| KENSEY NASH CORP ITEM 1A RISK FACTORS You should carefully consider the risks, uncertainties and other factors described below, in addition to the other information set forth in this report, because they could materially and adversely affect our business, operating results, financial condition, cash flows and prospects as well as adversely affect the value of an investment in our common stock |
| Risks Related to Our Business The TriActiv FX System, the QuickCat catheter and the ThromCat System endovascular products were recently introduced or gained regulatory approval in the United States |
| If any or all of these three products fail to gain or lose market acceptance, our business will suffer |
| We expect that sales of the TriActiv FX System, the QuickCat catheter and the ThromCat system in the United States will account for a significant portion of our revenue in the foreseeable future |
| Because of their recent commercial introduction and/or regulatory approval, these three products have limited product and brand recognition |
| We do not know if these products will be successful over the long term |
| Market acceptance of the three products may be hindered if physicians are not presented with compelling data from long-term studies of the safety and efficacy of the products compared to alternative procedures |
| We have no current plans to conduct such comparative studies |
| In addition, demand for the products may not increase as quickly as we expect |
| Failure of the products to significantly penetrate current or new markets would negatively impact our business, financial condition and results of operations |
| We may not be able to obtain the necessary regulatory approvals for the TriActiv ProGuard System or any future generations of the endovascular product platform in the United States |
| The FDA has not cleared the TriActiv ProGuard System in carotid stenting procedures for marketing nor have we completed the required clinical trials and/or regulatory submissions |
| Prior to granting approval for commercial sale or for the commencement of clinical trials on the ProGuard and other future generations of the device, the FDA may require clarification of information provided in our regulatory submissions, more information or more clinical studies |
| If granted, FDA approval may impose limitations on the uses for which our products may be marketed or how our products may be marketed |
| Should we experience delays or be unable to receive clearance from the FDA, our growth prospects will be diminished |
| We may not be successful commercializing current or future generations of our endovascular product platform through a direct sales force |
| We will commercialize the TriActiv FX System, which has only recently been approved for sale in the United States, as well as future generations our endovascular product line through a direct sales force |
| We may not be able to successfully recruit, develop and train our own sales force to sell and market the TriActiv FX System, the QuickCat catheter, the ThromCat™ Device, the ProGuard™ Device or other future generations of the 20 ______________________________________________________________________ [22]Table of Contents endovascular product platform |
| We began the development of a direct sales and marketing force in fiscal 2005 and must continue to develop and expand this force |
| We had no prior experience hiring or training a sales and marketing force and may not be able to expand and maintain such a team with adequate technical expertise and which is capable of supporting distribution |
| If we are unable to successfully commercialize current or future generations of our endovascular devices, our growth prospects will be diminished |
| We derive a substantial majority of our revenues from only three customers |
| A substantial majority of our total revenues are derived from only three customers |
| Royalty income from, and sales of biomaterials to, St |
| Jude Medical associated with the Angio-Seal represented approximately 57prca of our total revenue for fiscal 2006 while sales of biomaterials products to Arthrex, a distributor of orthopaedic products, represented approximately 22prca of total revenues and royalty income from, and sales of biomaterials products to Orthovita represented approximately 10prca of total revenue for fiscal 2006 |
| It is not possible for us to predict the future level of demand for our products that will be generated by these customers or the future demand for the Angio-Seal from customers of St |
| Our customer concentration exposes us to the risk of changes in the business condition of any of our major customers and to the risk that the loss of a major customer would adversely affect our results of operations |
| Our relationship with these customers is subject to change at any time |
| We anticipate that a substantial portion of our revenues will continue to come from the Angio-Seal, which is manufactured, marketed and distributed by St |
| Under our license agreements with St |
| Jude Medical, the Angio-Seal is manufactured, marketed and sold on a worldwide basis by St |
| Two of our significant sources of revenue for the future are expected to be sales of collagen to St |
| Jude Medical for use in the Angio-Seal and royalty income from the sale of the Angio-Seal product line |
| Our success with the Angio-Seal depends in part on the time, effort and attention that St |
| Jude Medical devotes to the Angio-Seal product line and on their success in manufacturing, marketing and selling the Angio-Seal product line |
| Under the terms of our agreements with St |
| Jude Medical, we have no control over the pricing and marketing strategy for the Angio-Seal product line |
| Jude Medical to successfully maintain levels of manufacturing sufficient to meet anticipated demand, abide by applicable manufacturing regulations and seek reimbursement approvals |
| Jude Medical can terminate the license agreement for any reason upon 12 months notice |
| At such time, all sales and marketing, manufacturing and distribution rights to the Angio-Seal would be returned to us |
| Jude Medical may not successfully pass future inspections of its manufacturing facility or adequately perform its manufacturing, marketing and selling duties |
| Any such failure by St |
| Jude Medical may negatively impact Angio-Seal unit sales and therefore reduce our royalties |
| If our biomaterials products are not successful, our operating results and business may be substantially impaired |
| The success of our existing biomaterials products, as well as any we develop in the future, depends on a variety of factors, including our ability to continue to manufacture, sell and competitively price these products and the acceptance of these products by the medical profession |
| In addition, we may be required to obtain regulatory approval for any future biomaterials products |
| We will require substantial additional funds to develop and market our biomaterials products |
| We expect to fund the growth of our biomaterials business out of our operating income, but this operating income may not be sufficient to develop new biomaterials products |
| To date, we have relied on strategic partners or customers to market and sell our biomaterials products |
| We cannot assure you that we will commercialize our products successfully through our existing and developing sales force |
| We depend on our customers to market and obtain regulatory approvals for their biomaterials products |
| We depend on the efforts of our biomaterials customers in marketing their products that include our biomaterials components |
| There can be no assurance that our customers’ end-use products that include our biomaterials components will be commercialized successfully by our customers or that our customers will otherwise be able to compete effectively in their markets |
| 21 ______________________________________________________________________ [23]Table of Contents The markets for our products are highly competitive and are likely to become more competitive, and our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements |
| The markets for our current and proposed products are fragmented, intensely competitive, subject to rapid change and sensitive to new product introductions and enhancements |
| We expect that the competitive environment for our products will become more intense as additional companies enter our markets and as new techniques and technologies are adopted |
| Our biomaterials and medical devices compete directly and indirectly for customers with a range of products and technologies produced by a wide variety of companies, as well as other processes and procedures which do not require the use of our products or those of our competitors |
| Many of our existing competitors, as well as a number of potential new competitors, have longer operating histories in these markets, greater name recognition, larger customer bases and greater financial, technical and marketing resources |
| Our biomaterials products compete with the products of many of the larger companies in the industry |
| (a subsidiary of Abbott Laboratories) and Vascular Solutions, Inc, amongst other smaller competitors |
| The majority of vascular sealing is performed through manual compression, which represents our primary competition |
| The TriActiv System is currently commercially available in the United Sates and Europe where our competitors include Boston Scientific Corporation, Johnson and Johnson, Inc, Medtronic, Inc |
| ) and Abbott Laboratories, among others |
| Our competitors may have broader product lines, which allow them to negotiate exclusive, long-term supply contracts and offer comprehensive pricing for their products |
| Broader product lines may also provide our competitors with a significant advantage in marketing competing products to group purchasing organizations and other managed care organizations that are increasingly seeking to reduce costs through centralized purchasing |
| Greater financial resources and product development capabilities may allow our competitors to respond more quickly to new or emerging technologies and changes in customer requirements that may render our products obsolete |
| Because a significant portion of our revenue depends on sales of medical devices by our customers to the end-user market, we are also affected by competition within the markets for these devices |
| Competition within the medical device market could also have an adverse effect on our business for a variety of reasons, including that our customers may compete directly with larger, dominant manufacturers with extensive product lines and greater sales, marketing and distribution capabilities |
| We are also unable to control other factors that may impact the commercialization of our components for end use products, such as marketing and sales efforts and competitive pricing pressures within particular markets |
| If our products are not accepted by the medical community or if our products are replaced by new technologies, our business may suffer |
| The success of our existing products depends on continued acceptance of these products by the medical community |
| We cannot predict whether or not our products will continue to be accepted and if that acceptance will be sustained to over the long term |
| The success of any products we develop in the future will depend on the adoption of these products by our targeted markets |
| We cannot predict how quickly, if at all, the medical community will accept our future products or the extent to which our future products will be used |
| If we encounter difficulties introducing future products into our targeted markets, our operating results and business may be substantially impaired |
| In addition, new technologies and techniques may be developed which may render our current products, along with those under development, obsolete |
| The loss of, or interruption of supply from, key vendors could limit our ability to manufacture our products |
| We purchase certain materials and components for our products from various suppliers |
| Some of these components are custom made for us, including many of our absorbable polymer and suture raw materials which are used in our custom polymer products across all markets |
| Any loss of, or interruption of supply from, key vendors may require us to find new vendors |
| We could experience production or development delays while we seek new vendors |
| 22 ______________________________________________________________________ [24]Table of Contents We may have problems manufacturing and delivering our biomaterials products in the future |
| The biomaterials industry is an emerging area, using many materials which are untested or whose properties are still not known |
| Consequently, from time to time we may experience unanticipated difficulties in manufacturing and delivering our biomaterials products to our customers |
| These difficulties may include an inability to meet customer demand, delays in delivering products or quality control problems with certain biomaterials products |
| Our use of hazardous materials exposes us to the risk of material environmental liabilities |
| Because we use hazardous substances in our research and development and manufacturing operations, we are potentially subject to material liabilities related to personal injuries or property damages that may be caused by hazardous substance releases or exposures at or from our facility |
| Decontamination costs, other clean-up costs and related damages or liabilities could substantially impair our business and operating results |
| We are required to comply with increasingly stringent laws and regulations governing environmental protection and workplace safety, including requirements governing the handling, storage and disposal of hazardous substances |
| Jude Medical’s and our international sales are subject to a number of risks that could harm future international sales of Angio-Seal and our ability to successfully commercialize new products in international markets |
| Many of our customers sell products internationally, additionally St |
| Jude Medical sells the Angio-Seal product line internationally and pays us a royalty on each unit sold |
| We also sell the TriActiv device, as well as some of our other products, in the international markets |
| Our sales and royalties from international sales of the Angio-Seal product line by St |
| Jude Medical and our revenues from our other international sales are subject to several risks, including: • the impact of recessions in economies both within and outside the United States; • unexpected changes in regulatory requirements, tariffs or other trade barriers; • weaker intellectual property rights protection in some countries; • fluctuations in exchange rates; • potentially adverse tax consequences; and • political and economic instability |
| The occurrence of any of these events could seriously harm St |
| Jude Medical’s or our future international sales |
| Our success depends on key personnel, the loss of whom could impair our operating results and business |
| Our success depends, to a significant extent, upon the efforts and abilities of Joseph W Kaufmann, Douglas G Evans, Wendy F DiCicco and other members of senior management |
| The loss of the services of one or more of these key employees could harm our operating results and business |
| In addition, we will not be successful unless we can attract and retain skilled personnel, particularly in the areas of research and product development |
| Our failure to expand our management systems and controls to support anticipated growth or integrate future acquisitions could seriously harm our operating results and business |
| Our operations continue to grow and we expect this expansion to continue as we execute our business strategy |
| Sustaining our growth has placed significant demands on management and our administrative, operational, information technology, manufacturing, financial and personnel resources |
| Accordingly, our future operating results will depend on the ability of our officers and other key employees to continue to implement and improve our operational, client support and financial control systems, and effectively expand, train and manage our employee base |
| We may not be able to manage our growth successfully |
| 23 ______________________________________________________________________ [25]Table of Contents Any acquisitions, including our acquisition of IntraLuminal Therapeutics in May 2006, that we undertake could be difficult to integrate, disrupt our business, dilute stockholder value and harm our operating results |
| We may acquire or make investments in complementary businesses, technologies, services or products if appropriate opportunities arise |
| The process of integrating any acquired business, technology, service or product into our business and operations may result in unforeseen operating difficulties and expenditures |
| Integration of any acquired company also may consume much of our management’s time and attention that could otherwise be available for ongoing development of our business |
| Moreover, the anticipated benefits of any acquisition may not be realized |
| Furthermore, we may be unable to identify, negotiate or finance future acquisitions successfully |
| Future acquisitions could result in potentially dilutive issuances of equity securities or the incurrence of debt, contingent liabilities or amortization expenses related to goodwill and other intangible assets |
| Our future operating results are difficult to predict and may vary significantly from quarter to quarter |
| Our operating results have varied significantly from quarter to quarter in the past and are likely to vary substantially in the future as a result of a number of factors, some of which are not in our control, including: • market perception and customer acceptance of our products; • market perception and acceptance of our customer’s products; • our efforts to increase sales of our biomaterials products; • our efforts to commercialize our endovascular products through our existing and developing sales force; • our efforts to gain CE Mark and FDA approval for future generations of endovascular devices; • the loss of significant orders; • changes in our relationship with St |
| Jude Medical; • our establishment of strategic alliances or acquisitions; • timely implementation of new and improved products; • delays in obtaining regulatory approvals; • reimbursement for our products; • increased competition; and • litigation concerning intellectual property rights in the medical device industry |
| You should not rely upon our results of operations for any particular quarter as an indication of our results for a full year or any other quarter |
| Risks Related to Our Intellectual Property If we are unable to protect our patents and proprietary rights, our reputation and competitiveness in the marketplace may be materially damaged |
| We regard our patents, biomaterials trade secrets and other intellectual property as important to our success |
| We rely upon patent law, trade secret protection, confidentiality agreements and license agreements with St |
| Jude Medical to protect our proprietary rights |
| Although we have registered certain of our patents with applicable international governmental authorities, effective patent protection may not be available in every country in which our products are made available, and we have not sought protection for our intellectual property in every country where our products may be sold |
| The steps we take to protect our proprietary rights may not be adequate to ensure that third parties will not infringe or otherwise violate our patents or similar proprietary rights |
| 24 ______________________________________________________________________ [26]Table of Contents We may be accused of infringing upon the proprietary rights of others and any related litigation could materially damage our operating results and business |
| Third parties may claim that we have violated their intellectual property rights |
| An adverse determination in any intellectual property litigation or interference proceedings brought against us could prohibit us from selling our products, subject us to significant liabilities to third parties or require us to seek licenses from third parties |
| The costs associated with these license arrangements may be substantial and could include ongoing royalties |
| Furthermore, the necessary licenses may not be available to us on satisfactory terms, if at all |
| Adverse determinations in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us from manufacturing and selling our products |
| Any of these claims, with or without merit, could subject us to costly litigation and divert the attention of key personnel |
| We do not own or control the use of the Angio-Seal device trademark |
| The term Angio-Seal is a trademark of St |
| All goodwill generated by the marketing and sales of devices bearing the Angio-Seal trademark belongs to St |
| Jude Medical and not to us |
| Should the St |
| Jude Medical license agreements terminate, we would not have the right to call any of our products “Angio-Seal” unless we purchase or license the trademark from St |
| Without rights to the Angio-Seal trademark, we would have to market our products under a different trademark |
| Moreover, upon the termination of the St |
| Jude Medical license agreements, St |
| Jude Medical would have the right to compete against us by selling collagen and puncture closure devices under the Angio-Seal trademark |
| Thus, purchasers of puncture closure devices may be more likely to recognize and purchase products labeled Angio-Seal regardless of whether those devices originate from us |
| Risks Related to Our Industry We may face product liability claims that could result in costly litigation and significant liabilities |
| The clinical testing, manufacture and sale of medical products involve an inherent risk that human subjects in clinical testing or consumers of the products may suffer serious bodily injury or death due to side effects or other unintended negative reactions to our products |
| Accordingly, the clinical testing, manufacture and sale of our products entail significant risk of product liability claims |
| The medical device industry in general has been subject to significant product liability litigation |
| Any product liability claims, with or without merit, could result in costly litigation, reduced sales, significant liabilities and diversion of our management’s time, attention and resources |
| We cannot be sure that our product liability insurance coverage is adequate or that it will continue to be available to us on acceptable terms, if at all |
| We face uncertainty relating to third party reimbursement for our products |
| We could be seriously harmed by changes in reimbursement policies of governmental or private healthcare payers, particularly to the extent any changes affect reimbursement for catheterization procedures in which our Angio-Seal products are used |
| Physicians, hospitals and other users of our products may fail to obtain sufficient reimbursement from healthcare payers for procedures in which our products are used or adverse changes may occur in governmental and private third-party payers’ policies toward reimbursement for these procedures |
| Our products and manufacturing activities are subject to extensive governmental regulation that could make it more expensive and time consuming for us to introduce new and improved products |
| Our products and manufacturing activities are subject to extensive regulation by a number of governmental agencies, including the FDA and comparable international agencies |
| We are required to: • obtain the approval of the FDA and international agencies before we can market and sell new products; • satisfy these agencies’ requirements for all of our labeling, sales and promotional materials in connection with our existing products; 25 ______________________________________________________________________ [27]Table of Contents • comply with all applicable manufacturing regulations; and • undergo rigorous inspections by these agencies |
| Compliance with the regulations of these agencies may delay or prevent us from introducing any new or improved products, including future generations of the TriActiv System |
| Furthermore, we may be subject to sanctions, including temporary or permanent suspension of operations, product recalls and marketing restrictions if we fail to comply with the laws and regulations pertaining to our business |
| We are also required to demonstrate compliance with the FDA’s Quality System Regulations |
| The FDA enforces its Quality System Regulations through pre-approval and periodic post-approval inspections |
| These regulations relate to product testing, vendor qualification, design control and quality assurance, as well as the maintenance of records and documentation |
| If we are unable to conform to these regulations, we will be required to locate alternative manufacturers that do conform |
| Identifying and qualifying alternative manufacturers may be a long, costly and difficult process and could seriously harm our business |
| The FDA and international regulatory agencies may also limit the indications for which our products are approved |
| These regulatory agencies may restrict or withdraw approvals we have received if additional information becomes available to support this action |
| Risks Related To Our Securities The trading price of our common stock is likely to fluctuate substantially in the future |
| The trading price of our common stock may fluctuate widely as a result of a number of factors, some of which are not in our control, including: • our ability to meet or exceed our own forecasts or expectations of analysts or investors; • quarter to quarter variations in our operating results; • announcements regarding clinical activities or new products by us or our competitors; • general conditions in the medical device industry; • changes in our own forecasts or earnings estimates by analysts; • our customers and licensees’ ability to meet or exceed the forecasts or expectations of analysts or investors; • price and volume fluctuations in the overall stock market, which have particularly affected the market prices of many medical device companies; and • general economic conditions |
| In addition, the market for our stock has experienced, and may continue to experience, price and volume fluctuations unrelated or disproportionate to our operating performance |
| In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted against that company |
| If any securities litigation is initiated against us, with or without merit, we could incur substantial costs, and our management’s attention and resources could be diverted from our business |
| Future sales of our common stock in the public market by management and other stockholders with significant holdings could cause our stock price to fall |
| Sales of a substantial number of shares of our common stock in the public market by management or other significant stockholders or the perception that such sales could occur, could cause the market price of our common stock to decline or adversely affect our future ability to raise capital through an offering of equity securities |
| 26 ______________________________________________________________________ [28]Table of Contents Our second amended and restated certificate of incorporation and Delaware law may discourage an acquisition of our company |
| Provisions of our second amended and restated certificate of incorporation and Delaware law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders |