| ATRION CORP ITEM 1A RISK FACTORS |
| 7 ITEM 1A RISK FACTORS In addition to the other information contained in this Form 10-K, the following risk factors should be considered carefully in evaluating our business |
| Our business, financial condition or results of operations could be materially adversely affected by any of these risks |
| Additional risks and uncertainties that we do not currently know about or that we currently believe are immaterial, or that we have not predicted, may also harm our business operations or adversely affect us |
| o Our business is dependent on the price and availability of resins and our ability to pass on resin price increases to our customers |
| The principal raw materials that we use in our products are polyethylene, polypropylene and polyvinyl chloride resins |
| Our ability to operate profitably is dependent, in large part, on the market for these resins |
| The resins used by us are derived from petroleum and natural gas; therefore; prices fluctuate substantially as a result of changes in petroleum and natural gas prices, demand and the capacity of the companies that produce these products to meet market needs |
| Instability in the world markets for petroleum and natural gas could adversely affect the prices of our raw materials and their general availability |
| Our ability to maintain profitability is heavily dependent upon our ability to pass through to our customers the full amount of any increase in raw material costs |
| If resin prices increase and we are not able to fully pass on the increases to our customers, our results of operations and our financial condition will be adversely affected |
| o The loss of a key supplier of raw materials could lead to increased costs and lower profit margins |
| The loss of a key supplier would force us to purchase raw materials in the open market, which may be at higher prices, until we could secure another source and such higher prices may not allow us to remain competitive |
| If we are unable to obtain raw materials in sufficient quantities, we may not be able to manufacture our products |
| Even if we were able to replace one of our raw material suppliers through another supply arrangement, there is no assurance that the terms that we enter into with such alternate supplier will be as favorable as the supply arrangements that we currently have |
| -7- o A substantial portion of our customer relationships are open short-term purchase commitments and, as a result, many of our customers may unilaterally reduce the purchase of our products |
| A substantial portion of our customer relationships are based on open short-term purchase commitments |
| As a result, many of our customers may unilaterally reduce the purchase of our products or, in certain cases, terminate existing orders for which we may have incurred significant production costs |
| A loss of a major customer or a number of our smaller customers could materially adversely affect our operations and financial condition |
| o Product liability claims could adversely affect our financial condition and results of operations |
| We may be subject to product liability claims involving claims of personal injury or property damage |
| Our product liability insurance coverage may not be adequate to cover the cost of defense and the potential award in the event of a claim |
| Also, a well-publicized actual or perceived problem could adversely affect our reputation and reduce the demand for our products |
| o Our success is dependent on our ability to develop patentable products, to preserve our trade secrets and operate without infringing or violating the proprietary rights of third parties |
| Others may challenge the validity of any patents issued to us, and we could encounter legal and financial difficulties in enforcing our patent rights against infringers |
| In addition, there can be no assurance that other technologies cannot or will not be developed or that patents will not be obtained by others which would render our patents less valuable or obsolete |
| Although we do not believe that patents are the sole determinant in the commercial success of our products, the loss of a significant percentage of our patents or of our patents relating to a specific major product line could have a material adverse effect on our business, financial condition and results of operations |
| We have developed technical knowledge which, although non-patentable, we consider to be significant in enabling us to compete |
| However, the proprietary nature of such knowledge may be difficult to protect |
| The medical device industry is characterized by extensive intellectual property litigation, and companies in the medical products industry sometimes use intellectual property litigation to gain a competitive advantage |
| Intellectual property litigation, regardless of outcome, is often complex and expensive, and the outcome of this litigation is generally difficult to predict |
| An adverse determination in any such proceeding could subject us to significant liabilities to third parties or require us to seek licenses from third parties or pay royalties that may be substantial |
| Furthermore, there can be no assurance that necessary licenses would be available to us on satisfactory terms or at all |
| Accordingly, an adverse determination in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us from manufacturing or selling certain of our products, which could have a material adverse effect on our business, financial condition and results of operations |
| o New lines of business or new products and services may subject us to additional risks |
| From time to time, we may implement new lines of business or offer new products and services within existing lines of business |
| There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed |
| In developing and marketing new lines of business or new products and services, we may invest significant time and resources |
| Initial timetables for the introduction and development of new lines of business and new products or services may not be -8- achieved and price and profitability targets may not prove feasible |
| External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service |
| Furthermore, any new line of business or new product or service could have a significant impact on the effectiveness of our system of internal controls |
| Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have a material adverse effect on our business, results of operations and financial condition |
| o Our competitors have significantly greater resources than we do, and it may be difficult for us to compete against them |
| In many of our markets, we compete with numerous other companies that have substantially greater financial resources and engage in substantially more research and development activities than we do |
| Furthermore, innovations in surgical techniques or medical practices could have the effect of reducing or eliminating market demand for one or more of our products |
| Some of the markets in which we compete are dominated by established manufacturers that have broader product lines, greater distribution capabilities, substantially larger marketing, research and development staffs and facilities than we do |
| Many of these competitors offer broader product lines within the specific product market and in the general field of medical devices and supplies |
| Broad product lines give many of our cardiovascular and fluid delivery competitors the ability to negotiate exclusive, long-term medical device supply contracts and, consequently, the ability to offer comprehensive pricing of their competing products |
| By offering a broader product line in the general field of medical devices and supplies, competitors may also have a significant advantage in marketing competing products to group purchasing organizations |
| In addition, our competitors may use price reductions to preserve market share in their product markets |
| o We are subject to substantial governmental regulation and our failure to comply with applicable governmental regulations could subject us to numerous penalties, any of which could adversely affect our business |
| We are subject to numerous governmental regulations relating to, among other things, our ability to sell our products, third-party reimbursement and fraud and abuse of Medicare or Medicaid |
| If we do not comply with applicable governmental regulations, governmental authorities could do any of the following: o impose fines and penalties on us; o prevent us from manufacturing our products; o bring civil or criminal charges against us; o delay the introduction of our new products into the market; o recall or seize our products; o disrupt the manufacture or distribution of our products; or o withdraw or deny approvals for our products |
| Any one of these results could materially adversely affect our revenues and profitability and harm our reputation |
| -9- o We will be unable to sell our products if we fail to comply with manufacturing regulations |
| To commercially manufacture our products, we must comply with government manufacturing regulations that govern design controls, quality systems and documentation policies and procedures |
| The FDA and equivalent foreign governmental authorities periodically inspect our manufacturing facilities and the manufacturing facilities of our OEM medical device customers |
| If we or our OEM medical device customers fail to comply with these manufacturing regulations or fail any FDA inspections our marketing or distribution of our products may be prevented or delayed, which would negatively impact our business |
| o Our products are subject to product recalls even after receiving regulatory clearance or approval, and any such recalls would negatively affect our financial performance and could harm our reputation |
| Any of our products may be found to have significant deficiencies or defects in design or manufacture |
| The FDA and similar governmental authorities in other countries have the authority to require the recall of any such defective product |
| A government-mandated or voluntary recall could occur as a result of component failures, manufacturing errors or design defects |
| We do not maintain insurance to cover losses incurred as a result of product recalls |
| Any product recall would divert managerial and financial resources and negatively affect our financial performance, and could harm our reputation with customers and end-users |
| o We may not receive regulatory approvals for new product candidates or approvals may be delayed |
| Regulation by government authorities in the United States and foreign countries is a significant factor in the development, manufacture and marketing of our proposed products and in our ongoing research and product development activities |
| Any failure to receive the regulatory approvals necessary to commercialize our product candidates, or the subsequent withdrawal of any such approvals, would harm our business |
| The process of obtaining these approvals and the subsequent compliance with federal and state statutes and regulations require spending substantial time and financial resources |
| If we fail to obtain or maintain, or encounter delays in obtaining or maintaining, regulatory approvals, it could adversely affect the marketing of any products we develop, our ability to receive product revenues, and our liquidity and capital resources |
| o We rely on technology to operate our business and any failure of these systems could harm our business |
| We rely heavily on communications and information systems to conduct our business, enhance customer service and increase employee productivity |
| Any failure, interruption or breach in security of these systems could result in failures or disruptions in our customer relationship management, general ledger, inventory, manufacturing and other systems |
| There is no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed by our policies and procedures that are intended to safeguard our systems |
| The occurrence of any failures, interruptions or security breaches of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations |
| -10- o We sell many of our products to healthcare providers that rely on Medicare, Medicaid and private health insurance plans to reimburse the costs associated with the procedures performed using our products and these third party payors may deny reimbursement for use of our products |
| We are dependent, in part, upon the ability of healthcare providers to obtain satisfactory reimbursement from third-party payors for medical procedures in which our products are used |
| Third-party payors may deny reimbursement if they determine that a prescribed product has not received appropriate regulatory clearances or approvals, is not used in accordance with cost-effective treatment methods as determined by the payor, or is experimental, unnecessary or inappropriate |
| Failure by hospitals and other users of our products to obtain reimbursement from third-party payors, or adverse changes in government and private third-party payors &apos policies toward reimbursement for procedures employing our products, could have a material adverse effect on the Companyapstas business, financial condition and results of operations |
| Major third party payors for medical services in the United States and other countries continue to work to contain healthcare costs |
| The introduction of cost containment incentives, combined with closer scrutiny of healthcare expenditures by both private health insurers and employers, has resulted in increased discounts and contractual adjustments to charges for services performed |
| Further implementation of legislative or administrative reforms to the United States or international reimbursement systems in a manner that significantly reduces reimbursement for procedures using our products or denies coverage for such procedures would have an adverse effect on our business, financial condition and results of operations |
| Hospitals or physicians may respond to these cost-containment pressures by substituting lower cost products or other therapies for our products |
| o We may not be able to attract and retain skilled people Our success depends, in large part, on our ability to attract and retain key people |
| Competition for the best people in most activities we engage in can be intense and we may not be able to hire people or to retain them |
| The unexpected loss of services of one or more of our key personnel could have a material adverse impact on our business because of their skills, knowledge of our market, years of industry experience and the difficulty of promptly finding qualified replacement personnel |
| o Severe weather, natural disasters, acts of war or terrorism or other external events could significantly impact our business |
| We currently conduct all our development, manufacturing and management at three locations |
| Severe weather, natural disasters, acts of war or terrorism and other adverse external events at any one or more of these locations could have a significant impact on our ability to conduct business |
| Our disaster recovery policies and procedures may not be effective and the occurrence of any such event could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations |
| Stock price volatility may make it more difficult for you to sell your common stock when you want and at prices you find attractive |
| Our stock price can fluctuate significantly in response to a variety of factors including, among other things: o Actual or anticipated variations in quarterly results of operations |
| o Recommendations by securities analysts o Operating and stock price performance of other companies that investors deem comparable to the Company |
| o Perceptions in the marketplace regarding the Company and our competitors o New technology used, or services offered, by competitors |
| -11- o Significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving the Company or our competitors |
| o Failure to integrate acquisitions or realize anticipated benefits from acquisitions o Changes in government regulations o Geopolitical conditions such as acts or threats of terrorism or military conflicts |
| General market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes or credit loss trends, could also cause our stock price to decrease regardless of operating results |