| ORTHOVITA INC ITEM 1A RISK FACTORS If VITOSS is not commercially successful in the United States or if CORTOSS and VITOSS are not commercially successful in the European Union, our operating results will be impaired |
| We are highly dependent on successfully selling our products for which we have received regulatory approval or clearance |
| We expect regulatory approvals or clearances in the United States for our products under development, if obtained at all, to take several years |
| To date, we have received regulatory approval to market VITOSS, CORTOSS and ALIQUOT for specified uses in the European Union, Australia and countries adhering to the regulatory standards of the European Union |
| We have also received regulatory clearance to market VITOSS and IMBIBE in the United States |
| For these reasons, we are dependent upon VITOSS and CORTOSS and their ancillary products, IMBIBE and ALIQUOT, in their respective approved markets to generate sufficient revenues to sustain operations in the future |
| These products have only been recently approved or cleared and launched, and the markets for our products are evolving |
| Accordingly, we cannot accurately predict either the future growth rate of product sales, if any, or the ultimate size of these markets |
| Certain factors that may limit our ability to increase sales include: • our dependence on the efforts of independent agents and distributors to promote the use of our products, over which we have limited control; • the introduction of new products into the market by competing orthopedic companies based upon other competing technologies; • our dependence on the continued publication of independent pre-clinical and clinical data to support the use of our products; • our need to train a sufficient number of surgeons to create demand for our products; and • the need for payors to authorize insurance reimbursement for procedures using our products |
| Market acceptance of our products will largely depend on our ability to demonstrate their relative safety, efficacy, cost-effectiveness and ease of use |
| Surgeons will not use our products unless they determine, based on experience, clinical data and recommendations from prominent surgeons and mentors that our products are safe and effective |
| Our products are based on new technologies that have not been previously used and must compete with more established treatments currently accepted as the standards of care |
| The attributes of some of our products may require some changes in surgical techniques that have become standard within the medical community, and there may be resistance to change |
| Therefore, for these products, we must be able to convince surgeons who currently favor existing techniques to switch to new procedures that would use our products |
| Many surgeons will not purchase our products until there is sufficient, long-term clinical evidence to convince them to alter their existing treatment methods |
| In addition, surgeons may be slow to change their medical treatment practices because of perceived liability risks arising from the use of new products and the uncertainty 21 ______________________________________________________________________ [43]Table of Contents of third party reimbursement for our products |
| Any failure to gain market acceptance of our products could result in lower sales and the inability to become profitable |
| Our plan to assume manufacturing of VITAGEL and its related products may not be successful or timely |
| Pursuant to our Exclusive Sales Distribution Agreement with Angiotech, as amended, we expect to assume full manufacturing for the VITAGEL product upon approval from the FDA of the PMA we submitted in December 2005 |
| There can be no assurance that we will receive FDA approval to manufacture VITAGEL or that, even if approved, we will be able to comply with FDA regulatory requirements to continue to manufacture VITAGEL, which could result in delay or inability to manufacture and sell the products |
| There can be no assurance that we will receive any such approval prior to running out of the limited product we purchased to sell that was manufactured by Angiotech prior to their shutting down their manufacturing facility in November 2005 |
| If we are unable to operate an effective sales and distribution network, our ability to generate sales and become profitable will be impaired |
| We have assembled a field sales network of independent sales agencies and direct sales representatives in the US in order to market VITOSS Bone Graft Substitute, VITAGEL and IMBIBE Outside of the US, we utilize a network of independent stocking distributors to market VITOSS Bone Graft Substitute, CORTOSS and ALIQUOT We seek to strengthen our field sales network through the addition of direct sales representatives in those US territories where we either do not have independent sales agency coverage or the territories are underserved |
| We are dependent upon our distributors, sales agencies and direct sales representatives for the sale of our products |
| Any failure to maintain and effectively manage our distribution network will impair our ability to generate additional sales and become profitable |
| There can be no assurance that the distributors and agencies will perform their obligations in their respective territories as expected, or that we will continue to derive any revenue from these arrangements |
| We cannot assure that our interests will continue to coincide with those of our distributors and agencies |
| In addition, we cannot assure that our distributors and agencies will not develop independently, or with other companies, other competitive products |
| The independent US agencies selling VITOSS Bone Graft Substitute generally sell products from other orthopedic companies |
| A single agency may sell VITOSS Bone Graft Substitute, as well as hardware manufactured by other orthopedic companies consisting of metal plates, screws and titanium spinal cages, to end user hospitals |
| Our sales could be adversely affected if, for any reason, one or more of our successful agencies lost their hardware product line provided by other orthopedic companies |
| Additionally, our independent agencies may be unable or unwilling to carry or effectively sell VITOSS Bone Graft Substitute as a result of the introduction of new products into the market based upon other technologies that could compete with VITOSS Bone Graft Substitute |
| Our sales could be adversely affected if one or more of our successful agencies eliminated VITOSS Bone Graft Substitute from their product line for any other reason and terminated their agency arrangement with us |
| Our sales could also be adversely affected if our independent agencies become concerned that their agency arrangement with us could be eliminated as a result of another company’s offer or threat to acquire us |
| The complete product line represented by the distributors and agencies, including our products, is an important factor in the distributors’ or agencies’ ability to penetrate the market |
| Accordingly, our ability to penetrate the markets that we intend to serve is highly dependent upon the quality and breadth of the other product lines carried by our distribution network, the components of which may change from time to time, and over which we have little or no control |
| 22 ______________________________________________________________________ [44]Table of Contents In an effort to further accelerate the growth of sales, we continue to build our sales management team and add direct sales representatives to our organization for certain open or underserved territories in the US The addition of direct sales representatives will increase our operating expenses |
| Furthermore, there is no assurance that adding direct sales representatives will improve sales or that our direct sales representatives will be successful in generating sufficient sales to cover the cost of supporting their sales activities |
| There is no assurance that we will be able to attract and retain qualified personnel to market or sell our products or that we will successfully implement this type of sales and distribution method |
| The unapproved or “off-label” use of our products could adversely affect the reputation of our products |
| The medical devices that we manufacture and market, or intend to market, are subject to extensive regulation by the FDA, the European Union Medical Devices Directive and other worldwide regulatory agencies |
| In order to market our products, we must apply for, receive and maintain all necessary regulatory approvals or clearances in each applicable jurisdiction for specified uses of the products |
| Under FDA regulations, we are only permitted to commercially distribute our products for approved indication(s) or use(s); failure to comply with these regulations may subject us to FDA enforcement action |
| CORTOSS received CE Certification, an international symbol of adherence to quality assurance standards and compliance with applicable European medical device directives, in January 2003 for use in repairing vertebral compression fractures |
| However, surgeons may have attempted to use CORTOSS “off-label” in procedures to repair vertebral compression fractures performed prior to the European Union’s approval of CORTOSS for this type of procedure |
| Furthermore, all surgeons have not been trained in the proper use of CORTOSS to repair vertebral compression fractures since the European Union only recently approved the use of CORTOSS for that type of procedure |
| A surgeon who has not been properly trained to use CORTOSS in a procedure to repair vertebral compression fractures could pose a risk to the reputation of our CORTOSS product |
| In addition, the occurrence of an adverse event while using our product “off-label” in procedures other than the repair of vertebral compression fractures or screw augmentation could adversely affect the reputation of CORTOSS or any of our other products as well as us |
| If we do not successfully train a sufficient number of surgeons, demand for our products could be adversely affected |
| It is critical to the commercial success of our products that our independent distributors, agents and direct sales representatives succeed in training a sufficient number of surgeons and in providing them adequate instruction in the use of our products |
| This training requires a commitment of time and money by surgeons that they may be unwilling to give |
| Even if surgeons are willing, if they are not properly trained, they may misuse or ineffectively use our products |
| This may result in unsatisfactory patient outcomes, patient injury, negative publicity or lawsuits against us, any of which could damage our business and reduce product sales |
| If health care providers cannot obtain third-party reimbursement for procedures using our products, or if such reimbursement is inadequate, we may never become profitable |
| Successful sales of our products in the United States and other markets will depend on the availability of adequate reimbursement from third-party payors |
| Healthcare providers, such as hospitals and surgeons 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 |
| Both public and private insurance reimbursement plans are central to new product acceptance |
| Healthcare providers may refuse to use our products if reimbursement is inadequate |
| We do not yet know how reimbursement will be handled for all of our products because some procedures that use our products are new and reimbursement policies regarding these procedures have not been finalized |
| Inadequate reimbursement by private insurance companies and government programs could significantly reduce usage of our products |
| 23 ______________________________________________________________________ [45]Table of Contents In addition, an increasing emphasis on managed care in the United States has placed, and we believe will continue to place, greater pressure on medical device pricing |
| Such pressures could have a material adverse effect on our ability to sell our products profitably |
| We could be negatively impacted by future interpretation or implementation of federal and state fraud and abuse laws, including anti-kickback laws and false claims laws |
| To the extent that our products receive government reimbursement, we are subject to various federal and state laws pertaining to health care fraud and abuse, including anti-kickback laws and false claims laws |
| Violations of these laws are punishable by criminal and/or civil sanctions, including, in some instances, imprisonment and exclusion from participation in federal and state health care programs, including Medicare, Medicaid, and veterans’ health programs |
| We have not been challenged by a governmental authority under any of these laws and believe that our operations are in compliance with such laws |
| Health care fraud and abuse regulations are complex, and even minor, inadvertent irregularities can potentially give rise to claims that the law has been violated |
| Any violations of these laws could result in a material adverse effect on our business, financial condition and results of operations |
| If there is a change in law, regulation or administrative or judicial interpretations, we may have to change our business practices or our existing business practices could be challenged as unlawful, which could have a material adverse effect on our business, financial condition and results of operations |
| We could become subject to false claims litigation under federal or state statutes, which can lead to civil money penalties, criminal fines and imprisonment, and/or exclusion from participation in federal health care programs |
| These false claims statutes include the federal False Claims Act, which allows any person to bring suit alleging the false or fraudulent submission of claims for payment under federal programs or other violations of the statute and to share in any amounts paid by the entity to the government in fines or settlement |
| Such suits, known as qui tam actions, have increased significantly in recent years and have increased the risk that companies like us may have to defend a false claim action |
| We could also become subject to similar false claims litigation under state statutes |
| If we are unsuccessful in defending any such action, such action may have a material adverse effect on our business, financial condition and results of operations |
| We may need to raise additional capital |
| If we are unable to raise additional capital in the future, our product development could be limited and our long term viability may be threatened; however, if we raise additional capital, your percentage ownership as a shareholder of Orthovita will decrease and constraints could be placed on the operation of our business |
| We may seek to obtain additional funds through equity or debt financings, or strategic alliances with third parties either alone or in combination with equity or debt financing investments |
| There are factors that may cause our future capital requirements to be greater than anticipated or could accelerate our need for funds including, without limitation: • unforeseen developments during our pre-clinical and clinical trials; • delays in the timing of receipt of required regulatory approvals or clearances to make or sell products; • unforeseen difficulties in operating an effective direct sales and distribution network; • unanticipated expenditures in research and product development or manufacturing activities; • delayed, insufficient or lack of market acceptance of our products; • unanticipated expenditures in the acquisition and defense of intellectual property rights; • the failure to develop strategic alliances for the marketing of some of our products; • unforeseen changes in healthcare reimbursement for procedures using our products; 24 ______________________________________________________________________ [46]Table of Contents • inability to increase sales of our approved or cleared products; • inability to train a sufficient number of surgeons to create demand for our products; • lack of financial resources to adequately support our operations; • difficulties in maintaining commercial scale manufacturing capacity and capability; • unforeseen problems with our third-party manufacturers and service providers or with our specialty suppliers of certain raw materials; • unanticipated difficulties in operating in international markets; • inability to meet our obligations under our revenue sharing agreement; • the need to respond to technological changes and increased competition; • unforeseen problems in attracting and retaining qualified personnel to market our products; • enactment of new legislation or administrative regulation; • the application to our business of new court decisions and regulatory interpretations; • claims that might be brought in excess of our insurance coverage; • any imposition of penalties for failure to comply with regulatory guidelines; or • management’s perception that uncertainties relating to these factors may be increasing |
| In addition, although we have no present commitments or understandings to do so, we may seek to expand our operations and product line through acquisitions or joint ventures |
| Any such acquisitions or joint ventures may increase our capital requirements |
| If we fail to obtain and maintain the regulatory approvals or clearances necessary to make or sell our products, sales could be delayed or never realized |
| The jurisdictions in which we seek to market our products will regulate these products as medical devices |
| In most circumstances, we and our distributors and agents must obtain regulatory clearances, approvals and certifications and otherwise comply with extensive regulations regarding safety, quality and efficacy standards |
| These regulations vary from country to country, and the regulatory review can be lengthy, expensive and uncertain |
| We may not obtain or maintain the regulatory clearances, approvals and certifications necessary to make or market our products in our targeted markets |
| Moreover, regulatory clearances, approvals and certifications that are obtained may involve significant restrictions on the anatomic sites and types of procedures for which our products can be used |
| In addition, we may be required to incur significant costs in obtaining or maintaining our regulatory clearances, approvals and certifications |
| If we do not obtain or maintain regulatory clearances, approvals and certifications to enable us to make or market our products in the US or elsewhere, or if the clearances, approvals and certifications are subject to significant restrictions, we may never generate significant revenues |
| The regulatory requirements in some of the jurisdictions where we currently market or intend to market our products are summarized below |
| United States Regulation by FDA The FDA regulates the clinical testing, manufacturing, labeling, distribution and promotion of medical devices |
| During 2002 and 2003, we received approval from the FDA to conduct two pilot clinical studies in the US to study the use of CORTOSS in vertebral augmentation |
| The two pilot clinical studies are fully enrolled and we expect those trials to be completed by the end of 2006 |
| During 2004, we received approval from the FDA to conduct a pivotal clinical study in the US to further study the use of CORTOSS in vertebral augmentation using the vertebroplasty surgical technique |
| We are still in the process of completing enrollment of the pivotal clinical study |
| There can be no assurance that the data from these clinical trials will support FDA clearance or approval to market this product for the designated use |
| We are currently manufacturing VITOSS Bone Graft Substitute and CORTOSS in the US, distributing VITOSS Bone Graft Substitute, VITAGEL and IMBIBE in the US, and distributing VITOSS Bone Graft 25 ______________________________________________________________________ [47]Table of Contents Substitute, CORTOSS and ALIQUOT outside the US We are manufacturing IMBIBE and ALIQUOT in the US through outside third-party contract manufacturers |
| In addition, under our agreement, Kensey has the exclusive right to manufacture any approved or cleared jointly developed products under the agreement, including the VITOSS FOAM product platform |
| In March 2005, the initial term of the agreement was extended by amendment for an additional three years to 2014 |
| VITAGEL and CELLPAKER will be manufactured by us following FDA approval |
| VITOSS Bone Graft Substitute, as well as any other products that we manufacture or distribute following their approval or clearance by the FDA, including VITAGEL if we are approved as a manufacturer, will be subject to extensive regulation by the FDA If safety or efficacy problems occur after the product reaches the market, the FDA may impose severe limitations on the use of the product |
| Moreover, modifications to the approved or cleared product may require the submission of a new 510(k) notification or premarket approval application or premarket application supplement |
| We may not be successful in obtaining approval to market the modified product in a timely manner, if at all |
| Noncompliance with applicable requirements can result in, among other things, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, failure of the government to grant premarket clearance or premarket approval for devices, withdrawal of marketing approvals and criminal prosecution |
| International sales of medical devices are subject to the regulatory requirements of each country in which the products are sold |
| Accordingly, the introduction of our products in markets outside the United States will be subject to regulatory approvals or clearances in those jurisdictions |
| The regulatory review process varies from country to country |
| Many countries also impose product standards, packaging and labeling requirements and import restrictions on medical devices |
| In addition, each country has its own tariff regulations, duties and tax requirements |
| The approval or clearance by foreign government authorities is uncertain and can be expensive |
| Our ability to market our products could be substantially limited due to delays in receipt of, or failure to receive, the necessary approvals or clearances |
| To market a product in the European Union, we must be entitled to affix a CE Certification, an international symbol of adherence to quality assurance standards and compliance with applicable European medical device directives |
| A CE Certification enables us to market a product in all of the countries of the European Union, as well as in other countries, such as Switzerland and Israel, that have adopted the European Union’s regulatory standards |
| To date, we have received a CE Certification for the use of VITOSS Bone Graft Substitute as a bone void filler and for the use of CORTOSS in screw augmentation and vertebral augmentation procedures |
| There can be no assurance that we will receive CE Certifications for CORTOSS for any other indications for use or that we will receive CE Certifications for other products |
| If we do not manage commercial scale manufacturing capability and capacity for our products in compliance with regulatory requirements and in a cost-effective manner, our product sales may suffer |
| Our VITOSS Bone Graft Substitute and CORTOSS Synthetic Cortical Bone manufacturing facilities produce commercial products and are currently certified as meeting the requirements of ISO 9001: 2000 for the period March 23, 2004 through March 22, 2007 and European Norm 13485 for the period July 1, 2003 through July 1, 2006, and are subject to inspection by the FDA for compliance with FDA device manufacture requirements |
| In addition to the need for regulatory approval in the US for CORTOSS, in order to commercialize CORTOSS in the US, its manufacturing facility and quality assurance system must first pass inspection by the FDA On November 30, 2005, we submitted a Duplicate PMA for VITAGEL to the FDA through a Grant of License from Angiotech to reference their PMA FDA approval of the PMA submitted by us, if obtained, will allow us to sell VITAGEL product that is manufactured on-site in our Malvern, Pennsylvania facility |
| As of December 31, 2005, we had included in inventory VITAGEL valued at dlra653cmam835 that was manufactured on-site at our Malvern facility |
| We have no 26 ______________________________________________________________________ [48]Table of Contents assurance that we will obtain FDA approval to sell VITAGEL manufactured by us prior to our current supply of VITAGEL being exhausted |
| We may not have sufficient inventory of VITAGEL during the second half of 2006 to support customer demand |
| Our product sales depend upon, among other things, our ability to manufacture our products in commercial quantities, in compliance with regulatory requirements and in a cost-effective manner |
| The manufacture of our products is subject to regulation and periodic inspection by the FDA and other regulatory bodies for compliance with quality standards |
| There can be no assurance that the regulatory authorities will not, during the course of an inspection of existing or new facilities, identify what they consider to be deficiencies in meeting the applicable standards and request or seek remedial action |
| Failure to comply with such regulations or a delay in attaining compliance may result in: • warning letters; • injunctions suspending our manufacture of products; • civil and criminal penalties; • refusal to grant premarket approvals or clearances, CE Certifications or clearances to products that are subject to future or pending submissions; • product recalls or seizures of products; and • total or partial suspensions of production |
| We are dependent on a limited number of specialty suppliers of certain raw materials |
| Our ability to manufacture VITOSS Bone Graft Substitute and CORTOSS and to have VITOSS FOAM and VITAGEL manufactured for us is dependent on a limited number of specialty suppliers of certain raw materials |
| The failure of a supplier to continue to provide us with these materials at a price or quality acceptable to us, or at all, would have a material adverse effect on our ability to manufacture these products |
| Moreover, our failure to maintain strategic reserve supplies of each significant single-sourced material used to manufacture VITOSS Bone Graft Substitute, CORTOSS and certain products that we may develop in the future may result in a breach of our material financing agreement with Royalty Trust |
| Although we believe that we maintain good relationships with our suppliers, there can be no guarantee that such supplies and services will continue to be available with respect to our current and future commercialized products |
| We are dependent on Kensey and other third-party manufacturers for the supply of products that we may sell |
| The manufacture of our products is subject to regulation and periodic inspection by various regulatory bodies for compliance with current FDA Quality System Regulation and requirements, and EU MDD International Organization for Standardization (“ISO”) 9000 Series standards and equivalent requirements |
| Our 24cmam800 square foot VITOSS Bone Graft Substitute and CORTOSS manufacturing facilities which produce our commercial products, are leased through July 2012 and are certified as meeting the requirements of ISO 9000: 2000 for the period March 22, 2004 through March 22, 2007, and European Norm (“EN”) 13485 for the period July 1, 2003 through July 1, 2006 |
| These facilities are subject to inspection by the FDA for compliance with FDA device manufacture requirements |
| The most recent FDA inspection resulted with no corrective actions being required |
| 27 ______________________________________________________________________ [49]Table of Contents We believe our manufacturing facilities have the capacity to meet our commercial needs for the next several years |
| We are manufacturing VITAGEL, CELLPAKER, IMBIBE, ENDOSKELETON TA, and ALIQUOT through outside third-party contract manufacturers |
| Our VITOSS Bone Graft Substitute is converted to VITOSS FOAM by Kensey, our development partner |
| Our third-party manufacturers are ISO 9001 certified or otherwise meet our quality system requirements |
| In addition to the need for CORTOSS US regulatory approval in order to commercialize CORTOSS in the US, the CORTOSS manufacturing facility and quality assurance system must pass inspection by the FDA Angiotech decided to cease to manufacture VITAGEL by November 2005; therefore, in October 2005, we purchased all available existing products, accessories and work-in-process from Angiotech for dlra1cmam800cmam000, which is expected to be sufficient to meet our operating requirements through mid 2006 |
| Additionally, on November 30, 2005, we submitted a Duplicate PMA for VITAGEL to the FDA through a Grant of License from Angiotech to reference their PMA FDA approval of the PMA submitted by us, if obtained, will allow us to sell VITAGEL product that is manufactured on-site in our Malvern, Pennsylvania facility |
| As of December 31, 2005, we had included in inventory VITAGEL valued at dlra653cmam835 that was manufactured on-site at our Malvern facility |
| We have no assurance that we will obtain FDA approval to sell VITAGEL manufactured by us prior to our current supply of VITAGEL being exhausted |
| We may not have sufficient inventory of VITAGEL during the second half of 2006 to support customer demand |
| Our ability to manufacture our products is dependent on a limited number of specialty suppliers of certain raw materials |
| We have a long-term supply agreement which provides bovine collagen for the manufacture of VITAGEL; however, we do not have any other long-term supply agreements for raw materials |
| The failure of a supplier to continue to provide us with these materials at a price or quality acceptable to us, or at all, would have a material adverse effect on our ability to manufacture these products |
| Moreover, our failure to continue to maintain strategic reserve supplies of each significant single-sourced material used to manufacture VITOSS Bone Graft Substitute, CORTOSS and certain products that we may develop in the future may result in a breach of our material financing agreement with Royalty Trust |
| The manufacture of our products is subject to regulation and periodic inspection by various regulatory bodies for compliance with quality standards |
| There can be no assurance that the regulatory authorities will not, during the course of an inspection of existing or new facilities, identify what they consider to be deficiencies in meeting the applicable standards and request or seek remedial action |
| Failure to comply with such regulations or a delay in attaining compliance may result in: • warning letters; • injunctions suspending our manufacture of products; • civil and criminal penalties; • refusal to grant premarket approvals, CE Certifications or clearances to products that are subject to future or pending submissions; • product recalls or seizures of products; and • total or partial suspensions of production |
| The difficulties of operating in international markets may harm sales of our products |
| The international nature of our business subjects us and our representatives, agents and distributors to the laws and regulations of the jurisdictions in which they operate, and in which our products are sold |
| The types of risks that we face in international operations include: • the imposition of governmental controls; 28 ______________________________________________________________________ [50]Table of Contents • logistical difficulties in managing international operations; and • fluctuations in foreign currency exchange rates |
| Our international sales and operations may be limited or disrupted if we cannot successfully meet the challenges of operating internationally |
| If losses continue in the long term, it could limit our growth in the orthopedic industry and jeopardize our viability |
| We have experienced negative operating cash flows since our inception and have funded our operations primarily from proceeds received from sales of our stock |
| In July 2004, we raised approximately dlra24dtta0 million in net proceeds from the sale of 5cmam681cmam818 shares of our Common Stock to Angiotech and, in December 2005, we raised an aggregate of approximately dlra12dtta9 million in net proceeds from the sale of 4cmam318cmam182 shares of our Common Stock to institutional investors |
| We believe our existing cash, cash equivalents, and investments of dlra27cmam672cmam221 as of December 31, 2005 will be sufficient to meet our currently estimated operating and investing requirements for at least the next twelve months |
| To date, we have not been profitable |
| We have incurred substantial operating losses since our inception and at December 31, 2005, had an accumulated deficit of dlra118cmam574cmam135 |
| These losses have resulted principally from: • the development and patenting of our technologies; • pre-clinical and clinical studies; • preparation of submissions to the FDA and foreign regulatory bodies; and • the development of manufacturing, sales and marketing capabilities |
| We expect to continue to incur significant operating losses in the future as we continue our product development efforts, expand our marketing and sales activities and further develop our manufacturing capabilities |
| We may not ever successfully commercialize our products in development |
| We may never be able to achieve or maintain profitability in the future and our products may never be commercially accepted or generate sufficient product sales to fund operations |
| If we fail to meet our obligations under a revenue sharing agreement, we may be required to repurchase from an investor its right to receive revenues on certain of our product sales, and the investor could foreclose on certain assets that are essential to our operations |
| During October 2001, we completed a dlra10cmam000cmam000 product development and equity financing with Paul Capital Royalty Acquisition Fund, LP, which was subsequently assigned to Royalty Trust |
| In this financing, we sold Royalty Trust a revenue interest and shares of our Common Stock |
| The revenue interest provides for Royalty Trust to receive 3dtta5prca on the first dlra100cmam000cmam000 of annual sales plus 1dtta75prca of annual sales in excess of dlra100cmam000cmam000 of certain of our products, including VITOSS, CORTOSS and any structural bioactive device developed, in North America and Europe through 2016, subject to certain adjustments |
| This revenue interest percentage can increase if we fail to meet contractually specified levels of annual net sales of products for which Royalty Trust is entitled to receive its revenue interest |
| We do not currently expect that changes in the revenue interest percentage resulting from fluctuations in sales of products subject to the revenue interest will have a material effect on operating results for a period when considered relative to sales of the products for that period |
| Throughout the term of the Royalty Trust revenue interest agreement, we are required to make advance payments on the revenue interest obligation at the beginning of each year |
| In January 2004, the revenue interest assignment agreement with Royalty Trust was amended by mutual agreement to reduce the advance payment for 2004 from dlra2cmam000cmam000 to dlra1cmam100cmam000 |
| Of the dlra1cmam100cmam000 paid to Royalty Trust, dlra837cmam844 was earned in 2004 and the balance of dlra262cmam154 was included in prepaid revenue interest expense on the accompanying consolidated balance sheet as of December 31, 2004, and was repaid to us during the first quarter of 2005 |
| In 29 ______________________________________________________________________ [51]Table of Contents February 2005, the revenue interest assignment agreement with Royalty Trust was amended by mutual agreement to reduce the advance payment for 2005 from dlra3cmam000cmam000 to dlra1cmam600cmam000 |
| Of the dlra1cmam600cmam000 paid to Royalty Trust, dlra989cmam287 was earned in 2005 and the balance of dlra610cmam713 was included in prepaid revenue interest expense on the accompanying consolidated balance sheet as of December 31, 2005, and is scheduled to be repaid to us in April of 2006 |
| In December 2005, the revenue interest assignment agreement with Royalty Trust was again amended by mutual agreement to reduce the advance payment for 2006 from dlra3cmam000cmam000 to dlra1cmam750cmam000, which was paid to Royalty Trust during January 2006 |
| While we believe that we will have sufficient cash at the end of 2006 to make the required dlra3cmam000cmam000 advance payments to Royalty Trust during 2007, we cannot be certain that we will have sufficient cash to meet our advance payment obligations for the years 2008 through 2016 |
| Advance payments impact cash flow when made, and they affect earnings only as the advance payments are credited within each period against the revenue interest actually earned by Royalty Trust during that year, with any excess advance payments refunded to us shortly after the end of the year |
| Our obligation to pay the revenue interest is secured by our licenses, patents and trademarks relating to certain of our products, including VITOSS Bone Graft Substitute, CORTOSS and any structural bioactive device developed, in North America and Europe, and the 12prca revenue interest we pay to one of our wholly-owned subsidiaries, on the sales of our products (collectively, the “Pledged Assets”) |
| We are also required to maintain: • Cash, cash equivalent and investment balances equal to or greater than the product of (i) 1dtta5 and (ii) total operating losses, net of non-cash charges, for the preceding fiscal quarter; and • total shareholders’ equity of at least dlra8cmam664cmam374; provided, however, that under the provisions of the agreement with Royalty Trust, when calculating shareholders’ equity for the purposes of the financial covenants, the revenue interest obligation is included in shareholders’ equity at its carrying value |
| As of December 31, 2005, we were in compliance with all financial covenants |
| However, if we fail to maintain such balances and shareholders’ equity, Royalty Trust can demand that we repurchase its revenue interest |
| In addition to the failure to comply with the financial covenants described above, the occurrence of certain events, including those set forth below, triggers Royalty Trust’s right to require us to repurchase its revenue interest: • a judicial decision that has a material adverse effect on our business, operations, assets or financial condition; • the acceleration of our obligations or the exercise of default remedies by a secured lender under certain debt instruments; • a voluntary or involuntary bankruptcy that involves us or our wholly owned subsidiary, Vita Special Purpose Corp |
| ; • our insolvency; • a change in control of our company; and • the breach of a representation, warranty or certification made by us in the agreements with Royalty Trust that, individually or in the aggregate, would reasonably be expected to have a material adverse effect on our business, operations, assets or financial condition, and such breach is not cured within 30 days after notice thereof from Royalty Trust |
| In addition, our failure to maintain strategic reserve supplies of each significant single-source material used to manufacture VITOSS Bone Graft Substitute, CORTOSS and certain products that we may develop in the future may result in a breach of our material financing agreement with Royalty Trust |
| We may not have sufficient cash funds to repurchase the revenue interest upon a repurchase event |
| The exact amount of the repurchase price is dependent upon certain factors, including when the repurchase event occurs |
| If a repurchase event had been 30 ______________________________________________________________________ [52]Table of Contents triggered and Royalty Trust exercised its right to require us to repurchase its revenue interest as of December 31, 2005, we would have owed Royalty Trust dlra19cmam606cmam958 |
| The repurchase price for Royalty Trust’s revenue interest as of a given date is calculated in three steps |
| First, a specified annual rate of return (25prca effective October 16, 2005) is applied to Royalty Trust’s dlra10cmam000cmam000 original purchase price from October 16, 2001 to the date of determination of the repurchase price |
| Second, the result obtained from the first step of the calculation is added to the original dlra10cmam000cmam000 purchase price |
| Third, the sum obtained from the second step of the calculation is reduced by both dlra3cmam333cmam333 and the actual amount of revenue interest paid during the specified period |
| If we were unable to repurchase the revenue interest upon a repurchase event, Royalty Trust could foreclose on the Pledged Assets, and we could be forced into bankruptcy |
| Royalty Trust could also foreclose on the Pledged Assets if we became insolvent or involved in a voluntary or involuntary bankruptcy proceeding |
| No repurchase events or foreclosures have occurred as of December 31, 2005 |
| In the event that we repurchased Royalty Trust’s revenue interest, Royalty Trust would have no obligation to surrender the shares of our Common Stock that it had purchased as part of the revenue interests assignment transaction |
| Our results of operations may fluctuate due to factors out of our control, which could cause volatility in our stock price |
| VITOSS Bone Graft Substitute, IMBIBE, CORTOSS and ALIQUOT are currently our only products for which we have received regulatory approvals for sale |
| VITOSS Bone Graft Substitute is cleared for sale in the US and the European Union |
| IMBIBE is cleared for sale in the US CORTOSS and ALIQUOT are cleared for sale in the European Union |
| In addition, we obtained distribution rights to VITAGEL and CELLPAKER in June 2004 and launched that product in the US in January 2005 |
| Future levels of VITOSS Bone Graft Substitute, VITAGEL, CORTOSS, ALIQUOT, CELLPAKER and IMBIBE product sales are difficult to predict |
| VITOSS Bone Graft Substitute product sales to date may not be indicative of future sales levels |
| VITOSS Bone Graft Substitute, CORTOSS and ALIQUOT sales levels in Europe may fluctuate due to seasonality of elective surgeries and the timing of any distributor stocking orders and VITOSS Bone Graft Substitute, VITAGEL, IMBIBE and CELLPAKER sales levels may fluctuate in the US due to seasonality of elective surgeries and the timing of orders from hospitals |
| Our results of operations may fluctuate significantly in the future as a result of a number of additional factors, many of which are outside of our control |
| These factors include, but are not limited to: • the timing of governmental approvals or clearances for our products and our competitors’ products; • unanticipated events associated with clinical and pre-clinical trials of our products; • the medical community’s acceptance of our products; • the timing in obtaining adequate third-party reimbursement of our products; • the success of competitive products; • our ability to enter into strategic alliances with other companies; • expenses associated with development and protection of intellectual property matters; • establishment of commercial scale manufacturing capabilities; • events affecting logistics and elective surgery trends; • the timing of expenses related to commercialization of new products; • competitive disruptions to our distribution channels; • the adequate training of a sufficient number of surgeons in the use of our products; • pending or threatened offers to acquire us; and • timing of governmental approvals or clearances for us to manufacture the products we sell |
| The results of our operations may fluctuate significantly from quarter to quarter and may not meet expectations of securities analysts and investors |
| 31 ______________________________________________________________________ [53]Table of Contents Our business will be damaged if we are unable to protect our proprietary rights to our products, and we may be subject to intellectual property infringement claims by others |
| We rely on patent protection, as well as a combination of copyright, trade secret and trademark laws, nondisclosure and confidentiality agreements and other contractual restrictions to protect our proprietary technology |
| However, these measures afford only limited protection and may not adequately protect our rights |
| For example, our patents may be challenged, invalidated or circumvented by third parties |
| As of December 31, 2005, we own or control eighteen issued US patents and thirteen pending patent applications in the US, and several counterparts of certain of these patents and pending patent applications worldwide, including Canada, Europe, Mexico and Japan |
| There can be no assurance that patents will issue from any of the pending patent applications |
| Moreover, we cannot be certain that we were the first creator of inventions covered by pending patent applications or we were the first to file patent applications for the relevant inventions for the following reasons: • patent applications filed prior to December 2000 in the US are maintained in secrecy until issued; • patent applications filed after November 2000 in the US are maintained in secrecy until eighteen months from the date of filing; and • the publication of discoveries in the scientific or patent literature tends to lag behind actual discoveries |
| If we do receive a patent, it may not be broad enough to protect our proprietary position in the technology or to be commercially useful to us |
| In addition, if we lose any key personnel, we may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by those former employees |
| Furthermore, the laws of foreign countries may not protect our intellectual property rights to the same extent as the laws of the US Finally, even if our intellectual property rights are adequately protected, litigation or other proceedings may be necessary to enforce our intellectual property rights, which could result in substantial costs to us and result in a diversion of management attention |
| If our intellectual property is not adequately protected, our competitors could use the intellectual property that we have developed to enhance their products and compete more directly with us, which could damage our business |
| In addition to the risk of failing to adequately protect our proprietary rights, there is a risk that we may become subject to a claim that we infringe upon the proprietary rights of others |
| Although we do not believe that we are infringing the rights of others, third parties may claim that we are doing so |
| There is a substantial amount of litigation over patent and other intellectual property rights in the medical device industry generally, and in the spinal market segments particularly |
| If the holder of patents brought an infringement action against us, the cost of litigating the claim could be substantial and divert management attention |
| In addition, if a court determined that one of our products infringed a patent, we could be prevented from selling that product unless we could obtain a license from the owner of the patent |
| A license may not be available on terms acceptable to us, if at all |
| Modification of our products or development of new products to avoid infringement may require us to conduct additional clinical trials for these new or modified products and to revise our filings with the FDA, which is time consuming and expensive |
| If we were not successful in obtaining a license or redesigning our product, our business could suffer |
| If we cannot keep up with technological changes and marketing initiatives of competitors, sales of our products may be harmed |
| Extensive research efforts and rapid technological change characterize the market for products in the orthopedic market |
| We anticipate that we will face intense competition from medical device, medical products and pharmaceutical companies |
| For instance, several PMMA bone cement received 510(k) clearance in 2004 for vertebral augmentation of VCFs |
| Further, in 2004, the spinal bone grafting market saw the introduction of total 32 ______________________________________________________________________ [54]Table of Contents disk replacement devices (TDRs) as treatment alternative for degenerative disk disease designed to preserve the motion of the vertebrae of the spine |
| Our products could be rendered noncompetitive or obsolete by these and other competitors’ technological advances |
| We may be unable to respond to technological advances through the development and introduction of new products |
| Moreover, many of our existing and potential competitors have substantially greater financial, marketing, sales, distribution, manufacturing and technological resources than us |
| These competitors may be in the process of seeking FDA or other regulatory approvals or clearances, or patent protection, for competitive products |
| Our competitors could, therefore, commercialize competing products in advance of our products |
| They may also enjoy substantial advantages over us in terms of: • research and development expertise; • experience in conducting clinical trials; • experience in regulatory matters; • manufacturing efficiency; • name recognition; • sales and marketing expertise; • established distribution channels; and • established relationships with health care providers and payors |
| These advantages may adversely affect our plans for market acceptance of our products |
| We may acquire technologies or companies in the future, and these acquisitions could result in dilution to our shareholders and disruption of our business |
| Entering into an acquisition could divert management attention |
| We also could fail to assimilate the acquired company, which could lead to higher operating expenses |
| Finally, our shareholders could be diluted if we issue shares of our stock to acquire another company or technology |
| 33 ______________________________________________________________________ [55]Table of Contents Provisions of Pennsylvania law or our Articles of Incorporation may deter a third party from seeking to obtain control of us or may affect your rights as a shareholder |
| Certain provisions of Pennsylvania law could make it more difficult for a third party to acquire us, or could discourage a third party from attempting to acquire us |
| These provisions could limit the price that certain investors might be willing to pay in the future for shares of our common stock |
| In addition, our Articles of Incorporation enable our board of directors to issue up to 20cmam000cmam000 shares of preferred stock having rights, privileges and preferences as are determined by the board of directors |
| Accordingly, our board is empowered, without shareholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights superior to those of our common shareholders |
| For example, an issuance of preferred stock could: • adversely affect the voting power of the common shareholders; • make it more difficult for a third party to gain control of us; • discourage bids for our common stock at a premium; or • otherwise adversely affect the market price of the common stock |
| Our stock price may be volatile |
| Our stock price, like that of many small cap medical technology companies, may be volatile |
| In general, equity markets, including Nasdaq, have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies |
| These broad market fluctuations may adversely affect the market price of our common stock |
| The following factors could also cause our stock price to be volatile or decrease: • fluctuations in our results of operations; • under-performance in relation to analysts’ estimates or financial guidance provided by us; • changes in the financial guidance we provide to the investment community; • changes in stock market analyst recommendations regarding our stock; • announcements of technological innovations or new products by us or our competitors; • issues in establishing commercial scale manufacturing capabilities; • disruptions with the manufacturing of our products, including with respect to our third-party manufacturers; • unanticipated events associated with clinical and pre-clinical trials; • FDA and international regulatory actions regarding us or our competitors; • determinations by governments and insurance companies regarding reimbursement for medical procedures using our or our competitors’ products; • the medical community’s acceptance of our products; • product sales growth rates; • difficulties in establishing and expanding our distribution channels; • disruptions to our distribution channels as a result of competitive market changes; • product recalls; • developments with respect to patents or proprietary rights; • public concern as to the safety of products developed by us or by others; • changes in health care policy in the United States and internationally; • acquisitions or strategic alliances by us or our competitors; • business conditions affecting other medical device companies or the medical device industry generally; • general market conditions, particularly for companies with small market capitalizations; and • pending or threatened offers to acquire us |
| 34 ______________________________________________________________________ [56]Table of Contents If we are sued in a product liability action, we could be forced to pay substantial damages and the attention of our management team may be diverted from operating our business |
| We manufacture medical devices that are used on patients in surgery, and we may be subject to a product liability lawsuit |
| In particular, the market for spine products has a history of product liability litigation |
| Under certain of our agreements with our distributors and sales agencies, we indemnify the distributor or sales agency from product liability claims |
| 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, we would have to pay any amount awarded by a court in excess of policy limits |
| We maintain product liability insurance in the annual aggregate amount of up to dlra10 million, although our insurance policies have various exclusions |
| Thus, we may be subject to a product liability claim for which we have no insurance coverage, in which case we may have to pay the entire amount of any award |
| A meritless or unsuccessful product liability claim would be time-consuming and expensive to defend and could result in the diversion of management’s attention from our core business |
| A successful product liability claim or series of claims brought against us in excess of our coverage could have a material adverse effect on our business, financial condition and results of operations |
| Our business could suffer if we cannot attract and retain the services of key employees |
| We depend substantially upon the continued service and performance of our existing executive officers |
| We rely on key personnel in formulating and implementing our product research, development and commercialization strategies |
| Our success will depend in large part on our ability to attract and retain highly skilled employees |
| We compete for such personnel with other companies, academic institutions, government entities and other organizations |
| If one or more of our key employees resigns, the loss of that employee could harm our business |
| If we lose any key personnel, we may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by those former employees, despite our use of confidentiality agreements |