| RESMED INC ITEM 1A RISK FACTORS Before deciding to purchase, hold or sell our common stock, you should carefully consider the risks described below in addition to the other cautionary statements and risks described elsewhere, and the other information contained, in this Report and in our other filings with the SEC, including our subsequent reports on Forms 10-Q and 8-K The risks and uncertainties described below are not the only ones we face |
| Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business |
| If any of these known or unknown risks or uncertainties actually occurs with material adverse effects on us, our business, financial condition and results of operations could be seriously harmed |
| In that event, the market price for our common stock will likely decline, and you may lose all or part of your investment |
| Our inability to compete successfully in our markets may harm our business |
| The markets for our sleep-disordered breathing products are highly competitive and are characterized by frequent product improvements and evolving technology |
| Our ability to compete successfully depends, in part, on our ability to develop, manufacture and market innovative new products |
| The development of innovative new products by our competitors or the discovery of alternative treatments or potential cures for the conditions that our products treat could make our products noncompetitive or obsolete |
| Current competitors, new entrants, academics, and others are trying to develop new devices, alternative treatments or cures, and pharmaceutical solutions to the conditions our products treat |
| Additionally, some of our competitors have greater financial, research and development, manufacturing and marketing resources than we do |
| The past several years have seen a trend towards consolidation in the healthcare industry and in the markets for our products |
| Industry consolidation could result in greater competition if our competitors combine their resources or if our competitors are acquired by other companies with greater resources than ours |
| This competition could increase pressure on us to reduce the selling prices of our products or could cause us to increase our spending on research and development and sales and marketing |
| If we are unable to develop innovative new products, maintain competitive pricing, and offer products that consumers perceive to be as reliable as those of our competitors, our sales or gross margins could decrease which would harm our business |
| Our business depends on our ability to market effectively to dealers of home healthcare products and sleep clinics |
| We market our products primarily to home healthcare dealers and to sleep clinics that diagnose OSA and other sleep disorders |
| We believe that home healthcare dealers and sleep clinics play a significant role in determining which brand of product a patient will use |
| The success of our business depends on our ability to market effectively to home healthcare dealers and sleep clinics to ensure that our products are properly marketed and sold by these third parties |
| We have limited resources to market to approximately the 3cmam000 US sleep clinics and the more than 6cmam000 home healthcare dealer branch locations, most of which use, sell or recommend several brands of products |
| In addition, home healthcare dealers have experienced price pressures as government and third-party reimbursement has declined for home healthcare products, and home healthcare dealers are requiring price discounts and longer periods of time to pay for products purchased from us |
| We - 21 - ______________________________________________________________________ [43]Table of Contents cannot assure you that sleep clinic physicians will continue to prescribe our products, or that home healthcare dealers or patients will not substitute competing products when a prescription specifying our products has been written |
| We have expanded our marketing activities to target the population with a predisposition to sleep-disordered breathing as well as primary care physicians and various medical specialists |
| We cannot assure you that these marketing efforts will be successful in increasing awareness or sales of our products |
| Any inability to market effectively our products outside the US could impact our profitability |
| Approximately half our revenues are generated outside the US, in over 67 different countries |
| Many of these countries have unique regulatory, medical and business environments, which may adversely impact our ability to market our products |
| If we are unable to market effectively our products outside the US, our overall financial performance could decline |
| Fluctuations in foreign currency exchange rates could result in declines in our reported sales and earnings |
| Since our international sales and a significant portion of our manufacturing costs are denominated in local currencies and not in US dollars, our reported sales and earnings are subject to fluctuations in foreign exchange rates |
| We had foreign currency transaction losses in recent periods and may have further losses in the future |
| We expect that international sales will continue to be a significant portion of our business and that a significant portion of our manufacturing costs will continue to be denominated in Australian dollars |
| If we are unable to support our continued growth, our business could suffer |
| As we continue to grow, the complexity of our operations increases, placing greater demands on our management |
| Our ability to manage our growth effectively depends on our ability to implement and improve our financial and management information systems on a timely basis and to effect other changes in our business |
| Unexpected difficulties during expansion, the failure to attract and retain qualified employees, the failure to successfully replace or upgrade our management information systems, the failure to manage costs or our inability to respond effectively to growth or plan for future expansion could cause our growth to stop |
| If we fail to manage effectively and efficiently our growth, our costs could increase faster than our revenues and our business could suffer |
| If we fail to integrate our recent acquisitions with our operations, our business could suffer |
| We are currently in the process of integrating our operations with these recent acquisitions |
| The integration will require significant efforts from each company |
| We may find it difficult to integrate the operations as personnel may leave and licensees, distributors or suppliers may terminate their arrangements or demand amended terms to these arrangements |
| Additionally, our management may have their attention diverted while trying to integrate these companies |
| If we are not able to successfully integrate the operations, we may not realize the anticipated benefits of these acquisitions |
| If we fail to implement our restructure plans successfully, our business could suffer |
| In fiscal year 2005, we merged the operations of ResMed Germany and MAP into a single operating unit as part of our German restructure plan |
| We will continue to monitor the progress of this restructure and adjust our business strategies and personnel accordingly to achieve maximum efficiencies, cost savings and success |
| If we are not able to integrate the operations successfully, we may not fully realize the anticipated benefits of the restructure |
| - 22 - ______________________________________________________________________ [44]Table of Contents We are subject to various risks relating to international activities that could affect our overall profitability |
| We manufacture substantially all of our products outside the US and sell a significant portion of our products in non-US markets |
| Sales outside North and Latin America accounted for approximately 48prca and 49prca of our net revenues in the years ended June 30, 2006 and 2005, respectively |
| We expect that sales within these areas will account for approximately 50prca of our net revenues in the foreseeable future |
| Our sales outside of North America and our operations in Europe, Australia and Asia are subject to several difficulties and risks that are separate and distinct from those we face in our US operations, including: • fluctuations in currency exchange rates; • tariffs and other trade barriers; • compliance with foreign medical device manufacturing regulations; • reduction in third party payer reimbursement for our products; • inability to obtain import licenses; • changes in trade policies and in US and foreign tax policies; • possible changes in export or import restrictions; and • the modification or introduction of other governmental policies with potentially adverse effects |
| Government and private insurance plans may not adequately reimburse patients for our products, which could result in reductions in sales or selling prices for our products |
| Our ability to sell our products depends in large part on the extent to which reimbursement for the cost of our products will be available from government health administration authorities, private health insurers and other organizations |
| These third party payers are increasingly challenging the prices charged for medical products and services |
| Therefore, even if a product is approved for marketing, we cannot assure you that reimbursement will be allowed for the product, that the reimbursement amount will be adequate or, that the reimbursement amount, even if initially adequate, will not subsequently be reduced |
| For example, in some markets, such as Spain, France and Germany, government reimbursement is currently available for purchase or rental of our products but is subject to constraints such as price controls or unit sales limitations |
| In other markets, such as Australia and the United Kingdom, there is currently limited or no reimbursement for devices that treat sleep-disordered breathing conditions |
| Additionally, future legislation or regulation concerning the healthcare industry or third party or governmental coverage and reimbursement, particularly legislation or regulation limiting consumers’ reimbursement rights, may harm our business |
| As we continue to develop new products, those products will generally not qualify for reimbursement, if at all, until they are approved for marketing |
| In the United States, we sell our products primarily to home healthcare dealers and to sleep clinics |
| We do not file claims and bill governmental programs and other third party payers directly for reimbursement for our products |
| However, we are still subject to laws and regulations relating to governmental reimbursement programs, particularly Medicaid and Medicare |
| In addition to reimbursement for our products, our customers depend in part on reimbursement by government and private health insurers for other products |
| Any proposed reductions in reimbursement, if they occur, may have a material impact on our customers |
| Any material impact on our customers may indirectly affect our sales to those customers, or the collectibility of receivables we have from those customers |
| Failure to comply with anti-kickback and fraud regulations could result in substantial penalties and changes in our business operations |
| In particular, the federal Anti-Kickback Law prohibits persons from knowingly and willfully soliciting, receiving, offering or providing remuneration, - 23 - ______________________________________________________________________ [45]Table of Contents directly or indirectly, to induce either the referral of an individual, or the furnishing, recommending or arranging for a good or service, for which payment may be made under a federal healthcare program such as the Medicare and Medicaid programs |
| The US government has interpreted this law broadly to apply to the marketing and sales activities of manufacturers and distributors like us |
| Many states and other governments have adopted laws similar to the federal Anti-Kickback Law |
| We are also subject to other federal and state fraud laws applicable to payment from any third party payer |
| These laws prohibit persons from knowingly and willfully filing false claims or executing a scheme to defraud any healthcare benefit program, including private third party payers |
| These laws may apply to manufacturers and distributors who provide information on coverage, coding, and reimbursement of their products to persons who do bill third party payers |
| Any violation of these laws and regulations could result in civil and criminal penalties (including fines), increased legal expenses and exclusions from governmental reimbursement programs, all of which could have a material adverse effect upon our business, financial conditions and results of operations |
| Complying with Food and Drug Administration, or FDA, and other regulations is an expensive and time-consuming process, and any failure to comply could result in substantial penalties |
| We are subject to various federal, state, local and international regulations regarding our business activities |
| Failure to comply with these regulations could result in, among other things, recalls of our products, substantial fines and criminal charges against us or against our employees |
| Furthermore, our products could be subject to recall if the FDA or we determine, for any reason, that our products are not safe or effective |
| Any recall or other regulatory action could increase our costs, damage our reputation, affect our ability to supply customers with the quantity of products they require and materially affect our operating results |
| Product sales, introductions or modifications may be delayed or canceled as a result of FDA regulations or similar foreign regulations, which could cause our sales and profits to decline |
| Before we can market or sell a new medical device in the United States, we must obtain FDA clearance, which can be a lengthy and time-consuming process |
| We generally receive clearance from the FDA to market our products in the United States under Section 510(k) of the Federal Food, Drug, and Cosmetic Act or our products are exempt from the 510(k) clearance process |
| However, if the FDA disagrees with us and requires us to submit new 510(k) notifications for modifications to our existing products, we may be required to stop marketing the products while the FDA reviews the 510(k) notification |
| Any new product introduction or existing product modification could be subjected to a lengthier, more rigorous FDA examination process |
| For example, in certain cases we may need to conduct clinical trials of a new product before submitting a 510(k) notice |
| Additionally, we may be required to obtain premarket approvals for our products |
| The requirements of these more rigorous processes could delay product introductions and increase the costs associated with FDA compliance |
| Marketing and sale of our products outside the United States are also subject to regulatory clearances and approvals, and if we fail to obtain these regulatory approvals, our sales could suffer |
| We cannot assure you that any new products we develop will receive required regulatory approvals from US or foreign regulatory agencies |
| Off-label marketing of our products could result in substantial penalties |
| Clearance under Section 510(k) only permits us to market our products for the uses indicated on the labeling cleared by the FDA We may request additional label indications for our current products, and the FDA may deny those requests outright, require additional expensive clinical data to support any additional indications or impose limitations on the intended use of any cleared products as a condition of clearance |
| If the FDA determines that we have marketed our products for off-label use, we could be subject to fines, injunctions or other penalties |
| - 24 - ______________________________________________________________________ [46]Table of Contents Disruptions in the supply of components from our single source suppliers could result in a significant reduction in sales and profitability |
| We purchase uniquely configured components for our devices from various suppliers, including some who are single-source suppliers for us |
| We cannot assure you that a replacement supplier would be able to configure its components for our devices on a timely basis or, in the alternative, that we would be able to reconfigure our devices to integrate the replacement part |
| A reduction or halt in supply while a replacement supplier reconfigures its components, or while we reconfigure our devices for the replacement part, would limit our ability to manufacture our devices, which could result in a significant reduction in sales and profitability |
| We cannot assure you that our inventories would be adequate to meet our production needs during any prolonged interruption of supply |
| Our intellectual property may not protect our products, and/or our products may infringe on the intellectual property rights of third parties |
| We rely on a combination of patents, trade secrets and non-disclosure agreements to protect our intellectual property |
| Our success depends, in part, on our ability to obtain and maintain United States and foreign patent protection for our products, their uses and our processes to preserve our trade secrets and to operate without infringing on the proprietary rights of third parties |
| We have a number of pending patent applications, and we do not know whether any patents will issue from any of these applications |
| We do not know whether any of the claims in our issued patents or pending applications will provide us with any significant protection against competitive products or otherwise be commercially valuable |
| Legal standards regarding the validity of patents and the proper scope of their claims are still evolving, and there is no consistent law or policy regarding the valid breadth of claims |
| Additionally, there may be third party patents, patent applications and other intellectual property relevant to our products and technology which are not known to us and that block or compete with our products |
| We face the risks that: • third parties will infringe our intellectual property rights; • our non-disclosure agreements will be breached; • we will not have adequate remedies for infringement; • our trade secrets will become known to or independently developed by our competitors; or • third parties will be issued patents that may prevent the sale of our products or require us to license and pay fees or royalties in order for us to be able to market some of our products |
| Litigation may be necessary to enforce patents issued to us, to protect our proprietary rights, or to defend third party claims that we have infringed upon proprietary rights of others |
| For example, we are currently appealing the decision of a court in Germany that entered judgment in favor of certain plaintiffs that had claimed they should be listed as co-inventors on two of our German patent applications |
| The defense and prosecution of patent claims, including these pending claims, as well as participation in other inter-party proceedings, can be expensive and time consuming, even in those instances in which the outcome is favorable to us |
| If the outcome of any litigation or proceeding brought against us were adverse, we could be subject to significant liabilities to third parties, could be required to obtain licenses from third parties, could be forced to design around the patents at issue or could be required to cease sales of the affected products |
| A license may not be available at all or on commercially viable terms, and we may not be able to redesign our products to avoid infringement |
| Additionally, the laws regarding the enforceability of patents vary from country to country, and we cannot assure you that any patent issues we face will be uniformly resolved, or that local laws will provide us with consistent rights and benefits |
| - 25 - ______________________________________________________________________ [47]Table of Contents We are subject to potential product liability claims that may exceed the scope and amount of our insurance coverage, which would expose us to liability for uninsured claims |
| We are subject to potential product liability claims as a result of the design, manufacture and marketing of medical devices |
| Any product liability claim brought against us, with or without merit, could result in the increase of our product liability insurance rates |
| In addition, we would have to pay any amount awarded by a court in excess of our policy limits |
| Our insurance policies have various exclusions, and thus we may be subject to a product liability claim for which we have no insurance coverage, in which case, we may have to pay the entire amount of any award |
| We cannot assure you that our insurance coverage will be adequate or that all claims brought against us will be covered by our insurance |
| Insurance varies in cost and can be difficult to obtain, and we cannot assure you that we will be able to obtain insurance in the future on terms acceptable to us or at all |
| A successful product liability claim brought against us in excess of our insurance coverage, if any, may require us to pay substantial amounts, which could harm our business |
| We are subject to tax audits by various tax authorities in many jurisdictions |
| From time to time we may be audited by the tax authorities and are still subject to an ongoing German tax audit |
| Any final assessment resulting from this audit could result in material changes to our past or future taxable income, tax payable or deferred tax assets, and could require us to pay penalties and interest that could materially adversely affect our financial results |
| Our quarterly operating results are subject to fluctuation for a variety of reasons |
| Our operating results have, from time to time, fluctuated on a quarterly basis and may be subject to similar fluctuations in the future |
| These fluctuations may result from a number of factors, including: • the introduction of new products by us or our competitors; • the geographic mix of product sales; • the success of our marketing efforts in new regions; • changes in third party reimbursement; • timing of regulatory clearances and approvals; • timing of orders by distributors; • expenditures incurred for research and development; • competitive pricing in different regions; • seasonality; • the cost and effect of promotional and marketing programs; • the effect of foreign currency transaction gains or losses; and • other activities of our competitors |
| Fluctuations in our quarterly operating results may cause the market price of our common stock to fluctuate |
| If a natural or man-made disaster strikes our manufacturing facilities, we will be unable to manufacture our products for a substantial amount of time and our sales and profitability will decline |
| Our facilities and the manufacturing equipment we use to produce our products would be costly to replace and could require substantial lead-time to repair or replace |
| The facilities may be affected by natural or man-made disasters and in the event they were affected by a disaster, we would be forced to rely on third party manufacturers |
| Although we believe we possess adequate insurance for damage to our property and the disruption of our business from casualties, such insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, or at all |
| - 26 - ______________________________________________________________________ [48]Table of Contents Delaware law, provisions in our charter and our shareholder rights plan could make it difficult for another company to acquire us |
| Provisions of our certificate of incorporation may have the effect of delaying or preventing changes in control or management which might be beneficial to us or our security holders |
| In particular, our board of directors is divided into three classes, serving for staggered three-year terms |
| Because of this classification it will require at least two annual meetings to elect directors constituting a majority of our board of directors |
| Additionally, our board of directors has the authority to issue up to 2cmam000cmam000 shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without further vote or action by the stockholders |
| Under our stockholder rights plan, we have also issued purchase rights to the holders of our common stock that entitle those holders to purchase our Series A Junior Participating Preferred Stock at a discount, under certain circumstances |
| The rights of the holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future |
| The issuance of preferred stock may have the effect of delaying, deferring or preventing a change in control, may discourage bids for our common stock at a premium over the market price of our common stock and may adversely affect the market price of our common stock and the voting and other rights of the holders of our common stock |
| You may not be able to enforce the judgments of US courts against some of our assets or officers and directors |
| A substantial portion of our assets are located outside the United States |
| Additionally, two of our eight directors and three of our seven executive officers reside outside the United States, along with all or a substantial portion of the assets of these persons |
| As a result, it may not be possible for investors to enforce judgments of US courts relating to any liabilities under US securities laws against our assets, those persons or their assets |
| In addition, we have been advised by our Australian counsel that some doubt exists as to the ability of investors to pursue claims based on US securities laws against these assets or these persons in Australian courts |