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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO __________
COMMISSION FILE NUMBER 000-50884
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STEREOTAXIS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-3120386
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER
OR ORGANIZATION) IDENTIFICATION NUMBER)
4041 FOREST PARK AVENUE
ST. LOUIS, MO 63108
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP CODE)
(314) 615-6940
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.001 Par Value
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. / /
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes / / No /X/
The initial public offering of the registrant's common stock was completed
on August 12, 2004, prior to which date there was no public market in the
registrant's common equity.
The number of outstanding shares of the registrant's common stock on
February 28, 2004 was 27,206,460.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's next Annual Meeting of
Stockholders are incorporated by reference into Part III of this Form 10-K.
STEREOTAXIS, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
PAGE
----
PART I.
Item 1. Business 3
Item 2. Properties 28
Item 3. Legal Proceedings 28
Item 4. Submission of Matters to a Vote of Security Holders 28
PART II.
Item 5. Market for the Registrant's Common Equity, Related
Stockholder Matters and Registrant Purchases of Equity
Securities 29
Item 6. Selected Financial Data 30
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 30
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 54
Item 8. Financial Statements and Supplementary Data 55
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 80
Item 9a. Controls and Procedures 80
Item 9b. Other Information 80
PART III.
Item 10. Directors and Executive Officers of the Registrant 80
Item 11. Executive Compensation 81
Item 12. Security Ownership of Certain Beneficial Owners and
Management 81
Item 13. Certain Relationships and Related Transactions 81
Item 14. Principal Accounting Fees and Services 81
PART IV.
Item 15. Exhibits and Financial Statement Schedules 82
SIGNATURES 83
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS 85
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 56
INDEX TO EXHIBITS 86
2
PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K, including the sections entitled
"Business" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations", contains forward-looking statements. These
statements relate to, among other things:
* our business strategy;
* our value proposition;
* the ability of physicians to perform certain medical procedures with
our products safely, effectively and efficiently;
* the adoption of our products by hospitals and physicians;
* the market opportunity for our products, including expected demand
for our products;
* the timing and prospects for regulatory approval of our additional
disposable interventional devices;
* our plans for hiring additional personnel;
* our estimates regarding our capital requirements; and
* any of our other plans, objectives, expectations and intentions
contained in this annual report that are not historical facts.
These statements relate to future events or future financial
performance, and involve known and unknown risks, uncertainties and other
factors that may cause our actual results, levels of activity, performance
or achievements to be materially different from any future results, levels
of activity, performance or achievements expressed or implied by such
forward-looking statements. In some cases, you can identify forward-looking
statements by terminology such as "may", "will", "should", "could",
"expects", "plans", "intends", "anticipates", "believes", "estimates",
"predicts", "potential" or "continue" or the negative of such terms or
other comparable terminology. Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot
guarantee future results, levels of activity, performance or achievements.
These statements are only predictions.
Factors that may cause our actual results to differ materially from
our forward-looking statements include, among others, changes in general
economic and business conditions and the risks and other factors set forth
in "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Factors that May Affect Future Results" and elsewhere in
this annual report on Form 10-K.
Our actual results may be materially different from what we expect.
We undertake no duty to update these forward-looking statements after the
date of this annual report, even though our situation may change in the
future. We qualify all of our forward-looking statements by these
cautionary statements.
OVERVIEW
We design, manufacture and market an advanced cardiology instrument
control system for use in a hospital's interventional surgical suite, or
"cath lab", that we believe revolutionizes the treatment of coronary artery
disease and arrhythmias by enabling important new therapeutic solutions and
enhancing the efficiency and efficacy of existing catheter-based, or
interventional, procedures. Our Stereotaxis System allows physicians to
more effectively navigate proprietary catheters, guidewires and stent
delivery devices, both our own and those we are co-developing
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with strategic partners, through the blood vessels and chambers of the
heart to treatment sites and then to effect treatment. This is achieved
using computer-controlled, externally applied magnetic fields that
precisely and directly govern the motion of the internal, or working, tip
of the catheter, guidewire or stent delivery device. We believe that our
Stereotaxis System represents a revolutionary technology in the cath lab,
bringing precise remote digital instrument control and programmability to
the cath lab, and has the potential to become the standard of care for a
broad range of complex cardiology procedures.
We believe that our Stereotaxis System is the only technology to be
commercialized that allows remote, computerized control of catheters,
guidewires and stent delivery devices directly at their working tip. To our
knowledge, we have no direct competitors in this field. We also believe
that our technology represents an important advance in the ongoing trend
toward digital instrumentation in the cath lab and provides substantial,
clinically important improvements and cost efficiencies over manual
interventional methods, which require years of physician training and often
result in long and unpredictable procedure times and sub-optimal
therapeutic outcomes.
We began commercial shipments in 2003, following U.S. and European
regulatory approval of the core components of the Stereotaxis System, and
had revenues of approximately $18.8 million in 2004 and $5.0 million in
2003. As of December 31, 2004, we had sold and delivered 30 Stereotaxis
Systems, including 20 in the U.S. and 10 internationally, and physicians
have used these systems to perform approximately 1,100 cardiology
procedures. We also had purchase orders and other commitments for an
additional $20 million of our Stereotaxis Systems. There can be no assurance
that we will recognize revenue in any particular period or at all because
some of our purchase orders and other commitments are subject to
contingencies that are outside our control. In addition, these orders and
commitments may be revised, modified or canceled, either by their express
terms, as a result of negotiations or by project changes or delays.
The Stereotaxis System is designed primarily for the interventional
treatment of coronary artery disease, or interventional cardiology, and for
the interventional treatment of abnormal heart rhythms known as
arrhythmias, or electrophysiology. Our Stereotaxis System consists of the
following proprietary components:
* our NIOBE cardiology magnet system, which utilizes permanent magnets
to navigate catheters, guidewires and stent delivery devices through
complex paths in the blood vessels and chambers of the heart to carry
out treatment;
* our NAVIGANT advanced user interface, or physician control center,
which physicians use to visualize and track procedures and to provide
instrument control commands that govern the motion of the working tip
of the catheter, guidewire or stent delivery device;
* our CARDIODRIVE automated catheter advancer, which is used to
remotely advance and retract the catheter in the patient's heart; and
* our suite of interventional catheters, guidewires and stent delivery
devices, which we refer to as disposable interventional devices.
The Stereotaxis System is designed to be installed in both new and
replacement cath labs worldwide. We currently have regulatory clearance to
market our NIOBE cardiology magnet system, our NAVIGANT advanced user
interface, our CARDIODRIVE automated catheter advancer and various
disposable interventional devices in the U.S. and in the European Union,
and we anticipate applying through Siemens and J&J to begin clinical trials
in Japan in 2005. Current and potential purchasers of our Stereotaxis
System include leading research and academic hospitals as well as medium
and high volume commercial and regional medical centers around the world.
We estimate that there are more than 750 new and replacement cardiology
cath labs being installed worldwide each year. We also estimate that the
initial imaging equipment and installation costs for a new or replacement
cardiology cath lab today can range as high as $2 million, for a total
cardiology cath lab installation market potentially in excess of $1.5
billion per year.
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The market for cardiovascular medical devices worldwide exceeds $12
billion per year and is estimated to be growing at 12% annually. Physicians
are currently performing approximately 1.8 million interventional
cardiology procedures and approximately 800,000 electrophysiology
procedures worldwide each year. This procedure base continues to grow, due
to patient demand for less invasive procedures, cost containment pressure
and an increasing incidence of coronary artery disease and arrhythmias.
While the Stereotaxis System potentially has broad applicability for many
of these procedures, we believe that it can provide significant advantages
relative to manual interventional methods for approximately 15% of
interventional cardiology procedures, or approximately 270,000 procedures
annually, including procedures for stent delivery and the treatment of
complex lesions. In electrophysiology, we believe that the Stereotaxis
System can provide significant advantages for approximately 30% of
procedures, or about 240,000 procedures annually, including procedures for
ablation and the placement of pacing leads. As a result, we believe that
the Stereotaxis System can provide substantial clinical benefits compared
to manual interventional methods in more than 500,000 worldwide annual
procedures.
The Stereotaxis System is designed to address the needs of patients,
hospitals, physicians, and third-party payors on a cost-effective basis by:
* meeting patient demands for less invasive procedures, while improving
patient safety and outcomes;
* enabling new procedures in interventional cardiology and
electrophysiology that currently cannot be performed, or are
extremely difficult to perform, with manual methods;
* enhancing the productivity of existing complex interventional
procedures, by both shortening procedure times and making them more
predictable, thereby improving cath lab scheduling efficiency and
lowering total costs;
* decreasing the number of disposable interventional devices used per
procedure, thereby potentially lowering provider costs;
* providing ease of use and lowering physician skill barriers for
complex cardiology procedures; and
* decreasing exposure to x-ray fluoroscopy fields for patients and
physicians and reducing the use of contrast dye injections, both of
which are potentially harmful.
We have alliances with each of Siemens AG Medical Solutions, Philips
Medical Systems and Biosense Webster, a subsidiary of Johnson & Johnson.
Through these alliances, we are integrating our Stereotaxis System with
Siemens' and Philips' market leading digital imaging and J&J's 3D catheter
location sensing technology, and developing compatible disposable
interventional devices, in order to continue to introduce new solutions to
the cath lab. Together, Siemens and Philips have a combined installed base
of more than 2,200 cardiology cath labs in the U.S., while J&J has the
leading market position in 3D catheter location sensing technology, an
important technology in complex electrophysiology ablation procedures. The
Siemens and Philips alliances provide for coordination of our sales and
marketing with that of our partners to facilitate co-placement of
integrated systems. In addition, Siemens and Philips have agreed to provide
worldwide service for our integrated systems. In connection with these
alliances, Siemens invested $10 million and J&J invested $9.5 million in
our equity in private placements prior to our initial public offering, and
Philips agreed to make payments of up to $7.5 million relating to the
integration of its x-ray fluoroscopy system with the Stereotaxis System.
The core elements of our Stereotaxis System are protected by an
extensive patent portfolio, as well as substantial know-how and trade
secrets.
BACKGROUND
Traditionally, cardiac procedures have been performed via open chest
heart bypass surgery. This procedure is very invasive, requiring cutting
open the rib cage and spreading it apart in order to gain access to the
heart. This
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enables the physician to directly view the patient's heart during the
procedure and to operate manually. Additionally, the patient is typically
placed on a heart lung bypass device. While generally very effective, the
procedure is highly traumatic for the patient, and usually requires a long
hospital stay, followed by a significant period of convalescence.
Conventional cardiac surgery is also expensive, with a procedure cost that
can range as high as $100,000.
Minimally invasive surgical procedures for cardiology were devised
to mitigate many of the drawbacks of bypass surgery while maintaining
essential elements of visualization and instrument control. These
procedures utilize an endoscope for visualization, which is inserted
through an incision in the patient's body. While these minimally invasive
surgical techniques have been used for a number of cardiac procedures, in
most instances they have not been as effective as conventional cardiac
surgery. As a result, bypass surgery, despite its drawbacks, has remained
the predominant method for cardiac surgical procedures.
Interventional cardiology represents the next, and most recent, step
in the evolution of less invasive cardiac procedures. These procedures are
performed in the cath lab, where real-time x-ray imaging, often enhanced by
the injection of contrast dye, provides visualization enabling physicians
to insert and navigate guidewires, catheters and stent delivery devices
into the vasculature or open chambers of the heart to deliver therapy.
Instrument control in typical interventional cardiology procedures for the
treatment of coronary artery disease requires the physician to manually
manipulate the external end of a long, slender guidewire in order to
indirectly control and position the working tip of the instrument. This
requires significant skill and, depending upon the type and location of the
lesion being treated, can be very difficult and time consuming. The
guidewire is typically used for navigation to the treatment site, after
which a catheter or stent delivery device is threaded over the guidewire to
perform the necessary treatment. Guidewires are also typically used to
place pacemaker leads used in cardiac resynchronization therapy for the
treatment of congestive heart failure. In electrophysiology mapping and
ablation procedures, physicians use specialized catheters that are manually
navigated using a system of mechanical control cables to map the patient's
heart, and then to ablate the heart tissue to eliminate arrhythmias. This
also requires significant skill, and, depending on the type and location of
the arrhythmia, can be very difficult and time consuming to perform.
Interventional cardiology and electrophysiology procedures have
proven to be very effective at treating coronary artery disease and
arrhythmias at sites accessible through the vasculature without the patient
trauma, complications, recovery times and cost generally associated with
open surgery. With the advent of drug-eluting stents, the number of
potential patients who could benefit from interventional cardiology
procedures has grown. However, major challenges associated with manual
approaches to interventional cardiology and electrophysiology persist. In
interventional cardiology, these challenges include difficulty in
navigating the disposable interventional device through tortuous
vasculature and crossing certain types of complex lesions to deliver
drug-eluting stents to effect treatment. As a result, numerous patients who
could be candidates for an interventional approach continue to be referred
to bypass surgery. In electrophysiology, these challenges include precisely
navigating the tip of the mapping and ablation catheter to the treatment
site on the heart wall and maintaining tissue contact throughout the
cardiac cycle to effect treatment, and, for atrial fibrillation, performing
complex ablations within the left atrium of the heart. As a result, large
numbers of patients are referred to palliative drug therapy that can have
harmful side effects.
We believe the Stereotaxis System represents a revolutionary step in
the trend toward highly effective, but less invasive, cardiac procedures.
As the first technology to permit direct, computerized control of the
working tip of a disposable interventional device, the Stereotaxis System
enables physicians to perform cardiac procedures interventionally that
historically would have been very difficult or impossible to perform in
this way and significantly improves the efficiency of existing complex
procedures in the cath lab.
6
THE GROWING IMPORTANCE OF THE CATH LAB
We believe that the cath lab's position as a hospital profit center,
coupled with the growth of interventional procedures, has made it possible
for decision-makers to justify large expenditures on capital equipment for
use within the cath lab. As a result, hospitals with cath labs have tended
to be early adopters of new technologies.
There has also been a major trend toward using digital rather than
analog instrument systems in the cath lab, resulting in the rapid
replacement of analog electrophysiology recording systems with digital
recording systems and the current rapid replacement of analog x-ray
fluoroscopy systems with digital x-ray fluoroscopy systems. Additionally,
new sources of diagnostic information such as 3D catheter location sensing
technology and catheter-based ultrasound are being introduced to the cath
lab. As a result, interventional procedures require physicians to analyze
large quantities of information from many disparate imaging and information
sources. We believe that the Stereotaxis System provides an important link
in completing the digital transformation of the cath lab, because it is the
only system that integrates the visualization and information systems in
the cath lab with digital control of the working tip of catheters,
guidewires and stent delivery devices. Furthermore, because the Stereotaxis
System brings precise remote digital instrument control and programmability
to the cath lab, we believe it can displace conventional manual control of
disposable interventional devices for complex cardiology procedures in the
same way that digital control, or "fly by wire" technology, replaced
mechanical control of the modern jet airplane.
Interventional techniques are routinely used in interventional
cardiology to treat partially occluded coronary arteries with balloon
angioplasty and to place coronary stents, and in electrophysiology to treat
certain types of arrhythmias. In the U.S. there are more than 1.1 million
interventional cardiology procedures performed for the treatment of
coronary artery disease each year, which represents approximately 60% of
the total number of such procedures performed on a worldwide basis. Each
year in the U.S., there are also more than 500,000 electrophysiology
procedures for treatment of arrhythmia, including more than 340,000
electrophysiology mapping procedures and more than 160,000 ablation
procedures, which represents approximately 65% of the total number of
electrophysiology procedures performed on a worldwide basis. Interventional
treatments are also emerging for atrial fibrillation and congestive heart
failure, and industry estimates indicate that the U.S. procedure base for
these diseases has the potential to grow rapidly if more effective
interventional treatments are available.
There are approximately 3,700 cardiology cath labs in the U.S.
installed at approximately 1,900 hospitals. Based on procedure volume, we
estimate that there are over 2,000 cardiology cath labs located throughout
the rest of the world. We estimate that there are more than 750 new and
replacement cardiology cath labs installed each year worldwide.
CURRENT CHALLENGES IN THE CATH LAB
Although great strides have been made in applying manual
interventional techniques, significant challenges remain that reduce cath
lab productivity and limit both the number of complex procedures and the
types of diseases that can be treated. These challenges primarily involve
the limitations of manual instrument control and the lack of integration of
the information systems used by physicians in the cath lab. As a result,
many complex procedures in interventional cardiology are referred to highly
invasive bypass surgery and many complex cases in electrophysiology are
treated with palliative drug therapy.
LIMITATIONS OF INSTRUMENT CONTROL
Navigation in the blood vessels and the chambers of the heart can be
difficult because the path that a disposable interventional device must
follow to arrive at the treatment site and deliver therapy can be complex
and tortuous. Physicians using manual methods often utilize a range of
different catheters and guidewires in succession in an attempt to find the
right device or devices for the procedure being performed.
7
Manually controlled catheters, guidewires and stent delivery
devices, even in the hands of the most skilled specialist, have inherent
instrument control limitations. In traditional interventional procedures,
the device is manually manipulated by the physician who twists and pushes
the external end of the instrument in an iterative process to thread the
instrument through the blood vessels to the treatment site. Manual control
of the working tip becomes increasingly difficult as more turns are
required to navigate the instrument to the treatment site, as the blood
vessels to be navigated become smaller and less accessible or more blocked,
and as greater precision is required to carry out therapy at the treatment
site.
LACK OF INTEGRATION OF INFORMATION SYSTEMS
While sophisticated imaging, mapping and location-sensing systems
have provided visualization for interventional procedures and allowed
interventional physicians to treat more complex conditions, the substantial
lack of integration of these information systems requires the physician to
mentally integrate and process large quantities of information from
different sources in real time during an interventional procedure. For
example, a physician ablating heart tissue to eliminate an arrhythmia will
often be required to mentally integrate information from a number of
sources, including:
* real-time x-ray fluoroscopy images;
* a real-time location-sensing system providing the 3D location of the
catheter tip;
* a pre-operative map of the electrical activity or anatomy of the
patient's heart;
* real-time recording of electrical activity of the heart; and
* temperature feedback from an ablation catheter.
Each of these systems displays data differently, requiring
physicians to continuously reorient themselves to the different formats and
displays as they shift their focus from one data source to the next while
at the same time manually controlling the interventional instrument.
THE STEREOTAXIS VALUE PROPOSITION
The Stereotaxis System addresses the current challenges in the cath
lab by providing precise computerized control of the working tip of the
interventional instrument and by integrating this control with the
visualization and information systems used during interventional cardiology
and electrophysiology procedures, on a cost justified basis. We believe
that the Stereotaxis System is the only technology to be commercialized
that allows remote, computerized control of disposable interventional
devices directly at their working tip.
We believe that the Stereotaxis System will:
* Expand the market by enabling new treatments for major diseases and
permitting the treatment of more complex existing cases. Treatment of
a number of major diseases, including chronic totally occluded
coronary arteries and atrial fibrillation, is highly problematic
using conventional catheter-based techniques. Additionally, many
patients with multi-vessel disease and certain complex arrhythmias
are often referred to other therapies because of the difficulty in
controlling the working tip of disposable interventional devices. As
a result, these patients are typically referred to more invasive
surgeries or largely ineffective drug therapy. Because the
Stereotaxis System provides precise, computerized control of the
working tip of disposable interventional devices, we believe that it
will potentially enable chronic totally occluded coronary arteries
and atrial fibrillation to be treated interventionally on a much
broader scale than today, and may permit physicians to predictably
treat complex cases involving partially occluded coronary arteries
and arrhythmias.
* Improve outcomes by optimizing therapy. Difficulty in controlling the
working tip of disposable interventional devices leads to sub-optimal
results in many procedures. Precise instrument control is necessary
for
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treating a number of cardiac conditions, including arrhythmias, where
precise placement of an ablation catheter against a beating inner
heart wall is necessary, and congestive heart failure, where precise
navigation within the coronary venous system for optimal placement of
pacemaker leads is required. Precise and correct navigation and
placement of expensive drug-eluting stents also have a significant
impact on procedure costs and outcomes. We believe the Stereotaxis
System can enhance procedure results by improving navigation of
disposable interventional devices to treatment sites, and by effecting
more precise treatments once these sites are reached.
* Enhance hospital efficiency by reducing and standardizing procedure
times, disposables utilization and staffing needs. Interventional
procedure times currently range from several minutes to many hours as
physicians often engage in repetitive, "trial and error" maneuvers
due to difficulties with manually controlling the working tip of
disposable interventional devices. By reducing both navigation time
and the time needed to carry out therapy at the target site, we
believe that the Stereotaxis System can reduce complex interventional
procedure times compared to manual procedures. We believe the
Stereotaxis System can also reduce the variability in procedure times
compared to manual methods. Greater standardization of procedure
times allows for more efficient cath lab scheduling. We also believe
that additional cost savings from the Stereotaxis System result from
decreased use of multiple catheters and guidewires in procedures
compared with manual methods and also from decreased staff
requirements during procedures, which further enhances the rate of
return to hospitals.
* Improve the efficacy of complex cardiology procedures by enhancing
physician skill levels. Training required for physicians to carry out
manual interventional procedures typically takes years, over and
above the training required to become a specialist in cardiology,
leading to a shortage of interventional physicians for more complex
procedures. The Stereotaxis System can allow procedures that
previously required the highest levels of manual dexterity and skill
to be performed effectively by a broader range of interventionalists,
with more standardized outcomes. In addition, interventional
physicians can be trained to use the Stereotaxis System in a
relatively short period of time. The Stereotaxis System can also be
programmed to carry out sequences of complex navigation
automatically.
* Improve patient and physician safety by reducing procedure times and
minimizing x-ray exposure and the use of contrast dye injections.
During conventional catheter-based procedures, both the physician,
who stands by the patient table to manually control the catheter, and
the patient are exposed to the potentially harmful x-ray fluoroscopy
field. This exposure can be minimized by reducing procedure times.
Reducing procedure times is also beneficial to the patient because
there is a direct correlation between complication rates and
procedure length. Shorter procedure times and improved navigation
result in reduced use of contrast dye injections which are
potentially harmful to the patient. The Stereotaxis System can
further improve physician safety by enabling them to conduct
procedures remotely from an adjacent control room, which reduces
their exposure to harmful radiation and helps alleviate orthopedic
problems that often result from wearing heavy lead vests to shield
them from x-ray exposure during procedures.
BUSINESS STRATEGY
Our goal is to establish the Stereotaxis System as the standard of
care for complex interventional procedures in cardiology by bringing
magnetic instrument control into standard interventional clinical practice.
The key elements of our strategy for achieving this goal are to:
* Leverage the efficiency and productivity improvements enabled by our
system to present a compelling economic justification to hospitals.
We believe our system enhances the rate of return to hospitals by
optimizing cath lab economics, reducing procedure times, disposable
interventional device usage and staffing requirements during
procedures. This allows us to present a compelling economic
justification to hospitals for the purchase of our systems.
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* Integrate our system with our key strategic partners' products and
leverage our partnerships to assist in further development,
commercialization, sales and service of our products. We are
integrating our system with Siemens' and Philips' widely used imaging
equipment and J&J's advanced 3D catheter location sensing technology
to provide seamless integration of instrument control and
visualization and a toolkit of disposable interventional devices that
we believe will enable new therapeutic solutions in the cath lab. We
have also entered into a manufacturing and supply agreement with Lake
Region Manufacturing, one of the world's leading manufactures of
guidewires for use in interventional medicine, to provide high volume
capability for guidewires. We intend to continue leveraging the
sales, distribution, service and maintenance expertise of our
strategic partners to facilitate co-placement of integrated systems
and disposable interventional devices and to support and maintain our
equipment at installed sites. See "Business--Collaborations" for a
further description of our strategic partnerships. We intend to
selectively expand the number of co-marketing agreements that we have
with major companies in the cath lab market in order to augment the
effectiveness of our direct sales force and distribution network, and
to add distributors to extend coverage to key areas outside the U.S.
We also intend to selectively enter into additional licensing,
development and manufacturing partnerships with major disposables
companies in order to expand the number of magnetically controlled
disposable interventional devices that can be used with the
Stereotaxis System. We will continue to outsource major components
and sub-assemblies of our equipment to maximize manufacturing
flexibility and lower fixed costs, while maintaining quality control
by completing final system assembly and inspection in-house.
* Provide an essential digital link in the cath lab between imaging
systems and instrument control. We intend to maintain an open
architecture approach to connectivity in the cath lab in order to
encourage the major imaging companies to consider Stereotaxis an
essential ingredient for digital integration and automation in the
cath lab. We believe that integrating our system with key imaging and
visualization technologies using an open architecture approach is a
key element in establishing our system as the standard of care for
complex interventional procedures.
* Expand clinical applications for, and utilization of, our technology.
We intend to pursue clinical research with leading interventional
cardiologists and electrophysiologists in order to further develop
and expand the range of clinical applications for magnetic instrument
control in the field of cardiology. We also intend to provide
comprehensive training and educational programs for physicians
regarding the use and benefits of our system in order to increase the
overall utilization of our technology. We believe that we can build
on our experience in the cardiology field to expand the scope of our
technology to other major clinical areas where there are potential
unmet needs for better device navigation and control.
* Capitalize on our technology leadership to enhance our competitive
position. We intend to enhance and maintain our technology leadership
with focused research and development. We also intend to build on our
"first mover" advantage to establish Stereotaxis as the preferred
approach for cath lab automation, by providing continuous improvement
of our technology and user-friendly software. We will continue to
protect our intellectual property through additions to our already
significant patent portfolio in order to cover the key aspects of our
technology, including new magnet designs, catheter and guidewire
designs, remote control systems, systems integration and automation
and software development.
OVERVIEW OF THE STEREOTAXIS SYSTEM
Our proprietary Stereotaxis System provides the physician with
precise remote digital instrument control through user friendly "point and
click" and/or joystick-operated technology, which can be operated either
from beside the patient table, as in traditional interventional procedures,
or from a room adjacent to the patient and outside the x-ray fluoroscopy
field. The NIOBE cardiology magnet system navigates disposable
interventional devices to the treatment site through complex paths in the
blood vessels and chambers of the heart to carry out treatment using
computer controlled, externally applied magnetic fields to directly govern
the motion of the working tip of these devices, each of which has a
magnetically sensitive tip that predictably responds to magnetic fields
generated by our system. Because the working tip of the disposable
interventional device is directly controlled by
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these external magnetic fields, the physician has the same degree of
control regardless of the number or type of turns, or the distance
traveled, by the working tip to arrive at its position in the blood vessels
or chambers of the heart, which results in highly precise digital control
of the working tip of the disposable interventional device while still
giving the physician the option to manually advance the catheter.
Through our alliances with Siemens, Philips and J&J, this precise
digital instrument control has been integrated with the visualization and
information systems used during interventional cardiology and
electrophysiology procedures in order to provide the physician with a
fully-integrated and automated information and instrument control system.
We have integrated our Stereotaxis System with Siemens' digital x-ray
fluoroscopy system, and we have completed the initial integration with
Philips' digital x-ray fluoroscopy system. In addition, we are integrating
the Stereotaxis System with J&J's 3D catheter location sensing technology,
to provide accurate real-time information as to the 3D location of the
working tip of the instrument, and with J&J's ablation tip technology. We
believe that the combination of these features will provide more effective
instrument control and therapy delivery.
The components of the Stereotaxis System are identified and
described below:
SYSTEMS
NIOBE Cardiology Magnet System. Our NIOBE cardiology magnet system
utilizes two permanent magnets mounted on articulating or pivoting arms
that are enclosed within a stationary housing, with one magnet on either
side of the patient table, inside the cath lab. These magnets generate
magnetic navigation fields that are less than 10% of the strength of fields
typically generated by MRI equipment and therefore require significantly
less shielding, and cause significantly less interference, than MRI
equipment.
NAVIGANT Advanced User Interface. The NAVIGANT advanced user
interface is an integrated information and control center that consolidates
the key information sources used by interventional cardiologists and
electrophysiologists and allows these physicians to provide instrument
control directions to precisely govern the motion of the working tip of
disposable interventional devices.
The NAVIGANT advanced user interface consists of:
* configurable display screens located both next to the patient table
inside the cath lab and in the adjacent control room, outside the
x-ray fluoroscopy field, that provide advanced visualization and
information integration to the physician;
* sophisticated embedded device software and system control algorithms
that are integrated with our disposable interventional devices to
facilitate ease of use and improved navigation of these devices;
* computer joystick or mouse control which the physician uses to direct
the motion of the working tip of the disposable interventional
device, either from inside the cath lab or from the adjacent control
room; and
* a software package designed for interventional cardiology or
electrophysiology, or both, as well as optional application software
tailored for specific clinical procedures.
CARDIODRIVE Automated Catheter Advancer. Where the physician is
conducting the procedure from the adjacent control room, the CARDIODRIVE
automated catheter advancer is used to advance and retract the catheter in
the patient's heart while the NIOBE magnets precisely steer the working tip
of the device.
We have received the FDA clearance and the CE Mark necessary for us
to market the NIOBE cardiology magnet system, the NAVIGANT advanced user
interface and the CARDIODRIVE automated catheter advancer in the U.S. and
Europe.
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DISPOSABLES AND OTHER ACCESSORIES
Our system is designed to use a toolkit of proprietary disposable
interventional devices. The toolkit currently consists of:
* our suite of CRONUS(R) coronary guidewires suitable for use in
interventional cardiology procedures for the introduction and
placement of over-the-wire therapeutic devices, such as biventricular
pacing leads used in cardiac resynchronization therapy for treating
congestive heart failure;
* our TANGENT(R) electrophysiology mapping catheter used to locate
aberrant electrical signals in the heart;
* our HELIOS(R) electrophysiology ablation catheter used for certain
arrhythmia treatments; and
* the Celcius ablation and Navistar mapping and catheters co-developed
with J&J, as described below.
We have received the FDA clearance and the CE Mark necessary for us
to market our suite of CRONUS coronary guidewires and our electrophysiology
mapping catheter in the U.S. and Europe. In addition, we have received the
CE Mark for our HELIOS electrophysiology ablation catheter and, in the
U.S., we have completed clinical trials in 2004 and expect to subsequently
file for a PMA.
Through our alliance with J&J, we are co-developing a range of
ablation catheters that can be navigated with our system, with and without
J&J's 3D catheter location sensing technology. We are also developing
disposable interventional devices for other applications. In addition, we
have developed plastic software keys, or smart chips, that allow our system
to recognize specific disposable interventional devices in order to prevent
unauthorized use of our system.
In March 2005, we announced the first commercial use of our
Stereotaxis system with the Celcius(TM) RMT ablation catheter, the
Navistar(TM) RMT mapping and ablation catheter and the CARTO(TM) RMT mapping
and ablation system in Europe. These products, which had recently received
CE Marking authorization in Europe and other countries that recognize the CE
Mark, are the first products to be commercialized pursuant to our strategic
alliance with J&J. We expect that approvals in the United States will follow
in 2005 and that Biosense Webster will continue to develop other
magnetically enabled catheters into 2006.
We believe that we can adapt most disposable interventional devices
for use with our system by using our proprietary technology to add an
inexpensive micro-magnet at their working tip. This micro-magnet is
activated by an external magnetic field, which allows interventional
devices with tip dimensions as small as 14 thousandths (0.014) of an inch
to be oriented and positioned in a predictable and controllable fashion. We
believe this approach to bringing digital control to disposable
interventional devices using embedded magnets can simplify the overall
design of these devices and reduce their manufacturing costs because
mechanical controls are no longer required.
CLINICAL APPLICATIONS
We have initially focused our clinical and commercial efforts on
applications of the Stereotaxis System in complex interventional cardiology
procedures for the treatment of coronary artery disease, and in
electrophysiology procedures for the treatment of arrhythmias. Our system
potentially has broad applicability in other areas, such as interventional
neurosurgery, interventional neuroradiology, peripheral vascular,
pulmonology, urology, gynecology and gastrointestinal medicine, and our
patent portfolio has been structured to permit expansion into these areas.
INTERVENTIONAL CARDIOLOGY
Nearly half a million people die annually from coronary artery
disease, a condition in which the formation of plaque in the coronary
arteries obstructs the supply of blood to the heart, making this the
leading cause of death in the U.S. Despite various attempts to reduce risk
factors, each year over one million patients undergo interventional
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procedures in an attempt to open blocked vessels and another half a million
patients undergo open heart surgery to bypass blocked coronary arteries.
Blockages within a coronary artery, often called lesions, are
categorized by degree of obstruction as partial occlusions, non-chronic
total occlusions and chronic total occlusions. Lesions are also categorized
by the degree of difficulty with which they can be opened as simple or
complex. If the blockage is in an easy to reach location, it can typically
be treated by pushing a guidewire through the portion of the vessel that is
blocked with plaque, expanding a small balloon to compress the plaque
against the artery walls in order to open the artery, and then finally
deploying a stent, which is a small metal scaffold, to help keep the artery
open. If a blockage is located within tortuous vasculature, however, the
physician must navigate the guidewire through a series of sharp turns,
making the blockage very difficult to reach. Even if such lesions are
reached, delivering a balloon or stent to the treatment site through
tortuous anatomy can be difficult. In addition, complex lesions, such as
chronic total occlusions, longer lesions, and lesions located within
smaller diameter vessels, are often very difficult or time consuming to
open with manual interventional techniques.
Physicians are currently performing approximately 1.8 million
interventional cardiology procedures worldwide each year, and we estimate
that approximately 15%, or 270,000, of these procedures are complex and
therefore require longer procedure times and may have sub-optimal outcomes.
We believe that our system can substantially benefit this subset of complex
interventional cardiology procedures, including procedures involving:
* Complex partial occlusions, complex non-chronic total occlusions and
chronic total occlusions. Treatment of these complex lesions is
generally more problematic due to the difficulty in steering and
pushing a guidewire through them. Because our system provides precise
computerized control of the working tip of a guidewire, it can enable
physicians to more easily locate small openings in, and to advance a
guidewire across, these lesions. Also, our magnetically steerable
microcatheter can help steer a variety of conventional wire products,
some of which are designed to cross complex lesions, but which
otherwise lack the controlled steering needed to avoid perforating
the vessel wall. The ability to cross complex lesions such as chronic
total occlusions has grown increasingly important due to the
effectiveness of drug eluting stents in treating these lesions. Since
approximately one-fifth of patients referred to bypass surgery have
chronic total occlusions, we believe a significant number of patients
could be treated interventionally instead of surgically if more of
these lesions could be opened for stenting.
* Tortuous Anatomy.
We estimate that between 10 and 15% of all interventional procedures
require physicians to navigate a disposable interventional device
through a series of sharp turns in the patient's vasculature.
Navigating through tortuous anatomy using manual interventional
techniques can be very time consuming and physicians often cannot
reach the lesion or manipulate the balloon or stent across the lesion
once it is reached. Because our system allows the working tip of
disposable interventional devices to be precisely oriented regardless
of the number of turns that have occurred, our technology allows
physicians to more effectively navigate these devices through complex
vasculature and deliver balloons and stents to treatment sites for
therapy.
* Stent placement.
The likelihood of restenosis, or re-blockage of cleared arteries, is
greatly increased in multi-vessel diseased patients whose blockages
are typically more diffusely distributed throughout longer lengths of
the vessel. As a result, these patients are often referred to
invasive bypass surgery. We expect that drug-eluting stents, which
dramatically reduce the likelihood of restenosis, will enable
patients with more complex lesions to be treated interventionally
rather than with bypass surgery. In order to treat this new group of
patients, however, physicians will need to place stents in more
challenging or remote locations. By using externally applied magnetic
fields to precisely direct a stent through a patient's vasculature,
we believe that our system allows these devices to be more easily
navigated to these difficult to reach treatment sites.
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* Small Vessels.
Based on our interpretation of various medical studies, we have
determined that diabetic patients usually comprise about 20 to 30% of
U.S. hospital's interventional procedure volume. These patients
generally have smaller vessels, which often contain longer lesions
with more diffusely distributed blockages, as well as tortuous
anatomy, making guidewire navigation and stent delivery extremely
difficult. We believe that these patients can benefit significantly
from the improved disposable interventional device navigation enabled
by our system.
ELECTROPHYSIOLOGY
The rhythmic beating of the heart results from the transmission of
electrical impulses through the heart. When these electrical impulses are
mis-timed or uncoordinated, the heart fails to function properly, resulting
in complications that can range from fatigue to stroke or death. Over four
million people in the U.S. currently suffer from the resulting abnormal
heart rhythms, which are known as arrhythmias.
Drug therapies for arrhythmias often fail to adequately control the
arrhythmia and may have significant side effects. Consequently, physicians
have increasingly sought more permanent, non-pharmacological, solutions for
arrhythmias. The most common interventional treatment for arrhythmias, and
in particular tachyarrhythmias, where the patient's heart rate is too high
or irregular, is an ablation procedure in which the diseased tissue giving
rise to the arrhythmia is isolated or destroyed. Prior to performing an
electrophysiology ablation, a physician typically performs a diagnostic
procedure in which the electrical signal patterns of the heart wall are
"mapped" to identify the heart tissue generating the aberrant electrical
signals. Following the mapping procedure, the physician may then use an
ablation catheter to disable the aberrant signal or signal path, restoring
the heart to its normal rhythm. In cases where an ablation is anticipated,
physicians will choose an ablation catheter and perform both the mapping
and ablation with the same catheter.
Based on an analysis of industry data, we have determined that
physicians are currently performing approximately 800,000 electrophysiology
procedures worldwide each year, including approximately 500,000
electrophysiological mapping procedures, approximately 240,000 ablation
procedures and approximately 60,000 other procedures such as treatment of
atrial fibrillation and congestive heart failure. We believe the
Stereotaxis System is particularly well-suited for those electrophysiology
procedures which are time consuming or which can only be performed by
highly experienced physicians, which we estimate to be approximately 30% of
all electrophysiology procedures performed worldwide each year. We estimate
that the number of these complex procedures is growing at a rate of
approximately 12% per year. These procedures include:
* Lengthy Ablations.
For the more routine but lengthy mapping and ablation procedures, our
system offers the unique benefit of automating the procedure and
directing catheter movement from the control room, saving the
physician time and helping to avoid unnecessary exposure to high
doses of radiation.
* Atrial Fibrillation.
A common cause of sustained abnormal heart rhythm, atrial
fibrillation, is a particular type of arrhythmia characterized by
rapid, disorganized contractions of the heart's upper chambers, the
atria, which lead to ineffective heart pumping and blood flow and can
be a major risk factor for stroke. The majority of potential patients
cannot benefit from manual catheter-based procedures for atrial
fibrillation because they are extremely complex and are performed by
only the most highly skilled electrophysiologists. They also
typically have much longer procedure times than conventional ablation
cases and success rates that are only in the 50% to 80% range. We
believe that our system can allow these procedures to be performed by
a broader range of electrophysiologists and, by automating some of
the more complex ablation routines, can standardize and reduce
procedure times and significantly improve outcomes.
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* Bi-Ventricular Pacing.
Congestive heart failure is a potentially fatal condition in which
the heart muscle is damaged to the point that it is unable to provide
adequate blood flow rate through the body. A new therapy, dual
chamber cardiac resynchronization therapy, or bi-ventricular pacing,
has shown promise in the treatment of a certain type of congestive
heart failure in which the left and right sides of the left ventricle
do not contract at the same time. The procedure used to carry out
this therapy involves the placement of a pacemaker lead into the
coronary venous system of the heart. Interventional treatment of this
patient population is growing rapidly but the placement of the venous
pacing lead with manual interventional technologies is highly
challenging and time consuming, and less than optimal lead placement
can contribute to poor outcomes. The unpredictability of procedure
times also makes efficient cath lab scheduling very difficult in
these cases. We estimate that approximately 50,000 biventricular
pacing leads are currently placed per year worldwide. Industry
estimates indicate, however, that if there were a more effective
method of placing these pacing leads, more than 700,000 congestive
heart failure patients per year in the U.S. would be eligible for the
procedure.
We believe that our system can address the current challenges in
electrophysiology by permitting the physician to remotely navigate
disposable interventional devices from a control room outside the x-ray
field. Our system also allows for more predictable and efficient navigation
of these devices to the treatment site, including the left atrium for
atrial fibrillation procedures, and enables appropriate contact force to be
maintained to effect ablations on the wall of the beating heart. We also
believe that our system will significantly lower the skill barriers
required for physicians to perform complex electrophysiology procedures
and, additionally, improve cath lab efficiency and reduce disposable
interventional device utilization.
INTERVENTIONAL NEURORADIOLOGY, NEUROSURGERY AND OTHER INTERVENTIONAL
APPLICATIONS
Physicians used a predecessor to our NIOBE system to conduct a
number of procedures for the treatment of brain aneurysms, a condition in
which a portion of a blood vessel wall balloons and which can result in
debilitating or fatal hemorrhagic strokes. Traditional treatment for brain
aneurysms involves highly invasive open brain surgery. Interventional
procedures have evolved for filling the aneurysm with platinum micro-coils
delivered to the site in order to reduce blood flow within the aneurysm. We
believe that the Stereotaxis System has the potential to be adapted for use
in the interventional treatment of brain aneurysms, by enabling physicians
to reach a broader range of aneurysm targets, and by making procedure times
for these cases more predictable.
The Stereotaxis System also has a range of potential applications in
minimally invasive neurosurgery, including biopsies and the treatment of
tumors, treatment of vascular malformations and, when deliverables are
commercialized by third parties, delivery of pharmacological compounds and
deep brain stimulators. We have successfully conducted what we believe to
be the first human surgical procedures ever conducted using computerized
control in our neurosurgery program by navigating complex pathways through
brain tissue to multiple target sites. The Stereotaxis System also has
applicability in the respiratory, gastro-intestinal and genito-urinary
systems, for diagnosis and treatment of diseases affecting the lungs,
prostate, kidneys, colon and small intestine. We do not anticipate any
significant revenue from these programs in the near term.
COLLABORATIONS
We have entered into collaborations with four technology leaders in
the global cath lab market, Siemens, Philips, J&J and Lake Region
Manufacturing, that we believe will aid us in commercializing our
Stereotaxis System. We believe our two imaging partners, Siemens and
Philips, have a combined installed base of more than 2,200 cardiology cath
labs in the U.S.
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We believe that these collaboration arrangements are favorable to
Stereotaxis because they:
* provide for the integration of our system with market leading digital
imaging and 3D catheter location sensing technology, as well as
disposable interventional devices;
* allow us to leverage the sales, distribution, service and maintenance
expertise of our strategic partners; and
* enable operational flexibility by not requiring us to provide any of
our strategic partners with a right of first refusal in the event
that another party wants to acquire us or with board representation
where a strategic partner has made a debt or equity investment in us.
IMAGING PARTNERS
Siemens Alliance. In June 2001, we entered into an alliance with
Siemens, a global leader in cath lab equipment sales, including x-ray
fluoroscopy systems. Under this alliance, we successfully integrated our
Stereotaxis System with Siemens' digital fluoroscopy system to provide
advanced cath lab visualization and instrument control through
user-friendly computerized interfaces. We also coordinate our sales efforts
with Siemens to co-place integrated systems at leading hospital sites in
the U.S. and Europe. Under this alliance and under a separate services
agreement, Siemens provides site planning, project management, equipment
maintenance and support services for our products directly to our
customers. To date, all of our systems placed for clinical use have been
integrated with Siemens' digital fluoroscopy systems.
In May 2003, we entered into an expanded alliance with Siemens, under
which we are collaborating to produce what we believe will be market leading
technology to provide physicians with real-time 3D visualization of a
patient's anatomy during a procedure by integrating pre-operative MRI and CT
data with x-ray fluoroscopic data. We also agreed to integrate our
instrument control technology with Siemens' imaging technology in order to
develop new solutions in cardiology and, potentially, in interventional
radiology. Where Siemens' proprietary technology is incorporated into
products being co-developed under this expanded alliance, there are
restrictions on our ability to use that technology to sell Stereotaxis
Systems integrated with other third party x-ray imaging systems. These
restrictions expire no later than December 31, 2005. We have also entered
into a separate development agreement for the Japanese market under which
Siemens will coordinate regulatory approval and distribute, install and
service our Stereotaxis Systems, whether integrated with the x-ray system of
Siemens, or other third parties, in Japan. We have also entered into a
software distribution agreement with Siemens under which we have the right
to sublicense Siemens' 3D pre-operative image navigation software as part of
our NAVIGANT advanced user interface.
Concurrently with entering into the expanded alliance, Siemens
invested $10 million in our Series E preferred stock in 2003. Siemens also
held a $2 million note convertible into Stereotaxis common stock, which was
issued by us in connection with the purchase of certain of Siemens'
intellectual property in August 2003. Both the Series E preferred stock and
this note were converted into our common stock in connection with our IPO
in August 2004. See "Certain Relationships and Related Party Transactions".
Philips Alliance. In October 2003, we entered into an alliance with
Philips, another recognized global leader in cath lab sales, pursuant to
which we agreed to integrate our Stereotaxis System with Philips' digital
x-ray fluoroscopy system to achieve seamless integration of our instrument
control technology and Philips' digital x-ray imaging on a user friendly
basis. We also agreed with Philips to identify areas of concentration for
bringing new solutions to integration of information sources and instrument
control in the cath lab in cardiology and neurology. Under this alliance,
we will coordinate our sales efforts with Philips in order to co-place our
integrated systems. Philips also agreed to pay our engineering and other
costs of the integration and related research and development work, and
agreed to purchase a maximum of three promotional integrated Stereotaxis
Systems from us for installation at agreed upon "centers of excellence."
Additionally, Philips has agreed to pay various co-placement fees to
Stereotaxis for each of the first 70 systems integrated with Philips that
are shipped commercially. The total amount
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that we are entitled to receive from Philips under this agreement for
research and development costs, co-placement fees and the purchase of our
promotional integrated Stereotaxis Systems is capped at $7.5 million.
DISPOSABLES PARTNERS
J&J Alliance. We entered into an alliance with J&J in May 2002
pursuant to which we agreed to integrate J&J's advanced Biosense 3D
catheter location sensing technology, which we believe has the leading
market position in this important field of visualization for
electrophysiology procedures, with our instrument control system, and to
jointly develop associated location sensing electrophysiology mapping and
ablation catheters that are navigable with the Stereotaxis System. We
believe that these integrated products will provide physicians with the
elements required for effective complex electrophysiology procedures:
highly accurate information as to the exact location of the catheter in the
body and highly precise control over the working tip of the catheter. We
also agreed to coordinate our sales force efforts with J&J in order to
place J&J Biosense CARTO Systems and our Stereotaxis Systems that, together
with the co-developed catheters, will comprise the full integration of our
instrument control and 3D location sensing technologies in the cath lab. We
expanded this alliance in November 2003 to include the parallel integration
of our instrument control technology with J&J's full line of non-location
sensing mapping and ablation catheters that are relevant to our targeted
applications in electrophysiology.
The co-developed catheters will be manufactured and distributed by
J&J, and each of the parties agreed to contribute to the resources required
for their development. We are entitled to royalty payments from J&J,
payable quarterly based on a profit formula for sales of the co-developed
catheters, and our revenue share increases under certain circumstances.
Under this alliance, we agreed to certain restrictions on our ability to
co-develop and distribute catheters competitive with those we are
developing with J&J and granted J&J certain notice and discussion rights
for product development activities we undertake relating to localization
and magnetically enabling interventional disposable devices in cardiology
fields outside of electrophysiology and mapping. In connection with our
expanded alliance, J&J also invested $9.5 million in our Series E-1
preferred stock in 2003. This preferred stock was converted into our common
stock in connection with our IPO in August 2004.
Either party may terminate this alliance in certain specified
"change of control" situations, although the termination would not be
effective until one year after the change of control and then would be
subject to a wind-down period during which J&J would continue to supply
co-developed catheters to us or to our customers for three years (or, for
non-location sensing mapping and ablation catheters, until our first sale
of a competitive product after a change of control, if earlier than three
years). If we terminate the agreement under this provision, we must pay a
termination fee to J&J equal to 5% of the total equity value of Stereotaxis
in the change of control transaction, up to a maximum of $10 million. We
also agreed to notify J&J if we reasonably consider that we are engaged in
substantive discussions in respect of the sale of the company or
substantially all of our assets. See "Certain Relationships and Related
Party Transactions".
Lake Region. We entered into an agreement with Lake Region
Manufacturing, Inc., one of the world's leading manufacturers of guidewires
for the development and production of magnetically enabled guidewires in
January 2005. The agreement provides Stereotaxis with the wherewithal to
increase both the availability and the technological sophistication of its
guidewires to better meet customer needs.
RESEARCH AND DEVELOPMENT
Our research and development team consists of 49 people focused on
system and disposable interventional device development. We have assembled
an experienced group of engineers and physicists with recognized expertise
in magnetics, software, control algorithms, systems integration and
disposable interventional device modeling and design.
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Our research and development efforts are focused in three major
areas:
* continuing to enhance our existing system through ongoing product and
software development;
* designing new proprietary disposable interventional devices for use
with our system; and
* developing next generation versions of our system.
Our research and development team collaborates with our strategic
partners, Siemens, Philips, and J&J, to integrate our Stereotaxis System's
open architecture platform with key imaging, location sensing and
information systems in the cath lab. We have also collaborated with a
number of highly regarded interventional physicians in key clinical areas
and have entered into agreements with a number of universities and research
institutions, which serve to increase our access to world class physicians
and scientists and to expand our name recognition in the medical community.
We have historically spent a significant portion of our capital
resources on research and development, incurring $18.4 million in 2004,
$13.9 million in 2003 and $14.7 million in 2002 in research and development
expenses.
CUSTOMER SERVICE AND SUPPORT
Stereotaxis has contracted with Siemens to provide worldwide
maintenance and support services to our customers for our integrated
products. This allows us to leverage Siemens' extensive maintenance and
support infrastructure for direct, on-site technical support activities,
including its call center, customer support engineers and service parts
logistics and delivery. It also provides a single point of contact for the
customer and allows us to focus on providing installation, training, and
back-up technical support. We have followed the same strategy with Philips
and intend to do the same with other potential collaboration partners in
the future.
Our back-up technical support includes a combination of on-line,
telephone and on-site technical assistance services 24 hours a day, seven
days a week. We have also hired service and support engineers with
networking and medical equipment expertise, and have outsourced a portion
of our support services. We offer several different levels of support to
our customers, including basic hardware and software maintenance, extended
product maintenance, and rapid response capability for both parts and
service.
MANUFACTURING
NIOBE SYSTEMS
Our manufacturing strategy for our NIOBE system is to sub-contract
the manufacture of major components and to complete the final assembly and
testing of those components in-house in order to control quality. This
permits us to focus on our core competencies in magnet design, magnetic
physics, magnetic instrument control and navigational algorithms.
Approximately 8,000 square feet of our St. Louis, Missouri facility is
dedicated to systems assembly, testing and inspection.
DISPOSABLE INTERVENTIONAL DEVICES
Our manufacturing strategy for disposable interventional devices is
to outsource their manufacture through subcontracting and through our
alliance with J&J and to expand partnerships for other interventional
devices. We currently maintain pilot level manufacturing capability along
with strong relationships with component level suppliers. We also
manufacture prototype disposables to facilitate product development. We
have approximately 5,000 square feet allocated to disposables
manufacturing, assembly, testing and inspection with approximately 1,300
square feet of clean rooms in Maple Grove, Minnesota. We have also entered
into a manufacturing agreement with Lake Region Manufacturing to provide
high volume capability for guidewires.
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SOFTWARE
The software components of the Stereotaxis System, including control
and application software, are developed both internally and with integrated
modules we purchase or license. We perform final testing of software
products in-house prior to their commercial release.
GENERAL
Our manufacturing facilities operate under processes that meet the
FDA's requirements under the Quality System Regulation, or QSR. In 2003,
the FDA audited our Maple Grove, Minnesota facility for regulatory
compliance, and no deficiencies were noted. A European regulatory agency
audited each facility in 2001, found them to be in compliance with the
requirements of ISO 9001, and issued a formal certification from the ISO
Registrar in January of 2002. If we fail to remain in compliance with the
FDA or ISO 9001 standards, we may be required to cease all or part of our
operations for some period of time until we can demonstrate that
appropriate steps have been taken to comply with such standards. We cannot
be certain that our facilities will comply with the FDA or ISO 9001
standards in future audits by regulatory authorities.
Our products require a number of complex operations, including
multiple fabrication and assembly processes. We purchase both custom and
off-the-shelf components from a number of certified suppliers and subject
them to stringent quality processes. We apply periodic quality reviews of
our suppliers and have established a supplier selection approval process.
Some of the components necessary for the assembly of our products are
supplied by a single supplier. Establishing additional or replacement
suppliers for certain of those components cannot be done quickly. The
disruption of the supply of components could cause a significant increase
in the costs of these components, which could affect our profitability. We
purchase components through both short and long-term supply arrangements
and generally do not maintain large volumes of inventory. We currently have
a long-term supply agreement for the supply of the permanent magnet
assemblies used in our Stereotaxis System. We believe we have the ability
to double our manufacturing capacity within six months to accommodate a
significant increase in sales volume of our Stereotaxis System.
Lead times for materials and components ordered by us and our
contract manufacturers vary and depend on factors such as the specific
supplier, contract terms and demand for a component at a given time. We and
our contract manufacturers acquire materials, complete standard
subassemblies and assemble fully configured systems based on sales
forecasts. If orders do not match forecasts, we and our contract
manufacturers may have excess or inadequate inventory of materials and
components. See "Factors That May Affect Future Results" for a discussion
of various risks associated with our manufacturing strategy.
SALES AND MARKETING
We market our products in the U.S. and Europe through a direct sales
force of senior sales specialists, supported by account managers that
provide training, clinical support, and other services to our customers. In
addition, our strategic alliances form an important part of our sales and
marketing strategy. We leverage the sales forces of Siemens and Philips to
co-market integrated systems on a worldwide basis. This approach allows us
to coordinate our marketing efforts with our strategic partners while still
dealing directly with the customer. J&J will exclusively distribute our
electrophysiology mapping and ablation catheters, co-developed pursuant to
our alliance with them. We intend to increase our sales personnel and the
number of account managers significantly over the next 24 months and to
enter into distribution and sales representative arrangements to market our
products in the rest of the world.
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Our sales and marketing process has two important steps: (1) selling
systems directly and through co-marketing agreements with our imaging
partners, Siemens and Philips and through distributors; and (2) leveraging
our installed base of systems to drive recurring sales of disposable
interventional devices, software and service.
Step One: System sales. Our system sales strategy involves both
direct selling, through our own sales force, and co-marketing with our
strategic imaging partners, by leveraging these relationships to identify
new or replacement cath labs being installed and then co-marketing
integrated systems to the customer. Siemens and Philips have a major share
of the cath lab installation market and therefore compete for a substantial
number of potential cath lab installations on a worldwide basis, which
gives us access to a large number of potential customers. These customers
fall into three broad categories:
* leading research institutions with physician thought leaders who are
interested in performing complex new procedures enabled by our
system;
* high-volume commercial institutions interested in the efficiency
benefits of our system; and
* medium volume regional centers that are competing intensely for
patients, attempting to minimize referrals of complex cases to other
centers and focusing on gaining market share in their regional
markets.
Once we have identified potential customers, we approach capital
equipment sales in five stages that bring significant predictability to our
sales process. This allows us to measure the progress of each account in
discrete steps through our sales funnel, and tailor our sales activity at
each stage. The five-stage process includes the following, and has taken an
average of 18 months for our 30 systems delivered to date:
* Build initial customer interest: presentation of our value
proposition;
* Gain commitment: formal proposal with cost justification rationale;
* Secure capital budget allocation: customer begins formal budget
approval process for system acquisition;
* Receive institutional approval: customer completes budget approval
process and executes purchase order; and
* System installation: installation begins as part of overall cath lab
construction or refurbishment.
As of December 31, 2004, we had received purchase orders and other
commitments for approximately $20 million of our Stereotaxis Systems. There
can be no assurance that we will recognize revenue in any particular period
or at all because some of our purchase orders and other commitments are
subject to contingencies that are outside of our control. In addition,
these orders and commitments may be revised, modified or canceled, either
by their express terms, as a result of negotiations or by project changes
or delays. All of our systems placed to date have been integrated with
Siemens' digital x-ray fluoroscopy systems. We have several purchase orders
with a commitment for installation with Philips and we anticipate
installing systems integrated with Philips' digital x-ray fluoroscopy
system beginning in early 2005.
Step Two: Recurring sales of disposable interventional devices,
software and service. Each of our systems utilizes proprietary disposable
interventional devices, both our own and those we are co-developing with
strategic partners, as well as software tailored to specific clinical
applications. We provide training and clinical support to users of our
systems in order to increase their familiarity with system features and
benefits, and thereby increase usage. More frequent usage should result in
increased consumption of disposable interventional devices and software.
While a basic one-year warranty is included with each system, we believe
service contracts providing for enhanced levels of support and service
beyond the basic warranty will become an important additional source of
revenue.
Our relationships with physician thought leaders in the fields of
interventional cardiology and electrophysiology are an important component
of our selling efforts. These relationships are typically built around
research
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collaborations, and they enable us to better understand and articulate the
most useful features and benefits of our system, and to develop new
solutions to long-standing challenges in interventional medicine. We will
continue to seek support and collaboration from highly regarded physicians
in order to perform important research and accelerate market awareness and
adoption of our systems.
REIMBURSEMENT
We believe that substantially all of the procedures, whether
commercial or in clinical trials, conducted in the U.S. with the
Stereotaxis System have been reimbursed to date and that substantially all
commercial procedures in Europe have been reimbursed. We expect that
third-party payors will reimburse, under existing billing codes, our line
of guidewires, as well as our line of ablation catheters and those on which
we are collaborating with J&J. We expect healthcare facilities in the U.S.
to bill various third-party payors, such as Medicare, Medicaid, other
government programs and private insurers, for services performed with our
products. We believe that procedures performed using our products, or
targeted for use by products that do not yet have regulatory clearance or
approval, are generally already reimbursable under government programs and
most private plans. Accordingly, we believe providers in the U.S. will
generally not be required to obtain new billing authorizations or codes in
order to be compensated for performing medically necessary procedures using
our products on insured patients. We cannot assure you that reimbursement
policies of third-party payors will not change in the future with respect
to some or all of the procedures using the Stereotaxis System. See "Factors
That May Affect Future Results" for a discussion of various risks
associated with reimbursement from third-party payors.
INTELLECTUAL PROPERTY
Our strategy is to patent the technology, inventions and
improvements that we consider important to the development of our business.
As a result, we believe that we have an extensive patent portfolio that
protects the fundamental scope of our technology, including our magnet
technology, navigational methods, procedures, systems, disposables
interventional devices and our 3D integration technology. As of December
31, 2004, we had 42 issued U.S. patents, eight exclusively licensed U.S.
patents, one exclusively licensed non-U.S. patent and three non-
exclusively licensed U.S. patents. In addition, we had 69 pending U.S.
patent applications, 17 pending non-U.S. patent applications, and six
Patent Cooperation Treaty applications. We also have a number of invention
disclosures under consideration and several applications that are being
prepared for filing. Accordingly, we anticipate that the number of pending
U.S. patent applications will increase.
Our patent portfolio covering magnet systems, including our NIOBE
cardiology magnet system, is comprised of eight issued patents and 11
pending applications. We have 16 issued patents and 19 pending applications
covering methods of magnetically controlling magnetic medical devices,
including the fundamental method of magnetically orienting and mechanically
advancing devices in the body. In addition, we have 10 issued patents and
18 pending applications covering disposable interventional devices,
including electrophysiology catheters, guidewires, atherectomy devices,
neuro and other devices and our CARDIODRIVE automated catheter advancer.
Finally, we have 19 pending patent applications for our disposable
interventional devices, interfaces and navigation techniques that cover
non-magnetic medical navigation.
The patent positions of medical device companies, including ours,
can be highly uncertain and involve complex and evolving legal and factual
questions. One or more of the above patent applications may be denied. In
addition, our issued patents may be challenged, based on prior art
circumvented or otherwise not provide protection for the products we
develop. Furthermore, we may not be able to obtain patent licenses from
third parties required for the development of new products for use with our
system. We also note that U.S. patents and patent applications may be
subject to interference proceedings and U.S. patents may be subject to
reexamination proceedings in the U.S. Patent and Trademark Office (and
foreign patents may be subject to opposition or comparable proceedings in
the corresponding foreign patent office), which proceedings could result in
either loss of the patent or denial of the patent
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application or loss or reduction in the scope of one or more of the claims
of the patent or patent application. In addition, such interference,
reexamination and opposition proceedings may be costly. In the event that
we seek to enforce any of our owned or exclusively licensed patents against
an infringing party, it is likely that the party defending the claim will
seek to invalidate the patents we assert, which, if successful could result
in the entire loss of our patent or the relevant portion of our patent and
not just with respect to that particular infringer. Any litigation to
enforce or defend our patents rights, even if we were to prevail, could be
costly and time-consuming and would divert the attention of our management
and key personnel from our business operations.
It would be technically difficult and costly to reverse engineer our
Stereotaxis System, which contains numerous complex algorithms that control
our disposable devices inside the magnetic fields generated by the
Stereotaxis System. We further believe that our patent portfolio is broad
enough in scope to enable us to obtain legal relief if any entity not
licensed by us attempted to market disposable devices that can be navigated
by the NIOBE system. We have developed plastic software keys, or smart
chips, that allow our system to recognize specific disposable
interventional devices in order to prevent unauthorized use of our system.
We anticipate that these smart chips will be an important part of our
disposable interventional device strategy going forward.
We have also developed substantial know-how in magnet design,
magnetic physics and magnetic instrument control that was developed in
connection with the development of the Stereotaxis System, which we
maintain as trade secrets. This centers around our proprietary magnet
design, which is a critical aspect of our ability to design, manufacture
and install a cost-effective cardiology magnet system that is small enough
to be installed in a standard cath lab.
We seek to protect our proprietary information by requiring our
employees, consultants, contractors, outside partners and other advisers to
execute nondisclosure and assignment of invention agreements upon
commencement of their employment or engagement, through which we seek to
protect our intellectual property. These agreements to protect our
unpatented technology provide only limited and possibly inadequate
protection of our rights. Third parties may therefore be able to use our
unpatented technology, reducing our ability to compete. In addition,
employees, consultants and other parties to these agreements may breach
them and adequate remedies may not be available to us for their breaches.
Many of our employees were previously employed at universities or other
medical device companies, including our competitors or potential
competitors. We could in the future be subject to claims that these
employees or we have used or disclosed trade secrets or other proprietary
information of their former employers. Litigation may be necessary to
defend against these claims. If we fail in defending such claims, in
addition to paying monetary damages, we may lose valuable intellectual
property rights or personnel. Even if we are successful in defending
against these claims, litigation could result in substantial costs and
divert the attention of management and key personnel from our business
operations. We also generally seek confidentiality agreements from third
parties that receive our confidential data or materials.
Our commercial success will depend in part on obtaining and
maintaining patent protection and trade secret protection of our
technologies and products as well as successfully defending these patents
against third-party challenges. Some of our technology was co-developed
with third parties and these third parties may claim rights in our
intellectual property. We may also be liable for patent infringement by
third parties whose products we use or combine with ours and for which we
have no right to indemnification. In addition, many countries, including
certain European countries, have compulsory licensing laws under which a
patent owner may be compelled to grant licenses to third parties in some
circumstances (for example, the patent owner has failed to "work" the
invention in that country, or the third party has patented improvements).
Many countries also limit the enforceability of patents against government
agencies or government contractors. In these countries, the patent owner
may have limited remedies, which could materially diminish the value of the
patent. We will only be able to protect our technologies from unauthorized
use by third parties to the extent that valid and enforceable patents or
trade secrets cover them. We expect to face expensive and time-consuming
infringement actions, validity challenges and other intellectual property
claims and proceedings, which are frequent in the medical device industry,
and which divert management's
22
attention from our business. There are other risks associated with our
patent portfolio and other intellectual property. Please refer to "Factors
That May Affect Future Results" for a more complete description of these
risks.
University of Virginia. We have exclusively licensed six patents
related to the field of magnetically guiding an element through the body
and viewing it for medical use from the University of Virginia Patent
Foundation. The UVA patents address earlier versions of our system which we
do not believe are essential to the protection of our current business
activities, although one of these patents could be construed to cover some
of our current activities. To date, we have expensed a five percent royalty
on sales of products that might arguably be covered by this patent and our
business model assumes continued payment of this royalty to UVA. However,
we have become aware of prior art that caused us to question the validity
of this patent, and as a result, we have initiated re-examination of the
patent in the U.S. Patent and Trademark Office. If this reexamination finds
the patent partially or completely invalid, our royalty obligations under
the license agreement could be reduced or eliminated. We believe that our
other patents would be sufficient to protect our technology in that event.
COMPETITION
The markets for medical devices are intensely competitive and are
characterized by rapid technological advances, frequent new product
introductions, evolving industry standards and price erosion.
We consider our primary competition to be existing manual
catheter-based interventional techniques and surgical procedures. To our
knowledge, we are the only company that has commercialized remote, digital
and direct control of the working tip of catheters and guidewires for
interventional use. Our success depends in part on convincing hospitals and
physicians to convert existing interventional procedures to
computer-assisted procedures.
We expect to face competition from companies that are developing new
approaches and products for use in interventional procedures, including
robotic approaches that may be directly competitive with our technology.
Many of these companies have an established presence in the field of
interventional cardiology, including the major imaging, capital equipment
and disposables companies that are currently selling products in the cath
lab. We also face competition from companies who currently market or are
developing drugs or gene therapies to treat the conditions for which our
products are intended.
We believe that the primary competitive factors in the market we
address are capability, safety, efficacy, ease of use, price, quality,
reliability and effective sales, support, training and service. The length
of time required for products to be developed and to receive regulatory and
reimbursement approval is also an important competitive factor. We believe
Stereotaxis has an important "first mover" advantage in establishing
clinical standards in these areas. See "Factors That May Affect Future
Results" for a discussion of other competitive risks facing our business.
GOVERNMENT REGULATION
The healthcare industry, and thus our business, is subject to
extensive federal, state, local and foreign regulation. Some of the
pertinent laws have not been definitively interpreted by the regulatory
authorities or the courts, and their provisions are open to a variety of
interpretations. In addition, these laws and their interpretations are
subject to change.
Both federal and state governmental agencies continue to subject the
healthcare industry to intense regulatory scrutiny, including heightened
civil and criminal enforcement efforts. As indicated by work plans and
reports issued by these agencies, the federal government will continue to
scrutinize, among other things, the billing practices of healthcare
providers and the marketing of healthcare products. The federal government
also has increased funding in recent years to fight healthcare fraud, and
various agencies, such as the U.S. Department of
23
Justice, the Office of Inspector General of the Department of Health and
Human Services, or OIG, and state Medicaid fraud control units, are
coordinating their enforcement efforts.
We believe that we have structured our business operations and
relationships with our customers to comply with all applicable legal
requirements. However, it is possible that governmental entities or other
third parties could interpret these laws differently and assert otherwise.
We discuss below the statutes and regulations that are most relevant to our
business and most frequently cited in enforcement actions.
U.S. FOOD AND DRUG ADMINISTRATION, OR FDA, REGULATION
The Food and Drug Administration strictly regulates the medical
devices we produce under the authority of the Federal Food, Drug and
Cosmetic Act, or FFDCA, the regulations promulgated under the FFDCA, and
other federal and state statutes and regulations. The FFDCA governs, among
other things, the pre-clinical and clinical testing, design, manufacture,
safety, efficacy, labeling, storage, record keeping, post market reporting
and advertising and promotion of medical devices.
Our medical devices are categorized under the statutory framework
described in the FFDCA. This framework is a risk-based system which
classifies medical devices into three classes from lowest risk (Class I) to
highest risk (Class III). In general, Class I and II devices are either
exempt from the need for FDA clearance or cleared for marketing through a
premarket notification, or 510(k), process. Our devices that are considered
to be general tools, such as our NIOBE cardiology magnet system and our
suite of guidewires, or that provide diagnostic information, such as our
TANGENT electrophysiology mapping catheters, are subject to 510(k)
requirements. These devices are cleared for use as general tools which have
utility in a variety of interventional procedures. Our therapeutic devices,
such as our HELIOS ablation catheters, are subject to the premarket
application, or PMA, process.
If clinical data is needed to support a marketing application for
our devices, generally, an investigational device exemption, or IDE, is
assembled and submitted to the FDA. The FDA reviews and must approve the
IDE before the study can begin. In addition, the study must be approved by
an Institutional Review Board covering each clinical site. When all
approvals are obtained, we initiate a clinical study to evaluate the
device. Following completion of the study, we collect, analyze, and present
the data in an appropriate submission to the FDA, either a 510(k) or PMA.
Under the 510(k) process, the FDA determines whether or not the
device is "substantially equivalent" to a predicate device. In making this
determination, the FDA compares both the new device and the predicate
device. If the two devices are comparable in intended use, safety, and
effectiveness, the device may be cleared for marketing.
Under the PMA process, the FDA examines detailed data relating to
the safety and effectiveness of the device. This information includes
design, development, manufacture, labeling, advertising, pre-clinical
testing, and clinical study data. Prior to approving the PMA, the FDA
generally will conduct an inspection of the facilities producing the device
and one or more clinical sites where the study was conducted. The facility
inspection evaluates the company's readiness to commercially produce and
distribute the device. The inspection includes an evaluation of compliance
under the Quality System Regulation (QSR). Under certain circumstances, the
FDA may convene an advisory panel meeting to seek review of the data
presented in the PMA. If the FDA's evaluation is favorable, the PMA is
approved, and we can market the device in the U.S. The FDA may approve the
PMA with conditions, such as post-market surveillance requirements.
We evaluate changes made following 510(k) clearance or PMA approval
for significance and if appropriate, make a subsequent submission to the
FDA. In the case of a significant change being made to a 510(k) device, we
submit a new 510(k). For a PMA device, we will either need approval through
a PMA supplement or will need to notify the FDA.
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For our 510(k) devices, we design the submission to cover multiple
models or variations in order to minimize the number of submissions. For
our PMA devices, we rely upon the PMA approvals of our strategic partners
to utilize the PMA supplement regulatory path rather than pursue an
original PMA. Because of the differences in the amount of data and numbers
of patients in clinical trials, a PMA supplement process is often much
shorter than the amount of time and data required for approval of an
original PMA.
Currently our NIOBE cardiology magnet system, NAVIGANT advanced user
interface, CARDIODRIVE automated catheter advancer, family of CRONUS
coronary guidewires, and TANGENT electrophysiology mapping catheter have
been cleared by the FDA to be used in interventional procedures. In
addition, we have received the CE Mark for our HELIOS electrophysiology
ablation catheter and, in the U.S., we have completed clinical trials in
2004 and expect to subsequently file a PMA.
We are subject to risks associated with U.S. government regulation.
See "Factors That May Affect Future Results" for a discussion of the
specific regulatory risks associated with our business.
FOREIGN REGULATION
In order for us to market our products in other countries, we must
obtain regulatory approvals and comply with extensive safety and quality
regulations in other countries. These regulations, including the
requirements for approvals or clearance and the time required for
regulatory review, vary from country to country. Failure to obtain
regulatory approval in any foreign country in which we plan to market our
products may harm our ability to generate revenue and harm our business.
The primary regulatory environment in Europe is that of the European
Union, which consists of 25 countries encompassing most of the major
countries in Europe. The European Union requires that manufacturers of
medical products obtain the right to affix the CE Mark to their products
before selling them in member countries of the European Union. The CE Mark
is an international symbol of adherence to quality assurance standards and
compliance with applicable European medical device directives. In order to
obtain the right to affix the CE Mark to products, a manufacturer must
obtain certification that its processes meet certain European quality
standards. Compliance with the Medical Device Directive, as certified by a
recognized European Notified Body, permits the manufacturer to affix the CE
Mark on its products and commercially distribute those products throughout
the European Union.
We have received the right to affix the CE Mark to each of our
products that has received 510(k) clearance in the U.S. and also for our
HELIOS ablation catheter. We are pursuing the right to affix the CE mark to
certain guidewires that have received 510(k) clearance in the U.S. If we
modify existing products or develop new products in the future, including
new devices, we will need to apply for permission to affix the CE Mark to
such products. We will be subject to regulatory audits, currently conducted
biannually, in order to maintain any CE Mark permissions we have already
obtained. We cannot be certain that we will be able to obtain permission to
affix the CE Mark for new or modified products or that we will continue to
meet the quality and safety standards required to maintain the permissions
we have already received. If we are unable to maintain permission to affix
the CE Mark to our products, we will no longer be able to sell our products
in member countries of the European Union.
In addition, through Siemens, we intend to submit an application for
regulatory approval to commence a clinical study in 2005 with the Japanese
Ministry of Health, Labor and Welfare for commercial use of the Stereotaxis
System in Japan. Siemens has agreed to coordinate the regulatory approval
process and act as distributor for our NIOBE cardiology magnet system and
NAVIGANT advanced user interface in Japan, and we have begun to formulate
our clinical plans for regulatory approval. We are currently formulating
our clinical and regulatory plans for China and anticipate using Siemens to
coordinate regulatory approval and distribute our products in China. We
will evaluate regulatory approval in other foreign countries on an
opportunistic basis.
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ANTI-KICKBACK STATUTE
The federal healthcare program Anti-Kickback Statute prohibits
persons from knowingly and willfully soliciting, offering, receiving or
providing remuneration, directly or indirectly, in exchange for or to
induce either the referral of an individual, or furnishing or arranging for
a good or service, for which payment may be made under a federal healthcare
program such as the Medicare and Medicaid programs. The definition of
"remuneration" has been broadly interpreted to include anything of value,
including for example gifts, discounts, the furnishing of supplies or
equipment, credit arrangements, payments of cash and waivers of payments.
Several courts have interpreted the statute's intent requirement to mean
that if any one purpose of an arrangement involving remuneration is to
induce referrals of federal healthcare covered business, the statute has
been violated. Penalties for violations include criminal penalties and
civil sanctions such as fines, imprisonment and possible exclusion from
Medicare, Medicaid and other federal healthcare programs. In addition, some
kickback allegations have been claimed to violate the Federal False Claims
Act, discussed in more detail below.
The Anti-Kickback Statute is broad and prohibits many arrangements
and practices that are lawful in businesses outside of the healthcare
industry. Recognizing that the Anti-Kickback Statute is broad and may
technically prohibit many innocuous or beneficial arrangements, Congress
authorized the OIG to issue a series of regulations, known as the "safe
harbors" which it did, beginning in July of 1991. These safe harbors set
forth provisions that, if all their applicable requirements are met, will
assure healthcare providers and other parties that they will not be
prosecuted under the Anti-Kickback Statute. The failure of a transaction or
arrangement to fit precisely within one or more safe harbors does not
necessarily mean that it is illegal or that prosecution will be pursued.
However, conduct and business arrangements that do not fully satisfy each
applicable safe harbor may result in increased scrutiny by government
enforcement authorities such as the OIG.
Many states have adopted laws similar to the Anti-Kickback Statute.
Some of these state prohibitions apply to referral of patients for
healthcare items or services reimbursed by any source, not only the
Medicare and Medicaid programs.
Government officials have focused their enforcement efforts on
marketing of healthcare services and products, among other activities, and
recently have brought cases against sales personnel who allegedly offered
unlawful inducements to potential or existing customers in an attempt to
procure their business. As part of our compliance program, we review our
sales contracts and marketing materials to help assure compliance with the
Anti-Kickback Statute and similar state laws. However, we cannot rule out
the possibility that the government or other third parties could interpret
these laws differently and assert otherwise.
HIPAA
The Health Insurance Portability and Accountability Act of 1996, or
HIPAA, created two new federal crimes: healthcare fraud and false
statements relating to healthcare matters. The healthcare fraud statute
prohibits knowingly and willfully executing a scheme to defraud any
healthcare benefit program, including private payors. A violation of this
statute is a felony and may result in fines, imprisonment or exclusion from
government sponsored programs. The false statements statute prohibits
knowingly and willfully falsifying, concealing or covering up a material
fact or making any materially false, fictitious or fraudulent statement in
connection with the delivery of or payment for healthcare benefits, items
or services. A violation of this statute is a felony and may result in
fines or imprisonment.
In addition to creating the two new federal healthcare crimes, HIPAA
also establishes uniform standards governing the conduct of certain
electronic healthcare transactions and protecting the security and privacy
of individually identifiable health information maintained or transmitted
by healthcare providers, health plans and healthcare clearinghouses. Two
standards have been promulgated under HIPAA: the Standards for Privacy of
26
Individually Identifiable Health Information, which restrict the use and
disclosure of certain individually identifiable health information, and the
Standards for Electronic Transactions, which establish standards for common
healthcare transactions, such as claims information, plan eligibility,
payment information and the use of electronic signatures. In addition, the
Security Standards will require covered entities to implement certain
security measures to safeguard certain electronic health information by
April 21, 2005. Although we believe we are not a covered entity and
therefore do not need to comply with these standards, our customers
generally are covered entities and frequently ask us to comply with certain
aspects of these standards. While the government intended this legislation
to reduce administrative expenses and burdens for the healthcare industry,
our compliance with certain provisions of these standards may entail
significant and costly changes for us. If we fail to comply with these
standards, it is possible that we could be subject to criminal penalties.
In addition to federal regulations issued under HIPAA, some states
have enacted privacy and security statutes or regulations that, in some
cases, are more stringent than those issued under HIPAA. In those cases, it
may be necessary to modify our operations and procedures to comply with the
more stringent state laws, which may entail significant and costly changes
for us. We believe that we are in compliance with such state laws and
regulations. However, if we fail to comply with applicable state laws and
regulations, we could be subject to additional sanctions.
FEDERAL FALSE CLAIMS ACT
Another trend affecting the healthcare industry is the increased use
of the federal False Claims Act and, in particular, actions under the False
Claims Act's "whistleblower" or "qui tam" provisions. Those provisions
allow a private individual to bring actions on behalf of the government
alleging that the defendant has defrauded the federal government. The
government must decide whether to intervene in the lawsuit and to become
the primary prosecutor. If it declines to do so, the individual may choose
to pursue the case alone, although the government must be kept apprised of
the progress of the lawsuit. Whether or not the federal government
intervenes in the case, it will receive the majority of any recovery. If
the individual's litigation is successful, the individual is entitled to no
less than 15%, but no more than 30%, of whatever amount the government
recovers. In recent years, the number of suits brought against healthcare
providers by private individuals has increased dramatically. In addition,
various states have enacted laws modeled after the federal False Claims
Act.
When an entity is determined to have violated the federal False
Claims Act, it may be required to pay up to three times the actual damages
sustained by the government, plus civil penalties of between $5,500 to
$11,000 for each separate false claim. There are many potential bases for
liability under the federal False Claims Act. Liability arises, primarily,
when an entity knowingly submits, or causes another to submit, a false
claim for reimbursement to the federal government. Although simple
negligence should not give rise to liability, submitting a claim with
reckless disregard or deliberate ignorance of its truth or falsity could
result in substantial civil liability. The False Claims Act has been used
to assert liability on the basis of inadequate care, improper referrals,
and improper use of Medicare numbers when detailing the provider of
services, in addition to the more predictable allegations as to
misrepresentations with respect to the services rendered. We are unable to
predict whether we could be subject to actions under the False Claims Act,
or the impact of such actions. However, the costs of defending claims under
the False Claims Act, as well as sanctions imposed under the Act, could
significantly affect our financial performance.
CERTIFICATE OF NEED LAWS
In approximately two-thirds of the states, a certificate of need or
similar regulatory approval is required prior to the acquisition of
high-cost capital items or various types of advanced medical equipment,
such as our Stereotaxis System. At present, many of the states in which we
sell Stereotaxis Systems have laws that require institutions located in
those states to obtain a certificate of need in connection with the
purchase of our system, and some of our purchase orders are conditioned
upon our customer's receipt of necessary certificate of need approval.
Certificate of need laws were enacted to contain rising health care costs,
prevent the unnecessary duplication of health resources, and increase
27
patient access for health services. In practice, certificate of need laws
have prevented hospitals and other providers who have been unable to obtain
a certificate of need from acquiring new equipment or offering new
services. A further increase in the number of states regulating our
business through certificate of need or similar programs could adversely
affect us. Moreover, some states may have additional requirements. For
example, we understand that California's certificate of need law also
incorporates seismic safety requirements which must be met before a
hospital can acquire our Stereotaxis System.
EMPLOYEES
As of December 31, 2004, we had 140 employees, 49 of whom were
engaged directly in research and development, 30 in manufacturing and
service, 12 in regulatory, clinical affairs and quality activities, 35 in
sales and marketing activities and 14 in general administrative and
accounting activities. None of our employees is covered by a collective
bargaining agreement, and we consider our relationship with our employees
to be good.
ITEM 2. PROPERTIES
We lease approximately 31,000 square feet of manufacturing and
office space in St. Louis, Missouri. The St. Louis facility is leased
through December 31, 2005. On November 18, 2004, we entered into an office
lease agreement under which we will lease space in a new building to be
constructed in St. Louis. Once the building is completed, we will move our
current St. Louis, Missouri operations to the leased space in the new
building. The lease for the new premises is effective December 1, 2005 and
has a term of ten years, with two renewal options of three years each. The
minimum annual rental under the terms of the lease ranges from
approximately $705,000 in 2006 to approximately $1,177,000 in 2015,
including rent for expansion space provided for in the lease.
We also lease approximately 10,000 square feet in Maple Grove,
Minnesota. The Minnesota facility is leased through December 31, 2006. We
believe that the Minnesota facility will be adequate to meet our needs
through 2006.
ITEM 3. LEGAL PROCEEDINGS
We are involved from time to time in various lawsuits and claims
arising in the normal course of business. Although the outcomes of these
lawsuits and claims are uncertain, we do not believe any of them will have
a material adverse effect on our business, financial condition or results
of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
quarter ended December 31, 2004.
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
PRICE RANGE OF COMMON STOCK
Our common stock has been traded on The Nasdaq Stock Market under
the symbol "STXS" since August 12, 2004. The following table sets forth the
high and low closing prices of our common stock for the periods indicated
and reported by Nasdaq.
QUARTER HIGH LOW
------- ---- ---
YEAR ENDED DECEMBER 31, 2004:
August 12, 2004 to September 30, 2004 $12.44 $7.50
Fourth Quarter 10.89 8.43
As of February 28, 2005, there were approximately 176 stockholders
of record of our common stock, although we believe that there is a
significantly larger number of beneficial owners of our common stock.
DIVIDEND POLICY
We have never declared or paid any cash dividends. We currently
expect to retain earnings for use in the operation and expansion of our
business, and therefore do not anticipate paying any cash dividends for the
next several years.
The information required by this item regarding equity compensation
is incorporated by reference to the information set forth in Item 12 of
this Annual Report on Form 10-K.
USE OF PROCEEDS FROM IPO
We effected the initial public offering of our common stock pursuant
to a Registration Statement on Form S-1 (File No. 333-115253) that was
declared effective by the Securities and Exchange Commission on August 11,
2004 and pursuant to which shares were offered on August 12, 2004.
The net proceeds from the offering, after an underwriting discount
and other expenses, were approximately $41.4 million. We have begun to use,
and intend to continue to use, the net proceeds of the offering for general
corporate purposes, including: working capital; continued sales, marketing
and clinical support initiatives relating to the commercialization of our
products; and continued research and development.
Pending other uses, we have invested the remaining net proceeds of
the offering primarily in short-term, investment gr