| CYTYC CORP Item 1A Risk Factors |
| The following factors, among others, could cause actual results to differ materially from those contained in forward-looking statements made in this report and presented elsewhere by management from time to time |
| Such factors, among others, may have a material adverse effect upon our business, financial condition, and results of operations |
| The following discussion of our risk factors should be read in conjunction with the consolidated financial statements and related notes included herein |
| Because of these and other factors, past financial performance should not be considered an indication of future performance |
| We depend principally on the sale of three product lines |
| Prior to our acquisitions of Novacept in March 2004 and Proxima Therapeutics, Inc |
| (“Proxima”) in March 2005, we derived most of our revenues from sales of our ThinPrep processor, filters and other disposable supplies for use in gynecological and non-gynecological testing applications |
| As a result of the Novacept and Proxima acquisitions, we now manufacture and market the NovaSure, MammoSite and GliaSite Systems, which represented 29prca of worldwide consolidated net sales in the year ended December 31, 2005 |
| Nevertheless, we still rely heavily on sales of our ThinPrep products to generate a significant portion of our net sales and earnings |
| If we are unable to continue to successfully develop and commercialize our current products as well as other new or improved products, our business, sales and profits may be materially impaired |
| In addition, in October 2003, an article in the New England Journal of Medicine suggested that the interval between screenings for cervical cancer could be extended from one year to three years for women over 30 who have had consistently negative results from previous screenings |
| If screening periods are extended as suggested, aggregate demand for testing is likely to decrease and if we are unable to successfully develop additional products, our business may be materially adversely affected |
| Furthermore, we may be required to obtain FDA approval and secure adequate reimbursement from insurance companies and other third-party payors for any other new or improved products that we are able to develop or acquire, and we may not be able to do so |
| Our sales are dependent on third-party reimbursement |
| Widespread adoption of our ThinPrep, ThinPrep Imaging, NovaSure, our newly acquired MammoSite and GliaSite Systems, and the FirstCyte Breast Test in the United States and other countries is dependent upon the ability of healthcare providers and laboratories to secure adequate reimbursement from third-party payors such as private insurance plans, managed care organizations, Medicare and Medicaid and foreign governmental healthcare agencies |
| Although a majority of managed care organizations in the United States have added the ThinPrep Pap Test to their coverage and the NovaSure, MammoSite and GliaSite procedures are reimbursed by many private healthcare insurance and managed care payors, we cannot guarantee that reimbursement will increase or continue to be available, or that reimbursement levels will be adequate to enable healthcare providers and clinical 17 ______________________________________________________________________ [40]Table of Contents laboratories in the United States and other countries to use our products instead of conventional methods or existing therapies, such as whole breast irradiation and brachytherapy, or the products of our competitors |
| Reimbursement and healthcare payment systems in international markets vary significantly by country and include both government-sponsored healthcare and private insurance |
| There can be no assurance that third-party payors will provide or continue to provide such coverage, that third-party reimbursement will be made available at an adequate level, if at all, for our products under any such overseas reimbursement system or that healthcare providers or clinical laboratories will use our products in lieu of other methods |
| We also will be required to secure adequate reimbursement for any new products we develop or acquire, and we may not be able to do so successfully |
| We are dependent upon a relatively small number of large clinical laboratory customers in the United States for a significant portion of our sales of the ThinPrep System |
| We are dependent upon a relatively small number of large clinical laboratory customers in the United States for a significant portion of our sales of the ThinPrep System, and our business may materially suffer if we are unable to increase sales to, or maintain our pricing levels with, our existing customers and establish new customers both within and outside the United States |
| Due in part to a trend toward consolidation of clinical laboratories in recent years and the relative size of the largest United States laboratories, it is likely that a significant portion of ThinPrep System sales will continue to be concentrated among a relatively small number of large clinical laboratories |
| Our business faces intense competition from other companies |
| Our products face direct competition from a number of publicly-traded and privately-held companies |
| Some of our competitors are large companies that enjoy significant competitive advantages over us, including: • significantly greater name recognition; • established distribution networks; • additional lines of products, and the ability to offer rebates or bundle products to offer discounts or incentives to gain competitive advantage; • greater resources for product development, sales and marketing; and • well-established products for procedures such as the radical mastectomy or traditional radiation therapy |
| The markets we sell in are intensely competitive, subject to rapid change and significantly affected by new product introductions and other market activities of industry participants |
| Other companies may develop products that are superior to ours or less expensive, or both |
| Improvements in existing competitive products or the introductions of new competitive products may reduce our ability to compete for sales, particularly if those competitive products demonstrate better safety or effectiveness, clinical results, ease of use or lower costs |
| The development, FDA approval and commercial marketing of competitive systems for cervical cancer screening, treatment for excessive menstrual bleeding, breast cancer, or malignant brain tumors could have a material adverse effect on our business and financial condition |
| If we are unable to compete effectively against existing and future competitors and existing and future alternative treatments, our sales could decline and our business could be adversely affected |
| The success of our business depends on our ability to protect our intellectual property rights |
| We rely on a combination of patents, trade secrets, copyrights, trademarks and confidentiality agreements to protect our products’ proprietary technology, rights and know-how |
| We also are the exclusive licensee of certain patented technology for use in the field of cytology related to the ThinPrep System, in the field of breast cancer detection and treatment related to the FirstCyte Breast Test and in the treatment of any proliferative disease relating to our GliaSite System |
| 18 ______________________________________________________________________ [41]Table of Contents With our acquisitions in March 2004 and 2005, we acquired all of Novacept’s and Proxima’s intellectual property rights, respectively, including those with respect to the NovaSure System, the MammoSite System and the GliaSite System |
| However, the medical device industry in general, and the therapeutic use of devices employing radiofrequency energy, such as the NovaSure System, in particular, have been subject to extensive litigation and administrative proceedings regarding patents and other intellectual property rights |
| If we fail to protect, defend and maintain the intellectual property rights with respect to any of our products or if we are subject to a successful third-party claim of infringement, the competitive position of these products could be impaired |
| In addition, infringement, interference and other intellectual property claims and proceedings, with or without merit, are expensive and time-consuming to litigate and could adversely affect our business, financial condition and operating results |
| If breast surgeons, radiation oncologists and patients do not adopt the MammoSite System as a preferred treatment for early-stage breast cancer, the intended benefits of our acquisition of Proxima may not be realized and the market price of our common stock could decline |
| The primary product acquired as a result of our acquisition of Proxima is the MammoSite System, which is used to treat early-stage breast cancer |
| The MammoSite System is supported by only four years of patient follow-up studies from the initial 43-patient study that was designed to gain clearance from the FDA and the one-year follow-up study from a 1cmam600-patient registry following the FDA clearance |
| We could discover that the results of these clinical trials are not indicative of results experienced in the market over time |
| Furthermore, some of the existing data has been produced in studies that involve relatively small patient groups, and such data may not be reproduced in wider patient populations |
| Currently, with respect to our MammoSite System, we are competing against breast cancer treatment using external beam radiation, which has longer-term data on patient outcome |
| We may have difficulty gaining further acceptance of the MammoSite System among breast surgeons, radiation oncologists and patients for a number of reasons including: • the presence of competing products sold by companies with longer operating histories, more recognizable names and more established distribution networks; • the introduction or existence of competing products or technologies that may be more effective, safer or easier to use than the MammoSite System; • the results of long-term clinical studies relating to the effectiveness of the MammoSite System; • the availability of alternative treatments or procedures that provide comparable levels of improvement in breast cancer treatment at a lower cost than the MammoSite System; • breast surgeons, radiation oncologists and patient perceptions of the MammoSite System as compared to other treatments for breast cancer; and • the continued availability of satisfactory reimbursement from healthcare payors for breast cancer treatment procedures |
| We believe that continued recommendation and support for the use of the MammoSite System by influential breast surgeons and radiation oncologists and treatment centers are essential for widespread market acceptance |
| If the MammoSite System does not continue to receive support from these key constituencies, or if longer-term data does not demonstrate continued support for the clinical efficacy of the MammoSite System, breast surgeons and radiation oncologists may not use, and hospitals and outpatient surgery centers may not purchase, the MammoSite System |
| If this occurs, the intended benefits of the acquisition, such as increased net sales, may not be realized and the market price of our common stock could decline |
| 19 ______________________________________________________________________ [42]Table of Contents Current levels of growth in the market for new endometrial ablation procedures for the treatment of excessive menstrual bleeding may not be indicative of future growth |
| Demand for newly introduced technologies or treatments can initially be exaggerated as supply increases to meet pre-existing demand |
| However, once the pre-existing demand is met, growth in the market may abruptly stop or significantly slow |
| We believe that some of the current growth in the market for new endometrial ablation procedures may be the result of a considerable pre-existing unmet demand for products of this nature |
| We cannot determine what portion of Novacept’s historical sales is attributable to this pre-existing demand, nor can we predict when, or at what rate, this demand may stop or decline in growth |
| If the demand for treatments like the NovaSure System were to stop abruptly or begin to decline, our operating results and profitability could be adversely affected |
| We cannot accurately predict the rates at which women will undergo the NovaSure procedure |
| We cannot assure you that the market for endometrial ablation products will continue to develop in the future or that the new endometrial ablation procedures, including the NovaSure procedure, will continue to experience similar or greater rates of use |
| We cannot assure you that we will be successful in continuing to attract physicians and women to use the NovaSure System, or whether or not evolving trends in the treatment of excessive menstrual bleeding will favor new endometrial ablation procedures as compared to traditional approaches |
| Our success depends on the continued market acceptance of our ThinPrep System products and their cost |
| Our success and growth depends on the continued market acceptance of our ThinPrep System and ThinPrep Imaging System, including any follow-on applications of ThinPrep technology |
| The laboratory cost of using the ThinPrep System and ThinPrep Imaging System for cervical cancer screening, both together and individually, is higher than that of a conventional Pap smear and, we believe, competing liquid-based slide preparation systems |
| Due in part to increased competitive pressures in the healthcare industry to reduce costs, our ability to gain market acceptance of the ThinPrep System and follow-on products depends on our ability to demonstrate that the higher cost of using the ThinPrep System is offset by (1) a reduction in costs often associated with conventional Pap smears or competing liquid-based slide preparation systems, such as inaccurate diagnoses and the need for repeat Pap smears, as well as (2) the ability to use our ThinPrep System for additional testing applications, such as testing for the HPV, Chlamydia trachomatis and Neisseria gonorrhea |
| In particular, for both the ThinPrep Imaging System and the FirstCyte Breast Test, we need to convince healthcare providers, insurance companies and other third-party payors, and clinical laboratories of the clinical benefits and cost-effectiveness of these products |
| For the FirstCyte Breast Test, we await the results of an outcome study to support additional claims to drive market acceptance of this product and its cost |
| Our success depends on our ability to manage growth effectively |
| The scope of our operations and facilities, the number of our employees and the geographic area of our operations have grown rapidly |
| If we are not able to manage our growth effectively, our business and financial condition will materially suffer |
| Our growth may significantly strain our managerial, operational and financial resources and systems |
| To manage our growth effectively, we will have to continue to implement and improve additional management and financial systems and controls, and to effectively expand, train and manage our employee base |
| We may not be able to successfully integrate future acquisitions |
| We continually explore opportunities to acquire related businesses, some of which could be material to us |
| Our ability to continue to grow may depend upon identifying and successfully acquiring attractive companies, effectively integrating such companies, achieving cost efficiencies and managing these businesses as part of our company |
| We may not be able to effectively integrate acquired companies and successfully implement appropriate operational, financial and management systems and controls to achieve the benefits expected to result from these acquisitions |
| Our effort to integrate these businesses could be affected by a number of factors beyond our control, such as regulatory developments, general economic conditions, increased competition, the loss of customers resulting from the acquisitions and the assumption of unknown liabilities |
| In addition, the process of integrating these businesses could cause an interruption of, or loss of momentum in, the activities of our existing business and the loss of key personnel and customers |
| The diversion of management’s attention and 20 ______________________________________________________________________ [43]Table of Contents any delays or difficulties encountered in connection with the integration of these businesses could negatively impact our business if any of the above adverse effects were to occur |
| Further, the benefits that we anticipate from any future acquisitions may not develop |
| Future acquisitions may also harm our operating results, dilute our stockholders’ equity and create other financial difficulties for us |
| We may in the future pursue acquisitions that we believe could provide us with new technologies, products or service offerings, or enable us to obtain other competitive advantages |
| Acquisitions by us may involve some or all of the following financial risks: • use of significant amounts of cash; • potential dilutive issuances of equity securities; • incurrence of debt or amortization expenses related to certain intangible assets; and • future impairment charges related to diminished fair value of businesses acquired as compared to the price we pay for them |
| We may not be successful in overcoming the risks described above or any other problems associated with future acquisitions |
| Any of these risks and problems could materially harm our business, prospects and financial condition |
| Additionally, we cannot guarantee that any companies we may acquire will achieve anticipated revenues or operating results |
| We may be subject to the risk of product liability claims relating to our products |
| Regardless of the technology employed, surgical procedures involve risk of complications and companies that produce medical devices for use in surgical procedures are subject to risk of product liability litigation |
| We could become a party to legal proceedings involving injuries to patients that occurred when one of our products is used |
| We will vigorously defend against any product liability claims that may arise related to any of our products |
| However, there can be no assurance that any defense against alleged claims will be successful |
| If one of our products is found to have caused or contributed to injuries or deaths, we could be held liable for substantial damages |
| Product liability insurance is in place for all of our products |
| However, we cannot assure you that available insurance will be sufficient to cover damages from any possible future claims |
| In addition, claims could adversely affect the reputation of the related product, which could damage its competitive position in the market |
| The sale and use of one of our diagnostic products could also lead to the filing of product liability claims if someone were to allege that one of our products contained a design or manufacturing defect that resulted in the failure to detect a disorder for which it was being used to screen or caused injuries to a patient |
| Any product liability claim brought against us, with or without merit, could result in the increase of our product liability insurance rates or the inability to secure additional coverage in the future |
| Also, even a meritless or unsuccessful product liability claim could be time consuming and expensive to defend, which could result in a diversion of management’s attention from our business and could adversely affect the perceived safety and efficacy of our products, as well as our financial condition and operating results |
| Our quarterly operating results may fluctuate |
| Our operating results have fluctuated significantly in the past on a quarterly basis |
| We expect that our operating results may fluctuate significantly from quarter to quarter and we may experience losses in the future depending on a number of factors, including the extent to which our products continue to gain or maintain market acceptance, the rate and size of expenditures incurred as we expand our domestic and establish our international sales and distribution networks, the timing and level of reimbursement for our products by third-party payors, and other factors, many of which are outside our control |
| 21 ______________________________________________________________________ [44]Table of Contents We currently have limited international sales capabilities and cannot guarantee success in international markets |
| Although we commenced sales in countries outside the United States in 1998, only a small percentage of our sales to date have been to international markets |
| If we fail to increase international sales, our business and financial condition may suffer materially |
| We cannot guarantee that we will successfully develop international sales channels or capabilities that will enable us to generate significant revenue from international sales |
| Even though we have established international sales capabilities, we may not be able to obtain favorable third-party reimbursements and required regulatory approvals in foreign countries |
| While we believe we have developed a comprehensive international patent filing strategy, we have not secured patents in all foreign countries which we currently sell or plan to sell our products |
| In some cases our ability to pursue patents in certain countries has lapsed |
| In those countries where we do have patents covering our products, we cannot guarantee that such patents may be successfully enforced against infringing products |
| We may also face difficulty and added expense in complying with the US and international regulations applicable to the sale and marketing of our products internationally |
| We are highly dependent on key personnel |
| We are highly dependent on the principal members of our management staff |
| Loss of our key personnel would likely impede achievement of our research and development, operational, or strategic objectives |
| To be successful, we must retain key employees and attract additional qualified employees |
| Our reliance on single source or limited source suppliers could harm our business |
| We currently obtain certain key components of our products, including the proprietary filter material and microscope slides used in the ThinPrep Pap Test, radioisotopes, certain balloons and other items used in the design and manufacture of the MammoSite System and the Iotrex liquid isotope used with the GliaSite System, from single or a limited number of sources due to technology, availability, price, quality and other considerations |
| Additionally, the NovaSure System utilizes several components that may become obsolete or no longer be manufactured |
| We attempt to mitigate these risks by working closely with key suppliers regarding our supply needs and we have qualified backup vendors for several of our key components |
| Although we believe that alternative sources for these components are available, a supply interruption could harm our ability to manufacture our products until a new source of supply is identified and qualified |
| Switching components may require product redesign and submission to the FDA of a pre-market supplement or possibly a separate pre-market approval, either of which could significantly delay production |
| If we are unable to obtain sufficient quantities of these components that meet our quality and technical requirements at reasonable prices and in a timely manner, we will not be able to manufacture and sell our products on a timely and cost-competitive basis, which would materially and adversely affect our business and financial condition |
| Our lack of redundant manufacturing capabilities could harm our business |
| We assemble all of our ThinPrep Processors, the ThinPrep Imaging System, the FirstCyte Breast Test and the single-use disposable devices in the NovaSure System |
| In addition, we contract with third-parties to manufacture our MammoSite System and GliaSite System |
| We have established a certain level of site redundancy on our core products, or have developed alternate sources |
| While we have made significant efforts to safeguard these core manufacturing processes, the loss of any of these facilities would impede our manufacturing and sales efforts, which would materially and adversely affect our business and financial condition |
| Because a component of the NovaSure System is manufactured in Costa Rica, we will be subject to the political and economic risks of doing business there |
| We cannot guarantee that the political, labor and economic climate in Costa Rica will remain sufficiently stable for uninterrupted manufacturing operations in that country |
| Our operations relating to the NovaSure System could be adversely affected by political unrest and we could also be harmed by strikes and other labor disruptions |
| Any of these events could result in increased costs or in disruptions of supply of the NovaSure disposable devices, or any other product or component we may elect to manufacture in Costa Rica in the future, which could harm our business, financial condition and operating results |
| 22 ______________________________________________________________________ [45]Table of Contents We are subject to numerous FDA laws and regulations, and non-compliance with such laws, as well as changes in such laws or future interpretations of such laws, could cause us to incur significant compliance costs and/or subject us to significant civil and criminal sanctions |
| Complying with these requirements imposes significant expenses on our operations |
| If we fail to comply with applicable regulations, we could be subject to a wide range of civil and criminal enforcement sanctions, our promotional practices may be restricted, and our marketed products could be subject to recall or loss of FDA marketing claim approval |
| We cannot guarantee we will obtain or maintain necessary regulatory approvals for our products |
| The FDA regulatory approval process can be expensive, lengthy and uncertain for both original and supplemental approvals |
| There can be no assurance that we will be able to obtain necessary regulatory clearances or approvals for any proposed future products or modifications of existing products |
| The failure to obtain clearances or approvals, loss of previously received clearances or approvals, or a failure to comply with existing or future regulatory requirements, would have a material adverse effect on our business, financial condition and results of operations |
| Any modifications to a device that has received a pre-market approval that affect its safety or effectiveness require a pre-market approval supplement or possibly a separate pre-market approval, either of which is likely to be time-consuming, expensive and uncertain to obtain |
| The FDA requires the device manufacturer to make and document its determination whether or not a pre-market approval or supplement is required, but the FDA can review the manufacturer’s decision |
| Before the acquisition, Novacept modified various aspects of the NovaSure System and filed and received approval for one pre-market supplement with respect to some of the changes in the design of and manufacturing process for its disposable device |
| However, the FDA may not agree with Novacept’s decisions not to seek supplements or new approvals for the other device modifications or with our decisions regarding any future device modifications for the NovaSure System or any of our other product lines |
| If the FDA requires us to seek one or more pre-market approval supplements or new pre-market approvals for any modification to a previously approved device, we may be required to cease marketing or to recall the modified device until we obtain approval, and we may be subject to significant criminal and/or civic sanctions, including but not limited to, regulatory fines or penalties |
| If we or our contract manufacturers fail to comply with the FDA’s Quality System Regulation, manufacturing operations could be interrupted, and our product sales and operating results could be adversely affected |
| Our design and manufacturing processes are required to comply with the FDA’s Quality System Regulation, which covers the procedures and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage and shipping of our devices |
| The FDA enforces its Quality System Regulation through unannounced inspections |
| If one of our manufacturing facilities fails an inspection, operations and manufacturing could be disrupted |
| Failure to take adequate and timely corrective action in response to an adverse inspection could force a shutdown of these manufacturing operations or a recall of the product |
| If we shut down manufacturing operations or recall our products, we may lose customers and experience a decline in our revenues |
| Our products may be subject to recalls even after receiving FDA clearance or approval, and if a recall occurs, the reputation of our products and our operating results could be adversely affected |
| 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 component failures, manufacturing errors or design defects, including defects in labeling |
| Any recall could harm the reputation of our products and adversely affect our financial condition and operating results |
| Some of our activities may subject us to risks under federal and state laws prohibiting “kickbacks” and false or fraudulent claims |
| We are subject to the provisions of a federal law commonly known as the Medicare/Medicaid anti-kickback law, and several similar state laws, which prohibit payments intended to induce physicians or others either to refer 23 ______________________________________________________________________ [46]Table of Contents patients or to acquire or arrange for or recommend the acquisition of healthcare products or services |
| While the federal law applies only to referrals, products or services for which payment may be made by a federal healthcare program, state laws often apply regardless of whether federal funds may be involved |
| These laws constrain the sales, marketing and other promotional activities of manufacturers of medical devices, such as us, by limiting the kinds of financial arrangements, including sales programs, with hospitals, physicians, laboratories and other potential purchasers of medical devices |
| Other federal and state laws generally prohibit individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payors that are false or fraudulent, or are for items or services that were not provided as claimed |
| Anti-kickback and false claims laws prescribe civil and criminal penalties for noncompliance that can be substantial |
| While we continually strive to comply with these complex requirements, interpretations of the applicability of these laws to marketing practices is ever evolving and even an unsuccessful challenge could cause adverse publicity and be costly to respond to, and thus could have a material adverse effect on our business, results of operations and financial condition |
| Certain provisions of our certificate of incorporation, bylaws and Delaware law may delay or prevent a change in control of our company |
| Our corporate documents and Delaware law contain provisions that may enable our board of directors to resist a change in control of our company |
| These provisions include: • a staggered board of directors; • limitations on persons authorized to call a special meeting of stockholders; • the authorization of undesignated preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval; • advance notice procedures required for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders; and • a stockholder rights agreement or “poison pill |
| ” In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which may prohibit large stockholders, in particular those owning 15prca or more of our outstanding voting stock, from merging or consolidating with us except under certain circumstances |
| These anti-takeover defenses could discourage, delay or prevent a transaction involving a change in control of our company |
| These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors of their choosing and cause us to take other corporate actions stockholders desire |