ITEM 1A. RISK FACTORS
Risks Related to Our Business
We
have incurred substantial losses since inception and anticipate that we will incur continued losses through at least the year ending December 31, 2014, we may not be able to raise additional financing to fund future losses and we may not be
able to continue to operate as a going concern.
We have experienced substantial net losses since our inception in late 2002 and
expect such losses to continue through at least the year ending December 31, 2014 as we continue to commercialize our technologies and develop new applications and technologies. As of June 30, 2014, we had an accumulated deficit of $379.4
million. We have funded our operations to date principally from the sale of our securities, the issuance of debt and through partnering and the licensing of intellectual property. As of June 30, 2014, our cash, cash equivalents,
short-investments and restricted cash total was $32.2 million. We incurred an operating loss of $26.7 million and had negative cash flows from operations of $19.0 million for the six months ended June 30, 2014. In addition, we are also subject
to minimum liquidity requirements under our existing borrowing arrangement with White Oak Global Advisors, LLC that requires us to maintain $15.0 million in liquidity, consisting of at least $13.0 million in cash and investments, of which $5.0
million is required to be restricted subject to lenders control, and up to $2.0 million in certain accounts receivable. Based on our current operating projections, we do not have sufficient liquidity to meet our anticipated cash requirements
through the next twelve months. These factors raise substantial doubt about our ability to continue as a going concern. In order to continue operations, we need to either obtain sufficient additional financing or adopt additional cost-cutting
measures to sufficiently extend our cash and liquidity. There can be no assurance, however, that such a financing will be successfully completed on terms acceptable to us or that we can implement cost cutting measures sufficient to extend our cash
and liquidity. We may seek additional financing at any time by selling additional equity or debt securities, licensing core or non-core intellectual property assets, entering into future research and development funding arrangements, refinancing or
restructuring existing debt arrangements, or entering into a credit facility. If we seek additional funding in the future by selling additional equity or debt securities or entering into debt or credit facilities, such additional funding may result
in substantial dilution to existing stockholders, may contain unfavorable terms or may not be available on any terms. Conditions in the global financial and credit markets may limit our ability to raise additional funds. We cannot guarantee that
future equity or debt financing will be available in amounts or on terms acceptable to us, if at all. Further, even if financing is available, the cost to us may be significantly higher than in the past.
In August 2013 we sold 28,455,284 shares of our common stock for $1.23 per share and warrants to purchase an aggregate of 34,146,339 shares of
our common stock for $0.125 per warrant in a private placement that raised an aggregate of approximately $39.0 million in gross proceeds at the initial closing. In February 2014, 11,382,117 of the warrants issued in the August 2013 private placement
were exercised for gross proceeds to us of approximately $14.0 million. Most recently, on July 30, 2014, we entered into an exchange agreement with certain of the participants in the August 2013 private placement, pursuant to which their
outstanding warrants will be exchanged for warrants exercisable for an aggregate of 26,728,369 shares of common stock. The exchange is contingent on our receipt of NASDAQ approval. The exchanged warrants will be comprised of the following two
tranches: (a) Series B/C Exchange Warrants (Series B/C Exchange Warrants) exercisable for an aggregate of 20,442,346 shares of common stock, with an exercise price equal to $1.13, the NASDAQ consolidated closing bid price for our
common stock on July 29, 2014, the last completed trading day before the exchange agreement was executed (the Closing Bid Price); and (b) Series D Warrants (Series D Warrants) exercisable for an aggregate of
6,286,023 shares of common stock, with an exercise price equal to the Closing Bid Price. Pending the satisfaction of certain closing conditions, the Series B/C Exchange Warrants will be issued and will be subject to mandatory exercise within 14 days
of issuance and assuming such exercise, would result in gross proceeds to the Company of approximately $23.1 million. Pending the satisfaction of certain closing conditions, the Series D Warrants will have an exercise period of five years, and if
exercised in full would yield approximately $7.1 million in gross proceeds to us. The Series B Warrants and Series C Warrants previously carried an expiration date of August 2015. The remaining Series B Warrants and Series C Warrants not included in
the exchange will remain outstanding until their exercise or expiration and if exercised in full would yield approximately $4.1 million in gross proceeds to us. Our ability to access the capital markets and raise funds required for our operations
may be severely restricted by general market conditions at a time when we would like, or need, to do so, which could have an adverse effect on our ability to meet our current and future funding requirements and on our flexibility to react to
changing economic and business conditions. This could leave us without adequate financial resources to fund our operations as presently conducted or as we plan to conduct them in the future. If adequate funds are not available, we may be required to
adopt additional cost-cutting measures, including additional reductions in our work force, reducing the scope of, delaying or eliminating some or all of our planned research, development and commercialization activities and/or reducing marketing,
customer support or other resources devoted to our products. If we seek additional funding through partnering and licensing transactions, we could be required to license to third parties the rights to commercialize products or technologies that we
would otherwise seek to commercialize ourselves or on terms that are less attractive than they might otherwise be. Any of these factors could materially harm our business and may negatively impact our ability to continue to operate as a going
concern.
Because we may not be successful in significantly increasing sales of our products, the extent of our future losses and the
timing of achieving sustained profitability are highly uncertain, and we may never achieve sustained profitable operations. If we require more time than we expect to generate significant revenue and achieve sustained profitability, we may not be
able to continue our operations. Even if we achieve significant revenues, we may never become profitable on a sustained basis.
29
Our efforts to commercialize our Magellan Robotic System and Sensei system may encounter
obstacles and delays which could significantly harm our ability to generate revenue.
Our ability to generate revenues depends upon
the successful commercialization of our Magellan Robotic System and Sensei system. These commercialization efforts may not succeed for a number of reasons, including those set forth in this Item 1A and that:
|
|
|
our systems may not be accepted by physicians or hospitals;
|
|
|
|
we may not be able to sell our systems and associated catheters in volumes and at prices that allow us to generate sufficient revenue necessary to achieve liquidity;
|
|
|
|
the use of our systems by customers may not achieve more predictable procedure times, enable more complex cases or result in other physician or clinical benefits that we believe will drive adoption of our products;
|
|
|
|
we, or the investigators of our products, may not be able to generate sufficient information regarding outcomes with our systems to satisfy potential purchasers;
|
|
|
|
the availability and perceived advantages of alternative treatments may hinder acceptance of our systems;
|
|
|
|
our assumptions regarding the economic value proposition of our systems for hospitals, including the reimbursement rates that hospitals may achieve for procedures using our systems, may not be sufficiently accurate to
drive adoption in acceptable quantities;
|
|
|
|
technological changes may make our products obsolete;
|
|
|
|
we may not be able to manufacture our systems or catheters in commercial quantities or at an acceptable cost;
|
|
|
|
we may not have adequate financial or other resources to complete the commercialization of our systems or the development of new products; and
|
|
|
|
difficult general economic and capital market conditions, slower than expected macro-economic recovery and uncertainty created by the Affordable Care Act has impacted capital purchases by healthcare providers; and
|
|
|
|
we may not obtain regulatory clearance for the applications for which many physicians wish to use our systems.
|
If we are not successful in the commercialization of our Sensei system for uses other than for mapping in electrophysiology procedures or the
development and commercialization of our Magellan Robotic System, we may never achieve sustained profitability and may be forced to cease operations.
Successful commercialization of our Magellan Robotic System is subject to manufacturing, marketing, sales and customer service risks
which could significantly harm our ability to generate revenue.
We have limited experienced in manufacturing our Magellan Robotic
System, Magellan Robotic Catheters and related accessories in commercial quantities and we may encounter unexpected manufacturing problems when scaling up the production of these new products. While we have experience marketing and selling the
Sensei system following its initial regulatory approvals in 2007, the marketing and sales effort for our Magellan Robotic System involves different customers, value propositions and purchasing processes, and we are only beginning to gain experience
in marketing and selling our Magellan Robotic System. Our Magellan Robotic System is a novel device, and hospitals are traditionally slow to adopt new products and treatment practices. Our Magellan Robotic System is an expensive capital equipment
purchase which slows the sales process. Since the Magellan Robotic System has only recently been commercially introduced, our Magellan Robotic System has limited product and brand recognition. Furthermore, we do not believe hospitals will purchase
our products unless the physicians at those hospitals express a strong desire to use our products and we cannot predict whether or not they will do so in sufficient numbers. The ability to obtain market acceptance of a new product such as the
Magellan Robotic System is highly variable and subject to many risks. As a result, our commercialization plans may be delayed, incomplete or unsuccessful. While we have prepared new training materials specifically for our Magellan Robotic System,
these materials have not been used extensively and only a limited number of clinical cases have been performed with our Magellan Robotic System. As a result, with greater physician experience with our Magellan Robotic System, we may identify areas
where further training is required. In addition, commercial introduction of new products sometimes results in the identification of latent or new product defects or quality issues that were not evident in the testing of the products. If we encounter
any of these new product introduction issues with our Magellan Robotic System, our financial condition and results of operations could be adversely impacted.
We may not be able to further develop our Magellan Robotic System as planned, which could significantly harm our ability to achieve
future regulatory approvals and market acceptance.
We intend to further develop our Magellan Robotic System, including our
Magellan Robotic Catheters and related accessories. Due to the advanced electrical, mechanical, and software capabilities of this new robotic platform, we may encounter challenges in designing, engineering and manufacturing future enhancements to
the platform, which may lead to compatibility obstacles with
30
operating room and catheter laboratory layouts, equipment quality or performance issues, unmet customer expectations regarding features or functionality or other defects in future versions of the
platform. Any such difficulties could result in delays in our submissions to regulatory agencies, delays in achieving or the failure to achieve additional regulatory approvals or clearances for enhancements to the system, lack of physician adoption
of our system, higher than expected service claims, litigation and negative press coverage.
If we are unable to manufacture our
systems and catheters in a manner that yields sufficient gross margins, we will be unable to achieve profitable commercialization.
We do not have significant experience in manufacturing, assembling or testing our current products on a commercial scale. Our products contain
expensive materials and are expensive to manufacture, particularly in limited quantities. In addition to increasing sales to increase manufacturing overhead absorption, we need to reduce the variable manufacturing costs of our catheters in order to
achieve our operational and financial goals. We face challenges in order to produce disposable catheters effectively, to appropriately phase in new products and designs, to efficiently utilize our manufacturing facility and to achieve planned
manufacturing cost reductions. If we are unable to effectively manage these issues, our costs of producing our products will negatively affect our gross margins which will negatively impact our business.
We are a company with a limited history of operations, which makes our future operating results difficult to predict.
We are a medical device company with a limited operating history and first recognized revenues in the second quarter of 2007. We have been
engaged in research and product development since our inception in late 2002. Our Sensei Robotic Catheter System, or Sensei system, received U.S. Food and Drug Administration, or FDA, clearance in May 2007 and our corresponding disposable Artisan
Control Catheter and Artisan Extend Control Catheter received FDA clearance in May 2007 and August 2012, respectively, for commercialization to facilitate manipulation, positioning and control of certain mapping catheters during electrophysiology
procedures. We also received the CE Mark in Europe for our Sensei system in September 2006, for our Artisan Control Catheter in May 2007, for our Lynx catheter in July 2010, for our Magellan Robotic System in July 2011, for our Magellan Robotic
Catheter in October 2011 and for our Artisan Extend Control Catheter in December 2012. We received FDA clearance for the commercialization of our Magellan Robotic System including the catheter and accessories in June 2012 and we received FDA
clearance for the marketing of our Magellan 6Fr Robotic Catheter in February 2014, and we have also received regulatory approvals for our Sensei system and/or our Magellan Robotic System in several countries outside of the U.S, including Canada. Our
Canadian license for the Sensei system, which was issued in December 2011, is conditioned upon our providing yearly safety and effectiveness data for a period of three years for post-market use of the system, including marketing history, a clinical
literature review, and up-to-date data on our randomized clinical study. Failure to provide these reports may result in suspension of our license.
The future success of our business will depend on our ability to design and obtain regulatory approval for new products, manufacture and
assemble our current and future products in sufficient quantities in accordance with applicable regulatory requirements and at lower costs, increase product sales and successfully support and service our products, all of which we may be unable to
do. We have a limited history of operations upon which you can evaluate our business and our operating expenses have fluctuated significantly. We have only recently introduced our Magellan Robotic System and do not have experience selling different
systems for different applications. Our lack of a significant operating history also limits your ability to make a comparative evaluation of us, our products and our prospects. If we are unable to successfully operate our business, our business and
financial condition will be harmed.
We have a debt facility with White Oak Global Advisors, LLC that shall requires us to meet
certain restrictive covenants that may limit our operating flexibility.
In August 2013, we entered into an amended and restated
$33.0 million loan and security agreement with White Oak Global Advisors, LLC, or White Oak, as a lender and as collateral agent for the lenders under the loan agreement. We are obligated to pay only interest on the loan until the loans
maturity date, which is December 30, 2017. At our option, we may prepay all or a portion of the outstanding principal balance, subject to paying a prepayment fee of 3.5% of the principal amount of the loan prepaid if our prepayment is made on
or before the third anniversary of the funding of the loan or 1.0% of the principal amount of the loan prepaid if our prepayment is made after the fourth anniversary of the funding of the loan. In addition, if we prepay all or a portion of the
outstanding principal balance on or prior to August 23, 2014, we will be required to pay an additional make-whole amount to pursuant to the agreement. We are also required to make mandatory prepayments upon certain events of loss and certain
dispositions of our assets as described in the loan agreement.
The loan agreement contains customary events of default, including if we
fail to make a payment on its due date, fail to perform specified obligations, fail to comply with certain covenants in the loan agreement, experience a material adverse change, or become insolvent. We have granted the lenders a first priority
security interest in substantially all of our assets, excluding any of our intellectual property, now owned or hereafter acquired, and all proceeds and products thereof. Two of our wholly-owned subsidiaries, AorTx, Inc. and Hansen Medical
International, Inc., have guaranteed our obligations under the loan and have granted first priority security interests in their assets, excluding any of their intellectual property, to secure their guarantee obligations. Under the loan agreement,
neither we nor Aortx, Inc. and Hansen Medical International, Inc. may grant a lien on any intellectual property to third parties. We have also pledged to the lenders shares of each of our direct and indirect subsidiaries as collateral for the loan.
We are also
31
subject to certain affirmative and negative covenants, including a requirement to maintain $15.0 million of liquidity, consisting of at least $13.0 million in cash and investments of which $5.0
million of which shall be restricted funds subject to lenders control, and up to $2.0 million in certain accounts receivable. We are subject to limitations on our ability to: undergo certain change of control events; convey, sell, lease,
transfer, assign or otherwise dispose of our assets; create, incur, assume, or be liable with respect to certain indebtedness; grant liens; pay dividends and make certain other restricted payments; make loans, acquisitions, or certain investments;
create subsidiaries or enter into joint ventures; repurchase certain equity interests; make payments on any subordinated debt; make material changes to our core business or the core business of any of our subsidiaries; enter into transactions with
any of our affiliates outside of the ordinary course of business; or permit our subsidiaries to do the same.
As of June 30, 2014, we
were in compliance with all financial covenants. In the event we were to violate any covenants or if White Oak believes that we have violated any covenants, and such violations are not cured pursuant to the terms of the loan and security agreement,
we would be in default under the loan and security agreement, which would entitle White Oak to exercise their remedies, including the right to accelerate the debt, upon which we may be required to repay all amounts then outstanding under the loan
and security agreement. Complying with these covenants may make it more difficult for us to successfully execute our business strategy.
If Philips is unable to develop or license new products or applications for the FOSSL technology, or such products are not commercially
viable, we may not realize the full benefits of our agreements with Philips which would harm our results of operations and could delay and or impair our ability to successfully commercialize that technology.
The realization of the full potential benefits of our agreements with Philips, including the receipt of any of the up to $78.0 million in
future payments associated with the successful commercialization by Philips or its collaborators of products containing the FOSSL technology, requires the development of new products and applications of technology that are subject to design,
engineering and manufacturing challenges, potential safety and regulatory issues that could delay, suspend or terminate clinical studies, regulatory approvals or sales, and our reliance on third parties to develop, obtain regulatory approval for,
manufacture, market and sell products containing FOSSL technology. Approximately two-thirds of the up to $78.0 million of potential future payments could arise from Philips sublicensing the FOSSL technology, but Philips has no obligations
to do so. Under certain circumstances, we have the right to reacquire certain of the rights licensed to Philips for an amount which in the aggregate would be greater than the upfront payment amounts received by us from Philips in connection with the
agreements related to the FOSSL technology, however, there can be no assurance that we would have the capital resources to exercise such rights or that we could find another commercial partner or develop commercially such technologies. In addition,
Philips sales of products containing the FOSSL technology could be sufficient to result in our not having any rights to reacquire any of the rights licensed to Philips, yet too low to result in any royalty payments to us. If any of these
events occurred, we would be unable to realize the full financial benefits of our agreements with Philips and may be delayed or unable to monetize the FOSSL technology in other areas, harming our research and development efforts and adversely
affecting our business.
We may be unable to complete our clinical trial for the treatment of atrial fibrillation or other future
trials, or we may experience significant delays in completing our clinical trials, which could prevent or delay regulatory approval of our Sensei system for expanded uses and impair our financial position.
We have received IDE approval to investigate the use of our Sensei system and Artisan Control and Artisan Extend catheters in the treatment of
atrial fibrillation in a clinical study designed to support the expansion of our current labeling in the U.S. beyond mapping. The study involves the treatment of atrial fibrillation. We enrolled our first patient in May 2010, but in January 2013,
proposed a modification to the study protocol to change the study design and reduce the required sample size. The modified study, which plans to enroll a minimum of 125 additional subjects, was approved by the FDA in August 2013 and approximately
one-third of the additional patients have been enrolled to date, including a complete enrollment in the randomized portion of the study. The study includes a seven-day follow-up for safety and a one-year follow-up for efficacy at intervals of 90,
180, and 365 days.
Enrollment of additional patients in the trial could be delayed for a variety of reasons, including:
|
|
|
reaching agreement on acceptable terms with prospective clinical trial sites;
|
|
|
|
obtaining additional institutional review board approval to conduct the trial at prospective sites; and
|
|
|
|
obtaining sufficient patient enrollment, which is a function of many factors, including the size of the patient population, the nature of the protocol, the willingness of patients to participate in a clinical trial, the
proximity of patients to clinical sites and the eligibility criteria for the trial.
|
In addition, the completion of the
trial, and any future clinical trials, could be delayed, suspended or terminated for several reasons, including:
|
|
|
ongoing discussions with regulatory authorities regarding the scope or design of our preclinical results or clinical trial or requests for supplemental information with respect to our preclinical results or clinical
trial results;
|
|
|
|
our failure or inability to conduct the clinical trials in accordance with regulatory requirements;
|
32
|
|
|
sites participating in the trial may drop out of the trial, which may require us to engage new sites or petition the FDA for an expansion of the number of sites that are permitted to be involved in the trial;
|
|
|
|
patients may not enroll in, remain in or complete the clinical trial at the rates we expect;
|
|
|
|
patients in either the control or test arm of the trial may experience serious adverse events or side effects during the trial, which, whether or not related to our products, could cause the FDA or other regulatory
authorities to place the clinical trial on hold; and
|
|
|
|
clinical investigators may not perform our clinical trials on our anticipated schedule or consistent with the clinical trial protocol and good clinical practices.
|
If our clinical trials are delayed it will take us longer to commercialize a product for the treatment of atrial fibrillation and generate
revenues from such product. Moreover, our development costs will increase if we have material delays in our clinical trials or if we need to perform more or larger clinical trials than planned.
Even if we complete our trial for the treatment of atrial fibrillation or other clinical trials, these trials may not produce results
that are sufficient to support approval of a PMA or 510(k) application.
We will consider our Sensei system to be effective if the
trial for the treatment of atrial fibrillation meets target performance goals based upon the manual control of the NaviStar Thermocool catheter, but there is a risk that, even if we achieve our trial endpoints, the FDA may not approve our Sensei
system for use in the treatment of atrial fibrillation. In addition, there is a risk that the FDA may require us to conduct a larger or longer clinical trial, submit additional follow-up data, or engage in other costly and time consuming activities
that may delay the FDAs clearance or approval of the Sensei system for use in atrial fibrillation. Although we plan to file a 510(k) application based on data from our trial for the use of Sensei system in the treatment of atrial fibrillation,
the FDA may require us to file a PMA, which is more time consuming and costly. If our clinical trials fail to produce sufficient data to support a PMA or 510(k) application, it will take us longer to ultimately commercialize a product for the
treatment of atrial fibrillation, or any other intended treatment, and generate revenue or the delay could result in our being unable to do so. Moreover, our development costs will increase if we need to perform more or larger clinical trials than
planned.
We have incurred substantial management and employee turnover and we may lose additional key personnel or fail to attract
and retain additional personnel needed for us to operate our business effectively.
We hired a new Senior Vice President of Global
Sales in January 2013, a new Vice President of Marketing and Business Development in April 2013, a new Chief Operating Officer in December 2013 and our new Chief Executive Officer in May 2014. In addition, the position of Chief Financial Officer is
currently held on an interim basis and we expect to hire a full-time Chief Financial Officer by the end of 2014. If we are unable to recruit and retain qualified individuals, including our new Chief Executive Officer and future Chief Financial
Officer, our product development and commercialization efforts could be materially delayed or be unsuccessful. We have periodically reduced our work force and we may undertake additional actions to reduce our work force in the future. These
reductions in force may make it more difficult to retain and attract the qualified personnel required, placing a significant strain on our management. Accordingly, retaining such personnel and recruiting necessary new employees in the future will be
critical to our success. There is intense competition from other companies and research and academic institutions for qualified personnel in the areas of our activities. If we fail to identify, attract, retain and motivate these highly skilled
management and personnel, we may be unable to continue our development and commercialization activities and our business will be harmed.
We are highly dependent on the principal members of our management and scientific staff. We do not carry key person insurance
covering any members of our senior management. Each of our officers and key employees may terminate his employment at any time without notice and without cause or good reason. The loss of any of these persons could prevent the implementation and
completion of our objectives, including the development and introduction of our products, and could require the remaining management members to direct immediate and substantial attention to seeking a replacement.
Credit, financial market and general economic conditions could delay or prevent potential customers from purchasing our products, which
would adversely affect our sales, financial condition and results of operation.
The sale of our systems often represents a
significant capital purchase for our customers and many customers finance their purchase of our systems through a credit facility or other financing. If prospective customers that need to finance their capital purchases are not able to access the
credit or capital markets on terms that they consider acceptable, they may decide to postpone or cancel a potential purchase of one of our systems. Potential customers with limited capital budgets may decide to spend those dollars on other
technologies rather than on our products. Also, even customers with sufficient financial resources to make such purchases without resorting to the credit and capital markets may be less likely to make capital purchases during periods when they view
the overall economic conditions unfavorably or with uncertainty. Many potential customers have delayed making a decision to purchase a Sensei or Magellan system, which has significantly impacted our sales, financial condition and results of
operations. If we are unable to obtain market acceptance for our products value proposition, potential customers may not make these significant capital purchases and our sales, financial condition and results of operations would be harmed.
33
We have limited sales, marketing and distribution experience and capabilities, which could
impair our ability to achieve sustained profitability.
In the second quarter of 2007, we received clearance to market, sell and
distribute our Sensei system for use in the mapping of electrophysiology procedures in the United States and Europe. We had no prior experience as a company in undertaking these efforts. We received CE Mark approval to market, sell and distribute
our Magellan Robotic System in Europe in the third quarter of 2011 and FDA clearance to market, sell and distribute our Magellan Robotic System in the United States in the second quarter of 2012. In the United States, we market our systems and
catheters through a direct sales force of regional sales employees, supported by clinical sales representatives who provide training, clinical support and other services to our customers. Our direct sales force competes against the experienced and
well-funded sales organizations of our competitors. Our revenues will depend largely on the effectiveness of our sales force. We face significant challenges and risks related to our direct sales force and the marketing of our current and future
products, including, among others:
|
|
|
the ability of sales personnel to obtain access to or persuade adequate numbers of hospitals to purchase our system and catheters or physicians to use our system and catheters;
|
|
|
|
our ability to retain, properly motivate, recruit and train adequate numbers of qualified sales and marketing personnel;
|
|
|
|
our ability to successfully integrate new management, including our newly hired Chief Executive Officer and future Chief Financial Officer;
|
|
|
|
the costs associated with an independent sales and marketing organization, hiring, maintaining and expanding an independent sales and marketing organization; and
|
|
|
|
our ability to promote our products effectively while maintaining compliance with government regulations and labeling restrictions with respect to the healthcare industry.
|
Outside the United States, primarily in the EU, we are establishing a combination of a direct sales force and distributors to market, sell and
support our current and future products. If we fail to select and maintain appropriate distributors, appropriately disengage from unsuccessful distributors or effectively use our distributors or sales personnel and coordinate our efforts for
distribution of our systems and catheters in the EU if their and our sales and marketing strategies are not effective in generating sales of our system, our revenues would be adversely affected and we may never become profitable on a sustained
basis.
We have limited experience in manufacturing and assembling our products and may encounter problems at our manufacturing
facilities or otherwise experience manufacturing delays that could result in lost revenue or diminishing margins.
We do not have
significant experience in manufacturing, assembling or testing our current products on a commercial scale. In addition, for our Sensei system and Magellan Robotic System, we subcontract the manufacturing of major components and complete the final
assembly and testing of those components in-house. We face challenges in order to produce our Sensei system and disposable catheters effectively, to appropriately phase in new products such as the Magellan Robotic System and product designs, to
efficiently utilize our manufacturing facility and to achieve planned manufacturing cost reductions. These challenges include equipment design and automation, material procurement, low or variable production yields on catheters and quality control
and assurance. The costs resulting from these challenges have had and will continue to have a significant impact on our gross margins and may result in significant fluctuations of gross margins from quarter to quarter. We may not successfully
complete required manufacturing changes or planned improvements in manufacturing efficiency on a timely basis or at all. The Company has in the past experienced recalls associated with its manufacturing processes and such recalls may occur again.
Any future manufacturing issues may result in our being unable to meet the expected demand for our products, maintain control over our expenses or otherwise successfully manage our manufacturing capabilities. If we are unable to satisfy demand for
our systems or catheters, our ability to generate revenue could be impaired and hospitals may instead purchase, or physicians may use, our competitors products. Since our Sensei system and Magellan Robotic System require the use of disposable
Artisan catheters and Magellan Robotic Catheters, respectively, our failure to meet demand for catheters from hospitals that have purchased our systems could adversely affect the market acceptance of our products and damage our commercial
reputation.
In addition, all of our operations are conducted at our facilities leased in Mountain View, California. We could encounter
problems at these facilities, which could delay or prevent us from manufacturing, assembling or testing our products or maintaining our manufacturing capabilities or otherwise conducting operations.
Our reliance on third-party manufacturers and on suppliers, and in one case, a single-source supplier, could harm our ability to meet
demand for our products in a timely manner or within budget, and could cause harm to our business and financial condition.
We depend on third-party manufacturers to produce most of the components of our systems and other current products, and have not entered into
formal agreements with several of these third parties. We also depend on various third-party suppliers for various components we use in our systems and for our catheters and sheaths. For example, Force Dimension Sàrl, a single-source
supplier, manufactures customized motion controllers that are a part of our Sensei system and Magellan Robotic System. We also obtain the motors for our Sensei system and Magellan Robotic System from a single supplier, Maxon Motor AG, from whom we
purchase on a purchase order basis, and we generally do not maintain large volumes of inventory. In September 2013, we terminated our supply agreement with Plexus Services Corp. in favor of a new supplier for certain components to our robotic
systems.
34
Our reliance on third parties involves a number of risks, including, among other things, the risk
that:
|
|
|
suppliers may fail to comply with regulatory requirements or make errors in manufacturing components that could negatively affect the efficacy or safety of our products or cause delays in or prevent shipments of our
products;
|
|
|
|
we may not be able to respond to unanticipated changes and increases in customer orders;
|
|
|
|
we may be subject to price fluctuations due to a lack of long-term supply arrangements for key components with our suppliers;
|
|
|
|
we may lose access to critical services and components, resulting in an interruption in the manufacture, assembly and shipment of our systems and other products;
|
|
|
|
our suppliers manufacture products for a range of customers, and fluctuations in demand for products these suppliers manufacture for others may affect their ability to deliver components to us in a timely manner;
|
|
|
|
our suppliers may wish to discontinue supplying goods or services to us;
|
|
|
|
we may not be able to find new or alternative components for our use or reconfigure our system and manufacturing processes in a timely manner if the components necessary for our system become unavailable; and
|
|
|
|
our suppliers may encounter financial hardships unrelated to our demand for components, which could inhibit their ability to fulfill our orders and meet our requirements.
|
If any of these risks materialize, it could significantly increase our costs and impact our ability to meet demand for our products.
In addition, if these manufacturers or suppliers stop providing us with the components or services necessary for the operation of our
business, we may not be able to identify alternative sources in a timely fashion. Any transition to alternative manufacturers or suppliers or a decision to discontinue our relationship with a current manufacturer or supplier could result in
operational problems, increased expenses or write-down of capitalized assets that would adversely affect operating results and could delay the shipment of, or limit our ability to provide, our products. We cannot assure you that we would be able to
enter into agreements with new manufacturers or suppliers on commercially reasonable terms on a timely basis or at all. Additionally, obtaining components from a new supplier may require qualification of a new supplier in the form of a new or
supplemental filing with applicable regulatory authorities and clearance or approval of the filing before we could resume purchasing components for inclusion in our products. Any disruptions in product supply may harm our ability to generate
revenues, lead to customer dissatisfaction, damage our reputation and result in additional costs or cancellation of orders by our customers. We currently purchase a number of the components for our systems in foreign jurisdictions. Any event causing
a disruption of imports, including the imposition of import restrictions, could adversely affect our business and our financial condition.
If we fail to maintain necessary FDA clearances/approvals and the CE Certificates of Conformity marks for our medical device products,
or if future clearances, approvals or the delivery of CE Certificates of Conformity are delayed, we will be unable to commercially distribute and market our products.
The process of seeking regulatory clearance, approval or CE Certificates of Conformity to market a medical device is expensive and
time-consuming and clearance, approval and grant of CE Certificates of Conformity are never guaranteed and, even if granted or obtained, clearance, approval or CE Certificates of Conformity may be suspended, withdrawn or revoked. In May 2007, we
received FDA clearance in the United States to commercialize our Sensei system and Artisan catheters only to facilitate manipulation, positioning and control, for collecting electrophysiological data within the heart atria with electro-anatomic
mapping and recording systems using two specified mapping catheters. We received FDA clearance to commercialize our Magellan Robotic System including the catheter and accessories in June 2012 and we received FDA clearance for the marketing of our
Magellan 6Fr Robotic Catheter in February 2014. Because the FDA has determined that there is a reasonable likelihood that our Sensei system and Artisan catheters could be used by physicians for uses not encompassed by the scope of the present label
and that such uses may cause harm, we are required to label these products to state that their safety and effectiveness for use with cardiac ablation catheters in the treatment of cardiac arrhythmias including atrial fibrillation have not been
established. Accordingly, the scope of the current label may be an obstacle to our ability to successfully market and sell our electrophysiology products in the United States to a broader group of potential customers. We will be required to seek a
separate 510(k) clearance or PMA approval to market our Sensei system for uses other than those in the current label. We cannot assure you that the FDA would not impose a more burdensome level of premarket review on other intended uses or
modifications to approved products. We plan to seek future approval of our Sensei system for other indications, including atrial fibrillation and other cardiac ablation procedures. We have received IDE approval to investigate the use of our Artisan
family of catheters in the treatment of atrial fibrillation in a clinical study designed to support the expansion of our current labeling in the U.S. beyond mapping. The study was planned to involve approximately 300 patients and involves the
treatment of atrial fibrillation. We enrolled our first patient in May 2010 and approximately 50 patients were enrolled as of January 2013. A proposed modification to the study protocol was submitted to FDA for review in January 2013. The modified
study, which plans to enroll a minimum of 125 additional subjects, was approved by the FDA in August 2013 and approximately one-third of the targeted number of additional patients have been enrolled to date. The study will include a seven-day
follow-up for safety and a one-year follow-up for efficacy at intervals of 90, 180, and 365 days. We cannot assure the timing or potential for success of those efforts. We cannot assure you that the study will be completed at all or in a timely
manner, nor that the study will be executed in a manner consistent with FDA requirements or yield sufficient data to support approval. Clinical studies are subject to FDA audits under the Bioresearch Monitoring program, and if our study execution or
that of our participating sites and investigators is found to be deficient, this may result in delays in approval or could prevent approval from being obtained. Any significant violations can also result in further enforcement action, as outlined
above.
35
With regard to our Sensei system, our Magellan Robotic System, or other products, the FDA can
delay, limit or deny clearance of a 510(k), or PMA approval, for many reasons, including:
|
|
|
our inability to demonstrate safety or effectiveness to the FDAs satisfaction;
|
|
|
|
the data from our preclinical studies and clinical trials may be insufficient to support approval;
|
|
|
|
the facilities of our third-party manufacturers or suppliers may not meet applicable requirements;
|
|
|
|
our compliance with preclinical, clinical or other regulations;
|
|
|
|
our inability to meet the FDAs statistical requirements or changes in statistical tests or significance levels the FDA requires for approval of a medical device, including ours; and
|
|
|
|
changes in the FDA approval policies, expectations with regard to the type or amount of scientific data required or adoption of new regulations may require additional data or additional clinical studies.
|
Furthermore, in order to market our products outside of the United States, we will need to establish and comply with the
numerous and varying regulatory requirements of other countries regarding quality, safety and efficacy. We received a CE Certificate of Conformity in the EEA for our Sensei system in September 2006, for our Artisan catheters in May 2007, for our
Lynx catheters in September 2010, for our Magellan Robotic System in July 2011 for our Magellan Robotic Catheter and related accessories designed for use with the Magellan Robotic System in October 2011, and for our Artisan Extend catheters in
February 2013. However, we may be required to go through new conformity assessment procedures with our Notified Body in the EEA in order to market our products for any additional uses. Regulatory approvals or CE Certificates of Conformity may be
difficult and costly to obtain, or may not be granted or obtained at all. If we are unable to maintain our regulatory clearances and CE Certificates of Conformity and obtain future clearances and CE Certificates of Conformity for our products, our
financial condition and cash flow may be adversely affected, and our ability to grow domestically and internationally may be limited.
If physicians and hospitals do not believe that our Sensei system and Artisan catheters are a viable alternative to existing mapping
technologies used in atrial fibrillation and other cardiac ablation procedures, or if they do not believe that our Magellan Robotic System and Magellan Robotic Catheters are a viable alternative for vascular diseases, they may choose not to use our
products.
We believe that physicians will not use, and hospitals will not purchase, our systems unless they determine that they
provide a safe and effective alternative to existing treatments. Since we have received FDA clearance to market our Sensei system and disposable Artisan catheters only for guiding catheters to map the heart anatomy, we will not be able to label or
promote these products, or train physicians, for use in guiding catheters for cardiac ablation until such clearance or approval is obtained. Currently, there is only limited clinical data on our Sensei system with which to assess its safety and
efficacy in any procedure, including atrial fibrillation and other cardiac ablation procedures. A number of studies have been published since the commercial launch of our Sensei system in 2007 on the efficacy, safety and efficiency of our products,
especially by comparison to manual techniques. While we believe many of those studies have demonstrated the benefits of our products, some of these studies have been cited by our competitors to portray our products in an unfavorable light. A number
of additional studies are underway both in the United States and Europe assessing the clinical experience with our products and continuing to compare usability and success of treatment between procedures performed with our Sensei system and manual
technique. If these studies, or other clinical studies performed by us or others, or clinical experience indicate that procedures with our Sensei system or the type of procedures that can be performed with the Sensei system are not effective or safe
for such uses, physicians may choose not to use our Sensei system. Reluctance by physicians to use our Sensei system or to perform procedures enabled by the Sensei system would harm sales. Furthermore, we commenced the commercialization of our
Magellan Robotic System and Magellan Robotic Catheters for the treatment of vascular diseases, but there is very little clinical data for the systems safety and efficacy. Reluctance by physicians to use our Magellan Robotic System or to
perform procedures enabled by the Magellan Robotic System would harm these sales. Further, unsatisfactory patient outcomes or patient injury in either of our major products could cause negative publicity for our products, particularly in the early
phases of product introduction. In addition, physicians may be slow to adopt our products if they perceive liability risks arising from the use of these new products. It is also possible that as our products become more widely used, latent or other
defects could be identified, creating negative publicity and liability problems for us, thereby adversely affecting demand for our products. If physicians do not adopt the use of our products in their practices, we likely will not become profitable
on a sustained basis and our business will be harmed. Our research and development efforts and our marketing strategy depend heavily on obtaining support and collaboration from highly regarded physicians at leading hospitals. If we are unable to
gain or maintain such support and collaboration, our ability to market our Sensei system and Magellan Robotic System and, as a result, our business and results of operations, could be harmed.
36
We expect to derive substantially all of our revenues from sales of our Sensei system, our
recently-introduced Magellan Robotic System and the associated catheters and accessories. If hospitals do not purchase our systems, we may not generate sufficient revenues to continue our operations.
Our initial commercial offering consisted primarily of two products, our Sensei system and our corresponding disposable Artisan catheters. The
Sensei system has been supplemented by an optional CoHesion Module and, in the third quarter of 2010, we introduced our Lynx catheter in Europe. In order for us to achieve sales, hospitals must purchase our Sensei system and Artisan and Lynx
catheters. We also received the CE Mark in Europe for our Magellan Robotic System in July 2011 and for the Magellan Robotic Catheter and related accessories designed for use with the Magellan Robotic System in October 2011. We received FDA clearance
to commercialize our Magellan Robotic System including the catheter and accessories in June 2012 and we received FDA clearance for the marketing of our Magellan 6Fr Robotic Catheter in February 2014. Because we have shipped only slightly more than
110 Sensei systems and our Magellan Robotic System has only recently been commercially introduced, our systems have limited product and brand recognition. Furthermore, we do not believe hospitals will purchase our products unless the physicians at
those hospitals express a strong desire to use our products and we cannot predict whether or not they will do so. If hospitals do not widely adopt our Sensei system or Magellan Robotic System, or if they decide that our systems are too expensive to
purchase or operate, we may never achieve significant revenue or become profitable. Such a failure to adequately sell our Sensei system or Magellan Robotic System would have a materially detrimental impact on our business, results of operations and
financial condition.
We may incur significant liability if it is determined that we are promoting off-label use of our products in
violation of federal, state and countries regulations in the United States or elsewhere.
Our promotional materials and training
methods regarding physicians must comply with FDA limitations and other applicable laws and regulations. Both our Magellan and Sensei systems are cleared by the FDA and CE marked in the EEA for defined uses. We believe that the specific procedures
for which our products are marketed fall within the scope of the applications that have been cleared by the FDA or are CE marked in the EEA. If the FDA or the competent authorities of the EEA countries determine that our promotional materials or
training constitutes promotion of a use which has not been approved or does not fall within the scope of the current CE mark, they could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions,
including the issuance of an untitled letter, a warning letter, injunction, seizure, civil fine and criminal penalties.
We have received
FDA clearance to market our Sensei system and Artisan catheters only to facilitate manipulation, positioning and control for collecting electrophysiological data within the heart atria with two specified mapping catheters, which is a critical step
in the identification of the heart tissue generating abnormal heart rhythms that may require ablation or other treatment. Because the FDA has determined that there is a reasonable likelihood that physicians may choose to use our products off-label,
and that harm may result, we are required to label these products to state that their safety and effectiveness for use with cardiac ablation catheters in the treatment of cardiac arrhythmias including atrial fibrillation have not been established.
We have commenced a clinical trial for the use of our Sensei system and Artisan catheter with an ablation catheter in the treatment of atrial fibrillation as part of our process to expand our current labeling in the U.S. beyond mapping. Thus,
efforts are underway to eventually seek regulatory clearance or approval for the use of our Sensei system in atrial fibrillation procedures. We may subsequently seek regulatory clearance for use of our Sensei system for use with other catheters. The
future of our electrophysiology business will depend primarily on the use of our Sensei system in the treatment of atrial fibrillation and other cardiovascular procedures, for which we do not yet, and may never, have FDA clearance or approval.
Unless and until we receive regulatory clearance or approval for use of our Sensei system with ablation catheters or in these procedures, uses
in these procedures will be considered off-label uses of our Sensei system. Under the Federal Food, Drug, and Cosmetic Act and other similar laws, we are prohibited from labeling or promoting our products, or training physicians, for such off-label
uses. This prohibition means that the FDA could deem it unlawful for us to make claims about the quality, safety or effectiveness of our Sensei system for use with ablation catheters and in cardiac ablation procedures and that we may not proactively
discuss or provide information or training on the use of our product in cardiac ablation procedures or use with unapproved catheters, with very limited exceptions. We presently believe that to date, all of the procedures in which our products have
been used in the United States have included off-label uses such as cardiac ablation, for which our Sensei system and Artisan catheters have not been cleared by the FDA.
In 2012, FDA cleared our Magellan Robotic System for use to facilitate navigation to anatomical targets in the peripheral vasculature. Our FDA
cleared labeling does not further specify the scope of the targets within the peripheral vasculature that are encompassed in the 510(k) clearance. The FDA could disagree with our interpretation of the scope of this clearance. If the FDA concludes
that our promotional materials exceed the scope of this clearance, the agency may retroactively require us to seek 510(k) clearance or PMA approval and such uses could be considered off-label use subject to the same restrictions as the use of the
Sensei system in cardiac ablation procedures. The FDA also can require us to cease marketing for any claims beyond the scope of the clearance, and can take other enforcement actions as outlined above.
The FDA and other competent authorities and agencies actively enforce regulations prohibiting promotion of off-label uses and the promotion of
products for which marketing clearance, approval or CE Certificates of Conformity has not been obtained. Moreover, scrutiny of such practices by the FDA and other competent authorities and agencies has recently increased. In the United States,
37
promotional activities for FDA regulated products of other companies have been the subject of enforcement action brought under healthcare reimbursement laws and consumer protection statutes. A
company that is found to have improperly promoted off-label uses may be subject to significant liability, including civil and administrative remedies under the Federal False Claims Act and various other federal and state laws, as well as criminal
sanctions. Administrative, civil and criminal sanctions can also be imposed in foreign countries.
For all of our products, including both
the Sensei and Magellan systems, we believe that the way in which they are marketed is consistent with the FDA clearance. However, the FDA and the competent authorities in the EEA countries could disagree and require us to stop promoting our
products for certain procedures until we obtain FDA clearance or approval or a specific CE Certificate of Conformity for them and/or could require us to initiate corrective actions that could include issuing corrective advertising. In addition, the
FDA and the competent authorities in the EEA countries could require us to generate and submit significant quality, safety and efficacy data to support use in those procedures for which the agency or the competent authorities of the EEA countries
require clearance, approval or a specific CE Certificate of Conformity. If we are perceived not to be in compliance with all of the restrictions limiting the promotion of our products for off-label use, we could be subject to various enforcement
measures, including investigations, administrative proceedings and country, federal and state court litigation, which would likely be costly to defend and harmful to our business. If the FDA or another competent authority ultimately concludes we are
not in compliance with such restrictions, we could be subject to significant liability, including civil and administrative remedies, injunctions against sales for off-label uses, significant monetary and punitive penalties and criminal sanctions,
any or all of which would be harmful to our business and in certain instances may cause us to have to cease operations.
The
training required for physicians to use our Sensei system and Magellan Robotic System could reduce the market acceptance of our system and reduce our revenue.
It is critical to the success of our sales efforts to ensure that there are a sufficient number of physicians familiar with, trained on and
proficient in the use of our Sensei system and Magellan Robotic System. Convincing physicians to dedicate the time and energy necessary for adequate training in the use of our systems is challenging, and we cannot assure you that we will be
successful in these efforts.
It is our policy to train U.S. physicians to only insert, navigate, map and remove catheters using our
Sensei system. Physicians must obtain training elsewhere to learn how to ablate cardiac tissue to treat atrial fibrillation, which is an off-label procedure with our Sensei system. This training may be provided in the U.S. by third parties, such as
hospitals and universities and through independent peer-to-peer training among doctors. We cannot assure you that a sufficient number of U.S. physicians will become aware of training programs or that physicians will dedicate the time, funds and
energy necessary for adequate training in the use of our system for these off label procedures. Additionally, we will have no control over the quality of these training programs. If physicians are not properly trained, they may misuse or
ineffectively use our products. This may result in unsatisfactory outcomes, patient injury, negative publicity or lawsuits against us, any of which could negatively affect our reputation and sales of our products. Furthermore, our inability to
educate and train U.S. physicians to use our Sensei system for cardiac ablation procedures may lead to inadequate demand for our products and have a material adverse impact on our business, financial condition and results of operation.
We monitor our training to ensure that off-label use is not promoted or enabled. However, from time to time, we may sponsor third party
training. There is a risk that independent peer-to-peer interaction between physicians and other third party training may include discussion or observation of off-label procedures because most procedures performed to date using the Sensei system
involve both mapping and cardiac ablation. If any such activities are attributed to us, the FDA or other governmental entities could conclude that we have engaged in off-label promotion of our products, which could subject us to significant
liability.
Because our markets are highly competitive, customers may choose to purchase our competitors products, which would
result in reduced revenue and harm our financial results.
Our Sensei system is still considered a new technology and must compete
with established manual interventional methods and methods of our competitors, such as Stereotaxis, Inc., in remote navigation. Conventional manual methods are widely accepted in the medical community, have a long history of use and do not require
the purchase of additional, expensive capital equipment. The Stereotaxis Niobe
®
system, which has been in the market since 2003, four years earlier than our Sensei system, has been adopted by
a number of leading clinicians. Similarly, our Magellan Robotic System is a new technology and must compete with established manual interventional techniques. In addition, many of the medical conditions that can be treated using our products can
also be treated with existing drugs or other medical devices and procedures. Many of these alternative treatments are widely accepted in the medical community and have a long history of use.
We also face competition from companies that are developing drugs or other medical devices or procedures to treat the conditions for which our
products are intended. The medical device and pharmaceutical industries make significant investments in research and development and innovation is rapid and continuous. If new products or technologies emerge that provide the same or superior
benefits as our products at equal or lesser cost, they could render our products obsolete or unmarketable. We cannot be certain that physicians will use our products to replace or supplement established treatments or that our products will be
competitive with current or future products and technologies.
38
Most of our competitors enjoy several competitive advantages over us, including:
|
|
|
significantly greater name recognition;
|
|
|
|
longer operating histories;
|
|
|
|
established relations with healthcare professionals, customers and third-party payors;
|
|
|
|
established distribution networks;
|
|
|
|
additional lines of products, and the ability to offer rebates or bundle products to offer higher discounts or incentives to gain a competitive advantage;
|
|
|
|
greater experience in conducting research and development, manufacturing, clinical trials, obtaining regulatory clearance for products and marketing approved products; and
|
|
|
|
greater financial and human resources for product development, sales and marketing, and patent litigation.
|
In addition, as the markets for medical devices develop, additional competitors could enter the market. As a result, we cannot assure you that
we will be able to compete successfully against existing or new competitors. Our revenues would be reduced or eliminated if our competitors develop and market products that are more effective and less expensive than our products.
We expect to continue to experience extended and variable sales cycles, which could cause significant variability in our results of
operations for any given quarter.
Our systems have a lengthy sales cycle because they involve a relatively expensive capital
equipment purchase, which generally requires the approval of senior management at hospitals, inclusion in the hospitals budget process for capital expenditures and, in some instances, a certificate of need from the state or other regulatory
clearance. We continue to estimate that this sales cycle may take between six and 18 months, though we have seen sales cycles lengthen towards the longer end of this range as many potential customers have postponed purchase decisions. Additionally,
the majority of our revenue is often shipped in the last weeks of a given quarter. Any disruption in our supply chain during those critical weeks or an inability to fulfill our deliverables during that compressed time frame could significantly
impact the timing of our ability to recognize revenue on those items. These factors have contributed in the past and may contribute in the future to substantial fluctuations in our quarterly operating results, particularly in the near term and
during any other periods in which our sales volume is relatively low. As a result, in future quarters our operating results could differ from our announcements of guidance regarding future operating or financial results or may fail to meet the
expectations of securities analysts or investors, in which event our stock price would likely decrease. These fluctuations also mean that you will not be able to rely upon our operating results in any particular period as an indication of future
performance. In addition, the introduction of new products such as our Magellan Robotic System and Magellan Robotic Catheters could adversely impact our sales cycle, as customers take additional time to assess the benefits of new investments in
capital products.
The use of our products could result in product liability claims that could be expensive, divert
managements attention and harm our reputation and business.
Our business exposes us to significant risks of product
liability claims that are inherent in the testing, manufacturing and marketing of medical devices. Moreover, the FDA has expressed concerns regarding the safety and efficacy of our Sensei system for ablation and other therapeutic indications,
including for the treatment of atrial fibrillation and has specifically instructed that our products be labeled to inform our customers that the safety and effectiveness of our technology for use with cardiac ablation catheters in the treatment of
cardiac arrhythmias, including for atrial fibrillation, have not been established. We presently believe that to date, all of the procedures in which our Sensei system has been used in the United States have included off-label uses such as cardiac
ablation, for which our Sensei system and Artisan catheters have not been cleared by the FDA and which therefore could increase the risk of product liability claims. The medical device industry has historically been subject to extensive litigation
over product liability claims. We may be subject to claims by consumers, healthcare providers, third-party payors or others selling our products if the use of our products were to cause, or merely appear to cause, injury or death. Any weakness in
training and services associated with our products may also result in product liability lawsuits. Although we maintain clinical trial liability and product liability insurance, the coverage is subject to deductibles and limitations, and may not be
adequate to cover future claims. Additionally, we may be unable to maintain our existing product liability insurance in the future at satisfactory rates or adequate amounts. A product liability claim, regardless of its merit or eventual outcome
could result in:
|
|
|
decreased demand for our products;
|
|
|
|
injury to our reputation;
|
|
|
|
diversion of managements attention;
|
|
|
|
withdrawal of clinical trial participants;
|
|
|
|
significant costs of related litigation;
|
39
|
|
|
payment of substantial monetary awards to patients;
|
|
|
|
product recalls or market withdrawals;
|
|
|
|
the inability to commercialize our products under development.
|
We may be unable to
complete the development and commercialization of our existing and anticipated products without additional funding.
Our operations
have consumed substantial amounts of cash since inception. We expect to continue to spend substantial amounts on research and development. We expect to spend significant additional amounts on the continuing commercialization of our products and the
development and introduction of new products. Net cash used in operating activities was $8.3 million for the second quarter of 2014. We expect that our cash used in operations will be significant in each of the next several years, and we will need
additional funds to continue the commercialization of both our Sensei system and our Magellan Robotic System in addition to ongoing product expansions.
Additional financing may not be available on a timely basis on terms acceptable to us, or at all. Furthermore, even if financing becomes
available, the cost to us may be significantly higher than in the past. Any additional financing may be dilutive to stockholders or may require us to grant a lender a security interest in our intellectual property assets. The amount of funding we
will need will depend on many factors, including:
|
|
|
the success of our research and product development efforts;
|
|
|
|
the expenses we incur in selling and marketing our products;
|
|
|
|
the costs and timing of future regulatory clearances;
|
|
|
|
the revenue generated by sales of our current and future products;
|
|
|
|
the gross margins generated by our revenues and cost of sales;
|
|
|
|
the rate of progress and cost of our clinical trials and other development activities;
|
|
|
|
the emergence of competing or complementary technological developments;
|
|
|
|
the cost of legal fees relating to shareholder lawsuits and government investigations;
|
|
|
|
the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, or participating in litigation-related activities;
|
|
|
|
the terms and timing of any collaborative, licensing or other arrangements that we may establish; and
|
|
|
|
the acquisition of businesses, products and technologies.
|
If adequate funds are not
available, we may have to delay development or commercialization of our products or license to third parties the rights to commercialize products or technologies that we would otherwise seek to commercialize. We also may have to reduce marketing,
customer support or other resources devoted to our products. Any of these factors could harm our financial condition.
Our products
and related technologies can be applied in different applications, and we may fail to focus on the most profitable areas or we may be unable to address successfully financial and technology risks associated with new applications, including
applications for the vascular market.
We may be unable to develop or commercialize our technology for additional applications. The
technology underlying our systems is designed to have the potential for applications beyond electrophysiology and vascular disease which require a control catheter to approach diseased tissue. We further believe that the technology underlying our
system can provide multiple opportunities to improve the speed and capability of many diagnostic and therapeutic procedures. However, we may be unable, due to limited financial or managerial resources, to develop these applications and seek a
separate 510(k) clearance or PMA approval from the FDA for these applications of our technology. Also, due to our limited financial and managerial resources, we may be required to focus on products in selected applications and to forego efforts with
regard to other products and industries including expansion of our electrophysiology and vascular applications as well as the development of other applications. Failure to capitalize on other applications for our technology may limit the addressable
market for our products and our ability to grow our revenues and expand our operations.
We are dedicating significant resources to the
development and commercialization of our Magellan Robotic System, Magellan Robotic Catheters and associated accessories. These efforts may not produce viable commercial products and may divert our limited resources from more profitable market
opportunities. Moreover, we may devote resources to developing products in additional areas but may be unable to justify the value proposition or otherwise develop a commercial market for products we develop in these areas, if any. In that case, the
return on investment in these additional areas may be limited, which could negatively affect our results of operations.
40
If we fail to maintain collaborative relationships with providers of imaging and
visualization technology on terms favorable to us, or at all, our Sensei system may not be able to gain market acceptance and our business may be harmed.
Our success depends on our ability to continually enhance and broaden our product offerings in response to changing technologies, customer
demands and competitive pressures. We believe that integrating our Sensei system with key imaging and visualization technologies using an open architecture approach is a key element in establishing our Sensei system as important for complex
interventional procedures. Our Sensei system currently utilizes a variety of imaging means to visualize and assist in navigating our catheters. These imaging systems include fluoroscopy, intravascular ultrasound and electro-anatomic mapping systems,
as well as pre-operatively acquired three-dimensional computed tomography and magnetic resonance imaging. We believe that in the future, as imaging companies develop increasingly sophisticated three-dimensional imaging systems, we will need to
integrate advanced imaging into our Sensei system in order to compete effectively. There can be no assurance that we can timely and effectively integrate these systems or components into our Sensei system in order to remain competitive. We expect to
face competition from companies that are developing new approaches and products for use in interventional procedures and that have an established presence in the field of interventional cardiology, including the major imaging, capital equipment and
disposables companies that are currently selling products in the electrophysiology laboratory. We may not be able to acquire or develop three-dimensional imaging and visualization technology for use with our Sensei system. In addition, developing or
acquiring key imaging and visualization technologies could be expensive and time-consuming and may not integrate well with our Sensei system. If we are unable to timely acquire, develop or integrate imaging and visualization technologies, or any
other changing technologies, effectively, our revenue may decline and our business will suffer.
In April 2007, we entered into agreements
with St. Jude Medical, Inc., or St. Jude, to integrate our Sensei system with St. Judes Ensite system and to co-market the integrated product. We are not obligated to undertake any other development projects except for the integration of the
Sensei system with the EnSite system. We are solely responsible for gaining regulatory approvals for, and all costs associated with, our portion of the integrated products developed under the arrangement. At the end of the second quarter of 2008,
the FDA cleared for marketing in the United States our CoHesion Module, which provides an interface between our Sensei system and the EnSite system; however, there can be no assurance that we will successfully maintain necessary regulatory
clearances or that we and St. Jude will maintain compatibility of our products under the collaboration or that the CoHesion Module will gain market acceptance. In August 2010, we entered into an agreement with St. Jude permitting us to
integrate St. Judes EnSite Velocity Cardiac Mapping System with our CoHesion Module to provide physicians the ability to visualize, locate and robotically control catheters within the heart to diagnose heart rhythm disorders. This Agreement
was amended in February 2014, and will expire in December 2014 unless extended by mutual agreement of the parties. If the agreement is not extended, we may be unable to maintain our ability to offer integration with the EnSite Velocity System with
new system sales, or to maintain compatibility with updated or upgraded versions of EnSite Velocity, which could adversely affect our revenues.
We have had material weaknesses in internal control over financial reporting in the past and cannot assure you that additional material
weaknesses will not be identified or develop in the future. If our internal control over financial reporting or disclosure controls and procedures are not effective, there may be errors in our financial statements that could require a restatement or
our filings may not be timely and investors may lose confidence in our reported financial information, which could lead to a decline in our stock price.
We evaluated our disclosure controls and procedures as of June 30, 2014 and determined that such controls and procedures were effective as
of that date, as more fully set forth in Part I, Item 4 of this Quarterly Report on Form 10-Q. We evaluated our disclosure controls and procedures in association with our assessment of the effectiveness of internal control over financial
reporting as of December 31, 2013 and determined that our internal control was effective as of that date, as more fully set forth in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2013. We cannot assure you,
however, that significant deficiencies or material weaknesses in our internal control over financial reporting will not exist in the future. Any failure to maintain or implement new or improved controls, or any difficulties we encounter in their
implementation, could result in significant deficiencies or material weaknesses, cause us to fail to timely meet our periodic reporting obligations, or result in material misstatements in our periodic reports, including the financial statements
included in such reports. Any such failure could also adversely affect the results of periodic management evaluations and annual auditor attestation reports regarding disclosure controls and the effectiveness of our internal control over financial
reporting required under Section 404 of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder. The existence of a significant deficiency or material weakness could result in errors in our financial statements that could result in
a restatement of financial statements, cause us to fail to timely meet our reporting obligations and cause investors to lose confidence in our reported financial information, which in turn could lead to a decline in our stock price shareholder
litigation, regulatory action and other adverse consequences.
Indemnification obligations to our current and former directors and
officers and contractual indemnification obligations to underwriters of our securities offerings could adversely affect our ability to defend claims for which we may be liable, our results of operations, our financial condition and our cash flows.
Under Delaware law, our charter documents and certain indemnification agreements, we may have an obligation to indemnify our
current and former officers, employees and directors in relation to these matters. In addition, we have contractual indemnification obligations to the underwriters and placement agents in our prior public and private offerings, as applicable,
of our equity securities.
41
Some of these advancement and indemnification obligations may not be covered by our directors and officers insurance policies or may exceed the coverage limits of those policies. If
we incur significant uninsured advancement or indemnity obligations, this could have a material adverse effect on our ability to defend claims for which we may be liable, our results of operations, our financial condition and our cash flows.
Software defects may be discovered in our products which would damage our ability to sell our products, our results of operations,
financial condition and cash flows.
Our systems incorporate sophisticated computer software. Complex software frequently contains
errors, especially when first introduced. Because our products are designed to be used to perform complex interventional procedures, we expect that physicians and hospitals will have an increased sensitivity to the potential for software and other
defects. We cannot assure you that our software will not experience errors or performance problems in the future. If we experience software errors or performance problems, we would likely also experience:
|
|
|
an increase in reportable adverse events to applicable authorities such as the FDA;
|
|
|
|
delay in market acceptance of our products;
|
|
|
|
damage to our reputation;
|
|
|
|
additional regulatory filings;
|
|
|
|
increased service or warranty costs; and/or
|
|
|
|
product liability claims relating to the software defects.
|
Our costs could
substantially increase if we receive a significant number of service claims which would harm our results of operations, financial condition and cash flows.
We typically provide post-contract customer service for each of our products against defects in materials and workmanship for a period of
approximately 12 months from the delivery or acceptance of our product by a customer which is normally when the system is installed. The associated expenses are charged to cost of revenues as incurred. We have a limited history of commercial
placements of our Sensei systems and a very limited history of commercial placements of our Magellan Robotic Systems from which to judge our rate of claims against our service contracts. Our obligation under these service contracts may be impacted
by product failure rates, material usage and service costs. Unforeseen exposure under these post-contract customer service contracts could negatively impact our business, financial condition and results of operations.
Hospitals or physicians may be unable to obtain coverage or reimbursement from third-party payors for procedures using our Sensei system
and Magellan Robotic System, which could affect the adoption or use of our systems and may cause our revenues to decline.
We
anticipate that third-party payors will continue to reimburse hospitals and physicians under existing billing codes for the vast majority of the procedures involving our products. We expect that healthcare facilities and physicians in the United
States will continue to bill various third-party payors, such as Medicare, Medicaid, other governmental programs and private insurers, for services performed using our products. We believe that procedures targeted for use with our products are
generally already reimbursable under government programs and most private plans. Accordingly, we believe providers in the United States will generally not be required to obtain new billing authorizations or codes in order to be compensated for
performing medically necessary procedures using our products on insured patients.
There can be no assurance, however, that coverage,
coding and reimbursement policies of third-party payors will not change in the future with respect to some or all of the procedures that would use our systems. Additionally, in the event that a physician uses our Sensei system or Magellan Robotic
System for indications not approved by the FDA, there can be no assurance that the coverage or reimbursement policies of third-party payors will be comparable to FDA-approved uses. Future legislation, regulation or coverage, coding and reimbursement
policies of third-party payors may adversely affect the demand for our products currently under development and limit our ability to profitably sell our products. For example, in prior years, certain regulatory changes were made to the methodology
for calculating payments for inpatient procedures in certain hospitals, resulting in a decrease to Medicare payment rates for surgical and cardiac procedures, including those procedures for which our products are targeted. The majority of the
procedures performed with our Sensei system and Artisan catheter are done on an in-patient basis and thus are paid under the Medicare severity diagnosis related group, or MS-DRG system.
We believe that the majority of procedures performed using our Sensei technology fall under MS-DRG 251,
percutaneous cardiovascular
procedures without coronary artery stent or acute myocardial infarction without major cardiovascular complication
. The Centers for Medicare & Medicaid Services update the MS-DRG payment rates annually effective October 1 through
September 30 of the following year. Because hospital inpatient reimbursement is largely dependent on geographical location and other hospital-specific factors, an individual hospitals revenues from using our technology can vary
significantly. At this time, although
42
payments for these cardiac procedures have not undergone further reductions, we cannot predict the full impact any future rate changes, including rate reductions, will have on our revenues or
business. We do not currently know which MS-DRGs will apply to procedures performed with our Magellan Robotic System or whether reimbursement amounts will be considered favorable by hospitals.
Our success in international markets also depends upon the eligibility of our products for coverage and reimbursement by government-sponsored
healthcare payment systems and third-party payors. Recent legislative initiatives in the United States to reform healthcare and government insurance programs have included a focus on healthcare costs which could limit the coverage and reimbursement
for procedures utilizing our products. In both the United States and foreign markets, healthcare cost-containment efforts are prevalent and are expected to continue and may increase. The failure of our customers to obtain sufficient reimbursement
could have a material adverse impact on our financial condition and harm our business.
Legislative reforms to the United States
healthcare system may adversely affect our revenues and business.
From time to time, legislative reform measures are proposed or
adopted that would impact healthcare expenditures for medical services, including the medical devices used to provide those services. For example, in March 2010, U.S. President Barack Obama signed the Patient Protection and Affordable Care Act, as
amended by the Health Care and Education Reconciliation Act, collectively referred to as the Affordable Care Act, which makes a number of substantial changes in the way health care is financed by both governmental and private insurers and the way
that Medicare providers are reimbursed. Among other things, the Affordable Care Act requires certain medical device manufacturers and importers to pay an excise tax equal to 2.3% of the price for which such medical devices are sold, beginning
January 1, 2013.
In addition, other legislative changes have been proposed and adopted since the Affordable Care Act was
enacted. On August 2, 2011, the President signed into law the Budget Control Act of 2011, which, among other things, created the Joint Select Committee on Deficit Reduction to recommend to Congress proposals in spending reductions. The
Joint Select Committee did not achieve a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, triggering the legislations automatic reduction to several government programs. This includes reductions to Medicare
payments to providers of 2.0% per fiscal year. On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, or the ATRA, which delayed for another two months the budget cuts mandated by these sequestration
provisions of the Budget Control Act of 2011. On March 1, 2013, the President signed an executive order implementing sequestration, and on April 1, 2013, the 2% Medicare payment reductions went into effect. The Bipartisan Budget Act of
2013, enacted on December 26, 2013, extends these cuts to 2023. The ATRA also, among other things, reduced Medicare payments to several providers, including hospitals, imaging centers and cancer treatment centers, and increased the statute of
limitations period for the government to recover overpayments to providers from three to five years. We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that
federal and state governments will pay for healthcare products and services, which could result in reduced demand for our products or additional pricing pressure.
Government and private sector initiatives to limit the growth of health care costs, including price regulation, competitive pricing, coverage
and payment policies, comparative effectiveness reviews of therapies, technology assessments, and managed-care arrangements, are continuing. Government programs, including Medicare and Medicaid, private health care insurance and managed-care plans
have attempted to control costs by limiting the amount of reimbursement they will pay for particular procedures or treatments, tying reimbursement to outcomes, and other mechanisms designed to constrain utilization and contain costs, including
delivery reforms such as expanded bundling of services. Hospitals are also seeking to reduce costs through a variety of mechanisms, which may increase price sensitivity among customers for our products, and adversely affect sales, pricing, and
utilization of our products. Some third-party payors must also approve coverage for new or innovative devices or therapies before they will reimburse health care providers who use the medical devices or therapies. We cannot predict the potential
impact of cost-containment trends on future operating results.
New regulations related to conflict minerals could adversely impact
our business.
The Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions to improve transparency and
accountability concerning the supply of certain minerals, known as conflict minerals, originating from the Democratic Republic of Congo (DRC) and adjoining countries. As a result, in August 2012 the SEC adopted annual disclosure and reporting
requirements for those companies who use conflict minerals mined from the DRC and adjoining countries in their products. These new requirements required due diligence efforts in 2013 and 2014, with initial disclosure requirements beginning in May
2014. There have been and will be costs associated with complying with these disclosure requirements, including for diligence to determine the sources of conflict minerals used in our products and other potential changes to products, processes or
sources of supply as a consequence of such verification activities. The implementation of these rules could adversely affect the sourcing, supply and pricing of materials used in our products. As there may be only a limited number of suppliers
offering conflict free conflict minerals, we cannot be sure that we will be able to obtain necessary conflict minerals from such suppliers in sufficient quantities or at competitive prices. Also, we may face reputational challenges if we
determine that certain of our products contain minerals not determined to be conflict free or if we are unable to sufficiently verify the origins for all conflict minerals used in our products through the procedures we may implement.
43
Environmental laws and regulations such as the recent RoHS directives, could cause a
disruption in our business and operations.
We are subject to various state, federal and international laws and regulations
governing the environment, including those restricting the presence of certain substances in electronic products and making manufacturers of those products financially responsible for the collection, treatment and recycling and disposal of certain
products. Such laws and regulations have been passed in several jurisdictions in which we operate, including various EU member countries. For example, the EU has enacted the WEEE directives. The WEEE directive obligates parties that place electrical
and electronic equipment on the market in the EU to put a clearly identifiable mark on the equipment, register with and report to EU member countries regarding distribution of the equipment and provide a mechanism to take back and properly dispose
of the equipment. Another example are the RoHS2 directives. On July 1, 2011, the Official Journal of the EU published the revised Directive 2011/65/EU (RoHS 2) on the restriction on the use of certain hazardous substances (six materials
specifically identified) in electrical and electronic equipment. This revised Directive (RoHS2) became effective July 21, 2011. The EU used a time-phased approach and identified 10 categories of products that needed to meet these new standards
at various start dates.
Category 8 includes medical devices and applies to our products. Compliance to this revised directive for
category 8 is required by July 22, 2014. All new products held for commerce in the EU must be in compliance with RoHS 2 as of that date. Any remaining inventory that is not in compliance with RoHS2 will be used in product sold in non-EU
countries. RoHS2 compliant products may be sold in both EU and non-EU countries. However, only RoHS2 compliant products may be sold in EU countries. In order to minimize duplicate inventory, we plan to produce all future products in compliance with
RoHS2 in order to sell them in both EU and non-EU countries. We are in the process of changing the materials and processes used, where necessary, to bring our products into compliance with RoHS2. It is expected that RoHS2 compliant products will be
ready to ship into the EU by September 16, 2014.
To make our products compliant with RoHS2 we may be required to modify some or all
of our products or replace one or more components in those products, which, if such modifications are possible, may be time-consuming, expensive to implement and decrease end-user demand, particularly if we increase prices to offset higher costs.
Our sales force will continue to actively market our products and accept customer orders while the required modifications are being made. However, if there is a production delay in having RoHS2 compliant product ready for shipment when ordered or if
it was determined that our product is not in compliance with RoHS2, we will not be able to ship our products into the EU until the product is in compliance with RoHS2. This delay could have an adverse impact on our revenues for three months ended
September 30, 2014 and could affect our revenues for the year ending December 31, 2014. There can be no assurance that similar programs will not be implemented in other jurisdictions resulting in additional costs, possible delays in
delivering products, and even the discontinuance of existing and planned future product replacements if the cost were to become prohibitive.
If we do not effectively manage our growth, we may be unable to successfully develop, market and sell our products.
Our future revenue and operating results will depend on our ability to manage the possible future growth of our business. We have experienced
periods of significant growth in the scope of our operations. This growth has placed significant demands on our management, as well as our financial and operations resources. In order to achieve our business objectives, however, we will need to
continue to grow, which presents numerous challenges, including:
|
|
|
implementing appropriate operational and financial systems and controls;
|
|
|
|
expanding manufacturing capacity, increasing production and improving margins;
|
|
|
|
developing our sales and marketing infrastructure and capabilities;
|
|
|
|
identifying, attracting and retaining qualified personnel in our areas of activity; and
|
|
|
|
training, managing and supervising our personnel worldwide.
|
Any failure to effectively manage
our growth could impede our ability to successfully develop, market and sell our products and our business will be harmed.
We sell
our systems internationally and are subject to various risks relating to such international activities which could adversely affect our international sales and operating performance.
A portion of our current and future revenues will come from international sales. To expand internationally, we will need to hire, train and
retain additional qualified personnel. Engaging in international business inherently involves a number of difficulties and risks, including:
|
|
|
required compliance with existing and changing foreign regulatory requirements and laws;
|
|
|
|
export or import restrictions and controls relating to technology;
|
|
|
|
laws and business practices favoring local companies;
|
44
|
|
|
difficulties in enforcing agreements and collecting receivables through certain foreign legal systems;
|
|
|
|
political and economic instability;
|
|
|
|
potentially adverse tax consequences, tariffs and other trade barriers;
|
|
|
|
international terrorism and anti-American sentiment;
|
|
|
|
difficulties in penetrating markets in which our competitors products are more established;
|
|
|
|
difficulties and costs of staffing and managing foreign operations; and
|
|
|
|
difficulties in enforcing intellectual property rights.
|
If one or more of these risks are
realized, it could require us to dedicate significant resources to remedy the situation, and if we are unsuccessful at finding a solution, our revenue may decline.
Our financial results are subject to currency fluctuations as a result of our international operations which could decrease our
revenues.
In the second quarter of 2014, approximately 67% of our total revenues were generated outside the United States. While
some of these revenues were denominated in U.S. dollars, approximately 4% of our total revenues for the second quarter of 2014 were generated in other currencies. We translate results of transactions denominated in local currencies into U.S. dollars
using market conversion rates applicable to the period in which the transaction is reported. As a result, changes in exchange rates during a period can unpredictably and adversely affect our consolidated operating results and our asset and liability
balances, even if the underlying value of the item in its original currency has not changed. The effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business would not have a material impact on our historical
consolidated financial statements.
Our business may be harmed by a natural disaster, terrorist attacks or other unanticipated
problems.
Our manufacturing and office facilities are located in Mountain View, California. Despite precautions taken by us, a
natural disaster such as fire or earthquake, a terrorist attack or other unanticipated problems at our facilities could interrupt our ability to manufacture our products or operate our business. These disasters or problems may also destroy our
product inventories. While we carry insurance for certain natural disasters and business interruption, any prolonged or repeated disruption or inability to manufacture our products or operate our business could result in losses that exceed the
amount of coverage provided by this insurance, and in such event could harm our business.
We may be liable for contamination or
other harm caused by materials that we handle, and changes in environmental regulations could cause us to incur additional expense.
Our research and development, manufacturing and clinical processes involve the handling of potentially harmful biological materials as well as
other hazardous materials. We are subject to federal, state and local laws and regulations governing the use, handling, storage and disposal of hazardous and biological materials and we incur expenses relating to compliance with these laws and
regulations. If violations of environmental, health and safety laws occur, we could be held liable for damages, penalties and costs of remedial actions. These expenses or this liability could have a significant negative impact on our financial
condition. We may violate environmental, health and safety laws in the future as a result of human error, equipment failure or other causes. Environmental laws could become more stringent over time, imposing greater compliance costs and increasing
risks and penalties associated with violations. We are subject to potentially conflicting and changing regulatory agendas of political, business and environmental groups. Changes to or restrictions on permitting requirements or processes, hazardous
or biological material storage or handling might require an unplanned capital investment or relocation. Failure to comply with new or existing laws or regulations could harm our business, financial condition and results of operations.
Changes to existing accounting pronouncements or taxation rules or practices may affect how we conduct our business and affect our
reported results of operations.
Significant new accounting pronouncements and taxation rules or practices and updated
interpretations of existing accounting pronouncements and taxation rules or practices have occurred in the past and may occur in the future. A change in accounting pronouncements or taxation rules or practices can have a significant effect on our
reported results and may even affect our reporting of transactions completed before the change is effective. In addition, a review of existing or prior accounting practices may result in a change in previously reported amounts. For example, the FASB
has recently issued new accounting principles around revenue recognition and the SEC is considering adoption of international financial reporting standards. These changes to existing rules, future changes, if any, or the questioning of current
practices may adversely affect our reported financial results or the way we conduct our business.
45
Risks Related to Our Intellectual Property
If we are unable to protect the intellectual property contained in our products from use by third parties, our ability to compete in the
market will be harmed.
Our commercial success will depend in part on obtaining patent and other intellectual property protection
for the technologies contained in our products, and on successfully defending our patents and other intellectual property against third party challenges. We expect to incur substantial costs in obtaining patents and, if necessary, defending our
proprietary rights. The patent positions of medical device companies, including ours, can be highly uncertain and involve complex and evolving legal and factual questions. We do not know whether we will be able to obtain the patent protection we
seek, or whether the protection we do obtain will be found valid and enforceable if challenged. We also do not know whether we will be able to develop additional patentable proprietary technologies. If we fail to obtain adequate protection of our
intellectual property, or if any protection we obtain is reduced or eliminated, others could use our intellectual property without compensating us, resulting in harm to our business. We may also determine that it is in our best interests to
voluntarily challenge a third partys products or patents in litigation or administrative proceedings, including patent interferences or reexaminations. In the event that we seek to enforce any of our owned or exclusively licensed patents
against an infringing party, it is likely that the party defending the claim will seek to invalidate the patents we assert, which, if successful could result in the loss of the entire patent or the relevant portion of our patent, which would not be
limited to any particular party. Any litigation to enforce or defend our patent rights, even if we were to prevail, could be costly and time-consuming and could divert the attention of our management and key personnel from our business operations.
Our competitors may independently develop similar or alternative technologies or products without infringing any of our patent or other intellectual property rights, or may design around our proprietary technologies.
We cannot assure you that we will obtain the patent protection we seek, that any protection we do obtain will be found valid and enforceable
if challenged or that such patent protection will confer any significant commercial advantage. United States patents and patent applications may also be subject to interference proceedings and United States patents may be subject to reexamination
proceedings and, starting in 2012, post grant and inter partes review in the United States Patent and Trademark Office, and foreign patents may be subject to opposition or comparable proceedings in the corresponding foreign patent offices, which
proceedings could result in either loss of the patent or denial of the patent application, or loss or reduction in the scope of one or more of the claims of, the patent or patent application. In addition, such interference, reexamination, post grant
review, inter partes review, and opposition proceedings may be costly. Some of our technology was, and continues to be, developed in conjunction with third parties, and thus there is a risk that such third parties may claim rights in our
intellectual property. Thus, any patents that we own or license from others may provide limited or no protection against competitors. Our pending patent applications, those we may file in the future, or those we may license from third parties, may
not result in patents being issued. If issued, they may not provide us with proprietary protection or competitive advantages against competitors with similar technology.
Non-payment or delay in payment of patent fees or annuities, whether intentional or unintentional, may result in loss of patents or patent
rights important to our business. Many countries, including certain countries in Europe, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In addition, many countries limit the
enforceability of patents against third parties, including government agencies or government contractors. In these countries, the patent owner may have limited remedies, which could materially diminish the value of the patent. In addition, the laws
of some foreign countries do not protect intellectual property rights to the same extent as do the laws of the United States, particularly in the field of medical products and procedures.
Our trade secrets, nondisclosure agreements and other contractual provisions to protect unpatented technology provide only limited and
possibly inadequate protection of our rights. As a result, third parties may be able to use our unpatented technology, and our ability to compete in the market would be reduced. In addition, employees, consultants and others who participate in
developing our products or in commercial relationships with us may breach their agreements with us regarding our intellectual property, and we may not have adequate remedies for the breach.
Third parties may assert that we are infringing their intellectual property rights which may result in litigation.
Successfully commercializing our Sensei system, our Magellan Robotic System and any other products we may develop, will depend in part on our
not infringing patents held by third parties. It is possible that one or more of our products, including those that we have developed in conjunction with third parties, infringes existing patents. From time to time, we have received, and likely will
continue to receive, communications from third parties inviting us to license their patents or accusing us of infringement. There can be no assurance that a third party will not take further action, such as filing a patent infringement lawsuit,
including a request for injunctive relief, to bar the manufacture and sale of our Sensei system in the United States or elsewhere or the sale of our Magellan Robotic System in Europe. We may also choose to defend ourselves by initiating litigation
or administrative proceedings to clarify or seek a declaration of our rights. As competition in our market grows, the possibility of a patent infringement claim against us or litigation we will initiate increases.
There may be existing patents which may be broad enough to cover aspects of our future technology. In addition, because patent applications in
many countries such as the United States are maintained under conditions of confidentiality and can take many years to issue, there may be applications now pending of which we are unaware and which may later result in issued patents that our
products
46
infringe. We do not know whether any of these patents, if challenged, would be upheld as valid, enforceable and infringed by our products or technology. From time to time, we receive, and likely
will continue to receive, letters from third parties accusing us of infringing their patents or inviting us to license their patents. We may be sued by, or become involved in an administrative proceeding with, one or more of these or other third
parties. We cannot assure you that a court or administrative body would agree with any arguments or defenses we may present concerning the invalidity, unenforceability or non-infringement of any third-party patent. In addition to the issued patents
of which we are aware, other parties may have filed, and in the future are likely to file, patent applications covering products that are similar or identical to ours. We cannot assure you that any patents issuing from applications will not cover
our products or will not have priority over our own products and patent applications.
We may not be able to maintain or obtain all
the licenses from third parties necessary or advisable for promoting, manufacturing and selling our Sensei system and our Magellan Robotic System, which may cause harm to our business, operations and financial condition.
We rely on technology that we license from others, including technology that is integral to our Sensei system and our Magellan Robotic System,
such as patents and other intellectual property that we have co-exclusively licensed from Intuitive Surgical, or Intuitive. Under our agreement with Intuitive, we received the right to apply Intuitives patent portfolio in the field
of intravascular approaches for the diagnosis or treatment of cardiovascular, neurovascular and peripheral vascular diseases. To the extent that we develop or commercialize robotic capability outside the field of use covered by our license with
Intuitive, which we may choose to do at some time in the future, we may not have the patent protection and the freedom to operate outside the field which is afforded by the license inside the field. Although we believe that there are opportunities
for us to operate outside the licensed field of use without using Intuitives intellectual property, Intuitive from time to time has told us that it believes certain of our past activities that have fallen outside the licensed field have
infringed its intellectual property rights. Although we disagree with Intuitives position, we presently remain focused within our licensed field and so have agreed to inform Intuitive before commencing any further outside clinical
investigations for endoluminal applications or engaging in external technology exhibitions at non-intravascular conferences. There can be no assurance that Intuitive will not challenge any activities we engage in outside the intravascular space, and
we cannot assure you that in the event of such a challenge we would be able to reach agreement with Intuitive on whether activities outside our licensed field may be conducted without the use of the Intuitives intellectual property. If
Intuitive asserts that any of our activities outside the licensed field are infringing their patent or other intellectual property rights or commences litigation against us, we will incur significant costs defending against such claims or seeking an
additional license from Intuitive, and we may be required to limit use of our systems or future products and technologies within our licensed intravascular field if any of our activities outside the licensed field are judged to infringe
Intuitives intellectual property, any of which could cause substantial harm our business, operations and financial condition. Although Intuitive is restricted in how it can terminate our license, if Intuitive were ever to successfully do so,
and if we are unable to obtain another license from Intuitive, we could be required to abandon use of our existing product technology completely and could have to undergo a substantial redesign and design-around effort, which we cannot assure you
would be successful. In October 2012, we signed an updated license agreement with Intuitive. Under the terms of the agreement, Intuitives existing co-exclusive rights to our patent portfolio to certain non-vascular procedures have been
extended to include patents filed or conceived by us subsequent to the original 2005 agreement up to and including the period three years subsequent to the amendment. We retain the right to use our intellectual property for all clinical
applications, both vascular and non-vascular.
The medical device industry is characterized by patent litigation and we could become
subject to litigation that could be costly, result in the diversion of managements attention, require us to pay damages and discontinue selling our products.
The medical device industry is characterized by frequent and extensive litigation and administrative proceedings over patent and other
intellectual property rights. Whether a product infringes a patent involves complex legal and factual issues, the determination of which is often difficult to predict, and the outcome may be uncertain until the Court has entered final judgment and
all appeals are exhausted. Our competitors may assert, and have asserted in the past, that our products or the use of our products are covered by United States or foreign patents held by them. This risk is heightened due to the numerous issued and
pending patents relating to the use of robotic and catheter-based procedures in the medical technology field. For example, we have received correspondence from a third party indicating it believes it holds a patent that our Sensei system may
infringe. While we do not believe that the Sensei system infringes this patent, there can be no assurance that the third party will not take further action, such as filing a patent infringement lawsuit, including a request for injunctive relief, to
bar the manufacture and sale of our Sensei system in the United States. If relevant patents are upheld as valid and enforceable and we are found to infringe, we could be prevented from selling our system unless we can obtain a license to use
technology or ideas covered by such patent or are able to redesign our products to avoid infringement. A license may not be available at all or on commercially reasonable terms, and we may not be able to redesign our products to avoid infringement.
Modification of our products or development of new products could require us to conduct additional clinical trials and to revise our filings with the FDA and other regulatory bodies, which would be time-consuming and expensive. If we are not
successful in obtaining a license or redesigning our products, we may be unable to sell our products and our business could suffer. In addition, our patents may be subject to various invalidity attacks, such as those based upon earlier filed patent
applications, patents, publications, products or processes, which might invalidate or limit the scope of the protection that our patents afford.
Infringement actions, validity challenges and other intellectual property claims and proceedings, whether with or without merit, may cause us
to incur substantial costs and could place a significant strain on our financial resources, divert the attention of management from our business and harm our reputation. We have incurred, and expect to continue to incur, substantial costs in
obtaining patents and expect to incur substantial costs defending our proprietary rights. Incurring such costs could have a material adverse effect on our financial condition, results of operations and cash flow.
47
We cannot be certain that we will successfully defend our patents from infringement or claims of
invalidity or unenforceability, or that we will successfully defend against allegations of infringement of third-party patents. In addition, any public announcements related to litigation or administrative proceedings initiated or threatened by us,
or initiated or threatened against us, could cause our stock price to decline.
We may be subject to damages resulting from claims
that our employees or we have wrongfully used or disclosed alleged trade secrets of their former employers.
Many of our employees
were previously employed at universities or other medical device companies, including our competitors or potential competitors. We could in the future be subject to claims that these employees, or we, have inadvertently or otherwise used or
disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. If we fail in defending against such claims, a court could order us to pay substantial damages and
prohibit us from using technologies or features that are essential to our products, if such technologies or features are found to incorporate or be derived from the trade secrets or other proprietary information of the former employers. An inability
to incorporate technologies or features that are important or essential to our products would have a material adverse effect on our business, and may prevent us from selling our products. In addition, we may lose valuable intellectual property
rights or personnel. A loss of key research personnel or their work product could hamper or prevent our ability to commercialize certain potential products, which could severely harm our business. Even if we are successful in defending against these
claims, such litigation could result in substantial costs and be a distraction to management. Incurring such costs could have a material adverse effect on our financial condition, results of operations and cash flow.
Additional Risks Related to Regulatory Matters
If we fail to obtain regulatory clearances in other countries for existing products or products under development, we will not be able to
commercialize these products in those countries.
In order to market our products outside of the United States, we must establish
and comply with numerous and varying regulatory requirements of other countries regarding quality, safety and efficacy of our products. Approval and CE marking procedures vary among countries and can involve additional product testing and additional
administrative review periods. The time required to obtain approval or CE Certificate of Conformity in other countries might differ from that required to obtain FDA clearance. The regulatory approval or CE marking process in other countries may
include all of the risks detailed above regarding FDA clearance in the United States. Regulatory approval or the CE marking of a product in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory
approval or a CE Certificate of Conformity in one country may negatively impact the regulatory process in others. Failure to obtain regulatory approval or a CE Certificate of Conformity in other countries or any delay or setback in obtaining such
approval could have the same adverse effects described above regarding FDA clearance in the United States.
For example, in the EEA, our
devices are required to comply with the Essential Requirements laid down in Annex I to the Medical Devices Directive. We are also required to ensure compliance with the relevant quality system requirements laid down in the Annexes to the Medical
Devices Directive. Companies compliant with ISO requirements such as EN ISO 13485: 2003 Medical devices Quality management systems Requirements for regulatory purposes benefit from a presumption of conformity with the
relevant Essential Requirements or the quality system requirements laid down in the Annexes to the Medical Devices Directive. Following successful completion of a conformity assessment procedure conducted in relation to the medical device and its
manufacturer and their conformity with the Essential Requirements and quality system requirements, the Notified Body issues a CE Certificate of Conformity. This Certificate entitles the manufacturer to affix the CE mark to its medical devices after
having prepared and signed a related EC Declaration of Conformity. We received a CE Certificate of Conformity for our Artisan catheters in May 2007, our Lynx catheters in July 2010, our Magellan Robotic System in July 2011, our Magellan Robotic
Catheter and related accessories designed for use with the Magellan Robotic System in October 2011, and our Artisan Extend catheters in February 2013. We cannot be certain that we will be successful in meeting and continuing to meet the requirements
of the Medical Devices Directive in the EEA.
We may fail to comply with continuing postmarket regulatory requirements of the FDA
and other authorities and become subject to substantial penalties, or marketing experience may show that our device is unsafe, forcing us to recall or withdraw it permanently from the market.
We must comply with continuing regulation by the FDA and other authorities, including the FDAs Quality System Regulation, or QSR,
requirements, labeling and promotional requirements and medical device adverse event and other reporting requirements. If the adverse event reports we file with the FDA regarding death, serious injuries or malfunctions indicate or suggest that the
device presents an unacceptable risk to patients, including when used off-label by physicians, we may be forced to recall the device and/or modify the device or its labeling, or withdraw it permanently from the market. The FDA has expressed concerns
regarding the safety of the Sensei system when used with catheters and in procedures not specified in the current label, such as ablation catheters and ablation procedures, and we have already filed Medical Device Reports reporting adverse events
during procedures utilizing our
48
technology. Physicians may be using our device off-label with ablation catheters in ablation procedures, as well as in other electrophysiology procedures for which we have not collected safety
data, and we therefore cannot assure you that clinical experience will demonstrate that the device is safe for these uses.
Any failure to
comply, or any perception that we are not complying, with continuing regulation by the FDA or other authorities, including restrictions regarding off-label promotion, could result in enforcement action that may include suspension or withdrawal of
regulatory clearances approvals, or CE Certificates of Conformity, recalling products, ceasing product marketing, seizure and detention of products, paying significant fines and penalties, criminal prosecution and similar actions that could limit
product sales, delay product shipment and harm our profitability and reputation.
In many foreign countries in which we market our
products, we are subject to regulations affecting, among other things, product standards, packaging requirements, labeling requirements, import restrictions, tariff regulations, duties and tax requirements. Many of these regulations are similar to
those of the FDA. In addition, in many countries the national health or social security organizations require our products to be qualified before procedures performed using our products become eligible for coverage and reimbursement. Failure to
receive, or delays in the receipt of, relevant foreign qualifications could have a material adverse effect on our business, financial condition and results of operations. If we fail to comply with applicable foreign regulatory requirements, we may
be subject to fines, suspension or withdrawal of regulatory clearances and CE Certificates of Conformity, product recalls, seizure of products, operating restrictions and criminal prosecution.
If we or our contract manufacturers fail to comply with the FDAs Quality System Regulations, California Department of Health
Services requirements or EEA quality system requirements, our manufacturing operations could be interrupted and our product sales and operating results could suffer.
Our manufacturing processes, and those of some of our contract manufacturers, are required to comply with the FDAs Quality System
Regulations, or QSR, which cover the procedures and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage and shipping of our devices. The FDA enforces the QSR through periodic
inspections of manufacturing facilities. We and our contract manufacturers are subject to such inspections. Similar quality system requirements also apply in the EEA. If our manufacturing facilities or those of any of our contract manufacturers fail
to take satisfactory corrective action in response to an adverse quality system inspection, the FDA, the Notified Body, the competent authorities in the EEA could take enforcement action, including any of the following sanctions, which could have a
material impact on our operations:
|
|
|
untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties;
|
|
|
|
unanticipated expenditures to address or defend such actions;
|
|
|
|
customer notifications for repair, replacement, refunds;
|
|
|
|
recall, detention or seizure of our products;
|
|
|
|
operating restrictions or partial suspension or total shutdown of production;
|
|
|
|
refusing or delaying our requests for 510(k) clearance or premarket approval of new products or modified products;
|
|
|
|
operating restrictions;
|
|
|
|
withdrawing 510(k) clearances or IDE/PMA approvals that have already been granted;
|
|
|
|
suspension or withdrawal of our CE Certificates of Conformity;
|
|
|
|
refusal to grant export approval or issue export documentation for our products; or
|
We underwent an FDA inspection, which employed QSIT, in July 2010 and
received two inspectional observations. The agency has accepted our responses and the inspection has been closed.
We are subject to the
licensing requirements of the California Department of Health Services, or CDHS. We have been inspected and licensed by the CDHS and remain subject to re-inspection at any time. Failure to maintain a license from the CDHS or to meet the inspection
criteria of the CDHS would disrupt our manufacturing processes. If an inspection by the CDHS indicates that there are deficiencies in our manufacturing process, we could be required to take remedial actions at potentially significant expense, and
our facility may be temporarily or permanently closed.
49
If our products cause or contribute to a death or a serious injury, or malfunction in
certain ways, we will be subject to medical device reporting regulations, which can result in voluntary corrective actions or agency enforcement actions. An increased frequency of filing Medical Device Reports, or MDRs, or Manufacturers
Incident Reports in the EEA concerning adverse events occurring during procedures performed with our technology could result in increased regulatory scrutiny of our products and could delay or prevent the adoption of our products.
Under the FDA medical device reporting regulations, medical device manufacturers are required to report to the FDA when the manufacturer
becomes aware of information from any source that alleges that a device marketed by the manufacturer has or may have caused or contributed to a death or serious injury or has malfunctioned in a way that would likely cause or contribute to death or
serious injury if the malfunction of the device or one of our similar devices were to recur. A manufacturer may determine that an event may not meet the FDAs reporting criteria so that an MDR is not necessary. However, the FDA can review a
manufacturers decision and may disagree. We have made decisions that certain types of events are not MDR reportable. In the EEA, similar reporting requirements are imposed on medical device manufacturers. When a medical device is suspected to
be a contributory cause of an event that led or might have led to death of or the serious deterioration of the health of a patient, or user or of other person, its manufacturer or authorized representative in the EU must report the event to the
Competent Authority of the EEA country where the incident occurred. There can be no assurance that the FDA or the competent authorities in the EEA country will agree with our decisions. If we fail to report MDRs to the FDA within the required
timeframes, or at all, or if the FDA or the competent authorities of the EEA countries disagree with any of our determinations that events are not reportable, the FDA could take enforcement action against us. Any such adverse event involving our
products also could result in future voluntary corrective actions, such as products withdrawals and recalls or customer notifications, or agency action, such as inspection or enforcement action. Any corrective action, whether voluntary or
involuntary, as well as defending ourselves in a lawsuit, will require the dedication of our time and capital, distract management from operating our business, and may harm our reputation and financial results.
We have filed Medical Device Reports, or MDRs, and Manufacturers Incident Reports reporting adverse events during procedures utilizing
our technology and have developed internal systems and processes that are designed to evaluate future events that may require adverse event reporting to the FDA or the competent authorities in the EEA countries. As the frequency of use of our
technology in electrophysiology and vascular procedures increases, we are experiencing, and anticipate continuing to experience, it being necessary to file an increased number of MDRs and Manufacturers Incident Reports. An increased frequency
of filing MDRs and Manufacturers Incident Reports or a failure to timely file MDRs may result in requests for further information from the FDA or the competent authorities of the EEA countries, which could delay other matters that we may have
pending before the FDA, the competent authorities of the EEA or our Notified Body or result in additional regulatory action. An increased frequency of MDRs and Manufacturers Incident Reports could also reduce confidence in the safety of our
products and delay or prevent the acceptance of our products by physicians and hospitals, which would harm our business and cause our stock price to decline.
Our products may in the future be subject to product recalls that could harm our reputation, business and financial results. As a
manufacturer we are sometimes required to make decisions about whether to take corrective action in the field and whether to report that activity to the FDA or the competent authorities of the EEA countries. If the FDA or the competent authorities
of the EEA countries disagrees with those decisions, we may be subject to enforcement action and our product sales and operating results could suffer.
The FDA and similar foreign competent authorities have the authority to require the recall of commercialized products in the event of material
deficiencies or defects in design or manufacture. In the case of the FDA, the authority to require a recall must be based on an FDA finding that there is a reasonable probability that the device would cause serious injury or death. In addition,
foreign competent authorities have the authority to require the recall of our products in the event of material deficiencies or defects in design, manufacture or performance of the products and inadequacy in the labeling or Instruction for Use. A
government-mandated or voluntary recall by us or one of our distributors could occur as a result of component failures, manufacturing errors, design or labeling defects or other deficiencies and issues. We have conducted voluntary recalls in the
past. Recalls of any of our products would likely divert managerial and financial resources and could have an adverse effect on our financial condition and results of operations.
The FDA requires that certain classifications of recalls be reported to the FDA within 10 working days after the recall is initiated.
Companies are required to maintain certain records of recalls, even if they are not reportable to the FDA or other competent authorities. We have in the past initiated voluntary actions involving our products that we determined did not require
notification of the FDA, and we may in the future initiate additional voluntary actions that we determine do not require notification of the FDA. If the FDA or the competent authorities of the EEA countries disagree with our determinations, they
could require us to report those actions as recalls. Additionally, we have, and may again in the future, take actions in the field that we do not consider to be recalls. If the FDA or other competent authorities disagree with our determinations,
they could require us to treat these actions as recalls, issue communications, or report those actions to FDA. The agency may also initiate other enforcement action if they disagree with our recall decisions, including but not limited to issuing
warning letters, or more serious actions such as civil or criminal penalties. A future recall announcement or enforcement action could harm our reputation with customers and negatively affect our sales. In addition, the FDA or other competent
authorities could take enforcement action for failing to treat certain actions as recalls and report the recalls when they were conducted.
50
Modifications to our products may, and in some instances, will, require new regulatory
clearances, approvals or CE Certificates of Conformity and may require us to recall or cease marketing our products until clearances, approvals or CE Certificates of Conformity are obtained.
Modifications to our products may require new regulatory approvals or clearances, including 510(k) clearances or premarket approvals, or PMAs,
and may require us to recall or cease marketing the modified devices until these clearances or approvals are obtained. The FDA requires device manufacturers to initially make and document a determination of whether or not modifications require a new
approval, supplement or clearance. A manufacturer of a 510(k) cleared product is required to obtain 510(k) clearance for device modifications that could significantly affect the safety or effectiveness of the device, or constitute a major change in
the intended use of the subject device. Accordingly, a manufacturer may determine that a modification could not significantly affect safety or efficacy and does not represent a major change in its intended use so that no new 510(k) clearance is
necessary. However, the FDA can review a manufacturers decision and may disagree. The FDA may also on its own initiative determine that a new clearance or approval is required.
For those products sold in the EEA, we must notify and await completion of the review of our Notified Body, before introducing substantial
changes to the products or to our quality system. Following its review, our Notified Body will decide whether our existing CE Certificates of Conformity can be maintained or varied, or whether new certificate are required.
We have made modifications to our products in the past and may make additional modifications in the future that we believe do not or will not
require additional review, clearances or approvals. There can be no assurance that the FDA, our Notified Body or the competent authorities of the EEA countries will agree with our approach in such matters or that, if required, subsequent requests
for 510(k) clearance, PMA approval or CE Certificates of Conformity will be received in a timely fashion, if at all. The FDA, our Notified Body or the competent authorities of the EEA countries may require us to cease supply, recall and to stop
marketing our products as modified or to disable features pending clearance or approval or the granting of a CE Certificate of Conformity which would significantly harm our ability to sell our products and cause harm to our existing customer
relationships and business. Even if we are not required to take such action, delays in obtaining clearances, approvals or CE Certificate of Conformity for features would adversely affect our ability to introduce enhanced products in a timely manner
and would harm our revenue and operating results. The FDA our Notified Body or the competent authorities of the EEA countries could also take other enforcement action, including but not limited to, issuing a warning letter relating to our decision
to implement features and other product modifications without submission of a new 510(k) notice or PMA and suspension or withdrawal of our existing CE Certificates of Conformity.
Clinical trials necessary to support any future 510(k), PMA application or CE marking of our products will be expensive and may require
the enrollment of large numbers of clinical sites and patients, and suitable patients may be difficult to identify and recruit. Delays or failures in our clinical trials may prevent us from commercializing any modified or new products and will
adversely affect our business, operating results and prospects.
Initiating and completing clinical trials necessary to support a
510(k), PMA application or CE marking for expanded indications for use of our existing products, will be time consuming and expensive and the outcome uncertain. Moreover, the results of early clinical trials are not necessarily predictive of future
results, and any product we advance into clinical trials may not have favorable results in later clinical trials.
Conducting successful
clinical studies may require the enrollment of large numbers of clinical sites and patients, and suitable patients may be difficult to identify and recruit. Patient enrollment in clinical trials and completion of patient participation and follow-up
depends on many factors, including the size of the patient population, the nature of the trial protocol, the attractiveness of, or the discomforts and risks associated with, the treatments received by enrolled subjects, the availability of
appropriate clinical trial investigators, support staff, and proximity of patients to clinical sites and ability to comply with the eligibility and exclusion criteria for participation in the clinical trial and patient compliance. For example,
patients may be discouraged from enrolling in our clinical trials if the trial protocol requires them to undergo extensive post-treatment procedures or follow-up to assess the safety and effectiveness of our products or if they determine that the
treatments received under the trial protocols are not attractive or involve unacceptable risks or discomforts. Patients may also not participate in our clinical trials if they choose to participate in contemporaneous clinical trials of competitive
products or they can obtain the treatment without participating in our trial through physicians who use the product off-label. We received IDE approval for an approximately 300 patient study for the treatment of atrial fibrillation and enrolled our
first patient in May 2010 and approximately 50 patients were enrolled as of January 2013. A proposed modification to the study protocol was submitted to FDA for review in January 2013. The modified study, which plans to enroll as few as 125
subjects, was approved by the FDA in August 2013 and approximately one-third of the targeted number of additional patients have been enrolled to date. The study includes a seven-day follow-up for safety and a one-year follow-up for efficacy at
intervals of 90, 180, and 365 days.
Development of sufficient and appropriate clinical protocols to demonstrate quality, safety and
efficacy may be required and we may not adequately develop such protocols to support clearance or approval. Delays in patient enrollment or failure of patients to consent or continue to participate in a clinical trial may cause an increase in costs
and delays in the approval and attempted commercialization of our products or result in the failure of the clinical trial. In addition, despite considerable time and expense invested in our clinical trials, FDA, our Notified Body or the competent
authorities of the EEA countries may not consider our data adequate to demonstrate quality, safety and efficacy. Such increased costs and delays or failures could adversely affect our business, operating results and prospects.
51
If we fail to comply with healthcare laws and regulations, we could face substantial
penalties and our business, operations and financial condition could be adversely affected.
Our activities, and the activities of
our agents, including some contracted third parties, are subject to extensive government regulation and oversight both in the U.S. and in foreign jurisdictions. Our interactions in the U.S. or abroad with physicians and other potential referral
sources who prescribe or purchase our products are subject to government regulation designed to prevent health care fraud and abuse. Relevant U.S. laws include:
|
|
|
the federal healthcare program Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, offering, paying or receiving remuneration, directly or indirectly, in cash or
in kind, to induce or reward either the referral of an individual, for an item or service or the purchasing, leasing, ordering or arranging for or recommending the purchase, lease or order of any item or service, for which payment may be made, in
whole or in part, by federal healthcare programs such as the Medicare and Medicaid;
|
|
|
|
federal civil False Claims Act which prohibits, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment of government funds that are false or fraudulent, and
which may apply to entities like us which provide coding and billing advice to customers or whose products are frequently used off-label;
|
|
|
|
the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which prohibits, among other things, executing a scheme to defraud any healthcare benefit program or making false statements relating to
healthcare matters and which also imposes certain obligations relating to safeguarding the privacy, security and transmission of individually identifiable health information;
|
|
|
|
the federal Foreign Corrupt Practices Act of 1997, which makes it illegal to offer or provide money or anything of value to officials of foreign governments, foreign political parties, or international organizations
with the intent to obtain or retain business or seek a business advantage and
|
|
|
|
state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers, state breach
notification laws, and state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.
In addition, there has been a recent trend of increased federal and state regulation of payments made to physicians. Some states, such as California, Massachusetts and Nevada, mandate implementation of commercial compliance programs and/or impose
restrictions on device manufacturer marketing practices and tracking and reporting of gifts, compensation and other remuneration to physicians.
|
The FDA, the Office of Inspector General for the Department of Health and Human Services, the Department of Justice, states Attorneys
General and other governmental authorities actively enforce the laws and regulations discussed above. In the U.S., pharmaceutical and device manufacturers have been the target of numerous government prosecutions and investigations alleging
violations of law, including claims asserting impermissible off-label promotion of pharmaceutical and medical device products, payments intended to influence the referral of federal or state health care business, and submission of false or
fraudulent claims for government payments. The Affordable Care Act also clarified that a person or entity need not have actual knowledge of the Anti-Kickback Statute or specific intent in order to violate it. In addition, the Affordable Care Act
provides that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal False Claims Act or federal civil
money penalties statute. As part of our compliance program, we have reviewed our sales contracts and marketing materials and practices to assure compliance with these federal and state laws, and inform employees and marketing representatives of the
Anti-Kickback Statute and their obligations thereunder. Although compliance programs can mitigate the risk of investigation and prosecution for violations of these laws, the risks cannot be entirely eliminated. We cannot rule out the possibility
that the government or other third parties could interpret these laws differently and challenge our practices under one or more of these laws.
The Affordable Care Act also imposes new tracking and disclosure requirements on device manufacturers for any transfer of value
made or distributed to physicians and teaching hospitals. Device manufacturers with products for which payment is available under Medicare, Medicaid or the State Childrens Health Insurance Program were required to begin tracking such payments
on August 1, 2013 and submit reports to CMS by March 31, 2014, and by the 90th day of each subsequent calendar year.
If our
past or present operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion of
our products from reimbursement under federal healthcare programs like Medicare and Medicaid and the curtailment or restructuring of our operations. Any penalties, damages, fines, curtailment or restructuring of our operations could adversely affect
our ability to operate our business and our financial results. The risk of our being found in violation of these laws is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their
provisions are open to a variety of interpretations. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our managements attention from the
operation of our business. Moreover, to achieve compliance with applicable federal and state privacy, security, and electronic transaction laws, we may be required to modify our operations with respect to the handling of patient information.
Implementing these modifications may prove costly. At this time, we are not able to determine the full consequences to us, including the total cost of compliance, of these various federal and state laws.
52
Our international operations expose us to liability under global anticorruption laws.
We are also subject to the U.S. Foreign Corrupt Practices Act, or FCPA and similar worldwide anti-bribery laws in
non-U.S. jurisdictions which generally prohibit companies and their intermediaries from making improper payments to government officials and/or other persons for the purpose of obtaining or retaining business. Because of the predominance of
government-sponsored healthcare systems around the world, many of our customer relationships outside of the United States involve governmental entities and are therefore subject to such anti-bribery laws. Our policies mandate compliance with these
anti-bribery laws. Despite our training and compliance programs, our internal control policies and procedures may not protect us from negligent, reckless or criminal acts committed by our employees or agents. Moreover, even a perceived or alleged
violation could result in costly investigations or proceedings that could harm our financial position and reputation.
The
application of state certificate of need regulations and compliance by providers with federal and state licensing requirements, as well as accreditation requirements, could substantially limit our ability to sell our products and grow our business.
Some states require healthcare providers to obtain a certificate of need or similar regulatory approval prior to the acquisition
of high-cost capital items such as our Sensei and Magellan systems. In many cases, a limited number of these certificates are available and, as a result, hospitals and other healthcare providers may be unable to obtain a certificate of need for the
purchase of our Sensei and Magellan systems. Further, our sales cycle for our system is typically longer in certificate of need states due to the time it takes our customers to obtain the required approvals. In addition, our customers must meet
various federal and state regulatory and/or accreditation requirements in order to receive reimbursement from government-sponsored healthcare programs such as Medicare and Medicaid and other third-party payors. Any lapse by our customers in
maintaining appropriate licensure, certification or accreditation, or the failure of our customers to satisfy the other necessary requirements under government-sponsored healthcare programs, could cause our sales to decline.
Risks Related to Ownership of Our Common Stock
The trading price of our common stock has been volatile and is likely to be volatile in the future.
The trading price of our common stock has been highly volatile. Further, our common stock has a limited trading history. Since our initial
public offering in November 2006 through July 31, 2014, our closing stock price has fluctuated from a low of $1.12 to a high of $38.87. The market price for our common stock may be affected by a number of factors, including those set forth in
this Item 1A as well as:
|
|
|
the announcement of our operating results, including the number of systems sold during a period and our revenue for the period, and the comparison of these results to the expectations of analysts and investors;
|
|
|
|
the receipt, denial or timing of regulatory clearances, approvals or actions of our products or competing products;
|
|
|
|
sales of common stock or other debt or equity securities by us or our stockholders in the future;
|
|
|
|
the success of any collaborations we may undertake with other companies;
|
|
|
|
our ability to develop, introduce and market new or enhanced versions of our products on a timely basis;
|
|
|
|
additions or departures of key scientific or management personnel;
|
|
|
|
the pace of enrollment or results of our clinical trial of at least 125 patients or any other clinical trials;
|
|
|
|
changes in policies affecting third-party coverage and reimbursement in the United States and other countries;
|
|
|
|
ability of our products to achieve market success;
|
|
|
|
the performance of third-party contract manufacturers and component suppliers;
|
|
|
|
our ability to develop sales and marketing capabilities;
|
|
|
|
our ability to manufacture our products to meet commercial and regulatory standards;
|
|
|
|
our ability to manage costs and improve margins;
|
|
|
|
actual or anticipated variations in our results of operations or those of our competitors;
|
|
|
|
announcements of new products, technological innovations or product advancements by us or our competitors;
|
|
|
|
announcements of acquisitions or dispositions by us or our competitors;
|
|
|
|
developments with respect to patents and other intellectual property rights;
|
|
|
|
disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies;
|
53
|
|
|
trading volume of our common stock;
|
|
|
|
our announcements of guidance regarding future operating or financial results which fails to meet investor or analyst expectations or which differs from our previously-announced guidance;
|
|
|
|
changes in earnings estimates or recommendations by securities analysts, failure to obtain analyst coverage of our common stock or our failure to achieve analyst earnings estimates;
|
|
|
|
public statements by analysts or clinicians regarding their perceptions of the effectiveness of our products;
|
|
|
|
developments in our industry;
|
|
|
|
general market conditions and other factors unrelated to our operating performance or the operating performance of our competitors; and
|
|
|
|
the impact of shareholder lawsuits and governmental investigations both on us and on our public perception.
|
The stock prices of many companies in the medical device industry have experienced wide fluctuations that have often been unrelated to the
operating performance of these companies. Following periods of volatility in the market price of a companys securities, stockholders have often instituted class action securities litigation against those companies. Additional class action
securities litigation, if instituted against us, could result in substantial costs and a diversion of our management resources, which could significantly harm our business.
Securities analysts may not continue, or additional 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.
Currently, several securities
analysts provide research coverage of our common stock. Several analysts have already published statements that do not portray our technology, products or procedures using our products in a positive light and others may do so in the future. If we
are unable to educate those who publicize such reports about the benefits we believe our technology provides, or if one or more of the analysts who elects to cover us downgrades our stock, our stock price would likely decline rapidly. 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. 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 sufficient securities analysts do not cover our common stock, the lack of research coverage may adversely affect the market price of our common stock. It may be difficult for companies such
as ours, with smaller market capitalizations, to attract and maintain sufficient independent financial analysts that will cover our common stock. This could have a negative effect on the market price of our stock.
Our principal stockholders, directors and management own a large percentage of our voting stock, which allows them to exercise
significant influence over matters subject to stockholder approval.
Based on our review of publicly available filings as of
July 31, 2014, our five largest stockholders together with our executive officers and directors beneficially own or control approximately 45.7 percent of our outstanding common stock and the ownership or control by these stockholders may
increase to over 50 percent of our outstanding common stock following the exercise of outstanding warrants to purchase shares of our common stock held by such stockholders. Assuming the closing of our July 30, 2014 warrant exchange, two of these
beneficial owners will hold warrants to purchase up to 18,265,293 shares of our common stock at a purchase price of $1.13 a share. Upon exercise of these warrants, our five largest stockholders together with our executive officers and directors
would beneficially own or control approximately 56.1 percent of our outstanding common stock. Accordingly, our principal stockholders and our executive officers and directors have substantial influence over the outcome of corporate actions requiring
stockholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of our assets or any other significant corporate transaction. These stockholders may also delay or prevent a change of control
or otherwise discourage a potential acquirer from attempting to obtain control of us, even if such a change of control would benefit our other stockholders. This significant concentration of stock ownership may adversely affect the trading price of
our common stock due to investors perception that conflicts of interest may exist or arise.
We have not paid dividends in the
past and do not expect to pay dividends in the future, and any return on investment may be limited to the value of our common stock.
We have never paid dividends on our common stock and do not anticipate paying dividends on our common stock in the foreseeable future. The
payment of dividends on our common stock will depend on our earnings, financial condition and other business and economic factors affecting us at such time as our Board of Directors may consider relevant. If we do not pay dividends, our common stock
may be less valuable because a return on your investment will only occur if our stock price appreciates. Pursuant to our loan agreement, we must obtain the lenders prior written consent in order to pay any dividends on our common stock.
54
Some provisions of our charter documents and Delaware law may have anti-takeover effects
that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our stockholders.
Provisions
in our amended and restated certificate of incorporation and amended and restated bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us, even if doing so would benefit our stockholders. These
provisions:
|
|
|
permit our Board of Directors to issue up to 10,000,000 shares of preferred stock, with any rights, preferences and privileges as they may designate, including the right to approve an acquisition or other change in our
control;
|
|
|
|
provide that the authorized number of directors may be changed only by resolution of the Board of Directors;
|
|
|
|
provide that all vacancies, including newly created directorships, may, except as otherwise required by law, be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum;
|
|
|
|
divide our Board of Directors into three classes;
|
|
|
|
require that any action to be taken by our stockholders must be effected at a duly called annual or special meeting of stockholders and not be taken by written consent;
|
|
|
|
provide that stockholders seeking to present proposals before a meeting of stockholders or to nominate candidates for election as directors at a meeting of stockholders must provide notice in writing in a timely manner,
and also specify requirements as to the form and content of a stockholders notice;
|
|
|
|
do not provide for cumulative voting rights, therefore allowing the holders of a majority of the shares of common stock entitled to vote in any election of directors to elect all of the directors standing for election,
if they should so choose;
|
|
|
|
provide that special meetings of our stockholders may be called only by the chairman of the Board, our chief executive officer or by the Board of Directors pursuant to a resolution adopted by a majority of the total
number of authorized directors; and
|
|
|
|
provide that stockholders will be permitted to amend our amended and restated bylaws only upon receiving at least 66 2/3 percent of the votes entitled to be cast by holders of all outstanding shares then entitled to
vote generally in the election of directors, voting together as a single class.
|
In addition, we are subject to
Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any broad range of business combinations with any stockholder who owns, or at any time in the last three years owned, 15
percent or more of our outstanding voting stock for a period of three years following the date on which the stockholder became an interested stockholder. This provision could have the effect of delaying or preventing a change of control, whether or
not it is desired by or beneficial to our stockholders.
Future sales or issuances of shares of our common stock, the announcement
to undertake such sales or issuances, or the perception that such sales or issuances may occur, may dilute our existing stockholders and depress the market price of our common stock.
Sales of our common stock or securities convertible into or exercisable for our common stock by us or by our stockholders, announcements of the
proposed sales of our common stock or securities convertible into or exercisable for our common stock or the perception that sales may be made, could cause the market price of our common stock to decline. We may issue additional shares of our common
stock or securities convertible into or exercisable for our common stock in follow-on offerings to raise additional capital or in connection with acquisitions, corporate alliances or settlements with third parties and we plan to issue additional
shares to our employees, directors or consultants in connection with their services to us. For example, in August 2013 we sold 28,455,284 shares of our common stock and warrants to purchase an aggregate of 34,146,339 shares of our common stock in a
private placement and in July 2014 we issued additional warrants to purchase an aggregate of 6,286,023 shares of our common stock in a subsequent private placement. The issuance of the shares of common stock resulted in immediate dilution to our
stockholders and the on-going exercises of outstanding warrants has caused, and may continue to cause, further dilution to our stockholders in the future.
Our financial results may vary significantly from period to period, which may reduce our stock price.
Our financial results may fluctuate as a result of a number of factors, many of which are outside of our control, which may cause the market
price of our common stock to fall. For these reasons, comparing our operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance. Our financial results
may be negatively affected by any of the risk factors listed in this Risk Factors section.
We incur significant costs
as a result of operating as a public company, and our management is required to devote substantial time to new compliance initiatives.
As a public company, we incur significant legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act, as well as rules
subsequently implemented by the United States Securities and Exchange Commission and the Nasdaq Global Market, have imposed various new requirements on public companies, including requiring establishment and maintenance of effective disclosure
55
and financial controls and changes in corporate governance practices. Our management and other personnel devote a substantial amount of time to these requirements. Moreover, these rules and
regulations increase our legal and financial compliance costs and make some activities more time-consuming and costly.