| CEPHEID ITEM 1A RISK FACTORS You should carefully consider the risks and uncertainties described below, together with all of the other information included in this report, in considering our business and prospects |
| The risks and uncertainties described below are not the only ones facing Cepheid |
| Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations |
| The occurrence of any of the following risks could harm our business, financial condition or results of operations |
| We may not achieve profitability |
| We have incurred operating losses in each year since our inception and expect to have negative cash flow from operations through at least the end of 2006 |
| As of December 31, 2005, we had an accumulated deficit of approximately dlra107dtta5 million |
| Our ability to become profitable will depend on our ability to increase our revenues, which is subject to a number of factors including our ability to successfully penetrate the clinical market, our ability to successfully market the GeneXpert system and develop effective GeneXpert tests, the extent of our participation in the USPS BDS program and the operating parameters of the BDS program, which will affect the rate of our consumable products sold, the success of our other collaborative programs, our ability to compete effectively against current and future competitors, global economic and political conditions and the impact of the new accounting for share-based payments such as stock options |
| Our ability to become profitable also depends on our expense levels and product gross margin, which are also influenced by a number of factors, including the resources we devote to developing and supporting our products, the continued progress of our research and development of potential products, our ability to improve manufacturing efficiencies, license fees or royalties we may be required to pay, and the potential need to acquire licenses to new technology or to use our technology in new markets, which could require us to pay unanticipated license fees and royalties in connection with these licenses |
| Our expansion efforts may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenues to offset higher expenses |
| These expenses, among other things, may cause our net income and working capital to decrease |
| If we fail to grow our revenue and manage our expenses and improve our product gross margin, we may never achieve profitability |
| If we fail to do so, the market price of our common stock will likely decline |
| Our participation in the USPS Biohazard Detection System program and other similar programs may not result in predictable contracts or revenues |
| Our participation in the USPS BDS program or any similar government programs involves significant uncertainties related to governmental decision-making and timing of deployment, and is highly sensitive to changes in national and international priorities and budgets |
| The world geopolitical climate in the wake of the September 11, 2001 terrorist attacks has created substantial public interest in the BDS However, budgetary pressures may result in reduced allocations to government agencies such as the USPS, sometimes without advanced notice |
| We cannot be certain that actual funding and operating parameters, or product purchases, will occur at currently expected levels or in the currently expected timeframe |
| In this and any similar future programs, there may be no obligation on the part of the eventual customer to buy a minimum number of units or tests, so, even though we have been awarded a production contract, we may be subject to future spending patterns and budgetary cycles |
| Furthermore, if we participate in any other collaborations bidding for government contracts, the bidding and evaluation process could be lengthy and involve significant expense, and may not result in a contract or a contract with acceptable terms |
| Accordingly, our participation in the USPS BDS program and other similar programs is subject to a number of risks and uncertainties and may not yield the expected revenues |
| If we cannot successfully commercialize our products, our business could be harmed |
| If our tests for use on the SmartCycler and GeneXpert platforms do not gain market acceptance, we will be unable to generate significant sales, which will prevent us from achieving profitability |
| We are in the 17 _________________________________________________________________ [69]Table of Contents process of researching and developing several tests, including MRSA Many factors may affect the market acceptance and commercial success of our products, including: • timely development of a menu of tests and reagents; • the results of clinical trials needed to support any regulatory approvals of our tests; • our ability to obtain requisite FDA or other regulatory clearances or approvals for our tests under development on a timely basis; • demand for the tests and reagents we are able to introduce; • the timing of market entry for various tests for the GeneXpert and the SmartCycler systems; • our ability to convince our potential customers of the advantages and economic value of our systems and tests over competing technologies and products; • the breadth of our test menu relative to competitors; • the extent and success of our marketing and sales efforts; and • publicity concerning our systems and tests |
| In particular, we believe that the success of our business will depend in large part on our ability to commercialize our products for the clinical diagnostic market |
| Our current reliance on revenues from the USPS BDS program has resulted in substantial revenue concentrations in recent periods |
| We believe that successfully building our business in the clinical market is critical to our long-term goals and success |
| We have limited experience operating in the clinical market and, as a result, we have limited ability to forecast future demand for our products in this market |
| In addition, we have committed substantial funds to licenses that are required for us to enter the clinical market |
| If we cannot successfully penetrate the clinical market to exploit these licenses, ongoing payments that we have agreed to make under them could significantly harm our business and operating results in future periods |
| The regulatory approval process is expensive, time-consuming, and uncertain and may prevent us from obtaining required approvals for the commercialization of some of our products |
| In the clinical market, our products may generally be regulated as medical devices by the FDA and comparable agencies of other countries |
| In particular, FDA regulations govern activities such as product development, product testing, product labeling, product storage, premarket clearance or approval, manufacturing, advertising, promotion, product sales, reporting of certain product failures and distribution |
| The 510(k) clearance process usually takes from three to six months from submission, but can take longer |
| The premarket approval process is much more costly, lengthy, and uncertain and generally takes from one to two years or longer from submission |
| Clinical trials are generally required to support both PMA and 510(k) submissions |
| Certain of our products for use on our SmartCycler and GeneXpert systems, when used for clinical purposes, may require premarket approval and all such tests will most likely, at a minimum, require 510(k) clearance |
| We are in the process of conducting clinical trials for several of our proposed test products and are planning clinical trials for other proposed products |
| Clinical trials are expensive and time-consuming |
| In addition, the commencement or completion of any clinical trials may be delayed or halted for any number of reasons, including product performance, changes in intended use, changes in medical practice and issues with evaluator Institutional Review Boards |
| Failure to comply with the applicable requirements can result in, among other things, warning letters, administrative or judicially imposed sanctions such as injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, refusal to grant premarket clearance or premarket approval for devices, withdrawal of marketing clearances or approvals, or criminal prosecution |
| To date, only the GBS and MRSA tests developed by Infectio Diagnostics, Inc |
| (IDI) for use on the SmartCycler have received FDA clearance |
| Approval or clearance from the FDA or any other governmental body has not been sought for other products for the SmartCycler or GeneXpert |
| If the FDA were to disagree with our regulatory assessment and 18 _________________________________________________________________ [70]Table of Contents conclude that approval or clearance is necessary to market the products, we could be forced to cease marketing the products and seek approval or clearance |
| With regard to those future products for which we will seek 510(k) clearance or premarket approval from the FDA, any failure or material delay to obtain such clearance or approval could harm our business |
| In addition, it is possible that the current regulatory framework could change or additional regulations could arise at any stage during our product development or marketing, which may adversely affect our ability to obtain or maintain approval of our products and could harm our business |
| Our manufacturing facilities, where we assemble and produce the SmartCycler system and the GeneXpert system, cartridges and reagents, are subject to periodic regulatory inspections by the FDA and other federal and state regulatory agencies |
| For example, these facilities are subject to Quality System Regulations (QSR) of the FDA and are subject to annual inspection and licensing by the State of California |
| If we fail to maintain these facilities in accordance with the QSR requirements, international quality standards or other regulatory requirements, our manufacturing process could be suspended or terminated, which would harm our business |
| We rely on licenses of key technology from third parties and will require additional licenses for many of our new product candidates |
| We rely on third-party licenses to be able to sell many of our products, and we could lose any of our third-party licenses for a number of reasons, including, for example, early terminations of such agreements due to breaches or alleged breaches by either party to the agreement |
| If we are unable to enter into a new agreement for licensed technologies, either on terms that are acceptable to us or at all, we may be unable to sell some of our products or access some geographic or industry markets |
| We also need to introduce new products and product features in order to market our products to a broader customer base and grow our revenues, and many new products and product features could require us to obtain additional licenses and pay additional license fees and royalties |
| Furthermore, for some markets, we intend to manufacture reagents and tests for use on our instruments |
| We believe that manufacturing reagents and developing tests for our instruments is important to our business and growth prospects, but will require additional licenses, which may not be available on commercially reasonable terms or at all |
| Our ability to develop, manufacture and sell products, and our strategic plans and growth, could be impaired if we are unable to obtain these licenses or if these licenses are terminated or expire and cannot be renewed |
| We may not be able to obtain or renew licenses for a given product or product feature, or for some reagents, on commercially reasonable terms, if at all |
| Furthermore, some of our competitors have rights to technologies and reagents that we do not have, which may put us at a competitive disadvantage in certain circumstances and could adversely affect our performance |
| If we acquire companies, products or technologies, we may face risks associated with those acquisitions |
| If we are presented with appropriate opportunities, we intend to acquire or make other investments in complementary companies, products or technologies |
| We may not realize the anticipated benefit of any acquisition or investment |
| If we acquire companies or technologies, we will likely face risks, uncertainties and disruptions associated with the integration process, including difficulties in the integration of these operations and services of an acquired company, integration of acquired technology with our products, diversion of our management’s attention from other business concerns, the potential loss of key employees or customers of the acquired businesses and impairment charges if future acquisitions are not as successful as we originally anticipate |
| If we fail to successfully integrate other companies, products or technologies that we may acquire, our business could be harmed |
| Furthermore, we may have to incur debt or issue equity securities to pay for any additional future acquisitions or investments, the issuance of which could be dilutive to our existing shareholders |
| In addition, our operating results may suffer because of acquisition-related costs or amortization expenses or charges relating to acquired intangible assets |
| 19 _________________________________________________________________ [71]Table of Contents Concerns about other national and international crises may increase public interest in products such as ours |
| Concerns about recent perceived international crises, such as the spread of severe acute respiratory syndrome (SARS), avian influenza, or bird flu, or West Nile viruses may increase public interest in products or technologies such as ours, even if there are no commercially available products for such applications |
| This increased interest could affect the market price of our common stock, despite the fact that we have not achieved any material revenues from these applications |
| In addition, public concern over these issues could wane over time, which could result in a decline in the market price of our common stock |
| We cannot assure you that any products that we may develop to address any such concerns will result in any material revenues to us |
| We expect that our operating results will fluctuate significantly, and any failure to meet financial expectations may result in a decline in our stock price |
| We expect that our quarterly operating results will fluctuate in the future as a result of many factors, such as those described elsewhere in this section, many of which are beyond our control |
| Because our revenue and operating results are difficult to predict, we believe that period-to-period comparisons of our results of operations are not a good indicator of our future performance |
| Our operating results may be affected by the inability of some of our customers to consummate anticipated purchases of our products, whether due to changes in internal priorities or, in the case of governmental customers, problems with the appropriations process and variability and timing of orders, or manufacturing inefficiencies |
| If revenue declines in a quarter, whether due to a delay in recognizing expected revenue, unexpected costs or otherwise, our results of operations will be harmed because many of our expenses are relatively fixed |
| In particular, research and development and selling, general and administrative expenses are not significantly affected by variations in revenue |
| If our quarterly operating results fail to meet or exceed the expectations of securities analysts or investors, our stock price could drop suddenly and significantly |
| If we are unable to manufacture our products in sufficient quantities and in a timely manner, our operating results will be harmed and our ability to generate revenue could be diminished |
| Our revenues and other operating results will depend in large part on our ability to manufacture and assemble our products in sufficient quantities and in a timely manner |
| Any interruptions we experience in the manufacturing or shipping of our products could delay our ability to recognize revenues in a particular quarter |
| We have limited experience in manufacturing large volumes of products and manufacturing problems can and do arise or we may be unable to adequately scale-up manufacturing in a timely manner or on a commercially reasonable basis if we experience increased demand |
| We may not be able to react quickly enough to ship products and recognize anticipated revenues for a given period if we experience significant delays in the manufacturing process |
| If we are unable to manufacture our products consistently and on a timely basis, our revenues from product sales, gross margins and our other operating results will be materially and adversely affected |
| If certain single source suppliers fail to deliver key product components in a timely manner, our manufacturing ability would be impaired and our product sales could suffer |
| We depend on certain single source suppliers that supply components used in the manufacture of the SmartCycler system, the GeneXpert modules and system, and our disposable reaction tubes and cartridges |
| If we need alternative sources for key component parts for any reason, these component parts may not be immediately available to us |
| If alternative suppliers are not immediately available, we will have to identify and qualify alternative suppliers, and production of these components may be delayed |
| We may not be able to find an adequate alternative supplier in a reasonable time period, or on commercially acceptable terms, if at all |
| Shipments of affected products have been limited or delayed as a result of such problems in the past, and similar problems could occur in the future |
| Our inability to obtain our key source supplies for the manufacture 20 _________________________________________________________________ [72]Table of Contents of our products may require us to delay shipments of products, harm customer relationships or force us to curtail or cease operations |
| If certain of our products fail to obtain an adequate level of reimbursement from third-party payers, our ability to sell products in the clinical market would be harmed |
| Our ability to sell our products in the clinical market will depend in part on the extent to which reimbursement for tests using our products will be available from: • government health care programs and health administration authorities; • private health coverage insurers; • managed care organizations; and • other organizations |
| There are efforts by governmental and third-party payers to contain or reduce the costs of health care through various means |
| Additionally, third-party payers are increasingly challenging the price of medical products and services |
| If purchasers or users of our products are not able to obtain adequate reimbursement for the cost of using our products, they may forego or reduce their use |
| Significant uncertainty exists as to the reimbursement status of newly approved health care products and whether adequate third-party coverage will be available |
| If our competitors and potential competitors develop superior products and technologies, our competitive position and results of operations would suffer |
| We face intense competition from a number of companies that offer products in our target markets |
| These competitors include: • companies developing and marketing sequence detection systems for industrial research products; • healthcare companies that manufacture laboratory-based tests and analyzers; • diagnostic companies; and • companies developing or offering biothreat detection technologies |
| Several companies provide instruments and reagents for DNA amplification or detection |
| Applied Biosystems, Roche, Bio-Rad Laboratories and Stratagene sell systems integrating DNA amplification and detection (sequence detection systems) to the commercial market |
| Idaho Technologies sells sequence detection systems to the military market |
| Roche, Abbott Laboratories and GenProbe sell large sequence detection systems, some with separate robotic batch DNA purification systems and sell reagents to the clinical market |
| Other companies, including Becton, Dickson and Company, Bayer and bioMerieux, offer molecular tests |
| If our products do not perform as expected, or the reliability of the technology on which our products are based is questioned, we could experience lost revenue, delayed or reduced market acceptance of our products, increased costs and damage to our reputation |
| Our success depends on the market’s confidence that we can provide reliable, high-quality molecular test systems |
| We believe that customers in the industrial, biothreat and clinical markets are likely to be particularly sensitive to product defects and errors |
| Our reputation and the public image of our products or technologies may be impaired if our products fail to perform as expected; or our products are perceived as difficult to use |
| Despite testing, defects or errors could occur in our products or technologies |
| For example, in July 2005, we notified customers of a software bug in connection with the diagnostic software used in conjunction with our SmartCycler system and provided replacement software to eliminate this bug |
| Furthermore, with respect to the BDS program, our products are incorporated into larger systems that are built and delivered by others; we cannot control many aspects of the final product |
| 21 _________________________________________________________________ [73]Table of Contents In the future, if we experience a material defect or error, this could result in loss or delay of revenues, delayed market acceptance, damaged reputation, diversion of development resources, legal claims, increased insurance costs or increased service and warranty costs, any of which could harm our business |
| Any failure in the overall BDS, even if it is unrelated to our products, could harm our business |
| Even after any underlying concerns or problems are resolved, any widespread concerns regarding our technology or any manufacturing defects or performance errors in our products could result in lost revenue, delayed market acceptance, damaged reputation, increased service and warranty costs, and claims against us |
| If product liability lawsuits are successfully brought against us, we may face reduced demand for our product and incur significant liabilities |
| We face an inherent risk of exposure to product liability claims if our technologies or systems are alleged to have caused harm or do not perform in accordance with specifications, in part because our products are used for sensitive applications |
| We cannot be certain that we would be able to successfully defend any product liability lawsuit brought against us |
| Regardless of merit or eventual outcome, product liability claims may result in: • decreased demand for our products; • injury to our reputation; • costs of related litigation; and • substantial monetary awards to plaintiffs |
| If we become the subject of a successful product liability lawsuit, we could incur substantial liabilities, which could harm our business |
| We rely on relationships with collaborative partners and other third parties for development, supply and marketing of products and potential products, and such collaborative partners or other third parties could fail to perform sufficiently |
| We believe that our success in penetrating our target markets depends in part on our ability to develop and maintain collaborative relationships with other companies |
| Relying on collaborative relationships is risky to our future success because, among other things: • our collaborative partners may not devote sufficient resources to the success of our collaboration; • our collaborative partners may not obtain regulatory approvals necessary to continue the collaborations in a timely manner; • our collaborative partners may be acquired by another company and decide to terminate our collaborative partnership or become insolvent; • our collaborative partners may develop technologies or components competitive with our products; • components developed by collaborators could fail to meet specifications, possibly causing us to lose potential projects and subjecting us to liability; • disagreements with collaborators could result in the termination of the relationship or litigation; • collaborators may not have sufficient capital resources; • collaborators may pursue tests or other products that will not generate significant volume for us, but may consume significant research and development and manufacturing resources; • our existing collaborations may preclude us from entering into additional future arrangements; or • we may not be able to negotiate future collaborative arrangements, or renewals of existing collaborative agreements, on acceptable terms |
| 22 _________________________________________________________________ [74]Table of Contents Because these and other factors may be beyond our control, the development or commercialization of our products may delayed or otherwise adversely affected |
| If we or any of our collaborative partners terminate a collaborative arrangement, we may be required to devote additional resources to product development and commercialization or we may need to cancel some development programs, which could adversely affect our product pipeline and business |
| If our direct selling efforts for our products fail, our business expansion plans could suffer and our ability to generate revenue will be diminished |
| We have a relatively small sales force compared to our competitors |
| We intend to expand our direct sales force in the future |
| Even if we are successful in increasing the size of our sales force, it may take some period of time before any new sales personnel become effective |
| If our direct sales force is not successful, we may not be able to increase market awareness and sales of our products |
| If our distributor relationships are not successful, our ability to market and sell our products would be harmed and our financial performance will be adversely affected |
| We depend on relationships with distributors for the marketing and sales of our products in the industrial and clinical markets in various geographic regions and we have a limited ability to influence their efforts |
| Product sales through distributors represented 14prca and 20prca of total product sales for 2005 and 2004, respectively |
| While sales through distributors accounted for a smaller percentage of our total revenues in recent periods because of the increase in direct sales in connection with the BDS program, we expect to continue to rely substantially on our distributor relationships for sales into other markets or geographic regions, which is key to our long-term growth potential |
| We also rely on various distributors for our sales of SmartCycler in Europe, China, Mexico and other parts of the world |
| Relying on distributors for our sales and marketing could harm our business for various reasons, including: • agreements with distributors may terminate prematurely due to disagreements or may result in litigation between the partners; • we may not be able to renew existing distributor agreements on acceptable terms; and • our distributors may not devote sufficient resources to the sale of products; • our distributors may be unsuccessful in marketing our products; • our existing relationships with distributors may preclude us from entering into additional future arrangements; and • we may not be able to negotiate future distributor agreements on acceptable terms |
| We may be subject to third-party claims that we require additional licenses for our products and we could face costly litigation, which could cause us to pay substantial damages and limit our ability to sell some or all of our products |
| Our industry is characterized by a large number of patents, claims of which appear to overlap in many cases |
| As a result, there is a significant amount of uncertainty regarding the extent of patent protection and infringement |
| Companies may have pending patent applications (which are typically confidential for the first eighteen months following filing) that cover technologies we incorporate in our products |
| As a result, we may be subjected to substantial damages for past infringement or be required to modify our products or stop selling them if it is ultimately determined that our products infringe a third party’s proprietary rights |
| Moreover, from time to time, we receive correspondence and other communications from companies that ask us to evaluate the need for a license of patents they hold, and indicating or suggesting that we need a license to their patents in order to offer our products and services or to conduct our business operations |
| In addition, Idaho Technology, Inc |
| and University of Utah Research Foundation filed a complaint against us in the United States District Court for the District of Utah claiming that we infringe certain patents; however, this complaint has not yet been served on us |
| If the plaintiffs determine to pursue this action, we intend to 23 _________________________________________________________________ [75]Table of Contents vigorously defend ourselves |
| Any litigation related to claims of patent infringement could consume our resources and lead to significant damages, royalty payments or an injunction on the sale of certain products |
| Any additional licenses to patented technology could obligate us to pay substantial additional royalties, which could adversely impact our product costs and harm our business |
| If we fail to maintain and protect our intellectual property rights, our competitors could use our technology to develop competing products and our business will suffer |
| Our competitive success will be affected in part by our continued ability to obtain and maintain patent protection for our inventions, technologies and discoveries, including our intellectual property that includes technologies that we license |
| Our ability to do so will depend on, among other things, complex legal and factual questions |
| We have patents related to some technology and have licensed some of our technology under patents of others |
| We cannot assure you that our patents and licenses will successfully preclude others from using our technology |
| Our pending patent applications may lack priority over others’ applications or may not result in the issuance of patents |
| Even if issued, our patents may not be sufficiently broad to provide protection against competitors with similar technologies and may be challenged, invalidated or circumvented |
| In addition to patents, we rely on a combination of trade secrets, copyright and trademark laws, nondisclosure agreements, licenses and other contractual provisions and technical measures to maintain and develop our competitive position with respect to intellectual property |
| Nevertheless, these measures may not be adequate to safeguard the technology underlying our products |
| For example, employees, consultants and others who participate in the development of our products may breach their agreements with us regarding our intellectual property and we may not have adequate remedies for the breach |
| We also may not be able to effectively protect our intellectual property rights in some foreign countries, as many countries do not offer the same level of legal protection for intellectual property as the United States |
| Furthermore, for a variety of reasons, we may decide not to file for patent, copyright or trademark protection outside of the United States |
| Our trade secrets could become known through other unforeseen means |
| Notwithstanding our efforts to protect our intellectual property, our competitors may independently develop similar or alternative technologies or products that are equal or superior to our technology |
| Our competitors may also develop similar products without infringing on any of our intellectual property rights or design around our proprietary technologies |
| Furthermore, any efforts to enforce our proprietary rights could result in disputes and legal proceedings that could be costly and divert attention from our business |
| We may need to initiate lawsuits to protect or enforce our patents, which would be expensive and, if we lose, may cause us to lose some, if not all, of our intellectual property rights, and thereby impair our ability to compete |
| We rely on patents to protect a large part of our intellectual property |
| To protect or enforce our patent rights, we may initiate patent litigation against third parties, such as infringement suits or interference proceedings |
| These lawsuits could be expensive, take significant time and divert management’s attention from other business concerns |
| They would also put our patents at risk of being invalidated or interpreted narrowly, and our patent applications at risk of not issuing |
| We may also provoke these third parties to assert claims against us |
| Patent law relating to the scope of claims in the technology fields in which we operate is still evolving and, consequently, patent positions in our industry are generally uncertain |
| We cannot assure you that we would prevail in any of these suits or that the damages or other remedies awarded, if any, would be commercially valuable |
| During the course of these suits, there may be public announcements of the results of hearings, motions and other interim proceedings or developments in the litigation |
| Any public announcements related to these suits could cause our stock price to decline |
| Our sales cycle, particularly in the industrial market and clinical molecular diagnostics market, can be lengthy, which can cause variability and unpredictability in our operating results |
| The sales cycles for our products, particularly in the industrial market and the clinical molecular diagnostics market, can be lengthy, which makes it more difficult for us to accurately forecast revenues in a given period, and may cause revenues and operating results to vary significantly from period to period |
| Sales of 24 _________________________________________________________________ [76]Table of Contents our products to the industrial market often involve purchasing decisions by large public and private institutions, and any purchases can require many levels of pre-approval |
| In addition, many of these sales depend on these institutions receiving research grants from various federal agencies, which grants vary considerably from year to year in both amount and timing due to the political process |
| As a result, we may expend considerable resources on unsuccessful sales efforts or we may not be able to complete transactions on the schedule anticipated |
| Our international operations subject us to additional risks and costs |
| Our international operations are subject to a number of difficulties and special costs, including: • compliance with multiple, conflicting and changing governmental laws and regulations; • laws and business practices favoring local competitors; • potential for exchange and currency risks; • potential difficulty in collecting accounts receivable; • import and export restrictions and tariffs; • difficulties staffing and managing foreign operations; • difficulties and expense in enforcing intellectual property rights; • business risks, including fluctuations in demand for our products and the cost and effort to conduct international operations and travel abroad to promote international distribution, and global economic conditions; • multiple conflicting tax laws and regulations; and • political and economic instability |
| We intend to expand our international sales and marketing activities, including through our European subsidiary, and enter into relationships with additional international distribution partners |
| We may not be able to attract international distribution partners that will be able to market our products effectively |
| Our international operations could also increase our exposure to international laws and regulations |
| If we cannot comply with foreign laws and regulations, which are often complex and subject to variation and unexpected changes, we could incur unexpected costs and potential litigation |
| For example, the governments of foreign countries might attempt to regulate our products and services or levy sales or other taxes relating to our activities |
| In addition, foreign countries may impose tariffs, duties, price controls or other restrictions on foreign currencies or trade barriers, any of which could make it more difficult for us to conduct our business |
| The nature of some of our products may also subject us to export control regulation by the US Department of State and the Department of Commerce |
| Violations of these regulations can result in monetary penalties and denial of export privileges |
| Our SmartCycler and GeneXpert products will be distributed in throughout Europe under the CE IVD mark, and we intend to introduce additional products under the CE IVD mark as we pursue our expansion plans |
| Our use of the CE IVD mark is based on self declarations of conformity with stated directives and standards of the European Parliament and Council and is subject to review by competent authorities in Europe |
| To date, our products and use of self-declarations have not been reviewed by any competent authority |
| If our products are reviewed, a competent authority may find that our products do not comply with stated directives and standards |
| Any finding of non-conformity could prevent or otherwise adversely affect our ability to distribute products in Europe and result in other consequences, including both criminal sanctions, such as the imposition of fines or penalties, and civil claims for damages from persons suffering damage as a result of the non-conformity |
| We are highly dependent on the principal members of our management and scientific staff |
| The loss of services of any of these persons could seriously harm our product development and commercialization efforts |
| In addition, we will require additional skilled personnel in areas such as microbiology, clinical and sales and marketing |
| Attracting, retaining and training personnel with the requisite skills remains challenging, and, as general economic conditions improve, is becoming increasingly competitive, particularly in the Silicon Valley area of California where our main office is located |
| If at any point we are unable to hire, train and retain a sufficient number of qualified employees to match our growth, our ability to conduct and expand our business could be seriously reduced |
| If we become subject to claims relating to improper handling, storage or disposal of hazardous materials, we could incur significant cost and time to comply |
| Our research and development processes involve the controlled storage, use and disposal of hazardous materials, including biological hazardous materials |
| We are subject to federal, state and local regulations governing the use, manufacture, storage, handling and disposal of materials and waste products |
| We may incur significant costs complying with both existing and future environmental laws and regulations |
| In particular, we are subject to regulation by the Occupational Safety and Health Administration (OSHA) and the Environmental Protection Agency (EPA), and to regulation under the Toxic Substances Control Act and the Resource Conservation and Recovery Act |
| OSHA or the EPA may adopt regulations that may affect our research and development programs |
| We are unable to predict whether any agency will adopt any regulations that would have a material adverse effect on our operations |
| The risk of accidental contamination or injury from hazardous materials cannot be eliminated completely |
| In the event of an accident, we could be held liable for any damages that result, and any liability could exceed the limits or fall outside the coverage of our insurance |
| We may not be able to maintain insurance on acceptable terms, if at all |
| We could be required to incur significant costs to comply with current or future environmental laws and regulations |
| Changes in the accounting treatment of stock options will adversely affect our results of operations |
| In December 2004, the Financial Accounting Standard Board issued a new statement, which requires all share-based payments to employees, including grants of employee stock options, to be recognized as expense in the financial statements based on their fair values |
| The new rules will be effective for us January 1, 2006 |
| This change will materially and adversely affect our reported results of operations |
| If a catastrophe strikes our manufacturing facilities, we may be unable to manufacture our products for a substantial amount of time and we would experience lost revenue |
| Our manufacturing facilities are located in Sunnyvale, California |
| Although we have business interruption insurance, our facilities and some pieces of manufacturing equipment are difficult to replace and could require substantial replacement lead-time |
| Various types of disasters, including earthquakes, fires, floods and acts of terrorism, may affect our manufacturing facilities |
| Earthquakes are of particular significance since the manufacturing facilities are located in an earthquake-prone area |
| In the event our existing manufacturing facilities or equipment is affected by man-made or natural disasters, we may be unable to manufacture products for sale, meet customer demands or sales projections |
| If our manufacturing operations were curtailed or ceased, it would seriously harm our business |
| We might require additional capital to support business growth, and such capital might not be available |
| We intend to continue to make investments to support business growth and may require additional funds to respond to business challenges, which include the need to develop new products or enhance existing products, conduct clinical trials, enhance our operating infrastructure and acquire complementary businesses and technologies |
| Equity and debt financing, however, might not be available when needed or, if available, 26 _________________________________________________________________ [78]Table of Contents might not be available on terms satisfactory to us |
| In addition, to the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of these securities could result in dilution to our shareholders |
| In addition, these securities may be sold at a discount from the market price of our common stock, and may include right preferences or privileges senior to those of our common stock |
| If we are unable to obtain adequate financing or financing on terms satisfactory to us, our ability to continue to support our business growth and to respond to business challenges could be significantly limited |
| Compliance with regulations governing public company corporate governance and reporting is complex and expensive |
| Many laws and regulations, notably those adopted in connection with the Sarbanes-Oxley Act of 2002 by the SEC and the NASDAQ National Market, impose obligations on public companies, such as ours, which have increased the scope, complexity, and cost of corporate governance, reporting, and disclosure practices |
| Our implementation of these reforms and enhanced new disclosures necessitates substantial management time and oversight and requires us to incur significant additional accounting and legal costs |