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ABMD > SEC Filings for ABMD > Form 10-K on 28-May-2013All Recent SEC Filings

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Form 10-K for ABIOMED INC


28-May-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

All statements, trend analysis and other information contained in the following discussion relative to markets for our products and trends in revenue, gross margin and anticipated expense levels, as well as other statements, including words such as "may," "anticipate," "believe," "plan," "estimate," "expect," and "intend" and other similar expressions constitute forward-looking statements. These forward-looking statements are subject to business and economic risks and uncertainties and our actual results of operations may differ materially from those contained in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed under Item 1A Risk Factors as well as other risks and uncertainties referenced in this report.

Overview

We are a leading provider of mechanical circulatory support devices and we offer a continuum of care to heart failure patients. We develop, manufacture and market proprietary products that are designed to enable the heart to rest, heal and recover by improving blood flow and/or performing the pumping function of the heart. Our products are used in the cardiac catheterization lab, or cath lab, by interventional cardiologists and in the heart surgery suite by heart surgeons for patients who are in need of hemodynamic support prophylactically or emergently before, during or after angioplasty or heart surgery procedures. We believe heart recovery is the optimal clinical outcome for patients experiencing heart failure because it restores their quality of life. In addition, we believe that for the care of such patients, heart recovery is the most cost-effective solution for the healthcare system.

Our strategic focus and the driver of the majority of our revenue growth is the market penetration of our Impella family of products, and principally our Impella 2.5 product, which received 510(k) clearance in June 2008 from the U.S. Food and Drug Administration, or FDA, for partial circulatory support for up to six hours.

We received 510(k) clearance in April 2009 for our Impella 5.0 and Impella LD devices for circulatory support for up to six hours. These devices are larger and provide more blood flow to patients than the Impella 2.5.

In September 2012, we announced that our Impella CP product received 510(k) clearance from the FDA for circulatory support for up to six hours. The Impella CP (previously marketed outside of the U.S. as Impella cVAD) received CE Mark approval to market the device in the European Union and Health Canada approval to market the device in Canada. We initiated a controlled launch with top heart hospitals in the U.S. during the second quarter of fiscal 2013 and have continued a controlled commercial launch of Impella CP to more hospitals in the U.S., which we expect to continue over the next 12 months.

In November 2012, we announced that the Impella RP received Investigational Device Exemption, or IDE, approval from the FDA for use in RECOVER RIGHT, a pivotal clinical study in the U.S. The Impella RP is a percutaneous catheter-based axial flow pump that is designed to allow greater than four liters of flow per minute and is intended to provide the flow and pressure needed to compensate for right side heart failure. In April 2013, we announced the enrollment of the first patient in RECOVER RIGHT and we expect to enroll 30 patients with signs of right side heart failure and are being treated in the cath lab or surgery suite. We are also conducting initial patient use trials of the Impella RP outside of the U.S. This product is not currently available for commercial use.

In December 2012, as part of the FDA's 515 Program Initiative, an FDA panel voted to recommend continuation of Class III status for temporary ventricular support devices within the non-roller type cardiopulmonary bypass blood pumps category, which includes our Impella products. The panel's recommendation of Class III for this category of device is consistent with the current Class III designation for these device types. If the FDA accepts the panel's determination and issues a final order classifying these devices in Class III, we will be required to file a PMA application for Impella 2.5. Under the 515 Program Initiative, we will be permitted to continue to market our Impella products pursuant to the 510(k) clearance for a sufficient period of time to allow for the submission and review of PMA applications relating to our Impella products. We intend to submit a modular PMA submission for Impella by the end of fiscal 2014. A modular PMA allows for a parallel submission of preclinical and manufacturing data for review while still preparing the clinical module. We are working with the FDA to prepare this modular PMA application for our Impella products.

In November 2011, we announced Symphony, a synchronized minimally invasive implantable cardiac assist device designed to treat chronic patients with moderate heart failure by improving patient hemodynamics and potentially improving their quality of life. The device is designed with the primary goal of stabilizing the progression of heart failure and recovering or remodeling the heart. We are currently conducting first-in-human clinical trials of Symphony outside the U.S. This product is not currently approved by the FDA for sale in the U.S.

On October 26, 2012, we were informed that the United States Attorney's Office for the District of Columbia is conducting an investigation that is focused on the Company's marketing and labeling of the Impella 2.5. On October 31, 2012, we accepted service of a subpoena related to this investigation. The subpoena seeks documents related to the Impella 2.5. We are in the process of responding and we intend to cooperate fully with the subpoena.

On November 16 and 19, 2012, two purported class action complaints were filed against us and certain of our officers in the U.S. District Court for the District of Massachusetts by alleged purchasers of our common stock, on behalf of themselves and persons or entities that purchased or acquired our securities between August 5, 2011 and October 31, 2012. The complaints allege that the defendants violated the


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federal securities laws in connection with disclosures related to the FDA and the marketing and labeling of our Impella 2.5 product and seek damages in an unspecified amount. The Court has consolidated these complaints. A consolidated amended complaint was filed by the plaintiffs on May 20, 2013.

Additionally, on February 4, 2013, an alleged holder of our common stock filed a derivative action on our behalf against each of our directors in the U.S. District Court for the District of Massachusetts. The complaint alleges that the directors breached their fiduciary duties to us and our stockholders in connection with disclosures related to the FDA and the marketing and labeling of our Impella 2.5 product and seeks damages in an unspecified amount. We have moved to dismiss the complaint in its entirety, and that motion has been briefed, argued and is under advisement by the Court. Separately, on January 21, 2013 and February 5, 2013, we received demands from purported stockholders to inspect certain of our books and records related to these matters.

In November 2012, we announced that the Impella RP received Investigational Device Exemption, or IDE, approval from the FDA for use in a pivotal clinical study in the U.S. The Impella RP is a percutaneous catheter-based axial flow pump that is designed to allow greater than four liters of flow per minute and is intended to provide the flow and pressure needed to compensate for right side heart failure. During the fourth quarter of fiscal 2013, we announced the enrollment of the first patient in RECOVER RIGHT, an Investigational Device Exemption (IDE) study of Impella RP (Right Peripheral). We are also conducting initial patient use trials of the Impella RP outside of the U.S. This product is not currently available for commercial use.

Our revenues are primarily generated from our Impella line of products. Revenues from our non-Impella products, largely focused on the heart surgery suite, have been lower recently as we have strategically shifted our sales and marketing efforts towards our Impella products and the cath lab. We expect revenues from our non-Impella products, including BVS and AB5000, will continue to decrease as we continue to focus on our Impella products.

For the year ended March 31, 2013, we recognized net income of $15.0 million. With the exception of fiscal 2012 and 2013, we have incurred net losses since our inception. Even though we were profitable in fiscal 2013, we may incur additional losses in the future as we continue to invest in research and development related to our products, conduct clinical studies and registries on our products, expand our commercial infrastructure, pay additional excise taxes as a result of the implementation of the medical device tax in the U.S. in January 2013, incur additional legal fees to comply with the subpoena received from the Department of Justice in October 2012, defend ourselves from other legal claims and invest in new markets such as Japan.

Critical Accounting Policies and Estimates

Significant Estimates

Our discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements. The preparation of financial statements in conformity with generally accepted accounting principles of the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We base our estimates on historical experience and various other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, collectability of receivables, realizability of inventory, goodwill and intangible assets, valuation of long-lived assets, accrued expenses, warranty provisions, stock-based compensation, income taxes including the valuation allowance for deferred tax assets, contingencies and litigation. Provisions for depreciation are based on their estimated useful lives using the straight-line method. Some of these estimates can be subjective and complex and, consequently, actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

We recognize revenue when evidence of an arrangement exists, title has passed (generally upon shipment) or services have been rendered, the selling price is fixed or determinable and collectibility is reasonably assured.

Revenue from product sales to customers is recognized when delivery has occurred. All costs related to product sales are recognized at time of delivery. We do not provide for rights of return to customers on our product sales and therefore do not record a provision for returns.

Maintenance and service support contract revenues are included in product revenue and are recognized ratably over the term of the service contracts based upon the elapsed term of the service contract. Revenue is recognized as it is earned in limited instances where we rent console medical devices to customers on a month-to-month basis or for a longer specified period of time.

Government-sponsored research and development contracts and grants generally provide for payment on a cost-plus-fixed-fee basis. Revenues from these contracts and grants are recognized as work is performed, provided the government has appropriated sufficient funds for the work. Under contracts in which we elect to spend significantly more on the development project during the term of the contract than the total contract amount, we prospectively recognize revenue on such contracts ratably over the term of the contract as related research and development costs are incurred.


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Goodwill

Goodwill is recorded when consideration for an acquisition exceeds the fair value of the net tangible and intangible assets acquired. Goodwill is not amortized, instead we evaluate goodwill for impairment at least annually at October 31, as well as whenever events or changes in circumstances suggest that the carrying amount may not be recoverable.

The goodwill impairment test involves a two-step process. The first step is a comparison of the reporting unit's fair value to its carrying value. If the reporting unit's fair value exceeds its carrying value, no further procedures are required. However, if the reporting unit's fair value is less than its carrying value, an impairment of goodwill may exist, requiring a second step to measure the amount of impairment loss. If the implied fair value of goodwill is less than the recorded goodwill, an impairment charge is recorded for the difference.

We estimate the fair value of our single reporting unit using a combination of the income approach and the market approach. The income approach incorporates the use of a discounted cash flow method in which the estimated future cash flows and terminal values for the reporting unit is discounted to a present value using an appropriate discount rate. Cash flow projections are based on management's estimates of economic and market conditions which drive key assumptions of revenue growth rates, operating margins, capital expenditures and working capital requirements. The discount rate is based on the specific risk characteristics of the reporting unit and its underlying forecast. The market approach estimates fair value by comparing publicly traded companies with similar operating and investment characteristics as the reporting unit. The fair values determined by the market approach and income approach, are weighted to determine the fair value for the reporting unit based primarily on the similarity of the operating and investment characteristics of the reporting unit to the comparable publicly traded companies used in the market approach. In order to assess the reasonableness of the calculated reporting unit's fair value, we also compare the reporting unit's fair value to our market capitalization (per share stock price times number of common shares outstanding) and calculate an implied control premium (the excess of the reporting unit's fair value over the market capitalization).

We performed our annual impairment review for fiscal 2013 as of October 31, 2012 and determined that no write-down for impairment of goodwill was required as the fair value of the reporting unit substantially exceeded the carrying value. The carrying amount of goodwill at March 31, 2013 was $35.4 million.

Stock-Based Compensation

We record stock-based compensation in our statements of operations based on the fair value method. This expense is determined after consideration of several significant judgments and estimates, including the probable outcome for awards with a performance condition or conditions. The fair value of stock option grants is estimated using the Black-Scholes option pricing model, which requires management to make certain assumptions with respect to selected model inputs. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for a term consistent with the expected life of the stock options. Volatility assumptions are calculated based on historical volatility of our stock. In addition, an expected dividend yield of zero is used in the option valuation model because we do not pay dividends and do not expect to pay any dividends in the foreseeable future. We estimate the expected term of options based on historical exercise experience and estimates of future exercises of unexercised options. Forfeitures are estimated based on an analysis of actual option forfeitures, adjusted to the extent historic forfeitures may not be indicative of forfeitures in the future.

For awards with service conditions only, we recognize compensation cost on a straight-line basis over the requisite service period. For awards with service and performance conditions, we recognize compensation costs using the graded vesting method over the requisite service period. Accruals of compensation cost for awards with performance conditions are based on the probable outcome of the performance conditions. The cumulative effects of changes in the probability outcomes are recorded in the period in which the changes occur.

Income Taxes

Our provision for income taxes is composed of a current and a deferred portion. The current income tax provision is calculated as the estimated taxes payable or refundable on tax returns for the current year. The deferred income tax provision is calculated for the estimated future tax effects attributable to temporary differences and net operating loss carryforwards using expected tax rates in effect in the years during which the differences are expected to reverse.

We regularly assess our ability to realize our deferred tax assets. Assessing the realization of deferred tax assets requires significant management judgment. In determining whether our deferred tax assets are more likely than not realizable, we evaluated all available positive and negative evidence, and weighted the evidence based on its objectivity. Evidence we considered included, net operating losses incurred from our inception to March 31, 2011, expiration of various federal and state attributes, the uncertainty relative to the Department of Justice investigation and our planned PMA application for our Impella products, profits before tax for fiscal 2012 and 2013 and forecasted profit before tax for fiscal 2014. Based on our review of all available evidence, we determined that the objectively verifiable negative evidence outweighed the positive evidence and we recorded a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realizable as of March 31, 2013.

Accounting for income taxes requires a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if, based on the technical merits, it is more likely than not that the position will be sustained upon audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. We re-evaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax laws, effectively settled issues under audit and new audit activity. Any changes in these factors could result in the recognition of a tax benefit or an additional charge to the tax provision. We accrue for the effects of uncertain tax positions and the related potential penalties and interest.


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Results of Operations

The following table sets forth certain consolidated statements of operations data for the periods indicated as a percentage of total revenues:

                                                        Year Ended March 31,
                                                2013            2012            2011
 Revenues:
 Product                                           99.7 %          99.1 %          98.7 %
 Funded research and development                    0.3             0.9             1.3

 Total revenues                                   100.0           100.0           100.0

 Costs and expenses:
 Cost of product revenue                           20.0            19.4            21.7
 Research and development                          16.2            21.5            26.4
 Selling, general and administrative               53.3            56.7            61.6
 Amortization of intangible assets                  0.1             1.2             1.4

 Total costs and expenses                          89.5            98.8           111.1

 Income (loss) from operations                     10.5             1.2           (11.1 )

 Other income (expense):
 Gain on settlement of investment                    -              0.8             0.5
 Other expense, net                                 0.2              -             (0.1 )

                                                    0.2             0.8             0.4

 Income (loss) before income tax provision         10.7             2.0           (10.7 )
 Income tax provision                               1.2             0.8             0.9

 Net income (loss)                                  9.5 %           1.2 %         (11.6 )%

Fiscal Years Ended March 31, 2013 and March 31, 2012 ("fiscal 2013" and "fiscal 2012")

Revenue

Our revenues are comprised of the following:



                                                      Year Ended
                                                       March 31,
                                                  2013          2012
                                                      (in $000's)
              Impella product revenue           $ 140,325     $ 106,925
              Other products                        8,134        11,088
              Service and other revenue             9,155         7,273

              Total product revenues              157,614       125,286
              Funded research and development         510         1,089

              Total revenues                    $ 158,124     $ 126,375

Impella product revenue encompasses Impella 2.5, Impella CP, Impella 5.0, and Impella LD product sales. Other product revenue includes AB5000, BVS5000 and cannulae product sales. Service and other revenue represents revenue earned on preventative maintenance service contracts and maintenance calls.

Total revenues for fiscal 2013 increased by $31.7 million, or 25%, to $158.1 million from $126.4 million for fiscal 2012. The increase in total revenue was primarily due to higher Impella revenue due to greater utilization in the U.S., which was attributable in part to the launch of Impella CP in fiscal 2013.


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Impella product revenues for fiscal 2013 increased by $33.4 million, or 31%, to $140.3 million from $106.9 million for fiscal 2012. Most of our increase in Impella revenue was from disposable catheter sales in the U.S., as we focus on increasing utilization of our disposable catheter products through continued investment in our field organization and physician training program. In the second half of fiscal 2013, we began our initial launch of Impella CP in the U.S. We plan to continue our controlled commercial launch of Impella CP during fiscal 2014 and we expect Impella CP and Impella 2.5 revenues to increase as we add new customer sites and increase utilization at existing customer sites.

Other product revenues for fiscal 2013 decreased by $3.0 million, or 27%, to $8.1 million from $11.1 million for fiscal 2012. The decrease in other revenue was due to a decline in BVS 5000 and AB5000 disposable sales. We are currently only actively selling the BVS 5000 upon request and expect that AB5000 revenue will continue to decline in fiscal 2014 as we focus our sales efforts in the surgical suite on Impella 5.0 and LD.

Service and other revenue for fiscal 2013 increased by $1.9 million, or 26%, to $9.2 million from $7.3 million for fiscal 2012. The increase in service revenue was primarily due to an increase in preventative maintenance service contracts, as we expand the use of our Impella AIC consoles.

Cost of Product Revenue

Cost of product revenue for fiscal 2013 increased by $7.1 million, or 29%, to $31.6 million from $24.5 million for fiscal 2012. Gross margin for fiscal 2013 was 80% compared to 81% for fiscal 2012. The increase in cost of product revenues was related to increased Impella demand and higher production volume and costs to support the higher demand for Impella products. The decrease in gross margin was related primarily to increased investment in expanding manufacturing capacity to support future demand for Impella products, start up costs related to the initial production of Impella CP and increased shipments of AIC consoles.

Research and Development Expenses

Research and development expenses for fiscal 2013 decreased by $1.6 million, or 6%, to $25.6 million from $27.2 million in fiscal 2012. The decrease in research and development expenses was due to a decrease in clinical trial expenditures as we completed the Protect II trial for the Impella 2.5 and spending on Impella CP product development activities decreased in fiscal 2013 after the Impella CP was approved in the U.S. in September 2012, and was partially offset by an increase in spending on product development initiatives associated with Impella RP and Symphony. We expect research and development expenses to increase in fiscal 2014 as we continue to focus on new product development initiatives associated with Impella RP and Symphony. We will also have additional research and development costs as we prepare our PMA application for our existing Impella products available for sale in the U.S. and expenses related to obtaining regulatory approval for our Impella products in Japan.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for fiscal 2013 increased by $12.5 million, or 17%, to $84.2 million from $71.7 million in fiscal 2012. The increase in selling, general and administrative expenses was primarily due to increased personnel expenses related to increased U.S. field sales and clinical headcount, increased spending on marketing initiatives as we continue to educate physicians on the benefits of hemodynamic support and increases in legal expenses. During fiscal 2013, we incurred legal expenses of approximately $3.1 million in connection with complying with the subpoena received from the Department of Justice in October 2012 and defense of other legal claims. We also incurred $0.7 million of expenses in fiscal 2013 for payment of the medical device tax after its implementation in the U.S. in January 2013.

We expect to continue to increase our expenditures on sales and marketing activities, with particular investments in field sales and clinical personnel with cath lab expertise. We also plan to increase our marketing, service, and training investments to support the efforts of the sales and field clinical teams to drive recovery awareness for acute heart failure patients. We also will have additional expenses with the implementation of the medical device tax. We expect to continue to incur significant legal expenses related to the Department of Justice investigation, our defense of purported class actions and a derivative action and our response to information requests for the foreseeable future.

Amortization of Intangible Assets

Amortization of intangible assets for fiscal 2013 decreased by $1.4 million, or 93%, to $0.1 million from $1.5 million for fiscal 2012. Amortization primarily relates to specifically identified assets from the Impella acquisition in May 2005. We fully amortized the remaining net book value of our intangible assets during the year ended March 31, 2013.

Income Tax Provision

During fiscal 2013 and 2012, we recorded provisions for income taxes of $1.8 . . .

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