UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date
of Report (Date of earliest event reported): December 9, 2010
HEARTWARE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware | 001-34256 | 26-3636023 | ||
(State or other Jurisdiction of Incorporation) |
(Commission File Number) | (IRS Employer Identification No.) |
205 Newbury Street, Suite 101 Framingham, Massachusetts |
01701 | |
(Address of Principal Executive Offices) | (Zip Code) |
Registrants telephone number, including area code: +1 508 739 0950
(Former name or former address if changed since last report.)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the
filing obligation of the registrant under any of the following provisions:
o | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) | |
o | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) | |
o | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) | |
o | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Item 8.01 Other Events
In connection with proposed concurrent offerings of convertible notes by HeartWare International,
Inc. (the Company) and common stock by a selling stockholder pursuant to a shelf registration
statement on Form S-3 (File No. 333-171054), the Company updated the description of its business and
its risk factors. The Company will include the following disclosure under the heading Summary
Overview, Summary Recent Developments,
Risk Factors Risks Related to Our Business and
Industry and Risk Factors Risks Related to Our Common Stock in the prospectus supplements forming part of the registration
statement. This information, together with the other information contained in the Companys Annual
Report on Form 10-K for the fiscal year ended December 31, 2009 and its quarterly reports on Form
10-Q for the quarterly periods ended March 31, June 30 and September 30, 2010 and the other
information that we filed with the Securities and Exchange Commission, should be carefully
considered in evaluating the Companys business.
Summary
Overview
HeartWare is a medical device company focused on the development and sale of implantable
blood pumps for the treatment of advanced heart failure.
The HeartWare» Ventricular Assist System (the HeartWare System), which includes a left
ventricular assist device, or blood pump, patient accessories and surgical tools, is designed to
provide circulatory support for patients with advanced heart failure. The core of the HeartWare
System is a proprietary continuous flow blood pump, the HVAD Pump, which is a full-output device
capable of pumping up to 10 liters of blood per minute.
In January 2009, the HeartWare System received Conformite Europenne (CE) Marking approval, which
allows us to market and sell the device in Europe. Our first commercial sale in Europe occurred in
March 2009. The HeartWare System is also sold to customers located in the US through our clinical
trials and under special access in Australia and Canada.
In April 2008, we received conditional Investigational Device Exemption (IDE) approval from the
United States Food and Drug Administration (FDA) to enroll 150 patients in a bridge-to-transplant
clinical study in the United States (called ADVANCE). Full IDE approval for the HeartWare System
was received from the FDA in September 2008 and, in October 2009 we received FDA approval to expand
the number of participating sites from 28 to 40 centers.
In August 2008, our first US patient received the HeartWare System at the Washington Hospital
Center in Washington, DC, marking the commencement of our ADVANCE trial. In February 2010, we
completed enrollment in this trial with 140 patients receiving the HeartWare System. The remaining
10 patients were enrolled but did not receive an implant of the HeartWare System because they
failed to meet the trials inclusion and exclusion criteria after being enrolled.
In April 2010, the FDA approved an IDE Supplement that allowed us to enroll up to an additional 54
patients in our ADVANCE trial under a Continued Access Protocol (CAP). In August 2010, we
completed enrollment of this initial allotment of 54 patients and in September 2010, the FDA
granted a second allotment of 54 patients. The CAP makes the HeartWare System available to patients
and clinicians while also providing additional data for the FDA to evaluate prior to determining
whether or not to approve the HeartWare System. The CAP patients will be enrolled and followed
under a modified protocol of the ADVANCE trial.
In June 2010, we received conditional IDE approval from the FDA to begin enrollment in our
destination therapy clinical study for the HeartWare System. Designed to enroll up to 450 patients
at 50 US hospitals, the non-inferiority study, which is named ENDURANCE, is a randomized,
controlled, unblinded, multi-center clinical trial to evaluate the use of the Heart-Ware System as
a destination therapy in advanced heart failure patients. The study population will be selected
from patients with end-stage heart failure who have not responded to standard medical management
and who are ineligible for cardiac transplantation. Patients in the study will be randomly selected
to receive either the HeartWare System or, as part of a control group they will be implanted with
any alternative left ventricular assist device (LVAD) approved by the FDA for destination
therapy, in a 2:1 ratio. Each patient receiving the HeartWare System or control LVAD will be
followed to the primary endpoint at two years, with a subsequent follow-up period extending to five
years post implant. In August 2010, our first patient was
implanted as part of the ENDURANCE trial and we received full IDE approval from the FDA in
September 2010.
Beyond the HeartWare System, we are also evaluating our new miniaturized device, known as the MVAD.
The MVAD is based on the same technology platform as the HeartWare System but adopts an axial flow,
rather than a centrifugal flow, configuration and is being developed in multiple configurations.
The MVAD designs are currently at the preclinical stage and undergoing animal studies focused on
less invasive implantation techniques. Each of the MVAD configurations is approximately one-third
the size of the HVAD Pump. We believe that the MVAD designs will be implantable by surgical
techniques that are even less invasive than those required to implant the HVAD Pump.
We began generating revenue from sales of the HeartWare System in August 2008 and have incurred net
losses in each year since our inception. We expect our losses to continue as we advance and expand
our clinical trial activities in the United States, continue to develop commercial markets outside
of the United States and expand our research and development into next generation products
including the MVAD.
We are headquartered in Framingham, Massachusetts. We have an operations and manufacturing facility
in Miami Lakes, Florida, a small development and operations facility in Sydney, Australia and a
small distribution and customer service facility in Hannover, Germany. As of September 30, 2010, we
had 196 employees worldwide.
Recent Developments
On November 3, 2010, we announced the financial results for our third fiscal quarter ended
September 30, 2010.
For the three months ended September 30, 2010, we generated revenues of approximately $13.8 million
compared to $7.5 million in revenues for the three months ended September 30, 2009, for an increase
of 84%. For the nine months ended September 30, 2010, we generated revenues of $34.3 million
compared to $12.0 million for the nine months ended September 30, 2009, for an increase of 186%.
Net loss for the three months ended September 30, 2010 was $7.8 million, or a $0.57 loss per basic
and diluted share, compared to a $5.9 million net loss, or a loss of $0.60 per basic and diluted
share, for the three months ended September 30, 2009. For the nine months ended September 30, 2010,
we recorded a net loss of $22.4 million, or a $1.66 loss per basic and diluted share, compared to a
$19.0 million net loss, or a loss of $2.07 per basic and diluted share, for the nine months ended
September 30, 2009.
On November 14, 2010, the data from HeartWares bridge to heart transplantation (BTT) study,
ADVANCE, was presented as a clinical trial at the 2010 Scientific Sessions of the American Heart
Association by co-principal investigator Keith Aaronson, M.D. M.S., Associate Professor in the
Division of Cardiovascular Medicine and Medical Director of the Heart Transplant Program and Center
for Circulatory Support at the University of Michigan, on behalf of the ADVANCE investigators.
Results from the ADVANCE clinical study showed that 92% of the investigational device patients met
the per protocol primary endpoint of the trial, which was defined as alive on the originally
implanted device, transplanted or explanted for recovery at 180 days. Results from the ADVANCE
clinical study also demonstrated that 94% of the investigational device patients enrolled in the
study achieved a survival endpoint at 180 days, and the study also projected one-year survival of
91% using Kaplan-Meier analysis.
HeartWares ADVANCE clinical trial is a Food and Drug Administration approved IDE study designed
to evaluate the HeartWare» Ventricular Assist System as a bridge to heart transplantation for
patients with end-stage heart failure. Between August 2008 and February 2010, 140 patients at 30
hospitals in the United States received the HeartWare investigational device. The per protocol
analysis includes 137 patients in the investigational device cohort.
Results for the comparator arm of the study, derived from 499 contemporaneous patients from the
Interagency Registry for Mechanically Assisted Circulatory Support (INTERMACS) demonstrated 90%
success of the primary endpoint at 180 days, as well as Kaplan-Meier survival at 180 days of 90%,
and 86% at 360 days. Based on these results for the primary endpoint of the ADVANCE study,
noninferiority of the investigational device was established [<
.001].
The final implant in ADVANCE was performed in February 2010, and the last follow-up evaluation at
180-days was in August 2010. HeartWare anticipates submission to the FDA of a premarket approval
application (PMA) seeking approval of the HeartWare System for the bridge-to-transplant
indication in December of this year, although we cannot assure you of the exact timing of this
submission.
Risk Factors
Risks Related to Our Business and Industry
We have incurred
operating losses since our inception and anticipate that we will
continue to incur operating losses for the foreseeable
future.
We have incurred net losses since our inception, including net
losses of $22.4 million for the nine months ended
September 30, 2010 and $20.9 million,
$23.8 million and $21.9 million for the fiscal years
ended December 31, 2009, 2008 and 2007, respectively. We
also expect to incur a net loss for the fiscal year ended
December 31, 2010. As of December 31, 2009, our
accumulated deficit was $97.9 million compared to an
accumulated deficit of $120.2 million as of September 30, 2010. Currently, we only have
one product approved for sale in Europe. None of our products
are approved for commercial sale in the United States although
we presently derive revenue from reimbursed sales of the
HeartWare system for use in clinical trials in the United
States. We continue to incur substantial clinical trial
expenditures, significant research and development costs and
costs related to our operations. We expect to continue to incur
significant operating losses for the foreseeable future as we
incur costs associated with:
| manufacturing product, |
| continuing to conduct multiple clinical trials, |
| further product research and development for next generation products and efforts to sustain and maintain incremental improvements to existing products, |
| building our service capabilities to meet growing customer demand; |
| growing, maintaining and protecting our intellectual property, |
| seeking regulatory approvals, |
| expanding our sales and marketing capabilities on a global basis, |
| increasing our manufacturing operations to meet increasing demand, |
| broadening our infrastructure in order to meet the needs of our growing operations, and |
| complying with the requirements related to being a public company in both the United States and Australia. |
To become and remain profitable, we must succeed in developing
and commercializing products with significant market potential.
This will require us to succeed in a range of challenging
activities, including all of the activities listed above. We may
never succeed in these activities, and we may never obtain
regulatory approvals in the markets in which we expect to
operate or otherwise generate revenues sufficient to achieve
profitability. Further, the markets in which we operate may
contract or we may not otherwise obtain significant market share
so as to support our ongoing business operations. If we do
achieve profitability, we may not be able to sustain it.
We currently rely
entirely on sales of our sole product, the HeartWare System, to
generate revenues. Our products may never achieve market
acceptance. In addition, any factors that negatively impact
sales of this product will adversely affect our business,
financial condition and results of operations.
Our sole product is the HeartWare System, which we introduced to
the European market in January 2009 and which does not have
regulatory approval in the United States. We expect to continue
to derive substantially all of our revenue from the sale of this
product and its related devices. Accordingly, our ability to
generate revenue is entirely reliant on our ability to market
and sell the devices.
Even if we obtain the necessary regulatory approvals in all
jurisdictions to commercialize the HeartWare System or any other
product that we may develop, our products may not gain market
acceptance among physicians, patients, health care payers or the
medical community. The degree of market acceptance of any of the
devices that we may develop will depend on a number of factors,
including:
| the perceived effectiveness of the product; |
| the prevalence and severity of any adverse events or side effects especially as it relates to survival, quality of life, stroke and bleeding; |
| potential advantages over alternative treatments or competitive products; |
| the strength of marketing and distribution support; |
| the strength and perceived advantages of our peripherals such as the monitor, controller and batteries; and |
| sufficient third party coverage or reimbursement. |
If the HeartWare System, or any other product that we may
develop, does not achieve an adequate level of acceptance by
physicians, patients, health care payers and the medical
community, we may not generate or maintain positive gross
margins and we may not become profitable or be able to sustain
profitability. If we do achieve market acceptance of our
products, we may not be able to sustain it or otherwise achieve
it to a degree which would support the ongoing viability of our
operations.
Our ability to
achieve profitability from a current net loss level will depend
on our ability to reduce the per unit cost of producing the
HeartWare System by increasing our customer orders and
manufacturing volume.
Currently, the gross profit from the sale of the HeartWare
System is not sufficient to cover our operating expenses. To
achieve profitability, we need to, among other things, reduce
the per unit cost of our products. We believe this can be
achieved by decreasing our product assembly costs and increasing
our manufacturing volume, which will allow for volume purchase
discounts to reduce our raw material and component costs and
improve absorption of manufacturing overhead costs. If we are
unable to reduce assembly, raw material, component and
manufacturing overhead costs, our ability to achieve
profitability will continue to be severely constrained. Any
increase in manufacturing volumes must be supported by a
concomitant increase in customer orders. As part of our efforts
to prepare for commercialization in the U.S., we are considering
expanding our manufacturing facility in Miami Lakes, Florida and
have entered into a lease for such purposes. Such lease will increase
our operating expenses. The occurrence
of one or more factors that negatively impact sales of our
products or our ability to forecast future sales may prevent us
from achieving our desired increase in manufacturing efficiency,
which would prevent us from attaining profitability.
We compete
against companies that have longer operating histories, more
established or approved products and greater resources than we
do, which may prevent us from achieving further market
penetration or improving operating results.
Competition in the medical device industry is intense. Our
products will compete against products offered by public
companies, such as Thoratec Corporation and World Heart
Corporation, as well as several private companies, such as
Jarvik Heart, Inc, Circulite, Evaheart and Terumo Heart, Inc.
Some of these competitors have significantly greater financial
and human resources than we do and have established reputations
or approved products or significantly greater name recognition,
as well as distribution channels and sales and marketing
capabilities that are significantly larger and more established
than ours. For example, Thoratec Corporation has received
marketing approval in the United States for HeartMate II
for both destination and
bridge-to-transplant
indications. Additional competitors may enter the market, and we
are likely to compete with new companies in the future. We also
face competition from other medical therapies which may focus on
our target market as well as competition from manufacturers of
pharmaceutical and other devices that have not yet been
developed. Competition from these companies could adversely
affect our business.
In addition, in Europe our customers are geographically
dispersed and, at this stage, a significant portion of our
revenue is sourced in Germany among a small number of clinical
sites, which also use other competing products. If these sites
were to cease using our products or use our products on a
reduced or inconsistent basis, such events would have a material
adverse effect on our financial condition and results of
operations.
Our ability to compete effectively depends upon our ability to
distinguish our company and our products from our competitors
and their products. Factors affecting our competitive position
include:
| the availability of other products and procedures, such as heart transplants; |
| product performance and design; |
| product safety; |
| sales, marketing and distribution capabilities; |
| comparable clinical outcomes; |
| success and timing of new product development and introductions; and |
| intellectual property protection. |
We have limited
sales, marketing and distribution experience.
To develop and increase sales, distribution and marketing
capabilities, we will have to invest significant amounts of
financial and management resources. In developing these sales,
marketing and distribution functions ourselves, we will face a
number of risks, including:
| we may not be able to attract and build a significant, successful or qualified marketing or sales force; |
| the cost of establishing, training and providing regulatory oversight for a marketing or sales force may be substantial; and |
| there are significant legal and regulatory risks in medical device marketing and sales, and any failure to comply with all legal and regulatory requirements for sales, marketing and distribution could result in enforcement action by the FDA or other authorities that could jeopardize our ability to market the product or could subject us to substantial liability. |
We have limited
capabilities and manufacturing personnel, and if our
manufacturing facilities are unable to provide an adequate
supply of products, our growth could be limited and our business
could be harmed.
We currently manufacture our HeartWare System at our facilities
in Miami Lakes, Florida. If there were a disruption to our
existing manufacturing facility or the surrounding area, for
example, due to a hurricane or climate change, we would have no
other means of manufacturing our HeartWare System until we were
able to restore the manufacturing capability at our facility or
develop alternative manufacturing facilities.
If we are unable to produce sufficient quantities of our
HeartWare System for sale or for use in our current and planned
clinical trials, or if our manufacturing process yields
substandard product, our development and commercialization
efforts would be delayed. Further, even if we are able to
produce sufficient quantities of our products we may not be able
to attain sufficient profitability on that production or any
resultant sales.
We currently have limited resources, facilities and experience
to commercially manufacture our products. In order to produce
our products in the quantities that we anticipate will be
required to meet anticipated market demand, we will need to
increase substantially the production process and efficiency
over the current level of production. There are significant
technical and regulatory challenges to increasing manufacturing
capacity and efficiency, and developing commercial-scale
manufacturing facilities will require the investment of
additional funds and hiring and retaining additional management
and technical personnel who have the necessary manufacturing
experience. We may not successfully complete any required
increase in a timely or economically viable manner or at all. If
we are unable to do so, we may not be able to produce the
HeartWare System in sufficient quantities to meet future demand.
If we are unable to manufacture a sufficient or consistent
supply of the HeartWare System or any other product we are
developing, or if we cannot do so efficiently, our revenues,
business and financial prospects would be adversely affected.
Fluctuations in
foreign currency exchange rates could adversely affect our
financial results.
Changes in foreign currency exchange rates can affect the value
of our assets, liabilities, costs and revenues. To date, the
majority of our revenues have been sourced from international
sales, mainly in Europe and denominated in Euro, while most of
our expenditures are incurred in U.S. dollars. We presently
derive revenue in the United States from our clinical trials but
until our products receive regulatory approval in the United
States, if ever, our United States sourced revenue will likely
constitute less than half of our net revenues.
With limited exceptions our international sales will be
denominated in Euro or in local currencies, not
U.S. dollars, and fluctuations in foreign currency exchange
rates, especially an appreciation of the U.S. dollar
against major international currencies, could materially impact
our revenues and earnings. Due to the size and stage of
development of our operations and revenues, we do not presently
mitigate our exposure to exchange risk other than by holding the
majority of our funds in U.S. dollars or U.S. dollar
denominated investments.
We may need
substantial additional funding and may be unable to raise
capital when needed, which would force us to delay, reduce or
eliminate our product development programs or commercialization
efforts.
Revenue generated from the HeartWare System is currently limited
to commercial sales outside of the U.S. and from our
clinical trials within the United States. Depending on a range
of outcomes, especially our achievement of regulatory approval
of our products and the growth of revenue, we may need to seek
additional funding in the future. Additional funding may not be
available on terms favorable to us, or at all. If we raise
additional funding through the issuance of equity securities,
our shares may suffer dilution. If we are unable to secure
additional funding, our product development programs and our
commercialization efforts would be delayed or reduced or may
cease entirely.
In addition, our operating subsidiary, HeartWare, Inc., issued
Series A-1
and
Series A-2
Preferred Stock to certain creditors of Kriton Medical, Inc.
when HeartWare, Inc. purchased substantially all of the assets
of Kriton in July 2003. The
Series A-1
and
Series A-2
Preferred Stock do not have any voting rights or the right to
receive dividends but entitle the holders thereof to receive
upon certain liquidation events (including deemed liquidation
events, which are defined as a merger or consolidation of
HeartWare, Inc., the sale of all or substantially all of its
assets or the sale of a majority of its voting power) of
HeartWare, Inc. an amount equal to $10 per share of
Series A-1
and an amount equal to $21 per share of
Series A-2,
which currently represent an aggregate liquidation preference of
$15 million. Such rights or any other similar rights in the
future, to receive a payment if there is a deemed liquidation
event of HeartWare, Inc. may restrict our ability to restructure
our Company and its operations and could inhibit our ability to
obtain financings.
Our products have
not yet been approved for commercial sale within the United
States, and our success will depend heavily on our ability to
obtain FDA approval of our HeartWare System for a
bridge-to-transplant
indication (and other indications currently subject to
U.S. clinical
trials, such as destination therapy) following submission of
a premarket approval application for such indications. If we are
unable to complete, or experience significant delays of, our
U.S. trials, our ability to obtain regulatory approval to
commercialize our products within the United States, the largest
medical device market in the world, and our ability to generate
revenues, will be materially adversely affected.
On January 30, 2009, we received approval for CE Marking
and subsequently began generating net sales in Europe. However,
future revenue will be limited if we do not receive regulatory
approval to commercially sell our products in the United States
or we are unable to maintain CE Marking or achieve regulatory
approval in other jurisdictions.
In April 2008, we received conditional IDE approval from the FDA
to enroll 150 patients in a
bridge-to-transplant
clinical study in the United States called ADVANCE. Full IDE
approval for the HeartWare System was received from the FDA in
September 2008 and, in October 2009 we received FDA approval to
expand the number of participating sites from 28 to 40 centers.
In August 2008, our first US patient received the HeartWare
System at the Washington Hospital Center in Washington, DC,
marking the commencement of our ADVANCE trial. In February 2010,
we completed enrollment in this trial with 140 patients
receiving the HeartWare System. The remaining 10 patients
were enrolled but did not receive an implant of the HeartWare
System because they failed to meet the trials inclusion
and exclusion criteria after being enrolled.
In April 2010, the FDA approved an IDE Supplement that allowed
us to enroll up to an additional 54 patients in our ADVANCE
trial under a CAP. In August 2010, we completed enrollment of
this initial allotment of 54 patients and in
September 2010, the FDA granted a second allotment of
54 patients. We currently anticipate submission to the FDA
of the Premarket Approval application, or PMA, seeking approval
of the HeartWare System for the
bridge-to-transplant
indication by the end of 2010, although we cannot assure you of
the exact timing of this submission.
In June 2010, we received conditional IDE approval from the FDA
to begin enrollment in our destination therapy clinical study
for the HeartWare System. Designed to enroll up to
450 patients at 50 US hospitals, the non-inferiority study,
which is named ENDURANCE, is a randomized,
controlled, unblinded, multi-center clinical trial to evaluate
the use of the HeartWare System as a destination therapy in
advanced heart failure patients. Each patient receiving the
HeartWare System or control LVAD will be followed to the primary
endpoint at two years, with a subsequent
follow-up
period extending to five years post implant. In August 2010, our
first patient was implanted as part of the ENDURANCE trial and
we received full IDE approval from the FDA in September 2010.
Completion of any of our clinical trials could be delayed or
adverse events during a trial could cause us to amend, repeat or
terminate the trial. If this were to happen our costs associated
with the trial will increase, and it will take us longer to
obtain regulatory approvals and commercialize the product or we
may never obtain such regulatory approvals. Our clinical trials
may also be suspended or terminated at any time by regulatory
authorities, the Data Safety and Monitoring Board or by us
including during the closing stages of enrollment of the trial
and the subsequent patient date
follow-up
period in the event that, for example, there should be a series
of adverse clinical events such as stroke, bleeding or pump
exchanges. Any failure or significant delay in completing
clinical trials for our products will harm our financial results
and the commercial prospects for our products.
The completion of any of our clinical trials could be
substantially delayed or prevented by several factors, including:
| slower than expected rates of patient recruitment and enrollment, including as a result of our competitors undertaking similar clinical trials or having functionally comparable products that have received approval for sale; |
| failure of patients to complete the clinical trial; |
| patients preferring to use approved devices or other experimental treatments or devices rather than our HeartWare System; |
| unforeseen safety issues; |
| perceived lack of product efficacy during clinical trials; |
| inability or unwillingness of patients or medical investigators to follow our clinical trial protocols; |
| inability to monitor patients adequately during or after treatment; |
| risks associated with trial design, which may result in a failure of the trial to show statistically significant results even if the product is effective; |
| governmental and regulatory delays or changes in regulatory requirements, policies or guidelines; |
| varying interpretation of data by regulatory agencies; and |
| perceived lack of product efficacy during clinical trials; |
The process of obtaining marketing approval or clearance from
the FDA for our HeartWare System, or any future products or
enhancements or modifications to any products, could:
| take a significant period of time; |
| require the expenditure of substantial resources; |
| involve rigorous pre-clinical and clinical testing; |
| require changes to our products; and |
| result in limitations on the indicated uses of the products. |
Assuming we are successful at timely filing the required FDA
regulatory premarket approval applications with respect to
trials for indications for our HeartWare System, there can be no
assurance that we will receive the required approvals from the
FDA or, if we do receive the required approvals, that we
will receive them on a timely basis or that we will otherwise be
able to satisfy the conditions of such approval, if any. The
failure to receive product approval clearance by the FDA, or any
significant delay in such receipt, will have a material adverse
effect on our business, financial condition or results of
operations.
We may not meet
regulatory quality standards applicable to our manufacturing and
quality processes, which could have an adverse effect on our
business, financial condition or results of
operations.
Even after products have received marketing approval or
clearance, product approvals and clearances by the FDA or other
regulatory bodies can be withdrawn due to failure to comply
with regulatory standards or the occurrence of problems
following initial approval. As a device manufacturer, we are
required to demonstrate and maintain compliance with a variety
of regulatory requirements, including the FDAs Quality
System Regulation, or QSR. The QSR is a complex
regulatory scheme that covers the methods and documentation of
the design, testing, control, manufacturing, labeling, quality
assurance, packaging, storage and shipping of our products. The
FDA enforces the QSR through periodic unannounced site
inspections. In addition, the U.S. federal medical device
reporting regulations require us to provide information to the
FDA whenever there is evidence that reasonably suggests that a
device may have caused or contributed to a death or serious
injury or, if a malfunction were to occur, could cause or
contribute to a death or serious injury. Compliance with
applicable regulatory requirements is subject to continual
review and is rigorously monitored through periodic inspections
by the FDA. Our failure to comply with the QSR or to take
satisfactory corrective action in response to an adverse QSR
inspection could result in enforcement actions, including a
public warning letter, a shutdown of or restrictions on our
manufacturing operations, delays in approving or clearing a
product, refusal to permit the import or export of our products,
a recall or seizure of our products, fines, injunctions, civil
or criminal penalties, or other sanctions, any of which could
cause our business and operating results to materially suffer.
In the European Union, we are required to maintain certain ISO
certifications in order to sell our products and must undergo
periodic inspections by notified bodies to obtain and maintain
these certifications. If we fail to continue to comply with ISO
regulations European Union organizations may withdraw clearance
to market, require a product recall or take other enforcement
action.
Product issues
could result in substantial costs and write-downs leading to
delay or termination of our trials.
Our products are subject to various regulatory guidelines and
are perishable. Identified quality problems, such as failure of
critical components such as batteries or controllers, or the
failure of third parties to supply us with sufficient quantities
of these products or components, could lead to adverse clinical
events during the trial, which could cause us to amend, repeat
or terminate such trials. In addition, product improvements or
failure to sell product before it expires could result in
scrapping or expensive rework of product and our business,
financial or results of operations could suffer. Quality issues
could result in the rework, recall or replacement of entire lots
of products, substantial costs and write-offs and harm to our
business reputation and financial results. Further such
activities could adversely affect our relationships with our
customers or affect our reputation which could materially
adversely affect our earnings, results and financial viability.
We plan to
operate in multiple regulatory environments that require costly
and time consuming approvals.
Even if we obtain regulatory approvals to commercialize the
HeartWare System or any other product that we may develop, sales
of our products in other jurisdictions will be subject to
regulatory requirements that vary from country to country. The
time and cost required to obtain approvals from these countries
may be longer or shorter than that required for FDA approval,
and requirements for licensing may differ from those of the FDA.
Laws and regulations regarding the manufacture and sale of our
products are subject to future changes, as are administrative
interpretations and policies of regulatory agencies. If we fail
to comply with
applicable foreign, federal, state or local market laws or
regulations, we could be subject to enforcement actions.
Enforcement actions could include product seizures, recalls,
withdrawal of clearances or approvals, and civil and criminal
penalties, which in each case would harm our business.
If we fail to
obtain and maintain adequate level of reimbursement for our
products by third party payers, there may be no commercially
viable markets for our products or the markets may be much
smaller than expected.
Although our customers have achieved reimbursement for the
purchase of products to date, the availability and levels of
reimbursement by governmental and other third party payers
affect the market for our products. Reimbursement and health
care payment systems vary significantly by country, and include
both government sponsored health care and private insurance.
Payers may attempt to limit coverage and the level of
reimbursement of new therapeutic products. Government and other
third party payers also continually attempt to contain or reduce
the costs of health care by challenging prices charged for
health care products and services.
To obtain reimbursement or pricing approval in some countries,
we may be required to produce clinical data, which may involve
one or more clinical trials, that compares the
cost-effectiveness of our products to other available therapies.
In addition, the efficacy, safety, performance and
cost-effectiveness of our products in comparison to any
competing products may determine the availability and level of
reimbursement for our products.
We believe that future reimbursement may be subject to increased
restrictions both in the United States and in international
markets. Future legislation, regulation or reimbursement
policies of third party payers may adversely affect the demand
for our products currently under development and limit our
ability to sell our product candidates on a profitable basis. We
cannot predict how pending or future legislative and regulatory
proposals would influence the manner in which medical devices,
including ours, are purchased or covered and reimbursed. For
example, the American Recovery and Reinvestment Act of 2009
includes funding to study the comparative effectiveness of
health care treatments and strategies. This funding will be
used, among other things, to conduct, support or synthesize
research that compares and evaluates the risk and benefits,
clinical outcomes, effectiveness and appropriateness of medical
products. Although Congress has indicated that this funding is
intended to improve the quality of health care, it remains
unclear how the research will impact coverage, reimbursement or
other third-party payer policies.
If reimbursement for our products is unavailable or limited in
scope or amount or if pricing is set at unsatisfactory levels,
market acceptance of our products would be impaired and our
future revenues would be materially adversely affected. During
2009, we were unable to implant a significant number of patients
under our IDE in the United States as the relevant insurance
providers refused to provide reimbursement for our products on
the basis that our products are experimental and do
not have the requisite regulatory approval in the
United States. If this practice reoccurs then this would
materially adversely affect our revenues, earnings, business and
stock price.
If hospitals do
not conduct or encourage the conduct of destination therapy
procedures using the HeartWare System, market opportunities for
our product will be diminished.
If hospitals do not conduct or encourage the conduct of
destination therapy procedures using our products, our market
opportunities will be diminished. The number of destination
therapy procedures actually performed depends on many factors,
most of which are out of our direct control, including:
| the number of sites approved for destination therapy by relevant regulatory agencies; |
| the clinical outcomes of destination therapy procedures; |
| cardiology and referring physician education, and their commitment to destination therapy; |
| the economics of the destination therapy procedure for individual hospitals, which includes the costs of the LVAD and related pre- and post-operative procedures and their reimbursement; and |
| the economics of hospitals not conducting a destination therapy procedure, including the costs and related reimbursements of long-term hospitalization. |
The different outcomes of these and other factors, and their
timing, may have a material and adverse effect on our future
results.
The long and
variable sales and deployment cycles for our VAD systems may
cause our product sales and operating results to vary
significantly from
quarter-to-quarter.
Our VAD systems have lengthy sales cycles and we may incur
substantial sales and marketing expenses and expend significant
effort without making a sale. Even after making the decision to
purchase our VAD systems, our customers often deploy our
products slowly. In addition, cardiac centers that buy the
majority of our products are usually led by cardiac surgeons who
are heavily recruited by competing centers or by centers looking
to increase their profiles. When one of these surgeons moves to
a new center we sometimes experience a temporary but significant
reduction in purchases by the departed center while it replaces
its lead surgeon. As a result, it is difficult for us to predict
the quarter in which customers may purchase our VAD systems and
our product sales and operating results may vary significantly
from quarter to quarter.
Adverse changes
in general economic conditions in the United States and overseas
could adversely affect us.
We are subject to the risks arising from adverse changes in
general economic market conditions. Many global economies remain
sluggish as they recover from a severe recession and
unprecedented turmoil. The U.S. and other developed
economies continue to suffer from market volatility,
difficulties in the financial services sector, tight credit
markets, softness in the housing markets, concerns of inflation,
reduced corporate profits and capital spending, significant job
losses, reduced consumer spending, and continuing economic
uncertainties. The turmoil and the uncertainty about future
economic conditions could negatively impact our current and
prospective customers, adversely affect the financial ability of
health insurers to pay claims, adversely impact our expenses and
ability to obtain financing of our operations, cause delays or
other problems with key suppliers and increase the risk of
counterparty failures. We cannot predict the timing, strength or
duration of the lingering effects of the severe global economic
downturn or the timing or strength of the subsequent recovery.
Healthcare spending in the United States and foreign
jurisdictions has been, and is expected to continue to be,
negatively affected by these economic trends. For example,
patients who have lost their jobs may no longer be covered by an
employee-sponsored health insurance plan and patients reducing
their overall spending may eliminate purchases requiring
co-payments. Since the sale of the HeartWare System to a new
patient is generally dependent on the availability of
third-party reimbursement and normally requires the patient to
make a significant co-payment, the impacts of the effects of the
recession on the current nascent recovery on our potential
customers may reduce the referrals generated and thereby reduce
our customer orders. Similarly, the impacts of the challenging
economy on our existing customers may cause some of them to
cease purchasing HeartWare Systems and this will reduce our
revenues, which in turn will make it more difficult to achieve
the per unit cost-savings which are expected to be attained
through increases in our manufacturing volume.
The severe recession has impacted the financial stability of
many private health insurers. As a result, it has been reported
that some insurers are scrutinizing claims more rigorously and
delaying or denying reimbursement more often. Since the sale of
the HeartWare System is generally dependent on the availability
of third-party reimbursement, any delay or decline in such
reimbursement will adversely affect our revenues.
Healthcare policy
changes, including recent federal legislation to reform the U.S.
healthcare system, may have a material adverse effect on
us.
In response to perceived increases in health care costs in
recent years, there have been and continue to be proposals by
the federal government, state governments, regulators and
third-party payors to control these costs and, more generally,
to reform the U.S. healthcare system. Certain of these
proposals could limit the prices we are able to charge for our
products or the amounts of reimbursement available for our
products and could limit the acceptance and availability of our
products. Moreover, as discussed below, recent federal
legislation would impose significant new taxes on medical device
makers such as us. The adoption of some or all of these
proposals, including the recent federal legislation, could have
a material adverse effect on our financial position and results
of operations.
On March 23, 2010, the Patient Protection and Affordable
Care Act (PPACA) was signed into law by President
Obama. On March 30, 2010, a companion bill, the Health Care
and Education Reconciliation Act of 2010 (the
Reconciliation Act) was also signed into law by
President Obama. Among other things, the PPACA and the
Reconciliation Act (collectively, the Acts), when
taken together, impose a 2.3% excise tax on the sale of certain
medical devices that will take effect in 2013. In addition, it
is possible that standard setters or regulators may address
certain unique aspects of the accounting for the Acts in the
future. In light of the inherent uncertainty of how these Acts
and other companion legislation, if any, will be implemented and
applied, we are unable to fully predict the actual impact on our
financial statements. Other elements of this legislation such as
comparative effectiveness research, an independent payment
advisory board, payment system reforms including shared savings
pilots and other provisions could meaningfully change the way
healthcare is developed and delivered, and may materially impact
numerous aspects of our business.
Our manufacturing
facilities and the manufacturing facilities of our suppliers
must comply with applicable regulatory requirements. If we fail
to achieve regulatory approval for these manufacturing
facilities, our business and our results of operations would be
harmed.
Completion of our clinical trials and commercialization of our
products require access to, or the development of, manufacturing
facilities that meet applicable regulatory standards to
manufacture a sufficient supply of our products. In addition,
the FDA must approve facilities that manufacture our products
for U.S. commercial purposes, as well as the manufacturing
processes and specifications for the product with similar,
additional, approvals required in order to achieve CE marking in
Europe. Suppliers of components, and products used to
manufacture, our products must also comply with FDA and foreign
regulatory requirements, which often require significant time,
money, resources and record-keeping and quality assurance
efforts and subject us and our suppliers to potential regulatory
inspections and stoppages. If we or our suppliers fail to comply
with the regulatory requirements for our manufacturing
operations, our commercialization efforts could be delayed,
which would harm our business and our results of operations.
We rely on
specialized suppliers for certain components and materials, and
we do not have second-source suppliers for all of our
components.
We depend on a number of suppliers to successfully manufacture
sufficient quantities of the components we use in our products.
We rely on suppliers for critical components including the
center post, housing and impeller that are assembled into our
primary product, the HeartWare System, as well as finished
products that comprise our peripheral and external equipment
that is included in the HeartWare System. Lead times for our
components are significant and can be up to as long as sixteen
weeks and many of our components are manufactured to very tight
tolerances or specifications. We do not presently have supply
agreements with the vast majority of our key suppliers but have
extensive purchase orders in place with these vendors.
We have second-source suppliers for some, but not all, of our
components. In particular, we do not have second-source
suppliers for our controllers, battery chargers and monitors.
Our reliance on third-party suppliers also subjects us to other
risks that could harm our business, including:
| we are not a major customer of many of our suppliers, and these suppliers may therefore give other customers needs higher priority than ours; |
| we may not be able to obtain adequate supply in a timely manner or on commercially reasonable terms; |
| some of our components are extraordinarily complex and must be manufactured to extremely tight tolerances and specifications with the result that our suppliers, especially new suppliers, may make errors in manufacturing that could negatively affect the efficacy or safety of our products or cause our components not to be delivered on time or at all or to be delivered outside of specifications; |
| the availability of second-source suppliers may be extremely limited or their implementation as a supplier may be lengthy due to the tight tolerances and specifications in which we typically operate; |
| switching components or changes to our components, specifications or designs may require product redesign and submission to the FDA or a PMA supplement; |
| our suppliers manufacture products for a range of customers, and fluctuations in demand for the products these suppliers manufacture for others may affect their ability to deliver products to us in a timely manner; and |
| our suppliers may encounter financial hardships unrelated to our demand, which could inhibit their ability to fulfill our orders and meet our requirements. |
Any interruption or delay in obtaining products from our
third-party suppliers, or our inability to obtain products from
alternate sources at acceptable prices in a timely manner, could
impair our ability to meet the demand of our customers and cause
them to cancel orders or switch to competing products.
While we have identified second-source suppliers for other key
components, we have not entered into written agreements with
these suppliers and we cannot assure you that we will be able to
maintain our manufacturing schedule without undue delay or
substantial cost if any of these arrangements is terminated.
Additionally, we may experience problems or delays in our own
manufacturing and assembly process, which may be harmful to our
financial status or reputation and therefore make it more
difficult or expensive for us to continue with or enter into
relationships with specialized suppliers. Our business plan is
predicated on maintaining strong relationships and supply with a
series of external parties to manufacture components of our
HeartWare System. If we are unsuccessful in this regard or are
unable to secure or maintain agreements with these manufacturers
on favorable terms or at all, then our ability to commercialize
our technology and expand our operations will be dramatically
impaired.
We may not be
able to effectively protect our intellectual property rights
which could have an adverse effect on our business, financial
condition or results of operations.
Our success depends in part on our ability to obtain and
maintain protection in the United States and other
countries of the intellectual property relating to or
incorporated into our technology and products. As of
December 7, 2010, we have 20 issued U.S. patents, 10
issued Australian patents, 5 issued patents in each of Japan,
Germany, the United Kingdom and France, as well as patents
issued in the Netherlands, Spain, Italy, Korea, Canada and
Israel. Our patent portfolio consists of internally developed
technology as well as patents and patent applications which we
acquired in 2003 in connection with a plan of liquidation for
Kriton Medical, Inc. and which pertain to technology used in the
HeartWare System. As a result, we may have less complete
knowledge and records with respect to the development and
ownership of such Kriton technology, patents and intellectual
property than we would otherwise have for technology, patents
and intellectual property developed internally by us. As of
Decmber 7, 2010 we also have 26 pending
U.S. non-provisional patent applications and a number of
international patent applications filed under the Patent
Cooperation Treaty, as well as in Japan, Europe, Australia,
China, India, Korea and Israel.
Our pending and future patent applications may not issue as
patents or, if issued, may not issue in a form that will provide
us with any meaningful protection or any competitive advantage.
Even if issued, existing or future patents may be challenged,
including with respect to the development and ownership thereof,
or narrowed, invalidated or circumvented, which could limit our
ability to stop competitors from developing and marketing
similar products or limit the length of terms of patent
protection we may have for our products. Further, other
companies may design around technologies we have patented,
licensed or developed. Moreover, changes
in patent laws or their interpretation in the United States and
other countries could also diminish the value of our
intellectual property or narrow the scope of our patent
protection. In addition, the legal systems of certain countries
do not favor the aggressive enforcement of patents, and the laws
of foreign countries may not protect our rights to the same
extent as the laws of the United States. As a result, our patent
portfolio may not provide us with sufficient rights to exclude
others from commercializing products similar or identical to
ours. In addition, in November 2005, we entered into a
settlement agreement with Ventrassist Pty., Limited, Ventracor
Limited (collectively Ventracor) and the University
of Technology, Sydney, under which the parties resolved all of
the claims and counterclaims filed by the parties in the
United States District Court for the Southern District of
Florida in 2004 and 2005, and agreed to mutual non-assertion
covenants. As part of that agreement, we agreed not to sue
Ventracor or the University of Technology, Sydney, or any of
their respective successors, assigns, affiliates, customers or
suppliers for infringement of 29 of our issued U.S. and
worldwide patents existing as of the date of the agreement or
any patents that issue from any patent applications existing as
of such date (including any type of patent that claims priority
or shares common priority to such patents). We also agreed not
to sue such parties for infringement of all of our issued
patents existing as of September 30, 2005, or any patents
that issue from any patent applications existing as of such
date, in respect of Ventracors blood pump devices existing
as of the date of the agreement or any device embodying a
modification of such devices which does not give rise to a new
independent claim for patent infringement. As a result,
Ventracor, the University of Technology, Sydney, or their
respective successors or assigns may commercialize competing
technology or products that would have otherwise been precluded
by our patents subject to the agreement. We understand that
Ventracors patent portfolio, or certain elements therein,
has since been acquired by Thoratec Corporation.
In order to preserve and enforce our patent and other
intellectual property rights, we may need to make claims or file
lawsuits against third parties. This can entail significant
costs to us and divert our managements attention from
developing and commercializing our products. The occurrence of
these events may have a material adverse effect on our business,
financial condition or results of operations.
Claims that our
current or future products infringe or misappropriate the
proprietary rights of others could adversely affect our ability
to sell those products and cause us to incur additional
costs.
Substantial litigation over intellectual property rights exists
in the medical device industry. We expect that we could be
increasingly subject to third-party infringement claims as our
revenues increase, the number of competitors grows and the
functionality of products and technology in different industry
segments overlaps. Third parties may currently have, or may
eventually be issued, patents on which our current or future
products or technologies may infringe. For example, we are aware
of certain patents and patent applications owned by third
parties that cover different aspects of mechanical circulatory
support, methodologies for the pumping of blood and other fluids
and the related devices and technologies. Any of these third
parties might make a claim of infringement against us.
In particular, in an August 2008 letter, Jarvik Heart invited us
to discuss an exclusive license as it relates to a
Jarvik patent concerning hybrid blood pumps. The patent
referenced by this letter relates to technology that is material
to our business. We have not had any substantive discussions
with Jarvik Heart concerning this matter since our receipt of
this letter and we do not believe that our blood pump infringes
this patent. In addition, we received a letter from
Abiomed, Inc. in September 2009 in which Abiomed suggested that
we may be interested in licensing Abiomeds
technology as it relates to an Abiomed patent concerning
bearingless blood pumps. Further, in a subsequent letter
received in February 2010, it was stated that Abiomed was
concerned that HeartWares left ventricular assist
rotary blood pump infringes one or more claims of an
Abiomed patent. We have had communications with Abiomed, Inc.
since receipt of the initial letter. The patent referenced by
these letters relates to technology that is potentially material
to our business and any litigation in this regard, irrespective
of the outcome, may have a material adverse effect on our
financial position, liquidity or results of operations. We
believe the HeartWare System does not infringe this patent.
There can be no certainty that litigation will not arise in
relation to the above matters or, if it does arise, whether or
not it will be determined in a manner which is favorable to us.
Any litigation, regardless of its outcome, would likely result
in the expenditure of significant financial resources and the
diversion of managements time and resources. In addition,
litigation in which we are accused of infringement may cause
negative publicity, adversely impact prospective customers,
cause product shipment delays, prohibit us from manufacturing,
marketing or selling our current or future products, require us
to develop non-infringing technology, make substantial payments
to third parties or enter into royalty or license agreements,
which may not be available on acceptable terms or at all. If a
successful claim of infringement were made against us and we
could not develop non-infringing technology or license the
infringed or similar technology on a timely and cost-effective
basis, our revenues may decrease substantially and we could be
exposed to significant liability. A court could enter orders
that temporarily, preliminarily or permanently enjoin us or our
customers from making, using, selling, offering to sell or
importing our current or future products, or could enter an
order mandating that we undertake certain remedial activities.
Claims that we have misappropriated the confidential information
or trade secrets of third parties can have a similar negative
impact on our reputation, business, financial condition or
results of operations.
We may need to
initiate lawsuits to protect or enforce our patents and other
intellectual property rights, which could be expensive and, if
we lose, could cause us to lose some of our intellectual
property rights, which would harm our ability to compete in the
market.
We rely on patents to protect a portion of our intellectual
property and our competitive position. Patent law relating to
the scope of claims in the technology fields in which we operate
is still evolving and, consequently, patent positions in the
medical device industry are generally uncertain. In order to
protect or enforce our patent rights, we may initiate patent
litigation against third parties, such as infringement suits or
interference proceedings. Litigation may be necessary to:
| assert claims of infringement; |
| enforce our patents; |
| protect our trade secrets or know-how; or |
| determine the enforceability, scope and validity of the proprietary rights of others. |
Any lawsuits that we initiate could be expensive, take
significant time and divert managements attention from
other business concerns. Litigation also puts our patents at
risk of being invalidated or interpreted narrowly and our patent
applications at risk of not issuing. Additionally, we may
provoke third parties to assert claims against us. We may not
prevail in any lawsuits that we initiate and the damages or
other remedies awarded, if any, may not be commercially
valuable. The occurrence of any of these events may have a
material adverse effect on our business, financial condition and
results of operations.
If we are unable
to protect the confidentiality of our proprietary information
and know-how, the value of our technology and products could be
adversely affected.
In addition to patented technology, we rely on our unpatented
proprietary technology, trade secrets, processes and know-how.
Despite these measures, any of our intellectual property rights
could, however, be challenged, invalidated, circumvented or
misappropriated. We generally seek to protect this information
by confidentiality, non-disclosure and assignment of invention
agreements with our employees, consultants, scientific advisors
and third parties. These agreements may be breached, and we may
not have adequate remedies for any such breach. In addition, our
trade secrets may be disclosed to or otherwise become known or
be independently developed by competitors. To the extent that
our employees, consultants or contractors use intellectual
property owned by others in their work for us, disputes may
arise as to the rights in related or resulting know-how and
inventions. If, for any of the above reasons, our intellectual
property is disclosed or misappropriated, it would harm our
ability to protect our rights and have a material adverse effect
on our business, financial condition and results of operations.
We may be subject
to claims that our employees or we have inadvertently or
otherwise used or disclosed alleged trade secrets or other
proprietary information of former employers of our
employees.
We employ individuals who were previously employed at other
medical device companies, including our competitors or potential
competitors. To the extent that our employees are involved in
research areas that are similar to those in which they were
involved with their former employers, we may be subject to
claims that such employees have inadvertently or otherwise used
or disclosed the alleged trade secrets or other proprietary
information of the former employers. Litigation may be necessary
to defend against such claims.
We are subject to
federal and state laws prohibiting kickbacks and
false or fraudulent claims, which, if violated, could subject us
to substantial penalties. Foreign jurisdictions in which we
operate may have similar laws. Additionally, any challenge to or
investigation into our practices under these laws could cause
adverse publicity and be costly to respond to, and thus could
harm our business.
A federal law commonly known as the Medicare/Medicaid
anti-kickback law, and several similar state and foreign laws,
prohibit payments that are intended to induce physicians or
others either to refer patients or to acquire or arrange for or
recommend the acquisition of healthcare products or services.
These laws constrain our sales, marketing and other promotional
activities by limiting the kinds of financial arrangements,
including sales programs, we may have with hospitals, physicians
or other potential purchasers of medical devices. Other federal
and state laws generally prohibit individuals or entities from
knowingly presenting, or causing to be presented, claims for
payment from Medicare, Medicaid or other third-party payors that
are false or fraudulent, or for items or services that were not
provided as claimed. Because we may provide some coding and
billing information to purchasers of the HeartWare System and
our other products, and because we cannot assure that the
government will regard any billing errors that may be made as
inadvertent, these laws are potentially applicable to us. In
addition, these laws are potentially applicable to us because we
provide reimbursement to healthcare
professionals for training patients on the use of the HeartWare
System and our other products. Anti-kickback and false claims
laws prescribe civil and criminal penalties for noncompliance,
which can be substantial. Even an unsuccessful challenge or
investigation into our practices could cause adverse publicity,
and be costly to respond to, and thus could have a material
adverse effect on our business, financial condition or results
of operations.
If we are found
to have violated laws protecting the confidentiality of patient
health information, we could be subject to civil or criminal
penalties, which could increase our liabilities and harm our
reputation or our business.
There are a number of federal and state and foreign laws
protecting the confidentiality of certain patient health
information, including patient records, and restricting the use
and disclosure of that protected information. In particular, the
U.S. Department of Health and Human Services promulgated
patient privacy rules under the Health Insurance Portability and
Accountability Act of 1996, or HIPAA. These privacy rules
protect medical records and other personal health information by
limiting their use and disclosure, giving individuals the right
to access, amend and seek accounting of their own health
information and limiting most use and disclosures of health
information to the minimum amount reasonably necessary to
accomplish the intended purpose. If we are found to be in
violation of the privacy rules under HIPAA or similar laws, we
could be subject to civil or criminal penalties, which could
increase our liabilities, harm our reputation and have a
material adverse effect on our business, financial condition and
results of operations.
If we are unable
to manage our expected growth, we may not be able to
commercialize our product candidates.
We expect to continue to expand our operations and grow our
research and development, product development, regulatory,
manufacturing, sales, marketing and administrative operations.
This expansion has placed, and is expected to continue to place,
a significant strain on our management, infrastructure and
operational and financial resources. To manage any further
growth and to commercialize our products, we will be required to
improve existing and implement new operational and financial
systems, procedures and controls and expand, train and manage
our growing employee base. Specifically, our information
technology and
back-up
systems and access to such systems will need to be improved and
upgraded to accommodate our growth. In addition, we will need to
manage relationships with various persons and entities
participating in our clinical trials, manufacturers, suppliers
and other organizations, including various regulatory bodies in
the United States and other jurisdictions. Our ability to manage
our operations and growth will require us to improve our
operational, financial and management controls, as well as our
internal reporting systems and controls. We may not be able to
implement such improvements to our management information and
internal control systems in an efficient and timely manner and
may discover deficiencies in existing systems and controls. Our
failure to accomplish any of these tasks could materially harm
our business.
If we fail to
successfully introduce next generation products and improvements
to our existing product, our future growth may suffer.
As part of our strategy, we intend to develop and introduce a
number of next generation products and make enhancement to our
existing product. We also intend to develop new indications for
our existing products. If we fail to successfully develop,
manufacture, design
clinical trials for, introduce or commercialize any of these new
products, product improvements and new indications on a timely
basis, or if they are not well accepted by the market, our
future growth may suffer.
If we choose to
license, invest in or acquire new businesses, products or technologies,
instead of developing them ourselves, these licenses, investments or acquisitions could disrupt our business and could result in the
use of significant amounts of equity, cash or a combination of
both.
From time to time we may seek to license, invest in or acquire new
businesses, products or technologies, instead of developing them
ourselves. Licenses, investments and acquisitions involve numerous risks,
including:
| the inability to complete the license, investment or acquisition; |
| disruption of our ongoing businesses and diversion of management attention; |
| difficulties in integrating the acquired entities, products or technologies; |
| risks associated with acquiring intellectual property; |
| difficulties in operating the acquired business profitably; |
| the inability to achieve anticipated synergies, cost savings or growth; |
| potential loss of key employees, particularly those of the acquired business; |
| difficulties in transitioning and maintaining key customer, distributor and supplier relationships; |
| risks associated with entering markets in which we have no or limited prior experience; and |
| unanticipated costs. |
In addition, any future licenses, investments or acquisitions may result
in one or more of the following:
| dilutive issuances of equity securities, which may be sold at a discount to market price; |
| the use of significant amounts of cash; |
| the incurrence of debt; |
| the assumption of significant liabilities; |
| increased operating costs or reduced earnings; |
| financing obtained on unfavorable terms; |
| large one-time expenses; and |
| the creation of certain intangible assets, including goodwill, the write-down of which in future periods may result in significant charges to earnings. |
Any of these factors could materially harm our stock price,
business, financial condition and results of operations.
If we cannot
successfully manage the additional business and regulatory risks
that result from our expansion into multiple foreign markets, we
may experience an adverse impact to our business, financial
condition and results of operations.
We have aggressively expanded, and expect to continue to expand,
into additional foreign markets. This expansion will subject us
to new business and regulatory risks, including, but not limited
to:
| failure to fulfill foreign regulatory requirements on a timely basis or at all to market the HeartWare System or other future products; |
| availability of, and changes in, reimbursement within prevailing foreign health care payment systems; |
| adapting to the differing laws and regulations, business and clinical practices, and patient preferences in foreign countries; |
| difficulties in managing foreign relationships and operations, including any relationships that we may establish with foreign partners, distributors or sales or marketing agents; |
| differing levels of protection for intellectual property rights in some countries; |
| difficulty in collecting accounts receivable and longer collection periods; |
| costs of enforcing contractual obligations in foreign jurisdictions; |
| recessions in economies outside of the United States; |
| political instability and unexpected changes in diplomatic and trade relationships; |
| currency exchange rate fluctuations; and |
| potentially adverse tax consequences, including our ability to interpret local tax rules and implement appropriate tax treatment/collection. |
We will be impacted by these additional business risks, which
may adversely impact our business, financial condition and
results of operations. In addition, expansion into additional
foreign markets imposes additional burdens on our small
executive and administrative personnel, research and sales
department and generally limited managerial resources. Our
efforts to introduce our current or future products into
additional foreign markets may not be successful, in which case
we may have expended significant resources without realizing the
expected benefit. Ultimately, the investments required for
expansion into additional foreign markets could exceed the
returns, if any, generated from this expansion.
The taxation and customs requirements, together with other
applicable laws and regulations of certain foreign
jurisdictions, can be inherently complex and subject to
differing interpretation by local authorities. We are subject to
the risk that either we have misinterpreted applicable laws and
regulations, or that foreign authorities may take inconsistent,
unclear or changing positions on local law, customs practices or
rules. In the event that we have misinterpreted any of the
above, or that foreign authorities take positions contrary to
ours, we may incur liabilities that may differ materially from
the amounts accrued in the accompanying condensed consolidated
financial statements.
The competition
for qualified personnel is particularly intense in our industry.
If we are unable to retain or hire key personnel, we may not be
able to sustain or grow our business.
Our ability to operate successfully and manage our potential
future growth depends significantly upon our ability to attract,
retain and motivate highly skilled and qualified research,
technical, clinical, regulatory, sales, marketing, managerial
and financial personnel. We face intense competition for such
personnel, and we may not be able to attract, retain and
motivate these individuals. We compete for talent with numerous
companies, as well as universities and non-profit research
organizations. Our future success also depends on the personal
efforts and abilities of the principal members of our senior
management and scientific staff to provide strategic direction,
manage our operations and maintain a cohesive and stable
environment. Although we have employment and incentive
compensation agreements with all of our executive officers and
incentive and compensation plans for our other personnel
providing them with various economic incentives to remain
employed with us, these incentives may not be sufficient to
retain them. We do not maintain key man life insurance on the
lives of any of the members of our senior management. The loss
of key personnel for any reason or our inability to hire, retain
and motivate additional qualified personnel in the future could
prevent us from sustaining or growing our business.
Product liability
claims could damage our reputation or adversely affect our
business.
The design, manufacture and marketing of human medical devices,
particularly implantable life-sustaining medical devices,
carries an inherent risk of product liability claims and other
damage claims. Such liability claims may be expensive to defend
and may result in large judgments against us. A product
liability or other damages claims, product recall or product
misuse, regardless of the ultimate outcome, could require us to
spend significant time and money in litigation or to pay
significant damages and could seriously harm our business. We
maintain clinical trial insurance and limited product liability
insurance. We cannot be certain that such insurance will be
sufficient to cover all claims that may be made against us. Our
insurance policies generally must be renewed on an annual basis.
We may not be able to maintain or increase such insurance on
acceptable terms or at reasonable costs. A successful claim
brought against us in excess, or outside, of our insurance
coverage could seriously harm our financial condition and
results of operations. Generally, our clinical trials will be
conducted in patients with serious life-threatening diseases for
whom conventional treatments have been unsuccessful or for whom
no conventional treatment exists, and, during the course of
treatment, these patients could suffer adverse medical effects
or die for reasons that may or may not be related to our medical
devices. Any of these events could result in a claim of
liability. For example, in 2009 we received a claim in
connection with the death of a patient from multiple organ
failure participating in our clinical trial in Germany. We may
receive similar claims from time to time in the future. Such
claims against us, regardless of their merit, could result in
significant awards against us that could materially adversely
harm our business, financial condition, results of operations
and prospects. A product liability or other damages claim,
product recall or product misuse involving any type of LVAD, but
especially involving one of ours, could also materially and
adversely damage our reputation and affect our ability to
attract and retain customers, irrespective of whether or not the
claim or recall was meritorious.
Investors could
lose confidence in our financial reports, and the value of our
shares may be adversely affected, if our internal controls over
financial reporting are found not to be effective by management
or by an independent registered public accounting firm or if we
make disclosure of existing or potential significant
deficiencies or material weaknesses in those controls.
Managements assessment of our internal controls over
financial reporting is discussed in Item 9A in our Annual
Report on
Form 10-K
for the year ended December 31, 2009. The Companys
management, with the participation of the Companys Chief
Executive Officer and Chief Financial Officer, evaluated the
effectiveness of the Companys disclosure controls and
procedures, and internal control over financial reporting as of
December 31, 2009. Based on that evaluation, the
Companys Chief Executive Officer and Chief Financial
Officer concluded that the Companys disclosure controls
and procedures, and internal control over financial reporting
are effective as of December 31, 2009. Our independent
registered public accounting firm has issued their attestation
report on our internal control over financial reporting, which
is also included in Item 9A of our Annual Report on
Form 10-K
for the year ended December 31, 2009.
We continue to evaluate our existing internal controls over
financial reporting against the standards adopted by the Public
Company Accounting Oversight Board, or PCAOB. During the course
of our ongoing evaluation of the internal controls, we may
identify areas requiring improvement and will design enhanced
processes and controls to address any issues identified through
this review. As we continue to commercialize our products, we
will need to enhance our accounting and financial controls
functions, particularly as they relate to accounting for revenue
and inventory, and we will need to add more personnel to our
financial reporting group. Remediating any deficiencies,
significant deficiencies or material weaknesses that have been
or could be identified by us or our independent registered
public accounting firm may require us to incur significant costs
and expend significant time and management resources. We cannot
assure you that any of the measures we implement to remedy any
such deficiencies will effectively mitigate or remedy such
deficiencies. The existence of one or more such deficiencies or
weaknesses could affect the accuracy and timing of our financial
reporting. Investors could lose confidence in our financial
reports, and the value of our shares may be adversely affected
if our internal controls over financial reporting are found not
to be effective by management or by our independent registered
public accounting firm or if we make disclosure of existing or
potential significant deficiencies or material weaknesses in
those controls.
Risks
Related to Our Common Stock
The price of our
common stock may fluctuate significantly.
The ordinary shares of HeartWare Limited had been traded on the
ASX from January 31, 2005 until November 13, 2008 when
the shares of common stock of HeartWare International, Inc.
started trading on the ASX in the form of CHESS Depositary
Interests, or CDIs, each representing one thirty-fifth of a
share of our common stock. The trading price of the common stock
and the CDIs, as applicable, has been, and is likely to continue
to be, volatile, which means that it could decline substantially
within a short period of time. For example, the closing price of
our CDIs traded on the ASX has ranged from AU$1.06 to AU$2.75 in
the period from January 1, 2010 to December 8, 2010.
In addition, our shares of common stock began trading on the
NASDAQ Global Market on February 24, 2009. Prior to that
time, there had been no public market for our common stock in
the United States. The closing price of our shares of common
stock traded on the NASDAQ Global Market has ranged from
U.S.$33.96 to U.S.$93.76 in the period from January 1, 2010
to December 8, 2010. The price of our common shares,
whether traded in the form of common stock or CDIs, could
fluctuate significantly for many reasons, including the
following:
| future announcements concerning us or our competitors; |
| regulatory developments, enforcement actions bearing on advertising, marketing or sales, and disclosure regarding completed, ongoing or future clinical trials; |
| quarterly variations in operating results and our liquidity, which we have experienced in the past and expect to experience in the future; |
| introduction of new products or changes in product pricing policies by us or our competitors; |
| acquisition or loss of significant customers, distributors or suppliers; |
| business acquisitions or divestitures; |
| changes in third party reimbursement practices; |
| fluctuations of investor interest in the medical device sector; and |
| fluctuations in the economy, world political events or general market conditions. |
In addition, stock markets in general and the market for shares
of health care stocks in particular, have experienced extreme
price and volume fluctuations in recent years, fluctuations that
frequently have been unrelated to the operating performance of
the affected companies. These broad market fluctuations may
adversely affect the market price of our shares. The market
price of our shares could decline below its current price and
the market price of our shares may fluctuate significantly in
the future. These fluctuations may be unrelated to our
performance.
Your interests
may differ or conflict with those of our largest
shareholder.
As of December 8, 2010, Apple Tree Partners I, L.P.,
(Apple Tree), beneficially owned approximately 19.3%
of our outstanding shares. Assuming the completion of the public
offering of Apple Trees common stock (the Apple Tree
Offering), Apple Tree is expected to beneficially own
approximately 11.0% of our outstanding shares
(12.1% if the underwriters for the Apple Tree
Offering exercise their over-allotment option in full). As a
result, Apple Tree has and is expected to continue to have
significant influence over the outcome of any matter, including
a change of control, requiring approval of holders of shares.
The interests of Apple Tree may differ from or conflict with the
interests of other shareholders regarding a potential change of
control of us or other matters requiring a vote of shareholders.
Apple Trees significant influence over us and our
subsidiaries may delay or prevent a change in
control even if desired by the other holders of shares, which
could adversely affect the trading price of the shares.
The sale of our
common stock by Apple Tree concurrently with this offering and
future sales of our common stock in the public market could
lower the market price for our common stock.
We are making a public offering of $100 million principal amount of convertible senior notes due
2017 (or up to $115 million principal amount of convertible senior notes if the underwriters for such
offering exercise their over-allotment option in full). In the future, we may sell additional shares of our
common stock to raise capital, and a substantial number of shares of our common stock is reserved for
issuance upon the exercise of stock options and upon conversion of the notes. We cannot predict the size
of future issuances or the effect, if any, that such future issuances or the sale of our notes in the concurrent
offering may have on the market price for our common stock. The issuance and sale of substantial
amounts of common stock, or the perception that such issuances and sales may occur, could adversely
affect the trading price of the notes and the market price of our common stock and impair our ability to
raise capital through the sale of additional equity securities.
We do not intend
to pay cash dividends on our common stock in the foreseeable
future.
We have never declared or paid any cash dividends on our shares,
and we currently do not anticipate paying any cash dividends in
the foreseeable future. We intend to retain any earnings to
finance the development and expansion of our products and
business. Accordingly, our shareholders will not realize a
return on their investment unless the trading price of our
shares appreciates.
Anti-takeover
provisions in our charter documents and Delaware law may
discourage a third party from acquiring us, which could limit
our stockholders opportunities to sell their shares at a
premium.
Certain provisions of our Certificate of Incorporation and
By-laws may be considered as having an anti-takeover effect,
such as those provisions establishing a classified board of
directors, consisting of three classes of directors, and
requiring that directors be removed only for cause, authorizing
the board of directors to issue from time to time any series of
preferred stock and fix the designation, powers, preferences and
rights of the shares of such series of preferred stock,
prohibiting stockholders from acting by written consent in lieu
of a meeting, requiring advance notice of stockholder intention
to put forth director nominees or bring up other business at a
stockholders meeting, and prohibiting stockholders from
calling a special meeting of stockholders. We are also subject
to Section 203 of the Delaware General Corporation Law,
which in general prohibits a Delaware corporation from engaging
in any business combination with any interested stockholder for
a period of three years following the date that the stockholder
became an interested stockholder, unless certain conditions
specified therein are satisfied. These provisions could have the
effect of depriving our stockholders of an opportunity to sell
their shares at a premium over prevailing market prices by
discouraging third parties from seeking to obtain control of us
in a tender offer or similar transaction.
We may be subject
to arbitrage risks.
Investors may seek to profit by exploiting the difference, if
any, in the price of our shares of common stock as reflected by
the trading price of our CDIs, each representing one
thirty-fifth of a share of our common stock, on the ASX and the
trading price of our shares of common stock on the NASDAQ Global
Market. Such arbitrage activities could cause the price of our
securities
(as adjusted to reflect the fact that each CDI represents one
thirty-fifth of a share of common stock) in the market with the
higher value to decrease to the price set by the market with the
lower value.
We are currently considering the possibility of delisting our
CHESS Depositary Interests from
the Australian Securities Exchange. If we should decide to pursue delisting, the market for
our common stock in the United States could be disrupted, which would have an adverse affect
on our stock price.
We are currently considering delisting our CHESS Depositary Interests from the Australian
Securities Exchange. The delisting of our CHESS Depositary Interests from the ASX could
disrupt the market for our common stock listed on the NASDAQ Global Market in the United
States as a result of the sudden influx onto the NASDAQ Global Market of the shares of our
common stock previously represented by CHESS Depositary Interests, which could have an
adverse affect on our stock price. In addition, the delisting of our CHESS Depositary Interests
from the ASX could have an adverse effect on our ability to raise capital, if needed, on terms
acceptable to us.
We may undergo an
ownership change for U.S. federal income tax
purposes, which would limit our ability to utilize net operating
losses from prior tax years.
As described in greater detail below, we have incurred net
operating losses since our inception. If we undergo an
ownership change for U.S. federal income tax
purposes, our ability to utilize net operating losses from prior
years to reduce taxable income in future tax years will be
limited by operation of the Internal Revenue Code. Certain
changes in the ownership of our common stock, including the sale
of our common stock by Apple Tree Partners I, L.P. concurrent
with this offering, may result in such an ownership change. We
have not determined whether the sale of stock by Apple Tree
Partners I, L.P. will cause ownership change for
U.S. federal income tax purposes, or the degree to which
our net operating losses will be limited if such an ownership
change occurs.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, as amended, the
Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly
authorized.
HeartWare International, Inc. |
||||
Date: December 9, 2010 | By: | /s/ David McIntyre | ||
Name: | David McIntyre | |||
Title: | Chief Operating Officer & Chief Financial Officer | |||