| REGENERATION TECHNOLOGIES INC Item 1A RISK FACTORS An investment in our common stock involves a high degree of risk |
| You should consider each of the risks and uncertainties described in this section and all of the other information in this document before deciding to invest in our common stock |
| Any of the risk factors we describe below could severely harm our business, financial condition and results of operations |
| The market price of our common stock could decline if any of these risks or uncertainties develop into actual events |
| You may lose all or part of the money you paid to buy our common stock |
| We depend heavily upon a limited number of sources of human tissue, and any failure to obtain tissue from these sources in a timely manner will interfere with our ability to process and distribute allografts |
| The limited supply of human tissue has at times limited our growth, and may not be sufficient to meet our future needs |
| In addition, due to seasonal changes in mortality rates, some scarce tissues that we use for our allografts are at times in particularly short supply |
| Other factors, some of which are unpredictable, such as negative publicity and regulatory actions in our industry also can unexpectedly reduce the available supply of tissue |
| We rely on donor recovery groups for our human tissue supply |
| Donor recovery groups are part of relatively complex relationships |
| They provide support to donor families, are regulated by the FDA, and are often affiliated with hospitals, universities or organ procurement groups |
| Our relationships with donor recovery groups, which are critical to our supply of tissue, can be affected by relationships they have with other organizations |
| Any negative impact of the regulatory and disease transmission issues facing the industry, as well as the negative publicity that these issues create, could have an impact on our ability to negotiate favorable contracts with recovery groups |
| Southeast Tissue Alliance, or SETA, our largest donor recovery group, supplied us with approximately 25prca of our total human tissue for the year ended December 31, 2005 |
| Our three largest recovery groups together supplied approximately 52prca of our total tissue for the year ended December 31, 2005 |
| If we were to lose any one of these three sources of tissue, the impact on our operating results would be material |
| We cannot be sure that our supply of human tissue will continue to be available at current levels or will be sufficient to meet our needs |
| If we are no longer able to obtain tissue from our current sources sufficient to meet our needs, we may not be able to locate additional replacement sources of tissue on commercially reasonable terms, if at all |
| Any interruption of our business caused by the need to locate additional sources of tissue would significantly hurt our revenues |
| We expect our revenues would decline in proportion to any decline in tissue supply |
| 12 ______________________________________________________________________ [48]Table of Contents If we fail to maintain our existing strategic relationships or are unable to identify additional distributors of our implants, our revenues may decrease |
| We currently derive the majority of our revenues through our relationships with two companies, Medtronic Sofamor Danek, or MSD and Exactech, Inc |
| For the year ended December 31, 2005, we derived approximately 60prca and 5prca of our revenues from distribution by MSD and Exactech, respectively |
| MSD provides nearly all of the instrumentation, surgeon training, distribution assistance and marketing materials for our line of spinal allografts |
| MSD materially reduced its orders from us during the past year |
| If our relationship with MSD is terminated or further reduced for any reason and we are unable to replace the relationship with other means of distribution, we would suffer a material decrease in revenues |
| We may need to obtain the assistance of additional distributors to market and distribute our new allografts and technologies, as well as to market and distribute our existing allografts and technologies to new market segments or geographical areas |
| We may not be able to find additional distributors who will agree to and successfully market and distribute our allografts and technologies on commercially reasonable terms, if at all |
| If we are unable to establish additional distribution relationships on favorable terms, our revenues may decline |
| If third party payors fail to provide appropriate levels of reimbursement for the use of our implants, our revenues would be adversely affected |
| Political, economic and regulatory influences are subjecting the healthcare industry in the United States to fundamental change |
| Any new federal or state legislation could result in significant changes in the availability, delivery, pricing or payment for healthcare services and products |
| While we cannot predict what form any new legislation will take, it is possible that any significant healthcare legislation, if adopted, could lower the amounts paid to us for our services, which would decrease our revenues |
| Our revenues depend largely on the reimbursement of patients’ medical expenses by government health care programs and private health insurers |
| Governments and private insurers closely examine medical procedures incorporating new technologies to determine whether the procedures will be covered by payment, and if so, the level of payment which may apply |
| We cannot be sure that third party payors will continue to reimburse us or provide payment at levels which will be profitable to us |
| If we fail to maintain the high processing standards that our implants require or if we are unable to develop processing capacity as required, our commercial opportunity will be reduced or eliminated |
| Our implants require careful calibration and precise, high-quality processing |
| Achieving precision and quality control requires skill and diligence by our personnel |
| If we fail to achieve and maintain these high processing standards, including avoiding processing errors, design defects or component failures: • we could be forced to recall, withdraw or suspend distribution of our implants; • our implants and technologies could fail quality assurance and performance tests; • production and deliveries of our implants could be delayed or cancelled; and • our processing costs could increase |
| Further, to be successful, we will need to manage our human tissue processing capacity related to tissue recovery and demand for our allografts |
| It may be difficult for us to match our processing capacity to demand due to problems related to yields, quality control and assurance, tissue availability, adequacy of control policies and procedures, and lack of skilled personnel |
| If we are unable to process and produce our implants on a timely basis, at acceptable quality and costs, and in sufficient quantities, or if we experience unanticipated technological problems or delays in processing, it will reduce our revenues and increase our cost per allograft processed |
| 13 ______________________________________________________________________ [49]Table of Contents Our allograft and xenograft implants and technologies could become subject to significantly greater regulation by the FDA, which could disrupt our business |
| The FDA could identify deficiencies in future inspections of our facilities or promulgate future regulatory rulings that could disrupt our business, hurting our profitability |
| For example, in mid-2001, the FDA reviewed our BioCleanse^® process after the FDA raised concerns about the process |
| While the FDA concluded that the compliance portion of its review of our BioCleanse^® process in January 2002 and determined we were in compliance with existing FDA requirements and that no regulatory action was warranted, the possibility always exists that the FDA could raise concerns with these or other aspects of our business |
| The FDA’s decision, that no regulatory action was warranted, does not constitute a formal approval of our BioCleanse^® process and the FDA is free to raise the same or similar concerns in the future |
| If any of our allografts fall under the FDA’s definitions of “more than minimally manipulated or indicated for nonhomologous use,” we would be required to obtain medical device approval or clearance or biologics licenses, which could require clinical testing |
| Disapproval of our license applications and restricted distribution of any of our allografts, which may become subject to pre-market approval, may result |
| The FDA could require post-market testing and surveillance to monitor the effects of such allografts, could restrict the commercial applications of these allografts, and could conduct periodic inspections of our facility and our suppliers’ facilities |
| Delays encountered during the FDA approval process could shorten the patent protection period during which we have the exclusive right to commercialize such technologies or could allow others to come to market with similar technologies before us |
| FDA regulations of human cellular and tissue-based products, titled “Good Tissue Practices,” went into full force as of May 2005 |
| These regulations cover all stages of allograft processing, from procurement of tissue to distribution of final allografts |
| These regulations may increase regulatory scrutiny within our industry and lead to increased enforcement action which affects the conduct of our business |
| In addition, the effect of these regulations may have a significant effect upon recovery agencies which supply us with tissue and increase the cost of recovery activities |
| Any such increase would translate into increased costs to us, as we compensate the recovery agencies based on their cost of recovery |
| Other regulatory entities include state agencies with statutes covering tissue banking |
| Of particular relevance to our business are regulations issued by Florida, New York, California and Maryland |
| Most states do not currently have tissue banking regulations |
| However, recent incidents of allograft related infections in the industry may stimulate the development of regulation in other states |
| It is possible that others may make allegations against us or against donor recovery groups or tissue banks, including those with which we have a relationship, about non-compliance with applicable FDA regulations or other relevant statutes and regulations |
| Allegations like these could cause regulators or other authorities to take investigative or other action, or could cause negative publicity for our business and our industry |
| Some of our implants in development will contain tissue derived from animals, commonly referred to as xenografts |
| Xenograft implants are medical devices that are subject to pre-market approval or clearance by the FDA We may not receive FDA approval or clearance to market new implants as we attempt to expand the quantity of xenograft implants available for distribution |
| The allograft industry is subject to additional local, state, federal and international government regulations and any increased regulations of our current or future activities could significantly increase the cost of doing business, thereby reducing our profitability |
| Some aspects of our business are subject to additional local, state, federal or international regulation |
| Changes in the laws or new interpretations of existing laws could negatively affect our business, revenues or 14 ______________________________________________________________________ [50]Table of Contents prospects, and increase the costs associated with conducting our business |
| In particular, the procurement and transplantation of allograft tissue is subject to federal regulation under the National Organ Transplant Act, or NOTA, a criminal statute that prohibits the purchase and sale of human organs, including bone and other tissue |
| NOTA permits the payment of reasonable expenses associated with the transportation, processing, preservation, quality control and storage of human tissue, which are the types of services we perform |
| If in the future NOTA were amended or interpreted in a way that made us unable to include some of these costs in the amounts we charge our customers, it could reduce our revenues and therefore hurt our business |
| It is possible that more restrictive interpretations or expansions of NOTA could be adopted in the future which could require us to change one or more aspects of our business, at a substantial cost, in order to continue to comply with this statute |
| A variety of additional local, state, federal and international government laws and regulations govern our business, including those relating to the storage, handling, generation, manufacture and disposal of medical wastes from the processing of tissue |
| If we fail to conduct our business in compliance with these laws and regulations, we could be subject to significant liabilities |
| We could be subject to significant liabilities arising from hazardous biological materials for which our insurance may not be adequate |
| Moreover, such insurance may not always be available in the future on commercially reasonable terms, if at all |
| If our insurance proves to be inadequate to pay a damage award, we may not have sufficient funds to do so, which could harm our financial condition and liquidity |
| Our success will depend on the continued acceptance of our allograft and xenograft implants and technologies by the medical community |
| Our new allograft and xenograft implants, technologies or enhancements to existing implants may never achieve broad market acceptance, which can be affected by numerous factors, including: • lack of clinical acceptance of our implants and technologies; • introduction of competitive tissue repair treatment options which render our implants and technologies too expensive or obsolete; • lack of availability of third-party reimbursement; and • difficulty training surgeons in the use of our tissue implants and technologies |
| Market acceptance will also depend on our ability to demonstrate that our existing and new implants and technologies are an attractive alternative to existing tissue repair treatment options |
| Our ability to do so will depend on surgeons’ evaluations of the clinical safety, efficacy, ease of use, reliability and cost-effectiveness of these tissue repair options and technologies |
| For example, we believe that some in the medical community have lingering concerns over the risk of disease transmission through the use of allografts |
| Furthermore, we believe that even if the medical community generally accepts our implants and technologies, recommendations and endorsements by influential surgeons will be important to their broad commercial success |
| If our implants and technologies are not broadly accepted in the marketplace, we may not achieve a competitive position in the market |
| Rapid technological changes will affect us and our customers, which could result in reduced demand for our allografts |
| Technologies change rapidly in our industry |
| For example, steady improvements have been made in synthetic human tissue substitutes which compete with our tissue implants |
| Unlike allografts, synthetic tissue technologies are not dependent on the availability of tissue |
| If one of our competitors successfully introduces synthetic technologies using recombinant technologies, which stimulate the growth of tissue surrounding an implant, it could result in a decline in demand for tissue implants |
| Although our growth strategy contemplates introducing new implants and technologies, the development of these new implants and technologies is a 15 ______________________________________________________________________ [51]Table of Contents complex and uncertain process, requiring a high level of innovation, as well as the ability to accurately predict future technology and market trends |
| The implants we currently have in development will require significant additional development, investment and testing |
| We may need to undertake costly and time-consuming efforts to achieve these objectives |
| We may not be able to respond effectively to technological changes and emerging industry standards, or to successfully identify, develop or support new technologies or enhancements to existing implants in a timely and cost-effective manner, if at all |
| If we are unable to achieve the improvements in our implants necessary for their successful commercialization, the demand for our implants will suffer |
| We face intense competition, which could result in reduced acceptance and demand for our implants and technologies |
| The medical technology/biotechnology industry is intensely competitive |
| We compete with companies in the United States and internationally that engage in the development and production of medical technologies and processes including: • biotechnology, orthopedic, pharmaceutical, biomaterial and other companies; • academic and scientific institutions; and • public and private research organizations |
| Many of our competitors have much greater financial, technical, research, marketing, distribution, service and other resources than we have |
| Moreover, our competitors may offer a broader array of tissue repair treatment products and technologies or may have greater name recognition than we do in the marketplace |
| For example, we compete with a number of divisions of Johnson & Johnson, a company with significantly greater resources and brand recognition than we have |
| Our competitors, including several development stage companies, may develop or market technologies that are more effective or commercially attractive than ours, or that may render our technologies obsolete |
| For example, the successful development of a synthetic tissue product that permits remodeling of bones could result in a decline in the demand for allograft-based products and technologies |
| If we do not manage the medical release of donor tissue into processing in an efficient manner, it could affect our profitability |
| There are many factors which affect the level and timing of donor medical releases, such as effectiveness of donor screening performed by our donor recovery groups, the timely receipt, recording and review of required medical documentation, and employee loss and turnover in our medical records department |
| Some of our donor recovery groups are also processors who provide us with partially processed tissues which they have already determined to be medically suitable for processing |
| Therefore, these sources provide a higher level of documentation than those that perform donor recovery alone |
| Although we strive for the timely medical release of tissue, while at the same time maximizing safety for our employees and for tissue recipients, our internal policies may sacrifice timely release of tissue in favor of safety |
| We continue to review our internal policies in order to provide the best framework for medical releases, however we can provide no assurance that releases will occur at levels which maximize our processing efficiency and minimize our cost per allograft processed |
| Negative publicity concerning methods of human tissue recovery and screening of donor tissue in our industry could reduce demand for our allografts and impact the supply of available donor tissue |
| Media reports or other negative publicity concerning both improper methods of tissue recovery from donors and disease transmission from donated tissue could limit widespread acceptance of our allografts |
| Unfavorable reports of improper or illegal tissue recovery practices, both in the United States and internationally, as well as incidents of improperly processed tissue leading to transmission of disease, may broadly affect the rate of future tissue donation and market acceptance of allograft technologies |
| 16 ______________________________________________________________________ [52]Table of Contents Potential patients may not distinguish our allografts, technologies and the tissue recovery and the processing procedures we have in place, from those of our competitors or others engaged in tissue recovery |
| In addition, families of potential donors may become reluctant to agree to donate tissue to for-profit tissue processors |
| If our patents and the other means we use to protect our intellectual property prove to be inadequate, our competitors could exploit our intellectual property to compete more effectively against us |
| The law of patents and trade secrets is constantly evolving and often involves complex legal and factual questions |
| The US government may deny or significantly reduce the coverage we seek in our patent applications before or after a patent is issued |
| We therefore cannot be sure that any particular patent we apply for will be issued, that the scope of the patent protection will be comprehensive enough to provide adequate protection from similar technologies which may compete with ours, that interference proceedings regarding any of our patent applications will not be filed, or that we will achieve any other competitive advantage from a patent |
| In addition, it is possible that one or more of our patents will be held invalid if challenged or that others will claim rights in or ownership of our patents and other proprietary rights |
| If any of these events occur, our competitors may be able to use our intellectual property to compete more effectively against us |
| Because patent applications are secret until patents are actually issued (or until 18 months after a patent application has been filed) and the publication of discoveries in the scientific or patent literature lags behind actual discoveries, we cannot be certain that our patent application was the first application filed covering a particular invention |
| If another party’s rights to an invention are superior to ours, we may not be able to obtain a license to use that party’s invention on commercially reasonable terms, if at all |
| In addition, our competitors, many of which have greater resources than we do, could obtain patents that will prevent, limit or interfere with our ability to make use of our inventions either in the United States or in international markets |
| Further, the laws of some foreign countries do not always protect our intellectual property rights to the same extent as the laws of the United States |
| Litigation or regulatory proceedings in the United States or foreign countries also may be necessary to enforce our patent or other intellectual property rights or to determine the scope and validity of our competitors’ proprietary rights |
| These proceedings can be costly, result in development delays, and divert our management’s attention from our business |
| We also rely upon unpatented proprietary techniques and processes in tissue recovery, research and development, tissue processing and quality assurance |
| It is possible that others will independently develop technology similar to ours or otherwise gain access to or disclose our proprietary technologies |
| We may not be able to meaningfully protect our rights in these proprietary technologies, which would reduce our ability to compete |
| In 1996, a law was passed in the United States that limits the enforcement of patents covering the performance of surgical or medical procedures on a human body |
| This law prevents medical practitioners and health care entities who practice these procedures, not otherwise covered by a patented procedure, from being sued for patent infringement |
| Therefore, depending upon how these limitations are interpreted by the courts, they could have a material adverse effect on our ability to enforce any of our proprietary methods or procedures deemed to be surgical or medical procedures |
| Our success will depend in part on our ability to operate without infringing on or misappropriating the proprietary rights of others, and if we are unable to do so we may be liable for damages |
| We cannot be certain that US or foreign patents or patent applications of other companies do not exist or will not be issued that would prevent us from commercializing our allografts and technologies |
| Third parties may sue us for infringing or misappropriating their patent or other intellectual property rights |
| Intellectual property litigation is costly |
| If we do not prevail in litigation, in addition to any damages we might have to pay, we could be required to stop the infringing activity or obtain a license requiring us to make royalty payments |
| It is possible that a required license will not be available to us on commercially acceptable terms, if at all |
| In addition, a 17 ______________________________________________________________________ [53]Table of Contents required license may be non-exclusive, and therefore our competitors may have access to the same technology licensed to us |
| If we fail to obtain a required license or are unable to design around another company’s patent, we may be unable to make use of some of the affected technologies or distribute the affected allografts which would negatively impact our revenues |
| We or our competitors may be exposed to product liability claims which could cause us to be liable for damages or cause investors to think we will be liable for similar claims in the future |
| The development of allografts and technologies for human tissue repair and treatment entails an inherent risk of product liability claims, and substantial product liability claims may be asserted against us |
| We are party to a number of legal proceedings related to product liability |
| We currently have dlra20 million of product liability insurance to cover claims |
| This amount of insurance may not be adequate for current claims if we are not successful in our defenses, and furthermore, we may not have adequate insurance coverage for any future claims that arise |
| Moreover, insurance covering our business may not always be available in the future on commercially reasonable terms, if at all |
| If our insurance proves to be inadequate to pay a damage award, we may not have sufficient funds to do so, which would harm our financial condition and liquidity |
| In addition, successful product liability claims made against one of our competitors could cause claims to be made against us or expose us to a perception that we are vulnerable to similar claims |
| In addition, claims against us, regardless of their merit or potential outcome, may also hurt our ability to obtain surgeon endorsement of our allografts or to expand our business |
| If we are not successful in expanding our distribution activities into international markets, we will not be able to pursue one of our strategies for increasing our revenues |
| Our current and planned international distribution strategies vary by market, as well as within each country in which we operate |
| For example, we distribute only a portion of our line of allografts within each country |
| Our international operations will be subject to a number of risks which may vary from the risks we face in the United States, including: • the need to obtain regulatory approvals in additional foreign countries before we can offer our implants and technologies for use; • longer distribution-to-collection cycles, as well as difficulty in collecting amounts owed to us; • dependence on local distributors; • limited protection of intellectual property rights; • fluctuations in the values of foreign currencies; and • political and economic instability |
| The value of our investment in Organ Recovery Systems, Inc |
| is dependent on the financial success of this venture |
| We own 1cmam285cmam347 shares of convertible preferred stock issued by Organ Recovery Systems, Inc, or ORS, a privately held company, for which the purchase price was dlra5dtta25 million |
| ORS is organized for the purpose of advancing organ transplantation technology |
| Realization of our investment in ORS is dependent upon ORS’s successful execution of its operational strategies and the continued industry acceptance of its current and future product developments |
| If ORS does not successfully execute its operational strategies and recognize long-term profitability, the value of our investment could be impaired which could have a negative effect on our financial statements for the period in which the impairment occurs |