| COOPER COMPANIES INC Item 1A Risk Factors |
| Our business faces significant risks |
| These risks include those described below and may include additional risks and uncertainties not presently known to us or that we currently deem immaterial |
| Our business, financial condition and results of operations could be materially adversely affected by any of these risks, and the trading prices of our common stock or convertible debentures could decline |
| These risks should be read in conjunction with the other information in this report |
| Risks Relating to Our Business We operate in the highly competitive healthcare industry and there can be no assurance that we will be able to compete successfully |
| Each of our businesses operates within a highly competitive environment |
| In our soft contact lens segment, CVI faces intense competition from competitors’ products, including newer silicone hydrogel contact lenses, and may face increasing competition as other new products enter the market |
| Our major competitors in the contact lens business have substantially greater financial resources, larger research and development budgets, larger sales forces, greater market penetration and larger manufacturing volumes than CVI Our major competitors in the specialty contact lens business offer competitive products, newer materials plus a variety of other eyecare products, including lens care products and ophthalmic pharmaceuticals, which may give them a competitive advantage in marketing their lenses |
| Moreover, newer silicone hydrogel lenses may gain market acceptance in the specialty lens business before we are able to manufacture in volume and market our own competitive silicone hydrogel specialty products, which could erode our market share and margins |
| The market for our non-specialty, commodity contact lenses is also intensely competitive and is characterized by declining prices for many older product lines and growing demand for newer silicone hydrogel based products |
| Our ability to respond to these competitive pressures will depend on our ability to decrease our costs and maintain gross margins and operating results and to introduce our own silicone hydrogel products on a timely basis and to achieve manufacturing efficiencies for such products |
| Any significant decrease in our costs per lens will depend, in part, on our ability to increase sales volume and production capacity |
| Our failure to respond to competitive pressures in a timely manner could have a material adverse effect on our business, financial condition and results of operations |
| To a lesser extent, CVI also competes with manufacturers of eyeglasses and other forms of vision correction including ophthalmic surgery |
| There can be no assurance that we will not encounter increased competition in the future, or that a successful entry into CVI’s higher-margin specialty lens segments by a larger competitor would not have a material adverse effect on our business, financial condition or results of operations |
| In the women’s healthcare segment, competitive factors include technological and scientific advances, product quality, price and effective communication of product information to physicians and hospitals |
| CooperSurgical competes with a number of manufacturers in each of its niche markets, some of which have substantially greater financial and personnel resources and sell a much broader range of products, which may give them an advantage in marketing competitive products |
| 17 ______________________________________________________________________ [38]Table of Contents Product innovations are important in the industry in which we operate, and we face the risk of product obsolescence |
| Product innovations are important in the contact lens business in which CVI competes and in the niche areas of the healthcare industry in which CSI competes |
| We have not historically allocated substantial resources to new product development, but rather have purchased, leveraged or licensed the technology developments of others |
| With the acquisition of Ocular, we have begun to invest more in new product development, including the development of silicone hydrogel based contact lenses |
| Although our focus is on products that will be marketable immediately or in the short to medium term rather than on funding longer-term, higher risk research and development projects, time commitments, the cost of obtaining necessary regulatory approval and other costs related to product innovations can be substantial |
| There can be no assurance that our new products will successfully compete in the marketplace and, as a result, justify the expense involved in their development and regulatory approval |
| In addition, our competitors may have developed or may in the future develop new products or technologies that could lead to the obsolescence of one or more of our products |
| Failure to stay current with our competitors with regard to new product offerings and technological changes and to offer products that provide performance that is at least comparable to competing products could have a material adverse effect on our business, financial condition, or results of operations |
| If our products are not accepted by the market, we will not be able to sustain or expand our business |
| Certain of our proposed products have not yet been clinically tested or commercially introduced, and we cannot assure you that any of them will achieve market acceptance or generate operating profits |
| We have not commercially marketed many of our planned new products, such as certain of our planned silicone hydrogel contact lens products and new contact lens products containing our patented phosphorilcoline (PC) technology and have just begun manufacturing silicone hydrogel lenses in Europe |
| Market acceptance and customer demand for these products are uncertain |
| The development of a market for our products may be influenced by many factors, some of which are out of our control, including: • acceptance of our products by eyecare and women’s healthcare practitioners; • the cost competitiveness of our products; • consumer reluctance to try and use a new product; • regulatory requirements; • the earlier release of competitive products, such as silicone hydrogel products into the market by our competitors; and • the emergence of newer and more competitive products |
| New medical and technological developments may reduce the need for our optical products |
| Technological developments in the eyecare and women’s healthcare industries, such as new surgical procedures or medical devices, may limit demand for our products |
| Corneal refractive surgical procedures such as Lasik surgery and the development of new pharmaceutical products may decrease the demand for our optical products |
| If these new advances were to provide a practical alternative to traditional vision correction, the demand for contact lenses and eyeglasses may materially decrease |
| We cannot assure that medical advances and technological developments will not have a material adverse effect on our businesses |
| 18 ______________________________________________________________________ [39]Table of Contents Our substantial and expanding international operations are subject to uncertainties which could affect our operating results |
| A significant portion of our current operations is conducted and located outside the United States, and our growth strategy involves expanding our existing foreign operations and entering into new foreign jurisdictions |
| We have significant manufacturing and distribution sites in North America and Europe |
| Approximately 49prca and 42prca of our net sales for fiscal years ended October 31, 2005 and 2004, respectively, were derived from the sale of products outside the United States |
| Further, we believe that sales outside the United States will continue to account for a material portion of our total net sales for the foreseeable future |
| International operations and business expansion plans are subject to numerous additional risks, including: • foreign customers may have longer payment cycles than customers in the United States; • failure to comply with United States Department of Commerce export controls may result in fines and/or penalties; • tax rates in some foreign countries may exceed those of the United States, and foreign earnings may be subject to withholding requirements or the imposition of tariffs, exchange controls or other restrictions; • we may find it difficult to comply with a variety of foreign regulatory requirements; • general economic and political conditions in the countries where we operate may have an adverse effect on our operations in those countries or not be favorable to our growth strategy; • we may find it difficult to manage a large organization spread throughout various countries; • foreign governments may adopt regulations or take other actions that would have a direct or indirect adverse impact on our business and market opportunities; • we may have difficulty enforcing agreements and collecting receivables through some foreign legal systems; • fluctuations in currency exchange rates could adversely affect our results; • we may have difficulty enforcing intellectual property rights in some foreign countries; • we may have difficulty gaining market share in countries such as Japan because of regulatory restrictions and customer preferences; and • we may find it difficult to enter new markets such as China, India and other developing nations due to, among other things, customer acceptance, undeveloped distribution channels and business knowledge of these new markets |
| As we continue to expand our business globally, our success will depend, in large part, on our ability to anticipate and effectively manage these and other risks associated with our international operations |
| However, any of these factors could adversely affect our international operations and, consequently, our operating results |
| Acquisitions we may make may involve numerous risks |
| We have a history of acquiring businesses and products that have significantly contributed to our growth in recent years, including our recent acquisition of Ocular |
| As part of our growth strategy, particularly at CSI, we intend to continue to consider acquiring complementary technologies, products and businesses |
| Future acquisitions could result in potentially dilutive issuances of equity securities, 19 ______________________________________________________________________ [40]Table of Contents the incurrence of debt and contingent liabilities and an increase in amortization and/or write-offs of goodwill and other intangible assets, which could have a material adverse effect upon our business, financial condition and results of operations |
| Risks we could face with respect to acquisitions include: • difficulties in the integration of the operations, technologies, products and personnel of the acquired company and establishment of appropriate accounting controls and reporting procedures and other regulatory compliance procedures; • risks of entering markets in which we have no or limited prior experience; • potential loss of employees; • an inability to identify and consummate future acquisitions on favorable terms or at all; • diversion of management’s attention away from other business concerns; • expenses of any undisclosed or potential liabilities of the acquired company; • expenses, including restructuring expenses, to shut-down our own locations and/or terminate our employees; • a dilution of earnings per share; and • risks inherent in accounting allocations and consequences thereof, such as whether a strategic or financial buyer would view such allocations as establishing a fair value for so called tangible and intangible assets |
| We face risks associated with disruption of manufacturing operations and failure to develop new manufacturing processes that could adversely affect our profitability or competitive position |
| We manufacture a significant portion of the medical device products we sell |
| Any prolonged disruption in the operations of our existing manufacturing facilities, whether due to technical or labor difficulties, destruction of or damage to any facility (as a result of natural disaster, use and storage of hazardous materials or other events) or other reasons, could have a material adverse effect on our business, financial condition and results of operations |
| In addition, materials, such as silicone hydrogel, require improvements to our manufacturing processes to make them cost effective |
| Our failure to develop such new manufacturing processes could significantly impact our ability to compete |
| CVI manufactures our molded contact lenses, which represent a significant portion of our contact lens revenues, primarily at our facilities in the United Kingdom, Puerto Rico and Norfolk, Virginia |
| CSI manufactures the majority of its products in Trumbull, Connecticut |
| We manufacture certain products at only one manufacturing site for certain markets, our products are approved for manufacturing only at one site |
| Before we can use a second manufacturing site we must obtain the approval of regulatory authorities and because this process is expensive, we have generally not sought approvals needed to manufacture at an additional site |
| If there were any prolonged disruption in the operations of the approved facility, it could take a significant amount of time to validate a second site and replace lost product, which could result in lost customers and thereby reduce sales, profitability and market share |
| If our manufacturing operations fail to comply with applicable regulations, our manufacturing could be delayed or disrupted, and our product sales and profitability could suffer |
| Our manufacturing operations and processes are required to comply with numerous federal, state and foreign regulatory requirements, including the FDA’s Quality System Regulation, or QSR regulations 20 ______________________________________________________________________ [41]Table of Contents in Japan, and other similar foreign regulations which govern the procedures related to the design, testing, production processes, controls, quality assurance, labeling, packaging, storage and shipping of our products |
| We also are subject to state requirements and licenses applicable to manufacturers of medical devices |
| In addition, we must engage in extensive recordkeeping and reporting and must make available our manufacturing facilities and records for periodic unscheduled inspections by governmental agencies, including the FDA, state authorities and comparable agencies in other countries |
| Failure to pass a QSR or similar foreign inspection or to comply with these and other applicable regulatory requirements could result in disruption of our operations and manufacturing delays in addition to, among other things, significant fines, suspension of approvals, seizures or recalls of products, operating restrictions and criminal prosecutions |
| As a result, any failure to comply with applicable requirements could adversely affect our product sales and profitability |
| We rely on independent suppliers for raw materials and we could experience inventory shortages if we were required to use an alternative supplier on short notice |
| We rely on independent suppliers for key raw materials, consisting primarily of various chemicals and packaging materials |
| Raw materials used by us are generally available from more than one source |
| However, because some products require specialized manufacturing procedures, we could experience inventory shortages if we were required to use an alternative manufacturer on short notice |
| (Asahi) is our sole supplier of the material used to make our silicone hydrogel contact lens products, comfilcon A If Asahi fails to supply sufficient material on a timely basis or at all for any reason, we may suffer a disruption in the supply of our silicone hydrogel contact lens products and may need to switch to an alternative supplier in accordance with our agreement with Asahi |
| A disruption in the supply of comfilcon A could disrupt production of our silicone hydrogel contact lens products thereby adversely impacting our ability to market and sell such products and our ability to compete in all segments of the contact lens market |
| We face risks related to environmental matters |
| Our facilities are subject to a broad range of federal, state, local and foreign environmental laws and requirements, including those governing discharges to the air and water, the handling or disposal of solid and hazardous substances and wastes and remediation of contamination associated with the release of hazardous substances at our facilities and offsite disposal locations |
| We have made, and will continue to make, expenditures to comply with such laws and requirements |
| Future events, such as changes in existing laws and regulations or the discovery of contamination at our facilities, may give rise to additional compliance or remediation costs that could have a material adverse effect on our business, results of operations or financial condition |
| As a manufacturer of various products, we are exposed to some risk of claims with respect to environmental matters, and there can be no assurance that material costs or liabilities will not be incurred in connection with any such claims |
| We are involved in a voluntary clean-up at one of our sites in the state of New York, and although the workplan submitted to the state was accepted and the clean-up is proceeding in accordance with the workplan and our expectations, there can be no assurance that the clean-up will be completed within the timeframe and cost projected, that the expected results will be achieved, or that we will not identify alternate sources of contamination in connection with their remediation |
| As such, there can be no assurance that material costs or liabilities will not be incurred in connection with any such remediation |
| 21 ______________________________________________________________________ [42]Table of Contents We could experience losses from product liability claims, including such claims and other losses resulting from sales of counterfeit and other infringing products |
| We face an inherent risk of exposure to product liability claims in the event that the use of our products results in personal injury |
| We also face the risk that defects in the design or manufacture of our products or sales of counterfeit or other infringing product might necessitate a product recall and other actions by manufacturers, distributors or retailers in order to safeguard the health of consumers and protect the integrity of the subject brand |
| In addition, consumers may halt or delay purchases of a product that is the subject of a claim or recall, or has been counterfeited |
| We handle some risk with third-party carrier policies that are subject to deductibles and limitations |
| There can be no assurance that we will not experience material losses due to product liability claims or recalls, or a decline in sales resulting from sales of counterfeit or other infringing product, in the future |
| If we fail to adequately protect our intellectual property, our business could suffer |
| We consider our intellectual property rights, including patents, trademarks and licensing agreements, to be an integral component of our business |
| We attempt to protect our intellectual property rights through a combination of patent, trademark, copyright and trade secret laws, as well as licensing agreements and third-party nondisclosure and assignment agreements |
| Our failure to obtain or maintain adequate protection of our intellectual property rights for any reason could have a material adverse effect on our business, results of operations and financial condition |
| We have applied for patent protection in the United States and other foreign jurisdictions relating to certain existing and proposed processes and products |
| We cannot assure you that any of our patent applications will be approved |
| Patent applications in the United States are maintained in secrecy for a period of time, which may last until patents are issued, and since publication of discoveries in the scientific or patent literature tends to lag behind actual discoveries by several months, we cannot be certain that we will be the first creator of inventions covered by any patent application we make or the first to file patent applications on such inventions |
| The patents we own could be challenged, invalidated or circumvented by others and may not be of sufficient scope or strength to provide us with any meaningful protection or commercial advantage |
| Further, we cannot assure you that we will have adequate resources to enforce our patents |
| We also rely on unpatented proprietary technology |
| It is possible that others will independently develop the same or similar technology or otherwise obtain access to our unpatented technology |
| To protect our trade secrets and other proprietary information, we require employees, consultants, advisors and collaborators to enter into confidentiality agreements |
| We cannot assure you that these agreements will provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information |
| If we are unable to maintain the proprietary nature of our technologies, we could lose competitive advantages and be materially adversely affected |
| The laws of certain foreign countries in which we do business or contemplate doing business in the future do not recognize intellectual property rights or protect them to the same extent as do the laws of the United States |
| Adverse determinations in a judicial or administrative proceeding could prevent us from manufacturing and selling our products or prevent us from stopping others from manufacturing and selling competing products, and thereby have a material adverse affect on our business, financial condition and results of operations |
| 22 ______________________________________________________________________ [43]Table of Contents Our intellectual property could be subject to claims of infringement |
| Our competitors in both the US and foreign countries, many of which have substantially greater resources and have made substantial investments in competing technologies, may have applied for or obtained, or may in the future apply for and obtain, patents that will prevent, limit or otherwise interfere with our ability to make and sell our existing and planned products |
| We have not conducted an independent review of patents issued to third parties |
| Claims that our products infringe the proprietary rights of others often are not asserted until after commencement of commercial sales incorporating our technology |
| Significant litigation regarding intellectual property rights exists in our industry |
| Third parties have made, and it is possible that they will make in future, claims of infringement against us or our contract manufacturers in connection with their use of our technology |
| Any claims, even those without merit, could: • be expensive and time consuming to defend; • cause us to cease making, licensing or using products that incorporate the challenged intellectual property; • require us to redesign or reengineer our products, if feasible; • divert management’s attention and resources; or • require us to enter into royalty or licensing agreements in order to obtain the right to use a necessary product, component or process |
| Any royalty or licensing agreements, if required, may not be available to us on acceptable terms or at all |
| A successful claim of infringement against us or our contract manufacturers in connection with the use of our technology, in particular if we are unable to manufacture or sell any of our planned products in any major market, could adversely affect our business |
| Our substantial indebtedness could adversely affect our financial health and prevent us from fulfilling our debt obligations |
| We have now and expect to continue to have a significant amount of indebtedness |
| As of October 31, 2005, we had total indebtedness of dlra704dtta9 million and dlra179dtta3 million of availability under our bank credit facility for further borrowings |
| Our substantial indebtedness could: • increase our vulnerability to general adverse economic and industry conditions; • require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions, research and development efforts and other general corporate purposes; • limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; • place us at a competitive disadvantage compared to our competitors that have less debt; • limit our ability to borrow additional funds; and 23 ______________________________________________________________________ [44]Table of Contents • make it more difficult for us to satisfy our obligations with respect to our debt, including our obligation to repay our credit facility or repurchase the debentures under certain circumstances; In addition, our credit facility contains financial and other restrictive covenants that will limit our ability to engage in activities that may be in our long-term best interests |
| Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our debt |
| We are vulnerable to interest rate risk with respect to our debt |
| We are subject to interest rate risk in connection with the issuance of variable and fixed-rate debt |
| In order to maintain our desired mix of fixed-rate and variable-rate debt, we may use interest rate swap agreements and exchange fixed and variable-rate interest payment obligations over the life of the arrangements, without exchange of the underlying principal amounts |
| We may not be successful in structuring such swap agreements to effectively manage our risks, which could adversely affect our business, earnings and financial condition |
| Exchange rate fluctuations could adversely affect our financial results |
| As a result of our international operations, currency exchange rate fluctuations tend to affect our results of operations and financial position |
| Our most significant currency exposures are the British Pound, Canadian Dollar, Japanese Yen, and Euro |
| We expect to generate an increasing portion of our revenue and incur a significant portion of our expenses in currencies other than US dollars |
| Although we may enter into foreign exchange agreements with financial institutions to reduce our exposure to fluctuations in foreign currency values relative to our debt or receivables obligations, these hedging transactions, if entered into, will not eliminate that risk entirely |
| In addition, to the extent we are unable to match revenue received in foreign currencies with costs paid in the same currency, exchange rate fluctuations could have a negative impact on our financial condition and results of operations |
| Additionally, because our consolidated financial results are reported in dollars, if we generate sales or earnings in other currencies the translation of those results into dollars can result in a significant increase or decrease in the amount of those sales or earnings |
| We may be required to recognize impairment charges on goodwill, which would reduce our consolidated net worth and stockholders’ equity |
| Pursuant to generally accepted accounting principles in the United States, we are required to perform impairment tests on our goodwill balance annually or at any time when events occur, which could impact the value of our business segments |
| Our determination of whether an impairment has occurred is based on a comparison of each of our reporting units’ fair market value with its carrying value |
| Significant and unanticipated changes could require a provision for impairment in a future period that could substantially affect our reported earnings in a period of such change |
| In addition, such charges would reduce our consolidated net worth and our shareholders’ equity, increasing our debt to total capitalization ratio, which may result in a default under our credit facilities |
| Increases in our effective tax rates or adverse outcomes resulting from examination of income tax returns for Ocular Sciences, Inc |
| for periods prior to our acquisition could adversely affect our results |
| Our future effective tax rates could be adversely affected by earnings being higher than anticipated in countries where the company has higher statutory rates or lower than anticipated in countries where it 24 ______________________________________________________________________ [45]Table of Contents has lower statutory rates, by changes in valuation of our deferred tax assets and liabilities, or by changes in tax laws or interpretations of those laws |
| In addition, the Internal Revenue Service has been auditing Ocular’s income tax returns for the years 1999 – 2003, and we are also subject to the examination of its income tax returns by other tax authorities |
| The outcome of these examinations could have a material adverse effect on our operating results and financial condition |
| We are in the process of upgrading certain of our management information systems and we cannot assure you that there will not be associated excessive costs or disruption of our business |
| We have implemented a management information system at our major locations and are in the process of implementing the system for substantially all of our businesses worldwide |
| Many other companies have had severe problems with computer system implementations of this nature and scope |
| We are using a controlled project plan, and we believe we have assigned adequate staffing and other resources to the projects to ensure its successful implementation |
| However, we cannot assure you that the design will meet our current and future business needs or that it will operate as designed |
| We are heavily dependent on such computer systems, and any failure or delay in the system implementation would cause a substantial interruption to our business, additional expense and loss of sales, customers and profits |
| If we do not retain our key personnel and attract and retain other highly skilled employees our business could suffer |
| If we fail to recruit and retain the necessary personnel, our business and our ability to obtain new customers, develop new products and provide acceptable levels of customer service could suffer |
| The success of our business is heavily dependent on the leadership of our key management personnel |
| Our success also depends on our ability to recruit, retain and motivate highly skilled sales, marketing and engineering personnel |
| Competition for these persons in our industry is intense and we may not be able to successfully recruit, train or retain qualified personnel |
| Provisions of our governing documents and Delaware law, and our rights plan, may have anti-takeover effects |
| Certain provisions of our Second Restated Certificate of Incorporation and Amended and Restated By-laws may inhibit changes in control of the Company not approved by our board of directors |
| These provisions include: (i) advance notice requirements for stockholder proposals and nominations and (ii) the authority of our board to issue without stockholder approval preferred stock with such terms as our board may determine |
| We will also be afforded the protections of Section 203 of the Delaware General Corporation Law, which could have similar effects |
| Our board of directors adopted a preferred stock purchase rights plan, commonly known as a “poison pill,” pursuant to a rights agreement dated as of October 29, 1997 |
| The rights agreement is intended to prevent abusive hostile takeover attempts by requiring a potential acquiror to negotiate the terms of an acquisition with our board of directors |
| However, it could have the effect of deterring or preventing an acquisition of our company, even if a majority of the our stockholders would be in favor of such acquisition, and could also have the effect of making it more difficult for a person or group to gain control of the Company or to change existing management |
| 25 ______________________________________________________________________ [46]Table of Contents Risks Relating to Government Regulation of Manufacture and Sale of Our Products Our failure to comply with regulatory requirements or to receive regulatory clearance or approval for our products or operations could adversely affect our business |
| Our products and operations are subject to rigorous regulation by the FDA, and numerous other federal, state and foreign governmental authorities |
| In the United States, the FDA regulates virtually all aspects of a medical device’s testing, manufacture, safety, labeling, storage, recordkeeping, reporting, marketing, promotion and distribution, as well as the export of medical devices manufactured in the United States to foreign markets |
| Our failure to comply with FDA regulations could lead to the imposition of administrative or judicial sanctions, including injunctions, suspensions or the loss of regulatory approvals, product recalls, termination of distribution, or product seizures |
| In the most egregious cases, criminal sanctions or closure of our manufacturing facilities are possible |
| Our medical devices require clearance or approval by the FDA before they can be commercially distributed in the United States and may require similar approvals by foreign regulatory agencies before distribution in foreign jurisdictions |
| The process of obtaining regulatory approvals to market a medical device, particularly from the FDA, can be costly and time consuming |
| There can be no assurance that such approvals will be granted on a timely basis, if at all, or that significant delays in the introduction of any new products or product enhancements will not occur, which could adversely affect our competitive position and results of operations |
| Modifications and enhancements to a medical device also require a new FDA clearance or approval if they could significantly affect its safety or effectiveness or would constitute a major change in its intended use, design or manufacture |
| The FDA requires every manufacturer to make this determination in the first instance, but the FDA may review any manufacturer’s decision |
| We have made modifications and enhancements to our medical devices that we do not believe require a new clearance or application, but we cannot confirm that the FDA will agree with our decisions |
| If the FDA requires us to seek clearance or approval for modification of a previously cleared product for which we have concluded that new clearances or approvals are unnecessary, we may be required to cease marketing or to recall the modified product until we obtain clearance or approval, and we may be subject to significant regulatory fines or penalties, which could have a material adverse effect on our financial results and competitive position |
| Even if regulatory approval or clearance of a medical device is granted, the FDA may impose limitations or restrictions on the uses and indications for which the device may be labeled and promoted, and failure to comply with FDA regulations prohibiting a manufacturer from promoting a device for an unapproved, or “off-label” use could result in enforcement action by the FDA, including, among other things, warning letters, fines, injunctions, consent decrees, and civil or criminal penalties |
| Development and marketing of our products is subject to strict governmental regulation by foreign regulatory agencies, and failure to receive, or delay in receiving, foreign qualifications could have a material adverse affect on our business |
| In many of the foreign countries in which we market our products, we are subject to regulations affecting, among other things, product standards, packaging requirements, labeling requirements, import restrictions, tariff regulations, duties and tax requirements |
| Many of the regulations applicable to our devices and products in such countries are similar to those of the FDA In many countries, the national health or social security organizations require our products to be qualified before they can be 26 ______________________________________________________________________ [47]Table of Contents marketed with the benefit of reimbursement eligibility |
| To date, we have not experienced difficulty in complying with these regulations |
| Due to the movement towards harmonization of standards in the European Union, we expect a changing regulatory environment in Europe characterized by a shift from a country by-country regulatory system to a European Union-wide single regulatory system |
| We cannot currently predict the timing of this harmonization |
| Our failure to receive, or delays in the receipt of, relevant foreign qualifications could have a material adverse effect on our business, financial condition and results of operations |
| Our products are subject to reporting requirements and recalls, even after receiving regulatory clearance or approval, which could harm our reputation, business and financial results |
| After a device is placed on the market, numerous regulatory requirements apply, including the FDA’s Quality System Regulation, or QSR, which requires manufacturers to follow design, testing, control, documentation and other quality assurance procedures during the manufacturing process; labeling regulations, which prohibit the promotion of products for unapproved or “off-label” uses and impose other restrictions on labeling; and medical device reporting regulations that require us to report to FDA or similar governmental bodies in other countries if our products cause or contribute to a death or serious injury or malfunction in a way that would be reasonably likely to contribute to death or serious injury if the malfunction were to recur |
| The FDA and similar governmental bodies in other countries have the authority to require the recall of our products in the event of material deficiencies or defects in design or manufacture |
| A government mandated or voluntary recall by us could occur as a result of manufacturing or labeling errors or design defects |
| Any voluntary or government mandated recall may divert management attention and financial resources and harm our reputation with customers |
| Any recall involving one of our products could also harm the reputation of the product and the Company and would be particularly harmful to our business and financial results |
| Changes in government regulation of the retail optical industry or in the selling and prescribing practices for contact lenses could have a material adverse impact on our business and financial results |
| Our success depends to a significant extent upon the success of our customers who prescribe and fit contact lenses, including optometrists, ophthalmologists, and optical retail outlets, which are subject to a variety of federal, state and local laws, regulations and ordinances |
| These regulations relate to who is permitted to prescribe and fit contact lenses, the prescriber’s obligation to provide prescriptions to its patients, the length of time a prescription is valid, the ability or obligation of prescribers to prescribe lenses by brand rather than by generic equivalent or specification, and other matters |
| The state and local legal requirements vary widely among jurisdictions and are subject to frequent change |
| In addition, numerous healthcare-related legislative proposals have been made in recent years in the Congress and in various state legislatures |
| For instance, the Fairness to Contact Lens Consumers Act, which was enacted on December 6, 2003, requires that contact lens prescribers provide patients with a copy of their contact lens prescriptions after a contact lens fitting and verify those prescriptions to any third party designated by a patient, such as an online seller |
| Further legislative or policy initiatives directed at prescribers and the retail optical industry could be introduced on either the federal or state level |
| The potential impact of these proposals with respect to the business of our customers is uncertain, and we cannot assure you that that the proposals, if adopted, would not have a material adverse impact on our revenues, business, financial condition and results of operations |
| 27 ______________________________________________________________________ [48]Table of Contents Adverse regulatory or other decisions affecting eyecare practitioners, or material changes in the selling and prescribing practices for contact lenses, could also have a material adverse affect on our business, operating results and financial condition |
| Finally, although cost controls or other requirements imposed by third party healthcare payors, such as insurers and health maintenance organizations, have not historically had a significant effect on contact lens prices or distribution practices, this could change in the future and could adversely affect our business, financial condition and results of operations |
| Changes in government regulation of the healthcare industry could materially adversely affect our business |
| In recent years, an increasing number of legislative initiatives have been introduced or proposed in Congress and in state legislatures that could effect major changes in the healthcare system, either nationally or at the state level |
| Among the proposals under consideration are price controls on hospitals, insurance market reforms to increase the availability of group health insurance to small businesses, requirements that all businesses offer health insurance coverage to their employees and the creation of a government health insurance plan or plans that would cover all citizens |
| There continue to be efforts at the federal level to introduce various insurance market reforms, expanded fraud and abuse and anti referral legislation and further reductions in Medicare and Medicaid coverage and reimbursement |
| A broad range of both similar and more comprehensive healthcare reform initiatives is likely to be considered at the state level |
| It is uncertain which, if any, of these or other proposals will be adopted |
| We cannot predict the effect such reforms or the prospect of their enactment may have on our business |
| The costs of complying with the requirements of federal laws pertaining to the privacy and security of health information and the potential liability associated with failure to do so could materially adversely affect our business and results of operations |
| Other federal legislation will affect the manner in which we use and disclose health information |
| The Health Insurance Portability and Accountability Act of 1996 (HIPAA) mandates, among other things, the adoption of standards for the electronic exchange of health information that may require significant and costly changes to current practices |
| The US Department of Health and Human Services (HHS) has released three rules to date mandating the use of new standards with respect to certain healthcare transactions and health information |
| The first rule requires the use of uniform standards for common healthcare transactions, including healthcare claims information, plan eligibility, referral certification and authorization, claims status, plan enrollment and disenrollment, payment and remittance advice, plan premium payments, and coordination of benefits |
| The second rule released by HHS imposes new standards relating to the privacy of individually identifiable health information |
| These standards not only require compliance with rules governing the use and disclosure of protected health information, but they also require an entity subject to HIPAA to obtain satisfactory assurances that any of its business associates to whom such information is disclosed will safeguard the information |
| The third rule released by HHS establishes minimum standards for the security of electronic health information |
| While we do not believe we are directly regulated as a covered entity under HIPAA, many of our customers are covered entities subject to HIPAA Such customers may require us to enter into business associates agreements, which obligate us to safeguard certain health information we obtain in the course of servicing the customers, restrict the manner in which we use and disclose such information and impose liability on us for failure to meet our contractual obligations |
| The costs of complying with these contractual obligations and potential liability associated with failure to do so could have a material adverse effect on our business and financial condition and results of operations |
| 28 ______________________________________________________________________ [49]Table of Contents Federal and state laws pertaining to healthcare fraud and abuse could materially adversely affect our business and results of operations |
| We may be subject to various federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback laws and physician self-referral laws |
| Violations of these laws are punishable by criminal and civil sanctions, including, in some instances, exclusion from participation in federal and state healthcare programs, including Medicare, Medicaid, Veterans Administration health programs and TRICARE While we believe that our operations are in material compliance with such laws, because of the complex and far-reaching nature of these laws, there can be no assurance that we would not be required to alter one or more of its practices to be in compliance with these laws |
| Any violations of these laws or regulations could result in a material adverse effect on our business, financial condition and results of operations |
| In addition, if there is a change in law, regulation, administrative or judicial interpretation, we may have to change our business practices or our existing business practices could be challenged as unlawful, which could have a material adverse effect on our business, financial condition and results of operations |