Spectranetics 10-K 2011
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Commission file number 0-19711
THE SPECTRANETICS CORPORATION
(Exact name of Registrant as specified in its charter)
9965 Federal Drive
Colorado Springs, Colorado 80921
(Address of principal executive offices and zip code)
Registrant's Telephone Number, Including Area Code:
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes o No T
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act Yes o No T
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes T No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes o No T
The aggregate market value of the voting stock of the Registrant, as of June 30, 2010, the last business day of the registrant's most recently completed second fiscal quarter was $166,243,947, as computed by reference to the closing sale price of the voting stock held by non-affiliates on such date. As of March 9, 2011, there were outstanding 33,226,063 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 2011 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission not later than May 2, 2011, are incorporated by reference into Part III as specified herein.
TABLE OF CONTENTS
The information set forth in this annual report on Form 10-K includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, and is subject to the safe harbor created by that section. Forward-looking statements contained in this report or incorporated herein by reference constitute our expectations or forecasts of future events as of the date this report was filed with the Securities and Exchange Commission (SEC) and are not statements of historical fact. You can identify these statements by the fact that they do not relate strictly to historical or current facts. Such statements may include words such as “anticipate,” “will,” “estimate,” “expect,” “project,” “intend,” “should,” “plan,” “believe,” “hope,” and other words and terms of similar meaning in connection with any discussion of, among other things, future operating or financial performance, strategic initiatives and business strategies, regulatory or competitive environments, our intellectual property and product development. You are cautioned not to place undue reliance on these forward-looking statements and to note that they speak only as of the date hereof. Factors that could cause actual results to differ materially from those set forth in the forward-looking statements are set forth in the risk factors listed from time to time in our filings with the SEC as well as those set forth in Item 1A, “Risk Factors.”
We disclaim any intention or obligation to update or revise any financial projections or forward-looking statements due to new information or other events.
ITEM 1. Business
Over our 26-year history, we have developed our proprietary excimer laser technology along with other non-laser products that we believe have enabled us to effectively meet the needs of physicians and their patients.
We develop, manufacture, market and distribute single-use medical devices used in minimally invasive procedures within the cardiovascular system. Our products are sold in 40 countries and are used to treat arterial blockages in the heart and legs as well as the removal of pacemaker and defibrillator leads. Approximately 60% of our disposable product revenue is from products used in connection with our proprietary excimer laser system, the CVX-300®. Our single-use laser catheters contain up to 250 small diameter, flexible optical fibers that can access difficult to reach peripheral and coronary anatomy and produce evenly distributed laser energy at the tip of the catheter for more uniform ablation. We believe that our excimer laser system is the only laser system approved in the United States, Europe, Japan and Canada for use in multiple, minimally invasive cardiovascular procedures.
We believe that the diversified nature of our business allows us to respond to a wide range of physician and patient needs. Our Vascular Intervention business unit includes:
Our Lead Management business unit includes excimer laser sheaths, non-laser sheaths and cardiac lead management accessories for the removal of pacemaker and defibrillator cardiac leads.
Vascular Intervention Business
Peripheral arterial disease (PAD) is characterized by clogged or obstructed arteries in the legs. The resulting lack of blood flow can cause leg pain and lead to tissue loss or amputation. According to a 2009 iData Research Inc. report, an estimated 10 million people in the United States suffer from PAD. Symptoms of PAD include pain, cramping and weakness in the leg or hip muscles. In the case of intermittent claudication, the symptoms may appear while walking. For individuals with critical limb ischemia, the most severe form of PAD, symptoms may appear while resting. According to a 2009 Millennium Research Group report, approximately 440,000 endovascular procedures are performed each year to treat PAD in the femoral, popliteal and infrapopliteal arteries in the leg. Endovascular treatment options include balloon angioplasty, stenting and atherectomy, and more invasive approaches include bypass surgery or finally amputation. According to a 2009 Medtech Insight report, there were approximately 185,000 femoropopliteal bypass procedures performed in the U.S. in 2008. In a 2009 study in the Journal of Vascular Surgery, Philip P. Goodney, et al studied all Medicare claims from the Centers for Medicare and Medicaid Services between 1996 and 2006. The study looked at the trends that have occurred over this time period in lower extremity bypass surgery, endovascular interventions and major amputations. The study found that endovascular interventions grew substantially (from 138 to 455 procedures per 100,000 beneficiaries) while lower extremity bypass surgery decreased by 42% and major lower extremity amputation declined 29% over the same time period.
We have a cleared indication by the Food and Drug Administration (FDA) for the treatment of stenoses and occlusions within the arteries of the leg. Because our technology can be utilized to ablate multiple lesion morphologies, including plaque, moderate calcium and thrombus, we believe our system enables physicians to expand the number of minimally invasive procedures they can perform. For example, our system can be used to cross chronic total occlusions (CTO) in the heart or the leg. We believe our 0.9 mm catheters are smaller than any approved balloon angioplasty catheter or any other approved mechanical atherectomy device, which enables the treatment of smaller arteries in the lower leg. In 2010 we commenced the commercial launch of our Turbo-Tandem® product, designed to treat blockages in the larger arteries above the knee.
We believe that physicians, including interventional cardiologists, vascular surgeons, and interventional radiologists, are looking for effective minimally invasive solutions to treat PAD. We believe that balloons and stents, although commonly used to treat PAD, have not been proven to have a long-lasting clinical benefit in the legs, while surgical bypass and amputation carry significant patient risk and cost. Laser atherectomy has emerged as a viable treatment option for PAD, both as a stand-alone treatment and as an adjunctive treatment with other therapies, such as balloons and stents. We offer our Turbo Elite® atherectomy catheters in a broad range of sizes, enabling physicians to treat both smaller and larger diameter arteries. In addition, we believe our laser system and Turbo Elite catheter technology offer a number of patient benefits, including a minimally invasive alternative to bypass surgery and amputation, as well as more predictable outcomes in addressing PAD, reduced procedure time and a better safety profile as compared with other atherectomy devices.
In the coronary market, our disposable catheter devices are used to treat complex coronary artery disease either as a stand-alone therapy or as an adjunctive treatment to traditional percutaneous coronary interventions, or PCI, using balloons and stents. We have the following seven FDA approved indications:
In the thrombus management market, we also offer aspiration and thrombectomy products to address thrombus-laden lesions. Thrombus, or clot, large enough to block blood flow in the coronary, peripheral, and cerebral arteries is an accumulation and final product of blood coagulation. Thrombosis is a natural response to vascular damage, commonly arising as a result of a lesion in the vessel wall, or atherosclerosis. The thrombus may block the artery at the lesion location and potentially can dislodge and travel further downstream in the arterial system. Depending on the location of the thrombus, arterial complications such as myocardial infarction in the coronaries, stroke in the brain, or acute limb ischemia in the extremities may occur.
Positive clinical results were published regarding the use of aspiration catheters in the 2008 TAPAS study. The study indicated a significantly lower risk of mortality and increased coronary muscle reperfusion indicated by angiographic blush grading when an aspiration catheter was used in combination with PCI compared to PCI alone.
In the United States, our thrombus management revenue consists primarily of the sale of aspiration catheters. According to a 2009 Millennium Research Group report, the aspiration catheter market in the United States was approximately $48.5 million in 2009 with a projected annual growth rate of 14.5%. In the coronaries, the primary usage is to treat an acute myocardial infarction with an aspiration catheter to immediately open the blocked artery.
Our Crossing Solutions products support guidewires or other devices in facilitating vascular access in the arterial system to enable various types of interventions. Gaining access to the lesion and fully crossing the blockage with the guidewire is essential. Without lesion access, the interventional procedure, whether atherectomy, balloon dilation, or stent placement, cannot occur. Our products are designed to provide outstanding directional support and force transfer to the guidewire, either columnar straightline strength to progress through an occluded artery or angled support to gain access into difficult branched anatomy. We believe we are the leader in the support catheter market, which we estimate to be in excess of $30 million annually.
Lead Management Business
We are also a leader in the market for selling devices for the removal of infected, defective or abandoned pacing and defibrillation leads. We believe that well over 100,000 leads are removed from functional service every year due to infection, malfunction, system upgrade, venous occlusion, and other less common reasons. We also believe that the majority of the non-infected portion of these leads are presently capped and left in the body as a predominant mode of practice, based on physician perception of risk associated with removal and perception that abandoned leads are benign. Data from our historical clinical trials indicates that the use of our Spectranetics Laser Sheath (SLS®) resulted in a low rate of major complication below 2%, and the recently published Lead Extraction in Contemporary Settings (LExICon) study results show major complications approaching only 1%. We believe that
the safety profile of laser-assisted lead removal is strongly established and the long-term consequences associated with abandoned leads are more significant than generally believed.
We believe that one of the key drivers of our cardiac lead management business is the increased rate of implantable cardioverter defibrillators (ICD) implantation. According to clinical research conducted by the Cardiac Rhythm Management industry, patients suffering from congestive heart failure, as well as patients who have had prior heart attacks, may have reduced mortality risk as a result of the implant of an ICD. Since the most advanced ICD systems, known as cardiac resynchronization therapy defibrillators or CRT-Ds, have more leads per device than standard pacemakers, and since defibrillation leads are typically larger in diameter than pacemaker leads, the potential for venous obstruction is increased. This is especially true in scenarios where an existing pacing system is upgraded to an ICD system resulting in a redundant ventricular pacing lead. As a result, we believe these situations lend themselves to an increased likelihood of redundant leads being removed.
We believe, along with many top physicians, that removal of non-functional leads in many cases, especially in relatively younger patients, serves to avoid future complicating scenarios that may occur over the course of the patient’s life with their implanted leads. Consistent with this, the Heart Rhythm Society updated its recommendations for lead extraction in 2009 and expanded the detailed list of indications for lead extraction to include several well-defined scenarios involving non-functional leads, functional leads, and venous occlusion, in addition to strengthening recommendations on extraction of infected leads. The ongoing management of the Medtronic Sprint Fidelis lead recall, initially announced in 2007 to affect 265,000 leads worldwide, has elevated physician awareness of the need to employ a comprehensive lead management strategy for their patients, to include appropriate use of laser-assisted lead removal. The Heart Rhythm Society guidelines from 2009 also identified specific clinical indications related to device patients requiring a magnetic resonance imaging (MRI), as nearly 200,000 device patients each year cannot have an MRI performed due to the potential for serious adverse events of exposing a traditional pacemaker, and pacing leads, to a strong magnetic field. Recently, Medtronic developed the world’s first pacemaker and dedicated pacing leads specifically designed to operate in an MRI environment. The opportunity for lead extraction for thousands of device patients to potentially have access to an MRI is another facet of the lead management discussion.
In May 2009, we announced initial data from the four-year, retrospective LExICon study, and final results were published in February 2010 in the Journal of the American College of Cardiology. The study examined laser-assisted lead removal of 2,405 leads in 1,449 patients at 13 centers between January 2004 and December 2007, using the SLS® II Laser Sheath. The study demonstrated a compelling low rate of complication with a 1.4% major adverse event rate and 0.28% mortality rate, which represent a 26% relative reduction and more than 50% relative reduction, respectively, compared to a previous multi-center study evaluating the original SLS laser sheath. Efficacy results were very strong with a 97.7% clinical success rate. We believe this data adds strongly to the clinical evidence supporting the safety of laser-assisted lead removal and will be instrumental in reshaping perceptions around this procedure as a mainstream treatment option for device patients.
Spectranetics is a Delaware corporation formed in 1984. Our principal executive offices are located at 9965 Federal Drive, Colorado Springs, Colorado 80921. Our telephone number is (719) 633-8333.
Our corporate website is located at www.spectranetics.com. A link to a third-party website is provided at our corporate website to access our SEC filings free of charge promptly after such material is electronically filed with, or furnished to, the SEC. We do not intend for information found on our website to be part of this document.
Our disposable products are focused in two categories: Vascular Intervention and cardiac Lead Management.
Vascular Intervention Products
We have four primary product categories for the Vascular Intervention product line: Peripheral Atherectomy, Coronary Atherectomy, Thrombus Management, and Crossing Solutions.
Peripheral Laser Atherectomy
The peripheral atherectomy product line consists of a broad selection of proprietary laser catheters that are indicated for the treatment of infrainguinal (leg) stenoses and occlusions. In the periphery, laser catheters are often used as an alternative to stents and other atherectomy or thrombectomy devices. Our laser catheters are offered in sizes ranging from 0.9 to 2.5 millimeters in diameter and contain up to 250 small, flexible optical fibers mounted within a thin plastic tube. These fibers are coupled to the laser using our intelligent connector, which identifies the catheter type to our CVX-300 laser computer, and automatically controls the calibration cycle and energy output. Our laser catheter is inserted into an artery through a small incision and then guided to the site of the blockage or lesion under x-ray guidance using conventional angioplasty tools. When the tip of the laser catheter has been placed at the site of the blockage or lesion, the physician activates the laser to ablate the lesion. Our laser generates minimal heat and is a contact ablation laser that only ablates materials within 50 microns (approximately the width of a human hair) ahead of the laser tip. It is able to break down the molecular bonds of plaque, moderate calcium and thrombus into particles, the majority of which are smaller than red blood cells, without significant thermal damage to surrounding tissue. The table below highlights our laser ablation products for the treatment of peripheral arterial disease.
Turbo Elite®. The Turbo Elite catheter was designed specifically for the treatment of PAD in infrainguinal (leg) arteries. It is currently indicated for the treatment of all stenoses and occlusions within the arteries of the leg and has no known contraindications. It is effective in this area due to catheter flexibility and the active ablation area covering a high percentage of the catheter tip. We believe our Turbo Elite catheter technology offers a
number of patient benefits, including a minimally invasive alternative to bypass surgery and amputation as well as more predictable outcomes in addressing PAD, reduced procedure time and a better safety profile when compared with other atherectomy devices. We believe that our Turbo Elite technology reduces the risk of distal embolization with proper advancement technique, because our laser can ablate blockages into tiny particles, the majority of which are smaller than red blood cells. Distal embolization occurs when particles dislodged during an interventional procedure create a blockage elsewhere in the vasculature.
Turbo-Booster®. The Turbo-Booster, introduced in July 2007, functions as a laser guide catheter for the Turbo Elite laser catheters. Turbo-Booster allows for circumferential guidance and positioning of the laser catheter within the vessel. Turbo-Booster and Turbo Elite combined are engineered to remove larger amounts of plaque, create larger lumens, efficiently treat long, diffuse disease and effectively target both eccentric and concentric lesions in the superficial femoral artery (SFA) and popliteal arteries.
Turbo-Tandem®. In January 2010 we received FDA clearance of our newly redesigned Turbo-Tandem system, which we introduced in March 2010 following completion of an initial market evaluation. The Turbo-Tandem is a unique combination of a 7French laser guide catheter integrated with a 2.0 mm equivalent laser catheter. It was designed to create larger lumens to perform atherectomy and ablation of plaque in arterial lesions above the knee, primarily within the superficial femoral and popliteal arteries. Based upon the design of the Turbo-Booster, we made some product improvements which include the addition of a handle to facilitate proper positioning of the laser catheter on the ramp; a distal tip with additional stiffness; and an increased ramp angle to allow for further biasing of the laser catheter. The angled ramp at the tip of the guide catheter allows the physician circumferential guidance and positioning of the laser catheter within the vessel, and push-button control greatly simplifies use of the Turbo-Tandem providing control for repeated passes through the vessel.
Coronary Laser Atherectomy
The coronary atherectomy product line consists of a broad selection of proprietary laser catheters that can be used in many different types of coronary artery disease (CAD). Approved indications include occluded saphenous vein bypass grafts, ostial lesions, long lesions, moderately calcified stenoses, total occlusions traversable by guidewire, lesions with previously failed balloon angioplasty, and restenosis in 316L stainless steel stents, prior to brachytherapy. In this market, our laser catheters are frequently used adjunctively with other devices such as drug-eluting stents. The table below highlights our laser product offerings for the treatment of coronary artery disease.
The thrombus management product line consists of three thrombus removal devices intended to remove fresh, soft thrombi and emboli from vessels in the arterial system as well as to address thrombotic occlusions in dialysis grafts and fistulae. In this market, these devices are often used adjunctively with other devices such as balloons and stents. The table below highlights our thrombus management product offerings.
QuickCat™ Catheter: The QuickCat aspiration catheter was designed for quick deliverability and efficient thrombus removal from vessels in the arterial system. It is provided with a 30cc vacuum syringe for thrombus aspiration and a 40 micron filter basket for visualization of debris post-procedure. The QuickCat catheter is available with a 4.5French crossing profile and a 145cm working length and is compatible with any 6French guide catheter.
ThromCat® Thrombus Removal System: The ThromCat System is a mechanical system that can remove heavier burdens or more organized thrombus. It is currently indicated for use in synthetic arterial-venous dialysis grafts and native dialysis fistulae. The ThromCat System is available with a 5.5French crossing profile and a 150cm working length and is compatible with a 6French sheath.
ThromCat® XT Thrombus Removal System: The ThromCat XT System is the next generation of the ThromCat introduced to European markets in June 2009. The ThromCat XT is an improvement to the current ThromCat System with enhanced thrombus removal and several advancements in ease-of-use, including an improved braid-reinforced, kink-resistant catheter jacket and a more robust helix. A mechanical system that can remove heavier burdens and organized thrombus, the ThromCat XT is indicated for use in thrombus removal in native coronary and infrainguinal arteries, and is available with a 5.5French crossing profile, a 150cm working length and is compatible with a 6French sheath. The ThromCat XT System generates a consistent vacuum pressure at the tip of the catheter to draw thrombus into the extraction ports where it is then macerated by an internal helix. Without further contact with the blood stream, the thrombus is then transported to an external collection bag.
Our Crossing Solutions products support guidewires or other devices in facilitating vascular access in the arterial system to enable various types of interventions. All of our crossing catheters offer a low profile tapered distal tip, slick, low-friction outer coating, and three radiopaque markers to aid in assessing lesion geometry. All of the Quick-Cross®, Quick-Cross Select, and Quick-Cross Extreme products are offered in 0.014” , 0.018” , and 0.035” guidewire compatible sizes with multiple lengths to meet clinical interventional needs. In addition to having a very low crossing profile and precisely matched inner lumen to hug and support the guidewire, the translucent shaft helps the physician confirm the correct distal guidewire position.
Quick-Cross® Support Catheter. We offer our Quick-Cross support catheters in 0.014”, 0.018” and 0.035” models with straight tip configurations. These support catheters are designed for use in the cardiovascular system to support and assist standard guidewires to facilitate initial crossing of the blockage. They also facilitate exchange of standard guidewires without losing access to the blockage.
Quick-Cross® Select Support Catheter. In December 2009, we introduced the full line of Quick-Cross Select catheters, a braided support catheter family offering an angled tip configuration. It provides the feature to torque and direct the tip to select branched anatomy when accessing challenging lesions. Additionally, Quick-Cross Select offers clinicians the reliability of the Quick-Cross Support Catheter with a braided catheter jacket for improved strength and pushability. We introduced the 0.014” and 0.018” models in late 2009. The 0.035” angled version, formerly named Quick-Cross Extreme Angled, is now included in the Quick-Cross Select product line.
Quick-Cross® Extreme Support Catheter. In December 2009, we introduced the Quick-Cross Extreme catheters, a braided support catheter family offering a straight-tipped configuration. It provides enhanced pushability when crossing through challenging lesions. Most importantly, Quick-Cross Extreme offers clinicians the reliability of the current Quick-Cross in a braided platform. The Quick-Cross Extreme is available in 0.014”, 0.018”, and 0.035” models.
Lead Management Products
Our CVX-300 excimer laser system was initially approved by the FDA for lead removal procedures in December 1997, with several subsequent approvals and 510(k) clearances (see the “Government Regulation” section below for an explanation of the 510(k) clearance process) as we expanded our Lead Management product line. This product line currently includes the following:
Spectranetics Laser Sheath (SLS® II). We have designed a laser-assisted lead removal device, the Spectranetics Laser Sheath, to be used with our CVX-300 excimer laser system to remove implanted leads with minimal force. The SLS II laser sheath consists of optical fibers arranged in a circle between inner and outer polymer tubing. The inner opening of the device is designed to allow a lead to pass through it as the device slides over the lead and toward the tip in the heart. Following the removal of scar tissue with the laser sheath, the lead is removed from the heart with counter-traction. The SLS II laser sheath uses excimer laser energy focused through the tip of the sheath to facilitate lead removal by ablating through scar tissue surrounding the lead with low-temperature ultraviolet light. We believe that the advantages of this approach include low trauma to the surrounding veins, low occurrence of complication, and both effectiveness and time efficiency that surpasses mechanical methods.
Lead Locking Device (LLD®). Our Lead Locking Device product complements our current laser sheath product line as an adjunctive mechanical tool. The LLD is a mechanical device that assists in the removal of leads by providing traction on the inner aspect of the leads, which are typically constructed of wire coils covered by insulating material. The LLD is advanced like a stylet down the innermost lumen of the lead, and then the braided mesh is expanded to grip the entire length of the lead’s inner lumen as tension is applied. This traction force is sometimes sufficient to remove the lead, but typically a sheath such as the SLS II is subsequently passed over the LLD and lead to complete the removal process. We believe that other similar stylet devices on the market, which merely grip the lead near the tip, provide less traction stability to support the lead removal process. In March 2005, we received 510(k) clearance from the FDA for the LLD E, an enhanced device that navigates more effectively within tortuous anatomy in the coronary vascular system. In 2008, we introduced a variant of this device, called LLD EZ®. Due to the materials and construction used, these models are more easily visualized under fluoroscopy than our earlier LLD products. Since the LLD line is not laser-based, it can also be used in conjunction with other mechanical sheaths for the removal of pacing or defibrillation leads.
VisiSheath™ Dilator Sheath. In 2009, we received CE Mark and FDA 510(k) approval to release the new VisiSheath Dilator Sheath product. The VisiSheath Dilator Sheath may be used alone as an independent sheath for dilating tissue surrounding cardiac leads, or as an enhanced outer support sheath in conjunction with compatible inner sheaths such as the SLS II, which currently is provided with a basic Teflon® outer sheath. The VisiSheath device employs unique gold-coated steel marker bands to provide physicians with more than 200 percent better fluoroscopic visibility of the device tip than standard Teflon or polypropylene sheaths. An advanced multi-layer construction and robust tip design deliver high performance for navigating over leads and dilating tissue. To provide options for different clinical scenarios and user preferences, the VisiSheath Dilator Sheath device is offered in nine sizes, comprised of combinations of three different diameters and three different lengths.
Corporate Compliance and Corporate Integrity Agreement
We have processes, policies and procedures designed to maintain compliance with applicable federal and state laws and regulations governing our operations.
In December 2009, in connection with the resolution of a federal investigation, we entered a five-year Corporate Integrity Agreement with the Office of Inspector General of the United States Department of Health and Human Services (OIG). The Corporate Integrity Agreement acknowledges the existence of our corporate compliance program and provides for certain other compliance-related activities during the five-year term of the agreement. Those activities include specific written standards, training, education, review, disclosure and reporting requirements
related to our governmental reporting functions, sales and promotional activities, and clinical studies. We have enhanced our compliance systems to address the provisions of the Corporate Integrity Agreement. We filed an Initial Implementation Report in May 2010 and our first Annual Report in February 2011.
While we believe that our compliance program is sufficient to meet our Corporate Integrity Agreement obligations and other legal requirements, we cannot assure you that we, our employees, our consultants or our contractors are or will be in compliance with all potentially applicable U.S. federal and state regulations and/or laws or all potentially applicable foreign regulations and/or laws.
Research and Development
We believe research and development investments are critical to increasing our revenue growth rate. Our product development and technology teams are focused on the development of additional disposable devices addressing the Vascular Intervention and Lead Management markets, as well as the development of our next-generation laser platform. Our team of research scientists, engineers and technicians, supported by third-party research and engineering organizations as needed, performs substantially all of our research and development activities. Our research and development expense, which also includes clinical studies and regulatory costs, totaled $12.1 million in 2010, $12.5 million in 2009 and $11.4 million in 2008. In 2008, we also expensed $3.8 million of in-process research and development related to a development project acquired from Kensey Nash in May 2008. We expect our research and development investments to increase as a percentage of revenue in 2011 as we advance clinical research focused on in-stent restenosis and peripheral arterial disease, as well as increased product development activities related to both next-generation versions and line extensions of existing products.
We support many of our new product initiatives with clinical studies in order to obtain regulatory approval and provide certain marketing data. Our clinical and regulatory departments are focused on developing the necessary clinical data to achieve regulatory clearance and expanded indications for our existing and emerging products around the world. The goal of a clinical trial is to meet the primary endpoint, which measures the clinical effectiveness, performance and safety of a device, which is the basis for FDA approval. Primary endpoints for clinical trials are selected based on the intended benefit of the medical device. Although clinical trial endpoints are measurements at an individual patient level, the results are extrapolated to an entire population of patients based on clinical similarities to patients in the clinical trials. The following is a summary of our key pending, current and historical trials. The trials listed below are intended to represent the significant trials we have commenced and, as such, may not be a complete listing of every trial conducted or underway. Furthermore, we can provide no assurance that each of the trials underway will be completed or that the clinical results of these trials will be favorable.
Pending Clinical Trials
On June 10, 2010 we announced plans to initiate a multi-center, randomized trial for in-stent restenosis (ISR) in the United States (study name: EXCITE ISR). The EXCITE ISR study will compare laser ablation followed by adjunctive balloon angioplasty with balloon angioplasty alone, using our Turbo-Tandem and Turbo Elite laser ablation devices. In February 2011, following completion of pre-clinical work required by the FDA, we submitted an investigational device exemption (IDE) to the FDA. The first enrollment in the EXCITE ISR study is anticipated in the second quarter of 2011. The planned enrollment for this study is 353 subjects at up to 30 sites in the U.S. Subjects enrolled in the study will be followed at 1, 6 and 12 months after the procedure. Data will be submitted to FDA via a 510(K) after the minimum number of subjects have had their 6 month follow-up.
We also plan to support a pilot study evaluating the use of laser ablation followed by a paclitaxel-coated angioplasty balloon (PTX PTA) compared with the use of PTX PTA alone in the treatment of in-stent lesions in above-the-knee arteries. This pilot study, Photoablation Followed by a Paclitaxel-Coated Balloon to Inhibit
Restenosis in Instent Femoro-popliteal Obstructions (PHOTOPAC), is not intended to be used to gain an indication in the U.S. for the use of PTX PTA with laser, but to determine whether the use of laser with PTX PTA provides a benefit over PTX PTA alone and to provide data for potential future studies. The planned enrollment for the PHOTOPAC trial is 50 patients, who will be followed at 1, 6 and 12 months after the procedure. Our support of the PHOTOPAC trial will be in the form of an unrestricted research grant and will be conducted at up to four sites in Germany. We expect this trial to commence in the first quarter of 2011.
Current Vascular Intervention Clinical Trial
The Photo Ablation Using the Turbo-Booster and Excimer Laser for In-Stent Restenosis Treatment, or PATENT, trial is a prospective, multi-center registry for the evaluation of the safety and performance of Spectranetics CE-marked peripheral atherectomy laser catheters used in conjunction with Turbo-Booster catheters for the treatment of certain patients presenting with in-stent restenosis of nitinol stents implanted within femoropopliteal arteries. We have engaged a third-party clinical research organization (CRO) to conduct this study, in which up to 100 subjects are expected to be enrolled at up to 10 sites in Germany. Subjects enrolled in the study will be followed at 1, 6 and 12 months after the procedure. As of the date of this report, 79 subjects have been enrolled at five centers.
Historical Clinical Trials
The Lead Extraction in Contemporary Settings, or LExICon, trial was an observational, multi-center retrospective data collection study of consecutive laser lead extractions utilizing the lead management SLS II system, evaluating factors affecting success and complications. In May 2009, we first announced data from the LExICon study. Subsequently, the study was published in the February 9, 2010 issue of the Journal of the American College of Cardiology. The study examined laser-assisted lead removal of 2,405 leads in 1,449 patients at 13 centers between January 2004 and December 2007, using the SLS II laser sheath. Resulting key data points included: (i) 97.7% clinical success rate, (ii) 96.5% complete lead removal success rate, (iii) 1.4% major adverse event rate—a 26% relative reduction (compared to a previous multi-center study evaluating the original SLS laser sheath), and (iv) 0.28% procedural mortality rate-more than a 50% relative reduction (compared to a previous multi-center study evaluating the original SLS laser sheath).
The CELLO trial was a pivotal IDE clinical trial for our Turbo-Booster catheter in the treatment of larger diameter arteries within the legs. We enrolled 65 patients in the trial at 17 sites in the United States and Europe. The trial included patients with stenoses and occlusions that were greater than or equal to 70% and less than or equal to 100% of the vessel lumen within arteries four to seven millimeters in diameter. Three independent core labs analyzed the angiographic, intravascular ultrasound, and duplex ultrasound data from the trial. The primary endpoints of the trial were the achievement of a minimum 20% reduction in the percent diameter stenosis post-laser compared to pre-intervention and major adverse events. The reduction in percent diameter stenosis following the use of the Turbo-Booster was 35% and there were no major adverse events reported through 6 months following the procedure. As a result, the primary endpoints were met. Further, the durability of the procedure was demonstrated through freedom from target lesion revascularization in 77% of the patients through twelve months following enrollment. Significant improvements in all clinical outcomes measured twelve months following the procedure were noted, including Rutherford category, ankle-brachial index and walking impairment. Based on a review of the data, in June 2007, we received clearance from the FDA to market our Turbo-Booster product for the treatment of arterial stenoses and occlusions in the leg. The Turbo-Booster functions as a guiding catheter facilitating directed ablation of blockages in the main arteries at or above the knee. The Turbo-Booster combined with Turbo Elite laser catheters allows for removal of large amounts of plaque material within the SFA and popliteal arteries. This approval represented a broader indication for use as compared to previous labeling of the existing peripheral laser catheters. The CELLO trial data through the 12 month follow-up was published in The Journal of Endovascular Therapy in December 2009.
The Thrombus Ablation in Acute Myocardial Infarction, or TAAMI, study was a multicenter, prospectively randomized clinical trial conducted at five centers in Poland. Up to 200 patients presenting with acute myocardial infarction (AMI), or heart attack, were to be enrolled. Due to the slower than expected enrollment caused by a change in the practice of treating AMI in Poland, enrollment in this study was stopped in 2009 after 78 subjects had been enrolled at five centers.
The Extended Flow in Acute Myocardial Infarction patients after Laser Intervention trial, or Extended FAMILI trial, was a feasibility trial to rapidly restore blood flow in patients who have had a heart attack. This trial benchmarked quantitative endpoints common in other AMI trials, such as myocardial blush scores and ST-segment resolution, which is a measurement of heart muscle recovery following restoration of bloodflow to the heart after a heart attack, for a subset of patients. Enrollment in the trial was completed in 2005. The data from the trial was presented at the Trans Catheter Therapeutic (TCT) convention held in Washington, D.C. in October 2006. The myocardial blush scores compared favorably with other clinical trials using other thrombectomy or distal protection devices.
FDA clearance for use of our CVX-300 excimer laser system for the treatment of CTOs in the leg that are not crossable with a guidewire was based on the LACI trial, which dealt with multi-vessel PAD in patients presenting with critical limb ischemia (CLI) who are not eligible for bypass surgery. The LACI trial enrolled 145 patients at 15 domestic and several European sites. The purpose of the study was to evaluate the effectiveness of laser-assisted PCI for CLI patients who were poor candidates for surgical revascularization, and, as a result, at a higher risk for amputation. The primary endpoint was limb salvage for a six-month follow-up period. Data from the trial indicated a 93% success rate as compared with 87% in the historical control group of 789 patients treated with a variety of standard therapies, including bypass surgery. There were no statistical differences in serious adverse events between the LACI group and the historical control group. Although the clinical trial endpoints were achieved, the advisory panel to the FDA recommended non-approval in October 2003, citing concerns over the non-randomized nature of the trial, use of a historical control group, and the inability to distinguish the specific benefit of laser treatment, since it was used adjunctively with balloons and stents. The FDA, which generally follows the advisory panel’s recommendation, issued a non-approval letter following the panel meeting. Based on input at the advisory panel meeting and subsequent discussions with the FDA, we elected to pursue 510(k) clearance to market our products to patients who have total occlusions that are not crossable with a guidewire, which is a subset of the LACI data. On January 14, 2004, we submitted data on 47 patients that showed a 95% limb salvage rate among the surviving patients six months after the procedure. The data consisted of 28 patients from the LACI trial supplemented with an additional 19 patients treated at two other sites that were not part of the original LACI trial, but followed the LACI trial protocol. There was no difference in serious adverse events as compared with the entire set of patients treated in the LACI trial. We received 510(k) clearance from the FDA on April 29, 2004.
The Peripheral Excimer Laser Angioplasty, or PELA, trial enrolled 250 patients in a randomized trial comparing excimer laser treatment followed with balloon angioplasty to balloon angioplasty alone. The trial was designed to test the safety and efficacy of treating total occlusions of at least 10 cm in length within the superficial femoral artery and to determine if the laser group was superior to the balloon only group. The clinical results showed equivalence in most study endpoints, including the primary endpoint, which was primary patency (the degree in which the artery is open) as measured by a less than 50% diameter stenosis (blockage) at one year by ultrasound with no reintervention; however, fewer stents were used in the laser arm of the trial. The largest catheters used in the trial were 2.5 mm in diameter as compared to artery sizes treated in excess of 6.0 mm in diameter. We believe that the low catheter diameter in relation to artery diameter adversely affected results.
Initial FDA approval for use of our excimer laser for coronary indications was based on the results of the Percutaneous Excimer Laser Coronary Angioplasty Study, or PELCA, which evaluated a registry of laser usage in blocked coronary arteries and served as the basis for the FDA approval for our technology in 1993.
With respect to our cardiac lead removal products, the Pacemaker Lead Extraction with the Excimer Sheath, or PLEXES, clinical trial was completed in October 1996 and demonstrated that use of our SLS increased the complete lead removal success rate to 94% as compared with 64% for mechanical lead removal techniques. This was a randomized trial that enrolled more than 750 patients. Another study completed in 1999 and published in December 2000 in the Journal of Interventional Cardiac Electrophysiology reported that using both our SLS and LLD increased our success rate to 98%.
Kensey Nash. In May 2008, we completed the acquisition of the endovascular business of Kensey Nash Corporation (KNC). Pursuant to an Asset Purchase Agreement and other related contracts (the Agreements) among us and KNC, we purchased from KNC all of the assets related to KNC’s QuickCat, ThromCat and Safe-Cross product lines for $10.7 million in cash, including acquisition costs of $0.7 million. The primary reason for the acquisition of these product lines was to leverage our existing sales organization while extending our product offering in the area of thrombus management. Under the terms of the Agreements, we agreed to pay KNC an additional $14 million based on product development, regulatory and sales milestones.
Of the $14 million, up to $8 million is payable based on various product development and regulatory milestones associated with the acquired products, and $6 million is payable once cumulative sales of the acquired products reach $20 million. As of December 31, 2010, we have paid $2.5 million of the product development and regulatory milestones. Most of the remaining product development and regulatory milestone payments will be payable over the next one to two years subject to completion of product development milestones by KNC and FDA approvals for the ThromCat device.
The sales milestone payment of $6 million is payable once cumulative sales of the acquired products reach $20 million. As of December 31, 2010, cumulative sales of the acquired products totaled $15.3 million. We expect to make the $6 million payment in late 2011.
We simultaneously entered into a Manufacturing and License Agreement pursuant to which KNC manufactures for us the endovascular products we acquired under the Asset Purchase Agreement, and we purchase such products exclusively from KNC for specified time periods. In December 2009, we transferred the manufacturing of the QuickCat product lines to our facility. We continue to purchase the ThromCat products from KNC, and we pay KNC transfer prices for the ThromCat based on the cost to manufacture the products plus a percentage of the sales of the ThromCat. After KNC’s manufacture of the ThromCat products is transferred to us, we will continue to pay KNC a share of revenues received from sales of such products, although at a reduced rate.
Additionally, we entered into a Development and Regulatory Services Agreement with KNC, amended in June 2009, pursuant to which KNC has conducted and will continue to conduct work to develop, on our behalf, next-generation ThromCat products at KNC’s expense. We will own all intellectual property resulting from this development work. If clinical studies are required to obtain regulatory approval from the FDA for those next-generation products, the costs will be shared equally by us and KNC. KNC additionally will be responsible, at its own expense, for regulatory filings with the FDA that are required to obtain regulatory approval from the FDA for the next-generation products. We have commercialized the next generation ThromCat in Europe and are in the process of determining the FDA regulatory pathway for the next generation ThromCat in the U.S.
Sales and Marketing
Our sales goals are to increase the use of laser catheters and other disposable devices and to increase revenue per account and revenue per sales representative. We seek to educate and train physicians and institutions regarding the safety, efficacy, ease of use and growing number of applications addressed by our excimer laser technology through published studies of clinical applications and our various training initiatives. By leveraging the success of existing product applications, we hope to expand the use of our technology in new applications.
Providing customers with answers about the cost of acquisition, use of the laser and types of lesions addressable by our excimer laser system is critical to the education process. Through the following marketing and distribution strategy, both in the United States and internationally, we believe that we are well positioned to capitalize not only on our core competency of our excimer laser technology in peripheral and coronary atherectomy, but also in lead extraction and in other new areas of development for excimer laser technology in the cardiovascular system. We are also continuing to expand sales of our non-laser disposable products, including crossing solutions and thrombectomy devices.
According to the Society of Cardiovascular Angiography and Interventions, there are over 2,100 cardiac catheterization laboratories operating in the United States. Our goal is to expand our customer base by continuing to focus our sales efforts on the 1,000 hospitals with cardiac catheter labs that we believe perform the highest volume of interventional procedures, as well as on stand-alone peripheral intervention practices. Since 2004, we have tripled the size of our sales organization.
U.S. Sales Organization. At the beginning of 2008, we made a strategic decision to split our U.S. sales organization into two separate groups, one focusing on Vascular Intervention and the other focusing on Lead Management, as there are very different selling strategies and physician specialties for these applications. Our Vascular Intervention sales team members primarily work with interventional cardiologists, vascular surgeons and interventional radiologists who perform vascular procedures which are done on a more regular basis and with a generally lower risk of complication and a wider range of treatment options, as compared with Lead Management. Our Lead Management sales team members primarily work with electrophysiologists and cardiac surgeons that perform lead extraction procedures. Both of these organizations currently report to our Senior Vice President, Sales and Marketing. A discussion of each of our sales teams follows:
Vascular Intervention Sales Team. At December 31, 2010, our Vascular Intervention sales team was comprised of 70 field sales employees, consisting of a director, region sales managers, territory sales managers and clinical specialists. The director is responsible for developing and implementing sales programs and strategy throughout the U.S. and has management responsibility for the region sales managers. Region sales managers are responsible for the overall management of a region, including sales of lasers and disposable products. They are directly responsible for the performance of the territory sales managers in their district. Territory sales managers focus on the sale of lasers and disposable products and assist in training our customers and establishing relationships with physicians for the purpose of expanding their use of our devices within the accounts in their territory. Clinical specialists support the territory sales managers by standing in on cases, assisting in catheter and laser parameter selection, and helping ensure proper protocol and technique is used by clinicians. Most of these clinical specialists have extensive prior experience working at a hospital in the operating lab and electrophysiologist lab.
Lead Management Sales Team. At December 31, 2010, our Lead Management sales team was comprised of 40 field based personnel, consisting of a vice-president, regional managers, business development managers and clinical specialists. The vice-president is responsible for developing and implementing sales programs and strategy throughout the U.S. and has management responsibility for the regional managers. Our regional managers have a similar role to their Vascular Intervention counterparts. Business development managers establish relationships
primarily with electrophysiologists as well as cardiac surgeons, and coordinate the support of the clinical specialists required for these procedures. Clinical specialists support the business development managers by standing in on cases, assisting in catheter and laser parameter selection, and helping ensure proper protocol and technique is used by clinicians. Most of these clinical specialists have extensive prior experience working at a hospital in the operating lab and electrophysiologist lab.
In 2010, we continued modest expansion of a dedicated sales and marketing team focused on Lead Management and increased investment in training, education, and product development. We conduct education sessions with our simulation system which is intended to augment traditional procedural training for physicians on laser-assisted lead extraction procedures by permitting hands-on practice with extraction tools and techniques in multiple case scenarios in a virtual operating environment. We also facilitate training through our fellows education program which provides comprehensive didactic materials as well as a computer simulation experience to supplement the clinical experience and help accelerate procedural proficiency. The goal is to assist more fellows to be better educated and trained on lead management before going into practice. For 2011, we will continue to increase investment in these areas based on our belief that the cardiac rhythm management industry will continue to grow and that the potential lead removal market is under-penetrated. We believe that our investments in sales, marketing, training, education, and product development will fuel continued growth in our Lead Management business in 2011 and beyond.
As of December 31, 2010, our field team in the United States also included field service engineers who are responsible for the installation of each laser and participation in the training program at each site. We provide a one-year warranty on laser sales, which includes parts, labor and replacement gas. Upon expiration of the warranty period, we offer service to our customers under annual service contracts or on a fee-for-service basis. The field service engineers also perform ongoing service on the lasers placed under our various rental programs.
We are focused on expanding our product line and developing an appropriate infrastructure to support sales growth. Since the use of excimer laser technology is highly specialized, our marketing product managers and direct sales team must have extensive knowledge about the use of our products and the various physician groups we serve. Our marketing activities are designed to support our direct sales teams and include advertising and product publicity in trade journals, newsletters, continuing education programs, and attendance at trade shows and professional association meetings. We currently have two defined marketing teams, supporting our two sales organizations, which include product managers and associate product managers who are responsible for global marketing activities for each of our target markets.
We have a sales presence in 40 countries outside of the U.S., including our direct sales operations in Europe and Latin America and a network of 48 distributors. Total international revenue in 2010 (including Asia Pacific and Latin American countries) was $16.9 million, or 14% of our consolidated revenue. This represents a decrease of 6% over 2009 international revenue of $17.9 million.
We market and sell our products in Europe, the Middle East and Russia through Spectranetics International, B.V., a wholly-owned subsidiary, and Spectranetics Deutschland GmbH, a wholly-owned subsidiary of Spectranetics International, B.V., as well as through distributors.
During 2010, we sold our products through direct sales operations in Germany, France, Belgium, the Netherlands, Luxembourg and Switzerland and we commenced direct sales operations in the UK. We sold products in other European countries through a network of local country distributors. In 2010, Spectranetics International, B.V. and Spectranetics Deutschland GmbH revenues totaled $13.8 million, or 12% of our revenue compared with $15.1 million, or 13% of our revenue in 2009.
At December 31, 2010, our international sales team was comprised of 23 sales representatives, sales management, distribution management and clinical personnel. These sales professionals sold both the Vascular Intervention and Lead Management products. As of December 31, 2010, our international field service team also included 3 service engineers who are responsible for the installation of each laser and participation in the training program at each site.
In addition to the operations of Spectranetics International, B.V. and Spectranetics Deutschland GmbH, we conduct international business in Japan and other selected countries in the Pacific Rim and Latin America through distributors. We also have a direct sales presence in Puerto Rico which falls under our international operations. In 2010, revenue from these foreign operations totaled $3.1 million, or 3% of our revenue, compared with $2.8 million, or 2% of our revenue, in 2009.
In conjunction with our Japanese Market Authorization Holder (MAH), DVx Inc., we have regulatory approval from the Japanese Ministry of Health, Labor and Welfare (MHLW) to market our laser and various models of our coronary and SLS lead extraction catheters in Japan. In July 2010, we announced that the MHLW approved product reimbursement to hospitals for the SLS II, which is used for the removal of pacemaker and defibrillator cardiac leads. Through our distribution partner, DVx Inc., the initial phase of the product launch commenced and is focused on establishing a limited number of lead extraction training centers in Japan. The SLS II is our first product to have both regulatory and reimbursement approval in Japan.
In addition, we are in various stages of the submission process to obtain regulatory approval in Japan for some of our newer products, including the submission of a dossier to MHLW in December 2009 for approval to market certain of our peripheral atherectomy, crossing solutions and lead locking device products.
Foreign sales may be subject to certain risks, including export/import licenses, tariffs, foreign exchange rate fluctuations, other trade regulations and foreign medical regulations and reimbursement. Tariff and trade policies, domestic and foreign tax and economic policies, exchange rate fluctuations and international monetary conditions have not significantly affected our business to date.
The medical device industry is highly competitive, subject to rapid change and significantly affected by new product introductions and other activities of industry participants. Our most direct competitors are manufacturers of atherectomy products that primarily use mechanical methods to remove arterial blockages in the peripheral and coronary. We also compete against manufacturers of products used in adjunctive or alternative therapies within the peripheral and coronary atherectomy markets, such as balloon angioplasty and stents (peripheral), bypass surgery (peripheral and coronary) and amputation (peripheral).
Although balloon angioplasty and stents are used extensively in the vascular system, we do not compete directly with these products. Rather, our laser technology is used as an adjunctive treatment to balloon angioplasty and stents in complex coronary and peripheral procedures.
Competitive methods available to remove implanted leads include open-chest surgery and transvenous removal with other mechanical sheaths or devices using radiofrequency energy, each having particular drawbacks or limitations. For example, open-chest surgery is costly and traumatic to the patient. Mechanical sheaths rely on tearing of scar tissue to liberate a lead targeted for removal.
Many of our competitors have substantially greater financial, manufacturing, marketing and technical resources than we do. Larger competitors have a broader product line, which enables them to offer customers bundled purchase contracts and quantity discounts, and more experience than we have in research and development, marketing, manufacturing, preclinical testing, conducting clinical trials, obtaining FDA and foreign regulatory
approvals and marketing approved products. Our competitors may discover technologies and techniques, or enter into partnerships with collaborators, in order to develop competing products that are more effective or less costly than the products we develop. This may render our technology or products obsolete and noncompetitive. Academic institutions, government agencies, and other public and private research organizations may seek patent protection with respect to potentially competitive products or technologies and may establish exclusive collaborative or licensing relationships with our competitors. As a result, our competitors may be better equipped than we are to develop, manufacture, market and sell competing products. We expect competition to intensify.
We believe that primary competitive factors in the Vascular Intervention market include:
Manufacturers of peripheral atherectomy devices include ev3 Inc. (acquired by Covidien in 2010), Cardiovascular Systems, Inc., and Pathway Medical Technologies, Inc. In the coronary atherectomy market, we compete primarily with Boston Scientific Corporation. Manufacturers of thrombectomy and aspiration devices include Medtronic, Inc., Vascular Solutions, Inc., ev3 Inc., Atrium Medical, Terumo Interventional Systems, Lumen Biomedical, Straub Medical AG and MEDRAD Interventional/Possis. In crossing solutions, we compete primarily with Vascular Solutions, Inc., ev3 Inc., Cook Vascular Inc., and Bard Peripheral Vascular, Inc.
We also compete with a narrow set of companies marketing non-laser lead extraction devices. In the lead removal market, the primary other supplier is Cook Vascular Inc., while internationally VascoMed also offers extraction devices.
We manufacture substantially all of our product lines with the exception of the ThromCat, which is manufactured by Kensey Nash pursuant to a Manufacturing and License Agreement with KNC. We have vertically integrated a number of manufacturing processes in an effort to provide increased quality and reliability of the components used in the production process. Many of our manufacturing processes are proprietary. We believe that our level of manufacturing integration allows us to better control lead time, costs, quality and process advancements, to accelerate new product development cycle time, to provide greater design flexibility and to scale manufacturing, should market demand increase.
Our manufacturing facilities are subject to periodic inspections by federal, state, international and other regulatory authorities, including Quality System Regulation (QSR) compliance inspections by the FDA and International Organization for Standardization (ISO 13485:2003) compliance inspections by BSi, which is a private company authorized by European medical agencies to assess and certify compliance with regulatory requirements (Notified Body). In addition, we are subject to inspections by the Japanese regulatory agency, the Pharmaceutical and Medical Device Agency (PMDA). During the past year we have undergone the following quality system inspections: an FDA inspection for QSR compliance; two BSi inspections for ISO 13485:2003 compliance, of which one was a Full Quality System inspection; two TÜV (another European Notified Body) factory safety inspections;
and one PMDA Japanese regulatory review. These inspections resulted in a limited number of noted observations, to which we believe we have provided adequate responses.
We purchase certain components of our CVX-300 excimer laser system from several sole source suppliers. In addition, most raw materials, components and subassemblies used in our disposable devices are purchased from outside suppliers and are generally readily available from multiple sources. While we believe we could obtain replacement components from alternative suppliers, we may be unable to do so. The loss of any of these suppliers could result in a disruption in our production and adversely affect us.
During 2008 and 2009, we moved all of our manufacturing lines producing 510(k) products to our expanded leased facility in north Colorado Springs. All products currently built at our new facility can be shipped within the U.S. and European markets. In January 2011, the FDA approved our PMA supplement requesting a manufacturing site change for the CVX-300 laser system. (See the “Government Regulation” section below for an explanation of the PMA process.) Obtaining this approval expands our manufacturing capabilities at corporate headquarters after completing the transfer of 510(k) products in 2009. We expect to submit a separate PMA supplement to the FDA later this year requesting a manufacturing site change for our remaining products, the ELCA coronary atherectomy product line and the SLS II laser-assisted lead extraction product line. We may experience difficulties in efficiently relocating our manufacturing operations in a manner that is approved by the FDA as required, and any difficulties in this endeavor could lead to quarterly fluctuations in operating results and adversely affect us.
Patents and Proprietary Rights
We hold 62 issued U.S. patents and have rights to 15 additional U.S. patents under license agreements. We also hold twelve issued patents in the United Kingdom, eleven issued patents in Germany, nine issued patents in each of France and Japan, eight in Italy, two in the Netherlands and one in Korea. Also, we hold 29 pending U.S. patent applications and 22 pending foreign patent applications. Our patents cover the connection (coupler) between our laser catheters and the laser system, general features of the laser system, the use of the laser and our catheters together, and specific design features of our catheters.
Certain of the coupler patents and system patents expired in 2010. We do not believe that the expiration of these patents is likely to have a material adverse effect on our business.
Any patents for which we have applied may not be granted. Our patents may not be sufficiently broad to protect our technology or to provide us with any competitive advantage. Our patents could be challenged as invalid or circumvented by competitors. In addition, we have limited patent protection in foreign countries, and the laws of certain foreign countries do not protect our intellectual property rights to the same extent as do the laws of the United States. We could be adversely affected if any of our licensors terminates our licenses to use patented technology.
It is our policy to require our employees and consultants to execute confidentiality agreements upon the commencement of an employment or consulting relationship with us. Each agreement provides that all confidential information developed or made known to the individual during the course of the relationship will be kept confidential and not disclosed to third parties except in specified circumstances. In the case of employees, the agreements provide that all inventions developed by the individual shall be our exclusive property, other than inventions unrelated to our business and developed entirely on the employee’s own time. There can be no assurance that these agreements will provide meaningful protection for our trade secrets in the event of unauthorized use or disclosure of such information.
We also rely on trade secrets and unpatented know-how to protect our proprietary technology and may be vulnerable to competitors who attempt to copy our products or gain access to our trade secrets and know-how.
We are party to several non-exclusive license agreements pursuant to which we license patents covering basic areas of laser technology and pay a royalty. We also pay a royalty under exclusive license agreements for patents covering laser-assisted lead removal and certain aspects of excimer laser technology in our products. In addition, we acquired an exclusive license for a proprietary catheter coating under which we pay a royalty.
We are party to a patent license agreement dated February 28, 1997 with Medtronic, Inc. pursuant to which Medtronic has granted us a worldwide exclusive license to commercialize products using certain Medtronic patents and technology related to our SLS device. The license agreement expires on the date of expiration of the last licensed patent unless terminated earlier as a result of breach, insolvency, or our failure to perform for more than 180 days within any 12-month period due to force majeure. We pay Medtronic royalties as a specified percentage of net sales of products using the licensed Medtronic patents. For 2010, we incurred royalties of approximately $1.4 million to Medtronic under this license agreement.
We are party to an amended vascular laser angioplasty catheter license agreement with SurModics pursuant to which SurModics has granted us a worldwide non-exclusive license to use a lubricious coating that is applied to our products using certain SurModics patents. We pay SurModics royalties as a specified percentage of net sales of products using their patents subject to a quarterly minimum royalty. The license agreement expires on the later of the date of expiration of the last licensed patent or the fifteenth anniversary of the date a licensed product is first sold unless terminated earlier (1) by either party if the other party is involved with insolvency, dissolution or bankruptcy proceedings, (2) by us upon 90 days’ advance written notice, or (3) by SurModics upon 60 days’ advance written notice if we have failed to perform our obligations under the agreement and have not cured such breach during such 60-day period, or if the amount of royalties we pay SurModics is not greater than specified levels. For 2010, we incurred royalties of approximately $0.6 million to SurModics under this license agreement.
In 2004, we purchased certain intellectual property assets related to our Turbo-Booster product from Peripheral Solutions, Inc. (PSI). Pursuant to our agreement with PSI, we have made payments to PSI upon the completion of certain sales and FDA approval milestones. In 2009, we paid an additional milestone payment in the amount of $100,000, based on issuance of the first U.S. patent relating to the intellectual property assets. The next contingent milestone payment would be in the amount of $1.0 million upon the sale of the first 100,000 units of the Turbo-Booster product or other products that incorporate the licensed technology.
In 2007, we purchased a patent from a director of the Company in the amount of $150,000, which includes provisions for royalties to be paid to the director based on our sales of QuickCat products that use inventions claimed by the patent. For 2010, we incurred royalties of approximately $93,000 under this agreement. During 2008, we entered into a license agreement with Medtronic, which granted them a non-exclusive paid-up license to this patent and settled patent infringement litigation we had initiated.
In December 2009, we entered into a license agreement with Peter Rentrop, M.D. As part of the agreement, we received a worldwide, exclusive license to certain patents and patent applications owned by Dr. Rentrop, which, in general, apply to laser catheters with a tip diameter less than 1 millimeter. We pay Dr. Rentrop royalties as a specified percentage of net sales of products using his patents subject to a quarterly minimum royalty. The license agreement expires in January 2020, unless terminated earlier in accordance with its terms. For 2010, we incurred royalties of approximately $0.7 million to Dr. Rentrop under this license agreement.
Litigation concerning patents and proprietary rights is time-consuming, expensive, unpredictable and could divert the efforts of our management. An adverse ruling could subject us to significant liability, require us to seek licenses and restrict our ability to manufacture and sell our products. We are and have in the past been a party to legal proceedings involving our intellectual property and may be a party to future proceedings. See Item 1A, “Risk Factors” for additional discussion regarding the risks associated with our intellectual property.
Our CVX-300 excimer laser system and related disposable devices are generally purchased by hospitals, which then bill various third party payers for the healthcare services provided to their patients. These payers include Medicare, Medicaid and private insurance payers. Private payers are influenced by Medicare coverage and payment methodologies. The Centers for Medicare and Medicaid Services (CMS) administers the federal Medicare program. Medicare policies and payment rates depend on the setting in which the services are performed.
Hospitals are reimbursed for inpatient services by Medicare under the Hospital Inpatient Prospective Payment System (IPPS). Payment is made to the hospital through the Medicare Severity Diagnosis Related Group (MS-DRG) methodology. MS-DRGs classify discharges into groups with similar clinical characteristics that are expected to require similar resource utilization. DRG assignment for a patient’s hospitalization is based on the patient’s reason for admission, discharge diagnoses, and procedures performed during the inpatient stay. Hospitals are paid a fixed payment for the hospital stay that is designed to be inclusive of all supplies, devices, and overhead associated with the encounter. IPPS does not separately reimburse for the actual cost of the medical device used or for the services provided. Hospitals performing inpatient procedures using our technology are paid the applicable DRG payment rate for the inpatient stay.
For outpatient hospital services, payments are also made under a prospective payment system—the hospital Outpatient Prospective Payment System (OPPS). Payments are based on Ambulatory Payment Classifications, or APCs, under which each procedure is categorized. Most procedures are assigned to APCs with other procedures that are clinically and resource comparable.
In addition to payments made to hospitals for procedures using our technology, the CMS make separate payments to physicians for their professional services. Payments to physicians are made under the national Medicare Physician Fee Schedule (MPFS). National payment rates are assigned based on the physician work, practice expense (procedure costs), and malpractice insurance expense. Payment is adjusted for geographic location.
Hospital outpatient and physician services are reported with the AMA Current Procedural Terminology (CPT) code sets. Cardiac lead extraction procedures using the SLS and LLD are typically reported with the current code sets describing lead removal. Coronary laser atherectomy procedures are reported with the current code sets for coronary atherectomy.
For 2011, the CPT codes for lower extremity peripheral vascular interventions have been revised. New code sets were created that reflect bundled procedures to include atherectomy when performed with only angioplasty or with only angioplasty and stents, catheter placement, and supervision and interpretation (S/I) services. These codes are now described as endovascular revascularization procedures. Historically, the interventions, imaging and S/I services were reported separately by individual codes.
The new endovascular revascularization codes resulted in Medicare payment changes. Hospital outpatient and physician payments now reflect bundled payments for the above described procedure codes. Importantly, CMS established payments for lower extremity endovascular revascularization procedures when performed in the office setting. Reimbursement by Medicare is now available not only for hospital outpatient lower extremity atherectomy procedures when performed in conjunction with angioplasty and/or stent but payment is also available for procedures provided in the physician office. We plan to leverage this newly established reimbursement for office-based procedures, which we believe widens our potential physician customer base for laser atherectomy.
Payments vary by code and will be higher or lower depending upon the site of service and the clinical circumstances. We cannot assure that the new codes and revised payments will always be favorable to interventions that include atherectomy procedures.
Most third-party payers currently cover and reimburse for procedures using our products. However, in the past, certain private payers have limited coverage for laser atherectomy procedures. While we believe that a laser atherectomy procedure offers a less costly alternative for the treatment of certain types of cardiovascular disease, we cannot assure you that the procedure will receive adequate coverage and reimbursement and will be viewed as cost-effective under future coverage and reimbursement guidelines or other healthcare payment systems, especially when used adjunctively with other therapies, such as angioplasty and stents.
Overview of Medical Device Regulation
Our products are medical devices subject to extensive regulation by the FDA under the Federal Food, Drug, and Cosmetic Act, or FDCA. FDA regulations govern, among other things, the following activities that we perform:
•product design, development, manufacture and testing;
•premarket clearance or approval;
•advertising and promotion;
•product sales and distribution; and
•post-market safety reporting.
To be commercially distributed in the United States, non-exempt medical devices must receive either approval through a Premarket Approval (PMA) or be found to be substantially equivalent to an already marketed device through a Premarket Notification 510(k) from the FDA prior to marketing and distribution pursuant to the FDCA. Using the FDA’s classification system, devices deemed to pose relatively less risk are placed into either Class I or II, which requires the manufacturer to submit a Pre-market Notification 510(k) requesting permission for commercial distribution. In some cases, devices in this low risk classification may be exempt from requiring market approval, which is defined by the FDA. Devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices, or devices deemed not substantially equivalent to a previously 510(k) cleared device or a pre-amendment Class III device for which the FDA has not yet called for submission of PMA applications are placed in Class III requiring a PMA.
510(k) Clearance Pre-market Notification Pathway. To obtain 510(k) clearance, a manufacturer must submit a Premarket Notification 510(k) application demonstrating that the proposed device is substantially equivalent in intended use and in safety and effectiveness to a previously 510(k) cleared device or a device that was in commercial distribution before May 28, 1976. The FDA’s 510(k) pre-market notification pathway usually takes from three to six months, but it can last longer.
After a device is found to be substantially equivalent through the 510(k) process, which is also referred to as a marketing clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, requires a new 510(k) clearance or could require a PMA. The FDA requires each manufacturer to make this determination in the first instance, but the FDA can review any such decision. If the FDA disagrees with a manufacturer’s decision not to seek a new 510(k) clearance, the agency may retroactively require the manufacturer to seek 510(k) or PMA approval. The FDA also can require the manufacturer
to cease marketing and/or recall the modified device until 510(k) or PMA approval is obtained.
PMA Pathway. A high risk device not eligible for 510(k) clearance must follow the PMA pathway, which requires proof of the safety and effectiveness of the device to the FDA’s satisfaction. The PMA pathway is much more costly, lengthy and uncertain. It generally takes from one to three years, but may take longer.
A PMA application must provide extensive preclinical and clinical trial data and also information about the device and its components regarding, among other things, device design, manufacturing and labeling. As part of the PMA review, the FDA will typically inspect the manufacturer’s facilities for compliance with accepted Quality System Regulations (QSR), which impose elaborate testing, control, documentation and other quality assurance procedures.
Upon submission, the FDA determines if the PMA application is sufficiently complete to permit a substantive review, and, if so, the application is accepted for filing. The FDA then commences an in-depth review of the PMA application, which can take one to three years, but may take longer. The review time is often significantly extended as a result of the FDA asking for more information or clarification of information already provided. The FDA also may respond with a “not approvable” determination based on deficiencies in the application and require additional clinical trials that are often expensive and time consuming and can delay approval for months or even years. During the review period, an FDA advisory committee, typically a panel of clinicians, likely will be convened to review the application and recommend to the FDA whether, or upon what conditions, the device should be approved. Although the FDA is not bound by the advisory panel decision, the panel’s recommendation is important to the FDA’s overall decision making process.
If the FDA’s evaluation of the PMA application is favorable, the FDA typically issues an “approvable letter” requiring the applicant’s agreement to specific conditions (e.g., changes in labeling) or specific additional information (e.g., submission of final labeling) in order to secure final approval of the PMA application. Once the approvable letter is satisfied, the FDA will issue a PMA for the approved indications, which can be more limited than those originally sought by the manufacturer. The PMA can include postapproval conditions that the FDA believes are necessary to ensure the safety and effectiveness of the device including, among other things, restrictions on labeling, promotion, sale and distribution. Failure to comply with the conditions of approval can result in enforcement action, which could have material adverse consequences, including the loss or withdrawal of the approval.
Even after a PMA, a new PMA or PMA supplement is required in the event of a modification to the device, its labeling or its manufacturing process. Supplements to a PMA often require the submission of the same type of information required for an original PMA, except that the supplement is generally limited to that information needed to support the proposed change from the product covered by the original PMA.
Clinical Trials. A clinical trial is often required to support a PMA application and is sometimes required for a Premarket Notification 510(k) application. In some cases, one or more relatively smaller Investigational Device Exemption (IDE) studies may precede a pivotal clinical trial intended to demonstrate the safety and efficacy of the investigational device.
All clinical studies of investigational devices must be conducted in compliance with the FDA’s requirements. If an investigational device could pose a significant risk to patients (as defined in the regulations), the FDA must approve an IDE application prior to initiation of investigational use. An IDE application must be supported by appropriate data, such as animal and laboratory test results, showing that it is safe to test the device in humans and that the testing protocol is scientifically sound. The FDA typically grants IDE approval for a specified number of patients to be treated at specified study centers. A non-significant risk device does not require FDA approval of an IDE. Both significant risk and non-significant risk investigational devices require approval from institutional review boards, or IRBs, at the study centers where the device will be used.
During the study, the sponsor must comply with the FDA’s IDE requirements for investigator selection, trial monitoring, reporting, and record keeping. The investigators must obtain patient informed consent, rigorously follow the investigational plan and study protocol, control the disposition of investigational devices, and comply with all reporting and record keeping requirements. The IDE requirements apply to all investigational devices, whether considered significant or non-significant risk. Prior to granting PMA, the FDA typically inspects the records relating to the conduct of the study and the clinical data supporting the PMA application for compliance with IDE requirements.
The FDA Quality System Regulations do not fully apply to investigational devices, but the requirement for controls on design and development does apply. The sponsor also must manufacture the investigational device in conformity with the quality controls described in the IDE application and any conditions of IDE approval that the FDA may impose with respect to manufacturing.
Postmarket. After a device is placed on the market, numerous regulatory requirements apply. These include: FDA labeling regulations that prohibit manufacturers from promoting products for unapproved or “off-label” uses, the Medical Device Reporting regulation (which requires that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if it were to recur), and the Reports of Corrections and Removals regulation (which requires manufacturers to report recalls and field actions to the FDA if initiated to reduce a risk to health posed by the device or to remedy a violation of the FDCA).
The FDA enforces these requirements by inspection and market surveillance. If the FDA finds a violation, it can institute a wide variety of enforcement actions, ranging from a public warning letter to more severe sanctions such as:
•fines, injunctions, and civil penalties;
•recall or seizure of products;
•operating restrictions, partial suspension or total shutdown of production;
•refusing requests for 510(k) clearance or PMA of new products;
•withdrawing 510(k) clearance or PMAs already granted; and
We cannot assure that the FDA will approve our current or future PMA applications or supplements or Premarket Notification 510(k) applications on a timely basis or at all. The absence of such approvals could have a material adverse impact on our ability to generate future revenue.
Labeling and promotional activities are also subject to scrutiny by the FDA and, in certain instances, by the Federal Trade Commission. The FDA actively enforces regulations prohibiting marketing of products for unapproved uses.
International Regulations. International sales of our products are subject to foreign regulations, including health and medical safety regulations. The regulatory review process varies from country to country. Many countries also impose product standards, packaging and labeling requirements, and import restrictions on devices. Exports of products that have been approved by the FDA do not require FDA authorization for export. However, foreign
countries often require an FDA Certificate to Foreign Government verifying that the product complies with FDCA requirements. To obtain a Certificate to Foreign Government, the device manufacturer must certify to the FDA that the product has been granted approval in the United States and that the manufacturer and the exported products are in substantial compliance with the FDCA and all applicable or pertinent regulations. The FDA may refuse to issue a Certificate to Foreign Government if significant outstanding Quality System violations exist.
The Medical Device Directive (MDD) is a directive which covers the regulatory requirements for medical devices in the European Union. The MDD was recently amended, and compliance with the new regulations became mandatory in March 2010. This amendment is the first significant modification to the MDD since 1993 and there are multiple changes that affect Spectranetics products. Specifically, clinical data is now required for all devices regardless of classification; the definition of “central circulatory system” has been expanded which may affect the classification of devices; and the definition of “continuous use” has been expanded and may affect the classification of devices.
With respect to our international operations, in November 1994, we received ISO 9001 certification from TÜV, which allows us to manufacture products for use in the European Community within compliance of the manufacturing quality regulations. In addition, we received CMDCAS (Canadian) certification by TÜV in January 2002. We have received CE (Communauté Européene) mark registration for all of our current products. The CE mark indicates that a product is certified for sale throughout the European Union and that the manufacturer of the product complies with applicable safety and quality standards. We have also received approval to market certain coronary atherectomy products and certain lead removal products in Japan, and are seeking additional approvals there for our other coronary, peripheral and lead removal products with the assistance of our distributor, DVx Japan. In Australia, we have approvals to market certain peripheral atherectomy, coronary atherectomy, crossing and lead removal products. We also have approvals to market certain products in several Asia Pacific and Latin American countries.
We are also subject to certain federal, state and local regulations regarding environmental protection and hazardous substance controls, among others. To date, compliance with such environmental regulations has not had a material effect on our capital expenditures or competitive position.
Product Liability Insurance
Our business entails the risk of product liability claims. We maintain product liability insurance in the amount of $10 million per occurrence with an annual aggregate maximum of $10 million. We cannot assure, however, that product liability claims will not exceed such insurance coverage limits or that such insurance coverage limits will continue to be available on acceptable terms, or at all.
As of December 31, 2010, we had 470 full time employees, including 37 in research and development, clinical and regulatory affairs; 184 in manufacturing and quality assurance; 163 in marketing, sales and field service; 49 in administration and regulatory compliance in the United States and 37 in marketing, sales and administration in our international operations. None of our employees are covered by collective bargaining agreements. We believe that the success of our business will depend, in part, on our ability to attract and retain qualified personnel. We believe that our relationship with our employees is good.
ITEM 1A. Risk Factors
Our business, financial condition, results of operations and cash flows could be significantly and adversely affected by certain healthcare reform initiatives recently enacted into law, in addition to other administration and legislative proposals that may be adopted in the future in our key markets.
In March 2010, the President signed the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act (collectively, the “PPACA”), which makes significant changes to the way healthcare is financed by both federal and state governmental and private insurers and directly impacts the pharmaceutical and medical device industries. The PPACA extends health insurance to more individuals and includes, among other things, with limited exceptions, an annual, deductible excise tax of 2.3% on entities that manufacture or import certain medical devices offered for sale in the United States, effective January 1, 2013. Various healthcare reform proposals also have emerged at the state level. We expect that the PPACA as well as other federal and state healthcare initiatives that may be adopted in the future, could have a material adverse effect on our industry generally and our results of operations.
Our ability to increase our revenue is largely dependent on our ability to successfully penetrate our target markets and develop new products for those markets.
Our ability to increase our revenue from current levels depends largely on our ability to increase sales (1) in the peripheral arterial disease (PAD) market with our Turbo Elite line of disposable catheters that was introduced in 2004, and with our Turbo-Tandem product line that was introduced in March 2010, and (2) in the lead management market with our Lead Management product line. In order to increase future revenue, we must increase sales of these and other products to existing and new customers. New products will also need to be developed and approved by the FDA and foreign regulatory agencies to sustain revenue growth within the market. In that regard, while our focus is on the PAD and lead management markets, we currently have FDA clearance for only one indication for the treatment of PAD. Additional clinical data and new products to treat coronary artery disease will also be necessary to grow revenue within the coronary market.
Our future growth depends on physician adoption of our products, which requires physicians to change their screening, referral and treatment practices.
We believe there is a correlation between PAD and coronary artery disease; however, many physicians do not routinely screen for PAD while screening for coronary artery disease. We target our sales efforts to interventional cardiologists, vascular surgeons and interventional radiologists because they are often the primary care physicians diagnosing and treating both coronary artery disease and PAD. However, the initial point of contact for many patients may be other physicians, including general practitioners and podiatrists, each of whom commonly treats patients experiencing complications resulting from PAD. If we do not educate referring physicians about PAD in general and the existence of our products in particular, they may not refer patients to interventional cardiologists, vascular surgeons or interventional radiologists for treatment with our laser system. In addition, in order to accelerate growth of our lead removal products, we must change the current standard of care for abandoned pacemaker and ICD leads, which is simply to cap the abandoned leads and leave them in the body. If we are not successful in educating physicians about screening for PAD or about risks related to infected, defective or abandoned pacemaker and ICD leads, and risks associated with the removal of pacemaker and ICD leads, our ability to increase our revenue may be impaired.
We may be unable to compete successfully with bigger companies in our highly competitive industry.
The industry in which we compete is highly competitive. Our primary competitors are manufacturers of products used in competing therapies within the peripheral and coronary atherectomy markets, such as:
Although balloon angioplasty, specialty balloon angioplasty and stents are used extensively in the coronary and peripheral vascular system, we do not compete directly with these products. Rather, our laser technology is used as an adjunctive treatment to balloon angioplasty and stents in complex coronary and peripheral procedures. Many of our competitors have substantially greater financial, manufacturing, marketing and technical resources than we do. Larger competitors have a broader product line, which enables them to offer customers bundled purchase contracts and quantity discounts, and more experience than we have in research and development, marketing, manufacturing, preclinical testing, conducting clinical trials, obtaining FDA and foreign regulatory approvals and marketing approved products. Our competitors may discover technologies and techniques, or enter into partnerships and collaborations, in order to develop competing products that are more effective or less costly than the products we develop. This may render our technology or products obsolete and noncompetitive. Academic institutions, government agencies, and other public and private research organizations may seek patent protection with respect to potentially competitive products or technologies and may establish exclusive collaborative or licensing relationships with our competitors. As a result, our competitors may be better equipped than we are to develop, manufacture, market and sell competing products. We expect competition to intensify.
We believe that the primary competitive factors in the interventional cardiology market include:
Manufacturers of peripheral atherectomy devices include ev3 Inc. (acquired by Covidien in 2010), Cardiovascular Systems, Inc., and Pathway Medical Technologies, Inc. In the coronary atherectomy market, we compete primarily with Boston Scientific Corporation. Manufacturers of thrombectomy and aspiration devices include Medtronic, Inc., Vascular Solutions, Inc., ev3 Inc., Atrium Medical, Terumo Interventional Systems, Lumen Biomedical, Straub Medical AG and MEDRAD Interventional/Possis. In crossing solutions, we compete primarily with Vascular Solutions, Inc., ev3 Inc., Cook Vascular Inc., and Bard Peripheral Vascular, Inc.
We also compete with a narrow set of companies marketing non-laser lead extraction devices. In the lead removal market, the primary other supplier is Cook Vascular Inc., while internationally VascoMed also offers extraction devices.
Our sales and marketing team and our international distributors may be unable to compete with our larger competitors or to reach potential customers.
Some of our competitors have substantially larger sales and marketing operations than we do. This allows those competitors to spend more time with potential customers and to focus on a larger number of potential customers, which gives them a significant advantage over our sales and marketing team and our international distributors in making sales. During 2010, we experienced higher sales turnover than in past years, particularly in our VI sales organization. This was due to declining revenue in an increasingly competitive environment combined with turnover initiated by the Company in small, non-productive sales territories. Although we believe we have taken steps to stabilize the sales organization, sales turnover may continue.
We use both a direct sales organization and distributors for sales of our products throughout most of Europe, the Middle East, the Pacific Rim and Latin America. The sales and marketing efforts on our behalf by international distributors could fail to attain long-term success.
Our products may not achieve or maintain market acceptance.
Our laser system and other products may not gain market acceptance. Market acceptance in the healthcare community, including physicians, patients and third-party payers, of our laser system and other products depends on many factors, including:
In addition, if any of our products achieves market acceptance, we may not be able to maintain that market acceptance over time if competing products or technologies are introduced that are received more favorably or are more cost effective. Failure to achieve or maintain market acceptance would limit our ability to generate revenue and would have a material adverse effect on our business, financial condition and results of operations.
If we do not achieve our projected development goals in the timeframes we announce and expect, the commercialization of our products under development may be delayed and our business may be harmed.
For planning purposes, we estimate the timing of the accomplishment of various scientific, clinical, regulatory and other product development and commercialization goals, which we sometimes refer to as milestones.
These milestones may include the commencement or completion of scientific studies and clinical trials and the submission of regulatory filings. From time to time, we publicly announce the expected timing of some of these milestones. All of these milestones are based on a variety of assumptions and are subject to numerous risks and uncertainties. There is a risk that we will not be successful in achieving these milestones on a timely basis or at all. Moreover, even if we are successful in achieving these milestones, the actual timing of the achievement of these milestones can vary dramatically compared to our estimates—in many cases for reasons beyond our control—depending on numerous factors, including:
If we do not meet these milestones for our products or if we are delayed in achieving any of these milestones, the development and commercialization of new products, modifications of existing products or sales of existing products for new approved indications may be prevented or delayed, which could damage our reputation or materially adversely affect our business.
Our business may be adversely affected by current litigation and other legal proceedings.
From time to time we are involved in legal proceedings relating to patent and other intellectual property matters, product liability claims, employee claims, tort or contract claims, federal regulatory investigations, security class action and shareholder derivative lawsuits, and other legal proceedings or investigations, any of which could have an adverse impact on our reputation, business and financial condition and divert the attention of our management from the operation of our business. See Note 18, “Commitments and Contingencies,” to our consolidated financial statements included in Part IV, Item 15, “Exhibits and Financial Statement Schedules.” Litigation is inherently unpredictable and can result in excessive or unanticipated verdicts and/or injunctive relief that affects how we operate our business. Consequently, it is possible that we could, in the future, incur judgments or enter into settlements of claims for monetary damages or change the way we operate our business. There can be no assurance that there will not be an increase in the scope of these matters or that there will not be additional lawsuits, claims, proceedings or investigations in the future, nor is there any assurance that these matters will not have a material adverse impact on the Company.
In addition, a federal investigation is ongoing with respect to certain former employees. The Company is generally obligated to indemnify its former employees against all losses, including expenses, incurred in such cases and to advance their reasonable legal defense expenses in such cases, unless certain conditions apply. The Company is honoring these obligations unless it determines that they are inapplicable. We maintain insurance for claims of this nature which does not apply in all such circumstances, may be denied or may not be adequate to cover all legal or other costs related to the investigation. A prolonged uninsured expense and indemnification obligation could have a material adverse impact on the Company. The indictment in August 2010 of three former employees with whom the Company has indemnification obligations significantly increased the likelihood that the former employees’ future defense costs will be substantial and ongoing, and that the Company’s indemnification obligations to these employees will exceed the limits of its insurance coverage. Therefore, at September 30, 2010, the Company
accrued a $6.5 million charge reflecting the low end of its estimate of the range of its contingent liability under the indemnification obligations. The Company currently estimates that the legal fees in this matter for the Federal District Court stage of these proceedings could range from $6.5 million to $11.5 million through trial and that these costs would be paid over the course of the court proceedings. The actual expenses may be higher or lower than the estimate depending upon final resolution of the matter.
If our clinical trials are unsuccessful or significantly delayed, or if we do not complete our clinical trials, our business may be harmed.
All of our potential products and improvements of our current products are subject to extensive regulation and will require approval or clearance from the FDA and other regulatory agencies prior to commercial sale and distribution. Pursuant to FDA regulations, unless exempt, the FDA permits commercial distribution of a new medical device only after the device has received 510(k) clearance or is the subject of an approved PMA. The FDA will clear marketing of a medical device through the 510(k) process if it is demonstrated that the new product is substantially equivalent to other 510(k)-cleared products. In some cases, a 510(k) clearance must be supported by preclinical and clinical data. The PMA application process is more costly, lengthy and uncertain than the 510(k) process, and must be supported by extensive data, including data from preclinical studies and human clinical trials. Therefore, in order to obtain regulatory approvals or clearance, we typically must, among other requirements, provide the FDA and similar foreign regulatory authorities with preclinical and clinical data that demonstrate to the satisfaction of the FDA and such other authorities that our products satisfy the criteria for approval or clearance. Preclinical testing and clinical trials must comply with the regulations of the FDA and other government authorities in the United States and similar agencies in other countries.
Clinical development is a long, expensive and uncertain process and is subject to delays and to the risk that products may ultimately prove ineffective in treating the indications for which they are designed. Completion of the necessary clinical trials usually takes several years or more. We cannot assure you that we will successfully complete clinical testing of our products within the time frame we have planned, or at all. Even if we achieve positive interim results in clinical trials, these results do not necessarily predict final results, and positive results in early trials may not be indicative of success in later trials. A number of companies in the medical device industry have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials.
We may experience numerous unforeseen events during, or as a result of, the clinical trial process that could delay or prevent us from receiving regulatory approval for new products, modification of existing products, or new approved indications for existing products including the following:
Failures or perceived failures in our clinical trials will delay and may prevent our product development and regulatory approval process, damage our business prospects and negatively affect our reputation and competitive position.
Regulatory compliance is expensive and complex, and approvals can often be denied or significantly delayed.
Our products are regulated as medical devices, which are subject to extensive regulation by the FDA and comparable state and foreign agencies. Complying with these regulations is costly, time consuming and complex. FDA regulations and regulations of comparable state and foreign agencies are wide-ranging and govern, among other things:
Additionally, we may be required to obtain PMAs, PMA supplements or 510(k) pre-market clearances to market modifications to our existing products. The FDA requires device manufacturers themselves to make and document a determination of whether or not a modification requires an approval, supplement or clearance; however, the FDA can review a manufacturer’s decision. The FDA may not agree with our decisions not to seek approvals, supplements or clearances for particular device modifications. If the FDA requires us to obtain PMAs, PMA supplements or pre-market clearances for any modification to a previously cleared or approved device, we may be required to cease manufacturing and marketing the modified device or to recall such modified device until we obtain FDA clearance or approval and we may be subject to significant regulatory fines or penalties. In addition, there can be no assurance that the FDA will clear or approve such submissions in a timely manner, if at all.
International regulatory approval processes may take longer than the FDA approval process. If we fail to comply with applicable FDA and foreign regulatory requirements, we may not receive regulatory approvals or may be subject to fines, suspensions or revocations of approvals, seizures or recalls of products, operating restrictions, criminal prosecutions and other penalties. We may be unable to obtain future regulatory approval in a timely manner, or at all, especially if existing regulations are changed or new regulations are adopted. For example, the FDA clearance process for the use of excimer laser technology in clearing blocked arteries in the leg took longer than we anticipated due to requests for additional clinical data and changes in regulatory requirements. A failure or delay in obtaining necessary regulatory approvals would materially adversely affect our business.
Our regulatory compliance program cannot guarantee that we are in compliance with all potentially applicable U.S. federal and state regulations and all potentially applicable foreign regulations.
The development, manufacturing, distribution, pricing, sales, marketing, import, export and reimbursement of our products, together with our general operations, are subject to extensive federal and state regulation in the United States and to extensive regulation in foreign countries. While we have a regulatory compliance program, we cannot assure you that we, our employees, our consultants or our contractors are or will be in compliance with all potentially applicable U.S. federal and state regulations and/or laws or all potentially applicable foreign regulations and/or laws. If we fail to comply with any of these regulations and/or laws a range of actions could result, including, but not limited to, the termination of clinical trials, the failure to approve a product candidate, restrictions on our products or manufacturing processes, including withdrawal of our products from the market, significant fines, penalties and/or damages, exclusion from government healthcare programs or other sanctions or litigation.
Compliance with the terms and conditions of our Corporate Integrity Agreement with the Office of Inspector General of the United States Department of Health and Human Services requires significant resources and management time and, if we fail to comply, we could be subject to penalties or, under certain circumstances, excluded from government health care programs, which would materially reduce our sales.
In December 2009, as part of the settlement of a federal investigation of our company, we entered into a five-year corporate integrity agreement (CIA) with the Office of Inspector General of the United States Department of Health and Human Services (OIG). The CIA provides criteria for establishing and maintaining compliance with various federal laws and regulations governing our clinical investigation related functions, reporting related functions and certain of our promotional and product services related functions. It applies to all of our U.S. subsidiaries and employees and certain of our employees based outside the U.S. Under the CIA, we are required, among other things, to keep in place our current compliance program, to provide specified training to employees, and to retain an independent review organization to perform reviews to assist us in assessing and evaluating our various functions discussed above.
Maintaining the broad array of processes, policies and procedures necessary to comply with the CIA is expected to continue to require a significant portion of management’s attention as well as the application of significant resources. Failure to meet the CIA obligations could have serious consequences for us including stipulated monetary penalties for each instance of noncompliance. In addition, material breaches of the CIA could result in our being excluded from participating in federal health care programs, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Adverse changes in general domestic and worldwide economic conditions and instability and disruption of credit markets could adversely affect our operating results, financial condition, or liquidity.
We are subject to risks arising from adverse changes in general domestic and global economic conditions, including recession or economic slowdown and disruption of credit markets. The credit and capital markets have experienced extreme volatility and disruption. The strength of the United States and global economy is uncertain, and the United States recession and slowed growth may continue indefinitely. We believe that the turbulence in the financial markets, liquidity crisis and general economic uncertainties have made it more difficult and more expensive for hospitals and health systems to obtain credit, and will continue to contribute to pressures on operating margin, resulting from rising supply costs, reduced investment income and philanthropic giving, increased interest expense, reimbursement pressure, reduced elective health care spending and uncompensated care. As a result, we expect many of our customers to continue to scrutinize costs, trim budgets and look for opportunities to further reduce or slow capital spending. Further, strengthening of the United States dollar associated with the global financial crisis may adversely affect the results of our international operations when those results are translated into United States dollars. Additionally, the disruption in the credit markets could impede our access to capital, which could be further adversely affected if we are unable to maintain our current credit ratings. Should we have limited access to additional financing sources, we may need to defer capital expenditures or seek other sources of liquidity, which may not be available to us on acceptable terms if at all. All of these factors related to the global economic situation, which are beyond our control, could negatively impact our business, results of operations, financial condition, and liquidity.
Some of our patents have expired and our patents and proprietary rights may be proved invalid, which would enable competitors to copy our products.
We hold patents and licenses to use patented technology, and have pending patent applications. Our patents cover the connection (coupler) between our laser catheters and the laser system, general features of the laser system, system patents that include the use of our laser and our catheters together, and specific design features of our catheters. Two of our licensed patents relating to a laser method for severing or removing blockages within the body expired in 2005, and another of our licensed patents relating to the use of a laser in a body lumen expired in 2006. In addition, certain of our coupler patents and system patents expired in 2010. We do not believe that the expiration of these patents is likely to have a material adverse effect on our business. However, our competitors may seek to produce products that include this technology which is no longer subject to patent protection, and this increase in competition may negatively affect our business.
In addition, the patents we own and license may not be sufficiently broad to protect our technology or to give us any competitive advantage. We could also be adversely affected if any of our licensors terminates our licenses to use patented technology. In addition, we have limited patent protection in foreign countries and the laws of certain foreign countries do not protect our intellectual property rights to the same extent as do the laws of the United States. We do not have patents in many foreign countries. Any of the foregoing could have a material adverse effect on our business.
We have a history of losses and may not be able to achieve and maintain profitability.
We incurred losses from operations since our inception in September 1984 until the year 2000, and again in 2002, 2006, 2008, 2009 and 2010 (with a loss from operations incurred of $7.0 million for the year ended December 31, 2010). At December 31, 2010, we had accumulated $97 million in net losses since inception. We expect that our research, development and clinical trial activities and regulatory approvals, together with future selling, general and administrative activities and the costs associated with launching our products for additional indications, will result in significant expenses for the foreseeable future.
The amount of our net operating loss carryovers may be limited.
We have net operating loss carryovers (NOLs) which may be used by us as an offset against taxable income, if any, for U.S. federal income tax purposes. In addition, we have foreign NOLs which may be used by us as an offset against taxable income in the Netherlands. However, the amount of NOLs that we may use in any year in the U.S. could be limited by Section 382 of the Internal Revenue Code of 1986, as amended, in addition to certain limitations we are currently subject to. In general, Section 382 would limit our ability to use NOLs for U.S. federal income tax purposes in the event of certain changes in ownership of our company. Any limitation of our use of NOLs could (depending on the extent of such limitation and the amount of NOLs previously used) result in us retaining less cash after payment of U.S. federal income taxes during any year in which we have taxable income (rather than losses) than we would be entitled to retain if such NOLs were available as an offset against such income for U.S. federal income tax reporting purposes.
Our products are subject to recalls after receiving FDA or foreign approval or clearance, which would divert managerial and financial resources, harm our reputation, and could adversely affect our business.
We are subject to medical device reporting regulations that require us to report to the FDA or similar foreign governmental authorities if our products cause or contribute to death or serious injury or malfunction in a way that would be reasonably likely to contribute to death or serious injury if the malfunction were to occur. The FDA and similar foreign governmental authorities have the authority to require the recall of our products in the event of any failure to comply with applicable laws and regulations or defects in design or manufacture. A government mandated or voluntary product recall by us could occur as a result of, among other things, component failures, device malfunctions, or other adverse events, such as serious injuries or deaths, or quality-related issues such as manufacturing errors or design or labeling defects. Any future recalls of any of our products could divert managerial and financial resources, harm our reputation, and could adversely affect our business.
The FDA requires the use of adjunctive balloon angioplasty in coronary procedures performed using our products, which increases the cost of performing these procedures.
The FDA has required that the label for the CVX-300 excimer laser system state that adjunctive balloon angioplasty was performed together with laser atherectomy in the coronary procedures we submitted to the FDA for PMA. This means that our laser system cannot be used alone to treat coronary conditions. Adjunctive balloon angioplasty requires the purchase of a balloon catheter in addition to the laser catheter. The requirement that our coronary procedures be performed together with balloon angioplasty increases the aggregate cost of performing these procedures. As a result, third-party payers may attempt to deny or limit reimbursement, including if they determine that a device used in a procedure was experimental, was used for a non-approved indication or was not used in accordance with established pay protocols regarding cost effective treatment methods. Hospitals that have experienced reimbursement problems or expect to experience reimbursement problems may not acquire or may cease using our laser system.
Technological change may result in our products becoming obsolete.
The medical device market is characterized by extensive research and development and rapid technological change. We derive most of our revenue from the sale of our disposable catheters. Technological progress or new developments in our industry could adversely affect sales of our products. Other companies, many of which have substantially greater resources than we do, are engaged in research and development for the treatment and prevention of peripheral and coronary arterial disease. These include pharmaceutical approaches as well as the development of new or improved balloon angioplasty, atherectomy, thrombectomy, stents or other devices. Our products could be rendered obsolete as a result of future innovations in the treatment of cardiovascular disease.
Third parties may infringe our patents or challenge their validity or enforceability.
Our patents could be challenged as invalid or circumvented by competitors. The issuance of a patent is not conclusive as to its validity or enforceability. Numerous United States and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which our products are marketed. Because patent applications can take many years to issue, there may be currently pending applications, unknown to us, which may later result in issued patents that our products or technologies may infringe. Challenges raised in patent infringement litigation may result in determinations that our patents or licensed patents are invalid, unenforceable or otherwise subject to limitations. In the event of any such determination, third parties may be able to use the discoveries or technologies without paying licensing fees or royalties to us, which could significantly diminish the value of our intellectual property. In addition, enforcing the patents that we hold or license may require significant expenditures regardless of the outcome of such efforts.
We and our component suppliers may not meet regulatory quality standards applicable to our manufacturing processes, which could have an adverse effect on our business, financial condition and results of operations.
As a device manufacturer, we are required to register with the FDA and are subject to periodic inspection by the FDA for compliance with the FDA’s Quality System Regulation (QSR) requirements, which require manufacturers of medical devices to adhere to certain good manufacturing practice regulations, including testing, quality control and documentation procedures. In addition, the federal Medical Device Reporting regulations require us to provide information to the FDA whenever there is evidence that reasonably suggests that a device may have caused or contributed to a death or serious injury or, if a malfunction were to occur, could cause or contribute to a death or serious injury. Compliance with applicable regulatory requirements is subject to continual review and is rigorously monitored through periodic inspections by the FDA. Our component suppliers are also required to meet certain standards applicable to their manufacturing processes.
We cannot assure you that we or any of our component suppliers is in compliance or that we will be able to maintain compliance with all regulatory requirements. The failure by us or one of our component suppliers to achieve or maintain compliance with these requirements or quality standards may disrupt our ability to supply products sufficient to meet demand until compliance is achieved or, in the case of a component supplier, until a new supplier has been identified and evaluated. In addition, our failure to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approval of our products, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of products, operating restrictions and criminal prosecutions, any of which could harm our business. Furthermore, we cannot assure you that if we find it necessary to engage new suppliers to satisfy our business requirements, that we will be able to locate new suppliers who are in compliance with regulatory requirements. Our failure to do so could have a material adverse effect on our business.
In the European Union, we are required to maintain certain International Organization for Standardization (ISO) certifications in order to sell our products and must undergo periodic inspections by notified bodies, including
BSi, to obtain and maintain these certifications. If we fail these inspections or fail to meet these regulatory standards, our business could be materially adversely affected.
Healthcare cost containment pressures and legislative or administrative reforms resulting in restrictive coverage and reimbursement practices of third-party payers could decrease the demand for our products, the prices that customers are willing to pay for those products and the number of procedures performed using our devices, which could have an adverse effect on our business.
Our products are purchased principally by hospitals and stand-alone peripheral intervention practices, which typically bill various third-party payers, including governmental programs (e.g., Medicare and Medicaid), private insurance plans and managed care plans, for the healthcare services provided to their patients. The ability of our customers to obtain appropriate coverage and reimbursement for our products and services from private and governmental third-party payers is critical to our success. The availability of coverage and reimbursement affects which products customers purchase and the prices they are willing to pay.
Reimbursement varies from country to country, state to state and plan to plan and can significantly impact the acceptance of new products and services. Certain private third-party payers may view some of the procedures using our products as experimental and may not provide coverage. We cannot assure you that third-party payers will cover and reimburse the procedures using our products in whole or in part in the future or that payment rates will be adequate. Further, the adequacy of coverage and reimbursement by third-party payers is also related to the existence of billing codes to describe procedures that are performed using our products. There are currently a number of billing codes that are used by hospitals and physicians to bill for such procedures. We cannot provide assurances that the billing codes currently available will continue to be recognized by third-party payers for use by our customers.
After we develop a new product or seek to market our products for new approved indications, we may find limited demand for the product unless adequate coverage and reimbursement is obtained from private and governmental third-party payers. Even with reimbursement approval and coverage by private and government payers, providers submitting reimbursement claims may face delay in payment if there is confusion on the part of providers regarding the appropriate codes to use in seeking reimbursement. Such delays may create an unfavorable impression within the marketplace regarding the level of reimbursement or coverage available for our products.
Demand for our current or new products or new approved indications for our existing products may fluctuate over time if federal or state legislative or administrative policy changes affect coverage or reimbursement levels for our products or the services related to our products. In the United States, there have been and we expect there will continue to be a number of legislative and regulatory proposals to change the healthcare system, some of which could significantly affect our business. Legislative or administrative reforms to the U.S. or international reimbursement systems in a manner that significantly reduces reimbursement for procedures using our medical devices or denies coverage for those procedures could have a material adverse effect on our business.
We may be subject, directly or indirectly, to federal and state healthcare fraud and abuse laws and regulations and, if we are unable to fully comply with such laws, could face substantial penalties.
Our operations may be directly or indirectly affected by various broad state and federal healthcare fraud and abuse laws. Such laws include the federal Anti-Kickback Statute and related state anti-kickback laws, which prohibit any person from knowingly and willfully offering, paying, soliciting or receiving remuneration, directly or indirectly, to induce or reward either the referral of an individual, or the furnishing, purchasing, leasing or ordering of, or arranging for or recommending the furnishing, purchasing, leasing or ordering of an item or service, for which payment may be made under federal healthcare programs, such as the Medicare and Medicaid programs. The federal Stark law and self-referral prohibitions under analogous state laws restrict referrals by physicians and, in some instances, other healthcare providers, practitioners and professionals, to entities with which they have indirect or direct financial relationships for furnishing of designated health services. These healthcare fraud and abuse laws are
subject to evolving interpretations by various state and federal enforcement and regulatory authorities. Under current interpretations of the Federal False Claims Act and certain similar state laws, some of these laws may also be subject to enforcement in a qui tam lawsuit brought by a private party “whistleblower,” with or without the intervention of the government.
If our past or present operations, including our laser system placement programs, clinical research and consulting arrangements with physicians who use our product or our “Cap Free” or other sales or marketing programs, are found to be in violation of these laws and not protected under a statutory exception or regulatory safe harbor provision to the applicable fraud and abuse laws, we, our officers or our employees may be subject to civil or criminal penalties, including large monetary penalties, damages, fines, imprisonment and exclusion from Medicare and other federal healthcare program participation, including the exclusion of our products from use in treatment of Medicare or other federal healthcare program patients. If federal or state investigations or enforcement actions were to occur, our business and financial condition would be harmed.
If we fail to obtain regulatory approvals in other countries for our products, we will not be able to market our products in such countries, which could harm our business.
The requirements governing the conduct of clinical trials and manufacturing and marketing of our products, new products or additional indications for our existing products outside the United States vary widely from country to country. Foreign approvals may take longer to obtain than FDA approvals and can require, among other things, additional testing and different clinical trial designs. Foreign regulatory approval processes generally include all of the risks associated with the FDA approval processes. Some foreign regulatory agencies also must approve the reimbursement policies related to specific products. We have experienced difficulties in the past in obtaining reimbursement approvals for our products in Europe and are currently seeking regulatory and reimbursement approval for certain of our products in Japan. We cannot assure you that this approval will be obtained or that revenue in Japan will increase if this approval is received. Regulatory approval in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may negatively impact the regulatory process in others. We may not be able to file for regulatory approvals and may not receive necessary approvals to market our existing products in any foreign country. If we fail to comply with these regulatory requirements or obtain and maintain required approvals in any foreign country, we will not be able to sell our products in that country and our ability to generate revenue could be materially adversely affected.
We are exposed to the problems that come from having international operations.
For the year ended December 31, 2010, our revenue from international operations represented 14% of consolidated revenue, of which 12% was generated in Europe, the Middle East and Russia. Changes in overseas political or economic conditions, war or other conflicts, currency exchange rates, foreign laws regulating the approval and sales of medical devices, foreign tax laws or tariffs, other trade regulations or intellectual property protection could adversely affect our ability to market our products outside the United States. Any significant changes in the competitive, political, legal, regulatory, reimbursement or economic environment where we will conduct international operations may have a material adverse impact on our business. To the extent we expand our international operations, we expect our sales and expenses denominated in foreign currencies to expand, therefore increasing the risk that we will be adversely affected by fluctuations in currency exchange rates. We currently do not hedge against foreign currency fluctuations, which could result in reduced consolidated revenue or increased operating expenses.
We have important sole source suppliers and may be unable to replace them if they stop supplying us.
We purchase certain components of our CVX-300 laser system from several sole source suppliers. We do not have guaranteed commitments from these suppliers, as we order products through purchase orders placed with these suppliers from time to time. While we believe that we could obtain replacement components from alternative
suppliers, we may be unable to do so. The loss of any of these suppliers could result in a disruption in our production. Our suppliers may encounter problems during manufacturing due to a variety of reasons, including failure to follow specific protocols and procedures, failure to comply with applicable regulations, equipment malfunction and environmental factors. In addition, establishing additional or replacement suppliers for these materials may take a substantial period of time, as certain of these suppliers must be approved by regulatory authorities. If we are unable to secure on a timely basis sufficient quantities of the materials we depend on to manufacture our CVX-300 laser systems, if we encounter delays or contractual or other difficulties in our relationships with these suppliers, or if we cannot find replacement suppliers at an acceptable cost, then the manufacture of our CVX-300 laser system may be disrupted, which could increase our costs and have a material adverse effect on our business.
We have yet to fully relocate our PMA products to our expanded leased facility in northern Colorado Springs. If we fail to conduct the remainder of the relocation in an efficient manner, our operation results may be adversely affected.
During 2008 and 2009, we moved all of our manufacturing lines producing 510(k) products to our expanded leased facility in north Colorado Springs. All products currently built at our new facility can be shipped within the U.S. and European markets. In January 2011, the FDA approved our PMA supplement requesting a manufacturing site change for the CVX-300 laser system. We expect to submit a separate PMA supplement to the FDA later this year requesting a manufacturing site change for our remaining products, the ELCA coronary atherectomy product line and the SLS II laser-assisted lead extraction product line. We may experience difficulties in efficiently relocating our remaining manufacturing operations in a manner that is approved by the FDA as required.
From time to time we engage outside parties to perform services related to certain of our clinical studies and trials, and any failure of those parties to fulfill their obligations could result in costs and delays.
From time to time we engage consultants and contract research organizations to help design and monitor and analyze the results of certain of our clinical studies and trials. The consultants and contract research organizations we engage interact with clinical investigators to enroll patients in our clinical trials. As a result, we depend on these clinical investigators, consultants and contract research organizations to perform the clinical studies and trials and monitor and analyze data from these studies and trials in accordance with the investigational plan and protocol for the study or trial and in compliance with regulations and standards, commonly referred to as good clinical practice, for conducting, recording and reporting results of clinical studies or trials to assure that the data and results are credible and accurate and the trial participants are adequately protected, as required by the FDA and foreign regulatory agencies. The consultants and contract research organizations are responsible for protecting confidential patient data and complying with U.S. and foreign laws and regulations related to data privacy, including but not limited to the Health Insurance Portability and Accountability Act. We may face delays in our regulatory approval process if these parties do not perform their obligations in a timely or competent fashion or if we are forced to change service providers. This risk is heightened for our clinical studies and trials conducted outside of the United States, where it may be more difficult to ensure that our studies and trials are conducted in compliance with FDA requirements. Any third parties that we hire to help design or monitor and analyze results of our clinical studies and trials may also provide services to our competitors, which could compromise the performance of their obligations to us. If these third parties do not successfully carry out their duties or meet expected deadlines, or if the quality, completeness or accuracy of the data they obtain is compromised due to the failure to adhere to our clinical trial protocols or for other reasons, our clinical studies or trials may be extended, delayed or terminated or may otherwise prove to be unsuccessful, and our development costs will increase. In addition, we may not be able to establish or maintain relationships with these third parties on favorable terms, or at all. If we need to enter into replacement arrangements because a third party is not performing in accordance with our expectations, we may not be able to do so without undue delays or considerable expenditures or at all.
Product liability and other claims against us may reduce demand for our products or result in substantial damages.
Our business exposes us to potential liability for risks that may arise from the clinical testing of our unapproved or cleared new products, the clinical testing of expanded indications for existing products, the use of our products by physicians and the manufacture and sale of any approved products. An individual may bring a product liability claim against us, including frivolous lawsuits, if one of our products causes, or merely appears to have caused, an injury. We maintain product liability insurance in the amount of $10 million per occurrence with an annual aggregate maximum of $10 million. We cannot assure, however, that product liability claims will not exceed such insurance coverage limits or that such insurance coverage limits will continue to be available on acceptable terms, or at all. The coverage limits of our insurance policies may be inadequate, and insurance coverage with acceptable terms could be unavailable in the future. A product liability claim, recall or other claim with respect to uninsured liabilities or for amounts in excess of insured liabilities could have a material adverse effect on our business. Any product liability claim or series of claims or class actions brought against us, with or without merit, could result in:
Patients treated with our products often are seriously ill or have pacemaker or ICD leads embedded and surrounded by scar tissue within their chest. Patients treated with our products suffer from severe infection, peripheral artery disease, coronary artery disease, diabetes, high blood pressure, high cholesterol and other problematic conditions. During procedures or the clinical follow-up subsequent to procedures involving the use of our products, serious adverse events may occur and some patients may die. Serious adverse events or patient deaths involving the use of our products may subject us to product liability litigation, product recalls or limit our ability to grow our revenue, which could have a material adverse impact on our business.
Claims may be made by consumers, healthcare providers or others selling our products. We may be subject to claims against us even if an alleged injury is due to the actions of others. For example, we rely on the expertise of physicians, nurses and other associated medical personnel to perform the medical procedures and related processes relating to our products. If these medical personnel are not properly trained or are negligent in using our products, the therapeutic effect of our products may be diminished or the patient may suffer injury, which may subject us to liability. In addition, an injury resulting from the activities of our suppliers may serve as a basis for a claim against us. We maintain policies and procedures and require training designed to educate our employees that off-label promotion is illegal. However, we cannot prevent a physician from using our products for any off-label applications. If injury to a patient results from such use, we may become involved in a product liability suit, which will likely be expensive to defend.
Supreme Court decisions and federal legislation could reverse the exemption for medical devices approved by the FDA under a pre-market approval application. This exemption provided a shield against product liability claims, provided that the medical devices were approved by the FDA under a pre-market approval application. If this exemption is removed, product liability claims may increase.
We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights, which could result in substantial costs and liability.
There may be patents and patent applications owned by others relating to laser and fiber-optic or other technologies, which, if determined to be valid and enforceable, may be infringed by us. Holders of certain patents, including holders of patents involving the use of lasers in the body, may contact us and request that we enter into license agreements for the underlying technology and pay them royalties, which could be substantial. We cannot guarantee that other patent holders will not file a lawsuit against us and prevail. If we decide that we need to obtain a license to use any intellectual property, we may be unable to obtain these licenses on favorable terms or at all or we may be required to make substantial royalty or other payments to use this intellectual property. Litigation concerning patents and proprietary rights is time-consuming, expensive, unpredictable and could divert the attention of our management from our business operations. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. An unfavorable outcome in an interference proceeding or patent infringement suit could require us to pay substantial damages, cease using the technology or to license rights, potentially at a substantial cost, from prevailing third parties. There is no guarantee that any prevailing party would offer us a license or that we could acquire any license made available to us on commercially acceptable terms. Even if we are able to obtain rights to a third party’s patented intellectual property, those rights may be non-exclusive and therefore our competitors may obtain access to the same intellectual property. Ultimately, we may have to cease some of our business operations as a result of patent infringement claims, which could severely harm our business. To the extent we are found to be infringing on the intellectual property of others, we may not be able to develop or otherwise obtain alternative technology. If we need to redesign our products to avoid third party patents, we may suffer significant regulatory delays associated with conducting additional studies or submitting technical, manufacturing or other information related to any redesigned product and, ultimately, in obtaining regulatory approval. Further, any such redesigns may result in less effective and/or less commercially desirable products.
If we are not able to protect and control unpatented trade secrets, know-how and other technological innovation, we may suffer competitive harm.
In addition to patented intellectual property, we also rely on unpatented technology, trade secrets, confidential information and know-how to protect our technology and maintain our competitive position, particularly when we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. In order to protect proprietary technology and processes, we rely in part on confidentiality and intellectual property assignment agreements with our employees, consultants and others. These agreements may not effectively prevent disclosure of confidential information nor result in the effective assignment to us of intellectual property, and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information or other breaches of the agreements. In addition, others may independently discover trade secrets and proprietary information that have been licensed to us or that we own, and in such case, we could not assert any trade secret rights against such party. Enforcing a claim that a party illegally obtained and is using trade secrets that have been licensed to us or that we own is difficult, expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States may be less willing to protect trade secrets. Costly and time-consuming litigation could be necessary to seek to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.
Environmental and health safety laws may result in liabilities, expenses and restrictions on our operations.
Federal, state, local and foreign laws regarding environmental protection, hazardous substances and human health and safety may adversely affect our business. The use of hazardous substances in our operations exposes us to the risk of accidental injury, contamination or other liability from the use, storage, importation, handling or disposal of hazardous materials. If our or our suppliers’ operations result in the contamination of the environment or expose individuals to hazardous substances, we could be liable for damages and fines, and any liability could significantly exceed our insurance coverage and have a material adverse effect on our financial condition. We maintain insurance for certain environmental risks, subject to substantial deductibles; however, we cannot assure you that we will be able to continue to maintain this insurance in the future at an acceptable cost or at all. Future changes to environmental and health and safety laws could cause us to incur additional expenses or restrict our operations.
We depend on attracting and retaining key management, clinical, scientific and sales and marketing personnel, and the loss of these personnel could impair the development and sales of our products.
Our success depends on our continued ability to attract, retain and motivate highly qualified management, clinical, scientific and sales and marketing personnel, including a chief executive officer. We do not have employment agreements with any of our employees. Their employment with us is “at will,” and each employee can terminate his or her employment with us at any time. As a condition of employment, our employees sign an agreement that precludes them, upon termination of their employment, from recruiting our employees or working for a direct competitor. The enforceability of these agreements depends on the circumstances at the time of separation and the agreements may, at times, be difficult to enforce. We also have agreements with eight officers of the Company, which provide for the payment of either a year’s salary plus bonus or six month’s salary plus bonus in the event of separation of the officer’s employment in certain circumstances. The agreements also prohibit the officer from competing with the Company and soliciting its employees and customers in the case of termination of employment. We do not carry “key person” insurance covering members of senior management. The competition for qualified personnel in the medical device industry is intense. We will need to hire additional personnel as we continue to expand our development activities and drive sales of our products. We may not be able to attract and retain quality personnel on acceptable terms given the competition for such personnel.
Effective November 1, 2010, Emile J. Geisenheimer retired from his positions as Chairman, President and Chief Executive Officer. The board of directors created an Executive Council, comprised of three executive officers to handle chief executive officer responsibilities until a chief executive officer is hired. The Executive Council is composed of Mr. Guy Childs, Chief Financial Officer, Mr. Jason Hein, Senior Vice President, Sales and Marketing, and Mr. Shar Matin, Senior Vice President, Operations, Product Development and International. Our board of directors is currently conducting a search for a chief executive officer. Leadership transitions can be inherently difficult to manage and may be a distraction to senior management or cause further turnover in key personnel.
If we make acquisitions, we could encounter difficulties that harm our business.
We may acquire companies, products or technologies that we believe to be complementary to the present or future direction of our business. If we engage in such acquisitions, we may have difficulty integrating the acquired personnel, financials, operations, products or technologies. Acquisitions may dilute our earnings per share, disrupt our ongoing business, distract our management and employees, increase our expenses, subject us to liabilities, and increase our risk of litigation, all of which could harm our business. If we use cash to acquire companies, products or technologies, it may divert resources otherwise available for other purposes. If we use our common stock to acquire companies, products or technologies, our stockholders may experience substantial dilution.
Our stock price may continue to be volatile.
The market price of our common stock, similar to other medical device companies, has been, and is likely to continue to be, highly volatile. The following factors may significantly affect the market price of our common stock:
In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. Following the decrease in our stock price in September 2008 following the execution of a search warrant by certain government employees, we became the target of securities litigation, and due to the potential volatility of our stock price, we may be the target of securities litigation in the future. Securities litigation could result in substantial costs and divert management’s attention and resources from our business and could require us to make substantial payments to settle those proceedings or satisfy any judgments that may be reached against us.
Protections against unsolicited takeovers in our charter and bylaws may reduce or eliminate our stockholders’ ability to resell their shares at a premium over market price.
Our charter and bylaws contain provisions relating to issuance of preferred stock, special meetings of stockholders and advance notification procedures for stockholder proposals that could have the effect of discouraging, delaying or preventing an unsolicited change in the control of Spectranetics. Our board of directors is elected for staggered three-year terms, which prevents stockholders from electing all directors at each annual meeting and may have the effect of discouraging, delaying or preventing a change in control.
We are subject to Section 203 of the Delaware General Corporation law, which in general and subject to exceptions, prohibits a publicly held Delaware corporation from engaging in a “business combination” (as defined in Section 203) with an “interested stockholder” (as defined in Section 203) for a period of three years after the date of the transaction in which the person became an interested stockholder, unless certain conditions are met. Section 203 may discourage, delay or prevent an acquisition of our company even at a price our stockholders may find attractive.
ITEM 1B. Unresolved Staff Comments
ITEM 2. Properties
All of our domestic operations are currently located in Colorado Springs, Colorado. In December 2006, we entered into a ten-year lease agreement for a 75,000 square foot building in northern Colorado Springs. All research and development, clinical studies, regulatory, marketing, sales support and administrative functions were moved to the new facility in 2007. The expanded facility has approximately 17,000 square feet of manufacturing space which contains the substantial portion of our manufacturing operations. We currently manufacture all 510(k) products and the CVX-300 laser system at this facility, and we expect to submit a PMA supplement to the FDA later this year requesting a manufacturing site change for our remaining products, the ELCA and SLS product lines.
In addition to the leased facility described above, we continue to occupy two buildings in central Colorado Springs. These facilities contain approximately 65,000 square feet of usable space, of which approximately half is currently devoted to manufacturing. The first building has 22,000 square feet, of which we currently occupy roughly half. The lease expired on December 31, 2010, and we have temporarily renewed this space which we anticipate vacating by mid-2011. We purchased for cash consideration the second facility in March 2005 for $1.4 million, and our ELCA and SLS products are currently manufactured at this facility.
Spectranetics International B.V. leases 3,337 square feet in Leusden, The Netherlands. The facility houses our operations for the marketing and distribution of products in Europe, and the lease expires June 30, 2012. Spectranetics Deutschland GmbH leases a small office in Germany through July 2015.
We believe these facilities are adequate to meet our requirements for the foreseeable future.
ITEM 3. Legal Proceedings
For a discussion of the Company’s legal proceedings, please refer to Note 18, “Commitments and Contingencies,” to our consolidated financial statements included in Part IV, Item 15, “Exhibits and Financial Statement Schedules.”
ITEM 5. Market for the Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Our Common Stock is traded on the NASDAQ National Market under the symbol “SPNC.” The table below sets forth the high and low sales prices for the Company’s Common Stock as reported on the NASDAQ National Market for each calendar quarter in 2010 and 2009. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions, and may not necessarily represent the sales prices in actual transactions.
Number of Record Holders; Dividends
We have not paid cash dividends on our Common Stock in the past and do not expect to do so in the foreseeable future. The payment of dividends in the future will be at the discretion of the Board of Directors and will be dependent upon our financial condition, results of operations, capital requirements and such other factors as the Board of Directors deems relevant.
The closing sales price of our Common Stock on March 9, 2011 was $4.64. On March 9, 2011, we had 517 shareholders of record. This number was derived from our stockholder records and does not include beneficial owners of our common stock whose shares are held in the names of various dealers, clearing agencies, banks, brokers, and other fiduciaries.
Recent Sales of Unregistered Equity Securities
During the fourth quarter ended December 31, 2010, we did not issue or sell any shares of our common stock or other equity securities of our company without registration under the Securities Act of 1933, as amended.
Issuer Purchases of Equity Securities
There were no repurchases of the Company's equity securities during the quarter ended December 31, 2010.
Securities Issuable Under Equity Compensation Plans
For a discussion of the securities authorized under our equity compensation plans, see Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters,” which incorporates by reference the information to be disclosed in our definitive proxy statement for our 2011 Annual Meeting of Stockholders.
ITEM 6. Selected Financial Data
The following selected consolidated financial data, as of and for each year in the five-year period ended December 31, 2010, is derived from our consolidated financial statements. The information set forth below should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations, and the Consolidated Financial Statements and Notes thereto included elsewhere in this annual report. The selected balance sheet data as of December 31, 2010 and 2009, and statement of operations data for each year in the three-year period ended December 31, 2010, have been derived from our audited financial statements also included elsewhere herein. The selected historical balance sheet data as of December 31, 2008, 2007 and 2006, and statement of operations data for the years ended December 31, 2007 and 2006, are derived from, and are qualified by reference to, audited financial statements of the Company not included herein.
During 2009, we eliminated certain positions in order to streamline operations. As a result, we recorded severance obligations totaling $0.4 million for year ended December 31, 2009. In addition, we recorded a charge for remaining lease obligations in the amount of $0.1 million for a portion of a leased facility that is no longer being utilized.
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our consolidated financial statements and the related notes contained elsewhere in this Annual Report on Form 10-K and in our other Securities and Exchange Commission filings. The following discussion may contain forward-looking statements that constitute our expectations or forecasts of future events as of the date this report was filed with the Securities and Exchange Commission (SEC) and are not statements of historical fact. You are cautioned not to place undue reliance on these forward-looking statements and to note that they speak only as of the date hereof. Factors that could cause actual results to differ materially from those set forth in the forward-looking statements are set forth in the risk factors listed from time to time in our filings with the SEC as well as those set forth in Item 1A, “Risk Factors.”
We develop, manufacture, market and distribute single-use medical devices used in minimally invasive procedures within the cardiovascular system. Our products are sold in 40 countries and are used to treat arterial blockages in the heart and legs as well as the removal of pacemaker and defibrillator leads. Approximately 60% of our disposable product revenue is from products used in connection with our proprietary excimer laser system, the CVX-300®. Our single-use laser catheters contain up to 250 small diameter, flexible optical fibers that can access difficult to reach peripheral and coronary anatomy and produce evenly distributed laser energy at the tip of the catheter for more uniform ablation. We believe that our excimer laser system is the only laser system approved in the United States, Europe, Japan and Canada for use in multiple, minimally invasive cardiovascular procedures.
For an overview of our Vascular Intervention and Lead Management business units, market opportunities, products and clinical trials, please see Part I, Item I, “Business” to this Annual Report on Form 10-K.
Revenue by Product Line
Financial Results by Geographical Segment
Our two reporting segments consist of United States Medical, which includes the United States and Canada, and International Medical, which includes Europe, the Middle East, Asia Pacific, Latin America and Puerto Rico. United States Medical also includes all costs for our corporate headquarters, research and development, and corporate administrative functions. The International Medical segment is engaged primarily in distribution activities, with no manufacturing or product development functions. As of December 31, 2010, 2009, and 2008, cost allocations of these functions to International Medical have not been performed.
Selected Consolidated Statements of Operations Data
The following tables present Consolidated Statements of Operations data for the years ended December 31, 2010 and December 31, 2009 based on the percentage of revenue for each line item, as well as the dollar and percentage change of each of the items.
Year Ended December 31, 2010 Compared with Year Ended December 31, 2009
Revenue and gross margin
Revenue for the year ended December 31, 2010 was $117.9 million, an increase of 3% as compared with $114.8 million for the year ended December 31, 2009. This increase is mainly due to increased Lead Management (LM) disposables revenue and increased equipment rental revenue, offset by a decline in Vascular Intervention (VI) disposables revenue compared with the prior year. Our product mix remained stable year-over-year, with disposables products generating 86% of revenue, service and other revenue generating 8% and revenue from laser sales and rentals at 6% of total revenue in both years.
VI revenue, which includes products used in both the peripheral and coronary vascular systems, decreased 3% from 2009 to 2010. VI sales include three product categories — atherectomy, which decreased 1%; crossing solutions, which decreased 4%; and thrombectomy, which decreased 8%, all compared with 2009. The decline in atherectomy revenue was due primarily to a decrease in sales of our Turbo Elite® products, as a result of a challenging economic environment, disruption associated with the elimination and realignment of certain sales territories in the second half of 2010 and ongoing competitive product pressures. These declines were partially offset by sales of our Turbo-Tandem® product which was launched in March 2010, which generated revenue of $4.4 million in 2010. We believe the decrease in crossing solutions product sales is primarily due to the competitive environment, with the introduction by competitors of alternative crossing solutions products in late 2009. We believe the decline in thrombectomy revenue is partially due to ordering patterns adversely impacted as a result of the QuickCat™ recall announced in July 2010.
For our VI business, we have six anticipated growth drivers for 2011 and beyond: (i) we intend to improve our sales execution; (ii) we intend to leverage the new reimbursement changes for 2011, including the newly established reimbursement for office-based procedures; (iii) we anticipate gaining product approval in Japan for our Turbo Elite® and Quick-Cross® family of products; (iv) we hope to gain FDA approval in late 2011 for a product line extension to our Turbo-Tandem; (v) we are pursuing a U.S. indication for ThromCat® XT, our peripheral thrombectomy product we currently sell in Europe; and (vi) we anticipate receiving FDA approval to begin our EXCITE in-stent restenosis (ISR) clinical trial.
LM revenue grew 12% in 2010 as compared with 2009. We continue to believe our LM revenue is increasing primarily as a result of: (1) clinical data supporting the safety and efficacy of removing pacemaker and defibrillator leads, including results from the four-year Lead Extraction in Contemporary Settings (LExICon) study published in the February 9, 2010 issue of the Journal of the American College of Cardiology, (2) expanded guidelines set forth by the Heart Rhythm Society for lead extractions, and (3) our expanded sales organization, which was initially established in 2008.
For our Lead Management business, we have five anticipated growth drivers in 2011 and beyond: (i) we intend to support training and education to more comprehensively manage non-functional or redundant pacemaker and defibrillator leads and scenarios where venous occlusion prevents implant of an additional lead; (ii) we intend to offer more simulation events in 2011 to meet a growing demand, as simulation is proving to be an excellent training platform; (iii) we intend to continue to build our Fellows program; (iv) we anticipate product approval for our new, advanced laser sheath in late 2011 in Europe; and (v) we anticipate approval for our LLD product in Japan.
Laser equipment revenue was $7.2 million and $6.8 million for 2010 and 2009, respectively. Rental revenue increased 11% in 2010 as compared with the prior year. This increase is due primarily to the increase in our installed rental base of laser systems, which increased to 456 at December 31, 2010 from 438 at December 31, 2009, as well as our focus on converting under-performing Cap-Free (fee per procedure) lasers to straight rentals. Equipment sales revenue, which is included in laser equipment revenue, decreased 7% from 2009. We sold 14 laser systems in each of 2010 and 2009; however, our average sales price of laser systems decreased slightly in 2010 compared with the prior year primarily due to the mix of new vs. remanufactured systems sales. Service and other
revenue increased 1%, to $9.4 million in 2010 from $9.3 million in 2009, due primarily to our increased installed base of laser systems.
We placed 78 laser systems with new customers during 2010 compared with 122 during the prior year. Of those new laser placements, 38 laser systems were transfers from the existing installed base in 2010 compared with 70 transfers in 2009. In the past two years, we have placed more focus on redeploying laser systems from hospitals with low laser-based catheter utilization to hospitals where we believe utilization will be higher, in order to increase productivity per laser system. Both our focus on redeploying laser systems and our emphasis on increasing sales to existing accounts have resulted in fewer net new placements as compared with year-ago periods, which was anticipated. This brings our worldwide installed base of laser systems to 942 (726 in the U.S.) at December 31, 2010.
On a geographic basis, revenue in the United States was $101.0 million in 2010, an increase of 4% from the prior year. International revenue totaled $16.9 million, a decrease of 6% from 2009, due in part to the impact of foreign currency fluctuations.
Gross margin in 2010 and 2009 was 71.1%. Gross margin was favorably impacted by the year-over-year change in product mix, as the year-over-year revenue increase was primarily in higher margin disposable products. Laser margins in 2010 were also slightly higher than laser margins in the prior year, due primarily to an increase in straight rentals and a decrease in Cap-Free (fee per procedure) programs. However, these improvements in gross margin were offset by the impact of the voluntary product recall and related expenses for product replacement of the QuickCat catheter. Cost of products sold included a $0.3 million charge related to the recall, of which $0.2 million was related to the costs associated with the return and replacement of product and $0.1 million was related to the disposal and write-off of inventory.
Operating expenses of $90.9 million in 2010 decreased 3% from $93.7 million in 2009. Operating expenses in 2010 and 2009 include a number of special items which are separately disclosed components within operating expenses in our statement of operations. In 2010, these special items totaled $9.4 million, compared with $10.1 million in 2009, and they are further described below. In addition, selling, general and administrative expenses decreased 3%, and research, development and other technology decreased 1% as compared with the prior year.
Operating expenses represented 77% of total revenue in 2010 as compared with 82% of total revenue in 2009. Over the past twelve months, our focus on productivity and expense management activities, along with the elimination of certain positions within the Company to streamline operations, have contributed to the reduction in operating expenses as a percentage of revenue as compared with the prior year.
Selling, general and administrative. Year-over-year fluctuations in selling, general and administrative expenses included:
Research and development. Research, development and other technology expenses of approximately $14.9 million in 2010 decreased 1% compared with 2009, and in 2009 and 2010 represented 13% of revenue. We believe research and development investments are critical to increasing our revenue growth rate. As a result, we plan
to increase our activities in this area which will likely result in increased research and development investments as a percentage of revenue. Costs included within research, development and other technology expenses are product costs, clinical studies costs and royalty costs associated with various license agreements with third-party licensors. Fluctuations in these costs are as follows:
Federal investigation legal and accrued indemnification costs. In the third quarter of 2010, three former employees with whom we have indemnification obligations were indicted on charges related to the subjects of a federal investigation, which significantly increased the likelihood that the former employees’ future defense costs will be substantial and ongoing, and that our indemnification obligations to these employees will exceed the limits of our insurance coverage. Therefore, at September 30, 2010, we recorded a $6.5 million charge to accrue the low end of our estimate of the range of our contingent liability under the indemnification obligations. We currently estimate that the legal fees in this matter for the Federal District Court stage of these proceedings could range from $6.5 million to $11.5 million through trial and that these costs would be paid over the course of the court proceedings. We developed the estimate with the assistance of outside legal counsel familiar with court proceedings similar in nature to the proceedings related to our indemnification obligations. The actual expenses may be higher or lower than the estimate depending upon final resolution of the matter. As of December 31, 2010, we have received invoices for such legal fees and related costs of $1.2 million related to the former employees’ defense. See Note 18, “Commitments and Contingencies,” of the consolidated financial statements included in Part IV, Item 15 of this report for further discussion of this matter. In addition, we incurred approximately $0.3 million of legal costs related to the conclusion of the federal investigation in 2010.
Legal and other expenses related to the federal investigation were approximately $2.4 million in 2009.
Federal investigation settlement. In December 2009, we reached a resolution with the federal government regarding the previously disclosed federal investigation. As part of the resolution, we entered into a Non-Prosecution Agreement with the Department of Justice (DOJ) and we agreed to a forfeiture of $100,000, and the DOJ has agreed not to prosecute the Company in return for compliance with the terms of the agreement. In addition, we entered into a civil Settlement Agreement with the DOJ and the Office of Inspector General (OIG) of the United States Department of Health and Human Services, pursuant to which we settled civil and administrative claims related to the federal investigation for a cash payment to the United States government of $4.9 million, without any admission of wrongdoing by the Company. See further discussion of this matter in Note 18, “Commitments and Contingencies,” of the consolidated financial statements included in Part IV, Item 15 of this report.
Employee termination and lease abandonment costs. In the third quarter of 2010, we terminated 14 employees, primarily within the Vascular Intervention sales organization, as a result of a strategic re-alignment of certain sales territories designed to improve sales productivity. As a result, we recorded severance obligations totaling $0.7 million in the third quarter of 2010. Effective November 1, 2010, Mr. Geisenheimer retired from his positions as Chairman, President, and Chief Executive Officer. In connection with Mr. Geisenheimer’s retirement
and release of claims, the Company paid to Mr. Geisenheimer a lump sum payment of $0.5 million, equal to one-year’s salary, which represents the amount payable under Mr. Geisenheimer’s Employment Agreement in connection with his termination of employment. In addition, outstanding stock options held by Mr. Geisenheimer covering 140,279 shares of the Company’s common stock became fully vested in accordance with their terms, resulting in non-cash stock compensation expense of $0.4 million. These amounts, along with certain health insurance premiums, were recorded in the three months ended December 31, 2010.
In the second and third quarters of 2009, we eliminated certain positions in order to streamline operations. As a result, we recorded severance obligations totaling $410,000 for the year ended December 31, 2009. In addition, we recorded a charge for remaining lease obligations in the amount of $126,000 for a portion of a leased facility that is no longer being utilized.
Asset impairment charge. In the third quarter of 2010, we wrote off a capital project in process which is now no longer expected to be completed and utilized, due to a recent EPA ruling which effectively limited the useful life of the asset.
Litigation settlement. The $1.2 million included in this line item in 2009 represent royalties related to a patent license agreement, which was executed and paid in December 2009.
Discontinuation costs—Safe-Cross product line. In the third quarter of 2009, we discontinued the marketing and sales of the Safe-Cross product line, which was acquired from KNC in May 2008. The $1.1 million charge includes a patent impairment charge in the amount of $0.2 million, impairment of long-lived assets in the amount of $0.4 million, inventory write-offs of $0.2 million and an amount in consideration of estimated remaining obligations to KNC and customers of $0.3 million.
Other income (expense)
Interest income, net. Interest income decreased 46% to $0.2 million in 2010 from $0.4 million in 2009. The decrease in interest income in 2010 is due primarily to lower interest rates on our invested balances and a lower investment portfolio balance.
Loss on sale of auction rate securities. In the fourth quarter of 2009, we sold two of our auction rate securities at 90% and 92% of par, respectively. The amounts recorded represent the realized loss on the sale of these securities, which were recorded on our balance sheet at 90% of par at the date of sale.
Other-than-temporary impairment of auction rate securities. In the fourth quarter of 2009, we determined that our remaining auction rate securities were other-than-temporarily impaired, due to a change by management regarding our intent to hold such investments until a full recovery of their par value. The $1.1 million recorded represents the impairment calculated by an independent consultant. See further discussion of our auction rate securities in Note 3 to the consolidated financial statements included in Part IV, Item 15 of this report.
Loss before income taxes
Pre-tax loss for the year ended December 31, 2010 was $6.8 million, compared with a pre-tax loss of $13.2 million for the year ended December 31, 2009. The current year results included $9.4 million of special items and the prior year results included $10.1 million of special items, in addition to $1.6 million of losses related to our auction rate securities, as described above.
Income tax expense
For the year ended December 31, 2010, we increased to 100% our valuation allowance against our U.S. deferred tax asset. The effect of the valuation allowance adjustment was to increase the Company’s provision for income taxes by $6.1 million for the year ended December 31, 2010. Recent events, primarily the third quarter indictment of former employees, the related $6.5 million accrual for indemnification costs for these employees, and the possibility that such costs could exceed the estimated accrual, caused us to conclude that we no longer meet the accounting criteria for recognizing a portion of our deferred tax asset. See Note 13, “Income Taxes,” to our consolidated financial statements for further discussion. Income tax expense also included approximately $142,000 comprised of state and foreign income taxes payable for the year ended December 31, 2010.
We recorded a net loss for year ended December 31, 2010 of $13.1 million, or $(0.39) per fully diluted share, compared with a net loss of $13.4 million, or $(0.41) per fully diluted share, in 2009.
The functional currency of Spectranetics International B.V. and Spectranetics Deutschland GmbH is the euro. All revenue and expenses are translated to U.S. dollars in the consolidated statements of operations using weighted average exchange rates during the year. Fluctuation in currency rates during the year ended December 31, 2010 as compared with the prior year caused a decrease in consolidated revenue of $0.5 million and a decrease in consolidated operating expenses of $0.3 million, representing less than a 1% decrease as compared with the prior year.
The following tables present Consolidated Statements of Operations data for the years ended December 31, 2009 and December 31, 2008 based on the percentage of revenue for each line item, as well as the dollar and percentage change of each of the items.
Year Ended December 31, 2009 Compared with Year Ended December 31, 2008