| VASCULAR SOLUTIONS INC ITEM 1A RISK FACTORS The risks and uncertainties described below are not the only ones facing our company |
| Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations |
| If any of the following risks occur, our business, financial condition or results of operations could be seriously harmed |
| We will not be successful if the interventional medical device community does not adopt our new products During the third quarter of 2000 we commenced sales of our first product, the Duett sealing device, in the United States, which we believe represents the largest market for interventional medical devices |
| We have not become profitable with our sales of the Duett |
| In the second half of 2003, we received clearance to commence sales of four new interventional products in the United States |
| Our success will depend on the medical community’s acceptance of our new products |
| We cannot predict how quickly, if at all, the medical community will accept our new products, or, if accepted, the extent of their use |
| Our potential customers must: • believe that our products offer benefits compared to the methodologies and/or devices that they are currently using; • use our products and obtain acceptable clinical outcomes; • believe that our products are worth the price that they will be asked to pay; and • be willing to commit the time and resources required to change their current methodology |
| Because we have only limited experience with sales of our new products, we have no ability to predict the level of growth in sales of these products |
| If we encounter difficulties in growing our sales of our new medical devices in the United States, our business will be seriously harmed |
| We have limited working capital to pursue our business On December 31, 2005, we had dlra4dtta3 million in cash and cash equivalents and a working capital of dlra10dtta9 million |
| During 2005, our operating activities resulted in the use of dlra1dtta7 million of cash |
| If our sales do not increase, or if we encounter unexpected expenses, we will need to raise additional working capital |
| We have no commitments for additional funding and so our ability to meet our long-term liquidity needs is uncertain |
| If we raise additional funds through the issuance of equity securities, our shareholders may experience significant dilution |
| Furthermore, additional financing may not be available when needed or, if available, financing may not be on terms favorable to us or our shareholders |
| If financing is not available when required or is not available on acceptable terms, we may be unable to develop or market our products or unable to take advantage of business opportunities, or we may be required to significantly curtail our business operations |
| 15 _________________________________________________________________ We have incurred losses and we may not be profitable in the future Since we commenced operations in February 1997, we have incurred net losses primarily from costs relating to the development and commercialization of our Duett sealing device and new products |
| At December 31, 2005, we had an accumulated deficit of dlra63dtta8 million |
| We expect to continue to significantly invest in our sales and marketing, and research and development activities |
| Because of our plans to introduce new products and expand our commercialization, we expect to incur net losses through at least the second quarter of 2006 |
| Our business strategies may not be successful, and we may not become profitable in any future period or at all |
| If we do become profitable, we cannot be certain that we can sustain or increase profitability on a quarterly or annual basis |
| We may face additional intellectual property claims in the future which could prevent us from manufacturing and selling our products or result in our incurring substantial costs and liabilities The interventional medical device industry is characterized by numerous patent filings and frequent and substantial intellectual property litigation |
| Companies in the interventional medical device industry have employed intellectual property litigation in an attempt to gain a competitive advantage |
| We have been subject to two intellectual property lawsuits concerning our Duett sealing device |
| Although we have settled both of these intellectual property lawsuits, it is possible that additional claims relating to the Duett could be brought in the future |
| We also are the subject of three intellectual property lawsuits concerning our Vari-Lase products |
| In addition, while we do not believe that any of our new products infringes any existing patent, it is highly likely that we will become subject to intellectual property claims with respect to our new products in the future |
| Intellectual property litigation in recent years has proven to be very complex, and the outcome of such litigation is difficult to predict |
| An adverse determination in any intellectual property litigation or interference proceedings could prohibit us from selling a product, subject us to significant liabilities to third parties or require us to seek licenses from third parties |
| The costs associated with these license arrangements may be substantial and could include ongoing royalties |
| Furthermore, the necessary licenses may not be available to us on satisfactory terms, if at all |
| Adverse determinations in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us from manufacturing and selling a product |
| Our defense of intellectual property claims filed in the future, regardless of the merits of the complaint, could divert the attention of our technical and management personnel away from the development and marketing of our products for significant periods of time |
| The costs incurred to future claims could be substantial and seriously harm us, even if our defense is ultimately successful |
| The loss of, or interruption of supply from, key vendors, including our single source supplier of thrombin, could limit our ability to manufacture our products We purchase components used in our products from various suppliers and rely on a single source for the thrombin component of our Duett sealing device and D-Stat products |
| There are currently no FDA-approved alternative suppliers of thrombin |
| Our current supply agreement with our thrombin vendor terminated in May 2005 |
| Because it requires FDA approval, establishing our new supplier for thrombin requires a lead-time of at least two years and involves significant additional costs |
| The failure by us to complete our thrombin qualification project on time and on budget, or the loss of any other key vendor, may limit our ability to manufacture our Duett, D-Stat Flowable and D-Stat Dry products and could therefore seriously harm our business |
| 16 _________________________________________________________________ We have purchased a substantial amount of thrombin inventory, and failure to both qualify our new source of thrombin and sell an increasing amount of our thrombin-based products could cause a substantial inventory write-off |
| The principal component in all of our hemostatic products is thrombin |
| Under a previous supply agreement with our original thrombin supplier we issued substantial purchase orders prior to its expiration in 2005 |
| As of December 31, 2005, we had approximately dlra1dtta4 million of thrombin from this original source in inventory |
| Currently we are in the process of qualifying a new source of thrombin, which has required us to purchase and hold in inventory approximately dlra1dtta7 million of additional thrombin as of December 31, 2005 |
| We must complete our qualification work and receive FDA clearance before we can utilize this new source of thrombin as a component in our hemostatic products |
| In addition, if any of our inventory of thrombin from the original source or the new source is destroyed or otherwise degraded, we could be exposed to substantial losses |
| Our future operating results are difficult to predict and may vary significantly from quarter to quarter, which may adversely affect the price of our common stock The limited history of our sales and our history of losses make prediction of future operating results difficult |
| You should not rely on our past revenue growth as any indication of future growth rates or operating results |
| The price of our common stock will likely fall in the event that our operating results do not meet the expectations of analysts and investors |
| Comparisons of our quarterly operating results are an unreliable indication of our future performance because they are likely to vary significantly based on many factors, including: • the level of sales of our products in the United States market; • our ability to introduce new products and enhancements in a timely manner; • the demand for and acceptance of our products; • the success of our competition and the introduction of alternative products; • our ability to command favorable pricing for our products; • the growth of the market for our devices; • the expansion and rate of success of our direct sales force in the United States and our independent distributors internationally; • actions relating to ongoing FDA compliance; • the effect of intellectual property disputes; • the size and timing of orders from independent distributors or customers; • the attraction and retention of key personnel, particularly in sales and marketing, regulatory, manufacturing and research and development; • unanticipated delays or an inability to control costs; • general economic conditions as well as those specific to our customers and markets; and • seasonal fluctuations in revenue due to the elective nature of some procedures |
| 17 _________________________________________________________________ We may face product liability claims that could result in costly litigation and significant liabilities The manufacture and sale of medical products entail significant risk of product liability claims |
| The medical device industry in general has been subject to significant medical malpractice litigation |
| Any product liability claims, with or without merit, could result in costly litigation, reduced sales, cause us to incur significant liabilities and divert our management’s time, attention and resources |
| Because of our limited operating history and lack of experience with these claims, we cannot be sure that our product liability insurance coverage is adequate or that it will continue to be available to us on acceptable terms, if at all |
| The market for interventional medical devices is highly competitive and will likely become more competitive, and our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements that may render our products obsolete The existing market for interventional medical devices is intensely competitive |
| We expect competition to increase further as companies develop new products and/or modify their existing products to compete directly with ours |
| Each of our products encounters competition from at least several medical device companies, including Medtronic Inc, Abbot Laboratories, St |
| Each of these companies has: • better name recognition; • broader product lines; • greater sales, marketing and distribution capabilities; • significantly greater financial resources; • larger research and development staffs and facilities; and • existing relationships with some of our potential customers |
| We may not be able to effectively compete with these companies |
| In addition, broad product lines may allow our competitors to negotiate exclusive, long-term supply contracts and offer comprehensive pricing for their products |
| Broader product lines may also provide our competitors with a significant advantage in marketing competing products to group purchasing organizations and other managed care organizations that are increasingly seeking to reduce costs through centralized purchasing |
| Greater financial resources and product development capabilities may allow our competitors to respond more quickly to new or emerging technologies and changes in customer requirements that may render our products obsolete |
| Our international sales are subject to a number of risks that could seriously harm our ability to successfully commercialize our products in any international market Our international sales are subject to several risks, including: • the ability of our independent distributors to sell our products; • the impact of recessions in economies outside the United States; • greater difficulty in collecting accounts receivable and longer collection periods; • unexpected changes in regulatory requirements, tariffs or other trade barriers; • weaker intellectual property rights protection in some countries; • potentially adverse tax consequences; and • political and economic instability |
| 18 _________________________________________________________________ The occurrence of any of these events could seriously harm our future international sales and our ability to successfully commercialize our products in any international market |
| We have limited manufacturing experience and may encounter difficulties in our manufacturing operations which could seriously harm our business We have limited experience in manufacturing our products |
| In particular, we have limited experience in lyophilization, which is a key manufacturing step for our D-Stat Dry hemostatic bandage |
| We believe our facilities are adequate for our projected production of our products for the foreseeable future, but future facility requirements will depend largely on future sales of our products in the United States |
| We may encounter unforeseen difficulties in expanding our production of our new products, including problems involving production yields, quality control and assurance, component supply and shortages of qualified personnel, compliance with FDA regulations and requirements regarding good manufacturing practices, and the need for further regulatory approval of new manufacturing processes |
| Difficulties encountered by us in expanding and maintaining our manufacturing capabilities could seriously harm our business |
| Our business and results of operations may be seriously harmed by changes in third-party reimbursement policies We could be seriously harmed by changes in reimbursement policies of governmental or private healthcare payors, particularly to the extent any changes affect reimbursement for catheterization procedures in which our products are used |
| Failure by physicians, hospitals and other users of our products to obtain sufficient reimbursement from healthcare payors for procedures in which our products are used or adverse changes in governmental and private third-party payors’ policies toward reimbursement for such procedures would seriously harm our business |
| In the United States, healthcare providers, including hospitals and clinics that purchase medical devices such as our products, generally rely on third-party payors, principally federal Medicare, state Medicaid and private health insurance plans, to reimburse all or part of the cost of catheterization procedures |
| Any changes in this reimbursement system could seriously harm our business |
| In international markets, acceptance of our products is dependent in part upon the availability of reimbursement within prevailing healthcare payment systems |
| Reimbursement and healthcare payment systems in international markets vary significantly by country |
| Our failure to receive international reimbursement approvals could have a negative impact on market acceptance of our products in the markets in which these approvals are sought |
| Our products and our manufacturing activities are subject to extensive governmental regulation that could prevent us from selling our products in the United States or introducing new and improved products Our products and our manufacturing activities are subject to extensive regulation by a number of governmental agencies, including the FDA and comparable international agencies |
| We are required to: • obtain the clearance of the FDA and international agencies before we can market and sell our products; • satisfy these agencies’ content requirements for all of our labeling, sales and promotional materials; and • undergo rigorous inspections by these agencies |
| 19 _________________________________________________________________ Compliance with the regulations of these agencies may delay or prevent us from introducing any new model of our existing products or other new products |
| Furthermore, we may be subject to sanctions, including temporary or permanent suspension of operations, product recalls and marketing restrictions if we fail to comply with the laws and regulations pertaining to our business |
| We are also required to demonstrate compliance with the FDA’s quality system regulations |
| The FDA enforces its quality system regulations through pre-approval and periodic post-approval inspections |
| These regulations relate to product testing, vendor qualification, design control and quality assurance, as well as the maintenance of records and documentation |
| If we are unable to conform to these regulations, the FDA may take actions which could seriously harm our business |
| In addition, government regulation may be established that could prevent, delay, modify or rescind regulatory clearance or approval of our products |