| Our operating results, including components of operating results, such as gross margin on product sales, may fluctuate from time to time, and such fluctuations could affect our stock price |
| Our operating results have fluctuated in the past and can be expected to fluctuate from time to time in the future |
| Some of the factors that may cause these fluctuations include: o the impact of acquisitions; o the timing of significant customer orders; o market acceptance of our existing products, as well as products in development; o the timing of regulatory approvals; o changes in the rate of exchange between the US dollar and other currencies of foreign countries in which we do business, such as the euro and the British pound; o expenses incurred and business lost in connection with product field corrections or recalls; o increases in the cost of energy and steel; o our ability to manufacture our products efficiently; and o the timing of our research and development expenditures |
| In general, there is intense competition among medical device companies |
| We compete with established medical technology and pharmaceutical companies in many of our product areas |
| Competition also comes from early stage companies that have alternative technological solutions for our primary clinical targets, as well as universities, research institutions and other non-profit entities |
| Many of our competitors have access to greater financial, technical, research and development, marketing, manufacturing, sales, distribution services and other resources than we do |
| Our competitors may be more effective at implementing their technologies to develop commercial products |
| Our competitors may be able to gain market share by offering lower-cost products |
| Our competitive position will depend on our ability to achieve market acceptance for our products, develop new products, implement production and marketing plans, secure regulatory approval for products under development, obtain reimbursement under Medicare and obtain patent protection |
| We may need to develop new applications for our products to remain competitive |
| Technological advances by one or more of our current or future competitors could render our present or future products obsolete or uneconomical |
| Our future success will depend upon our ability to compete effectively against current technology as well as to respond effectively to technological advances |
| Competitive pressures could adversely affect our profitability |
| For example, two of our largest competitors introduced an onlay dural graft matrix during 2004, and other companies have introduced and may be preparing to introduce similar products |
| The introduction of such products could reduce the sales, growth in sales and profitability of our duraplasty products |
| Our largest competitors in the neurosurgery markets are the Medtronic Neurosurgery division of Medtronic, Inc, the Codman division of Johnson & Johnson, the Aesculap division of B Braun Medical Inc |
| and the Valleylab division of Tyco International Ltd |
| In addition, many of our product lines compete with smaller specialized companies or larger companies that do not otherwise focus on neurosurgery |
| Our competitors in reconstructive surgery include LifeCell Corporation, Organogenesis Inc, Wright Medical Group, Inc, the DePuy division of Johnson & Johnson, Synthes, Inc |
| and Stryker Corporation |
| Some of these are major orthopedic companies that carry a full line of reconstructive products |
| Our private label products face diverse and broad competition, depending on the market that an individual product addresses |
| 11 Finally, in certain cases our products compete primarily against medical practices that treat a condition without using a device, rather than any particular product, such as autograft tissue as an alternative for our dermal regeneration products, our duraplasty products and our nerve repair products |
| In addition to internal growth, our current strategy involves growth through acquisitions |
| Since 1999, we have acquired 22 businesses or product lines at a total cost of approximately dlra289 million |
| We may be unable to continue to implement our growth strategy, and our strategy ultimately may be unsuccessful |
| A significant portion of our growth in revenues has resulted from, and is expected to continue to result from, the acquisition of businesses complementary to our own |
| We engage in evaluations of potential acquisitions and are in various stages of discussion regarding possible acquisitions, certain of which, if consummated, could be significant to us |
| Any potential acquisitions may result in material transaction expenses, increased interest and amortization expense, increased depreciation expense and increased operating expense, any of which could have a material adverse effect on our operating results |
| As we grow by acquisitions, we must integrate and manage the new businesses to realize economies of scale and control costs |
| In addition, acquisitions involve other risks, including diversion of management resources otherwise available for ongoing development of our business and risks associated with entering new markets with which our marketing and sales force has limited experience or where experienced distribution alliances are not available |
| Our future profitability will depend in part upon our ability to develop further our resources to adapt to these new products or business areas and to identify and enter into satisfactory distribution networks |
| We may not be able to identify suitable acquisition candidates in the future, obtain acceptable financing or consummate any future acquisitions |
| If we cannot integrate acquired operations, manage the cost of providing our products or price our products appropriately, our profitability could suffer |
| In addition, as a result of our acquisitions of other healthcare businesses, we may be subject to the risk of unanticipated business uncertainties, regulatory matters or legal liabilities relating to those acquired businesses for which the sellers of the acquired businesses may not indemnify us |
| Our research and development activities and the manufacturing, labeling, distribution and marketing of our existing and future products are subject to regulation by numerous governmental agencies in the United States and in other countries |
| The Food and Drug Administration (FDA) and comparable agencies in other countries impose mandatory procedures and standards for the conduct of clinical trials and the production and marketing of products for diagnostic and human therapeutic use |
| Our products under development are subject to FDA approval or clearance prior to marketing for commercial use |
| The process of obtaining necessary FDA approvals or clearances can take years and is expensive and full of uncertainties |
| Our inability to obtain required regulatory approval on a timely or acceptable basis could harm our business |
| Further, approval or clearance may place substantial restrictions on the indications for which the product may be marketed or to whom it may be marketed, the warnings that may be required to accompany the product or additional restrictions placed on the sale and/or use of the product |
| Further studies, including clinical trials and FDA approvals, may be required to gain approval for the use of a product for clinical indications other than those for which the product was initially approved or cleared or for significant changes to the product |
| In addition, for products with an approved Pre-Marketing Approval (PMA), the FDA requires annual reports and may require post-approval surveillance programs to monitor the products &apos safety and effectiveness |
| Results of post-approval programs may limit or expand the further marketing of the product |
| Another risk of application to the FDA relates to the regulatory classification of new products or proposed new uses for existing products |
| In the filing of each application, we make a legal judgment about the appropriate form and content of the application |
| If the FDA disagrees with our judgment in any particular case and, for example, requires us to file a PMA application rather than allowing us to market for approved uses while we seek broader approvals or requires extensive additional clinical data, the time and expense required to obtain the required approval might be significantly increased or approval might not be granted |
| 12 Approved products are subject to continuing FDA requirements relating to quality control and quality assurance, maintenance of records, reporting of adverse events and product recalls, documentation, and labeling and promotion of medical devices |
| The FDA and foreign regulatory authorities require that our products be manufactured according to rigorous standards |
| These regulatory requirements may significantly increase our production or purchasing costs and may even prevent us from making or obtaining our products in amounts sufficient to meet market demand |
| If we or a third-party manufacturer change our approved manufacturing process, the FDA may require a new approval before that process may be used |
| Failure to develop our manufacturing capability may mean that even if we develop promising new products, we may not be able to produce them profitably, as a result of delays and additional capital investment costs |
| Manufacturing facilities, both international and domestic, are also subject to inspections by or under the authority of the FDA In addition, failure to comply with applicable regulatory requirements could subject us to enforcement action, including product seizures, recalls, withdrawal of clearances or approvals, restrictions on or injunctions against marketing our product or products based on our technology, cessation of operations and civil and criminal penalties |
| We are also subject to the regulatory requirements of countries outside of the United States where we do business |
| For example, Japan is in the process of reforming its medical device regulations |
| A recent amendment to Japanapstas Pharmaceutical Affairs Law went into effect on April 1, 2005 |
| New regulations and requirements exist for obtaining approval of medical devices, including new requirements governing the conduct of clinical trials, the manufacturing of products and the distribution of products in Japan |
| Significant resources also may be needed to comply with the extensive auditing of and requests for documentation relating to all manufacturing facilities of our company and our vendors by the Ministry of Health, Labor and Welfare in Japan to comply with the amendment to the Pharmaceutical Affairs Law |
| These new regulations may affect our ability to obtain approvals of new products for sale in Japan |
| Certain of our products, including our dermal regeneration products, our duraplasty products and our nerve repair products, contain material derived from bovine tissue |
| Products that contain materials derived from animal sources, including food as well as pharmaceuticals and medical devices, are increasingly subject to scrutiny in the press and by regulatory authorities |
| Regulatory authorities are concerned about the potential for the transmission of disease from animals to humans via those materials |
| This public scrutiny has been particularly acute in Japan and Western Europe with respect to products derived from animal sources, because of concern that materials infected with the agent that causes bovine spongiform encephalopathy, otherwise known as BSE or mad cow disease, may, if ingested or implanted, cause a variant of the human Creutzfeldt-Jakob Disease, an ultimately fatal disease with no known cure |
| Recent cases of BSE in cattle discovered in Canada and the United States have increased awareness of the issue in North America |
| In particular, the collagen used in the products that Integra manufactures is derived only from the deep flexor tendon of cattle less than 24 months old from New Zealand, a country that has never had a case of BSE, or the United States |
| The collagen used in a product that we sell, but do not manufacture, is derived from bovine pericardium |
| We are also qualifying sources of collagen from other countries that are considered BSE-free |
| The World Health Organization classifies different types of cattle tissue for relative risk of BSE transmission |
| Deep flexor tendon and bovine pericardium are in the lowest risk categories for BSE transmission (the same category as milk, for example), and are therefore considered to have a negligible risk of containing the agent that causes BSE (an improperly folded protein known as a prion) |
| Nevertheless, products that contain materials derived from animals, including our products, may become subject to additional regulation, or even be banned in certain countries, because of concern over the potential for prion transmission |
| Significant new regulation, or a ban of our products, could have a material adverse effect on our current business or our ability to expand our business |
| In addition, we have been notified that Japan has issued new regulations regarding medical devices that contain tissue of animal origin |
| Among other regulations, Japan may require that the tendon used in the manufacture of medical devices sold in Japan originate in a country that has never had a case 13 of BSE Currently, we purchase our tendon from the United States and New Zealand |
| If we cannot continue to use or qualify a source of tendon from New Zealand or another country that has never had a case of BSE, we will not be permitted to sell our collagen hemostatic agents and products for oral surgery in Japan |
| We do not currently sell our dural or skin repair products in Japan |
| We cannot be certain that our current products or any other products that we may develop or market will achieve or maintain market acceptance |
| Certain of the medical indications that can be treated by our devices can also be treated by other medical devices or by medical practices that do not include a device |
| The medical community widely accepts many alternative treatments, and certain of these other treatments have a long history of use |
| For example, the use of autograft tissue is a well-established means for repairing the dermis, and it competes for acceptance in the market with the INTEGRA(R) Dermal Regeneration Template |
| In addition, the acceptance of our Newdeal products, which previously were distributed by third parties, faces similar competition |
| We cannot be certain that our devices and procedures will be able to replace those established treatments or that either physicians or the medical community in general will accept and utilize our devices or any other medical products that we may develop |
| In addition, our future success depends, in part, on our ability to develop additional products |
| Even if we determine that a product candidate has medical benefits, the cost of commercializing that product candidate may be too high to justify development |
| Competitors may develop products that are more effective, achieve more favorable reimbursement status from third-party payors, cost less or are ready for commercial introduction before our products |
| If we are unable to develop additional commercially viable products, our future prospects could be adversely affected |
| Market acceptance of our products depends on many factors, including our ability to convince prospective collaborators and customers that our technology is an attractive alternative to other technologies, to manufacture products in sufficient quantities and at acceptable costs, and to supply and service sufficient quantities of our products directly or through our distribution alliances |
| In addition, unfavorable reimbursement methodologies of third-party payors could harm acceptance of our products |
| The industry is subject to rapid and continuous change arising from, among other things, consolidation and technological improvements |
| One or more of these factors may vary unpredictably, which could have a material adverse effect on our competitive position |
| We may not be able to adjust our contemplated plan of development to meet changing market demands |
| Our ability to compete effectively depends in part, on our ability to maintain the proprietary nature of our technologies and manufacturing processes, which includes the ability to obtain, protect and enforce patents on our technology and to protect our trade secrets |
| We own or have licensed patents that cover aspects of some of our product lines |
| However, you should not rely on our patents to provide us with any significant competitive advantage |
| Others may challenge our patents and, as a result, our patents could be narrowed, invalidated or rendered unenforceable |
| Competitors may develop products similar to ours that our patents do not cover |
| In addition, our current and future patent applications may not result in the issuance of patents in the United States or foreign countries |
| Further, there is a substantial backlog of patent applications at the US Patent and Trademark Office, and the approval or rejection of patent applications usually takes approximately two years |
| Trade secrets are difficult to protect |
| We cannot assure you that others will not independently develop substantially equivalent proprietary information and 14 techniques or otherwise gain access to our trade secrets, that our trade secrets will not be disclosed or that we can effectively protect our rights to unpatented trade secrets |
| In an effort to protect our trade secrets, we require our employees, consultants and advisors to execute proprietary information and invention assignment agreements upon commencement of employment or consulting relationships with us |
| These agreements provide that, except in specified circumstances, all confidential information developed or made known to the individual during the course of their relationship with us must be kept confidential |
| We cannot assure you, however, that these agreements will provide meaningful protection for our trade secrets or other proprietary information in the event of the unauthorized use or disclosure of confidential information |
| We may be sued for infringing the intellectual property rights of others |
| In addition, we may find it necessary, if threatened, to initiate a lawsuit seeking a declaration from a court that we do not infringe the proprietary rights of others or that their rights are invalid or unenforceable |
| If we do not prevail in any litigation, in addition to any damages we might have to pay, we would be required to stop the infringing activity or obtain a license for the proprietary rights involved |
| Any required license may be unavailable to us on acceptable terms, or at all |
| In addition, some licenses may be nonexclusive and allow our competitors to access the same technology we license |
| If we fail to obtain a required license or are unable to design our product so as not to infringe on the proprietary rights of others, we may be unable to sell some of our products, which could have a material adverse effect on our revenues and profitability |
| To protect or enforce our intellectual property rights, we may have to initiate legal proceedings, such as infringement suits or interference proceedings, against third parties |
| For example, in December 2005 our Newdeal subsidiary sued Wright Medical Group, Inc |
| and Wright Medicalapstas French subsidiary alleging that certain products within Wright Medicalapstas "e Charlotte System "e of foot and ankle products infringe upon Newdealapstas foot-and-ankle system |
| In addition, we may have to institute proceedings regarding our competitors &apos promotional practices |
| Litigation is costly, and, even if we prevail, the cost of that litigation could affect our profitability |
| In addition, litigation is time consuming and could divert management attention and resources away from our business |
| We may also provoke these third parties to assert claims against us |
| Outside vendors, some of whom are sole-source suppliers, provide key components and raw materials used in the manufacture of our products |
| Although we believe that alternative sources for many of these components and raw materials are available, any supply interruption in a limited or sole source component or raw material could harm our ability to manufacture our products until a new source of supply is identified and qualified |
| In addition, an uncorrected defect or supplierapstas variation in a component or raw material, either unknown to us or incompatible with our manufacturing process, could harm our ability to manufacture products |
| We may not be able to find a sufficient alternative supplier in a reasonable time period, or on commercially reasonable terms, if at all, and our ability to produce and supply our products could be impaired |
| We believe that these factors are most likely to affect the following products that we manufacture: o our collagen-based products, such as the INTEGRA(R) Dermal Regeneration Template and wound dressing products, the DuraGen(R) family of products, and our Absorbable Collagen Sponges; o our products made from silicone, such as our neurosurgical shunts and drainage systems and hemodynamic shunts; and o products which use many different electronic parts from numerous suppliers, such as our intracranial monitors and catheters |
| If we were suddenly unable to purchase products from one or more of these companies, we would need a significant period of time to qualify a replacement, and the production of any affected products could be disrupted |
| While it is our policy to maintain sufficient inventory of components so that our production 15 will not be significantly disrupted even if a particular component or material is not available for a period of time, we remain at risk that we will not be able to qualify new components or materials quickly enough to prevent a disruption if one or more of our suppliers ceases production of important components or materials |
| We manufacture our products in a limited number of facilities |
| Damage to our manufacturing, development or research facilities due to fire, natural disaster, power loss, communications failure, unauthorized entry or other events could cause us to cease development and manufacturing of some or all of our products |
| In particular, our San Diego, California facility that manufactures our Camino(R), Ventrix(R) and LICOX(R) catheter product lines is as susceptible to earthquake damage, wildfire damage and power losses from electrical shortages as are other businesses in the Southern California area |
| Our Anasco, Puerto Rico plant, where we manufacture collagen, silicone and our private label products, is vulnerable to hurricane, storm and wind damage |
| Although we maintain property damage and business interruption insurance coverage on these facilities, our insurance might not cover all losses under such circumstances and we may not be able to renew or obtain such insurance in the future on acceptable terms with adequate coverage or at reasonable costs |
| In addition, we began implementing an enterprise business system in 2004, which we intend to use in all of our facilities |
| This system, the hosting and maintenance of which we outsource, replaces several systems on which we previously relied and will be implemented in several stages |
| We have outsourced our product distribution function in the United States and in the fourth quarter of 2005 began to outsource our European product distribution function |
| A delay or other problem with the system or in our implementation schedule for any of these initiatives could have a material adverse effect on our operations |
| We generate significant revenues outside the United States in euros, British pounds and in US dollar-denominated transactions conducted with customers who generate revenue in currencies other than the US dollar |
| For those foreign customers who purchase our products in US dollars, currency fluctuations between the US dollar and the currencies in which those customers do business may have an impact on the demand for our products in foreign countries where the US dollar has increased in value compared to the local currency |
| Because we have operations based in Europe and we generate revenues and incur operating expenses in euros and British pounds, we experience currency exchange risk with respect to those foreign currency-denominated revenues and expenses |
| In 2004 and 2005, the cost of products we manufactured in our European facilities or purchased in foreign currencies exceeded our foreign currency-denominated revenues |
| Accordingly, a weakening of the dollar against the euro and British pound could negatively affect future gross margins and operating margins |
| Currently, we do not use derivative financial instruments to manage operating foreign currency risk |
| If we believe that this potential impact presents a significant risk to our business, we may enter into derivative financial instruments to mitigate this risk |
| In general, we cannot predict the consolidated effects of exchange rate fluctuations upon our future operating results because of the number of currencies involved, the variability of currency exposure and the potential volatility of currency exchange rates |
| Our international operations subject us to customs and import-export laws |
| These laws restrict, and in some cases prohibit, United States companies from directly or indirectly selling goods, technology or services to people or entities in certain countries |
| Our sales to foreign markets also may be affected by local economic conditions, legal, regulatory or political considerations, the effectiveness of our sales representatives and distributors, local competition and changes in local medical 16 practice |
| Relationships with customers and effective terms of sale frequently vary by country, often with longer-term receivables than are typical in the United States |
| Trends toward managed care, health care cost containment and other changes in government and private sector initiatives in the United States and other countries in which we do business are placing increased emphasis on the delivery of more cost-effective medical therapies that could adversely affect the sale and/or the prices of our products |
| For example: o major third-party payors of hospital services and hospital outpatient services, including Medicare, Medicaid and private health care insurers, annually revise their payment methodologies, which can result in stricter standards for reimbursement of hospital charges for certain medical procedures; o Medicare, Medicaid and private health care insurer cutbacks could create downward price pressure on our products; o potential legislative proposals have been considered that would result in major reforms in the US health care system that could have an adverse effect on our business; o there has been a consolidation among health care facilities and purchasers of medical devices in the United States who prefer to limit the number of suppliers from whom they purchase medical products, and these entities may decide to stop purchasing our products or demand discounts on our prices; o we are party to contracts with group purchasing organizations, which negotiate pricing for many member hospitals, that require us to discount our prices for certain of our products and limit our ability to raise prices for certain of our products, particularly surgical instruments; o there is economic pressure to contain health care costs in domestic and international markets; o there are proposed and existing laws, regulations and industry policies in domestic and international markets regulating the sales and marketing practices and the pricing and profitability of companies in the health care industry; o proposed laws or regulations that will permit hospitals to provide financial incentives to doctors for reducing hospital costs (known as gainsharing) and to award physician efficiency (known as physician profiling) could reduce prices; and o there have been initiatives by third-party payors to challenge the prices charged for medical products that could affect our ability to sell products on a competitive basis |
| Both the pressures to reduce prices for our products in response to these trends and the decrease in the size of the market as a result of these trends could adversely affect our levels of revenues and profitability of sales |
| Regulatory Oversight Of The Medical Device Industry Might Affect The Manner In Which We May Sell Medical Devices There are laws and regulations that regulate the means by which companies in the health care industry may market their products to health care professionals and may compete by discounting the prices of their products |
| Although we exercise care in structuring our sales and marketing practices and customer discount arrangements to comply with those laws and regulations, we cannot assure you that: o government officials charged with responsibility for enforcing those laws will not assert that our sales and marketing practices or customer discount arrangements are in violation of those laws or regulations; or o government regulators or courts will interpret those laws or regulations in a manner consistent with our interpretation |
| In January 2004, ADVAMED, the principal US trade association for the medical device industry, put in place a model "e code of conduct "e that sets forth standards by which its members should abide in the promotion of their products |
| We have in place policies and procedures for compliance that we believe are at 17 least as stringent as those set forth in the ADVAMED Code, and we provide routine training to our sales and marketing personnel on our policies regarding sales and marketing practices |
| Nevertheless, the sales and marketing practices of our industry has been the subject of increased scrutiny from government agencies, and we believe that this trend will continue |
| Our private label business depends in part on our entering into and maintaining collaborative or alliance agreements with third parties concerning product marketing, as well as research and development programs |
| Our most important alliance is our agreement with the Wyeth BioPharma division of Wyeth for the development of collagen matrices to be used in conjunction with Wyeth BioPharmaapstas recombinant bone protein, a protein that stimulates the growth of bone in humans |
| The third parties with whom we have entered into agreements might terminate these agreements for a variety of reasons, including developing other sources for the product supplied by us |
| Termination of any of our alliances would require us to develop other means to distribute the affected products and could adversely affect our expectations for the growth of private label products |
| We are exposed to product liability and other claims in the event that our technologies or products are alleged to have caused harm |
| We may not be able to obtain insurance for the potential liability on acceptable terms with adequate coverage or at reasonable costs |
| Any potential product liability claims could exceed the amount of our insurance coverage or may be excluded from coverage under the terms of the policy |
| Our insurance may not be renewed at a cost and level of coverage comparable to that then in effect |
| Our research, development and manufacturing processes involve the controlled use of certain hazardous materials |
| We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of these materials and certain waste products |
| Although we believe that our safety procedures for handling and disposing of those materials comply with the standards prescribed by the applicable laws and regulations, the risk of accidental contamination or injury from these materials cannot be eliminated |
| In the event of such an accident, we could be held liable for any damages that result and any related liability could exceed the limits or fall outside the coverage of our insurance and could exceed our resources |
| We may not be able to maintain insurance on acceptable terms or at all |
| The Loss Of Key Personnel Could Harm Our Business |
| We believe our success depends on the contributions of a number of our key personnel, including Stuart M Essig, our President and Chief Executive Officer |
| If we lose the services of key personnel, those losses could materially harm our business |
| We maintain key person life insurance on Mr |
| Essig and two other members of management |