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ABMD > SEC Filings for ABMD > Form 10-K on 28-May-2014All Recent SEC Filings

Show all filings for ABIOMED INC

Form 10-K for ABIOMED INC


28-May-2014

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. Our Impella 2.5 product 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 and has been placed at 859 sites since initial launch.

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, our Impella CP product received 510(k) clearance from the FDA for partial circulatory support for up to six hours. The Impella CP also has CE Mark approval and Health Canada approval which allow us to market the device in the European Union and Canada. As of March 31, 2014, we have placed Impella CP at approximately 389 U.S. hospitals.

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 RECOVER RIGHT study was designed to enroll up to 30 patients with signs of right side heart failure who require hemodynamic support and are being treated in the cath lab or surgery suite. 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 enrolled the first patient in RECOVER RIGHT and we had completed enrollment of the 30 patients in the Impella RP RECOVER RIGHT study in March 2014. In May 2014, we received approval for implementation of a Continuous Access Protocol, or CAP, from the FDA for the RECOVER RIGHT RP Trial. The CAP will allow us to enroll up to 22 additional patients at the 15 U.S. investigational sites for a six month period. In April 2014, the Impella RP received CE Marking approval which allows for commercial sales of Impella RP in the EU and other countries that require a CE Marking approval for commercial sales. This product is not currently available for commercial use outside of Europe.

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. The FDA accepted the Panel's recommendation recently as reflected in its issuance of a Proposed Order reflecting this categorization. The Proposed Order was open for public comment until April 7 2014. The FDA process will then be to address the public comments and over an unspecified period of time develop and issues a final order classifying these devices in Class III. We will then be required to file a PMA application for our Impella products. We will have 90 days to file the PMA application from the issuance of the Final Order. 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 have been working with the FDA to submit a modular PMA submission for Impella 2.5 in response to the panel's recommendation of Class III for Impella products. A modular PMA allows for a parallel submission of preclinical and manufacturing data for review while still preparing the clinical module. In July 2013, we received written notification that the FDA has reviewed our proposed PMA shell for modular review of the Impella 2.5 System. The FDA has confirmed that it agrees with our proposed shell and we submitted all modules required by the FDA as part of the planned modular PMA submission in March 2014. The PMA will be treated as a standard PMA and all modules will now be combined for final review by the FDA.

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.


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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 our marketing and labeling of the Impella 2.5. On October 31, 2012, we accepted service of a subpoena related to this investigation seeking documents related to the Impella 2.5. We believe we have substantially complied with the subpoena and have submitted the requested documents to the United States Attorney's Office. On September 13, 2013, we entered into a tolling agreement with the United States Attorney's Office, pursuant to which we and the United States Attorney's Office mutually agreed to toll the applicable statutes of limitations for all criminal, civil and administrative offenses and violations that could be charged or claimed against us as of that date until June 2, 2014. On May 27, 2014, we executed an extension of the tolling agreement through February 2, 2015. Because the investigation is in the early stages, we are unable to predict the ultimate outcome or determine whether a liability has been incurred or make an estimate of the reasonably possible liability, if any, that could result from any unfavorable outcome associated with this inquiry. We have incurred significant expenses related to this investigation and we expect to continue to incur additional expenses in the future.

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 alleged that the defendants violated the 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 and a consolidated amended complaint was filed by the plaintiffs on May 20, 2013. On July 8, 2013, we filed a motion to dismiss the consolidated class action. Oral arguments on our motion to dismiss were conducted before the presiding district court judge on September 18, 2013. On April 10, 2014, the U.S. District Court entered an order granting our motion and dismissed the consolidated and amended complaint. On May 9, 2014, the plaintiffs filed a notice of appeal.

On February 4, 2013, an alleged stockholder of the Company 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 alleged 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 sought damages in an unspecified amount. On March 22, 2013, we filed a motion to dismiss the derivative action. On June 21, 2013, the District Court granted our motion to dismiss. The plaintiff has appealed the dismissal to the United States Court of Appeals for the First Circuit. Oral argument was conducted before the appellate court on February 5, 2014.

On April 25, 2014, we received a subpoena from the Boston regional office of the United States Department of Health and Human Services, Office of Inspector General requesting materials relevant to our reimbursement of expenses and remuneration to healthcare providers for a six month period from July 2012 through December 2012. The Office of Inspector General has informed us that the subpoena currently relates to a civil investigation. We intend to comply fully and promptly with this request.

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 over the past several years 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, primarily AB5000, will continue to decrease as we continue to focus on our Impella products.

For the year ended March 31, 2014, we recognized net income of $7.4 million. Even though we were profitable in fiscal 2014, 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 and the Office of the Inspector General in April 2014, defend ourselves from other legal claims, incur additional costs in preparing our PMA application, enter into collaborations with other parties 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.


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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 we 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. 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. Other service revenues are recognized as the services are performed.

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.

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.

Goodwill impairment assessments are performed at the reporting unit level. The goodwill 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 the 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.

In applying the goodwill impairment test, we may assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value ("Step 0"). Qualitative factors may include, but are not limited to, macroeconomic conditions, industry conditions, the competitive environment, changes in the market for our products and services, regulatory and political developments, cost factors, and entity specific factors such as strategies and overall financial performance. If, after assessing the qualitative factors, we determine it is not more likely than not that the fair value of a reporting unit is less than its carry amount, then performing the two-step impairment test is unnecessary.

When necessary, impairment of goodwill is tested at the reporting unit level by comparing the reporting unit's carrying amount, including goodwill, to the fair value of the reporting unit. 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 its 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).

If the carrying amount of the reporting unit exceeds its fair value, then a second step is performed to measure the amount of impairment loss, if any, by comparing the fair value of each identifiable asset and liability in the reporting unit to the total fair value of the reporting unit. Any impairment loss is expensed in the consolidated statement of operations and is not reversed if the fair value subsequently increases.

We performed a Step 0 qualitative assessment during the annual impairment review for fiscal 2014 as of October 31, 2013 and concluded that it is not more likely than not that the fair value of our single reporting unit is less than its carrying amount. Therefore, we determined that no write-down for impairment of goodwill was required for fiscal 2014. The carrying amount of goodwill at March 31, 2014 was $38.0 million.


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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, our history of net operating losses incurred for most of our existence, expiration of various federal and state attributes, the uncertainty relative to the Department of Justice investigation, our planned PMA application for our Impella products, expansion into new markets, such as Japan, government reimbursement environment for our products, profitability for recent years and uncertainties around forecasted profit before tax for fiscal 2015. 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, 2014.

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.

Recent Accounting Pronouncements

In June 2013, the FASB issued Accounting Standards Update, or ASU, 2013-11, Income Taxes (ASC Topic 740), Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The ASU requires entities to present unrecognized tax benefits as a decrease in a net operating loss, similar to tax loss or tax credit carryforward if certain criteria are met. The standard clarifies financial presentation requirements for unrecognized tax benefits but will not alter the way in which entities assess deferred tax assets for realizability. The guidance is effective for the fiscal year, and interim periods within that fiscal year, beginning after December 15, 2013. We will adopt this guidance beginning in the first quarter of fiscal 2015. The impact of adoption is not expected to be material.


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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,
                                             2014            2013            2012
    Revenues:
    Product                                     99.8 %          99.7 %          99.1 %
    Funded research and development              0.2             0.3             0.9

    Total revenues                             100.0           100.0           100.0

    Costs and expenses:
    Cost of product revenue                     20.3            20.0            19.4
    Research and development                    16.7            16.2            21.5
    Selling, general and administrative         58.4            53.3            56.7
    Amortization of intangible assets             -               -              1.2

    Total costs and expenses                    95.4            89.5            98.8

    Income from operations                       4.6            10.5             1.2

    Income before income tax provision           4.6            10.7             2.0
    Income tax provision                         0.6             1.2             0.8

    Net income                                   4.0 %           9.5 %           1.2 %

Fiscal Years Ended March 31, 2014 and March 31, 2013 ("fiscal 2014" and "fiscal 2013")

Revenue

Our revenues are comprised of the following:



                                                      Year Ended
                                                       March 31,
                                                  2014          2013
                                                      (in $000's)
              Impella product revenue           $ 166,971     $ 140,325
              Service and other revenue            10,944         9,155
              Other products                        5,365         8,134

              Total product revenues              183,280       157,614
              Funded research and development         363           510

              Total revenues                    $ 183,643     $ 158,124

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

Total revenues for fiscal 2014 increased by $25.5 million, or 16%, to $183.6 million from $158.1 million for fiscal 2013. The increase in total revenue was primarily due to higher Impella revenue due to greater utilization in the U.S., which was primarily attributable to the introduction of Impella CP in the second half of fiscal 2013.

Impella product revenues for fiscal 2014 increased by $26.7 million, or 19%, to $167.0 million from $140.3 million for fiscal 2013. 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 programs. Also, contributing to the sales increase was the introduction of Impella CP to 389 sites in the U.S. since regulatory approval in September 2012. Impella product revenues


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outside the US increased by $6.0 million, or 67%, during fiscal 2014. Most of . . .

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