Item 1.
Business
Overview
We are a medical device company specializing in innovative technologies for the cardiac and vascular markets. We pioneered and manufacture the
CO
2
Heart Laser System
(the "Heart Laser System") that cardiac surgeons use to perform carbon dioxide (CO
2
) transmyocardial
revascularization, or TMR, to alleviate symptoms of severe angina. In addition, we have commenced clinical trials for our RenalGuard Therapy and RenalGuard System (collectively "RenalGuard"), which is
the primary growth initiative for our business. RenalGuard is designed to reduce the toxic effects that contrast media can have on the kidneys, which can lead to contrast-induced nephropathy ("CIN"),
a potentially deadly form of acute kidney injury. We also manufacture
CO
2
surgical laser tubes and provide contract assembly services on
general purpose
CO
2
lasers, which we sell to a single customer on an original equipment manufacturer ("OEM") basis.
RenalGuard
Therapy is based on the theory that creating and maintaining a high urine output is beneficial to patients undergoing imaging procedures where contrast agents are used. The
real-time measurement and matched fluid replacement design of our RenalGuard System is intended to optimally administer RenalGuard Therapy and ensure that a high urine flow is maintained
before, during and after these procedures, thus allowing the body to rapidly eliminate contrast, reducing its toxic effects. The RenalGuard System consists of a proprietary, closed loop,
software-controlled console and accompanying single-use sets used for infusion and urine collection. The RenalGuard System, with its matched fluid replacement capability, is intended to
minimize the risk of over- or under-hydration.
In
December 2006, we received full Food and Drug Administration ("FDA") approval to conduct our first human clinical trial utilizing RenalGuard under an investigational device exemption
("IDE"). This pilot clinical trial was designed to evaluate the safety of RenalGuard and the ability of our RenalGuard System to accurately measure and balance fluid inputs and outputs on up to 40
patients undergoing a catheterization imaging procedure where contrast media would be administered.
We
enrolled a total of 23 patients in this pilot study. Based upon the positive safety data collected in the study and discussions we had with the FDA, we elected to stop enrolling new
patients in the pilot study in November 2007. We submitted an IDE supplement to the FDA in February 2008 seeking approval to move from our pilot study to a pivotal clinical trial to study the safety
and effectiveness of RenalGuard in the prevention of CIN. In March 2008 the FDA granted us conditional approval to begin our pivotal study. We have received approval to study RenalGuard on 246
patients at up to 30 U.S. clinical sites. We expect to begin enrolling patients in this study this spring after obtaining necessary institutional review board approval at the clinical sites where the
study will be conducted.
Other Recent Developments
On December 21, 2007, we announced that we had received the CE Mark Certificate for our RenalGuard System, clearing the way for us to begin our initial
limited launch of the product in the European Union ("EU").
On March 27, 2008, we appointed Artech s.r.l. ("Artech") as the exclusive distributor of our RenalGuard System in Italy. We signed a three year
distribution agreement with Artech and they issued us purchase orders for an initial stocking order of RenalGuard System consoles and single-use sets totaling 90,000 Euros. We and Artech
intend to focus our initial limited commercial launch activities
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for
RenalGuard on ten select hospital sites in Italy. In doing so we hope to interest early adopters of our technology who recognize the benefits of utilizing the unique fluid balancing capabilities
of the RenalGuard System in a catheterization laboratory setting during cardiovascular imaging procedures for patients at higher risk of CIN.
The CO
2
Heart Laser System
TMR is performed by a cardiovascular surgeon, who uses a laser to create channels through the myocardium of the heart in an attempt to restore perfusion to areas
of the heart not being reached by diseased or clogged arteries. This technique is used for relief of symptoms of severe angina in patients with ischemic heart disease not amenable to direct coronary
revascularization interventions, such as angioplasty, stenting or coronary artery bypass grafting (bypass surgery). In addition to providing new direct pathways for blood to reach the ischemic
myocardium, the creation of TMR channels is also believed to promote angiogenesis, the development of new blood vessels.
In
August 1998, we received approval from the FDA to market our first generation CO
2
Heart Laser, the HL1, throughout the U.S. We were the first company to receive FDA
approval to commercialize a product to perform TMR. In January 2001, we received approval from the FDA to market our smaller and lighter second generation CO
2
Heart Laser, the HL2.
Each
TMR procedure requires a sterile, single-use TMR kit containing assorted TMR handpieces, drapes and other disposable items. The HL1 and HL2 lasers each require this TMR
kit as part of the system. The same TMR kit may be used with either the HL1 or HL2 laser. The combination of either an HL1 or an HL2 with a TMR kit is referred to throughout this annual report as the
Heart Laser System.
We
manufacture the Heart Laser Systems at our facility in Franklin, Massachusetts.
Cardiovascular Disease and Current Therapies
According to the Heart Disease and Stroke Statistics—2008 Update, or 2008 HSSU, which was published by the American Heart Association, an estimated
80.7 million Americans suffered from one or more types of cardiovascular disease in 2005, with an estimated 16 million suffering from coronary heart disease and 9.1 million
suffering from angina pectoris (chest pain). This represents an increase over similar statistics published in the 2007 HSSU, when it was reported that 79.4 million Americans suffered from one
or more types of cardiovascular disease in 2004, with an estimated 15.8 million suffering from coronary heart disease and 8.9 million suffering from angina pectoris.
Cardiovascular
disease is the leading cause of death in the U.S., resulting in approximately 35% of the 2,448,000 deaths in 2005, or 1 of every 2.8 deaths in the U.S. The American Heart
Association estimates that the direct and indirect costs of cardiovascular disease in 2008 will be approximately $448.5 billion.
Angina is the medical term used to describe the chest pain or discomfort that an individual can experience when the heart does not receive an adequate supply of
oxygen-rich blood. This can occur when the arteries supplying blood flow to the heart muscle become partially blocked or narrowed by the accumulation of fatty deposits known as plaque.
This condition, where plaque progressively builds up in the interior walls of the arteries, resulting in reduced blood flow to the myocardium, ischemia and angina, is known as coronary
atherosclerosis. Atherosclerosis is the principal form of cardiovascular disease and the primary cause of heart attacks. Traditional treatment of atherosclerosis as a means to improve blood flow to
the heart includes drug therapy, angioplasty, stenting and bypass surgery.
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Drug
therapy alleviates some of the symptoms of atherosclerosis, but is often ineffective in serious cases. Angioplasty is a less invasive treatment for arteriosclerosis than bypass
surgery. The most common form of angioplasty involves inserting a catheter with a balloon at the tip into a diseased artery. By inflating the balloon at the site of blockage, the arterial plaque can
be pressed against the arterial walls and reshaped, resulting in increased blood flow and decreased angina symptoms. According to the 2008 HSSU, an estimated 1,271,000 inpatient angioplasty procedures
were performed in the U.S. in 2005.
Metallic
stents were developed to help prevent abrupt closures that sometimes occur after angioplasty. These stents are inserted into the artery after balloon angioplasty to hold the
expanded plaque in place. Because they are less traumatic and less costly, stenting procedures are preferred over bypass surgery when the blockages are not complicated and involve few coronary
arteries. While offering certain benefits compared to bypass surgery, some studies suggest restenosis, or the reclosure of the stented portion of the artery over time, is a serious problem. A new
generation of stents that are coated with drugs targeted at preventing restenosis have shown some success. Studies have shown significant reduction in restenosis when these drug-eluting stents are
used. However, the results of a recent clinical study, the COURAGE trial, showed that, for those patients with stable angina, there was no long term mortality difference between drug-eluting stents
and medical management. Other recent clinical studies of drug eluting stents have shown an increased risk of long term stent thrombosis complications when these devices are used. The results from
these various clinical studies appear to have caused at least a temporary reduction in the use of drug-eluting stents and it could lead to an increase in bypass surgery procedures in the near term.
Conventional
bypass surgery involves cutting open the patient's chest, cutting through the sternum, usually connecting the patient to a heart-lung machine, stopping the
heart, attaching a vein or artery removed from another part of the patient's body to create a bypass around the diseased blood vessel and restarting the heart. According to the 2008 HSSU, an estimated
469,000 coronary artery bypass procedures were performed on 261,000 patients in the U.S. in 2005 (up from an estimated 427,000 bypass procedures performed on 249,000 patients in the U.S. in 2004).
Certain patients, however, are not suited for bypass procedures, including some who have previously undergone bypass surgery, patients with extremely diffuse diseases, patients with vessels that are
too small to graft, patients with chronic obstructive pulmonary disease, some patients with diabetes, and others who are considered too ill to survive surgery.
We
believe that TMR using the Heart Laser System is useful as a treatment for patients who have severe, stable angina and who are no longer candidates for either angioplasty or bypass
surgery because of either extensive disease or small coronary arteries. The FDA has approved the Heart Laser Systems for such patients.
TMR
as a sole therapy is designed to be less invasive and less expensive than traditional bypass surgery, and may avoid the restenosis problem common with bypass surgery and balloon
angioplasty by not targeting the coronary arteries for treatment.
The main challenge in treating atherosclerosis is to allow adequate blood to flow to the heart muscle without significantly damaging the heart. The techniques
described above are used to bypass, reopen or widen blocked or narrowed arteries and can eventually fail due to restenosis or natural disease
progression. TMR using the Heart Laser Systems involves a different technique whereby channels are created in the myocardium as a means of supplying oxygen-rich blood from the left
ventricular chamber into the ischemic myocardium. TMR does not target the coronary arteries for treatment.
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Heart
muscle must be constantly supplied with oxygen in order to function effectively. Oxygen is delivered to the myocardium by blood, which is distributed to the myocardium through the
right and left coronary arteries. If these arteries are narrowed or blocked as a result of atherosclerosis, sufficient oxygen-rich blood may be unable to reach the heart to satisfy the
metabolic demands of the myocardium. Cardiovascular disease eventually may cause myocardial ischemia, often evidenced by severe and debilitating angina caused by lack of oxygen to the heart muscle,
which can progress to myocardial infarction (the death of an area of the heart muscle). Advanced multi-vessel ischemic heart disease is typically treated with bypass surgery.
During
a sole therapy TMR procedure, the patient is given general anesthesia and an incision is made in the patient's side between the ribs, exposing the heart. The Heart Laser Systems
are synchronized with the patient's heartbeat, firing only when the left ventricle is filled with blood and is electrically insensitive. We believe that synchronization may reduce the risk of
arrhythmias (irregular heartbeats) and their associated morbidity and mortality. Research studies conducted by the Texas Heart Institute in animal models indicated that performing TMR without
synchronization may be associated with an increase in life threatening arrhythmias. The synchronization technology is covered under a patent that we own. The Heart Laser Systems are capable of
creating a transmural channel in less than 0.1 second with a single laser pulse in a patient whose heart has not been stopped and who has not been placed on a heart-lung bypass machine.
The surgeon can vary the pulse width of the laser using a touch key control panel to accommodate for the thickness of the patient's heart wall. Transesophageal echocardiography is used to confirm that
complete channels are made by the laser. Generally, 15 to 25 new channels are created during the procedure.
We
believe that, in addition to providing new temporary direct pathways for blood to reach the ischemic myocardium, the creation of transmural channels using the Heart Laser Systems also
promotes angiogenesis, the formation of new blood vessels. We believe angiogenesis is the primary mechanism of action of TMR and the reason why patients who have undergone a TMR procedure have shown
sustained angina relief.
Based on clinical results to date, we believe that TMR using the Heart Laser Systems provides a number of benefits, although no assurance can be given that any of
the mentioned benefits will be received by patients and no assurance can be given that the FDA will approve additional indications for use of the Heart Laser Systems or that the FDA will not withdraw
or alter its current approval. These potential benefits include:
Therapy for Patients Not Suitable for Coronary Bypass.
The FDA has approved the use of the Heart Laser Systems for patients
who have stable angina (Canadian Cardiovascular Society Class III or IV) refractory to medical treatment and secondary to objectively demonstrated coronary artery atherosclerosis and
with a region of the myocardium not amenable to direct coronary revascularization.
Potentially Reduced Hospital Readmission Costs.
We believe that TMR is a cost effective treatment based on studies indicating
that patients who receive TMR have fewer readmissions to the hospital for chest pain than those who receive only drug therapy.
Potential Angiogenic Response Stimulator.
With additional clinical research, TMR therapy potentially could be found to be
synergistic with delivered growth factors, which may prove useful in treating patients with CAD.
RenalGuard Program
Our near term focus is to conduct clinical trials of RenalGuard to determine whether it is safe and effective in preventing CIN in patients who have some form of
pre-existing renal impairment or other
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significant
risk factors and who will be undergoing an imaging procedure where they will be exposed to potentially toxic contrast media. We believe if we can demonstrate through clinical studies that
RenalGuard is safe and effective in preventing CIN in such patients that there will be substantial markets and revenue growth prospects for the RenalGuard System.
The diagnosis and treatment of cardiovascular disease rely heavily on cardiovascular imaging. Interventional cardiologists and radiologists are increasingly
becoming involved at earlier stages in the management and treatment of patients suffering from cardiovascular disease, as noninvasive imaging and interventional treatment techniques, such as
angioplasty procedures and stent placements, increase in demand and outpace the use of invasive surgical options.
We
estimate that approximately seven million cardiovascular diagnostic and interventional imaging procedures are performed worldwide each year. These less invasive, image-guided medical
procedures require the use of an iodine-based radiocontrast media, or dye, to facilitate the capture and display of x-ray images. These contrast agents are known to be toxic to the
kidneys, whose main function is to filter and remove wastes and fluids, such as this dye, from the body. Patients who undergo a diagnostic or interventional imaging procedure and who present
themselves with a certain level of pre-existing impaired renal (kidney) function are especially susceptible to the toxic effects of these contrast agents and to developing CIN.
CIN
is a major and growing problem due to the increasing number of older patients, diabetics and patients with pre-existing renal failure requiring interventional procedures
that use radiographic contrast media. It is the third most common cause of in-hospital acute renal failure. CIN is associated with increased in-hospital mortality rates, and
increases in long-term mortality, major in-hospital adverse cardiac events, and risk of renal dialysis therapy. Any of these can result in prolonged hospital stays and
increased medical costs. We believe that approximately 10% to 20% of all patients undergoing image-guided cardiology and radiology procedures are at risk of developing CIN. The estimated mortality
rate for patients that develop CIN may be as high as 35%.
Based on a market research study that was performed for us as well as other sources, we estimate that there are approximately 4 million diagnostic and
interventional cardiology and radiology imaging procedures requiring the use of contrast agents that are performed annually in the U.S. alone. Patients with other significant risk factors besides
renal insufficiency, such as congestive heart failure, anemia, peripheral vascular disease, diabetes and being over the age of 75, are also at risk for developing CIN. This population continues to
grow. Specifically, the 2008 HSSU estimates that there were 171 million individuals with diabetes worldwide in 2000 and that number is projected to rise to 366 million by 2030. Heart
failure affected an estimated 5.3 million people in the U.S. alone in 2005. An estimated 16.8% of U.S. adults aged 20 or older between 1999 and 2004 had either chronic kidney disease or chronic
kidney disease indicators.
At-risk
patients with renal insufficiency are easily identified with a routine blood analysis involving the level of a waste product in the blood called serum creatinine and
an industry standard calculation called a creatinine clearance. Creatinine clearance can be accurately calculated using serum creatinine concentration and some or all of the following variables: sex,
age, weight and race, as suggested by the National Diabetes Association. An increase in creatinine clearance is generally accepted as a good indicator of kidney disease. CIN is usually defined as an
increase in serum creatinine of 25% over baseline within four days of a procedure where contrast is administered.
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Of
the estimated 7 million diagnostic and interventional imaging procedures performed worldwide each year that involve the use of contrast agents, we believe that 15% of these
cases, or approximately 1 million patients, could benefit from the use of our RenalGuard System and Therapy.
RenalGuard is designed to reduce the toxic effects that contrast media can have on the kidneys, which may lead to a reduction in the incidence of CIN in
at-risk patients. RenalGuard Therapy is based on existing published literature, including the industry-recognized PRINCE study, that supports the theory that inducing and maintaining high
urine output through the kidneys allows the body to rapidly eliminate contrast, reducing its toxic effects.
Our
RenalGuard System is a real-time measurement and matched fluid replacement device. The system is comprised of a software-controlled, fluid balancing system and a console
with a delivery mechanism for sterile replacement fluid, including detectors, monitors and alarms. It is a closed loop system where the urine produced by the patient through a standard
Foley-type catheter is continuously measured. A unique sterile disposable kit is required for each procedure.
Our
RenalGuard Therapy entails the use of a standard FDA approved loop diuretic that induces the required high urine output that is measured and in real-time replaced with an
equal volume of sterile solution, such as saline, by the RenalGuard System. This matched fluid replacement is intended to minimize the risk of over- or under-hydration, which can lead to
increased patient risks, including pulmonary edema—a swelling and/or fluid accumulation in the lungs which leads to impaired gas exchange and may cause respiratory failure.
We are attempting to bring RenalGuard to market as the first product of its kind. We believe it is a safe, innovative technology capable of achieving significant
market adoption due to its evidence-based therapy and straightforward integration into hospital environments where contrast agents are routinely used.
We have successfully completed supporting pre-clinical and human trials of our RenalGuard Therapy. The aim of these studies was to determine if very
high urine outputs with precise matching of intravascular volume significantly reduced the risk of CIN.
These
feasibility studies have given us confidence in our proof of concept by concluding that high urine output with matched fluid replacement to maintain intravascular volume reduced
the incidence of CIN. These studies indicated a reduction in CIN relative to accepted predictive models and current literature for the patients studied, without the occurrence of any serious
long-lasting adverse events.
We believe RenalGuard can easily be integrated into hospital environments where contrast agents are routinely used. It leverages existing hospital resources to
protect at-risk patients within the current therapy window.
RenalGuard
is designed to be simple to operate and to have features that are similar to devices currently used by hospital staff.
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RenalGuard is currently an investigational device. In December 2006, we received full FDA approval to conduct our first human clinical trial utilizing RenalGuard
under an IDE. This pilot clinical trial was designed to evaluate the safety of RenalGuard and the ability of our RenalGuard System to accurately measure and balance fluid inputs and outputs on up to
40 patients undergoing a catheterization imaging procedure where contrast media would be administered.
We
enrolled a total of 23 patients in this pilot study. Based upon the positive safety data collected in the study and discussions we had with FDA, we elected to stop enrolling new
patients in the pilot study in November 2007. We submitted an IDE supplement to the FDA in February 2008 seeking approval to move from our pilot study to a pivotal clinical trial to study the safety
and effectiveness of RenalGuard in the prevention of CIN. In March 2008 the FDA granted us conditional approval to begin our pivotal study. We have received approval to study RenalGuard on 246
patients at up to 30 U.S. clinical sites. We expect to begin enrolling patients in this study this spring after obtaining necessary institutional review board approval at the clinical sites where the
study will be conducted.
On December 21, 2007 we announced that we had received the CE Mark Certificate for our RenalGuard System, clearing the way for us to begin our initial
limited launch of the product in the European Union. We expect to focus our initial limited commercial launch activities for RenalGuard in 2008 on ten select hospital sites in Italy and prepare for a
broader EU launch in 2009.
We plan to focus our short-term marketing efforts on the interventional cardiovascular and radiology markets and the reduction of CIN in imaging
procedures requiring the use of contrast. In addition, we believe that our RenalGuard Therapy and System may be effectively used for patients undergoing other diagnostic treatments that require the
use of contrast, such as CT scans and other radiography procedures.
The only clinically accepted and endorsed preventive measure for patients at risk for CIN is pre- and post- procedure overnight hydration.
There is currently no FDA approved device or drug for CIN prevention. However, we believe that there are a number of other companies developing or investigating potential new CIN preventive drugs,
devices and therapies.
Other
preventive measures being used in clinical practice today include:
N-acetylcysteine (Mucomyst®) is both a renal vasodilator and antioxidant. It is prescribed by a doctor prior to the start of an
interventional procedure and is taken by the patient in prearranged doses that may start the day before the procedure. This therapy is employed by most physicians due to an extremely low risk profile
and cost. Clinical data linking Mucomyst to a reduction in CIN is to date inconclusive.
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Sodium bicarbonate is a pre-mixed pharmaceutical solution that is given intravenously on the same day as the procedure, prior to the start. Currently,
there are only a small number of published studies that have evaluated utilizing sodium bicarbonate as a preventive measure. There is some industry adoption of this measure to reduce the incidence of
CIN simply due to the lack of expense and low risk to patients.
FlowMedica, Inc. has introduced their Benephit® CV Infusion System, which is a catheter designed to deliver drugs and/or fluid directly to the
renal arteries during an interventional procedure. This system is FDA 510(k)-cleared and CE marked for the infusion of physician-specified agents in the peripheral vasculature. We believe market
challenges for this approach may include concerns regarding complications of direct renal intervention and the cost of the catheter.
Sales and Marketing Strategy
On March 20, 2007, we appointed Novadaq Corp. ("Novadaq"), a subsidiary of Novadaq Technologies Inc., to succeed Edwards Lifesciences LLC
("Edwards") as our exclusive U.S. distributor
for the HL2 and all TMR disposable procedure kits. Outside the U.S., we have established an independent distributor network to market our TMR products, although in some areas, principally Europe, we
continue to sell our TMR products directly to hospitals.
Novadaq
is a medical device company that develops and commercializes medical imaging devices for use in the operating room. Their proprietary SPY® Intra-operative Imaging
System enables cardiac surgeons to visually assess coronary bypass graft functionality during the course of open-heart surgery by means of an intravenous administration of a fluorescent
imaging agent, IC-Green™, coupled with a low level infrared laser source. We believe Novadaq will continue to market our Heart Laser System and the TMR procedure as a treatment
option to be used intra-operatively by the cardiac surgeon if their SPY Imaging System shows the surgeon that a bypass graft is not adequately providing new blood flow to a specific region of the
heart as intended.
We
believe this strong synergistic multi-product offering of the SPY Imaging System, which can be used by the cardiac surgeon as a real-time diagnostic device, and the Heart
Laser System, which can be used as a real-time treatment option when bypass grafts are shown not to be functioning as intended, can be an effective sales tool with cardiac surgeons.
Novadaq
currently employs a direct sales force that is responsible for marketing our TMR products along with their own SPY Imaging System, as well as other imaging related product lines
they market for non-cardiac applications.
International
sales (by origin) accounted for 3% of our total revenue in 2007, 8% in 2006 and 6% in 2005. We had no sales by origin in Canada, our jurisdiction of incorporation.
We
sell our TMR products to both Novadaq and our international distributors at a discount off list price.
As the exclusive U.S. distributor of our TMR products, Novadaq determines the programs, including sale, lease, rental and usage-based offerings, that it believes
will be most effective in the U.S. in selling our products to hospitals.
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Novadaq's
marketing efforts are directed primarily at cardiothoracic surgeons, whose influence is believed to be critical in a hospital's decision to purchase our products. Novadaq
emphasizes the synergistic nature of the SPY Imaging System and the Heart Laser System in their sales process with cardiac surgeons, highlighting the benefits the use of both these technologies can
provide them in their efforts to provide patients with the most complete revascularization treatment.
Products and Customers
We currently sell and service one principal product line, the Heart Laser Systems, which accounted for approximately 87%, 95% and 89% of our revenues for the
years ended December 31, 2007, 2006 and 2005, respectively.
Our
U.S. distributor (Novadaq currently and Edwards prior to March 20, 2007) is our largest customer and accounted for 85%, 88% and 89% of our total revenues in the years ended
December 31, 2007, 2006 and 2005, respectively. We expect this sales concentration with one customer to continue for the near future.
Manufacturing
We manufacture and test our products at our facility in Franklin, Massachusetts, approximately 40 miles west of Boston. We believe that our manufacturing capacity
will be sufficient to meet market demands anticipated in the coming year for all our products.
Some
of the components for our Heart Laser Systems, most notably the power supply and certain optics and fabricated parts for the HL2, are only available from one supplier, and we have
no assurance that we will be able to source any of our sole-sourced components from additional suppliers. Should the supply of certain critical components be interrupted or become
unavailable, we may not be able to meet demand for our products, which could have a material adverse effect on our business and results of operations.
Our
manufacturing facilities are subject to periodic inspection by regulatory authorities to ensure compliance with FDA and EU quality system regulations.
Government Regulation
The Heart Laser Systems and RenalGuard are subject to extensive regulation by the FDA and other regulatory authorities in the U.S. and abroad. The Federal Food,
Drug, and Cosmetic Act (the "FDC Act") and other federal and state statutes and regulations govern the research, design, development, manufacturing, preclinical and clinical testing, installation,
storage, packaging, recordkeeping, servicing, labeling, distribution and promotion of medical devices in the U.S. Our laser products are subject to additional FDA regulation under the radiation health
and safety provisions of the FDC Act, which impose labeling and other safety requirements related to radiation hazards.
As
a device manufacturer, we are also required to register with the FDA. As such, we are subject to inspection on a routine basis for compliance with the FDA's Quality Systems
regulations. These regulations require that we manufacture our products and maintain our documents in a prescribed manner with respect to manufacturing, testing and control activities. Further, we are
required to comply with various FDA requirements for reporting. The FDC Act and medical device reporting regulations require that we provide information to the FDA on deaths or serious injuries
alleged to have been caused or contributed to by the use of our products, as well as product malfunctions that would likely cause or contribute to death or serious injury if the malfunction were to
recur. The FDA also prohibits an approved device from being marketed for unapproved uses. Our product promotion and advertising is subject to continuing FDA regulation. Our laser products are subject
to periodic inspection under the radiation health and safety provisions of the FDC Act for compliance with labeling and other safety
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regulations.
The failure to comply with the applicable regulatory requirements may subject us to a variety of administrative or judicially imposed sanctions, including the FDA's refusal to approve
pending or supplemental applications, withdrawal of an approval or clearance, warning letters, product recalls, product seizures, total or partial suspension of production or distribution,
injunctions, fines, and civil and criminal penalties against that company or its officers, directors or employees. Failure to comply with regulatory requirements could have a material adverse effect
on our business, financial condition and results of operations.
As
a condition of our original FDA approval for our TMR products, we were required by the FDA to perform a postmarket surveillance study. The FDA requested that we submit a PMA
Postapproval Study report summarizing this postmarket surveillance study. As part of this report, the FDA requested that we analyze and discuss the adverse event and mortality rates seen in the
postmarket study and compare these results to the premarket study that was presented as part of our initial FDA PMA application. We filed this postapproval study report with the FDA on
February 28, 2007.
Because
of the significant safety information collected in the postapproval study, and as the FDA has indicated it plans to do in other product areas, we believe that the FDA plans to
present the results at a future meeting of the FDA Circulatory System Devices Advisory Panel and thereafter determine what, if any, actions should be taken with respect to our current Heart Laser
Systems PMA.
From
time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the approval, manufacturing and marketing of drug
products and medical devices. In addition, FDA regulations and guidance are often revised or reinterpreted by the agency in ways that may significantly affect our business and our products. It is
impossible to predict whether legislative changes will be enacted, or FDA regulations, guidance, or interpretations changed, and what the impact of such changes, if any, may be.
Various
foreign countries in which our products are or may be sold impose additional or different regulatory and testing requirements. The international regulatory approval process
varies from country to country and is subject to change in a given country as regulatory requirements change. Thus, the time required for an approval may differ and there can be substantial delays in
obtaining approval after the relevant applications are filed. There is no assurance that foreign regulatory authorities will approve the use or sale of our products in a particular country on a timely
basis, or at all.
The
FDA has approved the use of the Heart Laser Systems for patients who have stable angina (Canadian Cardiovascular Society Class III or IV) refractory to medical
treatment and secondary to objectively demonstrated coronary artery atherosclerosis and with a region of the myocardium not amenable to direct coronary revascularization.
Third-Party Reimbursement
Healthcare providers, including hospitals and physicians that purchase medical devices, such as the Heart Laser Systems, for use on their patients, generally rely
on third-party payers, principally Medicare, Medicaid and private health insurance plans, to reimburse all or part of the costs associated with the procedures performed with these devices.
Currently,
Medicare coverage is provided for TMR when it is performed as a sole therapy treatment. In addition, when two or more medical procedures are performed in combination with each
other, Medicare rules generally allow hospitals to bill for whichever of the two procedures carries the higher reimbursement amount. Therefore, in situations where sole therapy TMR reimbursement rates
exceed that provided for bypass surgery alone, if hospitals perform a combination procedure where both bypass surgery and adjunctive TMR are performed on a patient, the hospital is able to bill for
the
10
higher
TMR procedure reimbursement payment. In these instances, the doctor also can bill an additional amount for performing multiple procedures.
Certain
private insurance companies and health maintenance organizations also currently provide reimbursement for TMR procedures performed with our products, and physician reimbursement
codes have been established for TMR when performed as a sole therapy or as an adjunct to bypass surgery; however, we have limited data as to the breadth of this coverage for the TMR procedure by
private insurance companies and health maintenance organizations.
No
assurance can be given, however, that these payers will continue to reimburse healthcare providers who perform TMR procedures using our products now or in the future. Further, no
assurance can be given that additional payers will reimburse healthcare providers who perform TMR procedures using our products or that reimbursement, if provided, will be timely or adequate. In
addition, the market for our products could be adversely affected by future legislation to reform the nation's healthcare system or by changes in industry practices regarding reimbursement policies
and procedures.
Proprietary Processes, Patents, Licenses and Other Rights
It is our practice to file patent applications to protect our technology, inventions and product improvements. We also rely on trade secret protection for certain
confidential and proprietary information.
Since
April 1992, we have received 33 U.S. patents. These patents have terms which expire from 2009 through 2023 and cover, among other things, laser technology to create a pulsed,
fast-flow laser system, the use of a laser on a beating heart to revascularize the heart using TMR related disposable components, and the system used to time the heart's contractions to
synchronize the laser firing at the correct time. We also have U.S. patent applications pending relating to technology used in the Heart Laser Systems and technologies associated with percutaneous
myocardial revascularization. In addition, we have two patents issued and three applications filed in the field of percutaneous valves.
In
addition, we currently have nine patent applications pending at the U.S. patent office in connection with the prevention of contrast induced nephropathy. Seven of the applications are
related to our RenalGuard System and RenalGuard Therapy. The two additional applications cover other systems and methods for preventing contrast induced nephropathy and acute renal failure.
In
January 1999, CardioGenesis Corporation, our only direct competitor in the TMR market, agreed to the validity and enforceability of certain of our patents in connection with a
settlement of certain litigation between the companies. The patents, U.S. Patent No. 5,125,926 and related international patents, cover our proprietary synchronization technology, which we
believe is a critical factor in increasing the safety of TMR procedures. We granted CardioGenesis a non-exclusive worldwide license to the patents in exchange for payment of a license fee
and ongoing royalties over the life of the patents.
Although
we believe our patents to be strong, litigation by a competitor seeking to invalidate these patents could have a material adverse effect on our business, financial condition and
results of operations. No assurance can be given that the existing patents will be held valid if challenged, that any additional patents will be issued or that the scope of any patent protection will
exclude competitors. The breadth of claims in medical technology patents involves complex legal and factual issues and therefore can be highly uncertain.
11
We also rely upon unpatented proprietary technology and trade secrets that we seek to protect, in part, through confidentiality agreements with employees and other parties. No assurance
can be given that these agreements will not be breached, that we will have adequate remedies for any breach, that others will not independently develop or otherwise acquire substantially equivalent
proprietary technology and trade secrets or disclose such technology or that we can meaningfully protect our rights in such unpatented technology. In addition, others may hold or receive patents that
contain claims covering products developed by us.
We
believe our patents to be valid and enforceable. However, there has been substantial litigation regarding patent and other intellectual property rights in the medical device industry.
Litigation, which could result in substantial cost and diversion of our efforts, may be necessary to enforce our patents, to protect our trade secrets, to defend ourselves against claimed infringement
of the rights of others and to determine the scope and validity of the proprietary rights of others. Adverse determinations in litigation could subject us to significant liabilities to third parties,
require us to seek licenses from third parties and prevent us from manufacturing, selling or using our products, any of which could have a material adverse effect on our business, financial condition
and results of operations.
Competition
Our only direct competitor in the TMR market at this time is CardioGenesis. Although we do not believe it likely, because of the length of time and significant
cost involved to conduct the necessary human clinical trials that would be required to secure approval from the FDA to market new TMR products, other companies may enter the TMR market in the future.
CardioGenesis
has received FDA approval to market its holmium laser in the U.S. to perform TMR. CardioGenesis has also received CE Mark approval for their TMR system, which allows them
to sell their product commercially in the European Union. CardioGenesis promotes the advantages they believe their TMR system provides surgeons who wish to perform minimally invasive or robotically
assisted TMR procedures. It is unclear at this time how successful, if at all, CardioGenesis will be with this marketing approach or what impact their TMR products will have in terms of competing with
our present Heart Laser System design.
In
addition to their TMR system, CardioGenesis has pursued a "percutaneous" method of performing myocardial revascularization, previously known as PMR, and recently rebranded as PMC
(percutaneous myocardial channeling). PMC procedures are performed via a catheter inserted through an incision in a patient's leg and is a less invasive method than TMR of creating channels in a human
heart. CardioGenesis' PMC system was reviewed by the FDA Circulatory System Devices Panel in July 2001. That panel, in a 7-2 vote, found the PMA application for their PMC system to be not
approvable. CardioGenesis has previously announced that they have approval from the FDA under an Investigation Device Exemption ("IDE") to conduct a new clinical trial related to PMC; however, we do
not believe at this time that they have initiated a study pursuant to this IDE. Presently there are no FDA approved PMC devices in the marketplace and we are unable to assess whether there ever will
be an approved PMC device in the marketplace.
We
believe that the primary competitive factors in the medical treatment of coronary artery disease are clinical safety and efficacy, product safety and reliability, regulatory approval,
availability of reimbursement from insurance companies and other payers, product quality, price, reputation for quality, customer service and ease of use. We believe that our competitive success will
be based on our ability to create and maintain scientifically effective and safe technology, obtain and maintain required regulatory approvals, obtain and maintain third party reimbursement for use of
our products, attract and retain key personnel, obtain and maintain patent or other protection for our products and successfully differentiate, price, manufacture and market our products either
directly or indirectly through outside parties.
12
The
medical care products industry is characterized by extensive research efforts and rapid technological progress. New technologies and developments are expected to continue at a rapid
pace in both industry and academia. Competition in the market for surgical lasers and for the treatment of cardiovascular disease is intense and is expected to increase. We believe that the Heart
Laser Systems must compete not only with other TMR systems and potentially PMC systems, but also with medical management (drugs) and other coronary procedures (e.g., coronary bypass surgery,
balloon angioplasty, atherectomy, laser angioplasty and stents, including new drug-eluting stents that may significantly reduce restenosis). Many of the companies manufacturing these products have
substantially greater resources and experience than we do. Such companies may succeed in developing products that are more effective, less invasive or less costly in treating coronary disease than the
Heart Laser Systems and may be more successful than us in manufacturing and marketing their products. No assurance can be given that our competitors or others will not succeed in developing
technologies, products or procedures that are more effective than any being developed by us or that would render our technology and products obsolete or noncompetitive. Although we will continue to
work to develop new and improved products, the advent of either new devices or new pharmaceutical agents could hinder our ability to compete effectively and have a material adverse effect on our
business, financial condition and results of operations.
Research and Development
Research and development expenses were $2,382,000, $1,924,000 and $2,750,000 for the years ended December 31, 2007, 2006 and 2005, respectively. We expect
to continue to incur significant new research and development expenditures in future years. Our current and near term development efforts will be focused on performing clinical trials of RenalGuard,
which should result in increased research and development expenditures through at least 2009.
We
continue to monitor technologies that may be applicable to TMR or the market for CIN prevention. No assurance can be given that our research and development goals will be implemented
successfully.
Employees
As of March 14, 2008, we had 31 full-time employees worldwide, including our executive officers. Of these, seven are in general and
administrative positions, three are involved in sales, six are involved in research and development, two are involved in clinical affairs, six are involved in manufacturing, five are involved in
service and two are involved in quality and regulatory affairs. We also employ one part-time employee in administration. None of our employees are represented by a union. We consider our
relationship with our employees to be good.
Company Information
We were incorporated in British Columbia, Canada on March 3, 1987. We transferred our jurisdiction of incorporation to the Yukon Territory of Canada in
March 1999. Our principal offices and manufacturing facilities are located at 10 Forge Park, Franklin, Massachusetts 02038. Our telephone number is (508) 541-8800. Our Internet
address is
www.plcmed.com
. As used herein, the references to PLC, we, our and the Company mean, unless the context requires otherwise, PLC
and its subsidiaries, PLC Medical Systems, Inc. and PLC Sistemas Medicos Internacionais (Deutschland) GmbH.
Item 1A.
Risk Factors
The
risks and uncertainties described below are not the only risks we face. Additional risks and uncertainties not presently known to us or currently deemed immaterial may also impair
our business
13
operations.
If any of the following risks actually occur, our financial condition and operating results could be materially adversely affected.
We expect to incur significant operating losses in the near future.
We expect to incur net losses in future quarters, at least through 2009, as we increase our research and development on clinical studies of RenalGuard. We cannot
provide any assurance that we will be successful with our business strategy, that RenalGuard will receive FDA approval or commercial acceptance, or that we will ever return to profitability.
Our company may be unable to raise needed capital.
As of December 31, 2007, we had cash and cash equivalents totaling $8,060,000. Based on our current operating plan, we anticipate that our existing capital
resources should be sufficient to meet our working capital requirements for at least the next 12 months; however, we will need to raise additional capital for the future in order to implement
our business plan. We may not be able to raise additional capital upon satisfactory terms, or at all, and our business, financial condition and results of operations could be materially and adversely
affected. To the extent that we raise additional capital by issuing equity or convertible securities, ownership dilution to our shareholders will result. To the extent that we raise additional capital
through the incurrence of debt, our activities may be restricted by the repayment obligations and other restrictive covenants related to the debt.
If we are unable to raise additional capital during 2008, our common stock could be delisted from AMEX.
Our stockholders' equity was $4,950,000 as of December 31, 2007. Under the AMEX listing guidelines, our common stock could be delisted from AMEX if our
stockholders' equity is less than $4,000,000, and if we sustained losses from continuing operations and/or net losses in three of our four most recent
fiscal years. Based on our current projections, our stockholders' equity will fall below $4,000,000 as of December 31, 2008 if we are not able to raise additional capital prior to that time. We
are considering a number of options for raising additional capital but there can be no assurance that we will be successful. If our common stock were delisted from AMEX, we could face a number of
negative implications, including reduced liquidity in our common stock as a result of the loss of market efficiencies associated with AMEX and the loss of federal preemption of state securities laws,
as well as the potential loss of confidence by investors, suppliers, customers and employees, fewer business development opportunities and greater difficulty in obtaining financing or credit.
Our company is currently dependent on one principal customer.
Pursuant to the terms of our TMR distribution agreement with Novadaq, Novadaq is our exclusive distributor for our HL2 laser and TMR kits in the U.S. As a result
of this exclusive arrangement, our U.S. distributor (Novadaq currently and Edwards prior to March 20, 2007) accounted for 85%, 88% and 89% of total revenues in the years ended
December 31, 2007, 2006 and 2005, respectively, and we expect Novadaq to account for the significant majority of our revenue in the near future. As a result of this expected concentration of
sales with Novadaq, we bear an increased financial risk of timely sales collection if, for any reason, Novadaq's business condition should suffer.
We are dependent on Novadaq in the U.S. to attempt to increase our TMR revenues.
Novadaq's sales organization is responsible for selling a number of different products, including our TMR products. We will be largely dependent on the future
success of Novadaq's sales and marketing efforts in the U.S. to increase the installed base of HL2 lasers and TMR procedural volumes and revenues. If our relationship with Novadaq does not progress,
or if Novadaq's sales and marketing
14
strategies
fail to generate sales of our products in the future, our revenue will decrease significantly and our business, financial condition and results of operations will be seriously harmed.
Our company is currently dependent on one principal product line to generate revenues.
We currently sell one principal product line, the Heart Laser Systems, which accounts for the majority of our total revenues. Approximately 87%, 95% and 89% of
our revenues in the years ended December 31, 2007, 2006 and 2005, respectively, were derived from the sales and service of our Heart Laser Systems. This absence of a diversified product line
means that we are directly and materially impacted by changes in the market for Heart Laser Systems. We believe that the number of
opportunities for new TMR laser sales to hospital customers, and specifically sales of our HL2 laser, is likely to continue to decline in future quarters as a result of (1) a diminishing number
of available hospitals that have not already implemented a TMR program that are still likely to in the future and (2) continuing financial pressures that hospitals face, in particular for the
funding of new capital equipment purchases, in light of ongoing cutbacks in both Medicare and private insurance reimbursement rates for all medical procedures. In addition, we have seen a recent
downward trend in the price that new TMR lasers are being sold at in the market, as competition for the remaining available customers increases. These market factors and our dependency on revenues
related to sales of the Heart Laser System poses a serious risk to our ongoing ability to generate sufficient cash to fund our operations, which may seriously harm our business, financial condition
and results of operations in future quarters.
Our company is dependent on certain suppliers.
Some of the components for our Heart Laser Systems, most notably the power supply and certain optics and fabricated parts for the HL2, are only available from one
supplier, and we have no assurance that we will be able to source any of our sole-sourced components from additional suppliers. We are dependent upon our sole suppliers to perform their
obligations in a timely manner. In the past, we have experienced delays in product delivery from our sole suppliers and, because we do not have an alternative supplier to produce these products for
us, we have little leverage to enforce timely delivery. Any delay in product delivery or other interruption in supply from these suppliers could prevent us from meeting our commercial demands for our
products, which could have a material adverse effect on our business, financial condition and results of operations. Furthermore, we do not require significant quantities of any components because we
produce a limited number of our products each year. Our low-quantity needs may not generate substantial revenue for our suppliers. Therefore, it may be difficult for us to continue our
relationships with our current suppliers or establish relationships with additional suppliers on commercially reasonable terms, if at all, and such difficulties may seriously harm our business,
financial condition and results of operations.
We are dependent upon our key personnel and will need to hire additional key personnel in the near future.
Our ability to operate our business successfully depends in significant part upon the retention and motivation of certain key technical, regulatory, production
and managerial personnel and consultants and our ongoing ability to hire and retain additional qualified personnel in these areas. Competition for such personnel is intense, particularly in the
Greater Boston area. We cannot be certain that we will be able to attract such personnel and the loss of any of our current key employees or consultants could have a significant adverse impact on our
business.
15
In order to compete effectively, our current and future products need to gain commercial acceptance.
Our current TMR products may never achieve widespread commercial acceptance. To be successful, we and Novadaq need to:
-
•
-
demonstrate
to the medical community in general, and to heart surgeons and cardiologists in particular, that TMR procedures are effective, relatively safe and cost
effective;
-
•
-
support
third-party efforts to document the medical processes by which TMR procedures relieve angina;
-
•
-
have
more heart surgeons trained to perform TMR procedures using the Heart Laser Systems; and
-
•
-
maintain
and expand third-party reimbursement for the TMR procedure.
To
date, only a limited number of heart surgeons have been trained in the use of TMR using the Heart Laser Systems. We are dependent on Novadaq to expand related marketing and training
efforts in the U.S. for the use of our products.
The
Heart Laser Systems have not yet received widespread commercial acceptance. We believe that concerns over the lack of a consensus view on the reason or reasons why a TMR procedure
relieves angina in patients who undergo the procedure has limited demand for and use of the Heart Laser Systems. Until there is consensus, if ever, of the medical processes by which TMR procedures
relieve angina, we believe some hospitals will delay the implementation of a TMR program.
If
we are unable to achieve widespread commercial acceptance of the Heart Laser Systems, our business, financial condition and results of operations will be materially and adversely
affected.
Our newest product, RenalGuard, has only had limited testing in a clinical setting and we may need to modify it in the future to be
commercially acceptable.
We have only completed the first generation product design for our RenalGuard System and we have only been able to perform a limited amount of testing of this
device in a clinical hospital setting as part of our recently completed initial pilot human clinical study. We may need to make substantial modifications to the design, features or functions of our
device in order for it to obtain FDA approval or meet customer expectations. These changes may not be able to be completed in a timely fashion, if at all. Should any such modifications prove to be
significantly more costly or time consuming to engineer than we estimate, our ability to bring this product to market may be severely and negatively impacted.
Our planned future U.S. pivotal clinical trial to study the safety and effectiveness of RenalGuard in preventing contrast-induced
nephropathy will take us a significant amount of time to complete, if we can complete it at all, and the results of this clinical trial may not show sufficient safety and efficacy for us to either
obtain FDA approval or otherwise be able to successfully market and sell the product.
Our business strategy to grow our revenues and profitability is largely dependent on our success in timely completion of our planned future U.S. pivotal clinical
trial of RenalGuard. We hope to be able to demonstrate through this clinical trial that RenalGuard is safe and effective in preventing CIN.
We
can provide no assurance that when studied in humans, RenalGuard will be shown to be safe or effective in preventing CIN, or that the degree of any positive safety and efficacy
results will be sufficient to either obtain FDA approval or otherwise successfully market our product. Furthermore, the completion of our planned clinical trial is dependent upon many factors, some of
which are not entirely within our control, including, but not limited to, our ability to successfully recruit investigators, the availability of patients meeting the inclusion criteria of our clinical
study, the competition for these
16
particular
study patients amongst other clinical trials being conducted by other companies at these same study sites, the ability of the sites participating in our study to successfully enroll
patients in our trial, and proper data gathering on the part of the investigating sites.
Should
our U.S. pivotal clinical trial take longer than we expect, our competitive position relative to existing preventative measures, or relative to new devices, drugs or therapies
that may be developed, could be seriously harmed and our ability to successfully fund the completion of the trial and bring RenalGuard to market may be adversely affected.
We will need to build a direct sales and marketing organization or otherwise enter into one or more distribution arrangements in order to
market our RenalGuard System in the U.S, if and when it is approved for sale, and in the EU, as we prepare for a sales launch in this market in 2009.
We currently do not have a direct sales force. Instead, we market our existing TMR products through Novadaq in the U.S. and through independent distributors
outside the U.S. We do not plan to use Novadaq or our current international TMR distributors to market our RenalGuard System if and when it becomes commercially available to customers. We will need to
either build an internal direct sales and marketing organization or find new distribution partners in order to successfully market our RenalGuard System.
If
we choose to build a direct sales force, we may not be able to attract qualified individuals with the requisite training or experience to sell our product. In addition, we would need
to devote substantial management time instituting policies, procedures and controls to oversee and effectively manage this new part of our organization, which could adversely impact our daily
operations and would require us to invest significant financial resources, the cost of which could be prohibitive.
If
we instead choose to pursue an indirect distribution strategy, which is our current plan for the EU market, we may not be able to identify suitable distribution partners with
sufficient industry experience, brand recognition, sales capacity and willingness or ability to maximize sales. Further, we may not be able to negotiate distribution agreements with terms and
conditions that are acceptable to us, including ensuring that our product receives adequate sales force focus and attention.
Our primary competitor in TMR may obtain FDA approval to market a new device, the impact of which is uncertain on the future adoption rate
of TMR.
Our primary TMR competitor, CardioGenesis, has attempted in the past and may attempt in the future to obtain FDA approval to market its "percutaneous" method of
performing myocardial revascularization, previously known as PMR, and recently rebranded as PMC (percutaneous myocardial channeling), which would provide a less invasive method of creating channels in
the heart. If PMC can be shown to be safe and effective and is approved by the FDA, it would eliminate the need in certain patients to make an incision in the chest, reducing costs and speeding
recovery. It is unclear what impact, if any, approval of a PMC device would have on the future adoption rate for TMR procedures. If PMC is approved, it could erode the potential TMR market, which
would have a material adverse effect on our business, financial condition and results of operations.
Rapid technological changes in our industry could make our products obsolete.
Our industry is characterized by rapid technological change and intense competition. New technologies and products and new industry standards will develop at a
rapid pace, which could make our current and future planned products obsolete. The advent of new devices and procedures and advances in new drugs and genetic engineering are especially concerning
competitive threats. Our future success will depend upon our ability to develop and introduce product enhancements to address the needs of our customers. Material delays in introducing product
enhancements may cause customers to forego purchases of our products and purchase those of our competitors.
17
Many
potential competitors have substantially greater financial resources and are in a better financial position to exploit marketing and research and development opportunities.
We must receive and maintain government clearances or approvals in order to market our products.
Our products and our manufacturing activities are subject to extensive, rigorous and changing federal and state regulation in the U.S. and to similar regulatory
requirements in other major international markets, including the EU and Japan. These regulations and regulatory requirements are broad in scope and govern, among other things:
-
•
-
product
design and development;
-
•
-
product
testing;
-
•
-
product
labeling;
-
•
-
product
storage;
-
•
-
premarket
clearance and approval;
-
•
-
advertising
and promotion; and
-
•
-
product
sales and distribution.
Furthermore,
regulatory authorities subject a marketed product, its manufacturer and the manufacturing facilities to continual review and periodic inspections. We are subject to ongoing
FDA requirements, including required submissions of safety and other post-market information and reports, registration requirements, Quality Systems regulations and recordkeeping
requirements. The FDA's Quality Systems regulations include requirements relating to quality control and quality assurance, as well as the corresponding maintenance of records and documentation.
Depending on its activities, Novadaq may also be subject to certain requirements under the FDC Act and the regulations promulgated thereunder, and state laws and registration requirements covering the
distribution of our products. Regulatory agencies may change existing requirements or adopt new requirements or policies that could affect our regulatory responsibilities or the regulatory
responsibilities of a distributor like Novadaq. We may be slow to adapt or may not be able to adapt to these changes or new requirements.
Later
discovery of previously unknown problems with our products, manufacturing processes or our failure to comply with applicable regulatory requirements may result in enforcement
actions by the FDA and other international regulatory authorities, including, but not limited to:
-
•
-
warning
letters;
-
•
-
patient
or physician notification;
-
•
-
restrictions
on our products or manufacturing processes;
-
•
-
voluntary
or mandatory recalls;
-
•
-
product
seizures;
-
•
-
refusal
to approve pending applications or supplements to approved applications that we submit;
-
•
-
refusal
to permit the import or export of our products;
18
-
•
-
fines;
-
•
-
injunctions;
-
•
-
suspension
or withdrawal of marketing approvals or clearances; and
-
•
-
civil
and criminal penalties.
Should
any of these enforcement actions occur, our business, financial condition and results of operations could be materially and adversely affected.
To
date, we have received the following regulatory approvals for our products:
United States
—We received FDA approval to market the HL1 Heart Laser System in August 1998 and the HL2 Heart Laser System in
January 2001. However, although we have received FDA approval, the FDA:
-
•
-
has
restricted the use of the Heart Laser Systems by not allowing us to market these products to treat patients whose condition is amenable to conventional treatments, such
as heart bypass surgery, stenting and angioplasty; and
-
•
-
could
impose additional restrictions or reverse its ruling and prohibit use of the Heart Laser Systems at any time.
In
addition, as a condition of our original FDA approval for our TMR products, we were required by the FDA to perform a postmarket surveillance study. The FDA requested that we submit a
PMA Postapproval Study report summarizing this postmarket surveillance study. As part of this report, the FDA requested that we analyze and discuss the adverse event and mortality rates seen in the
postmarket study and compare these results to the premarket study which was presented as part of our initial FDA PMA application. We filed this postapproval study report with the FDA on
February 28, 2007.
Because
of the significant safety information collected in the postapproval study, and as the FDA has indicated it plans to do in other product areas, we believe that the FDA plans to
present the results at a future meeting of the FDA Circulatory System Devices Advisory Panel and thereafter determine what, if any, actions should be taken with respect to our current Heart Laser
Systems PMA.
Europe
—We received the CE Mark from the European Union for the HL1 and HL2 in March 1995 and February 2001, respectively.
However:
-
•
-
the
European Union could impose additional restrictions or reverse its ruling and prohibit use of the Heart Laser Systems at any time; and
-
•
-
France
has prohibited, and other European Union countries could prohibit or restrict, use of the Heart Laser Systems.
Japan
—Our HL1 Heart Laser System received marketing approval from the Japanese Ministry of Health, Labor and Welfare ("MHLW")
in May 2006. However, the MHLW could impose restrictions in the future or reverse its ruling and prohibit use of the Heart Laser Systems at any time.
In
addition, it is unclear what impact the introduction of the HL2 into the U.S. and other international markets will have on the ability of our Japanese distributor to market our older,
first generation HL1 in Japan. Although our Japanese distributor has indicated to us that it plans to seek MHLW approval in the future to market our newer HL2, we can provide no assurance that the
distributor will be successful in obtaining the necessary approvals or how long it may take to secure the required approvals.
19
We presently have approval to market RenalGuard only in the EU. We must receive either FDA approval or clearance before we can market RenalGuard in the United
States. Other countries may require their own approvals prior to our being able to market RenalGuard in those countries.
The
process of obtaining and maintaining regulatory approvals and clearances to market a medical device can be costly and time consuming, and we cannot predict when, if ever, such
approvals or clearances will be granted. Pursuant to FDA regulations, unless an exemption is available, the FDA permits commercial distribution of a new medical device only after the device has
received 510(k) clearance or is the subject of an approved PMA application. The FDA will clear marketing of a medical device through the 510(k) process only if it is demonstrated that the new product
is substantially equivalent to other 510(k)-cleared products.
At
the present time we are not aware of any clear predicates with substantially the same proposed indications for use which would enable us to conclude that RenalGuard is likely to be
cleared by the FDA as a 510(k) device. Therefore, we believe RenalGuard most likely will need to go through the PMA application process.
Because
the PMA application process is more costly, lengthy and uncertain than the 510(k) process and must be supported by extensive data, including data from preclinical studies and
human clinical trials, we cannot predict when RenalGuard may eventually come to market in the U.S. Should we be unable to obtain FDA approval for RenalGuard, or should the approval process take longer
than we anticipate, our future revenue growth prospects will be materially and adversely affected.
Changes in third party reimbursement for TMR procedures or our inability to obtain third party reimbursement for RenalGuard could
materially affect future demand for our products.
Demand for medical devices is often affected by whether third party reimbursement is available for the devices and related procedures. Currently Medicare coverage
is provided for TMR when it is performed as a sole therapy treatment. In addition, when two or more medical procedures are performed in combination with each other, Medicare rules generally allow
hospitals to bill for whichever of the two procedures carries the higher reimbursement amount. Therefore, in situations where sole therapy TMR reimbursement rates exceed that provided for bypass
surgery alone, if hospitals perform a combination procedure where both bypass surgery and adjunctive TMR are performed on a patient, the hospital is able to bill for the higher TMR procedure
reimbursement payment. In these instances, the doctor also can bill an additional amount for performing multiple procedures.
Certain
private insurance companies and health maintenance organizations also currently provide reimbursement for TMR procedures performed with our products and physician reimbursement
codes have been established for both surgical procedures.
No
assurance can be given, however, that these payers will continue to reimburse healthcare providers who perform TMR procedures using our products now or in the future. Further, no
assurance can be given that additional payers will reimburse healthcare providers who perform TMR procedures using our products or that reimbursement, if provided, will be timely or adequate.
Should
third party insurance reimbursement for TMR procedures be reduced or eliminated in the future, our business, financial condition and results of operations would be materially and
adversely affected.
Furthermore,
we know of no existing Medicare coverage or other third party reimbursement that would be available to either hospitals or physicians that would help defray the additional
cost that would result from the future purchase and/or use of our RenalGuard System. We also can provide no
20
assurance
that we will ever be able to obtain Medicare coverage or other third party reimbursement for the use of RenalGuard, which could materially and adversely affect the potential future demand
for this product.
In
addition, the market for our all our products could be adversely affected by future legislation to reform the nation's healthcare system or by changes in industry practices regarding
reimbursement policies and procedures.
Securing intellectual property rights for our RenalGuard System is critical to our future business plans, but may prove to be difficult or
impossible for us to obtain.
We have filed nine patent applications with the U.S. patent office related to our RenalGuard System, RenalGuard Therapy and other intellectual property in the
general field of preventing contrast-induced nephropathy and acute renal failure. Securing patent protection over our intellectual property ideas in this field is, we believe, critical to our plans to
successfully differentiate and market our RenalGuard System and grow our future revenues. We can provide no assurance, however, that we will be successful in securing any patent protection for our
intellectual property ideas in this field or that our efforts to obtain patent protection will not prove more difficult, and therefore more costly, than we are otherwise expecting. Furthermore, even
if we are successful in securing patent protection for some or all of our intellectual property ideas in this field, we cannot predict when in the future any such potential patents may be issued, how
strong such patent protection will prove to be, or whether these patents will be issued in a timely enough fashion to afford us any commercially meaningful advantage in marketing our RenalGuard System
against other potentially competitive devices.
Asserting and defending intellectual property rights may impact our results of operations.
In our industry, competitors often assert intellectual property infringement claims against one another. The success of our business depends on our ability to
successfully defend our intellectual property. Future litigation may have a material impact on our financial condition even if we are successful in marketing our products. We may not be successful in
defending or asserting our intellectual property rights.
An
adverse outcome in any litigation or interference proceeding could subject us to significant liabilities to third parties and require us to cease using the technology that is at issue
or to license the technology from third parties. In addition, a finding that any of our intellectual property is invalid could allow our competitors to more easily and cost-effectively
compete with us. Thus, an unfavorable outcome in any patent litigation or interference proceeding could have a material adverse effect on our business, financial condition or results of operations.
The
cost to us of any patent litigation or interference proceeding could be substantial. Uncertainties resulting from the initiation and continuation of patent litigation or interference
proceedings could have a material adverse effect on our ability to compete in the marketplace. Patent litigation and interference proceedings may also absorb significant management time.
We may be subject to product liability lawsuits; our insurance may not be sufficient to cover damages.
We may be subject to product liability claims. Such claims may absorb significant management time and could degrade our reputation and the marketability of our
products. If product liability claims are made with respect to our products, we may need to recall the implicated product, which could have a material adverse effect on our business, financial
condition and results of operations. In addition, although we maintain product liability insurance, we cannot be sure that our insurance will be adequate to cover potential product liability lawsuits.
Our insurance is expensive and in the future may not be available on acceptable terms, if at all. If a successful product liability claim or series of claims exceeds
21
our
insurance coverage, it could have a material adverse effect on our business, financial condition and results of operations.
A portion of our product sales is generated from operations outside of the U.S. Establishing, maintaining and expanding international sales can be expensive.
Managing and overseeing foreign operations are difficult and products may not receive market acceptance. Risks of doing business outside the U.S. include, but are not limited to, the following:
agreements may be difficult to enforce and receivables difficult to collect through a foreign country's legal system; foreign customers may have longer payment cycles; foreign countries may impose
additional withholding taxes or otherwise tax our foreign income, impose tariffs or adopt other restrictions on foreign trade; U.S. export licenses may be difficult to obtain; and the protection of
intellectual property rights in foreign countries may be more difficult to enforce. There can be no assurance that our international business will grow or that any of the foregoing risks will not
result in a material adverse effect on our business or results of operations.
Because we are incorporated in Canada, you may not be able to enforce judgments against us and our Canadian directors.
Under Canadian law, you may not be able to enforce a judgment issued by courts in the U.S. against us or our Canadian directors. The status of the law in Canada
is unclear as to whether a U.S. citizen can enforce a judgment from a U.S. court in Canada for violations of U.S. securities laws. A separate suit may need to be brought directly in Canada.
Our stock price has historically fluctuated and may continue to fluctuate significantly in the future which may result in losses for our
investors.
Our stock price has been and may continue to be volatile. Some of the factors that can affect our stock price are:
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•
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the
announcement of new products, services or technological innovations by us or our competitors;
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•
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actual
or anticipated quarterly increases or decreases in revenue, gross margin or earnings, and changes in our business, operations or prospects;
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•
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speculation
or actual news announcements in the media or industry trade journals about our company, our products, the TMR or CIN prevention procedures or changes in
reimbursement policies by Medicare and/or private insurance companies;
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•
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the
status of our clinical trials for RenalGuard;
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•
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announcements
relating to strategic relationships or mergers;
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•
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conditions
or trends in the medical device industry;
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•
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changes
in the economic performance or market valuations of other medical device companies; and
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•
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general
market conditions or domestic or international macroeconomic and geopolitical factors unrelated to our performance.
Certain current shareholders hold large amounts of our stock, which they could seek to sell in the public market from time to time. Sales of a substantial number
of shares of our common stock within a
22
short
period of time would cause our stock price to fall. In addition, the sale of these shares could impair our ability to raise capital through the sale of additional stock.