Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File No. 0-26224
December 31, 1999
INTEGRA LIFESCIENCES HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 51-0317849
------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
105 Morgan Lane
Plainsboro, New Jersey 08536
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 275-0500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
--------------------------------------
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant as of March 24, 2000 was approximately $134
million. (Reference is made to page 28 herein for a statement of the assumptions
upon which this calculation is based.)
The number of shares of the registrant's Common Stock outstanding as of
March 24, 2000 was 16,312,345.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's definitive proxy statement relating
to its scheduled May 16, 2000 Annual Meeting of Stockholders are incorporated by
reference in Part III of this report.
PART I
ITEM 1. BUSINESS
The terms "we", "our", "us" and "Integra" refer to Integra LifeSciences Holdings
Corporation and its subsidiaries unless the context suggests otherwise.
Integra develops, manufactures and markets medical devices, implants and
biomaterials. Our operations consist of (1) Integra NeuroSciences, which is a
leading provider of implants, instruments, and monitors used in neurosurgery,
neurotrauma, and related critical care and (2) Integra LifeSciences, which
develops and manufactures a variety of medical products and devices, including
products based on our proprietary tissue regeneration technology which are used
to treat soft tissue and orthopedic conditions. Integra NeuroSciences sells
primarily through a direct sales organization, and Integra LifeSciences sells
primarily through strategic alliances and distributors.
Integra was founded in 1989 and over the next decade built a product portfolio
based on resorbable collagen and a product and development platform based on
technologies directed toward tissue regeneration. During 1999, we expanded into
the neurosurgical market, an attractive niche market, through acquisitions and
new products. Our 1999 revenues increased to $42.5 million as compared to $17.5
million in 1998.
In 1999, we sold over 1,000 different products to over 1,900 hospitals and other
customers in more than 60 countries. We generate revenues from product sales,
strategic alliances and royalties and invested $8.7 million in research and
development relating to new products using our biomaterials, peptide chemistry
and collagen engineering technologies.
Integra Neurosciences accounted for 54% of total revenues in 1999. We market
these products to neurosurgeons and critical care units, which comprise a
focused group of hospital-based practitioners. As a result, we are able to
access this market through a cost-effective sales and marketing infrastructure.
For the majority of the products we manufacture under Integra LifeSciences, we
partner with market leaders, which we believe allows us to achieve our growth
objectives cost effectively while enabling us to focus our management efforts on
developing new products. Our strategic alliances include Johnson & Johnson
Medical, a division of Ethicon, Inc., Sulzer Medica Ltd., the Linvatec division
of CONMED Corporation, Bionx Implants, Inc., the Genetics Institute division of
American Home Products Corporation, the Sofamor-Danek division of Medtronic,
Inc. and Baxter Healthcare.
Strategy
Our goal is to become a leader in the development, manufacture and marketing of
medical devices, implants and biomaterials in the markets in which we compete.
Our products are principally used in the diagnosis and treatment of acute or
chronic neurosurgical, soft-tissue and orthopedic conditions and we intend to
expand our presence in those markets. Key elements of our strategy include the
following:
Expand our neurosurgery market presence. Through acquisitions and internal
growth, we have rapidly grown Integra NeuroSciences into a leading provider of
devices for the neurosurgery market. We believe there exists additional growth
potential in this market through:
o Increasing market share of existing product lines;
o Expanding our product portfolio through acquisitions; and
o Continuing development and promotion of innovative products, such as our
recently introduced DuraGen(TM) Dural Graft Matrix.
2
Continue to develop new and innovative medical products. As evidenced by our
development of INTEGRA(R) Artificial Skin, Biomend(R) and DuraGen(TM), we have a
leading proprietary resorbable implant franchise. INTEGRA(R) Artificial Skin is
a proprietary resorbable collagen used to enable the human body to regenerate
functional dermal tissue. In 1999, we introduced our DuraGen(TM) dural graft
matrix to close brain and spine casings. We are currently developing a variety
of innovative neurosurgical and non-neurosurgical medical products using our
resorbable collagen technology as well as expanded applications for our existing
products.
Continue to form strategic alliances for Integra LifeSciences products. We have
collaborated with leading companies to develop and market the majority of our
non-neurosurgical product lines. These products address large and diverse
markets, and we believe that they can be more cost effectively sold through
marketing partners than through developing our own sales infrastructure. We
recently partnered with Johnson & Johnson Medical to market our INTEGRA(R)
Artificial Skin and intend to pursue additional strategic alliances selectively.
Additional strategic acquisitions. Since March 1999 we have completed or entered
into contracts for three acquisitions in the neurosurgical market. We intend to
seek additional acquisitions in this market and seek strategic acquisitions in
other niche medical technology areas characterized by high margins, fragmented
competition and focused target customers.
Products
We manufacture and market a broad range of medical products for the diagnosis
and treatment of spinal and cranial disorders, soft tissue repair and orthopedic
conditions. We are also actively engaged in a variety of research and
development programs relating to new products or product enhancements utilizing
our tissue regeneration technology. Our products and products under development
are summarized in the following table.
Integra NeuroSciences
- ----------------------------------------------------------------------------------------------------
Product Application Status
- ----------------------------------------------------------------------------------------------------
Camino(R) and Ventrix(R) fiber For continuous pressure and Marketed
optic-based intracranial temperature monitoring of the brain
pressure monitoring systems following injury, and drainage
and Clinical Neuro Systems(TM) of excess fluid
drainage systems & cranial
access kits
- ----------------------------------------------------------------------------------------------------
Heyer - Schulte(R) Specifically designed for the Marketed
neurosurgical shunts maintenance of the chronic
condition, hydrocephalus (i.e.,
excess pressure in the brain)
- ----------------------------------------------------------------------------------------------------
3
Integra NeuroSciences, continued
- ----------------------------------------------------------------------------------------------------
Product Application Status
- ----------------------------------------------------------------------------------------------------
DuraGen(TM) Dural Graft Graft to close brain and spine Marketed
Matrix (absorbable collagen-based) casing
- ----------------------------------------------------------------------------------------------------
Redmond(TM) neurosurgical and Specialized surgical instruments Marketed
spinal instruments for use in brain or spinal surgery
- ----------------------------------------------------------------------------------------------------
Neuro-Navigational(R) flexible For minimally invasive surgical Marketed
endoscopes for neurosurgery access to the brain
- ----------------------------------------------------------------------------------------------------
Helitene(R) Microfibrillar Control of bleeding during Approved in
Hemostat surgery Europe; Pending
approval for
neurosurgical use
in U.S.
- ----------------------------------------------------------------------------------------------------
Peripheral nerve conduit Repair of peripheral nerves Development
- ----------------------------------------------------------------------------------------------------
Integra LifeSciences
- ------------------------------------------------------------------------------------------------------------------------
Product Application Status Marketing/Development Partner
- ------------------------------------------------------------------------------------------------------------------------
INTEGRA(R) Artificial Skin Regenerate dermis Marketed Johnson & Johnson Medical, Century
and skin defects Medical, Inc.
- ------------------------------------------------------------------------------------------------------------------------
BioMend(R) and Biomend(R) Extend, Used in guided Marketed Sulzer Medica
Absorbable Collagen Membrane tissue regeneration
in periodontal
surgery
- ------------------------------------------------------------------------------------------------------------------------
Articular cartilage repair Regeneration of Development DePuy division of Johnson & Johnson
joint cartilage
- ------------------------------------------------------------------------------------------------------------------------
Collagen material for use with bone Fracture Development Genetics Institute (AHP), Medtronic
morphogenetic protein (rhBMP-2) management/enabling Sofamor Danek
spinal fusion
- ------------------------------------------------------------------------------------------------------------------------
Tyrosine polycarbonates for fixation Fixation or Development Linvatec (CONMED), Bionx Implants, Inc.
devices such as resorbable screws, alignment of
plates, pins, wedges and nails fractures
- ------------------------------------------------------------------------------------------------------------------------
4
Integra LifeSciences, continued
- ---------------------------------------------------------------------------------------------------
VitaCuff(TM) Provides Marketed Bard Access Systems, Inc., Arrow
protection International, Inc
against
infection
arising from
long-term
catheters
- ----------------------------------------------------------------------------------------------------
BioPatch(TM) Anti-microbial Marketed Johnson & Johnson Medical
wound dressing
- ----------------------------------------------------------------------------------------------------
Helitene(R) and Helistat(R) Control of Marketed Sold through various distributors
absorbable collagen hemostatic bleeding
agents
- ----------------------------------------------------------------------------------------------------
CollaCote(R), CollaTape(R) and Used to control Marketed Sulzer Medica
CollaPlug(R) absorbable wound bleeding in
dressings dental surgery
- ----------------------------------------------------------------------------------------------------
Sundt(R) Shunt Carotid Marketed Sold directly and through various
endarterectomy distributors
shunts for
shunting blood
during
surgical
procedures
involving
blood vessels
- ----------------------------------------------------------------------------------------------------
INTEGRA NEUROSCIENCES
In General
We manufacture and market a multi-line offering of innovative neurosurgical
devices used for brain and spine injuries. We intend to be the neurosurgeon's
and intensive care unit's "one-stop shop" for these products. For the intensive
care unit, we sell the Camino(R) and Ventrix(R) lines of intracranial pressure
("ICP") monitoring systems and external drainage systems manufactured under the
Camino(R), Heyer-Schulte(R) and Clinical Neuro Systems(TM) brand names. For the
operating room, we sell a wide range of products, including cerebrospinal fluid
("CSF") shunting products, the DuraGen(TM) Dural Graft Matrix, Neuro
Navigational(R) endoscopes, and Redmond(TM) neurosurgical instruments.
We sell our neurosurgical products in the United States through a direct sales
force organized into five regions each with a region manager. We employ 27
direct sales personnel called neurospecialists covering 40 territories. We
intend to increase the number of sales personnel to 40. We also employ seven
clinical development specialists who directly educate and train both the
neurospecialists and our customers in the use of our products. In addition, we
employ a physician as medical director, and a Ph.D. in neurosciences as
scientific director. The sales organization has approximately doubled in size
since the acquisition of the first neurosciences business in early 1999. We
believe this expansion allows for smaller, more focused territories, greater
participation in trade shows and more extensive marketing efforts.
5
Outside of the United States, we sell our products through approximately 60
specialized neurosurgical distributors and dealers.
Industry
Integra NeuroSciences addresses the market need created by trauma cases and
hydrocephalus through its established market positions in ICP monitoring,
neurosurgical shunting, neuroendoscopy and specialty neurosurgical
instrumentation. Integra NeuroSciences currently has more than 3,000 ICP
monitors installed worldwide.
ICP monitors are used by neurosurgeons in diagnosing and treating cases of
severe head trauma and other diseases. There are approximately 400,000 cases of
head trauma each year in the United States.
Hydrocephalus is an incurable condition resulting from an imbalance between the
amount of CSF produced by the body and the rate at which CSF is absorbed by the
brain. This condition causes the ventricles of the brain to enlarge and the
pressure inside the head to increase. Hydrocephalus often is present at birth,
but may also result from head trauma, spina bifida, intraventricular hemorrhage,
intracranial tumors and cysts. The most common method of treatment of
hydrocephalus is the insertion of a shunt into the ventricular system of the
brain to divert the flow of CSF out of the brain. A pressure valve then
maintains the CSF at normal levels within the ventricles. According to the
Hydrocephalus Association, hydrocephalus affects approximately one in 500
children born in the United States. Approximately 80% of total CSF shunt sales
address birth-related hydrocephalus with the remaining 20% addressing surgical
procedures involving excess CSF due to head trauma.
Integra NeuroSciences's design, manufacture and production of minimally invasive
neuroendoscopy products addresses what we believe is significant growth
potential in the neuroendoscopy market resulting from an increasing number of
neurosurgeons embracing minimally invasive surgical techniques. We believe that
the worldwide market for neuroendoscopy products will grow more quickly than
most other neurosurgical device lines. This growth is expected, in part, because
of the introduction of new procedures called third ventriculostomies which are
increasingly substituting for shunt placement for patients who meet the
criteria. Accordingly, we believe that our Neuro Navigational(R) line of
disposable, semi-flexible, fiber-optic scopes will continue to grow and that the
Neuro Navigational(R) line addresses the needs of neurosurgeons employing these
techniques.
Our DuraGen(TM) product line addresses the market for dural substitutes,
including cranial and spinal procedures.
Integra NeuroSciences's broad line of neurosurgery and spinal instrumentation
products, including hand-held spinal and neurosurgery instruments such as
retractors, kerrisons, dissectors and curettes, addresses the market for
neurosurgical instruments.
Products
Intracranial Pressure Product Line. Integra NeuroSciences sells the Camino(R)
and Ventrix(R) lines of intracranial pressure monitoring systems. Core
technologies in the intracranial pressure monitoring product line include the
design and manufacture of the disposable catheters used in the monitoring
systems, patented pressure transducer technology, optical detection/fiber optic
transmission technology, sensor characterization and calibration technology and
monitor design and manufacture. The research, development and manufacture of
Integra NeuroSciences's ICP monitoring products are located in San Diego,
California.
6
External Drainage System Product Line. Integra NeuroSciences's external drainage
systems are manufactured under the Camino(R), Heyer-Shulte(R) and Clinical Neuro
Systems(TM) brand names. We manufacture the drainage systems in both Anasco,
Puerto Rico (for sale under the Camino(R) and Heyer-Schulte(R) brand names) and
in Exton, Pennsylvania (for sale under the Clinical Neuro Systems(TM) brand
name).
Shunts for Hydrocephalus Management. Our line of shunting products for
hydrocephalus management includes the Novus, LPV and Pudenz shunts, ventricular,
peritoneal and cardiac catheters, physician-specified hydrocephalus management
shunt kits, Ommaya CSF reservoirs and Spetzler lumbar and syringo-peritoneal
shunts. Shunts are implanted in the patient to drain excess CSF from the
ventricles of the brain into the peritoneal cavity or externally. Integra
NeuroSciences's hydrocephalus management shunt manufacturing operations are
located in the Anasco, Puerto Rico facility.
DuraGen(TM) Product Line. The DuraGen(TM) Dural Graft Matrix is a resorbable
collagen matrix indicated for the repair of the dura mater. The dura mater is
the thick membrane that contains the CSF within the brain and the spine. The
dura mater must be penetrated during brain surgery, and is often nicked or
otherwise damaged during spinal surgery. In either case, surgeons often close or
repair the dura mater with a graft. The graft may consist of other tissue taken
from elsewhere in the patient's body, or it may be one of the dural substitute
products currently on the market which are made of synthetic materials,
processed human cadaver, or bovine pericardium. We believe that each of the
prevailing methods for repairing the dura mater suffer from shortcomings
addressed by the DuraGen(TM) Dural Graft Matrix. We manufacture the DuraGen(TM)
Dural Graft Matrix product in our Plainsboro, New Jersey facility.
Our DuraGen(TM) product is an engineered resorbable collagen implant that has
been shown in clinical trials to be an effective means for closing the dura
mater without the need for suturing, which allows the neurosurgeon to conclude
the operation more efficiently. In addition, because the DuraGen(TM) product is
ultimately resorbed by the body and replaced with new natural tissue, the
patient avoids some of the risks associated with a permanent implant inside the
cranium.
Redmond(TM) Product Line. We provide neurosurgeons and spine surgeons with a
full line of specialty hand-held spinal and neurosurgical instruments sold under
the Redmond(TM) brand name. These products include retractors, kerrisons,
dissectors and curettes. Major product segments include spinal instruments,
microsurgical neuro instruments, and products customized by Integra
NeuroSciences and sold through other companies and distributors. We import most
of these instruments from Germany.
Neuro Navigational(R) Endoscope Product Line. We manufacture and sell disposable
minimally invasive neuroendoscopy products under the Neuro Navigational(R) brand
name. These fiber optic instruments are used to facilitate minimally invasive
neurosurgery. Neuroendoscopy manufacturing operations are located in San Diego,
California.
Helitene(R) Neurosurgical Hemostat Product Line. Helitene(R) hemostatic agent
consists of microfibular collagen, and is intended to control bleeding during
surgery. Outside of the United States, it is indicated for use in neurosurgery,
in addition to general surgery. During 2000, Integra NeuroSciences will begin to
sell Helitene(R) outside of the United States for use in neurosurgery.
Peripheral Nerve Conduit Product Line. Although peripheral nerves are one of the
few tissues of the body that spontaneously regenerate, in the majority of cases
they fail to make useful, functional connections. Consequently, peripheral nerve
injuries often result in permanent loss of sensation and motor control. At
present, there is no product on the market that regenerates peripheral nerves.
The conventional method of treatment for a severed peripheral nerve is
microsurgical repair or nerve grafts. Our peripheral
7
nerve regeneration device is a collagen tube designed to facilitate regeneration
of the severed nerve and to act as a bridge between the severed nerve ends. The
collagen conduit supports nerve regeneration and is then absorbed into the body.
Our pre-clinical studies have demonstrated the closure of 5-cm gaps in
peripheral nerves in non-human primates with restored nerve function. Our
proprietary resorbable conduit for regenerating and reconnecting peripheral
nerves is expected to enter clinical trials in Europe in humans during the first
half of 2000.
INTEGRA LIFESCIENCES
In General
Integra LifeSciences develops and markets tissue regeneration products and sells
surgical products that are primarily sold outside of neurosurgery and
neurotrauma. Many of the current products of Integra LifeSciences are built on
our expertise in resorbable collagen products. Integra LifeSciences's research
and development programs are generally constructed around strategic alliances
with leading medical device companies.
Products
INTEGRA(R) Artificial Skin. INTEGRA(R) Artificial Skin is designed to enable the
human body to regenerate functional dermal tissue. Human skin consists of the
epidermis and the dermis. The epidermis is the thin, outer layer that serves as
a protective seal for the body and the dermis is the thicker layer underneath
that provides structural strength and flexibility and supports the viability of
the epidermis through a vascular network. The body normally responds to severe
damage to the dermis by producing scar tissue in the wound area. This scar
tissue is accompanied by contraction that pulls the edges of the wound closer
which, while closing the wound, often permanently reduces flexibility. In severe
cases, this contraction leads to a reduction in the range of motion for the
patient, who subsequently requires extensive physical rehabilitation or
reconstructive surgery. Physicians treating severe wounds, such as
full-thickness burns, seek to minimize scarring and contraction.
INTEGRA(R) Artificial Skin was designed to minimize scar formation and wound
contracture in full thickness skin defects. INTEGRA(R) Artificial Skin consists
of two layers, a thin collagen-glycosaminoglycan sponge and a silicone membrane.
The product is applied with the sponge layer in contact with the excised wound.
The sponge material serves as a template for the growth of new functional dermal
tissue. The outer membrane layer acts as a temporary substitute for the
epidermis to control water vapor transmission, prevent re-injury and minimize
bacterial contamination.
INTEGRA(R) Artificial Skin is marketed and sold, except in Japan, by Johnson &
Johnson Medical. INTEGRA(R) Artificial Skin was approved by the FDA under a
premarket approval application ("PMA") for the post-excisional treatment of
life-threatening full-thickness or deep partial-thickness thermal injury where
sufficient autograft is not available at the time of excision or not desirable
due to the physiological condition of the patient. The FDA's approval order
includes requirements to provide a comprehensive practitioner training program
and to conduct a post approval study at multiple clinical sites. We have
enrolled more than the required number of patients in the post-approval study,
and expect to file the results with the FDA this year.
We estimate that the worldwide market for use of skin replacement products (such
as INTEGRA(R) Artificial Skin) in the treatment of severe burns is only about
$75 million. However, the potential market for the use of INTEGRA(R) Artificial
Skin for reconstructive surgery and the treatment of chronic wounds is much
larger, which we estimate to be in excess of $1 billion. In June 1999, Integra
LifeSciences
8
entered into a strategic alliance with Johnson & Johnson Medical to distribute
INTEGRA(R) Artificial Skin throughout the world, except Japan. As part of that
strategic alliance, Johnson & Johnson Medical has agreed to pay for clinical
trials to support applications to the FDA for these broader indications. We
cannot be certain that such clinical trials will be completed, or that
INTEGRA(R) Artificial Skin will receive the approvals necessary to permit
Johnson & Johnson Medical to promote it for such indications.
BioMend(R) Absorbable Collagen Membrane. Integra LifeSciences has also developed
the BioMend(R) Absorbable Collagen Membrane for use in guided tissue
regeneration in periodontal surgery. The BioMend(R) membrane is inserted between
the gum and the tooth after surgical treatment of periodontal disease,
preventing the gum tissue from interfering with the regeneration of the
periodontal ligament that holds the tooth in place. The BioMend(R) product is
intended to be absorbed after approximately four to seven weeks, avoiding the
requirement for additional surgical procedures to remove a non-absorbable
membrane. The BioMend(R) Absorbable Collagen Membrane is sold through the
Calcitek division of Sulzer Medica. It has been approved for marketing in the
United States and has received CE Mark certification for sales in the European
Union. Sulzer Medica is seeking regulatory approval in Japan. BioMend(R) Extend
was developed by Integra LifeSciences and has the same indication for use as
BioMend(R) except that it absorbs in approximately 16 weeks. The product has
received FDA clearance to market, and has been submitted for CE mark
certification and for approval in Canada and Japan.
Cartilage Repair Products. Damaged articular cartilage, which connects the
skeletal joints, is associated with the onset of progressive pain, degeneration
and, ultimately, long-term osteoarthritis. Normal articular cartilage does not
effectively heal. The conventional procedure for treating traumatic damage to
cartilage involves smoothing damaged portions of the tissue and removing
free-floating material from the joint using arthroscopic surgery with the
objective of reducing pain and restoring mobility. However, this therapy does
not stop joint surface degeneration, often requires two or more surgeries and
results in the formation of fibrocartilage, which is rough and non-weight
bearing over prolonged periods. Moreover, the long-term result of this procedure
often is permanent reduction of joint mobility and an increased risk of
developing osteoarthritis.
We are developing a device to allow in vivo regeneration of the patient's own
articular cartilage. This technology will allow the patient's body to regenerate
a smooth, weight-bearing surface. Our objective in developing this
cartilage-specific technology is to produce a product that provides the proper
matrix system to allow the natural regeneration of the patient's cartilage, with
full restoration of function and diminished risk of osteoarthritis.
The product under development would use our proprietary peptide technology to
encourage cells to grow into the template once implanted into the patient. Our
peptide portfolio includes bioactive agents designed to mimic natural proteins
to promote cell adhesion, cell survival and other important cellular functions.
Our product would employ proprietary designs based on multiple layers of
collagen material of varying but tightly controlled densities and pore sizes to
provide a scaffold for all proliferation and cartilage formation. Simultaneously
it would prevent the in-growth of unwanted cells that could lead to scar tissue
formation. We anticipate that the device will be absorbed into the body over a
period of several weeks. Pre-clinical studies involving several variations of
the above protocols are in progress.
Collagen matrices for use with rhBMP-2. We supply the Genetics Institute
division of American Home Products with absorbable collagen sponges for use in
developing bone regeneration implants. Since 1994, we have supplied absorbable
collagen sponges for use with Genetics Institute's recombinant human bone
morphogenic protein-2 (rhBMP-2). Recombinant human BMP-2 is a manufactured
version of human protein naturally present in very small quantities in the body.
Genetics Institute is developing rhBMP-2
9
for clinical evaluation in several areas of bone repair and augmentation. Spine
applications are being developed through a related collaboration with Medtronic
Sofamor Danek in North America.
Tyrosine polycarbonates for orthopedic implants. We are continuing to develop
additional biomaterial technologies that enhance the rate and quality of healing
and tissue regeneration with synthetic biodegradable scaffolds that support cell
attachment and growth. We are developing a new class of resorbable
polycarbonates created through the polymerization of tyrosine, a naturally
occurring amino acid. A well-defined and commercially scaleable manufacturing
process prepares these materials. Device fabrication by traditional techniques
such as compression molding and extrusion is readily achieved. We believe that
this new biomaterial will be useful in promoting full bone healing when
implanted in damaged sites. This material is currently being developed for
orthopedic and tissue engineering applications where strength and bone
compatibility are critical issues for success of healing. We have entered into
agreements to supply the material to Bionx Implants, Inc. and the Linvatec
division of CONMED, in each case for specified orthopedic implants. No medical
device containing the material has yet been approved for sale.
Other Surgical Products. Other current products of Integra LifeSciences include
the VitaCuff(TM) catheter access infection control device (sold to Bard Access
Systems, Inc., Arrow International, Inc. and the Quinton division of Tyco
International Ltd.), the BioPatch(TM) anti-microbial wound dressing (sold to
Johnson & Johnson Medical), and a wide range of resorbable collagen products for
hemostasis (sold to Sulzer Calcitek for use in periodontal surgery, and to
Baxter International and other distributors under the Helistat(R) and
Helitene(R) Absorbable Collagen Hemostatic Agent names). All of the foregoing
products are manufactured at our Plainsboro, New Jersey manufacturing facility.
Finally, our line of Sundt(R) carotid endarterectomy shunts is used to divert
blood to vital organs (such as the brain) during carotid artery surgical
procedures. Carotid shunts are manufactured at our medical-grade silicone
manufacturing facility in Anasco, Puerto Rico, and sold directly and through
distributors.
SALES AND MARKETING
Our sales and marketing strategy for our product lines differ based on the type
of market and our assessment of how we can maximize our resources and make the
greatest impact on the respective market. We market our Integra NeuroSciences
products to neurosurgeons and critical care units, which comprise a focused
group of hospital-based practitioners. As a result, we are able to access this
market through a cost-effective sales and marketing infrastructure. For the
majority of the products we manufacture under Integra LifeSciences, we partner
with market leaders, which we believe allows us to achieve our growth objectives
cost effectively while enabling us to focus our management efforts on developing
new products. The non-neurosurgical products represent large, diverse markets,
and we believe that they can be more cost effectively promoted through
leveraging leading marketing partners than through developing a sales
infrastructure ourselves. Our strategic alliances include Johnson & Johnson
Medical, a division of Ethicon, Inc., Sulzer Medica Ltd., the Linvatec division
of CONMED Corporation, Bionx Implants, Inc., the Genetics Institute division of
American Home Products Corporation, the Sofamor Danek division of Medtronic,
Inc. and Baxter Healthcare.
10
STRATEGIC ALLIANCES
We use distribution alliances to market the majority of our Integra LifeSciences
products. We have also entered into collaborative agreements relating to
research and development programs involving our technology. These arrangements
are described below.
In June 1999, Integra LifeSciences entered into a strategic alliance with
Johnson & Johnson Medical to distribute INTEGRA(R) Artificial Skin throughout
the world, except in Japan. Johnson & Johnson Medical is responsible for
marketing and selling the product, has agreed to make significant minimum
product purchases, and will provide $2 million annual funding for research,
development and certain clinical trials for the first five years of the alliance
and thereafter based on a percentage of net sales. In addition, Johnson &
Johnson Medical is obligated to make contingent payments to Integra LifeSciences
in the event of certain clinical developments and to assist in the expansion of
our manufacturing capacity as we achieve certain sales targets. Under the
agreement, we are obligated to manufacture the product and are responsible for
continued research and development.
In 1997, we signed an exclusive importation and sales agreement for INTEGRA(R)
Artificial Skin in Japan with Century Medical Inc., a subsidiary of ITOCHU
Corporation. Under this agreement, Century Medical, Inc. is conducting a
clinical trial in Japan at its own expense to obtain Japanese regulatory
approvals for the sale of INTEGRA(R) Artificial Skin in Japan.
In February 1998, we announced the signing of a strategic alliance with Johnson
& Johnson's DePuy division ("DePuy") to develop and market a new product to
regenerate joint cartilage. Integra LifeSciences has agreed to develop an
absorbable, collagen-based implant, designed in combination with its proprietary
RGD peptide technology, that will allow the body to repair and regenerate
articular cartilage found in the knee and other joints. DePuy will market the
product worldwide. Under the terms of the agreement, DePuy will make payments of
up to $13 million as Integra meets various milestones, and will fund all
necessary development costs beyond the pre-clinical phase. If a product is
successfully developed, we will be responsible for manufacturing the product and
for future product development.
In addition to the cartilage program, Integra LifeSciences has several other
programs oriented toward the orthopedic market. These programs include alliances
for the development of resorbable orthopedic implants made of our proprietary
tyrosine polycarbonate technology with Bionx Implants, Inc. and Linvatec and an
alliance with Genetics Institute for the development of collagen matrices to be
used in conjunction with Genetics Institute's recombinant human bone
morphogenetic protein-2 ("rhBMP-2"). If approved, rhBMP-2 is expected to be used
in conjunction with our matrices to regenerate bone. Genetics Institute is
developing products based on rhBMP-2 for applications in orthopedics, oral and
maxillofacial surgery and spine surgery. Spine applications are being developed
through a related collaboration with Medtronic Sofamor Danek in North America.
In September 1998, we announced two strategic alliances with Linvatec and Bionx
Implants, Inc. for developing fixation devices using Integra's polymer
technology. Under the agreements with Linvatec and Bionx Implants, those
companies have responsibility for clinical trials and any necessary regulatory
filings, as well as certain minimum annual purchase payments. Products covered
under the agreement with Linvatec include a resorbable line of interference
screws, as well as tacks and anchors used in reconstruction of the anterior
cruciate ligament and posterior cruciate ligament, fixation of ligaments and
tendons in the knee and shoulder, and bone-tendon-bone procedures. Linvatec also
intends to develop polymer implants for use in bladder neck suspension
procedures. Products covered under the agreement with Bionx Implants
11
include a resorbable line of screws, plates, pins, wedges and nails used for the
fixation and/or alignment of fractures or osteotomies in all areas of the
musculoskeletal system except in the spine and cranium.
Sulzer Medica's dental division, Sulzer Calcitek, has marketed and sold
BioMend(R) since 1995, BioMend Extend(TM) since 1999 and CollaCote(R),
CollaPlug(R) and CollaTape(R) since 1992.
RESEARCH STRATEGY
The Company has either acquired or secured the proprietary rights to several
important scientific platforms. These technologies provide support for the
Company's critical applications in neurosciences and tissue regeneration, and
additional opportunities for generating near-term and long-term revenues from
medical applications. The Company has been able to identify and bring together
critical platform technology components from which it works to develop solutions
for both tissue regeneration and neurosciences.
The Company spent approximately $8.7 million, $8.2 million and $6.2 million
during 1999, 1998 and 1997, respectively, on research and development
activities. Research and development activities funded by government grants and
contract development revenues amounted to $1.9 million, $1.8 million and
$490,000 during 1999, 1998 and 1997, respectively.
GOVERNMENT REGULATION
Our research and development activities and the manufacturing and marketing of
our existing and future products are subject to regulation by numerous
governmental agencies in the United States and in other countries. The FDA and
comparable agencies in other countries impose mandatory procedures and standards
for the conduct of clinical trials and the production and marketing of products
for diagnostic and human therapeutic use. The FDA product approval process has
different regulations for drugs, biologics, and medical devices. The FDA
currently classifies our proposed regenerative medicine products as medical
devices.
Review Process For Medical Devices
There are two types of FDA review/approval procedures for medical devices: a
Premarket Notification Section 510(k) ("510(k)") and a PMA application. A 510(k)
requires submission of sufficient data to demonstrate substantial equivalence to
a device marketed prior to May 28, 1976, or to a device marketed after that date
which has been classified into Class I or Class II which has received premarket
notification 510(k) clearance. Although the mandated period for FDA review is 90
days, actual review times can be substantially longer, and the sponsor cannot
market the device until FDA clearance is obtained. For those devices that
involve new technology and/or that present significant safety and effectiveness
issues, 510(k) submissions may require significantly more time for FDA review
and may require submission of more extensive safety and effectiveness data,
including clinical trial data.
Among the conditions for clearance to market of a 510(k) submission is the
requirement that the prospective manufacturer's quality control and
manufacturing procedures conform to the FDA's current Quality System
Regulations. In complying with standards set forth in these regulations,
manufacturers must expend time, money and effort for production and quality
control to ensure full technical compliance at all times. Manufacturing
establishments, both international and domestic, are also subject to inspections
by or under the authority of the FDA. Although, at present, the FDA generally
does not inspect such establishments prior to clearance of a 510(k) submission,
it is establishing a program of conducting Quality System inspections for new
devices in the future as a standard practice.
12
The Medical Device Amendments of 1976 amended the Federal Food, Drug and
Cosmetics Act to establish three regulatory classes for medical devices, based
on the level of control required to assure safety and effectiveness. Class III
Devices are defined as life-supporting and life-sustaining devices, devices of
substantial importance in preventing impairment of human health or devices that
present potentially unreasonable risk of illness or injury. Class III devices
are those for which there is insufficient information to show that Class I or
Class II controls can provide a reasonable assurance of safety or effectiveness.
The PMA application review process for Class III devices was established to
evaluate the safety and effectiveness of these devices on a product by product
basis. Manufacturers that wish to market Class III devices must submit and
receive approval of a PMA application from the FDA.
The FDA has substantial content and format requirements for PMA applications,
which include clinical and non-clinical safety and effectiveness data, labeling,
manufacturing processes and quality assurance programs. As part of the PMA
application process, the PMA application may be referred to an FDA Advisory
Panel for review. Additionally, final approval of the product is dependent on an
inspection of the manufacturing facility for compliance with FDA Quality System
Regulations.
All studies in the United States in humans for the purpose of investigating the
safety and effectiveness of an investigational significant risk medical device
must be conducted under the Investigational Device Exemption ("IDE")
regulations. An IDE application to the FDA includes all preclinical
biocompatibility testing, investigational protocols, patient informed consents,
reports of all prior investigations, manufacturing and quality control
information. It takes a number of years from initiation of the project until
submission of a PMA application to the FDA, and requires the expenditure of
substantial resources. If a PMA application is submitted, however, there can be
no assurance on the length of time for the review process at the FDA or that the
FDA will approve the PMA application.
Under either the 510(k) submission or PMA application process, manufacturing
establishments, foreign and domestic, are subject to periodic inspections by the
FDA for compliance with Quality System Regulations. The Company and each of its
operating subsidiaries are subject to such inspections. To gain approval for the
use of a product for clinical indications other than those for which the product
was initially evaluated or for significant changes to the product, further
studies, including clinical trials and FDA approvals, are required. In addition,
for products with an approved PMA application, the FDA requires postapproval
reporting and may require postapproval surveillance programs to monitor the
product's safety and effectiveness. Results of post-approval programs may limit
or expand the further marketing of the product.
International Regulatory Requirements
We are preparing for the changing international regulatory environment. "ISO
9000" is an international recognized set of guidelines that are aimed at
ensuring the manufacture and development of quality products. We were audited
under ISO standards in 1997 and received certification to ISO 9001, a full
quality system. In 1998, we underwent a surveillance audit and renewed our
certification to ISO 9001. We are required to be audited on an annual basis by a
recognized notified body to maintain certification. Companies that meet ISO
standards are internationally recognized as functioning under a quality system.
Approval of a product by regulatory authorities in international countries must
be obtained prior to the commencement of marketing of the product in such
countries. The requirements governing the conduct of clinical trials and product
approvals vary widely from country to country, and the time required for
approval may be longer or shorter than that required for FDA approval of the PMA
application. In June 1998, the European Union Medical Device Directive became
effective, and all medical devices must meet the Medical Device Directive
standards and receive CE mark certification. CE mark certification involves a
comprehensive quality system program, and submission of data on a product to the
notified body in Europe.
13
Other United States Regulatory Requirements
In addition to the regulatory framework for product approvals, we are and may be
subject to regulation under federal and state laws, including requirements
regarding occupational health and safety; laboratory practices; and the use,
handling and disposal of toxic or hazardous substances. We may also be subject
to other present and possible future local, state, federal and foreign
regulations.
Our research, development and manufacturing processes involve the controlled use
of certain hazardous materials. We are subject to federal, state and local laws
and regulations governing the use, manufacture, storage, handling and disposal
of such materials and certain waste products. Although we believe that our
safety procedures for handling and disposing of such materials comply with the
standards prescribed by such laws and regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated. In
the event of such an accident, we could be held liable for any damages that
result and any such liability could exceed our resources. Although we believe
that we are in compliance in all material respects with applicable environmental
laws and regulations, there can be no assurance that we will not incur
significant costs to comply with environmental laws and regulations in the
future, nor that our operations, business or assets will not be materially
adversely affected by current or future environmental laws or regulations.
PATENTS AND INTELLECTUAL PROPERTY
We pursue a policy of seeking patent protection of our technology, products and
product improvements both in the United States and in selected foreign
countries. When determined appropriate, we have and plan to continue to enforce
and defend our patent rights. In general, however, we do not rely on our patent
estate to provide us with any significant competitive advantages. We rely upon
trade secrets and continuing technological innovations to develop and maintain
our competitive position. We continue to develop a substantial database of
information concerning our research and development. We have taken security
measures to protect our data and are in the process of exploring ways to enhance
further the security of our data. In an effort to protect our trade secrets, we
have a policy of requiring our employees, consultants and advisors to execute
proprietary information and invention assignment agreements upon commencement of
employment or consulting relationships with us. These agreements provide that
all confidential information developed or made known to the individual during
the course of their relationship with us must be kept confidential, except in
specified circumstances.
COMPETITION
The largest competitors of Integra NeuroSciences in the neurosurgery markets are
the PS Medical division of Medtronic, Inc., the Codman division of Johnson &
Johnson, the Valleylab division of Tyco International Ltd., and NMT
Neurosciences, a division of NMT Medical, Inc. In addition, various of the
Integra NeuroSciences product lines compete with smaller specialized companies
or larger companies that do not otherwise focus on neurosurgery. The products of
Integra LifeSciences face diverse and broad competition, depending on the market
addressed by the product. In addition, certain companies are known to be
competing particularly in the area of skin substitution or regeneration,
including Organogenesis and Advanced Tissue Sciences. Finally, in certain cases
competition consists primarily of current medical practice, rather than any
particular product (such as autograft tissue as a substitute for INTEGRA(R)
Artificial Skin). Depending on the product line, we compete on the basis of our
products features, strength of our sales organization or marketing partner,
sophistication of our technology, and cost effectiveness of our solution to the
customer's medical requirements.
14
EMPLOYEES
At December 31, 1999, we had approximately 450 full-time employees engaged in
production and production support (including warehouse, engineering, and
facilities personnel), quality assurance/quality control, research and
development, regulatory and clinical affairs, sales/marketing and administration
and finance. None of our current employees are subject to a collective
bargaining agreement.
RECENT DEVELOPMENTS
In March 2000, we agreed to acquire from NMT Medical, Inc. ("NMT") the
Selector(R) Ultrasonic Aspirator, Ruggles(TM) Surgical Instrumentation and
Spembly Medical Cryosurgery product lines, including certain assets and
liabilities, for an acquisition price of $12.0 million. The acquisition is
expected to close by April 15, 2000. One of our subsidiaries will acquire the
Selector(R) Ultrasonic Aspirator and Spembly Medical Cryosurgery product lines
through the purchase of the stock of certain of NMT's subsidiaries, each
organized under the laws of the United Kingdom. In addition, one of our
subsidiaries will acquire related assets located in the United States, as well
as the inventory, customer list and certain other assets of the Ruggles(TM)line
of instruments for the neurosurgeon.
The Selector(R) Ultrasonic Aspirator products and the Ruggles(TM) surgical
instruments will be sold through Integra NeuroSciences, and the Spembly Medical
Cryosurgery products will be sold through Integra LifeSciences. The Selector(R)
Ultrasonic Aspirator uses very high frequency sound waves to pulverize cancer
tumors, and allows the surgeon to remove the damaged tumor tissue by aspiration.
The Ruggles(TM) line of surgical instruments complements and supplements our
Redmond(TM) instruments line, but has historically had significantly higher
revenues. Finally, the Spembly Medical Cryosurgery products allow surgeons to
use low temperatures to more easily extract diseased tissue.
We also acquired the manufacturing facility in Andover, England that
manufactures the ultrasonic aspirator and cryosurgery products. The Andover
facility employs approximately 65 employees. The Ruggles(TM) instruments are
purchased from various manufacturers and resold under the Ruggles(TM) brand
name.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have made statements in this report, including statements under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business," which constitute forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward-looking statements are made pursuant to the
safe harbor provisions of the Securities Litigation Reform Act of 1995 and are
subject to a number of risks, uncertainties and assumptions about Integra,
including, among other things:
o general economic and business conditions, both nationally and in our
international markets;
o our expectations and estimates concerning future financial performance,
financing plans and the impact of competition;
o anticipated trends in our business;
o existing and future regulations affecting our business;
o our ability to obtain additional debt and equity financing to fund capital
expenditures and working capital requirements;
o our ability to complete acquisitions and integrate and manage new
businesses; and
o other risk factors described below under "Risk Factors."
15
You can identify these forward-looking statements by forward-looking words such
as "believe," "may," "could," "will," "estimate," "continue," "anticipate,"
"intend," "seek," "plan," "expect," "should," "would" and similar expressions in
this report.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks and uncertainties, the forward-looking events and
circumstances discussed in this report may not occur and actual results could
differ materially from those anticipated or implied in the forward-looking
statements.
RISK FACTORS
The Company believes that the following important factors, among others, have
affected, and in the future could affect, the Company's business and results of
operations and could cause the Company's future results to differ materially
from its historical results and those expressed in any forward-looking
statements made by the Company. Such factors are not meant to represent an
exhaustive list of the risks and uncertainties associated with the Company's
business. These factors as well as other factors may affect the Company's future
results and the Company's stock price, particularly on a quarterly basis.
We expect to continue to incur operating losses and may never achieve
profitability.
To date, we have experienced significant operating losses in funding the
research, development, manufacturing and marketing of our products and may
continue to incur operating losses. At December 31, 1999, we had a cumulative
deficit of $94.3 million. Our ability to achieve profitability depends in part
upon our ability, either independently or in collaboration with others, to
successfully manufacture and market our products and services. There can be no
assurance that we will ever achieve a profitable level of operations or that
profitability, if achieved, can be sustained on an ongoing basis.
We may be unable to raise necessary additional financing.
We may need to raise additional funds in the future in order to implement our
business plan, to conduct research and development, to fund marketing programs
or to acquire complementary businesses, technologies or services. Our committed
sources of capital are limited. Any required additional financing may be
unavailable on terms favorable to us, or at all. If we raise additional funds by
issuing equity securities, our stockholders may experience significant dilution
of their ownership interest and these securities may have rights senior to those
of the holders of our common stock. If additional financing is not available
when required or is not available on acceptable terms, we may be unable to fund
our expansion, develop or enhance our products and services, take advantage of
business opportunities or respond to competitive pressures.
Our operating results may fluctuate from time to time, which could affect the
value of our common stock.
Our operating results have fluctuated in the past and can be expected to
fluctuate from time to time in the future. Some of the factors that may cause
these fluctuations include:
o the impact of acquisitions;
o the timing of significant customer orders;
o market acceptance of our existing products, as well as products in
development;
o the timing of regulatory approvals;
o the timing of payments received under collaborative arrangements and
strategic alliances;
o our ability to manufacture our products efficiently; and
o the timing of our research and development expenditures.
16
The industry and market segments in which we operate are highly competitive, and
we may not be able to compete effectively with other companies with greater
financial resources than we have.
In general, the medical technology industry is characterized by intense
competition. We compete with established pharmaceutical and medical technology
companies. Competition also comes from early stage companies that have
alternative technological solutions for our primary clinical targets, as well as
universities, research institutions and other non-profit entities. Many of our
competitors have access to greater financial, technical, research and
development, marketing, manufacturing, sales, distribution, services and other
resources than we do. Further, our competitors may be more effective at
implementing their technologies to develop commercial products.
Our competitive position will depend on our ability to achieve market acceptance
for our products, implement production and marketing plans, secure regulatory
approval for products under development, obtain patent protection and secure
adequate capital resources. We may need to develop new applications for our
products to remain competitive. Our present or future products could be rendered
obsolete or uneconomical by technological advances by one or more of our current
or future competitors. Our future success will depend upon our ability to
compete effectively against current technology as well as to respond effectively
to technological advances. We can not assure you that competitive pressures will
not adversely affect our profitability.
Our current strategy involves growth through acquisitions, which require us to
incur substantial costs and potential liabilities for which we may never realize
the anticipated benefits.
In addition to internal growth, our current strategy involves growth through
acquisitions. There can be no assurance that we will be able to continue to
implement our growth strategy, or that this strategy will ultimately be
successful. A significant portion of our growth in net revenue has resulted
from, and is expected to continue to result from, the acquisition of businesses
complementary to our own. We engage in evaluations of potential acquisitions and
are in various stages of discussion regarding possible acquisitions, certain of
which, if consummated, could be significant to us. Acquisitions by us may result
in significant transaction expenses, increased interest and amortization
expense, increased depreciation expense and increased operating expense, any of
which could have a material adverse effect on our operating results. As we grow
by acquisitions, we must be able to integrate and manage the new businesses to
realize economies of scale and control costs. In addition, acquisitions involve
other risks, including diversion of management resources otherwise available for
ongoing development of our business and risks associated with entering new
markets with which our marketing and sales force has limited experience or where
experienced distribution alliances are not available. Our future profitability
will depend in part upon our ability to further develop our resources to adapt
to the particulars of such new products or business areas and to identify and
enter into satisfactory distribution networks. We may not be able to identify
suitable acquisition candidates in the future, obtain acceptable financing or
consummate any future acquisitions. Any failure by us to integrate acquired
operations, manage the cost of providing our products or price our products
appropriately may have a material adverse effect on our operating results. In
addition, as a result of our acquisitions of other healthcare businesses, we may
be subject to the risk of unanticipated business uncertainties or legal
liabilities relating to such acquired businesses for which we may not be
indemnified by the sellers of the acquired businesses. Future acquisitions may
also result in potentially dilutive issuances of equity securities.
To market our products under development we will first need to obtain regulatory
approval. Further, if we fail to comply with the extensive governmental
regulations that affect our business, we could be subject to penalties and could
be precluded from marketing our products.
Our research and development activities and the manufacturing, labeling,
distribution and marketing of our existing and future products are subject to
regulation by numerous governmental agencies in the United States and in other
countries. The FDA and comparable agencies in other countries impose mandatory
procedures and standards for the conduct of clinical trials and the production
and marketing of products for diagnostic and human therapeutic use. The FDA and
other regulatory authorities require that our products be manufactured according
to rigorous standards. These regulatory requirements may
17
significantly increase our production or purchasing costs and may even prevent
us from making or obtaining our products in amounts sufficient to meet market
demand. If we, or a third party manufacturer, change our approved manufacturing
process, the FDA will require a new approval before that process could be used.
Failure to develop our manufacturing capability may mean that even if we develop
promising new products, we may not be able to produce them profitably, as a
result of delays and additional capital investment costs. Manufacturing
facilities, both international and domestic, are also subject to inspections by
or under the authority of the FDA.
Our products under development are subject to approval by the FDA prior to
marketing for commercial use. The process of obtaining necessary FDA approvals
can take years and is expensive and full of uncertainties. Our inability to
obtain required regulatory approval on a timely or acceptable basis could harm
our business. Further, approval may place substantial restrictions on the
indications for which the product may be marketed or to whom it may be marketed.
To gain approval for the use of a product for clinical indications other than
those for which the product was initially evaluated or for significant changes
to the product, further studies, including clinical trials and FDA approvals are
required. In addition, for products with an approved PMA application, the FDA
requires postapproval reporting and may require postapproval surveillance
programs to monitor the product's safety and effectiveness. Results of post
approval programs may limit or expand the further marketing of the product.
Approved products are subject to continuing FDA requirements relating to quality
control and quality assurance, maintenance of records and documentation and
labeling and promotion of medical devices. In addition, failure to comply with
applicable regulatory requirements could subject us to enforcement action,
including product seizures, recalls, withdrawal of clearances or approvals,
restrictions on or injunctions against marketing our product or products based
on our technology, and civil and criminal penalties.
Medical device laws and regulations are also in effect in many countries outside
the United States. These range from comprehensive device approval requirements
for some or all of our medical device products to requests for product data or
certifications. The number and scope of these requirements are increasing. The
requirements governing the conduct of clinical trials and product approvals vary
widely from country to country. Failure to comply with applicable federal, state
and foreign medical device laws and regulations would result in fines or other
censures or preclude our ability to market products. Because approximately 25%
of our 1999 revenues are derived from international sales, any delay or
withdrawal of approval or change in international regulations could have an
adverse effect on our revenues and profitability. See "Business -- Government
Regulation."
Lack of market acceptance for our products or market preference for technologies
which compete with our products would reduce our revenues and profitability.
We cannot be certain that our current products, or any other products that we
develop or market, will achieve or maintain market acceptance. Certain of the
medical indications that can be treated by our devices can also be treated by
other medical devices. Currently, the medical community widely accepts many
alternative treatments, and these other treatments have a long history of use.
We cannot be certain that our devices and procedures will be able to replace
such established treatments or that either physicians or the medical community
in general will accept and utilize our devices or any other medical products
that we may develop. In addition, our future success depends, in part, on our
ability to develop additional products. Even if we determine that a product
candidate has medical benefits, the cost of commercializing that product
candidate may be too high to justify development. In addition, competitors may
develop products that are more effective, cost less, or are ready for commercial
introduction before our products. If we are unable to develop additional,
commercially viable products, our future prospects will be adversely affected.
18
Market acceptance of our products depends on many factors, including our ability
to convince prospective collaborators and customers that our technology is an
attractive alternative to other technologies, manufacture products in sufficient
quantities and at an acceptable cost and place and service, directly, or through
our strategic alliances, sufficient quantities of our products. In addition, our
technology could be harmed by limited funding available for product and
technology acquisitions by our customers, as well as internal obstacles to
customer approvals of purchases of our products. The industry is subject to
rapid and continuous change arising from, among other things, consolidation and
technological improvements. One or more of these factors may vary unpredictably,
which could materially adversely affect our competitive position. We may not be
able to compete effectively or adjust our contemplated plan of development to
meet changing market conditions.
Our business depends significantly on key relationships with third parties which
we may not be able to establish and maintain.
Our revenue stream and our business strategy depend in part on our entering into
and maintaining collaborative or alliance agreements with third parties
concerning product marketing as well as research and development programs. Our
ability to enter into agreements with collaborators depends in part on
convincing them that our technology can help achieve and accelerate their goals
and strategies. This may require substantial time, effort and expense on our
part with no guarantee that a strategic relationship will result. We may not be
able to establish or maintain these relationships on commercially acceptable
terms. Our future agreements may not ultimately be successful. Even if we enter
into collaborative or alliance agreements, our collaborators could terminate
these agreements or they could expire before meaningful developmental milestones
are reached. The termination or expiration of any of these relationships could
have a material adverse effect on our business.
Much of the revenue that we may receive under these collaborations will depend
upon our collaborators' ability to successfully commercially introduce, market
and sell new products derived from our products. Our success depends in part
upon the performance by these collaborators of their responsibilities under
these agreements.
Some collaborators may not perform their obligations as we expect. Some of the
companies we currently have alliances with or are targeting as potential
alliances offer products competitive with our products or may develop
competitive production technologies or competitive products outside of their
collaborations with us that could have a material adverse effect on our
competitive position. In addition, our role in the collaborations is mostly
limited to the production aspects.
As a result, we may also be dependent on collaborators for other aspects of the
development, preclinical and clinical testing, regulatory approval, sales,
marketing and distribution of our products. If our current or future
collaborators do not effectively market our products or develop additional
products based on our technology, our revenues from sales and royalties will be
significantly reduced.
The intellectual property rights we rely upon to protect the technology
underlying our products may not be adequate, which could enable third parties to
use our technology or very similar technology and could reduce our ability to
compete in the market.
Our ability to compete effectively will depend, in part, on our ability to
maintain the proprietary nature of our technologies and manufacturing processes,
which includes the ability to obtain, protect and enforce patents on our
technology and to protect our trade secrets. You should not rely on our patents
to provide us with any significant competitive advantage. Others may challenge
our patents and, as a result, our patents could be narrowed, invalidated or
rendered unenforceable. Competitors may develop products similar to ours which
are not covered by our patents. In addition, our current and future patent
applications may not result in the issuance of patents in the United States or
foreign countries. Further, there is a substantial backlog of patent
applications at the U.S. Patent and Trademark Office, and the approval or
rejection of patent applications may take several years.
19
Our success will depend partly on our ability to operate without infringing or
misappropriating the proprietary rights of others.
We may be sued for infringing the intellectual property rights of others. In
addition, we may find it necessary, if threatened, to initiate a lawsuit seeking
a declaration from a court that we do not infringe the proprietary rights of
others or that these rights are invalid or unenforceable. If we do not prevail
in any litigation, in addition to any damages we might have to pay, we would be
required to stop the infringing activity or obtain a license. Any required
license may not be available to us on acceptable terms, or at all. In addition,
some licenses may be nonexclusive, and therefore, our competitors may have
access to the same technology licensed to us. If we fail to obtain a required
license or are unable to design around a patent, we may be unable to sell some
of our products, which could have a material adverse affect on our business,
financial condition and results of operations.
We may be involved in lawsuits to protect or enforce our intellectual property
rights, which may be expensive.
In order to protect or enforce our intellectual property rights, we may have to
initiate legal proceedings against third parties, such as infringement suits or
interference proceedings. Intellectual property litigation is costly, and, even
if we prevail, the cost of such litigation could affect our profitability. In
addition, litigation is time consuming and could divert management attention and
resources away from our business. We may also provoke these third parties to
assert claims against us.
Our competitive position is dependent in part upon unpatented trade secrets,
which we may not be able to protect.
Our competitive position is also dependent upon unpatented trade secrets. Trade
secrets are difficult to protect. We can not assure you that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to our trade secrets, that such trade
secrets will not be disclosed, or that we can effectively protect our rights to
unpatented trade secrets.
In an effort to protect our trade secrets, we have a policy of requiring our
employees, consultants and advisors to execute proprietary information and
invention assignment agreements upon commencement of employment or consulting
relationships with us. These agreements provide that all confidential
information developed or made known to the individual during the course of their
relationship with us must be kept confidential, except in specified
circumstances. There can be no assurance, however, that these agreements will
provide meaningful protection for our trade secrets or other proprietary
information in the event of the unauthorized use or disclosure of confidential
information.
We are exposed to a variety of risks relating to international sales, including
fluctuations in exchange rates, commercial unavailability of, and/or
governmental restrictions on access to, foreign exchange and delays in
collection of accounts receivable.
We generate significant sales outside the United States, a substantial portion
of which are conducted with customers who generate revenue in currencies other
than the U.S. dollar. As a result, currency fluctuations between the U.S. dollar
and the currencies in which such customers do business may impact the demand for
our products in foreign countries where the U.S. dollar has increased compared
to the local currency. We cannot predict the effects of exchange rate
fluctuations upon our future operating results because of the number of
currencies involved, the variability of currency exposure and the potential
volatility of currency exchange rates.
As a result of the announced acquisition of the NMT businesses, we will generate
revenues and incur operating expenses in British pounds sterling. To the extent
that we are unable to pay all of such operating expenses with revenues generated
in British pounds sterling or are required to exchange revenues generated in
British pounds sterling into U.S. dollars, we will experience currency exchange
risk with respect to such British pounds sterling denominated revenues or
expenses.
20
Changes in the health care industry may require us to decrease the selling price
for our products or could result in a reduction in the size of the market for
our products, and limit the means by which we may discount our products, each of
which could have a negative impact on our financial performance.
Trends toward managed care, health care cost containment, and other changes in
government and private sector initiatives in the United States and other
countries in which we do business are placing increased emphasis on the delivery
of more cost-effective medical therapies which could adversely affect the sale
and/or the prices of our products. For example:
o major third-party payors of hospital services, including Medicare,
Medicaid and private health care insurers, have substantially revised
their payment methodologies during the last few years which has resulted
in stricter standards for reimbursement of hospital charges for certain
medical procedures;
o Medicare, Medicaid and private health care insurer cutbacks could create
downward price pressure in the cardiac resuscitation pre-hospital market;
o proposals were adopted recently that will change the reimbursement
procedures for the capital expenditure portion of the cost of providing
care to Medicare patients;
o numerous legislative proposals have been considered that would result in
major reforms in the U.S. health care system that could have an adverse
effect on our business;
o there has been a consolidation among health care facilities and purchasers
of medical devices in the United States who prefer to limit the number of
suppliers from whom they purchase medical products, and these entities may
decide to stop purchasing our products or demand discounts on our prices;
o there is economic pressure to contain health care costs in international
markets;
o there are proposed and existing laws and regulations in domestic and
international markets regulating pricing and profitability of companies in
the health care industry; and
o there have been recent initiatives by third party payors to challenge the
prices charged for medical products which could affect our ability to sell
products on a competitive basis.
Both the pressure to reduce prices for our products in response to these trends
and the decrease in the size of the market as a result of these trends could
adversely affect our levels of revenues and profitability of sales, which could
have a material adverse effect on our business.
In addition, there are laws and regulations that regulate the means by which
companies in the health care industry may compete by discounting the prices of
their products. Although we exercise care in structuring our customer discount
arrangements to comply with such laws and regulations, there can be no assurance
that (1) government officials charged with responsibility for enforcing such
laws will not assert that such customer discount arrangements are in violation
of such laws or regulations, or (2) government regulators or courts will
interpret such laws or regulations in a manner consistent with our
interpretation.
Our dependence on suppliers for materials could impair our ability to
manufacture our products.
Outside vendors, some of whom are sole-source suppliers, provide key components
and raw materials used in the manufacture of our products. Although we believe
that alternative sources for these components and raw materials are available,
any supply interruption in a limited or sole source component or raw material
could harm our ability to manufacture our products until a new source of supply
is identified and qualified. In addition, an uncorrected defect or supplier's
variation in a component or raw material, either unknown to us or incompatible
with our manufacturing process, could harm our ability to manufacture products.
We may not be able to find a sufficient alternative supplier in a reasonable
time period, or on commercially reasonable terms, if at all, and our ability to
produce and supply our products could be impaired.
21
If any of our manufacturing facilities were damaged and/or our manufacturing
processes interrupted, we could experience lost revenues and our business could
be seriously harmed.
We manufacture our products in a limited number of facilities. Damage to our
manufacturing, development or research facilities due to fire, natural disaster,
power loss, communications failure, unauthorized entry or other events could
cause us to cease development and manufacturing of some or all of our products.
We may have significant product liability exposure and our insurance may not
cover all potential claims.
We face an inherent business risk of exposure to product liability and other
claims in the event that our technologies or products are alleged to have caused
harm. We may not be able to obtain insurance for such potential liability on
acceptable terms with adequate coverage, or at reasonable costs. Any potential
product liability claims could exceed the amount of our insurance coverage or
may be excluded from coverage under the terms of the policy. Our insurance, once
obtained, may not be renewed at a cost and level of coverage comparable to that
then in effect.
We are subject to other regulatory requirements relating to occupational health
and safety and the use of hazardous substances which may impose significant
compliance costs on us.
In addition to the regulatory framework for product approval, manufacturing and
marketing, we are and may be subject to regulation under federal and state laws,
including requirements regarding occupational health and safety, laboratory
practices, and the use, handling and disposal of toxic or hazardous substances.
Our research, development and manufacturing processes involve the controlled use
of certain hazardous materials. We are subject to federal, state and local laws
and regulations governing the use, manufacture, storage, handling and disposal
of such materials and certain waste products. Although we believe that our
safety procedures for handling and disposing of such materials comply with the
standards prescribed by such laws and regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated. In
the event of such an accident, we could be held liable for any damages that
result and any such liability could exceed the limits or fall outside the
coverage of our insurance and could exceed our resources. We may not be able to
maintain insurance on acceptable terms, or at all. We may incur significant
costs to comply with environmental laws and regulations in the future. We may
also be subject to other present and possible future local, state, federal and
foreign regulations.
Future sales of our common stock may depress our stock price.
Sales of our common stock, or the perception that such sales could occur, could
cause the market price of our common stock to decline and impair our ability to
raise additional capital in the future through the sale of equity securities.
The loss of key personnel could harm our business.
We believe our success depends on the contributions of a number of our key
personnel, including Stuart M. Essig, President and Chief Executive Officer of
Integra. If we lose the services of key personnel, that loss could materially
harm our business. We maintain "key person" life insurance on Mr. Essig. In
addition, recruiting and retaining qualified personnel will be critical to our
success. There is a shortage in the industry of qualified management and
scientific personnel, and competition for these individuals is intense. There
can be no assurance that we will be able to attract additional and retain
existing personnel.
Our stock price may continue to be highly volatile and our stockholders may not
be able to resell their shares at or above the price they paid for them.
The stock market in general, and the stock prices of medical device companies,
biotechnology companies and other technology-based companies in particular, have
experienced significant volatility that often has been unrelated to the
operating performance of and beyond the control of any specific public
companies. The market price of Integra common stock has fluctuated widely in the
past and is likely to continue to
22
fluctuate in the future. Factors that may have a significant impact on the
market price of Integra common stock include:
o shortfall in our revenues or earnings relative to the levels expected by
securities analysts;
o future announcements concerning Integra or its competitors, including the
announcement of acquisitions;
o changes in the prospects of our business partners or suppliers;
o developments regarding our patents or other proprietary rights or those of
our competitors;
o quality deficiencies in our products;
o competitive developments, including technological innovations by us or our
competitors;
o government regulation, including the FDA's review of our products and
developments;
o changes in recommendations of securities analysts and rumors that may be
circulated about Integra or our competitors;
o public perception of risks associated with our operations;
o conditions or trends in the medical device and biotechnology industries;
o additions or departures of key personnel; and
o sales of our common stock.
Any of these factors could immediately, significantly and adversely affect the
trading price of Integra common stock.
We do not intend to pay dividends in the foreseeable future.
We do not anticipate paying any cash dividends on our common stock in the
foreseeable future. We intend to retain future earnings to fund our growth.
Accordingly, our stockholders will not receive a return on their investment in
our common stock through the payment of dividends in the foreseeable future and
may not realize a return on their investment even if they sell their shares. As
a result, our stockholders may not be able to resell their shares at or above
the price they paid for them. Any future payment of dividends to our
stockholders will depend on decisions that will be made by our board of
directors and will depend on then existing conditions, including our financial
condition, contractual restrictions, capital requirements and business
prospects.
Our major stockholders could make decisions adverse to the interests of other
stockholders.
The Company's directors and executive officers and affiliates of certain
directors own or control a majority of the outstanding voting securities of the
Company and are generally able to elect all directors, to determine the outcome
of corporate actions requiring stockholder approval and otherwise to control the
business. Such control could preclude any unsolicited acquisition of Integra and
consequently adversely affect the market price of the common stock. Furthermore,
we are subject to Section 203 of the Delaware General Corporation Law, which
could have the effect of delaying or preventing a change of control.
Year 2000 related system failures or malfunctions could harm our business.
As of the date of this report, our systems have operated without any apparent
Year 2000 related problems and appear to be Year 2000 compliant. We are not
aware that any of our primary vendors or systems maintained by third parties
have experienced significant Year 2000 compliance problems. However, while no
such problem has been discovered as of the date of this report, Year 2000 issues
may not become apparent immediately and, therefore, Integra may be affected in
the future. We will continue to monitor the issue and work to remediate any Year
2000 issues that may arise.
23
ITEM 2. PROPERTIES
Our principal executive offices are located in Plainsboro, New Jersey. Principal
manufacturing and research facilities are located in Plainsboro, New Jersey, San
Diego, California and Anasco, Puerto Rico. In addition, we lease several smaller
facilities to support additional administrative and storage operations. Our
total manufacturing and research space approximates 82,000 square feet. Our
Integra LifeSciences products are manufactured in and distributed through the
Plainsboro facility. Our Integra NeuroSciences products are manufactured in the
Plainsboro, San Diego and Anasco facilities and are distributed through the
Plainsboro and San Diego facilities. In March 2000, we leased a warehouse
facility in Cranbury, New Jersey that will serve as the national distribution
center for all of our products in the United States. In connection with the
acquisition of the business, including certain assets and liabilities, of
Clinical Neuro Systems in January 2000, we assumed a lease for an FDA registered
and inspected manufacturing facility in Exton, Pennsylvania. All of our
facilities are leased.
All of our manufacturing and distribution facilities are FDA registered and
inspected. We believe that our manufacturing facilities are suitable for their
intended purposes and have capacities adequate for current and projected needs
for existing products. Some capacity of the plants is being converted, with any
needed modification, to meet the current and projected requirements of existing
and future products.
ITEM 3. LEGAL PROCEEDINGS
In July 1996, the Company filed a patent infringement lawsuit in the United
States District Court in San Diego against Merck KGaA, a German corporation,
Scripps Research Institute, a California nonprofit corporation, and David A.
Cheresh, Ph.D., a research scientist with Scripps seeking damages and injunctive
relief. The complaint charged, among other things, that the defendant Merck KGaA
willfully and deliberately induced, and continues to willfully and deliberately
induce, defendants Scripps Research Institute and Dr. David A. Cheresh to
infringe certain of the Company's patents. These patents are part of a group of
patents granted to The Burnham Institute and licensed by the Company that are
based on the interaction between a family of cell surface proteins called
integrins and the arginine-glycine-aspartic acid (known as "RGD") peptide
sequence found in many extracellular matrix proteins. The defendants filed a
countersuit asking for an award of defendants' reasonable attorney fees. In
March 2000 a jury returned a verdict, finding that Merck KGaA had willfully
induced infringement of the Company's patents and awarded the Company $15.0
million in damages, which may be adjusted by the court. The Company expects that
post-trial motions will be filed, and that Merck KGaA will appeal various
decisions of the court and request a new trial, a reduction in damages, or a
judgment as a matter of law notwithstanding the verdict. We cannot accurately
predict the ultimate resolution of this matter and have not reflected the
verdict in our financial statements.
Bruce D. Butler, Ph.D., Bruce A. McKinley, Ph.D., and C. Lee Parmley (the "Optex
Claimants"), each parties to a Letter Agreement (the "Letter Agreement") with
Camino NeuroCare, Inc. ("Camino") dated as of December 18, 1996, have alleged
that Camino breached the terms of the Letter Agreement prior to our acquisition
of the NeuroCare Group (Camino's prior parent company). The Letter Agreement
contains arbitration provisions and Integra and the Optex Claimants have agreed
to negotiate rather than seek arbitration for a limited time. While we believe
that Camino has valid legal and factual defenses, the Optex Claimants have
asserted unspecified significant damages, and we believe that the Optex
Claimants are likely to pursue arbitration under the Letter Agreement if the
matter is not settled otherwise. We cannot predict the outcome of such an
arbitration, were it to take place. In addition, we have asserted a
24
right to indemnification from the seller of the NeuroCare businesses, but there
can be no assurance that indemnification, if any, will be obtained.
The Company is also subject to other claims and lawsuits in the ordinary course
of its business. In the opinion of management, such other claims are either
adequately covered by insurance or otherwise indemnified, and are not expected,
individually or in the aggregate, to result in a material adverse effect on the
financial condition of the Company. The Company's financial statements do not
reflect any material amounts related to possible unfavorable outcomes of the
matters above or others. However, it is possible that the Company's results of
operations, financial position and cash flows in a particular period could be
materially affected by these contingencies.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
25
Additional Information:
The following information is furnished in this Part I pursuant to Instruction 3
to Item 401(b) of Regulation S-K.
Executive Officers
The executive officers of the Company serve at the discretion of the Board of
Directors. The only family relationship between any of the executive officers
and directors of the Company is that Mr. Holtz is the nephew of Richard E.
Caruso, Ph.D., who is Chairman of the Company's Board of Directors. The
following information indicates the position and age of the Company's executive
officers as of the date of this report and their previous business experience.
Name Age Position
- ---- --- --------
Stuart M. Essig, Ph.D. 38 President and Chief Executive Officer
George W. McKinney, III, Ph.D. 56 Executive Vice President and Chief
Operating Officer
John B. Henneman, III 38 Senior Vice President, Chief
Administrative Officer and General
Counsel
Judith E. O'Grady 49 Senior Vice President, Regulatory, Quality
Assurance and Clinical Affairs
Michael D. Pierschbacher, Ph.D. 48 Senior Vice President Research and
Development, General Manager, Corporate
Research Center
David B. Holtz 33 Vice President, Finance and Treasurer
Stuart M. Essig, Ph.D. has served as President and Chief Executive Officer and a
director of the Company since December 1997. Before joining the Company, Mr.
Essig supervised the medical technology practice at Goldman, Sachs & Co. as a
managing director. Mr. Essig had ten years of broad health care experience at
Goldman Sachs serving as a senior merger and acquisitions advisor to a broad
range of domestic and international medical technology, pharmaceutical and
biotechnology clients. Mr. Essig received an A.B. degree from the Woodrow Wilson
School of Public and International Affairs at Princeton University and an MBA
and a Ph.D. degree in Financial Economics from the University of Chicago,
Graduate School of Business. Mr. Essig also serves on the Board of Directors of
Vital Signs Incorporated and St. Jude Medical Corporation.
George W. McKinney, III, Ph.D. has served the Company as Vice Chairman,
Executive Vice President and Chief Operating Officer since May 1997 and as a
member of the Board of Directors since December 1992. Between 1990 and 1997, Dr.
McKinney was Managing Director of Beacon Venture Management Corporation, a
venture capital firm. Between 1992 and 1997, Dr. McKinney also served as
President and Chief Executive Officer of Gel Sciences, Inc. and GelMed, Inc., a
privately held specialty materials firm with development programs in both the
industrial and medical products fields. From 1983 to 1989, Dr. McKinney was a
Managing Director at American Research & Development, a venture capital firm.
Between 1986 and 1989, he also served as President and Chief Executive Officer
of American Superconductor, Inc., a development stage firm in the specialty
materials field. From 1965 to 1983, Dr.
26
McKinney worked for Corning Glass Works (now Corning, Inc.), a specialty
materials firm, in a variety of manufacturing, engineering, and financial
positions. At Corning, he served as President of Corning Designs, a subsidiary
which he founded, as Secretary to the Management Committee, as Director of
Business Development and Planning, as Treasurer, International, as Assistant
Treasurer, Domestic, and as Financial and Control Manager for the Engineering
Division. Dr. McKinney holds an S.B. in Management from MIT and a Ph.D. in
Strategic Planning from Stanford University.
John B. Henneman, III is the Company's Senior Vice President, Chief
Administrative Officer and General Counsel. Prior to joining the Company in
August 1998, Mr. Henneman served Neuromedical Systems, Inc., a public company
developer and manufacturer of in vitro diagnostic equipment, in various
capacities for more than four years. From 1994 until June 1997, Mr. Henneman was
Vice President of Corporate Development, General Counsel and Secretary. From
June 1997 through November 1997, he served in the additional capacity of interim
Co-Chief Executive Officer and from December 1997 to August 1998 Mr. Henneman
was Executive Vice President, US Operations, and Chief Legal Officer. In March
1999, Neuromedical Systems, Inc. filed a petition under Chapter 11 of the
federal bankruptcy laws. From 1986 to 1994, Mr. Henneman practiced law in the
Corporate Department of Latham & Watkins (Chicago, Illinois). Mr. Henneman
received his A.B. (Politics) from Princeton University in 1983 and his J.D. from
the University of Michigan Law School in 1986.
Judith E. O'Grady, Senior Vice President of Regulatory Affairs, Quality
Assurance and Clinical Research, has served the Company since 1985. Ms. O'Grady
has worked in the areas of medical devices and collagen technology for over 20
years. Prior to joining the Company, Ms. O'Grady worked for Colla-Tec, Inc., a
Marion Merrell Dow Company. During her career Ms. O'Grady has held positions
with Surgikos, a Johnson & Johnson company, and was on the faculty of Boston
University College of Nursing and Medical School. Ms. O'Grady obtained the FDA
approval for INTEGRA(R) Artificial Skin, the first regenerative product approved
by the FDA. She also has obtained approvals for several other product lines for
the Company. In addition, Ms. O'Grady obtained the CE Mark Certification for
approvals in the European Union as well as a multitude of other international
approvals. She has been pivotal in the ISO 9001 Certification of the Company.
She is a member of the NIST group on standards for clinical outcomes as well as
on the Board of Directors for the New Jersey League of Nursing. Ms. O'Grady has
presented professional programs and lectures, both nationally and
internationally. She received her BS degree from Marquette University and MSN in
Nursing from Boston University.
Michael D. Pierschbacher, Ph.D. joined the Company in October 1995 as Senior
Vice President, Research and Development. In May 1998 he was named Senior Vice
President and Director of the Corporate Research Center. From June 1987 to
September 1995, Dr. Pierschbacher served as Senior Vice President and Scientific
Director of Telios Pharmaceuticals, Inc. ("Telios") which was acquired by the
Company in connection with the reorganization of Telios under Chapter 11 of the
federal bankruptcy code. He was a co-founder of Telios in May 1987 and is the
co-discoverer and developer of Telios' matrix peptide technology. Before joining
Telios as a full-time employee in October 1988, he was a staff scientist at the
Burnham Institute for five years and remained on staff there in an adjunct
capacity until the end of 1997. He received his post-doctoral training at
Scripps Clinical and Research Foundation and at the Burnham Institute. Dr.
Pierschbacher received his Ph.D. in Biochemistry from the University of
Missouri.
David B. Holtz joined the Company as Controller in 1993 and has served as Vice
President, Finance and Treasurer since March 1997. His responsibilities include
managing all accounting and information systems functions. Before joining the
Company, Mr. Holtz was an associate with Coopers & Lybrand, L.L.P. in
Philadelphia and Cono Leasing Corporation, a private leasing company. He
received a BS degree in Business Administration from Susquehanna University in
1989 and has been certified as a public accountant.
27
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on The Nasdaq National Market under the symbol
"IART". The following table represents the high and low sales prices for the
Company's Common Stock for each quarter for the last two years. All outstanding
common share and per share amounts have been retroactively adjusted to reflect a
one-for-two reverse stock split of the Company's Common Stock on May 18, 1998.
HIGH LOW
---- ---
1999
----
First Quarter $5.188 $3.00
Second Quarter $7.50 $3.875
Third Quarter $10.375 $5.625
Fourth Quarter $6.4375 $5.375
1998
----
First Quarter $10.75 $8.125
Second Quarter $9.75 $6.125
Third Quarter $8.00 $4.375
Fourth Quarter $5.25 $3.25
The closing price for the Common Stock on March 24, 2000 was $14.75. For
purposes of calculating the aggregate market value of the shares of Common Stock
of the Company held by non-affiliates, as shown on the cover page of this
report, it has been assumed that all the outstanding shares were held by
non-affiliates except for the shares held by directors and executive officers of
the Company and stockholders owning 10% or more of outstanding shares. However,
this should not be deemed to constitute an admission that all such persons are,
in fact, affiliates of the Company. Further information concerning ownership of
the Company's Common Stock by executive officers, directors and principal
stockholders will be included in the Company's definitive proxy statement to be
filed with the Securities and Exchange Commission.
The Company does not currently pay any cash dividends on its Common Stock and
does not anticipate paying as such dividends in the foreseeable future.
The number of stockholders of record as of March 24, 2000 was approximately 850,
which includes stockholders whose shares were held in nominee name. The number
of beneficial stockholders at that date was over 6,700.
28
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth consolidated financial data with respect to the
Company for each of the five years in the period ended December 31, 1999. The
information set forth below should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
Company's consolidated financial statements and related notes included elsewhere
in this report.
Years Ended December 31,
----------------------------------------------------------
In thousands, except per share data 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Statement of Operations Data (1)
Product sales................................... $ 39,661 $ 14,076 $ 14,001 $ 11,210 $ 8,356
Other revenue................................... 2,829 3,379 745 1,938 1,873
-------- -------- -------- -------- --------
Total revenue............................... 42,490 17,455 14,746 13,148 10,229
Cost of product sales, including depreciation(2) 22,219 7,420 7,027 6,671 4,850
Research and development........................ 8,670 8,238 6,222 6,064 5,104
Selling and marketing........................... 9,481 5,953 5,458 4,304 2,455
General and administrative (3).................. 12,682 9,357 14,430 4,881 3,225
Amortization and other depreciation............. 1,818 667 520 675 504
Acquired in-process research and development (4) -- -- -- -- 19,593
-------- -------- -------- -------- --------
Total costs and expenses...................... 54,870 31,635 33,657 22,595 35,731
-------- -------- -------- -------- --------
Operating loss.................................. (12,380) (14,180) (18,911) (9,447) (25,502)
Interest income................................. 1,006 1,250 1,771 1,799 283
Interest expense................................ (712) -- -- -- (188)
Gain on disposition of product line............. 4,161 -- -- -- --
Other income.......... ......................... 141 588 176 120 5
-------- -------- -------- -------- --------
Net loss before income taxes.................... (7,784) (12,342) (16,964) (7,528) (25,402)
Income tax benefit (5).......................... 1,818 -- -- -- --
-------- -------- -------- -------- --------
Net loss........................................ $ (5,966) $(12,342) $(16,964) $ (7,528) $(25,402)
======== ======== ======== ======== ========
Basic and diluted net loss per share............ $ (.40) $ (.77) $ (1.15) $ (.54) $ (2.41)
======== ======== ======== ======== ========
Weighted average common shares outstanding...... 16,802 16,139 14,810 14,057 10,536
======== ======== ======== ======== ========
December 31,
----------------------------------------------------------
In thousands 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Balance Sheet Data (1)
Cash, cash equivalents and short-term investments $ 23,612 $ 20,187 $ 26,272 $ 34,276 $ 5,710
Working capital................................ 28,014 23,898 29,407 37,936 7,476
Total assets................................... 66,253 34,707 38,356 48,741 19,378
Long-term debt................................. 7,625 -- -- -- --
Accumulated deficit............................ (94,304) (88,287) (75,945) (58,981) (51,453)
Total stockholders' equity..................... 37,989 31,366 35,755 46,384 17,427
- ----------
(1) As the result of the Company's acquisitions of Telios Pharmaceuticals,
Inc. ("Telios") in August 1995, Rystan Company, Inc. ("Rystan") in
September 1998 and the NeuroCare group of companies ("NeuroCare") in March
1999, the consolidated financial results and balance sheet data for
certain of the periods presented above may not be directly comparable.
(2) The 1999 and 1998 cost of product sales include $2.4 million and $0.3
million, respectively, of fair value purchase accounting adjustments
related to inventory acquired in the NeuroCare and Rystan acquisitions.
(3) The 1997 general and administrative expense included the following two
non-cash charges: (i) $1.0 million related to an asset impairment charge;
and (ii) $5.9 million related to an equity-based signing bonus for the
Company's President and Chief Executive Officer.
(4) As a result of purchase accounting, the 1995 loss included $19.6 million
of acquired in-process research and development which was charged to
expense at the date of the Company's acquisition of Telios.
(5) The 1999 income tax benefit includes a non-cash benefit of $1.8 million
resulting from the reduction of the deferred tax liability recorded in the
NeuroCare acquisition to the extent that consolidated deferred tax assets
were generated subsequent to the acquisition.
29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
consolidated financial statements, the notes thereto and the other financial
information included elsewhere in this report.
General
The Company develops, manufactures and markets medical devices, implants and
biomaterials. The Company's operations consist of (1) Integra NeuroSciences,
which is a leading provider of implants, instruments, and monitors used in
neurosurgery, neurotrauma, and related critical care and (2) Integra
LifeSciences, which develops and manufactures a variety of medical products and
devices, including products based on our proprietary tissue regeneration
technology which are used to treat soft tissue and orthopedic conditions.
Integra NeuroSciences sells primarily through a direct sales organization and
Integra LifeSciences sells primarily through strategic alliances and
distributors.
In 1999, the Company initiated a repositioning of its business to selectively
focus on attractive niche markets. Implementation of this strategy included the
purchase of the NeuroCare Group of companies ("NeuroCare") in March 1999 and the
execution of an agreement (the "JJM Agreement") with Johnson & Johnson Medical,
Division of Ethicon, Inc. ("JJM") that provides JJM with exclusive marketing and
distribution rights to INTEGRA(R) Artificial Skin worldwide, excluding Japan. As
a result of these transactions, the Company formed its Integra NeuroSciences
segment and reorganized the remainder of the Company's products into its Integra
LifeSciences segment. The JJM Agreement allowed the Integra LifeSciences segment
to focus on strategic collaborative initiatives. A majority of the products in
the Integra NeuroSciences segment, which accounted for 54% of the Company's
total revenues in 1999, were acquired in the NeuroCare acquisition. The Integra
LifeSciences segment, which accounted for 46% of the Company's total revenues in
1999, now operates as a provider of innovative products and development
activities through strategic alliances with marketing partners and distributors.
As a result of these activities, the Company's segment financial results for
each of the years 1999, 1998 and 1997 may not be directly comparable.
The Company has incurred losses from operations since its inception and will
continue to incur such losses unless and until product sales and research and
collaborative arrangements generate sufficient revenue to fund continuing
operations. As of December 31, 1999, the Company had an accumulated deficit of
$94.3 million.
The Company's financial information discussed below should be considered in
light of the following transactions/events that occurred subsequent to December
31, 1999:
o The Company acquired the business, including certain assets and
liabilities, of Clinical Neuro Systems ("CNS") on January 17, 2000 for $6.8
million. CNS designs, manufactures and sells neurosurgical external
ventricular drainage systems including catheters and drainage bags, as well
as cranial access kits. The consideration for the CNS acquisition consisted
of $4.0 million in cash and a two-year $2.8 million note payable to the
seller.
o On March 21, 2000, the Company agreed to acquire the Selector(R) Ultrasonic
Aspirator, Ruggles(TM) hand-held neurosurgical instruments and cryosurgery
product lines, including certain assets and liabilities, from NMT Medical,
Inc. for $12.0 million in cash. The completion of this transaction is
subject to customary closing conditions and is expected to close early in
the second quarter of 2000.
o On March 29, 2000, the Company issued 54,000 shares of Series C Preferred
Stock ("Series C Preferred") and warrants to purchase 300,000 shares of
common stock at $9.00 per share to affiliates of Soros Private Equity
Partners LLC, resulting in proceeds to the Company of $5.4 million. The
Series C Preferred is convertible into 600,000 shares of our common stock
and has a liquidation preference of $5.4 million with a 10% cumulative
dividend. The Series C Preferred was issued with a beneficial conversion
feature that resulted in a nonrecurring non-cash dividend of $4.2 million
that will be reflected in earnings (loss) per share applicable to common
stock in the first quarter of 2000.
30
See Note 20 to the Company's consolidated financial statements under Item 8 of
this report for additional information.
Results of Operations
1999 Compared to 1998
Overall, the Company's net loss decreased from $12.3 million in 1998 to $6.0
million in 1999. Operating results improved $1.8 million in 1999, with an
operating loss of $12.4 million in 1999 as compared to a $14.2 million operating
loss in 1998. The improvement in 1999 operating results resulted from the
successful integration of the NeuroCare acquisition and implementation of the
JJM Agreement, cost savings achieved in all business segments as compared to
1998 spending levels, and sales increases in the Company's Integra LifeSciences
product lines. The Company also recognized a non-operating gain of $4.2 million
from the sale of a product line in January 1999 and $1.8 million of non-cash
deferred tax benefits recorded in 1999 subsequent to the NeuroCare acquisition.
Total revenues increased $25.0 million from $17.5 million in 1998 to $42.5
million in 1999 primarily as a result of the NeuroCare acquisition. This
increase consists of a $25.6 million increase in product sales, offset by a $0.6
million decrease in other revenue. Product sales and cost of product sales were
as follows (in thousands):
1999
- ---- Integra Integra
NeuroSciences LifeSciences Consolidated
------------- ------------ ------------
Product sales $ 22,369 $ 17,292 $ 39,661
Cost of product sales 13,192 9,027 22,219
Gross margin on product sales 9,177 8,265 17,442
Gross margin percentage 41% 48% 44%
1998
- ---- Integra Integra
NeuroSciences LifeSciences Consolidated
------------- ------------ ------------
Product sales $ -- $ 14,076 $ 14,076
Cost of product sales -- 7,420 7,420
Gross margin on product