| OSTEOTECH INC Item 1A Risk Factors We are dependent upon one client who accounts for approximately 27prca of our revenues |
| We are a processor of allograft bone tissue for national and international not-for-profit organizations |
| During 2005, MTF accounted for approximately 27prca of our consolidated revenues |
| We entered into a non-exclusive processing agreement with MTF in June, 2002, which expires on December 31, 2008, and we entered into a second processing agreement with MTF, which expires on December 31, 2006 unless extended in accordance with the agreement |
| The loss of MTF as a client or a substantial reduction in the amount of allograft bone tissue which we process for MTF would have a material adverse effect on our business, financial condition and results of operations |
| 20 _________________________________________________________________ [79]Table of Contents Our dependence upon a limited supply of human donors may curtail business expansion |
| Our allograft bone tissue processing business primarily depends upon the availability of bone and related connective tissue from human donors recovered by our clients, TRO’s and tissue banks that recover donated human cadaveric tissue for us or internationally from our own efforts |
| We rely on the efforts of not-for-profit donor procurement agencies, including our current clients, to educate the public and foster an increased willingness to donate bone tissue |
| These organizations may not be able to find a sufficient number of persons willing to donate, or may not be willing to provide, sufficient amounts of tissue to meet present or future demand for either allograft bone tissue we distribute or any allograft bone tissue-based osteogenic materials we are developing |
| Although we have taken steps to address this tissue supply problem, we cannot assure you that these efforts will be successful in the future or that we will otherwise be able to secure a sufficient supply of tissue |
| Our inability to secure enough donor tissue to meet our demands could have a material adverse effect on our business, financial condition and results of operations |
| We may need to secure additional financing to fund our long-term strategic plan |
| We expect to continue to make investments in our business to support our distribution efforts and future programs and initiatives, which may deplete our available cash balances |
| We believe that our available cash, cash equivalents, available lines of credit and anticipated future cash flow from operations will be sufficient to meet our forecasted cash needs in 2006 |
| Our future liquidity and capital requirements will depend upon numerous factors, including: • the progress of our product development programs and the need for and associated costs relating to regulatory approvals, if any, which may be needed to commercialize some of our products under development, or those commercialized products whose regulatory status may change; and • the resources we devote to the development, manufacture and marketing of our services and products |
| We may need to raise additional funds through the issuance of equity and/or debt financing in private placements or public offerings to provide funds to meet the needs of our long-term strategic plan |
| Additional funds may not be available, or if available, may not be available on favorable terms |
| Further equity financings, if obtained, may substantially dilute the interest of our pre-existing shareholders |
| Any additional debt financings may contain restrictive terms that limit our operating flexibility |
| As a result, any future financings could have a material adverse effect on our business, financial condition or results of operations |
| Our cash flows may be adversely impacted by our focus on direct distribution |
| Commencing in 2001, we began to distribute tissue forms directly to surgeons and hospitals |
| We expect to continue to expand our direct distribution efforts to surgeons and hospitals in future periods, with ultimately 100prca of our revenues being derived by these efforts |
| This change in distribution methodology has impacted and may negatively impact our future cash flow |
| As a greater percentage of our revenues are generated from direct shipments to hospitals and other healthcare providers, which typically pay invoices more slowly than our historical customer base, our accounts receivable balances may increase, therefore negatively impacting our 21 _________________________________________________________________ [80]Table of Contents cash flow |
| In addition, as our direct distribution efforts increase we may be required to expand the size of our tissue inventories, which would negatively impact our cash flow |
| We face strong competitive threats from firms with greater financial resources and lower costs |
| The allograft bone tissue we process competes in the bone graft substitute market with autograft bone tissue, synthetic bone void fillers, growth factors and allograft bone tissue processed by others |
| Autograft bone tissue has traditionally been the primary choice for surgeons and we believe autograft bone tissue is still used extensively in the United States |
| In the international marketplace, autograft bone tissue along with bone graft substitutes, such as bovine bone tissue and synthetics, currently comprise most of the bone grafting market |
| Many of our competitors have greater financial resources than we do |
| For numerous circumstances and procedures for which autograft bone tissue transplantation is either not feasible or not desirable, there are a number of competing alternatives available, including allograft bone tissue processed by others and bone graft substitutes |
| We believe that a majority of the cadaveric bone banks operating in the United States are engaged in processing allograft bone tissue for transplantation |
| Many of these bone tissue banks are not-for-profit organizations, and, as such, they may be able to supply processing services at a lower cost than we can |
| Several for-profit companies, certain of which have substantially greater resources then we do, are processing, marketing and distributing allograft tissue |
| We compete with such entities on the basis of our advanced processing technology and the quality and quantity of the bone tissue our processing yields |
| Since we introduced our allograft bone tissue processing technology in 1987, certain competing processors have claimed to have developed technology similar to that which we use |
| We may not be able to compete successfully in the area of allograft bone tissue processing and distribution |
| In recent years, our Grafton® DBM and Graftech® Bio-Implant products have faced increasing competitive pressures as more companies have developed, or have announced they are developing, products with characteristics similar to these products |
| Certain of those competitors have, in turn, partnered with large orthopaedic and spine companies to market the competing products they have developed |
| We expect that this competition will continue in the future |
| Many of these competitors have research and development, marketing and other resources that are significantly greater than ours |
| They also offer a full line of metal implants and other products used in spinal surgeries |
| This could give them a competitive advantage over us since they can offer surgeons a more complete line of products than we can |
| The primary advantage of synthetic bone substitutes and growth factors as compared to allograft bone tissue is that they do not depend on the availability of donated human tissue |
| In addition, members of the medical community and the general public may perceive synthetic materials and growth factors as safer than allograft-based bone tissue |
| The allograft bone tissue we process may be incapable of competing successfully with synthetic bone substitutes and growth factors which are developed and commercialized by others, which could have a material adverse effect on our business, financial condition and results of operations |
| Companies are also developing artificial disks, which would be used to replace a patient’s own injured, degenerated or diseased spinal disks |
| If these disks are successfully developed and commercialized, they 22 _________________________________________________________________ [81]Table of Contents could have a negative impact on our bio-implant business and, therefore, have a material adverse effect on our financial condition and results of operations |
| We rely on our independent sales agents and sales representatives to educate surgeons concerning our products and to market our products |
| Our success depends largely upon arrangements we have with independent sales agents and sales representatives whereby they educate surgeons concerning our products |
| These independent sales agents and sales representatives may terminate their relationship with us, or devote insufficient sales efforts to our products |
| We do not control our independent sales agents and they may not be successful in implementing our marketing plans |
| Our failure to attract and retain skilled independent sales agents and sale representatives could have an adverse effect on our operations |
| Our revenues will depend upon reimbursement from public and private insurers and national health systems |
| The continued ability of our clients to pay our processing charges for the processing of allograft bone tissue depends upon our or our clients’ ability to distribute processed allograft bone tissue and collect fees from end-users, which are typically hospitals |
| The ability of hospitals to pay fees for allograft bone tissue depends in part on the extent to which reimbursement for the costs of such materials and related treatments will continue to be available from government health administration authorities, private health coverage insurers and other organizations |
| We may have difficulty gaining market acceptance for our products and services if government and third-party payors do not provide adequate coverage and reimbursement |
| The medical community could choose not to use our allograft bone tissue products |
| We believe the market for allograft bone tissue will continue to be based primarily upon the use of such products by physicians specializing in the orthopaedic, spine, neurological and oral/maxillofacial surgical areas |
| Our future growth depends in part upon such physicians’ wider use of allograft bone tissue as an alternative to autograft bone tissue and other available materials and treatments |
| We have tried to educate physicians through our marketing activities |
| Our future efforts in this regard may fail to generate additional demand for our allograft tissue forms |
| Governmental regulation could restrict the use of our products or our procurement of tissue |
| In the United States, the procurement and transplantation of allograft bone tissue is subject to federal law pursuant to NOTA, a criminal statute which prohibits the purchase and sale of human organs used in human transplantation, including bone and related tissue, for “valuable consideration |
| ” NOTA permits reasonable payments associated with the removal, transportation, processing, preservation, quality control, implantation and storage of human bone tissue |
| We provide services in all of these areas, with the exception of removal and implantation, and receive payments for all such services |
| If NOTA is interpreted or enforced in a manner which prevents us from receiving payment for services we render or which prevents us from paying TRO’s or certain of our clients for the services they render for us, our business could be materially, adversely affected |
| 23 _________________________________________________________________ [82]Table of Contents We are engaged through our direct sales and marketing employees and our independent sales representatives in ongoing efforts designed to educate the medical community as to the benefits of processed allograft bone tissue and in particular our allograft bone tissue forms, and we intend to continue our educational activities |
| Although we believe that NOTA permits payments in connection with these educational efforts as reasonable payments associated with the processing, transportation and implantation of our allograft bone tissue forms, payments in connection with such education efforts are not exempt from NOTA’s restrictions and our inability to make such payments in connection with our education efforts may prevent us from paying our sales representatives for their education efforts and could adversely affect our business and prospects |
| No federal agency or court has determined whether NOTA is, or will be, applicable to every allograft bone tissue-based material, which our processing technologies may generate |
| Assuming that NOTA applies to our processing of allograft bone tissue, we believe that we comply with NOTA, but there can be no assurance that more restrictive interpretations of, or amendments to, NOTA will not be adopted in the future which would call into question one or more aspects of our method of operations |
| The US federal health care laws apply to certain aspects of our business if a customer submits a claim for an item or service that is reimbursed under Medicare, Medicaid or most other federally-funded health care programs |
| Of principal importance to us, federal law prohibits unlawful inducements for the referral of business reimbursable under federally-funded health care programs (the “Anti-Kickback Law”), such as remuneration provided to physicians to induce them to use certain tissue products or medical devices reimbursable by Medicare or Medicaid |
| The Anti-Kickback Law is subject to evolving interpretations |
| If a governmental authority were to conclude that we are not in compliance with applicable laws and regulations, Osteotech, its officers and employee, could be subject to severe criminal and civil penalties including, for example, exclusion from participation as a supplier of product to beneficiaries covered by Medicare or Medicaid |
| Our products are extensively regulated by federal and certain state agencies in the United States |
| Failure to comply with these requirements may subject us to administrative or judicial sanctions, such as the FDA’s refusal to clear pending applications, warning letters, product recalls, product seizures, total or partial suspension of production or distribution, civil penalties, injunctions and/or criminal prosecution |
| In the United States, the allograft bone tissues that we process are regulated by the FDA as human tissue-based products under section 361 of the Public Health Service Act, and under certain circumstances, may be regulated as a medical device under the Food, Drug, and Cosmetic Act |
| FDA regulations generally do not require that human tissue-based products be cleared or approved before they are marketed |
| We are, however, required to register and list these products with the FDA and to comply with regulations concerning tissue donor screening and testing, and related procedures and record keeping |
| The FDA periodically inspects tissue processors to determine compliance with these requirements |
| Effective in May 2005, the FDA’s “Current Good Tissue Practice” regulations went into effect, which impose requirements on the manufacture of human tissue-based products, including tissue recovery, donor screening, donors testing, processing, storage, labeling, packaging and distribution |
| We believe we comply with all aspects of the Current Good Tissue Practice regulations, although there can be no assurance that we will comply or will comply in the future |
| 24 _________________________________________________________________ [83]Table of Contents Allograft bone tissue and tissue banking activities, such as tissue donation and recovery and tissue processing, are regulated in virtually all countries in which we operate outside the United States |
| The regulatory schemes and specific requirements for these products and activities vary from country-to-country |
| There are no common or harmonized regulatory approvals or programs for these products and activities, such as there are for medical devices marketed in the European Union |
| We believe that we comply with the national regulations in the countries in which we currently operate or in the countries we plan to operate in the future, although there can be no assurances that we will be able to do so in the future |
| We may face lawsuits or governmental enforcement activities based on hazardous waste we generate in our operations |
| Our allograft bone tissue processing in both the United States and Europe generates waste materials, which, in the United States, are classified as medical waste and/or hazardous waste under regulations promulgated by the United States Environmental Protection Agency and the New Jersey Department of Environmental Protection |
| We segregate our waste materials and dispose of them through a licensed hazardous waste transporter in compliance with applicable regulations in both the United States and Europe |
| Our failure to fully comply with any environmental regulations could result in the imposition of penalties, sanctions or, in some cases, private lawsuits, which could have a material adverse effect on our business, financial condition and results of operations |
| We may incur losses from product liability lawsuits |
| The testing and use of human allograft bone tissue, bovine tissue products and medical devices manufactured by others and which we distribute, entail inherent risks of medical complications for patients and therefore may result in product liability claims against us |
| Further, our agreements with our allograft bone tissue processing clients provide for indemnification by us for liabilities arising out of defects in allograft bone tissue they distribute, which is caused by our processing |
| We presently maintain product liability insurance in the amount of dlra30 million per occurrence and per year in the aggregate |
| We may be unable to maintain such insurance in the future and such insurance may not be sufficient to cover all claims made against us or all types of liabilities, which may be asserted against us |
| Our success depends upon the continued contributions of our executive officers and scientific and technical personnel |
| The competition for qualified personnel is intense, and the loss of services of our key personnel, particularly members of senior management, could adversely affect our business |
| If we are unable to enforce our patents or if it is determined that we infringe patents held by others it could damage our business |
| We consider our allograft bone tissue processing technology and procedures proprietary and rely primarily on patents to protect our technology and innovations |
| Consultants employed by third parties and persons working in conjunction with medical institutions unaffiliated with us have conducted significant research and development for our products |
| Accordingly, disputes 25 _________________________________________________________________ [84]Table of Contents may arise concerning the proprietary rights to information applied to our projects, which have been independently developed, by such consultants or medical institutions |
| In addition, although we have attempted to protect our technology with patents, our existing patents may prove invalid or unenforceable as to products or services marketed by our competitors |
| Our pending patent applications may not result in issued patents |
| Moreover, our existing or future products and technologies could be found to infringe the patents of others |
| Prosecuting and defending patent lawsuits is very expensive |
| We are committed to aggressively asserting and defending our technology and related intellectual property, which we have spent a significant amount of money to develop |
| In addition, the industry in which we compete is known for having a great deal of litigation involving patents |
| These factors could cause us to become involved in new patent litigation in the future |
| The expense of prosecuting or defending these future lawsuits could also have a material adverse effect on our business, financial condition and results of operations |
| If we were to lose a patent lawsuit in which another party is asserting that our products infringe its patents, we would likely be prohibited from marketing those products and could also be liable for significant damages |
| Either or both of these results may have a material adverse effect on our business, financial condition and results of operations |
| If we lose a patent lawsuit in which we are claiming that another party’s products are infringing our patents and thus, are unable to enforce our patents, it may have a material adverse effect on our business, financial condition and results of operations |
| The issuance of preferred stock may adversely affect rights of common stockholders or discourage a takeover |
| Under our amended and restated certificate of incorporation, our Board of Directors has the authority to issue up to 5cmam000cmam000 shares of preferred stock and to determine the price, rights, preferences and privileges of those shares without any further vote or action by our stockholders |
| The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of the holders of any shares of preferred stock that may be issued in the future |
| In January, 1996, our board of directors authorized shares of Series E Preferred Stock in connection with its adoption of a stockholder rights plan, under which we issued rights to purchase Series E Preferred Stock to holders of our common stock |
| Upon certain triggering events, such rights become exercisable to purchase common stock (or, in the discretion of our board of directors, Series E Preferred Stock) at a price substantially discounted from the then current market price of the Common Stock |
| Our stockholder rights plan could generally discourage a merger or tender offer involving our securities that is not approved by our Board of Directors by increasing the cost of effecting any such transaction and, accordingly, could have an adverse impact on stockholders who might want to vote in favor of such merger or participate in such tender offer |
| While we have no present intention to authorize any additional series of preferred stock, such issuance, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could also have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock |
| The preferred stock may have other rights, including economic rights senior to the Common Stock, and, as a result, the issuance thereof could have a material adverse effect on the market value of the common stock |