| ORASURE TECHNOLOGIES INC ITEM 1A Risk Factors The following is a discussion of certain significant risk factors that could potentially negatively impact our financial condition, performance and prospects |
| Many of our proposed and existing products are subject to regulation by the FDA and other governmental or public health agencies |
| In particular, we are subject to strict governmental controls on the development, 18 ______________________________________________________________________ [45]Table of Contents manufacture, labeling, distribution and marketing of our products |
| In addition, we are often required to obtain approval or registration with foreign governments or regulatory bodies before we can import and sell our products in foreign countries |
| The process of obtaining required approvals or clearances from governmental or public health agencies can involve lengthy and detailed laboratory testing, human clinical trials, sampling activities and other costly, time-consuming procedures |
| For example, during 2004, we received several FDA approvals for our OraQuick^® ADVANCE^^™ rapid HIV-1/2 antibody test, including approval for use of the test on oral fluid samples |
| These approvals required the submission of clinical data and required significant time to obtain |
| The submission of an application to the FDA or other regulatory authority does not guarantee that an approval or clearance to market the product will be received |
| Each authority may impose its own requirements and delay or refuse to grant approval or clearance, even though a product has been approved in another country or by another agency |
| This time span increases our costs to develop new products as well as the risk that we will not succeed in introducing or selling them in the United States or other countries |
| Newly promulgated or changed regulations could also require us to undergo additional trials or procedures, or could make it impractical or impossible for us to market our products for certain uses, in certain markets, or at all |
| For example, during 2004 the Substance Abuse and Mental Health Services Administration (“SAMHSA”), which is part of the US Department of Health and Human Services, issued proposed regulations for the use of oral fluid drug testing for federal workers |
| The SAMHSA regulations, when issued in final form, could permit us to market and sell our oral fluid drug tests for use with federal workers only if certain modifications are made to our products |
| If we are unable to make these modifications, or if the modifications require significant time to develop, our ability to sell our oral fluid drug testing products in that market could be limited |
| In addition, the extent to which the final SAMHSA regulations permit the sale of our oral fluid drug tests for use with federal workers may influence whether customers in the workplace, criminal justice or other unregulated markets use our products |
| The regulations in some states may restrict our ability to sell products in those states |
| For example, certain states restrict or do not allow the testing of oral fluid for drugs of abuse or the rapid, point-of-care testing for HIV While we intend to work with state legislators and regulators to remove or modify any applicable restrictions, there is no guarantee we will be successful in these efforts |
| In addition, all in vitro diagnostic products that are to be sold in the European Union (“EU”) must bear the CE mark indicating conformance with the essential requirements of the In Vitro Diagnostic Directive, or IVDD We are not permitted to sell our products in the EU without a CE mark, which could lead to the termination of strategic alliances and agreements for sales of those products in the EU We have obtained the CE mark for several of our existing products, and we intend to CE mark certain of our future products and are not aware of any material reason why we will be unable to do so |
| However, there can be no assurance that compliance with all provisions of the IVDD will be demonstrated and the CE mark will be obtained for all products that we desire to sell in the EU Failure to Comply With FDA or Other Regulatory Requirements May Require Us to Suspend Production of Our Products or Institute a Recall Which Could Result in Higher Costs and a Loss of Revenues |
| We can manufacture and sell many of our products, both in the United States and internationally, only if we comply with regulations of government agencies such as the FDA We have implemented quality assurance and other systems that are intended to comply with applicable regulations |
| Although we believe that we have adequate processes in place to ensure compliance with these requirements, the FDA or other regulatory bodies could force us to stop manufacturing or selling our products if 19 ______________________________________________________________________ [46]Table of Contents it concludes that we are out of compliance with applicable regulations |
| The FDA and other regulatory bodies could also require us to recall products if we fail to comply with applicable regulations, which could force us to stop manufacturing such products |
| See the Section entitled “Government Regulation” in Item 1 of this Annual Report for a further discussion of applicable regulatory requirements |
| Risks Relating to Our Industry, Business and Strategy Our Ability to Sell Products Could be Affected by Competition From New and Existing Diagnostic Products and by Treatment or Other Non-Diagnostic Products Which May be Developed |
| The diagnostic industry is focused on the testing of biological specimens in a laboratory or at the point of care and is highly competitive and rapidly changing |
| Many of our principal competitors have considerably greater financial, technical and marketing resources |
| As new products enter the market, our products may become obsolete or a competitor’s products may be more effective or more effectively marketed and sold than ours |
| If we fail to maintain and enhance our competitive position, our customers may decide to use products developed by competitors which could result in a loss of revenues |
| We also face competition from products which may be sold at a lower price |
| To the extent this competition arises, customers may choose to buy lower cost products from third parties or we may be forced to sell our products at a lower price, both of which could result in a loss of revenues or a lower gross margin contribution from the sale of our products |
| In addition, the development and commercialization of products outside of the diagnostics industry could adversely affect sales of our product |
| For example, the development of a safe and effective vaccine to HIV or treatments for other diseases or conditions that our products are designed to detect, could reduce, or eventually eliminate, the demand for our HIV or other diagnostic products and thereby result in a loss of revenues |
| In order to remain competitive, we must regularly commit substantial resources to research and development and the commercialization of new products |
| The research and development process generally takes a significant amount of time from inception to commercial product launch |
| This process is conducted in various stages |
| During each stage there is a substantial risk that we will not achieve our goals on a timely basis, or at all, and we may have to abandon a product in which we have invested substantial amounts |
| During 2005, 2004 and 2003, we incurred dlra5dtta3 million, dlra6dtta1 million and dlra8dtta0 million, respectively, in research and development expenses |
| We expect to continue to incur significant costs from our research and development activities |
| Successful products require significant development and investment, including testing, to demonstrate their cost-effectiveness or other benefits prior to commercialization |
| In addition, regulatory approval must be obtained before most products may be sold |
| Additional development efforts on these products will be required before any regulatory authority will review them |
| Regulatory authorities may not approve these products for commercial sale |
| In addition, even if a product is developed and all applicable regulatory approvals are obtained, there may be little or no market for the product |
| Accordingly, if we fail to develop commercially successful products, or if competitors develop more effective products or a greater number of successful new products, customers may decide to use products developed by our competitors |
| This would result in a loss of revenues and adversely affect our results of operations, cash flows and business |
| 20 ______________________________________________________________________ [47]Table of Contents If We Lose Our Key Personnel or Are Unable to Attract and Retain Qualified Personnel as Necessary, Our Business Could be Harmed |
| Our success will depend to a large extent upon the contributions of our executive officers, management, and sales, marketing, operations and scientific staff |
| We may not be able to attract or retain qualified employees in the future due to the intense competition for qualified personnel among medical products businesses |
| If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may experience constraints that will adversely affect our ability to effectively manufacture, sell and market our products, to meet the demands of our strategic partners in a timely fashion, or to support internal research and development programs |
| Although we believe we will be successful in attracting and retaining qualified personnel, competition for experienced scientists and other personnel from numerous companies and academic and other research institutions may limit our ability to do so on acceptable terms |
| We may from time to time restructure and consolidate various aspects of our operations in order to achieve cost savings and other efficiencies |
| For example, during 2004 we completed the restructuring of our manufacturing operations, which included the transfer of the manufacturing of our Intercept^®, OraSure^® and oral fluid Western blot products from our Beaverton, Oregon facility and a contract manufacturer in Oregon to Bethlehem, Pennsylvania |
| We obtained FDA approval to transfer the operations to Pennsylvania, and our Pennsylvania facilities are ISO certified |
| This type of transfer and the need to obtain FDA approval and ISO certification could interfere with or delay our manufacturing processes and disrupt continued operations |
| Any delay in or disruption of operations, and in particular manufacturing operations, could result in increased costs or could delay or prevent us from selling certain products and thereby result in a loss of revenue |
| We may consider strategic acquisitions or investments as a way to expand our business in the future |
| These activities, and their impact on our business, are subject to the following risk factors: • Suitable acquisitions or investments may not be found or consummated on terms that are satisfactory to us; • We may be unable to successfully integrate an acquired company’s personnel, assets, management systems and technology into our business; • Acquisitions may require substantial expense and management time and could disrupt our business; • An acquisition and subsequent integration activities may require greater capital resources than originally anticipated at the time of acquisition; • An acquisition may result in the incurrence of unexpected expenses, the dilution of our earnings or our existing stockholders’ percentage ownership, or potential losses from undiscovered liabilities not covered by an indemnification from the seller(s) of the acquired business; • An acquisition may result in the loss of existing key personnel or customers or the loss of the acquired company’s key personnel or customers; • The benefits expected to be derived from an acquisition may not materialize and could be affected by numerous factors, such as regulatory developments, general economic conditions and increased competition; and • An acquisition of a foreign business may involve additional risks, including, but not limited to, foreign currency exposure, liability under foreign laws or regulations, and not being able to successfully assimilate differences in foreign business practices or overcome language or cultural barriers |
| 21 ______________________________________________________________________ [48]Table of Contents The occurrence of one or more of the above or other factors may prevent us from achieving all or a significant part of the benefits expected from an acquisition or investment |
| This may adversely affect our financial condition, results of operations and ability to grow our business or otherwise achieve our financial or strategic objectives |
| Our Net Sales Could be Affected by Third-Party Reimbursement Policies and Potential Cost Constraints |
| The end-users of our products are expected to increasingly include hospitals, physicians and other healthcare providers |
| Use of our products could be adversely impacted if these end-users do not receive reimbursement for the cost of our products by their patients’ healthcare insurers or payors |
| Our net sales could also be adversely affected by changes in reimbursement policies of governmental or private healthcare payors, including in particular the level of reimbursement for our products |
| In the United States, healthcare providers such as hospitals and physicians who purchase diagnostic products generally rely on third-party payors, principally private health insurance plans, Medicare and Medicaid, to reimburse all or part of the cost of the product and procedure |
| We believe that the overall escalating cost of medical products and services has led to, and will continue to lead to, increased pressures on the healthcare industry, both foreign and domestic, to reduce the cost of products and services |
| Given the efforts to control and reduce healthcare costs in the United States in recent years, currently available levels of reimbursement may not continue to be available in the future for our existing products or products under development |
| Third-party reimbursement and coverage may not be available or adequate in either the United States or foreign markets, current reimbursement amounts may be decreased in the future and future legislation, and regulation or reimbursement policies of third-party payors may reduce the demand for our products or our ability to sell our products on a profitable basis |
| Increases in Demand for Our Products Could Require Us to Spend Considerable Resources to Meet the Demand or Harm Our Customer Relationships if We are Unable to Meet Demand |
| If we experience significant or unexpected increases in the demand for our products, we and our suppliers may not be able to meet that demand without expending additional capital resources |
| These capital resources could involve the cost of new machinery or even the cost of new manufacturing facilities |
| This would increase our capital costs, which could adversely affect our earnings |
| Our suppliers may be unable or unwilling to expend the necessary capital resources or otherwise expand their capacity |
| If we or our suppliers are unable to develop necessary manufacturing capabilities in a timely manner, our net sales could be adversely affected |
| Failure to cost-effectively increase production volumes, if required, or lower than anticipated yields or production problems encountered as a result of changes that we or our suppliers make in our manufacturing processes to meet increased demand, could result in shipment delays or interruptions and increased manufacturing costs, which could also have a material adverse effect on our revenues and profitability |
| Our inability to meet customer demand for our products could also harm our customer relationships and impair our reputation within the industry |
| This, in turn, could have a material adverse effect on our business and prospects |
| We have marketed many of our products by collaborating with laboratories, diagnostic companies and distributors |
| For example, our OraSure^® oral fluid collection device is distributed to the insurance industry through major insurance testing laboratories, and Abbott Laboratories has exclusive rights to distribute our OraQuick^® ADVANCE^^™ HIV-1/2 test in the US hospital market and non-exclusive rights to the US physicians’ office market |
| Our sales depend to a substantial degree on our ability to sell products to these customers and develop new product distribution channels, and on the marketing abilities of the companies with which we collaborate |
| 22 ______________________________________________________________________ [49]Table of Contents Some of our distributors have consolidated in recent years, and such consolidation has had, and may continue to have, an adverse impact on the level of orders for our products |
| One of these laboratories, LabOne, Inc, acquired another large insurance laboratory customer, Osborne Group, Inc, in 2001 and our revenues decreased because of efficiencies resulting from that acquisition |
| More recently, LabOne was acquired by another of our laboratory distributors, Quest Diagnostics, and this acquisition could also affect the level of our revenues |
| In addition, some distributors have experienced, and may continue to experience, pressure from their customers to reduce the price of their products and testing services |
| For example, several of our insurance testing laboratories are facing this pressure and are using lower cost “home brew” insurance testing assays that they have developed internally or purchased from our competitors |
| This has reduced our assay sales and is expected to lower sales of these products in 2006 and beyond |
| Finally, some of our distributors may not fulfill their contractual obligations |
| Although we will try to maintain and expand our business with our distributors and require that they fulfill their contractual obligations, there can be no assurance that such companies will continue to purchase or distribute our products, maintain historic order volumes or otherwise meet their purchase or other obligations, or that new distribution channels will be available on satisfactory terms |
| We currently purchase certain critical components of our products from sole supply sources |
| For example, all of the HIV-1 antigen used to make our oral fluid Western blot HIV-1 confirmatory test is purchased from BMX, and all of the HIV antigen and nitrocellulose required to make our OraQuick^® rapid HIV-1 antibody test is purchased from sole source suppliers |
| If these suppliers are unable or unwilling to supply the required component, we would need to find another source, and perform additional development work and obtain FDA or other regulatory approvals for the use of the alternative component for our products |
| Completing that development and obtaining such approvals could require significant time to complete and may not occur at all |
| The availability of critical components from sole supply sources could also reduce our control over pricing, quality and timely delivery |
| These events could either disrupt our ability to manufacture and sell certain of our products, or completely prevent us from doing so or increase our costs |
| Any such event could have a material adverse effect on our results of operations, cash flows and business |
| In testing an oral fluid sample collected with an OraSure^® device for HIV-1 in the United States, our customers must use an HIV-1 screening test approved by the FDA for use with our OraSure^® device |
| Where an oral fluid sample screens positive for HIV-1, our customers must then use our oral fluid Western blot HIV-1 confirmatory test, which has also been approved by the FDA for use with our OraSure^® device, to confirm that positive indication |
| BMX manufactures and sells the only oral fluid HIV-1 screening test that has received FDA approval for use in detecting HIV-1 in an oral fluid specimen collected with our OraSure^® collection device |
| BMX has developed a new HIV-1 screening test, and has indicated that this new test will eventually replace its existing FDA-approved HIV-1 screening test |
| We are working with BMX to obtain FDA approval for use of the new screening test with our OraSure^® device and expect BMX to file a submission for approval with the FDA during 2006 |
| BMX also supplies the HIV-1 antigen used to manufacture our oral fluid Western blot HIV-1 confirmatory test and is the exclusive world-wide distributor of that product |
| If BMX ceases to manufacture or sell an HIV-1 screening test approved by the FDA for use with our OraSure^® collection device, or if our oral fluid Western blot HIV-1 confirmatory test is not made available to our 23 ______________________________________________________________________ [50]Table of Contents customers (because BMX either fails to supply the HIV-1 antigen required to make this product or fails to distribute this product), we would need to find alternate suppliers for these products, which would require additional development work and FDA approval |
| These activities would likely require significant time to complete |
| If our customers cannot obtain an HIV-1 screening test or Western blot HIV-1 confirmatory test that has been approved by the FDA for use in connection with our OraSure^® collection device, these customers would likely stop purchasing our OraSure^® device |
| Sales of the OraSure^® device were dlra10dtta0 million and dlra11dtta0 million, or 14prca and 20prca of our total revenues, in 2005 and 2004, respectively |
| Although we intend to pursue some product opportunities independently, opportunities that require a significant level of investment for development and commercialization or a distribution network beyond our existing sales force may necessitate involving one or more strategic partners |
| Our strategy for development and commercialization of products may entail entering into arrangements with distributors or other corporate partners, universities, research laboratories, licensees and others |
| We may be required to transfer material rights to such strategic partners, licensees and others |
| While we expect that our current and future partners, licensees and others have and will have an economic motivation to succeed in performing their contractual responsibilities, there is no assurance that they will do so and the amount and timing of resources to be devoted to these activities will be controlled by others |
| Consequently, there can be no assurance that any revenues or profits will be derived from such arrangements |
| We achieved our first full year of profitability in 2005, when we recorded net income of dlra27dtta4 million, which includes a dlra17dtta7 million net income tax benefit |
| As of December 31, 2005, the Company had an accumulated deficit of dlra103dtta7 million |
| Our ability to achieve continued profitability in the future will be dependent upon a number of factors including, without limitation, the following: • Creating market acceptance for and selling increasing volumes of our OraQuick^® ADVANCE^™ rapid HIV-1/2 antibody test, Intercept^® drug testing product, and OraSure^® collection device; • The degree to which certain of our new products may replace sales of our existing products and the financial impact of that change, including the degree to which our OraQuick^® ADVANCE^™ test will replace our OraSure^® collection device for HIV-1 testing or sales of our cryosurgical wart removal products in the OTC market will replace sales of our Histofreezer^® product to physicians’ offices or other professional markets; • Achieving growth in sales of our wart removal products in the OTC market and selling other products, such as our OraQuick^® ADVANCE^™ test, in the OTC market; • Achieving growth in international markets with our OraQuick^® ADVANCE^™ test, cryosurgical wart removal products and other products; • Changes in the level of competition, such as would occur if larger and financially stronger competitors introduced new or lower priced products to compete with our products; • Changes in economic conditions in domestic or international markets, such as economic downturns, reduced demand, inflation and currency fluctuations; • Failure to achieve our targets for growth in revenues; 24 ______________________________________________________________________ [51]Table of Contents • Changes in distributor buying patterns or a buildup of significant quantities in our distributors’ inventories or distribution channels; and • Commercially developing, and obtaining regulatory approvals and creating market acceptance for new products in a time frame consistent with our objectives |
| Even though we achieved profitability for 2005, there can be no assurance that we will be able to sustain such profitability in the future |
| Utilization of Our Deferred Tax Assets May Be Limited and is Dependent on Future Taxable Income |
| As of December 31, 2005, we had federal net operating loss (“NOL”) carryforwards of dlra66dtta6 million for federal income tax purposes |
| The Tax Reform Act of 1986 contains provisions under Section 382 of the Internal Revenue Code that limit the NOLs that may be used in any given year in the event of specified occurrences, including significant ownership changes |
| If these specified events occur, we may lose some or all of the tax benefits of these carryforwards |
| During 2005, we determined, based on our assessment of both positive and negative evidence, which takes into consideration our forecasted taxable income, that it was more likely than not that we will benefit from the use of a significant portion of our deferred tax assets, and therefore we reduced our valuation allowance on our deferred tax assets related to these NOLs |
| Upon reducing the valuation allowance, we recognized dlra26dtta7 million of deferred tax assets of which dlra18dtta2 million was recognized as a non-cash tax benefit and dlra8dtta5 million was recorded directly as an increase in stockholders’ equity |
| The favorable impact of the tax benefit distorts the trends in our operating results and impacts the comparability of our current period results of operations with other periods |
| If in the future we determine, based on our assessment of both positive and negative evidence, that it is more likely than not that we will not realize all or a portion of the deferred tax assets, we will record a valuation allowance on the deferred tax assets which would result in recognition of income tax expense |
| We May Require Future Additional Capital |
| Our future liquidity and ability to meet our future capital requirements will depend on numerous factors, including, but not limited to, the following: • The costs and timing of the expansion of our manufacturing capacity; • The success of our research and product development efforts; • The magnitude of capital expenditures; • Changes in existing and potential relationships with business partners; • The time and cost of obtaining regulatory approvals; • The costs involved in obtaining and enforcing patents, proprietary rights and necessary licenses; • The costs and liability associated with patent infringement or other types of litigation; • The costs and timing of expansion of sales and marketing activities; • The timing of the commercial launch of new products; • The extent to which existing and new products gain market acceptance; • The scope and results of clinical testing; • Competing technological and market developments; and • The scope and timing of strategic acquisitions |
| If additional financing is needed, we may seek to raise funds through the sale of equity or other securities or through bank borrowings |
| There can be no assurance that financing through the sale of securities, bank borrowings or otherwise, will be available to us on satisfactory terms, if at all |
| Changes in economic conditions could adversely affect our business |
| For example, in a difficult economic environment, customers may be unwilling or unable to invest in new diagnostic products, may elect to reduce the amount of their purchases or may perform less drug testing because of declining employment levels or the issuance of fewer life insurance policies |
| A weakening business climate could also cause longer sales cycles and slower growth, and could expose us to increased business or credit risk in dealing with customers or suppliers adversely affected by economic conditions |
| Terrorist attacks such as those occurring on September 11, 2001, or national disasters such as Hurricane Katrina, and subsequent governmental responses to these events could cause economic instability |
| These actions could adversely affect economic conditions both within and outside the United States and reduce demand for our products |
| Terrorist attacks and natural disasters could cause governments and regulatory agencies, such as the FDA or agencies that perform similar functions outside the United States, to focus their resources on other matters, such as relief efforts or vaccines or other products intended to address the threat of biological or chemical warfare |
| This diversion of resources could eliminate or delay the bulk procurement of our products by government agencies or delay our ability to obtain regulatory approvals required to manufacture, market or sell our products in the United States and other countries |
| These events could also disrupt the operations of our customers and suppliers and eliminate, reduce or delay our customers’ ability to purchase and use our products and our suppliers’ ability to provide raw materials and finished products |
| Our Stock Price Could Continue to be Volatile |
| Our stock price has been volatile, has fluctuated substantially in the past and may be volatile in the future and could experience substantial declines |
| The following factors, among others, could have a significant impact on the market for our Common Stock: • Future announcements concerning us or our products; • Future announcements concerning our competitors or industry; • Developments in patent or other proprietary rights; • Litigation or threatened litigation; • Public concern as to the performance or safety of products that we or others have developed or sold; • Failure to achieve, or changes in, financial estimates by securities analysts and comments or opinions about us by securities analysts or major stockholders; • Governmental regulation; • Clinical results with respect to our products in development or those of our competitors; • Changes in the level of competition; • Loss of or declines in sales to major distributors or customers; • The relatively low trading volume for our Common Stock; • Period to period fluctuations in our operating results; • General market and economic conditions; and • Terrorist attacks, civil unrest, war and national disasters |
| Future Sales by Existing Stockholders, Executive Officers or Directors Could Depress the Market Price of Our Common Stock and Make It More Difficult For Us to Sell Stock in the Future |
| Sales of our Common Stock in the public market, or the perception that such sales could occur, could negatively impact the market price of our Common Stock |
| We are unable to estimate the number of shares of our 26 ______________________________________________________________________ [53]Table of Contents Common Stock that may actually be resold in the public market since this will depend on the market price for our Common Stock, the individual circumstances of the sellers and other factors |
| We have a number of institutional stockholders that own significant blocks of our Common Stock |
| If one or more of these stockholders sell large portions of their holdings in a relatively short time, for liquidity or other reasons, the prevailing market price of our Common Stock could be negatively affected |
| In addition, it is possible that one or more of our executive officers or members of our Board of Directors could sell shares of our Common Stock during an open trading window under our Insider Trading Policy |
| These transactions and the perceived reasons for these transactions could have a negative effect on the prevailing market price of our Common Stock |
| Our Reported Financial Results May be Adversely Affected by Changes in Accounting Principles Generally Accepted in the United States |
| We prepare our financial statements in conformity with accounting principles generally accepted in the United States |
| These accounting principles are subject to creation or interpretation by the Financial Accounting Standards Board, the Securities and Exchange Commission and various bodies formed to interpret and create appropriate accounting principles |
| A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change |
| Risks Relating to Intellectual Property Our Success Depends on Our Ability to Protect Our Proprietary Technology |
| The diagnostics industry places considerable importance on obtaining patent, trademark, and trade secret protection, as well as other intellectual property rights, for new technologies, products and processes |
| Our success depends, in part, on our ability to develop and maintain a strong intellectual property portfolio or obtain licenses to patents for products and technologies both in the United States and in other countries |
| As appropriate, we intend to file patent applications and obtain patent protection for our proprietary technology |
| These patent applications and patents will cover, as applicable, compositions of matter for our products, methods of making those products, methods of using those products, and apparatus relating to the use or manufacture of those products |
| We will also rely on trade secrets, know-how, and continuing technological advancements to protect our proprietary technology |
| We have entered, and will continue to enter, into confidentiality agreements with our employees, consultants, advisors and collaborators |
| However, these parties may not honor these agreements and we may not be able to successfully protect our rights to unpatented trade secrets and know-how |
| Others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets and know-how |
| Many of our employees, including scientific and management personnel, were previously employed by competing companies |
| Although we encourage and expect all of our employees to abide by any confidentiality agreement with a prior employer, competing companies may allege trade secret violations and similar claims against us |
| We may collaborate with universities and governmental research organizations which, as a result, may acquire part of the rights to any inventions or technical information derived from collaboration with them |
| To facilitate development and commercialization of a proprietary technology base, we may need to obtain licenses to patents or other proprietary rights from other parties |
| Obtaining and maintaining such licenses may 27 ______________________________________________________________________ [54]Table of Contents require the payment of substantial amounts |
| In addition, if we are unable to obtain these types of licenses, our product development and commercialization efforts may be delayed or precluded |
| We may incur substantial costs and be required to expend substantial resources in asserting or protecting our intellectual property rights, or in defending suits against us related to intellectual property rights |
| Disputes regarding intellectual property rights could substantially delay product development or commercialization activities |
| Disputes regarding intellectual property rights might include state, federal or foreign court litigation as well as patent interference, patent reexamination, patent reissue, or trademark opposition proceedings in the United States Patent and Trademark Office |
| Opposition or revocation proceedings could be instituted in a foreign patent office |
| An adverse decision in any proceeding regarding intellectual property rights could result in the loss or limitation of our rights to a patent, an invention or trademark |
| We are Involved in Pending, and May Become Involved in Future, Intellectual Property Infringement Disputes, Which are Costly and Could Limit or Eliminate Our Ability to Sell Our Products or Use Certain of Our Technologies in the Future |
| From time to time, we may seek to enforce our patents or other intellectual property rights through litigation |
| In addition, there are a large number of patents and patent applications in our product areas, and additional patents may be issued to third parties relating to our product areas |
| We may be sued for infringement of patents or misappropriation of other intellectual property rights with respect to one or more of our products |
| Litigation in our industry regarding patent and other intellectual property rights is prevalent and is expected to continue |
| Our involvement in litigation with respect to patents or other intellectual property or to determine rights in proprietary technology, either as a plaintiff or defendant, could adversely affect our revenues, market share, results of operations and business because: • As is common with major litigation, it could consume a substantial portion of managerial and financial resources; • Its outcome would be uncertain and a court may find that our patents are invalid or unenforceable in response to claims by another party or that the third-party patent claims are valid and infringed by our products; • An adverse outcome could subject us to the loss of the protection of our patents or to liability in the form of past royalty payments, penalties, special and punitive damages, or future royalty payments significantly affecting our future earnings; • Failure to obtain a necessary license upon an adverse outcome could prevent us from selling our current products or other products we may develop; and • A court could award a preliminary and/or permanent injunction which would prevent us from selling our current or future products |
| The Sales Potential for OraQuick^® Could be Affected by Our Ability to Obtain Certain Licenses |
| Our OraQuick^® test is a lateral flow assay device that tests for specific antibodies or other substances |
| The term “lateral flow” generally refers to a test strip through which a sample flows and which provides a test result on a portion of the strip downstream from where the sample is applied |
| There are numerous patents in the United States and other countries which claim lateral flow assay methods and devices |
| Some of these patents may broadly cover the technology used in the OraQuick^® test and are in force in the United States and other countries |
| We may not be able to make or sell the OraQuick^® test in the United States or other countries where these patents are in force |
| We have obtained licenses under several lateral flow patents, which we believe should be sufficient to permit the manufacturing and sale of the OraQuick^® device as currently contemplated |
| However, licenses under 28 ______________________________________________________________________ [55]Table of Contents additional patents may be required and it is possible that a third party could seek to enforce one or more lateral flow patents against us |
| In the event that we are unable to successfully defend against such litigation or it is determined that a license is required and it is not possible to negotiate or otherwise obtain a license agreement on reasonable terms under a necessary patent, our ability to manufacture and sell the OraQuick^® device could be limited |
| In such case, we may be able to modify the OraQuick^® test such that a license would not be necessary |
| However, this alternative could delay or limit our ability to sell the OraQuick^® test in the United States and other markets, which would adversely affect our results of operations, cash flows and business |
| Our future success will depend, in part, on the market acceptance, and the timing of such acceptance, of our products such as the OraQuick^® ADVANCE^™ rapid HIV-1/2 antibody test, the Intercept^® drug test, and other new products or technologies that may be developed or acquired |
| To achieve market acceptance, we must make substantial marketing efforts and spend significant funds to inform potential customers and the public of the perceived benefits of these products |
| There may be limited evidence on which to evaluate the market reaction to products that may be developed, and there can be no assurance that any products will obtain market acceptance and fill the market need that is perceived to exist |
| We have made significant progress in gaining acceptance of oral fluid testing for HIV in the insurance and public health markets |
| We have also made significant progress in gaining acceptance of oral fluid testing for drugs of abuse in the workplace and criminal justice testing markets |
| However, the ultimate degree of acceptance in these markets is uncertain, and other markets may resist the adoption of oral fluid testing as a replacement for other testing methods in use today |
| In addition, certain state laws prohibit or restrict the use of oral fluid testing for drugs of abuse in certain markets or the rapid, point-of-care testing for HIV As a result, there can be no assurance that we will be able to expand the use of our oral fluid testing products in these or other markets |
| We may be held liable if any of our products, or any product which is made with the use or incorporation of any of our technologies, causes injury of any type or is found otherwise unsuitable during product testing, manufacturing, marketing, sale or usage |
| Although we have obtained product liability insurance, this insurance may not fully cover potential liabilities |
| As we bring new products to market, we may need to increase our product liability coverage |
| We are selling cryosurgical wart removal products in the consumer or OTC market in the United States, Canada, and Europe |
| We expect to expand the OTC sales of these products to other countries and to eventually distribute other types of products, such as our OraQuick^® ADVANCE^™ HIV-1/2 test |
| We believe the sale of products in the OTC market increases the risk of potential product liability exposure and the required level of insurance coverage that we will need to maintain |
| Inability to obtain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims could affect our decision to commercialize new products and our results of operations |
| Our products are generally sold with labeling that contains performance claims approved or cleared by the FDA or other regulators |
| If our products fail to perform in accordance with the applicable label claims or otherwise in accordance with the expectations or needs of our customers, customers may switch to a competing 29 ______________________________________________________________________ [56]Table of Contents product or otherwise stop using our products, and our revenues could be adversely affected |
| In addition, poor performance by one or more of our products and publicity surrounding such performance could have an adverse effect on our reputation, our continuing ability to sell products and the prevailing market price of our Common Stock |
| Our Increasing International Presence May be Affected by Regulatory, Cultural or Other Restraints |
| We intend to increase revenue derived from international sales of our products |
| Our international sales accounted for dlra9dtta5 million or 14prca of total revenues for 2005, dlra6dtta2 million or 11prca of total revenues for 2004, and dlra4dtta6 million or 11prca of total revenues for 2003 |
| A number of factors can slow or prevent international sales, or substantially increase the cost of international sales, including those set forth below: • Regulatory requirements (including compliance with applicable customs regulations) may slow, limit, or prevent the offering of products in foreign countries; • The unavailability of licenses to certain patents in force in a foreign country which cover our products may restrict our ability to sell into that country; • The inability to maintain ISO certification for our or our suppliers’ manufacturing facilities could preclude, interrupt or delay our ability to manufacture products for sale in Europe or other international territories; • Our ability to obtain the CE mark on our products in a timely manner may preclude or delay our ability to sell products in the European Union; • Cultural and political differences may make it difficult to effectively market, sell and gain acceptance of products in foreign countries; • Inexperience in international markets may slow or limit our ability to sell products in foreign countries; • Exchange rates, currency fluctuations, tariffs and other barriers, extended payment terms and dependence on and difficulties in managing international distributors or representatives may affect our revenues even when product sales occur; • The creditworthiness of foreign entities may be less certain and foreign accounts receivable collection may be more difficult; • Economic conditions, the absence of available funding sources, terrorism, civil unrest, war and natural disasters may slow or limit our ability to sell our products in foreign countries; • International markets often have long sales cycles, especially for sales to foreign governments, quasi-governmental agencies and international public health agencies, thereby delaying or limiting our ability to sell our products; and • We may be at a disadvantage if competitors in foreign countries sell competing products at prices at or below such competitors’ or our cost |
| In addition, we have entered into a contract for the manufacture and supply of the OraQuick^® test in Thailand, and the Histofreezer^® and Freeze Off^® cryosurgical products are currently manufactured in The Netherlands |
| We may enter into agreements to manufacture other products in foreign countries as well |
| However, factors such as economic and political conditions and foreign regulatory requirements may slow or prevent the manufacture of our products in countries other than the United States |
| Interruption of the supply of our products could reduce revenues or cause us to incur significant additional expenses in finding an alternative source of supply |
| In addition, foreign currency fluctuations and economic conditions in foreign countries could increase the costs of manufacturing our products in foreign countries |