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| ANIK > SEC Filings for ANIK > Form 10-Q on 17-May-2004 | All Recent SEC Filings |
17-May-2004
Quarterly Report
This Quarterly Report on Form 10-Q contains forward-looking statements withinthe meaning of Section 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934, including statements regarding:
• our future sales and product revenues, including possibleretroactive price adjustments and expectations of unit volumes or other offsetsto price reductions;
• our efforts to increase sales of ophthalmic viscoelasticproducts and support of the distribution of ORTHOVISC† in the U.S.;
• our manufacturing capacity and efficiency gains andwork-in-process manufacturing operations;
• the timing of, scope of and rate of patient enrollment forclinical trials;
• development of possible new products, including plans toadvance cosmetic tissue augmentation and post-surgical adhesion therapies intohuman clinical trials;
• FDA or other regulatory approvals and/or reimbursementapprovals of new or potential products;
• negotiations with potential and existing customers, includingour performance under any of our distribution or supply agreements or ourexpectations with respect to sales and milestones pursuant to such agreements;
• the level of our revenue or sales in particular geographicareas and/or for particular products;
• the market share for any of our products;
• our profitability and margin improvements resulting from ahigher margin product mix;
• our expectations of the size of the U.S. and European marketsfor osteoarthritis of the knee;
• our intention to increase market share for ORTHOVISC ininternational and domestic markets or otherwise penetrate growing markets forosteoarthritis of the knee;
• our current strategy, including our corporate objectives andresearch and development and collaboration opportunities, including, withoutlimitation, commencement of cosmetic tissue augmentation product andINCERT†clinical trials;
• our ability to achieve performance and sales thresholdmilestones in our existing and future distribution and supply agreements;
• our expected tax rate and taxable revenues;
• the rate at which we use cash, the amounts used, and theutilization of such cash; and
• possible negotiations or re-negotiations with existing or newdistribution or collaboration partners.
Furthermore, additional statements identified by words such as "will," "likely,""may," "believe," "expect," "anticipate," "intend," "seek," "designed,""develop," "would," "future," "can," "could" and other expressions that arepredictions of or indicate future events and trends and which do not relate tohistorical matters, also identify forward-looking statements. You should notrely on forward looking statements because they involve known and unknown risks,uncertainties and other factors, some of which are beyond our control, includingthose factors described in the section titled "Risk Factors and Certain FactorsAffecting Future Operating Results" in this Quarterly Report on Form 10-Q. These risks, uncertainties and other factors may cause our actual results,performance or achievement to be materially different from anticipated futureresults, performance or achievement, expressed or implied by the forward-lookingstatements. These forward looking statements are based upon the currentassumptions of our management and are only expectations of future results. Youshould carefully review all of these factors, and you should be aware that theremay be other factors that could cause these differences, including those factorsdiscussed herein and in the "Management's Discussions and Analysis of FinancialCondition and Results of Operations" beginning on page 11 of this QuarterlyReport on form 10-Q, as well as the risk factors described in our Annual Reporton Form 10-K for the year ended December 31, 2003 and in our press releases andother filings with the Securities and Exchange Commission. We undertake noobligation to update or revise any forward-looking statement to reflect changesin underlying assumptions or factors of new information, future events or otherchanges.
Management Overview
Anika Therapeutics develops, manufactures and commercializes therapeuticproducts and devices intended to promote the protection and healing of bone,cartilage and soft tissue. These products are based on hyaluronic acid (HA), anaturally occurring, biocompatible polymer found throughout the body. Due toits unique biophysical and biochemical properties, HA plays an important role ina number of physiological functions such as the protection and lubrication ofsoft tissues and joints, the maintenance of the structural integrity of tissues,and the transport of molecules to and within cells. Our marketed productsinclude therapies for the treatment of joint diseases such as osteoarthritis andviscoelastic products used in eye surgery. Products in development includechemically modified, cross-linked forms of HA to prevent surgical adhesions andfor cosmetic tissue augmentation (CTA).
Our currently marketed products consist of ORTHOVISC†, which is an HA productused in the treatment of some forms of osteoarthritis in humans, and HYVISC†,which is an HA product used in the treatment of equine osteoarthritis. ORTHOVISC became available for sale in the U.S. on March 1, 2004 and has beenapproved for sale and marketed internationally since 1996. HYVISC is marketedin the U.S. through an exclusive agreement with Boehringer Ingelheim Vetmedica,Inc. Our ophthalmic products include CoEase™, STAARVISC™-II, and ShellGel™,each an injectable ophthalmic viscoelastic HA product, distributed by AdvancedMedical Optics, Inc., STAAR Surgical Company, and Cytosol Ophthalmics, Inc.,respectively. We also manufacture AMVISC® and AMVISC® Plus, HA viscoelasticsupplement products used in ophthalmic surgery, for Bausch & Lomb Incorporated.
Three Months Ended March 31, Product revenue by region 2004 2003 ORTHOVISC U.S. 26 % — Turkey 10 % 12 % Canada 2 % 1 % Europe 2 % 2 % Middle East 1 % 1 % 41 % 16 %
HYVISC U.S. 16 % 26 %
Ophthalmic products U.S. 43 % 58 %
Osteoarthritis Business
ORTHOVISC, our product for the treatment of osteoarthritis of the knee, andHYVISC, our product for the treatment of equine osteoarthritis, contributed40.9% and 16.4%, respectively, of our product revenue for the three months endedMarch 31, 2004. In February 2004 we received marketing approval from the FDAfor ORTHOVISC and in March 2004 ORTHOVISC was launched in the U.S. by OrthoBiotech. U.S. sales of ORTHOVISC contributed 26.0% of product revenue for thethree months ended March 31, 2004. We expect U.S. sales of ORTHOVISC to be theprimary driver of revenue growth for 2004.
International sales of ORTHOVISC increased 56.2% for the three months endedMarch 31, 2004, compared to the same period in 2003 and contributed 14.9% ofproduct revenue for the period. Increased sales to our distributors in Turkey,Spain, Canada, and Greece were the primary contributors to the increase. Wecontinue to experience pricing pressure in Europe primarily due to competingproducts, however, we expect that the recent FDA approval and an anticipatedmid-year launch of a room temperature version of ORTHOVISC will strengthen ourposition. We expect continued modest international growth in 2004 as a resultof expanded penetration in Europe, including Germany and France, and sales inEgypt under a new distribution and marketing agreement.
HYVISC sales increased 6.4% for the three months ended March 31, 2004 comparedto the same
period last year.
Ophthalmic Business
Our ophthalmic business includes HA viscoelastic products used in ophthalmicsurgery. Our sales of ophthalmic products contributed 42.7% of our productrevenue for the three months ended March 31, 2004 and increased 20.2% comparedto the same period in 2003. Sales to Bausch & Lomb accounted for 68.3% ofophthalmic sales for three months ended March 31, 2004 and contributed 29.1% ofproduct revenue for the period. We believe the increase in ophthalmic productsales for the three months ended March 31, 2004 is largely attributable toinventory replenishment patterns of our distributors. We expect sales ofophthalmic products to increase modestly for 2004 as compared to ophthalmicproduct sales for 2003.
Our distributor for CoEase, Advanced Medical Optics, announced in April theirintent to acquire the surgical ophthalmology business of Pfizer, Inc., whichincludes a competing line of viscoelastic products for use in ocular surgery. We cannot predict the effect this will have on our relationship with AdvancedMedical Optics. As a result, in the future we may not be able to sustaincurrent product revenue levels in our ophthalmic business. For the three monthsended March 31, 2004, sales to Advanced Medical Optics contributed 23.1% ofophthalmic product revenue.
Research and Development
Our current research and development efforts include chemically modifiedformulations of HA designed for longer residence time in the body and secondgeneration advances to some of our current product line. In April 2004 weinitiated a pilot human clinical trial for INCERT†-S, a chemically modified formof HA designed to act as a barrier to prevent internal tissue adhesion andscarring following spinal surgery. In addition, in May 2004 we initiated apivotal clinical trial with our product for cosmetic tissue augmentation (CTA),a therapy for correcting dermal defects, including facial wrinkles, scarremediation and lip augmentation. The trial is designed to evaluate theeffectiveness of CTA for correcting nasolabial folds. Second generationadvances to our current product line in research and development include aroom-temperature version of ORTHOVISC, pH-buffered versions for our ophthalmicproducts and the use of ORTHOVISC-like products for osteoarthritis in otherjoints.
Our research and development costs increased 12.1% for the three months endedMarch 31, 2004 compared to the same period in 2003 primarily due to costsassociated with the clinical trials for INCERT and CTA. We expect to incuradditional costs associated with the human clinical trials for our productcandidates in 2004 and to increase personnel-related expenses as we expand ourresearch and development efforts. As a result, we expect an increase inresearch and development costs in 2004 compared to 2003.
Summary of Critical Accounting Policies; Significant Judgments and Estimates
Our discussion and analysis of our financial condition and results of operationsare based upon our financial statements, which have been prepared in accordancewith accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses, and related disclosure of contingent assets and liabilities. Wemonitor our estimates on an on-going basis for changes in facts andcircumstances, and material changes in these estimates could occur in thefuture. Changes in estimates are recorded in the period in which they becomeknown. We base our estimates on historical experience and other assumptionsthat we believe to be reasonable under the circumstances. Actual results maydiffer from our estimates if past experience or other assumptions do not turnout to be substantially accurate.
We have identified the policies below as critical to our business operations andthe understanding of our results of operations. The impact and any associatedrisks related to these policies on our business operations is discussedthroughout Management's Discussion and Analysis of Financial Condition and
Results of Operations where such policies affect our reported and expectedfinancial results. For a detailed discussion on the application of these andother accounting policies, see Note 3 in the Notes to the Consolidated FinancialStatements of this Quarterly Report on Form 10-Q for the quarterly period endedMarch 31, 2004.
Revenue Recognition and Allowance for Doubtful Accounts. Product revenue isrecognized upon confirmation of regulatory compliance and shipment to thecustomer as long as there is (1) persuasive evidence of an arrangement, (2)delivery has occurred and risk of loss has passed, (3) the sales price is fixedor determinable and (4) collection of the related receivable is probable. Amounts billed or collected prior to recognition of revenue are classified asdeferred revenue. When determining whether risk of loss has transferred tocustomers on product sales or if the sales price is fixed or determinable weevaluate both the contractual terms and conditions of our distribution andsupply agreements as well as our business practices. Under our agreement withBausch & Lomb, the price for units sold in a calendar year is dependent on totalunit volume of sales of certain ophthalmic products during the year. Accordingly, unit prices for sales occurring in interim quarters are subject topossible retroactive price adjustments when the actual annual unit volume forthe year becomes known. In accordance with our revenue recognition policy, theamount of revenue subject to the contracted price adjustment is recorded asdeferred revenue until the annual unit volume becomes known and the sales pricebecomes fixed. ORTHOVISC has been sold through several distributionarrangements as well as outsource order-processing arrangements (logisticagents). Sales of product through third party logistics agents in certainmarkets are recognized as revenue upon shipment by the logistics agent to thecustomer.
We recognize non-refundable upfront payments received as part of supply,distribution, and marketing arrangements, ratably over the terms of thearrangements to which the payments apply. Milestone payments received as partof supply, distribution, and marketing arrangements are evaluated under EmergingIssues Task Force No. 00-21, "Revenue Arrangements with Multiple Deliverables,"to determine whether the delivered item has value to the customer on astand-alone basis and whether objective and reliable evidence of the fair valueof the undelivered item exists. We recognize milestone payments as revenue uponachievement of the milestone only if (1) it represents a separate unit ofaccounting as defined in EITF 00-21, (2) the milestone payments arenon-refundable, (3) substantive effort is involved in achieving the milestone,and (4) the amount of the milestone is reasonable in relation to the effortexpended or the risk associated with achievement of the milestone. If any ofthese conditions are not met, we will defer the milestone payments and recognizethem as revenue over the term of the agreement as it completes its performanceobligations. We will apply recognition of deferred milestone payments over theterm of the agreement, on a cumulative basis, on the date the milestone isachieved. As such, the term over which deferred milestone payments arerecognized as revenue will be begin on the effective date of the relatedarrangement to which the payment applies. In February 2004, as part of the OBIagreement, we received a milestone payment of $20 million as a result ofobtaining FDA approval for ORTHOVISC. We evaluated the terms of the OBIAgreement and the circumstances under which the milestone was paid anddetermined that the milestone payment did not meet all of the conditions to berecognized upon achievement, therefore, we expect to defer the milestone paymentof $20 million and recognize it ratably over the initial ten-year term of theOBI Agreement beginning with the first quarter of 2004.
Reserve for Obsolete/Excess Inventory. Inventories are stated at the lower ofcost or market. We regularly review our inventories and record a provision forexcess and obsolete inventory based on certain factors that may impact therealizable value of our inventory including, but not limited to, technologicalchanges, market demand, inventory cycle time, regulatory requirements andsignificant changes in our cost structure. If ultimate usage variessignificantly from expected usage or other factors arise that are significantlydifferent than those anticipated by management, additional inventory write-downor increases in obsolescence reserves may be required.
We generally produce finished goods based upon specific orders or inanticipation of specific orders. As a result, we generally do not establishreserves against finished goods. Under certain
circumstances we may purchase raw materials or manufacture work-in-process orfinished goods inventory in anticipation of receiving regulatory approval forthe use of the raw materials in our manufacturing process or sale of thefinished goods inventory. We evaluate the value of inventory on a quarterlybasis and may, based on future changes in facts and circumstances, determinethat a write-down of inventory is required in future periods.
Deferred tax assets. We record a deferred tax asset or liability based on thedifference between the financial statement and tax basis of assets andliabilities, as measured by the enacted tax rates assumed to be in effect whenthese differences reverse.
In February 2004, we achieved a milestone under the OBI Agreement and receivedpayment of $20.0 million which we expect will be recognized as taxable income inthe first quarter of 2004. As a result, we expect that we will be able toutilize all of our net operating loss and credit carry-forwards in 2004 tooffset part of our taxable income. In accordance with our revenue recognitionpolicy, for financial statement purposes, the milestone payment of $20.0 millionwas deferred and is being recognized ratably over the expected ten-year term ofthe OBI Agreement. We recorded a deferred tax asset of $7.8 millionrepresenting the approximate income tax effect of the timing difference ofrevenue recognition for financial statement purposes and for tax purposes. Based on management's current expectations regarding future profitability, wereleased the valuation allowance previously established against our deferred taxassets and recorded a one-time income tax benefit of $7.0 million.
Results of Operations
Product revenue. Product revenue for the three months ended March 31, 2004 was$5,569,000, an increase of $2,199,000, or 65.3%, compared to $3,370,000 forthree months ended March 31, 2003. Product sales included shipments to our U.S.distributor of ORTHOVISC, Ortho Biotech, and related royalty fees tied toORTHOVISC end-user sales.
Three Months Ended March 31, 2004 2003 Ophthalmic Products $ 2,374,000 $ 1,975,000 ORTHOVISC† 2,275,000 530,000 HYVISC† 920,000 865,000 $ 5,569,000 $ 3,370,000
Ophthalmic product sales increased $399,000, or 20.2%, for the three monthsended March 31, 2004 compared to the same period last year. The increase isattributable to increased sales to all of our ophthalmic distributors. Sales toBausch & Lomb increased 26.8% for the three months ended March 31, 2004 comparedto the same period last year and contributed 29.1% of product revenue. Webelieve the increase to be primarily due to inventory replenishment patterns. ORTHOVISC sales increased $1,745,000, or 329.2%, for the three months endedMarch 31, 2004 compared to the same period last year. The increase is primarilydue to sales to our U.S. distributor, Ortho Biotech, following FDA marketingapproval in February 2004, and royalty fees tied to end-user sales. U. S. salesof ORTHOVISC were 26.0% of product sales for the period. International sales ofORTHOVISC increased 56.1% for the three months ended March 31, 2004 compared tothe same period last year. The increase in international sales was primarilydue to increased sales to our Turkish distributor combined with increased salesin Europe and Canada. Sales of HYVISC increased $55,000, or 6.4%, for the threemonths ended March 31, 2004 compared to the same period last year. Sales ofHYVISC were made to a single customer under an exclusive agreement.
Licensing and milestone revenue. Licensing and milestone revenue for the threemonths ended March 31, 2004 was $572,000, an increase of $558,000 compared to$14,000 for the same period last year. Licensing and milestone revenue included$550,000 for the ratable recognition of the $2.0 million up-front and $20.0million milestone payments from Ortho Biotech and maintenance payments oncertain supply
agreements with distributors of our ophthalmic products over the related termsof the applicable agreements.
Gross profit. Gross profit for the three months ended March 31, 2004 was$3,420,000, or 55.7% of revenue, an increase of $2,005,000, or 141.7%, fromgross profit of $1,415,000, or 41.8% of revenue, for three months endedMarch 31, 2003. Gross margin on product revenue was 51.1% for the three monthsended March 31, 2004 compared with 41.6% for the three months ended March 31,2003. Gross margin for three months ended March 31, 2004, as compared with sameperiods last year, benefited from a shift in sales mix toward higher marginosteoarthritis products and efficiencies in our manufacturing operations.
Research & development. Research and development expenses for the three monthsended March 31, 2004 was $907,000, an increase of $98,000, or 12.1%, compared to$809,000 for the three months ended March 31, 2003. Research and developmentexpenses include costs associated with our in-house research and developmentefforts for the development of new medical applications for our HA-basedtechnology, the management of clinical trials, and the preparation andprocessing of applications for regulatory approvals at various relevant stagesof development. The increase in research and development expenses for the threemonths ended March 31, 2004 is primarily attributable to expenditures associatedwith preparation for the pilot study for INCERT-S initiated in April 2004 andthe pivotal clinical trial for our product for cosmetic tissue augmentationinitiated in May 2004. The increase was partially offset by costs incurred inthe first quarter 2003 associated with the completion of our pivotal clinicaltrial for ORTHOVISC.
Selling, general & administrative. Selling, general and administrative expensesfor the three months ended March 31, 2004 was $1,308,000, an increase of$193,000, or 17.3%, compared to $1,115,000 for the same period last year. Theincrease is primarily attributable to an increase in personnel related costs of$271,000 partially offset by lower professional service fees of $91,000primarily attributable to lower legal costs.
Interest income. Interest income for the three months ended March 31, 2004 was$46,000, a 9.5% increase, compared to $42,000 for the same period last year. The increase is primarily attributable to higher average balance in cash andinvestments partially offset by lower interest rates.
Income taxes. Provision for income taxes was $504,000 for the three monthsended March 31, 2004 compared to an income tax benefit of $154,000 for the threemonths ended March 31, 2003. The effective tax rate for the current provisionfor the three months ended March 31, 2004 was approximately 40%; we anticipate asimilar rate for the balance of the year. In 2002 federal tax law changed toallow for a five year carryback period and a suspension of certain limitationson the use of alternative minimum tax losses. We filed an income tax carrybackclaim to carry our 2001 tax loss back to prior tax years. As a result of thecarryback claim, in the first quarter of 2003, we received a refund ofapproximately $154,000 of taxes paid in prior years.
We have determined that we will likely utilize all of our net operating loss andcredit carry-forwards as a result of the receipt of the $20 million milestonepayment in February 2004 from Ortho Biotech. In addition, based on our currentexpectations regarding future profitability, we released the previouslyestablished valuation allowance against our deferred tax assets and recorded aone-time income tax benefit of $7.0 million.
LIQUIDITY AND CAPITAL RESOURCES
We require cash to fund our operating expenses and to make capitalexpenditures. We expect that our requirement for cash to fund these uses willincrease as the scope of our operations expand. Historically we have funded ourcash requirements from available cash and investments on hand. At March 31,2004, cash and cash equivalents totaled $34.5 million compared $14.6 million atDecember 31, 2003. We received a $20.0 million milestone payment inFebruary 2004 as a result of obtaining FDA approval for ORTHOVISC.
Cash provided by operating activities was $19.6 million for the three monthsended March 31, 2004 compared with cash used in operating activities of $416,000for the three months ended March 31, 2003. Cash provided by operatingactivities in the first three months of 2004 resulted primarily from net incomeof $7.8 million, an increase in deferred revenue of $19.7 million and anincrease in income taxes payable of $3.0 million. The increase in cash providedby operating activities was partially offset by an increase in the deferred taxasset and a net increase in other current assets and liabilities of $1.5 millionprimarily due to a $1.6 million increase in accounts receivable. The increasein deferred revenue was primarily due to the $20.0 million milestone paymentreceived from Ortho Biotech in February 2004 related to FDA approval ofORTHOVISC combined with unit pricing provisions under our supply agreement withBausch & Lomb Surgical. The increase in income taxes payable includes thecurrent provision for income taxes of $504,000 and the tax affect of the $20.0million milestone payment in February 2004 partially offset by net operatingloss and credit carry-forwards. The increase in deferred tax asset primarilyresulted from the tax affect of the deferred revenue associated with the $20.0million milestone payment partially offset by the tax affect of the utilizationof net operating loss and credit carry-forwards combined with the release of thevaluation allowance. Accounts receivable increased primarily due to increasedsales including sales of ORTHOVISC to Ortho Biotech.
Cash provided by investing activities was $333,000 for the three months endedMarch 31, 2004 primarily reflecting the release of restricted cash of $482,000and which was partially offset by capital expenditures of $149,000, primarilyfor manufacturing and computer equipment.
RISK FACTORS AND CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
Our business is subject to comprehensive and varied government regulation and,as a result, failure to obtain FDA or other governmental approvals for ourproducts may materially adversely affect our business, results of operations andfinancial condition.
Product development and approval within the FDA framework takes a number ofyears and involves the expenditure of substantial resources. There can be noassurance that the FDA will grant approval for our new products on a timelybasis if at all, or that FDA review will not involve delays that will adverselyaffect our ability to commercialize additional products or expand permitted usesof existing products, or that the regulatory framework will not change, or thatadditional regulation will not arise at any stage of our product developmentprocess which may adversely affect approval of or delay an application orrequire additional expenditures by us. In the event our future products areregulated as human drugs or biologics, the FDA's review process of such productstypically would be substantially longer and more expensive than the reviewprocess to which they are currently subject as devices.
Our HA products under development, including a product for the cosmetic tissueaugmentation market, INCERT®, a product designed to prevent surgical adhesions,and certain second-generation versions of our existing ophthalmic andosteoarthritis products, have not obtained U.S. or foreign regulatory approvalfor commercial marketing and sale. We believe that these products will beregulated as Class III medical devices in the U.S. and will require a PMA priorto marketing. We cannot assure you that:
• we will begin or successfully complete clinical trials forthese products;
• the clinical data will support the efficacy of theseproducts;
• we will be able to successfully complete the FDA or foreignregulatory approval process; or
• additional clinical trials will support a PMA applicationand/or FDA approval or foreign regulatory approval in a timely manner or at all.
We also cannot assure you that any delay in receiving FDA approvals will notadversely affect our competitive position. Furthermore, even if we do receiveFDA approval:
• the approval may include significant limitations on theindications and other claims sought for use for which the products may bemarketed;
• the approval may include other significant conditions ofapproval such as post-market testing, tracking, or surveillance requirements;and
• meaningful sales may never be achieved.
Once obtained, marketing approval can be withdrawn by the FDA for a number ofreasons, including, among others, the failure to comply with regulatorystandards, or the occurrence of unforeseen problems following initial approval. We may be required to make further filings with the FDA under certaincircumstances. The FDA's regulations require a PMA supplement for certainchanges if they affect the safety and effectiveness of an approved device,including, but not limited to, new indications for use, labeling changes, theuse of a different facility to manufacture, process or package the device, andchanges in performance or design specifications. Changes in manufacturingprocedures or methods of manufacturing that may affect safety and effectivenessmay be deemed approved after a 30-day notice unless the FDA requests a 135-daysupplement. Our failure to receive approval of a PMA supplement regarding theuse of a different manufacturing facility or any other change affecting thesafety or effectiveness of an approved device on a timely basis, or at all, mayhave a material adverse effect on our business, financial condition, and resultsof operations. The FDA could also limit or prevent the manufacture ordistribution of our products and has the power to require the recall of suchproducts. Significant delay or cost in obtaining, or failure to obtain FDAapproval to market products, any FDA limitations on the use of our products, orany withdrawal or suspension of approval or rescission of approval by the FDAcould have a material adverse effect on our business, financial condition, andresults of operations.
In addition, all FDA approved or cleared products manufactured by us must bemanufactured in compliance with the FDA's Good Manufacturing Practices (GMP)regulations and, for medical devices, the FDA's Quality System Regulations(QSR). Ongoing compliance with QSR and other applicable regulatory requirementsis enforced through periodic inspection by state and federal agencies, includingthe FDA. The FDA may inspect us and our facilities from time to time todetermine whether we are in compliance with regulations relating to medicaldevice and manufacturing companies, including regulations concerningmanufacturing, testing, quality control and product labeling practices. Wecannot assure you that we will be able to comply with current or future FDArequirements applicable to the manufacture of products.
FDA regulations depend heavily on administrative interpretation and we cannotassure you that the future interpretations made by the FDA or other regulatorybodies, with possible retroactive effect, will not adversely affect us. Inaddition, changes in the existing regulations or adoption of new governmentalregulations or policies could prevent or delay regulatory approval of ourproducts.
Failure to comply with applicable regulatory requirements could result in, amongother things, warning letters, fines, injunctions, civil penalties, recall orseizure of products, total or partial suspension of production, refusal of theFDA to grant pre-market clearance or pre-market approval for devices, withdrawalof approvals and criminal prosecution.
In addition to regulations enforced by the FDA, we are subject to other existingand future federal, state, local and foreign regulations. Internationalregulatory bodies often establish regulations governing product standards,packing requirements, labeling requirements, import restrictions, tariffregulations, duties and tax requirements. We cannot assure you that we will beable to achieve and/or maintain compliance required for Conformité Européennemarking (CE marking) or other foreign regulatory approvals for any or all of ourproducts or that we will be able to produce our products in a timely andprofitable manner while complying with applicable requirements. Federal, state,local and foreign regulations regarding the manufacture and sale of medicalproducts are subject to change. We cannot predict what impact, if any, suchchanges might have on our business.
The process of obtaining approvals from the FDA and other regulatory authoritiescan be costly, time consuming, and subject to unanticipated delays. We cannotassure you that approvals or clearances of our products will be granted or thatwe will have the necessary funds to develop certain of our products.
Any failure to obtain, or delay in obtaining such approvals or clearances, couldadversely affect our ability to market our products.
We have historically incurred operating losses and we cannot make any assurancesabout our future profitability.
From our inception through December 31, 1996 and 1999 through 2002 we haveincurred annual operating losses. For the year ended December 31, 2003, werecorded net income of $827,000. For the three months ended March 31, 2004 werecorded net income of $7.8 million and as of March 31, 2004, we had anaccumulated deficit of approximately $5.8 million. Our ability to maintainprofitability is uncertain. The continued development of our products willrequire the commitment of substantial resources to conduct research andpreclinical and clinical development programs, and the establishment of salesand marketing capabilities or distribution arrangements either by us or ourpartners. We cannot assure you that we will be able to develop these productsor new medical applications of our existing products or technology, or that ifdeveloped, the necessary regulatory approvals will be obtained, or if obtained,that sales, marketing and distribution capabilities and arrangements will beestablished in order to permit us to maintain profitability.
Substantial competition could materially affect our financial performance.
We compete with many companies, including, among others, large pharmaceuticalcompanies and specialized medical products companies. Many of these companieshave substantially greater financial and other resources, larger research anddevelopment staffs, more extensive marketing and manufacturing organizations andmore experience in the regulatory process than us. We also compete withacademic institutions, governmental agencies and other research organizationsthat may be involved in research, development and commercialization ofproducts. Because a number of companies are developing or have developed HAproducts for similar applications and have received FDA approval, the successfulcommercialization of a particular product will depend in part upon our abilityto complete clinical studies and obtain FDA marketing and foreign regulatoryapprovals prior to our competitors, or, if regulatory approval is not obtainedprior to competitors, to identify markets for our products that may besufficient to permit meaningful sales of our products. For example, several ofour competitors obtained FDA and foreign regulatory approvals before us formarketing HA products with applications similar to that of ORTHOVISC. Thus, thesuccessful commercialization of ORTHOVISC will depend in part on our ability toeffectively market ORTHOVISC against more established products with a longersales history. There can be no assurance that we will be able to competeagainst current or future competitors or that competition will not have amaterial adverse effect on our business, financial condition and results ofoperations. In the past we have experienced volatility in our internationalsales of ORTHOVISC including ongoing competitive factors as well as economicissues, and potential regional conflict and political uncertainties. As aresult, we are uncertain of the extent of our future sales in these markets.
We are uncertain regarding the success of our clinical trials.
Several of our products will require clinical trials to determine their safetyand efficacy for U.S. and international marketing approval by regulatory bodies,including the FDA. We began a pilot human clinical trial in Europe for INCERT-Sin April 2004 and initiated a pivotal clinical trial for our product for CTA inMay 2004. There can be no assurance that we will successfully complete clinicaltrials of INCERT–S or our CTA product or that we will be able to successfullycomplete the FDA approval process for either INCERT–S or our CTA product. Inaddition, there can be no assurance that we will not encounter additionalproblems that will cause us to delay, suspend or terminate the clinical trials. In addition, we cannot make any assurance that such clinical trials, ifcompleted, will ultimately demonstrate these products to be safe andefficacious.
We are dependent upon marketing and distribution partners and the failure tomaintain strategic alliances on acceptable terms will have a material adverseeffect on our business, financial condition and results of operations.
Our success will be dependent, in part, upon the efforts of our marketingpartners and the terms and conditions of our relationships with such marketingpartners.
We cannot assure you that such marketing partners will not seek to renegotiatetheir current agreements on terms less favorable to us. Under the terms of theB&L Agreement, effective January 1, 2001, we became Bausch & Lomb's exclusiveprovider of AMVISC and AMVISC Plus ophthalmic viscoelastic products, in the U.S.and international markets. The B&L Agreement expires December 31, 2007, andsuperceded an existing supply contract with Bausch & Lomb that was set to expireDecember 31, 2001. The B&L Agreement is subject to early termination and/orreversion to a non-exclusive basis under certain circumstances. The B&LAgreement lifts contractual restrictions on our ability to sell certainophthalmic products to other companies, subject to our payment of royalties. Inexchange, we agreed to a reduction in unit selling prices retroactivelyeffective to April 1, 2000 and the elimination of minimum unit purchaseobligations by Bausch & Lomb.
We have not achieved incremental sales of our ophthalmic products to Bausch &Lomb and/or other companies sufficient to offset the effects of the pricereduction and royalties to Bausch & Lomb and there can be no assurances that wewill be able to do so in the future. The reduction in unit prices resulted in adecrease in our revenue and gross profit from the sale of AMVISC to Bausch &Lomb. We expect revenue from Bausch & Lomb in 2004 to be relatively consistentwith 2003. In addition, under certain circumstances, Bausch & Lomb has theright to terminate the agreement, and/or the agreement may revert to anon-exclusive basis; in each case, we cannot make any assurances that suchcircumstances will not occur. For the three months ended March 31, 2004 and2003, sales of AMVISC products to Bausch & Lomb accounted for 26.4% and 37.8% oftotal revenues, respectively. Although we intend to continue to seek newophthalmic product customers, there can be no assurances that we will besuccessful in obtaining new customers or to achieve meaningful sales to such newcustomers.
Our distributor for CoEase, Advanced Medical Optics, announced in April theirintent to acquire the surgical ophthalmology business of Pfizer, Inc. whichincludes a competing line of viscoelastic products for use in ocular surgery. We cannot predict the effect this will have on our relationship with AdvancedMedical Optics. As a result, we may not be able to sustain current productrevenue levels in our ophthalmic business.
We have entered into various agreements for the distribution of ORTHOVISCinternationally which are subject to termination under certain circumstances. We are continuing to seek to establish long-term distribution relationships inregions not covered by existing agreements, but can make no assurances that wewill be successful in doing so. There can be no assurance that we will be ableto identify or engage appropriate distribution or collaboration partners oreffectively transition to any such partners. There can be no assurance that wewill obtain European or other reimbursement approvals or, if such approvals areobtained, they will be obtained on a timely basis or at a satisfactory level ofreimbursement.
In December 2003 we entered into a ten-year licensing and supply agreement withOrtho Biotech Products, L.P., a member of the Johnson & Johnson family ofcompanies, to market ORTHOVISC in the U.S. and Mexico. Under the OBI AgreementOrtho Biotech will perform sales, marketing and distribution functions. Additionally, Ortho Biotech licensed the right to further develop andcommercialize ORTHOVISC as well as new products for the treatment of painassociated with
osteoarthritis. We cannot assure you that Ortho Biotech will be able to marketORTHOVISC effectively or to establish sales levels to the extent that Anika andOrtho Biotech believe are possible in the timeframes expected, or at all, norcan we assure you that we will be able to achieve the performance- and sales-based milestones provided in the OBI Agreement. For the three months endedMarch 31, 2004, sales of ORTHOVISC to Ortho Biotech accounted for 23.5% of totalrevenue. Furthermore, we cannot predict whether the license granted to OrthoBiotech in the OBI Agreement to further develop and commercialize ORTHOVISC aswell as new products for the treatment of pain associated with osteoarthritisbased on our proprietary viscosupplementation technology will result in any newproducts or indications for use.
We will need to obtain the assistance of additional marketing partners to bringnew and existing products to market and to replace certain marketing partners. The failure to establish strategic partnerships for the marketing anddistribution of our products on acceptable terms will have a material adverseeffect on our business, financial condition, and results of operations.
Our future success depends upon market acceptance of our existing and futureproducts.
Our success will depend in part upon the acceptance of our existing and futureproducts by the medical community, hospitals and physicians and other healthcare providers, and third-party payers. Such acceptance may depend upon theextent to which the medical community perceives our products as safer, moreeffective or cost-competitive than other similar products. Ultimately, for ournew products to gain general market acceptance, it will also be necessary for usto develop marketing partners for the distribution of our products. There canbe no assurance that our new products will achieve significant market acceptanceon a timely basis, or at all. Failure of some or all of our future products toachieve significant market acceptance could have a material adverse effect onour business, financial condition, and results of operations.
We may be unable to adequately protect our intellectual property rights.
Our success will depend, in part, on our ability to obtain and enforce patents,protect trade secrets, obtain licenses to technology owned by third parties whennecessary, and conduct our business without infringing on the proprietary rightsof others. The patent positions of pharmaceutical, medical products andbiotechnology firms, including ours, can be uncertain and involve complex legaland factual questions. There can be no assurance that any patent applicationswill result in the issuance of patents or, if any patents are issued, whetherthey will provide significant proprietary protection or commercial advantage, orwill not be circumvented by others. In the event a third party has also filedone or more patent applications for any of its inventions, we may have toparticipate in interference proceedings declared by the United States Patent andTrademark Office (PTO) to determine priority of invention, which could resultin failure to obtain, or the loss of, patent protection for the inventions andthe loss of any right to use the inventions. Even if the eventual outcome isfavorable to us, such interference proceedings could result in substantial costto us, and diversion of management's attention away from our operations. Filingand prosecution of patent applications, litigation to establish the validity andscope of patents, assertion of patent infringement claims against others and thedefense of patent infringement claims by others can be expensive and timeconsuming. There can be no assurance that in the event that any claims withrespect to any of our patents, if issued, are challenged by one or more thirdparties, that any court or patent authority ruling on such challenge willdetermine that such patent claims are valid and enforceable. An adverse outcomein such litigation could cause us to lose exclusivity covered by the disputedrights. If a third party is found to have rights covering products or processesused by us, we could be forced to cease using the technologies or marketing theproducts covered by such rights, could be subject to significant liabilities tosuch third party, and could be required to license technologies from such thirdparty. Furthermore, even if our patents are
determined to be valid, enforceable, and broad in scope, there can be noassurance that competitors will not be able to design around such patents andcompete with us using the resulting alternative technology.
We have a policy of seeking patent protection for patentable aspects of ourproprietary technology. We intend to seek patent protection with respect toproducts and processes developed in the course of our activities when we believesuch protection is in our best interest and when the cost of seeking suchprotection is not inordinate. However, no assurance can be given that anypatent application will be filed, that any filed applications will result inissued patents or that any issued patents will provide us with a competitiveadvantage or will not be successfully challenged by third parties. Theprotections afforded by patents will depend upon their scope and validity, andothers may be able to design around our patents.
Other entities have filed patent applications for or have been issued patentsconcerning various aspects of HA-related products or processes. There can be noassurance that the products or processes developed by us will not infringe onthe patent rights of others in the future. Any such infringement may have amaterial adverse effect on our business, financial condition, and results ofoperations. In particular, we received notice from the PTO in 1995 that a thirdparty was attempting to provoke a patent interference with respect to one of ourco-owned patents covering the use of INCERT for post-surgical adhesionprevention. It is unclear whether an interference will be declared. If aninterference is declared it is not possible at this time to determine the meritsof the interference or the effect, if any, the interference will have on ourmarketing of INCERT for this use. No assurance can be given that we would besuccessful in any such interference proceeding. If the third-party interferencewere to be decided adversely to us, involved claims of our patent would becancelled, our marketing of the INCERT product may be materially and adverselyaffected and the third party may enforce patent rights against us which couldprohibit the sale and use of INCERT products, which could have a materialadverse effect on our future operating results.
We also rely upon trade secrets and proprietary know-how for certainnon-patented aspects of our technology. To protect such information, we requireall employees, consultants and licensees to enter into confidentialityagreements limiting the disclosure and use of such information. There can be noassurance that these agreements provide meaningful protection or that they willnot be breached, that we would have adequate remedies for any such breach, orthat our trade secrets, proprietary know-how, and our technological advanceswill not otherwise become known to others. In addition, there can be noassurance that, despite precautions taken by us, others have not and will notobtain access to our proprietary technology. Further, there can be no assurancethat third parties will not independently develop substantially equivalent orbetter technology.
Pursuant to the B&L Agreement, we have agreed to transfer to Bausch & Lomb, uponexpiration of the term of the B&L agreement on December 31, 2007, or inconnection with earlier termination in certain circumstances, our manufacturingprocess, know-how and technical information, which relate to only AMVISCproducts. Upon expiration of the B&L Agreement, there can be no assurance thatBausch & Lomb will continue to use us to manufacture AMVISC and AMVISC Plus. IfBausch & Lomb discontinues the use of us as a manufacturer after such time, ourbusiness, financial condition, and results of operations would likely bematerially and adversely affected.
Our manufacturing processes involve inherent risks and disruption couldmaterially adversely affect our business, financial condition and results ofoperations.
Our results of operations are dependent upon the continued operation of ourmanufacturing facility in Woburn, Massachusetts. The operation of biomedicalmanufacturing plants involves many risks, including the risks of breakdown,failure or substandard performance of equipment, the occurrence of natural andother disasters, and the need to comply with the requirements of directives ofgovernment agencies, including the FDA. In addition, we rely on a singlesupplier for syringes and a small number of
suppliers for a number of other materials required for the manufacturing anddelivery of our HA products. Although we believe that alternative sources formany of these and other components and raw materials that we use in ourmanufacturing processes are available, any supply interruption could harm ourability to manufacture our products until a new source of supply is identifiedand qualified. We may not be able to find a sufficient alternative supplier ina reasonable time period, or on commercially reasonable terms, if at all, andour ability to produce and supply our products could be impaired.
Furthermore, our manufacturing processes and research and development effortsinvolve animals and products derived from animals. We procure ouranimal-derived raw materials from qualified vendors, control for contaminationand have processes that effectively inactivate infectious agents; however, wecannot assure you that we can completely eliminate the risk of transmission ofinfectious agents and in the future regulatory authorities could imposerestrictions on the use of animal-derived raw materials that could impact ourbusiness.
The utilization of animals in research and development and productcommercialization is subject to increasing focus by animal rights activists. The activities of animal rights groups and other organizations that haveprotested animal based research and development programs or boycotted theproducts resulting from such programs could cause an interruption in ourmanufacturing processes and research and development efforts. The occurrence ofmaterial operational problems, including but not limited to the events describedabove, could have a material adverse effect on our business, financialcondition, and results of operations during the period of such operationaldifficulties.
Our financial performance depends on the continued growth and demand for ourproducts and we may not be able to successfully manage the expansion of ouroperations
Our future success depends on substantial growth in product sales. There can beno assurance that such growth can be achieved or, if achieved, can besustained. We expect sales of ORTHOVISC to grow in 2004 as a result of FDAapproval and the entering into of the OBI Agreement with Ortho Biotech. Therecan be no assurance that even if substantial growth in product sales and thedemand for our products is achieved, we will be able to:
• develop the necessary manufacturing capabilities;
• obtain the assistance of additional marketing partners;
• attract, retain and integrate the required key personnel;
• implement the financial, accounting and management systemsneeded to manage growing demand for our products.
Our failure to successfully manage future growth could have a material adverseeffect on our business, financial condition, and results of operations.
If we engage in any acquisition as a part our growth strategy, we will incur avariety of costs, and may never realize the anticipated benefits of theacquisition.
Our business strategy may include the future acquisition of businesses,technologies, services or products that we believe are a strategic fit with ourbusiness. If we undertake any acquisition, the process of integrating anacquired business, technology, service or product may result in unforeseenoperating difficulties and expenditures and may absorb significant managementattention that would otherwise be available for ongoing development of ourbusiness. Moreover, we may fail to realize the anticipated benefits of anyacquisition as rapidly as expected or at all. Future acquisitions could reducestockholders' ownership, cause us to incur debt, expose us to future liabilitiesand result in amortization expenses related to intangible assets with definitelives. In addition, acquisitions involve other risks, including diversion ofmanagement resources otherwise available for ongoing development of our businessand risks associated
with entering new markets with which we have limited experience or whereexperienced distribution alliances are not available. Our future profitabilitymay depend in part upon our ability to develop further our resources to adapt tothese new products or business areas and to identify and enter into satisfactorydistribution networks. We may not be able to identify suitable acquisitioncandidates in the future or consummate future acquisitions.
Sales of our products are largely dependent upon third party reimbursement andour performance may be harmed by health care cost containment initiatives.
In the U.S. and other markets, health care providers, such as hospitals andphysicians, that purchase health care products, such as our products, generallyrely on third party payers, including Medicare, Medicaid and other healthinsurance and managed care plans, to reimburse all or part of the cost of thehealth care product. We depend upon the distributors for our products to securereimbursement and reimbursement approvals. Reimbursement by third party payersmay depend on a number of factors, including the payer's determination that theuse of our products is clinically useful and cost-effective, medically necessaryand not experimental or investigational. Since reimbursement approval isrequired from each payer individually, seeking such approvals can be a timeconsuming and costly process which, in the future, could require us or ourmarketing partners to provide supporting scientific, clinical andcost-effectiveness data for the use of our products to each payer separately. Significant uncertainty exists as to the reimbursement status of newly approvedhealth care products, and third party payers are increasingly attempting tocontain the costs of health care products and services by limiting both coverageand the level of reimbursement for new therapeutic products and by refusing insome cases to provide coverage for uses of approved products for diseaseindications for which the FDA has not granted marketing approval. In addition,Congress and certain state legislatures have considered reforms that may affectcurrent reimbursement practices, including controls on health care spendingthrough limitations on the growth of Medicare and Medicaid spending. There canbe no assurance that third party reimbursement coverage will be available oradequate for any products or services developed by us. Outside the U.S., thesuccess of our products is also dependent in part upon the availability ofreimbursement and health care payment systems. Lack of adequate coverage andreimbursement provided by governments and other third party payers for ourproducts and services could have a material adverse effect on our business,financial condition, and results of operations.
We may seek financing in the future, which could be difficult to obtain andwhich could dilute your ownership interest or the value of your shares.
We had cash and cash equivalents of approximately $34.5 million at March 31,2004. Our future capital requirements and the adequacy of available funds willdepend, however, on numerous factors, including:
• market acceptance of our existing and future products;
• the successful commercialization of products in development;
• progress in our product development efforts;
• the magnitude and scope of such product development efforts,
• progress with preclinical studies, clinical trials andproduct clearances by the FDA and other agencies;
• the cost and timing of our efforts to manage ourmanufacturing capabilities and related costs;
• the cost of filing, prosecuting, defending and enforcingpatent claims and other intellectual property rights;
• competing technological and market developments;
• the development of strategic alliances for the marketing ofcertain of our products;
• the terms of such strategic alliances, including provisions(and our ability to satisfy such
provisions) that provide upfront and/or milestone payments to us; and
• the cost of maintaining adequate inventory levels to meetcurrent and future product demands.
To the extent that funds generated from our operations, together with ourexisting capital resources are insufficient to meet future requirements, we willbe required to obtain additional funds through equity or debt financings,strategic alliances with corporate partners and others, or through othersources. The terms of any future equity financings may be dilutive to you andthe terms of any debt financings may contain restrictive covenants, which limitour ability to pursue certain courses of action. Our ability to obtainfinancing is dependent on the status of our future business prospects as well asconditions prevailing in the relevant capital markets. No assurance can begiven that any additional financing will be made available to us or will beavailable on acceptable terms should such a need arise.
We could become subject to product liability claims, which, if successful, couldmaterially adversely affect our business, financial condition and results ofoperations.
The testing, marketing and sale of human health care products entail an inherentrisk of allegations of product liability, and there can be no assurance thatsubstantial product liability claims will not be asserted against us. Althoughwe have not received any material product liability claims to date and have aninsurance policy of $5,000,000 per occurrence and $5,000,000 in the aggregate tocover such claims should they arise, there can be no assurance that materialclaims will not arise in the future or that our insurance will be adequate tocover all situations. Moreover, there can be no assurance that such insurance,or additional insurance, if required, will be available in the future or, ifavailable, will be available on commercially reasonable terms. Any productliability claim, if successful, could have a material adverse effect on ourbusiness, financial condition and results of operations.
Our business is dependent upon hiring and retaining qualified management andscientific personnel.
We are highly dependent on the members of our management and scientific staff,the loss of one or more of whom could have a material adverse effect on us. Webelieve that our future success will depend in large part upon our ability toattract and retain highly skilled, scientific, managerial and manufacturingpersonnel. We face significant competition for such personnel from othercompanies, research and academic institutions, government entities and otherorganizations. There can be no assurance that we will be successful in hiringor retaining the personnel we require. The failure to hire and retain suchpersonnel could have a material adverse effect on our business, financialcondition and results of operations.
We are subject to environmental regulation and any failure to comply withapplicable laws could subject us to significant liabilities and harm ourbusiness.
We are subject to a variety of local, state and federal government regulationsrelating to the storage, discharge, handling, emission, generation, manufactureand disposal of toxic, or other hazardous substances used in the manufacture ofour products. Any failure by us to control the use, disposal, removal orstorage of hazardous chemicals or toxic substances could subject us tosignificant liabilities, which could have a material adverse effect on ourbusiness, financial condition, and results of operations.
Our future operating results may be harmed by economic, political and otherrisks relating to international sales.
During the three months ended March 31, 2004 and 2003, approximately, 14.9% and15.7%, respectively, of our product sales were to international distributors. Our representatives, agents and distributors who sell products in internationalmarkets are subject to the laws and regulations of the foreign jurisdictions inwhich they operate and in which our products are sold. A number of risks areinherent in
international sales and operations. For example, the volume of internationalsales may be limited by the imposition of government controls, export licenserequirements, political and/or economic instability, trade restrictions, changesin tariffs, difficulties in managing international operations, importrestrictions and fluctuations in foreign currency exchange rates. Such changesin the volume of sales may have a material adverse effect on our business,financial condition, and results of operations.
Our stock price has been and may remain highly volatile, and we cannot assureyou that market making in our common stock will continue.
The market price of shares of our common stock may be highly volatile. Factorssuch as announcements of new commercial products or technological innovations byus or our competitors, disclosure of results of clinical testing or regulatoryproceedings, governmental regulation and approvals, developments in patent orother proprietary rights, public concern as to the safety of products developedby us and general market conditions may have a significant effect on the marketprice of our common stock. The trading price of our common stock could besubject to wide fluctuations in response to quarter-to-quarter variations in ouroperating results, material announcements by us or our competitors, governmentalregulatory action, conditions in the health care industry generally or in themedical products industry specifically, or other events or factors, many ofwhich are beyond our control. In addition, the stock market has experiencedextreme price and volume fluctuations which have particularly affected themarket prices of many medical products companies and which often have beenunrelated to the operating performance of such companies. Our operating resultsin future quarters may be below the expectations of equity research analysts andinvestors. In such event, the price of our common stock would likely decline,perhaps substantially.
No person is under any obligation to make a market in the common stock or topublish research reports on us, and any person making a market in the commonstock or publishing research reports on us may discontinue market making orpublishing such reports at any time without notice. There can be no assurancethat an active public market in our common stock will be sustained.
Our charter documents contain anti-takeover provisions that may prevent or delayan acquisition of us.
Certain provisions of our Restated Articles of Organization and Amended andRestated By-laws could have the effect of discouraging a third party frompursuing a non-negotiated takeover of us and preventing certain changes incontrol. These provisions include a classified Board of Directors, advancenotice to the Board of Directors of stockholder proposals, limitations on theability of stockholders to remove directors and to call stockholder meetings,the provision that vacancies on the Board of Directors be filled by a majorityof the remaining directors. In addition, the Board of Directors adopted aShareholders Rights Plan in April 1998. We are also subject to Chapter 110F ofthe Massachusetts General Laws which, subject to certain exceptions, prohibits aMassachusetts corporation from engaging in any of a broad range of businesscombinations with any "interested stockholder" for a period of three yearsfollowing the date that such stockholder became an interested stockholder. These provisions could discourage a third party from pursuing a takeover of usat a price considered attractive by many stockholders, since such provisionscould have the effect of preventing or delaying a potential acquirer fromacquiring control of us and our Board of Directors.
Our revenues are derived from a small number of customers, the loss of whichcould materially adversely affect our business, financial condition and resultsof operations.
We have historically derived the majority of our revenues from a small number ofcustomers, most of whom resell our products to end users and most of whom aresignificantly larger companies than us. For the three months ended March 31,2004, three customers accounted for 71.6% of product revenues and
84.3% of our accounts receivable balance. While it is expected that our abilityto market ORTHOVISC in the U.S. as a result of the receipt of FDA approval inFebruary 2004, and our entering into the OBI Agreement, will reduce ourdependence on Bausch & Lomb for revenues, historically our largest customer, wewill still be dependent on a small number of large customers for the majority ofour revenues. Our failure to generate as much revenue as expected from thesecustomers or the failure of these customers to purchase our products wouldseriously harm our business. In addition, if present and future customersterminate their purchasing arrangements with us, significantly reduce or delaytheir orders, or seek to renegotiate their agreements on terms less favorable tous, our business, financial condition, and results of operations will beadversely affected. If we accept terms less favorable than the terms of thecurrent agreement, such renegotiations may have a material adverse effect on ourbusiness, financial condition, and/or results of operations. Furthermore, wemay be subject to the perceived or actual leverage the customers may have giventheir relative size and importance to us in any future negotiations. Anytermination, change, reduction or delay in orders could seriously harm ourbusiness, financial condition, and results of operations. Accordingly, unlessand until we diversify and expand our customer base, our future success willsignificantly depend upon the timing and size of future purchases by our largestcustomers and the financial and operational success of these customers. Theloss of any one of our major customers or the delay of significant orders fromsuch customers, even if only temporary, could reduce or delay our recognition ofrevenues, harm our reputation in the industry, and reduce our ability toaccurately predict cash flow, and, as a consequence, could seriously harm ourbusiness, financial condition, and results of operations.
We, through our international distributors, distribute ORTHOVISC in Canada,Turkey and certain countries in Europe and the Middle East. Due to unfavorableresults of the U.S. ORTHOVISC pivotal clinical trial announced on May 31, 2000,marketing efforts in these countries have been negatively affected. There canbe no assurance that as a result receiving FDA marketing approval inFebruary 2004 for ORTHOVISC in the U.S. marketing efforts will improve or thatinternational sales levels for ORTHOVISC will improve, maintain historicallevels or that sales will occur at all in these countries.
Additional costs for complying with recent and proposed future changes inSecurities and Exchange Commission, Nasdaq Stock Market and accounting rulescould adversely affect our profits.
Recent and proposed future changes in the Securities and Exchange Commission andNasdaq rules, as well as changes in accounting rules, will cause us to incuradditional costs including professional fees, as well as additional personnelcosts, in order to keep informed of the changes and operate in a compliantmanner. In addition, we expect to incur additional general and administrativeexpense as we implement Section 404 of the Sarbanes-Oxley Act of 2002, whichrequires management to report on, and our independent auditors to attest to, ourinternal controls. These additional costs may be significant enough to causeour financial position and results of operation to be negatively impacted. Inaddition, compliance with these new rules could also result in continueddiversion of management's time and attention, which could prove to be disruptiveto our normal business operations. Failure to comply with any of the new lawsand regulations could adversely impact market perception of our company, whichcould make it difficult to access the capital markets or otherwise finance ouroperations in the future.
With new rules, including the Sarbanes-Oxley Act of 2002, we may have difficultyin retaining or attracting directors for the board and various sub-committeesthereof or officers.
The recent and proposed changes in SEC and Nasdaq rules, including thoseresulting from the Sarbanes-Oxley Act of 2002, may result in our being unable toattract and retain the necessary board directors and members of sub-committeesthereof or officers, to effectively provide for our management. The perceivedincreased personal risk associated with these recent changes may deter qualifiedindividuals from wanting to participate in these roles.
We may have difficulty obtaining adequate directors and officers insurance andthe cost for coverage may significantly increase.
We may have difficulty in obtaining adequate directors' and officers' insuranceto protect us and our directors and officers from claims made against them. Additionally, even if adequate coverage is available, the costs for suchcoverage may be significantly greater than current costs. This additional costmay have a significant effect on our profits and as a consequence our results ofoperations may be adversely affected.
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