| NUVASIVE INC Item 1A Risk Factors An investment in our common stock involves a high degree of risk |
| You should consider carefully the risks and uncertainties described below together with all other information contained or incorporated by reference in this report before you decide to invest in our common stock |
| If any of the following risks actually occurs, our business, financial condition, results of operations and our future growth prospects could be materially and adversely affected |
| Under these circumstances, the trading price of our common stock could decline, and you may lose all or part of your investment |
| Risks Related to Our Business and Industry Our failure to build an effective and dedicated distribution network for our products could significantly impair our ability to increase sales of our products |
| We have only been selling our products since 2001 |
| We currently sell a significant majority of our products in the United States through distribution arrangements with a network of independent agents and sales representatives managed by our sales managers |
| As a result, we are dependent upon the sales and marketing efforts of our third-party sales agencies |
| We pay these agents and sales representatives a commission based on their product sales |
| We are currently engaged in significant efforts to convince agents and sales representatives to exclusively sell our spine surgery products |
| We believe this is important in increasing our product sales as exclusivity brings greater focus from sales agents and a greater commitment to generate sales of our full product line |
| These efforts require us to offer higher commissions, sometimes for extended periods of time |
| As a result, these efforts can result in significantly increased expenses and may therefore negatively impact our results of operations |
| In addition, if we are unable to convince some of our established third-party sales agencies to exclusively sell our spine surgery products, we would have to try to 17 _________________________________________________________________ [70]Table of Contents transition this business to exclusive agents |
| There is a risk that sales revenue could be lost in connection with such a transition |
| Our efforts to build a dedicated sales force also include initiatives to hire sales representatives who work directly for us |
| We have little experience in establishing a direct sales force, so there is a risk that this sales force will not succeed in growing sales of our products |
| Although we believe the cost of a direct sales force will be comparable to that of independent agents, there is also a risk that the cost may turn out to be higher |
| The establishment and development of a broader and more dedicated distribution network and sales force is expensive and time consuming |
| Because of the intense competition for their services, we may be unable to identify additional qualified sales representatives and independent sales agencies |
| Further, we may not be able to enter into agreements with them on commercially reasonable terms, if at all |
| Even if we do enter into agreements with additional sales representatives and/or independent sales agencies, these parties may not be successful in marketing and selling our products |
| Our business, financial condition and results of operations will be adversely affected if the marketing and sales efforts of our direct sales representatives and independent sales agencies are unsuccessful |
| Pricing pressure from our competitors and sources of medical reimbursement may impact our ability to sell our products at prices necessary to expand our operations and reach profitability |
| The market for spine surgery products is large and growing at a significant rate |
| This has attracted numerous new companies and technologies, and encouraged more established companies to intensify competitive pressure |
| New entrants to our markets include companies owned partially by spine surgeons, who have significant market knowledge and access to the surgeons who use our products |
| As a result of this increased competition, we believe there will be growing pricing pressure in the near future |
| If competitive forces drive down the price we are able to charge for our products, our profit margins will shrink, which will hamper our ability to invest in and grow our business |
| Further, successful sales of our products will depend on the availability of adequate reimbursement from third-party payors |
| Healthcare providers, such as hospitals that purchase medical devices for treatment of their patients, generally rely on third-party payors to reimburse all or part of the costs and fees associated with the procedures performed with these devices |
| Spine surgeons are unlikely to use our products if they do not receive reimbursement adequate to cover the cost of their involvement in the surgical procedures |
| We also believe that future reimbursement may be subject to increased restrictions both in the United States and in international markets |
| Future legislation, regulation or reimbursement policies of third-party payors may adversely affect the demand for our existing products or our products currently under development and limit our ability to sell our products on a profitable basis |
| To the extent we sell our products internationally, market acceptance may depend, in part, upon the availability of reimbursement within prevailing healthcare payment systems |
| Reimbursement and healthcare payment systems in international markets vary significantly by country, and include both government sponsored healthcare and private insurance |
| We are in a highly competitive market segment and face competition from large, well-established medical device manufacturers as well as new market entrants |
| The market for spine surgery products and procedures is intensely competitive, subject to rapid change and significantly affected by new product introductions and other market activities of industry participants |
| With respect to NeuroVision, our nerve avoidance system, we compete with Medtronic Sofamor Danek, Inc, a wholly owned subsidiary of Medtronic, Inc, and Nicolet Biomedical, a VIASYS Healthcare company, both of which have significantly greater resources than we do |
| With respect to MaXcess, our minimally disruptive surgical system, our largest competitors are Medtronic Sofamor Danek, Inc, DePuy Spine, Inc, a Johnson & Johnson company, and Synthes-Stratec, Inc |
| We compete with many of the same companies with respect to our other products |
| At any time, these companies may develop alternative treatments, products or procedures for the treatment of spine disorders that compete directly or indirectly with our products |
| Many of our larger 18 _________________________________________________________________ [71]Table of Contents competitors are either publicly traded or divisions or subsidiaries of publicly traded companies, and enjoy several competitive advantages over us, including: • significantly greater name recognition; • established relations with spine surgeons, hospitals, other healthcare providers and third-party payors; • large and established distribution networks with significant international presence; • products supported by long-term clinical data; • greater experience in obtaining and maintaining United States Food and Drug Administration, or FDA, and other regulatory approvals or clearances for products and product enhancements; • more expansive portfolios of intellectual property rights; and • greater financial and other resources for product research and development, sales and marketing and litigation |
| In addition, the spine industry is becoming increasingly crowded with new market entrants, including companies owned at least partially by spine surgeons |
| Many of these new competitors focus on a specific product or market segment, making it more difficult for us to increase our overall market position |
| If these companies become successful, we expect that competition will become even more intense, leading to greater pricing pressure and making it more difficult for us to expand |
| To be commercially successful, we must convince spine surgeons that our products are an attractive alternative to existing surgical treatments of spine disorders |
| We believe spine surgeons may not widely adopt our products unless they determine, based on experience, clinical data and published peer reviewed journal articles, that our products provide benefits or an attractive alternative to conventional modalities of treating spine disorders |
| Surgeons may be slow to change their medical treatment practices for the following reasons, among others: • lack of experience with our products; • lack of evidence supporting additional patient benefits; • perceived liability risks generally associated with the use of new products and procedures; • limited availability of reimbursement within healthcare payment systems; • costs associated with the purchase of new products and equipment; and • the time that must be dedicated for training |
| In addition, we believe recommendations and support of our products by influential surgeons are essential for market acceptance and adoption |
| If we do not receive support from such surgeons or have favorable long-term data, surgeons and hospitals may not use our products |
| In such circumstances, we may not achieve expected revenues and may never become profitable |
| Our future success depends on our ability to timely develop and introduce new products or product enhancements that will be accepted by the market |
| It is important to our business that we continue to build a more complete product offering to surgeons and hospitals |
| As such, our success will depend in part on our ability to develop and introduce new products and enhancements to our existing products to keep pace with the rapidly changing spine market |
| We cannot assure you that we will be able to successfully develop, obtain regulatory approval for or market new products or that any of our future products will be accepted by the surgeons who use our products or the payors who financially 19 _________________________________________________________________ [72]Table of Contents support many of the procedures performed with our products |
| The success of any new product offering or enhancement to an existing product will depend on several factors, including our ability to: • properly identify and anticipate surgeon and patient needs; • develop and introduce new products or product enhancements in a timely manner; • develop products based on technology that we acquire, such as the technology recently acquired from Pearsalls Limited, RSB Spine LLC, and RiverBend Design LLC; • avoid infringing upon the intellectual property rights of third parties; • demonstrate, if required, the safety and efficacy of new products with data from preclinical studies and clinical trials; • obtain the necessary regulatory clearances or approvals for new products or product enhancements; • provide adequate training to potential users of our products; • receive adequate reimbursement; and • develop an effective and dedicated marketing and distribution network |
| If we do not develop new products or product enhancements in time to meet market demand or if there is insufficient demand for these products or enhancements, our results of operations will suffer |
| We may encounter difficulties in integrating acquired products, technologies or businesses, which could adversely affect our business |
| We recently acquired assets from each of Pearsalls Limited, RSB Spine LLC, and RiverBend Design LLC, and may in the future acquire technology, products or businesses related to our current or future business |
| We have limited experience in acquisition activities and may have to devote substantial time and resources in order to complete any future acquisitions |
| Further, these past and potential acquisitions entail risks, uncertainties and potential disruptions to our business |
| For example, we may not be able to successfully integrate an acquired company’s operations, technologies, products and services, information systems and personnel into our business |
| Further, products we acquire, such as the cervical plate we acquired from RSB Spine LLC and the ExtenSure product acquired from RiverBend Design LLC, may not provide the intended complementary fit with our existing products |
| In addition, certain acquired technology, such as that acquired from Pearsalls Limited, requires significant additional development work and efforts to obtain regulatory clearance or approval |
| An acquisition may further strain our existing financial and managerial controls, and divert management’s attention away from our other business concerns |
| In connection with in-process research and development activities, we would likely experience an increase in development expenses and capital expenditures |
| There may also be unanticipated costs and liabilities associated with an acquisition that could adversely affect our operating results |
| We are dependent on single source suppliers and manufacturers for certain of our products and components, and the loss of any of these suppliers or manufacturers, or their inability to supply us with an adequate supply of materials could harm our business |
| We rely on third-party suppliers and manufacturers to manufacture and supply our products |
| To be successful, our contract manufacturers must be able to provide us with products and components in substantial quantities, in compliance with regulatory requirements, in accordance with agreed upon specifications, at acceptable cost and on a timely basis |
| Our anticipated growth could strain the ability of suppliers to deliver an increasingly large supply of products, materials and components |
| Manufacturers often experience difficulties in scaling up production, including problems with production yields and quality control and assurance, especially with products such as allograft which is processed human tissue |
| If we are unable to obtain sufficient quantities of high quality components to meet customer demand on a timely basis, we could lose customers, our reputation may be harmed and our business could suffer |
| 20 _________________________________________________________________ [73]Table of Contents We currently use one or two manufacturers for each of our devices or components |
| Our dependence on one or two manufacturers involves several risks, including limited control over pricing, availability, quality and delivery schedules |
| If any one or more of our manufacturers cease to provide us with sufficient quantities of our components in a timely manner or on terms acceptable to us, or cease to manufacture components of acceptable quality, we would have to seek alternative sources of manufacturing |
| We could incur delays while we locate and engage alternative qualified suppliers and we might be unable to engage alternative suppliers on favorable terms |
| Any such disruption or increased expenses could harm our commercialization efforts and adversely affect our ability to generate revenue |
| Further, Tissue Banks International, Inc |
| and US Tissue and Cell (formerly Intermountain Tissue Center) collectively supply us with all of our allograft implants, and will continue to be our only sources for the foreseeable future |
| The processing of human tissue into allograft implants is very labor intensive and it is therefore difficult to maintain a steady supply stream |
| In addition, due to seasonal changes in mortality rates, some scarce tissues used for our allograft implants are at times in particularly short supply |
| We cannot be certain that our supply of allograft implants from Tissue Banks International and US Tissue and Cell will be available at current levels or will be sufficient to meet our needs |
| If we are no longer able to obtain allograft implants from these sources in amounts sufficient to meet our needs, we may not be able to locate and engage replacement sources of allograft implants on commercially reasonable terms, if at all |
| Any interruption of our business caused by the need to locate additional sources of allograft implants could significantly harm our revenues, which could cause the market price of our common stock to decline |
| is our exclusive supplier of polyetheretherketone, which comprises our PEEK partial vertebral body product called CoRoent |
| We have a supply agreement with Invibio, pursuant to which we have agreed to purchase our entire supply of polyetheretherketone from Invibio |
| In addition, we have an exclusive supply arrangement with Peak Industries, Inc, pursuant to which Peak Industries is our exclusive supplier of NeuroVision systems |
| In the event Peak Industries ceases to supply us, which it may do at any time, we would be forced to locate a suitable alternative supplier |
| We believe the start-up time to establish a new supply of NeuroVision would be approximately 16 to 20 weeks |
| We have established an inventory of NeuroVision systems to help us bridge any downtime in the event Peak Industries ceases to supply us; however, this inventory may be depleted before we are able to engage an alternate supplier |
| Any inability to meet our customers’ demands for NeuroVision systems could lead to decreased sales and harm our reputation, which could cause the market price of our common stock to decline |
| Any failure in our efforts to train spine surgeons could significantly reduce the market acceptance of our products |
| There is a learning process involved for spine surgeons to become proficient in the use of our products |
| It is critical to the success of our commercialization efforts to train a sufficient number of spine surgeons and to provide them with adequate instruction in the use of our products |
| This training process may take longer than expected and may therefore affect our ability to increase sales |
| Convincing surgeons to dedicate the time and energy necessary for adequate training is challenging, and we cannot assure you we will be successful in these efforts |
| If surgeons are not properly trained, they may misuse or ineffectively use our products |
| This may also result in unsatisfactory patient outcomes, patient injury, negative publicity or lawsuits against us, any of which could have an adverse effect on our business |
| Although we believe our training methods regarding surgeons are conducted in compliance with FDA and other applicable regulations, if the FDA determines that our training constitutes promotion of an unapproved use, they could request that we modify our training or subject us to regulatory enforcement actions, including the issuance of a warning letter, injunction, seizure, civil fine and criminal penalty |
| We are dependent on the services of Alexis V Lukianov and Keith Valentine, and the loss of either of them could harm our business |
| Our continued success depends in part upon the continued service of Alexis V Lukianov, our Chairman and Chief Executive Officer, and Keith Valentine, our President, who are critical to the overall management 21 _________________________________________________________________ [74]Table of Contents of NuVasive as well as to the development of our technology, our culture and our strategic direction |
| We have entered into employment agreements with Messrs |
| Lukianov and Valentine, but neither of these agreements guarantees the service of the individual for a specified period of time |
| Lukianov or Valentine could have a material adverse effect on our business, results of operations and financial condition |
| If we fail to properly manage our anticipated growth, our business could suffer |
| The rapid growth of our business has placed a significant strain on our managerial, operational and financial resources and systems |
| To execute our anticipated growth successfully, we must attract and retain qualified personnel and manage and train them effectively |
| We will be dependent on our personnel and third parties to effectively market our products to an increasing number of surgeons |
| We will also depend on our personnel to develop next generation technologies |
| Further, our anticipated growth will place additional strain on our suppliers and manufacturers, resulting in increased need for us to carefully monitor quality assurance |
| Any failure by us to manage our growth effectively could have an adverse effect on our ability to achieve our development and commercialization goals |
| In January 2005, we relocated our operations to a different facility in San Diego, California |
| Although this new facility allows for growth in our business and enables us to more effectively train surgeons in the use of our products, it has significantly increased our operating expenses |
| For example, our monthly lease payments approximately doubled and we also pay increased maintenance costs for this facility |
| If we do not generate additional business opportunities, these additional expenses could negatively affect our results of operations |
| If we fail to obtain, or experience significant delays in obtaining, FDA clearances or approvals for our future products or product enhancements, our ability to commercially distribute and market our products could suffer |
| Our medical devices are subject to rigorous regulation by the FDA and numerous other federal, state and foreign governmental authorities |
| The process of obtaining regulatory clearances or approvals to market a medical device, particularly from the FDA, can be costly and time consuming, and there can be no assurance that such clearances or approvals will be granted on a timely basis, if at all |
| In particular, the FDA permits commercial distribution of a new medical device only after the device has received clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act, or is the subject of an approved premarket approval application, or PMA The FDA will clear marketing of a medical device through the 510(k) process if it is demonstrated that the new product is substantially equivalent to other 510(k)-cleared products |
| The PMA process is more costly, lengthy and uncertain than the 510(k) clearance process |
| A PMA application must be supported by extensive data, including, but not limited to, technical, preclinical, clinical trial, manufacturing and labeling data, to demonstrate to the FDA’s satisfaction the safety and efficacy of the device for its intended use |
| Our failure to comply with such regulations could lead to the imposition of injunctions, suspensions or loss of regulatory approvals, product recalls, termination of distribution, or product seizures |
| In the most egregious cases, criminal sanctions or closure of our manufacturing facilities are possible |
| To date, all of our products, unless exempt, have been cleared through the 510(k) process |
| We have no experience in obtaining premarket approval |
| We expect that our total disc replacement devices currently under development, including CerPass, our investigational cervical total disc replacement device, and NeoDisc, our investigational nucleus-like cervical disc replacement device, will have to go through the PMA process |
| These devices have not yet reached the clinical trial stage and we cannot assure you whether successful clinical trials will be conducted or completed or regulatory approval will ultimately be obtained for these devices |
| Moreover, clinical trials typically have durations of several years and competing products may be introduced while our devices are undergoing clinical trials |
| This could reduce the potential demand for our products and negatively 22 _________________________________________________________________ [75]Table of Contents impact our business prospects |
| Our competitors’ new products and technologies may be more effective or less expensive than our products or render our products obsolete |
| Further, pursuant to FDA regulations, we can only market our products for cleared or approved uses |
| Certain of our products may be used by physicians for indications other than those cleared or approved by the FDA, but we cannot promote the products for such off-label uses |
| If the FDA determines that our promotional materials or training constitutes promotion of an unapproved use, it could request that we modify our training or promotional materials or subject us to regulatory enforcement actions, including the issuance of a warning letter, injunction, seizure, civil fine and criminal penalties |
| It is also possible that other federal, state or foreign enforcement authorities might take action if they consider promotional or training materials to constitute promotion of an unapproved use, which could result in significant fines or penalties under other statutory authorities |
| Foreign governmental authorities that regulate the manufacture and sale of medical devices have become increasingly stringent and, to the extent we market and sell our products in foreign countries, we may be subject to rigorous regulation in the future |
| In such circumstances, we would rely significantly on our foreign independent sales agencies to comply with the varying regulations, and any failures on their part could result in restrictions on the sale of our products in foreign countries |
| The safety of our products is not yet supported by long-term clinical data and may therefore prove to be less safe and effective than initially thought |
| We obtained clearance to offer almost all of our products that require FDA clearance or approval through the FDA’s 510(k) clearance process |
| The FDA’s 510(k) clearance process is less rigorous than the PMA process and requires less supporting clinical data |
| As a result, we currently lack the breadth of published long-term clinical data supporting the safety of our products and the benefits they offer that might have been generated in connection with the PMA process |
| For these reasons, spine surgeons may be slow to adopt our products, we may not have comparative data that our competitors have or are generating and we may be subject to greater regulatory and product liability risks |
| Further, future patient studies or clinical experience may indicate that treatment with our products does not improve patient outcomes |
| Such results would reduce demand for our products, significantly reduce our ability to achieve expected revenues and could prevent us from becoming profitable |
| Moreover, if future results and experience indicate that our products cause unexpected or serious complications or other unforeseen negative effects, we could be subject to significant legal liability and harm to our business reputation |
| The spine medical device market has been particularly prone to costly product liability litigation |
| If we or our suppliers fail to comply with the FDA’s quality system regulations, the manufacture of our products could be delayed |
| We and our suppliers are required to comply with the FDA’s quality system regulations, which cover the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, storage and shipping of our products |
| The FDA enforces the quality system regulation through inspections |
| If we or one of our suppliers fail a quality system regulations inspection or if any corrective action plan is not sufficient, the manufacture of our products could be delayed |
| We underwent an FDA inspection in August 2003 regarding our allograft implant business, and another FDA inspection in April 2004 regarding our medical device activities |
| In connection with these inspections, the FDA requested minor corrective actions, which we believe we have taken, but there can be no assurance the FDA will not subject us to further enforcement action |
| The FDA may impose additional inspections or audits at any time |
| Modifications to our marketed products may require new 510(k) clearances or premarket approvals, or may require us to cease marketing or recall the modified products until clearances are obtained |
| Any modification to a 510(k)-cleared device that could significantly affect its safety or efficacy, or that would constitute a major change in its intended use, requires a new 510(k) clearance or, possibly, premarket approval |
| The FDA requires every manufacturer to make this determination in the first instance, but the FDA 23 _________________________________________________________________ [76]Table of Contents may review any manufacturer’s decision |
| The FDA may not agree with any of our decisions regarding whether new clearances or approvals are necessary |
| If the FDA requires us to seek 510(k) clearance or premarket approval for any modification to a previously cleared product, we may be required to cease marketing or to recall the modified product until we obtain clearance or approval, and we may be subject to significant regulatory fines or penalties |
| Further, our products could be subject to recall if the FDA determines, for any reason, that our products are not safe or effective |
| Any recall or FDA requirement that we seek additional approvals or clearances could result in delays, fines, costs associated with modification of a product, loss of revenue and potential operating restrictions imposed by the FDA Risks Related to Our Financial Results and Need for Financing We have a limited operating history, have incurred significant operating losses since inception and expect to continue to incur losses, and we cannot assure you that we will achieve profitability |
| We were incorporated in Delaware in 1997, and have since focused primarily on research and development and on seeking regulatory clearances to market our products |
| We began commercial sales in 2001 and have several product offerings in both MAS and classic fusion |
| We have yet to demonstrate that we can generate sufficient sales of our products to become profitable |
| The extent of our future operating losses and the timing of profitability are highly uncertain, and we may never achieve profitability |
| At December 31, 2005, we had an accumulated deficit of approximately dlra108dtta8 million |
| It is possible that we will never generate sufficient revenues from product sales to achieve profitability |
| Even if we do achieve significant revenues from our product sales, we expect that increased operating expenses will result in significant operating losses in the near term as we, among other things: • pay the acquisition costs (ie, purchase price and related expenses) and continued development and regulatory costs related to our recent acquisition of assets and technology from each of RSB Spine LLC and Pearsalls Limited, especially with respect to the significant ongoing development and regulatory expenses associated with the assets acquired from Pearsalls Limited; • grow our internal and third-party sales and marketing forces to expand the penetration of our products in the United States, and expend significant sums in connection with our efforts to convince independent agents and sales representatives to exclusively sell our spine surgery products; • increase our research and development efforts to improve upon our existing products and develop new product candidates, such as the potential products resulting from the assets acquired from Pearsalls Limited; and • perform clinical research and trials on our existing products and product candidates |
| As a result of these activities, we may never become profitable |
| Even if we do achieve profitability, we may not be able to sustain or increase profitability on an ongoing basis |
| In addition, our independent distributors are entitled to certain payments in the event their services are terminated in connection with (or shortly following) a change of control of our company |
| These payments are the responsibility of our successor, but may represent an additional significant expense or reduce the price paid in connection with any such event |
| Our quarterly financial results are likely to fluctuate significantly because our sales prospects are uncertain |
| Our quarterly operating results are difficult to predict and may fluctuate significantly from period to period, particularly because our sales prospects are uncertain |
| These fluctuations will also affect our annual operating results and may cause those results to fluctuate unexpectedly from year to year |
| The level of our revenues and results of operations at any given time will be based primarily on the following factors: • our ability to drive increased sales of our products to hospitals and surgeons; • our ability to establish and maintain an effective and dedicated sales force; • pricing pressure applicable to our products, including adverse third-party reimbursement outcomes; 24 _________________________________________________________________ [77]Table of Contents • results of clinical research and trials on our existing products and products in development and our ability to obtain FDA approval or clearance; • the mix of our products sold (ie, profit margins differ between our products); • timing of new product offerings, acquisitions, licenses or other significant events by us or our competitors; • the ability of our suppliers to timely provide us with an adequate supply of materials and components; • the evolving product offerings of our competitors and the potential introduction of new and competing technologies; • regulatory approvals and legislative changes affecting the products we may offer or those of our competitors; and • interruption in the manufacturing or distribution of our products |
| Many of the products we may seek to develop and introduce in the future will require FDA approval or clearance, without which we cannot begin to commercialize them in the United States, and commercialization of them outside of the United States would likely require other regulatory approvals and import licenses |
| As a result, it will be difficult for us to forecast demand for these products with any degree of certainty |
| In addition, we will be increasing our operating expenses as we build our commercial capabilities |
| Accordingly, we may experience significant, unanticipated quarterly losses |
| Because of these factors, our operating results in one or more future quarters may fail to meet the expectations of securities analysts or investors |
| Risks Related to Our Intellectual Property and Potential Litigation Our ability to protect our intellectual property and proprietary technology through patents and other means is uncertain |
| Our success depends significantly on our ability to protect our proprietary rights to the technologies used in our products |
| We rely on patent protection, as well as a combination of copyright, trade secret and trademark laws, and nondisclosure, confidentiality and other contractual restrictions to protect our proprietary technology |
| However, these legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage |
| For example, our pending US and foreign patent applications may not issue as patents in a form that will be advantageous to us or may issue and be subsequently successfully challenged by others and invalidated |
| In addition, our pending patent applications include claims to material aspects of our products and procedures that are not currently protected by issued patents |
| Both the patent application process and the process of managing patent disputes can be time consuming and expensive |
| Competitors may be able to design around our patents or develop products which provide outcomes which are comparable to ours |
| Although we have taken steps to protect our intellectual property and proprietary technology, including entering into confidentiality agreements and intellectual property assignment agreements with our officers, employees, consultants and advisors, such agreements may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements |
| Furthermore, the laws of some foreign countries may not protect our intellectual property rights to the same extent as do the laws of the United States |
| In the event a competitor infringes upon our patent or other intellectual property rights, enforcing those rights may be costly, difficult and time consuming |
| Even if successful, litigation to enforce our intellectual property rights or to defend our patents against challenge could be expensive and time consuming and could divert our management’s attention |
| We may not have sufficient resources to enforce our intellectual property rights or to defend our patents against a challenge |
| In addition, certain product categories, including pedicle screws, have been the subject of significant litigation in recent years |
| Since we sell pedicle screws and recently introduced our SpheRx pedicle screw system, any related litigation could harm our business |
| 25 _________________________________________________________________ [78]Table of Contents The medical device industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement |
| Patent litigation can involve complex factual and legal questions and its outcome is uncertain |
| Any claim relating to infringement of patents that is successfully asserted against us may require us to pay substantial damages |
| Even if we were to prevail, any litigation could be costly and time-consuming and would divert the attention of our management and key personnel from our business operations |
| Our success will also depend in part on our not infringing patents issued to others, including our competitors and potential competitors |
| If our products are found to infringe the patents of others, our development, manufacture and sale of such potential products could be severely restricted or prohibited |
| In addition, our competitors may independently develop similar technologies |
| Because of the importance of our patent portfolio to our business, we may lose market share to our competitors if we fail to protect our intellectual property rights |
| As the number of entrants into our market increases, the possibility of a patent infringement claim against us grows |
| While we make an effort to ensure that our products do not infringe other parties’ patents and proprietary rights, our products and methods may be covered by patents held by our competitors |
| In addition, our competitors may assert that future products we may market infringe their patents |
| A patent infringement suit brought against us or any strategic partners or licensees may force us or any strategic partners or licensees to stop or delay developing, manufacturing or selling potential products that are claimed to infringe a third party’s intellectual property, unless that party grants us or any strategic partners or licensees rights to use its intellectual property |
| In such cases, we may be required to obtain licenses to patents or proprietary rights of others in order to continue to commercialize our products |
| However, we may not be able to obtain any licenses required under any patents or proprietary rights of third parties on acceptable terms, or at all |
| Even if any strategic partners, licensees or we were able to obtain rights to the third party’s intellectual property, these rights may be non-exclusive, thereby giving our competitors access to the same intellectual property |
| Ultimately, we may be unable to commercialize some of our potential products or may have to cease some of our business operations as a result of patent infringement claims, which could severely harm our business |
| We are subject to litigation regarding cadavers we purchased that originated from the University of California at Los Angeles |
| For a period of time, we purchased cadavers for surgeon training purposes from a broker who is now being investigated for his practices in obtaining those cadavers from the University of California, Los Angeles, or UCLA We previously received inquiries and document requests from the FDA and the State of California regarding this investigation |
| Although we have been informed that we are not a subject of this investigation, we have been named as a defendant, along with the Regents of the University of California, The David Geffen School of Medicine at UCLA, Ernest V Nelson, Henry G Reid, and Johnson & Johnson, in multiple civil class action lawsuits relating to the underlying events |
| The lawsuits have been consolidated in a single court in the Superior Court of the State of California, County of Los Angeles |
| The lawsuits generally allege fraud, negligence and unfair business practices in connection with the use and distribution of the donated cadavers, and further allege that the cadavers were improperly sold |
| These lawsuits may result in significant legal fees and could be a diversion of management’s time and other resources |
| If the claims contained in the lawsuit are successfully asserted against us, our financial performance and cash position could be negatively impacted and the market price of our shares may decline |
| If we become subject to product liability claims, we may be required to pay damages that exceed our insurance coverage |
| Our business exposes us to potential product liability claims that are inherent in the testing, manufacture and sale of medical devices for spine surgery procedures |
| Spine surgery involves significant risk of serious complications, including bleeding, nerve injury, paralysis and even death |
| In addition, we sell allograft implants, derived from cadaver bones, which pose the potential risk of biological contamination |
| If any such contamination is found to exist, sales of allograft products could decline |
| 26 _________________________________________________________________ [79]Table of Contents Currently, we maintain product liability insurance in the amount of dlra10 million |
| Any product liability claim brought against us, with or without merit, could result in the increase of our product liability insurance rates or the inability to secure coverage in the future |
| In addition, if our product liability insurance proves to be inadequate to pay a damage award, we may have to pay the excess out of our cash reserves, if such reserves are not sufficient, which may harm our financial condition |
| If longer-term patient results and experience indicate that our products or any component cause tissue damage, motor impairment or other adverse effects, we could be subject to significant liability |
| Finally, even a meritless or unsuccessful product liability claim could harm our reputation in the industry, lead to significant legal fees and could result in the diversion of management’s attention from managing our business |
| Any claims relating to our making improper payments to physicians for consulting services, or other potential violations of regulations governing interactions between us and healthcare providers, could be time consuming and costly |
| We frequently engage spine surgeons as consultants to assist us with scientific research and development and to help us evaluate technologies |
| We are subject to federal and state laws and regulations governing our relationships with physicians and other health care providers |
| In April 2005, the United States Department of Justice expanded its investigation into the relationships between medical device companies and health care providers |
| The investigation originally appeared to focus on Medtronic Sofamor Danek, Inc, but the Department of Justice has apparently since issued subpoenas to DePuy Spine, Inc, a Johnson & Johnson company, Biomet, Smith & Nephew, Stryker and Zimmer Holdings, all orthopedic device manufacturers, relating to the consulting process and procedures tied to fees that such companies have paid to physicians as consultants |
| Although we have not been contacted by the Department of Justice in respect of this investigation, we could become a subject of the investigation and be forced to incur significant costs as a result |
| The regulations governing the interactions between medical device companies and health care providers continue to evolve |
| Compliance with these regulations is costly, especially as accepted methods of compliance are developed |
| We expect to continue to incur costs related to compliance with these new measures, such as the requirement to comply with the new California Prescription Drug Marketing Act |
| We or our suppliers may be the subject of claims for non-compliance with FDA regulations in connection with the processing or distribution of allograft implants |
| It is possible that allegations may be made against us or against donor recovery groups or tissue banks, including those with which we have a contractual relationship, claiming that the acquisition or processing of tissue for allograft implants does not comply with applicable FDA regulations or other relevant statutes and regulations |
| Allegations like these could cause regulators or other authorities to take investigative or other action against us, or could cause negative publicity for us or our industry generally |
| These actions or any negative publicity could cause us to incur substantial costs, divert the attention of our management from our business, harm our reputation and cause the market price of our shares to decline |
| Risks Related to the Securities Markets and Ownership of Our Common Stock We expect that the price of our common stock will fluctuate substantially, potentially adversely affecting the ability of investors to sell their shares |
| The market price of our common stock is likely to be volatile and may fluctuate substantially due to many factors, including: • volume and timing of orders for our products; • the introduction of new products or product enhancements by us or our competitors; • disputes or other developments with respect to intellectual property rights or other potential legal actions; 27 _________________________________________________________________ [80]Table of Contents • our ability to develop, obtain regulatory clearance or approval for, and market new and enhanced products on a timely basis; • quarterly variations in our or our competitor’s results of operations; • sales of large blocks of our common stock, including sales by our executive officers and directors; • announcements of technological or medical innovations for the treatment of spine pathology; • changes in governmental regulations or in the status of our regulatory approvals, clearances or applications; • changes in the availability of third-party reimbursement in the United States or other countries; • the acquisition or divestiture of products, assets or technology; • changes in earnings estimates or recommendations by securities analysts; and • general market conditions and other factors, including factors unrelated to our operating performance or the operating performance of our competitors |
| Market price fluctuations may negatively affect the ability of investors to sell our shares at consistent prices |
| Recent changes in the required accounting treatment for stock options will have a material negative impact on our financial statements and may affect our stock price |
| In December 2004, the Financial Accounting Standards Board, or FASB, issued SFAS Nodtta 123R, pursuant to which we must measure all stock-based compensation awards, including grants of employee stock options, using a fair value-based method and record such expense in our consolidated financial statements |
| Currently, we disclose such expenses on a pro forma basis in the notes to our consolidated financial statements, but we do not record a charge for employee stock option expense in the financial statements |
| We began complying with SFAS Nodtta 123R as of January 1, 2006; as a result our reported earnings will decrease, which may affect our stock price |
| We may become involved in securities class action litigation that could divert management’s attention and harm our business |
| The stock market in general, the Nasdaq National Market and the market for medical device companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies |
| Further, the market prices of securities of medical device companies have been particularly volatile |
| These broad market and industry factors may materially harm the market price of our common stock, regardless of our operating performance |
| In the past, following periods of volatility in the market price of a particular company’s securities, securities class action litigation has often been brought against that company |
| We may become involved in this type of litigation in the future |
| Litigation often is expensive and diverts management’s attention and resources, which could materially harm our financial condition and results of operations |
| Anti-takeover provisions in our organizational documents and Delaware law may discourage or prevent a change of control, even if an acquisition would be beneficial to our stockholders, which could affect our stock price adversely and prevent attempts by our stockholders to replace or remove our current management |
| Our certificate of incorporation and bylaws contain provisions that could delay or prevent a change of control of our company or changes in our board of directors that our stockholders might consider favorable |
| Some of these provisions: • authorize the issuance of preferred stock which can be created and issued by the board of directors without prior stockholder approval, with rights senior to those of the common stock; 28 _________________________________________________________________ [81]Table of Contents • provide for a classified board of directors, with each director serving a staggered three-year term; • prohibit our stockholders from filling board vacancies, calling special stockholder meetings, or taking action by written consent; • prohibit our stockholders from making certain changes to our certificate of incorporation or bylaws except with 66^2/3prca stockholder approval; and • require advance written notice of stockholder proposals and director nominations |
| In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law, which may prohibit certain business combinations with stockholders owning 15prca or more of our outstanding voting stock |
| These and other provisions in our certificate of incorporation, our bylaws and Delaware law could make it more difficult for stockholders or potential acquirers to obtain control of our board of directors or initiate actions that are opposed by our then-current board of directors, including delay or impede a merger, tender offer, or proxy contest involving our company |
| Any delay or prevention of a change of control transaction or changes in our board of directors could cause the market price of our common stock to decline |
| We do not intend to pay cash dividends |
| We have never declared or paid cash dividends on our capital stock |
| We currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future |
| In addition, the terms of any future debt or credit facility may preclude us from paying any dividends |
| As a result, capital appreciation, if any, of our common stock will be our stockholders’ source of potential gain for the foreseeable future |