| AMERICAN MEDICAL SYSTEMS HOLDINGS INC Item 1A Risk Factors The following risk factors should be considered carefully in connection with any evaluation of our business, financial condition, results of operations, prospects and an investment in our common stock |
| Additionally, the following risk factors could cause our actual results to materially differ from those reflected in any forward-looking statements |
| Our sales may be adversely affected if physicians do not recommend or endorse our products |
| We rely upon physicians to recommend, endorse and accept our products |
| Many of the products we acquired or are developing are based on new treatment methods |
| Acceptance of our products is dependent on educating the medical community as to the distinctive characteristics, perceived benefits, clinical efficacy, and cost-effectiveness of our products compared to competitive products, and on training physicians in the proper application of our products |
| We believe our products address major market opportunities, but if we are unsuccessful in marketing them, our sales and earnings could be adversely affected |
| Our growth will be slowed if new products are delayed or are not accepted |
| As part of our growth strategy, we intend to introduce a number of new products and product improvements |
| Product introductions depend upon a variety of factors, including timely receipt of appropriate regulatory approvals |
| If we do not introduce these new products and product improvements on schedule, for any reason, or if they are not well accepted by the market, our business may be adversely affected |
| Our sales could decline if our procedures are not accepted by patients |
| We predominantly sell implants and therapies for surgical procedures or therapies |
| Patient acceptance of our products and therapies depends on a number of factors, including the failure of non-invasive therapies, the degree of invasiveness involved in the procedures using our products, the rate and severity of complications, and other adverse side effects from the procedures using our products |
| Patients are more likely to first consider non-invasive alternatives to treat their urological disorders |
| Broader patient acceptance of alternative therapies or the introduction of new oral medications or other less-invasive therapies could adversely affect our business |
| Changes in third party reimbursement for our products and therapies may influence our customers’ purchasing activity |
| Our physician and hospital customers depend on third party government and non-government entities around the world to reimburse them for services provided to patients |
| The level of such third party reimbursement has fluctuated from time to time in the past, may fluctuate in the future, and is subject to review or withdrawal at any time |
| The level of reimbursement may influence whether customers purchase our products |
| Further, as we expand our offerings from implants surgically delivered to patients in hospital settings to minimally-invasive therapies delivered to patients in physician offices, we must address the information needs of varied reimbursement systems and processes |
| While our sales history of devices in the US does not reflect an obvious correlation between sales levels and changes in CMS reimbursement rates, office-based 8 _________________________________________________________________ [48]Table of Contents business may be more directly impacted by reimbursement rate fluctuations than our hospital-based business has been historically |
| Any unfavorable change in reimbursement could have a negative impact on our business |
| Our revenues and operating results may be negatively affected and we may not achieve future growth projections if we fail to compete successfully against our competitors |
| Many of our competitors have greater resources, more widely accepted products, less invasive therapies, greater technical capabilities and stronger name recognition in individual product categories than we do |
| Our competitors will continue to improve their products and develop new competing products, including less invasive or noninvasive products or pharmaceuticals |
| We may be unable to compete effectively with our competitors if we cannot keep up with existing or new alternative products, techniques, therapies and technology in the markets we serve |
| These new technologies and products may beat our products to the market, be more effective than our products or render our products obsolete by substantially reducing the prevalence of the conditions our products and therapies treat |
| We may experience an interruption in sales of a product and incur costs if that product is recalled |
| In the event that any of our products present a health hazard to the patient or physician or fail to meet product performance criteria or specifications, we could voluntarily recall the products |
| The FDA or an international regulatory body could also require us to recall the products |
| There is a possibility that we may recall products in the future and that future recalls could result in significant costs to us and in significant negative publicity which could harm our ability to market our products in the future |
| We may not be able to supply products that incorporate materials or components which are single- or sole-sourced |
| Many of our products utilize raw materials or components that are either single-or sole-sourced |
| These sources of supply could encounter manufacturing difficulties or may unilaterally decide to stop supplying us because of product liability concerns or other factors |
| We currently rely on single source suppliers for the silicone and fabric used in our male prostheses and for the porcine dermis and mesh used in many of our female products |
| Furthermore, we use single sources for the TherMatrx consoles and disposables |
| A key component of the InhibiZone antibiotic technology is also procured from a single source |
| We have no written agreements with our key suppliers requiring them to supply us with these raw materials or components, and there is no assurance that we would be able to timely or cost-effectively replace any of these sources upon any disruption |
| The loss of any of these suppliers could have a material adverse effect on our financial results in the near term, as we would be required to qualify alternate designs or sources |
| Inadequate data submissions or clinical study results which do not support a product approval may delay or preclude a product’s commercialization |
| Regulatory authorities around the world dictate different levels of manufacturing and design information and/or clinical data for various products and therapies in order to ensure their safety and efficacy |
| In the event the data submitted is deemed inadequate or the clinical study results do not support approval, a product may either not be fit for commercialization or may require a redesign to satisfy the regulatory authorities and/or clinical study outcomes |
| In addition, though a product’s clinical results may meet the regulatory requirements for product approval and commercialization, market acceptance and adoption of the product may not meet our expectations |
| Our sale of products could be reduced if we are unable to obtain the regulatory approvals necessary to market our products in the United States and foreign jurisdictions |
| If we fail to receive regulatory approval for future products, we will be unable to market and sell these products |
| In the United States, we must obtain approval from the FDA before we can begin commercializing most of our products |
| The FDA approval process is typically lengthy and expensive, and approval is never certain |
| Products distributed outside of the United States are also subject to foreign government regulations which vary from country to country |
| The time required to obtain approval from a foreign country may be longer or shorter than that required for FDA clearance |
| Our failure to comply with regulatory approvals could result in government authorities: • imposing fines and penalties on us; • preventing us from manufacturing our products; 9 _________________________________________________________________ [49]Table of Contents • bringing civil or criminal charges against us; • delaying the introduction of our new products into the market; • recalling or seizing our products; • disrupting the manufacture or distribution of our products; or • withdrawing or denying approvals for our products |
| In the event we fail to comply with manufacturing regulations, we could be prevented from selling our products |
| In order to commercially manufacture our products, we must comply with the FDA’s manufacturing regulations which govern design controls, quality systems and documentation policies and procedures |
| The FDA and foreign authorities periodically inspect our manufacturing facilities |
| Our failure to comply with these manufacturing regulations may prevent us or delay us from marketing or distributing our products and this would have a negative impact on our business |
| Our business may suffer if our new products are not cleared to market in the United States or any other market |
| We sell some of our products only in international markets because they have not been cleared for marketing in the United States |
| We may be unable to sell future products in Europe, the United States or any other market for a number of reasons |
| These reasons include, among others, that the potential products could be: • ineffective or cause harmful side effects during preclinical testing or clinical trials; • difficult to manufacture on a large scale; or • uneconomical for the healthcare reimbursement system |
| We may lose market share to our competitors and be unable to operate our business profitably in the event our patents and other intellectual property rights do not adequately protect our products and therapies |
| We rely on patents, trade secrets, copyrights, know-how, trademarks, license agreements and contractual provisions to establish our intellectual property rights and protect our products |
| These legal means, however, afford only limited protection and may not adequately protect our rights |
| In addition, we cannot be assured that pending patent applications will issue |
| The US Patent and Trademark Office (PTO) may deny or significantly narrow claims made under patent applications and the issued patents, if any, may not provide us with significant commercial protection |
| We could incur substantial costs in proceedings before the PTO These proceedings could result in adverse decisions as to the priority of our inventions |
| In addition, the laws of some of the countries in which our products are or may be sold may not protect our products and intellectual property to the same extent as US laws, or at all |
| We may be unable to protect our rights in trade secrets and unpatented proprietary technology in these countries |
| We seek to protect our trade secrets and unpatented proprietary technology, in part, with confidentiality agreements with our employees and consultants |
| We cannot assure you, however, that: • these agreements will not be breached; • we will have adequate remedies for any breach; or • trade secrets will not otherwise become known to or independently developed by our competitors |
| In the event of a claim that we infringe upon another’s intellectual property rights, we could incur significant costs and/or be required to stop the sale of the related product |
| The medical device industry is highly litigious with respect to patents and other intellectual property rights |
| Companies in the medical device industry have used intellectual property litigation to seek to gain a competitive advantage |
| In the future, we may become a party to lawsuits involving patents or other intellectual property |
| A legal proceeding, regardless of the outcome, would draw upon our financial resources and divert the time and efforts of our management |
| If we lose one of these proceedings, a court, or a similar foreign governing body, could require us to pay significant damages to third parties, require us to seek licenses from third parties and pay ongoing royalties, require us to redesign our products, or prevent us from manufacturing, using or selling our products |
| In addition to being costly, protracted litigation to defend or enforce 10 _________________________________________________________________ [50]Table of Contents our intellectual property rights could result in our customers or potential customers deferring or limiting their purchase or use of the affected products until the litigation is resolved |
| We may be involved in future proceedings before the US PTO with regard to three requests for interference claims filed by Conceptus, Inc |
| against two Ovion patent applications and one Ovion patent |
| We could incur significant costs or other negative impacts if significant product liability claims are made against us |
| The manufacture and sale of medical devices exposes us to significant risk of product liability claims |
| In the past, we have had a number of product liability claims relating to our products |
| In the future, we may be subject to additional product liability claims, some of which may have a negative impact on our business |
| As our product and therapy portfolio broadens into the treatment of additional medical indications, our historical product liability experience may not be a reflection of our longer term future exposure |
| If a product liability claim or series of claims is brought against us for uninsured liabilities or for amounts in excess of our insurance coverage, our business could suffer |
| If physician malpractice insurance costs increase, at some point physicians may alter their practice patterns and cease using our products |
| Unless the patients who would have been treated by these physicians are referred to other physicians, sales of our products could decline |
| If we are unsuccessful in integrating acquisitions, our business and financial condition could be adversely affected |
| We have acquired businesses in the past and we may acquire other businesses in the future |
| Failure to successfully retain critical employees of an acquired company, failure to gain FDA approval for the products of an acquired company, or the inability to establish and maintain appropriate communications, performance expectations, regulatory compliance procedures, accounting controls, and reporting procedures could have a material adverse affect on our business |
| Once an acquisition is completed, we may also experience: • difficulties in assimilating any acquired companies and products into our existing business; • delays in realizing the benefits of the acquired company or products; • diversion of our management’s time and attention from other business concerns; • lack of or limited direct experience in new markets we may enter; or • difficulties in retaining key employees of the acquired business necessary to manage these acquisitions |
| In addition, an acquisition could materially impair our operating results by causing us to incur debt or requiring us to amortize acquisition expenses and acquired assets |
| Loss of our manufacturing facility would adversely affect our financial position |
| We are currently operating with one manufacturing shift at a single facility |
| Although we believe we have adequate physical capacity to serve our business operations for the foreseeable future, we do not have a back up facility, and the loss of our Minnetonka facility would have a material adverse effect on our sales, earnings, and financial condition |
| Changes in international stability or foreign exchange rates could negatively impact our sales |
| During the fiscal 2005, approximately 21dtta8 percent of our sales were to customers outside the United States |
| Some of these sales were to governmental entities and other organizations with extended payment terms |
| A number of factors, including political or economic instability in the countries where we do business, could affect payment terms and our ability to collect foreign receivables |
| We have little influence over these factors and changes could have a material adverse impact on our business |
| In addition, foreign sales are influenced by fluctuations in currency exchange rates, mainly in the euro |
| In recent years, our sales have been positively impacted by increases in the value of the euro relative to the US dollar |
| Decreases in the value of the euro relative to the US dollar would negatively impact our sales |
| 11 _________________________________________________________________ [51]Table of Contents An inability to meet the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 could adversely affect investor confidence and, as a result, our stock price |
| During fiscal 2005 and 2004, we expended significant resources to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 |
| The requirements of this Act must be maintained quarterly and are likely to evolve as the result of a reassessment of the Act’s initial implementation |
| Failure to respond to changes in the requirements of the Act, our inability to comply regularly with the Act’s requirements, and the costs of ongoing compliance could have a material adverse affect on investor confidence and our business |
| Stock option expensing could impact investors’ confidence in our stock price |
| In December 2004, the Financial Accounting Standard board issued SFAS Nodtta 123(R), Share-Based Payment, pursuant to which all stock-based compensation awards must be measured and expensed in consolidated financial statements beginning for us with our first fiscal quarter of 2006 |
| Though we have been including footnote disclosure of the impact of the expense that would be recorded under SFAS Nodtta 123 to our earnings and earnings per share in our regularly published SEC filings, the impact of this change to our stock price, and to those throughout the market, is uncertain at this time |