| ASPECT MEDICAL SYSTEMS INC Item 1A Risk Factors |
| This Annual Report on Form 10-K contains, in addition to historical information, forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, including information relating to our ability to maintain profitability, information with respect to market acceptance of our BIS system, continued growth in sales of our products, our dependence on the BIS system, regulatory approvals for our products, our ability to develop or acquire new products and remain competitive and achieve future growth, information with respect to other plans and strategies for our business and factors that may influence our revenue and earnings for each fiscal quarter in 2006, for the year ending December 31, 2006 and beyond |
| These forward-looking statements involve risks and uncertainties and are not guarantees of future performance |
| Words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate” and variations of these words and similar expressions are intended to identify forward-looking statements |
| Our actual results could differ significantly from the results discussed in these forward-looking statements |
| The following important factors represent some of the current challenges to us that create risk and uncertainty |
| Failure to adequately overcome any of the following challenges could have a material adverse effect on our results of operations, business or financial condition |
| In addition, subsequent events and developments may 17 _________________________________________________________________ [59]Table of Contents cause our expectations to change |
| While we may elect to update these forward-looking statements we specifically disclaim any obligation to do so, even if our expectations change |
| We will not continue to be profitable if hospitals and anesthesia providers do not buy and use our BIS system in sufficient quantities |
| We were profitable for each of the years ended December 31, 2004 and December 31, 2005 |
| Our customers may determine that the cost of the BIS system exceeds cost savings in drugs, personnel and post-anesthesia care recovery resulting from use of the BIS system |
| In addition, hospitals and anesthesia providers may not accept the BIS system as an accurate means of assessing a patient’s level of consciousness during surgery or in the intensive care unit |
| If extensive or frequent malfunctions occur, healthcare providers may also conclude that the BIS system is unreliable |
| If hospitals and anesthesia providers do not accept the BIS system as cost-effective, accurate and reliable, they will not buy and use the BIS system in sufficient quantities to enable us to continue to be profitable |
| The success of our business also depends in a large part on continued use of the BIS system by our customers and, accordingly, sales by us of BIS Sensors |
| We expect that over time, sales of BIS Sensors will increase as a percentage of our revenue as compared to sales of Equipment as we build our installed base of monitors and modules |
| If use of our BIS system, and accordingly, sales of our BIS Sensors, do not increase, our ability to grow our revenue and maintain profitability could be adversely affected |
| We depend on our BIS system for substantially all of our revenue, and if the BIS system does not gain widespread market acceptance, then our revenue will not grow |
| We began selling our current BIS system in early 1998 and introduced commercially the latest version, the BIS XP system, at the end of the third fiscal quarter of 2001 |
| We also offer BIS monitoring systems, including the BISx system, for the integration into equipment sold by original equipment manufacturers |
| To date, we have not achieved widespread market acceptance of the BIS system for use in the operating room or in the intensive care unit from healthcare providers or professional anesthesia organizations |
| Because we depend on our BIS system for substantially all of our revenue and we have no other significant products, if we fail to achieve widespread market acceptance for the BIS system, we will not be able to sustain or grow our product revenue |
| Various factors may adversely affect our quarterly operating results through the first fiscal quarter of 2006 |
| Various factors may adversely affect our quarterly operating results through the first fiscal quarter of 2006 |
| Among these factors are the following: first, we continue to shift the focus of our placements from BIS monitors to original equipment manufacturer products which may lead to a reduction in Equipment revenue and gross margin on Equipment |
| Second, although the Japanese Ministry of Health, Labor and Welfare, or the Japanese Ministry, recently approved the sale of the BIS XP system through our distributor, Nihon Kohden, the potential benefits of this approval may not be recognized some time, or at all |
| Third, on October 7, 2004, the Joint Commission on Accreditation of Healthcare Organizations, or JCAHO, issued a Sentinel Event Alert, or Alert, aimed at preventing and managing the impact of anesthesia awareness |
| The Alert identifies the incidence of awareness, describes common underlying causes and suggests steps for healthcare professionals and institutions to take in order to manage and prevent future occurrences and recommends healthcare organizations develop and implement policies to address anesthesia awareness |
| Additionally, on October 25, 2005, the ASA House of Delegates approved a Practice Advisory on Intraoperative Awareness and Brain Monitoring, or Practice Advisory, including our BIS Technology |
| The Practice Advisory recommends that the decision to use brain monitoring technology be made by individual practitioners on a case-by-case basis |
| While we believe that both the Alert and the Practice Advisory are favorable to our business, industry organizations and others in the anesthesia community may not agree with 18 _________________________________________________________________ [60]Table of Contents the position taken in the Alert or in the Practice Advisory and, accordingly, potential benefits to our business that could have resulted from the Alert and the Practice Advisory may not be significant or realized at all |
| Fluctuations in our quarterly operating results could cause our stock price to decrease |
| Our operating results have fluctuated significantly from quarter to quarter in the past and are likely to vary in the future |
| These fluctuations are due to several factors relating to the sale of our products, including: • the timing and volume of customer orders for our BIS system, • use of and demand for our BIS Sensors, • transition of sales focus from BIS monitors to original equipment manufacturer products, • customer cancellations, • introduction of competitive products, • regulatory approvals, • changes in management, • turnover in our direct sales force, • effectiveness of new marketing and sales programs, • communications published by industry organizations or other professional entities in the anesthesia community that are unfavorable to our business, • reductions in orders by our distributors and original equipment manufacturers, and • the timing and amount of our expenses |
| Because of these fluctuations, it is likely that in some future quarter or quarters our operating results could fall below the expectations of securities analysts or investors |
| If our quarterly operating results are below expectations in the future, the market price of our common stock would likely decrease |
| In addition, because we do not have a substantial backlog of customer orders for our BIS system, revenue in any quarter depends on orders received in that quarter |
| Our quarterly results may also be adversely affected because some customers may have inadequate financial resources to purchase our products or may fail to pay for our products after receiving them |
| In particular, hospitals continue to experience financial constraints, consolidations and reorganizations as a result of cost containment measures and declining third-party reimbursement for services, which may result in decreased product orders or an increase in bad debt allowances in any quarter |
| If the estimates we make, and the assumptions on which we rely in preparing our financial statements prove inaccurate, our actual results may vary from those reflected in our financial statements |
| Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States |
| The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and expenses, the amounts of charges accrued by us and related disclosure of contingent assets and liabilities |
| This includes estimates and judgments regarding revenue recognition, warranty reserves, inventory valuations and allowances for doubtful accounts |
| We base our estimates and judgments on historical experience and on various other assumptions that we believe to be reasonable under the circumstances at the time such estimates and judgments were made |
| There can be no assurance, however, that our estimates and judgments, or the assumptions underlying them, will be correct |
| We may need additional financing for our future capital needs and may not be able to raise additional funds on terms acceptable to us, or at all |
| We believe that the financial resources available to us, including our current working capital and available revolving lines of credit, will be sufficient to finance our planned operations and capital expenditures through 19 _________________________________________________________________ [61]Table of Contents at least the end of 2006 |
| If we are unable to increase our revenue and maintain positive cash flow, we will need to raise additional funds |
| We may also need additional financing if: • the research and development costs of our products currently under development increase beyond current estimates, • we decide to expand faster than currently planned, • we develop new or enhanced services or products ahead of schedule, • we decide to undertake new sales and/or marketing initiatives, • we are required to defend or enforce our intellectual property rights, • sales of our products do not meet our expectations domestically or internationally, • we need to respond to competitive pressures, or • we decide to acquire complementary products, businesses or technologies |
| We can provide no assurance that we will be able to raise additional funds on terms acceptable to us, if at all |
| If future financing is not available or is not available on acceptable terms, we may not be able to fund our future operations which would significantly limit our ability to implement our business plan |
| In addition, we may have to issue equity securities that may have rights, preferences and privileges senior to our common stock or issue debt securities that may contain limitations or restrictions on our ability to engage in certain transactions in the future |
| Cases of awareness with recall during monitoring with the BIS system could limit market acceptance of the BIS system and could expose us to product liability claims |
| Clinicians have reported to us cases of possible awareness with recall during surgical procedures monitored with the BIS system |
| In most of the cases that were reported to us, when BIS index values were recorded at the time of awareness, high BIS index values were noted, indicating that the BIS index correctly identified the increased risk of awareness with recall in these patients |
| However, in a small number of these reported cases, awareness with recall may not have been detected by monitoring with the BIS system |
| We have not systematically solicited reports of awareness with recall |
| It is possible that additional cases of awareness with recall during surgical procedures monitored with the BIS system have not been reported to us |
| Anesthesia providers and hospitals may elect not to purchase and use the BIS system if there is adverse publicity resulting from the report of cases of awareness with recall that were not detected during procedures monitored with the BIS system |
| If anesthesia providers and hospitals do not purchase and use the BIS system, then we may not sustain or grow our product revenue |
| Although our multi-center, multinational clinical studies have demonstrated that the use of BIS monitoring to help guide anesthetic administration may be associated with the reduction of the incidence of awareness with recall in adults using general anesthesia and sedation, we may be subject to product liability claims for cases of awareness with recall during surgical procedures monitored with the BIS system |
| Any of these claims could require us to spend significant time and money in litigation or to pay significant damages |
| Moreover, if the patient safety benefits of BIS monitoring are not persuasive enough to lead to wider adoption of our BIS technology, or if any additional clinical research we undertake fails to support evidence of a link between the use of BIS monitoring and the incidence of awareness, our business could be adversely affected |
| We may not be able to compete with new products or alternative techniques developed by others, which could impair our ability to remain competitive and achieve future growth |
| The medical device industry in which we market our products is characterized by rapid product development and technological advances |
| Our competitors have introduced commercially anesthesia monitoring products which have been cleared by the United States Food and Drug Administration, or FDA If we do 20 _________________________________________________________________ [62]Table of Contents not compete effectively with these monitoring products, our revenue will be adversely affected |
| Our current or planned products are at risk of obsolescence from: • other new monitoring products, based on new or improved technologies, • new products or technologies used on patients or in the operating room during surgery in lieu of monitoring devices, • electrical or mechanical interference from new or existing products or technologies, • alternative techniques for evaluating the effects of anesthesia, • significant changes in the methods of delivering anesthesia, and • the development of new anesthetic agents |
| We may not be able to improve our products or develop new products or technologies quickly enough to maintain a competitive position in our markets and continue to grow our business |
| If we do not maintain our relationships with the anesthesia community, our growth will be limited and our business could be harmed |
| If anesthesiologists and other healthcare providers do not recommend and endorse our products, our sales may decline or we may be unable to increase our sales and profits |
| Physicians typically influence the medical device purchasing decisions of the hospitals and other healthcare institutions in which they practice |
| Consequently, our relationships with anesthesiologists are critical to our continued growth |
| We believe that these relationships are based on the quality of our products, our long-standing commitment to the consciousness monitoring market, our marketing efforts and our presence at medical society and trade association meetings |
| Any actual or perceived diminution in our reputation or the quality of our products, or our failure or inability to maintain our commitment to the consciousness monitoring market and our other marketing and product promotion efforts could damage our current relationships, or prevent us from forming new relationships, with anesthesiologists and other anesthesia professionals and cause our growth to be limited and our business to be harmed |
| In order for us to sell our products, anesthesia professionals must recommend and endorse them |
| We may not obtain the necessary recommendations or endorsements from this community |
| Acceptance of our products depends on educating the medical community as to the distinctive characteristics, perceived benefits, safety, clinical efficacy and cost-effectiveness of our products compared to traditional methods of consciousness monitoring and the products of our competitors, and on training healthcare professionals in the proper application of our products |
| If we are not successful in obtaining the recommendations or endorsements of anesthesiologists and other healthcare professionals for our products, our sales may decline or we may be unable to increase our sales and profits |
| Negative publicity or unfavorable media coverage could damage our reputation and harm our operations |
| Certain companies that manufacture medical devices have received significant negative publicity in the past when their products did not perform as the medical community or patients expected |
| This publicity, and the perception such products may not have functioned properly, may result in increased litigation, including large jury awards, legislative activity, increased regulation and governmental review of company and industry practices |
| If we were to receive such negative publicity or unfavorable media attention, whether warranted or unwarranted, our ability to market our products would be adversely effected, we may be required to change our products, become subject to increased regulatory burdens and we may be required to pay large judgments or fines |
| Any combination of these factors could further increase our cost of doing business and adversely affect our financial position, results of operations and cash flows |
| 21 _________________________________________________________________ [63]Table of Contents If we do not successfully develop or acquire and introduce enhanced or new products we could lose revenue opportunities and customers |
| Our success in developing or acquiring and commercializing new products and enhancements of current products is affected by our ability to: • Identify in a timely manner new market trends; • Assess customer needs; • Successfully develop or acquire competitive products; • Complete regulatory clearance in a timely manner; • Successfully develop cost effective manufacturing processes; • Introduce such products to our customers in a timely manner; and • Achieve market acceptance |
| If we are unable to continue to develop or acquire and market new products and technologies, we may experience a decrease in demand for our products, and a loss of market share and our business would suffer |
| As the market for our BIS system matures, we need to develop or acquire and introduce new products for anesthesia monitoring or other applications |
| In 2002, we introduced commercially the BIS Extend Sensor for patients who are typically monitored for an extended period of time, such as in intensive care unit settings |
| We do not know whether the use of the BIS system in the intensive care unit will achieve market acceptance |
| In addition, we have begun to research the use of BIS monitoring to diagnose and track neurological diseases, including Alzheimer’s Disease and depression, and face at least the following two related risks: • we may not successfully adapt the BIS system to function properly for procedural sedation, when used with anesthetics we have not tested or with patient populations we have not studied, such as infants, and • our technology is complex, and we may not be able to develop it further for applications outside anesthesia monitoring, such as the diagnosis and tracking of neurological diseases |
| We are focused on the market for brain monitoring products |
| The projected demand for our products could materially differ from actual demand if our assumptions regarding this market and its trends and acceptance of our products by the medical community prove to be incorrect or do not materialize or if other products or technologies gain more widespread acceptance, which in each case would adversely affect our business prospects and profitability |
| If we do not successfully adapt the BIS system for new products and applications both within and outside the field of anesthesia monitoring, or if such products and applications are developed but not successfully commercialized, then we could lose revenue opportunities and customers |
| If our clinical trials are delayed or unsuccessful, it could have an adverse effect on our business |
| We are in the process of initiating several clinical studies, including studies in the area of interoperative awareness in children, depression and Alzheimer’s disease, and the association between deep anesthesia and long-term patient outcomes |
| Clinical trials require sufficient patient enrollment, which is a function of many factors, including the size of the patient population, the nature of the protocol and the eligibility criteria for the clinical trial |
| Delays in patient enrollment can result in increased costs and longer development times |
| We cannot predict whether we will encounter problems with respect to any of our completed, ongoing or planned clinical trials that will cause us or regulatory authorities to delay or suspend our clinical trials or delay the analysis of data from our completed or ongoing clinical trials |
| In addition, we cannot assure you that we will be successful in reaching the endpoints in these trials, or if we do, that the FDA or other regulatory agencies will accept the results |
| 22 _________________________________________________________________ [64]Table of Contents Any of the following could delay the completion of our ongoing and planned clinical trials, or result in failure of these trials to support our business: • delays or the inability to obtain required approvals from institutional review boards or other governing entities at clinical sites selected for participation in our clinical trials, • delays in enrolling patients and volunteers into clinical trials, • lower than anticipated retention rate of patients and volunteers in clinical trials, • negative results from clinical trials for any of our potential products, including those involving the management of depression and the early diagnosis and tracking of Alzheimers disease, • failure of our clinical trials to demonstrate the efficacy or clinical utility of our potential products |
| If we determine that the costs associated with attaining regulatory approval of a product exceed the potential financial benefits or if the projected development timeline is inconsistent with our determination of when we need to get the product to market, we may chose to stop a clinical trial and/or development of a product |
| If we do not develop and implement a successful sales and marketing strategy, we will not expand our business |
| It is possible that high turnover may occur in the future |
| If new sales representatives do not acquire the technological skills to sell our products in a timely and successful manner or we experience high turnover in our direct sales force, we may not be able to sustain and grow our product revenue |
| In addition, in order to increase our sales, we need to continue to strengthen our relationships with our international distributors and continue to add international distributors |
| Also, we need to continue to strengthen our relationships with our original equipment manufacturers and other sales channels and increase sales through these channels |
| On an ongoing basis, we need to develop and introduce new sales and marketing programs and clinical education programs to promote the use of the BIS system by our customers |
| If we do not implement these new sales and marketing and education programs in a timely and successful manner, we may not be able to achieve the level of market awareness and sales required to expand our business |
| We have only limited sales and marketing experience both in the United States and internationally and may not be successful in developing and implementing our strategy |
| Among other things, we need to: • provide or assure that distributors and original equipment manufacturers provide the technical and educational support customers need to use the BIS system successfully, • promote frequent use of the BIS system so that sales of our disposable BIS Sensors increase, • establish and implement successful sales and marketing and education programs that encourage our customers to purchase our products or the products that are made by original equipment manufacturers incorporating our technology, • manage geographically dispersed operations, and • modify our products and marketing and sales programs for foreign markets |
| We encourage our direct sales force, distributors and original equipment manufacturers to maximize the amount of our products they sell and they may engage in aggressive sales practices that may harm our reputation |
| We sell our products through a combination of direct sales force, third party distributors and original equipment manufacturers |
| As a means to incentivize the sales force, distributors and original equipment manufacturers, the compensation we pay increases with the amount of our products they sell |
| For example, the compensation paid to our members of our direct sales force consists, in part, of commissions and, the greater the number of sales, the higher the commission we pay |
| The participants in our sales channels may engage in 23 _________________________________________________________________ [65]Table of Contents sales practices that are aggressive or considered to be inappropriate by existing or potential customers |
| In addition, we do not exercise control over, and may not be able to provide sufficient oversight of, the sales practices and techniques used by third party distributors and original equipment manufacturers |
| Negative public opinion resulting from these sales practices can adversely affect our ability to keep and attract customers and could expose us to litigation |
| Our third-party distribution and original equipment manufacturer relationships could negatively affect our profitability, cause sales of our products to decline and be difficult to terminate if we are dissatisfied |
| Sales through distributors could be less profitable than direct sales |
| We do not control our original equipment manufacturers and distribution partners |
| Our partners could sell competing products, may not incorporate our technology into their products in a timely manner and may devote insufficient sales efforts to our products |
| In addition, our partners are generally not required to purchase minimum quantities |
| As a result, even if we are dissatisfied with the performance of our partners, we may be unable to terminate our agreements with these partners or enter into alternative arrangements |
| We may not be able to generate enough additional revenue from our international expansion to offset the costs associated with establishing and maintaining foreign operations |
| A component of our growth strategy is to expand our presence in international markets |
| We conduct international business primarily in Europe and Japan and we are attempting to increase the number of countries in which we do business |
| It is costly to establish international facilities and operations and to promote the BIS system in international markets |
| We have encountered barriers to the sale of our BIS system outside the United States, including less acceptance by anesthesia providers for use of disposable products, such as BIS Sensors, delays in regulatory approvals outside of the United States, particularly in Japan, and difficulties selling through indirect sales channels |
| In addition, we have little experience in marketing and distributing products in international markets |
| Revenue from international activities may not offset the expense of establishing and maintaining these international operations |
| We may not be able to meet the unique operational, legal and financial challenges that we will encounter in our international operations, which may limit the growth of our business |
| We are increasingly subject to a number of challenges which specifically relate to our international business activities |
| These challenges include: • failure of local laws to provide adequate protection against infringement of our intellectual property, • protectionist laws and business practices that favor local competitors, which could slow our growth in international markets, • difficulties in terminating or modifying distributor arrangements because of restrictions in markets outside the United States, • less acceptance by foreign anesthesia providers of the use of disposable products, such as BIS Sensors, • delays in regulatory approval of our products, • currency conversion issues arising from sales denominated in currencies other than the United States dollar, • foreign currency exchange rate fluctuations, • longer sales cycles to sell products like the BIS system to hospitals and outpatient surgical centers, which could slow our revenue growth from international sales, and • longer accounts receivable payment cycles and difficulties in collecting accounts receivable |
| 24 _________________________________________________________________ [66]Table of Contents If we are unable to meet and overcome these challenges, our international operations may not be successful which would limit the growth of our business and could adversely impact our results of operations |
| We may experience customer dissatisfaction and our reputation could suffer if we fail to manufacture enough products to meet our customers’ demands |
| We rely on third-party manufacturers to assemble and manufacture the components of our BIS monitors, original equipment manufacturer products and a portion of our BIS Sensors |
| We manufacture substantially all BIS Sensors in our own manufacturing facility |
| We have only one manufacturing facility |
| If we fail to produce enough products at our own manufacturing facility or at a third-party manufacturing facility for any reason, including damage or destruction of the facility, or experience a termination or modification of any manufacturing arrangement with a third party, we may be unable to deliver products to our customers on a timely basis |
| Even if we are able to identify alternative facilities to manufacture our products, if necessary, we may experience disruption in the supply of our products until such facilities are available |
| Although we believe we possess adequate insurance for damage to our property and the disruption of our business from casualties, such insurance may not be sufficient to cover all of our potential losses and may not be available to us on acceptable terms or at all |
| In addition, we intend to transfer our manufacturing operations from our facilities in Newton, Massachusetts to our newly leased property in Norwood, Massachusetts |
| We may encounter delays in delivering our products as we establish and qualify these manufacturing operations at our new facility |
| Our failure to deliver products on a timely basis could lead to customer dissatisfaction and damage our reputation |
| Our reliance on sole-source suppliers could adversely affect our ability to meet our customers’ demands for our products in a timely manner or within budget |
| Some of the components that are necessary for the assembly of our BIS system, including some of the components used in our BIS Sensors, are currently provided to us by sole-source suppliers or a limited group of suppliers |
| We purchase components through purchase orders rather than long-term supply agreements and generally do not maintain large volumes of inventory |
| We have experienced shortages and delays in obtaining some of the components of our BIS systems in the past, and we may experience similar shortages or delays in the future |
| The disruption or termination of the supply of components could cause a significant increase in the costs of these components, which could affect our profitability |
| A disruption or termination in the supply of components could also result in our inability to meet demand for our products, which could lead to customer dissatisfaction and damage our reputation |
| If a supplier is no longer willing or able to manufacture components that we purchase and integrate into the BIS system, we may attempt to design replacement components ourselves that would be compatible with our existing technology |
| In doing so, we would incur additional research and development expenses, and there can be no assurance that we would be successful in designing or manufacturing any replacement components |
| Furthermore, if we are required to change the manufacturer of a key component of the BIS system, we may be required to verify that the new manufacturer maintains facilities and procedures that comply with quality standards and with all applicable regulations and guidelines |
| The delays associated with the verification of a new manufacturer could delay our ability to manufacture BIS systems in a timely manner or within budget |
| We plan to relocate our facilities in 2006 and it may cause disruption to our operations and our business |
| We have announced our intention to move our principal operating facilities to Norwood, Massachusetts by the end of 2006 |
| Our new facility requires significant construction and build out before we will be able to relocate |
| If the new facility is not completed in a timely manner or if we are able to move some but not all of our operations to the new facility, we may experience significant interruption to our business |
| We will be required to achieve compliance at our new facility with FDA Good Manufacturing Practices and other regulatory approvals in order to manufacture our products |
| Any delay in receiving necessary approvals would adversely affect our ability to supply our product and reduce our sales and could adversely affect our reputation |
| In addition, as a result of our relocation we may lose some of our key employees, and if we are not able to retain or replace key personnel, our business could be adversely affected |
| 25 _________________________________________________________________ [67]Table of Contents We may be required to bring litigation to enforce our intellectual property rights, which may result in substantial expense and may divert our attention from the implementation of our business strategy |
| We believe that the success of our business depends, in part, on obtaining patent protection for our products, defending our patents once obtained and preserving our trade secrets |
| We rely on a combination of contractual provisions, confidentiality procedures and patent, trademark and trade secret laws to protect the proprietary aspects of our technology |
| These legal measures afford only limited protection, and competitors may gain access to our intellectual property and proprietary information |
| Any patents we have obtained or will obtain in the future might also be invalidated or circumvented by third parties |
| Our pending patent applications may not issue as patents or, if issued, may not provide commercially meaningful protection, as competitors may be able to design around our patents or produce alternative, non-infringing designs |
| Litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets and to determine the validity and scope of our proprietary rights |
| Any litigation could result in substantial expense and diversion of our attention from the business and may not be adequate to protect our intellectual property rights |
| We may be sued by third parties which claim that our products infringe on their intellectual property rights, particularly because there is substantial uncertainty about the validity and breadth of medical device patents |
| We may be subject to litigation by third parties based on claims that our products infringe the intellectual property rights of others |
| This risk is exacerbated by the fact that the validity and breadth of claims covered in medical technology patents involve complex legal and factual questions for which important legal principles are unresolved |
| Any litigation or claims against us, whether or not valid, could result in substantial costs, could place a significant strain on our financial resources and could harm our reputation |
| In addition, intellectual property litigation or claims could force us to do one or more of the following: • cease selling, incorporating or using any of our products that incorporate the challenged intellectual property, which would adversely affect our revenue, • obtain a license from the holder of the infringed intellectual property right, which license may not be available on reasonable terms, if at all, and • redesign our products, which may be costly, time-consuming and may not be successful |
| We could be exposed to significant product liability claims which could divert management attention and adversely affect our cash balances, our ability to obtain and maintain insurance coverage at satisfactory rates or in adequate amounts and our reputation |
| The manufacture and sale of our products expose us to product liability claims and product recalls, including those which may arise from misuse or malfunction of, or design flaws in, our products or use of our products with components or systems not manufactured or sold by us |
| There may be increased risk of misuse of our products if persons not skilled in consciousness monitoring attempt to use our BIS monitoring products |
| Product liability claims or product recalls, regardless of their ultimate outcome, could require us to spend significant time and money in litigation or to pay significant damages |
| We currently maintain product liability insurance; however, it may not cover the costs of any product liability claims made against us |
| Furthermore, we may not be able to obtain insurance in the future at satisfactory rates or in adequate amounts |
| In addition, publicity pertaining to the misuse or malfunction of, or design flaws in, our products could impair our ability to successfully market and sell our products and could lead to product recalls |
| Several class action lawsuits have been filed against the underwriters of our initial public offering which may result in negative publicity and potential litigation against us that would be costly to defend and the outcome of which is uncertain and may harm our business |
| The underwriters of our initial public offering are named as defendants in several class action complaints which have been filed allegedly on behalf of certain persons who purchased shares of our common stock between January 28, 2000 and December 6, 2000 |
| These complaints allege violations of the Securities Act of 26 _________________________________________________________________ [68]Table of Contents 1933 and the Securities Exchange Act of 1934 |
| Primarily they allege that there was undisclosed compensation received by our underwriters in connection with our initial public offering |
| While we and our officers and directors have not been named as defendants in these suits, based on comparable lawsuits filed against other companies, there can be no assurance that we and our officers and directors will not be named in similar complaints in the future |
| In addition, the underwriters may assert that we are liable for some or all of any liability that they are found to have to the plaintiffs, pursuant to the indemnification provisions of the underwriting agreement we entered into as part of the initial public offering, or otherwise |
| We can provide no assurance as to the outcome of these complaints or any potential suit against us or our officers and directors |
| Any conclusion of these matters in a manner adverse to us could have a material adverse affect on our financial position and results of operations |
| In addition, the costs to us of defending any litigation or other proceeding, even if resolved in our favor, could be substantial |
| Such litigation could also substantially divert the attention of our management and our resources in general |
| Even if we are not named as defendants in these lawsuits, we may also be required to incur significant costs and our management may be distracted by being required to provide information, documents or testimony in connection with the actions against our underwriters |
| Uncertainties resulting from the initiation and continuation of any litigation or other proceedings and the negative publicity associated with this litigation could harm our ability to compete in the marketplace |
| Boston Scientific Corporation may be able to affect corporate actions requiring stockholder approval because it owns a significant amount of our common stock, additionally, if our strategic alliance with Boston Scientific Corporation is not successful, our operating results could be adversely affected |
| As of March 1, 2006, Boston Scientific Corporation owned approximately 27prca of our outstanding common stock |
| If Boston Scientific Corporation maintains or increases its ownership of our outstanding common stock, it may have the ability to affect corporate actions requiring stockholder approval |
| If Boston Scientific Corporation sells shares of our common stock, it may cause a decline in the price of our common stock |
| On August 7, 2002, we formed a strategic alliance with Boston Scientific Corporation |
| In connection with this strategic alliance, we entered into an agreement pursuant to which we granted Boston Scientific Corporation an option to distribute newly developed technology for monitoring patients under sedation in a range of less-invasive medical specialties Additionally, in May 2005 we entered into a product development and distribution agreement with Boston Scientific under which Boston Scientific Corporation will provide us with dlra25dtta0 million to fund the development of brain monitoring technology designed to aid the diagnosis and treatment for depression and Alzheimer’s disease |
| If such products are not successfully developed, marketed and sold under either agreement in a manner consistent with our expectations, the growth of our business and our operating results will be adversely affected |
| Additionally, if Boston Scientific Corporation terminates either our strategic alliance or our development agreement or if there are any disruptions in our relationship with them, it could materially, adversely affect the development of our business and, in certain cases, could adversely affect the funding we receive for the development of our product candidates for depression and Alzheimer’s disease |
| We may not reserve amounts adequate to cover product obsolescence, claims and returns, which could result in unanticipated expenses and fluctuations in operating results |
| Depending on factors such as the timing of our introduction of new products which utilize our BIS technology, as well as warranty claims and product returns, we may need to reserve amounts in excess of those currently reserved for product obsolescence, excess inventory, warranty claims and product returns |
| These reserves may not be adequate to cover all costs associated with these items |
| If these reserves are inadequate, we would be required to incur unanticipated expenses which could result in unexpected fluctuations in quarterly operating results |
| We may not be able to compete effectively, which could result in price reductions and decreased demand for our products |
| We are facing increased competition in the domestic level of consciousness monitoring market as a result of a number of competitors’ monitoring systems which have been cleared by the FDA These products are 27 _________________________________________________________________ [69]Table of Contents marketed by well-established medical products companies with significant resources |
| We may not be able to compete effectively with these and other potential competitors |
| We may also face substantial competition from companies which may develop sensor products that compete with our proprietary BIS Sensors for use with our BIS monitors or with third-party monitoring systems or anesthesia delivery systems that incorporate the BIS index |
| We also expect to face competition from companies currently marketing conventional electroencephalogram, or EEG, monitors using standard and novel signal-processing techniques |
| Other companies may develop anesthesia-monitoring systems that perform better than the BIS system and/or sell for less |
| In addition, one or more of our competitors may develop products that are substantially equivalent to our FDA-approved products, in which case they may be able to use our products as predicate devices to more quickly obtain FDA approval of their competing products |
| Medical device companies developing these and other competitive products may have greater financial, technical, marketing and other resources than we do |
| Competition in the sale of anesthesia-monitoring systems could result in price reductions, fewer orders, reduced gross margins and loss of market share |
| We are seeking to develop new products and technologies in the areas of depression and Alzheimer’s disease |
| If we are not successful in developing new products or technologies, or if we experience delays in development or release of such products, we may not be able to compete successfully |
| Our ability to market and sell our products and generate revenue depends upon receipt of domestic and foreign regulatory approval of our products and manufacturing operations |
| Before we can market new products in the United States, we must obtain clearance from the FDA If the FDA concludes that any of our products do not meet the requirements to obtain clearance of a premarket notification under Section 510(k) of the Food, Drug and Cosmetic Act, then we would be required to file a premarket approval application |
| The premarket approval application process is lengthy, expensive and typically requires extensive preclinical and clinical trial data |
| We may not obtain clearance of a 510(k) notification or approval of a premarket approval application with respect to any of our products on a timely basis, if at all |
| If we fail to obtain timely clearance or approval for our products, we will not be able to market and sell our products, which will limit our ability to generate revenue |
| We may also be required to obtain clearance of a 510(k) notification from the FDA before we can market certain previously marketed products which we modify after they have been cleared |
| We have made certain enhancements to our currently marketed products which we have determined do not necessitate the filing of a new 510(k) notification |
| However, if the FDA does not agree with our determination, it will require us to file a new 510(k) notification for the modification and we may be prohibited from marketing the modified device until we obtain FDA clearance |
| The FDA also requires us to adhere to current Good Manufacturing Practices regulations, which include production design controls, testing, quality control, storage and documentation procedures |
| The FDA may at any time inspect our facilities to determine whether adequate compliance has been achieved |
| Compliance with current Good Manufacturing Practices regulations for medical devices is difficult and costly |
| In addition, we may not continue to be compliant as a result of future changes in, or interpretations of, regulations by the FDA or other regulatory agencies |
| If we do not achieve continued compliance, the FDA may withdraw marketing clearance or require product recall |
| When any change or modification is made to a device or its intended use, the manufacturer may be required to reassess compliance with current Good Manufacturing Practices regulations, which may cause interruptions or delays in the marketing and sale of our products |
| Sales of our products outside the United States are subject to foreign regulatory requirements that vary from country to country |
| The time required to obtain approvals from foreign countries may be longer than that required for FDA approval, and requirements for foreign licensing may differ from FDA requirements |
| The federal, state and foreign laws and regulations regarding the manufacture and sale of our products are subject to future changes, as are administrative interpretations of regulatory agencies |
| If we fail to comply with applicable federal, state or foreign laws or regulations, we could be subject to enforcement actions, including product seizures, recalls, withdrawal of clearances or approvals and civil and criminal penalties |
| 28 _________________________________________________________________ [70]Table of Contents Even if we obtain the necessary FDA clearances or approvals, if we or our suppliers fail to comply with ongoing regulatory requirements our products could be subject to restrictions or withdrawal from the market |
| We are subject to the Medical Device Reporting, or MDR, regulations that require us to report to the FDA if our products may have caused or contributed to patient death or serious injury, or if our device malfunctions and a recurrence of the malfunction would likely result in a death or serious injury |
| We must also file reports of device corrections and removals and adhere to the FDA’s rules on labeling and promotion |
| Our failure to comply with these or other applicable regulatory requirements could result in enforcement action by the FDA, which may include any of the following: • untitled letters, warning letters, fines, injunctions and civil penalties, • administrative detention, which is the detention by the FDA of medical devices believed to be adulterated or misbranded, • customer notification, or orders for repair, replacement or refund, • voluntary or mandatory recall or seizure of our products, • operating restrictions, partial suspension or total shutdown of production, • refusal to review pre-market notification or pre-market approval submissions, • rescission of a substantial equivalence order or suspension or withdrawal of a pre-market approval, and • criminal prosecution |
| Any of the foregoing actions by the FDA could have a material adverse effect on our business and results of operations |
| 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 state and federal healthcare fraud and abuse laws, including the federal Anti-Kickback Statute, 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 or arranging for an item or service, for which payment may be made under federal healthcare programs, such as the Medicare and Medicaid programs |
| If our past or present operations are found to be in violation of these laws, we or our officers may be subject to civil or criminal penalties, including large monetary penalties, damages, fines, imprisonment and exclusion from Medicare and Medicaid program participation |
| If enforcement action were to occur, our business and financial condition would be harmed |
| If we do not retain our senior management and other key employees, we may not be able to successfully implement our business strategy |
| Our president and chief executive officer, Nassib Chamoun, joined us at our inception in 1987 |
| Our chairman, J Breckenridge Eagle, began serving as a director in 1988 |
| Many other members of our management and key employees have extensive experience with us and other companies in the medical device industry |
| Our success is substantially dependent on the ability, experience and performance of these members of our senior management and other key employees |
| Because of their ability and experience, if we lose one or more of the members of our senior management or other key employees, our ability to successfully implement our business strategy could be seriously harmed |
| 29 _________________________________________________________________ [71]Table of Contents If we do not attract and retain skilled personnel, or if we do not maintain good relationships with our employees, we will not be able to expand our business |
| Accordingly, we require skilled personnel to develop, manufacture, sell and support our products |
| Our future success will depend largely on our ability to continue to hire, train, retain and motivate additional skilled personnel, particularly sales representatives who are responsible for customer education and training and post-installation customer support |
| Consequently, if we are not able to attract and retain skilled personnel, we will not be able to expand our business |
| In addition, we may be subject to claims that we engage in discriminatory or inappropriate practices with respect to our hiring, termination, promotion and compensation processes for our employees |
| Such claims, with or without merit, could be time consuming, distracting and expensive to defend, could divert attention of our management from other tasks important to the success of our business and could adversely affect our reputation as an employer |
| Our employees may engage in misconduct or other improper activities, including insider trading |
| We are exposed to the risk that employee fraud or other misconduct could occur |
| Misconduct by employees could include intentional failures to comply with FDA regulations, to provide accurate information to the FDA, to comply with manufacturing standards we have established, to accurately report financial information or data or to disclose unauthorized activities to us |
| Employee misconduct could also involve the improper use of customer information or information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation |
| We have adopted a Code of Business Conduct and Ethics, but it is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses |
| In addition, during the course of our operations, our directors, executives and employees may have access to material, non-public information regarding our business, our results of operations or potential transactions we are considering |
| Despite the adoption of an Insider Trading Policy, we may not be able to prevent a director or employee from trading in our common stock on the basis of or while having access to material, non-public information |
| If a director or employee were to be investigated, or an action were be brought against a director or employee, for insider trading, it could have a negative impact on our reputation and our stock price |
| Such a claim, with or without merit, could also result in substantial expenditures of time and money, and divert attention of our management team from other tasks important to the success of our business |
| Failure of users of the BIS system, or users of future products of the company, to obtain adequate reimbursement from third-party payors could limit market acceptance of the BIS system and other products, which could prevent us from sustaining profitability |
| Anesthesia providers are generally not reimbursed separately for patient monitoring activities utilizing the BIS system |
| For hospitals and outpatient surgical centers, when reimbursement is based on charges or costs, patient monitoring with the BIS system may reduce reimbursements for surgical procedures, because charges or costs may decline as a result of monitoring with the BIS system |
| Failure by hospitals and other users of the BIS system to obtain adequate reimbursement from third-party payors, or any reduction in the reimbursement by third-party payors to hospitals and other users as a result of using the BIS system could limit market acceptance of the BIS system, which could prevent us from sustaining profitability |
| In addition, market acceptance of future products serving the depression and Alzheimer’s disease markets could depend upon adequate reimbursement from third-party payors |
| The ability and willingness of third-party payors to authorize coverage and sufficient reimbursement to compensate and encourage physicians to use such products is both problematical and uncertain |
| 30 _________________________________________________________________ [72]Table of Contents Transactions engaged in by our largest stockholders, our directors or executives involving our common stock may have an adverse effect on the price of our stock |
| Our largest three stockholders each own greater than 9prca of our outstanding common stock |
| Subsequent sales of our shares by these stockholders could have the effect of lowering our stock price |
| The perceived risk associated with the possible sale of a large number of shares by these stockholders, or the adoption of significant short positions by hedge funds or other significant investors, could cause some of our stockholders to sell their stock, thus causing the price of our stock to decline |
| In addition, actual or anticipated downward pressure on our stock price due to actual or anticipated sales of stock by directors or officers of the Company could cause other institutions or individuals to engage in sales of our common stock, which may further cause the price of our stock to decline |
| From time to time our directors and executive officers sell shares of our common stock on the open market |
| These sales are publicly disclosed in filings made with the SEC In the future, our directors and executive officers may sell a significant number of shares for a variety of reasons unrelated to the performance of our business |
| Our stockholders may perceive these sales as a reflection on management’s view of the business and result in some stockholders selling their shares of our common stock |
| We have various mechanisms in place to discourage takeover attempts, which may reduce or eliminate our stockholders’ ability to sell their shares for a premium in a change of control transaction |
| Various provisions of our certificate of incorporation and by-laws and of Delaware corporate law may discourage, delay or prevent a change in control or takeover attempt of our company by a third party that is opposed by our management and board of directors |
| Public stockholders who might desire to participate in such a transaction may not have the opportunity to do so |
| These anti-takeover provisions could substantially impede the ability of public stockholders to benefit from a change of control or change in our management and board of directors |
| These provisions include: • preferred stock that could be issued by our board of directors to make it more difficult for a third party to acquire, or to discourage a third party from acquiring, a majority of our outstanding voting stock, • classification of our directors into three classes with respect to the time for which they hold office, • non-cumulative voting for directors, • control by our board of directors of the size of our board of directors, • limitations on the ability of stockholders to call special meetings of stockholders, • inability of our stockholders to take any action by written consent, and • advance notice requirements for nominations of candidates for election to our board of directors or for proposing matters that can be acted upon by our stockholders at stockholder meetings |
| In addition, in November 2004, our board of directors adopted a shareholder rights plan, the provisions of which could make it more difficult for a potential acquirer of Aspect to consummate an acquisition transaction |