| INVERNESS MEDICAL INNOVATIONS INC ITEM 1A RISK FACTORS The risk factors described below may materially impact your investment in our company or may in the future, and, in some cases already do, materially affect us and our business, financial condition and results of operations |
| You should carefully consider these factors with respect to your investment in our securities |
| This section includes or refers to certain forward-looking statements; you should read the explanation of the qualifications and limitations on such forward-looking statements beginning on pages 2 and 30 of this report |
| Our business has substantial indebtedness, which could, among other things, make it more difficult for us to satisfy our debt obligations, require us to use a large portion of our cash flow from operations to repay and service our debt or otherwise create liquidity problems, limit our flexibility to adjust to market conditions, place us at a competitive disadvantage and expose us to interest rate fluctuations |
| We currently have, and we will likely continue to have, a substantial amount of indebtedness |
| As of December 31, 2005, we had approximately dlra262dtta5 million in aggregate principal indebtedness outstanding, of which dlra93dtta2 million is secured indebtedness, and dlra11dtta0 million of additional borrowing capacity under the revolving portions of our credit facilities |
| In addition, subject to restrictions in our credit facilities and the indenture governing our dlra150dtta0 million in outstanding 8^3/4prca senior subordinated notes, or the senior subordinated notes, we may incur additional indebtedness |
| During the fiscal years ended December 31, 2005 and 2004, we recorded dlra21dtta8 million and dlra22dtta1 million, respectively, of interest expense related to our indebtedness, which included dlra2dtta3 million and dlra4dtta2 million, respectively, in non-cash interest primarily related to amortization of debt origination costs |
| Our substantial indebtedness could affect our future operations in important ways |
| For example, it could: • make it more difficult to satisfy our obligations under the senior subordinated notes, our credit facilities and our other debt-related instruments; • require us to use a large portion of our cash flow from operations to pay principal and interest on our indebtedness, which would reduce the amount of cash available to finance our operations and other business activities and may require us, in order to meet our debt service obligations, to delay or reduce capital expenditures or the introduction of new products and/or forego business opportunities, including acquisitions, research and development projects or product design enhancements; • limit our flexibility to adjust to market conditions, leaving us vulnerable in a downturn in general economic conditions or in our business and less able to plan for, or react to, changes in our business and the industries in which we operate; • impair our ability to obtain additional financing; • place us at a competitive disadvantage compared to our competitors that have less debt; and • expose us to fluctuations in the interest rate environment with respect to our indebtedness that bears interest at variable rates |
| We expect to obtain the money to pay our expenses and to pay the principal and interest on the senior subordinated notes, our senior credit facility and our other debt from cash flow from our operations and from additional loans under our senior credit facility, subject to continued covenant compliance, and potentially from other debt or equity offerings |
| Our ability to meet our expenses thus depends on our future performance, which will be affected by financial, business, economic and other factors |
| We will not be able to control many of these factors, such as economic conditions in the markets in which we operate and pressure from competitors |
| We cannot be certain that our cash flow will be sufficient to allow us to pay principal and interest on our debt and meet our other obligations |
| 11 _________________________________________________________________ If our cash flow and capital resources prove inadequate, we could face substantial liquidity problems and might be required to dispose of material assets or operations, restructure or refinance our debt, including the notes, seek additional equity capital or borrow more money |
| In addition, the terms of existing or future debt agreements, including the credit agreement governing our senior credit facility and the indenture governing the senior subordinated notes, may restrict us from adopting any of these alternatives |
| We have entered into agreements governing our indebtedness that subject us to various restrictions that may limit our ability to pursue business opportunities |
| The agreements governing our indebtedness, including the credit agreement governing our senior credit facility and the indenture governing the senior subordinated notes, subject us to various restrictions on our ability to engage in certain activities, including, among other things, our ability to: • incur additional indebtedness; • pay dividends or make distributions or repurchase or redeem our stock; • acquire other businesses; • make investments; • make loans to or extend credit for the benefit of third parties or our subsidiaries; • enter into transactions with affiliates; • raise additional capital; • make capital or finance lease expenditures; • dispose of or encumber assets; and • consolidate, merge or sell all or substantially all of our assets |
| These restrictions may limit our ability to pursue business opportunities or strategies that we would otherwise consider to be in our best interests |
| In particular, all acquisitions of other businesses, other than very small acquisitions, will require us to obtain our lenders &apos consent under our senior credit facility |
| We have been required to obtain, and have obtained, our lenders &apos consent under our senior credit facility in order to complete our acquisitions of the Wampole Division of MedPointe Inc, or Wampole, Ostex International, Inc, or Ostex, Applied Biotech, Inc, or ABI, the rapid diagnostics business that we acquired from Abbott Laboratories in 2003, or the 2003 Abbott rapid diagnostics business, Ischemia, Inc, or Ischemia, Binax, Inc, or Binax, the Determine/DainaScreen business that we acquired from Abbott Laboratories in 2005, or the Determine business, Thermo BioStar Inc, or BioStar, Innogenetics Diagnostica y Terapeutica SAU, or IDT, and CLONDIAG chip technologies GmbH, or Clondiag |
| In addition, we are required to obtain our lenders &apos consent in order to consummate our recently announced agreement to acquire certain assets from ACON Laboratories, or the ACON acquisition |
| Our senior credit facilities contain certain financial covenants that we may not satisfy which, if not satisfied, could result in the acceleration of the amounts due under our credit facilities and the limitation of our ability to borrow additional funds in the future |
| As of December 31, 2005, we had approximately dlra89dtta0 million of indebtedness outstanding under our senior credit facility and approximately dlra11dtta0 million of additional borrowing capacity thereunder |
| The agreements governing this facility subject us to various financial and other covenants with which we must comply on an ongoing or periodic basis |
| These include covenants pertaining to fixed charge coverage, capital expenditures, various leverage ratios, minimum EBITDA and minimum cash 12 _________________________________________________________________ requirements |
| If we violate any of these covenants, there may be a material adverse effect on us |
| Most notably, our outstanding debt under our senior credit facility could become immediately due and payable, our lenders could proceed against any collateral securing such indebtedness, and our ability to borrow additional funds in the future may be limited |
| A default under any of our agreements governing our indebtedness could result in a default and acceleration of indebtedness under other agreements |
| The agreements governing our indebtedness, including our senior credit facility and the indenture governing the senior subordinated notes, contain cross-default provisions whereby a default under one agreement could result in a default and acceleration of our repayment obligations under other agreements |
| Even if new financing were available, it may not be on commercially reasonable terms or terms that are acceptable to us |
| If some or all of our indebtedness is in default for any reason, our business, financial condition and results of operations could be materially and adversely affected |
| We may not be able to satisfy our debt obligations upon a change of control, which could limit our opportunity to enter into a change of control transaction |
| Upon the occurrence of a "e change of control, "e as defined in the indenture governing the senior subordinated notes, each holder of our senior subordinated notes will have the right to require us to purchase the notes at a price equal to 101prca of the principal amount, together with any accrued and unpaid interest |
| Our failure to purchase, or give notice of purchase of, the senior subordinated notes would be a default under the indenture, which would in turn be a default under our senior credit facility |
| In addition, a change of control may constitute an event of default under our senior credit facility |
| A default under our senior credit facility would result in an event of default under our 10prca subordinated notes and, if the lenders accelerate the debt under our senior credit facility, the indenture governing the senior subordinated notes, and may result in the acceleration of any of our other indebtedness outstanding at the time |
| As a result, if we do not have enough cash to repay all of our indebtedness or to repurchase all of the senior subordinated notes, we may be limited in the change of control transactions that we may pursue |
| Our acquisitions may not be profitable, and the integration of these businesses may be costly and difficult and may cause disruption to our business |
| We have, since commencing activities in November 2001, acquired and we have attempted to integrate, or we are in the process of integrating, into our operations Unipath Limited and its associated companies and assets, or the Unipath business, IVC Industries, Inc |
| (now doing business as Inverness Medical Nutritionals Group, or IMN), Wampole, Ostex, ABI, the 2003 Abbott rapid diagnostics business, Ischemia, Binax, the Determine business, BioStar, IDT and Clondiag |
| We have also made a number of smaller acquisitions |
| The ultimate success of all of our acquisitions depends, in part, on our ability to realize the anticipated synergies, cost savings and growth opportunities from integrating these businesses or assets into our existing businesses |
| However, the successful integration of independent businesses or assets is a complex, costly and time-consuming process |
| The difficulties of integrating companies and acquired assets include among others: • consolidating manufacturing and research and development operations, where appropriate; • integrating newly acquired businesses or product lines into a uniform financial reporting system; • coordinating sales, distribution and marketing functions; 13 _________________________________________________________________ • establishing or expanding manufacturing, sales, distribution and marketing functions in order to accommodate newly acquired businesses or product lines; • preserving the important licensing, research and development, manufacturing and supply, distribution, marketing, customer and other relationships; • minimizing the diversion of managementapstas attention from ongoing business concerns; and • coordinating geographically separate organizations |
| We may not accomplish the integration of our acquisitions smoothly or successfully |
| The diversion of the attention of our management from our current operations to the integration effort and any difficulties encountered in combining operations could prevent us from realizing the full benefits anticipated to result from these acquisitions and adversely affect our other businesses |
| Additionally, the costs associated with the integration of our acquisitions can be substantial |
| To the extent that we incur integration costs that are not anticipated when we finance our acquisitions, these unexpected costs could adversely impact our liquidity or force us to borrow additional funds |
| Ultimately, the value of any business or asset that we have acquired may not be greater than or equal to its purchase price |
| If we choose to acquire or invest in new and complementary businesses, products or technologies instead of developing them ourselves, such acquisitions or investments could disrupt our business and, depending on how we finance these acquisitions or investments, could result in the use of significant amounts of cash |
| Our success depends in part on our ability to continually enhance and broaden our product offerings in response to changing technologies, customer demands and competitive pressures |
| Accordingly, from time to time we may seek to acquire or invest in businesses, products or technologies instead of developing them ourselves |
| Acquisitions and investments involve numerous risks, including: • the inability to complete the acquisition or investment; • disruption of our ongoing businesses and diversion of management attention; • difficulties in integrating the acquired entities, products or technologies; • difficulties in operating the acquired business profitably; • difficulties in transitioning key customer, distributor and supplier relationships; • risks associated with entering markets in which we have no or limited prior experience; and • unanticipated costs |
| In addition, any future acquisitions or investments may result in: • issuances of dilutive equity securities, which may be sold at a discount to market price; • use of significant amounts of cash; • the incurrence of debt; • the assumption of significant liabilities; • unfavorable financing terms; • large one-time expenses; and • the creation of certain intangible assets, including goodwill, the write-down of which may result in significant charges to earnings |
| Any of these factors could materially harm our business or our operating results |
| 14 _________________________________________________________________ If goodwill and/or other intangible assets that we have recorded in connection with our acquisitions of other businesses become impaired, we could have to take significant charges against earnings |
| In connection with the accounting for our acquisitions of the Unipath business, Wampole, Ostex, ABI, the 2003 Abbott rapid diagnostics product lines, Ischemia, Binax, the Determine business, BioStar, IDT and Clondiag, we have recorded, or expect to record, a significant amount of goodwill and other intangible assets |
| Under current accounting guidelines, we must assess, at least annually and potentially more frequently, whether the value of goodwill and other intangible assets has been impaired |
| Any reduction or impairment of the value of goodwill or other intangible assets will result in a charge against earnings which could materially adversely affect our reported results of operations in future periods |
| We could experience significant manufacturing delays, disruptions to our ongoing research and development and increased production costs if Unilever is unable to successfully assign or sublease to us the lease for the multi-purpose facility that we currently use in Bedford, England |
| One of our primary operating facilities is located in Bedford, England |
| The Bedford facility is a multi-purpose facility that is registered with the FDA, contains state-of-the-art research laboratories and is equipped with specialized manufacturing equipment |
| This facility currently provides the manufacturing for most of our Clearblue and Clearview products, serves as our primary research and development center and serves as the administrative center for our European operations |
| We also use this facility to manufacture the digital and non-digital e |
| t pregnancy tests for Pfizer in connection with our supply arrangements with Pfizer for these products |
| We are currently using the Bedford facility pursuant to our acquisition agreement with Unilever relating to our acquisition of the Unipath business in late 2001 |
| Unilever currently leases this facility from a third party landlord |
| Pursuant to the terms of Unileverapstas lease, Unilever cannot assign the lease or sublet the Bedford facility to us without first obtaining the landlordapstas consent |
| The landlord has not yet consented to, and may not in the future consent to, an assignment of the lease or a sublease to us |
| The terms of our acquisition agreement obligate Unilever to provide to us the benefit of its lease of the Bedford facility |
| If Unilever is unable to successfully acquire such consent or otherwise enable us to realize the benefit of Unileverapstas lease of the Bedford facility, or if its lease is terminated, we may be forced to renegotiate a lease of the Bedford facility on substantially less favorable terms or seek alternative means of producing our products, conducting our research and housing our European administrative staff |
| In either case, we may experience increased production costs or manufacturing delays, which could prevent us from meeting contractual supply obligations or jeopardize important customer relationships |
| We may also suffer disruptions to our ongoing research and development while we are resolving these issues |
| We cannot assure you that we will be able to renegotiate a lease for the Bedford facility on terms that are acceptable to us or find an acceptable replacement for this facility |
| Any one or more of these events may have a material adverse effect on us |
| We may experience manufacturing problems or delays, which could result in decreased revenues or increased costs |
| Many of our manufacturing processes are complex and require specialized and expensive equipment |
| Replacement parts for our specialized equipment can be expensive and, in some cases, can require lead times of up to a year to acquire |
| In addition, our private label consumer diagnostic products business, and our private label and bulk nutritional supplements business in particular, rely on operational efficiency to mass produce products at low margins per unit |
| We also rely on numerous third parties to supply production materials and in some cases there may not be alternative sources immediately available |
| In addition, we currently rely on approximately ten significant third-party manufacturers, as well as numerous other less significant manufacturers, to produce many of our professional diagnostic products 15 _________________________________________________________________ and certain components of our consumer diagnostic products |
| In addition, we manufacture the products acquired with the Determine business from a facility in Matsudo, Japan that is made available to us, and with support services provided by, Abbott Laboratories |
| Any event impacting our manufacturing facilities, our manufacturing systems or equipment, or our contract manufacturers or suppliers, including, without limitation, wars, terrorist activities, natural disasters and outbreaks of infectious disease, could delay or suspend shipments of products or the release of new products or could result in the delivery of inferior products |
| Our revenues from the affected products would decline or we could incur losses until such time as we were able to restore our production processes or put in place alternative contract manufacturers or suppliers |
| Even though we carry business interruption insurance policies, we may suffer losses as a result of business interruptions that exceed the coverage available under our insurance policies |
| We may experience difficulties that may delay or prevent our development, introduction or marketing of new or enhanced products |
| We intend to continue to invest in product and technology development |
| The development of new or enhanced products is a complex and uncertain process |
| We may experience research and development, manufacturing, marketing and other difficulties that could delay or prevent our development, introduction or marketing of new products or enhancements |
| We cannot be certain that: • any of the products under development will prove to be effective in clinical trials; • we will be able to obtain, in a timely manner or at all, regulatory approval to market any of our products that are in development or contemplated; • any of such products can be manufactured at acceptable cost and with appropriate quality; or • any such products, if and when approved, can be successfully marketed |
| The factors listed above, as well as manufacturing or distribution problems, or other factors beyond our control, could delay new product launches |
| In addition, we cannot assure you that the market will accept these products |
| Accordingly, there is no assurance that our overall revenues will increase if and when new products are launched |
| Our failure to meet strict regulatory requirements could require us to pay fines, incur other costs or even close our facilities |
| Our facilities and manufacturing techniques generally must conform to standards that are established by government agencies, including those of European and other foreign governments, as well as the FDA, and, to a lesser extent, the US Drug Enforcement Administration, or the DEA, and local health agencies |
| These regulatory agencies may conduct periodic audits of our facilities or our processes to monitor our compliance with applicable regulatory standards |
| If a regulatory agency finds that we fail to comply with the appropriate regulatory standards, it may impose fines on us, delay or withdraw pre-market clearances or other regulatory approvals or if such a regulatory agency determines that our non-compliance is severe, it may close our facilities |
| Any adverse action by an applicable regulatory agency could impair our ability to produce our products in a cost-effective and timely manner in order to meet our customers &apos demands |
| We may also be required to bear other costs or take other actions that may have a negative impact on our future sales and profits |
| In March 2005, our ABI subsidiary was informed by the FDA that based on inspectional findings that included data integrity and design control issues, ABI had become subject to the FDAapstas Application Integrity Policy |
| As a result, the FDA is obligated to defer the review of any pending or future applications made by ABI until the FDA determines that ABI has resolved these issues |
| ABI currently has no applications pending |
| ABI is not restricted from introducing new tests outside of the United States, or from selling products in the United States based on any existing 510(k)s |
| However, 16 _________________________________________________________________ ABI withdrew certain 510(k)s related to its drugs of abuse products that were cited by the FDA, and a Class III recall (based on our assessment that any hazard to the public health is unlikely) was undertaken for the corresponding products |
| ABI is in the final stages of both an internal and external audit, and is committed to taking any actions required by those audits in order to fulfill its regulatory obligations |
| It is our understanding at this time that the FDA action applies only to ABI and does not otherwise restrict our ability, or the ability of our other subsidiaries, to submit applications to the FDA or commercialize products |
| However, the scope of the FDA action is uncertain, and may have a negative impact on our future sales and profits |
| Regulatory agencies may also impose new or enhanced standards that would increase our costs as well as the risks associated with non-compliance |
| For example, we anticipate that the FDA may soon finalize and implement "e good manufacturing practice, "e or GMP, regulations for nutritional supplements |
| GMP regulations would require supplements to be prepared, packaged and held in compliance with certain rules, and might require quality control provisions similar to those in the GMP regulations for drugs |
| While our manufacturing facilities for nutritional supplements have been subjected to, and passed, third party inspections against anticipated GMP standards, the ongoing compliance required in the event that GMP regulations are adopted would involve additional costs and would present new risks associated with any failure to comply with the regulations in the future |
| If we deliver products with defects, our credibility may be harmed, market acceptance of our products may decrease and we may be exposed to liability in excess of our product liability insurance coverage |
| The manufacturing and marketing of consumer and professional diagnostic products involve an inherent risk of product liability claims |
| In addition, our product development and production are extremely complex and could expose our products to defects |
| Any defects could harm our credibility and decrease market acceptance of our products |
| In addition, our marketing of vitamins and nutritional supplements may cause us to be subjected to various product liability claims, including, among others, claims that the vitamins and nutritional supplements have inadequate warnings concerning side effects and interactions with other substances |
| Potential product liability claims may exceed the amount of our insurance coverage or may be excluded from coverage under the terms of the policy |
| In the event that we are held liable for a claim for which we are not indemnified, or for damages exceeding the limits of our insurance coverage, that claim could materially damage our business and our financial condition |
| Our sales of branded nutritional supplements have been trending downward since 1998 due to the maturity of the market segments they serve and the age of that product line and we may experience further declines in sales of those products |
| Our aggregate sales of all of our brand name nutritional products, including, among others, Ferro-Sequels, Stresstabs, Protegra, Posture, SoyCare, ALLBEE, and Z-BEC, have declined each year since 1998 through the year 2005, except in 2002 when they increased slightly as compared to 2001 |
| We believe that these products have under-performed because they are, for the most part, aging brands with limited brand recognition that face increasing private label competition |
| The overall age of this product line means that we are subject to future distribution loss for under-performing brands, while our opportunities for new distribution on the existing product lines are limited |
| As a result we do not expect significant sales growth of our existing brand name nutritional products and we may experience further declines in overall sales of our brand name nutritional products in the future |
| 17 _________________________________________________________________ Our sales of specific vitamins and nutritional supplements could be negatively impacted by media attention or other news developments that challenge the safety and effectiveness of those specific vitamins and nutritional supplements |
| Most growth in the vitamin and nutritional supplement industry is attributed to new products that tend to generate greater attention in the marketplace than do older products |
| Positive media attention resulting from new scientific studies or announcements can spur rapid growth in individual segments of the market, and also impact individual brands |
| Conversely, news that challenges individual segments or products can have a negative impact on the industry overall as well as on sales of the challenged segments or products |
| Most of our vitamin and nutritional supplements products serve well-established market segments and, absent unforeseen new developments or trends, are not expected to benefit from rapid growth |
| A few of our vitamin and nutritional products are newer products that are more likely to be the subject of new scientific studies or announcements, which could be either positive or negative |
| News or other developments that challenge the safety or effectiveness of these products could negatively impact the profitability of our vitamin and nutritional supplements business |
| We could suffer monetary damages, incur substantial costs or be prevented from using technologies important to our products as a result of legal proceedings |
| We are involved in various legal proceedings arising out of our consumer diagnostics, nutritional supplements and professional diagnostics business |
| Because of the nature of our business, we may be subject at any particular time to commercial disputes, consumer product claims or various other lawsuits arising in the ordinary course of our business, including employment matters, and expect that this will continue to be the case in the future |
| Such lawsuits generally seek damages, sometimes in substantial amounts, for commercial or personal injuries allegedly suffered and can include claims for punitive or other special damages |
| An adverse ruling or rulings in one or more such lawsuits could, individually or in the aggregate, have a material adverse effect on our sales, operations or financial performance |
| In addition, we aggressively defend our patent and other intellectual property rights |
| This often involves bringing infringement or other commercial claims against third parties |
| These suits can be expensive and result in counterclaims challenging the validity of our patents and other rights |
| We cannot assure you that these lawsuits or any future lawsuits relating to our businesses will not have a material adverse effect on us |
| The profitability of our consumer products businesses may suffer if we are unable to establish and maintain close working relationships with our customers |
| For the years ended December 31, 2005 and 2004, approximately 58prca and 65prca, respectively, of our net product sales were derived from our consumer products business, which consists of our consumer diagnostic products and vitamin and nutritional supplements segments |
| These businesses rely to a great extent on close working relationships with our customers rather than long-term exclusive contractual arrangements |
| Customer concentration in these businesses is relatively high, especially in our vitamin and nutritional supplements segment where two customers accounted for approximately 61prca of sales during 2005 |
| In addition, customers of our branded and private label consumer products businesses purchase products through purchase orders only and are not obligated to make future purchases |
| We therefore rely on our ability to deliver quality products on time in order to retain and generate customers |
| If we fail to meet our customers &apos needs or expectations, whether due to manufacturing issues that affect quality or capacity issues that result in late shipments, we will harm our reputation and customer relationships and likely lose customers |
| Additionally, if we are unable to maintain close working relationships with our customers, sales of all of our products and our ability to successfully launch new products could suffer |
| The loss of a major customer and the failure to generate new accounts could significantly reduce our revenues or prevent us from achieving projected growth |
| 18 _________________________________________________________________ The profitability of our consumer products businesses may suffer if Pfizer Inc |
| is unable to successfully market and sell its e |
| Under the terms of a manufacturing, packaging and supply agreement that we entered into with Pfizer Inc, through one of its wholly-owned subsidiaries, Pfizer purchases its non-digital e |
| t pregnancy tests from us through June 6, 2009 |
| Additionally, pursuant to the terms of a five-year supply agreement entered into in December 2003, as amended on June 1, 2005, we currently supply Pfizer with a digital version of its e |
| t brand pregnancy tests on an exclusive basis |
| The amount of revenues or profits that we generate under these agreements will depend on the volume of orders that we receive from Pfizer |
| As a result, if Pfizer is unable to successfully market and sell its e |
| t pregnancy tests, or if other events adversely affect the volume of Pfizerapstas sales of its e |
| t pregnancy tests, then our future revenues and profit may be adversely affected |
| Because sales of our private label nutritional supplements are generally made at low margins, the profitability of these products may suffer significantly as a result of relatively small increases in raw material or other manufacturing costs |
| Sales of our private label nutritional supplements, which for the years ended December 31, 2005 and 2004, provided approximately 16prca and 17prca, respectively, of our net product sales, generate low profit margins |
| We rely on our ability to efficiently mass produce nutritional supplements in order to make meaningful profits from these products |
| Changes in raw material or other manufacturing costs can drastically cut into or eliminate the profits generated from the sale of a particular product |
| The private label nutritional supplements business is also highly competitive such that our ability to raise prices as a result of increased costs is limited |
| Customers generally purchase private label products via purchase order, not through long-term contracts, and they often purchase these products from the lowest bidder on a product by product basis |
| The internet has enhanced price competition among private label manufacturers through the advent of on-line auctions, where customers will auction off the right to manufacture a particular product to the lowest bidder |
| The resulting margin erosion in our nutritionals business has resulted in a reduction in our overall gross margin and contributed to our losses in 2005 |
| Our financial condition or results of operations may be adversely affected by international business risks |
| Approximately 42prca and 40prca of our net revenues were generated from outside the United States for the years ended December 31, 2005 and 2004, respectively |
| A significant number of our employees, including manufacturing, sales, support and research and development personnel, are located in foreign countries, including England, Japan, China, Ireland and Israel |
| Conducting business outside of the United States subjects us to numerous risks, including: • increased costs or reduced revenue as a result of movements in foreign currency exchange rates; • decreased liquidity resulting from longer accounts receivable collection cycles typical of foreign countries; • lower productivity resulting from difficulties managing our sales, support and research and development operations across many countries; • lost revenues resulting from difficulties associated with enforcing agreements and collecting receivables through foreign legal systems; • lost revenues resulting from the imposition by foreign governments of trade protection measures; • higher cost of sales resulting from import or export licensing requirements; 19 _________________________________________________________________ • lost revenues or other adverse affects as a result of economic or political instability in or affecting foreign countries in which we sell our products or operate; and • adverse effects resulting from changes in foreign regulatory or other laws affecting the sales of our products or our foreign operations |
| Because our business relies heavily on foreign operations and revenues, changes in foreign currency exchange rates and our ability to convert currencies may negatively affect our financial condition and results of operations |
| Our business relies heavily on our foreign operations |
| Four of our manufacturing operations are conducted outside the United States, in Bedford, England; Shanghai, China; Matsudo, Japan and Yavne, Israel |
| We have consolidated much of our cardiovascular related research and development in Scotland and ultimately we intend to establish a significant manufacturing operation there |
| Approximately 42prca and 40prca of our net revenues were generated from outside the United States for the years ended December 31, 2005 and 2004, respectively |
| Our Clearblue pregnancy test product sales have historically been much stronger outside the United States, with 68prca of net product sales of these products coming from outside the United States during the year ended December 31, 2005 |
| In addition, the Abbott rapid diagnostics business, which we acquired on September 30, 2003, generates a majority of its sales outside the United States, and all of the revenues of the Determine business are derived outside of the United States |
| Because of our foreign operations and foreign sales, we face exposure to movements in foreign currency exchange rates |
| Our primary exposures are related to the operations of our European subsidiaries |
| With our recent acquisition of the Determine business and the establishment of our manufacturing facility in Shanghai, we anticipate that our currency exposures related to the yen and the Chinese yuan will become more significant to our results than in prior periods |
| Should it be consummated, our pending acquisition of the rapid diagnostic business of ACON Laboratories for most major markets, which includes the acquisition of a major manufacturing facility in China, will also increase our exposure to the Chinese yuan |
| These exposures may change over time as business practices evolve and could result in increased costs or reduced revenue and could impact our actual cash flow |
| Intense competition could reduce our market share or limit our ability to increase market share, which could impair the sales of our products and harm our financial performance |
| The medical products industry is rapidly evolving and developments are expected to continue at a rapid pace |
| Competition in this industry, which includes both our consumer diagnostics and professional diagnostics businesses, is intense and expected to increase as new products and technologies become available and new competitors enter the market |
| Our competitors in the United States and abroad are numerous and include, among others, diagnostic testing and medical products companies, universities and other research institutions |
| Our future success depends upon maintaining a competitive position in the development of products and technologies in our areas of focus |
| Our competitors may: • develop technologies and products that are more effective than our products or that render our technologies or products obsolete or noncompetitive; • obtain patent protection or other intellectual property rights that would prevent us from developing our potential products; or • obtain regulatory approval for the commercialization of their products more rapidly or effectively than we do |
| Also, the possibility of patent disputes with competitors holding foreign patent rights may limit or delay expansion possibilities for our diagnostics businesses in certain foreign jurisdictions |
| In addition, many of our existing or potential competitors have or may have substantially greater research and 20 _________________________________________________________________ development capabilities, clinical, manufacturing, regulatory and marketing experience and financial and managerial resources |
| The market for the sale of vitamins and nutritional supplements is also highly competitive |
| This competition is based principally upon price, quality of products, customer service and marketing support |
| There are numerous companies in the vitamins and nutritional supplements industry selling products to retailers such as mass merchandisers, drug store chains, independent drug stores, supermarkets, groceries and health food stores |
| As most of these companies are privately held, we are unable to obtain the information necessary to assess precisely the size and success of these competitors |
| However, we believe that a number of our competitors, particularly manufacturers of nationally advertised brand name products, are substantially larger than we are and have greater financial resources |
| The rights we rely upon to protect the intellectual property underlying our products may not be adequate, which could enable third parties to use our technology and would reduce our ability to compete in the market |
| Our success will depend in part on our ability to develop or acquire commercially valuable patent rights and to protect our intellectual property |
| Our patent position is generally uncertain and involves complex legal and factual questions |
| The degree of present and future protection for our proprietary rights is uncertain |
| The risks and uncertainties that we face with respect to our patents and other proprietary rights include the following: • the pending patent applications we have filed or to which we have exclusive rights may not result in issued patents or may take longer than we expect to result in issued patents; • the claims of any patents which are issued may not provide meaningful protection; • we may not be able to develop additional proprietary technologies that are patentable; • the patents licensed or issued to us or our customers may not provide a competitive advantage; • other parties may challenge patents or patent applications licensed or issued to us or our customers; • patents issued to other companies may harm our ability to do business; and • other companies may design around technologies we have patented, licensed or developed |
| In addition to patents, we rely on a combination of trade secrets, nondisclosure agreements and other contractual provisions and technical measures to protect our intellectual property rights |
| Nevertheless, these measures may not be adequate to safeguard the technology underlying our products |
| If they do not protect our rights, third parties could use our technology and our ability to compete in the market would be reduced |
| In addition, employees, consultants and others who participate in the development of our products may breach their agreements with us regarding our intellectual property and we may not have adequate remedies for the breach |
| We also may not be able to effectively protect our intellectual property rights in some foreign countries |
| For a variety of reasons, we may decide not to file for patent, copyright or trademark protection or prosecute potential infringements of our patents |
| We also realize that our trade secrets may become known through other means not currently foreseen by us |
| Despite our efforts to protect our intellectual property, our competitors or customers may independently develop similar or alternative technologies or products that are equal or superior to our technology and products without infringing on any of our intellectual property rights or design around our proprietary technologies |
| 21 _________________________________________________________________ Claims by other companies that our products infringe on their proprietary rights could adversely affect our ability to sell our products and increase our costs |
| Substantial litigation over intellectual property rights exists in both the consumer and professional diagnostic industries |
| We expect that our products and products in these industries could be increasingly subject to third party infringement claims as the number of competitors grows and the functionality of products and technology in different industry segments overlaps |
| Third parties may currently have, or may eventually be issued, patents on which our products or technology may infringe |
| Any of these third parties might make a claim of infringement against us |
| Any litigation could result in the expenditure of significant financial resources and the diversion of managementapstas time and resources |
| In addition, litigation in which we are accused of infringement may cause negative publicity, have an impact on prospective customers, cause product shipment delays or require us to develop non-infringing technology, make substantial payments to third parties, or enter into royalty or license agreements, which may not be available on acceptable terms, or at all |
| If a successful claim of infringement was made against us and we could not develop non-infringing technology or license the infringed or similar technology on a timely and cost-effective basis, our revenue may decrease and we could be exposed to legal actions by our customers |
| We have initiated, and may need to further initiate, lawsuits to protect or enforce our patents and other intellectual property rights, which could be expensive and, if we lose, could cause us to lose some of our intellectual property rights, which would reduce our ability to compete in the market |
| We rely on patents to protect a portion of our intellectual property and our competitive position |
| In order to protect or enforce our patent rights, we may initiate patent litigation against third parties, such as infringement suits or interference proceedings |
| Litigation may be necessary to: • assert claims of infringement; • enforce our patents; • protect our trade secrets or know-how; or • determine the enforceability, scope and validity of the proprietary rights of others |
| Currently, we have initiated a number of lawsuits against competitors who we believe to be selling products that infringe our proprietary rights |
| These current lawsuits and any other lawsuits that we initiate could be expensive, take significant time and divert managementapstas attention from other business concerns |
| Litigation also puts our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing |
| Additionally, we may provoke third parties to assert claims against us |
| Patent law relating to the scope of claims in the technology fields in which we operate is still evolving and, consequently, patent positions in our industry are generally uncertain |
| We may not prevail in any of these suits and the damages or other remedies awarded, if any, may not be commercially valuable |
| During the course of these suits, there may be public announcements of the results of hearings, motions and other interim proceedings or developments in the litigation |
| If securities analysts or investors perceive any of these results to be negative, our stock price could decline |
| In December 2005, we learned that the Securities and Exchange Commission, or the SEC, had issued a formal order of investigation in connection with the previously disclosed revenue recognition matter at one of our diagnostic divisions |
| We cannot predict what the outcome of this investigation will be |
| In December 2005, we learned that the SEC had issued a formal order of investigation in connection with the previously disclosed revenue recognition matter at one of our diagnostic divisions, and we subsequently received a subpoena for documents |
| We believe that we fully responded to the 22 _________________________________________________________________ subpoena and we will continue to fully cooperate with the SECapstas investigation |
| We cannot predict whether the SEC will seek additional information or what the outcome of its investigation will be |
| Non-competition obligations and other restrictions will limit our ability to take full advantage of our management team, the technology we own or license and our research and development capabilities |
| Members of our management team have had significant experience in the diabetes field |
| In addition, technology we own or license may have potential applications to this field and our research and development capabilities could be applied to this field |
| However, in conjunction with our split-off from Inverness Medical Technology, Inc, or IMT, we agreed not to compete with IMT and Johnson & Johnson in the field of diabetes through 2011 |
| Ron Zwanziger, our Chairman, Chief Executive Officer and President, and two of our senior scientists, Dr |
| David Scott and Dr |
| Jerry McAleer, have entered into consulting agreements with IMT that impose similar restrictions |
| Further, our license agreement with IMT prevents us from using any of the licensed technology in the field of diabetes |
| As a result of these restrictions, we cannot pursue opportunities in the field of diabetes |
| Our operating results may fluctuate due to various factors and as a result period-to-period comparisons of our results of operations will not necessarily be meaningful |
| Factors relating to our business make our future operating results uncertain and may cause them to fluctuate from period to period |
| Such factors include: • the timing of new product announcements and introductions by us and our competitors; • market acceptance of new or enhanced versions of our products; • changes in manufacturing costs or other expenses; • competitive pricing pressures; • the gain or loss of significant distribution outlets or customers; • increased research and development expenses; • the timing of any future acquisitions; • general economic conditions; or • general stock market conditions or other economic or external factors |
| Because our operating results may fluctuate from quarter to quarter, it may be difficult for us or our investors to predict our future performance by viewing our historical operating results |
| Period-to-period comparisons of our operating results may not be meaningful due to our acquisitions |
| We have engaged in a number of acquisitions in recent years which make it difficult to analyze our results and to compare them from period to period, including the acquisitions of the Unipath business in December 2001, IVC Industries, Inc |
| in March 2002, Wampole in September 2002, Ostex in June 2003, ABI in August 2003, the 2003 Abbott rapid diagnostics product lines in September 2003, Binax and Ischemia in March 2005, the Determine business in June 2005, BioStar and IDT in September 2005 and Clondiag in February 2006 |
| Period-to-period comparisons of our results of operations may not be meaningful due to these acquisitions and are not indications of our future performance |
| Any future acquisitions will also make our results difficult to compare from period to period in the future |
| 23 _________________________________________________________________ Our stock price may fluctuate significantly and stockholders who buy or sell our common stock may lose all or part of the value of their investment, depending on the price of our common stock from time to time |
| Our common stock has only been listed on the American Stock Exchange since November 23, 2001 and we have a limited market capitalization |
| As a result, we are currently followed by only a few market analysts and a portion of the investment community |
| Limited trading of our common stock may therefore make it more difficult for you to sell your shares |
| In addition, our share price may be volatile due to our operating results, as well as factors beyond our control |
| It is possible that in some future periods the results of our operations will be below the expectations of the public market |
| Furthermore, the stock market may experience significant price and volume fluctuations, which may affect the market price of our common stock for reasons unrelated to our operating performance |
| The market price of our common stock may be highly volatile and may be affected by factors such as: • our quarterly and annual operating results, including our failure to meet the performance estimates of securities analysts; • changes in financial estimates of our revenues and operating results or buy/sell recommendations by securities analysts; • the timing of announcements by us or our competitors of significant products, contracts or acquisitions or publicity regarding actual or potential results or performance thereof; • changes in general conditions in the economy, the financial markets or the health care industry; • government regulation in the health care industry; • changes in other areas such as tax laws; • sales of substantial amounts of common stock or the perception that such sales could occur; • changes in investor perception of our industry, our businesses or our prospects; • the loss of key employees, officers or directors; or • other developments affecting us or our competitors |
| Anti-takeover provisions in our organizational documents and Delaware law may limit the ability of our stockholders to control our policies and effect a change of control of our company and prevent attempts by our stockholders to replace or remove our current management, which may not be in your best interests |
| There are provisions in our certificate of incorporation and bylaws that may discourage a third party from making a proposal to acquire us, even if some of our stockholders might consider the proposal to be in their best interests, and prevent attempts by our stockholders to replace or remove our current management |
| These provisions include the following: • our certificate of incorporation provides for three classes of directors with the term of office of one class expiring each year, commonly referred to as a staggered board |
| By preventing stockholders from voting on the election of more than one class of directors at any annual meeting of stockholders, this provision may have the effect of keeping the current members of our board of directors in control for a longer period of time than stockholders may desire; 24 _________________________________________________________________ • our certificate of incorporation authorizes our board of directors to issue shares of preferred stock without stockholder approval and to establish the preferences and rights of any preferred stock issued, which would allow the board to issue one or more classes or series of preferred stock that could discourage or delay a tender offer or change in control |
| • our certificate of incorporation prohibits our stockholders from filling board vacancies, calling special stockholder meetings or taking action by written consent; • our certificate of incorporation provides for the removal of a director only with cause and by the affirmative vote of the holders of 75prca or more of the shares then entitled to vote at an election of our directors; and • our bylaws require advance written notice of stockholder proposals and director nominations |
| Additionally, we are subject to Section 203 of the Delaware General Corporation Law, which, in general, imposes restrictions upon acquirers of 15prca or more of our stock |
| Finally, the board of directors may in the future adopt other protective measures, such as a stockholder rights plan, which could delay, deter or prevent a change of control |
| Because we do not intend to pay dividends on our common stock, you will benefit from an investment in our common stock only if it appreciates in value |
| We currently intend to retain our future earnings, if any, to finance the expansion of our business and do not expect to pay any cash dividends on our common stock in the foreseeable future |
| In addition, our senior credit facility currently prohibits the payment of dividends and the indenture governing the terms of our senior subordinated notes restricts the amount of any dividends that we may pay |
| As a result, the success of your investment in our common stock will depend entirely upon any future appreciation |
| There is no guarantee that our common stock will appreciate in value or even maintain the price at which you purchased your shares |