| (together with its subsidiaries, "e Arrow "e or the "e Company "e ) was incorporated as a Pennsylvania corporation in 1975 |
| Arrow develops, manufactures and markets a broad range of clinically advanced, disposable catheters, heart assist devices and related products for critical and cardiac care |
| The Companyapstas critical care products are used principally for central vascular access in the administration of fluids, drugs and blood products, patient monitoring and diagnostic purposes |
| These products are used by anesthesiologists, critical care specialists, surgeons, cardiologists, nephrologists, emergency and trauma physicians and other health care providers |
| Arrowapstas cardiac care products are used by interventional cardiologists, cardiac surgeons, interventional radiologists and electrophysiologists for such purposes as the diagnosis and treatment of heart and vascular disease and to provide short-term cardiac assist following cardiac surgery, serious heart attack or balloon angioplasty |
| CRITICAL CARE PRODUCTS Arrowapstas critical care products, the first of which were originally introduced in 1977, accounted for approximately 85dtta0prca of net sales in each of fiscal 2006, 2005 and 2004 |
| The majority of these products are vascular access catheters and related devices which consist principally of the following: the Arrow-Howes(TM) Multi-Lumen Catheter, a catheter equipped with three or four channels, or lumens, that enables the simultaneous administration of multiple critical care therapies through a single puncture site; double-and single-lumen catheters, which are designed for use in a variety of clinical procedures; percutaneous sheath introducers, which are used as a means for inserting cardiovascular and other catheterization devices into the vascular system during critical care procedures; radial artery catheters, which are used for measuring arterial blood pressure and taking blood samples; FlexTip Plus(TM) epidural catheters, which are designed to minimize indwelling complications associated with conventional epidural catheters; Percutaneous Thrombolytic Devices, which are designed for clearance of thrombosed hemodialysis grafts in chronic hemodialysis patients; and hemodialysis access catheters, including the Cannon CatheterTM, which are used to facilitate dialysis treatment |
| Many of the Companyapstas vascular access catheters are treated with the ARROWg+ard(TM) or ARROWg+ard Blue Plus(TM) antiseptic surface treatments to reduce the risk of catheter related infection |
| ARROWg+ard Blue Plus(TM) is a newer, longer lasting formulation of ARROWg+ard(TM) and provides antimicrobial treatment of the interior lumens and hubs of each catheter |
| Many of the Companyapstas procedure kits also feature its sharps safety devices to protect against inadvertent needle sticks |
| The Company also sells its Arrow Select Kits in certain geographic regions, which serve the Companyapstas customers by providing configured kits to meet their specific needs |
| These kits can be assembled from any of the Companyapstas product lines and are configured according to a customerapstas specifications |
| During the second quarter of fiscal 2006, as part of its ongoing efforts to meet physicians &apos needs for safety and management of risk of infection in the hospital setting, the Company began selling its new Maximal Barrier central venous access kit, which includes a full body drape, a catheter treated with the ARROWg+ard(R) antimicrobial technology, and other accessories |
| This new kit addresses recent guidelines for reducing catheter-related bloodstream infections promulgated by the Centers for Disease Control and the Institute for Healthcare Improvementapstas `100cmam000 Lives &apos initiative |
| In October 2006, the Company introduced the Arrow Pressure Injectable PICC (Peripherally Inserted Central Catheter), which addresses the emerging therapeutic needs for a catheter that can withstand the higher pressures required by the injection of contrast media for CT scans |
| The Companyapstas critical care product line also includes custom tubing sets used to connect central venous catheters to blood pressure monitoring devices and drug infusion systems, and the HemoSonic(TM), a hemodynamic monitoring system that continuously measures descending aortic blood flow using a non-invasive esophageal ultrasound probe |
| In March 2003, the Company expanded its critical care product line with the acquisition of Klein-Baker Medical, Inc, a company that develops, manufactures and markets the Neo[heart]Care product line of specialty catheters and related procedure kits for use by neonatal intensive care units |
| As previously reported, in December 2004, the Company announced a voluntary nationwide recall of all of the Neo[heart]Care NeoPICC 1dtta9 FR Peripherally Inserted Central Catheters (the "e NeoPICC Catheters "e ) |
| As part of its previously announced plans to rationalize its global manufacturing operations, the Company decided to accelerate the integration of its Neo[heart]Care manufacturing operations into its other existing facilities and, in December 2005, sold its San Antonio, Texas facility where these operations had formerly been conducted |
| To address inspectional observations of the US Food and Drug Administration, or the FDA, and to facilitate this integration, in January 2005 the Company temporarily ceased the manufacture, shipment and sale of its entire Neo[heart]Care product line, including the NeoPICC Catheters, until it has completed the implementation of all corrective actions related to the FDAapstas inspections |
| The Company presently expects to submit a new 510(k) pre-market notification to the FDA for a modified version of the NeoPICC Catheter during the second quarter of fiscal 2007 and has decided to delay the resumption of production of the Neo[heart]Care product line, including the NeoPICC Catheters, until it has received FDA marketing clearance for these modifications |
| See Notes to Consolidated Financial Statements - Note 19 in Item 8 of this report and "e Government Regulation "e elsewhere in this Item 1 |
| CARDIAC CARE PRODUCTS Arrowapstas cardiac care products accounted for approximately 15dtta0prca of net sales in each of fiscal 2006, 2005 and 2004 |
| These products include cardiac assist products, such as intra-aortic balloon, or IAB, pumps and catheters, which are used primarily to augment temporarily the pumping capability of the heart following cardiac surgery, serious heart attack or balloon angioplasty |
| The Companyapstas IAB products include the AutoCat(TM)2 WAVE IAB pump and associated LightWAVE(TM) catheter system, which utilizes fiber optic pressure-sensing catheter instrumentation and provides total automation of the pumping process for the broadest range of patients, including those with severely arrhythmic heartbeats |
| The AutoCAT(R)2 WAVE(TM) is the only IAB pump that anticipates aortic valve closures before they occur and has generated significant interest since its introduction in January 2004, (3) resulting in customer feedback that has provided the Company with valuable information for making various enhancements to this product |
| During the fourth quarter of fiscal 2006, the Company released the latest version of the AutoCat(TM)2 WAVE IAB pump and associated LightWAVE(TM) catheter system, which includes new software upgrades and related hardware changes, all contributing to the enhanced functionality of the device |
| The Companyapstas IAB products also include the Ultraflex 7dtta5 Fr |
| catheter, which is the smallest IAB in the market and employs the Companyapstas proprietary, wire reinforced technology |
| In addition, the Companyapstas cardiac care product line includes electrophysiology products, which are used primarily to map the electrical signals which activate the heart; the Berman(TM) Angiographic Catheter, which is used for pediatric cardiac angiographic procedures; and the Super Arrow-Flex(TM) sheath, which provides a kink-resistant passageway for the introduction of cardiac and other catheters into the vascular system |
| In addition, as further discussed below under "e Research and Product Development, "e the Company is currently developing the CorAide(TM) Left Ventricular Assist System, or LVAS, a small non-pulsatile, centrifugal flow ventricular assist device |
| SALES AND MARKETING Arrow markets its products to physicians and hospitals through a combination of direct selling, independent distributors and group purchasing organizations |
| Within each hospital, marketing efforts are targeted to those physicians, including critical care specialists, cardiologists, anesthesiologists, interventional radiologists, electrophysiologists and surgeons, most likely to use the Companyapstas products |
| Arrowapstas products are generally sold in the form of pre-sterilized procedure kits containing the catheters and virtually all of the related medical components and accessories needed by the clinician to prepare for and perform the intended medical procedure |
| Additional sales revenue is derived from equipment provided for use in connection with certain of the Companyapstas disposable products |
| In this market, approximately 94dtta0prca of the Companyapstas fiscal 2006 revenue was generated by its direct sales force |
| The remainder resulted from shipments to independent distributors |
| For the majority of such distributors, the Companyapstas products represent a principal product line |
| Direct selling generally yields higher gross profit margins than sales made through independent distributors |
| The Companyapstas acquisitions of some of its distributors in key US and international markets during the past several years have resulted in sales and gross profit growth, including, most recently, its acquisition in April 2006 of certain assets of Kimal PLC, its former distributor in the United Kingdom and Ireland, which continues to distribute the Companyapstas products in the Middle East region |
| Internationally, the Company sells its products through direct sales subsidiaries serving markets in Japan, Germany, the Netherlands, France, Spain, Greece, South Africa, Canada, Mexico, the Czech Republic, Slovakia, Austria, Switzerland, Portugal, Italy, the United Kingdom and Ireland |
| As of October 1, 2006, independent distributors in 91 additional countries sell the Companyapstas products in the remainder of the world |
| To support growth in international sales, the Company owns and operates two manufacturing facilities in Chihuahua, Mexico, the second of which was completed and commenced production in the second quarter of fiscal 2006, and has leased additional manufacturing space in Mexico since fiscal 2002 |
| The Company also owns and operates a manufacturing and product development facility in Hradec Kralove, Czech Republic, which was expanded in fiscal 2003, and a new manufacturing and packaging facility in Zdar, Czech Republic, which was completed and commenced production in the fourth quarter of fiscal 2006 |
| Both the new Chihuahua, Mexico plant and the new Zdar, Czech Republic plant were constructed as part of the Companyapstas multi-year capital investment plan to increase its worldwide manufacturing capacity and rationalize its production operations |
| Production is based primarily on the level of inventories of finished products and projections of future customer demand with the objective of shipping from stock upon receipt of orders |
| As previously reported, increased demand for the Companyapstas products over the last several years had limited its ability to supply products at the required unit volumes given its previously existing manufacturing capacity level |
| As a result, during fiscal 2006, the Company continued to actively address the root causes of these capacity constraints that resulted in backorders on several products by expanding its worldwide manufacturing capacity and improving the efficiency of its processes and technology on a priority basis as part of its previously reported "e Project Operational Excellence "e |
| As a result of these efforts, the Company has been able to decrease its backorders and increase its order fill rates during fiscal 2006 |
| No single customer accounts for more than 10prca of the Companyapstas sales |
| Purchases of the Companyapstas products by hospitals and physicians have not been materially influenced by seasonal factors |
| RESEARCH AND PRODUCT DEVELOPMENT Arrow is engaged in ongoing research and development to introduce clinically advanced new products, to enhance the effectiveness, ease of use, safety and reliability of its existing products and to expand the clinical applications for which use of its products is appropriate |
| The principal focus of the Companyapstas research and development effort is to identify and analyze the needs of physicians in critical and cardiac care medicine, and to develop products that address these needs |
| The Company views ideas submitted by physicians and other health care professionals as an important source of potential research and development projects |
| The Company believes that these end-users are often in the best position to conceive of new products and to recommend ways to improve the performance of existing products |
| Many of the Companyapstas principal products and product improvements have resulted from collaborative efforts with physicians, other health care professionals or other affiliated entities |
| For certain proprietary ideas, the Company pays royalties to such persons, and in many instances, incorporates such persons &apos names in the trade name or trademark for the specific product |
| The Company also utilizes other outside consultants, inventors and medical researchers to carry on its research and development effort and sponsors research through medical associations and at various universities and teaching hospitals |
| Certain of the Companyapstas strategic acquisitions and investments have provided the basis for its introduction of significant new products, including its IAB pumps and other cardiac care products, hemodynamic monitoring device, Cannon Catheter(TM) (4) hemodialysis catheter product and, until the temporary cessation of the Neo[heart]Care(R) product line in January 2005, specialty catheters and related procedure kits for use in neonatal intensive care units |
| Research and development expenses totaled dlra27dtta5 million (5dtta7prca of net sales), dlra29dtta7 million (6dtta5prca of net sales) and dlra30dtta4 million (7dtta0prca of net sales) in fiscal 2006, 2005 and 2004, respectively |
| Such amounts were used to develop new products, improve existing products and implement new technology to produce these products |
| There can be no assurance that the FDA or any similar foreign government regulatory authority will grant the Company authorization to market products under development or, if such authorization is obtained, that such products will prove competitive when measured against other available products |
| The Companyapstas principal long-term development programs are described below |
| HEMOSONIC During fiscal 2006, the Company continued to support its HemoSonicTM cardiac output monitoring system that continuously measures descending aortic blood flow using a non-invasive esophageal ultrasound probe |
| The Companyapstas fiscal 2006 sales of this product were primarily outside of the US The Company is continuing its development of a second generation version of the device that will have a more extensive feature set, which the Company believes will be more user-friendly and better able to meet the needs of a broader range of clinicians |
| CORAIDE LVAS In April 2001, the Company entered into an agreement with The Cleveland Clinic Foundation, or the CCF, for the exclusive license of the CCFapstas patents in the field of non-pulsatile, centrifugal flow ventricular assist devices for the treatment of congestive heart failure and a related agreement for continued research and development of the CorAide(TM) ventricular assist device that had been a joint development effort of the CCF and the National Institutes of Health |
| The unique, magnetically suspended continuous flow pumping mechanism of the CorAide(TM) device uses moving blood as its lubricating system |
| Arrow considers the CorAide to be one of the most promising, continuous flow bridge-to-transplant devices currently in development and believes it may represent a future generation of permanent ventricular assist devices if human organ systems prove to be adaptable to non-pulsatile blood flow over a long period of time |
| During fiscal 2006, the Company continued its previously reported European clinical trial of the CorAide(TM) left ventricular assist system, or LVAS During the third quarter of fiscal 2006, the researchers conducting this clinical trial identified the need for several modifications to the CorAide(TM) device |
| As a result, the Company decided not to proceed with the enrollment of additional patients in the trial until these design modifications have been assessed and implemented |
| The Company views the CorAide(TM) LVAS as a long-term development program |
| The current version of the CorAide(TM) device is intended to provide support for Class IV congestive heart failure patients waiting for heart transplantation, candidates for bridging to natural recovery of ventricular function and patients requiring longer-term support |
| The Company believes that the CorAide(TM)apstas smaller size, less invasive surgical approach and inherently simpler design promises better opportunities for broader market acceptance than currently marketed LVAS devices |
| MANUFACTURING AND PRODUCTION TECHNOLOGY Arrow has developed the core technologies that the Company believes are necessary for it to design, develop and manufacture complex, high quality catheter-related medical devices |
| This technological capability has enabled the Company to develop internally many of the major components of its products and reduce its unit manufacturing costs |
| To help further reduce manufacturing costs and improve efficiency, the Company has increasingly automated the production of its high-volume products and plans to continue to make significant capital expenditures to improve efficiency and reduce operating costs |
| Raw materials and purchased components essential to Arrowapstas business have typically been available within the lead times required by the Company and, consequently, procurement has not historically posed any significant problems in the operation of the Companyapstas business |
| The Company currently maintains single suppliers for certain of its out-sourced components, particularly those used in the AutoCAT(R)2WAVETM, for reasons of quality assurance, sole source availability, cost-effectiveness or constraints resulting from regulatory requirements |
| Arrow works closely with its suppliers to assure continuity of supply while maintaining high quality and reliability |
| See "e Supply Interruption "e in Item 1A of this report |
| As previously reported, in April 2004, the Companyapstas Board of Directors authorized the initiation of a multi-year capital investment plan to increase its worldwide manufacturing capacity and rationalize its production operations |
| This effort included the construction or acquisition of additional manufacturing facilities in Zdar, Czech Republic and in Chihuahua, Mexico, both of which new facilities were completed and commenced operations during fiscal 2006, and the installation of related new equipment, which is ongoing |
| PATENTS, TRADEMARKS, PROPRIETARY RIGHTS AND LICENSES Arrow believes that patents and other proprietary rights are important to its business |
| The Company also relies upon trade secrets, know-how, continuing technological innovations and licensing opportunities to develop and maintain its competitive position |
| Arrow currently holds numerous US and foreign patents and patent applications that relate to aspects of the technology used in certain of the Companyapstas products, including its radial artery catheter, percutaneous sheath introducer, hemodialysis catheter, percutaneous thrombolytic device, interventional diagnostic sheath and catheter products, CorAide(TM) LVAS, esophageal ultrasound probe jacket and IAB pump products |
| In addition, Arrow is a party to several license agreements with unrelated third parties pursuant to which it has obtained, under varying terms, the exclusive rights to certain patents held by such third parties in consideration for royalty payments |
| Many of the Companyapstas major products, including its antiseptic surface treatment for catheters, have been developed pursuant to such license agreements |
| All existing patents owned by or licensed to the Company relating to any of its major products expire after fiscal 2007 |
| (5) There can be no assurance that patent applications owned by or licensed to the Company will result in the issuance of patents or that any patents owned by or licensed to the Company will provide competitive advantages for the Companyapstas products or will not be challenged or circumvented by others |
| See "e Dependence on Patents and Proprietary Rights "e in Item 1A of this report |
| From time to time, the Company is subject to legal actions involving patent and other intellectual property claims |
| The Company had been a defendant in a lawsuit in the United States District Court in the Southern District of New York, in which the plaintiffs, Thierry Pourchez and Bard Access Systems Inc, alleged that the Companyapstas Cannon-Cath(TM) split-tip hemodialysis catheters, which were acquired as part of the Companyapstas acquisition in November 2002 of specified assets of Diatek, Inc, infringed a patent owned by or licensed to the plaintiffs |
| In November 2003, this lawsuit was stayed pending the US Patent and Trademark Officeapstas ruling on its re-examination of the patent at issue |
| In September 2005, the Court dismissed this lawsuit because the US Patent and Trademark Office had not yet concluded its re-examination of the patent at issue |
| The plaintiffs may seek reinstatement of this lawsuit when the re-examination is concluded, which is expected to occur in calendar 2006, although the Company cannot presently predict the precise timing |
| Based on information presently available to the Company, the Company believes that its products do not infringe any valid claim of the plaintiffs &apos patent and that, consequently, it has meritorious legal defenses with respect to this action in the event it were to be reinstated |
| The Company is currently a plaintiff in two related patent infringement lawsuits in the United States District Court in Baltimore, Maryland against Datascope Corp |
| of Montvale, New Jersey |
| The Company manufactures and sells the Arrow-Trerotola(TM) Percutaneous Thrombolytic Device (PTD(R)), which is used to mechanically declot native arterio-venous fistulae and synthetic hemodialysis grafts |
| The PTD was invented by Dr |
| Scott Trerotola while working at Johns Hopkins University |
| Johns Hopkins University, the owner of three patents covering the PTD, is also a plaintiff, and the Company is the exclusive licensee of the Trerotola patents |
| The Company has alleged that Datascope infringes these three patents |
| The Company also commenced a patent infringement lawsuit in the United States District Court in Boston, Massachusetts against Spire Corporation of Bedford, Massachusetts |
| The Company is the owner of United States Patent Nodtta 6cmam872cmam198, which covers a method of inserting a double-Y-shaped multi-lumen catheter |
| The Company has alleged that the use of Spireapstas Pourchez RetrO(TM) High Flow Kink-Resistant Catheter infringes this patent |
| This case is currently in the middle of the discovery phase, and a trial is anticipated during calendar year 2007, although the Company cannot presently predict the precise timing |
| Although the ultimate outcome of any of these actions is not expected to have a material adverse effect on the Companyapstas business or financial condition, whether an adverse outcome in any of these actions would materially adversely affect the Companyapstas reported results of operations in any future period cannot be predicted with certainty |
| Arrow owns a number of registered trademarks in the United States and, in addition, has obtained registration in many of its major foreign markets for the trademark ARROW(R) and certain other trademarks |
| GOVERNMENT REGULATION As a developer, manufacturer and marketer of medical devices, Arrow is subject to extensive regulation by, among other governmental entities, the FDA and the corresponding state, local and foreign regulatory agencies in jurisdictions in which the Company sells its products |
| These regulations govern the introduction, marketing, distribution, installation and servicing of medical devices, the observance of certain standards with respect to the manufacture, testing and labeling of such devices, the maintenance of certain records, the tracking of such devices and other matters |
| Failure to comply with applicable federal, state, local or foreign laws or regulations could subject the Company to enforcement action, including product seizures, recalls, operating restrictions, withdrawal of marketing clearances or approvals, and civil and criminal penalties, including exclusion under Medicaid or Medicare, any one or more of which could have a material adverse effect on the Company |
| In recent years, the FDA has pursued a more rigorous enforcement program to ensure that regulated businesses, like the Companyapstas, comply with applicable laws and regulations |
| The FDA, in cooperation with US Customs and Border Protection, or CBP, also administers controls over the import of medical devices into the US The CBP imposes its own regulatory requirements on the import of the Companyapstas products, including inspection and possible sanctions for noncompliance |
| In addition, the FDA administers certain controls over the export of medical devices from the US See "e Stringent Government Regulation "e in Item 1A of this report |
| In addition, federal, state, local and foreign laws and regulations regarding the manufacture and sale of medical devices are subject to future changes |
| There can be no assurance that such changes or FDA, state, local or foreign regulatory agency enforcement activities will not have a material adverse effect on the Companyapstas business, financial condition or results of operations |
| In October 2002, The Medical Device User Fee and Modernization Act of 2002 was enacted, which amended the FDAapstas regulations to provide, among other things, the ability for the FDA to impose user fees for pre-market reviews of medical devices |
| The Companyapstas filings with the FDA for pre-market review are subject to this fee structure |
| The precise amount of fees that the Company will incur each year will be dependent upon the specific quantity and nature of its filings |
| Through the Medical Device User Fee and Modernization Act of 2002, the FDA increased its oversight of businesses involved with the reprocessing of single use medical devices, or SUDs |
| The regulation was amended to require reprocessing labeling, clarify submission pathways and define the requirements for validation of cleaning, sterilizing and functional performance of reprocessed SUDs |
| The improved guidance to reprocessors facilitates the reprocessing business and may result in increased competition and price erosion |
| On occasion, the Company has received notifications, including warning letters, from the FDA of alleged deficiencies in the Companyapstas compliance with FDA requirements |
| In addition, from time to time the Company has recalled, or issued safety alerts on, certain of its products, including its voluntary recall in December 2004 of its NeoPICC Catheters |
| (6) In fiscal 2005, the Company received three warning letters from the FDA related to the FDAapstas prior inspections of the Companyapstas Mount Holly, New Jersey facility, where it manufactures the Arrow Trerotola PTD(TM) Percutaneous Thrombolytic Device (the "e PTD "e ), and its Reading, Pennsylvania facility with respect to oversight of its Neo[heart]Care manufacturing operations and its San Antonio, Texas facility where it formerly manufactured Neo[heart]Careapstas NeoPICC Catheters prior to its termination of operations at this facility and integration of such operations into other existing facilities |
| The letters referred to inspectional observations that the FDA had previously issued concerning the PTDapstas and Neo[heart]Careapstas non-conformance with certain Quality System Regulations for medical devices |
| The Company responded to the warning letters by describing the specific follow-on corrective actions it had taken, including, as previously reported, the temporary cessation of the manufacture and sale of its entire Neo[heart]Care product line and, with respect to the PTD, the implementation and enhancement of new compliance procedures, as well as related additional training of operation personnel |
| In addition, the Company reiterated its commitment to enhancing its good manufacturing practices and quality systems |
| As part of its Project Operational Excellence program, in February 2005 the Company engaged Quintiles Consulting, a provider of global consulting services to the medical device, pharmaceutical and biologics industries, to assist its project teams in implementing rigorous compliance procedures that in many respects are expected to exceed those meeting existing regulatory requirements, with the objective of achieving the highest practicable levels of product quality assurance |
| The Company continued its progress during fiscal 2006 in implementing these enhanced compliance procedures, and expects this process to be completed during the first quarter of fiscal 2007, after which the Company will embed these procedures into its corporate culture as part of its ongoing commitment to maintaining high quality standards |
| To date, no FDA warning letter, recall or safety alert has had a material adverse effect on the Company, but there can be no assurance that any such event would not have such an effect in the future |
| The Company has also increasingly become subject to new FDA and state regulations governing the distribution of pharmaceuticals because some of its procedure kits contain small quantities of certain prescription drugs manufactured by others, such as Lidocaine, to assist the physician in performing the intended medical procedure |
| These new regulations, which vary somewhat depending on the jurisdiction and are still evolving, impose rigorous compliance requirements with respect to both licensing of distributors and provision of drug pedigree certificates confirming the authenticity of the pharmaceuticals being distributed, including those contained in the Companyapstas kits |
| The Company is in the process of obtaining licenses and implementing other procedures for compliance with these new requirements |
| In addition, the delivery of the Companyapstas products is also regulated by the US Department of Health and Human Services and comparable state and foreign agencies responsible for reimbursement and regulation of healthcare |
| The Company is also governed by federal, state, local and foreign laws of general applicability, such as those regulating employee health and safety |
| In the early to mid 1990s, the review time by the FDA to approve medical devices for commercial release lengthened, and the number of marketing clearances and approvals decreased |
| In response to public and congressional concern, the FDA Modernization Act of 1997 was adopted with the intent of bringing better definition to the clearance process for new medical products |
| While FDA review times have improved since passage of the 1997 Act, there can be no assurance that the FDA review process will not continue to delay the Companyapstas introduction of new products in the US in the future |
| In addition, many foreign countries have adopted more stringent regulatory requirements that also have added to the delays and uncertainties associated with the release of new products, as well as the clinical and regulatory costs of supporting such releases |
| It is possible that delays in receipt of, or failure to receive, any necessary clearance or approval for the Companyapstas new product offerings could have a material adverse effect on the Companyapstas business, financial condition or results of operations |
| HEALTH CARE COST CONTAINMENT AND THIRD PARTY REIMBURSEMENT Government and private sector initiatives to limit the growth of health care costs, including price regulation, competitive pricing, insurance coverage and payment policies, and managed-care arrangements, are continuing in the United States and in many other countries where the Company does business |
| As a result of these changes, the marketplace has placed increased emphasis on the delivery of more cost-effective medical therapies |
| Government programs, including Medicare and Medicaid, private health care insurance and managed-care plans have attempted to control costs by limiting the amount of reimbursement such third party payors will pay to hospitals, other medical institutions and physicians for particular products, procedures or treatments |
| The increased emphasis on health care cost containment may result in reduced growth in demand for certain of the Companyapstas products in markets in the US where Arrow has 80prca or greater market share, and protecting that market share has affected the Companyapstas pricing in some instances |
| The Company also continues to face pricing pressures in certain product lines in both European and Japanese markets as governments strive to curtail increases in health care costs |
| The Company anticipates that the US Congress, state legislatures, foreign governments and the private sector will continue to review and assess alternative health care delivery and payment systems |
| The Company cannot predict what additional legislation or regulation, if any, relating to the health care industry may be enacted in the future or what impact the adoption of any federal, state or foreign health care reform, private sector reform or market forces may have on its business |
| There can be no assurance that any such reforms will not have a material adverse effect on the Companyapstas business, financial condition or results of operations |
| COMPETITION Arrow faces substantial competition from a number of other companies in the market for catheters and related medical devices and equipment, ranging from small, start-up enterprises to companies that are larger than Arrow with greater financial and other resources |
| The Company believes that its products are competing primarily on the basis of product quality and performance, product features that provide enhanced benefits to patients, customer and sales support, and cost-effectiveness |
| The Company also believes that its comprehensive manufacturing capability enables it to expedite the development and market introduction of new products and product features, and to reduce manufacturing costs, thereby permitting it to respond more effectively to competitive pricing in an environment where its ability to increase prices is limited |
| ENVIRONMENTAL COMPLIANCE The Company is subject to various federal, state and local laws and regulations relating to the protection of the environment |
| In the course of its business, the Company is involved in the handling, storing and disposal of materials which are classified as hazardous |
| The Company believes that its operations comply in all material respects with applicable environmental laws and regulations |
| Although the Company continues to make any necessary capital and operational expenditures for protection of the environment, it does not anticipate that these expenditures will have a material adverse effect on its business, financial condition or results of operations |
| PRODUCT LIABILITY AND INSURANCE The design, manufacture and marketing of medical devices of the types produced by the Company entail an inherent risk of product liability |
| The Companyapstas products are used in surgical and intensive care settings with seriously ill patients |
| Although the Company believes that, based on claims made against the Company in the past, the amount of product liability insurance maintained by the Company is adequate, there can be no assurance that such insurance will be available, or in an amount sufficient to satisfy claims made against the Company in the future, or that the Company will be able to obtain insurance in the future at satisfactory rates or in adequate amounts |
| The Companyapstas primary global product liability insurance policy is on a claims made basis |
| Product liability claims in the future, regardless of their ultimate outcome, could result in costly litigation and could have a material adverse effect on the Companyapstas business, reputation, its ability to attract and retain customers for its products, and its results of operations |
| EMPLOYEES As of October 1, 2006, the Company had approximately 4cmam000 full-time employees, of which 279 were hourly-paid manufacturing employees at the Companyapstas Reading and Wyomissing, Pennsylvania facilities |
| The Company has never experienced an organized work stoppage or strike and considers its relations with its employees to be good |
| AVAILABLE INFORMATION Arrowapstas internet address is: http://www |
| The Company makes available, free of charge, on its internet website its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other information filed or furnished pursuant to the Securities Exchange Act of 1934, as amended, or the Exchange Act, as soon as reasonably practicable after these filings have been made electronically with the SEC The Companyapstas Code of Conduct, which applies to all of its directors, officers and other employees, is also posted on its website |
| Information contained on the Companyapstas website is not incorporated by reference in this report |
| In particular, the Company must obtain specific clearance or approval from the FDA before it can market new products or certain modified products in the United States |
| In the United States, permission to distribute a new device generally can be met either through a 510(k) premarket notification or an application for a premarket approval, or PMA Under the FDAapstas requirements, if a manufacturer can establish that a newly developed device is "e substantially equivalent "e to a legally marketed predicate device, the manufacturer may seek marketing clearance from the FDA to market the device by filing a 510(k) premarket notification with the FDA With the exception of one IAB product, the Company has, to date, obtained FDA marketing clearance for its products only through the 510(k) premarket notification process |
| The 510(k) premarket notification must be (8) supported by data establishing the claim of substantial equivalence to the satisfaction of the FDA The process of obtaining a 510(k) clearance is normally three months or less |
| If substantial equivalence cannot be established or if the FDA determines that additional safety and effectiveness data is required to support an approval, the FDA will require that the manufacturer submit a PMA application that must be approved by the FDA prior to marketing the device in the United States |
| The PMA application must be supported by extensive data, including preclinical (laboratory) data and human clinical data, to demonstrate the safety and efficacy of the device with respect to its intended use disclosed in the application |
| Certain of the Companyapstas products, including the IAB and IAB pump and CorAideTM ventricular assist device currently under development, require approval through the more rigorous PMA application process |
| By regulation, the FDA has 180 days to review a PMA application and during that time an advisory committee may evaluate the application and provide recommendations to the FDA While the FDA has approved PMA applications within the allotted time period, review more often occurs over a significantly protracted period, usually 18 to 36 months, and some devices may never be approved for marketing |
| There can be no assurance that the FDA will grant all such clearances or approvals sought by the Company or that FDA review will not involve delays adversely affecting the marketing and sale of its products |
| Both a 510(k) premarket notification and a PMA application, if approved, may also include significant limitations on the indicated uses for which a product may be marketed |
| FDA enforcement policy prohibits the promotion of approved medical devices for unapproved uses |
| In addition, product approvals can be withdrawn for failure to comply with regulatory requirements or the occurrence of unforeseen problems following initial marketing |
| The FDA often requires post-market surveillance requirements for significant risk devices, such as ventricular assist devices, that require ongoing collection of clinical data during commercialization, which must be gathered, analyzed and submitted to the FDA periodically for up to several years |
| The Company is also required to adhere to applicable US and international quality system regulations, which require that the Company manufacture its products and maintain its records in a prescribed manner with respect to design, test, and manufacturing and quality control activities |
| To the extent that any quality issues are identified with respect to the Companyapstas products, the Company could be subject to substantial costs and write-offs, which could materially impact its results of operations |
| In addition, the Company is required to comply with FDA requirements for labeling and promotion of its products |
| Medical device laws are also in effect in many of the countries outside the US in which the Company does business |
| These laws range from comprehensive device approval and quality system requirements for some or all of the Companyapstas products to simpler requests for product data, certifications or compliance with packaging or labeling requirements |
| Many of the regulations applicable to the Companyapstas products in foreign countries are similar to those of the FDA and the number, scope and stringency of these requirements are increasing, which is adding to the delays and uncertainties associated with new product releases, as well as the clinical and regulatory costs of supporting such releases |
| For example, in the European Union, a single regulatory approval process has been created, with approval represented by the CE-mark |
| Although the Company has to date received authorization to CE-mark many of its more innovative products, including its Cannon Catheter(TM), there can be no assurance that its other products under development will be able to meet this stringent requirement for marketing a medical device in the European Union |
| The regulation of medical devices in Japan is governed by the Pharmaceutical Affairs Law, or the PAL Under the PAL, medical device manufacturers outside of Japan, such as the Company, must appoint a Marketing Authorization Holder, or MAH, located in Japan that holds a license to import and sell medical devices, and provide primary distribution services, including conducting quality assurance and safety control tasks for each such device |
| The PAL was amended in July 2006 to require foreign manufacturing facility accreditation by the MAH and also to permit the Japanese Government, through the Ministry of Health, Labor and Welfare, to inspect foreign manufacturing facilities that produce medical devices that are imported into Japan |
| The Company is in the process of completing product documentation files and other procedures for compliance with the amended PAL In addition, the Company is required to notify the FDA if it exports to certain countries medical devices manufactured in the US that have not been cleared by the FDA for distribution in the US Failure to comply with applicable federal, state, local or foreign laws or regulations could subject the Company to enforcement action, including product seizures, recalls, operating restrictions, withdrawal of marketing clearances or approvals or other required licenses, prohibition against importation of products from manufacturing facilities outside the US, and civil and criminal penalties, including exclusion under Medicaid or Medicare, any one or more of which could have a material adverse effect on its business, financial condition and results of operations |
| Federal, state, local and foreign laws and regulations regarding the development, manufacture and sale of medical devices are subject to future changes |
| There can be no assurance that such changes will not have a material adverse effect on the Companyapstas business, financial condition and results of operations |
| Significant Competition and Continual Technological Change The markets for medical devices are highly competitive |
| The Company currently competes with many companies in the development and marketing of catheters and related medical devices, as well as for establishing relationships with academic and research institutes, intellectual property licenses and collaborative development agreements |
| Some of the Companyapstas competitors have access to greater financial and other resources than it does |
| Furthermore, the markets for medical devices are characterized by rapid product development and technological change |
| Technological advances by one or more of the Companyapstas current or future competitors could render its present or future products obsolete or uneconomical |
| The Companyapstas future success will depend upon its ability to develop new products and technology to remain competitive with other developers of catheters and related medical devices, as well as to address the increasingly sophisticated and varied needs of its prospective consumers |
| The Companyapstas business strategy emphasizes the continued development and commercialization of new products and the enhancement of existing products for the critical care and cardiac care (9) markets |
| There can be no assurance that the Company will be able to continue to successfully develop new products and to enhance existing products, to manufacture these products in a commercially viable manner, to obtain required regulatory approvals or to gain satisfactory market acceptance for its products |
| Health Care Cost Containment and Third Party Reimbursement The Companyapstas products are purchased principally by hospitals, hospital networks and hospital buying groups |
| Although its products are used primarily for non-optional medical procedures, the Company believes that the overall, escalating cost of medical products and services has led and will continue to lead to increased pressures upon the health care industry to reduce the cost or usage of certain products and services |
| In the United States, these cost pressures have led to increased emphasis on the price and cost-effectiveness of any treatment regimen and medical device |
| Third party payors, such as governmental programs (eg, Medicare and Medicaid), private insurance plans and managed care plans, which are billed by hospitals for such health care services, are increasingly negotiating the prices charged for medical products and services and may deny reimbursement if they determine that a device was not used in accordance with cost-effective treatment methods as determined by the payor, was experimental, unnecessary or used for an unapproved indication |
| As a result, even though a new medical device may have been approved by the FDA, the Company may find limited demand for the device until reimbursement approval has been obtained from governmental and private third party payors |
| If reimbursement for the Companyapstas products is not available or at an insufficient level, the Company would not be able to sell its products on a competitive basis |
| Many international markets have government managed health care systems that control reimbursement for certain medical devices and procedures and, in most such markets, there also are private insurance systems which impose similar cost restraints |
| There can be no assurance that hospital purchasing decisions or government or private third party reimbursement policies in the United States or in international markets will not adversely affect the profitability of the Companyapstas products |
| Several comprehensive health care reform proposals have been, and continue to be, considered by the US Congress |
| While none of these proposals have to date been adopted, the intent of these proposals was, generally, to expand health care coverage for the uninsured and reduce the rate of growth of total health care expenditures |
| In addition, certain states have made significant changes to their Medicaid programs and have adopted various measures to expand coverage and limit costs |
| Several foreign countries in which the Company does business are also considering, and in some countries have already adopted, similar reforms to limit the growth of health care costs, including price regulation |
| Implementation of government health care reform, and other efforts to control costs may limit the price of, or the level at which reimbursement is provided for, the Companyapstas products |
| The Company anticipates that the US Congress, state legislatures, foreign governments and the private sector will continue to review and assess alternative health care delivery and payment systems |
| The Company cannot predict what additional legislation or regulation, if any, relating to the health care industry may be enacted in the future or what impact the adoption of any federal, state or foreign health care reform, private sector reform or market forces may have on its business |
| There can be no assurance that any such reforms will not have a material adverse effect on the Companyapstas business, financial condition or results of operations |
| Consolidation within the Medical Device Industry In keeping with the increased emphasis on cost-effectiveness in health care delivery, the current trend among hospitals and other customers of medical device manufacturers is to consolidate into larger purchasing groups to enhance purchasing power |
| As a result, transactions with customers tend to be larger, more complex and involve more long-term contracts than in the past |
| If the Company is not one of the providers selected by a purchasing group, it may be precluded from making sales to members of the purchasing group |
| Even if the Company is one of the selected providers, it may be at a disadvantage relative to other selected providers that are able to offer volume discounts based on purchases of a broader range of medical equipment and supplies |
| Furthermore, the enhanced purchasing power of these larger customers may also increase the pressure on pricing of the Companyapstas products and the Company may be required to commit to a pricing level that has a material adverse effect on its sales and profit margins, business, financial condition and results of operation |
| The medical device industry has also experienced some consolidation, partly in order to offer a broader range of products to large purchasers |
| As these consolidations occur, competition to provide products like the Companyapstas will become more intense |
| To the extent that the Company is forced to reduce its prices, its business will become less profitable unless it is able to achieve corresponding reductions in its expenses |
| Dependence on Patents and Proprietary Rights The Company owns numerous US and foreign patents and has several US and foreign patent applications pending |
| The Company also has exclusive license rights to certain patents held by third parties |
| These patents relate to aspects of the technology used in certain of the Companyapstas products |
| In addition, certain of the Companyapstas patents are due to expire within the next two years, including a US patent related to the original formulation of its ARROWg+ard(R) antiseptic surface treatment |
| The number of units sold in the US with the original formulation of the ARROWg+ard(R) antiseptic surface treatment as a percentage of the Companyapstas total US multilumen and hemodialysis unit sales was 18prca in fiscal 2006 |
| In recent years, the Company has been converting many of its sales of ARROWg+ard(R) coated products from the original formulation to the newer, longer lasting ARROWg+ard(R) BluePlus formulation and believes that this transition will reduce the potential risk associated with the expiration of the patent related to the original ARROWg+ard(R) formulation |
| The Company may be unsuccessful in its efforts to extend patent protection through improvement patents or modifications, and the failure to maintain its patents could have a material adverse effect on the Company |
| In addition, there can be no assurance that pending patent applications will result in issued patents or that patents issued to or licensed-in by the Company will not be challenged or circumvented by competitors or found to be valid or sufficiently broad to protect its technology or to provide it with any competitive advantage |
| The Company also relies on trade secrets and proprietary technology that it seeks to protect, in part, through confidentiality agreements with employees, consultants and other parties |
| There can be no assurance that (10) these agreements will not be breached, that the Company will have adequate remedies for any breach, that others will not independently develop substantially equivalent proprietary information or that third parties will not otherwise gain access to its trade secrets |
| The Company expends significant resources to monitor and enforce its intellectual property rights |
| However, it may not be able to detect infringement and its competitive position in the industry could be materially adversely affected |
| There has been substantial litigation regarding patent and other intellectual property rights in the medical device industry |
| From time to time, the Company is subject to legal actions involving patent and other intellectual property claims |
| Successful litigation against the Company regarding its patents or infringement of the patent rights of others could have a material adverse effect on its business, financial condition and results of operations |
| Historically, litigation has also been necessary to enforce and defend certain patent and trademark rights held by the Company |
| Future litigation may be necessary to enforce patent and other intellectual property rights belonging to the Company, to protect its trade secrets or other know-how owned by it, or to defend itself against claimed infringement of the rights of others and to determine the scope and validity of its and others &apos proprietary rights |
| Any such litigation could result in substantial cost to and diversion of effort by the Company |
| Adverse determinations in any such litigation could subject the Company to significant liabilities to third parties, require it to seek licenses from third parties for significant royalties or prevent it from manufacturing, selling or using certain of its products, any one or more of which could have a material adverse effect on the Companyapstas business, financial condition and results of operations |
| Risks Associated with International Operations Because the Company generates significant sales outside of the United States and many of its manufacturing facilities and suppliers are located outside of the US, it is subject to risks generally associated with international operations, such as: unexpected changes in regulatory requirements; tariffs, customs, duties and other trade barriers; difficulties in staffing and managing foreign operations; differing labor regulations; longer payment cycles and problems in collecting accounts receivable; risks arising from a specific countryapstas or regionapstas political or economic conditions, including the possibility of terrorist actions and economic destabilization of a region; destruction or natural disasters in significant geographical areas where the Company or its suppliers have manufacturing facilities; outbreak of life threatening communicable disease; fluctuations in currency exchange rates; foreign exchange controls that restrict or prohibit repatriation of funds; export and import restrictions or prohibitions; delays from customs brokers or government agencies; changes in foreign medical reimbursement policies and programs; differing protection of intellectual property; and potentially adverse tax consequences resulting from operating in multiple jurisdictions with different tax laws |
| Any one or more of these risks could materially adversely impact the success of the Companyapstas international operations |
| As the Companyapstas revenues from international operations increase, an increasing portion of its revenues and expenses are being denominated in currencies other than US dollars and, consequently, changes in exchange rates are having a greater effect on its operations |
| Inventory management is a concern in international operations due to the potential for rapidly changing business conditions and currency exposure |
| There can be no assurance that such factors will not have a material adverse effect on the Companyapstas business, financial condition and results of operations |
| In addition, there can be no assurance that laws or administrative practices relating to regulation of medical devices, labor, taxation, foreign exchange or other matters of countries within which the Company operates will not change |
| Any such change could also have a material adverse effect on the Companyapstas business, financial condition and results of operations |
| Potential Product Liability The Companyapstas business exposes it to potential product liability risks which are inherent in the design, manufacture and marketing of catheters and related medical devices |
| The Companyapstas products are often used in surgical and intensive care settings with seriously ill patients |
| In addition, many of the medical devices manufactured and sold by the Company are designed to be implanted in the human body for long periods of time, and component failures, manufacturing flaws, design defects or inadequate disclosure of product-related risks with respect to these or other products manufactured or sold by the Company could result in an unsafe condition or injury to, or death of, the patient |
| The occurrence of such a problem could result in product liability claims and/or a recall of, or safety alert relating to, one or more of the Companyapstas products |
| There can be no assurance that the product liability insurance maintained by the Company will be available or sufficient to satisfy all claims made against it or that it will be able to obtain insurance in the future at satisfactory rates or in adequate amounts |
| Product liability claims, safety alerts or product recalls in the future, regardless of their ultimate outcome, could result in costly litigation and could have a material adverse effect on the Companyapstas business, reputation, its ability to attract and retain customers for its products and its results of operations |
| In recent years, physicians, hospitals and other medical service providers who are users of the Companyapstas products have become subject to an increasing number of lawsuits alleging medical malpractice |
| Medical malpractice suits often involve large claims and substantial defense costs |
| The Company is subject to the risks associated with any such medical malpractice lawsuits |
| Supply Interruptions Raw materials and purchased components relating to the Companyapstas business have typically been available within the lead times required by the Company |
| However, there can be no assurance that they will continue to be available on the same terms |
| The Company maintains single suppliers for certain of its out-sourced components, and, although it has considered and continues to explore alternative vendors for many of these items, there can be no certainty that suitable alternative vendors, if needed, could be identified |
| Furthermore, the Company does not typically pursue regulatory qualification of alternative sources due to the strength of its existing supplier relationships and the time and expense associated with the regulatory validation process |
| If the Company were unable to obtain these raw materials or there were a significant increase in the price of essential materials or components, its business could be harmed |
| Dependence upon Strong Relationships with Physicians The research, development, marketing and sale of many of the Companyapstas products is dependent upon the Company maintaining strong working relationships with physicians and other health care professionals |
| The Company relies on these professionals to provide it with considerable knowledge and experience regarding its products and the marketing of its products |
| (11) Physicians assist the Company as researchers, marketing consultants, product consultants, inventors and as public speakers |
| If the Company fails to maintain its working relationships with physicians and receive the benefits of their knowledge, advice and input, many of its products may not be developed and marketed in line with the needs and expectations of the professionals who use and support its products, which could have a material adverse effect on its business, financial condition and results of operations |
| Risks Associated with Derivative Financial Instruments As a partial hedge against adverse fluctuations in exchange rates, the Company periodically enters into foreign currency exchange contracts with certain major financial institutions |
| By their nature, all such contracts involve risk, including the risk of nonperformance by counterparties |
| Accordingly, losses relating to these contracts could have a material adverse effect upon the Companyapstas business, financial condition and results of operations |
| The Companyapstas Foreign Currency Management Policy prohibits the use of derivative instruments for speculative purposes |
| Dependence on Key Management The Companyapstas success depends upon the continued contributions of key members of its senior management team |
| Accordingly, loss of the services of one or more of these key members of management could have a material adverse effect on the Companyapstas business |
| None of these individuals has an employment agreement with the Company |