| IOMED INC Item 1A RISK FACTORS Our business is subject to certain risks and uncertainties, each of which could materially adversely affect our business, financial condition, cash flows and results of operations |
| You should carefully consider the following risks prior to investing in us |
| You should also keep in mind that the following risks are not the only risks we face |
| Additional risks we are unaware of or risks that we currently believe are not material also may impair us |
| If we are adversely affected by such risks, then the trading price of our common stock could decline, and you could lose all or part of your investment |
| You should also refer to the other information set forth in this Annual Report on Form 10-K, including the discussions set forth in “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as our financial statements and the related notes |
| The market price for the securities of drug delivery, pharmaceutical, biotechnology, medical device and other high technology companies has been highly volatile |
| This volatility has significantly affected the market prices for these securities for reasons frequently unrelated to the operating performance of the specific company |
| These broad market fluctuations may adversely affect the market price of our common shares |
| The market price for our common shares has fluctuated significantly since public trading commenced and it is likely that it will continue to fluctuate in future |
| Events and factors that may have a significant impact on our business and on the market price of our common shares include the following: · fluctuations or volatility in operating results compared to market expectations; · announcement of the outcome, if any, of our exploration of strategic alternatives; · our entry into or discontinuance of a collaborative relationship; · announcements by us or our competitors of technological innovations, clinical trial results, new product development initiatives, or new commercial product introductions; · regulatory developments in the United Sates or foreign countries; · changes in the current structure of health care financing and payment systems; · developments in or disputes regarding patent or other proprietary rights; · commencement or the results of any litigation; and · general market and economic conditions |
| These and other factors may cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from readily selling our common shares and otherwise negatively effect the liquidity for our common shares |
| In addition, sales of substantial amounts of our common shares, including shares issued upon the exercise of stock options, could adversely affect the market price of our common shares |
| Such sales could also make it more difficult for us to sell equity securities or equity-related securities in the future at a time and price that we deem appropriate |
| We may not be able to sustain profitability |
| Our ability to sustain profitability will depend on a number of factors including: · our ability to maintain and successfully expand market acceptance and sales of existing products; · our ability to successfully complete the development of, receive regulatory approvals for and successfully manufacture and market new products; · the nature and timing of any new product introductions relative to our competitors; and · our ability to efficiently manage and resolve current litigation matters |
| With limited exception, prior to fiscal 2003, we sustained losses in each fiscal year |
| We had an accumulated deficit of dlra31dtta1 million as of June 30, 2006 |
| 14 ______________________________________________________________________ We rely on a limited number of independent third party distributors to sell our products, one of whom recently terminated their distribution agreement with us |
| We market our products through a nationwide network of independent third party distributors and manufacturing sales representatives, which provide us indirect access to the clinicians that use our products to administer patient treatments |
| Limited access to end user customers may result in reduced future sales and market penetration of current and future products |
| Our sales growth is dependent on our ability to broaden distribution and market penetration of our current and future products, which may require an expanded marketing presence through direct sales and marketing or co-marketing of products with collaborative partners or distributors that have national or market-specific marketing capabilities |
| We may not be able to maintain existing, or establish new, marketing arrangements on favorable terms, if at all |
| Two distributors combined to account for approximately 43prca, 40prca and 32prca of our total product sales for the fiscal years ended June 30, 2006, 2005 and 2004 |
| One of these distributors, Compex Technologies (formerly Rehabilicare, Inc |
| ) was our second largest distributor and accounted for over 16prca of our total product sales during each of the past three fiscal years |
| Following their acquisition by Encore Medical Corporation, the parent company of our primary competitor (Empi, Inc |
| ), Compex elected to terminate its distribution agreement with us effective July 1, 2006 |
| The loss of this distributor will have a negative effect on our future sales and operating results |
| Demand for our products is dependent on third party reimbursement |
| Product sales depend, in part, on continued reimbursement by third party payers to clinicians and their patients for using our products in patient treatments |
| These third party payers, including government health administration authorities, private health insurers and other organizations, can affect the pricing and relative attractiveness of using our products and competing products, including alternative therapies, by regulating reimbursement levels |
| Changes in these relative reimbursement levels may affect sales of our product |
| In addition, some of these payers limit reimbursement amounts paid to health care providers for use of our products in certain applications and may further limit reimbursement in the future |
| Furthermore, significant uncertainty exists as to the reimbursement status of any new product we may develop |
| The business in which we operate is intensely competitive and prone to rapid technological change |
| Our commercial business has formidable competition, and we expect competition to remain intense during fiscal 2007 and beyond |
| Our technology competes with various companies in the drug delivery, pharmaceutical and biotechnology industries |
| These industries are highly competitive and rapidly evolving with significant developments expected to continue at a rapid pace |
| Our competitors include public and private corporations, academic institutions, governmental agencies and public and private research organizations that are involved in developing, manufacturing or marketing iontophoretic and other drug delivery systems |
| Many of our competitors are substantially larger with greater financial and other resources, have more experience, have greater name recognition, offer broader product lines, and are able to offer discounts as a competitive tactic |
| Our competitors may succeed in more rapidly developing competing technologies, obtaining FDA approval, or gaining market share for products than us |
| Many competitors currently have drug delivery products approved or in development |
| Some of these products could be more effective or commercially attractive to our customers than our products |
| In the case of new products, the first product to reach the market is often able to establish and maintain significant market share relative to later entrants to the market |
| New drugs or further development of alternative drug delivery methods may provide greater therapeutic benefits for a specific drug or indication or may offer comparable performance at lower costs than our products |
| Our competitors’ ability to more rapidly develop new products than us represents a significant competitive advantage |
| No transaction may result from our determination to explore strategic alternatives |
| We commenced a process in September 2005 to explore various strategic alternatives to seek to maximize shareholder value, including possible sale transactions involving our entire company or certain of our assets |
| We are uncertain whether any transaction will result from this process |
| If a transaction does result, we are uncertain what its form or terms would be |
| Any transaction that does result from this process may not 15 ______________________________________________________________________ ultimately maximize shareholder value |
| If a transaction does not result from that process our stock price may be adversely affected |
| Uncertainties and adverse effects related to this process include: · disruption of operations and distraction of management’s attention; · perceived uncertainties regarding our future direction resulting in the loss of and increasing the difficulty of attracting new customers, employees or business partners; · difficulties retaining or replacing key employees; · the incurrence of costs and expense related to this process; and · inability to identify and consummate an attractive strategic alternative |
| A material agreement to which we are a party contains terms that may deter takeover attempts and limit the opportunity of our shareholders to sell their shares at a favorable price |
| We are party to a cross-license agreement with Alza Corporation pursuant to which we have exchanged non-exclusive, royalty free rights to certain patented technologies which each party believed to be of significant strategic importance to the potential technological success of many iontophoretic drug delivery applications |
| This agreement may have the effect of delaying or preventing the sale, merger, assignment, or transfer of all or part of our company or technologies because both Alza and ourselves are prohibited from assigning rights under the agreement to certain named companies or to any other entity that derives more than 50 percent of its income from the development, licensing and/or sale of drug delivery systems to other pharmaceutical companies without the consent of the other party |
| In addition, this agreement may limit our ability to capitalize on the commercial and other economic potential of our technologies through collaborative and other transactions |
| Our ability to utilize net operating losses may become limited and adversely affect financial results |
| As of June 30, 2006, we had approximately dlra20 million and dlra15 million in federal and state net operating loss carryforwards, respectively |
| Our ability to utilize these net operating loss carryforwards could be significantly limited if we or our shareholders engage in transactions that result in an “ownership change” as defined in Section 382 of the Internal Revenue Code |
| If our usage of net operating losses were to become subject to limitation and if at that time we are profitable, our earnings and cash flows could be adversely impacted due to our increased tax liability |
| In addition, the financial benefits of certain strategic alternatives, which may be available to us, such as a disposition of a portion of our assets, would be reduced if the use of our net operating losses is subject to limitation |
| Our business relies on our proprietary technology and intellectual property rights |
| Our success depends on our and our licensors’ proprietary technology |
| We rely on a combination of patents, trade secrets, confidentiality procedures, trademarks, licensing arrangements and copyrights to establish and protect our proprietary rights position |
| The creation and protection of proprietary rights is expensive and may require us to engage in costly and distracting litigation |
| Despite these efforts third parties could copy or otherwise use our technology without authorization |
| The patent positions of drug delivery, pharmaceutical and biotechnology companies are highly uncertain and involve complex legal and factual questions |
| The patents owned and licensed by us may not prevent other companies from developing similar or therapeutically equivalent products and licensors who have licensed technology to us on a non-exclusive basis may license the same technology to competitors |
| In addition, other companies may be issued patents that prevent the sale of our products or require licensing and the payment of significant royalties by us |
| Any current or new products, processes, or methods may not be patentable or may not provide an exclusive position in the covered subject matter |
| Furthermore, our pending patent applications may not result in issued patents, we or our licensors may not protect issued patents, we may become involved in patent infringement actions, and our and our licensor’s patents may not be enforceable or may not provide meaningful protection |
| We also operate in many foreign countries that do not protect intellectual property rights to the same extent as the United States |
| We also rely on trade secrets and other confidential proprietary information which we seek to protect through confidentiality agreements |
| Our competitors may independently develop similar information and these agreements may not be effective to prevent disclosure of our confidential information or provide adequate remedy in the event of an unauthorized disclosure |
| If competitors gain access to our proprietary 16 ______________________________________________________________________ technology or information, our business, financial position, and results of operations may be materially adversely impacted |
| Third Parties claiming that we infringe their proprietary rights regardless of their merit could cause us to incur significant legal expenses and prevent us from selling our products |
| From time to time, we have received claims that we have infringed the intellectual property rights of others and lawsuits alleging such have been brought against us, including one such lawsuit that is currently pending (EEMSO, Inc |
| Compex Technologies, Inc |
| These claims have included allegations of infringement of patents, trade secrets, or other proprietary rights as well as allegations of unfair competition |
| For example, the claim brought against us by Travanti Pharma was resolved through a settlement that included the acquisition of certain intellectual property rights for dlra750cmam000 after we had incurred significant fees and expenses in the defense of that matter |
| The ultimate outcome of any allegation or lawsuit is uncertain and, regardless of outcome, any such claim, with or without merit, could be time consuming to defend, result in costly litigation, and divert management’s time and attention from our business |
| A claim successfully brought could result in us being required to stop selling, delay shipping, or redesign one or more of our products |
| In addition, we could also be required to satisfy indemnification obligations to some of our customers, purchase a license to use the intellectual property, and pay substantial monetary damages |
| Product development is expensive, time consuming, and may be unsuccessful |
| We are required to undertake time-consuming and costly product development activities, including clinical trials, and seek regulatory approval for new applications and products |
| Our product development efforts, either alone or in collaboration with other parties, may never be successfully completed, obtain regulatory approvals, be manufactured at acceptable cost or with appropriate quality, meet market needs or achieve market acceptance |
| Before seeking regulatory approval of our products, we may not successfully complete preclinical studies or clinical trials that demonstrate our products are both safe and effective for use in the target indications |
| The results of preclinical and early clinical trials are not indicative of the results of large scale testing |
| A new product could also produce undesirable side effects that could result in the interruption, delay or suspension of clinical trials, or the failure to obtain FDA or other regulatory approval for targeted indications |
| If our future products are not shown to be safe and effective in clinical trials, resulting delays in developing other compounds and conducting related preclinical testing and clinical trials, as well as the need for additional financing to complete such testing and trials, could have a material adverse effect on our business, financial condition, and results of operations |
| Product revenues on future products may not be realized for several years, and, if our product development efforts are unsuccessful, may never be achieved |
| Even if a product development effort is successful, a product could prove to be difficult to commercialize because of manufacturing costs or lack of market acceptance |
| We may need to raise additional capital or enter into a collaborative arrangement in order to undertake a significant new product development effort |
| If we are unable to maintain relationships with current collaborative partners or enter into new collaborative arrangements then our business could be harmed |
| Part of our business strategy is to form collaborative arrangements with corporate partners, licensors, licensees and other parties for the development, clinical testing, manufacture, marketing or commercialization of our products or products in development |
| The process of establishing a collaborative arrangement is difficult, time-consuming, and involves significant uncertainty |
| Discussions with potential collaborators may not lead to the establishment of a successful collaborative relationship with favorable terms |
| Once established, a collaborative arrangement may prove to be unsuccessful or may not generate significant revenue |
| Until we enter into additional collaborative arrangements, we will be required to internally fund all research and development expenditures |
| Future collaborative arrangements may require that we continue to fund all or a portion of product development costs |
| Collaborative arrangements limit our flexibility in pursuing alternatives for the development or commercialization of products |
| Our strategic partner may not comply with the terms of the agreement, elect 17 ______________________________________________________________________ not to provide funding, or terminate the agreement |
| A strategic partner may also pursue alternative competitive products on its own or with others, including our competitors |
| If we are unable to establish, and to the extent we choose to defer the establishment of, collaborative arrangements, we will experience significantly increased business risk and capital requirements with respect to any significant new product development we choose to undertake |
| We could also encounter significant delays in bringing any resulting products to market or find that the development, manufacture or sale of resulting products is adversely affected by the absence of collaborative arrangements |
| The loss of key personnel could adversely impact our business |
| We are dependent on the continued services of our key personnel that have acquired specialized knowledge and skills with respect to our operations |
| The loss of one or more of these key personnel could negatively impact our performance |
| In addition, were we to have to replace one or more of these individuals or were to seek to hire additional personnel we would experience the intense competition that exists in our industry for the limited number of qualified personnel |
| We may not be able to effectively manage expanded operations for existing or new products |
| Expanded business operations could result in new and increased responsibilities for our management personnel and place significant strain on our management, operating and financial systems and other resources |
| To accommodate any such expansion and compete effectively, we may be required to implement improved information systems, procedures and controls, and to hire additional personnel which we may not be able to do successfully |
| We depend on a limited number of suppliers |
| Key materials used in many of our electrode products have limited sources of supply |
| Although we believe that, if necessary, alternative sources could be developed and/or alternate materials substituted for each of these limited source materials, this activity could result in interruptions in our business and manufacturing operations, increased costs and time for product validations, and additional regulatory submissions and approvals |
| We have limited production capacity and manufacturing experience and rely on contract manufacturers |
| Our Phoresor dose controllers and certain patch components are manufactured under contracts with third party manufacturers and we rely on them to manufacture a sufficient quantity of product to satisfy demand for our products on a timely basis and to meet quality and performance standards for the manufacturing facility |
| In the event of a loss of a contract manufacturer, we would be required to identify, qualify, and validate an alternative supply source within a reasonable period of time |
| We manufacture all of our iontophoretic drug delivery electrode patches in quantities sufficient to satisfy our current level of product sales |
| Significant capital expenditures for manufacturing equipment or a new contract manufacturing relationship may be required to increase capacity for existing products or any modifications to existing products or new products |
| We may not be able to successfully increase capacity on a profitable basis, or contract with another party on acceptable terms, if at all |
| Significant increases in production volume could likely require changes in products and manufacturing processes in order to facilitate increased production automation and our efforts to automate production may not be successful |
| Accordingly, we may not be able to successfully increase production on a profitable basis or at all |
| Our and our third party manufacturer’s facilities operate in accordance with the FDA’s Quality System Regulations and other quality systems regulations, including ISO13485, which is similar to ISO 9001 but with additional elements specifically for medical device manufacturers, and CE Mark standards |
| We are also audited by the FDA for compliance with good manufacturing process (GMP) regulations |
| Any failure by us or our contract manufacturer to maintain compliance with any of these regulations could have a material adverse effect on our business |
| In the United States, the research, development, manufacture and marketing of our products is regulated by the FDA, which requires approval of drugs and medical devices before they can be marketed |
| Similar approvals are also required from other regulatory bodies outside the United States |
| The regulatory processes established by these government agencies are extensive and uncertain, and compliance is expensive |
| In addition, an approval may be withdrawn and the applicable regulations may change |
| Even if we obtain and maintain regulatory approval for a product, the manufacture of it and related operations are subject to extensive government regulation and periodic inspections to confirm compliance with procedures relative to control and documentation of product design, control and validation of the manufacturing process and overall product quality |
| Discovery of a failure to comply with applicable regulations could result in FDA or other regulatory sanctions, restrictions, or an order to withdraw and/or recall a product |
| The FDA currently allows us to market our iontophoretic dose controllers and electrode products for use with ions of soluble salts or other drugs under the FDA’s 510(k) regulations governing medical devices |
| We also have FDA approval to market Iontocaine, our own brand of lidocaine, for use with our Phoresor system but stopped marketing Iontocaine in fiscal 2005 |
| In 1994, the FDA publicly stated that it intends to require manufacturers of iontophoretic devices to obtain Pre-Market Approval (PMA) for marketed devices currently used with drugs not specifically labeled for iontophoretic delivery, which would include our dose controller for use with ions of soluble salts or other drugs, such as dexamethasone |
| The agency to date has not published such a regulation |
| If the FDA requires a PMA for our iontophoretic devices, we would be required to seek FDA approval to continue to market those devices |
| Such a regulation could require that an application be filed as quickly as 90 days after the publication date of the regulation |
| In such an event we might not be able to complete and file a PMA within the prescribed time period, or the FDA might not provide approval |
| Failure to submit a PMA within the prescribed time period and ultimately to obtain FDA approval could result in our being required to cease commercial distribution of the Phoresor system for use with dexamethasone or any other drug other than Iontocaine |
| Any interference with our ability to distribute our Phoresor system for use with dexamethasone would have a material adverse effect on our financial condition and results of operations |
| Our iontophoretic dose controller and electrode kits are marketed under 510(k) clearance |
| Since obtaining these clearances we have made modifications to certain products |
| Under the FDA’s regulations, we are required to obtain an additional 510(k) clearance if we modify a device for which we have previously received a 510(k) clearance in a way that significantly affects the safety or efficacy of the device, or if the modification results in a major change in intended use |
| Based on the limited guidance provided by the FDA to assist manufacturers in determining whether they are required to obtain a 510(k) clearance for a modified device, we determined that a new 510(k) submission was not required in connection with certain products |
| However, the FDA could require us to obtain one or more additional 510(k) clearances in the future for certain of those products |
| During that process, we could be prohibited from marketing the modified device until the clearance is obtained from the FDA We may require additional capital in the future and that capital may not be available |
| Our future capital requirements depend on many factors, including: · the costs, timing, and success of our product development activities, including preclinical studies and clinical trials and the terms of any associated collaborative relationship; · market demand for any new product resulting from our product development activity; · requirements to improve or increase manufacturing capacity; · the costs, timing, and success of our sales and marketing efforts · acquisition opportunities; · the terms of any new collaborative relationships; · competing technological and market developments; and · the costs to obtain, maintain and to enforce our intellectual property rights and defend ourselves from claims that we have infringed a third party’s intellectual property rights |
| 19 ______________________________________________________________________ Although we believe that at current operating levels, existing cash balances and cash generated from operations will be sufficient to fund our operating needs through fiscal 2008 and beyond; we may be required or elect to raise additional capital before that time |
| To satisfy capital requirements, we may seek to raise funds through public or private financings, collaborative relationships or other arrangements that may be dilutive to shareholders, involve significant restrictive covenants, or require us to relinquish rights to certain technologies, products or marketing territories |
| Additional capital, if required, may not be available on terms satisfactory to us, if at all |
| Failure to raise capital when needed could have a material adverse effect on our business, financial condition and results of operations |
| Acquisition activity could disrupt our ongoing business and involve significant risks |
| Acquisitions are inherently risky |
| We can not be certain that an acquisition will be successful and will not materially adversely affect our business |
| We have acquired and in the future may evaluate and acquire businesses, services, products or technologies that compliment our strategic direction |
| These acquisitions may involve significant risks, including: · potentially dilutive issuances of our stock; · incurrence of debt and contingent liabilities; · inability to successfully integrate the acquired technologies, services, products, and operations into our business and to maintain uniform standards, controls, policies and procedures; · distraction of management from normal business operations; · insufficient revenue generation to offset liabilities assumed and justify the purchase price; · write offs related to intangible assets; and · unidentified issues not discovered in the due diligence process |
| Product liability insurance is costly and difficult to obtain |
| Product liability insurance in our industry is expensive and difficult to obtain and we may not be able to maintain existing levels of coverage or obtain desired coverage on acceptable terms in the future |
| In addition, we are not sure if our existing coverage is adequate |
| An inability to maintain or obtain sufficient product liability insurance on acceptable terms to protect against potential product liability claims could prevent or inhibit the continued commercialization of our products |
| If we were successfully sued for product liability we could face substantial liabilities |
| Our business exposes us to potential liability risks inherent in the testing, marketing and sale of drug delivery and related pharmaceutical products for use in humans, including product liability claims, product recall, or excessive warranty claims |
| The use of our products in clinical trials and the sale of future products may also expose us to potential product liability risks |
| A successful product liability claim in excess of our insurance coverage could have a material adverse effect on our business and could further prevent us from obtaining product liability insurance in the future on commercially desirable or reasonable terms |
| Our business involves environmental risks that may result in liability for us |
| Our research and development activities involve the controlled use of hazardous materials, chemicals and various radioactive compounds |
| The use, disposal and handling of these materials are extensively regulated by federal, state and local government authorities |
| Although we believe our safety procedures for handling and disposing of such materials comply in all material respects with the standards prescribed by state and federal regulations, the risk of accidental environmental contamination or personal injury from these materials cannot be completely eliminated and we could be required to incur significant costs to comply with applicable regulations in the future |
| Furthermore, in the event of an accident, we could be held liable for any damages and any such liability could exceed our resources |