Table of
Contents
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark
One)
x
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended: June 30, 2010
OR
o
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 0-23678
BIOSPHERE
MEDICAL, INC.
(Exact
Name of Registrant as Specified in its Charter)
Delaware
|
|
04-3216867
|
(State or Other Jurisdiction of
Organization or Incorporation)
|
|
(I.R.S. Employer
Identification No.)
|
1050 Hingham Street, Rockland, Massachusetts 02370
(Address
of Principal Executive Offices) (Zip Code)
(781) 681-7900
(Registrants
Telephone Number, Including Area Code)
Indicate
by a 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
o
Indicate by check mark whether the registrant has
submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
Yes
o
No
o
Indicate
by a check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of large accelerated filer, accelerated filer, and smaller
reporting company in Rule 12b-2 of the Exchange Act. (check one):
Large
accelerated filer
o
|
|
Accelerated
filer
o
|
|
|
|
Non-accelerated
filer
o
|
|
Smaller
reporting company
x
|
(Do
not check if a smaller reporting company)
|
|
|
Indicate
by check mark whether the registrant is a shell company (as defined by
Rule 12b-2 of the Exchange Act.). Yes
o
No
x
The
number of shares outstanding of the registrants common stock as of
August 2, 2010 was 18,758,982 shares.
Table
of Contents
PART I.
FINANCIAL
INFORMATION
ITEM 1.
FINANCIAL
STATEMENTS
BIOSPHERE MEDICAL, INC. AND
SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
|
|
June 30,
2010
|
|
December 31,
2009
|
|
|
|
(unaudited)
|
|
|
|
ASSETS
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,049
|
|
$
|
8,573
|
|
Marketable securities
|
|
12,048
|
|
9,515
|
|
Accounts receivable, net of allowance for doubtful
accounts of $56 and $57 as of June 30, 2010 and December 31, 2009,
respectively
|
|
4,927
|
|
5,183
|
|
Inventories
|
|
3,026
|
|
3,713
|
|
Prepaid and other current assets
|
|
850
|
|
639
|
|
Total current assets
|
|
22,900
|
|
27,623
|
|
Property and equipment, net
|
|
648
|
|
829
|
|
Goodwill
|
|
1,443
|
|
1,443
|
|
Other assets
|
|
403
|
|
552
|
|
Total Assets
|
|
$
|
25,394
|
|
$
|
30,447
|
|
LIABILITIES AND STOCKHOLDERS
EQUITY
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,127
|
|
$
|
1,128
|
|
Accrued compensation
|
|
1,811
|
|
2,796
|
|
Accrued preferred dividend
|
|
144
|
|
144
|
|
Other accrued liabilities
|
|
1,969
|
|
1,960
|
|
Current portion of capital lease obligations
|
|
3
|
|
8
|
|
Current portion of deferred revenue
|
|
333
|
|
333
|
|
Total current liabilities
|
|
5,387
|
|
6,369
|
|
Long-term portion of deferred revenue
|
|
404
|
|
431
|
|
Total Liabilities
|
|
5,791
|
|
6,800
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 7)
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
Preferred stock, $.01 par value; 1,000,000 shares
authorized; 6% series A convertible preferred stock, 12,000 shares
authorized, 9,636 shares issued and outstanding as of June 30, 2010 and
December 31, 2009
|
|
8,521
|
|
8,521
|
|
Common stock, $.01 par value; 50,000,000 shares
authorized, 18,758,982 and 18,419,895 shares issued and outstanding as of
June 30, 2010 and December 31, 2009, respectively
|
|
188
|
|
184
|
|
Additional paid-in capital
|
|
108,616
|
|
107,742
|
|
Accumulated deficit
|
|
(97,266
|
)
|
(93,381
|
)
|
Accumulated other comprehensive income
|
|
(456
|
)
|
581
|
|
Total stockholders equity
|
|
19,603
|
|
23,647
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
25,394
|
|
$
|
30,447
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
3
Table
of Contents
BIOSPHERE MEDICAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
|
|
Three Months
Ended
June 30,
|
|
Six Months
Ended
June 30,
|
|
(in thousands, except per share data)
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
7,688
|
|
$
|
7,937
|
|
$
|
14,706
|
|
$
|
15,117
|
|
Licensing and collaborative revenue
|
|
108
|
|
174
|
|
211
|
|
278
|
|
Total revenue
|
|
7,796
|
|
8,111
|
|
14,917
|
|
15,395
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
Cost of product sales
|
|
1,945
|
|
1,914
|
|
3,735
|
|
3,755
|
|
Research and development
|
|
639
|
|
704
|
|
1,356
|
|
1,690
|
|
Sales
|
|
2,770
|
|
2,623
|
|
5,268
|
|
5,340
|
|
Marketing
|
|
1,359
|
|
1,311
|
|
2,765
|
|
2,825
|
|
General and administrative
|
|
3,815
|
|
1,702
|
|
5,654
|
|
3,599
|
|
Patent
|
|
119
|
|
205
|
|
322
|
|
377
|
|
Total costs and expenses
|
|
10,647
|
|
8,459
|
|
19,100
|
|
17,586
|
|
Loss from operations
|
|
(2,851
|
)
|
(348
|
)
|
(4,183
|
)
|
(2,191
|
)
|
Interest income
|
|
7
|
|
|
|
10
|
|
2
|
|
Interest expense
|
|
(1
|
)
|
(1
|
)
|
(3
|
)
|
(3
|
)
|
Foreign exchange gain (loss), net
|
|
317
|
|
(138
|
)
|
534
|
|
63
|
|
Realized loss on investments
|
|
|
|
(35
|
)
|
|
|
(35
|
)
|
Loss before income tax
|
|
(2,528
|
)
|
(522
|
)
|
(3,642
|
)
|
(2,164
|
)
|
Income tax benefit
|
|
19
|
|
|
|
46
|
|
|
|
Net loss
|
|
(2,509
|
)
|
(522
|
)
|
(3,596
|
)
|
(2,164
|
)
|
Preferred stock dividends
|
|
(145
|
)
|
(145
|
)
|
(289
|
)
|
(289
|
)
|
Net loss applicable to common stockholders
|
|
$
|
(2,654
|
)
|
$
|
(667
|
)
|
$
|
(3,885
|
)
|
$
|
(2,453
|
)
|
Net loss per common share applicable to common
stockholders
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.15
|
)
|
$
|
(0.04
|
)
|
$
|
(0.21
|
)
|
$
|
(0.14
|
)
|
Weighted average number of common shares
outstanding
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
18,106
|
|
18,035
|
|
18,096
|
|
18,024
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
4
Table
of Contents
BIOSPHERE MEDICAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
|
For the Six Months Ended June 30,
|
|
(in thousands)
|
|
2010
|
|
2009
|
|
Cash flows from operating activities:
|
|
|
|
|
|
Net loss
|
|
$
|
(3,596
|
)
|
$
|
(2,164
|
)
|
Adjustments to reconcile net loss to net cash used
in operating activities:
|
|
|
|
|
|
Provision for inventory obsolescence
|
|
16
|
|
|
|
Depreciation and amortization
|
|
185
|
|
212
|
|
Non-cash stock compensation
|
|
817
|
|
925
|
|
Foreign currency gains, net
|
|
(534
|
)
|
(63
|
)
|
Realized loss on available-for-sale investments
|
|
|
|
35
|
|
Loss on disposal of property and equipment
|
|
|
|
2
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Accounts receivable
|
|
110
|
|
(287
|
)
|
Inventories
|
|
287
|
|
363
|
|
Prepaid and other current assets
|
|
(146
|
)
|
144
|
|
Accounts payable
|
|
44
|
|
(81
|
)
|
Deferred revenue
|
|
(27
|
)
|
175
|
|
Accrued compensation
|
|
(870
|
)
|
22
|
|
Other accrued liabilities
|
|
188
|
|
626
|
|
Net cash used in operating activities
|
|
(3,526
|
)
|
(91
|
)
|
Cash flows from investing activities:
|
|
|
|
|
|
Purchase of property and equipment
|
|
(79
|
)
|
(185
|
)
|
Purchase of marketable securities
|
|
(11,491
|
)
|
|
|
Proceeds from the sale and maturity of marketable
securities
|
|
8,963
|
|
313
|
|
Net cash (used in) provided by investing
activities
|
|
(2,607
|
)
|
128
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Proceeds from issuance of common stock under
employee benefit and incentive plans
|
|
62
|
|
41
|
|
Payment of cash dividends
|
|
(289
|
)
|
(289
|
)
|
Principal payments under capital lease obligations
|
|
(5
|
)
|
(5
|
)
|
Net cash used in financing activities
|
|
(232
|
)
|
(253
|
)
|
Effect of exchange rate changes on cash and cash
equivalents
|
|
(159
|
)
|
(9
|
)
|
Net change in cash and cash equivalents
|
|
(6,524
|
)
|
(225
|
)
|
Cash and cash equivalents at beginning of period
|
|
8,573
|
|
17,837
|
|
Cash and cash equivalents at end of period
|
|
$
|
2,049
|
|
$
|
17,612
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
5
Table
of Contents
BIOSPHERE MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Nature of Business
BioSphere Medical, Inc. (the Company) develops, manufactures and
markets products for medical procedures that use embolotherapy. Embolotherapy
is the minimally invasive, image-guided therapeutic introduction of various
biocompatible substances into a patients circulatory system to occlude a blood
vessel, either to arrest or prevent hemorrhaging or to devitalize or destroy a
structure by occluding its blood supply. The Companys core technologies
consist of patented bioengineered polymers, which are chemical compounds that
the Company creates through the application to medical science, engineering
principles and manufacturing methods. These core technologies are used to
produce miniature spherical embolic particles, or microspheres, that are
designed to have uniquely beneficial properties for a variety of medical
applications. The Companys principal focus is the application of its
Embosphere
®
Microspheres for the treatment of symptomatic
uterine fibroids using a procedure called uterine fibroid embolization (UFE).
The Companys wholly-owned subsidiary, BioSphere Medical SA (BMSA), a
French société anonyme, holds the license to the embolotherapy technology that
is the main focus of the Companys business.
2.
Summary of Significant Accounting Policies
Basis of Presentation
The
accompanying consolidated financial statements are unaudited and have been
prepared on a basis consistent with the Companys annual audited financial
statements included in its Annual Report on Form 10-K for the fiscal year
ended December 31, 2009. The consolidated financial statements include the
accounts of the Companys three wholly-owned subsidiaries, BMSA, BioSphere
Medical Japan, Inc. and BSMD Ventures, Inc. All intercompany balances
and transactions have been eliminated in consolidation. Certain information and
footnote disclosures normally included in the Companys annual audited
financial statements have been condensed or omitted. The consolidated financial
statements, in the opinion of management, reflect all adjustments (including
normal recurring adjustments) necessary for a fair presentation of the results
for three- and six-month periods ended June 30, 2010 and 2009. The results
of operations for the periods presented are not necessarily indicative of the
results of operations to be expected for the entire fiscal year. These
consolidated financial statements should be read in conjunction with the
audited financial statements included in the Companys Annual Report on
Form 10-K for the fiscal year ended December 31, 2009, which was
filed with the Securities and Exchange Commission (the SEC) on March 26,
2010.
Plan of Merger
On May 13, 2010, the Company
entered into a definitive agreement and plan of merger with Merit Medical
Systems, Inc. (Merit Medical) and Merit BioAcquisition Co., a
wholly-owned subsidiary of Merit Medical, pursuant to which the Company agreed
to merge with and into Merit BioAcquisition Co. in a cash transaction valued at
approximately $96.00 million. In
connection with the transaction, on August 11, 2010, the Company called
for redemption on September 8, 2010 all 9,636 currently outstanding shares
of series A preferred stock at a redemption price of $1,000 per share plus
accrued but unpaid dividends. Holders of such shares of series A preferred
stock may elect to convert each share of series A preferred stock into 250
shares of common stock prior the redemption date. The redemption date will
occur prior to the date set for consummation of the merger, such that to the
extent that any holder of the series A preferred stock has not elected to
convert such shares into shares of common stock prior to the redemption date,
all of such shares will be redeemed on the redemption date and before the
consummation of the merger. Under the terms of the merger agreement, and
assuming the conversion of all outstanding shares of series A preferred stock
into shares of common stock prior to the redemption date, at closing (i) each
share of the Companys common stock will be exchanged for $4.38 per share in
cash; (ii) all of the Companys outstanding stock options, whether vested
or unvested, will be cancelled and each holder of such stock options will be
entitled to receive an amount equal to the product of (A) the number of
shares subject to such holders stock option, multiplied by (B) $4.38 less
the applicable per-share exercise price; and (iii) each share of the
Companys restricted stock will become fully vested and free of any repurchase
rights or other restrictions immediately prior to the effective time of the
merger, and will be treated in a manner consistent with the other shares of the
Companys common stock. Completion of the transaction is subject to approval by
the Companys stockholders and other customary closing conditions and is
expected to occur in the third quarter of 2010.
Subject to the satisfaction of
certain conditions, the Companys board may withdraw or modify its
recommendation to its stockholders for adoption of the merger agreement. In the
event that the board withdraws or modifies its recommendation in a manner
adverse to Merit Medical and the merger agreement is terminated, the Company
may be required to pay a termination fee of $3.84 million to Merit Medical.
6
Table of Contents
Subsequent Events
In
preparing these consolidated financial statements, the Company evaluated the
events and transactions that occurred after June 30, 2010 and on or before
the date these consolidated financial statements were issued.
Cash, Cash Equivalents and
Marketable Securities
The Company considers all highly liquid investments with an original
maturity of ninety days or less, as of the date of purchase, to be cash
equivalents. In accordance with its investment policy, surplus cash is invested
in investment-grade corporate and U.S. government debt as well as certain
asset-backed securities. The Company determines the appropriate classification
of marketable securities at each balance sheet date. Available-for-sale
marketable securities are carried at their fair value. Unrealized gains and
unrealized losses that are not deemed to be other than temporary are included
in accumulated other comprehensive income. The Company recognizes declines in
fair value of its marketable securities that are deemed to be other-than-temporary
impairments in the consolidated statement of operations. In evaluating the
Companys financial investments for other-than-temporary impairments, it
considers credit losses, credit ratings and other factors such as changes in
interest rates. For the six months ended June 30, 2010, the Company did
not record significant realized gains or realized losses on marketable
securities. During the six months ended June 30, 2009, the Company
recognized an approximate $35,000 charge to income as a result of a write-down
of certain asset-backed securities due to an other-than-temporary decline.
As of June 30, 2010, the Company has restricted investments of
$58,000, which consist of amounts the Company is required to keep as collateral
for its existing letter of credit relating to its facility lease in Rockland,
Massachusetts.
Fair Value of Financial
Instruments
The
Companys financial instruments include cash and cash equivalents, marketable
securities, accounts receivable and payable, capital lease obligations and
accrued liabilities. The carrying amount of these instruments approximates fair
value because of their short-term nature.
Revenue Recognition
The Company recognizes revenue when products are shipped and the
customer or distributor takes ownership and assumes risk of loss, collection of
the relevant receivable is reasonably assured, persuasive evidence of an
arrangement exists (such as a valid purchase order from an approved customer or
distributor), the sales price is fixed or determinable, payment is not
contingent on resale and the Company does not have any continuing obligations
to ensure resale. The Company establishes reserves for potential sales returns
and evaluates the adequacy of those reserves based upon realized experience and
expectations. Any significant credit returns could have a material adverse
impact on the Companys revenue and operating results for the period or periods
in which such returns occur. Shipping and handling costs are included in costs
of product sales.
In September 2006, the Company entered into an agreement to
license certain patent technologies to a third party in exchange for an
up-front lump-sum payment of $250,000 and an additional royalty on future net
sales of the licensed products. Under the agreement, the third party paid a
minimum royalty of $1.00 million over the first three years of the
agreement. The Company is recognizing both the up-front payment and the minimum
royalties over the estimated useful life of the patent. The Company recognized
approximately $44,000 and $208,000 as licensing revenue relating to this
agreement during the six months ended June 30, 2010 and 2009,
respectively.
On April 16, 2009, the Company entered into an international
distribution agreement with Nippon Kayaku Co., Ltd. (Nippon Kayaku).
The agreement grants Nippon Kayaku the exclusive right to distribute the
Companys HepaSphere Microspheres and Embosphere Microspheres upon regulatory
approval in Japan. The agreement provides that Nippon Kayaku is responsible for
filing, obtaining and maintaining all regulatory approvals necessary for the
sale, marketing, pricing and reimbursement of the products in Japan, including
performing any clinical trials required as a result of seeking such regulatory
approvals in Japan. Assuming product approval, the Company will provide
HepaSphere Microspheres and Embosphere Microspheres to Nippon Kayaku for
distribution and sale in Japan. Additionally, Nippon Kayaku made a
nonrefundable milestone payment of $1.00 million in 2009 which is being
recognized as collaborative revenue ratably over the expected term of the
research and development period, and has agreed to make up to
$3.00 million in additional milestone payments based upon specified
objectives, including achievement of clinical, regulatory and sales goals. For
the six months ended June 30, 2010, the Company recognized approximately
$167,000 as collaborative revenue relating to the Nippon Kayaku agreement, with
the remaining balance of $333,000 and $264,000 recorded as short- and long-term
deferred revenue, respectively.
7
Table
of Contents
During
the six-month period ended June 30, 2010, the Company recognized $140,000
in deferred revenue relating to security deposits received pursuant to new
international distribution agreements. Under these new agreements, distributors
are required to pay the Company an annual security deposit over the life of the
agreement.
Income Taxes
The Company uses the asset and liability accounting method whereby
deferred tax assets and liabilities are recognized based on temporary
differences between the amount recorded in the financial statements and the tax
bases of such assets and liabilities using current statutory tax rates. A
valuation allowance against net deferred tax assets is recorded if, based on
the available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized.
The Company is subject to income tax in numerous jurisdictions at
various rates worldwide, and the use of estimates is required in determining
the tax provision and valuation allowance against net deferred tax assets. The
Company has substantial net operating loss carryforwards that have generated
significant deferred tax assets in its tax jurisdictions. Due to the size of
the net operating loss carryforwards in relation to the Companys history of
unprofitable operations, the Company historically has not recognized any of its
net deferred tax assets. However, future improvements in the Companys
operating performance in a tax jurisdiction or significant changes in any of
the Companys estimates and judgments, including the operating profitability of
its French subsidiary, if any, could increase the certainty of the Companys
ability to apply its deferred tax assets against taxable income, which, if so
applied, could have a significant impact on the valuation of the Companys
deferred tax assets and reported operating results.
As of June 30, 2010, the Company has recognized approximately
$46,000 in research and development tax credits related to research and
development activities performed at the Companys French facility during the
first half of 2010. During the first six
months of 2010, the Company received $77,000 from the French tax authorities
because the credits earned in 2005 were monetized under an economic stimulus
program enacted by the French government. As of June 30, 2010, $215,000 in
outstanding research and development tax credits related to 2009 and the first
half of 2010 have been included in other long-term assets until they are
received from the French tax authorities.
Comprehensive Loss
Comprehensive loss consists of net
loss and other comprehensive income (loss). Other comprehensive income (loss)
includes certain changes in equity that are excluded from net loss;
specifically, the effects of foreign currency translation adjustments and
unrealized gains or losses on available-for-sale marketable securities. For the
three and six months ended June 30, 2010 and 2009, the Companys
comprehensive loss was as follows:
|
|
Three Months
Ended June 30,
|
|
Six Months
Ended June 30,
|
|
(in thousands)
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Net loss
|
|
$
|
(2,509
|
)
|
$
|
(522
|
)
|
$
|
(3,596
|
)
|
$
|
(2,164
|
)
|
Cumulative translation adjustment
|
|
(631
|
)
|
304
|
|
(1,042
|
)
|
(8
|
)
|
Unrealized gain on investments
|
|
5
|
|
28
|
|
5
|
|
33
|
|
Total comprehensive loss
|
|
$
|
(3,135
|
)
|
$
|
(190
|
)
|
$
|
(4,633
|
)
|
$
|
(2,139
|
)
|
8
Table of Contents
Net Loss Per Share
The Company calculates net income (loss) per share in accordance with
the two-class method. Basic net loss per share is computed by dividing the net
loss available to common stockholders by the weighted-average number of common
shares outstanding during the period. Should the Company become profitable,
diluted net loss per share would be computed using the more dilutive of
(a) the two-class method, or (b) the if-converted method. Since the
Company is in a net loss position, shares used to compute dilutive net loss per
share exclude the following common-share equivalents as their inclusion would
have an antidilutive effect. These are as follows:
|
|
As of June 30,
|
|
(in thousands)
|
|
2010
|
|
2009
|
|
Shares
issuable upon exercise of stock options
|
|
3,502
|
|
3,450
|
|
Shares
issuable upon conversion of convertible securities
|
|
2,409
|
|
2,409
|
|
Shares
issuable upon exercise of outstanding warrants
|
|
|
|
400
|
|
Unvested
restricted stock awards
|
|
634
|
|
335
|
|
|
|
6,545
|
|
6,594
|
|
Stock Options
The Company measures the cost of employee services in exchange for an
award of equity instruments based on the grant-date fair value of the award and
recognizes the cost over the requisite service period. The Company adopted the
accounting guidance related to stock compensation on January 1, 2006 (the adoption
date). Under this guidance, the Company recognizes compensation expense for
(1) all share-based payments granted after the adoption date and
(2) all awards granted to employees prior to the adoption date that remain
unvested on the adoption date. The Company recognizes compensation expense on
fixed awards with graded vesting on a straight-line basis over the vesting
period of such awards.
3.
Marketable Securities and Cash Equivalents
All current fixed maturity securities are classified as available for
sale and are reported at fair value. The Company has determined that its
investment securities are available to support current operations and,
accordingly, has classified such marketable securities as current assets
without regard to contractual maturities. The unrealized gains or losses on
these securities are included in accumulated other comprehensive income as a
separate component of stockholders equity unless the decline in value is
deemed to be other than temporary, in which case securities are written down to
fair value and the loss is charged to income. The Company evaluates its
investment securities for other-than-temporary declines based on quantitative
and qualitative factors.
The Companys available-for-sale marketable securities and cash
equivalents, including accrued interest receivable, as of June 30, 2010
are as follows:
(in thousands)
|
|
Amortized
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Estimated
Fair
Value
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
2,698
|
|
$
|
|
|
$
|
(1
|
)
|
$
|
2,697
|
|
Bank obligations
|
|
999
|
|
1
|
|
|
|
1,000
|
|
Federal agency obligations
|
|
8,338
|
|
3
|
|
|
|
8,341
|
|
Residential mortgage-backed obligations
|
|
10
|
|
|
|
|
|
10
|
|
Total marketable securities
|
|
12,045
|
|
4
|
|
(1
|
)
|
12,048
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
822
|
|
|
|
|
|
822
|
|
Total cash equivalents
|
|
822
|
|
|
|
|
|
822
|
|
Total marketable securities and cash equivalents
|
|
$
|
12,867
|
|
$
|
4
|
|
$
|
(1
|
)
|
$
|
12,870
|
|
9
Table of
Contents
The Companys available-for-sale marketable securities and cash
equivalents, including accrued interest receivable, as of December 31,
2009 are as follows:
(in thousands)
|
|
Amortized
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Estimated
Fair
Value
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
4,051
|
|
$
|
1
|
|
$
|
|
|
$
|
4,052
|
|
Bank obligations
|
|
2,648
|
|
2
|
|
|
|
2,650
|
|
Federal agency obligations
|
|
2,794
|
|
|
|
(4
|
)
|
2,790
|
|
Residential mortgage-backed obligations
|
|
23
|
|
|
|
|
|
23
|
|
Total marketable securities
|
|
9,516
|
|
3
|
|
(4
|
)
|
9,515
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
Treasury bills
|
|
125
|
|
|
|
|
|
125
|
|
Bank obligations
|
|
1,458
|
|
|
|
|
|
1,458
|
|
Federal agency obligations
|
|
1,000
|
|
|
|
|
|
1,000
|
|
Money market funds
|
|
2,623
|
|
|
|
|
|
2,623
|
|
Total cash equivalents
|
|
5,206
|
|
|
|
|
|
5,206
|
|
Total marketable securities and cash equivalents
|
|
$
|
14,722
|
|
$
|
3
|
|
$
|
(4
|
)
|
$
|
14,721
|
|
As of June 30, 2010,
the contractual maturities of marketable securities are as follows:
(in thousands)
|
|
Estimated
Fair Value
|
|
Due within one year:
|
|
|
|
Corporate bonds
|
|
$
|
2,697
|
|
Bank obligations
|
|
1,000
|
|
Federal agency obligations
|
|
8,341
|
|
Due after ten years:
|
|
|
|
Residential mortgage-backed obligations
|
|
10
|
|
Total marketable securities
|
|
12,048
|
|
Cash equivalents:
|
|
|
|
Money market funds
|
|
822
|
|
Total cash equivalents
|
|
822
|
|
Total marketable securities and cash equivalents
|
|
$
|
12,870
|
|
10
Table of Contents
The following table presents
information about the Companys assets that are measured at fair value on a
recurring basis at each reporting period as of June 30, 2010, and
indicates the fair value hierarchy of the valuation techniques utilized to
determine such fair value. In general, fair values determined by Level 1 inputs
utilize quoted prices (unadjusted) in active markets for identical assets or
liabilities. Fair values determined by Level 2 inputs utilize data points that
are observable, such as quoted prices, interest rates and yield curves. Fair
values determined by Level 3 inputs are unobservable data points for the asset
or liability, and include situations where there is little, if any, market
activity for the asset or liability:
|
|
|
|
Fair Value Measurements at
Reporting Date Using
|
|
(in thousands)
|
|
Fair Value at June 30,
2010
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
2,697
|
|
$
|
|
|
$
|
2,697
|
|
$
|
|
|
Bank obligations
|
|
1,000
|
|
|
|
1,000
|
|
|
|
Federal agency obligations
|
|
8,341
|
|
|
|
8,341
|
|
|
|
Mortgage-backed obligations
|
|
10
|
|
|
|
10
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
822
|
|
822
|
|
|
|
|
|
Total marketable securities and cash equivalents
|
|
$
|
12,870
|
|
$
|
822
|
|
$
|
12,048
|
|
$
|
|
|
The Company measures the fair value of money market funds and other
cash equivalents based on quoted prices in active markets for identical assets
or liabilities. The valuation techniques used to measure the fair value of all
other financial instruments were valued either based on quoted market prices or
model-driven valuations using significant inputs derived from or corroborated
by observable market data.
The Companys policy is to recognize transfers into and out of the
levels within the fair value of the hierarchy as of the actual date of the
event or change in circumstance that caused the transfer. Transfers between Level 1 and Level 2 of the
fair value measurement hierarchy during the six months ended June 30, 2010
primarily consist of purchases of $11.49 million, and sales and maturities
totaling $8.96 million, of available-for-sale equity securities.
4.
Inventories
Inventories
are stated at the lower of cost (first-in, first-out) or market and consist of
the following as of:
(in thousands)
|
|
June 30,
2010
|
|
December 31,
2009
|
|
Raw
material
|
|
$
|
410
|
|
$
|
427
|
|
Work in
process
|
|
1,252
|
|
1,394
|
|
Finished
goods
|
|
1,364
|
|
1,892
|
|
Total
inventory
|
|
$
|
3,026
|
|
$
|
3,713
|
|
11
Table of Contents
5.
Segment Information
The
Company develops microspheres and other ancillary embolotherapy products for
use in the treatment of hypervascularized tumors, including uterine fibroids,
and arteriovenous malformations. The Company operates exclusively in the
embolotherapy product business, which the Company considers as one business
segment
.
Financial information by geographic
area, attributable to countries according to the location of customers and
equipment, is as follows:
|
|
Three Months
Ended June 30,
|
|
Six Months
Ended June 30,
|
|
(in thousands)
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
6,048
|
|
$
|
6,418
|
|
$
|
11,505
|
|
$
|
12,207
|
|
France
|
|
404
|
|
420
|
|
767
|
|
899
|
|
Other European Union countries
|
|
395
|
|
545
|
|
891
|
|
1,210
|
|
Other foreign countries
|
|
949
|
|
728
|
|
1,754
|
|
1,079
|
|
Total revenue
|
|
$
|
7,796
|
|
$
|
8,111
|
|
$
|
14,917
|
|
$
|
15,395
|
|
(in thousands)
|
|
June 30,
2010
|
|
December 31,
2009
|
|
Property and equipment, net:
|
|
|
|
|
|
United States
|
|
$
|
168
|
|
$
|
210
|
|
France
|
|
480
|
|
619
|
|
Total property and equipment, net
|
|
$
|
648
|
|
$
|
829
|
|
6.
Stock Plans
The fair value of stock
options granted during the three and six months ended June 30, 2010 and
2009 are estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions:
|
|
Three Months
Ended June 30,
|
|
Six Months
Ended June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Options
granted (in thousands)
|
|
|
|
45
|
|
97
|
|
603
|
|
Weighted-average
exercise price
|
|
N/A
|
|
$
|
1.90
|
|
$
|
2.91
|
|
$
|
1.72
|
|
Weighted-average
grant date fair value
|
|
N/A
|
|
$
|
1.38
|
|
$
|
1.75
|
|
$
|
1.08
|
|
Assumptions:
|
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
N/A
|
|
0
|
%
|
0
|
%
|
0
|
%
|
Expected volatility
|
|
N/A
|
|
72
|
%
|
65
|
%
|
68
|
%
|
Risk-free interest rate
|
|
N/A
|
|
2.99
|
%
|
2.42
|
%
|
2.32
|
%
|
Expected term (years)
|
|
N/A
|
|
8.07
|
|
5.86
|
|
6.20
|
|
12
Table of Contents
Changes
in outstanding stock options for the six months ended June 30, 2010 were
as follows:
(in thousands, except exercise price and term)
|
|
Number
of Stock
Options
|
|
Weighted-Average
Exercise Price
|
|
Weighted-Average
Remaining
Contractual Term
in Years
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding
at December 31, 2009
|
|
3,475
|
|
$
|
4.40
|
|
|
|
|
|
Granted
|
|
97
|
|
$
|
2.91
|
|
|
|
|
|
Exercised
|
|
|
|
$
|
|
|
|
|
|
|
Forfeited
and expired
|
|
(70
|
)
|
$
|
15.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at June 30, 2010
|
|
3,502
|
|
$
|
4.14
|
|
6.31
|
|
$
|
3,244
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at June 30, 2010
|
|
2,212
|
|
$
|
4.47
|
|
5.39
|
|
$
|
1,712
|
|
Vested
or expected to vest at June 30, 2010
|
|
3,358
|
|
$
|
4.15
|
|
6.24
|
|
$
|
3,089
|
|
Changes
in unvested restricted stock awards for the six months ended June 30, 2010
were as follows:
(in thousands, except fair value)
|
|
Number
of
Restricted Shares
|
|
Weighted-Average
Grant Date
Fair Value
|
|
Unvested
at December 31, 2009
|
|
335
|
|
$
|
1.59
|
|
Awarded
|
|
316
|
|
$
|
3.18
|
|
Vested
|
|
(17
|
)
|
$
|
3.81
|
|
Unvested
at June 30, 2010
|
|
634
|
|
$
|
2.32
|
|
At June 30, 2010, there
were $2.30 million and $848,000 of unrecognized compensation cost, net of
estimated forfeitures, related to unvested stock options and restricted stock
awards, respectively, which the Company expects to recognize over
weighted-average periods of 2.41 years and 3.52 years, respectively. However, the amount of stock compensation
expense recognized in any future period cannot be predicted at this time
because it will depend on levels of share-based payments granted in the future.
7.
Contingencies
On June 10, 2010, certain of
the Companys directors were named as defendants in a putative class action
complaint, captioned
Fessahaye v. Faleschini
,
et al., C.A. No. 5553-CC, filed in the Court of Chancery of the State of
Delaware. The action, purportedly brought on behalf of a class of the Companys
stockholders, alleges that certain of the Companys directors purportedly
breached their fiduciary duties in connection with the proposed merger by
failing to maximize shareholder value and obtain the best financial and other
terms. The complaint includes requests for declaratory, injunctive and other
equitable relief, including enjoining the Company from consummating the merger
with Merit Medical Systems, Inc., in addition to fees and costs. On July 19, 2010, plaintiff filed an
amended complaint adding the Company as a defendant and further alleging that
its preliminary proxy statement failed to provide material information and
provided materially misleading information relating to the proposed merger.
On July 30, 2010, plaintiff
(on behalf of himself and the members of the putative class) and all defendants
entered into a memorandum of understanding reflecting an agreement in principle
to settle the matter. The agreement in principle required, among other things,
the Company to disclose additional information, which information was included
in the Companys definitive proxy statement on Schedule 14A that was filed with
the SEC on August 3, 2010. The agreement in principle is subject to the
parties reaching agreement on the terms of a mutually acceptable definitive
settlement agreement. Thereafter, the settlement agreement will be subject
to approval by the court and also conditioned upon consummation of the merger.
8.
Recent Accounting Pronouncements
In September 2009, the Financial Accounting Standards Board (FASB)
issued Accounting Standards Update (ASU) No. 2009-13,
Multiple-Deliverable Revenue Arrangements
(ASU 2009-13).
ASU 2009-13 requires an entity to allocate arrangement consideration at the
inception of an arrangement to all of its deliverables based on their relative
selling prices. When applying the relative-selling-price method, the
determination of the selling price for each deliverable must be consistent with
the objective of determining vendor-specific objective evidence of fair value,
which is the price at which the entity does or would sell the element on a
stand-alone basis. ASU 2009-13 requires both ongoing disclosures regarding an
entitys multiple-element revenue arrangement, as well as certain transitional
disclosures during the periods after adoption. This guidance must be adopted no
later than the beginning of the first fiscal year beginning on or after
June 15, 2010. The Company does not believe the adoption of this standard
will have a material impact on its results of operations, financial position or
cash flows.
13
Table
of Contents
In
January 2010, the FASB issued ASU No. 2010-06
Fair Value
Measurements and Disclosures Improving Disclosures about Fair Value
Measurements
(ASU 2010-06). ASU 2010-06 requires new disclosures
for significant transfers in and out of Level 1 and 2 of the fair value
hierarchy and the activity within Level 3 of the fair value hierarchy. ASU
2010-06 also clarifies existing disclosures regarding the level of
disaggregation of assets or liabilities and the valuation techniques and inputs
used to measure fair value. ASU 2010-06 was effective for interim and annual
reporting periods beginning after December 15, 2009, with the exception of
the new Level 3 activity disclosures, which are effective for interim and
annual reporting periods beginning after December 15, 2010. The adoption
of this standard did not, and is not expected to, have a material impact on the
Companys results of operations, financial position or cash flows.
In
April 2010, the FASB issued ASU No. 2010-17
Revenue
Recognition Milestone Method of Revenue Recognition
(ASU 2010-17). ASU 2010-17 states the milestone method is a
valid application of the proportional performance revenue recognition model
when applied to research and development arrangements. Under the milestone
method, revenue for a milestone payment may be recognized in its entirety upon
achievement of a substantive milestone if the consideration for achieving the
milestone relates solely to past performance. ASU 2010-17 will be applied
prospectively to milestones achieved in fiscal years, and interim periods
within those fiscal years, beginning on or after June 15, 2010. The
adoption of this standard did not have a material impact on the Companys
results of operations, financial position or cash flows.
9.
Subsequent Event
Redemption Notice; Redemption Loan
In
connection with the Companys call for redemption on August 11, 2010 of
its series A preferred stock (see Note 2), on August 10, 2010, the Company
issued a convertible promissory note to Merit Medical, pursuant to which Merit
Medical has agreed to loan to the Company an aggregate of $10.00 million solely
to fund the payment of the aggregate series A liquidation preference amount
upon such redemption. The redemption
date will occur on September 8, 2010 and will take place prior to the date
set for the consummation of the merger, such that to the extent that any holder
of the series A preferred stock has not elected to convert such shares into
shares of common stock prior to the redemption date, all of such shares will be
redeemed on the redemption date and before the consummation of the merger.
Merit
Medical has agreed to make the loan at least one business day prior to the
redemption date set forth on the redemption notice sent by the Company to the
holders of the Companys series A preferred stock. The Company has agreed that,
to the extent that any holder of its series A preferred stock converts such
shares prior to redemption, the Company will not use the loan funds made
available for such redemption for any purpose and will return such advanced
loan funds to Merit Medical within two business days of the redemption date.
Any
loan made will bear interest at a rate per annum equal to the prime interest
rate, as determined by Wells Fargo Bank, National Association, plus 2%, but
shall not be less than 6%, per annum. Upon the occurrence and continuance of an
event of default, the loan will bear interest at a rate equal to the interest
rate described above plus 2%, per annum.
The Company may, at any time prepay any advances under the loan, in
whole or in part, upon at least five business days prior written notice to
Merit Medical.
All
loan amounts then outstanding, together with accrued and unpaid interest, will
be due and payable in full in immediately available funds on the earliest of (i) two
(2) business days following the redemption date, with respect to all
advanced loan funds which were not used for payment of such redemption, (ii) February
10, 2012, or (iii) the consummation of any business combination or similar
transaction in which the holders of the Companys voting stock immediately
prior to such transaction hold less than a majority voting power of BioSphere
or any successor entity.
In
the event that the merger agreement is terminated under certain conditions, the
Company or Merit Medical will have the right to convert the outstanding
principal amount of any loan (prior to the Companys repayment of the loan
amounts in the case of conversion by Merit Medical), including any accrued and
unpaid interest, in whole or in part, into shares of the Companys common stock
at a conversion rate equal to $4.38 per share.
The
Companys subsidiaries have jointly and severally guaranteed the due and
punctual payment, fulfillment and performance of all of its obligations under
the Convertible Promissory Note pursuant to a Guaranty, dated as of August 10,
2010, by and among the Companys subsidiaries and Merit Medical.
14
Table of Contents
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following
discussion of our financial condition and results of operations should be read
in conjunction with our unaudited consolidated financial statements and the
related notes included elsewhere in this report. Some of the information
contained in this discussion and analysis and set forth elsewhere in this
report, including information with respect to our plans, strategies and
expectations for our business, financial condition and operations, includes
forward-looking statements that involve risks and uncertainties. You should
review the section titled Part II, Item 1A
Risk Factors for a discussion of
important factors that could cause actual results to differ materially from the
results described in or implied by the forward-looking statements contained in
the following discussion and analysis.
Recent
Development
On
May 13, 2010, we entered into a definitive agreement and plan of merger
with Merit Medical Systems, Inc., or Merit Medical, and Merit
BioAcquisition Co., which we refer to as merger sub, a wholly-owned subsidiary
of Merit Medical, pursuant to which we agreed to merge with and into Merit
BioAcquisition Co. in a cash transaction valued at approximately $96.00
million. We refer to the agreement and plan of merger as the merger agreement.
In connection with but prior to the consummation of the transaction, on August 11,
2010, we called for redemption on September 8, 2010 all 9,636 currently
outstanding shares of series A preferred stock at a redemption price of $1,000
per share plus accrued but unpaid dividends. Holders of such shares of series A
preferred stock may elect to convert each share of series A preferred stock
into 250 shares of common stock prior to the redemption date. The redemption
date will occur prior to the date set for consummation of the merger, such that
to the extent that any holder of the series A preferred stock has not elected
to convert such shares into shares of common stock prior to the redemption
date, all of such shares will be redeemed on the redemption date and before the
consummation of the merger. Under the terms of the merger agreement, and
assuming the conversion of all outstanding shares of series A preferred stock
into shares of common stock prior to the redemption date, at closing (i) each
share of our common stock will be exchanged for $4.38 per share in cash; (ii) all
of our outstanding stock options, whether vested or unvested, will be cancelled
and each holder of such stock options will be entitled to receive an amount
equal to the product of (A) the number of shares subject to such holders
stock options, multiplied by (B) $4.38 less the applicable per-share
exercise price; and (iii) each share of our restricted stock will become
fully vested and free of any repurchase rights or other restrictions
immediately prior to the effective time of the merger, and will be treated in a
manner consistent with the other shares of our common stock. Completion of the
transaction is subject to approval by our stockholders and other customary
closing conditions and is expected to occur in the third quarter of 2010.
In
connection with our issuance on August 11, 2010 of the redemption notice
referred to above, on August 10, 2010, we issued a convertible promissory
note to Merit Medical, pursuant to which Merit Medical has agreed to loan to us
an aggregate of $10.00 million solely to fund the payment of the aggregate
series A liquidation preference amount upon such redemption. For a further description of the redemption
loan, see Note 9 of the Notes to Consolidated Financial Statements set forth
herein and Liquidity and Capital Resources - Borrowing Arrangements.
Overview
We develop, manufacture and market products for medical procedures that
use embolotherapy. Embolotherapy is the minimally invasive, image-guided
therapeutic introduction of various biocompatible substances into a patients
circulatory system to occlude a blood vessel, either to arrest or prevent
hemorrhaging or to devitalize or destroy the structure by occluding its blood
supply. Our core technologies consist of patented bioengineered polymers, which
are chemical compounds created through the application of medical science,
engineering principles and manufacturing methods. These core technologies are
used to produce miniature spherical embolic particles, or microspheres, that
are designed to have uniquely beneficial properties for a variety of medical
applications. We currently market and sell four microsphere products:
·
Embosphere
®
Microspheres
, which are marketed for
symptomatic uterine fibroids, hypervascularized tumors and arteriovenous
malformations in the United States, the European Union, Brazil, the Peoples
Republic of China and several other markets outside the United States;
·
EmboGold
®
Microspheres
, which are marketed for
hypervascularized tumors and arteriovenous malformations in the United States,
the European Union and several other markets outside the United States;
·
HepaSphere
Microspheres
, which are marketed in the European Union, Brazil
and Russia, including drug delivery, in the treatment of primary and metastatic
liver cancer; and
15
Table
of Contents
·
QuadraSphere
®
Microspheres
, which are marketed for the
treatment of hypervascularized tumors and arteriovenous malformations in the
United States.
Our QuadraSphere Microspheres are identical in all respects to our
HepaSphere Microspheres. However, regulations of the United States Food and
Drug Administration, or FDA, require that we conduct clinical trials and submit
a marketing application which includes positive data from the clinical trials
in order to obtain the approvals and clearances required to promote
QuadraSphere Microspheres for the treatment of a specific disease or condition,
including primary liver cancer. European Union regulations do not require
preclearance clinical trials for this class of medical device on an
indication-by-indication basis. In October 2009, we submitted to the FDA
an investigational device exemption, or IDE, application seeking to commence a
clinical trial to compare the effectiveness of our QuadraSphere Microspheres
combined with the chemotherapeutic agent doxorubicin to conventional
transarterial chemoembolization, or cTACE, with doxorubicin in patients with
primary liver cancer. Based upon our discussions with the FDA to date, we have
determined that our study protocol will include as a primary endpoint patient
survival rather than overall tumor response rate at six months, which was the
primary endpoint that we proposed in our initial IDE application. In addition,
the FDA has advised us that approval of the IDE will also be conditioned upon
our study protocol including a third study arm assessing QuadraSphere
Microspheres as a stand-alone therapy (e.g., without the addition of
doxorubicin) as compared to both QuadraSphere Microspheres combined with
doxorubicin and conventional transarterial chemoembolization, or cTACE, with
doxorubicin. In August 2010, we submitted an appeal to the FDA requesting
that they reconsider their recommendation that our clinical trial also include
the third study arm of treatment with QuadraSphere Microspheres as a
stand-alone therapy. Our satisfactory
resolution of the FDAs comments and recommendations on the IDE is a condition
to starting the clinical trial in the United States and, because our
discussions with the FDA are ongoing and we have not yet agreed upon and
finalized the trial design, we have not determined whether or when to undertake
the clinical trial. As such, we will not be able to estimate the cost and timeline
for completing the trial until we have agreed upon the final trial design with
the FDA and have otherwise determined to go forward with the trial.
On February 23, 2010, we received approval to market our
HepaSphere Microspheres with the delivery of doxorubicin in Brazil for the
treatment of primary and metastatic liver cancer.
On March 24, 2010, we entered into a settlement agreement with the
plaintiff in a product liability lawsuit filed against us and other defendants
in the Superior Court of California, County of Los Angeles in the matter
captioned Hamid Rashidi v. Franklin Moser, M.D., Cedars-Sinai Medical
Center and Biosphere Medical, Inc. The parties agreed to settle the case
without any admission of liability. We maintain product liability insurance,
and our insurer has agreed to pay the full amount of the settlement. At a
hearing on May 10, 2010, the Court entered an order that the settlement
was entered into in good faith under California law. In accordance with
California law, this order effectively bars our co-defendants in the lawsuit
from seeking non-contractual contribution or indemnity from us for any economic
damages for which they are adjudged liable in the matter.
In the six-month period ended June 30, 2010, we generated revenue
primarily from product sales of our embolic products in North America and the
European Union. We also generated revenue from product sales in other
geographic territories, including the Middle East, Africa, South America and
Asia. Product revenue also includes the sale of accessory embolotherapy devices
such as our EmboCath
®
Plus Infusion
Microcatheter, Sequitor
®
Steerable Guidewire, Segway
®
Guidewire and Tenor Steerable Guidewire. We
derive a majority of our revenue in the United States and the European Union
from the sale of Embosphere Microspheres for use in the treatment of uterine
fibroids, using a procedure called uterine fibroid embolization, or UFE.
Although we have not received approval or clearance from the FDA to market our
QuadraSphere Microspheres for primary or metastatic liver cancer, we believe
that some physicians are using QuadraSphere Microspheres in the treatment of
primary and metastatic liver cancer.
We have experienced operating losses in each period since our
inception. As of June 30, 2010, we had $14.10 million in cash, cash
equivalents and marketable securities, and an accumulated deficit of $97.27
million. Most of our expenditures to date have been for sales and marketing
activities, general and administrative expenses and research and development
activities. We expect to continue to incur operating losses in 2010 as we seek
to execute on our business plan, including continuing to establish sales and
marketing capabilities for our products and conducting research and development
activities. Prior to 1999, we were engaged in chromatography programs that we
divested in 1999. Of the cumulative operating loss at end of the second quarter
of 2010, $31.54 million was related to our prior chromatography business
and $65.73 million was related to our embolotherapy platform development.
16
Table of Contents
Research
and Development
Research and development expense as a percentage of total revenue for
the six months ended June 30, 2010 and 2009 was 9% and 11%, respectively.
Research and development expense in these periods relates primarily to:
·
efforts to develop improved
manufacturing processes for our currently marketed products;
·
research to identify and
evaluate new and innovative embolotherapy products based on our platform
microsphere technology, including a smaller-sized HepaSphere Microsphere and
QuadraSphere Microsphere designed to allow for delivery into smaller
vasculature, which is in preclinical development;
·
efforts to develop a new
generation of steerable guidewire to augment and/or replace our current
guidewire product offerings;
·
efforts to prepare for our
possible QuadraSphere Microspheres clinical trial; and
·
further preclinical testing
and nonclinical trials to support initial and/or additional clinical
indications and/or premarketing approvals for our Embosphere Microspheres,
HepaSphere Microspheres, QuadraSphere Microspheres, Sequitor Steerable
Guidewire and EmboCath Plus Infusion Microcatheter, all of which are currently
approved and marketed for specified indications in specified geographic
locations.
Our research and development functions typically work on a number of
projects concurrently. In addition, except for clinical expenses, a substantial
amount of fixed research and development costs such as salary and
salary-related benefits, facility costs, equipment depreciation and maintenance
are shared among various programs. Accordingly, we have not historically
tracked specific costs for each of our research and development projects.
We cannot reasonably estimate or know the nature, timing and estimated
costs of the efforts necessary to complete the development of any of our
product candidates that are currently in development, or the period in which
material net cash inflows are expected to commence from any of our product
candidates that are currently in development or from any of our currently
marketed products for which we are seeking expanded marketing approvals or
clearances in selected indications or geographic regions, due to the numerous
risks and uncertainties associated with developing and commercializing medical
devices, including uncertainties relating to:
·
the technical risks in
new-product research and development;
·
the timing, scope, rate of
progress and cost of clinical trials and other research and development
activities undertaken by us;
·
future clinical trial
results;
·
publicity with respect to
our products or their indications;
·
the cost, timing and success
of regulatory approvals or clearances, including approvals or clearances for
commencement or advancement of clinical trials for sale or marketing of product
candidates;
·
the cost, timing and success
of establishing sales, marketing and distribution capabilities;
·
the cost of establishing
clinical and commercial supplies of our product candidates and any products
that we may develop;
·
market acceptance of our
approved products;
·
the effect of competing technological
and market developments; and
·
the cost of filing,
prosecuting, defending and enforcing any patent claims and other intellectual
property rights.
Any failure to complete the development of our product candidates in a
timely manner, or at all, could have a material adverse effect on our
operations, financial position and liquidity. A discussion of the risks and
uncertainties associated with completing our projects on schedule, or at all,
and some consequences of failing to do so, is set forth in Part II, Item 1ARisk
Factors.
17
Table
of Contents
Critical
Accounting Policies and Estimates
The discussion and analysis of our
financial condition and results of operations are based upon our consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States, or GAAP. The preparation of
these financial statements requires us
to
make estimates and judgments that affect the reported amounts of assets and
liabilities, revenue and expenses, and related disclosure at the date of our
financial statements. We believe the application of accounting policies related
to revenue recognition, stock-based compensation, accounts receivable,
inventories, long-lived assets, income taxes and investments, which are
important to our financial position and results of operations, require
significant judgments and estimates on the part of management. For a more
detailed explanation of the judgments made in these areas, refer to Note 2 of
the notes to our consolidated financial statements included in our Annual
Report on Form 10-K for the year ended December 31, 2009, or 2009
Annual Report on Form 10-K, which is on file with the Securities and
Exchange Commission, or SEC.
In our 2009 Annual Report on
Form 10-K, we identified the critical accounting policies and estimates
upon which the consolidated financial statements were prepared. We have
reviewed these critical accounting policies and estimates and have determined
that they continue to be our most critical accounting policies and estimates
for the quarter ended June 30, 2010.
Actual
results could differ materially from these estimates.
Results
of Operations
Three and Six
Months Ended June 30, 2010 and June 30, 2009
Revenue and Margin Overview
|
|
For the Three Months Ended,
|
|
Increase/
|
|
Increase/
|
|
|
|
June 30,
|
|
(Decrease)
|
|
(Decrease)
|
|
(in thousands)
|
|
2010
|
|
2009
|
|
($)
|
|
(%)
|
|
Total
revenue
|
|
$
|
7,796
|
|
$
|
8,111
|
|
$
|
(315
|
)
|
(4
|
)%
|
Cost of
product sales
|
|
1,945
|
|
1,914
|
|
31
|
|
2
|
%
|
Gross
margin
|
|
$
|
5,851
|
|
$
|
6,197
|
|
$
|
(346
|
)
|
(6
|
)%
|
Gross
margin %
|
|
75
|
%
|
76
|
%
|
(1
|
)%
|
|
|
|
|
For the Six Months Ended,
|
|
Increase/
|
|
Increase/
|
|
|
|
June 30,
|
|
(Decrease)
|
|
(Decrease)
|
|
(in thousands)
|
|
2010
|
|
2009
|
|
($)
|
|
(%)
|
|
Total
revenue
|
|
$
|
14,917
|
|
$
|
15,395
|
|
$
|
(478
|
)
|
(3
|
)%
|
Cost of
product sales
|
|
3,735
|
|
3,755
|
|
(20
|
)
|
(1
|
)%
|
Gross
margin
|
|
$
|
11,182
|
|
$
|
11,640
|
|
$
|
(458
|
)
|
(4
|
)%
|
Gross
margin %
|
|
75
|
%
|
76
|
%
|
(1
|
)%
|
|
|
Revenue
. Revenue decreased
$315,000 and
$478,000, respectively, for the three- and six-month periods ended June 30,
2010, a decrease of 4% and 3%, respectively, as compared to the same periods in
2009. The decreases
were
primarily due to a decrease in sales of our microsphere products used in UFE.
Worldwide product revenue from
sales of our microspheres for use in interventional gynecology for UFE
procedures decreased $362,000 and $614,000, respectively, or 6%, from the
three- and six-month periods ended June 30, 2009, due to a decrease in
sales in the United States and in Europe, the Middle East and Africa, or EMEA,
offset by an increase in sales outside of the United States and EMEA. Sales in the United States decreased $345,000
and $632,000, respectively, or 7%, from the three- and six-month periods ended June 30,
2009, which we believe is primarily a result of the current economic
environment, including the high rate of unemployment in the United States,
which has reduced the demand for elective procedures such as UFE. Revenue from
EMEA decreased $93,000 and $169,000, or 14% and 12%, respectively, during the
three- and six-month periods ended June 30, 2010, compared to the same
periods in 2009 due to a decrease in demand, primarily in Spain and United
Kingdom. Revenue from sales outside of the United States and EMEA increased
$76,000 and $187,000, or 22% and 36%, respectively, during the three- and
six-month periods ended June 30, 2010, compared to the same periods in
2009 due to increased sales in China, Brazil and Japan. In the second quarter of 2010, we recognized
the sale of product totaling $30,000 for use in clinical trials to support
product registration in Japan.
Worldwide product revenue from
sales of our microspheres for use in interventional oncology increased $174,000
and $240,000, or 11% and 7%, respectively, from the three- and six-month
periods ended June 30, 2009 because of higher sales of our QuadraSphere
Microspheres in the United States and higher sales of our Embosphere
Microspheres in China and Japan. During the three- and six-month periods ended June 30,
2010, revenue from sales in the United States of our QuadraSphere Microspheres
18
Table of Contents
increased $215,000 and $303,000, or
99% and 80%, respectively, as compared to the same periods in 2009. Revenue
from sales of our Embosphere Microspheres outside the United States and EMEA
increased $68,000 and $107,000, or 47% and 40%, respectively, during the three-
and six-month periods ended June 30, 2010. Offsetting these increases was
a decrease in revenue from sales of our Embosphere Microspheres in the United
States of $92,000 and $111,000, or 10% and 6%, respectively, during the three-
and six-month periods ended June 30, 2010. We believe the decrease in
sales in the United States was due in part to the scarcity of Ethiodol, a
third-party product used by doctors with our Embosphere Microspheres during
conventional transarterial chemoembolization, or cTACE, procedures for
treatment of liver cancer. The United States distributor of Ethiodol ceased
distribution of this product in the first quarter of 2010. On May 11,
2010, the FDA announced that Guerbet LLC, or Guerbet, acquired the Ethiodol
new-drug application and that Guerbet is working with the FDA to resume
manufacturing of Ethiodol in the near future to enable continued availability
for patients in the United States. On June 9,
2010 the FDA announced that Guerbet, in conjunction with the FDA, is initiating
a temporary importation of Lipiodol , which contains the same drug components
as Ethiodol, to the United States. At this time, no other entity except Guerbet
is authorized by the FDA to import or distribute either Ethiodol or Lipiodol.
Also
included in total revenue for the three- and six-month periods ended June 30,
2010 is $108,000 and $211,000, respectively, of revenue from our licensing of
nonstrategic technology to a third party and pursuant to collaborative
agreements. During the three and six months ended June 30, 2010, we
recognized $83,000 and $167,000 of revenue related to the $1.00 million
nonrefundable payment we received upon the signing of a distribution agreement
with Nippon Kayaku Co., Ltd. for the planned exclusive distribution of our
embolic products in Japan.
Included in the revenue changes
noted above is the effect of changes in foreign exchange rates. During the
three and six months ended June 30, 2010, as compared to the same periods
in 2009, total revenue decreased approximately $62,000 and $9,000,
respectively, due to changes in foreign exchange rates as revenue from our
French operations decreased due to the strengthening of the U.S. dollar versus
the euro.
Gross Margin.
Gross margin
declined for the three- and six-month periods ended June 30, 2010 as
compared to the same periods in 2009.
The decline was primarily due to manufacturing problems experienced by
one of the subcontracted assembly manufacturers of our EmboCath Plus Infusion
Microcatheter during 2010.This manufacturing problem resulted in the coating
not properly curing to the catheter. In
response, we are consolidating the manufacturing process for these products
with the original equipment manufacturer. The cost associated with this problem
totaled approximately $103,000, which was recognized during the second quarter
of 2010.
Expense Overview
|
|
For the Three Months Ended
|
|
Increase/
|
|
Increase/
|
|
|
|
June 30,
|
|
(Decrease)
|
|
(Decrease)
|
|
(in thousands)
|
|
2010
|
|
2009
|
|
($)
|
|
(%)
|
|
Research
and development
|
|
$
|
639
|
|
$
|
704
|
|
$
|
(65
|
)
|
(9
|
)%
|
Sales
|
|
2,770
|
|
2,623
|
|
147
|
|
6
|
%
|
Marketing
|
|
1,359
|
|
1,311
|
|
48
|
|
4
|
%
|
General
and administrative
|
|
3,815
|
|
1,702
|
|
2,113
|
|
124
|
%
|
Patent
|
|
119
|
|
205
|
|
(86
|
)
|
(42
|
)%
|
Total
operating expenses
|
|
$
|
8,702
|
|
$
|
6,545
|
|
$
|
2,157
|
|
|
|
|
|
For the Six Months Ended
|
|
Increase/
|
|
Increase/
|
|
|
|
June 30,
|
|
(Decrease)
|
|
(Decrease)
|
|
(in thousands)
|
|
2010
|
|
2009
|
|
($)
|
|
(%)
|
|
Research
and development
|
|
$
|
1,356
|
|
$
|
1,690
|
|
$
|
(334
|
)
|
(20
|
)%
|
Sales
|
|
5,268
|
|
5,340
|
|
(72
|
)
|
(1
|
)%
|
Marketing
|
|
2,765
|
|
2,825
|
|
(60
|
)
|
(2
|
)%
|
General
and administrative
|
|
5,654
|
|
3,599
|
|
2,055
|
|
57
|
%
|
Patent
|
|
322
|
|
377
|
|
(55
|
)
|
(15
|
)%
|
Total
operating expenses
|
|
$
|
15,365
|
|
$
|
13,831
|
|
$
|
1,534
|
|
|
|
Research and
Development Expense.
Research and development expense
for the three- and six-month periods ended June 30, 2010 decreased as
compared to the same periods in 2009, primarily due to a decrease in incentive
compensation and a reduction in development activities. Incentive compensation
decreased during the three and six months ended June 30, 2010 compared to
the same periods in 2009 due to lower management incentive bonuses. We
decreased spending on comparative studies and process-development activity to
focus on our planned multi-site clinical trial of our QuadraSphere
Microspheres. Offsetting these decreases
19
Table of Contents
was an
increase in costs associated with our preparations for conducting such
potential multi-site clinical trial.
During
the second quarter of 2010, we incurred approximately $193,000 in incremental
costs in preparation for the commencement of our multi-site clinical trial.
During the
first quarter of 2009, we paid approximately $300,000 to a third-party developer
for a working prototype relating to a new process for the manufacture of our
Embosphere Microspheres; we did not incur any such costs during the first half
of 2010.
Sales Expense
. Sales expense
increased for the three-month period ended June 30, 2010 compared to the
same period in 2009 due to an expansion of our sales presence to support EMEA
and South America. These increases were offset by changes in foreign exchange
rates. Sales expense for the six-month period ended June 30, 2010
decreased $72,000 compared to the same period in 2009 due
to lower
incentive compensation.
Marketing
Expense.
Marketing expense for the three-month period
ended June 30, 2010 increased as compared to the same period in 2009,
primarily due to an increase in online activities, including an increase in the
volume of direct-to-patient e-mail marketing and enabling online patient
registration for our community health talk, or CHT, programs. These increases
were offset by changes in foreign exchange rates. For the six-month period ended June 30,
2010, the increase in online activities was offset by a reduction in national
marketing activities.
General and
Administrative Expense
. General and administrative expense increased
for the three- and six-month periods ended June 30, 2010 compared to the
same periods in 2009. The increase in expense was primarily due to investment
banking fees and legal fees related to
the agreement and plan of
merger with Merit Medical Systems, Inc.
Patent Expense
. Patent expense
decreased for the three- and six-month periods ended June 30, 2010
compared to the same periods in 2009. In
the second quarter of 2009, a review of our patent portfolio was performed; w
e did not incur
any such costs during the first half of 2010.
Interest Income
. Interest income in
the three- and six-month periods ended June 30, 2010 increased $7,000 and
$8,000, respectively, compared to the same periods in 2009 due to higher
interest rates earned on available investment-grade assets.
Foreign Exchange
Gains, Net.
Foreign exchange gains
primarily resulted from euro-to-U.S. dollar foreign
currency
fluctuations
on euro-denominated intercompany short-term trade payable accounts.
Income tax benefit.
For the three-
and six-month periods ended June 30, 2010, we have recognized approximately
$19,000 and $46,000, respectively, in research and development tax credits
related to research and development activities performed at our French facility
during the first half of 2010.
Liquidity
and Capital Resources
As
of June 30, 2010, we had $14.10 million of cash, cash equivalents and
marketable securities, a decrease of $3.99 million from $18.09 million at
December 31, 2009. This decrease was primarily the result of net cash used
by operating activities, transaction costs related to the plan of merger with
Merit Medical and changes in working capital. We have historically funded our
operations from the net proceeds provided by public and private equity
offerings, net revenue, bank financing and, to a lesser extent, the exercise of
stock options.
Net
cash used in operating activities for the six months ended June 30, 2010
was $3.53 million and included a net loss of $3.60 million, and $414,000 in
working capital changes, offset by non-cash charges primarily related to
stock-based compensation, and depreciation. Accounts receivable decreased
$110,000 from December 31, 2009 due to lower sales and an increase in days
that sales were outstanding, or DSO, which increased to 57 days at June 30,
2010 from 56 days at December 31, 2009. The increase in DSO is primarily
due to the delayed receipt of a payment from one of our international
distributors, which we received early in the third quarter of 2010. Inventory
decreased $287,000 from December 31, 2009, primarily due to a decrease in
the level of delivery systems on hand as of June 30, 2010. We did not
purchase any additional catheters in the first half of 2010 as we are in the
process of consolidating the manufacturing process. Accrued compensation
decreased $870,000 from December 31, 2009, primarily due to the payment of
2009 management incentive bonuses, which were paid in the first quarter of
2010. The decrease in accrued compensation was offset by an increase in accrued
payroll and other expenses as of June 30, 2010 as compared to December 31,
2009, due to the timing of the payroll cycle related to United States
operations. Other accrued expenses increased $188,000 from December 31,
2009, primarily due to the increase in accrued legal expenses related to the
agreement and plan of merger with Merit Medical, offset by the annual payment
associated with royalties on intellectual property, which was paid in the first
quarter of 2010.
Net
cash used in operating activities for the six months ended June 30, 2009
was $91,000 and includes a net loss of $2.16 million, offset by $962,000 in
working capital changes, non-cash charges primarily related to stock-based
compensation and depreciation and amortization. Accounts receivable increased
$287,000 from December 31, 2008 due to higher sales, offset by a decrease
in DSO, which decreased to 56 days at June 30, 2009 from 59 days at
December 31, 2008. The decrease in DSO is primarily
20
Table of
Contents
due
to increased collection efforts in the United States. Inventory decreased
$363,000 from December 31, 2008 due to a decrease in delivery system
products relating to the timing of purchasing these products, which are
manufactured for us by third parties, and a reduction in HepaSphere
Microspheres and QuadraSphere Microspheres inventory due to higher than
expected sales. Other accrued expenses increased $626,000 from
December 31, 2008, primarily due to deferred revenue relating to the Nippon
Kayaku distribution agreement and an increase in the reserve of research and
development tax credit carryforwards, offset by annual payments associated with
royalties on intellectual property.
In
the first six months of 2010, we spent $79,000 to upgrade the clean-room
manufacturing facilities and replace computer equipment and hardware. In the
same period in 2009, we spent $185,000 to purchase new trade-show booths and
equipment to increase the capacity of our research and development facility. In
the first six months of 2010, through our investment portfolio, we purchased
$11.49 million and sold or had maturities totaling $8.96 million.
Net
cash used in financing activities was $232,000 for the six months ended June 30,
2010, which included $289,000 for the payment of quarterly preferred stock
dividends in cash and scheduled principal payments on existing capital
arrangements, offset by the proceeds from the issuance of common stock under
employee benefit and incentive plans.
We
believe that the $14.10 million in cash, cash equivalents and marketable
securities that we have as of June 30, 2010, together with anticipated
proceeds from sales of our microspheres and delivery systems, will be
sufficient to fund our operating and capital requirements as currently planned
through at least the next twelve months.
Our currently planned operating and capital requirements primarily
include the need for working capital to:
·
support our clinical trial
for QuadraSphere Microspheres, if we commence such trial;
·
produce and manufacture our
products;
·
support our United States
sales force;
·
support our sales and
marketing efforts directed at the use of our products in interventional
gynecology and other indications, as well as our other products for sale;
·
support our ongoing research
and development activities; and
·
fund our general and
administrative costs and expenses.
However, our cash requirements may vary materially from those now
planned due to a number of factors, including, without limitation:
·
unanticipated changes in the
amount of revenue we generate from sales of our products, in particular from
sales of our Embosphere Microspheres for UFE and cTACE;
·
unanticipated costs relating
to our planned merger with Merit Medical;
·
costs that could arise to
the extent that we may be required to draw down funds under the redemption loan
with Merit Medical in order to make a redemption payment to any holder of series
A preferred stock that does not elect to convert its shares of series A
preferred stock into common stock prior to the redemption date;
·
changes in our UFE
regulatory and marketing programs;
·
an adverse judgment in a
product liability lawsuit which could materially adversely impact market
acceptance of our products and, if not adequately covered by our product
liability insurance, have a material adverse effect on our liquidity and our
ability to continue all or a portion of our business operations;
·
costs resulting from changes
to the scope or design of our QuadraSphere Microspheres clinical trial, if we
commence such trial;
·
costs resulting from changes
in our research and development, regulatory and marketing strategies;
·
competitive advances that
make it harder for us to market and sell our products;
21
Table
of Contents
·
the timing and cost of FDA
regulatory review;
·
the markets acceptance of
any approved products; and
·
adverse global market and
economic conditions.
We also may need additional funds for possible strategic acquisitions
of synergistic businesses, products and/or technologies.
We may require substantial additional cash to fund our planned, and any
unplanned, expenses. If adequate funds are not available, we could be required
to reduce our capital expenditures, scale back or eliminate some or all of our
clinical research, development, sales and marketing initiatives, reduce our
workforce, license to others, or divest products or technologies that we
otherwise would seek to commercialize ourselves, or otherwise curtail our
business operations. If market conditions permit, we may seek additional funding
through a combination of collaborative arrangements, debt financing or the sale
of additional equity securities. We may not receive such additional funding on
reasonable terms, or at all. Any sales of equity or debt securities are likely
to dilute our existing stockholders, and the new securities may have rights,
preferences or privileges senior to those of existing holders of our capital
stock. Debt financing, if available, may involve agreements that include
covenants limiting or restricting our ability to take specific actions such as
incurring additional debt or making capital expenditures. If we raise
additional funds through collaboration and licensing arrangements with third
parties, we may have to relinquish valuable rights to our technologies or products,
or grant licenses on terms that are not favorable to us.
Borrowing Agreements
In
connection with the merger, on August 11, 2010, we called for redemption
on September 8, 2010 all 9,636 currently outstanding shares of series A
preferred stock at a redemption price of $1,000 per share plus accrued but
unpaid dividends. Holders of such shares
of series A preferred stock may elect to convert each share of series A
preferred stock into 250 shares of common stock prior to the redemption
date. In connection with our issuance of
the redemption notice, on August 10, 2010, we issued a convertible
promissory note to Merit Medical, pursuant to which Merit Medical has agreed to
loan us an aggregate of $10.00 million solely to fund the payment of the
aggregate series A liquidation preference amount upon such redemption. The redemption will take place prior to the
consummation of the merger, should the holders of the series A preferred stock
not elect to convert such shares into shares of common stock prior to the
redemption date.
Merit
Medical has agreed to make the loan at least one business day prior to the
redemption date set forth on the redemption notice sent by us to the holders of
our series A preferred stock. We have agreed that, to the extent that any
holder of our series A preferred stock converts such shares prior to
redemption, we will not use the loan funds made available for such redemption
for any purpose and will return such advanced loan funds to Merit Medical
within two business days of the redemption date.
Any
loan made will bear interest at a rate per annum equal to the prime interest
rate, as determined by Wells Fargo Bank, National Association, plus 2%, but
shall not be less than 6%, per annum. Upon the occurrence and continuance of an
event of default, the loan will bear interest at a rate equal to the interest
rate described above plus 2%, per annum.
We may, at any time prepay any advances under the loan, in whole or in
part, upon at least five business days prior written notice to Merit Medical.
All
loan amounts then outstanding, together with accrued and unpaid interest, will
be due and payable in full in immediately available funds on the earliest of (i) two
(2) business days following the redemption date, with respect to all
advanced loan funds which were not used for payment of such redemption, (ii) February
10, 2012, or (iii) the consummation of any business combination or similar
transaction in which the holders of the our voting stock immediately prior to
such transaction hold less than a majority voting power of BioSphere or any
successor entity.
In
the event that the merger agreement is terminated under certain conditions, we
or Merit Medical will have the right to convert the outstanding principal
amount of any loan (prior to our repayment of the loan amounts in the case of
conversion by Merit Medical), including any accrued and unpaid interest, in
whole or in part, into shares of our common stock at a conversion rate equal to
$4.38 per share.
Our
subsidiaries have jointly and severally guaranteed the due and punctual
payment, fulfillment and performance of all of our obligations under the
Convertible Promissory Note pursuant to a Guaranty, dated as of August 10,
2010, by and among our subsidiaries and Merit Medical.
22
Table of
Contents
Other Contractual Obligations
There
have been no significant changes to our contractual obligations and commercial
commitments from those previously included in our 2009 Annual Report on Form 10-K.
As of June 30, 2010, we are party to two operating leases for our
facilities in Rockland, Massachusetts, and Roissy, France. The Roissy, France,
original operating lease was scheduled to expire in May 2010; however, in
accordance with the lease agreement, it automatically renewed for a three-year
period that ends in May 2013. In March 2010, we amended the lease for
the office and laboratory facility that we currently occupy in Rockland,
Massachusetts. Pursuant to that amendment, the term of the lease was extended
from February 28, 2010 to February 28, 2011.
Related-Party Transactions
We
did not have any related-party transactions during the six-month periods ended June 30,
2010 and 2009.
Off-Balance Sheet Arrangements
We
do not have any material off-balance sheet arrangements.
Inflation
We
believe that the effects of inflation generally do not have a material adverse
impact on our operations or financial condition.
New Accounting Pronouncements
In September 2009, the Financial Accounting Standards Board, or
FASB, issued Accounting Standards Update, or ASU, No. 2009-13,
Multiple-Deliverable Revenue Arrangements,
or ASU 2009-13.
ASU 2009-13 requires an entity to allocate arrangement consideration at the
inception of an arrangement to all of its deliverables based on their relative
selling prices. When applying the relative-selling-price method, the
determination of the selling price for each deliverable must be consistent with
the objective of determining vendor-specific objective evidence of fair value,
which is the price at which the entity does or would sell the element on a
stand-alone basis. ASU 2009-13 requires both ongoing disclosures regarding an
entitys multiple-element revenue arrangement, as well as certain transitional
disclosures during the periods after adoption. This guidance must be adopted no
later than the beginning of the first fiscal year beginning on or after
June 15, 2010. We do not believe the adoption of this standard will have a
material impact on our results of operations, financial position or cash flows.
In
January 2010, the FASB issued ASU No. 2010-06
Fair Value
Measurements and Disclosures Improving Disclosures about Fair Value
Measurements,
or ASU 2010-06. ASU 2010-06 requires new disclosures
for significant transfers in and out of Level 1 and 2 of the fair value
hierarchy and the activity within Level 3 of the fair value hierarchy. ASU
2010-06 also clarifies existing disclosures regarding the level of
disaggregation of assets or liabilities and the valuation techniques and inputs
used to measure fair value. ASU 2010-06 was effective for interim and annual
reporting periods beginning after December 15, 2009, with the exception of
the new Level 3 activity disclosures, which are effective for interim and
annual reporting periods beginning after December 15, 2010. The adoption
of this standard did not, and is not expected to, have a material impact on our
results of operations, financial position or cash flows.
In
April 2010, the FASB issued ASU No. 2010-17
Revenue
Recognition Milestone Method of Revenue Recognition
(ASU 2010-17).
ASU 2010-17 states the milestone method is a valid application of the
proportional performance revenue recognition model when applied to research and
development arrangements. Under the milestone method, revenue for a milestone
payment may be recognized in its entirety upon achievement of a substantive
milestone if the consideration for achieving the milestone relates solely to
past performance. ASU 2010-17 will be applied prospectively to milestones
achieved in fiscal years, and interim periods within those fiscal years,
beginning on or after June 15, 2010. The adoption of this standard did not
have a material impact on our results of operations, financial position or cash
flows.
23
Table of
Contents
Forward-Looking
Statements
This
quarterly report on Form 10-Q contains forward-looking statements that
involve risks, uncertainties and assumptions that, if they never materialize or
prove incorrect, could cause our results to differ materially from those
expressed or implied by such forward-looking statements. All statements other than
statements of historical fact are statements that could be deemed
forward-looking statements, including:
·
any projections of the
availability of cash to fund our operations, revenue, expenses, earnings or
losses from operations, or other financial items;
·
any statements regarding the
planned merger with Merit Medical;
·
any statements of the plans,
strategies and objectives of management for future operations;
·
any statements regarding our
position in litigation;
·
any statements concerning
product research, development, regulatory approval or clearance and
commercialization timelines;
·
any statements about our
expectations regarding market acceptance and market penetration for our
products;
·
any statements regarding the
anticipated timing of, goals for and outcomes of our planned QuadraSphere
Microspheres clinical trial, if we commence such trial;
·
any statements of
expectation or belief; and
·
any statements of
assumptions underlying any of the foregoing.
The
risks, uncertainties and assumptions referred to above include risks that are
described below in Risk Factors and elsewhere in this quarterly report on
Form 10-Q and that are otherwise described from time to time in our
reports filed with the SEC after this report.
The
forward-looking statements included in this quarterly report on Form 10-Q
represent our estimates as of the date of this quarterly report on
Form 10-Q. We specifically disclaim any obligation to update these
forward-looking statements in the future. These forward-looking statements
should not be relied upon as representing our estimates or views as of any date
subsequent to the date of this quarterly report on Form 10-Q.
ITEM 3. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Derivative
Financial Instruments, Other Financial Instruments and Derivative Commodity
Instruments
As
of June 30, 2010, we did not own any derivative financial instruments or
other financial and commodity instruments. However, in the future we may
consider certain financing instruments, including foreign currency forward
contracts or alternative instruments, which may be considered derivative in
nature.
Primary
Market Risk Exposures
Our primary market risk exposure is in the area of foreign currency
exchange rate fluctuations. We are exposed to currency exchange rate
fluctuations related to our operations in France. Operations in France are
denominated in the euro, and as of June 30, 2010, approximately
euro 3.05 million, or $3.73 million, remained outstanding within
our intercompany trade accounts. We have not engaged in formal currency hedging
activities to date, but we do have a limited natural hedge in that both our
revenue and expenses in France are primarily denominated in the euro. We also
attempt to minimize exchange rate risk by converting non-U.S. currency to U.S.
dollars as often as practicable. We generally view our investment in foreign
subsidiaries operating under a functional currency (the euro) other than our
reporting currency (the U.S. dollar) as long term. Our investment in foreign
subsidiaries is sensitive to fluctuations in foreign currency exchange rates.
The effect of a change in foreign exchange rates on our net investment in
foreign subsidiaries is reflected in the Accumulated other comprehensive
income component of stockholders equity. A hypothetical 100-basis-point
increase or decrease in foreign exchange rates would not have a material impact
on the fair value of our investment in foreign subsidiaries.
The primary objective of our cash, cash equivalent and marketable
securities investment activities is to preserve principal while at the same
time maximizing the income we receive from our investments without
significantly increasing risk. We maintain our portfolio of cash equivalents
and short-term investments in corporate, bank, federal agency and
mortgage-backed obligations and, to a lesser extent, in treasuries. Due to the
conservative nature of our investments, the relatively short duration of their
maturities, our
24
Table of
Contents
ability
to convert some or all of our long-term investments to less interest
rate-sensitive holdings and our general intent to hold most securities until
maturity, we believe interest rate risk is not significant. A hypothetical
100-basis-point increase or decrease in interest rates would not have a
material impact on the fair value of our short-term investments or their
respective cash flows as of June 30, 2010. As of June 30, 2010,
nearly 100% of the $12.05 million of investments classified as
available-for-sale marketable securities and cash equivalents will mature
within one year.
ITEM 4. CONTROLS AND PROCEDURES
Our
management, with the participation of our chief executive officer and chief
financial officer, evaluated the effectiveness of our disclosure controls and
procedures as of June 30, 2010. The term disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended, or Exchange Act, means
controls and other procedures of a company that are designed to ensure that
information required to be disclosed by a company in the reports that it files
or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SECs rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by a
company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the companys management, including its
principal executive and principal financial officers, as appropriate, to allow
timely decisions regarding required disclosure. Management recognizes that any
controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving their objectives, and management
necessarily applies its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Based on the evaluation of our disclosure
controls and procedures as of June 30, 2010, our chief executive officer
and chief financial officer concluded that, as of such date, our disclosure
controls and procedures were effective at the reasonable assurance level.
No
change in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred
during the fiscal quarter ended June 30, 2010 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
II. OTHER
INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 10, 2010, certain of
our directors were named as defendants in a putative class action complaint,
captioned
Fessahaye v. Faleschini
, et al., C.A. No. 5553-CC,
filed in the Court of Chancery of the State of Delaware. The action,
purportedly brought on behalf of a class of our stockholders, alleges that
certain of our directors purportedly breached their fiduciary duties in
connection with the proposed merger by failing to maximize shareholder value
and obtain the best financial and other terms. The complaint includes requests
for declaratory, injunctive and other equitable relief, including enjoining us
from consummating the merger with Merit Medical Systems, Inc., in addition
to fees and costs. On July 19,
2010, plaintiff filed an amended complaint adding BioSphere Medical, Inc.
as a defendant and further alleging that our preliminary proxy statement failed
to provide material information and provided materially misleading information
relating to the proposed merger.
On July 30, 2010, plaintiff
(on behalf of himself and the members of the putative class) and all defendants
entered into a memorandum of understanding reflecting an agreement in principle
to settle the matter. The agreement in principle requires, among other things,
that we disclose additional information, which information was included in our
definitive proxy statement on schedule 14A that was filed with the SEC on August 3,
2010. The agreement in principle is subject to the parties reaching agreement
on the terms of a mutually acceptable definitive settlement
agreement. Thereafter, the settlement agreement will be subject to
approval by the court and also conditioned upon consummation of the merger.
25
Table of
Contents
ITEM 1A. RISK FACTORS
Investing in our common stock involves a high degree of
risk. The risks described below are not the only ones facing our company.
Additional risks not presently known to us or that we deem immaterial may also
impair our business operations. Any of the following risks could materially
adversely affect our business, operating results and financial condition and
could result in a complete loss of your investment.
The following risk factors restate and supersede
the risk factors previously disclosed in Part I, Item 1A of our
Annual Report on Form 10-K for the fiscal year ended December 31,
2009.
Risks
Related to the Merger
Our proposed merger with Merit Medical may
be delayed or not occur at all for a variety of reasons, including the
possibility that the merger agreement is terminated prior to the completion of
the merger. If our acquisition by Merit Medical is not completed as expected,
our stock price, business and results of operations may suffer.
On May 13, 2010, we entered
into a merger agreement with Merit Medical and merger sub, a wholly-owned
subsidiary of Merit Medical, pursuant to which we agreed to merge with and into
merger sub in a cash transaction valued at approximately $96.00 million. In
connection with the transaction, we called for redemption all 9,636 currently
outstanding shares of series A preferred stock at a redemption price of $1,000
per share plus accrued but unpaid dividends. Holders may elect to convert each
share of series A preferred stock into 250 shares of common stock prior to
consummation of such redemption. Under the terms of the agreement, and assuming
the conversion of all outstanding shares of series A preferred stock into
shares of common stock, at closing (i) each share of our common stock will be
exchanged for $4.38 per share in cash; (ii) all of our outstanding stock
options, whether vested or unvested, will be cancelled and each holder of such
stock options will be entitled to receive an amount equal to the product of (A)
the number of shares subject to such holders stock options, multiplied by (B)
$4.38 less the applicable per-share exercise price; and (iii) each share of our
restricted stock will become fully vested and free of any repurchase rights or
other restrictions immediately prior to the effective time of the merger, and
will be treated in a manner consistent with the other shares of our common
stock.
Completion of the transaction is
subject to customary closing conditions, including the adoption of the merger
agreement by our stockholders. Moreover,
the merger agreement with Merit Medical may be terminated at any time before
the completion of the merger, under certain circumstances, including:
·
mutual written
consent;
·
by either Merit
Medical or us if the merger has not been consummated by November 15, 2010,
except that this termination right will not be available to any party whose
breach of or failure to fulfill any obligation under the merger agreement has
been a principal cause of or resulted in the failure of the merger to occur on
or before such date;
·
by either Merit
Medical or us if a governmental entity of competent jurisdiction has issued a
nonappealable final order, decree or ruling or taken any other nonappealable
final action, in each case having the effect of permanently restraining,
enjoining or otherwise prohibiting the merger, except that this termination
right will not be available to any party whose failure to fulfill any
obligation under the merger agreement has been a principal cause of or resulted
in such order, decree, ruling or other action;
·
by either Merit
Medical or us, if our stockholders do not adopt the agreement and plan of
merger at the special meeting;
·
by Merit
Medical and merger sub, prior to our stockholders adoption of the merger
agreement, upon the occurrence of any of the following:
·
our board of
directors fails to recommend the approval of the merger in this proxy statement
or withdraws, qualifies or modifies its recommendation of the merger to our
stockholders in a manner adverse to Merit Medical or the consummation of the
merger;
·
our board of
directors fails to recommend the approval of the merger in this proxy statement
or withdraws, qualifies or modifies its recommendation of the merger to our
stockholders in a manner adverse to Merit Medical or the consummation of the
merger;
·
our board of
directors fails to recommend the approval of the merger in this proxy statement
or withdraws, qualifies or modifies its recommendation of the merger to our
stockholders in a manner adverse to Merit Medical or the consummation of the
merger;
26
Table
of Contents
·
our board of
directors fails to recommend the approval of the merger in this proxy statement
or withdraws, qualifies or modifies its recommendation of the merger to our
stockholders in a manner adverse to Merit Medical or the consummation of the
merger;
·
our board of
directors approves, endorses or recommends to our stockholders a superior
proposal;
·
a tender offer
or exchange offer for our outstanding common stock is commenced and our board
of directors recommends that our stockholders tender their shares in such
tender or exchange offer or, within ten business days after the commencement of
such tender or exchange offer, fails to recommend against acceptance of such
offer and reiterate its recommendations with respect to the merger agreement
and the merger;
·
we breach or
fail to perform any of our representations, warranties, covenants or agreements
in the merger agreement and such breach or failure to perform would cause
certain conditions to the obligations of Merit Medical and merger sub to
consummate the closing not to be satisfied and such breach or failure to
perform is not timely cured or is not capable of being cured;
·
all of the
conditions to our obligation to consummate the merger have been satisfied
(other than those conditions that by their nature are to be satisfied by
actions taken at the closing) and Merit Medical has notified us in writing that
it is ready and willing to consummate the merger (subject to the satisfaction
of all of the conditions to its obligation to consummate the merger), and we
fail to consummate the merger within five business days following Merit Medicals
delivery of such notice.
·
by us, if:
·
our board of
directors pursuant to and in compliance with our non-solicitation obligations
under the merger agreement, approves or recommends to our stockholders a
superior proposal and we provide Merit Medical notice of our intent to exercise
this termination right no less than two business days prior to doing so;
·
Merit Medical
or merger sub breach or fail to perform any of their representations,
warranties, covenants or agreements in the merger agreement and such breach or
failure to perform would cause certain conditions to our obligation to
consummate the closing not to be satisfied and such breach or failure to
perform is not timely cured or is not capable of being cured; or
·
all of the
conditions to the obligations of Merit Medical and merger sub to consummate the
merger have been satisfied (other than those conditions that by their nature
are to be satisfied by actions taken at the closing), and we have notified
Merit Medical in writing that we are ready and willing to consummate the merger
(subject to the satisfaction of all of the conditions to our obligation to
consummate the merger), and Merit Medical and merger sub fail to consummate the
merger within five business days following our delivery of such notice.
If the merger is delayed or otherwise not consummated within the
contemplated time periods or at all, we could suffer a number of consequences
that may adversely affect our business, results of operations and stock price,
including:
·
activities related to the merger and related
uncertainties may lead to a loss of revenue and market position that we may not
be able to regain if the proposed transaction does not occur;
·
the market price of our common stock could
decline following an announcement that the proposed transaction had been
abandoned or delayed;
·
we would remain liable for our costs related
to the proposed transaction, including substantial legal, accounting and
investment banking expenses; and
·
we may not be able to take advantage of
alternative business opportunities or effectively respond to competitive
pressures.
27
Table
of Contents
During the pendency of the merger with
Merit Medical, we may not be able to enter into a business combination with
another party because of restrictions in the merger agreement.
Covenants
in the merger agreement limit our ability to make acquisitions or complete
other transactions that are not in the ordinary course of business pending
completion of the merger with Merit Medical. While the merger agreement is in
effect, and subject to limited exceptions, we have agreed that, neither we nor
any of our subsidiaries will, and we will use our commercially reasonable efforts
to cause our directors, officers, employees, investment bankers, attorneys,
accountants and other advisors or representatives not to, directly or
indirectly:
·
solicit,
initiate, seek, knowingly encourage, knowingly facilitate, knowingly support or
respond to any inquiries or requests for any information with respect to, or
the making, announcements or submission of, any proposal or offer that
constitutes, or could reasonably be expected to lead to, any acquisition
proposal; or
·
engage, enter
into, continue or otherwise participate in any discussions or negotiations
regarding, or furnish to any person any non-public information for the purpose
of encouraging or facilitating, any acquisition proposal.
However,
we may furnish information with respect to BioSphere to, or engage in
discussions or negotiations with, a person who has made an acquisition
proposal, and amend, or grant a waiver or release under, any standstill
agreement only if:
·
such
acquisition proposal did not result from a breach of or non-solicitation
obligations under the merger agreement;
·
we comply with
our obligations under the merger agreement concerning changes in our board of
directors recommendations to our stockholders in favor of the merger and the
entry into agreements with respect to alternative acquisition proposals; and
·
our board of
directors first determines in good faith, after consultation with outside
counsel and its financial advisors, that such acquisition proposal constitutes
or is reasonably likely to lead to a superior proposal.
We
may furnish such information only pursuant to a confidentiality agreement not
materially less restrictive in any respect of the person making such
acquisition proposal than the confidentiality agreement we previously entered
into with Merit Medical.
Subject
to the satisfaction of certain conditions, our board may withdraw or modify its
recommendation to our stockholders for adoption of the merger agreement. In the
event that our board withdraws or modifies its recommendation in a manner
adverse to Merit Medical and the merger agreement is terminated, we may be
required to pay a termination fee of $3,840,000 to Merit Medical.
Risks
Relating to Our Future Profitability, Our Financial Results and Need For
Financing
Because we have a history of losses
and our future profitability is uncertain, our common stock is a speculative
investment.
We have incurred operating losses since our inception and, as of June 30,
2010, had an accumulated deficit of approximately $97.27 million. We expect to
spend substantial funds to continue research and product testing, to maintain
sales, to perform clinical trials, for marketing, quality control, regulatory,
manufacturing and administrative capabilities and for other general corporate
purposes. We expect to continue to incur operating losses in 2010 as we seek to
execute on our business plan, including continuing to establish sales and
marketing capabilities and conducting research and development activities.
We may never become profitable. If we do become profitable, we may not
remain profitable on a continuing basis. Our failure to become and remain
profitable could depress the market price of our common stock and impair our
ability to raise capital and expand, diversify or continue our operations.
We will continue to need additional
funds, and if additional capital is not available, we may have to limit or
scale back our operations.
We believe that our existing cash and other working capital, together
with anticipated proceeds from sales of our products, will be sufficient to
fund our currently planned operating and capital requirements through at least
the next twelve months.
28
Table of
Contents
Our currently planned operating and capital requirements primarily
include the need for working capital to:
·
produce and manufacture our
products;
·
support our sales and
marketing efforts for our Embosphere Microsphere products for UFE and other
indications, as well as our other products for sale;
·
support our QuadraSphere
Microspheres clinical trial, if we commence such trial;
·
support our ongoing research
and development activities; and
·
fund our general and
administrative costs and expenses.
However, our cash
requirements may vary materially from those now planned due to a number of
factors, including, without limitation:
·
unanticipated changes in the
amount of revenue we generate from sales of our products, in particular from
sales of our Embosphere Microspheres for UFE and cTACE;
·
unanticipated costs related
to our planned merger with Merit Medical;
·
the extent to
which we may be required to draw down funds under the redemption loan with
Merit Medical in order to make a redemption payment to any holder of series A
preferred stock that does not elect to convert its shares of series A preferred
stock into common stock prior to the redemption date;
·
an adverse judgment in a
product liability lawsuit which could materially adversely affect market
acceptance of our products, and, if not covered by our product liability
insurance, could have a material adverse effect on our liquidity;
·
unplanned costs associated
with our QuadraSphere Microspheres clinical trial, if we commence such trial;
·
costs resulting from changes
in our research and development, regulatory and marketing strategies;
·
competitive advances that
make it harder for us to market and sell our products;
·
the timing and cost of
regulatory approvals and clearances; and
·
adverse global market and
economic conditions.
We may also need additional funds for possible strategic acquisitions
of synergistic businesses, products and/or technologies.
We will require substantial additional cash to fund our planned, and
any unplanned, expenses. If adequate funds are not available, we could be
required to reduce our capital expenditures, scale back or eliminate some or
all of our research, development, sales and marketing initiatives, reduce our
workforce and license to others or divest products or technologies that we
otherwise would seek to commercialize ourselves. We may seek additional funding
through a combination of collaborative arrangements, debt financing or the sale
of additional equity securities. We may not receive such additional funding on
reasonable terms, or at all. Any sales of equity or debt securities are likely
to dilute the ownership of our existing stockholders, and the new securities
may have rights, preferences or privileges senior to those of existing holders
of our capital stock. Debt financing, if available, may involve agreements that
include covenants limiting or restricting our ability to take specific actions
such as incurring additional debt, making capital expenditures or declaring
dividends. If we raise additional funds through collaboration and licensing
arrangements with third parties, we may have to relinquish valuable rights to
our technologies or products, or grant licenses on terms that are not favorable
to us.
If our operating results fluctuate
significantly from quarter to quarter, then our stock price may decline.
Our operating results could fluctuate significantly from quarter to
quarter. These fluctuations may be due to a number of factors, including:
·
inflation and adverse global
economic conditions, which may affect the rate of UFE procedures and the sales
of our products;
29
Table
of Contents
·
the timing and volume of
customer orders for our products;
·
introduction or announcement
of competitive products;
·
regulatory approvals or
clearances;
·
product recalls;
·
the timing and progress of
any clinical trials we undertake;
·
product liability claims
against our products, including any adverse judgments;
·
turnover in our direct sales
force;
·
the timing and amount of
expenses;
·
the timing of orders by our
distributors;
·
the effectiveness of new
marketing and sales programs;
·
exchange rate fluctuations;
and
·
liquidity constraints and
losses in our invested cash due to the current adverse conditions in the global
capital markets.
In addition, a large portion of our expenses, including expenses for
facilities, equipment and personnel, are relatively fixed. Accordingly, if our
revenue declines or does not grow as much as we anticipate, we might not be
able to improve our operating margins. Failure to achieve anticipated levels of
revenue could significantly harm our operating results for a particular fiscal
period. Due to these fluctuations, our operating results in some quarters may
not meet the expectations of our investors and our stock price may decline as a
result.
We anticipate that the sale of our
Embosphere Microspheres for use in conventional transarterial
chemoembolization, or cTACE, in the United States could decline in the near
term due to the limited availability of third-party materials used by doctors
for this procedure. As a result, our revenue in the United States may decline,
which could adversely affect our stock price and our ability to become and
remain profitable in future periods.
We are aware that our Embosphere Microspheres are sometimes used off
label in conventional transarterial chemoembolization, or cTACE, a procedure to
treat liver cancer in which microspheres are used in combination with
chemotherapy in an attempt to both occlude the blood vessels feeding liver
tumors and more effectively kill the liver cancer cells. Although we do not
have a label that allows us to promote the use of our Embosphere Microspheres
for cTACE and we are not able to precisely track levels of sales for this indication,
we estimate that up to approximately 17% of our total worldwide revenue for the
six-month period ended June 30, 2010 was from sales of our Embosphere
Microspheres to hospitals for use in cTACE procedures. Physicians that perform
cTACE also use a compound called Ethiodol to emulsify chemotherapeutic drugs
used in the procedure. Ethiodol is manufactured and sold by a third party. We
understand that the United States distributor of Ethiodol ceased distribution
of this product during the first quarter of 2010. On May 11, 2010, the FDA
announced that Guerbet LLC, or Guerbet, has acquired the Ethiodol new- drug
application and that Guerbet is working with the FDA to resume manufacturing of
Ethiodol in the near future to ensure continued availability for patients in
the United States.
On June 9,
2010 the FDA announced that Guerbet, in conjunction with the FDA, is initiating
a temporary importation of Lipiodol, which contains the same drug components as
Ethiodol, to the United States. At this time, no other entity except Guerbet is
authorized by the FDA to import or distribute Lipiodol.
As a result of
these factors, we anticipate that the rate of cTACE procedures using Embosphere
Microspheres could decline in the United States in the near term, which could adversely
affect the amount of revenue we receive in future periods. A decline in our
revenue as compared to prior periods could cause our stock price to decline and
could also adversely affect our ability to become and remain profitable in the
future.
Unstable market and economic
conditions may have serious adverse consequences on our business.
As widely reported, global credit and financial markets have been
experiencing extreme disruptions for more than a year, including severely
diminished liquidity and credit availability, declines in consumer confidence,
declines in economic growth, increases in unemployment rates and uncertainty
about economic stability. There can be no assurance that further deterioration
in credit and financial markets and confidence in economic conditions will not
occur. Our general business strategy may be adversely affected by the recent
economic downturn and volatile business environment and continued unpredictable
and unstable market conditions. The global economic crisis could adversely
affect sales of our products. For example, we believe that worldwide product
30
Table of
Contents
revenue
from sales of our microspheres for use in interventional gynecology for UFE
procedures declined in part due to current economic conditions, including the
high rate of unemployment, which we believe reduced the demand for elective
procedures and the use of our products. We may experience declines in revenue
in 2010 and beyond as a result of these factors. Also, if the current equity
and credit markets deteriorate further, or do not improve, it may make any
necessary debt or equity financing more difficult, more costly and more
dilutive. Failure to secure any necessary financing in a timely manner and on
favorable terms could have a material adverse effect on our growth strategy,
financial performance and stock price and could require us to delay or abandon
clinical development plans. In addition, there is a risk that one or more of
our current service providers, manufacturers or other partners may not survive
these difficult economic times, which would directly affect our ability to
attain our operating goals.
At June 30, 2010, we had $14.10 million of cash, cash equivalents
and marketable securities consisting of corporate, bank, federal agency,
mortgage-backed and government obligations. We are not aware of any downgrades,
material losses, or other significant deterioration in the fair value of our
cash equivalents or marketable securities since June 30, 2010, but no
assurance can be given that further deterioration in conditions of the global
credit and financial markets would not negatively impact our current portfolio
of cash equivalents and marketable securities or our ability to meet our
financing objectives. Further dislocations in the credit market may adversely
impact the value and/or liquidity of marketable securities owned by us.
There is also a possibility that our stock price may decline because of
the volatility of the stock market and the general economic downturn.
Compliance with changing regulation
of corporate governance and public disclosure, as well as potential new
accounting pronouncements, could impact our future financial position and
results of operations.
Changing laws, regulations and standards relating to corporate
governance and public disclosure, including SEC regulations and NASDAQ Global
Market rules, could result in continuing uncertainty regarding compliance
matters and higher costs necessitated by ongoing revisions to disclosure and
governance practices. In addition, future changes in financial accounting
standards may cause adverse, unexpected revenue fluctuations and affect our
financial position or results of operations. New accounting pronouncements and
varying interpretations of pronouncements have occurred with frequency in the
past and may occur again in the future, and as a result we may be required to
make changes in our accounting policies.
Our efforts to comply with evolving laws, regulations and standards
have resulted in, and are likely to continue to result in, increased general
and administrative expenses and management time related to compliance
activities. We expect these efforts to require the continued commitment of
significant resources. If our efforts to comply with new or changed laws,
regulations and standards differ from the activities intended by regulatory or
governing bodies due to ambiguities related to practice, our reputation might
be harmed and we might be subject to sanctions or investigation by regulatory
authorities, such as the SEC. Any such action could adversely affect our
financial results and our stock price.
Changes to our performance in each
jurisdiction in which we operate, resulting from either changes in our business
or as a result of routine tax audits, could materially impact our deferred tax
assets or could materially impact our future financial position or results of
operations.
We use the asset and liability accounting method whereby deferred tax
assets and liabilities are recognized based on temporary differences between
the financial statement carrying amounts and tax bases of assets and
liabilities using current statutory tax rates in each tax jurisdiction in which
we operate. A valuation allowance against net deferred tax assets is recorded
if, based on the available evidence, it is more likely than not that some or
all of the deferred tax assets will not be realized. Due to the size of our net
operating loss carryforward in relation to our history of unprofitable
operations, we have not recognized any of our net deferred tax assets. However,
future improvements in operational performance in any tax jurisdiction in which
we operate, while not guaranteed, could result in increased certainty of our
ability to apply deferred tax assets against taxable income, which could, in
turn, result in a significant impact on the value of our deferred tax assets
and reported operating results.
Risks
Relating to Our Industry, Business and Strategy
A significant portion of our revenue
is derived from sales of our Embosphere Microspheres for UFE, and if we do not
successfully commercialize and achieve widespread market acceptance of our
Embosphere Microspheres for UFE, our business will be materially harmed and our
stock price will decline.
The majority of our revenue for the quarter ended June 30, 2010
was derived from the sale of Embosphere Microspheres for use in UFE. Our
principal business focus is to grow our embolotherapy business through
increases in the utilization rate for UFE procedures versus other procedures to
treat uterine fibroids and in the employment by medical providers of our
Embosphere
31
Table of
Contents
Microspheres
in such procedures in lieu of competing products. We began marketing and
selling Embosphere Microspheres for UFE in 2002, but to date we have not achieved
widespread market acceptance of UFE as an alternative to other procedures,
including hysterectomy. Our ability to grow our product revenue is
substantially dependent upon growth in UFE procedures and our ability to
achieve widespread acceptance of the use of Embosphere Microspheres for use in
UFE procedures. If growth in UFE procedures does not occur and if we do not
achieve such market acceptance, our product revenue and our prospects for
profitability and success will be materially adversely affected.
We face a number of significant risks relating to our ability to
successfully commercialize Embosphere Microspheres for use in UFE, including
risks relating to:
·
our ability to successfully
market and sell Embosphere Microspheres for use in UFE with our limited sales
force;
·
the success of our sales and
marketing strategies for Embosphere Microspheres for use in UFE, including, but
not limited to, our ask4UFE and Consumer Health Talk, or CHT, campaigns and
other public relations campaigns, in which we are seeking to increase awareness
among patients, referring physicians, interventional radiologists and
third-party payors of UFE as an alternative treatment for fibroids;
·
the unknown future impact
that Health Care Reform and other measures may have on our ability to educate
patients about fibroids and treatment options on behalf of or in partnership
with hospitals;
·
our ability to recruit and
train our sales force and the effectiveness of our sales force in influencing
referral behavior with gynecologists and other health-care providers;
·
reimbursement treatment from
government and third-party insurers for our products;
·
longstanding use of
established treatment options for uterine fibroids and/or the emergence of new
treatment options;
·
our ability to gain market
acceptance of UFE using Embosphere Microspheres as a safe, effective and
medically necessary treatment for uterine fibroids;
·
the availability of substantial
amounts of cash to fund our commercialization plans;
·
competitive factors;
·
our ability to effectively
develop adequate marketing, manufacturing and distribution capabilities;
·
our ability to maintain the
necessary patent protection and regulatory approvals required to market and
sell Embosphere Microspheres for UFE;
·
unemployment levels and
adverse economic conditions, which we believe has caused and may continue to
cause a decrease in UFE procedure rates and sales of our products; and
·
the various other factors
discussed in detail throughout this section titled Risk Factors.
If the market concludes that our
microsphere products are not safe or effective, we will not achieve widespread
market acceptance of our microsphere products, and our business prospects will
be seriously harmed.
In the United States, we began selling our first microsphere product in
the first half of 2000. In November 2002, we received clearance from the
FDA to market our Embosphere Microspheres in the United States for UFE
procedures. We began to market and sell our HepaSphere Microspheres in the
European Union in the fourth quarter of 2005 and received marketing clearance
from the FDA for our QuadraSphere Microspheres in November 2006. Our
success will depend upon increasing acceptance by the medical community,
patients and third-party payors that our Embosphere Microspheres and other
products are medically therapeutic and cost-effective. Our products may not
gain widespread market acceptance for a variety of reasons, including:
·
Our microspheres are
designed to occlude targeted blood vessels permanently. There is some risk that
some or all of the microspheres used in a medical procedure may travel in the
blood system to sites other than the intended treatment site and occlude, or
block, other blood vessels, resulting in the potential for significant adverse
health effects on the patient or, in a worst case, even death.
32
Table of Contents
·
To use our microspheres
correctly for a particular medical procedure, trained physicians must correctly
evaluate the subjects vasculature, select and use the proper size and quantity
of the product, and carry out appropriate placement of the product. Physician
error potentially could have significant adverse health effects on the patient,
including death.
·
In UFE procedures, patients
commonly experience a day or two of post-procedure abdominal pain or cramping.
Other infrequently occurring complications may include allergic reactions,
rashes, early onset of menopause, infertility and infection that may, in some
cases, require a hysterectomy. We are also aware that a small number of the
patient population, which we believe constituted approximately 2% of those
receiving the UFE procedure using EmboGold Microspheres, reported a delayed
onset of rash and/or pain.
·
There are only limited data
concerning the long-term health effects on persons receiving embolotherapy
using our microspheres. For example, the effect of UFE on continued fertility
has not yet been specifically studied, and our FDA clearance for Embosphere
Microspheres currently does not include women who desire future pregnancy.
·
Product liability claims
could create a perception that our products are unsafe. For example, we were
named as a defendant in two product liability lawsuits in which the plaintiffs
claimed that they were harmed as a result of the use of our microspheres or the
negligence of the health-care providers or both factors combined.
·
Many health-care providers,
including obstetricians and gynecologists, use other forms of treatment for
patients with uterine fibroids that do not require referral to an
interventional radiologist.
·
We received approval to use
our HepaSphere Microspheres to treat liver cancer using procedures such as
targeted liver embolotherapy and transarterial chemoembolization in the
European Union. Physicians may refrain from using our product for such
procedures until further clinical data demonstrate its safety and efficacy as
compared to other treatments. Physicians also may not elect to use our
HepaSphere Microspheres to treat liver cancer for a number of other reasons,
including, without limitation, unfavorable reimbursement from third-party
payors, the effectiveness of our competitors in marketing their products, and
our failure to convince physicians that our HepaSphere Microspheres have
greater benefits than existing products or therapies.
In March 2006, we instituted a voluntary recall of our HepaSphere
Microspheres in Europe to correct a packaging defect that we identified while
conducting aging studies. HepaSphere Microspheres are contained in a prefilled
vial that was in turn initially packaged inside a paper pouch. In the third
quarter of 2006, we launched a new plastic packaging configuration for our
HepaSphere Microsphere product designed to correct this defect. Although we are
not aware of any adverse events resulting from the defects in the paper
packaging, our voluntary recall of this product, or any future recall,
voluntary or mandatory, of any of our products, could result in reputational
harm or a perception that the recalled product is not safe, either of which
could adversely affect market acceptance of our products and result in
decreased sales.
Other factors could also affect market acceptance of our products,
including, without limitation, the introduction of competing products, safety
concerns with similar products marketed by others, ineffective sales, marketing
and distribution support and significant warranty claims.
If gynecologists, obstetricians,
interventional radiologists and other health-care providers do not recommend
and endorse our products, and if health-care providers do not make the
necessary referrals to interventional radiologists who administer our
embolotherapy products, our sales may decline or we may be unable to increase our
sales and profits.
Our ability to establish and maintain favorable relationships with
gynecologists, obstetricians, interventional radiologists and other health-care
providers is critical to our continued growth. We believe that the success of
these relationships is, and will be, based on, among other things, the quality
of our products, such providers perceptions concerning our commitment to
embolotherapy treatments, our marketing efforts and our presence at medical
society and trade association meetings. Any actual or perceived diminution in
our reputation or the quality of our products, or our failure or inability to
maintain these or other efforts, could damage our current relationships or
prevent us from forming new relationships with health-care professionals and
cause our growth to be limited and our business to be harmed.
In order for us to sell our products, health-care professionals must
recommend and endorse them. For example, our embolotherapy techniques are
administered by interventional radiologists. In the treatment of uterine
fibroids, we believe that the UFE procedure utilizing our Embosphere
Microspheres has not yet achieved widespread acceptance primarily because
obstetrics and gynecology physicians may elect to offer and provide other forms
of treatment to their patients with uterine fibroids that do not require a
referral to another specialist, such as an interventional radiologist. The
majority of our revenue is from the sale of our Embosphere
33
Table of Contents
Microspheres
for UFE and, accordingly, our future success will depend upon obstetrics and
gynecology physicians referring patients to interventional radiologists to
receive treatment using our Embosphere Microspheres in lieu of, or in addition
to, receiving other forms of treatment that the obstetrics and gynecology
physicians can provide directly. We have not achieved widespread market
acceptance for UFE as an alternative to other forms of treatment. Acceptance of
UFE as a procedure, and our ability to obtain the necessary endorsements and
referrals, depend on our ability to educate the medical community as to the
distinctive characteristics, perceived benefits, safety, clinical efficacy and
cost-effectiveness of our products compared to traditional methods of treatment
and the products of our competitors, and on our ability to train health-care
professionals in the proper application of our products. If we are not
successful in obtaining the recommendations or endorsements of gynecologists,
obstetricians, interventional radiologists and other health-care professionals
for our products, our sales may decline or we may be unable to increase our sales
and profits.
Product liability claims could create a perception that our products
are unsafe. For example, we were named as a defendant in two product liability
lawsuits in which the plaintiffs claimed that they were harmed as a result of
the use of our microspheres or the negligence of the health-care providers or
both factors combined.
If we experience delays,
difficulties or unanticipated costs in establishing and growing the sales,
distribution and marketing capabilities necessary to successfully commercialize
our products, we will have difficulty maintaining and seeking to increase our
sales.
We continue to develop sales, distribution and marketing capabilities
primarily in the United States, the European Union, Asia and South America to
promote UFE awareness and the benefits of our product for the treatment of
uterine fibroids. It has been, and we expect it will continue to be, expensive
and time-consuming for us to develop a global sales and marketing force. At June 30,
2010, we had a sales and marketing force of 43 persons located principally in
the United States. Competition for skilled salespersons in the medical device
industry is intense, and we may not be able to provide adequate incentives to
maintain our sales and marketing force or to attract new sales and marketing
personnel to promote our products. We have only limited sales and marketing
experience in the United States and internationally and may not be successful
in developing and implementing our strategy. Among other things, we need to:
·
provide or ensure that our
distribution channels provide the technical and educational support customers
need to use our products successfully;
·
establish and implement
successful sales and marketing and education programs that encourage our
customers to purchase our products;
·
manage geographically
dispersed markets; and
·
modify our products and
marketing and sales programs for foreign markets.
We currently have distribution agreements with a number of third-party
distributors, and we may choose or find it necessary to enter into additional
third-party agreements to sell, distribute or market our products in the
future. Any third party with whom we have established a sales, distribution
and/or marketing relationship may not devote sufficient time to the marketing
and sales of our products, thereby adversely affecting our planned revenue and
exposing us to potential expenses in terminating such distribution agreements.
We and any of our third-party collaborators must also market our products in
compliance with federal, state and local laws relating to the provision of
incentives and inducements. Violation of these laws can result in substantial
penalties. If we are unable to successfully motivate and expand our marketing
and sales force and further develop our sales and marketing capabilities, or if
our distributors fail to promote our products, we will have difficulty
maintaining and increasing our sales, we may not achieve profitability and our
stock price could decline.
We will be required to expend
significant resources for research, development, testing and regulatory
approval or clearance of our products under development, and these products may
not be developed successfully.
We are developing and commercializing products for medical applications
using embolotherapy techniques, including, without limitation, smaller-sized
versions of our HepaSphere Microspheres and QuadraSphere Microspheres, which
are still in preclinical development. Our products under development may not
provide greater benefits than current treatments or products, or alternative
treatments or products under development.
All of our products under development will require significant
additional research, development, engineering and preclinical and/or clinical
testing, as well as regulatory approval or clearance and a commitment of
significant additional resources prior to their commercialization. For example,
FDA regulations require that we conduct clinical trials and submit a marketing
application which
34
Table of Contents
includes
positive data from clinical trials to the FDA in order to obtain the approvals
and clearances required to promote QuadraSphere Microspheres for the treatment
of a specific disease or condition, including primary and metastatic liver
cancer. In October 2009, we submitted to the FDA an IDE application to
commence a clinical trial to compare the effectiveness of our QuadraSphere Microspheres
combined with the chemotherapeutic agent doxorubicin to conventional
transarterial chemoembolization with doxorubicin in patients with primary liver
cancer. Our satisfactory resolution of the FDAs comments on the IDE is a
condition to starting the clinical trial in the United States. Based upon our
discussions with the FDA, we have determined that our study protocol will
include as a primary endpoint patient survival rather than overall tumor
response rate at six months, which was the primary endpoint that we proposed in
our initial IDE application. In addition, the FDA has advised us that approval
of the IDE will also be conditioned upon our study protocol including a third
study arm assessing QuadraSphere Microspheres as a stand-alone therapy (e.g.,
without the addition of doxorubicin) as compared to both QuadraSphere
Microspheres combined with doxorubicin and conventional transarterial
chemoembolization, or cTACE, with doxorubicin.
In August 2010, we submitted an appeal to the FDA requesting that
they reconsider their recommendation that our clinical trial also include the
third study arm of treatment with QuadraSphere Microspheres as a stand-alone
therapy. Our satisfactory resolution of the FDAs comments and recommendations
on the IDE is a condition to starting the clinical trial in the United States
and, because our discussions with the FDA are ongoing and we have not yet
agreed upon and finalized the trial design, we have not determined whether or
when to undertake the clinical trial and if we determine to not undertake the
trial, or if we undertake the trial and the results are not sufficient to
obtain FDA approval, then we will not be able to promote our QuadraSphere
Microspheres for liver cancer indications in the United States. Our potential
products may not:
·
be developed successfully;
·
be proven safe and effective
in clinical trials;
·
offer therapeutic or other
improvements over current treatments and products;
·
meet applicable regulatory
standards or receive regulatory approvals or clearances;
·
be capable of production in
commercial quantities at acceptable costs and in compliance with regulatory
requirements; or
·
be successfully marketed.
If we do not develop and introduce
new products, our business may not grow and our future prospects may be adversely
affected.
In order to grow our revenue in future periods we need to develop and
introduce new applications for our embolotherapy technology and pursue
opportunities for microsphere technology in other medical applications. Any
such new application for our embolotherapy technology or microsphere technology
will be subject to a number of risks inherent in the development and
commercialization of a medical device product, including uncertainties with
respect to the successful completion of clinical trials, our ability to achieve
and maintain, and our willingness to seek, required regulatory approvals or
clearances and our ability to successfully commercialize, market and sell these
new applications, if FDA approval or clearance is achieved. If, as a result of
these or other risks, we are not successful in developing new applications and
products, our position in, and share of, the markets in which we participate,
and our business, financial condition, results of operations and prospects may
be adversely affected.
We have been subject to product
liability claims in the past and may be subject to additional claims in the
future; we may incur substantial costs and expenses in defending such claims;
and, if we are unable to obtain or maintain adequate product liability
insurance, we may have to pay significant monetary damages in a successful
product liability claim against us.
The development and sale of medical devices entails an inherent risk of
product liability. For example, if physicians do not use our products properly,
if patients experience adverse side effects in procedures in which our products
are used, or if patients, health-care providers or other constituencies
conclude that any of our products are not safe or effective for any reason, we
may be exposed to product liability claims. Any such product liability claims
may include, among other things, allegations of defects in manufacturing,
defects in design, a failure to warn of dangers inherent in the product,
negligence, strict liability and a breach of warranties. Claims could also be
asserted under state consumer protection acts. In 2005 and 2008, we were named
as a defendant in two such product liability lawsuits in which the plaintiffs
alleged, among other things, that they were harmed by the use of our
microsphere products, the negligence of the health-care providers, or both of
these factors combined. Although these lawsuits settled within the limits of
our product liability insurance, we are subject to the risk of additional
product liability lawsuits, and our business, financial condition, results of
operations and future prospects are subject to a number of significant risks
relating to any such lawsuits, including the following:
35
Table of Contents
·
Claims asserting medical
product liability have in the past resulted in multiple-million-dollar damage
awards for plaintiffs against various manufacturers of drugs and medical
devices. Although we currently maintain product liability insurance coverage, if
a plaintiff in a product liability lawsuit were to prevail in his or her claims
against us and was awarded substantial damages, our insurance, which is subject
to a $5.00 million cap on the maximum amount our insurer is required to
pay for all claims within any one-year period and which is eroded by the costs
of defense, may not provide us with adequate coverage for a judgment against
us. If we are forced to satisfy a judgment in excess of our product liability
coverage, we may not have sufficient cash to pay such judgment. There can be no
assurance that, if required, we would be able to raise the additional funds
required to satisfy such judgment on favorable terms, or at all. In such case,
we may be required to curtail our operations, which could have a material
adverse effect on our financial condition, results of operations, the viability
of our business and future prospects, and would likely cause our stock price to
decline.
·
Although we maintain product
liability insurance, any claim that may be brought against us could result in
court judgments or settlements that are not covered, in whole or in part, by
our insurance. For example, our current product liability insurance policy
contains an exclusion for punitive damages, which are typically sought in
product liability lawsuits. Our insurance policies also have various other
exclusions, and we may be subject to a product liability claim for which we
have no coverage. We will have to pay any amounts awarded by a court or
negotiated in a settlement that exceed our coverage limitations or that are not
covered by our insurance, and, in such case, we could be required to make a
substantial payment for which we may not have sufficient cash. There can be no
assurance that, if required, we would be able to raise the additional funds
required to make such payment on favorable terms, or at all. In such case, we
may be required to curtail our operations, which could have a material adverse
effect on our financial condition, results of operations, the viability of our
business and our future prospects, and would likely cause our stock price to
decline.
·
Any product liability claim
brought against us, regardless of whether it has merit, could result in an
increase in our product liability insurance rates or our inability to secure
additional insurance coverage in the future.
·
Defending litigation can be
time consuming and can divert our managements attention from other priorities,
including the execution of business plans and strategies that are important to
our ability to grow our business.
·
Our reputation with patients
and health-care providers, including the referring gynecologists, oncologists
and interventional radiologists, who are key to our current sales and marketing
strategies, could be harmed because we have been named as a defendant in
product liability lawsuits in the past, and could also be harmed if we are
subject to any such claims in the future. Any reputational harm could adversely
affect our ability to execute on our current sales and marketing strategies
and, ultimately, on the sales of our products, and our stock price would likely
decline.
·
If, as a result of past or
future product liability litigation, the market perceives that our products are
unsafe, we could be unsuccessful in our efforts to gain market acceptance of
our products and experience a decline in our revenue, which could adversely
affect our financial condition, results of operations and the viability of our
business, and would likely cause our stock price to decline.
·
In the prior lawsuits in
which we were named as a party, the plaintiffs alleged that our microspheres
were defective and that the manner in which the applicable product was marketed
was insufficient. As is often the case when product liability lawsuits arise
that assert claims of defects in the manufacturing and design of a medical
device or of a failure to warn of risks inherent to such product, the FDA and
comparable regulatory agencies outside of the U.S. could engage in a further
review of the safety of these products and their approved conditions for use.
On the basis of that review, the FDA or such other regulatory agency could
decide to impose additional requirements regarding the manufacturing, marketing
or promotion of these products, require changes to the labeling of these
products, recall these products or commence proceedings to withdraw its
clearance of these products, any of which could harm our reputation, adversely
affect market acceptance of these products or cause a decline in revenue from
the sale of the applicable product, which could adversely affect our financial
condition, results of operations, the viability of our business and our future
prospects, and would likely cause our stock price to decline.
If we are not able to compete
effectively, we may experience decreased demand for our products, which may
result in price reductions.
The medical device market is characterized by extensive research and
development, and rapid technological change. Our success depends upon our
ability to develop and maintain a competitive position in both the
embolotherapy and related delivery systems markets. We have many competitors in
the United States and abroad, including medical device, biotechnology and other
alternative therapeutic companies, universities and other private and public
research institutions. Our key competitors in both the fields of embolotherapy
and the delivery systems used in the UFE procedure are Biocompatibles Limited,
Boston Scientific
36
Table of Contents
Corporation,
Cook Incorporated, Cordis Corporation, a Johnson & Johnson company,
Pfizer Inc., Terumo Corporation and CeloNova BioSciences, Inc.
Many of our competitors may have greater capabilities, experience and
financial resources than we do. As a result, they may develop products more
quickly or at less cost that compete with our microsphere products and related
delivery systems. For example, in recent years we have experienced increased
competition from products that compete with Embosphere Microsphere products for
UFE. Moreover, some of our competitors have provided free or reduced-price
samples of competing forms of microspheres for use in medical procedures for
which our Embosphere Microspheres are indicated. We believe the availability of
these free or reduced-price samples may have adversely affected our revenue,
and if this practice recurs our product revenue may continue to be adversely
affected.
Currently, the primary products with which our microspheres compete for
some of our applications are spherical PVA sold by Boston Scientific, Terumo
and Biocompatibles, Embozene sold by CeloNova, gelfoam sold by Pfizer,
non-spherical (particle) PVA sold by Boston Scientific and Cook, and
drug-eluting beads sold by Biocompatibles.
In the treatment of symptomatic uterine fibroids, our customers compete
with obstetrics and gynecology physicians who elect to offer and provide other
forms of treatment to their patients with uterine fibroids that do not require
referral to another specialist. These treatment options currently include
hysterectomy, myomectomy, laparoscopic myomectomy, drug therapy and
robotic-assisted hysterectomy.
Developments by other companies of new or improved products, processes
or technologies, in particular in the market for treating uterine fibroids, may
make our products or proposed products obsolete or less competitive and may
negatively impact our revenue. As a result of these and other factors, we may
not be able to improve our products or develop new products or technologies quickly
enough to maintain a competitive position in our market and continue to develop
our business commercially.
If we fail to maintain, or in some
instances obtain, an adequate level of reimbursement for our products by
third-party payors, there may be no commercially viable markets for our
products.
The availability and levels of reimbursement by governmental and other
third-party payors affects the market for any medical device. We may not be
able to sell our products profitably if reimbursement is unavailable or limited
in scope or amount. Some insurance companies do not fully reimburse for
embolization procedures. These third-party payors may attempt to contain or
reduce the costs of health care by lowering the rate at which providers are
reimbursed for embolization procedures or challenging the prices that companies
such as ours charge for medical products. For example, on January 1, 2007,
the Centers for Medicare and Medicaid Services, or CMS, issued a rule providing
for a single, all-inclusive reimbursement code for UFE. This code is inclusive
of all services occurring on the day of the procedure. This physician
reimbursement rate is lower than the rate historically received by physicians.
We believe that some physicians have shifted their procedural mix away from UFE
in response to this change in reimbursement, which has negatively affected, and
may continue to negatively affect, our sales growth. Conversely, beginning
January 1, 2008 the CMS assigned a new ambulatory procedure code, or APC,
for UFE procedures performed in an outpatient setting. We believe that this new
APC has resulted in an increase in hospital reimbursement for UFE procedures.
However, CMS could adversely change this APC in the future or otherwise
decrease the payment rate for such UFE procedures. Any change in reimbursement
levels could have an adverse effect on utilization rates for UFE or liver
embolization procedures.
In some foreign countries, particularly the countries of the European
Union where our microsphere products are currently marketed and sold, the
pricing of medical devices is subject to governmental control, and the prices
charged for our products have in some instances been reduced as a result of
these controls.
Initiatives to limit the growth of health-care costs, including price
regulation, are underway in the United States and other major health-care
markets. For example, payors may increase the complexity of patient
precertification required prior to performing a UFE procedure. In addition, we
may be affected by prescription drug benefit legislation recently enacted in
the United States. It is unclear what, if any, impact on hospital and/or
physician reimbursement levels for UFE may result from the new health-care
reform bill that was just passed by U.S. Congress. While these initiatives have
in many cases related to pharmaceutical pricing, implementation of more
sweeping health-care reforms in significant markets may limit the price of, or
the level at which reimbursement is provided for, our products and may influence
a physicians selection of products used to treat patients.
If we do not recruit and retain
senior management and other key employees, we may not be able to successfully
implement our business strategy.
Our success is substantially dependent on our ability to recruit and
retain members of our senior management, including Richard J. Faleschini, our
president and chief executive officer; Martin J. Joyce, our executive vice
president of finance and
37
Table of Contents
administration
and chief financial officer; Melodie R. Domurad, Ph.D., our vice president of
regulatory, medical affairs and quality systems; Peter C. Sutcliffe, our vice
president of manufacturing; and other key employees. All of the agreements with
our officers provide that their employment may be terminated either by the
employee or by us at any time and without notice. The loss of the services of
any of these persons might impede the achievement of our research, development
and commercialization objectives. We do not carry key man life insurance on any
of our executive officers or other personnel.
If we make any acquisitions, we will
incur a variety of costs and may never successfully integrate the acquired
businesses into ours.
We may attempt to acquire businesses, technologies, services or
products that we believe are a strategic complement to our business model. We
may encounter operating difficulties and expenditures relating to the
integration of an acquired business, technology, service or product. These
acquisitions may also absorb significant management attention that would
otherwise be available for ongoing development of our business. Moreover, we may
never realize the anticipated benefits of any acquisition. We may also make
dilutive issuances of equity securities, incur debt or experience a decrease in
the cash available for our operations, or incur contingent liabilities in
connection with any future acquisitions.
Because key stockholders
beneficially own a significant amount of our common stock, they may be able to
exert control over us.
As of August 2, 2010, we believe that Sepracor Inc., an
indirect wholly-owned subsidiary of Dainippon Sumitomo
Pharma Co., Ltd., or Sepracor, and funds affiliated with Cerberus
Capital Management, L.P., or Cerberus, beneficially owned approximately
21% and 13% of our outstanding common stock, respectively, including shares of
common stock issuable upon the exercise of series A preferred stock held
by these stockholders. Moreover, we have granted board-observation rights to
Sepracor and Cerberus. Accordingly, Sepracor and Cerberus may have significant
influence over corporate actions requiring stockholder approval, such as the
election of directors, amendment of our charter documents and the approval of
merger or significant asset sale transactions, including our planned merger
with Merit Medical. In addition, the shares of our series A preferred
stock held by Sepracor and Cerberus entitle them to certain voting rights in
accordance with the terms and conditions of the series A preferred stock.
Specifically, we will need the consent of holders of at least 50% of the
series A preferred stock initially purchased by Sepracor and Cerberus to
undertake certain key corporate actions, including the following:
·
amending our charter or
bylaws in a manner that adversely affects the holders of series A
preferred stock;
·
authorizing or issuing any
equity security that is senior to or pari passu with the series A
preferred stock; and
·
declaring or paying any dividends
on, or redeeming or repurchasing any shares of, our capital stock, subject to
customary exceptions.
The ownership concentration of Sepracor and Cerberus could cause the
market price of our common stock to decline. In addition, conflicts of interest
between these key stockholders and us may arise, including with respect to
competitive business activities and control of our management and our affairs.
The holders of shares of our
series A preferred stock have rights that could adversely affect an investment
in our common stock.
The holders of our series A preferred stock have the right to an
adjustment in the conversion rate of the series A preferred stock if we
issue securities at a price below the purchase price paid by these holders.
These provisions could substantially dilute stockholders interest in us in the
event of future financing transactions. The holders of series A preferred
stock also have the right to receive a 6% dividend per annum which, at our
election, may be paid in cash or additional shares of series A preferred
stock. To the extent such dividends are paid in stock, this dividend could also
further dilute stockholders ownership interest. In addition, the holders of
our series A preferred stock have the right to participate in future
capital-raising transactions by us. The existence of this right may reduce our
ability to establish terms with respect to, or enter into, any financing with
parties other than the holders of our series A preferred stock.
Unless the shares of series A preferred stock are redeemed, in the
event that we enter into an acquisition or business combination in which we
sell all or substantially all of our assets, or if there occurs a change of
control of a majority of our common stock outstanding prior to such transaction,
the holders of our series A preferred stock will have the right to
receive, before any distributions or payments to the holders of our common
stock, an amount in cash equal to $1,000 (subject to adjustment) for each share
of Series A preferred stock then held by such holder, plus an amount equal
to any accrued but unpaid dividends, and will then participate with the holders
of the common stock on a pro rata basis with respect to the distribution of any
remaining assets. The existence of this right may make it difficult for us to
raise capital in financing transactions with third parties and will also result
in
38
Table of Contents
holders
of our common stock receiving smaller distributions or payments upon a change
of control or asset sale than they would be entitled to receive if no
preferential payments were required to be made to holders of our series A
preferred stock.
Our employees may engage in
misconduct or other improper activities, including noncompliance with
regulatory standards and requirements and insider trading.
We are exposed to the risk of employee fraud or other misconduct.
Misconduct by employees could include intentional failures to comply with FDA
regulations, to provide accurate information to the FDA, to comply with
manufacturing standards we have established, to comply with federal and state
health-care fraud and abuse laws and regulations or the Foreign Corrupt
Practices Act, to report financial information or data accurately or to
disclose unauthorized activities to us. Employee misconduct could also involve
the improper use of customer information or information obtained in the course
of clinical trials, which could result in regulatory sanctions and serious harm
to our reputation. We have adopted a code of business conduct and ethics, but
it is not always possible to identify and deter employee misconduct, and the
precautions we take to detect and prevent this activity may not be effective in
controlling unknown or unmanaged risks or losses.
The marketing claims the FDA specifically authorized us to make
regarding our microspheres in the United States were set forth in the FDA
clearance. Our EmboGold Microspheres have not been specifically cleared for use
in UFE. Although our QuadraSphere Microspheres are identical to our HepaSphere
Microspheres, which are currently marketed in the European Union for use in the
embolization of hepatocellular carcinoma and hepatic metastasis, our
QuadraSphere Microspheres are not indicated for use in hepatocellular carcinoma
and hepatic metastasis. We will need to conduct a clinical trial and obtain FDA
clearance or approval of a marketing application in order to claim the use of
the QuadraSphere Microspheres for the treatment of a specific disease or
condition, such as hepatocellular cancer or hepatic metastasis, in the United
States. European Union regulations do not require such an application for this
class of medical devices. In order for us to seek FDA clearance or approval to
promote the use of QuadraSphere Microspheres for the embolization of
hepatocellular carcinoma and hepatic metastasis, we will need to complete a
clinical trial and submit positive clinical data to the FDA. In October 2009,
we submitted to the FDA an application to commence a clinical trial to compare
the effectiveness of our QuadraSphere Microspheres combined with the
chemotherapeutic agent doxorubicin to conventional transarterial chemoembolization
with doxorubicin in patients with primary liver cancer. Our satisfactory
resolution of the FDAs comments on the IDE is a condition to starting the
clinical trial in the United States. Based upon our discussions with the FDA,
we have determined that our study protocol will include as a primary endpoint
patient survival rather than overall tumor response rate at six months, which
was the primary endpoint that we proposed in our initial IDE application. In
addition, the FDA has advised us that approval of the IDE will also be
conditioned upon our study protocol including a third study arm assessing
QuadraSphere Microspheres as a stand-alone therapy (e.g., without the addition
of doxorubicin) as compared to both QuadraSphere Microspheres combined with doxorubicin
and conventional transarterial chemoembolization, or cTACE, with
doxorubicin. In August 2010, we
submitted an appeal to the FDA requesting that they reconsider their
recommendation that our clinical trial also include the third study arm of treatment
with QuadraSphere Microspheres as a stand-alone therapy. Our satisfactory
resolution of the FDAs comments and recommendations on the IDE is a condition
to starting the clinical trial in the United States and, because our
discussions with the FDA are ongoing and we have not yet agreed upon and
finalized the trial design, we have not determined whether or when to undertake
the clinical trial, and if we determine to not undertake the trial, or if we
undertake the trial and the results are not sufficient to obtain FDA approval,
then we will not be able to promote our QuadraSphere Microspheres for liver
cancer indications in the United States. Although we have not received approval
or clearance from the FDA to market our QuadraSphere Microspheres for primary
or metastatic liver cancer in the United States, we believe that some
physicians are using QuadraSphere Microspheres off label in the treatment of
primary and metastatic liver cancer. If the FDA were to conclude that we have
improperly promoted our products for unapproved indications, the FDA could
allege that our promotional activities misbrand or adulterate our products,
leading to enforcement action against us. A government agency could also allege
that the promotion of products for off -label use could violate the false
claims act or other similar law.
In addition, during the course of our operations, our directors,
executives and employees may have access to material, nonpublic information
regarding our business, our results of operations or potential transactions we
are considering. Despite our adoption of an insider trading policy, we may not
be able to prevent a director or employee from trading in our common stock on
the basis of, or while having access to, material, nonpublic information. If a
director or employee were to be investigated, or an action were to be brought
against a director or employee for insider trading, it could have a negative
impact on our reputation and our stock price. Such a claim, with or without
merit, could also result in substantial expenditures of time and money, and
divert attention of our management team from other tasks important to the
success of our business.
39
Table of Contents
Risks
Relating to Regulatory Matters
If we do not obtain and maintain the
regulatory approvals or clearances required to market and sell our products,
then our business may be unsuccessful and the market price of our stock may
decline.
We are subject to regulation by government agencies in the United
States and abroad with respect to the design, manufacture, packaging, labeling,
advertising, promotion, distribution and sale of our products. For example, our
products are subject to approval or clearance by the FDA prior to commercial
marketing in the United States. Similar regulations exist in most major foreign
markets, including the European Union, Latin America and Asia. The process of
obtaining necessary regulatory approvals and clearances is time-consuming and
expensive for us. If we do not receive required regulatory approval or
clearance to market our products, or if any approvals or clearances we have
received are revoked or terminated, we may not be able to commercialize our
products and become profitable, and the value of our common stock may decline.
We are also subject to numerous U.S. and foreign regulatory
requirements governing the conduct of clinical trials, marketing authorization,
pricing and third-party reimbursement. The foreign regulatory approval process
includes all the risks associated with FDA approval or clearance described
above, as well as risks attributable to the requirement to satisfy local
regulations in foreign jurisdictions. Approval or clearance by the FDA does not
ensure approval by regulatory authorities of some countries outside the United
States. Many foreign regulatory authorities, including those in major markets
such as Japan and the Peoples Republic of China, have different approval
processes.
Clinical trials of new products or
new indications for our products, if commenced, may not be successful, which
may delay or prevent commercialization of such new products or new indications.
In order to obtain regulatory approval to market new products or new
indications for our products, we may be required to complete clinical trials to
demonstrate the safety and effectiveness of such new products or new
indications. For example, the FDA is requiring that we conduct clinical trials
and submit a marketing application seeking to obtain the approvals and
clearances required to promote our QuadraSphere Microspheres for primary liver
cancer in the United States. In October 2009, we submitted to the FDA an
IDE application to commence a clinical trial comparing the effectiveness of our
QuadraSphere Microspheres combined with the chemotherapeutic agent doxorubicin
to conventional transarterial chemoembolization with doxorubicin in patients
with primary liver cancer. Because our discussions with the FDA are ongoing and
we have not yet agreed upon and finalized the trial design, we have not
determined whether or when to undertake the clinical trial. Clinical testing is
expensive, difficult to design and implement, can take multiple years to complete
and is uncertain as to outcome. We may experience numerous unforeseen events
during, or as a result of, any clinical trials that could delay or prevent our
ability to receive the regulatory approval we are seeking. These unforeseen
events may include:
·
regulatory authorities may
not approve our application to commence such a trial, or we may be delayed in
obtaining approval of such application by the regulatory authority;
·
conditions imposed on us by
the regulatory authority regarding the scope or design of such clinical trials;
·
difficulty obtaining or
maintaining institutional review board approval of such clinical trials at one
or more clinical sites;
·
difficulty in complying with
applicable regulations for conducting such clinical trials;
·
any clinical trials we may
undertake may produce negative or inconclusive results, and we may decide, or
regulators may require us, to conduct additional clinical trials;
·
the number of patients
required for such clinical trials may be larger than we anticipate, enrollment
in such clinical trials may be slower than we anticipate, or participants may
drop out of such clinical trials at a higher rate than we anticipate, any of
which would result in significant delays and increased costs;
·
we might have to suspend or
terminate clinical trials if the participants are experiencing unacceptable
health risks;
·
regulators may require that
we hold, suspend or terminate clinical research for various reasons, including
noncompliance with regulatory requirements;
·
the cost of clinical trials
may be greater than we anticipate; and
40
Table of Contents
·
we may not achieve the
desired favorable effects, the treatment may not compare favorably with other
methods or procedures, may produce undesirable side effects or may have other
unexpected characteristics.
If we are required to conduct additional clinical trials or other
testing of the use of new products or products for new indications, if we are
unable to successfully complete clinical trials or other testing, if the
results of any such trials are not positive or are only modestly positive, or
if there are safety concerns, we may:
·
be delayed in obtaining
marketing approval for the new products or new indications that are the subject
of the clinical trial;
·
not be able to obtain
marketing approval; or
·
obtain approval for an
indication that is not as broad as the indication that we sought.
We are required to register certain types of device clinical trials and
report the results in a national, publicly accessible database
(www.clinicaltrials.gov). The FDA requires the submission of certification of
compliance with this requirement with applications or reports concerning such
studies. If we fail to comply with the clinical trial registry requirements, we
will be potentially subject to civil monetary penalties.
The delay, suspension or discontinuation of clinical trials for any of
the foregoing reasons could adversely affect our efforts to obtain regulatory
approval for and to commercialize the new products or new indications that are
the subject of the clinical trial, increase our operating expenses, and have a
material adverse effect on our results of operations and financial condition.
If the FDA or another regulatory
agency places restrictions on, or imposes additional approval or clearance
requirements with respect to, products we are then marketing, we may incur
substantial additional costs and experience delays or difficulties in
continuing to market and sell these products.
Even if the FDA grants us approval or clearance with respect to
marketing any product, such product will be subject to ongoing regulatory
review, including the review of adverse events and field experience reported
after such product is made commercially available, and restrictions on the
indications for which we can market the product. The FDA can propose to
withdraw approval or clearance or impose additional restrictions if postmarket
adverse events and field experience indicate that a product may not be safe for
use under the cleared or approved conditions of use. For example, we were named
as a defendant in two product liability lawsuits in which the plaintiffs
claimed that our microspheres were defective and not accompanied by proper
warnings and instructions for use. Product liability claims like these can lead
the FDA and comparable regulatory agencies outside of the U.S. to engage in a
further review of the safety of these products and their approved conditions
for use. On the basis of that review, the FDA or such other regulatory agency
could determine to impose additional requirements regarding the manufacturing,
marketing or promotion of these products, require changes to the labeling of
these products, or commence proceedings to withdraw its clearance of these
products, any of which could harm our reputation, adversely affect market
acceptance of these products or cause a decline in revenue from the sale of the
applicable product, which in turn could adversely affect our financial
condition, results of operations, the viability of our business and our future
prospects and cause our stock price to decline.
The marketing claims we are permitted to make in labeling or
advertising regarding our microspheres in the United States are limited to
those consistent with any FDA approval or clearance. For example, because our
EmboGold Microspheres are not cleared for specific use in UFE, we may not
promote them for this specific use. Although our QuadraSphere Microspheres are
identical in all respects to our HepaSphere Microspheres, which are currently
marketed in the European Union for use in the embolization of hepatocellular
carcinoma and hepatic metastasis, our QuadraSphere Microspheres are not
specifically indicated for use in hepatocellular carcinoma and hepatic
metastasis. FDA regulations require that we conduct clinical trials prior to
submitting a marketing application to claim the use of QuadraSphere
Microspheres for the treatment of a specific disease or condition, such as
hepatocellular cancer or hepatic metastasis, while European Union regulations
do not require preclearance clinical trials for this class of medical device on
an indication-by-indication basis. Accordingly, in order for us to seek FDA
approval or clearance to promote the use of QuadraSphere Microspheres for the
embolization of hepatocellular carcinoma and hepatic metastasis, we will be
required to undertake clinical trials. In October 2009, we submitted to
the FDA an IDE application to commence a clinical trial to compare the
effectiveness of our QuadraSphere Microspheres combined with the
chemotherapeutic agent doxorubicin to conventional transarterial
chemoembolization with doxorubicin in patients with primary liver cancer. The
FDA has advised us that our study protocol will need to include patient
survival as a primary endpoint for the trial, rather than overall tumor
response rate at six months, which was the primary endpoint that we proposed in
our IDE application. . In addition, the
FDA has advised us that approval of the IDE will also be conditioned upon our
study protocol including a third study arm assessing QuadraSphere Microspheres
as a stand-alone therapy (e.g., without the addition of doxorubicin) as
compared to both QuadraSphere Microspheres combined with doxorubicin and
conventional
41
Table of Contents
transarterial
chemoembolization, or cTACE, with doxorubicin.
In August 2010, we submitted an appeal to the FDA requesting that
they reconsider their recommendation that our clinical trial also include the
third study arm of treatment with QuadraSphere Microspheres as a stand-alone
therapy. Our satisfactory resolution of
the FDAs comments and recommendations on the IDE is a condition to starting
the clinical trial in the United States and, because our discussions with the
FDA are ongoing and we have not yet agreed upon and finalized the trial design.
We have not reached a conclusion about whether or when to undertake the
clinical trial, and if we determine to not undertake the trial, or if we
undertake the trial and the results are not sufficient to obtain FDA approval,
then we will not be able to promote our QuadraSphere Microspheres for liver
cancer indications in the United States.
If the FDA were to conclude that our advertisements, labeling or
statements made by our sales representatives or other company officials
improperly promote our products for unapproved indications or otherwise violate
the law, the FDA could allege that our promotional activities misbrand or
adulterate our products. Specifically, the FDA could issue an untitled letter
or warning letter, which may request, among other things, that we cease such
promotional activities, including disseminating the advertisements and
promotional labeling, and that we issue corrective labeling, including sending
letters to health-care providers. The FDA also could take enforcement action,
including seizure of product, injunction or criminal prosecution against us and
our officers or employees, or seek civil penalties, disgorgement or
restitution.
We may in the future make modifications to our microspheres or their
labeling or the process through which they are manufactured, which we determine
do not necessitate the filing of a new 510(k) notification or premarket
approval application supplement, or PMA supplement. However, if the FDA does
not agree with our determination, it may require us to make additional 510(k) filings
for the modification, or to file a PMA supplement, and we may be
prohibited from marketing the modified product or the new claims until we
obtain FDA approval or clearance. The FDA may also institute an enforcement
action against us in these circumstances. If we fail to comply with applicable
federal, state or foreign laws or regulations, we could be subject to
enforcement actions which could affect our ability to develop, market and sell
our products and product candidates successfully and could harm our reputation
and lead to decreased acceptance of our products by the market.
Even if we obtain the necessary FDA
clearances or approvals, if we or our suppliers fail to comply with ongoing
regulatory requirements, our products could be subject to corrections, removals
or recalls from the market or other enforcement action.
We are subject to the Medical Device Reporting, or MDR, regulations
that require us to report to the FDA if our products may have caused or
contributed to a patient death or serious injury, or if our device
malfunctioned and a recurrence of the malfunction would likely result in a
death or serious injury. We must also file reports of device corrections and
removals and adhere to the FDAs rules on labeling and promotion. We must
also comply with the FDAs Good Manufacturing Practice requirements as set
forth in the Quality System regulations. Our failure to comply with these or
other applicable regulatory requirements could result in enforcement action by
the FDA, which may include any of the following:
·
untitled letters, warning
letters, fines, product seizures, injunctions and civil penalties;
·
administrative detention,
which is the detention by the FDA of medical devices believed to be adulterated
or misbranded;
·
customer notification of, or
FDA orders for, repair, replacement or refund;
·
voluntary or mandatory
recall of our products;
·
operating restrictions,
partial suspension or total shutdown of production or a refusal to allow
imported product into the United States;
·
refusal to review premarket
notification or premarket approval submissions;
·
rescission of a substantial
equivalence order or suspension or withdrawal of a premarket approval; and
·
criminal prosecution.
If we are subject to an enforcement action, our ability to develop,
market and sell our products successfully would be adversely affected, our
reputation could be harmed, and we may experience decreased market acceptance
of our products.
42
Table of Contents
Existing or future legislation or
regulations, or the FDAs implementation thereof, may make it more difficult
and costly for us to obtain regulatory approval or clearance of our product
candidates and to produce, market and distribute products after approval.
Legislation or regulations enacted or modified in the future, including
potential changes to the 510(k) premarket notification process, may also make
it more difficult and/or costly to obtain clearance of new medical device
products or to produce, market and distribute products after approval. The FDA
is currently reviewing its 510(k) regulatory program and may implement changes
that will make it more difficult, time-consuming or costly to obtain 510(k)
clearance.
We may be subject, directly or
indirectly, to federal and state health-care fraud and abuse laws and
regulations and, if we are unable to fully comply with such laws, could face
substantial penalties.
Our operations may be directly or indirectly affected by various broad
state and federal health-care fraud and abuse laws, including the federal
Anti-Kickback Statute, which prohibit any person from knowingly and willfully
offering, paying, soliciting or receiving remuneration, directly or indirectly,
to induce or reward either the referral of an individual, or the furnishing or
arranging for an item or service, for which payment may be made under federal
health-care programs, such as the Medicare and Medicaid programs.
If our past or present operations are found to be in violation of these
laws, we and our officers may be subject to civil or criminal penalties,
including large monetary penalties, damages, fines, imprisonment and exclusion
from Medicare and Medicaid program participation. If enforcement action were to
occur, our business and financial condition would be harmed.
Risks
Relating to Our Intellectual Property
If we are unable to obtain patent
protection for our products, their competitive value could decline.
We may not obtain meaningful protection for our technology and products
with the patents and patent applications that we own or license relating to our
microsphere technology or other ancillary products. In particular, the patent
rights we possess or are pursuing generally cover our technologies to varying
degrees, and these rights may not prevent others from designing products
similar to or otherwise competitive with our Embosphere Microspheres and other
products we commercialize. To the extent that our competitors are able to
design products competitive with ours, we may experience less market
penetration with our products and, consequently, we may have decreased revenue.
The patent laws involving medical devices and life sciences technologies such
as our microspheres are complex and vary from country to country. Thus,
although we have a current policy of pursuing patent protection wherever
possible for our new technologies, we cannot predict whether we will secure
patent protection from any of our existing patent applications in the United
States or abroad. We also cannot predict whether such coverage obtained in any
of our United States or foreign patent applications will be meaningful.
We do not know whether competitors have similar U.S. patent
applications on file, since U.S. patent applications filed before
November 28, 2000, or for which no foreign patents will be sought, are
secret until issued, and applications filed after November 28, 2000 are
published approximately 18 months after their earliest priority date.
Consequently, the United States Patent and Trademark Office could initiate
interference proceedings involving our owned or licensed U.S. patent
applications or issued patents. Further, there is a substantial backlog of patent
applications at the United States Patent and Trademark Office, and the approval
or rejection of patent applications may take several years.
We require our employees, consultants and advisors to execute
confidentiality agreements. However, we cannot guarantee that these agreements
will provide us with adequate protection against improper use or disclosure of
confidential information. In addition, in some situations, these agreements may
conflict with, or be subject to, the rights of third parties with whom our
employees, consultants or advisors have prior employment or consulting
relationships. Further, others may independently develop substantially
equivalent proprietary information and techniques, or otherwise gain access to
our trade secrets. Our failure to protect our proprietary information and
techniques may inhibit or limit our ability to exclude certain competitors from
the market.
If we become involved in expensive
patent litigation or other proceedings to enforce or defend our patent rights,
we could incur substantial costs and expenses or substantial liability for
damages or be required to stop our product development and commercialization
efforts.
On January 13, 2005, we were notified of a Notice of Opposition
filed in the European Patent Office, or EPO, by Biocompatibles UK Limited on
December 23, 2004, challenging the patentability of the claims in our
granted European Patent, EP 1128816, which relates to certain PVA microspheres
for use in embolization and methods thereof. On December 10, 2007, the EPO
upheld the claims of our patent in amended form and on December 27, 2007
rendered its formal written decision. We and Biocompatibles have appealed this
decision. The EPO has not set a date, but we expect oral proceedings to be
scheduled within the
43
Table of Contents
next
twelve months. On July 1, 2008, Biocompatibles UK Limited filed a Notice
of Opposition in the EPO challenging the patentability of the claims in our
granted European Patent, EP 1267839, which relates to certain drug-loaded
microspheres and their use in embolization. We filed a reply to Notice of
Opposition on March 19, 2009. Oral Proceedings are scheduled for
September 23, 2010. We intend to continue to defend our European patents.
We are not able to predict the outcome of either of these opposition
proceedings.
With the exception of the two European Opposition proceedings just
described, we are not currently involved in any other litigation or actions
with third parties to enforce or defend our patent rights. However, in order to
protect or enforce our patent rights, we may have to initiate legal proceedings
against third parties, such as infringement suits, opposition proceedings or
interference proceedings, or defend against such proceedings. By initiating
legal proceedings to enforce our intellectual property rights, we may also
provoke these third parties to assert claims against us. If we do not prevail
in any such proceedings, our patents could be narrowed, invalidated or rendered
unenforceable. Furthermore, we may be sued for infringing on the intellectual
property rights of others. We may find it necessary, if threatened, to initiate
a lawsuit seeking a declaration from a court regarding the proprietary rights
of others. As we introduce new products into the market, we may be accused of
infringing the patent rights of third parties. If we do not prevail in such a
patent litigation brought against one of our products or its use, we may be
required to pay damages, stop selling our product or obtain a royalty-bearing
license if one is obtainable. Any required license might not be available to us
on acceptable terms, or at all. In addition, some licenses may be nonexclusive,
and therefore our competitors may have access to the same technology licensed
to us. If we fail to obtain a required license or are unable to design around a
patent, we may be prevented from selling some of our products, which could
decrease our revenue. Intellectual property litigation is costly and, even if
we prevail, could divert management attention and resources away from our
business.
If our exclusive license to use the
Embosphere Microsphere intellectual property that we jointly own with LAssistance
Publique-Hôpitaux de Paris is terminated, then our competitive position,
financial condition, prospects and stock price could be adversely affected.
We have an agreement with LAssistance Publique-Hôpitaux de Paris, or
AP-HP, pursuant to which AP-HP has granted us exclusive rights to use two
United States patents and their foreign counterparts that we jointly own with
AP-HP relating to Embosphere Microspheres. This agreement can be terminated on
short notice by AP-HP if we default on our obligations under the license and
fail to cure such default after notice is provided. The license imposes
commercialization, sublicensing, royalty, insurance and other obligations on
us. Our failure, or any sublicensees failure, to comply with the terms of the
license could result in our loss of our exclusive rights to the jointly-owned
intellectual property that is the subject of the license. If the AP-HP
exclusive license is terminated, AP-HP will have the right to grant a
nonexclusive license to our jointly-owned technology to a third party which
would then have the freedom to seek regulatory approval of, and to market,
products identical to our Embosphere Microspheres. This could have a material
adverse effect on our competitive business position, financial condition and
our business prospects and would likely cause our stock price to decline.
Risks
Relating to the Production and Supply of Our Products
If we experience manufacturing
delays or interruptions in production, then we may experience customer
dissatisfaction and our reputation could suffer.
If we fail to produce sufficient products at our own manufacturing
facility or at a third-party manufacturing facility, we may be unable to
deliver products to our customers on a timely basis, which could lead to
customer dissatisfaction and could harm our reputation and ability to compete.
We currently produce and package all of our microsphere products in one
manufacturing facility in France. We have contracted with two suppliers for our
guidewire products. Either we or any third-party manufacturer would likely
experience significant delays or a cessation in producing our products if we or
they experience difficulties, delays or failures in manufacturing processes,
quality control processes, equipment calibration, process-critical equipment or
in any other process necessary for the manufacture of our products, or if we or
they experience a labor-based error or omission, or a labor strike, natural
disaster, local or regional conflict or any disruption in supply. If we are
unable to manufacture and package our products at our facility in France, we
may be required to enter into arrangements with one or more alternative
contract manufacturing companies.
Even if we are able to identify alternative facilities to manufacture
our products, if necessary, we may experience disruption in the supply of our
products until such facilities are available. Although we believe we possess
adequate insurance for damage to our property and the disruption of our business
from casualties, such insurance may not be sufficient to cover all of our
potential losses and may not be available to us on acceptable terms or at all.
Our failure to deliver products on a timely basis could lead to customer
dissatisfaction and damage our reputation. In addition, if we are required to
depend on third-party manufacturers, our profit margins may be lower, which
will make it more difficult for us to become profitable.
Medical device manufacturers must adhere to current Good Manufacturing
Practices and Quality System Regulations which are enforced by the FDA through
its inspection program. We and other third-party manufacturers must comply with
various quality
44
Table of Contents
system
requirements pertaining to all aspects of our product design and manufacturing
process, including requirements for packaging, labeling and record keeping,
complaint handling, corrective and preventive actions, adoption of new
manufacturing methods and internal auditing. In addition, medical device
manufacturing laws are also in effect in many countries outside of the U.S. We
or our third-party manufacturers may not be able to comply or maintain
compliance. If we or any third-party manufacturers we engage fail to comply,
such noncompliance could significantly delay our receipt of new product
premarket approvals, result in FDA enforcement action, including an embargo on
imported devices, or otherwise cause delays and disruptions in the manufacture
and supply of our products, any of which would harm our reputation and could
materially adversely affect our operating results.
Because we rely on a limited number
of suppliers, we may experience difficulty in meeting our customers demands
for our products in a timely manner or within budget.
We currently purchase key components and services with respect to our
microspheres, catheters and guidewires from approximately ten third-party
vendors, including a third party from which we purchase guidewires for our
Segway Guidewire product; a third party from which we purchase catheters for
our EmboCath Plus Infusion Microcatheter product; and a third party from which
we purchase guidewires for our Sequitor Steerable Guidewire and recently
released Tenor Steerable Guidewire products. Our reliance on our suppliers
exposes us to risks, including:
·
the possibility that one or
more of our suppliers could terminate their services at any time without
penalty;
·
the potential inability of
our suppliers to obtain required components;
·
the potential delays and
expenses of seeking alternative sources of supply;
·
reduced control over
pricing, quality and timely delivery due to difficulties in switching to
alternative suppliers; and
·
the possibility that one or
more of our suppliers could fail to be compliant with Quality System
Regulations, 21 CFR Part 820.
Consequently, in the event that our suppliers delay or interrupt the
supply of components for any reason, our ability to produce and supply our
products could be impaired, which could lead to customer dissatisfaction and
harm our reputation.
Risks
Relating to Our Foreign Operations
If we are unable to meet the
operational, legal and financial challenges that we encounter in our
international operations, we may not be able to grow our business.
Our worldwide manufacturing and European sales operations are currently
conducted primarily through our French subsidiary. Furthermore, we currently
derive a portion of our revenue from the sale of our microspheres and delivery
system products outside the United States. For the six months ended June 30, 2010
and for the year ended December 31, 2009, approximately 22% of our revenue
was derived from sales of our microspheres and delivery systems in geographic
territories outside the United States. We are increasingly subject to a number
of challenges that specifically relate to our international business
activities. Our international operations may not be successful if we are unable
to meet and overcome these challenges, which would limit the growth of our
business. These challenges include:
·
failure of local laws to
provide the same degree of protection against infringement of our intellectual
property that United States laws provide;
·
protectionist laws and
business practices that favor local competitors, which could slow our growth in
international markets;
·
the requirement that we
obtain regulatory approval or clearance in each country in which we choose to
offer and sell our products;
·
in some jurisdictions,
strict government-regulated price controls;
·
complex reimbursement
procedures;
·
potentially longer sales
cycles to sell products, which could slow our revenue growth from international
sales; and
45
Table of Contents
·
potentially longer accounts
receivable payment cycles and difficulties in collecting accounts receivables.
In 2008, we commercially launched our Embosphere Microsphere product in
the Peoples Republic of China. Conducting business in China exposes us to a
variety of risks and uncertainties that are unique to China. The economy of
China has been transitioning from a planned economy to a market-oriented
economy. Although in recent years the Chinese government has implemented
measures emphasizing the utilization of market forces for economic reform, the
reduction of state ownership of productive assets and the establishment of
sound corporate governance in business enterprises, a substantial portion of
productive assets in China is still owned by the Chinese government. In
addition, the Chinese government continues to play a significant role in
regulating industrial development. It also exercises significant control over
Chinas economic growth by allocating resources, controlling payment of foreign
currency-denominated obligations, setting monetary policy and providing
preferential treatment to particular industries or companies. Efforts by the
Chinese government to slow the pace of growth of the Chinese economy could
result in interruptions of our commercialization efforts in China. In addition,
the Chinese legal system is a civil law system based on written statutes.
Unlike common law systems, it is a system in which decided legal cases have
little precedential value. In 1979, the Chinese government began to promulgate
a comprehensive system of laws and regulations governing economic matters in
general. Accordingly, we cannot predict the effect of future developments in
the Chinese legal system, including the promulgation of new laws, changes to
existing laws or the interpretation or enforcement thereof, or the preemption
of local regulations by national laws. Our commercialization efforts in China
could be materially harmed by any changes in the political, legal or economic
climate in China or the inability to enforce applicable Chinese laws and
regulations. If such commercialization efforts in China are materially harmed,
we would not be able to grow sales of our Embosphere Microspheres in China and
our operating results could be adversely affected.
Because we translate foreign
currency from international sales into U.S. dollars and are required to make
foreign currency payments, we may incur losses due to fluctuations in foreign
currency exchange rates.
A significant portion of our business is conducted in the European
Union euro. We recognize foreign currency gains or losses arising from our
operations in the period incurred. As a result, currency fluctuations between
the U.S. dollar and the currencies in which we do business will cause foreign
currency translation gains and losses, which may cause fluctuations in our
future operating results. We do not currently engage in foreign exchange
hedging transactions to manage our foreign currency exposure.
Risk
Relating to Our Stock Price
Because the market price of our
stock is highly volatile, investments in our stock could rapidly lose their
value and we may incur significant costs from class action litigation.
The market price of our stock is highly volatile. From January 1,
2008 through August 2, 2010, the price of our common stock has ranged from a
low of $1.26 to a high of $6.00. As a result of this volatility, investments in
our stock could rapidly lose their value.
Our stock price could fluctuate for many reasons, including, without
limitation:
·
variations in our quarterly
operating results or those of companies that are perceived to be similar to us;
·
third-party sales of large
blocks of our common stock;
·
rumors relating to us or our
competitors;
·
changes to our research and
development plans and/or announcements regarding new technologies by us or our
competitors;
·
our decision not to commence
our planned QuadraSphere Microspheres clinical trial, or if commenced,
suspension or termination of such trial;
·
announcements related to our
planned acquisition by Merit Medical;
·
negative publicity or
unfavorable media coverage;
·
filings of, results of, or
developments under, lawsuits involving us or our competitors;
·
sales by us of equity or
debt to fund our operations;
46
Table of Contents
·
the loss of any of our key
scientific or management personnel;
·
FDA or international
regulatory actions or lawsuits concerning the safety of our products; and
·
market conditions, both in
the medical device sector and generally.
In addition, the stock market often experiences extreme price and
volume fluctuations, which affect the stock prices of many medical device
companies and which are often unrelated to the operating performance of these
companies.
When the market price of a stock has been as volatile as our stock
price has been, holders of that stock may institute securities class action
litigation against the company that issued the stock. If any of our
stockholders were to bring a lawsuit of this type against us, even if the
lawsuit is without merit, we could incur substantial costs in defending the
lawsuit. The lawsuit could also divert the time and attention of our
management.
Securities analysts may not initiate
coverage for our common stock or may issue negative reports, and this may have
a negative impact on the market price of our common stock.
Securities analysts may elect not to provide research coverage of our
common stock. If securities analysts do not cover our common stock, the lack of
research coverage may adversely affect the market price of our common stock.
The trading market for our common stock may be affected in part by the research
and reports that industry or financial analysts publish about us or our
business. If one or more of the analysts who elect to cover us downgrades our
stock, our stock price could decline. If one or more of these analysts ceases
coverage of our company, we could lose visibility in the market, which in turn
could cause our stock price to decline. It may be difficult for a company of
our size, with a smaller market capitalization, to attract independent
financial analysts that will cover our common stock. This could have a negative
effect on the market price of our stock.
47
Table of Contents
ITEM 5.
OTHER
INFORMATION.
In
connection with the merger with Merit Medical, on August 11, 2010, we called
for redemption on September 8, 2010 all 9,636 currently outstanding shares of
series A preferred stock at a redemption price of $1,000 per share plus accrued
but unpaid dividends. Holders of such shares of series A preferred stock may
elect to convert each share of series A preferred stock into 250 shares of
common stock prior to the redemption date. The redemption date will occur prior
to the date set for consummation of our merger with Merit Medical, such that to
the extent that any holder of the series A preferred stock has not elected to
convert such shares into shares of common stock prior to the redemption date,
all of such shares will be redeemed on the redemption date and before the
consummation of the merger.
In
connection with our issuance of the redemption notice referred to above, on
August 10, 2010, we issued a convertible promissory note to Merit Medical,
pursuant to which Merit Medical has agreed to loan to us an aggregate of $10.00
million solely to fund the payment of the aggregate series A liquidation
preference amount upon such redemption.
For a further description of the redemption loan, see Note 9 of the
Notes to Consolidated Financial Statements set forth herein and Liquidity and
Capital Resources - Borrowing Arrangements, which is incorporated herein by
reference.
Our
subsidiaries have jointly and severally guaranteed the due and punctual
payment, fulfillment and performance of all of our obligations under the
convertible promissory note pursuant to a Guaranty, dated as of August 10,
2010, by and among our subsidiaries and Merit Medical.
The
foregoing descriptions of the promissory note and Guaranty do not purport to be
complete and are qualified in their entirety by reference to those agreements,
copies of which are filed, respectively, as Exhibits 10.1 and 10.2 hereto and
are incorporated herein by reference.
ITEM 6.
EXHIBITS
The
exhibits listed in the accompanying exhibit index are filed as part of this
quarterly report on Form 10-Q.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Date:
August 13, 2010
|
BIOSPHERE
MEDICAL, INC.
|
|
|
|
|
|
/s/
RICHARD J. FALESCHINI
|
|
Richard
J. Faleschini
|
|
President
and Chief Executive Officer
|
|
(Principal
Executive Officer)
|
|
|
Date:
August 13, 2010
|
/s/
MARTIN J. JOYCE
|
|
Martin
J. Joyce
|
|
Executive
Vice President and Chief Financial Officer
|
|
(Principal
Financial Officer)
|
|
|
|
|
Date:
August 13, 2010
|
/s/
MICHAEL R. MEGNA
|
|
Michael
R. Megna
|
|
Corporate
Controller and Chief Accounting Officer
|
|
(Principal
Accounting Officer)
|
48
Table of Contents
EXHIBIT INDEX
Exhibit
|
|
|
Number
|
|
Description
|
|
|
|
10.1*
|
|
Convertible
Promissory Note, dated August 10, 2010, issued to Merit Medical Systems, Inc.
|
|
|
|
10.2*
|
|
Guaranty,
dated as of August 10, 2010, by BioSphere Medical S.A., BioSphere Medical
Japan, Inc. and BSMD Ventures, Inc. in favor of Merit Medical Systems, Inc.
|
|
|
|
31.1*
|
|
Certification
of the principal executive officer pursuant to Rule 13a-14(a) and
15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
31.2*
|
|
Certification
of the principal financial officer pursuant to Rule 13a-14(a) and
15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32.1*
|
|
Certification
of the principal executive officer pursuant to pursuant to
Rule 13a-14(b) and 15d-14(b) of the Securities Exchange Act of
1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32.2*
|
|
Certification
of the principal financial officer pursuant to pursuant to
Rule 13a-14(b) and 15d-14(b) of the Securities Exchange Act of
1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
|
*
|
|
Filed
herewith.
|
|
|
|
+
|
|
Indicates
confidential treatment requested as to certain portions, which portions were
omitted and filed separately with the Securities and Exchange Commission
pursuant to a confidential treatment request.
|
49
Biosphere Medical (MM) (NASDAQ:BSMD)
Historical Stock Chart
From Oct 2024 to Oct 2024
Biosphere Medical (MM) (NASDAQ:BSMD)
Historical Stock Chart
From Oct 2023 to Oct 2024