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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NUMBER 0-28288
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ECLIPSE SURGICAL TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
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CALIFORNIA 77-0223740
(State of incorporation) (I.R.S. Employer Identification
Number)
1049 KIEL COURT
SUNNYVALE, CALIFORNIA 94089
(Address of principal executive offices)
(408) 548-2100
(Registrant's telephone number, including area code)
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TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
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COMMON STOCK, NO PAR VALUE NASDAQ NATIONAL MARKET
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 voting stock held by non-affiliates of the
Registrant was approximately $129,286,586 as of February 26, 1999, based upon
the closing sale price reported for that date on the Nasdaq National Market.
Shares of Common Stock held by each officer and director and by each person who
owns 5% or more of the outstanding Common Stock have been excluded because such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily conclusive for other purposes.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock outstanding as of the last practicable date.
17,630,675 shares
As of February 26, 1999
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INDEX TO FORM 10-K
PAGE
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PART I
Item 1. Business....................................................................................... 3
Item 2. Description of Property........................................................................ 15
Item 3. Legal Proceedings.............................................................................. 15
Item 4. Submission of Matters to a Vote of Security Holders............................................ 15
PART II
Item 5. Market for Registrant's Shares and Related Shareholder Matters................................. 16
Item 6. Selected Consolidated Financial Data........................................................... 17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..................................... 35
Item 8. Consolidated Financial Statements and Supplementary Schedules.................................. 35
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........... 35
PART III
Item 10. Directors and Executive Officers of the Registrant............................................. 36
Item 11. Executive Compensation......................................................................... 37
Item 12. Security Ownership of Certain Beneficial Owners and Management................................. 42
Item 13. Certain Relationships and Related Transactions................................................. 43
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K................................. 44
Signatures................................................................................................. 63
PART I
ITEM 1. BUSINESS.
THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. THE STATEMENTS CONTAINED HEREIN THAT ARE NOT
PURELY HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT, INCLUDING WITHOUT
LIMITATION STATEMENTS REGARDING ECLIPSE'S EXPECTATIONS, BELIEFS, INTENTIONS OR
STRATEGIES REGARDING THE FUTURE. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS
DOCUMENT OR INCORPORATED BY REFERENCE HEREIN ARE BASED ON INFORMATION AVAILABLE
TO ECLIPSE ON THE DATE HEREOF, AND ECLIPSE ASSUMES NO OBLIGATION TO UPDATE ANY
SUCH FORWARD-LOOKING STATEMENTS. ECLIPSE'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A
RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH IN ITEM 7 AND ELSEWHERE.
GENERAL
Eclipse Surgical Technologies, Inc ("Eclipse"), incorporated in California
in 1989, designs, develops, manufactures and distributes laser-based surgical
products and disposable fiber-optic accessories for the treatment of advanced
cardiovascular disease through transmyocardial revascularization ("TMR") and
percutaneous transluminal myocardial revascularization ("PTMR"). TMR and PTMR
are new laser-based heart treatments in which one millimeter channels are made
in the heart muscle. It is believed these procedures encourage new vessel
formation, or angiogenesis, and result in reduced angina pain. TMR is performed
by a cardiac surgeon through a small incision in the chest. PTMR is performed by
a cardiologist in a catheter based procedure under local anesthesia. Both
procedures can be performed as stand alone treatments or adjunctively with
coronary artery bypass graft ("CABG") or balloon angioplasty, respectively.
Eclipse has ongoing clinical trials for certain indications in each of these
areas. In the U.S., Eclipse offered its laser systems for sale in limited
numbers for investigational use only pursuant to Investigational Device
Exemptions ("IDEs") from the U.S. Food and Drug Administration (the "FDA"). On
February 11, 1999, Eclipse received final approval from the FDA for its TMR
products for treatment of stable patients with angina (Canadian Cardiovascular
Society Class 4) refractory to other medical treatments and secondary to
objectively demonstrated coronary artery atherosclerosis and with a region of
the myocardium with reversible ischemia not amenable to direct coronary
revascularization. Eclipse continues to offer its PTMR products in limited
numbers for investigational use only pursuant to Investigational Device
Exemptions ("IDEs") from the U.S. Food and Drug Administration (the "FDA").
On October 22, 1998, Eclipse announced the signing of a definitive agreement
that provided for a business combination with CardioGenesis Corporation
("CardioGenesis"). On March 17, 1999, Eclipse and CardioGenesis announced the
completion of their business combination. Under the terms of the combination,
each share of CardioGenesis Common Stock has been converted into 0.8 of a share
of Eclipse Common Stock, and Eclipse has assumed all outstanding CardioGenesis
stock options. CardioGenesis has become a wholly-owned subsidiary of Eclipse and
its shares will no longer be publicly traded. As a result of the transaction,
Eclipse has increased its outstanding shares by approximately 9.9 million shares
which are issuable to the former CardioGenesis stockholders upon proper
surrender of their stock certificates. These shares represent approximately 36%
of Eclipse's post-combination outstanding shares. The transaction has been
structured to qualify as a tax-free reorganization and will be accounted for as
a pooling of interests.
BACKGROUND
Cardiovascular disease is the leading cause of death and disability in the
U.S., according to the American Heart Association (the "AHA"). Coronary artery
disease is the principal form of cardiovascular disease and is characterized by
a progressive narrowing of the coronary arteries, which supply blood to the
heart. This narrowing process is usually due to atherosclerosis, the buildup of
fatty deposits, or plaque, on the inner lining of the arteries. Coronary artery
disease reduces the available supply of oxygenated blood to
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the heart muscle, potentially resulting in severe chest pain known as angina, as
well as damage to the heart. Typically, the condition worsens over time and
often leads to heart attack or death.
Based on standards promulgated by the Canadian Heart Association, angina is
typically classified into four classes, ranging from Class 1, in which anginal
pain results only from strenuous exertion, to the most severe class, Class 4, in
which the patient is unable to conduct any physical activity without angina and
angina may be present even at rest. The AHA estimates that more than six million
Americans experience anginal symptoms.
The primary therapeutic options for treatment of coronary artery disease are
drug therapy, balloon angioplasty also known as percutaneous transluminal
coronary angioplasty or ("PTCA"), other interventional techniques which augment
or replace PTCA such as stent placement and atherectomy, and CABG. The objective
of each of these approaches is to increase blood flow through the coronary
arteries to the heart.
Drug therapy may be effective for mild cases of coronary artery disease and
angina either through medical effects on the arteries that improve blood flow
without reducing the plaque or by decreasing the rate of formation of additional
plaque (E.G., by reducing blood levels of cholesterol). Because of the
progressive nature of the disease, however, many patients with angina ultimately
undergo either PTCA or open heart bypass surgery.
PTCA is a less-invasive alternative to CABG introduced in the early 1980s in
which a balloon-tipped catheter is inserted into an artery, typically near the
groin, and guided to the areas of blockage in the coronary arteries. The balloon
is then inflated and deflated at each blockage site, thereby rupturing the
blockage and stretching the vessel. Although the procedure is usually successful
in widening the blocked channel, the artery often re-narrows within six months
of the procedure, a process called "restenosis," often necessitating a repeat
procedure. A variety of techniques for use in conjunction with PTCA have been
developed in an attempt to reduce the frequency of restenosis, including stent
placement and atherectomy. Stents are small metal frames delivered to the area
of blockage using a balloon catheter and deployed or expanded within the
coronary artery. The stent is a permanent implant intended to keep the channel
open. Atherectomy is a means of using mechanical, laser or other techniques at
the tip of a catheter to cut or grind away plaque.
CABG is an open chest procedure developed in the 1960s in which conduit
vessels are taken from elsewhere in the body and grafted to the blocked coronary
arteries so that blood can bypass the blockage. CABG typically requires the use
of a heart-lung bypass machine to render the heart inactive (to allow the
surgeon to operate on a still, relatively bloodless heart) and involves
prolonged hospitalization and patient recovery periods. Accordingly, it is
generally reserved for patients with severe cases of coronary artery disease or
those who have previously failed to receive adequate relief of their symptoms
from PTCA or related techniques. Unfortunately, most bypass grafts fail within
one to fifteen years following the procedure. Repeating the surgery ("re-do
bypass surgery") is possible, but is made more difficult because of scar tissue
and adhesions that typically form as a result of the first operation. Moreover,
for many patients CABG is inadvisable for various reasons, such as the severity
of the patient's overall condition, the extent of coronary artery disease or the
small size of the blocked arteries.
When these treatment options are exhausted, the patient is left with no
viable surgical alternative other than, in limited cases, heart transplantation.
Without a viable surgical alternative, the patient is generally managed with
drug therapy, often with significant lifestyle limitations. TMR and PTMR,
currently under clinical investigation by Eclipse and certain other companies,
offer potential relief to a large class of patients with severe cardiovascular
disease.
THE TMR AND PTMR PROCEDURE
TMR, or transmyocardial revascularization, is a surgical procedure performed
on the beating or non-beating heart, in which a laser device is used to create
pathways through the myocardium directly into
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the heart chamber. The pathways are intended to enable improved perfusion, or
supply, of blood to the myocardium and reduce angina in the patient. TMR
potentially can be performed using any of several different surgical approaches,
including open chest surgery, minimally invasive surgery through a four inch
incision between the ribs, or videoscopically through small openings or ports in
the chest. TMR offers end-stage cardiac patients who are not candidates for PTCA
or CABG as a means to alleviate their symptoms and improve their quality of
life. TMR may also be effective when used in conjunction with CABG to treat
areas of the heart not treated after bypass surgery. Eclipse has received FDA
approval for commercial distribution in the U.S. of the Eclipse TMR 2000 Holmium
laser system for certain indications.
PTMR, or percutaneous transluminal myocardial revascularization, is an
interventional procedure performed by a cardiologist. PTMR is based upon the
same principles as TMR, but the procedure is much less invasive. The patient is
under local anesthesia, and is treated through a catheter inserted in the
femoral artery at the top of the leg. A laser transmitting catheter is threaded
up into the heart chamber, where channels are created in the inner portion of
the myocardium (i.e. heart muscle). PTMR potentially offers angina sufferers
another treatment option before being referred to a surgeon for a more invasive
course of treatment. PTMR may also be effective when used in conjunction with
PTCA to treat areas of the heart not revascularized by a balloon or stent.
Eclipse has received FDA approval to conduct clinical trials studying PTMR, as
well as PTMR in conjunction with PTCA.
The physiologic principles underlying TMR and PTMR as potential treatments
for cardiovascular disease were first identified in the 1930s. It was observed
then that, although the human myocardium depends on external coronary arteries
for its blood supply, it displays elements of certain direct blood pathways
found in reptilian hearts. In reptiles, blood is supplied directly to the
myocardium through these pathways from the chambers of the heart. These
observations led to a belief that impaired vascularization in the human
myocardium could be treated by creating direct pathways through the myocardium
into the heart chamber. Following numerous advancements in the use of laser
technology in medical applications, human trials of laser-based TMR commenced in
the 1980s and of PTMR in the 1990s. TMR with the Eclipse TMR 2000 Holmium laser
system is approved by the FDA in the U.S. for treatment of stable patients with
angina (Canadian Cardiovascular Society Class 4) refractory to medical treatment
and secondary to objectively demonstrated coronary artery atherosclerosis and
with a region of the myocardium with reversible ischemia not amenable to direct
coronary revascularization. TMR with CABG and PTMR are now being offered as
investigational procedures as part of clinical studies to determine the safety
and effectiveness of such procedures.
BUSINESS STRATEGY
Eclipse's objective is to become the leading supplier in the TMR and PTMR
markets. Eclipse's strategies to achieve this goal are as follow:
DEMONSTRATE CLINICAL UTILITY OF TMR AND PTMR. TMR with the Eclipse TMR 2000
laser system is approved by the FDA in the U.S. for treatment of stable patients
with angina (Canadian Cardiovascular Society Class 4) refractory to medical
treatment and secondary to objectively demonstrated coronary artery
atherosclerosis and with a region of the myocardium with reversible ischemia not
amenable to direct coronary revascularization. Eclipse is seeking to demonstrate
the clinical safety and effectiveness of TMR with CABG as well as and PTMR and
achieve FDA approval of its products through clinical trials. Eclipse has
commenced additional trials, including "TMR as an Adjunct to Bypass Surgery,"
"PTMR Compared to Drug Therapy," and "PTMR as an Adjunct to PTCA".
DEVELOP COMPREHENSIVE PRODUCT LINES FOR TMR AND PTMR. Eclipse is seeking to
develop multiple surgical platforms and provide a comprehensive suite of high
quality products for TMR. Eclipse believes that its compact, flexible,
fiber-optic based system will enable it to offer effective TMR solutions across
the three principal TMR surgical approaches for TMR, open chest surgery,
minimally invasive surgery and percutaneous TMR. Eclipse is also developing a
broad range of disposable fiber-optic based surgical tools designed to operate
with its laser base unit and intended to provide physicians with a broad range
of
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options for their individual tactile preferences and solutions for the different
geometry of each patient's heart cavity.
LEVERAGE PROPRIETARY TECHNOLOGY. Eclipse believes that its significant
expertise in laser and catheter-based systems for cardiovascular disease and the
proprietary technologies it has developed are important factors in its efforts
to demonstrate the safety and effectiveness of its TMR and PTMR procedures.
Eclipse is seeking to develop additional proprietary technologies for TMR, PTMR
and related procedures. Eclipse has 40 patents or allowed patent applications
and 63 patent applications pending relating to various aspects of TMR, PTMR and
other cardiovascular therapies.
EXPAND MARKET FOR THE COMPANY'S PRODUCTS. Eclipse is seeking to expand
market awareness of its products among opinion leaders in the cardiovascular
field, subject to appropriate regulatory guidelines. In connection with the
current clinical trials, Eclipse has focused its initial efforts in the U.S. on
the 200 hospitals that perform the greatest number of cardiovascular procedures.
Eclipse also sells its products through its direct international sales
organization and a network of distributors and agents. In addition, Eclipse has
assembled a board of scientific advisors consisting of a number of influential
cardiac surgeons and cardiologists. Eclipse has also developed a comprehensive
training program to assist physicians in acquiring the expertise necessary to
utilize its TMR or PTMR products and procedures. Eclipse is seeking to expand
the approved indications for TMR or PTMR through additional clinical studies.
PRODUCTS AND TECHNOLOGY
ECLIPSE TMR 2000 SYSTEM
The Eclipse TMR 2000 system consists of the Eclipse TMR 2000 laser base unit
and a line of fiber-optic, laser-based surgical tools. Each surgical tool
utilizes optical fiber to deliver laser energy from the source laser base unit
to the distal tip of the surgical handpiece or PTMR catheter. The compact base
unit occupies a small amount of operating room floor space, operates on a
standard 208 or 220-volt power supply, features a self-contained cooling system
which eliminates the need for electrical or plumbing modifications to the
hospital operating room or catheterization laboratory where it is typically used
on patients, and is light enough to move within the operating room or among
operating rooms in order to use operating room space efficiently. Moreover, the
flexible, lightweight and slender optical fiber used to deliver the laser energy
to the patient enables ready access to the patient and to various sites within
the heart.
The Eclipse TMR 2000 system and related surgical procedures are designed to
be used without the requirement of the external systems utilized with certain
competitive TMR systems. For example, the Eclipse TMR 2000 system does not
require electrocardiogram synchronization, which monitors the electrical output
of the heart and times the use of the laser to minimize electrical disruption of
the heart, or transesophageal echocardiography, which tests each application of
the laser to the myocardium during the TMR procedure to determine if the pathway
has penetrated through the myocardium into the heart chamber.
ECLIPSE HOLMIUM LASER. The Eclipse TMR 2000 laser base unit generates laser
light of a 2-micron wavelength by photoelectric excitation of a solid state
holmium crystal. The holmium laser, because it uses a solid state crystal as its
source, is compact, reliable and requires low maintenance. Eclipse has been
using holmium lasers since its inception.
DISPOSABLE SURGICAL TOOLS. Eclipse offers to physicians a broad range of
surgical tool options for their individual tactile preferences and solutions for
the different geometry of each patient's heart cavity. These products are
designed to give the surgeon control of the procedure, access to difficult to
reach areas of the heart and clear visualization of the surgical field. Each
such tool is designed for disposal after use in a single surgical procedure. The
products include the following devices:
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SOLO-GRIP II. The Solo-Grip II handpiece system contains multiple, fine
fiber-optic strands in a one millimeter diameter bundle. The flexible fiber
optic delivery system combined with the ergonomic handpiece provides access
for treating all regions of the left ventricle.
PTMR CATHETER AND SLIMFLEX. The PTMR catheter is an over-the-wire,
steerable, disposable catheter system that features torque control,
deflection capability, infusion port and radioopaque markers for enhanced
visualization and depth control. After insertion into an artery of the leg,
the PTMR catheter is advanced over the aortic arch, across the aortic valve
and into the heart chamber. Visualization is achieved using standard
fluoroscopic or x-ray techniques common to all hospitals doing cardiac
catheterization.
The Solo-Grip II and SlimFlex fiber-optic delivery systems each have an easy
to install connector which screws into the laser base unit, and each device is
pre-calibrated in the factory so it requires no special preparation.
REGULATORY STATUS
Eclipse received final approval from the FDA for use of its TMR products for
treatment of stable patients with angina (Canadian Cardiovascular Society Class
4) refractory to other medical treatments and secondary to objectively
demonstrated coronary artery atherosclerosis and with a region of the myocardium
with reversible ischemia not amenable to direct coronary revascularization on
February 11, 1999.
In February 1996, Eclipse obtained FDA clearance to undertake Phase I of
another clinical study of TMR intended to assess the safety and effectiveness of
"TMR Used in Conjunction with CABG" as compared with CABG alone. In September
1996, the FDA provided Eclipse with clearance to begin Phase II of this study
and final data collection is currently in process. During 1998 Eclipse was
granted FDA clearance to begin two additional surgical clinical trials. One of
these trials has completed enrollment and the other trial is in process.
In June 1997, Eclipse received an IDE from the FDA to begin its first PTMR
clinical trial, comparing patients treated with PTMR to patients receiving only
drug therapy. In November 1997, the FDA gave Eclipse authorization to begin
Phase II of this trial. This study has completed enrollment and final data
collection is currently in process.
In April 1998, Eclipse received approval to begin Phase I of another PTMR
clinical trial. This trial is studying PTMR in conjunction with PTCA or various
other interventional procedures, compared to people receiving only PTCA. Phase
II is currently in process.
SALES AND MARKETING
Eclipse has received Pre Market Approval ("PMA") from the FDA for its
surgical TMR laser system. Health Care Finance Administration ("HCFA") has also
announced its coverage policy for the TMR with FDA approved systems. Eclipse
expects revenues from sales of surgical TMR systems to increase and expenses in
support of clinical trials to decrease over the short-term and possibly
thereafter. Eclipse is promoting market awareness of Eclipse's approved surgical
products among opinion leaders in the cardiovascular field and is recruiting
physicians and hospitals. To support the surgical launch, Eclipse has expanded
the domestic sales force to sixteen sales people in three sales regions.
Eclipse currently offers a laser base unit, at a current end user list price
of $320,000 per unit, and disposable surgical tools (at least one of which must
be used with each procedure) at an end user unit list price of $2,495 for a TMR
handpiece or $2,295 for a PTMR catheter. In order to assist hospitals in making
a substantial investment in Eclipse's laser system, Eclipse intends to continue
selling the systems to the hospital outright or placing the system with the
hospital under leasing or fee per use contracts.
Eclipse intends to continue to broaden its line of disposable products as
part of its strategy to develop multiple platforms for TMR. The open chest,
minimally invasive TMR procedures and percutaneous TMR
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procedures are made possible by the use of the Company's flexible, lightweight
and slender fiber-optic based surgical tools. Open chest TMR procedures and
minimally invasive TMR surgical procedures are performed by cardiac surgeons. In
contrast, PTMR is performed by interventional cardiologists using catheter-based
products.
Internationally, Eclipse sells its products through a direct sales and
support organization of six people and a network of distributors and agents.
From September 1995 through December 31, 1998, Eclipse shipped 200 systems
worldwide.
Eclipse has developed, in conjunction with several major hospitals using
Eclipse's TMR or PTMR products, a training program to assist physicians in
acquiring the expertise necessary to utilize Eclipse's products and procedures.
This program includes a comprehensive one-day course including observation of
live procedures, didactic training and hands-on performance of TMR or PTMR in
vivo.
Eclipse exhibits its products at major cardiovascular meetings and recruits
new investigators to buy its products for investigational use in their
hospitals. Investigators of Eclipse's products have made presentations at
meetings around the world, describing their results. Abstracts have been
published and articles will be submitted to peer-reviewed publications and
industry journals to present the results of the ongoing clinical trials.
SCIENTIFIC ADVISORY BOARD
Eclipse's Scientific Advisory Board meets with Eclipse on an individual and
group basis to discuss Eclipse's TMR and PTMR products and procedures, relevant
developments in cardiology and the treatment of heart disease, and strategic
directions. In addition, Eclipse has worked with the medical staffs of several
major universities in developing the protocols for Eclipse's TMR and PTMR
procedures and in clinical data monitoring and statistical analysis.
The Scientific Advisory Board consists of a number of prominent members of
the medical and scientific communities, including the following persons:
NAME OCCUPATION/TITLE
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Eric Powers, M.D................................ Professor of Medicine and Director
Cardiac Cath Laboratory
University of Virginia
Vaughn Starnes, M.D............................. Professor of Surgery and Chief
Cardiothoracic Surgery
University of Southern California School of Medicine
Eric Topol, M.D................................. Chairman
Department of Cardiology
Cleveland Clinic Foundation
In addition, Eclipse meets several times each year, during professional
conferences and exhibitions, with the group of physicians who serve as
investigators in connection with Eclipse's clinical trials in order to discuss
clinical procedures and results.
RESEARCH AND DEVELOPMENT
Eclipse's ongoing research and product development efforts are focused on
the development of new and enhanced lasers, fiber-optic handpieces and TMR and
PTMR applications. In addition, Eclipse continues to develop new laser
handpieces in order to enhance the utility and quality of Eclipse's line of
disposable surgical tools and to expand the indications for use and variety of
procedures that can be performed with Eclipse's surgical tools. Specifically,
Eclipse is seeking to achieve continual improvements in its TMR and PTMR
procedures, including greater surgical access and visualization of the surgical
field;
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greater precision in the placement of pathways; reduced epicardial bleeding and
bruising of heart muscle; greater margins of safety with respect to underlying
heart structures; and reduced likelihood of induction of arrhythmia.
In furtherance of Eclipse's strategy to develop the three principal surgical
platforms for performance of TMR, current research efforts include enhancements
to open chest surgical TMR as well as complementary techniques for minimally
invasive surgical TMR and PTMR. In all these cases, Eclipse anticipates new
disposable products will be required to satisfy market requirements.
Eclipse's research and development spending, including expenditures related
to clinical trials, was $14,175,000 in 1998, $12,007,000 in 1997 and $6,183,000
in 1996. Due to a May 1997 change in the HCFA policy regarding Medicare
reimbursement for TMR procedures in clinical trials, Eclipse's expenses in
support of clinical trials increased. Eclipse believes the FDA approval of its
surgical TMR system and indication of coverage by HCFA during 1999 will decrease
the level of research and development expenditures in connection with clinical
trials.
MANUFACTURING AND QUALITY ASSURANCE
Eclipse manufactures and assembles its products from purchased components
and subassemblies, primarily at its facility in Sunnyvale, California.
Each laser is mobile and shock resistant, complies with Underwriters
Laboratory ("UL") standards and is equipped with safety interlocks and user
friendly controls and meters. Eclipse production personnel assemble and test
each laser system in a process designed to test the integrity of the laser
system and to provide for accurate calibration of system components. Upon
completion of these tests, the laser is packaged for shipment. Eclipse personnel
uncrate and install the laser at the hospital, and verify that the system meets
acceptance criteria, including all laser power output specifications.
Laser handpieces are fabricated from tubing, connectors and optical fibers,
each of which is purchased from outside vendors. The individual optical fibers
are cut to the appropriate length, bundled and placed in the extruded tubing and
metal connectors, and the tip of the device is molded and polished. Prior to
packaging, each handpiece is tested on a laser system to verify acceptable power
output.
Eclipse's assembly and manufacturing activities to date have consisted
primarily of producing limited quantities of its laser units and fiber-optic
accessories for sale to clinical investigators. Eclipse's future profitability
will depend, in part, on its ability to achieve manufacturing efficiencies as
production volumes increase.
The core components of Eclipse's laser units and fiber-optic handpieces are
generally acquired from multiple sources. Eclipse currently purchases certain
laser and fiber-optic components and subassemblies from single sources. Although
Eclipse has identified alternative vendors, the qualification of additional or
replacement vendors for certain components or services is a lengthy process. Any
significant supply interruption would have a material adverse effect on
Eclipse's ability to manufacture its products and, therefore, would materially
and adversely affect Eclipse's business, financial condition and results of
operations. Eclipse intends to continue to qualify multiple sources for
components that are presently single sourced and also to build an inventory of
these items for use in the event of supply interruptions.
In May 1997, Eclipse received ISO 9001 Certification for its quality
assurance process. Eclipse is committed to continuous quality improvement in its
manufacturing and assembly operations. Each subassembly and product is
thoroughly tested at multiple stages of production to ensure proper operation
and compliance with applicable regulatory standards. Manufacturing quality is
documented and monitored continually under ISO guidelines.
Eclipse is required to register as a manufacturer of medical devices with
the FDA and state agencies such as the California Department of Health Services.
As a condition to receipt of a PMA, Eclipse's
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facilities, procedures and practices will be subject to pre-approval Good
Manufacturing Practices ("GMP") inspections and thereafter to ongoing, periodic
inspections by the FDA and such other regulatory agencies.
Eclipse is also subject to certain federal, state and local regulations
regarding environmental protection and hazardous substance controls, among
others. Although Eclipse believes it currently complies in all material respects
with such regulations, failure to comply could subject Eclipse to fines or other
enforcement actions.
Eclipse provides to its customers in the U.S. and to its foreign
distributors a free one-year parts and service warranty for each laser unit.
Eclipse offers extended warranty coverage for one-year periods to customers in
the U.S. Eclipse also performs service on a fee basis on laser units that are no
longer covered by warranty. Annual service contracts are generally priced at 10%
of the purchase price of the laser unit. Handpieces are sold without warranty.
COMPETITION
Eclipse expects that the market for TMR and PTMR, which is currently in the
early stages of development, will be intensely competitive. Competitors include
PLC Systems, Inc. ("PLC"), Johnson and Johnson ("J&J"), and U.S. Surgical
Corporation ("U.S. Surgical") which are currently selling TMR or PTMR products
for investigational use in the U.S. and abroad. Other competitors may also enter
the market, including large companies in the laser and cardiac surgery markets.
Many of these companies have or may have significantly greater financial,
research and development, marketing and other resources than Eclipse.
PLC is a publicly traded corporation which uses a CO(2) laser and an
articulated mechanical arm in its TMR products. PLC obtained a PMA for TMR in
1998. PLC has received the CE Marking which allows sales of its products
commercially in all European Union countries. PLC has been issued patents for
its apparatus and methods for TMR.
J&J is a publicly traded company which uses a holmium laser and fiber-optics
in its PTMR products. J&J has acquired a ventricular mapping company to further
its PTMR product line and has begun U.S. trials under an IDE.
U.S. Surgical is a publicly traded company which uses an excimer laser and
fiber-optics in its TMR products. U.S. Surgical is actively promoting its
products in Europe and has begun clinical trials in the U.S. under an IDE. U.S.
Surgical has acquired one laser company and rights to products from another
laser supplier.
Eclipse believes that the factors which will be critical to market success
include the timing of receipt of requisite regulatory approvals, effectiveness
and ease of use of the TMR products and procedures on both a stand alone basis
and in conjunction with other procedures such as CABG and PTCA, breadth of
product line, system reliability, brand name recognition and effectiveness of
distribution channels and cost of capital equipment and disposable devices.
TMR and PTMR also competes with other methods for the treatment of
cardiovascular disease, including drug therapy, PTCA and CABG. Even with recent
FDA approval of the Eclipse TMR system in patients for whom other cardiovascular
treatments are not likely to provide relief, and when used in conjunction with
other treatments, there can be no assurance that Eclipse's TMR or PTMR products
will be accepted. Moreover, technological advances in other therapies for
cardiovascular disease such as pharmaceuticals or future innovations in cardiac
surgery techniques could make such other therapies more effective or lower in
cost than the Company's TMR procedure and could render Eclipse's technology
obsolete. There can be no assurance that physicians will use Eclipse's TMR
procedure to replace or supplement established treatments, or that Eclipse's TMR
procedure will be competitive with current or future technologies. Such
competition could materially and adversely affect Eclipse's business, financial
condition and results of operations.
10
The TMR laser system and any other product developed by Eclipse that gains
regulatory approval will face competition for market acceptance and market
share. An important factor in such competition may be the timing of market
introduction of competitive products. Accordingly, the relative pace at which
Eclipse can develop products, complete clinical testing and regulatory approval
processes, gain reimbursement acceptance and supply commercial quantities of the
product to the market are expected to be important competitive factors. In the
event a competitor is able to obtain a PMA for its products prior to Eclipse,
Eclipse's ability to compete successfully could be materially and adversely
affected. There can be no assurance that Eclipse will be able to compete
successfully against current and future competitors even if Eclipse obtains a
PMA prior to its competitors.
GOVERNMENT REGULATION
Laser-based surgical products and disposable fiber-optic accessories for the
treatment of advanced cardiovascular disease through TMR are considered medical
devices, and as such are subject to regulation in the U.S. by the FDA. Eclipse
has FDA clearance for the sale of the Eclipse laser system for thoracic surgery.
Eclipse has recently obtained FDA approval through the more rigorous PMA process
for the performance of TMR with the Eclipse TMR 2000 laser system for treatment
of stable patients with angina (Canadian Cardiovascular Society Class 4)
refractory to medical treatment and secondary to objectively demonstrated
coronary artery atherosclerosis and with a region of the myocardium with
reversible ischemia not amenable to direct coronary revascularization.
To obtain a PMA for a medical device, Eclipse must file a PMA application
that includes clinical data and the results of pre-clinical and other testing
sufficient to show that there is a reasonable assurance of safety and
effectiveness of the product for its intended use. To begin a clinical study, an
IDE must be obtained and the study must be conducted in accordance with FDA
regulations. An IDE application must contain preclinical test data demonstrating
the safety of the product for human investigational use, information on
manufacturing processes and procedures, and proposed clinical protocols. If the
IDE application is cleared by the FDA, human clinical trials may begin. The
results obtained from these trials, if satisfactory, are accumulated and
submitted to the FDA in support of a PMA application. Premarket approval from
the FDA is required before commercial distribution of devices similar to those
under development by the Company is permitted in the U.S. In addition to the
results of clinical trials, the PMA application must include other information
relevant to the safety and effectiveness of the device, a description of the
facilities and controls used in the manufacturing of the device, and proposed
labeling. By law, the FDA has 180 days to review a PMA application. While the
FDA has responded to PMA applications within the allotted time frame, reviews
more often occur over a significantly longer period and may include requests for
additional information or extensive additional trials. There can be no assurance
that Eclipse will not be required to conduct additional trials which may result
in substantial costs and delays, nor can there be any assurance that a PMA will
be obtained for each product in a timely manner, if at all. In addition, changes
in existing regulations or the adoption of new regulations or policies could
prevent or delay regulatory approval of Eclipse's products. Furthermore, even if
a PMA is granted, subsequent modifications of the approved device or the
manufacturing process may require a supplemental PMA or the submission of a new
PMA which could require substantial additional clinical efficacy data and FDA
review. After the FDA accepts a PMA application for filing, and after FDA review
of the application, a public meeting is frequently held before an FDA advisory
panel in which the PMA is reviewed and discussed. The panel then issues a
favorable or unfavorable recommendation to the FDA or recommends approval with
conditions. Although the FDA is not bound by the panel's recommendations, it
tends to give such recommendations significant weight. In February 1999, Eclipse
received a PMA for its TMR laser system for use in certain indications.
Products manufactured or distributed by Eclipse pursuant to a PMA will be
subject to pervasive and continuing regulation by the FDA, including, among
other things, postmarket surveillance and adverse event reporting requirements.
Failure to comply with applicable regulatory requirements can result in, among
other things, warning letters, fines, suspensions or delays of approvals,
seizures or recalls of
11
products, operating restrictions or criminal prosecutions. The Federal Food,
Drug and Cosmetic Act ("FD&C Act") requires Eclipse to manufacture its products
in registered establishments and in accordance with GMP regulations and to list
its devices with the FDA. Furthermore, as a condition to receipt of a PMA,
Eclipse's facilities, procedures and practices will be subject to additional
pre-approval GMP inspections and thereafter to ongoing, periodic GMP inspections
by the FDA. These GMP regulations impose certain procedural and documentation
requirements upon Eclipse with respect to manufacturing and quality assurance
activities. Labeling and promotional activities are subject to scrutiny by the
FDA. Current FDA enforcement policy prohibits the marketing of approved medical
devices for unapproved uses. Changes in existing regulatory requirements or
adoption of new requirements could materially and adversely affect Eclipse's
business, financial condition and results of operations. There can be no
assurance that Eclipse will not be required to incur significant costs to comply
with laws and regulations in the future or that current or future laws and
regulations will not materially and adversely affect Eclipse's business,
financial condition and result of operations.
Eclipse is also regulated by the FDA under the Radiation Control for Health
and Safety Act, which requires laser products to comply with performance
standards, including design and operation requirements, and manufacturers to
certify in product labeling and in reports to the FDA that their products comply
with all such standards. The law also requires laser manufacturers to file new
product and annual reports, maintain manufacturing, testing and sales records,
and report product defects. Various warning labels must be affixed and certain
protective devices installed, depending on the class of the product. In
addition, Eclipse is subject to California regulations governing the manufacture
of medical devices, including an annual licensing requirement. Eclipse's
facilities are subject to ongoing, periodic inspections by the FDA and
California regulatory authorities.
Sales, manufacturing and further development of Eclipse's TMR and PTMR
systems also may be subject to additional federal regulations pertaining to
export controls and environmental and worker protection, as well as to state and
local health, safety and other regulations that vary by locality, which may
require obtaining additional permits. The impact of such regulations on
Eclipse's business, financial condition and results of operations cannot be
predicted.
Sales of medical devices outside of the U.S. are subject to foreign
regulatory requirements that vary widely by country. In addition, the FDA must
approve the export of devices to certain countries. To market in Europe, a
manufacturer must obtain the certifications necessary to affix to its products
the CE Marking. The CE Marking is an international symbol of adherence to
quality assurance standards and compliance with applicable European medical
device directives. In order to obtain a CE Marking, a manufacturer must be in
compliance with appropriate ISO 9001 standards and obtain certification of its
quality assurance systems by a recognized European Union notified body. However,
certain individual countries within Europe require further approval by their
national regulatory agencies. Failure to receive the right to affix the CE
Marking or other requisite approvals will prohibit Eclipse from selling its TMR
products in member countries of the European Union or elsewhere, and there can
be no assurance that Eclipse will be successful in meeting the European
certification requirements. In December 1996, Eclipse obtained a CE Marking for
its TMR laser system. In July 1998, Eclipse obtained CE Marking for its PTMR
catheter system.
INTELLECTUAL PROPERTY MATTERS
Eclipse's success will depend, in part, on its ability to obtain patent
protection for its products, preserve its trade secrets, and operate without
infringing the proprietary rights of others. Eclipse's policy is to seek to
protect its proprietary position by, among other methods, filing U.S. and
foreign patent applications related to its technology, inventions and
improvements that are important to the development of its business. Eclipse has
40 patents or allowed patent applications and 63 patent applications pending
relating to various aspects of TMR, PTMR and other cardiovascular therapies.
There can be no assurance that any of Eclipse's patents or patent applications
will not be challenged, invalidated or circumvented in
12
the future or that the rights granted thereunder will provide a competitive
advantage. Eclipse intends to vigorously protect and defend its intellectual
property. It is uncertain whether patent protection will continue to be
available for surgical methods in the future. Costly and time-consuming
litigation brought by Eclipse may be necessary to enforce patents issued to
Eclipse, to protect trade secrets or know-how owned by Eclipse, or to determine
the enforceability, scope and validity of the proprietary rights of others.
Eclipse also relies upon trade secrets, technical know-how and continuing
technological innovation to develop and maintain its competitive position.
Eclipse typically requires its employees, consultants and advisors to execute
confidentiality and assignment of inventions agreements in connection with their
employment, consulting, or advisory relationships with Eclipse. There can be no
assurance, however, that these agreements will not be breached or that Eclipse
will have adequate remedies for any breach. Furthermore, no assurance can be
given that competitors will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to Eclipse's
proprietary technology, or that Eclipse can meaningfully protect its rights in
unpatented proprietary technology.
The medical device industry in general, and the industry segment that
includes products for the treatment of cardiovascular disease in particular,
have been characterized by substantial competition and litigation regarding
patent and other intellectual property rights. In this regard, competitors of
Eclipse have been issued a number of patents related to TMR and PTMR. In
September 1995 Eclipse received from a competitor a notice of potential
infringement of the competitor's patent regarding a method for TMR utilizing
synchronization of laser pulses to the electrical signals from the heart. In
January 1996, Eclipse received from CardioGenesis a notice of potential
infringement of the competitor's patents regarding methods to perform TMR/PTMR
using fiber-optics. Eclipse had concluded in each case, following discussion
with its patent counsel, that it did not utilize the process and/or apparatus
which is the subject of the patent at issue, and had responded to the respective
competitor to such effect and has received no further correspondence on either
matter. There can be no assurance, however, that further claims or proceedings
will not be initiated by either competitor, or that claims by other parties will
not arise in the future. Any such claims in the future, with or without merit,
could be time-consuming and expensive to respond to and could divert the
attention of Eclipse's technical and management personnel. Eclipse may be
involved in litigation to defend against claims of infringement by Eclipse, to
enforce patents issued to Eclipse, or to protect trade secrets of Eclipse. If
any relevant claims of third party patents are upheld as valid and enforceable
in any litigation or administrative proceeding, Eclipse could be prevented from
practicing the subject matter claimed in such patents, or would be required to
obtain licenses from the patent owners of each such patent or to redesign its
products or processes to avoid infringement.
Patent applications in the U.S. are maintained in secrecy until patents
issue, and patent applications in foreign countries are maintained in secrecy
for a period after filing. Publication of discoveries in the scientific or
patent literature tends to lag behind actual discoveries and the filing of
related patent applications. Accordingly, there can be no assurance that current
and potential competitors and other third parties have not filed or in the
future will not file applications for, or have not received or in the future
will not receive, patents or obtain additional proprietary rights that will
prevent, limit or interfere with Eclipse's ability to make, use or sell its
products either in the U.S. or internationally. In the event Eclipse were to
require licenses to patents issued to third parties, there can be no assurance
that such licenses would be available or, if available, would be available on
terms acceptable to Eclipse, nor can there be any assurance that Eclipse would
be successful in any attempt to redesign its products or processes to avoid
infringement or that any such redesign could be accomplished in a cost-effective
manner. Accordingly, an adverse determination in a judicial or administrative
proceeding or failure to obtain necessary licenses could prevent Eclipse from
manufacturing and selling its products, which would materially and adversely
affect Eclipse's business, financial condition and results of operations.
Unrelated to the products used in its TMR procedure, Eclipse has received
notices from three holders of patents requesting that Eclipse become a licensee.
Although Eclipse believes that either these patents are subject to challenge as
being invalid or are not infringed by Eclipse's products, there can be no
13
assurance that Eclipse would prevail in any such action. In one case, Eclipse
has taken a non-exclusive license to a patent involving arthroscopy use. In a
second case, Eclipse buys components only from licensees of the patent holder,
which Eclipse believes obviates the need for a separate license. In addition,
Eclipse has received notice of interference of one of its patents involving
products that Eclipse is not actively pursuing. Eclipse has received a
non-exclusive license to the technology. Should Eclipse determine that it is
necessary for it to obtain a license to any patents or intellectual property,
there can be no assurance that any such license would be available on acceptable
terms or at all, or that Eclipse would be able to develop or otherwise obtain
alternative technology. Failure of Eclipse to obtain necessary licenses could
prevent Eclipse from manufacturing and selling its products, which would
materially and adversely affect Eclipse's business, financial condition and
results of operations.
THIRD PARTY REIMBURSEMENT
Eclipse expects that sales volumes and prices of Eclipse's products will
depend significantly on the availability of reimbursement for surgical
procedures using Eclipse's products from third party payors such as governmental
programs, private insurance and private health plans. Reimbursement is a
significant factor considered by hospitals in determining whether to acquire new
equipment. Reimbursement rates from third party payors vary depending on the
third party payor, the procedure performed and other factors. Moreover, third
party payors, including government programs, private insurance and private
health plans, have in recent years been instituting increasing cost containment
measures designed to limit payments made to healthcare providers by, among other
measures, reducing reimbursement rates, limiting services covered, negotiating
prospective or discounted contract pricing and carefully reviewing and
increasingly challenging the prices charged for medical products and services.
Medicare reimburses hospitals on a prospectively determined fixed amount for
the costs associated with an in-patient hospitalization based on the patient's
discharge diagnosis, and reimburses physicians on a prospectively determined
fixed amount based on the procedure performed, regardless of the actual costs
incurred by the hospital or physician in furnishing the care and unrelated to
the specific devices used in that procedure. Medicare and other third party
payors are increasingly scrutinizing whether to cover new products and the level
of reimbursement for covered products. In addition, Medicare traditionally has
considered items or services involving devices that have not been approved or
cleared for marketing by the FDA to be precluded from Medicare coverage. Under a
HCFA policy effective November 1, 1995, Medicare coverage was not precluded for
items and related services involving devices that had been classified by the FDA
as "non-experimental/investigational" ("Category B") devices and that are
furnished in accordance with FDA-approved protocols governing clinical trials.
Even with items or services involving Category B devices, however, Medicare
coverage could have been denied if other coverage requirements are not met, for
example if the treatment is not medically needed for the specific patient. In
November 1995, Eclipse received Category B designation for its TMR procedure
from the HCFA. Accordingly, Eclipse's procedures had received third party
reimbursement in many cases under HCFA's policy. In May 1997, HCFA decided to
retain Eclipse's Category B status but ruled to rescind coverage. In January
1999, HCFA announced coverage policy for FDA approved TMR systems for any
manufacturer's TMR procedures. While Eclipse is unable to determine the ultimate
effect of this policy change on the business and operating results, Eclipse
anticipates that research and development expenses will decrease due to
decreased expenses in support of clinical trials, and revenues from the sale of
FDA approved surgical TMR products are likely to increase, at least over the
short-term and possibly thereafter.
Eclipse has limited experience to date with the acceptability of its TMR
procedures for reimbursement by private insurance and private health plans.
There can be no assurance that private insurance and private health plans will
approve reimbursement for TMR or PTMR.
In foreign markets, reimbursement is obtained from a variety of sources,
including governmental authorities, private health insurance plans and labor
unions. In most foreign countries, there are also private insurance systems that
may offer payments for alternative therapies. Although not as prevalent as
14
in the U.S., health maintenance organizations are emerging in certain European
countries. Eclipse may need to seek international reimbursement approvals, and
there can be no assurance that any such approvals will be obtained in a timely
manner, if at all. Failure to receive foreign reimbursement approvals could have
an adverse effect on the market acceptance of Eclipse's products in the foreign
markets in which such approvals are sought.
Eclipse believes that reimbursement in the future will be subject to
increased restrictions such as those described above, both in the U.S. and in
foreign markets. Eclipse believes that the escalating cost of medical products
and services has led to and will continue to lead to increased pressures on the
health care industry, both foreign and domestic, to reduce the cost of products
and services, including products offered by Eclipse. There can be no assurance
that third party reimbursement and coverage will be available or adequate in
U.S. or foreign markets, that current levels of reimbursement will not be
decreased in the future, or that future legislation, regulation, or
reimbursement policies of third party payors will not otherwise adversely affect
the demand for Eclipse's products or its ability to sell its products on a
profitable basis. Fundamental reforms in the healthcare industry in the U.S. and
Europe that could affect the availability of third party reimbursement continue
to be proposed, and Eclipse cannot predict the timing or effect of any such
proposal. If third party payor coverage or reimbursement is unavailable or
inadequate, Eclipse's business, financial condition and results of operations
could be materially and adversely affected.
PRODUCT LIABILITY AND INSURANCE
Eclipse maintains insurance against product liability claims in the amount
of $10 million per occurrence and $10 million in the aggregate, and may seek to
increase such coverage now that Eclipse has received a PMA. However, there can
be no assurance that such coverage will continue to be available in the amount
desired or on terms acceptable to Eclipse, or that such coverage will be
adequate for liabilities actually incurred. Any uninsured or underinsured claim
brought against Eclipse, or any claim or product recall that results in
significant cost to or adverse publicity against Eclipse, could materially and
adversely affect Eclipse's business, financial condition and results of
operations.
EMPLOYEES
As of December 31, 1998 Eclipse had 123 employees, including 22 in research
and development, 45 in manufacturing, 32 in sales and marketing and 24 in
administration. All employees have entered into confidentiality agreements with
Eclipse but Eclipse does not otherwise have employment agreements with any of
its employees. None of Eclipse's employees is covered by a collective bargaining
agreement and Eclipse has experienced no work stoppages to date.
ITEM 2. DESCRIPTION OF PROPERTY.
Eclipse's facilities are comprised of 50,335 square feet under five separate
leases. The facility contains a Class 10,000 clean room for laser handpiece and
catheter fabrication. The leases expire from December 1999 through December
2002. Eclipse's headquarters are located in Sunnyvale, California. Eclipse
believes its facilities are adequate to meet its foreseeable requirements
through at least 1999. There can be no assurance that additional facilities will
be available to Eclipse, if and when needed, thereafter.
ITEM 3. LEGAL PROCEEDINGS.
There are no pending legal proceedings against Eclipse other than ordinary
litigation incidental to Eclipse's business, the outcome of which, individually
or in the aggregate, is not expected to have a material adverse effect on
Eclipse's business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
15
PART II
ITEM 5. MARKET FOR REGISTRANTS SHARES AND RELATED SHAREHOLDER MATTERS.
(a) Eclipse's Common Stock is traded on the Nasdaq National Market under the
symbol, ESTI, commencing May 31, 1996. For the periods indicated, the following
table presents the range of high and low sale prices for the Common Stock as
reported by the Nasdaq National Market.
1998 HIGH LOW
- ---------------------------------------------------------------------------- --------- ---------
First Quarter............................................................... $ 13.50 $ 5.88
Second Quarter.............................................................. $ 13.00 $ 9.38
Third Quarter............................................................... $ 10.13 $ 5.63
Fourth Quarter.............................................................. $ 9.56 $ 6.31
1997 HIGH LOW
- ---------------------------------------------------------------------------- --------- ---------
First Quarter............................................................... $ 9.75 $ 4.88
Second Quarter.............................................................. $ 8.50 $ 4.88
Third Quarter............................................................... $ 10.00 $ 6.75
Fourth Quarter.............................................................. $ 9.50 $ 5.50
As of December 31, 1998, shares of Eclipse's Common Stock were held by 177
registered shareholders.
Eclipse has never paid a cash dividend on its capital stock and does not
anticipate paying any cash dividends on the Common Stock in the foreseeable
future, as it intends to retain its earnings, if any, to generate increased
growth and for general corporate purposes.
(b) CHANGES IN SECURITIES AND USE OF PROCEEDS.
In connection with its initial public offering in 1996 Eclipse filed a
Registration Statement on Form S-1, SEC File No. 333-03770 (the "Registration
Statement"), which was declared effective by the Securities and Exchange
Commission on May 31, 1996. Eclipse registered 4,600,000 shares of its Common
Stock, no par value per share. The offering commenced on May 31, 1996 and
4,000,000 shares were sold. The aggregate offering price of the registered
shares was $64,000,000. The managing underwriters of the offering were
PaineWebber Incorporated, Deutsche Morgan Grenfell, and Jefferies & Company,
Inc. Eclipse incurred the following expenses in connection with the offering:
Underwriting discounts and commissions...................................... $ 4,480,000
Other expenses.............................................................. 1,565,000
------------
Total expenses.............................................................. $ 6,045,000
------------
------------
All of such expenses were direct or indirect payments to others.
The net offering proceeds to Eclipse after deducting the total expenses
above were approximately $57,955,000. From May 31, 1996 to December 31, 1998,
Eclipse used such net offering proceeds, in direct or indirect payments to
others, as follows:
Purchase and installment of machinery and equipment........................ $ 2,847,000
Working capital............................................................ 44,992,000
Investment in short-term, interest-bearing obligations..................... 7,526,000
Repayment of indebtedness.................................................. 1,777,000
-------------
Total...................................................................... $ 57,142,000
-------------
-------------
16
Each of such amounts is a reasonable estimate of the application of the net
offering proceeds. This use of proceeds does not represent a material change in
the use of proceeds described in the prospectus of the Registration Statement.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The following selected consolidated financial data with respect to Eclipse
for the five years ended December 31, 1998, are derived from the consolidated
financial statements of Eclipse which have been audited by
PricewaterhouseCoopers LLP for the five fiscal years ended December 31, 1998.
The data should be read in conjunction with the consolidated financial
statements, related notes and other financial information included herein.
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- --------- ---------
STATEMENT OF OPERATIONS DATA:
Net revenues............................................. $ 12,002 $ 5,499 $ 9,759 $ 2,707 $ 2,020
Cost of revenues......................................... 4,735 2,779 3,558 1,642 1,173
---------- ---------- ---------- --------- ---------
Gross profit......................................... 7,267 2,720 6,201 1,065 847
---------- ---------- ---------- --------- ---------
Operating expenses:
Research and development............................... 14,175 12,007 6,183 1,010 971
Sales and marketing.................................... 11,417 7,345 3,327 879 392
General and administrative............................. 3,619 4,036 2,403 681 1,031
---------- ---------- ---------- --------- ---------
Total operating expenses................................. 29,211 23,388 11,913 2,570 2,394
---------- ---------- ---------- --------- ---------
Operating loss....................................... (21,944) (20,668) (5,712) (1,505) (1,547)
Interest and other income (expense), net................. 1,590 2,421 1,556 (921) (435)
---------- ---------- ---------- --------- ---------
Net loss............................................. $ (20,354) $ (18,247) $ (4,156) $ (2,426) $ (1,982)
---------- ---------- ---------- --------- ---------
---------- ---------- ---------- --------- ---------
Net loss per share--basic and diluted................ $ (1.18) $ (1.11) $ (0.30) $ (0.23) $ (0.19)
---------- ---------- ---------- --------- ---------
---------- ---------- ---------- --------- ---------
Shares used in per share calculation................. 17,227 16,404 14,078 10,470 10,231
---------- ---------- ---------- --------- ---------
---------- ---------- ---------- --------- ---------
1998 1997 1996 1995 1994
---------- ---------- ---------- --------- ---------
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities......... $ 8,339 $ 35,194 $ 52,063 $ 123 $ 132
Working capital (deficit)................................ 8,501 36,434 47,861 (1,549) 657
Total assets............................................. 26,243 43,474 58,706 2,459 2,922
Long-term debt, less current portion..................... 114 10 20 -- 1,009
Accumulated deficit...................................... (48,772) (28,418) (10,171) (6,015) (3,589)
Total shareholders' equity (deficit)..................... 19,727 38,228 55,666 (1,429) (139)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS CONTAINS DESCRIPTIONS OF ECLIPSE'S EXPECTATIONS REGARDING FUTURE
TRENDS AFFECTING ITS BUSINESS. THESE FORWARD-LOOKING STATEMENTS AND OTHER
FORWARD-LOOKING STATEMENTS MADE ELSEWHERE IN THIS DOCUMENT ARE MADE IN RELIANCE
UPON THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995. PLEASE READ THE SECTION BELOW TITLED "FACTORS THAT MAY AFFECT FUTURE
RESULTS" TO REVIEW CONDITIONS WHICH ECLIPSE BELIEVES COULD CAUSE ACTUAL
17
RESULTS TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY THE FORWARD-LOOKING
STATEMENTS. FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, THOSE
ITEMS IDENTIFIED WITH A FOOTNOTE(1) SYMBOL. ECLIPSE UNDERTAKES NO OBLIGATION TO
UPDATE THE INFORMATION CONTAINED HEREIN.
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH FINANCIAL
STATEMENTS AND NOTES THERETO INCLUDED IN THIS ANNUAL REPORT ON FORM 10-K.
OVERVIEW
Eclipse was founded in 1989. From 1989 through September 1995, Eclipse
engaged in the research, development and sale of surgical laser products
principally for procedures such as atherectomy and arthroscopy. In 1995, Eclipse
determined that there was a significant opportunity in the Transmyocardial
Revascularization ("TMR") market, and that Eclipse was well-positioned to enter
this market because of Eclipse's expertise with laser-based surgical techniques
and the treatment of cardiovascular disease. Accordingly, in late 1995, Eclipse
changed its strategic direction to enter the TMR market.
Prior to 1996, Eclipse focused almost exclusively on research and
development activities relating to surgical laser products. Since 1996, Eclipse
has focused on TMR and Percutaneous Transmyocardial Revascularization ("PTMR")
activities, particularly research and development activities and clinical
trials. At December 31, 1998, Eclipse had an accumulated deficit of $48,772,000.
On May 19, 1997, HCFA adopted a policy to restrict Medicare reimbursement
for TMR equipment and procedures. Eclipse's products had received third party
reimbursement under the preceding HCFA policy. Reimbursement was a significant
factor considered by hospitals in determining whether to acquire new equipment.
On October 22, 1998, Eclipse announced the signing of a definitive agreement
that provided for a business combination with CardioGenesis Corporation
("CardioGenesis"). On March 17, 1999, Eclipse and CardioGenesis announced the
completion of their business combination. Under the terms of the combination,
each share of CardioGenesis Common Stock has been converted into 0.8 of a share
of Eclipse Common Stock, and Eclipse has assumed all outstanding CardioGenesis
stock options. CardioGenesis has become a wholly-owned subsidiary of Eclipse and
its shares will no longer be publicly traded. As a result of the transaction,
Eclipse has increased its outstanding shares by approximately 9.9 million shares
which are issuable to the former CardioGenesis stockholders upon proper
surrender of their stock certificates. These shares represent approximately 36%
of Eclipse's post-combination outstanding shares. The transaction has been
structured to qualify as a tax-free reorganization and will be accounted for as
a pooling of interests.
On February 11, 1999, Eclipse received final approval from the FDA for its
TMR products for certain indications and is now able to sell those products in
the U.S. on a commercial basis. Eclipse has also received the European
Conforming Mark ("CE Mark") allowing the commercial sale of its TMR laser
systems and its PTMR catheter system to customers in the European Community. In
February 1999, HCFA issued an indication of coverage for TMR procedures that are
FDA approved. When HCFA issues final guidelines, hospitals will again receive
Medicare reimbursement for TMR equipment and procedures which is expected to
result in a reduction in Eclipse's costs of clinical trials(1).
Eclipse expects to continue to incur operating losses related to the
expansion of sales and marketing resources, research and development activities,
including clinical studies, and the continued development of corporate
infrastructure. The timing and amounts of Eclipse's expenditures will depend
upon a number of factors, including the progress of Eclipse's clinical trials,
the status and timing of regulatory approvals, the timing of market acceptance,
if any, of Eclipse's products, and the efforts required to develop Eclipse's
sales and marketing organization.
- ------------------------
(1) Forward looking statement.
18
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
NET REVENUES
Net revenues of $12,002,000 for the year ended December 31, 1998 increased
$6,503,000 or 118% when compared to net revenues of $5,499,000 for the year
ended December 31, 1997. The increase in revenues was a result of higher laser
system and disposable product sales.
Future revenues could continue to be affected by restrictions on third party
reimbursement. Eclipse intends to continue selling its laser systems to
hospitals outright or placing the systems with hospitals under lease or fee per
use agreements.
GROSS PROFIT
Gross profit increased to $7,267,000 or 61% of net revenues for the year
ended December 31, 1998 as compared to $2,720,000 or 49% of net revenues for the
year ended December 31, 1997. The increase resulted from greater sales volume
and a higher average sales price per laser in 1998 compared to 1997. The
increase in sales volumes in 1998 resulted in increased production volumes which
resulted in lower per unit manufacturing costs as a result of production
efficiencies.
RESEARCH AND DEVELOPMENT
Research and development expenditures of $14,175,000 increased $2,168,000 or
18% for the year ended December 31, 1998 when compared to $12,007,000 for the
year ended December 31, 1997. The increase in these expenses reflected a higher
level of costs related to the development of new products, and increases in the
number of clinical trials and the cost of supporting these trials.
On February 11, 1999, Eclipse received FDA approval for the TMR 2000 laser
system. TMR with the Eclipse TMR 2000 laser system is approved for treatment of
stable patients with angina (Canadian Cardiovascular Society Class 4) refractory
to medical treatment and secondary to objectively demonstrated coronary artery
atherosclerosis and with a region of the myocardium with reversible ischemia not
amenable to direct coronary revascularization.
Eclipse's products for other indications are currently in clinical trials
and therefore subject to limitations by the FDA. Eclipse believes that continued
investment in the development of new and improved products and procedures and
continued investment in Eclipse's clinical trials is critical to its future
success. As a result of the FDA approval of the Eclipse surgical TMR system and
the coverage notice by HCFA during 1999, it is anticipated that the level of
research and development expenditures incurred in connection with clinical
trials will decrease(1). There can be no assurance that Eclipse's future
revenues will be sufficient to cover the research and development expenses
required in connection with ongoing efforts including current and future
clinical trials.
SALES AND MARKETING
Sales and Marketing expenditures of $11,417,000 increased $4,072,000 or 55%
for the year ended December 31, 1998 when compared to $7,345,000 for the year
ended December 31, 1997. The increase is due primarily to increases in
headcount, sales commissions and physician training. Eclipse expects that sales
and marketing expenses will continue to increase as Eclipse continues to focus
resources on the development of the TMR and PTMR market(1).
- ------------------------
(1) Forward looking statement.
19
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased by $417,000 or 10% to
$3,619,000 in 1998 from $4,036,000 in 1997. The decrease in 1998 as compared to
1997 reflected a decrease in investor relations costs.
INTEREST AND OTHER INCOME (EXPENSE), NET
Interest and other income of $1,673,000 decreased $773,000 or 32% for the
year ended December 31, 1998 when compared to $2,446,000 for the year ended
December 31, 1997. This decrease was due primarily to lower cash balances and
lower investments in marketable securities in 1998.
In November 1998, the Company contributed certain licenses, patents, and
other intellectual property and the MicroHeart name to MicroHeart Holdings, Inc.
("MHH") in exchange for MHH common stock, representing less than 1% of MHH's
outstanding common stock and two warrants to acquire MHH common stock for an
aggregate exercise price of approximately $290,000. In addition, the Company has
agreed to perform research and development related to the contributed technology
over the next 6 months, for which the Company will be paid $1,120,000 by MHH.
Eclipse has recorded a $400,000 investment and related gain on the contributed
technology and revenue of $290,000 related to research and development performed
on the contributed technology in the year ended December 31, 1998.
Interest expense of $83,000 increased $58,000 or 232% for the year ended
December 31, 1998 when compared to $25,000 for the year ended December 31, 1997.
This increase was a result of a note payable held by Eclipse's subsidiary,
MicroHeart, Inc. from October 1997 to October 1998.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
NET REVENUES
Net revenues of $5,499,000 for the year ended December 31, 1997 decreased
$4,260,000 or 44% when compared to net revenues of $9,759,000 for the year ended
December 31, 1996. The decrease resulted primarily from a change in the mix of
lasers sold versus placed. This change was primarily due to a HCFA policy
effective May 19, 1997 which restricted Medicare reimbursement for TMR equipment
and procedures. Eclipse's products had received third party reimbursement under
the preceding HCFA policy. Reimbursement was a significant factor considered by
hospitals in determining whether to acquire new equipment.
GROSS PROFIT
Gross profit decreased to $2,720,000 or 49% of net revenues for the year
ended December 31, 1997 as compared to $6,201,000 or 64% of net revenues for the
year ended December 31, 1996. The decrease resulted from a higher level of
manufacturing overhead associated with facility and infrastructure expansion
including increased headcount, as well as a lower average sales price per laser
in 1997 due to the higher mix of lasers placed versus sold in 1997 as compared
to 1996.
RESEARCH AND DEVELOPMENT
Research and development expenditures of $12,007,000 increased $5,824,000 or
94% for the year ended December 31, 1997 when compared to $6,183,000 for the
year ended December 31, 1996. The increase in these expenses reflected a higher
level of costs related to the development of new products, increases in the
number of clinical trials and the cost of supporting these trials, and an
increase in headcount to 39 at December 31, 1997 from 25 research and
development employees at December 31, 1996.
20
SALES AND MARKETING
Sales and marketing expenditures of $7,345,000 increased $4,018,000 or 121%
for the year ended December 31, 1997 when compared to $3,327,000 for the year
ended December 31, 1996. The increase was due primarily to a headcount increase
to 27 in 1997 from nine in 1996, which resulted in significant increases in
salary, commission and travel expenses. The additional headcount has been
utilized in the areas of international sales, service, training and clinical
support to the increasing number of clinical sites.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased to $4,036,000 in 1997 from
$2,403,000 in 1996. The increase for the year ended December 31, 1997 as
compared to for the year ended December 31, 1996 reflected an increase in patent
and patent related expenses. At December 31, 1997, Eclipse had 30 patents or
allowed patent applications and 32 patent applications pending relating to
various aspects of TMR, PTMR and other cardiovascular therapies as compared to
five and 29, respectively, at December 31, 1996. The increase also reflected
expenses related to being a publicly traded company, including investor
relations fees, legal, accounting and stock administration expenses, which were
incurred throughout the year in 1997 as compared to seven months in 1996.
INTEREST AND OTHER INCOME (EXPENSE), NET
Interest income of $2,446,000 increased $694,000 or 40% for the year ended
December 31, 1997 as compared to $1,752,000 for the year ended December 31,
1996. This increase was due primarily to the funds received in connection with
an initial public offering in May 1996 being invested for twelve months in 1997
as compared to seven months in 1996.
Interest expense of $25,000 decreased $171,000 or 87% for the year ended
December 31, 1997 as compared to $196,000 for the year ended December 31, 1996.
This decrease reflected the use of funds from the initial public offering to
repay debt, resulting in a lower debt level in 1997 as compared to 1996.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short and long-term marketable securities were
$8,339,000 at December 31, 1998 compared to $35,194,000 at December 31, 1997, a
decrease of 76%. Marketable securities are classified as "available-for-sale"
and are readily marketable at their fair market value. Eclipse used $27,324,000
of cash for operating activities, including funding its operating loss and
increases in accounts receivable and inventory in 1998.
Since its inception, Eclipse has satisfied its capital requirements
primarily through sales of its equity securities and, to a lesser extent, loans
from shareholders. In addition, Eclipse's operations have been funded in part
through sales of Eclipse's products. At December 31, 1998, Eclipse had an
accumulated deficit of $48,772,000.
Eclipse anticipates that its current cash, cash equivalents and marketable
securities will be sufficient to meet Eclipse's funding requirements through at
least December 31, 1999(1). There can be no assurance, however, that Eclipse
will not require additional sources of cash at an earlier date in the future,
depending upon the progress of expansion of Eclipse's clinical trials, any need
for additional clinical trials or other testing of Eclipse's products, and the
timing of other required expenditures as indicated above. If Eclipse is required
to obtain additional financing in the future, there can be no assurance that
capital will be available on terms acceptable to Eclipse, if at all.
- ------------------------
(1) Forward looking statement.
21
RECENTLY ISSUED ACCOUNTING STANDARDS
Management does not believe that there are any recently issued accounting
standards not yet adopted by Eclipse, the future adoption of which will have a
material impact on Eclipse's financial position or results of operations.
YEAR 2000 COMPLIANCE
The Year 2000 compliance issue (in which systems do not properly recognize
date sensitive information when the year changes to 2000) creates risks for
Eclipse if internal data management, accounting, manufacturing and/or
operational software and systems do not adequately or accurately process or
manage day or date information beyond the year 1999. To address the issue
Eclipse has assembled a cross-functional project team to review and assess
internal software, data management and accounting, manufacturing and operational
systems to ensure that they do not malfunction as a result of the Year 2000 date
transition. The project team has identified the following systems which are in
the process of being evaluated:
Security systems Network equipment
Facility systems Printers, copiers and fax machines
Telephony Server tape backups
Servers Testing equipment
Personal computers Miscellaneous software
The vast majority of Eclipse's information systems hardware and software is
already Year 2000 compliant. These same hardware and software systems are used
for process controls in Eclipse's manufacturing operations which do not depend
otherwise upon date data oriented equipment. Eclipse does not anticipate any
material disruption in its operations as a result of any failure by Eclipse to
be in Year 2000 compliance(1). Eclipse will estimate the cost to modify its
systems to be Year 2000 compliant as part of its assessment phase, however, at
present, Eclipse does not anticipate that the cost will be material to its
financial condition or results of operations(1). To date as well, Eclipse
believes that the cost is not material to its financial condition or results of
operations.
Eclipse's products have no internal date clocks, do not use software that is
dependent on date data processing and do not have electrical ports for
connection of other devices that require date date processing. This means that
Eclipse products, when used as intended by Eclipse in accordance with Eclipse
procedures and user/service manuals, will not be affected by the change from
1999 to 2000.
Eclipse is also working with its suppliers of products, services and systems
to assure that the products, services and systems supplied to Eclipse, and the
products Eclipse supplies to its customers, are Year 2000 compliant. As a
contingency plan, Eclipse intends to maintain higher inventory levels at year
end to mitigate any possible supplier delays. With respect to compliance of the
products Eclipse supplies to its customers, the efforts are complete as
Eclipse's products are not dependent upon date data processing and the products
do not have electrical ports for connection of other devices.
Eclipse has not found it necessary to delay or cancel any internal services,
programs, or projects as a result of its preparatory activities for Year 2000
compliance. Eclipse does not anticipate any material disruption in its
operations as a result of any internal or external failures to be in Year 2000
compliance, however, Eclipse is prepared, as a worse-case scenario, for minor
delivery delays in the receipt of materials and services(1).
Eclipse expects that its Year 2000 compliance project will be completed
prior to the second quarter of fiscal 1999 and will not have a material adverse
effect on Eclipse's financial condition or overall trends in the results of
operations(1). However, there can be no assurance that unexpected delays or
problems,
- ------------------------
(1) Forward looking statement.
22
including the failure to ensure the Year 2000 compliance of systems, services or
products supplied to Eclipse by a third party, will not have an adverse effect
on Eclipse, its financial performance, or the competitiveness or customer
acceptance of its products. Further, Eclipse's current understanding of expected
costs is subject to change as the project progresses and does not include the
potential cost of internal software and hardware replaced in the normal course
of business.
FACTORS AFFECTING FUTURE RESULTS
ECLIPSE HAS IDENTIFIED CERTAIN FORWARD-LOOKING STATEMENTS IN THE
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS AND ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K WITH A FOOTNOTE(1)
SYMBOL. ECLIPSE MAY ALSO MAKE ORAL FORWARD-LOOKING STATEMENTS FROM TIME TO TIME.
ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE PROJECTED IN ANY SUCH
FORWARD-LOOKING STATEMENTS DUE TO A NUMBER OF FACTORS, INCLUDING THOSE SET FORTH
BELOW AND ELSEWHERE IN THIS FORM 10-K.
ECLIPSE OPERATES IN A DYNAMIC AND RAPIDLY CHANGING ENVIRONMENT THAT INVOLVES
NUMEROUS RISKS AND UNCERTAINTIES. THE FOLLOWING SECTION LISTS SOME, BUT NOT ALL,
OF THOSE RISKS AND UNCERTAINTIES WHICH MAY HAVE A MATERIAL ADVERSE EFFECT ON
ECLIPSE'S BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS. THIS SECTION
SHOULD BE READ IN CONJUNCTION WITH THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES THERETO INCLUDED IN PART IV--ITEM 14 OF THIS ANNUAL REPORT ON FORM
10-K.
ECLIPSE MAY FAIL TO OBTAIN REQUIRED REGULATORY APPROVALS TO MARKET ITS
PRODUCTS IN THE UNITED STATES. Eclipse may not be able to obtain the regulatory
approval required for commercial sale of its laser systems in a timely manner.
On February 11, 1999, Eclipse received final approval from the FDA for its TMR
products for certain indications but, to date, none of its PTMR laser systems
has been approved for sale in the U.S.
The business, financial condition and results of operations of Eclipse could
be materially and adversely affected by any of the following events,
circumstances or occurrences related to the regulatory process:
- delays in initiating or completing clinical trials or in the receipt of
regulatory approvals;
- the failure to obtain regulatory approvals for such products;
- significant limitations in the indicated uses for which such products may
be marketed; or
- substantial costs incurred in obtaining such approvals.
Eclipse must submit and the FDA must approve applications for preliminary
market approval, known as a PMA, before it can sell its laser systems as medical
devices. Before submitting a PMA application, Eclipse must complete clinical
testing to demonstrate the safety and effectiveness of their products.
In 1997, Eclipse submitted a PMA application to the FDA for certain
applications of its TMR laser system. On October 27, 1998, an advisory panel of
the FDA recommended that the FDA approve Eclipse's PMA application for the TMR
laser system. Along with its approval, the FDA panel requested that Eclipse
conduct postmarket surveillance in a form to be determined through further
discussions with the FDA. On February 11, 1999, Eclipse received final approval
from the FDA for its TMR products. Eclipse also has applied for and received
IDEs to engage in various clinical trials of its PTMR products and procedures.
Eclipse must successfully complete clinical trials of its PTMR products and
procedures before filing a PMA application for those products and procedures.
ECLIPSE PRODUCTS MAY CONTAIN DEFECTS WHICH COULD DELAY REGULATORY APPROVAL
OR MARKET ACCEPTANCE OF ITS PRODUCTS. Eclipse may experience future product
defects, malfunctions, manufacturing difficulties or recalls related to the
lasers or other components used in its laser systems. Any such occurrence could
cause a delay in future regulatory approvals or adversely affect the acceptance
of its products and could have a material adverse effect on Eclipse's business,
financial condition and results of operations.
23
ECLIPSE MAY FAIL TO COMPLY WITH INTERNATIONAL REGULATORY REQUIREMENTS AND
COULD BE SUBJECT TO REGULATORY DELAYS, FINES OR OTHER PENALTIES. Regulatory
requirements in foreign countries for international sales of medical devices
often vary from country to country. The impact of the following factors would
have a material adverse effect on Eclipse's business, financial condition and
results of operations:
- delays in receipt of, or failure to receive, foreign regulatory approvals
or clearances;
- the loss of previously obtained approvals or clearances; or
- the failure to comply with existing or future regulatory requirements.
Eclipse's products are subject to other regulatory requirements in the
European Union and other countries. Any enforcement action by regulatory
authorities with respect to past or future regulatory noncompliance could have a
material adverse effect on Eclipse's business, financial condition and results
of operations.
The time required to obtain approval for sale in foreign countries may be
longer or shorter than required for FDA approval, and the requirements may
differ. In addition, there may be foreign regulatory barriers other than
regulatory approval. Except as stated in the following sentence, the FDA must
approve exports of devices that require a PMA but are not yet approved
domestically. An unapproved device may be exported without prior FDA approval to
any member country of the European Union and the other "listed" countries,
including Australia, Canada, Israel, Japan, New Zealand, Switzerland and South
Africa:
- if the device is approved for sale by that country; or
- the device is for investigational use in accordance with the laws of that
country.
Eclipse received the CE Mark for its TMR laser system in December 1996 and
for its PTMR laser system in July 1998. In the European Economic Area, Eclipse
will be:
- subject to continued supervision;
- required to report any serious adverse incidents to the appropriate
authorities; and
- required to comply with additional national requirements that are outside
the scope of the Medical Device Directive.
Eclipse became ISO 9001 certified in May 1997. Eclipse may not be able to:
- achieve or maintain the compliance required for CE marking on all or any
of its products; or
- produce its products profitably and in a timely manner while complying
with the requirements of the Medical Device Directive and other regulatory
requirements.
If Eclipse fails to comply with the applicable regulatory requirements it
could face:
- fines, injunctions, civil penalties;
- recalls or seizures of products;
- total or partial suspensions of production;
- refusals by foreign governments to permit product sales; and
- criminal prosecution.
Furthermore, if existing regulations are changed or new regulations or
policies are adopted, Eclipse may:
- not be able to obtain, or affect the timing of, future regulatory
approvals or clearances;
- not be able to obtain necessary regulatory clearances or approvals on a
timely basis or at all; and
24
- be required to incur significant costs in obtaining or maintaining such
foreign regulatory approvals.
ECLIPSE PRODUCTS ARE EXPERIMENTAL AND HAVE NOT BEEN BROADLY ADOPTED BY THE
MEDICAL COMMUNITY AND UNLESS THEY ARE BROADLY ADOPTED ECLIPSE'S BUSINESS WILL BE
ADVERSELY AFFECTED. TMR and PTMR products using lasers are experimental and
have not yet achieved broad clinical adoption. Eclipse cannot predict whether or
at what rate and how broadly its products will be adopted by the medical
community. The business, financial condition and results of operations of
Eclipse may be adversely affected if:
- its products fail to achieve significant clinical adoptions; or
- its TMR or PTMR laser systems fail to achieve significant market
acceptance.
Positive endorsements by physicians are essential for clinical adoption of
TMR and PTMR laser systems. Even if the clinical efficacy of TMR and PTMR laser
systems is established, physicians may elect not to recommend TMR or PTMR laser
systems for any number of reasons. The reasons why TMR or PTMR laser systems may
effectively treat coronary artery disease are not well understood. Although
Eclipse intends to use research, development and clinical efforts to understand
better the physiological effects of TMR and PTMR treatments, Eclipse may not
achieve such understanding on a timely basis, or at all. TMR and PTMR laser
systems may not be clinically adopted unless Eclipse:
- understands thoroughly the physiological effects of the products; and
- disseminates such understanding within the medical community.
Clinical adoption of these products will also depend upon:
- the ability of Eclipse to facilitate training of cardiothoracic surgeons
and interventional cardiologists in TMR and PTMR therapy; and
- the willingness of such physicians to adopt and recommend such procedures
to their patients.
Patient acceptance of the procedure will depend on:
- physician recommendations;
- the degree of invasiveness;
- the effectiveness of the procedure; and
- the rate and severity of complications associated with the procedure as
compared to other procedures.
ECLIPSE PRODUCTS DEPEND ON TMR TECHNOLOGY WHICH IS RAPIDLY CHANGING, WHICH
COULD REQUIRE ECLIPSE TO INCUR SUBSTANTIAL PRODUCT DEVELOPMENT EXPENDITURES TO
RESPOND TO INDUSTRY CHANGES. TMR and PTMR laser systems are the only products
of Eclipse. Accordingly, if Eclipse fails to develop and commercialize
successfully its TMR and PTMR laser systems, then its business, financial
condition and results of operations would be materially adversely affected.
The medical device industry is characterized by rapid and significant
technological change. The future success of Eclipse will depend in large part on
its ability to respond to such changes. In addition, Eclipse must expand the
indications and applications for its products by developing and introducing
enhanced and new versions of its TMR and PTMR laser systems. Product research
and development requires substantial expenditures and is inherently risky.
Eclipse may not be able to:
- identify products for which demand exists; or
- develop products that have the characteristics necessary to treat
particular indications.
Even if Eclipse identifies and develops such products, it may not receive
regulatory approval and may not be commercially successful.
25
THIRD PARTIES MAY LIMIT THE DEVELOPMENT AND PROTECTION OF ECLIPSE'S
INTELLECTUAL PROPERTY WHICH COULD ADVERSELY AFFECT ITS COMPETITIVE
POSITION. The success of Eclipse is dependent in large part on its ability to:
- obtain patent protection for its products and processes;
- preserve its trade secrets and proprietary technology; and
- operate without infringing upon the patents or proprietary rights of third
parties.
The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights. Companies in the
medical device industry have employed intellectual property litigation to gain a
competitive advantage. Certain competitors and potential competitors of Eclipse
have obtained U.S. patents covering technology that could be used for certain
TMR and PTMR procedures. There can be no assurance such competitors, potential
competitors or others have not filed and do not hold international patents
covering other TMR or PTMR technology. In addition, international patents may
not be interpreted the same as any counterpart U.S. patents.
In September 1995, one of Eclipse's competitors sent Eclipse a notice of
potential infringement of their patent regarding a method for TMR utilizing
synchronization of laser pulses to the electrical signals from the heart. After
discussion with patent counsel, Eclipse concluded that it did not utilize the
process and/or apparatus that was the subject of the patent at issue, and
Eclipse provided a response to the competitor to that effect. Eclipse has not
received any additional correspondence from this competitor on these matters.
While Eclipse periodically reviews the scope of its patents and other
relevant patents of which it is aware, the question of patent infringement
involves complex legal and factual issues. Any conclusion regarding infringement
may not be consistent with the resolution of any such issues by a court.
Eclipse may not be able to protect its intellectual property because:
- patents may not be issued;
- patents may be challenged, invalidated or designed around by competitors;
or
- patent protection may not continue to be available for surgical methods in
the future.
COSTLY LITIGATION MAY BE NECESSARY TO PROTECT INTELLECTUAL PROPERTY
RIGHTS. Eclipse may have to engage in time consuming and costly litigation to
protect its intellectual property rights or to determine the proprietary rights
of others.
In addition, Eclipse may become subject to:
- patent infringement claims or litigation; or
- interference proceedings declared by the U.S. Patent Office to determine
the priority of inventions.
Defending and prosecuting intellectual property suits, U.S. Patent Office
interference proceedings and related legal and administrative proceedings are
both costly and time-consuming. Eclipse may be required to litigate further to:
- enforce its issued patents;
- protect its trade secrets or know-how; or
- determine the enforceability, scope and validity of the proprietary rights
of others.
Any litigation or interference proceedings will result in:
- substantial expense; and
- a significant diversion of effort by technical and management personnel.
26
If the results of such litigation or interference proceedings are adverse to
Eclipse, then the results may:
- subject Eclipse to significant liabilities to third parties;
- require Eclipse to seek licenses from third parties;
- prevent Eclipse from selling its products in certain markets, or at all;
or
- require Eclipse to modify its products.
Although patent and intellectual property disputes regarding medical devices
are often settled through licensing and similar arrangements, costs associated
with such arrangements may be substantial and could include ongoing royalties.
Furthermore, there can be no assurance that the necessary licenses would be
available on satisfactory terms, if at all.
Adverse determinations in a judicial or administrative proceeding or failure
to obtain necessary licenses could prevent Eclipse from manufacturing and
selling its products. This would have a material adverse effect on Eclipse's
business, financial condition and results of operations.
ECLIPSE RELIES ON PATENT AND TRADE SECRET LAWS WHICH ARE COMPLEX AND MAY BE
DIFFICULT TO ENFORCE. The validity and breadth of claims in medical technology
patents involve complex legal and factual questions and, therefore, may be
highly uncertain. Issued patents or patents based on pending patent applications
or any future patent application may not exclude competitors or may not provide
a competitive advantage to Eclipse. In addition, patents issued or licensed to
Eclipse may not be held valid if subsequently challenged and others may claim
rights in or ownership of such patents.
Furthermore, there can be no assurance that competitors:
- have not developed or will not develop similar products;
- will not duplicate products of Eclipse; or
- will not design around any patents issued to or licensed by Eclipse.
Since patent applications in the U.S. are maintained in secrecy until
patents issue, Eclipse cannot be certain:
- others did not first file applications for inventions covered by their
pending patent applications; nor
- that they will not infringe any patents that may issue to others on such
applications.
The U.S. patent laws were recently amended to exempt physicians, other
healthcare professionals, and affiliated entities from infringement liability
for medical and surgical procedures performed on patients. Eclipse is not able
to predict if this amendment will materially affect its ability to protect its
proprietary methods and procedures.
Competitors may:
- independently develop proprietary information substantially equivalent to
the proprietary information and techniques of Eclipse; or
- otherwise gain access to its proprietary technology.
In addition to its patents, Eclipse relies upon trade secrets, technical
know-how and continuing technological innovation to develop and maintain its
competitive position. Eclipse may not be able to meaningfully protect its
unpatented technology because:
- its employees, consultants and advisors may breach their confidentiality
and invention assignment agreements and there may not be an adequate
remedy for such breach;
27
- its competitors may independently develop substantially equivalent
proprietary information and techniques; or
- competitors may otherwise gain access to Eclipse's proprietary technology.
The inability of Eclipse to protect its unpatented intellectual property
could materially adversely affect its business.
ECLIPSE FACES INTENSE COMPETITION AND COMPETITIVE PRODUCTS COULD RENDER ITS
PRODUCTS OBSOLETE. The market for TMR and PTMR laser systems is intensely
competitive and is constantly becoming more competitive. If competitors are more
effective in developing new products and procedures and marketing existing and
future products, the business, financial condition and results of operations of
Eclipse may be materially adversely affected.
The market for TMR and PTMR laser systems is characterized by rapid
technical innovation. Accordingly, competitors may succeed in developing TMR and
PTMR products or procedures that:
- are more effective than products marketed by Eclipse;
- are more effectively marketed than products marketed by Eclipse; or
- may render the products or technology of Eclipse obsolete.
Eclipse competes with:
- PLC Systems, Inc.;
- U.S. Surgical Corporation; and
- Johnson & Johnson.
Each of these competitors are currently selling TMR and/or PTMR products for
investigational use in the U.S. and abroad. Certain companies, including PLC,
have:
- completed enrollment in randomized clinical trials of products and
procedures involving TMR; and
- received regulatory approvals in U.S. and Europe to begin commercially
marketing their various TMR products.
Earlier entrants in the market in a therapeutic area often obtain and
maintain greater market share than later entrants. PLC obtained a PMA approval
of it's TMR laser system in 1998 and thus, would be able to capture a greater
market share.
Even with the FDA approval for it's TMR laser, will face competition for
market acceptance and market share for that product. Eclipse's ability to
compete may depend in significant part on the timing of the introduction of
competitive products into the market, which will be affected by the pace,
relative to competitors, at which it is able to:
- develop products;
- complete clinical testing and regulatory approval processes;
- obtain third party reimbursement acceptance; and
- supply adequate quantities of the product to the market.
ECLIPSE SELLS ITS PRODUCTS INTERNATIONALLY WHICH SUBJECTS IT TO CERTAIN
SIGNIFICANT RISKS OF TRANSACTING BUSINESS IN FOREIGN COUNTRIES. The
international revenue of Eclipse is subject to the following risks:
- foreign currency fluctuations;
- economic or political instability;
28
- foreign tax laws;
- shipping delays;
- various tariffs and trade regulations;
- restrictions and foreign medical regulations;
- customs duties, export quotas or other trade restrictions; and
- difficulty in protecting intellectual property rights.
Any of these factors could have a material adverse effect on the business,
financial condition and results of operations of Eclipse.
ECLIPSE'S PRODUCTS ALSO COMPETE WITH ALTERNATIVE TREATMENT METHODS AND ITS
PRODUCTS MUST REPLACE THESE METHODS TO BE COMMERCIALLY SUCCESSFUL. Many of the
medical indications that may be treatable with TMR and PTMR laser systems are
currently being treated by drug therapies or surgery and other interventional
therapies, including percutanous transluminal coronary angioplasty (known as
PTCA) and coronary artery bypass grafts.
The business, financial condition and results of operations of Eclipse would
be materially adversely affected if TMR technology fails:
- to replace or augment existing therapies; or
- to be more effective, safer or more cost effective than new therapies.
A number of the existing therapies:
- are widely accepted in the medical community;
- have a long history of use; and
- continue to be enhanced rapidly.
Procedures using TMR and PTMR technology may not be able to replace or
augment such established treatments. Clinical research results may not support
the use of TMR or PTMR procedures to augment or replace existing treatments.
Others are developing new surgical procedures and new drug therapies to
treat coronary artery disease. These new procedures and drug therapies could be
more effective, safer or more cost effective than TMR and PTMR laser systems.
The market acceptance and commercial success of Eclipse's TMR and PTMR laser
systems will depend not only upon their safety and effectiveness, but also upon
the relative safety and effectiveness of alternative treatments.
ECLIPSE HAS A HISTORY OF LOSSES AND MAY NOT BE PROFITABLE IN THE
FUTURE. Eclipse has incurred significant losses since inception and may not
achieve or sustain profitability in the future. Eclipse's revenues and operating
income will be constrained:
- until such time, as Eclipse obtains FDA and other regulatory approvals for
its PTMR products;
- for an uncertain period of time after such approvals are obtained; and
- until the medical community embraces laser systems as an effective
treatment for coronary artery disease.
29
IF ECLIPSE EXPERIENCES INCREASED DEMAND FOR ITS PRODUCTS, IT MAY NOT BE ABLE
TO EXPAND ITS BUSINESS TO MEET SUCH DEMAND. Eclipse may be required to expand
its business to:
- complete the clinical trials that are currently in progress;
- prepare additional products for clinical trials;
- develop future products; and
- generally compete successfully.
Such expansion could place a significant strain on Eclipse's managerial,
operational and financial systems and resources. To accommodate such expansion
and compete effectively, Eclipse must:
- improve information systems, procedures and controls; and
- expand, train, motivate and manage its employees.
ECLIPSE DEPENDS ON SINGLE SOURCE SUPPLIERS FOR CERTAIN KEY COMPONENTS AND
PRODUCTION COULD BE INTERRUPTED IF A KEY SUPPLIER HAD TO BE REPLACED. Eclipse
currently purchases certain critical laser and fiber-optic components from
single sources. Although Eclipse has identified alternative suppliers, a lengthy
process would be required to qualify them as additional or replacement
suppliers. Any significant interruption in the supply of critical materials or
components could adversely affect the ability of Eclipse to manufacture its
products and could materially adversely affect its manufacturing operations,
business and results of operations.
Eclipse anticipates that products will be manufactured based on forecasted
demand and will seek to purchase subassemblies and components in anticipation of
the actual receipt of purchase orders from customers. Lead times for materials
and components vary significantly and depend on factors such as the business
practices of each specific supplier and the terms of particular contracts, as
well as the overall market demand for such materials and components at any given
time. If the forecasts are inaccurate, Eclipse could experience fluctuations in
inventory levels, resulting in excess inventory, or shortages of critical
components, either of which could materially adversely affect its business and
results of operations.
Certain suppliers to Eclipse could have difficulty expanding their
manufacturing capacity to meet the needs of Eclipse if demand for Eclipse's TMR
and PTMR laser systems were to increase rapidly or significantly. In addition,
any defect or malfunction in the laser or other products provided by such
suppliers could cause a delay in regulatory approvals or adversely affect
product acceptance. There can be no assurance that:
- materials obtained from outside suppliers will continue to be available in
adequate quantities; or
- alternative suppliers can be located on a timely basis.
Eclipse operates on a purchase order basis with most of its suppliers. Such
vendors could at any time determine to cease the supply and production of such
components.
ECLIPSE HAS LIMITED MANUFACTURING EXPERIENCE WHICH COULD PREVENT IT FROM
SUCCESSFULLY INCREASING CAPACITY IN RESPONSE TO MARKET DEMAND. Eclipse has
limited experience in manufacturing products. Manufacturers often encounter
difficulties in increasing production, including problems involving:
- production yields;
- adequate supplies of components;
- quality control and assurance (including failure to comply with GMP
regulations, international quality standards and other regulatory
requirements); and
- shortages of qualified personnel.
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