| GUIDANT CORP ITEM 1A Risk Factors In addition to the other information contained in this Form 10-K, the following risk factors should be considered carefully in evaluating our business |
| Our business, financial condition, or results of operations could be materially adversely affected by any of these risks |
| Please note that additional risks not presently known to the Company or that the Company currently deems immaterial may also impair its business and operations |
| Obtaining required approvals and satisfying closing conditions may delay or prevent completion of our merger with Boston Scientific Corporation |
| Completion of the merger is conditioned upon the receipt of all material governmental authorizations, consents, orders and approvals, including the expiration or termination of the applicable waiting period, and any extension of the waiting period, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and approval by the European Commission under European Commission merger regulations |
| While the merger agreement requires certain divestitures, including the divestiture of our vascular intervention and endovascular solutions business, and the Abbott transaction agreement has been entered into in order to effect that divestiture prior to the merger, these consents, orders and approvals may impose conditions on, or require divestitures relating to, the divisions, operations or assets in addition to the Abbott transaction |
| These conditions or divestitures may jeopardize or delay completion of the Abbott transaction or the merger or may reduce the anticipated benefits of the Abbott transaction or the merger |
| Further, no assurance can be given that the required consents and approvals will be obtained or that the required conditions to closing will be satisfied, and, if all required consents and approvals are obtained and the conditions are satisfied, no assurance can be given as to the terms, conditions and timing of the approvals or that they will satisfy the terms of the merger agreement |
| Additionally, completion of the merger is conditioned on the absence of certain restraining orders or injunctions by judgment, court order or law that would restrain or prohibit consummation of the merger |
| We are subject to recent claims related to the merger from plaintiffs seeking an injunction to prohibit consummation of the merger and other relief including monetary damages |
| Completion of the merger is also conditioned upon approval of the transaction by the shareholders of both Guidant and BSC 10 _________________________________________________________________ [47]Table of Contents Since June of 2005, we have issued a number of product advisories to physicians concerning our defibrillator and pacemaker systems due to reported adverse events and malfunctions that have adversely impacted our sales and market share and could continue to have an adverse effect on our business, financial condition and results of operations |
| Since June of 2005, we have issued a number of product advisories to physicians concerning our defibrillator and pacemaker systems due to reported adverse events and malfunctions described in more detail in Item 7 |
| Sales during the second half of 2005 decreased 14prca compared to the same period in 2004, primarily due to the impact of various implantable defibrillator and pacemaker system field actions that occurred in 2005, including certain voluntary product recalls and physician notifications (2005 product communications) |
| The 2005 product communications included Guidant’s decision announced on June 24, 2005 to temporarily stop selling Guidant’s leading defibrillator systems, which were returned to the market beginning on August 2, 2005 |
| The impact of the 2005 product communications resulted in Guidant having a lower market share for implantable defibrillator and pacemaker systems for the second half of 2005 compared to the same period in the prior year |
| While Guidant has made progress in regaining market share and sales of these devices, there can be no assurance as to when, or if, our market share and sales will return to pre-2005 product communications levels due to, among other things, customer perceptions of the 2005 product communications, market acceptance of recently launched products, and regulatory and competitive developments |
| If we are unable to regain market share and sales for our implantable defibrillator and pacemaker systems or we do not regain market share and sales on a timely basis, these events could continue to adversely affect our business, financial condition and results of operations |
| There can be no assurance that we will not have product communications concerning defibrillator and pacemaker systems in the future or that any product communications would not have a material adverse effect on our business, financial condition and results of operations |
| The FDA, the US Department of Justice, the Securities and Exchange Commission (SEC) and various state agencies are conducting, and other governmental entities may commence, investigations of Guidant in connection with our 2005 product communications which could have an adverse effect on our business, financial condition and results of operations |
| The FDA, the US Department of Justice, the SEC and various state agencies are conducting, and other governmental entities may commence, investigations of Guidant in connection with our 2005 product communications as described in more detail in Item 7 |
| While we are cooperating with officials in connection with these investigations, we cannot predict when these investigations will be resolved, the outcome of these investigations or their impact on our business |
| An adverse outcome in any of these investigations could include the commencement of civil and/or criminal proceedings involving substantial fines, penalties and injunctive or administrative remedies, including our exclusion from government reimbursement programs |
| Additionally, if these investigations continue over a long period of time, they could divert the attention of our management from the day-to-day operations of our business, impose significant administrative burdens on us and result in additional compliance or other costs |
| These potential consequences, as well as any adverse outcome from any of these investigations, could have a material adverse effect on our business, financial condition and results of operations |
| We are subject to extensive domestic and foreign medical device regulation which may impede or hinder the approval process for our products and, in some cases, may not ultimately result in approval or may result in the recall or seizure of previously approved products |
| Our products, development activities and manufacturing processes are subject to extensive and rigorous regulation by the FDA pursuant to the Federal Food, Drug, and Cosmetic Act (the FDC Act), by comparable agencies in foreign countries, and by other regulatory agencies and governing bodies |
| Under the FDC Act, medical devices must receive FDA clearance or approval before they can be commercially marketed in the US In addition, most major markets for medical devices outside the US require clearance, approval or compliance with certain standards before a product can be commercially marketed |
| The process of obtaining marketing approval or clearance from the FDA for new products, or with respect to enhancements or modifications to existing products could: • take a significant period of time; 11 _________________________________________________________________ [48]Table of Contents • require the expenditure of substantial resources; • involve rigorous pre-clinical and clinical testing; • require changes to the products; and • result in limitations on the indicated uses of the product |
| Even after products have received marketing approval or clearance, product approvals and clearances by the FDA can be withdrawn due to failure to comply with regulatory standards or the occurrence of unforeseen problems following initial approval |
| There can be no assurance that we will receive the required clearances from the FDA for new products or modifications to existing products on a timely basis or that any FDA approval will not be subsequently withdrawn |
| Later discovery of previously unknown problems with a product or manufacturer could result in fines, delays or suspensions of regulatory clearances, seizures or recalls of products, operating restrictions and/or criminal prosecution |
| The failure to receive product approval clearance on a timely basis, suspensions of regulatory clearances, seizures or recalls of products or the withdrawal of product approval by the FDA could have a material adverse effect on our business, financial condition and results of operations |
| We may not meet regulatory quality standards applicable to our manufacturing processes, which could have an adverse effect on our business, financial condition and results of operations |
| As a device manufacturer, we are required to register with the FDA and are subject to periodic inspection by the FDA for compliance with the FDA’s Quality System Regulation (QSR) requirements, which require manufacturers of medical devices to adhere to certain regulations, including testing, quality control and documentation procedures |
| In addition, the federal Medical Device Reporting regulations require us to provide information to the FDA whenever there is evidence that reasonably suggests that a device may have caused or contributed to a death or serious injury or, if a malfunction were to occur, could cause or contribute to a death or serious injury |
| Compliance with applicable regulatory requirements is subject to continual review and is rigorously monitored through periodic inspections by the FDA In the European Community, we are required to maintain certain International Organization for Standardization (ISO) certifications in order to sell our products and must undergo periodic inspections by notified bodies to obtain and maintain these certifications |
| In that regard, we are currently taking remedial action in response to certain deficiencies of our manufacturing quality systems as cited in the FDA warning letter to us |
| On December 23, 2005, Guidant received an FDA warning letter citing certain deficiencies with respect to our manufacturing quality systems and record keeping procedures in our CRM facility in St |
| The FDA warning letter resulted from an extensive inspection by the FDA of these CRM facilities that was completed on September 1, 2005 and resulted in a notice citing observations of non-compliance |
| We received a follow-up letter from the FDA dated January 5, 2006 |
| As stated in the FDA warning letter, until the deficiencies identified in the letter have been corrected, the FDA may not grant requests by us for exportation certificates to foreign governments or approve pre-market submissions for our class III devices to which the deficiencies described are reasonably related |
| A further FDA inspection of this facility was conducted between December 15, 2005 and February 9, 2006 and resulted in one observation |
| While we are working with the FDA to resolve these issues, this work has required and will continue to require the dedication of significant internal and external resources and there can be no assurances regarding the length of time it will take to resolve these issues, if at all |
| In addition, if the remedial actions taken by us are not satisfactory to the FDA, we may be unable to obtain pre-approval clearance by the FDA for certain devices or authorization to sell certain devices to overseas markets |
| We may face enforcement actions in connection with these FDA communications, including injunctive relief and civil fines |
| If we fail to adhere to QSR or ISO requirements, this could delay production of our products and lead to fines, difficulties in obtaining regulatory clearances, recalls or other consequences, which could in turn have a material adverse effect on our business, financial condition and results of operations |
| In June 2003, we entered into a five-year Corporate Integrity Agreement with the office of Inspector General of HHS relating to the resolution of the ANCURE matter further described in Item 8, Note 16 to the consolidated financial statements |
| Regulatory enforcement actions (including any action with respect to our Corporate Integrity Agreement) could result in injunctions, payment of royalties or other damages, or fines or penalties |
| 12 _________________________________________________________________ [49]Table of Contents Pending and future patent litigation could be costly and disruptive to our business |
| We operate in an industry that is susceptible to significant patent litigation and, in recent years, it has been common for companies in the medical device industry to aggressively challenge the rights of other companies to prevent the marketing of new devices |
| We are currently the subject of various patent litigation proceedings as described in more detail in Item 8, Note 16 to the consolidated financial statements |
| Intellectual property litigation is expensive, complex and lengthy and its outcome is difficult to predict |
| Any pending or future patent litigation may result in significant royalty or other payments or injunctions that can prevent the sale of products and may significantly divert the attention of our technical and management personnel |
| In the event our right to market any of our products is successfully challenged, and if we fail to obtain a required license or are unable to design around a patent, our business, financial condition and results of operations could be materially adversely affected |
| We may not be able to effectively protect our intellectual property rights which could have an adverse effect on our business, financial condition and results of operations |
| Patents and other proprietary rights are and will be essential to our business, and our ability to compete effectively with other companies will be dependent upon the proprietary nature of our technologies |
| We rely upon trade secrets, know-how, continuing technological innovations and licensing opportunities to develop, maintain and strengthen our competitive position |
| We pursue a policy of generally obtaining patent protection in both the US and abroad, where commercially advantageous, for patentable subject matter in our proprietary devices and also attempt, and will attempt, to review third-party patents and patent applications to the extent publicly available to develop an effective patent strategy, avoid infringement of third-party patents, identify licensing opportunities and monitor the patent claims of others |
| We currently own numerous US and foreign patents and have numerous patent applications pending |
| We also are party to various license agreements pursuant to which patent rights have been obtained or granted in consideration for cash, cross-licensing rights or royalty payments |
| No assurance can be made that any pending or future patent applications will result in issued patents, that any current or future patents issued to, or licensed by us will not be challenged, invalidated or circumvented by our competitors, or that our patents will not be found invalid |
| We may have to take legal action in the future to enforce our patents, trade secrets or know-how against others |
| Any legal action of that type could be costly and time consuming to us and no assurances can be made that any lawsuit will be successful |
| We are generally involved as both a plaintiff and a defendant in a number of patent infringement and other intellectual property-related actions |
| The invalidation of key patents or proprietary rights that we own, or an unsuccessful outcome in lawsuits, in which we are a defendant, to protect our intellectual property, could have a material adverse effect on our business, financial position and results of operations |
| (See Item 8, Note 16 to the consolidated financial statements |
| ) Pending and future product liability claims and other litigation, including private securities litigation and shareholder derivative suits, may adversely impact our business, financial condition, results of operations, reputation and ability to attract and retain customers |
| The design, manufacture and marketing of medical devices of the types that we produce entail an inherent risk of product liability claims |
| Many of the medical devices that we manufacture and sell are designed to be implanted in the human body for long periods of time or indefinitely |
| A number of factors could result in an unsafe condition or injury to, or death of, a patient with respect to these or other products that we manufacture or sell, including component failures, manufacturing flaws, design defects or inadequate disclosure of product-related risks or product-related information |
| These factors could result in product liability claims, a recall, or a safety alert relating to one or more of our products |
| Product liability claims may be brought by individuals or by groups seeking to represent a class |
| We are currently the subject of numerous product liability claims and other litigation, including private securities litigation and shareholder derivative suits relating to such product liability claims as described in more detail in Item 8, Note 16 to the consolidated financial statements |
| The outcome of litigation, particularly class action lawsuits, is difficult to assess or quantify |
| Plaintiffs in these types of lawsuits often seek recovery of very large or indeterminate amounts, including not only actual damages, but also punitive damages |
| The magnitude of the 13 _________________________________________________________________ [50]Table of Contents potential loss relating to these lawsuits may remain unknown for substantial periods of time |
| In addition, the cost to defend against any future litigation may be significant and it may divert the attention of our management |
| As a result of economic factors currently impacting the insurance industry, meaningful product liability insurance coverage has become unavailable due to its economically prohibitive cost |
| As a result, beginning September 1, 2005, we are largely self-insured for product liability claims |
| The decision to become self-insured does not affect coverage with respect to claims made under previous policies which, most recently, contained substantial self-insurance retentions; however, certain product liability claims may be, and in certain circumstances, have been, contested by the carrier |
| The absence of third-party insurance coverage increases our potential exposure to unanticipated claims and adverse decisions |
| Product liability claims, product recalls and other litigation in the future, regardless of their ultimate outcome, could have a material adverse effect on our business, financial condition and results of operations |
| We face intense competition and may not be able to keep pace with the rapid technological changes in the medical devices industry which could have an adverse effect on our business, financial condition and results of operations |
| The medical device market is highly competitive |
| We encounter significant competition across our product lines and in each market in which our products are sold from various medical device companies, some of which may have greater financial and marketing resources than we do |
| Our primary competitors for implantable cardiac rhythm management devices are Medtronic and St |
| Guidant’s primary competitors for vascular disease products include Abbott, BSC, J&J and Medtronic |
| We face a number of additional competitors with respect to Guidant’s other products |
| In addition, we also face competition from a wide range of companies that sell a single or a limited number of competitive products or which participate only in a specific market segment, as well as from non-medical device companies, including pharmaceutical companies, which may offer non-surgical alternative therapies for disease states intended to be treated using our products |
| Additionally, the medical device market is characterized by extensive research and development, and rapid technological change |
| Developments by other companies of new or improved products, processes or technologies, in particular in the drug eluting stent or CRM markets, may make our products or proposed products obsolete or less competitive and may negatively impact our revenues |
| We devote continued efforts and financial resources to develop or acquire scientifically advanced technologies and products, apply our technologies cost-effectively across product lines and markets, attract and retain skilled development personnel, obtain patent and other protection for our technologies and products, obtain required regulatory and reimbursement approvals and successfully manufacture and market our products |
| If we fail to develop new products or enhance existing products, it could have a material adverse effect on our business, financial condition and results of operations |
| Our future growth is dependent upon the development of new products, which requires significant research and development, clinical trials and regulatory approvals, all of which are very expensive and time-consuming and may not result in a commercially viable product |
| In order to develop new products and improve our current product offerings, we will focus our research and development programs largely on the development of next-generation and novel technology offerings across multiple programs and divisions |
| We expect to launch our next-generation implantable cardioverter defibrillator and cardiac resynchronization therapy defibrillator systems devices within the next 12 months, subject to regulatory approval |
| If the SPIRIT family of clinical trials is successful, Guidant expects to enter the US market in approximately two years |
| If we are unable to develop and launch these products as anticipated, our ability to maintain or expand our positions in the stent or CRM market may be adversely impacted, which could have a material adverse effect on our business, financial condition and results of operations |
| As a part of the regulatory process of obtaining marketing clearance from the FDA for new products, we will conduct and participate in numerous clinical trials with a variety of study designs, patient populations and trial endpoints |
| Unfavorable or inconsistent clinical data from existing or future clinical trials conducted by us, our competitors or third parties, or the market’s perception of this clinical data, may adversely impact our ability to 14 _________________________________________________________________ [51]Table of Contents obtain product approvals from the FDA, our position in, and share of, the markets in which we participate and our business, financial condition and results of operations |
| Healthcare cost containment pressures and legislative or administrative reforms resulting in restrictive reimbursement practices of third-party payers or preferences for alternate therapies could decrease the demand for our products, the prices that customers are willing to pay for those products and the number of procedures performed using our devices, which could have an adverse effect on our business, financial condition and results of operations |
| Our products are purchased principally by hospitals or physicians, which typically bill various third-party payers, including governmental programs (eg, Medicare and Medicaid), private insurance plans and managed care plans, for the healthcare services provided to their patients |
| The ability of customers to obtain appropriate reimbursement for their products and services from private and governmental third-party payers is critical to the success of medical device companies |
| The availability of reimbursement affects which products customers purchase and the prices they are willing to pay |
| Reimbursement varies from country to country and can significantly impact the acceptance of new products and services |
| After we develop a promising new product, we may find limited demand for the product unless reimbursement approval is obtained from private and governmental third-party payers |
| Further legislative or administrative reforms to the US or international reimbursement systems in a manner that significantly reduces reimbursement for procedures using our medical devices or denies coverage for those procedures could have a material adverse effect on our business, financial condition and results of operations |
| Major third-party payers for hospital services in the US and abroad continue to work to contain healthcare costs |
| The introduction of cost containment incentives, combined with closer scrutiny of healthcare expenditures by both private health insurers and employers, has resulted in increased discounts and contractual adjustments to hospital charges for services performed, and shifted services between inpatient and outpatient settings |
| Initiatives to limit the increase of healthcare costs, including price regulation, are also underway in several countries in which we do business |
| Further legislative or administrative reforms to the US or international reimbursement systems in a manner that significantly reduces reimbursement for procedures using our medical devices or denies coverage for such procedures would have an adverse effect on our business, financial condition and results of operations |
| Hospitals or physicians may respond to these cost-containment pressures by substituting lower cost products or other therapies for our products |
| Additionally, in light of our recalls, third-party payers may seek claims and further recourse against us for the recalled defibrillator and pacemaker systems for which we had previously received reimbursement |
| Consolidation in the healthcare industry could lead to demands for price concessions or to the exclusion of some suppliers from certain of our significant market segments which could have an adverse effect on our business, financial condition and results of operations |
| The cost of healthcare has risen significantly over the past decade and numerous initiatives and reforms initiated by legislators, regulators and third-party payers to curb these costs have resulted in a consolidation trend in the healthcare industry, including hospitals |
| This in turn has resulted in greater pricing pressures and the exclusion of certain suppliers from important market segments as group purchasing organizations, independent delivery networks and large single accounts continue to consolidate purchasing decisions for some of our hospital customers |
| We expect that market demand, government regulation, third-party reimbursement policies and societal pressures will continue to change the worldwide healthcare industry, resulting in further business consolidations and alliances among our customers, which may reduce competition, exert further downward pressure on the prices of our products and may adversely impact our business, financial condition and results of operations |
| Because a portion of our future growth is expected to come from international operations, changes in international economic or regulatory conditions could have a material impact on our business, financial condition and results of operations |
| Our revenues, costs of operations and net income could be affected by a number of international economic or regulatory conditions, including changes in foreign currency exchange rates, changes in economic or regulatory conditions from country to country, changes in a country’s political condition, trade protection measures, 15 _________________________________________________________________ [52]Table of Contents intellectual property protection and other legal requirements and local tax issues |
| For example, international markets are also being affected by economic pressure to contain reimbursement levels and healthcare costs |
| The trend in countries around the world, including Japan, toward more stringent regulatory requirements for product clearance, changing reimbursement models and more vigorous enforcement activities has generally caused or may cause medical device manufacturers to experience more uncertainty, delay, greater risk and higher expenses |
| Any significant changes in the competitive, political, legal, regulatory, reimbursement or economic environment where we will conduct international operations may have a material impact on our business, financial condition and results of operations |