| SPECTRANETICS CORP ITEM 1A Risk Factors Increases in our Stock Price are Largely Dependent on our Ability to Grow Revenues |
| Revenue growth from current levels depends largely on our ability to successfully penetrate the peripheral atherectomy market with our CliRpath product line that was introduced in 2004 and that is targeted at total occlusions (blockages) in the legs |
| The success of this launch will require increased re-order rates from existing customers and adoption by new customers |
| Beyond the initial CliRpath product line launch, new products will need to be developed and approved by the FDA and foreign regulatory agencies to sustain revenue growth within the peripheral market |
| Additional clinical data and new products to treat coronary artery disease will likely be necessary to grow revenue within the coronary market |
| We incurred losses from operations since our inception in June 1984 until the second quarter of 2001, and we incurred net losses in the first and second quarters of 2002 |
| At December 31, 2005, we had accumulated dlra72dtta4 million in net losses since inception |
| We expect that our research, development and clinical trial activities and regulatory approvals, together with future selling, general and administrative activities and the costs associated with launching our products for additional indications, will result in significant expenses for the foreseeable future |
| In addition, we expect the adoption of Statement 123R effective January 1, 2006 will result in significant compensation expense in future periods |
| Although we demonstrated profitability over the last four years and are focused on maintaining profitability, no assurance can be given that we will be able to maintain profitability in the future |
| The industry in which we compete is subject to extensive regulation by the FDA and comparable state and foreign agencies |
| Complying with these regulations is costly and time consuming |
| International regulatory approval processes may take longer than the FDA approval process |
| If we fail to comply with applicable regulatory requirements, we may be subject to fines, suspensions or revocations of approvals, seizures or recalls of products, operating restrictions, criminal prosecutions and other penalties |
| We may be unable to obtain future regulatory approval in a timely manner, or at all, especially if existing regulations are changed or new regulations are adopted |
| For example, the FDA approval process for the use of excimer laser technology in clearing blocked arteries in the leg took longer than we anticipated due to requests for additional clinical data and changes in regulatory requirements |
| All of Spectranetics’ potential products are subject to extensive regulation and will require approval from the FDA and other regulatory agencies prior to commercial sale |
| The results from pre-clinical testing and early clinical trials may not be predictive of results obtained in later clinical trials |
| Companies in the medical device industry have suffered 16 _________________________________________________________________ [56]Table of Contents significant setbacks in various stages of clinical trials, even in advanced clinical trials, after apparently promising results had been obtained in earlier trials |
| The development of safe and effective products is uncertain and subject to numerous risks |
| The product development process may take several years, depending on the type, complexity, novelty and intended use of the product |
| Larger competitors are able to offer larger financial incentives to their customers to support their clinical trials |
| Enrollment in our clinical trials may be adversely affected by clinical trials financed by our larger competitors |
| Product candidates that may appear to be promising in development may not reach the market for a number of reasons |
| Product candidates may: • be found ineffective; • take longer to progress through clinical trials than had been anticipated; or • require additional clinical data and testing |
| Our Small Sales and Marketing Team May Be Unable To Compete With Our Larger Competitors or To Reach Potential Customers |
| Although we are expanding our sales and marketing organizations, many of our competitors have substantially larger sales and marketing operations than we do |
| This allows those competitors to spend more time with potential customers and to focus on a larger number of potential customers, which gives them a significant advantage over our team in making sales |
| Additionally, our field sales organization consists primarily of individuals with extensive clinical experience within hospital catheterization labs; however, their sales experience is limited |
| We are providing sales training and, as we add new field sales employees, will attempt to recruit candidates with more sales experience |
| However, there are no assurances that our sales training and recruiting will improve productivity within our field sales organization |
| Further, there may be more turnover within the field sales organization relative to past history as a result of our transition towards a higher level of sales skills |
| Excimer laser technology is generally used adjunctively with more established therapies such as balloon angioplasty and stent implantation for restoring circulation to clogged or obstructed arteries |
| Market acceptance of the excimer laser system depends on our ability to provide incremental clinical and economic data that shows the clinical efficacy and cost effectiveness of, and patient benefits from, excimer laser atherectomy used with balloon angioplasty and stent implantation |
| Our primary competitors are manufacturers of products used in competing therapies within the coronary and peripheral atherectomy markets, such as: • bypass surgery (coronary and peripheral); • atherectomy and thrombectomy, using mechanical methods to remove arterial blockages (coronary and peripheral); • amputation (peripheral); and • balloon angioplasty (peripheral) |
| We also compete with companies marketing lead extraction devices or removal methods, such as mechanical sheaths |
| In the lead removal market, we compete worldwide with lead removal devices manufactured by Cook Vascular Inc |
| and we compete in Europe with devices manufactured by VascoMed |
| Although balloon angioplasty and stents are used extensively in the coronary vascular system, we do not compete directly with these products |
| Rather, our laser technology is used as an adjunctive treatment to balloon angioplasty and stents in complex procedures |
| Almost all of our competitors have substantially greater financial, manufacturing, marketing and technical resources than we do |
| Larger competitors have a broader product line, which enables them to offer customers bundled purchase contracts and quantity discounts |
| We expect competition to intensify |
| 17 _________________________________________________________________ [57]Table of Contents We believe that primary competitive factors in the interventional cardiovascular market include: • the ability to treat a variety of lesions safely and effectively as demonstrated by credible clinical data; • the impact of managed care practices, related reimbursement to the health care provider, and procedure costs; • ease of use; • size and effectiveness of sales forces; and • research and development capabilities |
| Manufacturers of atherectomy or thrombectomy devices include Boston Scientific, Guidant, Possis Medical, Fox Hollow Technologies and Intraluminal Therapeutics |
| There are other potential competitors, such as Pathway Medical and Cardiovascular Systems, that are seeking FDA approval to market their mechanical atherectomy devices |
| The initial cost of purchasing our CVX 300 laser unit is substantial and hospitals and other healthcare providers are not reimbursed for the cost of acquiring this unit, but instead are reimbursed for individual procedures performed using the unit |
| Many competing products do not require an up-front investment in the form of a capital equipment purchase, lease, or rental |
| As a result, the initial cost of purchasing our laser unit may prevent hospitals and other healthcare providers from using our devices, which in turn would adversely affect both our revenues from the sale and rental of laser units, and more significantly, our revenue from the sale of our disposable products |
| Our laser-based procedures require that the healthcare provider use one of our CVX 300 laser units |
| We sell our CVX-300 laser units primarily to hospitals, which then bill third-party payers such as government programs and private insurance plans, for the services the hospitals provide to individual patients using the CVX-300 laser unit |
| As a result, hospitals and other healthcare providers are not reimbursed for the substantial initial cost of purchasing the laser unit |
| By contrast, many competing products and procedures, like balloon angioplasty do not require the purchase or lease of expensive equipment |
| Moreover, in some circumstances, the amount reimbursed to a hospital for procedures involving our products may not be adequate to allow them to recoup their initial investment in our laser unit |
| Moreover, because our catheters and other disposable products generally can be used only in conjunction with our laser unit, any limitation of the acquisition of our laser units by hospitals and other healthcare providers will adversely affect sales of our disposable products |
| The FDA has required that the label for the CVX-300 laser unit state that adjunctive balloon angioplasty was performed together with laser atherectomy in most of the coronary procedures we submitted to the FDA for pre-market approval |
| Adjunctive balloon angioplasty requires the purchase of a balloon catheter in addition to the laser catheter |
| The requirement that our procedures be performed together with balloon angioplasty increases the aggregate cost of performing these procedures |
| As a result, third-party payers may attempt to deny or limit reimbursement, including if they determine that a device used in a procedure was experimental, was used for a non-approved indication, or was not used in accordance with established pay protocols regarding cost-effective treatment methods |
| Hospitals that have experienced reimbursement problems or expect to experience reimbursement problems may not acquire our excimer laser systems |
| We derive substantially all of our revenue from the sale or lease of the CVX-300 laser unit, related disposable devices and service |
| Technological progress or new developments in our industry could adversely affect sales of our products |
| Many companies, some of which have substantially greater resources than we do, are engaged in research and development for the treatment and prevention of coronary artery disease and peripheral vascular disease |
| These include pharmaceutical approaches as well as development of new or improved angioplasty, ather- 18 _________________________________________________________________ [58]Table of Contents ectomy, thrombectomy, stents or other devices |
| Our products could be rendered obsolete as a result of future innovations in the treatment of vascular disease |
| We utilize distributors throughout most of Europe |
| The sales and marketing efforts on our behalf by distributors in Europe could fail to attain long-term success |
| On January 1, 2006, we commenced the marketing of products directly to our German customers through our European sales and clinical organization, following the expiration of an agreement with our German distributor on December 31, 2005 |
| There can be no assurance that our direct sales effort in Germany will be successful |
| For the year ended December 31, 2005, our revenue from international operations represented 14 percent of consolidated revenue |
| Changes in overseas economic conditions, war, currency exchange rates, foreign laws regulating the approval and sales of medical devices, foreign tax laws or tariffs or other trade regulations could adversely affect our ability to market our products outside the United States |
| The new product approval process in foreign countries is often complex and lengthy |
| For example, the reimbursement approval process in Japan is taking longer than anticipated due to the complexity of this process |
| To the extent we expand our international operations, we expect our sales and expenses denominated in foreign currencies to expand, therefore increasing the risk that we will be adversely affected by fluctuations in currency exchange rates |
| We currently do not hedge against foreign currency fluctuations, which could result in reduced consolidated revenues or increased operating expenses |
| We Have Important Sole Source Suppliers and May Be Unable To Replace Them if They Stop Supplying Us |
| We purchase certain components of our CVX-300 laser unit from several sole source suppliers |
| We do not have guaranteed commitments from these suppliers and order products through purchase orders placed with these suppliers from time to time |
| While we believe that we could obtain replacement components from alternative suppliers, we may be unable to do so |
| We May Be Unable to Meet Customer Demand Associated with Growth in Unit Volumes |
| We have experienced increase unit volume growth and our ability to fulfill customer demand is becoming more difficult |
| Although we are making what we believe are the necessary investments to increase manufacturing capacity, these investments may not be sufficient to fulfill customer demand on a timely basis Potential Product Liability Claims and Insufficient Insurance Coverage May Hurt Our Business and Stock Price |
| We are subject to risk of product liability claims |
| We maintain product liability insurance with coverage and aggregate maximum amounts of dlra5cmam000cmam000 |
| The coverage limits of our insurance policies may be inadequate, and insurance coverage with acceptable terms could be unavailable in the future |
| We hold patents and licenses to use patented technology, and have patent applications pending |
| Our patents cover the connection (coupler) between our laser catheters and the laser unit, general features of the laser system, system patents that include the use of our laser and our catheters together, and specific design features of our catheters |
| Certain of the coupler patents and system patents expire in 2010, and we are currently exploring new technology and design changes that may extend the patent protection for the coupler and system patents, however, there can be no assurance we will be successful in doing so |
| In addition, the patents we own and license may not be sufficiently broad to protect our technology or to give us any competitive advantage |
| Our patents could be challenged as invalid or circumvented by competitors |
| In addition, the laws of certain foreign countries do not protect our intellectual property rights to the same extent as do the laws of the United States |
| We could be adversely affected if any of our licensors terminate our licenses to use patented technology |
| Spectranetics respects the intellectual property rights of others |
| However, there may be patents and patent applications owned by others relating to laser and fiber-optic technologies, which, if determined to be valid and enforceable, may be infringed by Spectranetics |
| Holders of certain patents, including holders of patents involving the use of lasers in the body, may contact us and request that we enter into license 19 _________________________________________________________________ [59]Table of Contents agreements for the underlying technology and pay them royalties, which could be substantial |
| For example, we have been made aware of a patent issued to Dr |
| Peter Rentrop for a certain catheter with a diameter of less than 0dtta9 millimeters and are currently involved in litigation regarding this patent |
| See “Legal Proceedings” herein for further discussion of this litigation |
| We cannot guarantee that we will prevail in this litigation or that another patent holder will not file a lawsuit against us and prevail |
| If we decide that we need to obtain a license to use any intellectual property, we may be unable to obtain these licenses on favorable terms or at all or we may be required to make substantial royalty or other payments to use this intellectual property |
| We may not be able to develop or otherwise obtain alternative technology |
| Litigation concerning patents and proprietary rights is time-consuming, expensive, unpredictable and could divert the efforts of our management |
| An adverse ruling could subject us to significant liability, require us to seek licenses and restrict our ability to manufacture and sell our products |
| Our Stock Price May Continue To Be Volatile |
| The market price of our common stock, similar to other medical device companies, has been, and is likely to continue to be, highly volatile |
| The following factors may significantly affect the market price of our common stock: • fluctuations in operating results; • announcements of technological innovations or new products by Spectranetics or our competitors; • governmental regulation; • developments with respect to patents or proprietary rights; • public concern regarding the safety of products developed by Spectranetics or others; • the initiation or cessation in coverage of our common stock, or changes in ratings of our common stock, by securities analysts; • past or future management changes; • litigation; • general market conditions; and • financing of future operations through additional issuances of equity securities, which may result in dilution to existing stockholders and falling stock prices |
| Protections Against Unsolicited Takeovers in Our Rights Plan, Charter and Bylaws May Reduce or Eliminate Our Stockholders’ Ability To Resell Their Shares at a Premium Over Market Price |
| We have a stockholders’ rights plan that may prevent an unsolicited change of control of Spectranetics |
| The rights plan may adversely affect the market price of our common stock or the ability of stockholders to participate in a transaction in which they might otherwise receive a premium for their shares |
| In addition, the issuance of preferred stock or common stock upon exercise of rights issued under this plan could dilute the voting, liquidation and other economic rights or our other stockholders and make it more difficult for a third party to acquire us |
| However, our stockholder rights plan by its terms will expire in May, 2006 and we do not intend to extend or renew the rights plan |
| Our charter and bylaws contain provisions relating to issuance of preferred stock, special meetings of stockholders and amendments of the bylaws that could have the effect of delaying, deferring or preventing an unsolicited change in the control of Spectranetics |
| Our Board of Directors is elected for staggered three-year terms, which prevents stockholders from electing all directors at each annual meeting and may have the effect of delaying or deferring a change in control |