Summary of EV3 INC. - Yahoo! Finance

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis provides material historical and prospective disclosures intended to enable investors and other users to assess our financial condition and results of operations. Statements that are not historical are forward-looking and involve risks and uncertainties discussed under the heading "Forward-Looking Statements" below. The following discussion of our results of operations and financial condition should be read in conjunction with our consolidated financial statements and the related notes thereto included elsewhere in this report. Business Overview
We are a leading global medical device company focused on catheter-based technologies for the endovascular treatment of vascular diseases and disorders. Within the endovascular market, we have targeted our business strategy efforts on the peripheral vascular and neurovascular markets, which we believe offer higher growth potential with fewer entrenched competitors than other markets. We are focused on emerging and under-innovated opportunities which treat peripheral and neurovascular patients around the world, a strategy that we believe allows us to compete with smaller companies that have narrow product lines and lack an international sales force and infrastructure, yet also compete with larger companies that do not have our focus and agility.
We believe the overall market for endovascular devices will, in the long term, grow as the demand for minimally invasive treatment of vascular diseases and disorders continues to increase. We intend to capitalize on this market opportunity by the continued introduction of new products. We expect to originate these new products primarily through our internal research and development and clinical efforts, but we may supplement them with acquisitions or other external collaborations. In October 2007, we acquired FoxHollow Technologies, Inc. FoxHollow's principal product is the SilverHawk Plaque Excision System, which is a minimally invasive catheter system that treats peripheral artery disease by removing plaque in order to reopen narrowed or blocked arteries. Additionally, our growth has been, and will continue to be, impacted by our expansion into new geographic markets, the expansion of our direct sales organization in existing geographic markets and increased efficiency of our existing direct sales organization.
Our product portfolio includes a broad spectrum of over 100 products consisting of over 1,500 SKUs to treat vascular disease in both the peripheral vascular and neurovascular markets, including stents, atherectomy and thrombectomy products, PTA balloons, embolic protection devices, infusion catheters/wires, embolic coils and liquid embolics. As a result of our FoxHollow acquisition, until recently, we also were engaged in a research collaboration with Merck & Co., Inc. (Merck) for the analysis of atherosclerotic plaque removed from patient arteries with the goal of identifying new biomarkers for atherosclerotic disease progression and new therapies for atherosclerotic disease. Dr. Simpson's resignation from our board of directors in February 2008 gave rise to a right of termination by Merck at any time during the six-month period thereafter. Merck exercised the termination right and our amended and restated collaboration and license agreement terminated effective July 22, 2008. During the third quarter 2008, we negotiated an agreement with Merck to accomplish an orderly wind-down of activities. Under the agreement Merck will reimburse us for costs directly associated with the wind-down of our research collaboration activities, plus an agreed upon markup.
Our management, including our chief executive officer who is our chief operating decision maker, report and manage our operations in two reportable business segments based on similarities in the products sold, customer base and distribution system. Our peripheral vascular segment, which was formerly referred to as our cardio peripheral segment, contains products that are used primarily in peripheral vascular procedures by radiologists, vascular surgeons and cardiologists and in targeted endovascular procedures. Our neurovascular segment contains products that are used primarily by neuroradiologists and neurosurgeons. Our sales activities and operations are aligned closely with our business segments. We generally have dedicated peripheral vascular sales teams in the United States, Canada, Europe and other international countries that target customers who perform primarily peripheral vascular procedures and separate, dedicated neurovascular sales teams in such countries that are specifically focused on our neurovascular business customer base. We have corporate infrastructure and direct sales capabilities in the United States, Canada, Europe and other countries and have established distribution relationships primarily in selected international markets. Our corporate headquarters and our principal manufacturing, research and development, and U.S. sales operations for our peripheral vascular product line are located in Plymouth, Minnesota. Our manufacturing, research and development, and U.S. sales operations for our neurovascular product lines are located in Irvine, California. Our FoxHollow atherectomy and thrombectomy products were manufactured in Redwood City, California. However, in order to streamline our operations and improve efficiencies, we have relocated the sales, manufacturing and research and development activities performed in Redwood City, facility

Table of Contents

to our existing facilities located in Plymouth, Minnesota and Irvine, California. Outside of the United States, our primary office is in Paris, France.
We sell our products through a direct sales force and independent distributors in more than 60 countries. Our direct sales and marketing infrastructure includes a worldwide sales force of approximately 385 sales professionals as of September 28, 2008 in the United States, Canada and Europe. Our direct sales representatives accounted for approximately 86% and 87% of our net sales during the three and nine months ended September 28, 2008, respectively, with the balance generated by independent distributors.
Since our acquisition of FoxHollow, we have spent considerable time and resources integrating our two operations, including in particular, our U.S. peripheral vascular sales force, and training our combined sales force on our combined product offering and cross-selling opportunities. We reduced the number of our U.S. peripheral vascular sales representatives from approximately 328 at the time of our acquisition of FoxHollow to approximately 175 as of September 28, 2008. We have continued to strive to increase productivity from our U.S. peripheral vascular sales representatives.
We also have focused on our international strategy for SilverHawk by training physicians, establishing key opinion leaders, conducting European clinical research and developing specific product and procedure reimbursement strategies to support the broad dissemination of the atherectomy procedure and our products.
In order to drive sales growth, we have invested heavily throughout our history in not only the expansion of our global distribution system, but also new product development and clinical trials to obtain regulatory approvals. A significant portion of our net sales has historically been, and we expect to continue to be, attributable to new and enhanced products. During 2007, we launched our Protégé RX Carotid Stents, additional lengths in our EverFlex family of stents and our SilverHawk LS-M and MS-M products in the United States for the peripheral vascular market and our Axium coil for the neurovascular market, all of which have contributed to our net sales in the first nine months of 2008. To date, in 2008, we have launched the SilverHawk LX-M device in the United States and received FDA clearance for our RockHawk Atherectomy System for surgical use and the 5mm diameter Protégé EverFlex Self-Expanding Stent System for use in the biliary. We expect to continue our focus to further validate the clinical and competitive benefits of our technology platforms to drive new and enhanced products. During third quarter 2008, we reported positive 12-month follow-up results for our European DURABILITY I clinical study, a peripheral stent study covering long lesion lengths in a challenging patient population, and we announced our DEFINITIVE clinical trial series to expand the clinical evidence supporting the value of our SilverHawk and RockHawk Plaque Excision Systems to drive increased procedure adoption, expand clinical indications and support the use of atherectomy as a front-line therapy. We also recently enrolled our first patient in DEFINITIVE Ca++ U.S. investigational device exemption (IDE) trial to evaluate RockHawk Plaque Excision System when used in conjunction with the SpiderFX Embolic Protection Device in the treatment of moderate to heavily calcified peripheral artery lesions.
Since our distribution agreement with Invatec expires on December 31, 2008, we have been working during 2008 to launch our own PTA balloon catheters in the beginning of 2009. The Invatec products we distribute include the Sailor Plus, Submarine Plus, Admiral Xtreme and Amphirion Deep PTA catheters and the Diver C.E. Thrombus Aspiration Catheter. Under the distribution agreement, we are permitted to continue to sell our inventory of Invatec products for a period of up to six months after the expiration of the distribution agreement. During third quarter 2008, we submitted 510(k) applications to the FDA for our EverCross and NanoCross PTA balloons.
It is our understanding that certain biliary stent manufacturers recently have received subpoenas from the United States Department of Justice. Based on publicly available information, we believe that these subpoenas requested information regarding the sales and marketing activities of these manufacturers' biliary stent products and that the Department of Justice is seeking to determine whether any of these activities violated civil and /or criminal laws, including the Federal False Claims Act, the Food and Drug Cosmetic Act and the Anti-Kickback Statute in connection with Medicare and/or Medicaid reimbursement paid to third parties. As of the date of this report, we have not received a subpoena from the Department of Justice relating to this investigation. No assurance can be provided, however, that we will not receive such a subpoena or become the subject of such an investigation, which could adversely affect our business and stock price.
Summary of Third Fiscal Quarter 2008 Financial Results and Outlook Our net sales increased 65% in third quarter 2008 compared to third quarter 2007. We attribute this increase primarily to the addition of atherectomy product sales as a result of our acquisition of FoxHollow, expansion in our neurovascular and international businesses and increased sales of our other peripheral vascular products. Third quarter 2008 sales included

Table of Contents

$21.0 million of atherectomy product sales, which we believe were hampered due to heightened competitive pressures and the related physician trialing of competitive devices.
During the remainder of 2008, we intend to remain focused on expanding our global position in the peripheral vascular and neurovascular markets by increasing procedural penetration, driving growth and expansion in international markets, investing in the development of our next generation of products and advancing our clinical trial programs. We also intend to remain focused on improving sales execution and operational efficiency. We are mindful, however, of general worldwide economic conditions, to which our business is not immune. We believe the current worldwide economic crisis has resulted and may continue to result in reduced procedures using our products. Many of the procedures that use our products are, to some extent, elective and therefore can be deferred by patients. In light of the current economic conditions, patients may not be as willing to take time off from work or spend their money on deductibles and co-payments often required in connection with the procedures that use our products. In particular, patients that have high-deductible health plans and health savings accounts and thus require the patients to incur significant out-of-pocket costs are especially more apt to defer procedures at time when cash is tight. The worldwide economic crisis also may have other adverse implications on our business, operating results and financial position as described in more detail under the heading "Part II. Item 1.A. Risk Factors." Our third fiscal quarter 2008 results and financial condition included the following items of significance, some of which we expect may also affect our results and financial condition during the remainder of 2008:
• Our net sales of $107.0 million for the third quarter 2008 included product net sales of $66.9 million in our peripheral vascular segment, $33.1 million in our neurovascular segment and $7.0 million of research collaboration revenue. Our atherectomy business is still under some pressure due to heightened competitive pressures and the related physician trialing of competitive devices. We expect our peripheral vascular net sales to increase during the remainder of 2008 as compared to the same period in 2007 due to market growth, specifically in our international markets, including the continued penetration of our atherectomy products into international markets, and increased market penetration of the EverFlex family of stents. We expect our neurovascular net sales to increase during the remainder of 2008 as compared to the same period in 2007 due to continued penetration of our Axium coil and neuro access and delivery products, and increased market growth internationally.

• On a geographic basis, 66% of our net sales for the third quarter 2008 were generated in the United States and 34% were generated outside the United States. Changes in foreign currency rates had a positive impact of approximately $1.7 million on third quarter 2008 net sales compared to third quarter 2007, principally resulting from the strength of the U.S. dollar as compared to the Euro. We expect our international net sales to increase during the remainder of 2008 as compared to the same period last year primarily as a result of increased market penetration of the Axium coil and the EverFlex family of stents and the continued penetration of atherectomy products into international markets.

• During the third quarter 2008, we recognized $7.0 million in research collaboration revenue. Of this amount, $2.0 million was a result of our agreement to accomplish an orderly wind-down of our research collaboration activities. We expect to recognize additional revenue of approximately $800,000 from wind-down activities in the fourth quarter 2008.

• Our operating expenses were $111.6 million in the third quarter 2008. Although our sales, general and administrative expenses and research and development expenses each increased in absolute dollars in the third quarter 2008 compared to third quarter 2007, each decreased as a percentage of net sales. We expect our sales, general and administrative expenses, research and development expense and amortization of intangible assets to decrease in absolute dollars in the remainder of 2008 as compared to the same period in 2007. We expect sales, general and administrative expenses and research and development expense each to continue to decline as a percentage of net sales.

• Other (income) expense, net was an expense of $2.3 million in the third quarter 2008 compared to income of $1.6 million in the same period of 2007. The stronger U.S. dollar compared to the Euro negatively impacted our Euro designated accounts receivable in the third quarter 2008 and the continued volatility of foreign currency exchange rates may continue to impact our operating results in future periods.

• Our net loss for the third quarter 2008 was $7.3 million, or $0.07 per common share. Our focus for the remainder of 2008 is to improve our profitability.

Table of Contents

• Our cash and cash equivalents were $45.9 million at September 28, 2008, an increase of $7.2 million compared to the end of the second quarter 2008. This increase was primarily due to cash provided by operating activities during the third quarter 2008. We believe our cash and cash equivalents and current financing arrangements will be sufficient to meet our liquidity requirements through at least the next 12 months. We will continue to focus our efforts on improving our cash position during the remainder of 2008 however, the strength of the U.S. Dollar against various foreign currencies and the general downtown of worldwide economic conditions may place pressure on certain of our international customers and distributors which could delay cash flows corresponding to those accounts receivable.

Table of Contents

Results of Operations
The following table sets forth, for the periods indicated, our results of
operations expressed as dollar amounts (dollars in thousands, except per share
amounts), and the changes between the specified periods expressed as percent
increases or decreases or "NM" if such increases or decreases are not material
or applicable:

                                                      Three Months Ended                                               Nine Months Ended
                                            September 28,           September 30,          Percent           September 28,           September 30,          Percent
                                                 2008                   2007                Change                2008                   2007                Change
Results of Operations:
Sales
Product sales                               $      100,018         $        65,060             53.7 %        $      296,577         $       191,955             54.5 %
Research collaboration                               7,011                       -             NM                    19,426                       -             NM

Net sales                                   $      107,029         $        65,060             64.5 %        $      316,003         $       191,955             64.6 %
Operating expenses:
Product cost of goods sold (a)                      36,182                  23,097             56.7 %               102,442                  65,916             55.4 %
Research collaboration                               2,100                       -             NM                     5,647                       -             NM
Sales, general and administrative (a)               53,005                  45,353             16.9 %               178,769                 125,372             42.6 %
Research and development (a)                        12,133                  10,708             13.3 %                37,913                  29,464             28.7 %
Amortization of intangible assets                    8,101                   3,952            105.0 %                24,285                  11,916            103.8 %
Intangible asset impairment                              -                       -             NM                    10,459                       -             NM
Loss (gain) on sale or disposal of
assets, net                                            116                       -             NM                       116                    (988 )           NM
Special charges                                          -                  20,183             NM                         -                  20,183             NM

Total operating expenses                           111,637                 103,293              8.1 %               359,631                 251,863             42.8 %
Loss from operations                                (4,608 )               (38,233 )          (87.9 )%              (43,628 )               (59,908 )          (27.2 )%
Other (income) expense:
Realized and unrealized gains on
investments, net                                      (142 )                     -             NM                      (542 )                     -             NM
Interest (income) expense, net                          49                    (417 )           NM                      (307 )                  (823 )           NM
Other (income) expense, net                          2,279                  (1,554 )           NM                       192                  (2,066 )           NM

Loss before income taxes                            (6,794 )               (36,262 )          (81.3 )%              (42,971 )               (57,019 )          (24.6 )%
Income tax expense                                     516                     250             NM                     1,531                     858             NM


Net loss                                    $       (7,310 )       $       (36,512 )          (80.0 )%       $      (44,502 )       $       (57,877 )          (23.1 )%

Net loss per common share (basic and
diluted)                                    $        (0.07 )       $         (0.60 )                         $        (0.43 )       $         (0.98 )

Weighted average shares outstanding
(basic and diluted)                            104,474,600              60,365,027                              104,276,029              59,141,035

(a) Includes stock-based compensation charges of:

   Product cost of goods sold          $   121     $   101             $    596     $   446
   Sales, general and administrative     2,572       2,100                9,608       6,166
   Research and development                366         269                1,478         717

                                       $ 3,059     $ 2,470             $ 11,682     $ 7,329

Table of Contents

The following tables set forth, for the periods indicated, our net sales by segment and geography expressed as dollar amounts (in thousands) and the changes in net sales between the specified periods expressed as percentages or "NM" if such increases or decreases are not material or applicable:

                                           Three Months Ended                                             Nine Months Ended
                                  September 28,          September 30,          Percent          September 28,          September 30,          Percent
                                      2008                   2007               Change               2008                   2007               Change
NET SALES BY SEGMENT:
Net product sales:
Peripheral vascular:
Atherectomy                      $        20,992        $             -            NM           $        68,624        $             -             NM
Stents                                    26,772                 23,105             15.9 %               77,932                 65,064             19.8 %
Thrombectomy and embolic
protection                                 6,938                  5,368             29.2 %               19,990                 20,029             (0.2 )%
Procedural support and
other                                     12,184                 10,240             19.0 %               35,243                 30,742             14.6 %

Total peripheral vascular                 66,886                 38,713             72.8 %              201,789                115,835             74.2 %

Neurovascular:
Embolic products                          18,174                 14,698             23.6 %               53,469                 40,451             32.2 %
Neuro access and delivery
products and other                        14,958                 11,649             28.4 %               41,319                 35,669             15.8 %

Total neurovascular                       33,132                 26,347             25.8 %               94,788                 76,120             24.5 %

Total net product sales                  100,018                 65,060             53.7 %              296,577                191,955             54.5 %

Research collaboration:                    7,011                      -            NM                    19,426                      -             NM


Total net sales                  $       107,029        $        65,060             64.5 %      $       316,003        $       191,955             64.6 %




                                              Three Months Ended                                             Nine Months Ended
                                     September 28,          September 30,          Percent          September 28,          September 30,          Percent
                                         2008                   2007               Change               2008                   2007               Change
NET SALES BY GEOGRAPHY:
United States                       $        70,452        $        38,312             83.9 %      $       208,773        $       113,028             84.7 %
International
Before foreign exchange impact               34,842                 26,748             30.3 %               99,496                 78,927             26.1 %
Foreign exchange impact                       1,735                      -                -                  7,734                      -                -

Total                                        36,577                 26,748             36.7 %              107,230                 78,927             35.9 %

Total net sales                     $       107,029        $        65,060             64.5 %      $       316,003        $       191,955             64.6 %

Comparison of the Three Months Ended September 28, 2008 to the Three Months Ended September 30, 2007
Net sales. Net sales increased 65% to $107.0 million in the three months ended September 28, 2008 compared to $65.1 million in the three months ended September 30, 2007, reflecting sales growth in each of our reportable business segments and geographic markets. In particular, our sales growth was positively affected by our FoxHollow acquisition, the launch of our Axium coil during the fourth quarter 2007 and continued market penetration of the EverFlex family of stents and the Onyx Liquid Embolic System. Our net sales in the three months ended September 28, 2008 included $21.0 million of net sales from our atherectomy products and $7.0 million in research collaboration revenue. Net sales of peripheral vascular products. Net sales of our peripheral vascular products increased 73% to $66.9 million in the three months ended September 28, 2008 compared to $38.7 million in the three months ended September 30, 2007. This sales growth was primarily the result of our FoxHollow acquisition and increased market penetration of our EverFlex family of stents. Third fiscal quarter 2008 net sales included $21.0 million of atherectomy product sales. Net sales in our stent product line increased 16% to $26.8 million in the three months ended September 28, 2008 compared to $23.1 million in the three months ended September 30, 2007. This increase was attributable to increased market penetration of our EverFlex family of stents. Net sales of our thrombectomy and embolic protection devices increased 29% to $6.9 million in the three months ended September 28, 2008 compared to $5.4 million in the same period of 2007. Net sales of our procedural support and other products increased 19% to $12.2 million in the three months ended September 28, 2008 compared to $10.2 million in the three months ended September 30, 2007 largely due to the increased market penetration of PTA balloon catheters in the United States.

Table of Contents

. . .