| WRIGHT MEDICAL GROUP INC Item 1A Risk Factors |
| Our business and its future performance may be affected by various factors, the most significant of which are discussed below |
| We are subject to substantial government regulation that could have a material adverse effect on our business The production and marketing of our products and our ongoing research and development, preclinical testing and clinical trial activities are subject to extensive regulation and review by numerous governmental authorities both in the US and abroad |
| US and foreign regulations govern the testing, marketing and registration of new medical devices, in addition to regulating manufacturing practices, reporting, labeling and recordkeeping procedures |
| The regulatory process requires significant time, effort and expenditures to bring our products to market, and we cannot be assured that any of our products will be approved |
| Our failure to comply with applicable regulatory requirements could result in these governmental authorities: • imposing fines and penalties on us; • preventing us from manufacturing or selling our products; • bringing civil or criminal charges against us; • delaying the introduction of our new products into the market; • recalling or seizing our products; or • withdrawing or denying approvals or clearances for our products |
| Even if regulatory approval or clearance of a product is granted, this could result in limitations on the uses for which the product may be labeled and promoted |
| Further, for a marketed product, its manufacturer and manufacturing facilities are subject to periodic review and inspection |
| Subsequent discovery of problems with a product, manufacturer or facility may result in restrictions on the product, manufacturer or facility, including withdrawal of the product from the market or other enforcement actions |
| We are currently conducting clinical studies of some of our products under an IDE Clinical studies must be conducted in compliance with FDA regulations, or the FDA may take enforcement action |
| The data collected from these clinical studies will ultimately be used to support market clearance for these products |
| There is no assurance that the FDA will accept the data from these clinical studies or that it will ultimately allow market clearance for these products |
| We are subject to various federal and state laws concerning health care fraud and abuse, including false claims laws, anti-kickback laws, and physician self-referral laws |
| Violations of these laws can result in criminal and/or civil punishment, including fines, imprisonment, and in the US, exclusion from participation in government health care programs |
| The scope of these laws and related regulations are expanding and their interpretation is evolving |
| There is very little precedent related to these laws and regulations |
| Increased funding for enforcement of these laws and regulations has resulted in greater scrutiny of marketing practices in our industry and resulted in several government investigations by various government authorities |
| If a governmental authority were to determine that we do not comply with these laws and regulations, then we and our officers and employees could be subject to criminal and civil sanctions, including exclusion from participation in federal health care reimbursement programs |
| In order to market our product devices in the member countries of the European Union (EU), we are required to comply with the Medical Devices Directive and obtain CE mark certification |
| CE mark certification is the European symbol of adherence to quality assurance standards and compliance with applicable European Medical Device Directives |
| Under the Medical Devices Directive, all medical devices including active implants must qualify for CE marking |
| In August 2005, an EU Medical Devices Directive changed the classification of hip, knee, and shoulder implants from class IIb to class III The transition period for these changes begins September 1, 2007 |
| Upon reclassification to class III, manufacturers will be required to assemble significantly more documentation and submit it to their Notified Body for formal approval prior to affixing the CE mark to their product and packaging |
| We intend to comply with the Medical Devices Directive for all of our products manufactured and sold in the EU However, there can be no assurance that our products will be approved for CE marking in a timely manner or at all |
| 14 _________________________________________________________________ [41]Table of Contents Our biologics business is subject to emerging governmental regulations that can significantly impact our business The FDA has statutory authority to regulate allograft-based products, processing and materials |
| The FDA has been working to establish a more comprehensive regulatory framework for allograft-based products, which are principally derived from cadaveric tissue |
| The framework developed by the FDA establishes criteria for determining whether a particular human tissue-based product will be classified as human tissue, a medical device or biologic drug requiring premarket clearance or approval |
| All tissue-based products are subject to extensive FDA regulation, including a requirement that ensures that diseases are not transmitted to tissue recipients |
| The FDA has also proposed extensive additional regulations that would govern the processing and distribution of all allograft products |
| The regulations for allograft-based products are still developing |
| From time to time, the FDA reviews these products and may informally suggest to us how these products should be classified |
| If it is considered a medical device or biologic drug, then FDA clearance or approval may be required |
| Additionally, our biologics business involves the procurement and transplantation of allograft tissue, which is subject to federal regulation under NOTA NOTA prohibits the sale of human organs, including bone and other human tissue, for valuable consideration within the meaning of NOTA NOTA permits the payment of reasonable expenses associated with the transportation, processing, preservation, quality control and storage of human tissue |
| We currently charge our customers for these expenses |
| In the future, if NOTA is amended or reinterpreted, we may not be able to charge these expenses to our customers and, as a result, our business could be adversely affected |
| Modifications to our marketed devices may require FDA regulatory clearances or approvals or require us to cease marketing or recall the modified devices until such clearances or approvals are obtained When required, the products we market in the US have obtained premarket notification under Section 510(k) of the FDC Act or were exempt from the 510(k) clearance process |
| We have modified some of our products and product labeling since obtaining 510(k) clearance, but we do not believe these modifications require us to submit new 510(k) notifications |
| However, if the FDA disagrees with us and requires us to submit a new 510(k) notification for modifications to our existing products, we may be the subject of enforcement actions by the FDA and be required to stop marketing the products while the FDA reviews the 510(k) notification |
| If the FDA requires us to go through a lengthier, more rigorous examination than we had expected, our product introductions or modifications could be delayed or canceled, which could cause our sales to decline |
| In addition, the FDA may determine that future products will require the more costly, lengthy and uncertain PMA application process |
| Products that are approved through a PMA application generally need FDA approval before they can be modified |
| ” If we lose one of our key suppliers, we may be unable to meet customer orders for our products in a timely manner or within our budget We rely on a limited number of suppliers for the components used in our products |
| Our reconstructive joint devices are produced from various surgical grades of titanium, cobalt chrome and stainless steel, various grades of high-density polyethylenes, silicone elastomer and ceramics |
| We rely on one supplier for the silicone elastomer used in our extremity products |
| We are aware of only two suppliers of silicone elastomer to the medical device industry for permanent implant usage |
| Additionally, we rely on one supplier of ceramics for use in our hip products |
| In addition, for our biologics products, we presently depend upon a single supplier as our source for DBM and CBM, and any failure to obtain DBM and CBM from this source in a timely manner will deplete levels of on-hand raw materials inventory and could interfere with our ability to process and distribute allograft products |
| During 2006, we are expecting a single not-for-profit tissue bank to meet nearly all of our DBM and CBM order requirements, a key component in the allograft products we currently produce, market and distribute |
| We cannot be sure that our supply of DBM and CBM will continue to be available at current levels or will be sufficient to meet our needs, or that future 15 _________________________________________________________________ [42]Table of Contents suppliers of DBM and CBM will be free from FDA regulatory action impacting their sale of DBM and CBM Since there is a small number of suppliers, if we cannot continue to obtain DBM and CBM from our current source in volumes sufficient to meet our needs, we may not be able to locate replacement sources of DBM and CBM on commercially reasonable terms, if at all |
| This could have the effect of interrupting our business, which could adversely affect our sales |
| Further, we rely on one supplier for our GRAFTJACKET^^® family of soft tissue repair and graft containment products, as well as one supplier for our ADCON^^® Gel products |
| Suppliers of raw materials and components may decide, or be required, for reasons beyond our control to cease supplying raw materials and components to us |
| FDA regulations may require additional testing of any raw materials or components from new suppliers prior to our use of these materials or components and in the case of a device with a PMA application, we may be required to obtain prior FDA permission, either of which could delay or prevent our access to or use of such raw materials or components |
| If we fail to compete successfully in the future against our existing or potential competitors, our sales and operating results may be negatively affected and we may not achieve future growth The markets for our products are highly competitive and dominated by a small number of large companies |
| We may not be able to meet the prices offered by our competitors, or offer products similar to or more desirable than those offered by our competitors |
| ” If we are unable to continue to develop and market new products and technologies, we may experience a decrease in demand for our products or our products could become obsolete, and our business would suffer We are continually engaged in product development and improvement programs, and new products represent a significant component of our growth rate |
| We may be unable to compete effectively with our competitors unless we can keep up with existing or new products and technologies in the orthopaedic implant market |
| If we do not continue to introduce new products and technologies, or if those products and technologies are not accepted, we may not be successful |
| Additionally, our competitors’ new products and technologies may beat our products to market, may be more effective or less expensive than our products, or may render our products obsolete |
| ” If our patents and other intellectual property rights do not adequately protect our products, we may lose market share to our competitors and be unable to operate our business profitably We rely on patents, trade secrets, copyrights, know-how, trademarks, license agreements and contractual provisions to establish our intellectual property rights and protect our products |
| ” These legal means, however, afford only limited protection and may not adequately protect our rights |
| In addition, we cannot be assured that any of our pending patent applications will issue |
| The USPTO may deny or require a significant narrowing of the claims in our pending patent applications and the patents issuing from such applications |
| Any patents issuing from the pending patent applications may not provide us with significant commercial protection |
| We could incur substantial costs in proceedings before the USPTO These proceedings could result in adverse decisions as to the priority of our inventions and the narrowing or invalidation of claims in issued patents |
| In addition, the laws of some of the countries in which our products are or may be sold may not protect our intellectual property to the same extent as US laws or at all |
| We also may be unable to protect our rights in trade secrets and unpatented proprietary technology in these countries |
| In addition, we hold licenses from third parties that are necessary to utilize certain technologies used in the design and manufacturing of some of our products |
| The loss of such licenses would prevent us from manufacturing, marketing and selling these products, which could harm our business |
| We seek to protect our trade secrets, know-how and other unpatented proprietary technology, in part, with confidentiality agreements with our employees, independent distributors and consultants |
| We cannot be assured, however, that the agreements will not be breached, adequate remedies for any breach would be available, or our trade secrets, know-how, and other unpatented proprietary technology will not otherwise become known to or independently developed by our competitors |
| 16 _________________________________________________________________ [43]Table of Contents If we lose any existing or future intellectual property lawsuits, a court could require us to pay significant damages or prevent us from selling our products The medical device industry is litigious with respect to patents and other intellectual property rights |
| Companies in the medical device industry have used intellectual property litigation to gain a competitive advantage |
| We are currently involved in an intellectual property lawsuit with Howmedica Osteonics Corp, a subsidiary of Stryker Corporation, where it is alleged that our ADVANCE^^® Knee product line infringes one of Howmedica’s patents |
| See “Legal Proceedings” for more information regarding this lawsuit |
| If Howmedica were to succeed in obtaining the relief it claims, the court could award damages to Howmedica and impose an injunction against further sales of our product |
| If a monetary judgment is rendered against us, we may be forced to raise or borrow funds, as a supplement to any available insurance claim proceeds, to pay the damages award |
| In the future, we may become a party to other lawsuits involving patents or other intellectual property |
| A legal proceeding, regardless of the outcome, could drain our financial resources and divert the time and effort of our management |
| If we lose one of these proceedings, a court, or a similar foreign governing body, could require us to pay significant damages to third parties, require us to seek licenses from third parties and pay ongoing royalties, require us to redesign our products, or prevent us from manufacturing, using or selling our products |
| In addition to being costly, protracted litigation to defend or prosecute our intellectual property rights could result in our customers or potential customers deferring or limiting their purchase or use of the affected products until resolution of the litigation |
| If product liability lawsuits are brought against us, our business may be harmed The manufacture and sale of medical devices exposes us to significant risk of product liability claims |
| In the past, we have had a number of product liability claims relating to our products, none of which either individually, or in the aggregate, have resulted in a material negative impact on our business |
| In the future, we may be subject to additional product liability claims, some of which may have a negative impact on our business |
| Additionally, we could experience a material design or manufacturing failure in our products, a quality system failure, other safety issues, or heightened regulatory scrutiny that would warrant a recall of some of our products |
| Our existing product liability insurance coverage may be inadequate to protect us from any liabilities we might incur |
| If a product liability claim or series of claims is brought against us for uninsured liabilities or in excess of our insurance coverage, our business could suffer |
| In addition, a recall of some of our products, whether or not the result of a product liability claim, could result in significant costs and loss of customers |
| Fluctuations in insurance expense could adversely affect our profitability We hold a number of insurance policies, including product liability insurance, directors’ and officers’ liability insurance, property insurance and workers’ compensation insurance |
| If the costs of maintaining adequate insurance coverage should increase significantly in the future, our operating results could be materially adversely impacted |
| If we cannot retain our key personnel, we will not be able to manage and operate successfully and we may not be able to meet our strategic objectives Our continued success depends, in part, upon key managerial, scientific, sales and technical personnel, as well as our ability to continue to attract and retain additional highly qualified personnel |
| We compete for such personnel with other companies, academic institutions, governmental entities and other organizations |
| There can be no assurance that we will be successful in retaining our current personnel or in hiring or retaining qualified personnel in the future |
| Loss of key personnel or the inability to hire or retain qualified personnel in the future could have a material adverse effect on our ability to operate successfully |
| Further, any inability on our part to enforce non-compete arrangements related to key personnel who have left the business could have a material adverse effect on our business |
| 17 _________________________________________________________________ [44]Table of Contents We derive a significant portion of our sales from operations in international markets that are subject to political, economic and social instability We derive a significant portion of our sales from operations in international markets |
| Our international distribution system consists of 8 direct sales offices and approximately 100 stocking distribution partners, which combined employ approximately 430 sales representatives who sell in over 60 countries |
| Most of these countries are, to some degree, subject to political, social and economic instability |
| For the years ended December 31, 2005 and 2004, approximately 38prca and 39prca, respectively, of our net sales were derived from our international operations |
| Our international sales operations expose us and our representatives, agents and distributors to risks inherent in operating in foreign jurisdictions |
| These risks include: • the imposition of additional foreign governmental controls or regulations on orthopaedic implants and biologics products; • new export license requirements, particularly related to our biologics products; • economic instability, including currency risk between the US dollar and foreign currencies, in our target markets; • a shortage of high-quality international salespeople and distributors; • loss of any key personnel who possess proprietary knowledge or are otherwise important to our success in international markets; • changes in third-party reimbursement policy that may require some of the patients who receive our implant products to directly absorb medical costs or that may necessitate our reducing selling prices for our products; • changes in tariffs and other trade restrictions, particularly related to the exportation of our biologics products; • work stoppages or strikes in the health care industry, such as those that have previously affected our operations in France, Canada, Korea and Finland in the past; • a shortage of nurses in some of our target markets, particularly affecting our operations in France; and • exposure to different legal and political standards due to our conducting business in over 60 countries |
| Any material decrease in our foreign sales would negatively impact our profitability |
| Our international sales are predominately generated in Europe |
| In Europe, health care regulation and reimbursement for medical devices vary significantly from country to country |
| This changing environment could adversely affect our ability to sell our products in some European countries |
| Our business could suffer if the medical community does not continue to accept allograft technology New allograft products, technologies and enhancements may never achieve broad market acceptance due to numerous factors, including: • lack of clinical acceptance of allograft products and related technologies; • the introduction of competitive tissue repair treatment options that render allograft products and technologies too expensive and obsolete; • lack of available third-party reimbursement; • the inability to train surgeons in the use of allograft products and technologies; • the risk of disease transmission; and • ethical concerns about the commercial aspects of harvesting cadaveric tissue |
| 18 _________________________________________________________________ [45]Table of Contents Market acceptance will also depend on the ability to demonstrate that existing and new allografts and technologies are attractive alternatives to existing tissue repair treatment options |
| To demonstrate this, we rely upon surgeon evaluations of the clinical safety, efficacy, ease of use, reliability and cost effectiveness of our tissue repair options and technologies |
| Recommendations and endorsements by influential surgeons are important to the commercial success of allograft products and technologies |
| In addition, several countries, notably Japan, prohibit the use of allografts |
| If allograft products and technologies are not broadly accepted in the marketplace, we may not achieve a competitive position in the market |
| If adequate levels of reimbursement from third-party payors for our products are not obtained, surgeons and patients may be reluctant to use our products and our sales may decline In the US, health care providers that purchase our products generally rely on third-party payors, principally federal Medicare, state Medicaid and private health insurance plans, to pay for all or a portion of the cost of joint reconstructive procedures and products utilized in those procedures |
| We may be unable to sell our products on a profitable basis if third-party payors deny coverage or reduce their current levels of reimbursement |
| Our sales depend largely on governmental health care programs and private health insurers reimbursing patients’ medical expenses |
| Surgeons, hospitals and other health care providers may not purchase our products if they do not receive satisfactory reimbursement from these third-party payors for the cost of the procedures using our products |
| Payors continue to review their coverage policies carefully for existing and new therapies and can, without notice, deny coverage for treatments that include the use of our products |
| In addition, some health care providers in the US have adopted or are considering a managed care system in which the providers contract to provide comprehensive heath care for a fixed cost per person |
| Health care providers may attempt to control costs by authorizing fewer elective surgical procedures, including joint reconstructive surgeries, or by requiring the use of the least expensive implant available |
| If adequate levels of reimbursement from third-party payors outside of the US are not obtained, international sales of our products may decline |
| Outside of the US, reimbursement systems vary significantly by country |
| Many foreign markets have government-managed health care systems that govern reimbursement for medical devices and procedures |
| Canada, and some European and Asian countries, in particular France, Japan, Taiwan, and Korea, have tightened reimbursement rates |
| Additionally, some foreign reimbursement systems provide for limited payments in a given period and therefore result in extended payment periods |
| See “Business – Third-Party Reimbursement” for more information regarding reimbursement in the US and abroad |
| If market clearance is not obtained for the re-launch of the ADCON ^® Gel products and the launch of the CONSERVE^® Plus implant in the US, growth of our biologics and hip product lines could be impacted Our ADCON^^® Gel products and our CONSERVE^^® Plus Resurfacing Implant are available outside the US There can be no assurance that the sale of our ADCON^^® Gel or CONSERVE^^® Plus products in the US will be cleared by the FDA in a timely manner or at all, which could have a significant impact on the future growth of our biologics and hip product lines, respectively |
| In 2005, our PMA application with the FDA for our ADCON^^® Gel product was withdrawn by management |
| Management is evaluating whether to continue to pursue re-submission for this product |
| If re-submitted, there can be no assurance that the FDA will accept another submission for filing in a timely manner or at all |
| If surgeons do not recommend and endorse our products, our sales may decline or we may be unable to increase our sales and profits In order for us to sell our products, surgeons must recommend and endorse them |
| We may not obtain the necessary recommendations or endorsements from surgeons |
| Acceptance of our products depends on educating the medical community as to the distinctive characteristics, perceived benefits, clinical efficacy and cost-effectiveness of our products compared to products of our competitors and on training surgeons in the proper application of our products |
| 19 _________________________________________________________________ [46]Table of Contents If a natural or man-made disaster strikes our manufacturing facilities, we could be unable to manufacture our products for a substantial amount of time and our sales could decline We have principally relied to date on our manufacturing facilities in Arlington, Tennessee, and Toulon, France |
| These facilities and the manufacturing equipment we use to produce our products would be difficult to replace and could require substantial lead-time to repair or replace |
| Our facilities may be affected by natural or man-made disasters |
| In the event one of our facilities was affected by a disaster, we would be forced to rely on third-party manufacturers or shift production to our other manufacturing facility |
| Although we believe we possess adequate insurance for damage to our property and the disruption of our business from casualties, such insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms or at all |
| Our business plan relies on certain assumptions about the market for our products, which, if incorrect, may adversely affect our profitability We believe that the aging of the general population and increasingly active lifestyles will continue and that these trends will increase the need for our orthopaedic implant products |
| The projected demand for our products could materially differ from actual demand if our assumptions regarding these trends and acceptance of our products by the medical community prove to be incorrect or do not materialize, or if non-surgical treatments gain more widespread acceptance as a viable alternative to orthopaedic implants |
| Fluctuations in foreign currency exchange rates could result in declines in our reported sales and earnings Since a majority of our international sales are denominated in local currencies and not in US dollars, our reported sales and earnings are subject to fluctuations in foreign exchange rates |
| Our international net sales were favorably affected by the impact of foreign currency fluctuations totaling approximately dlra400cmam000 in 2005 and dlra8dtta1 million in 2004 |
| We currently employ a derivative program using 30-day foreign currency forward contracts to mitigate the risk of currency fluctuations on our intercompany receivable and payable balances that are denominated in foreign currencies |
| These forward contracts are expected to offset the transactional gains and losses on the related intercompany balances |
| These forward contracts are not designated as hedging instruments under SFAS Nodtta 133, Accounting for Derivative Instruments and Hedging Activities |
| Accordingly, the changes in the fair value and the settlement of the contracts are recognized in the period incurred |
| 20 _________________________________________________________________ [47]Table of Contents Efforts to acquire and integrate other companies or product lines could adversely affect our operations and financial results We may pursue acquisitions of other companies or product lines |
| Our ability to grow through acquisitions depends upon our ability to identify, negotiate, complete and integrate suitable acquisitions and to obtain any necessary financing |
| Even if we complete acquisitions, we may also experience: • difficulties in integrating any acquired companies, personnel and products into our existing business; • delays in realizing the benefits of the acquired company or products; • diversion of our management’s time and attention from other business concerns; • limited or no direct prior experience in new markets or countries we may enter; • higher costs of integration than we anticipated; or • difficulties in retaining key employees of the acquired business who are necessary to manage these acquisitions |
| In addition, an acquisition could materially impair our operating results by causing us to incur debt or requiring us to amortize acquisition expenses and acquired assets |
| Our quarterly operating results are subject to substantial fluctuations and you should not rely on them as an indication of our future results Our quarterly operating results may vary significantly due to a combination of factors, many of which are beyond our control |
| These factors include: • demand for products, which historically has been lowest in the third quarter; • our ability to meet the demand for our products; • increased competition; • the number, timing and significance of new products and product introductions and enhancements by us and our competitors; • our ability to develop, introduce and market new and enhanced versions of our products on a timely basis; • changes in pricing policies by us and our competitors; • changes in the treatment practices of orthopaedic surgeons; • changes in distributor relationships and sales force size and composition; • the timing of material expense- or income-generating events and the related recognition of their associated financial impact; • the timing of significant orders and shipments; • availability of raw materials; • work stoppages or strikes in the health care industry; • changes in FDA and foreign governmental regulatory policies, requirements and enforcement practices; 21 _________________________________________________________________ [48]Table of Contents • changes in accounting policies, estimates, and treatments; and • general economic factors |
| We believe that our quarterly sales and operating results may vary significantly in the future and that period-to-period comparisons of our results of operations are not necessarily meaningful and should not be relied upon as indications of future performance |
| We cannot assure you that our sales will increase or be sustained in future periods or that we will be profitable in any future period |
| Any shortfalls in sales or earnings from levels expected by securities or orthopaedic industry analysts could have an immediate and significant adverse effect on the trading price of our common stock in any given period |
| We rely on our independent sales distributors and sales representatives to market and sell our products Our success depends largely upon marketing arrangements with independent sales distributors and sales representatives, in particular their sales and service expertise and relationships with the customers in the marketplace |
| Independent distributors and sales representatives may terminate their relationships with us or devote insufficient sales efforts to our products |
| We do not control our independent distributors and they may not be successful in implementing our marketing plans |
| Our failure to maintain our existing relationships with our independent distributors and sales representatives could have an adverse effect on our operations |
| Similarly, our failure to recruit and retain additional skilled independent sales distributors and sales representatives could have an adverse effect on our operations |
| We have experienced turnover with some of our independent distributors in the past which adversely affected short-term financial results while we transitioned to new independent distributors |
| While we believe these transitions have been managed effectively, similar occurrences could happen in the future with different results which could have a greater adverse effect on our operations than we have previously experienced |