| ENDOLOGIX INC /DE/ Item 1A Risk Factors The following risks could affect our business, financial results and results of operations |
| These risk factors should be considered in connection with evaluating the forward-looking statements contained in this Annual Report on Form 10-K because these factors could cause the actual results and conditions to differ materially from those projected in the forward-looking statements |
| Our success depends on the safety and efficacy of the Powerlink System in general use |
| While we have demonstrated the safety and efficacy of the Powerlink System in our clinical studies with our clinical investigators, market acceptance will depend on similar results with the Powerlink System in general use |
| Any significant difficulties or adverse events encountered in general use will impair the success of the Powerlink System and our business |
| Our success depends on the growth in the number of AAA patient treated with endovascular devices |
| Of the estimated 1dtta7 million people with AAA in the US, only about 220cmam000 are diagnosed annually, and of that amount only about 20cmam000 to 25cmam000 are treated with an endovascular device |
| Our success with our Powerlink System will depend on increasing percentage of patients with AAA being diagnosed at earlier stages and an increasing percentage of those receiving endovascular, as opposed to open surgical procedures |
| Initiatives to increase screening for AAA are underway but are out of our control and such general screening programs may never gain wide acceptance |
| The failure to diagnose more patients with AAA, at an earlier stage, will negatively impact sales of the Powerlink System |
| Our success depends on convincing a concentrated customer base of vascular surgeons and a limited number of interventional radiologists and cardiologists to use our product over alternative products and treatment modalities |
| The physicians currently treating AAA have choices in treatment approach, one of which is endovascular AAA stent graft placement |
| There are several competing endovascular stent grafts to choose from and that number may increase |
| Increasing revenues from sales of Powerlink Systems will depend on our marketing and sales team demonstrating that the Powerlink System is a superior treatment alternative to watchful waiting, open surgery and competitive products |
| We believe that this will require continued demonstration through clinical data and personal experience of the efficacy of the Powerlink System |
| While we have committed, and intend to continue to commit substantial resources to our marketing efforts, our competitors have superior resources to market and promote their endovascular stent graft products |
| The most prominent devices that pose a competitive challenge to us include: • Medtronic’s AneuRx, WL Gore’s Excluder, and Cook’s Zenith AAA system, which are available both in the US and Europe; • other AAA graft Systems by Medtronic, and Johnson & Johnson, which currently have more limited availability; and, • other technologies in various phases of development, including pharmaceutical solutions |
| 12 _________________________________________________________________ [65]Table of Contents Any of these treatments could prove to be more effective or may achieve greater market acceptance than the Powerlink System |
| Even if these treatments are not as effective as the Powerlink System, many of the companies pursuing these treatments and technologies have: • significantly greater financial, management and other resources; • more extensive research and development capability; • established market positions; and, • larger sales and marketing organizations |
| In addition, we believe that many of the purchasers and potential purchasers of our competitors’ products prefer to purchase medical devices from a single source |
| Accordingly, many of our competitors may have an advantage over us because of their size and range of product offerings |
| Any failure of our Powerlink System to achieve clinical and commercial acceptance over our competitors products will harm our business |
| If third-party payors do not provide reimbursement for the use of the Powerlink System, our revenues may be negatively impacted Our success in marketing the Powerlink System depends in large part on whether domestic and international government health administrative authorities, private health insurers and other organizations will reimburse customers for the cost of our product |
| Reimbursement systems in international markets vary significantly by country and by region within some countries, and reimbursement approvals must be obtained on a country-by-country basis |
| Further, many international markets have government managed healthcare systems that control reimbursement for new devices and procedures |
| In most markets there are private insurance systems as well as government-managed systems |
| If sufficient reimbursement is not made available for the Powerlink System, or any other product that we may develop, in either the United States or internationally, the demand for our products will be adversely affected |
| Substantially all of our revenue is generated from a single product, the Powerlink System, and any declines in the sale of this product will negatively impact our business |
| We have focused heavily on the development and commercial launch of a single technology, the Powerlink System, because of limited resources |
| If we are unable to successfully commercialize the existing Powerlink System and reach positive cash flow from operations, we will be constrained in our ability to fund development and commercialization improvements and other product lines |
| We expect to incur losses for the foreseeable future and may never achieve profitability |
| Our operations to date have consumed a substantial amount of cash |
| From our formation in 1992 to December 31, 2005, we have incurred an accumulated deficit of approximately dlra99dtta1 million, including a net loss of dlra15dtta5 million for the year ended December 31, 2005 |
| We only began generating significant revenues from product sales in 2005, and it is possible that we may never achieve profitability |
| Our ability to achieve positive cash flow from operations will be impacted by a number of factors, including market acceptance of the Powerlink System, our ability to develop additional products, competing technologies and regulatory developments |
| If we are unable to achieve profitability, our business will be negatively impacted |
| Our future operating results are difficult to predict and may vary significantly from quarter to quarter, which may negatively impact our stock price in the future |
| We have only commercially distributed the Powerlink System in the United States since late 2004 and therefore, we are unable to predict future revenues derived from sales of the Powerlink System |
| As a result, our quarterly revenues and results of operations may fluctuate in the future due to: • physician acceptance of the Powerlink System; • the conduct and results of clinical trials; 13 _________________________________________________________________ [66]Table of Contents • the timing of, and expense in obtaining, future regulatory approvals; • fluctuations in our expenses associated with expanding our operations; • introduction of new products by our competitors; • changes in our pricing policies or in the pricing policies of our competitors or suppliers; • variations in foreign exchange rates; and, • changes in third-party payors’ reimbursement policies |
| In addition, we believe that sales of our products may be lower in the fourth fiscal quarter as many patients choose to delay elective procedures during the holiday season |
| Therefore, we believe that period to period comparison of our operating results may not necessarily be reliable indicators of our future performance |
| It is likely that in some future period our operating results will not meet investor expectations or those of public market analysts |
| Any unanticipated change in revenues or operating results is likely to cause our stock price to fluctuate since such changes reflect new information available to investors and analysts |
| New information may cause investors and analysts to revalue our stock, which could cause a decline in the trading price of our stock |
| Our business is subject to extensive governmental regulation that could make it more expensive and time consuming for us to introduce new or improved products |
| These requirements involve lengthy and detailed laboratory and clinical testing procedures, sampling activities, an extensive FDA review process, and other costly and time-consuming procedures |
| It often takes several years to satisfy these requirements, depending on the complexity and novelty of the product |
| We also are subject to numerous additional licensing and regulatory requirements relating to safe working conditions, manufacturing practices, environmental protection, fire hazard control and disposal of hazardous or potentially hazardous substances |
| Some of the most important requirements we face include: • FDA approval process; • California Department of Health Services requirements; • ISO 9001:1994 and ENISO 13485:2003; and, • European Union CE Mark requirements |
| Government regulation may impede our ability to conduct continuing clinical trials of Powerlink System enhancements and to manufacture the Powerlink System and other prospective products |
| Government regulation also could delay our marketing of new products for a considerable period of time and impose costly procedures on our activities |
| The FDA and other regulatory agencies may not approve any of our future products on a timely basis, if at all |
| Any delay in obtaining, or failure to obtain, such approvals could negatively impact our marketing of any proposed products and reduce our product revenues |
| Our products remain subject to strict regulatory controls on manufacturing, marketing and use |
| We may be forced to modify or recall our product after release in response to regulatory action or unanticipated difficulties encountered in general use |
| Any such action could have a material effect on the reputation of our products and on our business and financial position |
| Further, regulations may change, and any additional regulation could limit or restrict our ability to use any of our technologies, which could harm our business |
| We could also be subject to new federal, state or local regulations that could affect our research and development programs and harm our business in unforeseen ways |
| If this happens, we may have to incur significant costs to comply with such laws and regulations, which will harm our results of operations |
| We may not receive approval to market the Powerlink System in Japan |
| In 2005, the Japanese Ministry of Health notified us that they would not grant Shonin approval for the PowerWeb System |
| However, the Ministry of Health requested that we submit the data on the FDA approved Powerlink System and informed us that we would be able to utilize the clinical results from our PowerWeb clinical trials as supplementary data |
| We estimate that the Powerlink System will receive Shonin approval by the end of 2006 |
| However, the Ministry of Health may not grant Shonin approval by such time, or at all, either of which may negatively impact our future results of operations |
| 14 _________________________________________________________________ [67]Table of Contents If we fail to increase our direct sales force in a timely manner, our business could suffer |
| We have a limited domestic direct sales force and we utilize a distribution network for sales outside of the US As we launch new products and increase our marketing efforts with respect to existing products, we will need to significantly expand the number of our direct sales personnel |
| The establishment and development of a more extensive sales force will be expensive and time consuming |
| In addition, there is significant competition for sales personnel experienced in relevant medical device sales |
| If we are unable to attract, motivate and retain qualified sales personnel and thereby increase our sales force, we may not be able to increase our revenues |
| Our third-party distributors may not effectively distribute our products |
| We depend on medical device distributors and strategic relationships for the marketing and selling of our Powerlink System internationally |
| We depend on these distributors’ efforts to market our product, yet we are unable to control their efforts completely |
| If our distributors fail to market and sell our products effectively, our operating results and business may suffer substantially, or we may have to make significant additional expenditures or concessions to market our products |
| If we fail to properly manage our anticipated growth, our business could suffer |
| We may experience periods of rapid growth and expansion, which could place a significant strain on our limited personnel and other resources |
| In particular, the ongoing increase in our direct sales force will require significant management and other supporting resources |
| Any failure by us to manage our growth effectively could have an adverse effect on our ability to achieve our development and commercialization goals |
| To achieve our revenue goals, we must successfully increase production output as required by customer demand |
| We may in the future experience difficulties in increasing production, including problems with production yields and quality control and assurance, component supply, and shortages of qualified personnel |
| These problems could result in delays in product availability and increases in expenses |
| Any such delay or increased expense could adversely affect our ability to generate revenues |
| Future growth will also impose significant added responsibilities on management, including the need to identify, recruit, train and integrate additional employees |
| In addition, rapid and significant growth will place a strain on our administrative and operational infrastructure |
| In order to manage our operations and growth we will need to continue to improve our operational and management controls, reporting and information technology systems, and financial internal controls procedures |
| If we are unable to manage our growth effectively, it may be difficult for us to execute our business strategy and our operating results and business could suffer |
| We rely on a single vendor to supply our graft material for the Powerlink System, and any disruption in our supply could delay or prevent us from producing the product for sale |
| Currently, we rely on Bard Peripheral Vascular Systems, a subsidiary of CR Bard, Inc, to supply us with graft material, which is a primary component for the Powerlink System |
| Our reliance on a sole source supplier exposes our operations to disruptions in supply caused by: • failure of our supplier to comply with regulatory requirements; • any strike or work stoppage; • disruptions in shipping; • a natural disaster caused by fire, floods or earthquakes; • a supply shortage experienced by our sole source supplier; and, • the fiscal health and manufacturing strength of our sole source supplier |
| Although we retain a significant stock of the graft material, the occurrence of any of the above disruptions in supply or other unforeseen events that could cause a disruption in supply from our sole source graft supplier 15 _________________________________________________________________ [68]Table of Contents may cause us to halt or experience a disruption in manufacturing the Powerlink System |
| Because we do not have alternative suppliers, our sales and profitability would be harmed in the event of a disruption |
| If we are unable to protect our intellectual property, our business may be negatively affected |
| The market for medical devices is subject to frequent litigation regarding patent and other intellectual property rights |
| It is possible that our patents or licenses may not withstand challenges made by others or protect our rights adequately |
| Our success depends in large part on our ability to secure effective patent protection for our products and processes in the United States and internationally |
| We have filed and intend to continue to file patent applications for various aspects of our technology |
| However, we face the risks that: • we may fail to secure necessary patents prior to or after obtaining regulatory clearances, thereby permitting competitors to market competing products; and, • our already-granted patents may be re-examined, re-issued or invalidated |
| We also own trade secrets and confidential information that we try to protect by entering into confidentiality agreements with other parties |
| However, the confidentiality agreements may not be honored or, if breached, we may not have sufficient remedies to protect our confidential information |
| Further, our competitors may independently learn our trade secrets or develop similar or superior technologies |
| To the extent that our consultants, key employees or others apply technological information to our projects that they develop independently or others develop, disputes may arise regarding the ownership of proprietary rights to such information, and such disputes may not be resolved in our favor |
| If we are unable to protect our intellectual property adequately, our business and commercial prospects likely will suffer |
| If our products or processes infringe upon the intellectual property of our competitors, the sale of these products may be challenged and we may have to defend costly and time-consuming infringement claims |
| We may need to engage in expensive and prolonged litigation to assert any of our rights or to determine the scope and validity of rights claimed by other parties |
| With no certainty as to the outcome, litigation could be too expensive for us to pursue |
| Our failure to prevail in such litigation or our failure to pursue litigation could result in the loss of our rights that could hurt our business substantially |
| In addition, the laws of some foreign countries do not protect our intellectual property rights to the same extent as the laws of the United States, if at all |
| Our failure to obtain rights to intellectual property of third parties or the potential for intellectual property litigation could force us to do one or more of the following: • stop selling, making or using our products that use the disputed intellectual property; • obtain a license from the intellectual property owner to continue selling, making, licensing or using our products, which license may not be available on reasonable terms, or at all; • redesign our products, processes or services; and, • subject us to significant liabilities to third parties |
| If any of the foregoing occurs, we may be unable to manufacture and sell our products or license our technology and may suffer severe financial harm |
| Whether or not an intellectual property claim is valid, the cost of responding to it, in terms of legal fees and expenses and the diversion of management resources, could harm our business |
| Our sales in international markets subject us to foreign currency exchange and costs which could harm our business |
| A portion of our revenues are derived from sales outside the United States |
| For the fiscal years ended December 31, 2005, 2004, and 2003, International sales were 30prca, 86prca, and 86prca of total product revenue, 16 _________________________________________________________________ [69]Table of Contents respectively |
| Foreign exchange gains or losses as a result of exchange rate fluctuations in any given period could harm our operating results and negatively impact our revenues |
| Additionally, if the effective price of our products were to increase as a result of fluctuations in foreign currency exchange rates, demand for our products could decline and adversely affect our results of operations and financial condition |
| If we are unable to effectively manage our inventory held on consignment by our intended customers, we will not achieve our expected results |
| Our Powerlink System is sold primarily on a consignment basis to hospitals which purchase our product as they use it |
| In these consignment locations, we do not have physical possession of our products |
| We therefore must rely on information from our customers as well as periodic inspections by our sales personnel and third party inventory auditors to determine when our products have been used |
| Our efforts to strengthen our monitoring and management of consigned inventory may not be adequate to meaningfully reduce the risk of inventory loss |
| If we are not able to effectively manage appropriate consigned inventory levels, we may suffer inventory losses which will reduce our operating results |
| We may face product liability claims that could result in costly litigation and significant liabilities |
| Manufacturing and marketing of our commercial products, and clinical testing of our products under development, may expose us to product liability claims |
| Although we have, and intend to maintain, product liability insurance, the coverage limits of our insurance policies may not be adequate and one or more successful claims brought against us may have a material adverse effect on our business and results of operations |
| Additionally, adverse product liability actions could negatively affect the reputation and sales of our products, our ability to obtain and maintain regulatory approval for our products and may divert management’s attention from other matters |
| Our operations are capital intensive, and we may need to raise additional funds in the future to fund our operations |
| Our activities are capital intensive |
| Although we believe that our existing cash resources will be sufficient to meet our anticipated cash needs for operations and planned capital requirements through at least December 31, 2006, we may require additional capital to fund on-going operations |
| Our cash requirements in the future may be significantly different from our current estimates and depend on many factors, including: • the results of our commercialization efforts for the Powerlink System; • the time and costs involved in obtaining additional regulatory approvals; • the costs involved in obtaining and enforcing patents or any litigation by third parties regarding intellectual property; • the establishment of high volume manufacturing and increased sales and marketing capabilities; and, • our success in entering into collaborative relationships with other parties |
| To finance these activities, we may seek funds through borrowings or through additional rounds of financing, including private or public equity or debt offerings and collaborative arrangements with corporate partners |
| We may be unable to raise funds on favorable terms, or at all |
| In addition, the sale of additional equity or convertible debt securities could result in additional dilution to our stockholders |
| If we borrow additional funds or issue debt securities, these securities could have rights superior to holders of our common stock, and could contain covenants that will restrict our operations |
| We might have to obtain funds through arrangements with collaborative partners or others that may require us to relinquish rights to our technologies, product candidates or products that we otherwise would not relinquish |
| If adequate funds are not available, we might have to delay, scale back or eliminate one or more of our development programs, which could significantly impair our ability to operate our business |
| 17 _________________________________________________________________ [70]Table of Contents Our operations are currently conducted at a single location that may be at risk from earthquakes or other natural disasters |
| We currently conduct all of our manufacturing, development and management activities at a single location in Irvine, California, near known earthquake fault zones |
| We have taken precautions to safeguard our facilities, including insurance, health and safety protocols, and off-site storage of computer data |
| However, any future natural disaster, such as an earthquake, could cause substantial delays in our operations, damage or destroy our equipment or inventory, and cause us to incur additional expenses |
| A disaster could seriously harm our business and results of operations |
| The insurance coverage we maintain against earthquakes and other natural disasters may not be adequate to cover our losses in any particular case |
| The price of our stock may fluctuate unpredictably in response to factors unrelated to our operating performance |
| The stock market periodically experiences significant price and volume fluctuations that are unrelated to the operating performance of particular companies |
| These broad market fluctuations may cause the market price of our common stock to drop |
| In particular, the market price of securities of small medical device companies, like ours, has been very unpredictable and may vary in response to: • announcements by us or our competitors concerning technological innovations; • introductions of new products; • FDA and foreign regulatory actions; • developments or disputes relating to patents or proprietary rights; • failure of our results of operations to meet the expectations of stock market analysts and investors; • changes in stock market analyst recommendations regarding our common stock; • changes in healthcare policy in the United States or other countries; and, • general stock market conditions |
| Some provisions of our charter documents may make takeover attempts difficult, which could depress the price of our stock and inhibit your ability to receive a premium price for your shares |
| Provisions of our amended and restated certificate of incorporation could make it more difficult for a third party to acquire control of our business, even if such change in control would be beneficial to our stockholders |
| Our amended and restated certificate of incorporation allows our board of directors to issue up to five million shares of preferred stock and to fix the rights and preferences of such shares without stockholder approval |
| Any such issuance could make it more difficult for a third party to acquire our business and may adversely affect the rights of our stockholders |
| In addition, our board of directors is divided into three classes for staggered terms of three years |
| These provisions may delay, deter or prevent a change in control of us, adversely affecting the market price of our common stock |