| CONCEPTUS INC ITEM 1A RISK FACTORS In addition to the other information in this Form 10-K, the following factors should be considered carefully in evaluating Conceptus and our business |
| This Form 10-K contains forward-looking statements within the meaning of section 27A of the Securities Act of 1933, as amended and section 21E of the Securities Exchange Act of 1934, as amended |
| Some of the forward-looking statements can be identified by use of forward-looking words such as "e believes, "e "e expects, "e "e anticipates, "e "e may, "e "e will, "e "e should, "e "e seeks, "e "e approximates, "e "e intends, "e "e plans, "e or "e estimates, "e or the negative of these words, or other comparable terminology |
| The discussion of financial trends, strategy, plans or intentions may also include forward-looking statements |
| Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected |
| Although it is not possible to predict or identify all such risks and uncertainties, they may include, but are not limited to, the following factors |
| The readers should not consider this list to be a complete statement of all potential risks and uncertainties |
| We have a limited history of operation with the Essure system and have incurred significant operating losses since inception |
| We expect to incur significant operating losses for the foreseeable future and we may never achieve or maintain profitability |
| We have a limited history of operation with the Essure system and have incurred significant operating losses since our inception in 1992, including operating losses of dlra22dtta7 million in the fiscal year 2005, dlra26dtta6 million in fiscal 2004 and dlra40dtta2 million in fiscal 2003 |
| We expect to continue to incur significant operating expenses and net losses as we continue sales and marketing efforts in the United States |
| Our net losses will continue until sufficient revenues can be generated to offset these expenses |
| We may not be able to generate these revenues, and we may never achieve profitability |
| Our failure to achieve and sustain profitability would negatively impact the market price of our common stock |
| We are presently a one-product company and if our product fails to gain market acceptance, our business will suffer |
| We are attempting to introduce a novel product into the contraception market, which is dominated by procedures that are well established among physicians and patients and are routinely taught to new physicians |
| As a result, we believe that recommendations and endorsements by physicians will be essential for market acceptance of our product |
| We do not know whether physicians and patients will accept our product or whether we will be able to obtain their recommendations or endorsements in sufficient amounts to be profitable |
| We believe that physicians will not use a product unless they determine, based on clinical data and other factors, that it is an attractive alternative to other means of contraception and that it offers clinical utility in a cost-effective manner |
| Physicians are traditionally slow to adopt new products and treatment practices, partly because of perceived liability risks |
| We are dependent on the Essure system, which is currently our only commercial product |
| If the Essure system does not achieve significant market acceptance among physicians, patients and healthcare payers, even if reimbursement levels are sufficient and necessary United States and international regulatory approvals are maintained, we may never achieve significant revenues or profitability |
| Our future liquidity and capital requirements are uncertain |
| As we commercialize the Essure system on a wide-scale basis, we may require additional financing and therefore may in the future seek to raise additional funds through bank facilities, debt or equity offerings or other sources of capital |
| Any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants and interest expenses that will affect our financial results |
| Additional funding may not be available when needed or on terms acceptable to us |
| If we are unable to obtain additional capital, we may be required to delay, reduce the scope of or 20 _________________________________________________________________ eliminate our selling and marketing activities |
| Our future liquidity and capital requirements will depend upon many factors, including, among others: • the rate of product adoption by doctors and patients; • obtaining government and third-party reimbursement for the Essure procedure; • the liquidity of private insurance systems, as well as the timeliness of payments of government-management reimbursement systems; • our ability to improve our days sales outstanding; • the resources devoted to increasing manufacturing capacity to meet commercial demands; • our ability to reduce our cost of sales; • the resources devoted to developing and conducting sales and marketing and distribution programs; • the progress and cost of product development programs; and • the potential requirement to make royalty payments subject to the Ovion-Conceptus settlement agreement |
| If the effectiveness and safety of our product are not supported by long-term data, we may not achieve market acceptance and we could be subject to liability |
| In September 2005, the Company received from the US Food and Drug Administration, or FDA, approval to terminate the Companyapstas post-approval study with physicians newly trained in performing the Essure procedure due to the positive placement data obtained to date |
| The purpose of the post-approval study, required by FDA as a condition of the November 2002 approval of the Essure system, was to determine the rate of successful bilateral placements of the Essure micro-inserts at first attempt with a large number of newly trained physicians who were not part of the previous clinical studies |
| Although treatment of the total number of patients required by FDA had not been completed, the data obtained to date provided the Company with the ability to request an early termination of the study |
| Nevertheless, the long-term results of using the Essure device will not be available for several years |
| If long-term studies or clinical experience indicate that the Essure system is less effective or less safe than our current data suggest, we may not achieve or sustain market acceptance and/or we could be subject to significant liability |
| Our agreements and contracts entered into with partners and other third parties may not be successful |
| We signed in the past and may pursue in the future contracts and agreements with third parties that would assist our marketing, manufacturing, selling and distribution efforts |
| There can be no assurances that, if these agreements are entered into in the future, they will be successful |
| Our advertising campaigns may not be successful |
| Our advertising programs, which are aimed at increasing consumer awareness for our product, are generally expensive and may have limited success, if any |
| Such campaigns require consumers to make contact with an Essure trained physician, often involving a referral from their primary care physician and then to be provided information regarding birth control options by the physician, be pre-authorized for insurance reimbursement and then be scheduled for the procedure |
| Many of these steps are not within our control, and the program may not result in revenue generation commensurate with its costs |
| 21 _________________________________________________________________ We depend on our contract manufacturer to supply our commercial product requirements and we may experience disruption in supply if they are not in compliance with FDA and other health authority regulations or if our manufacturerapstas business fails to succeed |
| In April 2004, we received FDA approval to begin manufacturing the Essure product at Accellent, Inc, or Accellent, formerly named Venusa, our third-party subcontractor located in Mexico |
| We transitioned almost all of our internal manufacturing operations to Accellent by the end of 2004 to manufacture the components and assemble our product |
| If Accellent does not comply with FDA and other health authority regulations or encounters manufacturing difficulties, this could negatively impact sales of the Essure system |
| Government or third party reimbursement for the Essure procedure may not be available or may be inadequate, which would limit our future product revenues and delay or prevent our profitability |
| Market acceptance of the Essure system in the United States and in international markets will depend in part upon the availability of reimbursement within prevailing healthcare payment systems |
| Reimbursement systems in international markets vary significantly by country and sometimes by region, and reimbursement approvals must be obtained on a country-by-country basis |
| Many international markets have government-managed health care systems that determine reimbursement for new devices and procedures |
| In most markets, there are private insurance systems as well as government-managed systems |
| Regardless of the type of reimbursement system, we believe that physician advocacy of our product will be required to obtain reimbursement |
| Availability and extent of continued reimbursement will depend, at least in part, on the clinical and cost effectiveness of our product |
| We cannot assure you that reimbursement for our product will continue to be available in the United States or in international markets under either government or private reimbursement systems, or that physicians will support and advocate reimbursement for use of our product for all indications intended by us |
| We may be unable to obtain or maintain reimbursement in any country within a particular time frame, for a particular amount, or at all, which would limit our future product revenues and delay or prevent our profitability |
| We may not maintain regulatory approvals for the Essure system, our only product, which would delay or prevent us from generating product revenues, and would harm our business and force us to curtail or cease operations |
| Numerous government authorities, both in the United States and internationally, regulate the manufacture and sale of medical devices, including the Essure system |
| In the United States, the principal regulatory authorities are the FDA and corresponding state agencies, such as the California Department of Health Services |
| The process of obtaining and maintaining required regulatory clearances is lengthy, expensive and uncertain |
| We have received FDA approval to market the Essure system in the United States |
| If we lose that approval or fail to comply with existing or future regulatory requirements, it would delay or prevent us from generating further product revenues |
| Sales of medical devices outside of the United States are subject to international regulatory requirements that vary widely from country to country |
| The time required to obtain clearance required by foreign countries may be longer or shorter than that required for FDA clearance, and requirements for licensing may differ significantly from FDA requirements |
| Many countries in which we currently market or intend to market the Essure system either do not currently regulate medical devices or have minimal registration requirements; however, these countries may develop more extensive regulations in the future, which could delay or prevent us from marketing the Essure system in these countries |
| The FDA and certain foreign regulatory authorities impose numerous requirements with which medical device manufacturers must comply in order to maintain regulatory approvals |
| FDA 22 _________________________________________________________________ enforcement policy strictly prohibits the promotion of approved medical devices for uses other than those for which the device is specifically approved by the FDA We will be required to adhere to applicable FDA regulations, such as the Quality System Regulation, and similar regulations in other countries, which include testing, control and documentation requirements |
| Ongoing compliance with the Quality System Regulation and other applicable regulatory requirements will be monitored through periodic inspections by federal and state agencies, including the FDA and the California Department of Health Services, and by comparable agencies in other countries |
| If we fail to comply with applicable regulatory requirements, we may be subject to, among other things, warning letters, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, refusal of the government to grant pre-market clearance or pre-market approval for devices, withdrawal of approvals and criminal prosecution, any of which could negatively impact our business |
| Our intellectual property rights may not provide meaningful commercial protection for our product, which could enable third parties to use our technology, or very similar technology, and could impair our ability to compete in the market |
| We rely on patent, copyright, trade secret and trademark laws to limit the ability of others to compete with us using the same or similar technology in the United States and other countries |
| However, as described below, these laws afford only limited protection and may not adequately protect our rights to the extent necessary to sustain any competitive advantage we may have |
| The laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States, and many companies have encountered significant problems in protecting their proprietary rights abroad |
| These problems can be caused by the absence of rules and methods for defending intellectual property rights |
| We will be able to protect our technology from unauthorized use by third parties only to the extent that they are covered by valid and enforceable patents or are effectively maintained as trade secrets |
| The patent positions of companies developing medical devices, including our patent position, generally are uncertain and involve complex legal and factual questions concerning the enforceability of such patents against alleged infringement |
| Recent judicial decisions have established new case law and a reinterpretation of previous patent case law, and consequently we cannot assure you that historical legal standards surrounding the questions of infringement and validity will be applied in future cases |
| In addition, legislation may be pending in United States Congress that, if enacted in its present form, may limit the ability of medical device manufacturers in the future to obtain patents on surgical and medical procedures that are not performed by, or as a part of, devices or compositions that are themselves patentable |
| Our ability to protect our proprietary methods and procedures may be compromised by the enactment of this legislation or any other limitation or reduction in the patentability of medical and surgical methods and procedures |
| Changes in either the patent laws or in interpretations of patent laws in the United States and other countries may therefore diminish the value of our intellectual property |
| We own, or control through licenses, a variety of issued patents and pending patent applications |
| However, the patents on which we rely may be challenged and invalidated, and our patent applications may not result in issued patents |
| Moreover, our patents and patent applications may not be sufficiently broad to prevent others from practicing our technologies or from developing competing products |
| We also face the risk that others may independently develop similar or alternative technologies or design around our patented technologies |
| We have taken security measures to protect our proprietary information, especially proprietary information that is not covered by patents or patent applications |
| These measures, however, may not provide adequate protection of our trade secrets or other proprietary information |
| We seek to protect our proprietary information by entering into confidentiality agreements with employees, collaborators and consultants |
| Nevertheless, employees, collaborators or consultants could still disclose our proprietary information and we may not be able to protect our trade secrets in a meaningful way |
| If we 23 _________________________________________________________________ lose any employees, we may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by those former employees despite the existence of a nondisclosure and confidentiality agreement and other contractual restrictions designed and intended to protect our proprietary technology |
| In addition, others may independently develop substantially equivalent proprietary information or techniques or otherwise gain access to our trade secrets |
| Our ability to compete effectively will depend substantially on our ability to develop and maintain proprietary aspects of our technology |
| Our issued patents, any future patents that may be issued as a result of our United States or foreign patent applications, or the patents under which we have license rights may not offer any degree of protection against competitive products |
| Any patents that may be issued or licensed to us or any of our patent applications could be challenged, invalidated or circumvented in the future |
| If we cannot operate our business without infringing third-party intellectual property rights, our prospects will suffer |
| Our success will depend in part on our ability to operate without infringing or misappropriating the proprietary rights of others |
| We may be exposed to future litigation by third parties based on claims that our product infringes the intellectual property rights of others |
| There are numerous issued patents in the medical device industry and, as described in the next risk factor, the validity and breadth of medical device patents involve complex legal and factual questions for which important legal principles remain unresolved |
| Our competitors may assert that our product and the methods we employ may be covered by United States or foreign patents held by them |
| In addition, because patent applications can take many years to issue, there may be currently pending patent applications of which we are unaware that may later result in issued patents that our product may infringe |
| There could also be existing patents of which we are unaware that our product may inadvertently infringe |
| If we lose a patent infringement lawsuit, we could be prevented from selling our product unless we can obtain a license to use technology or ideas covered by that patent or are able to redesign the product to avoid infringement |
| A license may not be available to us on terms acceptable to us, or at all, and we may not be able to redesign our product to avoid any infringement |
| If we are not successful in obtaining a license or redesigning our product, we may be unable to sell our product and our business would suffer |
| We have been, and may be in the future, a party to patent litigation, which could be expensive and divert our managementapstas attention |
| The medical device industry has been characterized by extensive litigation regarding patents and other intellectual property rights, and companies in the industry have used intellectual property litigation to gain a competitive advantage |
| We may become a party to patent infringement claims and litigation or interference proceedings declared by the United States Patent and Trademark Office, or PTO, to determine the priority of inventions |
| The defense and prosecution of these matters are both costly and time consuming |
| We may need to commence proceedings against others to enforce our patents, to protect our trade secrets or know-how or to determine the enforceability, scope and validity of the proprietary rights of others |
| These proceedings would result in substantial expense to us and significant diversion of effort by our technical and management personnel |
| A third party, Ovion, Inc, Ovion, which is now a subsidiary of American Medical Systems, or AMS, brought to our attention a patent and certain claims from a pending patent application owned by it |
| Ovion indicated that it believes that the claims of its patent and application cover the Essure system and its use |
| On October 23, 2003, we entered into a settlement agreement with Ovion pursuant to which we received a sole, worldwide license to Ovionapstas patent rights relative to the Essure system, and Ovion may not grant any additional such licenses to other parties |
| The settlement agreement provided for the payment of a royalty to Ovion that will be equal to 3dtta25prca of the cumulative net sales of the 24 _________________________________________________________________ Essure system in excess of dlra75dtta0 million for a period of no longer than ten years |
| In addition, the settlement agreement provided for a cash payment of dlra2dtta0 million in the fourth quarter of 2003 as a prepaid royalty, and a license fee of dlra2dtta0 million payable in our common stock in equal installments in the first and second quarters of 2004 |
| Ovion was not granted any rights to our intellectual property pursuant to the settlement agreement |
| The settlement agreement was approved by the US District Court for the Northern District of California on November 6, 2003 |
| Although we have reached a settlement agreement with Ovion, we still believe that some or all of Ovionapstas claims should be included within our own patents and we have requested that the PTO to declare an interference |
| An interference is a proceeding within the PTO to determine which party was the first to invent, and which party is thereby entitled to ownership of the claims |
| We believe that we filed our patent applications for the Essure system before Ovion filed the application that issued as its patent, and that we are entitled to any patentable claims now appearing in their patent that cover our product |
| We do not know whether the PTO will declare an interference, whether we invented our product prior to Ovionapstas date of invention, or whether we will prevail in an interference proceeding if it is declared by the PTO If the PTO declares an interference in our favor and we are found to have priority of invention, we may avoid having to pay Ovion future royalties on the sales of our product |
| An adverse determination in new litigation or interference proceedings to which we are or may become a party could subject us to significant liabilities to third parties or require us to seek licenses from third parties |
| Although patent and intellectual property disputes in the medical device area have often been settled through licensing or similar arrangements, costs associated with such arrangements may be substantial and could include ongoing royalties |
| We may be unable to obtain necessary licenses on satisfactory terms, if at all |
| Adverse determinations in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us from manufacturing and selling the Essure system |
| One of the patents included in our license from Target Therapeutics, a division of Boston Scientific Corporation, has been the subject of reexamination proceedings in the PTO and an infringement lawsuit by Target Therapeutics |
| The patent is directed to variable stiffness catheters for use with guidewires, as might be used in our future products |
| Although the PTO reaffirmed the patent with amended claims and the lawsuit was settled, the patent could be challenged or invalidated in the future |
| If this patent is invalidated, our ability to prevent others from using this proprietary technology would be compromised |
| We may in the future acquire one or more technologies, products or companies that complement our business |
| We may not be able to effectively integrate these into our business and any such acquisition could bring additional risks, exposures and challenges to our company |
| If we fail to manage any acquisition, our business could be impaired |
| Our third-party manufacturer and we will depend upon third party and single source suppliers for raw materials and finished goods and we do not have forward contracts with many of these suppliers |
| We and our third party manufacturer purchase both raw materials used in our product and finished goods from various suppliers, and we rely on a single source supplier for one component of our product, the polyester fiber |
| We do not have formal supply contracts with several key vendors and, accordingly, these firms may not continue to supply us or our third party manufacturer with raw materials or finished goods in sufficient quantities, or at all |
| Delays associated with any future raw materials or finished goods shortages could impair our sales of the Essure system, particularly as our third-party manufacturer scales up its manufacturing activities in support of United States and international commercial sales of the Essure system |
| 25 _________________________________________________________________ Health care reform may limit our return on our product |
| The levels of revenue and profitability of medical device companies may be affected by the efforts of government and third party payers to contain or reduce the costs of health care through various means |
| In the United States, there have been, and we expect that there will continue to be, a number of federal, state and private proposals to control health care costs |
| These proposals may contain measures intended to control public and private spending on health care, as well as to provide universal public access to the health care system |
| If enacted, these proposals may result in a substantial restructuring of the health care delivery system |
| Significant changes in the United States health care system are likely to have a substantial impact over time on the manner in which we conduct our business and could have a material adverse effect on our business, financial condition and results of operations |
| We may be exposed to product liability claims, and we have only limited insurance coverage |
| The manufacture and sale of medical products involve an inherent risk of exposure to product liability claims and product recalls |
| We currently maintain product liability insurance with coverage limits of dlra10dtta0 million per occurrence and an annual aggregate maximum of dlra10dtta0 million, which we believe is comparable to that maintained by other companies of similar size serving similar markets |
| However, we cannot assure you that product liability claims in connection with clinical trials or commercial sales of the Essure system will not exceed such insurance coverage limits or that such insurance will continue to be available on commercially reasonable terms, or at all |
| Insurance is expensive and in the future may not be available on acceptable terms, if at all |
| A successful product liability claim or series of claims brought against us in excess of our insurance coverage, or a recall of our product, could cause our stock price to fall |
| We may not be able to attract and retain additional key management, sales and marketing and technical personnel or we may lose existing key management, sales and marketing or technical personnel, which may delay our development and marketing efforts |
| We depend on a number of key management, sales and marketing and technical personnel |
| The loss of the services of one or more key employees could delay the achievement of our development and marketing objectives |
| Our success will also depend on our ability to attract and retain additional highly qualified management, sales and marketing and technical personnel to meet our growth goals |
| We face intense competition for qualified personnel, many of whom are often subject to competing employment offers, and we do not know whether we will be able to attract and retain such personnel |
| We face intense competition, and if we are unable to compete effectively, demand for the Essure system may be reduced |
| The medical device industry is highly competitive and is characterized by rapid and significant technological change |
| The length of time required for product development and regulatory approval plays an important role in a companyapstas competitive position |
| As we commercialize Essure, we expect to compete with: • other methods of permanent contraception, in particular tubal ligation; • other methods of non-permanent contraception, including devices such as intrauterine devices, or IUDs, vaginal rings, condoms and prescription drugs such as the birth control pill, injectable and implantable contraceptives and patches; and • other companies that may develop permanent contraception devices that are similar to or otherwise compete with the Essure system |
| 26 _________________________________________________________________ We are aware of a company that is in the clinical stages of development for non-incisional permanent contraception devices |
| In addition, new competition and products may arise due to mergers or acquisitions performed by external parties |
| Other companies may develop products that could compete with the Essure system |
| Competitive factors may render the Essure system obsolete or noncompetitive or reduce demand for the Essure system |
| Our future quarterly results may fluctuate |
| Our future revenues and results of operations may fluctuate significantly from quarter to quarter and will depend upon, among other factors: • the rate at which new physicians are trained; • actions relating to reimbursement matters; • the rate at which we establish United States and international distributors or marketing partners and the degree of their success; • the extent to which the Essure system gains market acceptance; • the timing and size of distributor purchases; and • introduction of competitive products |
| Changes in stock option accounting rules may adversely impact our reported operating results prepared in accordance with generally accepted accounting principles, our stock price and our competitiveness in the employee marketplace |
| Technology companies like ours have a history of using broad based employee stock option programs to hire, incentivize and retain our workforce in a competitive marketplace |
| Statement of Financial Accounting Standards, or SFAS, Nodtta 123 allowed companies the choice of either using a fair value method of accounting for options, which would result in expense recognition for all options granted, or using an intrinsic value method, as prescribed by Accounting Principles Board Opinion Nodtta 25, "e Accounting for Stock Issued to Employees "e , or APB 25, with a pro forma disclosure of the impact on net income (loss) of using the fair value option expense recognition method |
| We had elected to apply APB 25 and accordingly we generally do not recognize any expense with respect to employee stock options as long as such options are granted at exercise prices equal to the fair value of our common stock on the date of grant |
| In December 2004, the Financial Accounting Standards Board, or FASB, issued SFAS Nodtta 123(R) "e Share-Based Payments "e |
| We adopted this statement on January 1, 2006, which is the first annual reporting period after June 15, 2005 |
| This statement will have a significant impact on our consolidated statement of operations as we will be required to expense the fair value of our stock options rather than disclosing the impact on our consolidated result of operations within our footnotes in accordance with the disclosure provisions of SFAS Nodtta 123 |
| This will result in lower reported earnings per share or in higher reported losses per share, which could negatively impact our future stock price |
| In addition, this could impact our ability to utilize broad based employee stock plans to reward employees and could result in a competitive disadvantage to us in the employee marketplace |
| Future changes in financial accounting standards or practices or existing taxation rules or practices may cause adverse unexpected revenue fluctuations and affect our reported results of operations |
| A change in accounting standards or practices or a change in existing taxation rules or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective |
| New accounting pronouncements and taxation rules and varying interpretations of accounting pronouncements and taxation practice have occurred and may 27 _________________________________________________________________ occur in the future |
| Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business |