incorporates the Company's Slide Wizard technology and consists of an
AutoPap instrument networked to one, or several, routine microscope(s) equipped
with computer-controlled automated stages for fast relocation of "fields of
interest" on cervical slides which have been previously processed by the
AutoPap. The AutoPap is modified to determine whether a slide is "within normal
limits" and can be archived or alternatively has to be reviewed. Further, during
its review process, the AutoPap GS stores a pre-set number of the "fields" with
the highest probability of containing some abnormality. Instead of sending the
"review" slides to the more time-consuming manual relocation process, the slides
can be quickly assessed by automatically relocating the stored fields under the
networked routine microscopes for manual review. If abnormal findings can be
confirmed by the human observer, then the slides undergo full manual review.
Otherwise, the slides are archived.
The Company believes the established quality of the AutoPap algorithms,
coupled with the highly focused nature of location-guided screening, allow a
laboratory to improve quality, increase capacity by up to 200% and alleviate
backlogs and/or labor shortages.
AutoCyte SCREEN System
AutoCyte SCREEN, known as SCREEN, is an automated image analysis technology
which combines proprietary imaging technology and classification software with
off-the-shelf computer hardware to screen thin-layer slides prepared using the
PREP system. The Company filed a PMA with the FDA in July 1998 seeking approval
for its SCREEN technology. Since the merger of NeoPath and AutoCyte in September
1999, the Company has adopted the AutoPap system as the platform for its
cervical cytology business. While TriPath Imaging retains the proprietary
technology for SCREEN as a component of its core imaging technology, the Company
has elected not to pursue approval for the AutoCyte SCREEN System as submitted
to the FDA in 1998. TriPath Imaging will continue to leverage this technology in
future product applications, however.
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Extended Slide Wizard
TriPath Imaging's long-term product strategy encompasses an initiative into
the broader clinical laboratory automation market. The extended Slide Wizard
product line consists of PC-based applications focused on the quantification of
the nuclear DNA content of cells, the quantification of the amount of specific
molecules in cells or tissue sections (immunohistochemistry and
immunocytochemistry assays), the management and archiving of images and patient
information, the exchange of data via telepathology and the creation of
comprehensive reports combining color images and patient data. Applications
currently available from the Company include:
- Telepathology system -- LINK;
- Image management & archiving system -- AIMS;
- DNA quantification -- QUIC DNA;
- Immunohistochemistry/Immunocytochemistry quantification -- QUIC IMMUNO;
- Antinuclear antibody quantification -- ImageTiter;
- Electronic dotting and labeling system -- Slide Wizard.
The Company markets its extended Slide Wizard products primarily through
distributors. The base system of this product line, the Slide Wizard, is also a
component of the AutoPap GS system which is currently sold outside the United
States only. See "Marketing and Sales." The Company's strategy includes the
development of additional applications or modules in the field of tissue
diagnosis and prognosis to run on the proprietary extended Slide Wizard platform
which support and integrate a systematic approach to diagnostic cytology and
pathology.
Other Applications for TriPath Imaging's Imaging Technology
TriPath Imaging believes that its automated visual intelligence technology
can be used for other diagnostic tests that involve microscopic analysis of
biological specimens on glass slides, such as sputum, blood, urine, or other
samples. In addition, TriPath Imaging has identified several other potential
uses for its technology, including automated analysis of breast, prostate,
ovary, colon and skin tissue. To develop its systems for other applications,
TriPath Imaging will need to adapt software algorithms to analyze each of these
other tissue specimens.
Further, the Company will continue to seek alternative applications for its
other imaging technologies through internal research and development as well as
potential strategic partnerships with other companies.
CLINICAL TRIALS AND REGULATORY STATUS
Supplement to AutoPap Primary Screening PMA
In September 1999, the Company submitted a supplement to its existing PMA
for the AutoPap system to pursue FDA approval to process PREP thin-layer slides
on the AutoPap. In December 2000, TriPath Imaging submitted an amendment to the
original supplement that addressed questions raised by the FDA on the Company's
original application. As a result of ongoing discussions with the FDA regarding
the Company's submissions, the Company believes that it will have various
options in connection with the pending PMA supplement regarding use of the
AutoPap system to screen PREP thin-layer slides. Among these are to accept
limitations in the Company's proposed product labeling or to collect additional
data to support the current labeling proposal. The Company is evaluating its
options and considering the best course of action. In connection with its
submissions, the Company has voluntarily brought to the FDA's attention several
assertions recently made by a former Company employee questioning the use of the
AutoPap system to screen thin-layer preparations. The Company has conducted an
internal investigation and has determined that these assertions appear to be
without merit. The FDA has advised the Company that it will conduct an
inspection to investigate these assertions prior to completing Agency review of
the Company's PMA supplement. The Company cannot determine at this time when the
FDA proceedings will conclude or what conclusions the FDA will reach.
FDA Warning Letter
In April 2000, the Company received a warning letter from the FDA, Office
of Compliance, alleging that the Company had improperly distributed certain
promotional materials related to the PREP system. The Agency did not state that
it had any concerns with the safety and effectiveness or performance of the PREP
system. The Company worked interactively with the Agency to address and resolve
their concerns. In August
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2000, the Company received confirmation from the FDA that it had satisfactorily
resolved the issues raised in the April 2000 warning letter.
TriPath Imaging's Facilities
The Company's manufacturing process is subject to extensive regulation by
the FDA, including the FDA's Quality System Regulation ("QSR," also known as
Good Manufacturing Practice, or "GMP") requirements. In April 1999, the
Company's Redmond, Washington manufacturing facility underwent a routine
inspection by the FDA for compliance with QSR requirements. The Company was
notified in May 1999, in writing, that the facility was in substantial
compliance with the applicable requirements of the Federal Food, Drug, and
Cosmetic Act and implementing regulations. In July 2000, the Company's
Burlington, North Carolina manufacturing facility underwent a similar inspection
and the FDA notified the Company in September 2000, in writing, that the
facility was in substantial compliance with the applicable requirements of the
Federal Food, Drug, and Cosmetic Act and implementing regulations.
Extended Slide Wizard Product Line (formerly Pathology Workstation)
In November 1995, the Company received FDA clearance of a premarket
notification ("510(k)") covering ImageTiter, an application for the extended
Slide Wizard product line which TriPath Imaging is currently selling through
distributors. Some of the Company's products under this line, QUIC DNA and QUIC
IMMUNO, are presently offered "For Research Only" in the U.S. The Company may
elect to pursue regulatory clearance to market in the United States additional
Slide Wizard applications currently under development or those developed in the
future.
MARKETING AND SALES
Automated slide preparation and screening products were introduced into the
cervical cancer screening market in the mid-1990's. The Company expects to
benefit from the increased awareness and acceptance of these new technologies.
The Company began limited international commercial sales of its PREP system in
1993, and in 1999 commenced commercialization in the United States, following
FDA approval. The Company began placements of AutoPap QC systems, a predecessor
to the current AutoPap, in 1995 and of AutoPap system in 1998. AutoPap is the
only fully automated Pap smear screening device to receive regulatory clearance
for marketing in the United States.
The principal market for gynecological applications of PREP and AutoPap are
clinical laboratories worldwide. Clinical laboratories are the focal point for a
variety of constituents related to the Pap smear process including the patient,
the physician, and third party payors. In an effort to facilitate the adoption
of the Company's products, TriPath Imaging has implemented the necessary sales
professionals to educate and promote the Company's products to each of these
distinct groups. Furthermore, the Company has contractual partnerships with
organizations associated with physician education and payor/reimbursement
support. Management sees these partnerships as a necessary extension of the
Company given its position of potential growth and new technologies.
TriPath Imaging generates PREP revenue from either the sale, or rental, of
PREP systems and from the sale of the related test kits, comprised of
proprietary reagents and other disposables. Additionally, the Company generates
revenue from service contracts on PREP systems. For system sales, customers
purchase the PREP instrument and make separate purchases of test kits.
Additionally, domestic customers may elect to purchase the PREP instruments
under the IPO program where the PREP instrument is placed at the customer's
site, free of charge, and the customer pays a higher "per-test" price for the
reagents and disposables. Under the IPO program, the Company records revenue for
the instrument sale, which is actually sold to a third-party financial
institution. The Company has entered into an agreement with a financial
institution to support the placement of PREP IPO systems. The financial
institution is repaid with part of the proceeds of the reagents and disposables
sold.
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For system rentals, actually called a "reagent rental," a PREP instrument
is placed at a customer site, free of charge, and the customer commits to
purchase an agreed upon number of test kits over the life of the agreement. Each
PREP system placed typically provides a recurring revenue stream as customers
process the test kits sold by the Company.
TriPath Imaging currently generates AutoPap-related revenue from the direct
sale of AutoPap systems and from placing AutoPap systems under fee-per-use
contracts. In the latter cases, fee-per-use revenue commences in the month a
system is initially placed in commercial use at a customer site and consists of
per-slide monthly billings, fixed rental billings or certain fee-per-use
contracts that require minimum payments for the duration of the agreement,
normally three-to-five years. Additionally, domestic customers may elect to
purchase the AutoPap instrument under the IPO program. Recently, the Company
has also converted fee-per-use contracts to direct sale arrangements. Under the
direct sale option, recurring revenue comes from annual service contracts that
may be sold to the customer. As product development efforts improve the
performance of the AutoPap System, TriPath Imaging intends, subject to obtaining
applicable regulatory approvals, to offer upgraded products to its customers.
The first such development, the AutoPap GS System, was introduced in October
2000 outside of the US. The Company has begun preclinical feasibility studies in
the U.S. and plans to begin U.S. clinical trials in the second quarter of 2001.
As these, and other, product enhancements come to market, TriPath Imaging
anticipates that upgrades will increase its fee-per-use and sale pricing.
The principal market for non-gynecological applications of PREP is also
clinical laboratories worldwide, although these applications are performed in
significantly lower quantities than cervical cancer screening applications.
Non-gynecological applications for the detection of cancer are performed on body
fluids, including urine samples, respiratory specimens and a variety of
fine-needle aspirates of specific organs.
Marketing Strategy
TriPath Imaging markets its products to domestic and foreign clinical
laboratories through direct sales activities in the United States and primarily
through distributors in international markets. The Company significantly
expanded its marketing and sales activities to accelerate the commercialization
of its core business in several ways. Additional laboratory sales
representatives were hired to increase contact potential for the laboratory
customer marketplace. Through an alliance with NPS, the Company engaged the
physician market directly for the first time by adding physician directed
representatives, on a contract basis, to augment TriPath Imaging's direct sales
efforts. An additional element of the Company's marketing strategy is to achieve
broad market acceptance for the system integrating PREP and AutoPap for cervical
cancer screening if FDA approval is achieved. There can be no assurance when, if
ever, such approval will be received. In implementing this strategy, the Company
will address the needs of the constituencies described below.
Clinician/OB-GYN. The clinician requires a simple collection technique
which results in an accurate and adequate sample from the patient. TriPath
Imaging believes that PREP's patented cell enrichment process and single
collection device facilitate high quality results using a simple collection
technique.
Large clinical laboratories. Conventional Pap smear testing has become a
concentrated market in the United States. The Company believes that
approximately 50% of cervical cancer test volume is concentrated among a
relatively small number of large laboratories. The Company estimates that two
major clinical laboratories, Quest Diagnostics, Inc. ("Quest") and Laboratory
Corporation of America Holdings ("LabCorp"), account for almost 18 million
conventional Pap smears annually. In January 2000, Quest announced an exclusive
supplier agreement for thin-layer preparations with a competitor of the Company
(see "Competition"). TriPath Imaging believes the following factors will enable
the Company to market PREP and AutoPap successfully to this concentrated market
segment:
- PREP's high throughput and cost-effectiveness;
- AutoPap's ability to identify more abnormal slides than conventional
methods; and
- AutoPap's ability to show improved specificity over current practice,
coupled with the Company's recently expanded resources dedicated to
marketing and selling activities.
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Moreover, the pressures associated with rising health care costs, rising
litigation costs, and the limited supply of qualified cytotechnologists should
further facilitate adoption of PREP and AutoPap by the large laboratory market.
Medium and small clinical laboratories. The Company also intends to
continue to devote a substantial portion of its marketing and sales resources to
targeting medium-sized and small clinical laboratories. Hospital consolidation,
and particularly the consolidation of laboratories of larger hospitals, is
creating a new medium-sized customer for the Company's products. The Company
expects that the medium-sized and small clinical laboratory segment of the
market generally will utilize the Company's IPO, or equipment rental program.
Third-party payors. While the Company has made great strides in gaining
market acceptance of its products by third party payors, by devoting additional
resources in the area of reimbursement, the Company will continue to promote the
clinical and economic benefits of its PREP and AutoPap systems to nationally
managed care providers, major private insurers and other third-party payors. The
Company has demonstrated that the overall cost savings to the health care
system, resulting from earlier detection of cervical cancer, reduced ASCUS
diagnoses and the resulting reduction of unnecessary biopsies and colposcopies,
and improved specimen adequacy and resulting reduction of unnecessary repeat Pap
smears, more than offset the cost of the Company's products. See also
"Third-Party Reimbursement" below.
Marketing and Sales Organization
The Company currently employs in excess of 40 full-time personnel
worldwide, and engages another 28 people through its arrangement with NPS, to
market, sell and provide after-sale support of its products. The Company expects
to increase its worldwide base of sales and marketing employees to over 100
full-time personnel by the end of 2001.
In the United States, the Company has expanded its efforts to market its
cervical cancer screening products through a direct sales force. This direct
sales organization is focused on both the physician, primarily OB-GYN and
primary care physicians, and the laboratory markets to achieve market
penetration and availability of the Company's products. Further, TriPath
Imaging's marketing organization will expand the Company's presence in the
marketplace through activities including advertising and promotion, Company-
sponsored seminars and trade shows, and peer selling activities. The Company
will also continue to expand its reimbursement specialists with an emphasis on
managed care organizations and other third-party payors to achieve maximum
reimbursement levels and to further stimulate demand for its products. TriPath
Imaging will seek co-marketing agreements with sales organizations of major
reference laboratories to market its products directly to health care providers.
In international markets, the Company markets and sells its products
primarily through a distribution network. To support these efforts, the Company
employs five full-time personnel, consisting of sales professionals, product
managers and after-sales support personnel located in Europe. The Company
anticipates that these distributor organizations will ultimately assume
responsibility for all sales and after sales support activities as well as a
portion of the Company's marketing activities. Both large distribution
organizations with products focused on the clinical diagnostic market, and
smaller distribution organizations with products focused specifically on the
anatomic pathology market have been employed to distribute TriPath Imaging
products worldwide.
After-sale support services, including customer training, product
installation, telephone technical support and repair service is offered directly
to customers in the United States. Personnel providing these services are
located both at the Company's headquarters and in select major metropolitan
areas. Internationally, the Company provides these services through Company
employees and distributor organizations.
MANUFACTURING
AutoPap
Final assembly, integration and testing of the electronic, mechanical and
optical components and modules of AutoPap take place in the Company's Redmond,
Washington facility. TriPath Imaging's
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manufacturing operations have produced sufficient AutoPap systems to meet
customer demand since it began commercial operations in 1996. The Company
believes it has sufficient capacity to meet anticipated customer needs for its
AutoPap product.
TriPath Imaging purchases all components for the AutoPap system from
outside vendors. Several components of the AutoPap are supplied by sole-source
vendors. If any of these sole-source suppliers are unable or choose not to do
business with the Company, TriPath Imaging would need to modify any components
provided by additional or replacement suppliers for use in AutoPap. The Company
would be unable to quickly establish additional or replacement sources of supply
for several AutoPap components. In addition, TriPath Imaging may need to obtain
regulatory approval to substitute certain components. There can be no assurance
that the Company would be able to obtain the necessary approvals. If one of its
vendors becomes unable to supply acceptable components in a timely manner and in
the quantity required, TriPath Imaging may need to delay or halt its
manufacturing process. Any delay or cessation of manufacturing could adversely
affect its business.
In its manufacturing process, TriPath Imaging must meet and adhere to all
applicable requirements of U.S. and foreign regulatory agencies, including
Quality Systems Regulations issued by the FDA. As part of the FDA regulatory
process, TriPath Imaging faces periodic FDA inspections and other periodic
inspections by U.S. and foreign regulatory agencies. See "Governmental
Regulation."
PREP
The Company currently assembles, tests and packages components of PREP at
its manufacturing facility in Burlington, North Carolina. The Company also
manufactures its CytoRich line of reagents and stains for PREP at the Burlington
facility. The Company believes that its existing manufacturing and assembly
processes are adequate to meet the near-term, full-scale production requirements
of its PREP system for cervical cancer screening.
The Company purchases certain of the PREP instrument components from a
single supplier in Europe. The consumable items used with PREP are purchased
from a variety of third-party vendors, some of which are sole-source suppliers.
In 1998, the Company agreed to a new multi-year exclusive contract with the
supplier of manufactured plastic components that are incorporated into its
products. The contract began in June 1998 and will terminate in June 2002.
Pricing is fixed, but is subject to adjustment based upon changes in raw
material costs. The Company's obligation to use this supplier exclusively for
the components is contingent upon this supplier supplying the Company at prices
competitive with those offered by third parties on similar terms, and upon this
supplier meeting the Company's quality and production requirements. The Company
believes that the supplier has sufficient capacity to meet its present and
future requirements for plastic components.
Extended Slide Wizard Products
The Company currently manufactures most of its extended Slide Wizard
product line at its Burlington, North Carolina facility and believes it has
sufficient capacity to meet anticipated customer demand for this product. The
Company also manufactures the Slide Wizard instrument and integrates it into the
AutoPap GS at its Redmond, Washington facility and believes it has sufficient
capacity to meet anticipated customer demand for this product.
The Company's extended Slide Wizard products consist primarily of
off-the-shelf components and proprietary software. The components are supplied
by a variety of vendors, some of which are sole-source suppliers. The Company
has been integrating and selling extended Slide Wizard products since 1993.
The Company's Suppliers
Several components of the Company's products are supplied by sole-source
vendors. Subject to any contractual limitations upon its ability to do so, the
Company may seek to establish other relationships with additional suppliers or
vendors for components of its products, although there can be no assurance that
it will
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be successful in doing so. If any of the Company's current or future sole-source
suppliers are unable or choose not to do business with the Company, TriPath
Imaging would need to modify any components provided by additional or
replacement suppliers for use in its products. The Company would be unable to
quickly establish additional or replacement sources of supply for several of
these components. The incorporation of new components, or replacement components
from alternative suppliers into the Company's products may require the Company
to submit PMA supplements to, and obtain further regulatory approvals from, the
FDA before marketing the products with the new or replacement components. There
can be no assurance that the Company would be able to obtain the necessary
approvals. If one of its vendors becomes unable to supply acceptable components
in a timely manner and in the quantity required, TriPath Imaging may need to
delay or halt its manufacturing process. Any delay or cessation of manufacturing
could adversely affect its business.
Manufacturing Standards
Both the Burlington, North Carolina and Redmond, Washington facilities are
subject to periodic FDA inspections. In April 1999, the Company's Redmond,
Washington manufacturing facility was inspected by the FDA for compliance with
QSR requirements. The Company was notified in May 1999, in writing, that the
facility was in substantial compliance with the applicable requirements of the
federal Food, Drug, and Cosmetic Act (the "FDC Act") and implementing
regulations. In July 2000, the Company's Burlington, North Carolina
manufacturing facility was inspected by the FDA for compliance with the FDA's
QSR requirements. The Company was notified in September 2000, in writing, that
the facility was in substantial compliance with the applicable requirements of
the FDC Act and implementing regulations. Failure to comply with the FDA's QSR
requirements would materially impair the Company's ability to achieve or
maintain commercial-scale production. In addition, if the Company is unable to
maintain full-scale production capability, acceptance by the market of PREP and
AutoPap would be impaired, which in turn would have a material adverse effect on
the Company.
In addition to QSR requirements, the Company is required to meet
requirements relating to ISO 9001 certification and other European regulatory
requirements. A European "CE" certification is required to successfully sell
PREP and AutoPap in Europe according to certain directives of the European
Union. The addition of other European directives may require TriPath Imaging to
further demonstrate compliance with new or modified requirements in order to
apply the CE mark specific to those directives. The OEM supplier of the PREP
instrument components has ISO 9001 certification and has obtained CE
certification for the main PREP component. CE compliance for the entire AutoCyte
PREP system has been obtained by the Company. The AutoPap System is certified to
EN55022:94/CISPR 22, Class A, EN 50082-1 92, AS/NZS2064/CISPR 11, Class A.
The Company obtained ISO 9001 certification in 1999. Compliance audits were
conducted on the Company's Burlington, North Carolina facility by a certified
ISO auditor in May 2000 and in January 2001, and the Company was subsequently
notified in each case that the facility had no outstanding deficiencies and had
successfully passed the audit inspection.
The Company has initiated its efforts to obtain ISO 9001 certification at
its Redmond, Washington facility in 2001.
Failure to maintain compliance with the applicable manufacturing
requirements of regulatory agencies would have a material adverse effect on the
Company.
RESEARCH AND DEVELOPMENT
The Company's research and development programs are currently focused on
three major goals: (1) continued improvement and streamlining of the
AutoPap/AutoPap GS product, (2) continued enhancement of PREP, including, but
not limited to adjunctive testing using the PREP CytoRich preservative solution,
improvement of related reagents and disposables, and further streamlining and
automating the PREP slide preparation and handling process, and (3) continued
product development of additional extended Slide Wizard applications with
scalable automation capabilities to address the needs of the broader pathology
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automation market, as well as the needs of potential strategic partnerships as
they continue to be a Company focus.
Enhancements to both AutoPap and PREP are particularly designed to increase
the instruments' efficiency, ease of use, reliability and cost-effectiveness.
This also includes initiatives directed at extending the shelf life of the
CytoRich line of reagents and preservatives used with the PREP system. Further,
the Company plans to explore alternative uses for adjunctive testing using the
Company's CytoRich preservative fluid and to seek approval for the use of
alternative collection devices in connection with the specimen collection
process related to the PREP system.
PREPMATE, an automated front-end processor for PREP, is designed to reduce
the number of manual pre-preparation steps required for use of the PREP system.
PREPMATE functions as a robotic mixer of the cell suspension in the preservative
vial. It automatically layers the cell sample before centrifugation. PREPMATE is
designed to further enhance the throughput of the PREP system and to streamline
the front-end processing. PREPMATE is not currently approved for use in the U.S.
by the FDA, but the Company submitted a PMA to the FDA in December 2000 for
approval of PREPMATE in the U.S.
The Company continues to enhance its extended Slide Wizard platform. This
platform has been expanded to a modular concept which allows rapid prototyping
and product development. The degree of automation for the resulting applications
can be adjusted to the needs of the corresponding market, from interaction to
complete automation. This technology takes advantage of TriPath Imaging's
intellectual property and will be applied primarily to complement the existing
portfolio of applications with new developments focused on gene or protein based
cancer staging and prognostic testing.
The Company will continue to seek alternative applications for its
technologies through internal research and development, as well as, potential
strategic partnerships with other companies.
There can be no assurance that any product enhancement or development
project undertaken by the Company either currently or in the future will be
successfully completed, receive regulatory approvals or be successfully
commercialized. The failure of any such enhancement or project to be completed,
approved or commercialized could prevent the Company from successfully competing
in its targeted markets and could have a material adverse effect on the Company.
As of December 31, 2000, the Company had approximately 50 employees engaged
in research and development activities. The Company's expenditures for research
and development were approximately $16.0 million, $12.3 million, and $9.4
million for the years ended December 31, 1998, 1999 and 2000, respectively.
THIRD-PARTY REIMBURSEMENT
Some private third-party medical insurance providers and governmental
agencies offer reimbursement for laboratory testing associated with routine
medical examinations, including Pap smears. In the United States, the level of
reimbursement by those third-party payors varies considerably, often resulting
in payments by patients for Pap smears. Third-party healthcare payors in the
United States are increasingly sensitive to containing healthcare costs and
heavily scrutinize new technology. Third-party payors may also influence the
pricing or perceived attractiveness of TriPath Imaging's products and services
by regulating the maximum amount of reimbursement they provide, or by not
providing any reimbursement at all. Successful commercialization of PREP and
AutoPap for cervical cancer screening in the United States and some other
countries will depend on the availability of reimbursement from such third-party
payors. Because the up-front costs of using the Company's products are typically
greater than the cost of the conventional Pap smear, the Company has worked to
convince third-party payors that the overall cost savings to the health care
system, resulting from earlier detection of cervical cancer and its precursors
will more than offset the cost of the Company's products.
Restrictions on reimbursement may limit the price TriPath Imaging can
charge for the PREP and AutoPap systems or reduce the demand for its products.
If these third-party payors do not reimburse for the PREP and AutoPap systems,
or if they provide reimbursement significantly below the amounts laboratories
charge patients to perform PREP preparations and AutoPap screening, TriPath
Imaging's potential market will be reduced. The Company has focused on obtaining
coverage and reimbursement from major national and
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regional managed care organizations and insurance carriers throughout the United
States. In early 1998, TriPath Imaging established a reimbursement team to work
with third-party insurers and managed care organizations to establish and
improve third-party reimbursement rates for its products. Most third-party payor
organizations independently evaluate new diagnostic procedures by reviewing the
published literature and the Medicare coverage and reimbursement policies on the
specific diagnostic procedures. To assist third-party payors in their respective
evaluations of PREP and AutoPap, the Company provides scientific and clinical
data to support its claims of the safety and efficacy of the Company's products.
The Company focuses on improved disease detection and long-term cost savings
benefits in obtaining reimbursement for PREP and AutoPap for cervical cancer
screening.
A critical component in the reimbursement decision by most private insurers
and the United States Health Care Financing Administration ("HCFA"), which
administers Medicare, is the assignment of a Current Procedural Terminology
("CPT") code which is used in the submission of claims to insurers for
reimbursement for medical services. CPT codes are assigned, maintained and
revised by the CPT Editorial Board administered by the American Medical
Association. In January 1998 the CPT Editorial Board established two separate
CPT reimbursement codes (88142 and 88143) for liquid-based cervical cytology
specimens automatically prepared and manually screened. In January 1999, CPT
reimbursement codes became effective for the AutoPap system (88147 and 88148).
In a Program Memorandum to Regional Intermediaries/Carriers dated March 14,
2001, HCFA announced it had established National Limitation Amounts for the CPT
reimbursement codes that relate to TriPath Imaging products. HCFA set the
national reimbursement limit at $28.00 for the manual screening (CPT code 88142)
and re-screening (CPT code 88143) of each sample prepared using the PREP system.
For slides screened by the AutoPap system, the national limit is $14.60 for each
sample which falls within the category of slides classified as "within normal
limits" and requiring no further review, or 25% of all slides screened (CPT code
88147). The national limit for the remaining 75% of the slides screened using
the AutoPap system and requiring further review (CPT code 88148) is $20.30. The
Company does not believe these limits will adversely impact the Company's
current pricing strategy or reduce the demand for its products. There is
currently no separate CPT code in place for the archiving of thin-layer
specimens after being processed on the AutoPap. New codes will not be available
until January 2003 at the earliest.
The Company has limited experience in obtaining reimbursement for its
products in the United States or in other countries. In addition, third-party
payors are routinely limiting reimbursement and coverage for medical devices
and, in many instances, are exerting significant pressure on medical suppliers
to lower their prices. Lack of, or inadequate reimbursement by government and
other third-party payors for the Company's products would have a material
adverse effect on the Company's business, financial condition and results of
operations. Further, outside of the United States, health care reimbursement
systems vary from country to country, and there can be no assurance that
third-party reimbursement will be made available at an adequate level, if at
all, for PREP or AutoPap under any other reimbursement system.
Although the Company's products have already received some reimbursement
approval in the U.S., there is uncertainty concerning third-party reimbursement
for the use of any medical device incorporating new technology. In July 1998,
the American College of Obstetricians and Gynecologists, or ACOG, released a
report stating that, while the new technologies improve sensitivity of the Pap
test, their routine use cannot be recommended based on costs and a lack of
sufficient data demonstrating a reduction in incidence of late-stage disease or
an improvement in cervical cancer survival rate. In July 1999, ACOG released an
update to their statement reiterating their position that the conventional Pap
smear is still the standard of care and resources may be better spent on
increasing the compliance rate of women obtaining an annual Pap test as opposed
to using new technologies. In February 2001, however, ACOG withdrew its opinion
favoring the conventional Pap smear over new Pap test screening techniques.
Accordingly, ACOG currently takes no position on the advisability of such new
technologies and has stated that it will not reevaluate its position until it
has reviewed data from the ASCUS-LSIL Triage Study, currently taking place, and
from the Bethesda System conference which takes place in April 2001.
Recent health care cost containment initiatives in the United States that
have focused on reduction in reimbursement levels may effect the Company
negatively. However, emphasis on preventive measures to reduce the overall costs
to the health care system could lead to more frequent testing for cervical
cancer and use of PREP and AutoPap. The Company is unable to predict the outcome
or the effect on its business of the current health care reform debate. In early
2000, Congress passed a bill directing HCFA to increase reimbursement for the
conventional Pap smear from $7.15 to $14.60. In early 2001, Congress passed a
bill
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increasing the Medicare approved frequency of payment for screening type Pap
smears from every three years to every two years.
PATENTS, COPYRIGHTS, LICENSES AND PROPRIETARY RIGHTS
Because of the substantial length of time and expense required to bring new
products through development and regulatory approval to the marketplace, the
Company relies on a combination of patents, trade secrets, copyrights and
confidentiality agreements to protect its proprietary technology, rights and
know-how. The Company holds 104 issued or allowed United States patents and has
four United States patent applications pending. These patents cover system
components, such as the disaggregation syringe, the PREP process, and various
aspects of its high-speed image-interpretation technology. TriPath Imaging holds
77 foreign patents and has applied for patent protection for certain aspects of
its technology in various foreign countries. TriPath Imaging intends to continue
to pursue patent protection where it is available and cost-effective, both in
the United States as well as in other countries. The Company's existing United
States and foreign patents will expire from 2012 through 2018. There can be no
assurance, however, that the claims allowed in any of the Company's existing or
future patents will provide competitive advantages for the Company's products or
will not be successfully challenged or circumvented by competitors.
Under current law, patent applications in the United States and in foreign
countries are maintained in secrecy for a period after filing. The right to a
patent in the United States is attributable to the first to invent, not the
first to file a patent application. The Company cannot be sure that its products
or technologies do not infringe patents that may be granted in the future
pursuant to pending patent applications or that its products do not infringe any
patents or proprietary rights of third parties. There can be no assurance that a
court would rule that the Company's products do not infringe other third-party
patents or would invalidate such third-party patents. The Company may incur
substantial legal fees in defending against a patent infringement claim or in
asserting claims of invalidity against third parties. In the event that the
Company is determined to be infringing any claims of third-party patents and
such claims are upheld as valid and enforceable, the Company could be required
to pay damages and be prevented from selling its products or could be required
to obtain licenses from the owners of such patents or be required to redesign
its products to avoid infringement. There can be no assurance that such licenses
would be available or, if available, would be on terms acceptable to the Company
or that the Company would be successful in any attempt to redesign its products
or processes to avoid infringement. The Company's failure to obtain these
licenses or to redesign its products would have a material adverse effect on the
Company's business, financial condition and results of operations.
In September 1999, Cytyc filed suit against TriPath Imaging in the United
States District Court for the District of Delaware alleging that the Company's
CytoRich proprietary preservative fluid infringed Cytyc's patent titled "Cell
Preservative Solution." TriPath Imaging denied Cytyc's claims. In May 2000,
Cytyc filed suit against TriPath Imaging in the United States District Court for
the District of Massachusetts alleging that the Company had distributed
misleading information to current and potential purchasers of Cytyc's products.
TriPath Imaging denied Cytyc's claims and asserted counterclaims alleging that
Cytyc had made misleading statements regarding both its own product and TriPath
Imaging's product, and had violated antitrust laws. In January 2001, Cytyc and
TriPath Imaging settled all litigation between the two companies. All claims and
counterclaims against each other pending in Delaware and Massachusetts were
dismissed with prejudice.
The Company has entered into confidentiality agreements with all of its
employees and several of its consultants and third-party vendors. These
agreements also require employees and consultants to disclose to TriPath Imaging
ideas, developments, discoveries or inventions they conceive during employment
or consultation. They also must assign their proprietary rights in such matters
if the matters relate to TriPath Imaging's business and technology. There can be
no assurance that the obligations of employees and consultants of the Company
and third parties with whom the Company has entered into confidentiality
agreements to maintain the confidentiality of trade secrets and proprietary
information will effectively prevent disclosure of the Company's confidential
information or provide meaningful protection for the Company's confidential
information if there is unauthorized use or disclosure, or that the Company's
trade secrets or proprietary information will not be independently developed by
the Company's competitors.
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TriPath Imaging has registered trademarks in the United States, Australia,
Japan, Canada, France, the Benelux countries, Germany, the United Kingdom, Italy
and Spain for "NeoPath" and "AutoPap." TriPath also has registered trademarks in
the United States and in several countries throughout the world for "AutoCyte,"
"AutoCyte QUIC," "CytoRich," "ImageTiter," "PAPMAP," and "PAPNET." Three
additional marks are nearing completion of the registration process in the
United States and the Company expects to have them fully registered in 2001.
Additionally, TriPath Imaging has applied for registration of its trademarks in
several other foreign countries. The Company also holds unregistered rights to
copyrights on documentation and operating software developed by it for the PREP
system. There can be no assurance that any trademarks or copyrights owned by the
Company will provide competitive advantages for the Company's products or will
not be challenged or circumvented by its competitors. Litigation may be
necessary to defend against claims of infringement, to enforce patents,
trademarks and copyrights of the Company, or to protect trade secrets and could
result in substantial cost to, and diversion of effort by, the Company. There
can be no assurance that the Company would prevail in any such litigation. In
addition, the laws of some foreign countries do not protect the Company's
proprietary rights to the same extent as do the laws of the United States.
COMPETITION
The cervical cancer screening market is comprised of the conventional Pap
smear process and certain technologies that have been introduced in recent years
or are currently under development to provide improvements over the conventional
Pap smear process. The Company's competitors in the development and
commercialization of alternative cervical cancer screening technologies include
both publicly traded and privately held companies. The alternative technologies
known to the Company have focused on improvements in slide sample preparation,
the development of automated, computerized screening systems and adjunctive
testing technologies. Nevertheless, some competitors' products have already
received FDA approval and are being marketed in the United States. In addition,
one of the Company's competitors has greater financial, marketing, sales,
distribution and technical resources than the Company, and more experience in
research and development, clinical trials, regulatory matters, customer support,
manufacturing and marketing. The Company believes that its products will compete
on the basis of a number of factors, including slide specimen adequacy,
screening sensitivity, ease of use, efficiency, cost to customers and
performance claims. While the Company believes that its products will have
competitive advantages based on some of these factors, there can be no assurance
that various competitors' products will not have competitive advantages based on
other factors that, when coupled with the earlier market entry of some products,
will adversely effect the market acceptance of PREP and AutoPap. Moreover, there
can be no assurance that the Company will be able to compete successfully
against current or future competitors or that competition, including the
development and commercialization of new products and technologies, will not
have a material adverse effect on the Company. The Company's products could be
rendered obsolete or uneconomical by technological advances of the Company's
current or potential competitors, the introduction and market acceptance of
competing products or by other approaches.
The Company's primary competitor in thin-layer slide preparation is Cytyc.
Cytyc's systems, the ThinPrep 2000 and 3000 Processors ("ThinPrep 2000" and
"ThinPrep 3000"), are based on a membrane-filtration separation system rather
than the centrifugation approach used in the AutoCyte PREP process. The Cytyc
ThinPrep systems are presently the only other thin-layer sample preparation
systems approved by the FDA as a replacement for the conventional Pap smear.
They are also used for non-gynecological applications. The FDA has allowed Cytyc
to conclude in the discussion section of the package insert for ThinPrep 2000,
and ThinPrep 3000, that the sample preparation is "...significantly more
effective than the conventional Pap smear for the detection of Low Grade
Squamous Intraepithelial (LSIL) and more severe lesions in a variety of patient
populations." The FDA has also allowed Cytyc to conclude in the package insert
that specimen quality "...is significantly improved over that of conventional
Pap smear preparation in a variety of patient populations." In addition, in
October of 1996, Cytyc announced a non-exclusive co-marketing agreement with
Digene Corporation, which has developed a product that detects the presence or
absence of HPV in precancerous cervical lesions. In September 1997, the FDA
approved PMA supplements submitted by Cytyc and Digene enabling testing for HPV
directly from Cytyc's ThinPrep process cell suspension. The Company is
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presently working with Digene on a PMA supplement for use of PREP's cell
suspension with Digene's HPV test in the United States. In Europe, the AutoCyte
PREP cell suspension is already in routine use with Digene's HPV test. In May
2000, Cytyc announced that it received FDA approval for its ThinPrep 3000
system. The PMA was submitted to the FDA in the fall of 1999. In January 1999,
Cytyc announced that it was expanding its direct sales force by 75 people to
sell directly to hospitals, laboratories and doctors. In January 2000, Cytyc and
Quest Diagnostics announced a multi-year agreement naming ThinPrep as the
exclusive liquid-based cervical cancer screening methodology for Quest. In
October 2000, Cytyc announced an exclusive U.S. strategic alliance for women's
health with Roche Diagnostics. Further, in January 2001, Cytyc announced an
exclusive co-promotion agreement with Digene Corporation surrounding the use of
Digene's HPV test using the Cytyc preservative solution. Cytyc's success with
implementation of any of the foregoing arrangements or marketing initiatives may
make it more difficult for the Company to promote PREP in markets in which it
competes with Cytyc.
The Company faces several competitors, or potential competitors, in the
imaging arena. To date, the AutoPap system is the only FDA-approved device for
the automated primary screening of conventional Pap smear slides. Cytyc has
announced its intentions to develop a device to automate the screening of
thin-layer slides prepared using their ThinPrep System. Other competitors
include ChromaVision Medical Systems, Inc., which develops, manufactures and
markets an automated cellular imaging system to assist in the detection,
diagnosis and treatment of cellular diseases such as cancer and infectious
disease, and Applied Imaging Corporation, which develops and markets automated
genetic testing systems and imaging systems used in cancer pathology and
research which are capable of sending digital images electronically for remote
review and consultation. There can be no assurance that these or other
competitors will not succeed in developing technologies and products that are
more effective, easier to use or less expensive that those which are currently
offered or are being developed by the Company or that would render the Company's
technology and products obsolete and noncompetitive. In addition, there can be
no assurance that these or other competitors will not succeed in obtaining FDA
and other regulatory clearances and approvals of their products more rapidly
than the Company.
GOVERNMENT REGULATION
The manufacture and sale of medical diagnostic devices are subject to
extensive governmental regulation in the United States and in other countries.
PREP and AutoPap are regulated for cervical cytology applications in the United
States as medical devices by the FDA under the FDC Act and require premarket
approval by the FDA prior to commercial distribution. In addition, certain
modifications to medical devices, their manufacture or their labeling also are
subject to FDA review and approval before marketing. Pursuant to the FDC Act,
the FDA regulates the clinical testing, manufacture, labeling, distribution,
sales, marketing, advertising and promotion of medical devices in the United
States. Noncompliance with applicable requirements, including good clinical
practice requirements, can result in the refusal of the government to grant
premarket approval for devices, suspension or withdrawal of clearances or
approvals, total or partial suspension of production, distribution, sales and
marketing, fines, injunctions, civil penalties, recall or seizure of products,
and criminal prosecution of a company and its officers and employees.
Medical devices are classified into one of three classes, Class I, II or
III, on the basis of the controls deemed by the FDA to be necessary to
reasonably ensure their safety and effectiveness. Class I devices are subject to
general controls (e.g., labeling and adherence to FDA-mandated quality system
(including QSR) requirements and, in some cases, premarket notification
("510(k)")). Class II devices are subject to general controls including, in most
cases, premarket notification, and to special controls (e.g., performance
standards, patient registries and FDA guidelines). Generally, Class III devices
are those that must receive premarket approval by the FDA to ensure their safety
and effectiveness (e.g., life-sustaining, life-supporting and implantable
devices) and also include most devices that were not on the market before May
28, 1976 ("new medical devices") and for which the FDA has not made a finding of
"substantial equivalence" based on a premarket notification. Class III devices
usually require clinical testing that demonstrates the device is safe and
effective, and must have FDA approval prior to marketing and distribution. The
conduct of clinical studies is subject to FDA regulations, including
requirements for institutional review, board approval, informal
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consent, recordkeeping, and reporting. The Company's PREP and AutoPap products,
when intended for gynecological use, are regulated as Class III medical devices.
PREP and AutoPap and any other products manufactured or distributed by the
Company pursuant to an approved PMA application and supplements (or to 510(k)
clearances) will be subject to pervasive and continuing regulation by the FDA,
including record-keeping requirements and reporting of adverse experience with
the use of the device. TriPath Imaging will continue to be inspected on a
routine basis by the FDA for compliance with regulations with respect to
manufacturing, testing, distribution, storage and control activities. TriPath
Imaging has established and maintains a system for tracking AutoPap and PREP
systems through the chain of distribution and conducts post-market surveillance.
TriPath Imaging must provide periodic reports containing safety and
effectiveness information. Device manufacturers are required to register their
establishments and list their devices with the FDA. The FDC Act requires that
medical devices be manufactured in accordance with the FDA's QSR regulation.
Product labeling and promotional activities are also subject to scrutiny by the
FDA and, in certain instances, by the Federal Trade Commission. Products may
only be promoted by the Company and any of its distributors for their approved
indications. No assurance can be given that modifications to the labeling which
may be required by the FDA in the future will not adversely affect the Company's
ability to market or sell PREP, AutoPap or other products of the Company.
In addition, the FDA's Medical Device Reporting regulations require medical
device companies such as TriPath Imaging to provide information to the FDA
whenever evidence reasonably suggests that a device may have caused or
contributed to a death or serious injury. These regulations also apply if the
device malfunctions and the device or a similar device sold by the Company would
be likely to cause or contribute to a death or serious injury if the malfunction
were to recur.
If the FDA believes that TriPath Imaging has not complied with the law, it
can take one or more of the following actions:
- refuse to review or clear applications to market its products in the
United States;
- refuse to allow TriPath Imaging to enter into government supply
contracts;
- withdraw approvals already granted;
- require that TriPath Imaging notify users regarding newly found risks;
- request repair, refund or replacement of faulty devices;
- request corrective advertisements, recalls or temporary marketing
suspension; or
- initiate legal proceedings to detain or seize products, enjoin future
violations or assess criminal penalties against TriPath Imaging or its
officers or employees.
These actions could disrupt TriPath Imaging's operations for an indefinite
period of time.
The Company also is subject to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of hazardous or
potentially hazardous substances. There can be no assurance that the Company
will not be required to incur significant costs to comply with such laws and
regulations in the future, or that such laws or regulations will not have a
material adverse effect upon the Company's business, financial condition and
results of operations.
Sales of medical devices outside of the United States are subject to
foreign regulatory requirements that vary widely from country to country. The
time required to obtain approval by a foreign country may be longer or shorter
than that required for FDA approval, and the requirements may differ. No
assurance can be given that such foreign regulatory approvals will be granted on
a timely basis, or at all. The Company has been advised by various parties,
including consultants engaged by the Company and foreign distributors, that no
regulatory approvals for a device analogous to FDA approval of a PMA are
currently required by any country where the Company currently sells PREP. Such
approval requirements may be imposed in the future. In addition to regulatory
approvals in the United States, the AutoPap system is approved for primary
screening
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and quality control rescreening in Japan, Canada, Australia, New Zealand, The
Netherlands, Italy, Hong Kong, Korea, and Taiwan. TriPath Imaging intends to
pursue additional product registrations in other foreign countries. The Company
received an FDA permit to export PREP and AutoPap to all foreign countries in
which the Company is currently selling these products and where such a permit
was required. There can be no assurance that the Company will meet the FDA's
export requirements or receive additional FDA export approval when such approval
is necessary, or that countries to which the devices are to be exported will
approve the devices for import. Failure of the Company to meet the FDA's export
requirements or obtain FDA export approval when required to do so, or to obtain
approval for import, could have a material adverse effect on the Company's
business, financial condition and results of operations.
TriPath Imaging's products are subject to a variety of regulations in
Europe, including the European Union. In vitro medical devices, including the
AutoPap System, must now comply with the EU's In-Vitro Diagnostic Medical
Devices Directive. The Directive was published in the Official Journal of
European Communities in December 1998. The EU member states were required to
implement the Directive into national law by December 1999. A transition period,
which begins from the date of publication of the Directive and ends December
2003, applies to all devices placed on the market in the EU. During this
transition period, both Directive CE-marked and non-CE-marked devices may be
placed on the market. In other words, companies may choose to follow either the
CE mark or the national legislation, if any. If no such national legislation
exists, the devices can be freely placed on the market. By the conclusion of
this transition period, TriPath Imaging's products must comply with the
requirements of the Directive and member-state local language requirements. At
such time, products not bearing the CE mark may not be commercially distributed
in European Union member countries. In addition, member states may continue to
restrict or prohibit the marketing of CE-marked devices pursuant to the
safeguard clause of the Directive if the member state determines a particular
device may compromise the health and/or safety of patients or users. The Company
intends to comply with the Directive and other applicable regulations in
accordance with the requirements of the countries in which it markets and sells
its products.
Other European countries may enact national laws that would conform to the
Directive. Member states of the EU and the European Economic Area may enact
requirements in addition to those imposed by the Directive. Some European
countries have established national regulations relating to in vitro diagnostic
medical devices. EU directives and national laws impose requirements for
electrical safety and electromagnetic compatibility that apply to the PREP
System, PREPMATE, and AutoPap System. TriPath Imaging has performed the
requisite testing procedures and related documentation to apply the European CE
mark to the AutoPap, PREP and PREPMATE systems. TriPath Imaging cannot guarantee
that the AutoPap System or any other product it may develop will obtain any
required regulatory clearance or approval on a timely basis, if at all.
Congress has directed the Department of Health and Human Services to issue
regulations designed to improve the quality of biomedical analytic services,
particularly the examination of Pap smears. These regulations require clinical
laboratories to re-screen at least 10% of the Pap smears classified on initial
manual screen as normal. This 10% must include normal cases selected from the
laboratory's total caseload, and from patients or groups of patients that have a
high probability of developing cervical cancer based on available patient
information. The laboratories that would purchase the Company's PREP and AutoPap
products are subject to extensive regulation under the Clinical Laboratory
Improvement Act ("CLIA"), which requires laboratories to meet specified
standards in the areas of personnel qualifications, administration,
participation in proficiency testing, patient test management, quality control,
quality assurance and inspections. The Company believes that its PREP and
AutoPap products operate in a manner that will allow laboratories using the
products to comply with CLIA requirements. However, there can be no assurance
that interpretations of current CLIA regulations or future changes in CLIA
regulations would not make compliance by the laboratory difficult or impossible
and therefore have an adverse effect on sales of the Company's products.
In addition, laboratories often must comply with state regulations,
inspection, and licensing. In recent years, a few states, including New York and
California, have adopted regulations that limit the number of slides that may be
manually examined by a cytotechnologist within a given period of time. TriPath
Imaging
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cannot guarantee that states will not directly regulate AutoPap in the future.
TriPath Imaging cannot predict the effect, if any, regulation may have on its
business or operations.
PRODUCT LIABILITY
Commercial use of any Company products may expose the Company to product
liability claims. The Company currently carries general liability (including
product liability) insurance coverage and believes that the amount carried is
adequate to meet its present needs. The medical device industry has experienced
increasing difficulty in obtaining and maintaining reasonable product liability
coverage, and substantial increases in insurance premium costs in many cases
have rendered coverage economically impractical. To date, the Company has not
experienced difficulty obtaining an amount of insurance coverage commensurate
with its level of sales. As the Company's sales expand, however, there can be no
assurance that the Company's existing product liability insurance will be
adequate or that additional product liability insurance will be available to the
Company at a reasonable cost, or that any product liability claim would not have
a material adverse effect on the Company's business, financial condition and
results of operations.
On January 29, 2001, the Company was added as a defendant to an action
commenced on September 12, 2000 in California Superior Court in Los Angeles
County against several other defendants. The complaint alleges that certain
defendants, including the Company, incorrectly analyzed the product of a Pap
smear procedure performed on one of the plaintiffs. The Company believes the
alleged equipment involved was the AutoPap QC instrument, a product no longer
marketed by the Company. The plaintiffs seek general damages against all
defendants in the aggregate amount of $3 million and special damages in an
unspecified amount. The Company intends to defend itself vigorously and has
denied all claims asserted against it in this action. The action is in an early
stage and its ultimate outcome cannot be predicted with certainty; however the
Company believes that the disposition of the matter should not have a material
adverse effect on its financial position.
EMPLOYEES
As of December 31, 2000 the Company employed approximately 170 people on a
full-time basis. The Company believes that its relations with its employees are
good. None of the Company's employees are party to a collective bargaining
agreement.
ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT
The current executive officers of the Company are as follows:
NAME AGE POSITION
- ---- --- --------
Paul R. Sohmer, M.D....................... 52 President, Chief Executive Officer and
Chairman of the Board
Thomas Gahm, Ph.D......................... 44 Vice President of Research and Development
Roger W. Martin........................... 53 Vice President of Sales and Marketing
Mary K. Norton............................ 38 Vice President of Regulatory/Government
Affairs and Quality Assurance
David H. Robison,......................... 51 Vice President of Operations
Paul R. Sohmer, M.D. has served as Chairman of the Board of Directors of
the Company since November 2000, and as its President and Chief Executive
Officer since June 2000. Prior to joining TriPath Imaging, Dr. Sohmer served as
the President and Chief Executive Officer of Neuromedical Systems, Inc. ("NSI")
from 1997 through 1999. From 1996 until 1997, Dr. Sohmer served as President of
a consulting firm which he founded. From 1993 to 1996, he served as President
and Chief Executive Officer of Genetrix, Inc., a genetic services company based
in Scottsdale, Arizona. From 1991 through 1993, Dr. Sohmer was the Corporate
Vice-President of Professional Services and President of the Professional
Services Organization for Nichols Institute, a clinical laboratory company,
where he was responsible for sales, marketing, information
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systems, logistics, and clinical studies. From 1985 until 1991, Dr. Sohmer
served as the President and Chief Executive Officer of Pathology Institute in
Berkeley, California, during which time he founded and served as Medical
Director of the Chiron Reference Laboratory. Dr. Sohmer received a B.A. degree
from Northwestern University and an M.D. from Chicago Medical School.
Thomas Gahm, Ph.D. has served as Vice-President of Research and Development
since June 2000. He served as Vice President of Computer Science of the Company
from November 1996 through May 2000. Previously, he served RIAS and RBL in the
same capacity since August 1993. From 1983 to 1993, Dr. Gahm was a Scientific
Advisor and Project Coordinator of Kontron Electronics, Image Analysis Division,
where he focused on the commercial development of microscopic image analysis.
Dr. Gahm received an engineering degree from the University of Stuttgart
(Institute of Physical Electronics) and a Ph.D. from the Medical and Technical
University of Hannover, Germany.
Roger W. Martin has served as Vice President of Sales and Marketing since
December 1999. From November, 1998 until he joined TriPath Imaging, Mr. Martin
provided sales and marketing consultation for several development stage
companies. From 1994 to October 1998, he was employed by Roche Diagnostic
Systems, a division of Hoffmann-La Roche as the Western Area Sales Manager.
Additionally, Mr. Martin was responsible for National Account Management. Mr.
Martin was employed by Becton Dickinson Primary Care, a division of Becton
Dickinson and Company, from 1979 to 1994. He held various sales management and
sales positions with Becton Dickinson and Company.
Mary K. Norton has served as Vice President of Regulatory/Government
Affairs and Quality Assurance since May 1998. Ms. Norton joined TriPath Imaging
in August 1996 and served as the Company's Director of Regulatory and Clinical
Affairs. In May 1998, Ms. Norton was named Vice President, Regulatory Affairs
and Quality Assurance, and in January 1999, was named Vice President,
Regulatory/Government Affairs & Quality Assurance. Prior to joining TriPath
Imaging, Ms. Norton directed Regulatory Affairs and Quality Assurance from July
1994 through May 1996 at Bioject, Inc., a company that develops, manufactures
and markets advanced needle-free drug delivery systems. Ms. Norton was employed
by Siemens Medical Systems, Ultrasound Group, as Senior Biomedical Engineer from
August 1992 to June 1994. From September 1987 to October 1990, Ms. Norton was
employed by Advanced Technology Laboratories.
David H. Robison has served as Vice President of Operations since May 1996.
Prior to his employment with TriPath Imaging, Mr. Robison was employed by Abbott
Laboratories in various positions from February 1978 through May 1996. From
February 1995 to May 1996, Mr. Robison was Research and Development Director for
Abbott's Diagnostic Division, and from May 1990 to February 1995 he was
Director, Customer Satisfaction.
ITEM 2. PROPERTIES
The Company currently leases a total of 43,000 square feet of space devoted
to manufacturing, warehousing, administrative, research and development and
engineering functions, at 780 Plantation Drive, Burlington, North Carolina under
a seven-year lease expiring in July 2005. The lease is renewable for five
additional one-year terms. TriPath Imaging leases approximately 72,000 square
feet of office and manufacturing space in Redmond, Washington under operating
leases expiring in December 2004. Of this space in Redmond, the Company
subleases approximately 30,000 square feet as sublessor. TriPath Imaging
believes that its facilities and other available office space are adequate for
its current needs. The Company also currently leases a 5,000 square foot
education facility at 1111 Huffman Mill Road in Burlington, North Carolina under
a three-year lease expiring in June 2001. The education facility lease is
renewable for one additional three-year term, and also contains an option to
expand the leased space by 4,500 square feet. TriPath Imaging also leases office
space in Brussels, Belgium, under an operating lease expiring in August 2007.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business, the Company is subject to various legal
proceedings and claims. The Company has recently settled one such claim as
further described below and believes that the ultimate
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outcome of the other claims described below should not have a material adverse
effect on the Company's financial position.
In September 1999, Cytyc filed suit against TriPath Imaging in the United
States District Court for the District of Delaware alleging that the Company's
CytoRich proprietary preservative fluid infringed Cytyc's patent titled "Cell
Preservative Solution." TriPath Imaging denied Cytyc's claims. In May 2000,
Cytyc filed suit against TriPath Imaging in the United States District Court for
the District of Massachusetts alleging that the Company had distributed
misleading information to current and potential purchasers of Cytyc's products.
TriPath Imaging denied Cytyc's claims and asserted counterclaims alleging that
Cytyc had made misleading statements regarding both its own product and TriPath
Imaging's product and had violated antitrust laws. In January 2001, Cytyc and
TriPath Imaging settled all litigation between the two companies. All claims and
counterclaims against each other pending in Delaware and Massachusetts were
dismissed with prejudice.
On August 4, 2000, the Company and several other parties were named as
defendants to a civil action commenced in the District Court of Tarrant County,
Texas. The petition alleges that the defendants, including the Company,
fraudulently induced the plaintiffs to retain their investment in NeoPath. The
plaintiffs seek to recover an unspecified amount of damages. On October 27,
2000, the action was removed to the United States District Court for the
Northern District of Texas. The plaintiffs' complaint was dismissed with
prejudice on February 5, 2001, and the plaintiffs have appealed this dismissal
to the United States Court of Appeals for the Fifth Circuit. Although the
ultimate outcome cannot be predicted with certainty, the Company believes that
the disposition of the matter should not have a material adverse effect on its
financial position.
On January 29, 2001, the Company was added as a defendant to an action
commenced on September 12, 2000 in California Superior Court in Los Angeles
County against several other defendants. The complaint alleges that certain
defendants, including the Company, incorrectly analyzed the product of a Pap
smear procedure performed on one of the plaintiffs. The Company believes the
alleged equipment involved was the AutoPap QC instrument, a product no longer
marketed by the Company. The plaintiffs seek general damages against all
defendants in the aggregate amount of $3 million and special damages in an
unspecified amount. The Company intends to defend itself vigorously and has
denied all claims asserted against it in this action. The action is in an early
stage and its ultimate outcome cannot be predicted with certainty; however the
Company believes that the disposition of the matter should not have a material
adverse effect on its financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders of the
Company during the fourth quarter of the fiscal year ended December 31, 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock, $0.01 par value per share (the "Common Stock"),
is traded on the Nasdaq National Market under the symbol "TPTH". The following
table sets forth, for the calendar periods indicated, the range of high and low
bid and ask prices for the Common Stock of the Company on the Nasdaq National
Market. These prices do not include retail mark-up, mark-down or commissions and
may not represent actual transactions.
HIGH LOW
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YEAR ENDED DECEMBER 30, 1999:
First Quarter............................................. $ 7.750 $ 3.188
Second Quarter............................................ $ 8.250 $ 5.188
Third Quarter............................................. $ 7.125 $ 3.500
Fourth Quarter............................................ $ 6.625 $ 3.500
YEAR ENDED DECEMBER 30, 2000:
First Quarter............................................. $14.125 $ 3.750
Second Quarter............................................ $ 9.125 $ 4.500
Third Quarter............................................. $11.125 $ 4.563
Fourth Quarter............................................ $10.000 $ 7.500
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On March 30, 2001, the last reported sales price of the Common Stock on the
Nasdaq National Market was $6.25 per share. As of March 30, 2001, there were
approximately 300 holders of record of the Common Stock.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its capital stock.
The Company currently int