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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER: 0-28440
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.)
13900 ALTON PARKWAY, SUITE 122, 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 NAME OF EACH EXCHANGE
EACH CLASS ON WHICH REGISTERED
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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 13, 2001, was approximately $56,130,000 (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 13, 2001, approximately 13,067,000 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 2001 Annual Meeting of
Stockholders to be held on June 5, 2001 are incorporated by reference into Part
III.
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. We have based these forward-looking statements largely on our current
expectations and projections about future events and trends affecting the
financial condition of our business. These forward-looking statements are
subject to a number of risks, uncertainties, and assumptions including, among
other things:
- research and development of our products;
- development and management of our business and anticipated trends on our
business;
- our ability to attract, retain and motivate qualified personnel;
- our ability to attract and retain customers;
- the market opportunity for our products and technology;
- the nature of regulatory requirements that apply to us, our suppliers and
competitors and our ability to obtain and maintain any required
regulatory approvals;
- our future capital expenditures and needs;
- our ability to obtain financing on commercially reasonable terms;
- our ability to compete;
- general economic and business conditions; and
- other risk factors set forth under "Risk Factors" in this Annual Report
on Form 10-K.
You can identify forward-looking statements generally by the use of
forward-looking terminology such as "believes," "expects," "may," "will,"
"intends," "plans," "should," "could," "seeks," "pro forma," "anticipates,"
"estimates," "continues," or other variations thereof, including their use in
the negative, or by discussions of strategies, opportunities, plans or
intentions.
Unless otherwise required by law, we undertake no obligation to publicly
update or revise any forward-looking statements, either as a result of new
information, future events or otherwise after the date of this Annual Report on
Form 10-K. The forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to differ in
significant ways from any future results expressed or implied by the
forward-looking statements.
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PART I
ITEM 1. BUSINESS
INTRODUCTION
We are developing proprietary devices to deliver radiation to prevent the
recurrence of blockages in arteries following balloon angioplasty, vascular
stenting and other interventional treatments of blockages in coronary and
peripheral arteries. We incorporate our proprietary RDX technology into
catheter-based systems that deliver beta radiation to the site of a treated
blockage in an artery in order to decrease the likelihood of restenosis. The
application of beta radiation inside the artery at the site of a blockage has
proven clinically effective in inhibiting cell proliferation, a cause of
restenosis.
We designed the RDX system to provide safe and effective treatment for the
prevention of restenosis without many of the disadvantages inherent in
alternative radiation delivery systems. Our proprietary RDX system is the only
device in clinical trials that carries a radiation source on an inflatable
balloon catheter. This patented technology allows the RDX system to deliver a
therapeutic dose of radiation with approximately 80% less total radiation
activity than competing systems. As a result, the RDX system is easier to use,
does not require supplemental capital equipment, and is readily disposable. In
addition, we believe that the RDX system is suitable to treat arteries that are
significantly larger and smaller than can be treated with alternative radiation
delivery systems. This flexibility should allow the RDX to treat a larger number
of patients than said alternative systems.
In addition to the RDX system, we manufacture and market coronary stents,
coronary stent delivery systems and balloon dilatation catheters for coronary
applications. We licensed our proprietary Focus balloon technology to Guidant
Corporation for use in Guidant's stent delivery systems. Royalties from this
license, as well as sales of our own interventional coronary products, are the
primary source of our current revenues.
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 generally is characterized by the
progressive accumulation of plaque on the walls of arteries as a result of the
deposit of cholesterol and other fatty materials. This accumulation of plaque
leads to a narrowing of the interior passage, or lumen, of the arteries,
reducing blood flow to the heart. Insufficient blood flow to the heart restricts
the oxygen supply, resulting in heart attack and/or death.
Coronary artery disease is treated by re-opening or bypassing narrowed
blood vessels, thereby increasing blood flow to the heart. The three most common
forms of treatment are:
- coronary artery bypass graft, or CABG;
- percutaneous transluminal coronary angioplasty, or PTCA; and
- stenting.
CABG is a highly invasive, open-chest surgical procedure in which blood
vessel grafts from the patient's leg or chest 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.
PTCA is the principal less invasive alternative to CABG. PTCA is performed
in a cardiac catheterization laboratory, commonly referred to as a cath lab, by
an interventional cardiologist. During PTCA, the cardiologist inserts a
guidewire into a blood vessel through a puncture in the leg, or arm in some
cases, and guides it through the blood vessel to the diseased site. The
cardiologist then guides a balloon-tipped catheter over the wire to the location
of the plaque, or lesion, obstructing the artery. After positioning the balloon
across
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the lesion inside the vessel, the cardiologist inflates and deflates the balloon
several times. Frequently, the cardiologist inflates successively larger
balloons 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 passage. PTCA typically results in
increased blood flow without the actual removal of any plaque. However, injury
to the arterial wall often occurs under balloon pressure. Clinical studies
indicate that patients treated with PTCA often experience restenosis within six
months following the procedure.
Coronary stents are expandable, implantable metal devices permanently
deployed at a lesion site. Stents maintain increased diameter in the coronary
artery by mechanically supporting the diseased site. Of all the non-surgical
treatments that have sought to improve PTCA, stents have shown the best results
in reducing the rate of restenosis. In 1999, stents were used in approximately
70% to 90% of the PTCA procedures performed in the United States. In a typical
stent procedure, a cardiologist pre-dilates the artery at the lesion site with a
balloon catheter, delivers the stent to the site of the lesion and, with the use
of a second balloon catheter, expands the stent and firmly positions it in
place. Once placed, stents support the walls of the coronary artery to enable
the artery to remain open and functional.
The use of stents has grown rapidly since their commercial introduction in
the United States in 1994. Despite their rapid adoption, stents have some
disadvantages. While stents appear to be effective in reducing the frequency of
restenosis resulting from elastic recoil and appear to limit vascular
remodeling, they may increase, rather than decrease, the excessive proliferation
of cells at the treatment site, referred to as hyperplasia. Stents not only are
permanent implants that may result in unforeseen long-term adverse effects, but
stents also cannot be used in cases where the coronary arteries are too tortuous
or too narrow.
Peripheral Vascular Disease
Peripheral vascular disease encompasses a broad spectrum of blockages
outside the coronary circulatory system. Peripheral vascular disease generally
is characterized by atherosclerosis of the inside walls of the peripheral, or
non-coronary, arteries, frequently those of the legs. This condition leads to a
narrowing of the lumen, reducing blood flow to the extremities, especially the
feet and legs. Insufficient blood flow to these areas restricts the oxygen
supply, resulting in tissue death and, in extreme cases, gangrene and
amputation. Treatment methods for these patients include arterial bypass surgery
and balloon angioplasty.
Restenosis
Restenosis typically refers to a renarrowing of an artery within six months
of a revascularization treatment to less than 50% of the artery's size following
the original procedure. Restenosis is a vascular response to arterial injury and
occurs frequently after a revascularization procedure. A revascularization
stretches arteries or otherwise damages the treated segment of an 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 or years. Restenosis that occurs shortly after a revascularization
procedure usually results from elastic recoil 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, known as hyperplasia, or from a remodeling of the arterial segment, the
causes of which are not well understood. 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.
Radiation Therapy and Vascular Brachytherapy
For more than 50 years, radiation therapy has been used routinely to treat
proliferative cellular disorders, such as cancer. There are two types of
radiation used for brachytherapy, beta and gamma. While externally applied
radiation has shown little beneficial effect on treated arteries, the
application of beta and gamma radiation within the blood vessel at the site of
arterial injury has proven clinically effective in treating restenosis by
inhibiting cell proliferation. This type of treatment is referred to as vascular
brachytherapy.
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A number of clinical trials indicate that the application of radiation
inhibits cellular proliferation, which is a cause of restenosis. An advantage of
beta radiation is that it travels only a short distance, approximately 2 to 4
millimeters, after which its radiation activity diminishes to a negligible
amount. This relatively short distance of travel makes it compatible with
current cath lab practices. Gamma radiation is significantly more penetrating
and therefore potentially more hazardous to use than beta radiation. For
example, healthcare workers leave the cath lab during administration of gamma
radiation to ensure their safety by limiting their exposure to gamma radiation.
In addition, gamma radiation impacts patient tissue beyond the treatment site.
MARKET OPPORTUNITY
Size of Market
Coronary Artery Disease. Coronary artery disease is the leading cause of
death in the United States and Europe. In 1999, physicians performed
approximately 1.2 million PTCA procedures worldwide to treat this disease.
Approximately 40% of PTCA patients experience restenosis within six months of
the initial procedure. These patients may require another angioplasty procedure
or a CABG procedure. Approximately 400,000 CABG procedures are performed
annually in the United States. Approximately 25% of all heart bypass grafts
narrow or become blocked within five years, requiring a repeat procedure.
Approximately 70% to 90% of angioplasty procedures include the placement of
a stent. Clinical studies indicate that 15% to 30% of the patients who receive
stents following balloon angioplasty experience restenosis, referred to as
"in-stent" restenosis. Patients suffering from in-stent restenosis often
experience recurrent restenosis and, as a result, are prone to multiple
revascularization procedures. The likelihood of recurrent restenosis in this
group of patients is between 40% to 65%. In total, approximately $3 billion is
spent annually in the United States on repeat revascularization procedures
prompted by restenosis.
Peripheral Vascular Disease. Peripheral vascular disease encompasses a
broad spectrum of blockages outside the coronary circulatory system. This
disease afflicts up to 5% of all men and 2% of all women age 50 or older,
resulting in approximately 350,000 newly diagnosed cases per year in the United
States. Physicians perform approximately 300,000 peripheral vascular blockage
revascularization procedures annually in the United States. Of these,
approximately 35% to 40% are peripheral balloon angioplasty procedures. More
than 40% of these patients experience restenosis. At present, the treatment
options for restenosis in these patients include a repeat angioplasty or a
peripheral artery bypass procedure.
Limitations of Alternative Radiation Technologies
In addition to the RDX system, other radiation treatment products are in
various phases of development, and in some cases have been approved in the U.S.
and/or Europe, to deliver radiation inside of coronary arteries. These
technologies are based upon previously developed cancer treatments and utilize
the same types of technology that oncologists have used for decades. These
technologies typically deliver radiation via a seed or wire in a catheter-based
system. Seed-based technology, which oncologists pioneered as a treatment for
prostate cancer and other forms of cancer, involves the delivery of beta
radiation via a "train" of several miniature sealed sources containing a
beta-emitting radioisotope hydraulically delivered and retrieved via a catheter.
Source wires with gamma-emitting radioactive tips have been used for some time
in cancer therapy. Radioactive source wires and seed trains are used in
conjunction with an afterloader, a specialized piece of equipment that may be
computer controlled to automatically calculate treatment times, control movement
of the source wire, and store and shield the source wire when not in use.
Radioactive stents, which are similar to a conventional stent treated to emit
radiation, are also in development.
We believe there are a number of limitations and disadvantages to
alternative radiation technologies for the treatment of restenosis:
- Use of Gamma Radiation. Some competing technologies use gamma radiation,
which, although potentially effective to treat restenosis, is much more
penetrating and difficult to limit to the targeted area than beta
radiation. Gamma radiation may damage a patient's healthy tissue during
treatment. In addition, during gamma procedures, healthcare professionals
must use cumbersome shielding and leave
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the treatment area to minimize their radiation exposure, a precaution not
required with beta radiation. Also, treatment time is up to five times
longer with gamma than with beta radiation.
- Existing Beta Radiation Systems Require Larger Amounts of Radioactive
material than our RDX system. Competing products use beta radiation on a
wire or in seeds which can be 1 to 2 millimeters away from the arterial
wall. Consequently, these systems must use high levels of activity to
achieve adequate dose rates to the arterial wall.
- Wire and Seed-Based Systems are Difficult to Center Within the
Artery. Because wire and seed-based systems are not apposed to the vessel
wall, the radiation source must be centered within the artery, which may
be difficult or impossible. If it is not centered, the source of
radiation may be closer to one side of the arterial wall than to the
other. Consequently, one side may receive too little radiation, which
could increase rather than decrease cell proliferation, while the other
side receives too much radiation, which may damage the arterial wall.
- Wire and Seed Based Systems Require Calculation of Dwell-Time During the
Procedure. Because of the differing sizes of the arteries and the depth
of penetration, dwell-times, or the time the source irradiates the tissue
to generate the prescribed dose, must be calculated during the procedure
after making arterial measurements. Even if computerized, this adds
significant procedure time and adds an additional source of potential
procedural error.
- Limited Capabilities for Small Coronary Arteries. Native coronary
arteries range from 1.5 to 4.0 millimeters in diameter. All of the
competitive vascular brachytherapy devices require a separate delivery
catheter to provide access to the coronary anatomy prior to inserting the
wire or seed-based device. The two device mechanism deployed in wire or
seed-based procedures makes it difficult to access small coronary
arteries that are less than 2.5 millimeters in diameter.
- Limited Capability for Large Arteries. All of the competitive vascular
brachytherapy devices are severely limited in treating blockages in large
arteries such as peripheral arteries and CABG grafts. For example, the
arteries in the femoral and iliac regions of the legs range from 5 to 12
millimeters in diameter. Using a wire or seed-based system in these
arteries can be difficult because beta radiation penetrates approximately
2 to 4 millimeters from the radioactive source. Thus, for most patients,
the arterial passage is too large for effective penetration of beta
radiation. Although doctors can use gamma radiation to treat peripheral
arteries, gamma radiation has the problems previously noted.
- Expensive, Bulky Equipment. Competitive wire and seed-based devices
require expensive and sometimes bulky equipment in order to safely house
the radioactive agents. The expense of this equipment may increase the
patient's cost of treatment. Some treatment facilities may view the bulk
of the equipment as a drawback.
- Difficult Handling and Disposal of Radioactive Material. Long-lived
radioisotopes or devices with higher radiation activity may require
special and expensive handling, transportation and storage.
- Additional Training and More Complicated Procedures. Wire and seed-based
systems require extensive training to use and calibrate their radiation
delivery system. These systems also involve complicated procedures and
use a guide wire and a catheter, or in other cases a centering balloon,
dummy wire and then a radioactive wire.
- Radioactive Stents Have Failed to Show Efficacy. Radioactive stents have
failed to reduce the rate of restenosis in clinical trials despite
testing of varying sizes of stents and varying amounts of radiation.
Various clinical trials of a variety of radioactive stents have concluded
that the arterial wall at the edges of the stent tend to block the
artery, in what is known as the "candy-wrapper" effect. To date in
clinical trials, radioactive stents have exhibited a candy-wrapper effect
and have failed to show significant reduction in restenosis rates.
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OUR RDX TECHNOLOGY SOLUTION
Because it is the only method of vascular brachytherapy that was developed
specifically to treat arterial restenosis and not derived from cancer treatment
methods, we believe that the RDX system is a second generation vascular
brachytherapy treatment. The RDX system enables solid form radioactive material
of virtually any isotope to be integrated into the wall of the balloon material
itself, which creates a radioactive balloon catheter. Our second generation
approach combines the demonstrated benefits of beta radiation with the utility
of direct blood vessel wall apposition associated with balloon deployment.
Advantages of the RDX System
We believe the RDX system provides the following advantages compared to
competing technologies:
- Highly Accurate Dose Delivery. The RDX system places the radiation source
directly against, or apposed to, the arterial wall. This feature
overcomes the problem of inconsistent dose delivery inherent with
alternative vascular brachytherapy devices.
- Approximately 80% Less Radioactivity. The RDX system delivers a
therapeutic dose with approximately 80% less radioactive material than
other radiation technologies. The RDX system requires less radiation
activity because, unlike competing systems, the radioactive source is
apposed to the arterial wall.
- No Costly Capital Equipment. The RDX system does not require expensive
capital equipment, such as an afterloader system, nor does it require
extensive radiation shielding. The afterloader system stores, delivers
and computes the dwell time to deliver the appropriate radiation dose to
the treatment site. Our system consists of a catheter with a plastic
shield that covers the beta radiation source.
- Ease of Dwell-Time Calculation. With the RDX system, the dwell-time is
calculated at the time of manufacture and printed on the package. With
other devices, a dwell-time must be calculated during the procedure for
each vessel size to deliver the correct dose.
- Capable of Treating Small Vessels. Coronary arteries range from 1.5 to
4.0 millimeters in diameter. Many competing systems cannot treat coronary
arteries smaller than 2.5 millimeters in diameter due to the large size
or multiple components. We can make the RDX system with small balloon
sizes, giving it the capability to treat smaller and more tortuous
vessels.
- Capable of Treating Large Vessels. Beta radiation falls off rapidly the
farther it travels from the source. Small diameter radiation sources
centered in large arteries cannot treat these vessels effectively because
the radiation dose is too weak by the time it reaches the target area.
The RDX system overcomes this limitation by placing the radiation source
against the vessel surface.
- Easy to Use and Disposable. The RDX system is simple, easy to use and
disposable. The RDX system is similar to other types of catheters
interventional cardiologists are familiar with and accustomed to using.
In addition, the hospital disposes of the source as normal medical waste
after holding the radioactive source balloon for approximately one year.
- Safe to Use. The RDX system double balloon construction protects and
contains the radiation in the solid film substrate during use. Also, the
use of the beta isotope as a radiation source with less total radiation
activity than competing devices increases the safety of the RDX system
for patients, physicians and hospital personnel.
- Overcomes Barriers to Treatment. The RDX system effectively delivers
radiation treatment through barriers such as stents or calcium deposits
due to the close proximity of the radioactive source to the artery wall.
- Potentially Useful in a Wide Variety of Vascular Applications. In
addition to coronary and peripheral vascular disease, the RDX system is
potentially useful in other vascular applications such as renal arteries,
carotid arteries and kidney dialysis grafts because of its ability to
deploy radiation regardless of
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vessel size by using larger or smaller balloons. This could broaden the
clinical utility and market potential for the RDX system.
- Potentially Useful in Oncology Applications. The design of the RDX system
may make our technology useful for the treatment of a variety of cancers,
including esophageal and biliary cancer. We may be exploring these areas
in the future.
PRODUCTS
The RDX System
Device description. The RDX system is a patented device that we believe
represents a second generation radiation delivery technology for use in vascular
brachytherapy. The RDX system is unique among devices developed for this purpose
due to its use of a radioactive source carried by a balloon. Our innovative RDX
system is fabricated by encapsulating, or sandwiching, a radioactive film source
within two balloon membranes. The two balloon membranes isolate the source from
direct contact with the patient and the inflation media, thereby fully
containing the isotope. The source element is a thin film containing solid state
Phosphorous-32, or (32)P. (32)P is a pure beta emitter, with a half-life of 14.3
days.
A customized plastic shield approximately 2.0 centimeters in diameter
covers the radioactive portion of the catheter. Plastic is an effective shield
for beta isotopes. Dose rates measured on the surface of the shield while the
balloon is in the shield are less than the hand dose received from other medical
equipment typically used in a catheterization procedure. The radiation is low
enough that the RDX system can be packaged in a standard catheter kit and
shipped via overnight delivery. The shield serves both to protect personnel from
radiation while the device is not in use, and to introduce the device into the
guiding catheter. We are developing the RDX system in a variety of balloon
diameters and source lengths for coronary and peripheral treatment applications.
We designed the RDX system's catheter to allow for its configuration in both
over-the-wire and rapid-exchange format, the two methods used to deploy
angioplasty balloons.
The RDX System Treatment Procedure. The RDX system is approximately as
flexible as a conventional PTCA catheter, and delivers the balloon radiation
source to the lesion site the same way as a conventional balloon catheter. The
RDX system does not require any custom guides, catheters or wires for use. Prior
to using the RDX system, the cardiologist completes the primary
revascularization procedure, leaving the guidewire across the lesion.
The cardiologist introduces the RDX system into the patient and advances it
to the treatment site in a manner similar to any PTCA catheter. Once in place,
low pressure inflation of the balloon at two atmospheres deploys the source
directly against the internal wall of the vessel. After leaving the RDX catheter
in place for the dwell time, which is pre-printed on the package, to achieve the
correct dose, the cardiologist deflates the balloon and withdraws the source
back into the shield.
For disposal, the source portion is cut off of the catheter into a shielded
container, and the balance of the catheter is disposed of as normal medical
waste. Approximately one year later, the medical facility disposes of the source
portion as normal medical waste.
RDX System Product Pipeline. We are developing an RDX system to treat
peripheral vascular disease. In addition, in January 2001 we received a patent
for combining a stent on the same catheter as an RDX system for delivering
radiation to the coronary or peripheral vasculature. This patent includes claims
that cover the RDX system to perform an angioplasty procedure, deliver a stent
and deliver radiation to the treated blood vessel site. We intend to initiate a
program to develop the RDX system for this application.
Existing Catheter and Stent Products
We manufacture a number of coronary integrated stent delivery systems. In
addition, using our patented Focus technology we have created angioplasty
balloons that expand to different sizes, permitting cardiologists to deliver
stents and perform other interventional procedures in blood vessels of varying
diameters and anatomical locations. This design enables cardiologists to avoid
the costs and difficulties of inflating multiple
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balloons to treat blood vessels of varying diameters. In June 1998, we licensed
our Focus technology to Guidant for use in stent delivery as part of a long term
technology license agreement.
CLINICAL TRIALS
Our RDX Clinical Trials
We currently are conducting two clinical trials in the United States and
Europe to obtain regulatory approval to market the RDX system, the Beta
Radiation Trial to Eliminate Restenosis, or BETTER, clinical study in Europe and
the Beta Radiation to Reduce In-Stent Restenosis, or BRITE, clinical studies in
the United States. The BRITE SVG clinical study is being conducted as a
feasibility study for the use of the RDX system in treating restenosis in
sapheneous vein graft patients. The BETTER study is designed to provide us with
the data we need to obtain CE Mark approval and commercialize the RDX system in
Europe and other foreign countries. We expect that data from both trials will
support our pre-market approval applications to the FDA to market our device in
the United States. We also have announced plans to conduct two additional
studies, the first for restenosis in small arteries and the second for
restenosis in peripheral arteries. The treatment of these indications represents
approximately 25% to 30% of the procedures performed by interventional
cardiologists on a worldwide basis.
BETTER Clinical Study. We completed enrollment of 147 patients in the
multi-center European BETTER study in 2000. The study tests the safety of the
RDX system and its ability to prevent restenosis in a wide variety of patients
following conventional balloon angioplasty and/or coronary stenting. We
submitted an application for CE Mark approval on August 30, 2000 based on the
data from this trial. Following CE Mark approval, we expect to begin marketing
the RDX system in Europe and other regions during the first half of 2001.
In November 2000, we released preliminary data from the first 90 patients
in the BETTER study following 6-month clinical and angiographic follow up.
Restenosis occurred within the target lesion in approximately 5 percent of these
patients. In a subgroup of 24 patients treated for in-stent restenosis,
restenosis occurred in two patients (8 percent). These results are preliminary
and not necessarily indicative of the final results that may be shown upon
completion of the study.
BRITE Clinical Study. The objective of the U.S. multi-center BRITE study is
to evaluate the safety and efficacy of the RDX system in preventing the
recurrence of restenosis in patients who have received stents. We began Phase I
in February 2000 and have now completed six month follow up of each patient
included in this phase of the study. Restenosis in the target lesion was not
found in any patient in this study. In August 2000, we submitted technical
documentation and data from both the BETTER and the BRITE clinical studies to
the FDA and requested approval to begin the final randomized, placebo-controlled
phase of the BRITE study. FDA approval was received in December 2000 and we
began the final phase trial of this 480 patient study in January 2001.
BRITE SVG Clinical Study. In August 2000, we filed with the FDA a
supplement to our existing investigational device exemption, or IDE, to initiate
a clinical trial to prove the safety of the RDX system in reducing restenosis in
saphenous vein graft patients. This clinical study will include patients who
have undergone a coronary bypass surgical procedure and, following a diagnosis
of a blockage in one of the bypass grafts, require further interventional
treatment. The vessels in such patients are larger than normal coronary arteries
and are 3.0 to 5.0 millimeters in size. We believe we can design the RDX system
to treat arteries of any size by using different size balloons. Therefore, these
graft patients are excellent candidates for treatment with the RDX system. FDA
approval was received for a Phase I trial and enrollment began in January 2001.
We expect to enroll fifty patients and complete the enrollment phase of this
study in 2001.
Small Coronary Artery Trial. This multinational clinical trial is designed
to prove the value of the RDX system in reducing restenosis within smaller
coronary arteries. This trial targets patients with atherosclerotic disease in
smaller coronary arteries of less than 3.0 millimeters in diameter. Following
either conventional balloon angioplasty or coronary stenting, these smaller
arteries are highly susceptible to restenosis. We believe that the RDX catheter
is ideal for the treatment of such difficult to treat small coronary arteries.
This study
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will require approximately 18 to 24 months for completion. We are currently
awaiting in-country approval in Europe for the trial before beginning patient
enrollment.
Other Clinical Trials of Beta Radiation Brachytherapy
In addition to the four clinical trials we are sponsoring or plan to
sponsor, other clinical trials have demonstrated that beta radiation is a useful
treatment for restenosis. Third parties are conducting and have completed
clinical trials of other vascular brachytherapy devices. Two of the more
significant trials are the Stents and Radiation Therapy, or START, trial and the
Intimal Hyperplasia Inhibition with Beta In-stent, or INHIBIT, trial. These
trials indicate that beta radiation sources are safe and effective in reducing
restenosis following an interventional procedure in the coronary vasculature.
Another trial conducted by Novoste, the Beta-Cath Trial, indicates that beta
radiation sources are safe and effective in reducing restenosis following PTCA,
but may not be effective following first time stent placement.
START Trial. In March 2000, the results from the Novoste START trial were
released. This trial included 476 patients from 50 clinical sites in North
America and Europe and studied the safety and effectiveness of a system for
delivering Sr-90 (beta) radiation sources to the site of in-stent restenosis in
a coronary artery. The START trial results showed the following statistically
significant results for patients with in-stent restenosis treated with
seed-based beta radiation when compared to patients treated with placebo:
- 34% reduction in the rate of target vessel revascularization, or
requirement for repeat procedures in the treated vessel;
- 66% decrease in rate of restenosis within the stented portion of the
treated artery;
- 36% reduction in the rate of restenosis at a longer section of the
artery, 10 millimeters beyond the area treated with radiation or
revascularization methods; and
- 31% decrease in the rate of major, adverse cardiac events.
Beta-Cath System Trial. In March 2001, Novoste released the results from
its Beta-Cath System trial, the first radiation trial in patients with de novo
lesions. This trial included 1,455 patients at 59 clinical sites in North
America and Europe and studied the clinical safety and efficacy of a system for
delivering beta radiation sources to the site of PTCA or first time stent
placement. For PTCA cases, the trial showed the following results with
seed-based beta radiation when compared to patients treated with a placebo:
- 28% reduction in the rate of target vessel revascularization, or
requirement for repeat procedures in the treated vessel;
- 14% reduction in the rate of restenosis at a longer section of the
artery, beyond the area treated with radiation or revascularization
methods; and
- 30% decrease in the rate of major, adverse cardiac events.
However, for first time stent placements, radiation did not improve
restenosis in the longer section of the artery.
INHIBIT Trial. The Guidant INHIBIT trial evaluated the clinical safety and
efficacy of a (32)P wire system for the prevention of restenosis. The trial
enrolled 332 patients divided equally into a placebo group and a group treated
with a 20gy P-32 (beta) dose level. The trial results showed the following
statistically significant results for patients with in-stent restenosis treated
with wire-based beta radiation when compared to patients treated with placebo:
- 33% reduction in the rate of target vessel revascularization, or
requirement for repeat procedures in the treated vessel;
- 67% decrease in rate of restenosis within the stented portion of the
treated artery;
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- 50% reduction in the rate of restenosis at a longer section of the
artery, 10 millimeters beyond the area treated with radiation or
revascularization methods; and
- 33% decrease in the rate of major, adverse cardiac events.
MANUFACTURING
The RDX System. We manufacture the base catheter of the RDX system at our
facilities in Irvine, California. In Europe, we have an agreement with Bebig, a
German manufacturer, to activate the radioactive sources and complete final
assembly of the RDX system. Pursuant to an amended two year manufacturing
agreement that is renewable three times for subsequent two-year terms, Bebig
will perform final assembly with our proprietary equipment and proprietary
processes. Bebig has produced only a small number of units for us under the
manufacturing agreement as we are still in the process of setting up the Bebig
facility. In the United States, we expect to enter into a similar agreement.
Currently, all radioactive source manufacture and final assembly used for
clinical trials have been produced by a U.S. based, licensed radiation facility.
Regulations require that a licensed facility must perform the handling of
radioactive materials. We do not have and do not intend to pursue such a
license, and therefore we contract with outside facilities to handle radioactive
materials for us.
Due to the shelf-life of the RDX system, it is critical to manufacture and
ship these products as close to the date of use as possible. Moreover,
coordination among us, the contract manufacturer, the shipping carrier and the
end user is necessary in order to reduce product waste. Because radioactive
sources must travel from one licensed facility to another licensed facility, the
source manufacturer, such as Bebig, will be responsible for warehousing the
final RDX system and shipping it to the end user.
Catheter and Stent Products. With the exception of final assembly and
sterilization procedures for those products designed to be sold only outside the
United States, we produce all of our current products at our facilities in
Irvine, California.
We fabricate certain proprietary components, then assemble, inspect, test
and package all components into finished products. By designing and assembling
our catheter products, we believe we are better able to control quality and
costs, limit third-party access to our proprietary technology, and manage
manufacturing process enhancements and new product introductions. In addition,
we purchase many standard and custom-built components from independent suppliers
and subcontract certain processes from independent vendors. Most of these
components and processes are available from more than one vendor.
We have obtained the right to affix the CE Mark to all of our products
currently sold in the countries of the European Economic Area and Switzerland.
As part of the CE Mark process, we also received ISO 9001/EN46001 certification
with respect to the manufacturing of all of our currently marketed products. We
have undergone and expect to continue to undergo regular QSR and ISO 9001
inspections in connection with the manufacture of our products at our
facilities.
MARKETING AND SALES
We are developing the RDX system for commercial marketing and sale in
domestic and international markets. We presently are exploring distribution
strategies for the RDX system in both domestic and international markets. These
strategies include establishing a direct sales force and partnering with a major
device manufacturer. Our present intention is to develop our own direct sales
and marketing capabilities and continue to evaluate alternative strategies.
Pursuant to our sub-license agreement with Bebig, we must pay a minimum
annual license fee, subject to offset by certain amounts paid under a
manufacturing agreement with them, that began in July 2000 and royalty fees for
any products sold by us worldwide that incorporate the licensed technology. The
sub-license is subject to renewal, without cost, through the expiration dates of
the patents.
We currently sell our PTCA catheters and coronary stent systems through
medical device distributors and direct sales personnel. Our existing products
are sold primarily in international markets. However, some of
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our products are not available in each market due to regulatory and intellectual
property restrictions. Our most important distribution agreements and licensing
arrangements are with Guidant and Cosmotec.
Guidant Corporation. In June 1998, we entered into a technology license
agreement with Guidant, an international interventional cardiology products
company, granting them a 10 year license to manufacture and distribute stent
delivery products using our Focus technology. Under this agreement, we have
received milestone payments based upon the transfer of the technological
knowledge to Guidant and royalty payments based upon Guidant's sales of products
using Focus technology. During 1999, we received $2.0 million in milestone
payments and recorded the minimum annual royalty of $250,000. No additional
milestone payments are due under the agreement, but royalties are due as long as
the agreement is in effect. In the year ended December 31, 2000, we recorded
$6.4 million in royalties.
Cosmotec Co., Ltd. In June 1999, we granted Cosmotec of Japan distribution
rights to market our vascular radiation therapy products in Japan. We received
an upfront cash payment and are recognizing the income over the seven-year term
of the distribution agreement. We also received $1.0 million from Cosmotec for a
debenture issued in June 2000, which was converted into 142,857 shares of common
stock at $7.00 per share in August 2000. As part of this transaction, in August
1999 we acquired a 51% interest, for $233,000, in a new joint venture with an
affiliate of Cosmotec. The joint venture, named Radiatec, was formed to gain
regulatory approval of and provide distribution for the RDX system in Japan.
In 1998 and 1999, we reduced our U.S. sales force and did not actively
promote our products in the United States due to regulatory approval
requirements, the competitive environment and our decision to focus our efforts
on the development of the RDX system. Due to the licensing in June 1998 of the
technology upon which our currently-marketed products are based, and the sale of
our vascular access product line and related assets in January 1999, our product
sales have decreased substantially since 1998. We expect them to continue to
decrease prior to the sales launch of the RDX system in Europe in 2001.
PATENTS AND PROPRIETARY INFORMATION
We own two issued United States patents and hold a non-exclusive license to
a third issued United States patent along with its issued German counterpart,
covering the present design of the RDX system. All four issued patents relate to
radiation delivery catheters in which the radioisotope is carried by an
inflatable balloon for positioning against a vessel wall. We own three
additional issued United States patents relating to radiation delivery systems
which are not incorporated in the present design of the RDX system.
In July 1999, we entered into a three-year technology sub-license agreement
with Bebig for non-exclusive rights to the Hehrlein patents for radiation
technology. Pursuant to this sub-license agreement, we pay to Bebig a minimum
annual license fee that began in July 2000, and royalty fees for any products
sold by us worldwide that incorporate the licensed technology. The sub-license
is subject to renewal at our option, without cost, through the expiration dates
of the patents.
Including the patents and rights to the RDX system and radiation delivery,
we own or have the rights to 31 issued U.S. patents, one issued European patent
and two Japanese patents covering certain aspects of our technologies. Our
policy is to protect our 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 our business. We cannot
assure you that any issued patents will provide competitive advantages for our
products or that they will not be challenged or circumvented by our competitors.
COMPETITION
We believe that the primary competitive factors in the market for
interventional cardiology devices are:
- clinical effectiveness;
- product safety;
- catheter size;
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- flexibility and trackability;
- ease of use;
- reliability;
- price;
- availability of third-party reimbursement;
- distribution capability;
- time necessary to develop products successfully; and
- ability to receive regulatory approval.
Radioactive source wires or seed trains represent the most common
competitive approach. Three companies are analyzing the effectiveness of this
type of technology in treating in-stent restenosis. Johnson & Johnson received
pre-market approval from the FDA in November 2000 for the use of a manually
advanced gamma radiation wire system. Their application for approval was based
on the results of three clinical trials, all of which demonstrated a substantial
reduction in restenosis. This system is also available in Europe. Guidant's beta
radiation wire-based system is available in Europe, and Guidant filed a
pre-market approval application with the FDA in December 2000 for its beta
wire/afterloader system. Novoste completed its START trial and, in November
2000, received pre-market approval from the FDA. Novoste's beta radiation
seed-based system is also available in Europe.
Guidant is developing a beta radiation coronary stent and initiated a
30-patient feasibility trial to study the safety of its device. Johnson &
Johnson also has developed a radioactive stent that has been evaluated in
several clinical trials but is not being marketed currently.
Several companies, including Johnson & Johnson, Boston Scientific and Cook,
are attempting to develop drug coated stents. These stents typically are coated
with a drug that inhibits growth of tissue to attempt to prevent or reduce the
occurrence of restenosis. Johnson & Johnson's stent, in a small feasibility
trial, showed a significant reduction in restenosis, and they are pursuing
approval for a 1,100 patient, randomized trial. We believe, however, that it is
too early to determine whether drug-coated stents will have competitive
advantages over our brachytherapy products. Because currently marketed stents
have artery placement limitations, we also believe that if drug-coated stents
ultimately show competitive advantages over our brachytherapy products, there
still will be a significant market for our products if we demonstrate their
efficacy in significantly reducing restenosis.
Our catheters, stents and other products compete with catheters and stents
marketed by a number of manufacturers, including Guidant, Johnson & Johnson,
Medtronic and Boston Scientific. We also compete with manufacturers of other
catheter-based atherectomy devices, vascular stents and pharmaceutical products
intended to treat vascular disease. We believe that many of the purchasers and
potential purchasers of our current products prefer to purchase catheter and
stent products from a single source. Accordingly, many of our competitors,
because of their size and range of product offerings, have a competitive
advantage over us.
Although we believe we compete favorably overall with respect to most
competitive factors, most of our competitors have substantially greater capital
resources than we do and also have greater resources and expertise in the areas
of research and development, obtaining regulatory approvals, manufacturing and
marketing. We cannot assure you 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. Additionally,
many of the competitors have the capability to bundle a wide variety of products
in sales to cath labs. We may be unable to compete effectively against such
competitors and other potential competitors in terms of manufacturing, marketing
and sales.
Any product we develop that gains regulatory clearance or approval will
have to compete for market acceptance and market share. An important factor in
such competition may be the timing of market
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introduction of competitive products. Accordingly, we expect the relative speed
with which we can develop products, gain regulatory approval and reimbursement
acceptance and supply commercial quantities of the product to the market to be
an important competitive factor. In addition, we believe that the primary
competitive factors for products addressing restenosis include safety, efficacy,
ease of use, reliability, suitability for use in cath labs, service and price.
We also believe that physician relationships, especially relationships with
leaders in the interventional cardiology community, are important competitive
factors.
THIRD-PARTY REIMBURSEMENT
In the United States, our 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
healthcare 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 established by the U.S. Healthcare Finance
Administration. 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 diagnosis-related group, 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 our products currently is
covered under a diagnosis-related group. We cannot assure you that reimbursement
for such procedures will continue to be available to hospitals and other users
of our products, or that future reimbursement policies of payors will not hamper
our ability to sell our products on a profitable basis.
Outside the United States, market acceptance of the RDX system depends
partly upon the availability of reimbursement within the prevailing healthcare
payment systems. Reimbursement systems vary significantly by country, and by
region within some countries, and reimbursement approvals must be obtained on a
country-by-country basis. Reimbursement is obtained from a variety of sources,
including government sponsored healthcare and private health insurance plans.
Some countries have centrally organized healthcare systems, but in most
cases there is a degree of regional autonomy either in deciding whether to pay
for a particular procedure or in setting the reimbursement level. The manner in
which new devices enter the healthcare system depends on the system: there may
be a national appraisal process leading to a new procedure or product coding, or
it may be a local decision made by the relevant hospital department. The latter
is particularly the case where a global payment is made that does not detail
specific technologies used in the treatment of a patient. Most foreign countries
also have private insurance plans that may reimburse patients for alternative
therapies. Although not as prevalent as in the United States, managed care is
gaining prevalence in certain European countries.
We will seek international reimbursement approvals, although we may fail to
obtain such approvals in a timely manner or at all. We believe that
reimbursement in the future will be subject to increased restrictions such as
those described above, both in the United States and in other countries. The
general escalation in medical costs has led to and probably will continue to
create increased pressures on the healthcare providers, to reduce the cost of
products and services, including our products. If third-party reimbursements are
inadequate to provide us with a profit on our products, efforts to develop and
market our products may fail.
GOVERNMENT REGULATION
The manufacturing and marketing of our products are subject to extensive
and rigorous government regulation in the United States and in other countries.
Prior to commercialization, new products must meet rigorous governmental agency
requirements for pre-clinical and clinical testing and patient follow-up.
Federal regulations control the ongoing safety, efficacy, manufacture, storage,
labeling, record-keeping, and marketing of all medical devices. We cannot sell
or market our existing products or the RDX system without U.S. and foreign
approvals.
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If a medical device manufacturer establishes 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 Food and Drug Administration, or FDA, has not
called for a pre-market approval application, or 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 our catheters were based on
substantial equivalence to legally marketed devices. We cannot assure you that
the FDA will grant us timely 510(k) clearance for any of our future products or
significant modifications of our existing products. In addition, if the FDA has
concerns about the safety or effectiveness of any of our products, it could act
to withdraw approval or clearances of those products or request that we present
additional data.
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 typically 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. The RDX system and 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 January 2001, we began the BRITE II trial, a 480
patient randomized study to test the efficacy of the RDX system for the
treatment of in-stent restenosis. In addition to the FDA, we expect to file an
application with the Ministry of Health and Welfare in Japan. This procedure
requires completion of 60 to 100 patients in two to three Japanese clinical
investigation sites. We expect the Japanese approval process to take
approximately 18 to 24 months.
Because the RDX system 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, we will need to obtain approval
from the U.S. Nuclear Regulatory Commission, or NRC, or an equivalent state
agency, of our radiation sources for certain medical uses to distribute the
radiation sources commercially to licensed recipients in the United States. In
addition, we and/or our 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. We and/or our 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 system. 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 system. We
expect to comply with comparable radiation regulatory requirements and/or
approvals in markets outside the United States.
FDA regulations require us to register as a medical device manufacturer
with the FDA. Additionally, the California Department of Health Services, or
CDHS, requires us to register as a medical device manufacturer within the state.
Because of this, the FDA and the CDHS inspect us on a routine basis for
compliance with QSR regulations. These regulations require that we manufacture
our products and maintain related documentation in a prescribed manner with
respect to manufacturing, testing and control activities. We have undergone and
expect to continue to undergo regular QSR inspections in connection with the
manufacture of our products at our facilities. Further, the FDA requires us to
comply with various FDA regulations regarding labeling. The Medical Device
Reporting laws and regulations require us to provide information to the FDA on
deaths or serious injuries alleged to have been associated with the use of our
devices, as well as product malfunctions that likely would 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. We have received FDA approval to market the catheters which
utilize our 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 us in the United States for such use. Because we licensed the Focus
technology to Guidant in June 1998, we have no plans to seek said FDA approval
for stent deployment for that technology.
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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 our 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 our business, financial
condition and results of operations.
We are subject to other federal, state and local laws, regulations and
recommendations relating to safe working conditions, laboratory and
manufacturing practices. We cannot accurately predict the extent of government
regulation that might result from any future legislation or administrative
action. Failure to comply with regulatory requirements could have a material
adverse effect on our business, financial condition and results of operations.
International sales of our products are subject to 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. We typically rely
on our distributors in such foreign countries to obtain the requisite regulatory
approvals. We cannot assure you, however, we will obtain such approvals 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 our products in Europe, we must comply with the
requirements of the Medical Devices Directive, or MDD, and affix the CE Mark on
our products to attest to such compliance. To achieve compliance, our products
must meet the "Essential Requirements" of the MDD relating to safety and
performance and we must successfully undergo verification of our regulatory
compliance, or conformity assessment, by a Notified Body selected by us. The
level of scrutiny of such assessment depends on the regulatory class of the
product, and many of our coronary products are currently in Class III, the
highest risk class, and therefore subject to the most rigorous controls.
In December 1996, we received ISO 9001/EN46001 certification from our
Notified Body with respect to the manufacturing of all of our products in our
Irvine facilities. Our contracted manufacturing facility in The Netherlands
received such certification in 1993. This certification demonstrates that we
manufacture our products in accordance with certain international quality
requirements. A manufacturer must receive ISO 9001/EN46001 certification prior
to applying for the CE Mark of specific products. In January 1998, we obtained
the right to affix the CE Mark to all of our products currently sold in Europe.
We are subject to continued supervision by our Notified Body and will be
required to report any serious adverse incidents to the appropriate authorities.
We also must comply with additional requirements of individual nations. Failure
to maintain compliance required for the CE Mark could have a material adverse
effect upon our business, financial condition and results of operations. We
cannot assure you that we will be able to achieve or maintain such compliance on
all or any of our products or that we will be able to produce our products
timely and profitably while complying with the MDD and other regulatory
requirements.
On August 30, 2000, we filed an application for CE Mark approval of the RDX
system. Following CE Mark approval, we expect to begin marketing the RDX system
in Europe and other regions during the first half of 2001.
PRODUCT LIABILITY
We face the risk of financial exposure to product liability claims. Our
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. We are 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. We cannot assure you that our product liability insurance is
adequate or that such insurance coverage will remain available at acceptable
costs. We also cannot assure you that we will not incur significant product
liability claims in the future. A successful claim brought against us in excess
of its insurance coverage could have a material adverse effect on our business,
financial condition and results of operations. Additionally, adverse product
liability actions could negatively affect the reputation and sales of
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our products and our ability to obtain and maintain regulatory approval for our
products, as well as substantially divert the time and effort of management away
from our operations.
EMPLOYEES
As of December 31, 2000, we had 66 employees, including 32 in
manufacturing, 23 in research, development, and regulatory and clinical affairs,
3 in sales and marketing and 8 in administration. We believe that the success of
our business will depend, in part, on our ability to attract and retain
qualified personnel. Our employees are not subject to a collective bargaining
agreement, and we believe we have good relations with our employees.
RESEARCH AND DEVELOPMENT
We spent $11.5 million in fiscal year 2000, $8.6 million in fiscal year
1999, and $8.0 million in fiscal year 1998 on research and development.
ITEM 2. PROPERTIES
Currently, we lease facilities aggregating approximately 33,000 square
feet, including 7,000 square feet subleased to others, in Irvine, California
under various lease agreements, most of which expire in October 2003. We believe
that our facilities are adequate to meet requirements through the term of our
lease.
ITEM 3. LEGAL PROCEEDINGS
In September 1999, EndoSonics Corporation, now a wholly-owned subsidiary of
Jomed N.V., filed a complaint for declaratory relief against Radiance in the
Superior Court in Orange County, California, claiming that under a 1997
licensing agreement between the parties, Endosonics had rights to combine
Radiance's Focus balloon technology with an Endosonics' ultrasound imaging
transducer on the same catheter with a coronary vascular stent. In February
2001, the court ruled in our favor, ruling that Jomed-Endosonics had no such
rights to include a stent with the Focus balloon and ultrasound imaging
transducer. Under the judgment, we are entitled to recover our legal fees.
Although Jomed-EndoSonics may appeal the judgment, we believe that this matter
would not have a material adverse effect on our financial position or operating
results.
We are 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 our consolidated financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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EXECUTIVE OFFICERS
The following table sets forth information as of March 13, 2001 with
respect to our executive officers:
NAME AGE POSITION
---- --- --------
Michael R. Henson.................... 55 Chairman of the Board of Directors
Jeffrey H. Thiel..................... 45 President and Chief Executive Officer
Stephen R. Kroll..................... 54 Vice President, Finance and Administration, Chief
Financial Officer and Corporate Secretary
Paul A. Molloy....................... 39 Senior Vice President, Sales and Marketing
Joseph A. Bishop..................... 36 Vice President, Operations
Edward F. Smith, III Ph.D. .......... 47 Vice President, Research and Development
Brett A. Trauthen.................... 39 Vice President, Clinical Development
Michael R. Henson. Mr. Henson joined us in February 1992 as President,
Chief Executive Officer and Chairman of our board of directors, and currently
serves as Chairman of our board of directors. From June 1997 until March 1999,
Mr. Henson served as the Chairman of our board of directors, and as the Chairman
of the board of directors, Chief Executive Officer and President of the former
Radiance Medical Systems, Inc. From 1988 to February 1995, Mr. Henson served as
the Chief Executive Officer of EndoSonics Corporation and, from February 1993 to
November 1996, as Chairman of the board of directors. From April 1983 to
February 1988, Mr. Henson served as President and Chief Executive Officer of
Trimedyne, Inc., a manufacturer of medical lasers and catheters. Mr. Henson also
serves on the board of directors of other, private medical device companies,
including Endologix, Inc., Anchor Medical Technologies, Inc. and Micrus
Corporation.
Jeffrey H. Thiel. Mr. Thiel joined us in October 1996 and serves as our
President and Chief Executive Officer and is a member of our board of directors.
From September 1999 to December 2000, Mr. Thiel served as our President and
Chief Operating Officer, and from February 1999 to September 1999, Mr. Thiel
served as our Executive Vice President. From October 1996 to February 1999, he
served as our Vice President, Operations. From May 1995 to October 1996, Mr.
Thiel served as Director of Operations of BEI Medical Systems. Mr. Thiel serves
on the board of directors of Micrus Corporation.
Stephen R. Kroll. Mr. Kroll joined us in April 1998 as and serves as our
Vice President, Finance and Administration, Chief Financial Officer and
Corporate Secretary. From May 1989 until May 1991, Mr. Kroll served as Vice
President, Finance and Corporate Secretary, and from May 1991 until March 1997
as Vice President, Administration and Corporate Secretary for Viking Office
Products.
Paul A. Molloy. Mr. Molloy joined us in January 2001 and serves as our
Senior Vice President, Sales and Marketing. From January 1999 to January 2001,
Mr. Molloy served as Vice President of Global Sales for Applied Medical
Resources Corporation. From January 1998 to January 1999, Mr. Molloy served as
Director of Marketing, Vascular Therapies Division, for Tyco Healthcare. From
March 1997 to January 1998, Mr. Molloy held the Director of Global Marketing
position at Baxter Healthcare Corporation, Minimally Invasive Cardiac Surgery
Division. From March 1989 to March 1997, Mr. Molloy served as General Manager
World Wide Distributor Operations and various other marketing management
positions with Datascope Corporation, Cardiac Assistance Division.
Joseph A. Bishop. Mr. Bishop joined us in August 1996 and serves as our
Vice President, Operations. From May 1998 to August 2000, Mr. Bishop served as
our Director of Manufacturing and from August 1996 to May 1998, held several
management and engineering positions. Prior to joining us, Mr. Bishop held
several manufacturing supervision positions with Guidant Corporation from June
1986 to August 1996.
Edward F. Smith, III, Ph.D. Dr. Smith joined us in October 1999 and serves
as Vice President, Research and Development. From November 1992 to July 1999,
Dr. Smith was employed by Mallinkrodt, Inc., and served as Director,
Endovascular Research and Development from July 1995 to July 1999, and as
Associate Director, Cardiology Therapeutics Research and Development from
November 1992 to June 1995.
Brett A. Trauthen. Mr. Trauthen joined us in January 1999 following our
merger with the former Radiance and serves as our Vice President of Clinical
Development. From January 1999 until October 1999,
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Mr. Trauthen served as Director of Coronary Radiation Catheter Products. From
September 1997 to January 1999, Mr. Trauthen served as Director of Research and
Development and Engineering for the former Radiance. From 1995 to August 1997,
Mr. Trauthen held various operations and executive staff positions with Applied
Medical Resources Corporation.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our 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
the high and low sale prices for our common stock as reported on the Nasdaq
National Market for the periods indicated.
HIGH LOW
------ -----
YEAR ENDED DECEMBER 31, 1999
First Quarter............................................... $ 4.75 $3.00
Second Quarter.............................................. 4.00 2.25
Third Quarter............................................... 7.75 2.38
Fourth Quarter.............................................. 6.81 4.69
YEAR ENDED DECEMBER 31, 2000
First Quarter............................................... $12.75 $4.56
Second Quarter.............................................. 11.25 6.88
Third Quarter............................................... 16.69 7.47
Fourth Quarter.............................................. 11.63 4.56
YEAR ENDED DECEMBER 31, 2001
First Quarter (through March 13, 2001)...................... $ 7.31 $4.31
On March 13, 2001 the closing sale price on the Nasdaq National Market was
$4.81 per share and there were approximately 241 record holders of Radiance
common stock.
DIVIDEND POLICY
We have never paid any dividends. We currently intend to retain all
earnings, if any, for use in the expansion of our business and therefore do not
anticipate paying any dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
None.
USE OF PROCEEDS
In the second quarter of 1996, we closed our initial public offering of
common stock ("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. We used approximately $2.7 million of the net proceeds
from our IPO for repayment of certain outstanding indebtedness to EndoSonics,
Inc. From the date of the IPO until December 31, 2000, in the normal course of
business, we paid salaries and bonuses in excess of $100,000 each (approximately
$5.2 million, in aggregate) to twelve present and former officers and used $26.0
million for working capital. We also used approximately $2.3 million of the net
proceeds for machinery and equipment and leasehold improvement purchases.
Through December 31, 2000, we used approximately $3.7 million to purchase
686,000 shares our common stock on the open market. In September 1998, we
exercised a warrant to acquire 1,500,000 shares of Series B Preferred Stock of
former Radiance for $1.5 million. In January 1999, we paid $692,000 to
stockholders of the former Radiance who elected to receive cash for their common
stock of the former Radiance and $588,000 in costs relating to the acquisition
of the remaining common stock of the former Radiance not held by us.
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ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1996 1997 1998 1999 2000
------- -------- ------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenue:
Sales................................ $ 8,384 $ 9,438 $ 9,415 $ 3,856 $ 2,139
License fee and other................ 150 -- 2,760 2,855 6,800
Contract............................. 200 -- -- -- --
------- -------- ------- -------- -------
Total revenue................ 8,734 9,438 12,175 6,711 8,939
Operating costs and expenses:
Cost of sales........................ 4,111 6,102 6,152 2,823 1,465
Research and development............. 3,582 7,041 7,957 8,610 11,508
Marketing and sales.................. 3,358 6,691 5,371 1,989 842
General and administrative........... 1,548 2,347 2,937 2,468 3,097
Charge for acquired in-process
research and development(1)....... 2,133 -- 234 4,194 --
Minority interest.................... -- -- (992) (6) (26)
------- -------- ------- -------- -------
Total operating costs and
expenses................... 14,732 22,181 21,659 20,078 16,886
------- -------- ------- -------- -------
Loss from operations................... (5,998) (12,743) (9,484) (13,367) (7,947)
Other income........................... 1,374 2,225 1,498 2,587 2,484
------- -------- ------- -------- -------
Net loss............................... $(4,624) $(10,518) $(7,986) $(10,780) $(5,463)
======= ======== ======= ======== =======
Basic and diluted net loss per share
(pro forma through June 1996)........ $ (0.69) $ (1.15) $ (0.90) $ (0.98) $ (0.46)
======= ======== ======= ======== =======
Shares used in computing basic and
diluted net loss per share (pro forma
through June 1996)................... 6,755 9,118 8,862 10,951 11,749
======= ======== ======= ======== =======
DECEMBER 31,
--------------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents........... $ 17,192 $ 6,141 $ 1,437 $ 2,051 $ 6,311
Marketable securities
available-for-sale................ 25,733 24,773 23,375 20,004 24,046
Working capital..................... 46,142 33,828 24,905 9,793 23,202
Total assets........................ 50,084 39,615 32,035 29,873 38,454
Accumulated deficit................. (11,049) (21,567) (29,553) (40,333) (45,796)
Total stockholders' equity.......... 47,623 36,127 27,449 25,111 35,240
- ---------------
(1) The charge for acquired in-process research and development for the year
ended December 31, 1996 relates to our acquisition of Intraluminal Devices,
Inc. The charges for acquired in-process research and development for the
years ended December 31, 1998 and 1999 relate to our acquisition of the
former Radiance Medical Systems, Inc. These charges represent the portion of
the purchase price allocated to the acquired research and development
projects, which, at the date of the acquisition, were in-process, had not
reached technological feasibility and had no alternative future use. See
Note 2 to the Consolidated Financial Statements.
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SUMMARIZED QUARTERLY DATA
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2000:
Net sales......................................... $ 570 $ 623 $ 537 $ 409
Total revenues.................................... 2,362 2,542 1,876 2,159
Gross profit...................................... 1,869 2,176 1,358 2,071
Net loss.......................................... (1,447) (1,171) (1,926) (919)
Basic and diluted net loss per share.............. (0.13) (0.10) (0.17) (0.07)
1999:
Net sales......................................... $ 1,193 $ 1,144 $ 648 $ 871
Total revenues.................................... 1,756 1,805 1,474 1,676
Gross profit...................................... 909 752 1,062 1,165
Net loss.......................................... (6,348) (2,010) (1,277) (1,145)
Basic and diluted net loss per share.............. (0.60) (0.18) (0.12) (0.10)
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion and analysis in conjunction with
"Selected Consolidated Financial Data" and our Consolidated Financial Statements
and the related notes included in this Annual Report on Form 10-K. This
discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in the forward-looking statements as a result of various factors including the
risks we discuss in "Risk Factors" and elsewhere in this Annual Report on Form
10-K.
OVERVIEW
Our Business
We are developing proprietary devices to deliver radiation to prevent the
recurrence of blockages in arteries following balloon angioplasty, vascular
stenting, arterial bypass surgery and other interventional treatments of
blockages in coronary and peripheral arteries. We incorporate our proprietary
RDX technology into catheter-based systems that deliver beta radiation to the
site of a treated blockage in an artery in order to decrease the likelihood of
restenosis. Restenosis is the recurrence of a blockage following interventional
therapy. The application of beta radiation inside the artery at the site of a
blockage has proven clinically effective in inhibiting cell proliferation, a
cause of restenosis.
Prior to June 1998, we focused on manufacturing and selling a broad range
of angioplasty catheters and stent products, including our Focus technology
product line. As catheter and stent products became widely available and subject
to increasing price pressure, we shifted our focus to the research and
development of radiation therapy devices to treat restenosis. Since June 1998,
we have acquired the portion of our former Radiance Medical Systems subsidiary
that we did not already own, which was researching and developing radiation
therapy treatment devices to prevent blockages in arteries following
interventional treatments; sold our vascular access product line and related
assets; licensed our proprietary Focus balloon technology to Guidant for use in
Guidant's stent delivery systems; and reduced our direct sales force. We
continue to sell our remaining stent and catheter products, including our Focus
technology products, on a limited basis through medical device distributors.
Development and Operations
We plan to continue to dedicate our corporate resources to: completing
clinical trials of the RDX system; obtaining regulatory approvals for the RDX
system; and continuing research and development activities related to devices
for the delivery of radiation to treat restenosis.
Over the past few years, our source of revenues has shifted gradually from
direct sales to royalties from licenses involving our products. We are a party
to several agreements for the distribution of products incorporating our Focus
technology and other existing products in the United States and 23 other
countries, the most significant of which is our license agreement with Guidant.
In June 1998, we entered into a technology license agreement with Guidant,
granting Guidant rights, including exclusive rights in the United States, to
manufacture and distribute products using our Focus technology for the delivery
of stents. In exchange, we received milestone payments based upon the transfer
of the technological knowledge to Guidant, and continue to receive royalty
payments based upon the sale of products by Guidant using the Focus technology.
The payments under the Guidant license are the primary source of our existing
revenues. Until we obtain regulatory approvals and successfully commercialize
the RDX system, we anticipate that our revenues will continue to decline as
sales of products incorporating our licensed technology decline and as our
technology becomes obsolete. See Note 5 to the Consolidated Financial
Statements.
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We have experienced an operating loss for each of the last three years and
expect to continue to incur operating losses through at least the end of 2001.
Our results of operations have varied significantly from quarter to quarter, and
we expect that our results of operations will continue to vary significantly in
the future. Our quarterly operating results depend upon several factors,
including:
- the timing and amount of expenses associated with development of the RDX
system;
- the progress of clinical trials and the timing of regulatory approvals;
- new product introductions both in the United States and internationally;
- varying product sales by our licensee;
- variations in foreign exchange rates; and
- third-party payors' reimbursement policies.
We do not operate with a significant backlog of customer orders, and
therefore revenues in any quarter are significantly dependent on orders received
during that quarter. In addition, we cannot predict ordering rates by
distributors, some of whom place infrequent stocking orders. Our expenses are
relatively fixed and difficult to adjust in response to fluctuating revenues.
Organizational History
We were formed in 1992, and our common stock began trading publicly in
1996. The current Radiance Medical Systems, Inc. resulted from our 1999
acquisition of the portion of our former Radiance Medical Systems subsidiary
that we did not already own. We originally incorporated the former Radiance as a
separate entity to focus on the research and development of radiation therapy to
treat cardiovascular disease, and to obtain outside sources of financing for
such research and development. In January 1999, we paid approximately $6.9
million in stock, $692,000 in cash, and $1.1 million in common stock options to
acquire the portion of the former Radiance that we did not already own. In
addition, the stockholders and option holders of the former Radiance may still
receive a product development milestone payment of up to $0.46 for each share of
preferred stock and $0.69 for each share of common stock of the former Radiance.
The milestone payment may be increased up to 30%, or reduced or eliminated if
the milestone is reached earlier or later, respectively, than the milestone
target date. The first three milestones were not achieved. See Note 2 to the
Consolidated Financial Statements.
RESULTS OF OPERATIONS
COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND 2000
Sales. Sales decreased 45% to $2.1 million in the year ended December 31,
2000 from $3.9 million in the year ended December 31, 1999. In June 1998, we
licensed to Guidant our Focus technology for use with stents. In January 1999,
we sold our vascular access product line and related assets and acquired the
former Radiance. As a result of the license to Guidant and increased competition
for angioplasty catheter products, sales of our Focus technology products
decreased 38% to $2.1 million in the year ended December 31, 2000 from $3.4
million in year ended December 31, 1999. As a result of our sale of the vascular
access product line, there were no sales of vascular access products in the year
ended December 31, 2000 compared to $486,000 in sales in the year ended December
31, 1999.
License Fee and Other. License fee and other revenue increased 138% to $6.8
million in the year ended December 31, 2000 from $2.9 million in the year ended
December 31, 1999. In 1998, we signed a technology license agreement with
Guidant, which resulted in $2.3 million in milestone-related license fees and
$250,000 in royalties in 1999 and $6.4 million in royalties in 2000. In
addition, in 1999 and 2000, we recognized $300,000 in minimum royalties under
the asset sale and purchase agreement with Escalon Medical Corporation
("Escalon") for the vascular access product line and related assets.
In February 2001, we amended the asset sale and purchase agreement with
Escalon regarding the payment of royalties. $182,000 of royalties, of which
$165,000 was outstanding at December 31, 2000, and due
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in the first quarter of 2001, will be paid with 50,000 shares of Escalon common
stock with an estimated fair value of $100,000, an interest bearing note due in
January 2002 for $65,000, and cash of $17,000. Additionally, we received an
interest bearing note for $718,000, payable from April 2002 through January
2005, to secure the remaining minimum royalties due under the aforementioned
agreement. See Note 16 to the Consolidated Financial Statements.
Cost of Sales. The cost of sales decreased 48% to $1.5 million in the year
ended December 31, 2000 from $2.8 million in the year ended December 31, 1999.
This decrease was attributable primarily to a 45% decrease in sales to $2.1
million in the year ended December 31, 2000 from $3.9 million in the year ended
December 31, 1999.
Research and Development. Research and development expenses increased 34%
to $11.5 million in the year ended December 31, 2000 from $8.6 million in the
year ended December 31, 1999. The primary reason for this increase was
additional spending on clinical trials and development of pilot production for
the RDX system.
Marketing and Sales. Marketing and sales expenses decreased 58% to $0.8
million in the year ended December 31, 2000 from $2.0 million in the year ended
December 31, 1999. This decrease primarily was the result of the expiration of a
marketing allowance for Cathex, our Japanese Focus technology distributor, in
the fourth quarter of 2000. Reductions in our international sales force and
related expenses also contributed to the decrease in expenses.
General and Administrative. General and administrative expenses increased
25% to $3.1 million in the year ended December 31, 2000 from $2.5 million in the
year ended December 31, 1999. The increase was due primarily to higher legal
costs associated with the Endosonics litigation and to a higher incidence of bad
debt expense in 2000 compared with 1999.
Charge for Acquired In-Process Research and Development. We recognized a
charge of $4.2 million in the year ended December 31, 1999. We incurred the
charge for the acquisition in January 1999 of the shares of the former Radiance
Medical Systems that we did not already own.
Other Income (Expense). Other income decreased 4% to $2.5 million for the
year ended December 31, 2000 from $2.6 million in the year ended December 31,
1999. Interest income increased 11% to $1.4 million in the year ended December
31, 2000 from $1.2 million in the year ended December 31, 1999. The increase was
due primarily to a increase in invested cash from our secondary offering in
October 2000. Gain on sale of assets decreased to $1.1 million in 2000 from $1.3
million in 1999. The primary source for the 2000 gain on sale of assets was the
sale of an option to purchase certain equity investments held by us. Because the
option expired, without exercise, in December 2000, we anticipate that other
income will be significantly lower for 2001, compared with 2000. The 1999 gain
included $1.0 million from the sale of the assets of the vascular access product
line and related assets.
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1999
Sales. Sales decreased 59% to $3.9 million in the year ended December 31,
1999 from $9.4 million in the year ended December 31, 1998. Due to the licensing
of our Focus technology to Guidant in June 1998, reductions in our domestic
sales force, the sale of our vascular access product line and related assets in
January 1999, and increased competition, sales of our Focus technology products
decreased 49% to $3.4 million in the year ended December 31, 1999 from $6.7
million in year ended December 31, 1998. Additionally, because of our sale of
the vascular access product line, sales of our vascular access products
decreased 82% to $486,000 in the year ended December 31, 1999 from $2.7 million
in the year ended December 31, 1998.
License Fee and Other. License fee and other revenue increased 3% to $2.9
million in the year ended December 31, 1999 from $2.8 million in the year ended
December 31, 1998. In June 1998, we signed a technology license agreement with
Guidant, which resulted in $2.8 million in milestone-related license fees in
1998 and $2.3 million in milestone-related license fees and $250,000 in
royalties in 1999. In addition, in 1999, we recognized $300,000 in minimum
royalties under the sale agreement for our vascular access product line and
related assets.
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Cost of Sales. The cost of sales decreased 54% to $2.8 million in the year
ended December 31, 1999 from $6.2 million in the year ended December 31, 1998.
This decrease was attributable primarily to $2.9 million from licensing fees
received in 1999 that had no associated cost of sales and to relatively lower
product sales compared with 1998.
We agreed to produce vascular access products for six months following the
sale of our 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 we earned on sales of such
products was substantially lower in 1999 compared with 1998.
Research and Development. Research and development expenses increased 8% to
$8.6 million in the year ended December 31, 1999 from $8.0 million in the year
ended December 31, 1998. The primary reason for this increase was additional
spending on development of and clinical trials for the RDX system.
Marketing and Sales. Marketing and sales expenses decreased 63% to $2.0
million in the year ended December 31, 1999 from $5.4 million in the year ended
December 31, 1998. This decrease primarily was the result of reductions in our
domestic and international sales force and related expenses.
General and Administrative. General and administrative expenses decreased
16% to $2.5 million in the year ended December 31, 1999 from $2.9 million in the
year ended December 31, 1998. The decrease was due primarily to lower bad debt
expense in 1999 compared with 1998.
Charge for Acquired In-Process Research and Development. We recognized a
charge of $4.2 million in the year ended December 31, 1999 and a charge of
$234,000 in the year ended December 31, 1998. We incurred the 1999 charge for
the acquisition in January 1999 of the shares of the former Radiance Medical
Systems that we did not already own. We incurred the 1998 charge upon exercise
in September 1998 of a warrant to purchase additional equity securities in the
former Radiance, which exercise resulted in our ownership of approximately 50%
of the former Radiance, and thus an acquisition of a controlling interest.
Other Income (Expense). Other income increased 73% to $2.6 million for the
year ended December 31, 1999 from $1.5 million in the year ended December 31,
1998. Interest income decreased 20% to $1.2 million in the year ended December
31, 1999 from $1.6 million in the year ended December 31, 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 on sale of assets
increased to $1.3 million in 1999 from a loss of $47,000 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 $6,000 in 1999 from an expense
of $22,000 in 1998 due primarily to other income from the sale of an option to
purchase equity securities we hold as an investment.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily by: selling our
equity securities; obtaining advances from EndoSonics, our former parent company
and the selling stockholder in this offering; licensing our technologies; and
entering into international product distribution agreements.
Prior to our initial public offering in 1996, we raised an aggregate of
approximately $11.4 million from the private sales of preferred and common stock
and $2.7 million in working capital advances from EndoSonics, which we repaid
during the third quarter of 1996.
In the second quarter of 1996, we closed our initial public offering of
common stock, which resulted in net proceeds of approximately $42.8 million
after deducting underwriting discounts and commissions and other expenses of the
offering.
In the third quarter of 1997, SCIMED Life Systems, Inc. exercised 120,000
common stock warrants, obtained from us through a 1995 stock purchase and
technology license agreement, for $377,000. We also received $200,000 from the
sale of 25,000 shares of our common stock to Cathex, Ltd. under a May 1997
agreement that gave Cathex exclusive product distribution rights in Japan for
our existing products until January 1, 2001. The distribution agreement with
Cathex was terminated in the fourth quarter of 2000.
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In January 1999, we also sold substantially all of our vascular access
product line and related assets to Escalon Medical Corporation for approximately
$2.1 million. See Notes 2 and 16 to the Consolidated Financial Statements.
In June 1999, we granted Cosmotec Co., Ltd. of Japan the exclusive
distribution rights to market our vascular radiation therapy products in Japan.
We received $1.0 million from Cosmotec as an upfront cash payment and began
recognizing income ratably over the seven-year term of the agreement. As part of
the transaction with Cosmotec, in August 1999, we acquired a 51% interest, for
$233,000, in a new joint venture with an affiliate of Cosmotec. The joint
venture, named Radiatec, was formed to gain regulatory approval of and provide
distribution for the RDX system in Japan.
We borrowed $1.0 million from Cosmotec and recorded $1.4 million in debt in
June 2000 to reflect the fair value of the 5%, $1.0 million face amount
convertible debenture. On September 13, 2000, Cosmotec converted the debenture
into 142,857 shares of our common stock at $7.00 per share. See Note 10 to the
Consolidated Financial Statements.
In July 1999, we entered into a two-year contract manufacturing agreement
with Bebig GmbH to activate the radioactive sources and complete final assembly
of the RDX system using our proprietary processes. Pursuant to the agreement,
Bebig will build a facility for the production of the RDX system. We paid Bebig
$100,000 and $732,000 during 1999 and 2000, respectively, and will pay
approximately $635,000 in 2001 for facility set-up fees under a 2000 amendment
to the agreement. In February 2001, we agreed to a second and third amendment to
the manufacturing agreement. The second amendment calls for expansion of the
production capacity and we will pay additional charges of $635,000 in 2001. In
the first half of 2001, we will prepare the additional manufacturing equipment
to be used by Bebig to perform the final assembly of the RDX system, estimated
to cost approximately $450,000, and Bebig will purchase the equipment from us at
cost. The third amendment increases the amount we will pay Bebig for each unit
produced and sets a minimum monthly facility charge of $20,000, beginning in the
month the first product is manufactured, but not later than April 2001. We also
will pay all material and third party costs associated with production
validation and an agreed amount for each unit produced, ranging from
approximately $300 to $380 depending upon the volume of units produced. The cost
of the facility set-up fees, equipment costs and other costs could increase
materially as the design of the production processes and facilities evolves over
the coming year. We have expensed all costs incurred by us with Bebig as
research and development costs.
In conjunction with the contract manufacturing agreement, in July 1999, we
entered into a three-year sub-license agreement to use Bebig's exclusive license
of the Hehrlein patents for radiation technology that may be useful in the
development of the RDX system. Pursuant to this sub-license agreement, we must
pay to Bebig royalty fees, subject to offsets for certain payments under a
related manufacturing agreement, for any products sold by us worldwide that
incorporate the licensed technology. The sub-license is subject to renewal,
without cost, through the expiration dates of Bebig's patents.
In October 2000, we sold in a secondary offering 686,000 and 814,000 shares
of our common stock held in treasury and newly issued, respectively. We received
$13.0 million in net proceeds, after deducting underwriting discounts and
commissions and other expenses.
Net cash used in operating activities increased 1% to $6.7 million for the
year ended December 31, 2000 from $6.6 million for the year ended December 31,
1999. The increase in net cash used resulted primarily from higher research,
development and clinical expenses for 2000 compared with 1999.
We believe that research and development expenses relating to the RDX
system will increase, as will costs associated with commercialization of the RDX
system if we successfully obtain regulatory approvals. We plan to begin selling
the RDX system in Europe once we receive CE Mark approval, which we expect to
receive in the first half of 2001.
At December 31,2000, we had cash, cash equivalents and marketable
securities available for sale of $30.4 million. We expect to incur substantial
costs related to, among other things, clinical testing, product development,
marketing and sales of the RDX system, and expect to utilize increased levels of
working capital prior to achieving positive cash flow from operations. We
anticipate that our cash and anticipated revenues
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from operations will be sufficient to fund our operations through the second
quarter of 2002. Our future capital requirements will depend on many factors,
including: our 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.
We may need to raise funds through additional financings, including private
or public equity or debt offerings and collaborative arrangements with existing
or new corporate partners. We cannot assure you that we will be able to raise
funds on favorable terms, or at all. If adequate funds are not available, we may
need 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 grant rights to certain technologies or products that we would
not otherwise grant.
Trade accounts receivable, net, decreased 47% to $564,000 at December 31,
2000 from $1.1 million at December 31, 1999. The decrease resulted primarily
from lower product sales.
Other receivables increased 238% to $2.5 million at December 31, 2000 from
$742,000 at December 31, 1999. The increase is attributable primarily to an
increase in the license revenue receivable from Guidant of $1.4 million for
licensed product sales during the fourth quarter of 2000.
Inventory increased 32% to $1.1 million at December 31, 2000 from $822,000
at December 31, 1999. The increase was due primarily to relatively higher RDX
system materials inventory and production for research and development and
clinical units.
Accounts payable and accrued expenses decreased 5% to $2.6 million at
December 31, 2000 from $2.7 million at December 31, 1999, due primarily to the
expiration of a marketing allowance for Cathex, our Japanese Focus technology
products distributor, following the termination of the distribution agreement in
the fourth quarter of 2000.
Deferred revenue decreased 76% to $441,000 at December 31, 2000 from $1.8
million at December 31, 1999. The decrease was due primarily to the recognition
of deferred revenue on the sale of an option and deferred license revenue during
2000. See Notes 3 and 10 to the Consolidated Financial Statements.
RISK FACTORS
You should carefully consider the following risk factors, in addition to
the other information set forth in this Annual Report on Form 10-K. Each of
these risk factors could adversely affect our business, operating results and
financial condition, as well as adversely affect the value of an investment in
our common stock. An investment involves a high degree of risk.
RISKS RELATED TO OUR BUSINESS
WE EXPECT TO INCUR LOSSES FOR THE FORESEEABLE FUTURE AND MAY NEVER ACHIEVE
PROFITABILITY.
From our formation in 1992 to December 31, 2000, we have incurred a
cumulative net loss of approximately $45.8 million. We incurred a net loss of
$5.5 million for the year ended December 31, 2000 and incurred a net loss of
$10.8 million for the year ended December 31, 1999. We expect to continue to
incur losses through at least 2001, and it is possible that we may never achieve
profitability. Even if we eventually generate revenues from sales and achieve
profitability, we nevertheless expect to incur significant operating losses over
the next several years as we continue our research and development activities,
and our expenditures related to clinical testing and product development. Our
ability to become profitable will depend on:
- the time and expense necessary to research and develop the RDX system;
- whether and how quickly we obtain regulatory approvals for the RDX
system; and
- our success in bringing the RDX system to market.
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WE CANNOT ASSURE YOU THAT WE WILL BE ABLE TO OBTAIN REGULATORY APPROVALS
FOR THE RDX SYSTEM.
We need to conduct additional human clinical trials for the RDX system. The
RDX system is the only product we have under development and has not been
approved for marketing by the Food and Drug Administration, or FDA, the Nuclear
Regulatory Commission, or NRC, or by any government entity outside of the United
States. We will require substantial additional funds to develop the product,
conduct clinical trials and gain regulatory approvals for the RDX system. Prior
to granting approval, the FDA or foreign regulatory bodies may require more
information or clarification of information provided in our regulatory
submissions, or more clinical studies, which could require significant
additional expenditures. If granted, the FDA or other foreign regulatory body
approval may impose limitations on the uses for which or how we may market the
RDX system. Should we experience delays or be unable to obtain regulatory
approvals, we may never generate significant revenues, and our business
prospects will be substantially impaired.
OUR OPERATIONS ARE CAPITAL INTENSIVE, AND WE MAY NEED TO RAISE ADDITIONAL
FUNDS IN THE FUTURE TO FUND OUR OPERATIONS.
Our activities are capital intensive. We currently are spending cash at a
rate of approximately $1.0 million per month, and based on our current plans, we
expect this rate of spending to increase to approximately $1.25 million per
month in the second quarter of 2001 and continue for at least the next 12 to 18
months. Although we believe that our cash and anticipated revenues from
operations will be sufficient to meet our planned capital requirements at least
through the second quarter of 2002, we may 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:
- the progress of our research and development programs for the RDX system;
- the scope and results of our clinical trials;
- the time and costs involved in obtaining regulatory approvals for the RDX
system;
- the costs involved in obtaining and enforcing patents or any litigation
by third parties regarding intellectual property;
- the establishment of sales and marketing capabilities; and
- our success in entering into collaborative relationships with other
parties.
To finance these activities, we may seek funds through additional rounds of
financing, including private or public equity or debt offerings and
collaborative arrangements with corporate partners. We may be unable to raise
funds on favorable terms, or not at all. The sale of additional equity or
convertible debt securities could result in additional dilution to our
stockholders. If we issue debt securities, these securities could have rights
superior to holders of our common stock, and could contain covenants that will
restrict our operations. We might have to obtain funds through arrangements with
collaborative partners or others that may require us to relinquish rights to our
technologies, product candidates or products that we otherwise would not
relinquish. If adequate funds are not available, we might have to delay, scale
back or eliminate one or more of our development programs, which would impair
our future prospects.
EVEN IF WE RECEIVE NECESSARY REGULATORY APPROVAL, WE MAY NOT BE ABLE TO
COMMERCIALIZE THE RDX SYSTEM SUCCESSFULLY.
The RDX system and related 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. Any or all of these proposed technologies and products may
prove to be ineffective, unsafe or uneconomical to manufacture commercially.
Even if our products are safe and effective, we cannot guarantee that we will be
able to manufacture or market them successfully, either on our own or through
third parties, or that we will manage the expansion of our operations
successfully.
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IF WE RECEIVE REGULATORY APPROVAL FOR OUR PRODUCTS, WE WILL NEED TO GROW
RAPIDLY. RAPID GROWTH MAY STRAIN THE CAPABILITIES OF OUR MANAGERS,
OPERATIONS AND FACILITIES AND, CONSEQUENTLY, COULD HARM OUR BUSINESS.
If we obtain the required regulatory approvals for the RDX system,
commercial-scale production will require us to expand our operations. Rapid
growth may strain our managerial and other organizational resources. Our ability
to manage our growth will depend on the ability of our officers and key
employees to:
- operate or contract with production facilities that can handle the
radiation sources required for the manufacture of the RDX system;
- manage the simultaneous manufacture of different products efficiently and
integrate the manufacture of new products with existing product lines;
- address difficulties in scaling up production of new products, including
problems involving production yields, quality control and assurance,
component supply and shortages of qualified personnel; and
- implement and improve our operational, management information and
financial control systems.
WE RELY ON A SINGLE VENDOR TO SUPPLY OUR RADIOACTIVE SOURCES AND PERFORM
FINAL ASSEMBLY OF THE RDX SYSTEM, AND ANY DISRUPTION IN OUR SUPPLY COULD
CURTAIL OUR OPERATIONS SEVERELY AND ADVERSELY AFFECT OUR PROFITABILITY.
Although we manufacture components and sub-assemblies for the RDX system,
we do not apply the beta radiation. We have contracted with a third party
manufacturer in Germany, Bebig GmbH, to perform the final assembly and
radioactive source manufacturing of the RDX system for use in Europe. Bebig has
produced only minor quantities of units for testing purposes for us under the
manufacturing agreement, as we are in the process of setting up the Bebig
radiation facility. We expect to complete the facility set-up during the first
half of 2001. We expect to enter into a similar manufacturing supply
relationship with a manufacturer in the United States. Currently, we rely on a
small, U.S. based manufacturer to supply us with radioactive source balloons for
use in research and clinical trials. Our reliance on a sole source supplier in
the United States and Europe may reduce our leverage in negotiating the terms of
manufacturing and supply agreements with these manufacturers and could,
therefore, reduce our profitability. In addition, our reliance on sole source
manufacturers exposes our operations and profitability to disruptions in supply
caused by:
- failure of our suppliers to comply with regulatory requirements;
- any strike or work stoppage;