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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________ .
COMMISSION FILE NUMBER: 0-28440
RADIANCE MEDICAL SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 68-0328265
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
13700 ALTON PARKWAY, SUITE 160, IRVINE, CALIFORNIA 92618
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 457-9546
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS
------------------- NAME OF EACH EXCHANGE ON WHICH REGISTERED
NONE NONE
SECURITIES TO BE 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 a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, as of March 15, 2000, was approximately $87,669,000 (based upon
the closing price for shares of the Registrant's Common Stock as reported by the
Nasdaq National Market for the last trading date prior to that date). Shares of
Common Stock held by each officer, director and holder of 5% or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
On March 15, 2000, approximately 12,021,000 shares of the Registrant's
Common Stock, $.001 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the Registrant's Proxy Statement for the 2000 Annual Meeting of
Stockholders to be held on June 6, 2000 are incorporated by reference into Part
III.
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FORWARD-LOOKING STATEMENTS
Radiance cautions stockholders that, in addition to the historical
financial information included herein, this Annual Report on Form 10-K includes
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that are
based on management's beliefs, as well as on assumptions made by and information
currently available to management. All statements other than statements of
historical fact included in this Annual Report of Form 10-K, including without
limitation, certain statements under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business," and statements
located elsewhere herein regarding Radiance's financial position and business
strategy, may constitute forward-looking statements. In addition, you generally
can identify forward-looking statements by the use of forward-looking
terminology such as "believes," "may," "will," "expects," "intends,"
"estimates," "anticipates," "plans," "seeks," or "continues," or the negative
thereof or variations thereon or similar terminology. Such forward-looking
statements involve known and unknown risks, including, but not limited to,
economic and market conditions, the regulatory environment in which Radiance
operates, competitive activities or other business conditions. We cannot assure
you that our actual results, performance or achievements will not differ
materially from any future results, performance or achievements expressed or
implied from such forward-looking statements. Important factors that could cause
actual results to differ materially from Radiance's expectations ("Cautionary
Statements") are disclosed in this Annual Report on Form 10-K, including, but
not limited to, those discussed in "Item 7 -- Risk Factors." All subsequent
written and oral forward-looking statements attributable to us or persons acting
on our behalf are expressly qualified in their entirety by these Cautionary
Statements.
PART I
ITEM 1. BUSINESS
INTRODUCTION
Radiance Medical Systems, Inc. ("Radiance," or the "Company") develops,
manufactures and markets proprietary devices for the prevention of the
recurrence of atherosclerotic blockages following the interventional treatment
of atherosclerosis. Radiance currently is primarily engaged in conducting
research and development on radiation therapy, and its primary product under
development is the RDX Catheter, a balloon catheter-based delivery system
designed to allow the temporary delivery of radioactive materials to the area of
an artery that has been treated with conventional interventional therapy such as
Percutaneous Transluminal Coronary Angioplasty ("PTCA"), atherectomy and/or
stent deployment. See "Item 1 -- Products."
The Company is the result of an acquisition effected by the merger of the
(former) Radiance Medical Systems, Inc. ("RMS") with and into CVD/RMS
Acquisition Corporation, a wholly-owned subsidiary of CardioVascular Dynamics,
Inc. (now named Radiance Medical Systems, Inc.). RMS originally was formed by
the Company as a separate entity to focus on the development of radiation
therapy technology for the treatment of cardiovascular disease, and to obtain
financing for such development from sources other than the Company. As a result
of the merger, the Company reacquired all of the shares of RMS which it did not
own. The Company was incorporated on March 16, 1992.
INDUSTRY BACKGROUND
Coronary Artery Disease
Coronary artery disease is the leading cause of death in the United States.
More than 13 million people in the United States currently have been diagnosed
with coronary artery disease, which is generally characterized by the
progressive accumulation of plaque as a result of the deposit of cholesterol and
other fatty materials on the walls of arteries. The accumulation of plaque leads
to a narrowing of the interior passage, or lumen, of the arteries, reducing
blood flow to the heart. When blood flow to the heart becomes insufficient, the
oxygen supply is restricted, resulting in heart attack and/or death. Each year
more than 900,000 revascularization procedures are performed in the United
States, and approximately 1.5 million such procedures are performed worldwide,
to treat coronary artery disease and increase blood flow to the heart.
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Types of Treatment
The two most common forms or treatment for coronary artery disease are: (i)
the coronary artery bypass graft ("CABG"); and (ii) percutaneous transluminal
coronary angioplasty ("PTCA") and other catheter-based technologies. CABG is a
highly invasive, open surgical procedure in which blood vessel grafts are used
to bypass the site of a blocked artery, thereby restoring blood flow. CABG,
still considered the most effective and long-lasting treatment for coronary
artery disease, is generally the primary treatment for severe coronary artery
disease involving multiple vessels. In addition, CABG is often a treatment of
last resort for patients who have undergone other less invasive procedures but
require reintervention. CABG, however, has significant limitations, including
medical complications, such as stroke, multiple organ dysfunction, inflammatory
response, respiratory failure and post-operative bleeding, each of which may
result in death. In addition, CABG is a very expensive procedure and requires a
long recovery period. In the United States, the cost of undergoing CABG is
approximately $32,000 to $36,000, and the average post-operative recovery period
following CABG is approximately six to eight weeks. Approximately 400,000 CABG
procedures are performed annually in the United States. Currently, several
minimally invasive surgical techniques are being developed to lessen the cost
and trauma of CABG procedures.
PTCA is the principal, less invasive alternative to CABG. PTCA is a
procedure performed in a cath lab by an interventional cardiologist. During
PTCA, a guidewire is inserted into a blood vessel through a puncture in the leg
(or arm in some cases) and guided through the vasculature to a diseased site in
the coronary artery. A balloon-tipped catheter is then guided over the wire to
the deposit of plaque ("lesion") occluding the artery. Once the balloon is
positioned across the lesion inside the vessel, the balloon is inflated and
deflated several times. Frequently, successively larger balloons are inflated at
the lesion site, requiring the use of multiple balloon catheters. The inflation
of the balloon cracks or reshapes the plaque and the arterial wall, thereby
expanding the arterial lumen. Though injury to the arterial wall often occurs
under balloon pressure, PTCA typically results in increased blood flow without
the actual removal of any plaque. In 1997, more than 600,000 PTCA procedures
were performed in the United States. The average cost of each PTCA procedure is
approximately $15,000, or less than one half of the average cost of CABG, and
the length of stay and recuperation period are substantially less than required
for CABG.
The principal limitation of PTCA is the high rate of restenosis, a
re-narrowing of a treated artery, which generally requires reintervention. Due
to the effects of restenosis, the long-term cost-effectiveness of PTCA has not
proven greater than that of CABG. Studies have indicated that within six months
after PTCA, between 25% and 45% of PTCA patients experience restenosis. In
addition, 60% of patients with multi-vessel coronary artery disease who received
PTCA have been shown to require reintervention within three years of treatment.
Although the average cost of PTCA initially is less than one-half of the cost of
CABG, a recent study indicated that three years after the procedure, PTCA has no
cost advantage over CABG due to the need for subsequent interventional
treatment.
A variety of other catheter-based, minimally invasive, interventional
devices for coronary artery disease have been developed in an attempt to reduce
the frequency of restenosis following PTCA. These devices include atherectomy
devices (catheter devices that cut and remove plaque from the arterial wall),
rotational ablation devices (catheter devices which use a rotating burr to
remove plaque), and laser catheter devices (devices that use laser energy to
reduce plaque in arteries). Although these new approaches to coronary artery
disease have been found to be effective in certain lesion types and in certain
locations in the coronary arteries, they still exhibit high rates of restenosis.
RESTENOSIS
Clinical restenosis is typically defined as a renarrowing of a coronary
artery within six months of a revascularization treatment to less than 50% of
its original size. Restenosis is a vascular response to arterial injury and
occurs frequently after a revascularization procedure, which stretches coronary
arteries or otherwise damages the treated segment of the artery. Due to multiple
mechanisms controlling vascular repair, restenosis may occur within a short
period after a revascularization procedure or may develop over the course of
months
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or years. Restenosis that occurs shortly after a revascularization procedure is
usually attributed to elastic recoil (acute loss of lumen diameter) of the
artery.
Restenosis occurring a longer period of time after a revascularization
procedure may result from excessive proliferation of cells at the treatment site
("hyperplasia") or from a generalized geometric remodeling of the arterial
segment, the causes of which are not well understood. Hyperplasia is a
physiological response to injury, similar to scarring which occurs in wound
healing. In response to an arterial injury from revascularization, the body
initiates a biochemical response to repair the injury site and protect it from
further harm. This response will include a signal to adjacent cells of the
arterial wall to multiply. Often this cell proliferation goes unchecked,
resulting in a much thicker and inelastic arterial wall and in reduced blood
flow. Radiance believes that hyperplasia and vascular remodeling may be
responsible for a large portion of the overall effect of restenosis.
Coronary Stenting
Coronary stents are expandable, implantable metal devices permanently
deployed at a lesion site. Stents maintain increased lumen diameter by
mechanically supporting the diseased site in a coronary artery. Of all the
non-surgical treatments which have sought to improve upon PTCA, stents have
demonstrated the best results in reducing the rate of restenosis. In a typical
stent procedure, the artery is pre-dilated at the lesion site with a balloon
catheter and the stent is delivered to the site of the lesion and deployed with
the use of a second balloon catheter, which expands the stent and firmly
positions it in place. This positioning is often followed by a third dilatation
using a high pressure balloon to fully expand and secure the stent. Once placed,
stents exert radial force against the walls of the coronary artery to enable the
artery to remain open and functional.
Recent studies have concluded that the rate of restenosis in patients who
receive coronary stents following PTCA is approximately 30% lower than in
patients treated only by PTCA. Additional clinical studies with stents which
incorporate a specialized coating may show a greater reduction in the rate of
restenosis. Stents appear to be effective in reducing the frequency of
restenosis resulting from elastic recoil and appear to limit vascular
remodeling, but may increase, rather than decrease, hyperplasia.
The use of stents has grown rapidly since commercial introduction in the
United States in 1994. Approximately 300,000 of the approximately 600,000 PTCA
procedures performed in the United States in 1997 utilized stents. Despite their
rapid adoption, stents have certain disadvantages. Not only are they permanent
implants which may result in unforeseen long-term adverse effects, but they
cannot be used in cases where the coronary arteries are too tortuous or too
narrow. In addition, the use of stents approximately doubles the cost of a PTCA
procedure and restenosis still may occur, often requiring reintervention.
Radiotherapy
For more than 50 years, radiotherapy has been used routinely to treat
proliferative cellular disorders in humans. While externally applied radiation
has shown little beneficial effect on treated arteries, the application of beta
and gamma radiation at the site of arterial injury has proven more useful in
treating restenosis.
Gamma radiation has been demonstrated in a number of models to inhibit the
cellular proliferation associated with the restenosis mechanism. Gamma is
compatible with vessels of all sizes but is more complicated to use in the cath
lab because of its activity.
Beta radiation has been demonstrated to inhibit intimal hyperplasia. Since
beta radiation travels only a short distance (2-4 mm) before loosing its
therapeutic value, it is imperative that the source be placed as close as
possible to the arterial wall. This relatively short distance of travel makes
its compatible with current cath lab practices. Dosage is calculated by knowing
the energy level of the source and the distance from the treatment target.
Uniform dosage to the intended area is dependent upon maintaining a consistent
energy field.
The placement of guidewire based systems of radiation transport in the
curved coronary anatomy has been shown to produce inconsistent dosages to actual
tissue because of the different distances the guidewire lays from the vessel
wall over the length of the active wire. When guidewire centering balloons are
used, the
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beneficial effect of the radiation is lost over the distance from the wire to
the arterial wall. As the vessel diameter increases, the therapeutic effect also
diminishes. The Company believes that if any benefit is to be realized with
guidewire based techniques it would be limited to small diameter, straight
arteries. The extended inflation times of the centering balloon required to
insure adequate dosage also may result in ischemia and unacceptable discomfort
or hazard to the patient.
A stent activated to emit beta radiation would overcome the proximity
issues inherent in a guidewire delivery system by placing the beta source
directly opposed to the vessel. This approach also assumes a one dose for all
patients, removing control of dose from the clinician. This approach also
assumes a vessel of fixed size and that the energy level of the implanted stent
will be adequate to deliver the required radiation dosage after implant. Vessel
diameter is often difficult to quantify. As a stent expands, the space between
its active elements increases. Since the radioactive stent cannot be removed
after placement, the patient continues to receive the ionizing effects until the
radiation dissipated over five half lives of the isotope used. In the case of
beta p32, this is approximately 70 days.
PRODUCTS
In addition to research and development of radiotherapy products, Radiance
also manufactures and markets catheters and coronary stent systems used in
conjunction with angioplasty and vascular stenting. The Company's proprietary
Focus catheter technology enables physicians to deliver therapeutic radial force
and stents accurately and effectively to the treatment site. The Company's
proprietary stent designs offer characteristics enabling physicians to access
varying coronary anatomy. RMS believes that these products enable physicians to
perform challenging interventional procedures effectively, resulting in improved
treatment outcomes and lower costs. RMS owns the rights to 26 issued U.S.
patents, one issued European patent and two Japanese patents covering certain
aspects of its catheter and stent technologies.
Radiation Products Technology
Radiance believes that its radiation source technology, combined with its
existing catheter and stent delivery systems, can deliver radioactive materials
to the localized site safely and effectively. The Company's radiation technology
enables solid form radioactive material of virtually any isotope to be
integrated into the wall of the balloon material itself, which creates a
balloon/source angioplasty catheter. The Radiance approach combines the
demonstrated benefits of beta radiation with the utility of direct vessel wall
apposition associated with balloon dilatation.
Radiance currently is focusing on the development of the RDX catheter, a
radiation delivery balloon catheter system. The RDX Catheter consists of an
expandable dual balloon system which enables the radiation dosage to be
delivered precisely to the vessel wall. Because the balloon is in contact with
the wall, this method of delivering Radiotherapy is appropriate for vessels of
any diameter with proper balloon size selection.
Because the beta source is positioned relatively close to the vessel wall
and the exact radiation strength is known prior to delivery, accurate dose
calculations can be made to customize patient treatment. This device may also
incorporate a perfusion system to maintain blood flow distal to the inflated
balloon to permit longer inflation times, if required, to optimize radiation
dosage delivery effectively.
Radiance believes that the RDX Catheter has several technical and clinical
advantages for the treatment of restenosis.
- The RDX Catheter provides complete apposition to the arterial wall,
reducing the problems of distance determination and closing with current
vascular radiotherapy devices.
- The RDX Catheter can deliver equal or higher radioisotope activity with
less total radiation dose than other technologies since it delivers the
activity directly against the artery wall to be treated, as opposed to
products using an irradiated source in the center of the artery.
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- The RDX catheter requires no expensive capital equipment, such as a
radiation shielding afterloader system or a system to compute dosimetry,
like competing radiotherapy products.
- The fully-deployable radiation source is independent of vessel size.
Coronary arteries range from 1.5-6.0 millimeters. With other devices, a
different dose of radiation has to be calculated and/or delivered for
each vessel size. With the RDX Catheter, the dose is the same regardless
of the vessel dimensions because the dose is delivered to the vessel
wall. This also makes the RDX Catheter system useful in other vascular
applications such as coronary, peripheral vascular leg arteries, renal,
carotid and kidney dialysis grafts. This potentially broadens the
clinical utility and market potential for the RDX system.
- The RDX Catheter is simple and easy-to-use. Use of the RDX Catheter is
consistent with the use of other types of catheters by interventional
cardiologists.
- The solid film substrate is protected by the double balloon construction.
The use of the beta isotope within the system increases the safety of the
RDX Catheter as a vascular radiotherapy delivery device.
The Company currently is focusing on developing products for the treatment
of restenosis following the interventional treatment of atherosclerosis. The
Company believes, however, that its Radiotherapy technology may eventually be
utilized to prevent and treat restenosis in all vascular segments of the body,
including coronary, peripheral vascular, carotid, neurovascular and renal
arteries. However, there is no assurance that Radiance will develop and market
the RDX Catheter technology or any other radiation therapy technology
successfully, that such products or radiation therapy in general will receive
market acceptance or that such products, whether under development or
commercialized, will not be rendered obsolete as a result of other technology.
Clinical Trials
In September 1999, the Company began European human clinical trials of its
RDX Coronary Radiation Delivery System. The BETTER (Beta Radiation Trial To
Eliminate Restenosis) clinical trial is designed to provide the data for the
Company to obtain CE Mark approval and commercialize the RDX catheter in Europe
and other international countries. The Company expects to complete the BETTER
trial enrollment of approximately 150 patients during 2000. After completion of
patient follow-up studies, the Company will apply for CE Mark approval to begin
marketing the RDX Catheter in Europe. As of March 1, 2000, the Company had
enrolled 62 patients in the study. As the first patients were enrolled in the
late third quarter of 1999, six month follow-up had not yet been performed on
any patients.
In February 2000, the Company received approval of the U.S. Food
Administration for the Company's Investigational Device Exemption ("IDE") to
commence human clinical trials for its RDX catheter radiation delivery system.
The BRITE (Beta Radiation to Reduce Instent Restenosis) clinical trials will
evaluate the RDX System in patients who previously have had a coronary stent
implanted and have returned with restenosis at the site of the stent implant
("in-stent restenosis"). The initial phase of the study will include enrollment
of approximately 45 patients and is expected to be completed prior to the end of
2000. As of March 1, 2000 the Company had enrolled 3 patients in the study.
Radiance will be required to seek FDA approval for any new product and
expects that some of these products will be subject to the PMA process. The
Company also will be subject to federal, state and/or local laws and regulations
governing the use and handling of radioactive materials. See "Item
1 -- Government Regulation." There can be no assurance that Radiance will
complete the development of any products successfully or that any such products
will receive any required regulatory approvals. The failure of Radiance to
develop new products successfully or to obtain regulatory approvals could have a
material adverse effect on the business and results of operations of the
Company.
Existing Catheter Products Technology
Radiance has utilized its Focus technology to develop catheter products
that address the principal challenges physicians experience in treating vascular
diseases: restenosis of a treated vessel, chronic total
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occlusions and acute reclosure of a vessel during or soon after a procedure.
Traditional balloon extrusion technology does not enable the combination of
compliant and non-compliant materials, resulting in a catheter that can be
inflated only to a uniform diameter. Therefore, existing uniform diameter
catheters require cardiologists to use multiple balloons to treat vessels of
varying diameters, resulting in unnecessary costs. The Company's patented Focus
technology combines compliant and non-compliant balloon materials on a single
catheter, creating an angioplasty balloon that has an adjustable, larger center
diameter with fixed, smaller diameters at each end. The center compliant section
of the Focus catheter enlarges predictably at a rate of 0.1 mm per atmosphere of
pressure when inflation pressures exceed six atmospheres. The ends of the
balloon remain at their nominal diameters and do not expand with increased
pressure. These characteristics allow a single balloon to expand to multiple
diameters, enabling the physician to deliver stents and perform interventional
procedures in vessels of varying diameters and anatomical locations.
Radiance believes the Focus catheters deliver stents more effectively by
focusing the radial deployment force on the stented section, rather than along
the entire balloon, which may reduce the damage to the adjacent vessel. The
technology also is available in various combinations on a multiple-purpose
catheter, thereby enabling physicians to treat vascular disease
cost-effectively. The Company's products are designed to be low profile (small,
uninflated diameter), enabling cardiologists to advance them along narrow
vessels, as well as flexible and trackable, enabling cardiologists to advance
and control them accurately within the vasculature.
In June 1998, Radiance entered into a technology license agreement with
Guidant Corporation, an international interventional cardiology products
company, granting Guidant rights to manufacture and distribute products using
Radiance's Focus technology for delivery of stents, including exclusive
marketing rights in the United States. In exchange for those rights Radiance has
received, and will receive, certain milestone payments based upon the transfer
of the technological knowledge to Guidant, and royalty payments based upon the
sale of products by Guidant using Focus technology.
The following table lists the Company's catheter products which currently
are marketed:
FIRST
COMMERCIAL
PRODUCTS INTENDED APPLICATIONS U.S. REGULATORY STATUS SALE
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FOCUS CATHETERS
Guardian PTCA (i.e., balloon PMA Supplement Approved Q2 1998
Over-the-wire design angioplasty in coronary
arteries)
Lynx F/X PTCA or Stent Delivery(2) N/A(1) Q1 1997
Rail Design
ARC PTCA PMA Supplement Approved Q3 1996
Over-the-wire design
FACT Catheter PTCA PMA Supplement Approved Q1 1996
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(1) Available only outside the United States due to patent restrictions.
(2) Not approved in the United States for stent delivery. The marketing of this
product in the United States for such use will require Radiance to obtain a
PMA supplement approval. Radiance is not currently seeking such approval.
Existing Stent Products Technology
Radiance's line of coronary integrated stent delivery systems provide
physicians with unique products of varying measures of strength and flexibility
to allow optimal placement and stenting characteristics to aid in the
minimization of restenosis.
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The following table lists Radiance's currently marketed stent products
which are not available in the United States due to Radiance's decision not to
apply for regulatory approval.
FIRST
PRODUCTS INTENDED APPLICATIONS COMMERCIAL SALE
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Synthesis Stent Coronary Stenting Q1 1998
Synthesis Star System (1) Coronary Stenting Q1 1998
Enforcer Stent Coronary Stenting Q3 1997
Enforcer Stent System Coronary Stenting Q4 1997
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(1) Pre-mounted stent on a Star balloon catheter delivery system.
Vascular Access Products
Radiance's vascular access products utilized patented technology to provide
rapid, accurate access to the body's vascular system for guidewire and catheter
entry. In January 1999, Radiance sold its vascular access product line and
related assets to Escalon Medical Corp. The Company believes that the sale of
its vascular access product line and related assets, combined with the CVD/RMS
merger, focuses the Company's business on developing its proprietary
technologies for the interventional cardiology market.
MANUFACTURING
With the exception of certain final assembly and sterilization procedures
for those products designed to be sold only outside the United States and for
radiation devices, and the manufacture of those products which Radiance has
licensed to third parties, all of Radiance's current products are produced in
its facilities in Irvine, California. However, we have contracted for a third
party manufacturer for the final assembly and irradiation of our radiotherapy
catheter (See "Item 7, Management's Discussion and Analysis of Financial
Conditions and Results of Operations", under the subheading "Overview" for a
discussion of third party manufacturer Bebig GmbH.). Radiance fabricates certain
proprietary components, then assembles, inspects, tests and packages all
components into finished products. By designing and assembling its catheter
products, Radiance believes it is better able to control quality and costs,
limit third-party access to its proprietary technology, and better manage
manufacturing process enhancements and new product introductions. In addition,
Radiance purchases many standard and custom-built components from independent
suppliers and subcontracts certain processes from independent vendors. Most of
these components and processes are available from more than one vendor. However,
certain manufacturing processes currently are performed by single vendors,
especially for final assembly and radioactive source manufacturing. While
Radiance believes that there are other vendors available to perform these
processes, an interruption of performance by any of these vendors could have a
material adverse effect on Radiance's ability to manufacture its products until
a new source of supply were qualified and, as a result, could have a material
adverse effect on Radiance's business, financial condition and results of
operations.
Due to the relatively short half-life (i.e., shelf life) of the Company's
radiotherapy products, unlike its existing products, it is critical to ship the
products as close to the date of use as possible. Moreover, coordination between
the Company, a contract manufacturer, the distributor and the end user is
necessary in order to reduce waste and returned products. To help reduce the
shipping time for the product and improve the Company's response time, the
Company has contracted with a third party manufacturer, Bebig, in Europe to
perform the final assembly and radioactive source manufacturing of the devices
for international use and anticipates the use of a similar facility in the
United States. If the Company fails to establish the aforementioned capability,
it could have a material adverse effect on Radiance's business, financial
condition and results of operations.
Radiance has obtained the right to affix the CE (Conformite Europeene)
marking to all of its products currently sold in the countries of the European
Economic Area and Switzerland. CE marking is a European symbol of conformance to
strict product manufacturing and quality system standards. As part of the CE
marking process, Radiance also received ISO 9001/EN46001 certification with
respect to the manufacturing of all of its currently marketed products.
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Radiance's success will depend in part upon its ability to manufacture its
products in compliance with ISO 9001, the FDA's quality system regulations
("QSR") requirements, and California Department of Health Services ("CDHS")
licensing and other regulatory requirements, in sufficient quantities and on a
timely basis, while maintaining product quality and acceptable manufacturing
costs. Radiance began manufacturing certain of its products at its facilities in
July 1995. Accordingly, Radiance has limited experience in manufacturing its
products. Radiance has undergone and expects to continue to undergo regular
"QSR" inspections in connection with the manufacture of its products at
Radiance's facilities. Radiance's success will depend upon, among other things,
its ability to manage the simultaneous manufacture of different products
efficiently and to integrate the manufacture of new products with existing
products. There can be no assurance that Radiance will not encounter
difficulties in scaling up production of new products, including problems
involving production yields, quality control and assurance, component supply and
shortages of qualified personnel. Radiance's failure to commence the
manufacturing of these new products successfully, or to increase production
volumes of new and existing products in a timely manner, would materially and
adversely affect Radiance's business, financial condition and results of
operations. Failure to increase production volumes in a timely or cost-effective
manner or to maintain compliance with ISO 9001, QSR requirements, CDHS or other
regulatory requirements could have a material adverse effect on Radiance's
business, financial condition and results of operations.
MARKETING AND SALES
Radiance is trying to develop but does not have any products based on
radiation therapy currently available for commercial marketing and sale to the
public. Due to the licensing of the technology upon which the Company's
currently-marketed products are based in June 1998, and the sale of its Vascular
Access product line and related assets in January 1999, product sales were
substantially lower in 1999, compared with 1998, and are expected to decrease
further in 2000. Radiance's existing catheter and coronary stent system products
are sold in the United States and international markets, principally Europe and
Japan. However, certain of Radiance's products are not available in each market
due to regulatory and intellectual property restrictions. Radiance currently
sells its products through a combination of strategic partners, medical device
distributors and direct sales personnel. Radiance also has distribution
agreements with companies covering countries outside the United States and
Japan. Radiance entered into an exclusive distribution agreement in Japan with
Cathex in May 1997 which terminates in January 2001. Sales to Cathex accounted
for 16%, 28% and 10% of Radiance's total product sales in 1997, 1998 and 1999,
respectively. See "Item 7 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview." Radiance intends to expand its
sales and marketing capability and to distribute selected new products through
strategic partnerships.
In 1998 and 1999, the Company reduced its domestic sales force and does not
actively promote its products here in the U.S. due to patent restrictions, the
competitive environment and its decision to focus its efforts on the development
of the RDX catheter technology. Moreover, the U.S. market for the Company's
existing products is dominated by a few competitors with substantially greater
assets and much more extensive sales and distribution networks. Additionally,
because of hospital buying preferences, the competitive environment is conducive
to companies with wide product portfolios. Thus, we believe that the Company
will only be able to compete in the near term in the U.S. market if it is
successful in developing unique, proprietary, cost-saving technology.
In 1997, 1998 and 1999, total export sales were $4.7 million, $5.9 million
and $3.1 million, respectively, or approximately 50%, 63% and 82% respectively,
of total product sales. In 1997, 1998 and 1999, sales to Europe accounted for
$1.1 million, $2.5 million and $2.1 million, respectively; sales to Japan
represented $2.4 million, $2.6 million and $0.4 million, respectively; and sales
to other regions represented $1.2 million, $0.8 million and $0.6 million,
respectively. Radiance expects to continue to derive revenue from international
sales and therefore a significant portion of Radiance's revenues will continue
to be subject to the risks associated with international sales, including
economic or political instability, shipping delays, changes in applicable
regulatory policies, inadequate protection of intellectual property,
fluctuations in foreign currency exchange rates and various trade restrictions,
all of which could have a significant impact on Radiance's ability to deliver
products
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on a competitive and timely basis. However, all of the Company's foreign sales
are denominated in dollars, except for sales in Germany which totaled $1.4
million, or 15% of total product sales in 1998 and $1.2 million or 31% of total
product sales in 1999. Future imposition of, or significant increases in the
level of, customs duties, export quotas or other trade restrictions, could have
an adverse effect on Radiance's business, financial condition and results of
operation. In foreign countries, Radiance's products are subject to a wide
variety of governmental review and certification. The regulation of medical
devices, particularly in the European Community, continues to expand and there
can be no assurance that new laws or regulations will not have an adverse effect
on Radiance. See "Item 1 -- Government Regulation," and "Note 1 of Notes to
Consolidated Financial Statements."
POST-MARKETING CLINICAL STUDIES
In a Comparative Performance and Pathological Study conducted at the
University of Texas Department of Medicine, Radiance's FACT Focus catheter was
compared with conventional percutaneous transluminal coronary angioplasty
("PTCA") catheters from other leading manufacturers in an animal study. The
investigators concluded that the use of the Focus catheter resulted in reduced
arterial damage without reduction in catheter performance as determined by
catheter preparation, trackability, pushability, inflation/deflation and
angiographic visualization.
The Focus Lesion Expansion Optimizes Results Study ("FLEXOR Study")
compared Focus PTCA catheter with conventional PTCA catheters. The FLEXOR Study
evaluated the efficacy of Focus technology in improving clinical results
following angioplasty procedures. Success was evaluated based on the ability of
Focus technology to improve the minimal lumen diameter ("MLD") of the arterial
opening, and to reduce the number of catheters necessary for PTCA procedures.
MLD is a commonly-used measurement of the ability of a therapeutic tool to open
a blocked artery and reestablish required blood flow. The FLEXOR Study commenced
in the fourth quarter of 1996 and was completed in the first quarter of 1997.
Results of the study were presented at the 1997 Transcatheter Therapeutics
symposium in Washington D.C. Data from this study of 80 patients demonstrated a
trend toward fewer balloons used per procedure with Focus technology, especially
when stent implantation was required, without any increase in complications.
Additionally, the Focus technology group of patients had a lower residual
stenosis than the conventional angioplasty group.
Certain of Radiance's products that utilize Focus technology have received
FDA approval for PTCA and percutaneous transluminal angioplasty ("PTA")
indications. However, none of these products has received FDA approval for use
in stent delivery. An investigator-controlled study was testing Radiance's Focus
technology with respect to stent implantation. The Optimal Stent Implantation
Study ("OSTI-2 Study") was evaluating the ability of stent delivery with Focus
technology compared with conventional delivery techniques to reduce acute
outcomes and restenosis rates. The study was being conducted using two patient
subgroups of approximately 100 patients each divided according to vessel size.
In the first group, stent delivery was being evaluated in vessels greater than
three millimeters in diameter; in the second group stent delivery was being
evaluated in vessels less than three millimeters in diameter. Each subgroup
presents different clinical issues related to stent delivery and the OSTI-2
Study protocol was evaluating the efficacy of Focus technology in each subgroup.
The OSTI-2 Study began in February 1996 and completed enrollment of patients in
the first quarter of 1998. Preliminary results of the study were reported at the
American Heart Association Scientific Sessions in November 1997 and additional
results were reported at the American College of Cardiology meeting in March
1998 and at American Heart Association Scientific Sessions in November 1998.
Early results demonstrated that Focus technology facilitates achieving a larger
in stent MLD following conventional stent expansion techniques and also
following optimal PTCA. These increased MLDs were achieved without increased
complication rates. In June 1998, Radiance signed a technology license agreement
with Guidant Corporation, an international interventional cardiology products
company, granting Guidant rights to manufacture and distribute products using
Radiance's Focus technology for delivery of stents. In the fourth quarter of
1999, the OSTI-2 Study was terminated before conclusion due to a lack of
funding. Because the technology being tested had been licensed to Guidant, the
Company did not consider funding a similar study. See the discussion below in
this section "Strategic Relationships."
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Radiance completed a clinical study in Europe in 1998 of its proprietary
Synthesis(TM) coronary stent. The multicenter study enrolled 85 patients at four
centers in Germany. Procedural and 30 day follow-up results demonstrated a high
technical success rate with low complication and low major adverse event rates.
STRATEGIC RELATIONSHIPS
Radiance evaluates on an ongoing basis potential strategic relationships
with corporate and other partners where such relationships may complement and
expand Radiance's manufacturing, research, development, sales and marketing
capabilities. Radiance currently is a party to six such agreements, described
below.
Bebig GmbH. In July 1999, the Company entered into a two year contract
manufacturing agreement with Bebig GmbH ("Bebig") to manufacture its radiation
therapy catheter in Europe. According to the agreement, during 1999 and 2000,
Radiance will pay certain facility set-up fees, totaling approximately $0.8
million, and all material and third party costs associated with production
validation. Radiance will prepare the manufacturing equipment used to perform
the final assembly of the RDX catheter, estimated to cost approximately $0.6
million, and Bebig will purchase the equipment from Radiance for $0.5 million.
Radiance will also pay Bebig an agreed amount for each unit produced. For a
nominal charge, the Company can renew the agreement for three successive,
two-year terms. In conjunction with the contract manufacturing agreement, the
Bebig granted the Company a three year sub-license agreement for certain
radiation technology that the Company believes may be useful in the development
of its radiation therapy products. There is a minimum annual license fee to
Bebig of $0.2 million payable beginning in July 2000, subject to offset by
certain amounts paid under the manufacturing agreement. Royalty fees are payable
to Bebig for any products sold worldwide that incorporate the licensed
technology. The sub-license is subject to renewal, without cost, until the
underlying patents' expiration dates.
Cosmotec Co., Ltd. In June 1999, the Company granted Cosmotec Co., Ltd.
("Cosmotec") of Japan distribution rights to market its vascular radiation
therapy products in Japan. Radiance received $1.0 million as an upfront cash
payment and will recognize the income over the seven-year term of the
distribution agreement. Radiance will also receive $1.0 million from Cosmotec
for a debenture issuable in June 2000 and convertible into Radiance common stock
over the subsequent three-year period at an initial conversion price of $7 per
share.
Guidant Corporation. In June 1998, Radiance entered into a Technology
License Agreement with Guidant Corporation, an international interventional
cardiology products company, to grant them a 10 year license to manufacture and
distribute products using Radiance's Focus Technology. Under the Agreement,
Radiance has received certain milestone payments based upon the transfer of the
technological knowledge to Guidant, and royalty payments based upon the sale of
products using Focus technology by Guidant. During 1999, the Company received
$2.0 million of milestone payments and recorded the minimum annual royalty of
$0.3 million. No more milestone payments are due under the agreement but
royalties are due as long as the agreement is in effect.
SCIMED Life Systems, Inc. Radiance entered into a Stock Purchase and
Technology License Agreement, dated September 10, 1994, with SCIMED, now a unit
of Boston Scientific Corporation (the "SCIMED Agreement"). Pursuant to the
SCIMED Agreement, SCIMED purchased a 19% equity position in Radiance, which is
now diluted to below 5%. SCIMED also was granted an exclusive worldwide license
to certain combined site-specific solution delivery and coronary angioplasty
technology in exchange for license and royalty fees. The term of the SCIMED
Agreement is for the life of the patents; however, it may be terminated (i) in
the event of breach on 90 days notice by the non-breaching party; or (ii) on 30
days notice in certain limited circumstances or (iii) by SCIMED upon 180 days
notice.
Cathex Co., Ltd. Radiance entered into a distribution agreement dated May
1, 1997 with Cathex Co., Ltd. ("Cathex"), whereby Cathex serves as Radiance's
exclusive distributor for certain of Radiance's products in Japan. In exchange
for this exclusive distributorship, certain Cathex shareholders agreed to
purchase $200,000 of Radiance Common Stock (approximately 25,000 shares) and
Cathex agreed to purchase predetermined minimum quantities of Radiance's
products. The initial term of the agreement
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expires on January 1, 2001 and is subject to a five-year extension. The
agreement may be terminated in the event of breach upon 90 days notice by the
non-breaching party, subject to cure within the notice period.
EndoSonics Corporation. Radiance entered into license agreements with
EndoSonics Corporation ("EndoSonics"), dated December 22, 1995 and May 16, 1997
(the "EndoSonics Agreements"), in which Radiance granted EndoSonics the
non-exclusive, royalty-free right to Radiance's Focus technology for the
development and sale of a device with a Radiance Focus technology balloon when
it is combined only on the same catheter with an EndoSonics' ultrasound product.
In exchange, Radiance received the non-exclusive, royalty-free right to submit
PMA supplement applications utilizing an EndoSonics PMA as a reference and to
manufacture and distribute Radiance products as a supplement to the EndoSonics
PMA. In February 1998, the FDA approved Radiance's PMA application and, as a
result, Radiance can obtain independent FDA supplemental approvals on its
products. The EndoSonics Agreements may be terminated in the event of breach
upon 60 days notice by the nonbreaching party, subject to the breaching party's
right to cure. In addition, in March of 1996, EndoSonics purchased 400,000
shares of Radiance's Series B Preferred Stock for a purchase price of
$8,000,000, which converted into 800,000 shares of Common Stock upon the
consummation of Radiance's initial public offering on June 19, 1996. In February
1998, Radiance repurchased 300,000 shares of its own common stock from
EndoSonics for an aggregate price of $1,275,000.
On September 15, 1999, EndoSonics Corporation filed a complaint for
declaratory relief in the Superior Court in Orange County, California, relating
to the EndoSonics Agreements. EndoSonics is seeking a declaratory judgment that
the EndoSonics Agreement entitles EndoSonics to place a stent on the licensed
catheters, when used in a procedure with an ultrasound transducer. The Company
believes that EndoSonics is authorized only to use the Focus technology with the
EndoSonics ultrasound transducer and not also with a stent.
The Company has filed an answer and discovery is commencing. Although the
outcome of the matter cannot be predicted with any certainty, the Company
believes that this matter will not have a material adverse effect on its
financial position or operating results.
PATENTS AND PROPRIETARY INFORMATION
Radiance's policy is to protect its proprietary position by, among other
methods, filing U.S. and foreign patent applications to protect technology,
inventions and improvements that are important to the development of its
business. Radiance owns or has the rights 26 issued U.S. patents, one issued
European patent and two Japanese patents covering certain aspects of its
technologies. We cannot assure you any issued patents will provide competitive
advantages for Radiance's products, or that they will not be challenged or
circumvented by competitors.
The interventional cardiovascular market in general and the stent and
balloon angioplasty catheter market (including the type of catheters offered by
Radiance) in particular have been characterized by substantial litigation
regarding patent and other intellectual property rights. We cannot assure you
that Radiance's products do not infringe such patents or rights. During 1997,
Radiance was sued for trademark infringement regarding Radiance's use of the
product name "Lynx" in connection with one of Radiance's balloon angioplasty
catheter product lines. Radiance paid no monetary damages but agreed to a
consent judgment which prohibits Radiance from using this name in the United
States. In the event that any such third-parties assert claims against Radiance
for patent infringement and such patents are upheld as valid and enforceable,
Radiance could be prevented from utilizing the subject matter claimed in such
patents, or would be required to obtain licenses from the owners of any such
patents or redesign its products or processes to avoid infringement. We cannot
assure you that such licenses would be available or, if available, would be so
on terms acceptable to Radiance or that Radiance would be successful in any
attempt to redesign its products or processes to avoid infringement. In
addition, foreign intellectual property laws may not provide protection
commensurate with that provided by U.S. intellectual property laws, and we
cannot assure you that foreign intellectual property laws will protect
Radiance's foreign intellectual property rights adequately. Radiance also relies
on trade secrets and proprietary technology and enters into confidentiality and
non-disclosure agreements with its employees, consultants and advisors. We
cannot assure you that employees, consultants,
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advisors or others will maintain the confidentiality of such trade secrets or
proprietary information, or that Radiance's trade secrets or proprietary
technology will not otherwise become known or be independently developed by
competitors in such a manner that Radiance has no practical recourse. Litigation
may be necessary to defend against claims of infringement or invalidity, to
enforce patents issued to Radiance or to protect trade secrets. There can be no
assurance that any such litigation would be successful. Any litigation could
result in substantial costs to, and diversion of resources by, Radiance and its
officers, which would have a material adverse effect on its business, financial
condition and results of operations.
COMPETITION
There are more than ten competing development programs in the area of
vascular radiotherapy. The major competitors include Novoste Corporation,
Johnson & Johnson, Guidant Corporation and Boston Scientific Corporation,
Schneider Division. The radiation sources being developed by these competitors
vary between gamma, beta and x-ray.
The most common competitive approach is represented by radioactive source
wires or seed trains. Three companies are in the pivotal clinical trial stage in
the United States, all addressing the in-stent restenosis indication. Johnson &
Johnson has completed patient enrollment into its trial, Gamma I. The purpose of
the Gamma I trial is to assess the use of Best Medical International's manually
advanced gamma wire. Guidant currently is evaluating its beta wire/afterloader
system in the INHIBIT Trial and Novoste has completed follow up in its START
Trial. Still in the pilot study stage in the United States, Boston Scientific,
through its Schneider AG subsidiary, is also developing a beta wire/afterloader
system that is under investigation in Europe.
Most of the radioactive source wires are used in conjunction with an
afterloader, a specialized piece of equipment that is typically computer
controlled. It is used to automatically calculate treatment times, control
movement of the source wire, and to store and shield the source wire when not in
use. This equipment is large, complex, and expensive. Source wires with
gamma-emitting radioactive tips have been used for some time in cancer therapy.
Gamma radiation is significantly more penetrating and therefore more hazardous
to use than beta radiation. For example, health care workers must leave the
catheterization lab during administration of gamma radiation to ensure their
safety by limiting their ongoing exposure to gamma radiation. In addition, gamma
radiation impacts patient tissue beyond the treatment site.
Competition in the market for devices used in the treatment of
cardiovascular and peripheral vascular disease is intense and characterized by
extensive research and development and rapidly advancing technology. The
interventional cardiology market is characterized by rapid technological
innovation and change, and Radiance's products could be rendered obsolete as a
result of future innovations. Radiance's catheters, stents and other products
under development compete or will compete with catheters and stents marketed by
a number of manufacturers, including Guidant Corporation, Boston Scientific
Corporation, Johnson & Johnson, Medtronic, Inc., and Arterial Vascular
Engineering (a subsidiary of Medtronic, Inc.). Such companies have significantly
greater financial, management and other resources, established market positions,
and significantly larger sales and marketing organizations than does Radiance.
Radiance also faces competition from manufacturers of other catheter-based
atherectomy devices, vascular stents and pharmaceutical products intended to
treat vascular disease. In addition, Radiance believes that many of the
purchasers and potential purchasers of Radiance's current products prefer to
purchase catheter and stent products from a single source. Accordingly, many of
Radiance's competitors, because of their size and range of product offerings,
have a competitive advantage over Radiance.
We believe that the primary competitive factors in the market for
interventional cardiology devices are clinical effectiveness, product safety,
catheter size, flexibility and trackability, ease of use, reliability, price and
availability of third party reimbursement. In addition, a company's distribution
capability and the time in which products can be developed and receive
regulatory approval are important competitive factors. Although we believe we
compete favorably overall with respect to most of the foregoing factors, most of
our competitors and potential competitors have substantially greater capital
resources than we do and also have greater
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resources and expertise in the areas of research and development, obtaining
regulatory approvals, manufacturing and marketing.
We believe that our competitive position is dependent upon our ability to
continue to develop innovative new catheter technologies, including the RDX
Catheter, and to obtain rapid regulatory approval. However, we cannot provide
any assurance that competitors and potential competitors will not succeed in
developing, marketing and distributing technologies and products that are more
effective than those we will develop and market or that would render our
technology and products obsolete or noncompetitive. We may be unable to compete
effectively against such competitors and other potential competitors in terms of
manufacturing, marketing and sales. We cannot assure you that our competitors
will not succeed in developing or marketing technologies and products that are
more clinically or cost effective than any that are being marketed or developed
by us, or that such competitors will not succeed in obtaining regulatory
approval for introducing or commercializing any such products before we can.
THIRD-PARTY REIMBURSEMENT
In the United States, the Company's products are purchased primarily by
medical institutions, which then bill various third-party payors, such as
Medicare, Medicaid, and other government programs and private insurance plans,
for the health care services provided to patients. Government agencies, private
insurers and other payors determine whether to provide coverage for a particular
procedure and reimburse hospitals for medical treatment at a fixed rate based on
the diagnosis-related group ("DRG") established by the U.S. Healthcare Finance
Administration ("HCFA"). The fixed rate of reimbursement is based on the
procedure performed, and is unrelated to the specific devices used in that
procedure. If a procedure is not covered by a DRG, payors may deny
reimbursement. In addition, some payors may deny reimbursement if they determine
that the device used in a treatment was unnecessary, inappropriate or not
cost-effective, experimental or used for a non-approved indication.
Reimbursement of interventional procedures utilizing Radiance's products is
currently covered under a DRG. There can be no assurance that reimbursement for
such procedures will continue to be available, or that future reimbursement
policies of payors will not adversely affect Radiance's ability to sell its
products on a profitable basis. Failure by hospitals and other users of
Radiance's products to obtain reimbursement from third-party payors, or changes
in government and private third-party payors' policies toward reimbursement for
procedures employing Radiance's products, would have a material adverse effect
on Radiance's business, financial condition and results of operations.
GOVERNMENT REGULATION
The manufacturing and marketing of Radiance's products are subject to
extensive and rigorous government regulation in the United States and in other
countries. All new products will require regulatory approval by appropriate
governmental agencies prior to commercialization and will be subject to rigorous
pre-clinical and human clinical testing and patient follow-up. Federal
regulations control the ongoing safety, efficacy, manufacture, storage,
labeling, record-keeping, and marketing of all medical devices. Radiance
believes its success also will depend upon commercial sales of improved versions
of its catheter products. Radiance will not be able to market these new products
in the United States unless and until Radiance obtains approval or clearance
from the FDA. Foreign and domestic regulatory approvals, if granted, may include
significant limitations on the indicated uses for which a product may be
marketed.
If a medical device manufacturer can establish that a newly developed
device is "substantially equivalent" to a legally marketed Class I or Class II
device, or to a Class III device that the FDA has not called for a premarket
approval application ("PMA"), the manufacturer may seek clearance from the FDA
to market the device by filing a premarket notification with the FDA under
Section 510(k) of the Federal Food, Drug, and Cosmetic Act. All of the 510(k)
clearances received for Radiance's catheters were based on substantial
equivalence to legally marketed devices. There can be no assurance that 510(k)
clearance for any future product or significant modification of an existing
product will be granted or that the process will not be unduly lengthy. In
addition, if the FDA has concerns about the safety or effectiveness of any of
Radiance's products, it could act to withdraw approval or clearances of those
products or request Radiance present
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additional data. Any such actions would have a material adverse effect on
Radiance's business, financial condition and results of operations.
If substantial equivalence cannot be established, or if the FDA determines
the device or the particular application for the device requires a more rigorous
review to assure safety and effectiveness, the FDA will require the manufacturer
to submit a PMA which must be reviewed and approved by the FDA prior to sales
and marketing of the device in the United States. The PMA process is
significantly more complex, expensive and time consuming than the 510(k)
clearance process and always requires the submission of clinical data. The PMA
process may require as many as 1,000 patients depending on indications with at
least one year follow-up. Radiance expects that the RDX Catheter and certain
other products under development will be subject to this PMA process over the
next two to three years, depending upon many factors including the number of
patients and the follow up period required. In addition to the FDA, the Company
expects to file an application with the Ministry of Health and Welfare in Japan.
This procedure requires completion of 60-100 patients in two to three Japanese
clinical investigation sites. The Company expects the Japanese approval process
to take approximately 18-24 months.
Because the RDX Catheter utilizes radiation sources, its manufacture,
distribution, transportation import/export, use and disposal are subject to
federal, state and/or local laws and regulations relating to the use and
handling of radioactive materials. Specifically, after PMA approval is obtained,
approval by the U.S. Nuclear Regulatory Commission ("NRC"), or an equivalent
state agency, of Radiance's radiation sources for certain medical uses will be
required to distribute the radiation sources commercially to licensed recipients
in the U.S. In addition, Radiance and/or its supplier of radiation sources must
obtain a specific license from the NRC to distribute such radiation sources
commercially as well as comply with all applicable regulations. Radiance and/or
its supplier of radiation sources also must comply with NRC and U.S. Department
of Transportation regulations on the labeling and packaging requirements for
shipment of radiation sources to hospitals or other users of the RDX Catheter.
In addition, hospitals may be required to obtain or expand their licenses to use
and handle beta radiation prior to receiving radiation sources for use in the
RDX Catheter. The Company expects to comply with comparable radiation regulatory
requirements and/or approvals in markets outside the U.S.
Radiance is required to register as a medical device manufacturer with the
FDA and maintain a license with certain state agencies, such as the CDHS. As
such, Radiance is inspected on a routine basis by both the FDA and the CDHS for
compliance with QSR regulations. These regulations require that Radiance
manufacture its products and maintain related documentation in a prescribed
manner with respect to manufacturing, testing and control activities. Radiance
has undergone and expects to continue to undergo regular QSR inspections in
connection with the manufacture of its products at Radiance's facilities.
Further, Radiance is required to comply with various FDA requirements for
labeling. The Medical Device Reporting laws and regulations require Radiance to
provide information to the FDA on deaths or serious injuries alleged to have
been associated with the use of its devices, as well as product malfunctions
that would likely cause or contribute to death or serious injury if the
malfunction were to recur. In addition, the FDA prohibits an approved device
from being marketed for unapproved applications. Radiance has received FDA
approval to market the FACT, ARC and GUARDIAN catheters, which utilize the Focus
technology, for coronary balloon angioplasty. These catheters are marketed
outside the United States for use in stent deployment. However, without specific
FDA approval for stent deployment, these catheters may not be marketed by
Radiance in the United States for such use. As the Company licensed the Focus
technology to Guidant in June 1998, it has no plans to seek said FDA approval
for stent deployment.
Failure to comply with applicable regulatory requirements can, among other
consequences, result in fines, injunctions, civil penalties, suspensions or loss
of regulatory approvals, product recalls, seizure of products, operating
restrictions and criminal prosecution. In addition, government regulations may
be established in the future that could prevent or delay regulatory clearance or
approval of Radiance's products. Delays in receipt of clearances or approvals,
failure to receive clearances or approvals or the loss of previously received
clearances or approvals would have a material adverse effect on Radiance's
business, financial condition and results of operations.
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Radiance also is subject to other federal, state and local laws,
regulations and recommendations relating to safe working conditions, laboratory
and manufacturing practices. The extent of government regulation that might
result from any future legislation or administrative action cannot be predicted
accurately. Failure to comply with regulatory requirements could have a material
adverse effect on Radiance's business, financial condition and results of
operations.
International sales of Radiance's products are subject to the regulatory
requirements in many countries. The regulatory review process varies from
country to country and may in some cases require the submission of clinical
data. Radiance typically relies on its distributors in such foreign countries to
obtain the requisite regulatory approvals. There can be no assurance, however,
that such approvals will be obtained on a timely basis or at all. In addition,
the FDA must approve the export to certain countries of devices which require a
PMA but are not yet approved domestically.
In order to sell its products within the European Economic Area and
Switzerland, Radiance must achieve compliance with the requirements of the
Medical Devices Directive ("MDD") and affix CE marking on its products to attest
to such compliance. To achieve compliance, Radiance's products must meet the
"Essential Requirements" of the MDD relating to safety and performance and
Radiance must successfully undergo verification of its regulatory compliance
("conformity assessment") by a Notified Body selected by Radiance. Radiance has
selected TUV Product Service of Munich, Germany as its Notified Body. The level
of scrutiny of such assessment depends on the regulatory class of the product,
and many of Radiance's coronary products are currently in Class III, the highest
risk class, and therefore subject to the most rigorous controls.
In December 1996, Radiance received ISO 9001/EN46001 certification from its
Notified Body with respect to the manufacturing of all of its products in its
Irvine facilities. Radiance's contracted manufacturing facility in The
Netherlands received such certification in 1993. This certification demonstrates
that Radiance manufactures its products in accordance with certain international
quality requirements. A manufacturer must receive ISO 9001/EN46001 certification
prior to applying for CE marking of specific products. In January 1998, Radiance
obtained the right to affix CE marking to all of its products currently sold in
all countries of the European Economic Area and Switzerland. Radiance is subject
to continued supervision by its Notified Body and will be required to report any
serious adverse incidents to the appropriate authorities. Radiance also must
comply with additional requirements of individual nations. Failure to maintain
compliance required for CE marking could have a material adverse effect upon
Radiance's business, financial condition and results of operations. There can be
no assurance Radiance will be able to achieve or maintain such compliance on all
or any of its products or that it will be able to produce its products timely
and profitably while complying with the MDD and other regulatory requirements.
PRODUCT LIABILITY
Radiance faces the risk of financial exposure to product liability claims.
Radiance's products are often used in situations in which there is a high risk
of serious injury or death. Such risks will exist even with respect to those
products that have received, or in the future may receive, regulatory approval
for commercial sale. Radiance is currently covered under a product liability
insurance policy with coverage limits of $10.0 million per occurrence and $10.0
million per year in the aggregate. There can be no assurance that Radiance's
product liability insurance is adequate or that such insurance coverage will
remain available at acceptable costs. There can be no assurance that Radiance
will not incur significant product liability claims in the future. A successful
claim brought against Radiance in excess of its insurance coverage could have a
material adverse effect on Radiance's business, financial condition and results
of operations. Additionally, adverse product liability actions could negatively
affect the reputation and sales of Radiance's products and Radiance's ability to
obtain and maintain regulatory approval for its products, as well as
substantially divert the time and effort of management away from Radiance's
operations.
EMPLOYEES
As of December 31, 1999, Radiance had 73 employees, including 41 in
manufacturing, 20 in research, development, and regulatory and clinical affairs,
5 in sales and marketing and 7 in administration. Radiance
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believes that the success of its business will depend, in part, on its ability
to attract and retain qualified personnel. Radiance believes it has good
relations with its employees.
RESEARCH AND DEVELOPMENT
Expenditures for research and development amounted to $8,610,000 in fiscal
year 1999, $7,957,000 in fiscal year 1998, and $7,041,000 in fiscal 1997.
ITEM 2. PROPERTIES
Currently, Radiance leases facilities aggregating approximately 28,000
square feet in Irvine, California under various lease agreements, most of which
expire in May 2001. Radiance believes that its facilities are adequate to meet
its requirements through fiscal 2000.
ITEM 3. LEGAL PROCEEDINGS
On September 15, 1999, EndoSonics Corporation filed a complaint for
declaratory relief in the Superior Court in Orange County, California, relating
to the EndoSonics Agreements, see "Item 1 -- Strategic Relationships".
EndoSonics is seeking a declaratory judgement that the EndoSonics Agreements
entitle EndoSonics to place a stent on the licensed catheters, when used in a
procedure with an ultrasound transducer. The Company believes that EndoSonics is
authorized only to use the Focus technology with the EndoSonics ultrasound
transducer and not also with a stent.
The Company has filed an answer and discovery is commencing. Although the
outcome of the matter cannot be predicted with any certainty, the Company
believes that this matter will not have a material adverse effect on its
financial position or operating results. However, if Endosonics prevails in
their suit, the Company may have to pay damages and/or renegotiate its license
agreement with Guidant. See Note 5.
Radiance is a party to other ordinary disputes arising in the normal course
of business. Management is of the opinion that the outcome of these matters will
not have a material adverse effect on Radiance's consolidated financial
position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and key employees of the Company, and their ages as
of March 1, 2000, are as follows:
NAME AGE POSITION
---- --- --------
Michael R. Henson..... 54 Chairman of the Board of Directors and Chief Executive
Officer
Jeffrey H. Thiel...... 44 President and Chief Operating Officer
Stephen R. Kroll...... 53 Vice President, Finance and Administration, Chief Financial
Officer and Corporate Secretary
Edward F. Smith, III.. 46 Vice President, Research and Development
Brett A. Trauthen..... 38 Vice President, Clinical Development
BACKGROUND
The principal occupations of each executive officer and key employee of the
Company for at least the last five years are as follows:
Michael R. Henson joined the Company in February 1992 as President, Chief
Executive Officer and Chairman of the Board of Directors, and currently serves
as Chief Executive Officer and Chairman of the Board of Directors. From June
1997 until March 1999, Mr. Henson served Chairman of the Board, Chief
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Executive Officer and President of the (former) Radiance Medical Systems, Inc.,
and as Chairman of the Board of the Company. Prior to joining the Company, Mr.
Henson served as the Chief Executive Officer of EndoSonics Corporation from 1988
to February 1995, and as Chairman of the Board from February 1993 to November
1996. Between April 1983 and February 1988, Mr. Henson served as President and
Chief Executive Officer of Trimedyne, Inc., a manufacturer of medical lasers and
catheters. Prior to joining Trimedyne in 1983, Mr. Henson held positions as Vice
President for G.D. Searle & Company, Director of Marketing for the Hospital
Products Division of Abbott Laboratories, and Marketing Manager for Bristol
Myers and Company. Mr. Henson also serves as chairman of the board of directors
of two private companies, Endologix, Inc. and Micrus Corporation.
Jeffrey H. Thiel was appointed President and Chief Operating Officer of the
Company in September 1999, served as Executive Vice President of the Company
from February 1999 to September 1999, and Vice President, Operations from
October 1996 to February 1999. Prior to joining Radiance, Mr. Thiel served as
Director of Operations of BEI Medical Systems from May 1995 to October 1996.
From July 1985 to November 1994, Mr. Thiel held various Manufacturing and
Operations Management positions with St. Jude Medical. Mr. Thiel also serves on
the board of directors of Micrus Corporation.
Stephen R. Kroll joined the Company in April 1998 as Vice President of
Finance and Administration, Chief Financial Officer and Corporate Secretary.
From May 1989 until May 1991, Mr. Kroll served as Vice President of Finance and
Corporate Secretary, and from May 1991 until March 1997 as Vice President of
Administration and Corporate Secretary, for Viking Office Products.
Edward F. Smith, III, Ph.D. joined Radiance in October 1999 as Vice
President, Research and Development. Prior to joining Radiance, Dr. Smith served
in various positions within the medical device and pharmaceutical industries.
Most recently Dr. Smith was employed at Mallinkrodt, Inc. and served as
Director, Endovascular Research and Development from 1995 to 1999, and Associate
Director, Cardiology Therapeutics Research and Development from 1992 to 1995.
Brett Trauthen joined the Company in January 1999 following its merger with
(former) Radiance Medical Systems, Inc., as Director of Research and Development
and Engineering. Since September 1999, Mr. Trauthen serves as the Company's Vice
President of Clinical Development. Mr. Trauthen served as Director of Research
and Development and Engineering for (former) Radiance Medical Systems, Inc. from
September 1997 until January 1999. From 1995 to August 1997 Mr. Trauthen held
various operations and executive staff positions with Applied Medical Resources
Corporation. From 1984 to 1995. Mr. Trauthen held various Engineering and
Research and Development positions at Baxter Healthcare Corporation, Edwards
Divisions.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock commenced trading on the Nasdaq National Market
on June 20, 1996 and is traded under the symbol "RADX". The following table sets
forth for the periods indicated the high and low sale prices for the Common
Stock as reported on the Nasdaq National Market.
HIGH LOW
---- ---
FISCAL 1998
First Quarter............................................... $ 6 3/8 $ 4 3/16
Second Quarter.............................................. 7 3/4 4 5/8
Third Quarter............................................... 6 1/4 2 1/2
Fourth Quarter.............................................. 5 2 1/4
FISCAL 1999
First Quarter............................................... $ 4 3/4 $ 3
Second Quarter.............................................. 4 2 1/4
Third Quarter............................................... 7 3/4 2 3/8
Fourth Quarter.............................................. 6 13/16 4 11/16
FISCAL 2000
First Quarter............................................... $12 3/4 $ 4 9/16
On March 15, 2000 the closing sale price on the Nasdaq National Market was
$10 1/4 per share and there were approximately 282 record holders of Radiance
Common Stock.
SALES OF UNREGISTERED SECURITIES
None.
USE OF PROCEEDS
In the second quarter of 1996, the Company closed its initial public
offering of common stock (the "IPO"), SEC file number 333-04560, resulting in
net proceeds of $42.8 million after deducting underwriting discounts and
commissions and other expenses of the offering. The Company used approximately
$2.7 million of the net proceeds from the IPO for repayment of certain
outstanding indebtedness to EndoSonics, Inc., a holder of in excess of ten
percent of the Common Stock of the Company. From the date of the IPO until
December 31, 1999, the Company has paid a total of $4.0 million in salaries and
bonuses to fifteen present and former officers of the Company, and used $16.9
million for working capital. The Company has also used approximately $2.2
million of the net proceeds for machinery and equipment and leasehold
improvement purchases. Through the end of 1999, the Company used approximately
$3.7 million to purchase 686,000 shares of the Company's Common Stock on the
open market. In September of 1998, the Company exercised a Warrant to acquire
1,500,000 Series B Preferred Stock of Radiance Medical Systems, Inc. for $1.5
million. In January 1999, the Company paid $0.7 million to stockholders of RMS
who elected to receive cash for their RMS common stock and $0.6 million in costs
relating to the acquisition of the remaining common stock of RMS not held by the
Company. At December 31, 1999, approximately $21.3 million was held in temporary
investments, of which approximately $9.2 million was invested in U.S. Federal
and State Agency debt securities, and $12.1 million was invested in corporate
debt securities.
DIVIDEND POLICY
The Company has never paid any dividends. The Company currently intends to
retain all earnings, if any, for use in the expansion of its business and
therefore does not anticipate paying any dividends in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1995 1996 1997(1) 1998 1999
------- -------- -------- -------- --------
(IN THOUSANDS)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
Sales...................................... $ 3,462 $ 8,384 $ 9,438 $ 9,415 $ 3,856
License fee and other...................... -- 150 -- 2,760 2,855
Contract................................... 641 200 -- -- --
------- -------- -------- -------- --------
Total revenue...................... 4,103 8,734 9,438 12,175 6,711
Operating costs and expenses:
Cost of sales.............................. 2,051 4,111 6,102 6,152 2,823
Research and development................... 1,683 3,582 7,041 7,957 8,610
Marketing and sales........................ 1,526 3,358 6,691 5,371 1,989
General and administrative................. 1,331 1,548 2,347 2,937 2,468
Charge for acquired in-process research and
Development(2).......................... 488 2,133 -- 234 4,194
Minority interest.......................... -- -- -- (992) (6)
------- -------- -------- -------- --------
Total operating costs and
expenses......................... 7,079 14,732 22,181 21,659 20,078
------- -------- -------- -------- --------
Loss from operations......................... (2,976) (5,998) (12,743) (9,484) (13,367)
Other income................................. 102 1,374 2,225 1,498 2,587
------- -------- -------- -------- --------
Net loss..................................... $(2,874) $ (4,624) $(10,518) $ (7,986) $(10,780)
======= ======== ======== ======== ========
Basic and diluted net loss per share (pro
forma through June 1996)................... $ (0.71) $ (0.69) $ (1.15) $ (0.90) $ (0.98)
======= ======== ======== ======== ========
Shares used in computing basic and diluted
net loss per share (pro forma through June
1996)...................................... 4,052 6,755 9,118 8,862 10,951
======= ======== ======== ======== ========
DECEMBER 31,
---------------------------------------------------
1995 1996 1997(1) 1998(1) 1999
------- -------- -------- -------- --------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.................... $ 1,568 $ 17,192 $ 6,141 $ 1,437 $ 2,051
Marketable securities available-for-sale..... -- 25,733 24,773 23,375 20,004
Working capital (deficit).................... (774) 46,142 33,828 24,905 21,206
Total assets................................. 4,002 50,084 39,615 32,035 29,873
Convertible obligation....................... 750 -- -- -- --
Accumulated deficit.......................... (6,425) (11,049) (21,567) (29,553) (40,333)
Total stockholders' equity (net capital
deficiency)................................ $(1,098) $ 47,623 $ 36,127 $ 27,499 $ 25,111
- ---------------
(1) Restated. See Note 1 of Notes to the Consolidated Financial Statements.
(2) The charge for acquired in-process research and development reflects a
change in the basis of the Company's assets and liabilities as a result of
the acquisition by EndoSonics which has been allocated to the Company for
the year ended December 31, 1995 and the excess of the purchase price over
the net assets acquired for Intraluminal Devices, Inc. and (the former)
Radiance Medical Systems, Inc., and the associated acquisition expenses for
the years ended December 31, 1996 and 1998, respectively. See Notes 1 and 2
of Notes to Consolidated Financial Statements.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Radiance Medical Systems, Inc. ("Radiance," or the "Company") develops,
manufactures and markets proprietary devices for the prevention of the
recurrence of atherosclerotic blockages following the interventional treatment
of atherosclerosis. Radiance currently is primarily engaged in conducting
research and development on radiation therapy, and its primary product under
development is the RDX Catheter, a balloon catheter-based delivery system
designed to deliver radioactive materials to the area of an artery that has been
treated with conventional interventional therapy such as Percutaneous
Transluminal Coronary Angioplasty ("PTCA"), atherectomy and/or stent deployment.
See "Item 1 -- Products."
The Company is the result of an acquisition effected by the merger of the
(former) Radiance Medical Systems, Inc. ("RMS") with and into CVD/RMS
Acquisition Corporation, a wholly-owned subsidiary of CardioVascular Dynamics,
Inc. (now named Radiance Medical Systems, Inc.). From inception (March 16, 1992)
through the first quarter of 1994, the Company's operations were limited and
consisted primarily of research and development and other start-up activities.
In 1994, the Company introduced for sale its angioplasty catheter products. Over
the next three years, the Company would continue its development and
introduction of what would be called its "Focus technology" angioplasty catheter
products and introduced its Vascular Access product line. While product sales
continued to grow into 1997, changes in angioplasty technology, and increasing
competition from much larger competitors would necessitate the development of
angioplasty devices based upon new technology. Because the Company's management
believed that radiation therapy technology would produce the next generation of
angioplasty catheters, in August of 1997, RMS was formed as a separate entity to
focus on the development of radiation therapy technology for the treatment of
cardiovascular disease and to obtain financing for such development from sources
other than the Company. In January 1999, after RMS had completed the initial
development of the RDX catheter, the Company reacquired all of the shares of RMS
that it did not own as a result of a merger and now concentrates its product
development on radiation therapy technology for angioplasty.
Radiance has not completed the development of the RDX catheter and
currently sells its existing products primarily through medical device
distributors. Radiance is a party to three agreements for the U.S. distribution
of products incorporating its Focus technology. Radiance distributes certain
products in Japan through an exclusive distribution agreement with Cathex.
Radiance also has distribution agreements with 22 companies covering 22
countries outside the United States and Japan. See "BUSINESS OF Radiance --
Strategic Relationships."
On July 15, 1996, Radiance entered into co-distribution agreements with
Medtronic, providing for the co-distribution of Radiance's FACT, CAT and ARC
balloon angioplasty catheters. Under the terms of these agreements, Medtronic
purchased a minimum number of angioplasty catheters manufactured by Radiance for
distribution worldwide for a period of up to three years. Specific products to
be distributed by Medtronic differed in individual country markets. The initial
term of the Medtronic agreements was for a period of three years from the date
of first delivery of a product. In May 1997, Medtronic advised Radiance of its
election to not make minimum purchases of product for the second year of the
agreement. In June 1997, Medtronic informed Radiance that it would not fulfill
its commitment for the first year of the agreement and that it did not believe
it was required to fulfill such commitment. This dispute adversely affected
Radiance's financial results for the second half of 1997 and first half of 1998.
In June 1998, Radiance entered into a technology license agreement with
Guidant Corporation, an international interventional cardiology products
company, granting Guidant rights to manufacture and distribute products using
Radiance's Focus technology for delivery of stents, including exclusive rights
in the United States. In exchange for those rights Radiance has received, and
will receive, certain milestone payments based upon the transfer of the
technological knowledge to Guidant, and royalty payments based upon the sale of
products by Guidant using Focus technology.
In January 1999, the Company sold substantially all of the properties and
assets used exclusively in its Vascular Access product line to Escalon Medical
Corporation. The Company received an initial payment of
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$1.1 million for actual assets transferred, received an additional $1.0 million
upon the completion of the transfer of the assets and technology in October
1999, and also is entitled to receive royalty payments upon the sale of products
for a five-year period. During 1999, the Company recognized the minimum annual
royalty under the sale agreement of approximately $0.3 million. The Company
continued to manufacture certain vascular access products for eleven months
following the completion of the sale on a "cost plus" basis.
In January 1999, the Company acquired through a merger all of capital stock
which it did not own of the (former) Radiance Medical Systems, Inc. ("RMS").
Pursuant to the Merger, the Company paid the former stockholders of RMS $3.00
for each share of RMS preferred stock and $2.00 for each share of RMS common
stock, for a total consideration of approximately $7.0 million, excluding the
value of RMS common stock options to be provided to RMS optionholders in
exchange for their RMS common stock options. The consideration was paid by
delivery of an aggregate of 1,900,157 shares of Company Common Stock, and $0.7
million in cash to certain RMS stockholders who elected cash. Options for
546,250 shares of RMS common stock accelerated and vested immediately prior to
the completion of the Merger. Of these, 1,250 were exercised, and the holders
received the same consideration for their shares of RMS Common Stock as other
holders of RMS Common Stock. The options not exercised prior to the completion
of the Merger were assumed by the Company and converted into options at the same
exercise price to purchase an aggregate of 317,776 share of the Company Common
Stock.
In addition, the former RMS stockholders and optionholders may receive
product development milestone payments of $2.00 for each share of RMS preferred
stock and $3.00 for each share of RMS common stock. One of the milestones, which
was scheduled during the second quarter of 1999 and extended into the third
quarter of 1999, was not met. As a result, the maximum total of potential
milestone payments, before adjustment for early or late achievement of the
milestones, is reduced to $1.69 for each share of preferred stock and $2.54 for
each share of common stock. The milestone payments may be increased up to 30%,
or reduced or eliminated if the milestones are reached earlier or later,
respectively, than the milestone target dates. The milestones represent
important steps in the United States Food and Drug Administration and European
approval process which the Company has determined are critical to bringing the
Company's technology to the marketplace.
The RMS merger consideration was allocated to tangible assets (aggregating
approximately $0.5 million) acquired and assumed liabilities (aggregating
approximately $0.2 million), with the remaining merger consideration being
allocated to acquired in-process research and development ("IPR&D"), developed
technology and employment contracts, according to an independent appraisal. See
Note 2.
In June of 1999, the Company granted Cosmotec Co., Ltd. of Japan
distribution rights to market its vascular radiation therapy products in Japan.
Radiance received $1.0 million as an upfront cash payment and will recognize the
revenue ratably over the seven-year term of the agreement. The Company
recognized $0.1 million of the aforementioned revenue for the year ended
December 31, 1999. Radiance will also receive $1.0 million from Cosmotec for a
debenture issuable in June 2000, which will be convertible into Radiance common
stock over the subsequent three-year period at an initial conversion price of $7
per share. As part of the transaction with Cosmotec, it was agreed that a joint
venture, between the Company and an affiliate of Cosmotec, would be formed to
distribute the Company's RDX catheter products in Japan. In August 1999, the
Company purchased for cash of $0.2 million a 51% interest in the joint venture,
named Radiatec.
In July 1999, the Company entered into a two year contract manufacturing
agreement with Bebig GmbH ("Bebig") to manufacture its radiation therapy
catheter in Europe. According to the agreement, during 1999 and 2000, Radiance
will pay certain facility set-up fees, totaling approximately $0.8 million, and
all material and third party costs associated with production validation.
Radiance will prepare the manufacturing equipment used to perform the final
assembly of the RDX catheter, estimated to cost approximately $0.6 million, and
Bebig will purchase the equipment from Radiance for $0.5 million. Radiance will
also pay Bebig an agreed amount for each unit produced. For a nominal charge,
the Company can renew the agreement for three successive, two-year terms. In
conjunction with the contract manufacturing agreement, the Company entered into
a three year sub-license agreement for certain radiation technology that it
believed may be useful in the development of its radiation therapy products.
There is a minimum annual license fee of $0.2 million,
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23
subject to offset by certain amounts paid under the aforementioned manufacturing
agreement, beginning in July 2000 and royalty fees for any products sold
worldwide that incorporate the licensed technology. The sub-license is subject
to renewal, without cost, until the underlying patents' expiration dates.
As a result of the 1999 closing of Clinitec GmbH, the Company's German
distribution subsidiary, the Company reconsidered the initial accounting for the
acquisition of this subsidiary in 1997. In recording the acquisition, the
Company accounted for the forgiveness of its account receivable from Clinitec
for product sales to be a part of its total purchase price, and allocated such
amount to goodwill resulting from the business combination. In the accompanying
consolidated financial statements, the Company has restated 1997 sales to
eliminate $1.9 million in sales to Clinitec in that year, since no payment had
been received for these sales, and has written off as a bad debt expense in 1997
the remaining $0.1 million Clinitec account receivable balance related to 1996
sales. Net of related adjustments to cost of sales and amortization expense, the
Company has increased reported net loss for 1997 by $1.7 million and decreased
goodwill by a corresponding amount. The remaining $0.2 million balance of the
amount originally assigned to goodwill has been treated as an identifiable
intangible asset and was amortized over the period ended December 31, 1998. This
restatement has no effect on cash flows from operations or other sources or uses
of cash.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1999
Sales Revenue. Sales revenue in 1999 decreased 59% to $3.9 million compared
to $9.4 million for the same period of 1998. During 1998, the Company reduced
its domestic direct sales force and , in June of that year, licensed its focus
technology. In January 1999, it sold its Vascular Access product line and
related assets and acquired RMS as the Company sought to maximize the value of
existing technology, while acquiring a technology which management believes will
have greater potential for future product sales. As a result of the
aforementioned license and sale, and increased competition for angioplasty
catheter products, sales of Focus technology decreased $3.3 million, from $6.7
million in 1998 to $3.4 million in 1999, and Vascular Access products decreased
$2.2 million, from $2.7 million in 1998 to $0.5 million in 1999.
The Company expects that sales of its existing products will continue to
decline in 2000, compared with 1999 sales, as its remaining products age, and
the licensee's products gain wider regulatory approval and market acceptance.
Additionally, there will be no sales of Vascular Access products in 2000 (1999
sales of Vascular Access Products totaled approximately $0.5 million, or 13% of
total revenues).
If RDX technology development concludes successfully and we receive
regulatory approval for sale in Europe in late 2000, the ability of the Company
to generate product sales in 2000 and in the future will be dependent upon many
factors, including but not limited to market acceptance, medical reimbursement,
competitive products. See "Risk Factors."
License Fee and Other Revenue. License fee and other revenue increased from
$2.8 million in 1998 to $2.9 million in 1999. In 1998, the Company signed a
technology license agreement with Guidant Corporation resulting in $2.8 million
and $2.3 million in license fees in 1998 and 1999, respectively. Additionally,
the Company recognized $0.3 million and $0.3 million in minimum royalties under
the sale agreement for the Vascular Access product line and related assets and
the technology license agreement with Guidant, respectively, in 1999.
Because there are no more milestone payments due under the aforementioned
Guidant license agreement or Vascular Access sale agreement, management
anticipates significantly lower license revenue in 2000, compared with 1999.
However, some reduction in milestone payments should be offset by higher royalty
income in 2000, compared with 1999.
Cost of Sales. The cost of sales decreased to $2.8 million in 1999 compared
with $6.2 million in 1998. The cost of sales for 1999 decreased to 42% compared
to 51% of revenues for 1998. This decrease was primarily attributable to $2.9
million from licensing fees received in 1999 that had no associated cost of
sales and relatively lower product sales compared with 1998.
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24
The Company agreed to produce Vascular Access products for six months
following the sale of the Vascular Access product line and related assets in
January 1999 on a "cost plus" reimbursement basis for the acquiring company and
extended that commitment until December 1999. Thus, the margin that the Company
earned on sales of such products was substantially lower in 1999 compared with
1998.
Management anticipates lower margins on existing products for 2000,
compared with 1999, due to increasing competition and lower volume production.
Charge for Acquired In-Process Research and Development. Due to the
acquisition of a controlling interest in RMS in September 1998, and the
acquisition of the remaining shares of RMS not owned by the Company in January
1999, the Company recognized a charge of $0.2 million and $4.2 million for
acquired in-process research and development in 1998 and 1999, respectively. See
Note 1 -- Intangible Assets.
Research and Development. Research and development expenses, which include
clinical expenses, increased by 8% to $8.6 million for 1999 from $8.0 million in
1998. The primary reason for this increase was additional spending on
development of and clinical trials for the Company's new Radiation catheter. The
Company believes that the research, development and clinical expenses could be
substantially higher in 2000 compared with 1999, primarily due to higher costs
for the clinical expenses as the European and U.S. clinicals for the RDX
catheter began in late third quarter 1999 and first quarter 2000, respectively.
Marketing and Sales. Marketing and sales expenses declined 63% to $2.0
million in 1999, from $5.4 million in 1998. This decrease primarily reflects
reductions in the Company's domestic and international sales force and related
expenses.
General and Administrative. General and administrative expenses decreased
by 16% to $2.5 million for 1999 from $2.9 million for 1998. The decrease was due
primarily to lower bad debt expense in 1999, compared with 1998.
Other Income. Interest income declined to $1.2 million in 1999 compared
with $1.6 million in 1998. The decrease was due primarily to a reduction of $2.8
million in cash, cash equivalents and marketable securities during 1999, due to
the use of funds for operations, the purchase of treasury stock and capital
expenditures. Gain (loss) on sale of assets increased to $1.0 million in 1999
from $0.0 million in 1998 due mainly to the sale of the assets of the Vascular
Access product line and related assets in January 1999. Other income (expense)
increased to $0.4 million income in 1999 due primarily to other income from the
sale of an option to purchase an investment held by the Company. See Note
3 -- Deferred Revenue.
YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1998
Sales Revenue. Sales revenue in 1998 and 1997 was $9.4 million in each
year.
License Fee and Other Revenue. In 1998, the Company signed a technology
license agreement with Guidant Corporation resulting in $2.8 million in license
fees. The Company did not have any license fees in 1997.
Cost of Sales. The cost of sales increased to $6.2 million in 1998,
compared with $6.1 million in 1997. The cost of sales for 1998 decreased to 51%
of revenues compared to 65% of revenues for 1997. This decrease was primarily
attributable to the receipt of the $2.8 million Guidant licensing fees received
in 1998 that had no associated cost of sales.
Charge for Acquired In-Process Research and Development. Due to the
acquisition of a controlling interest in RMS, the Company recognized a charge of
$0.2 million for acquired in-process research and development in 1998. See Note
1 -- Intangible Assets.
Research and Development. Research and development expenses, which include
clinical expenses, increased by 13% to $8.0 million for 1998, from $7.0 million
in 1997. The primary reason for this increase was additional spending on
development of the Company's new Radiation catheter and Self-Expanding Arterial
Lining ("SEAL") technology and increased spending on clinical trials for these
products.
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Marketing and Sales. Marketing and sales expenses declined 20% to $5.4
million in 1998, from $6.7 million in 1997. This decrease primarily reflects
reductions in the Company's domestic sales force and related expenses.
General and Administrative. General and administrative expenses increased
by 25% to $2.9 million for 1998, from $2.3 million for 1997. The increase was
due primarily to additions to the allowance for uncollectible accounts
receivable and the salary expense of an additional executive officer.
Other Income. Interest income declined to $1.5 million in 1998 compared
with $2.2 million in 1997. The decrease was due to a reduction of $6.1 million
in cash, cash equivalents and marketable securities during 1998, due to the use
of funds for operations, the purchase of treasury stock and capital
expenditures.
Radiance has experienced an operating loss for each of the last three years
and expects to continue to incur operating losses through at least 2001.
Radiance's results of operations have varied significantly from quarter to
quarter. Quarterly operating results depend upon several factors, including the
timing and amount of expenses associated with expanding the Company's
operations, the conduct of clinical trials and the timing of regulatory
approvals, new product introductions both in the United States and
internationally, the mix between pilot production of new products and full-scale
manufacturing of existing products, the mix between domestic and export sales,
variations in foreign exchange rates, changes in third-party payors'
reimbursement policies and healthcare reform. The Company does not operate with
a significant backlog of customer orders, and therefore revenues in any quarter
are significantly dependent on orders received within that quarter. In addition,
the Company cannot predict ordering rates by distributors, some of whom place
infrequent stocking orders. The Company's expenses are relatively fixed and
difficult to adjust in response to fluctuation revenues. As a result of these
and other factors, the Company expects to continue to experience significant
fluctuations in quarterly operating results, and there can be no assurance that
the Company will be able to achieve or maintain profitability in the future.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily from the
sale of its equity securities, advances from EndoSonics, licensing its
technologies and through international product distribution agreements. Prior to
the Company's initial public offering, the Company had raised an aggregate of
approximately $11.4 million from the private sales of preferred and common stock
and $2.7 million in working capital from EndoSonics, which was repaid to
EndoSonics during the third quarter of 1996. In the second quarter of 1996, the
Company closed its initial public offering of common stock, resulting in net
proceeds of $42.8 million after deducting underwriting discounts and commissions
and other expenses of the offering. For the years ended December 31, 1999, 1998
and 1997, the Company's net cash used in operating activities was $6.6 million,
$5.0 million and $9.8 million, respectively. The increase in 1999 was primarily
the result of a decrease in net working capital. The decrease in 1998 was
primarily the result of a lower net loss and a decrease in net working capital.
At December 31, 1999, Radiance had cash, cash equivalents and marketable
securities available for sale of $22.1 million. The Company expects to incur
substantial costs related to, among other things, clinical testing, product
development, marketing and sales expenses, and to utilize increased levels of
working capital to finance its accounts receivable and inventories prior to
achieving positive cash flow from operations. The Company anticipates that its
existing capital resources will be sufficient to fund its operations through
June 30, 2001. Radiance's future capital requirements will depend on many
factors, including its research and development programs, the scope and results
of clinical trials, the regulatory approval process, the costs involved in
intellectual property rights enforcement or litigation, competitive products,
the establishment of manufacturing capacity, the establishment of sales and
marketing capabilities, and the establishment of collaborative relationships
with other parties. The Company may need to raise funds through additional
financings, including private or public equity offerings and collaborative
arrangements with existing or new corporate partners. There can be no assurance
that funds will be raised on favorable terms, or at all. If adequate funds are
not available, the Company may be required to delay, scale back or eliminate one
or more of its development programs or obtain funds through arrangements with
collaborative partners or others that
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may require the Company to grant rights to certain technologies or products that
the Company would not otherwise grant.
RISK FACTORS
Operating Losses, Anticipated Future Losses and Future Capital
Requirements. From our formation in 1992 to the date of this filing, we have had
substantial annual operating losses and expect to have them at least through
2001, if not longer, due to our continued research and development activities,
and expenditures related to clinical testing and product development. We had an
accumulated deficit of approximately $40.3 million as of December 31, 1999.
Our activities are highly capital intensive. Although we believe that our
present capital and anticipated revenues from operations will be sufficient to
meet our presently planned capital needs at least through the second quarter of
2001, there can be no assurance that we will not require additional capital
during that time or thereafter. Our cash requirements in the future may be
significantly different from our current estimates and depend on many factors,
including:
- Research and development programs;
- Scope and results of clinical trials;
- Time and costs involved in obtaining regulatory approvals;
- Costs involved in obtaining and enforcing patents or any litigation by
third parties regarding intellectual property;
- Status of competitive products;
- Establishment and scale-up of manufacturing capacity;
- Establishment of sales and marketing capabilities; and
- Establishment of collaborative relationships with other parties and costs
related to the acquisition of new technologies and product development.
We may require additional funds to finance these activities and for working
capital requirements, and may seek such funds through additional rounds of
financing, including private or public equity or debt offerings and
collaborative arrangements with corporate partners. In addition, we may be
required to undertake significant capital expenditures to achieve and maintain
any technological and competitive position in our industry. There can be no
assurance that funds will be raised on favorable terms, if at all. If adequate
funds are not available, we may be required to delay, scale back or eliminate
one or more of our development programs or obtain funds through arrangements
with collaborative partners or others that may require us to relinquish rights
to certain technologies, product candidates or products that we would not
otherwise relinquish. If we are successful in raising additional funds, we may
issue additional equity securities that may dilute our earnings and net tangible
book value per share.
Dependence on New and Unproven Radiation Technology. The RDX Catheter is
designed to reduce the frequency of restenosis following the interventional
treatment of atherosclerosis by locally applying beta radiation to the diseased
blood vessel. This and other radiation technologies and products that we intend
to develop are in the early stages of development and require significant
research, development and testing. Our development of these products is subject
to the risks of failure commonly experienced in the development of new products
based on innovative or novel technologies. While early clinical results by our
competitors indicate that radiation will reduce local restenosis, the limited
clinical trials of the technology show positive and lasting clinical results.
The possibility also exists that any or all of these proposed technologies and
products will be found to be ineffective or unsafe, will fail to meet applicable
regulatory standards or will fail to obtain required regulatory approvals. In
addition, even if radiation technology and products are developed successfully
and are effective, they may be uneconomical to market, or other companies may
hold the proprietary rights which could preclude us from marketing such
technologies and products.
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Due to the relatively short half-life (i.e., shelf life) of the Company's
current RDX catheter design, unlike its existing products, it is critical to
ship the products as close to the date of use as possible. Moreover,
coordination between the Company, a contract manufacturer, the distributor and
the end user is necessary in order to reduce waste and returned products. To
help reduce the shipping time for the product and improve the Company's response
time, the Company has contracted with a third party manufacturer, Bebig, in
Europe to perform the final assembly and radioactive source manufacturing of the
devices for international use and anticipates the use of a similar facility in
the United States. If the Company fails to establish the aforementioned shipping
capability or adequate manufacturing sources, it could have a material adverse
effect on Radiance's business, financial condition and results of operations.
To achieve profitable operations, we must develop and obtain regulatory
approval for products based on radiation technology, and introduce and market
these products successfully. Significant preclinical and clinical development
work for the products based on the Radiance technologies remains to be
completed. We have not generated, nor can we be certain that we will generate in
the near future, any operating revenues based on new products. We cannot assure
you that we will develop, obtain regulatory approval for or introduce and market
these products successfully, and any failure on our part could have a material
adverse effect on our business and results of operations.
Dependence Upon New Products and Technology; Rapid Technological Change;
Risk of Obsolescence. We are in the rapidly changing, competitive and heavily
regulated medical device industry, which makes it difficult for us to predict
our risks and expenses with any amount of certainty. We cannot say with any
certainty that our research and development activities will enable us to produce
any products able to withstand competition. Our development of each product is
subject to the risks of failure commonly experienced in the development of
products based upon innovative technologies and the expense and difficulty of
obtaining approvals from regulatory agencies. All of our potential products
currently under development will require significant additional funding and
development and pre-clinical and clinical testing before we are able to submit
them to any of the regulatory agencies for approval for commercial use. We
cannot assure you that we will be able to license any technologies or proposed
products or to complete successfully any of our research and development
activities. Even if we do complete them, there is no assurance that we will be
ab