| IMMUNICON CORP Item 1A Risk factors The following is a discussion of certain significant risk factors that could potentially negatively impact our financial condition, performance and prospects |
| In addition to other information contained in this report, you should carefully consider the following factors in evaluating our company |
| Any of the following factors could materially and adversely affect our business, financial position and results of operations |
| RISKS RELATING TO OUR BUSINESS We have a history of operating losses, expect to continue to incur substantial losses, and might never achieve or maintain profitability |
| We have incurred significant net losses since we began operations in 1983 |
| As of December 31, 2005, we had an accumulated deficit dlra118dtta4 million |
| For the three years ended December 31, 2005, 2004 and 2003 we had net losses of dlra26dtta9 million, dlra27dtta9 million and dlra17dtta6 million, respectively |
| These losses have resulted primarily from costs incurred in our research and development programs and from our general and administrative expenses |
| Because our operating expenses may increase in the near term, we will need to generate significant additional revenue to achieve profitability |
| As we do not as yet have sufficient operating revenue from the sales of our products to offset our losses, we do not expect to have any sufficient operating income from the sale of our products until at least 2008 |
| We will continue to incur research and development and clinical trial expenses, as well as increased manufacturing, sales and marketing expenses |
| These losses, among other things, have had and will continue to have an adverse effect on our working capital, total assets and stockholders’ equity |
| Because of the numerous risks and uncertainties associated with our product development efforts, _________________________________________________________________ 34 ______________________________________________________________________ Part I _________________________________________________________________ market acceptance and uncertainties concerning the success of sales efforts by us and Veridex, we are unable to predict when we will become profitable, and we may never become profitable |
| Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis |
| If we are unable to achieve and then maintain profitability, the market value of our common stock will decline |
| If our relationship with Veridex is terminated or does not function effectively, we may be unable to continue to commercialize effectively certain of our products based on our technologies in the field of cancer |
| We entered into a development, license and supply agreement with Veridex, under which we granted to Veridex a worldwide exclusive license in the field of cancer to commercialize cell analysis products based on our technologies |
| We also appointed Veridex as our exclusive sales, invoicing and collection agent for our cell analysis instrumentation in cancer |
| Veridex may terminate this agreement with or without reason at any time by providing us with 24 months’ prior written notice |
| Veridex also may terminate this agreement if we are in material breach or are acquired by a competitor in the IVD field |
| In addition, while we have granted Veridex the exclusive right to market, distribute and conduct field, technical, customer service and certain manufacturing finishing operations for these products, Veridex has very limited obligations to perform these functions under this agreement |
| For example, the agreement does not require Veridex to meet any minimum levels with respect to sales, marketing personnel or other marketing expenditures |
| If Veridex were to terminate, or fail to meet its obligations under this agreement or fail to deploy adequate resources to commercialize products under this agreement: Ø we would incur significant delays and expense in the commercialization of these products; Ø we might be unable to enter into a similar agreement with another company with similar resources to commercialize these products and perform these functions on acceptable terms, if at all; and Ø we might be unable to commercialize these products or perform these functions successfully ourselves |
| Any of these outcomes could result in delays in our ability to generate revenues from the sales of these products, an increase in our expenses and a resulting adverse impact on our operations and financial results, and the value of our common stock would likely decline |
| If we and Veridex are able to generate product sales under our agreement, we are required to invest an amount ranging from between 8dtta5prca and 10prca of total net product sales by Veridex, excluding revenue from cell analysis system sales, in research and development for cancer-related cell analysis products |
| If our products and Veridex’s products do not achieve market acceptance, we will be unable to generate significant revenues from them |
| The future commercial success of our products and of Veridex’s products based on our technologies will depend primarily on: Ø convincing research, reference and clinical laboratories to conduct validation studies using these products and to offer these products as research tools for scientists and clinical investigators and as diagnostic products to physicians, laboratory professionals and other medical practitioners; and Ø convincing physicians to order tests for their patients, and laboratory professionals and other medical practitioners to use our technologies |
| To accomplish this, we and Veridex will need to convince oncologists, primary care physicians, surgeons, laboratory professionals and other members of the medical and biotechnology communities of the benefits of these products through published papers, presentations at scientific conferences and _________________________________________________________________ 35 ______________________________________________________________________ Part I _________________________________________________________________ additional clinical trials |
| If we and Veridex are not successful in these efforts, the market acceptance for these products could be limited |
| Additionally, if ongoing or future clinical trials result in unfavorable or inconsistent results, these products may not achieve market acceptance |
| Other factors that might influence market acceptance of these products include the following: Ø evidence of clinical utility; Ø ability to obtain sufficient third-party coverage or reimbursement; Ø convenience and ease of administration; Ø availability of alternative and competing diagnostic products; Ø cost-effectiveness; Ø effectiveness of marketing, distribution and pricing strategy; and Ø publicity concerning these products or competitive products |
| If these products do not gain broad market acceptance, our business will suffer |
| If we or Veridex are not able to obtain all of the regulatory approvals and clearances required to commercialize our products, our business would be significantly harmed |
| The products based on our technologies are generally regulated as medical devices by the FDA and comparable agencies of other countries |
| In particular, FDA regulations govern, among other things, the activities that we and Veridex perform, including product development, product testing, product labeling, product storage, pre-market notification clearance (or 510(k) clearance) or pre-market approval (or PMA), manufacturing, advertising, promotion, product sales, reporting of certain product failures and distribution |
| Most of the products that we plan to develop and commercialize in the US will require either 510(k) clearance, or PMA approval from the FDA prior to marketing |
| The 510(k) clearance process usually takes from two to twelve months from submission, but can take longer |
| The PMA process is much more costly, lengthy and uncertain and generally takes from one to two years or longer from submission |
| All of the products that we or Veridex intend to submit for FDA clearance or approval will be subject to substantial restrictions, including, among other things, restrictions on the indications for which we and Veridex may market these products, which could result in lower revenues |
| The marketing claims we and Veridex will be permitted to make in labeling or advertising regarding our cancer diagnostic products, if cleared or approved by the FDA, will be limited to those specified in any clearance or approval |
| We expect that initially many of these products will be limited to research use only |
| In addition, both we and Veridex are subject to inspection and marketing surveillance by the FDA to determine our compliance with regulatory requirements |
| If the FDA determines that we or Veridex have failed to comply with these requirements, it can institute a wide variety of enforcement actions, ranging from a public warning letter to more severe sanctions, including: Ø fines, injunctions and civil penalties; Ø recall or seizure of our products or Veridex’s products; Ø operating restrictions, partial suspension or total shutdown of production; Ø denial of requests for 510(k) clearances or PMAs of product candidates; Ø withdrawal of 510(k) clearances already granted; Ø disgorgement of profits; and Ø criminal prosecution |
| _________________________________________________________________ 36 ______________________________________________________________________ Part I _________________________________________________________________ Any of these enforcement actions could affect our ability or Veridex’s ability to commercially distribute our products in the US and may also harm our ability to conduct the clinical trials necessary to support the marketing, clearance or approval of these products |
| If the third-party manufacturers we rely on either refuse or are unable to successfully manufacture certain of our products, we may be unable to commercialize these products |
| We have limited commercial manufacturing experience and capabilities |
| We currently assemble or perform final assembly, test and release of the CTAII and CellTracks AutoPrep System, as well as bulk reagents and other associated products used with the CellTracks AutoPrep System, at our facility located in Huntingdon Valley, Pennsylvania |
| We currently have adequate manufacturing capacity to meet anticipated demand for 2006 and 2007 |
| However, in order to meet anticipated demand thereafter, we will likely have to expand our manufacturing processes and facilities or increase our reliance on third-party manufacturers |
| Under our agreement with Veridex, we might be required to establish a third manufacturing facility or qualify a contract manufacturer in the future |
| We might encounter difficulties in expanding our manufacturing processes and facilities or in expanding our relationships with third-party manufacturers and might be unsuccessful in overcoming these difficulties |
| In that event, our ability to meet product demand could be impaired or delayed |
| We face additional risks inherent in operating a single manufacturing facility for those products we manufacture ourselves |
| We do not have alternative production plans in place or alternative facilities available at this time |
| If there are unforeseen shutdowns to our facility, we will be unable to satisfy customer orders on a timely basis with respect to these products |
| We rely currently and intend to continue to rely significantly in the future on third-party manufacturers to produce some of our products |
| For example, we are dependent on a small, private contract design, engineering and manufacturing company, Astro Instrumentation, LLC, or Astro, for our CellTracks AutoPrep System and for certain components of the CTAII If Astro loses key personnel or encounters financial or other difficulties, they may be unable to continue to manufacture this system and provide ongoing design and engineering support for commercialization and future enhancements of this system, and we may have difficulty replacing them |
| In addition, we currently use a third-party manufacturer for our CellSave Preservative Tube |
| We are dependent on these third-party manufacturers to perform their obligations in a timely and effective manner and in compliance with FDA and other regulatory requirements |
| If these third-party manufacturers fail to perform their obligations, our competitive position and ability to generate revenue could be adversely affected in a number of ways, including: Ø we might not be able to initiate or continue clinical trials on products that are under development; Ø we might be delayed in submitting applications for regulatory approvals and clearances for products; and Ø we might not be able to meet commercial demands for any approved or cleared products |
| Any failures in manufacturing these products may also result in a breach of our agreement with Veridex |
| If third-party payors do not reimburse customers for our products and Veridex’s products, they might not be used or purchased, which would adversely affect our revenues |
| The majority of the sales of our products and Veridex’s products based on our technologies in the US and other markets will depend, in large part, on the availability of adequate reimbursement to users of these products from government insurance plans, including Medicare and Medicaid in the US, managed _________________________________________________________________ 37 ______________________________________________________________________ Part I _________________________________________________________________ care organizations, private insurance plans and other third-party payors |
| Because these products have only recently been commercially introduced, third-party payors have limited history of reimbursing for the cost of these products |
| Third-party payors are often reluctant to reimburse healthcare providers for the use of medical diagnostic products incorporating new technology |
| In addition, third-party payors are increasingly limiting reimbursement coverage for medical diagnostic products and, in many instances, are exerting pressure on medical products suppliers to reduce their prices |
| Consequently, third-party reimbursement might not be consistently available or adequate to cover the cost of our products or changes may occur in the reimbursement policies of third-party payors |
| Any of these events could limit our ability or Veridex’s ability to sell these products or cause the prices of these products to be reduced, which would adversely affect our operating results |
| Because each third-party payor individually approves reimbursement, obtaining these approvals is a time-consuming and costly process that will require us and Veridex to provide scientific and clinical support for the use of each of these products to each third-party payor separately with no assurance that approval will be obtained |
| This process could delay the market acceptance of new products and could have a negative effect on our revenues and operating results |
| If we or any of our third-party manufacturers do not maintain high standards of manufacturing in accordance with Quality System Regulations, our ability to develop, and Veridex’s and our ability to commercialize our products, could be delayed or curtailed |
| We and any third-party manufacturers on which we currently rely or will rely in the future, including those we rely on to produce our CellTracks AutoPrep System and CellSave Preservative Tube, must continuously adhere to the current good manufacturing practices, or cGMP, set forth in the FDA’s Quality System Regulations, or QSR, and enforced by the FDA through its facilities inspection program |
| In complying with QSR, we and any of our third-party manufacturers must expend significant time, money and effort in design and development, testing, production, record-keeping and quality control to assure that our products meet applicable specifications and other regulatory requirements |
| The failure to comply with these specifications and other requirements could result in an FDA enforcement action, including the seizure of products and shut down of production |
| We or any of these third-party manufacturers also may be subject to comparable or more stringent regulations of foreign regulatory authorities, which include compliance with ISO 13485 2003 and the European Union’s in vitro Diagnostic Directive 98/97/EC If we or any of our third-party manufacturers fail to comply with these regulations, we might be subject to regulatory action, which could delay or curtail our ability to develop, and Veridex’s and our ability to commercialize, products based on our technologies |
| If we fail to obtain necessary funds for our operations, we will be unable to continue to develop and commercialize new products and technologies |
| We expect capital outlays and operating expenditures to increase over the next several years as we expand our infrastructure, commercialization, manufacturing, clinical trials and research and development activities |
| Specifically, we will need to raise additional capital to, among other things: Ø sustain commercialization with Veridex of our initial products; Ø pursue regulatory approvals and clearances; Ø expand our technologies into other areas of cancer and medicine; Ø expand our research and development activities; Ø acquire or license technologies; _________________________________________________________________ 38 ______________________________________________________________________ Part I _________________________________________________________________ Ø fund our clinical trial activities; Ø expand our manufacturing activities; and Ø finance capital expenditures and our general and administrative expenses |
| To date, we have raised capital through private equity, public equity and debt financings, license and milestone revenues from corporate collaborations, capital equipment and leasehold financing, government grants and interest earned on cash and investments |
| However, our present and future funding requirements will depend on many factors, including, among other things: Ø the level of research and development investment required to maintain and improve our technology position; Ø costs of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights; Ø our need or decision to acquire or license complementary technologies or acquire complementary businesses; Ø changes in product development plans needed to address any difficulties in manufacturing or commercialization; Ø competing technological and market developments; and Ø changes in regulatory policies or laws that affect our operations |
| We do not know whether additional financing will be available on commercially acceptable terms when needed, if at all |
| If adequate funds are not available or are not available on commercially acceptable terms, our ability to fund our operations, develop products or technologies or otherwise respond to competitive pressures could be significantly delayed or limited, and we might need to downsize or halt our operations |
| If we raise additional funds by issuing equity securities, further dilution to our stockholders could result, and new investors could have rights superior to those of our existing shareholders |
| Any equity securities issued also may provide for rights, preferences or privileges senior to those of holders of our common stock |
| If we raise additional funds by issuing debt securities, these debt securities would have rights, preferences and privileges senior to those of holders of our common stock, and the terms of the debt securities issued could impose significant restrictions on our operations |
| If we raise additional funds through collaborations and licensing arrangements, we might be required to relinquish significant rights to our technologies or products, or grant licenses on terms that are not favorable to us |
| If adequate funds are not available, we may have to delay or may be unable to continue to develop our products |
| If the third parties with which we intend to contract with for clinical trials do not perform in an acceptable manner, or if we suffer setbacks in these clinical trials, our business may suffer |
| We do not have the ability to conduct independently the clinical trials required to obtain regulatory clearances for our products |
| If we cannot locate and enter into favorable agreements with acceptable third parties, or if these third parties do not successfully carry out their contractual obligations, meet expected deadlines or follow regulatory requirements, including clinical laboratory, manufacturing and good clinical practice guidelines, then we may be the subject of an enforcement action by the FDA or some other regulatory body, and may be unable to obtain clearances for our products or to commercialize them on a timely basis, if at all |
| _________________________________________________________________ 39 ______________________________________________________________________ Part I _________________________________________________________________ The completion of clinical trials of our products may be delayed by many other factors, including the rate of enrollment of patients |
| Neither we nor any third-party clinical investigators and CROs can control the rate of patient enrollment, and this rate might not be consistent with our expectations or sufficient to enable clinical trials of our products to be completed in a timely manner or to be completed at all |
| In addition, regulatory authorities might not permit us to undertake additional clinical trials for one or more of these products |
| Currently, we have two important labeling trials underway in colorectal and prostate cancer |
| If we suffer any significant delays, setbacks or negative results in, or termination of, these clinical trials or our other clinical trials for our products, we may be unable to generate product sales from these products in the future |
| If we lose key management or scientific personnel, scientific collaborators or other advisors, our business would suffer |
| Our success depends, in large part, on the efforts and abilities of Byron D Hewett, who is our President and Chief Executive Officer, Leon WMM Terstappen, who is our Senior Vice President of Research and Development and Chief Scientific Officer, and James G Murphy, who is our Senior Vice President of Finance and Administration and Chief Financial Officer, as well as the other members of our senior management and our scientific and technical personnel |
| Erickson notified our board of directors of his intention to step down as Chief Executive Officer on March 31, 2006 |
| Given that the pool of individuals with relevant experience in biotechnology and diagnostic products in particular is limited, it would be costly and time-consuming to replace any of our senior management or scientific personnel |
| Although we maintain key-person life insurance on Dr |
| Terstappen, we do not maintain key-person life insurance on any of our other officers, employees or consultants |
| We also depend on our scientific collaborators and other advisors, particularly with respect to our research and development efforts |
| If we lose the services of one or more of our key officers, employees or consultants, or are unable to retain the services of our scientific collaborators and other advisors, our research and development and product development efforts could be delayed or curtailed |
| If Veridex and the other third-parties on which we currently rely or may rely in the future to perform marketing, sales and distribution services for our products do not successfully perform these services, our business will be harmed |
| We have limited marketing, sales and distribution experience and capabilities |
| In order to commercialize any of our products, we must either internally develop sales, marketing and distribution capabilities or make arrangements with third parties to perform these services |
| We currently rely, and we intend to rely for the foreseeable future on sales, marketing and distribution arrangements with third parties for the commercialization of our products |
| Specifically, we rely on Veridex for the commercialization of cancer diagnostic products based on our technologies |
| We may be unable to enter into sales, marketing and distribution agreements with third parties on acceptable terms, if at all |
| Also, the sales, marketing, and distribution efforts of these third parties might not be successful |
| Any sales through these third parties might be less profitable to us than direct sales |
| If we decide to perform any sales, marketing and distribution functions ourselves, we might face a number of risks, including: Ø the inability to attract and build the significant and skilled marketing staff or sales force necessary to commercialize and gain market acceptance for our products; Ø the amount of time and cost of establishing a marketing staff or sales force might not be justifiable by the revenues generated by any particular product; and Ø the failure of our direct sales and marketing personnel to initiate and execute successful commercialization activities |
| _________________________________________________________________ 40 ______________________________________________________________________ Part I _________________________________________________________________ If the limited number of suppliers on which we rely fail to supply the raw materials we use in the manufacturing of our reagent products, we might be unable to satisfy product demand, which would negatively impact our business |
| Some of the raw materials used in the manufacturing of our reagent products used in several of our platforms and instruments currently are available only from a limited number of suppliers |
| We acquire all of these raw materials on a purchase-order basis, which means that the supplier is not required to supply us with specified quantities of these raw materials over a certain period of time or to set aside part of its inventory for our forecasted requirements |
| Additionally, for certain of these raw materials, we have not arranged for alternative suppliers, and it might be difficult to find alternative suppliers in a timely manner and on terms acceptable to us |
| Consequently, as we continue our commercialization efforts, if we do not forecast properly, or if our suppliers are unable or unwilling to supply us in sufficient quantities or on commercially acceptable terms, we might not have access to sufficient quantities of these raw materials on a timely basis and might not be able to satisfy product demand |
| In addition, if any of these components and raw materials are no longer available in the marketplace, we will be forced to further develop our technologies to incorporate alternate components and to do so in compliance with QSR and other quality standards, such as ISO 13485 |
| If we incorporate new components or raw materials into our products we might need to seek and obtain additional approvals or clearances from the FDA or foreign regulatory agencies, which could delay the commercialization of these products |
| If our competitors develop and market technologies or research and diagnostic products faster than we or Veridex do or if those products are more effective than our products, our commercial opportunities will be reduced or eliminated |
| The extent to which any of our technologies and products achieve market acceptance will depend on many competitive factors, many of which are beyond our control |
| Competition in the pharmaceutical and biotechnology industries, and the medical devices and diagnostic products segments in particular, is intense and has been accentuated by the rapid pace of technological development |
| Our competitors include large diagnostics and life sciences companies |
| Most of these entities have substantially greater research and development capabilities and financial, scientific, manufacturing, marketing, sales and service resources than we do |
| Some of them also have more experience than we do in research and development, clinical trials, regulatory matters, manufacturing, marketing and sales |
| These organizations also compete with us to: Ø pursue acquisitions, joint ventures or other collaborations; Ø license proprietary technologies that are competitive with our technologies; Ø attract funding; and Ø attract and hire scientific talent |
| If we or Veridex cannot successfully compete with new or existing products or technologies, sales of our products will suffer and we may never achieve profitability |
| Because of their greater experience with commercializing their technologies and larger research and development capabilities, our competitors might succeed in developing and commercializing technologies or products earlier and obtaining regulatory approvals and clearances from the FDA more rapidly than Veridex or us |
| Our competitors also might develop more effective technologies or products that are more predictive, more highly automated or more cost-effective, which may render our technologies or products obsolete or non-competitive |
| _________________________________________________________________ 41 ______________________________________________________________________ Part I _________________________________________________________________ If we experience delays in the development of new products or delays in planned improvements to our products, our commercial opportunities will be reduced |
| To improve our competitive position, we believe that we will need to develop new products as well as improve our existing instruments and software, reagents and ancillary products |
| Improvements in operator workflow, automation and throughput (the number of tests that can be performed in a specified period of time) for our products will be important to maintain a competitive position of our products as we market to a broader, perhaps less technically proficient, group of customers |
| Our ability to develop new products and make improvements in our products may face difficult technological challenges leading to development delays |
| For example, we had experienced delays in connection with the development of our laser-based CellTracks Analyzer cell analysis instrument for use in cancer diagnostic testing |
| These delays were the result of technical problems associated with reliability of the system to detect cancer cells |
| In response, in June 2005, we introduced a second generation instrument, the CellTracks Analyzer II, which, among other improvements over our current CellSpotter Analyzer, implements enhancements such as the automation of data acquisition and enhanced detection of CTCs and other types of cells |
| We are also continuing to develop our analyzer platforms further because we believe that some of the planned features, such as foreign language capability of our software and the ability to quantify cellular markers using ASRs, may be required to remain competitive and address future potential research and clinical applications |
| If we are unable to successfully complete development of new products or planned enhancements to our products, in each case without significant delays, our future competitive position may be adversely affected |
| If product liability lawsuits are successfully brought against us, we might incur substantial liabilities and could be required to limit the commercialization of our products |
| Our business exposes us to potential product liability risks that are inherent in the testing, manufacturing, marketing and sale of diagnostic products |
| We might be unable to avoid product liability claims |
| Product liability insurance generally is expensive for our industry |
| If we are unable to maintain sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability claims, we may be unable to commercialize our products |
| A successful product liability claim brought against us in excess of any insurance coverage we have at that time could cause us to incur substantial liabilities and our business to fail |
| If we use biological and hazardous materials in a manner that causes injury, we could be liable for damages |
| Our research and development activities sometimes involve the controlled use of potentially harmful biological materials, hazardous materials and chemicals |
| We cannot completely eliminate the risk of accidental contamination or injury to third parties from the use, storage, handling or disposal of these materials |
| In the event of contamination or injury, we could be held liable for any resulting damages, and any liability could exceed our resources or any applicable insurance coverage we may have |
| Additionally, we are subject on an ongoing basis to federal, state and local laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products |
| The cost of compliance with these laws and regulations might be significant and could negatively affect our profitability |
| If we are unable to manage growth in connection with our transition from an early-stage development company to a company that commercializes research and diagnostic products, our operations will suffer |
| We may need to add a significant number of new personnel and expand our capabilities in order to successfully pursue our commercialization strategy for our initial IVD products as well as our research _________________________________________________________________ 42 ______________________________________________________________________ Part I _________________________________________________________________ and development efforts |
| Certain aspects of our operations may need to be scaled up, for example, to increase the batch sizes of antibodies and other bulk components that we will need to provide for use in the test kits manufactured by Veridex and the number of instrument systems we can manufacture per quarter |
| Organizational growth and scale-up of operations could strain our existing managerial, operational, financial and other resources |
| If we fail to manage this growth effectively, we may not be able to achieve our research and development and commercialization goals |
| RISKS RELATED TO OUR INTELLECTUAL PROPERTY If we are unable to protect our proprietary rights, we may not be able to compete effectively |
| We have obtained patents in the US and in foreign countries relating to many of the technologies that are the basis of our products, such as the basic technologies relating to the separation and isolation of cells for the detection of cancer and the various aspects of the reagents, methods and instrument platforms that we are commercializing or plan to commercialize |
| In addition, we maintain trade secrets, especially where we believe patent protection is not appropriate or obtainable, on various aspects of our technologies and that we do not wish to become publicly known |
| However, obtaining, defending and enforcing our patents and other intellectual property rights involve complex legal and factual questions |
| For example, many of our key patents relating to our basic technologies for the separation and isolation of cells for the detection of cancer contain claims covering our processes for manufacturing and using our magnetic separation particles, or ferrofluids |
| If a competitor were to practice or use these processes without our knowledge or consent, these patents may be particularly difficult to defend or enforce because it may not be apparent from examination of the competitor’s products that the competitor is using our patented processes |
| In particular, if we were not able successfully to defend or enforce our patents that cover our ferrofluids, which are utilized as a key component of our CellTracks AutoPrep System, competitors could more easily produce systems that might be able to perform separation of CTCs from blood samples in a manner substantially equivalent to our CellTracks AutoPrep System without compensating us, resulting in substantial damage to our business |
| Because the issuance of a patent is not conclusive of its validity or enforceability and can be challenged, we do not know how much protection, if any, our patents will provide to us if we attempt to enforce them or if others challenge their validity or enforceability in court |
| For example, if our patents relating to the separation of CTCs from blood samples were challenged and invalidated, we would not be able to prevent others from utilizing these key aspects of our technologies, which would substantially harm our business |
| Moreover, our patent applications may not result in issued patents, and even if issued, our patents may not contain claims that are sufficiently broad to prevent others from practicing our technologies or developing competing products |
| Accordingly, we cannot assure you that we will be able to obtain, defend or enforce our patent rights covering our technologies in the US or in foreign countries |
| In addition, if others discover or misappropriate the technologies that we have chosen to maintain as trade secrets, we may not be able to effectively maintain our technologies as unpatented trade secrets |
| Although we have taken measures to protect our unpatented trade secrets and other non-public information such as know-how, including the use of confidentiality and invention assignment agreements with our employees, consultants and some of our contractors, it is possible that these persons may unintentionally or willingly breach the agreements or that our competitors may independently develop or otherwise discover our trade secrets and know-how |
| A challenge to one or more of our pending patent applications, or issued patents, may result in limiting the coverage of our patents so that a competitor can effectively avoid our patent claims |
| In addition, competitors may avoid our patents by using technologies that perform in substantially the same manner as our technologies, but avoid infringing our patent claims |
| For example, if a competitor were to use a _________________________________________________________________ 43 ______________________________________________________________________ Part I _________________________________________________________________ cell separation technology that performs as well, or nearly as well, as our patented ferrofluids, the competitor may be able to market products that may be functionally equivalent and perform as well or nearly as well as our products, thereby diminishing the competitive advantage afforded by our issued patents |
| Although we may initiate litigation to stop the infringement of our patent claims or to attempt to force an unauthorized user of our patented inventions or trade secrets to compensate us for the infringement or unauthorized use, patent and trade secret litigation is complex and often difficult and expensive, and would consume the time of our management and other significant resources |
| If the outcome of litigation is adverse to us, third parties may be able to use our technologies without payments to us |
| Moreover, some of our competitors may be better able to sustain the costs of litigation because they have substantially greater resources |
| Because of these factors relating to litigation, we may be unable effectively to prevent misappropriation of our patent and other proprietary rights |
| If the use of our technologies conflicts with the intellectual property rights of third-parties, we may incur substantial liabilities and we may be unable to commercialize products based on these technologies in a profitable manner, if at all |
| Our competitors or others may have or acquire patent rights that they could enforce against us |
| If they do so, we may be required to alter our technologies, pay licensing fees or cease activities |
| If our technologies conflict with patent rights of others, third parties could bring legal action against us or our licensees, suppliers, customers or collaborators, claiming damages and seeking to enjoin manufacturing and marketing of the affected products |
| If these legal actions are successful, in addition to any potential liability for damages, we might have to obtain a license in order to continue to manufacture or market the affected products |
| A required license under the related patent may not be available on acceptable terms, if at all |
| We may be unaware of issued patents that our technologies infringe |
| Because patent applications can take many years to issue, there may be currently pending applications, unknown to us, that may later result in issued patents upon which our technologies may infringe |
| There could also be existing patents of which we are unaware upon which our technologies may infringe |
| In addition, if third parties file patent applications or obtain patents claiming technology also claimed by us in pending applications, we may have to participate in interference proceedings in the US Patent and Trademark Office to determine priority of invention |
| If third parties file oppositions in foreign countries, we may also have to participate in opposition proceedings in foreign tribunals to defend the patentability of the filed foreign patent applications |
| We may also have to participate in interference proceedings involving our issued patents or our pending applications |
| If a third-party claims that we infringe upon its proprietary rights, any of the following may occur: Ø we may become involved in time-consuming and expensive litigation, even if the claim is without merit; Ø we may become liable for substantial damages for past infringement if a court decides that our technologies infringe upon a competitor’s patent; Ø a court may prohibit us from selling or licensing our product without a license from the patent holder, which may not be available on commercially acceptable terms, if at all, or which may require us to pay substantial royalties or grant cross licenses to our patents; and Ø we may have to redesign our product so that it does not infringe upon others’ patent rights, which may not be possible or could require substantial funds or time |
| If any of these events occurs, our business will suffer and the market price of our common stock will likely decline |
| _________________________________________________________________ 44 ______________________________________________________________________ Part I _________________________________________________________________ Our rights to use technologies licensed to us by third parties are not within our control, and we may not be able to implement our products without these technologies |
| We have licensed patents and other rights that are necessary to commercialize our products |
| Our business will significantly suffer if these licenses terminate, if the licensors fail to abide by the terms of the license or fail to prevent infringement by third parties or if the licensed patents or other rights are found to be invalid |
| We have exclusively in-licensed significant intellectual property, including patents and know-how, related to our cell analysis instrumentation and cell isolation and enrichment products |
| In September 1999, we entered into a license agreement with the University of Texas, or Texas, under which we were granted exclusive rights to technology, including patents and know-how, which we developed in collaboration with Texas, relating to the isolation, enrichment and characterization of CTCs |
| CTCs are cells that cover external and internal body surfaces and give rise to the majority of solid tumors |
| This technology and the underlying patents and know-how contribute significantly to our cell analysis products in the field of cancer diagnostics |
| We are responsible for making royalty payments of 1prca of our sales of reagents incorporating the intellectual property licensed to us under this agreement |
| This agreement terminates when all of Texas’s rights to the licensed technologies expire |
| In addition, Texas also may unilaterally terminate this agreement if we are in material breach or become bankrupt or insolvent |
| Texas also may unilaterally terminate the license granted under this agreement, or the exclusivity of such license, in any national political jurisdiction if we fail to provide written evidence satisfactory to Texas, within 90 days of receiving written notice from Texas that it intends to terminate this license, that we or our sublicensees have commercialized or are actively attempting to commercialize a licensed invention in these jurisdictions |
| In addition, in July 2002, we entered into a license agreement with Streck |
| Under this agreement, Streck granted to us a non-exclusive, worldwide, royalty-bearing license to practice certain of Streck’s cell preservative technology, including patents and know-how, for the research, development, manufacture and sale of our CellSave Preservative Tube to test for the presence of epithelial cells or CTCs in a sample of fluid from a patient |
| This agreement will terminate upon the expiration date of the last to expire of the patents licensed under this agreement |
| In addition, either party also may terminate this agreement if the other party is in material breach or becomes involved in financial difficulties, including bankruptcy and insolvency |
| If we violate the terms of our licenses, or otherwise lose our rights to these patents or patent applications, we may be unable to continue development of our products |
| Our licensors or others may dispute the scope of our rights under any of these licenses |
| Additionally, the licensors under these licenses might breach the terms of their respective agreements or fail to prevent infringement of the licensed patents by third parties |
| Loss of any of these licenses for any reason could materially harm our financial condition and operating results |
| If we cannot obtain additional licenses to intellectual property owned by third parties that we desire to incorporate into new products we plan to develop, we may not be able to develop or commercialize these future products |
| We are developing products designed to identify and characterize additional types of cells other than CTCs and epithelial cells, such as endothelial cells |
| We are also developing cell profile and molecular products using reagents that are fluorescently tagged antibodies and/or probes designed to characterize target cells, which may be classified by the FDA as analyte specific reagents, or ASRs |
| ASRs can be used in research as an aid in evaluating new therapies in clinical trials, and we plan to develop a family of ASRs for profiling of each rare cell type of interest |
| However, many, if not all, of the target-specific and _________________________________________________________________ 45 ______________________________________________________________________ Part I _________________________________________________________________ other reagents, including antibodies and probes, that we ultimately may use in the development and commercialization of these future cell profile products and in our future products for identifying additional types of cells may be protected by patent and other intellectual property rights owned by third parties |
| If we are unable to obtain rights to use this third-party intellectual property under commercially reasonable terms, or at all, we may be unable to develop these products, and this could harm our ability to expand our commercial products offerings and to generate additional revenue from these products |
| RISKS RELATING TO OUR COMMON STOCK The market price of our common stock may be highly volatile |
| We cannot assure you that an active trading market for our common stock will exist at any time |
| For the year ended December 31, 2005, our average daily trading volume was approximately 106cmam000 shares |
| Substantially all of the 27dtta5 million shares outstanding are eligible for sale in the public market |
| The trading price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in price in response to various factors, many of which are beyond our control, including: Ø actual or anticipated results of our clinical trials; Ø actual or anticipated regulatory approvals of our products or of competing products; Ø changes in laws or regulations applicable to our products; Ø changes in the expected or actual timing of our development programs; Ø actual or anticipated variations in quarterly operating results; Ø announcements of technological innovations by us, our collaborators or our competitors; Ø new products or services introduced or announced by us or our competitors; Ø changes in financial estimates or recommendations by securities analysts; Ø conditions or trends in the biotechnology and pharmaceutical industries; Ø changes in the market valuations of similar companies; Ø announcements by us of significant acquisitions, strategic partnerships, joint ventures or capital commitments; Ø additions or departures of key personnel; Ø disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies; Ø the loss of a collaborator, including Veridex; Ø developments concerning our collaborations; Ø trading volume of our common stock; and Ø sales of our common stock by us or our stockholders |
| In addition, the stock market in general, the Nasdaq National Market and the market for technology companies in particular have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies |
| Further, there has been _________________________________________________________________ 46 ______________________________________________________________________ Part I _________________________________________________________________ particular volatility in the market prices of securities of biotechnology and life sciences companies |
| These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance |
| In the past, following periods of volatility in the market, securities class-action litigation has often been instituted against companies |
| Such litigation, if instituted against us, could result in substantial costs and diversion of management’s attention and resources |
| The future sale of our common stock and the exercise of outstanding options and warrants could negatively affect our stock price and cause dilution |
| As of December 31, 2005, options to purchase 3cmam302cmam480 shares of our common stock and warrants to purchase 42cmam169 shares of our common stock were outstanding |
| A total of 1cmam358cmam796 of the outstanding options and warrants are “in the money” and exercisable as of December 31, 2005 |
| “In the money” means that the current market price of the common stock is above the exercise price of the shares subject to the warrant or option |
| The issuance of common stock upon the exercise of these options and warrants could adversely affect the market price of the common stock or result in substantial dilution to our existing stockholders |
| As of December 31, 2005 we also had restricted shares grants totaling 260cmam000 outstanding |
| These grants represent outright grants of our common stock which will vest as follows, 160cmam000 shares in 2008 and 100cmam000 in 2009 |
| The issuance of common stock upon the exercise of these options, warrants and restricted common stock grants could adversely affect the market price of the common stock or result in substantial dilution to our existing stockholders |
| If the price and volume of our common stock experience fluctuations, this could lead to costly litigation for us |
| Because we have a limited operating history and operate within the medical devices and diagnostic products segments of the pharmaceutical and biotechnology industries, our stock price is likely to be volatile |
| The market price of our common stock may fluctuate substantially due to a variety of factors, including: Ø results of our clinical trials related to developing multiple indications for our cancer diagnostic products, such as those related to colorectal, lung or other solid tissue cancers, or expanding the applications of our technologies to fields of medicine other than cancer, such as cardiovascular and infectious diseases; Ø changes in reimbursement policies concerning the diagnostic products that we or our competitors offer; Ø media reports and publications and announcements about cancer or diagnostic products or new cancer treatments or innovations that could compete with our products; Ø announcements concerning our competitors or the medical devices and diagnostic products segments in general; Ø new regulatory pronouncements, changes in regulatory guidelines, such as adverse changes in reimbursement for cancer diagnostic products, and timing of regulatory approvals concerning the products in our pipeline; Ø market conditions or trends related to the medical diagnostics and biotechnology industries or the market in general; Ø additions to or departures of our key personnel, in particular, the loss of, Byron D Hewett, our President and Chief Executive Officer, Leon WMM Terstappen, our Chief Scientific Officer, and James G Murphy, our Chief Financial Officer; _________________________________________________________________ 47 ______________________________________________________________________ Part I _________________________________________________________________ Ø disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies; Ø changes in financial estimates or recommendations by securities analysts; Ø variations in our quarterly financial and operating results; and Ø changes in accounting principles |
| The market prices of the securities of biotechnology and diagnostic companies, particularly companies like ours without consistent product revenues and earnings, have been highly volatile and are likely to remain highly volatile in the future |
| This volatility has often been unrelated to the operating performance of particular companies |
| Moreover, market prices for stocks of biotechnology-related companies, particularly following an initial public offering, frequently reach levels that bear no relationship to the operating performance of these companies |
| These market prices generally are not sustainable and are highly volatile |
| In the past, companies that experience volatility in the market price of their securities have often faced securities class action litigation |
| Whether or not meritorious, litigation brought against us could result in substantial costs, divert our management’s attention and resources and harm our ability to grow our business |
| Anti-takeover provisions in our certificate of incorporation and bylaws and under Delaware law could inhibit a change in control or a change in management that holders of our common stock consider favorable |
| Provisions in our certificate of incorporation and bylaws could delay or prevent a change of control or change in management that would provide holders of our common stock with a premium to the market price of our common stock |
| These provisions include those: Ø authorizing the issuance without further approval of “blank check” preferred stock that could be issued by our board of directors to increase the number of outstanding shares and thwart a takeover attempt; Ø prohibiting cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates; Ø limiting the ability to remove directors; Ø limiting the ability of stockholders to call special meetings of stockholders; Ø prohibiting stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of stockholders; and Ø establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings |
| In addition, Section 203 of the General Corporation Law of the State of Delaware, as amended, or the Delaware General Corporation Law limits business combination transactions with 15 percent stockholders that have not been approved by our board of directors |
| These provisions and others could make it difficult for a third-party to acquire us, or for members of our board of directors to be replaced, even if doing so would be beneficial to our stockholders |
| Because our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt to replace the current management team |
| If a change of control or change in management is delayed or prevented, holders of our common stock may lose an opportunity to realize a premium on their shares of common stock or the market price of our common stock could decline |
| _________________________________________________________________ 48 ______________________________________________________________________ Part I _________________________________________________________________ We do not expect to pay dividends in the foreseeable future |
| As a result, holders of our common stock must rely on stock appreciation for any return on their investment |
| We do not anticipate paying cash dividends on our common stock in the foreseeable future |
| Certain of our existing credit agreements prohibit the payment of cash dividends without lender consent |
| Any payment of cash dividends will also depend on our financial condition, results of operations, capital requirements and other factors and will be at the discretion of our board of directors |
| Accordingly, holders of our common stock will have to rely on capital appreciation, if any, to earn a return on their investment in our common stock |
| Furthermore, we may in the future become subject to contractual restrictions on, or prohibitions against, the payment of dividends |