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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Mark One:
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1996 or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____ to ____
Commission file number 0-27214
GYNECARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3197941
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
235 Constitution Drive, Menlo Park, CA 94025
--------------------------------------------
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (415) 614-2500
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days.
Yes /X/ No / /
The number of shares of Common Stock outstanding as of November 7, 1996
was 8,283,197.
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TABLE OF CONTENTS
Page
Part I. Financial Information
Item 1. Financial Statements
Condensed Balance Sheets at September 30, 1996
and December 31, 1995 3
Statements of Operations for the three and nine
months ended September 30, 1996 and 1995 4
Statements of Cash Flows for the nine months
ended September 30, 1996 and 1995 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GYNECARE, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 4,200,000 $22,330,000
Short-term investments.......................... 11,132,000 380,000
Accounts receivable, net........................ 435,000 433,000
Inventories..................................... 634,000 1,034,000
Prepaids and other current assets............... 86,000 344,000
------------ -----------
Total current assets.......................... 16,487,000 24,521,000
Property and equipment, net....................... 1,450,000 1,205,000
Prepaid royalties................................. 1,914,000 1,951,000
Other assets...................................... 960,000 594,000
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Total assets $ 20,811,000 $28,271,000
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------------ -----------
LIABILITIES
Current liabilities:
Accounts payable................................ $ 446,000 $ 941,000
Accrued expenses................................ 485,000 294,000
Current portion of long-term debt............... 291,000 270,000
------------ -----------
Total current liabilities..................... 1,222,000 1,505,000
Long-term debt, net of current portion............ 218,000 458,000
------------ -----------
Total liabilities............................. 1,440,000 1,963,000
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STOCKHOLDERS' EQUITY
Common Stock...................................... 8,000 8,000
Additional paid-in-capital........................ 33,617,000 33,501,000
Deferred compensation............................. (427,000) (566,000)
Accumulated deficit............................... (13,827,000) (6,635,000)
------------ -----------
Total stockholders' equity.................... 19,371,000 26,308,000
------------ -----------
Total liabilities and stockholders' equity.. $ 20,811,000 $28,271,000
------------ -----------
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</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
3
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GYNECARE, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------------- ---------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues...................................... $ 233,000 $ 151,000 $ 708,000 $ 645,000
Cost of goods sold............................ 446,000 138,000 1,146,000 550,000
----------- ----------- ----------- -----------
Gross profit................................ (213,000) 13,000 (438,000) 95,000
Operating expenses:
Research and development.................... 1,079,000 621,000 3,583,000 1,644,000
Selling, general and administrative......... 1,431,000 752,000 3,786,000 1,822,000
----------- ----------- ----------- -----------
Total operating expenses.................. 2,510,000 1,373,000 7,369,000 3,466,000
----------- ----------- ----------- -----------
Loss from operations.......................... (2,723,000) (1,360,000) (7,807,000) (3,371,000)
Interest income, net.......................... 185,000 126,000 615,000 289,000
----------- ----------- ----------- -----------
Net loss...................................... $(2,538,000) $(1,234,000) $(7,192,000) $(3,082,000)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net loss per share............................ $ (0.31) $ (0.73) $ (0.88) $ (1.83)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Shares used in computing net loss per share... 8,239,000 1,688,000 8,185,000 1,688,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
4
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GYNECARE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
-----------------------------
1996 1995
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<S> <C> <C>
Cash flows from operating activities:
Net loss................................................ $ (7,192,000) $(3,082,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization........................... 297,000 87,000
Amortization of deferred compensation................... 139,000 54,000
Provision for doubtful accounts......................... 61,000 50,000
Changes in operating assets and liabilities:
Accounts receivable................................... (63,000) (417,000)
Inventories........................................... 400,000 (780,000)
Prepaids and other current assets..................... 258,000 (34,000)
Other assets.......................................... 17,000 16,000
Accounts payable...................................... (495,000) (143,000)
Accrued expenses...................................... 191,000 (10,000)
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Net cash used in operating activities.............. (6,387,000) (4,259,000)
------------ -----------
Cash flows from investing activities:
Acquisition of property and equipment................... (488,000) (489,000)
Acquisition of patent rights and related
technical information.................................. (400,000) --
Purchase of investments................................. (20,530,000) (6,407,000)
Maturity of investments................................. 9,778,000 --
Other assets............................................ -- (296,000)
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Net cash used in investing activities.............. (11,640,000) (7,192,000)
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Cash flows from financing activities:
Proceeds from issuance of Preferred Stock, net of
issuance costs......................................... -- 9,393,000
Proceeds from issuance of Common Stock.................. 116,000 258,000
Proceeds from issuance of debt.......................... -- 375,000
Payments on debt........................................ (219,000) --
------------ -----------
Net cash provided by/(used in) financing
activities........................................ (103,000) 10,026,000
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Net decrease in cash and cash equivalents................. (18,130,000) (1,425,000)
Cash and cash equivalents at beginning of period.......... 22,330,000 4,106,000
------------ -----------
Cash and cash equivalents at end of period................ $ 4,200,000 $ 2,681,000
------------ -----------
------------ -----------
Supplemental cash flow information:
Interest paid during the period......................... $52,000 $ 9,000
------------ -----------
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</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
5
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GYNECARE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited financial
statements have been prepared by the Company in accordance with
generally accepted accounting principles for interim financial
information and pursuant to the rules and regulations of the Securities
and Exchange Commission. All adjustments, consisting of only normal
recurring adjustments, necessary for a fair presentation have been
included. The results of operations for the three and nine month
periods ended September 30, 1996 are not necessarily indicative of the
results to be expected for any other interim period or for the entire
year.
The financial statements should be read in conjunction with the audited
financial statements and notes thereto included in Gynecare's (the
Company's) Annual Report on Form 10-K, for the year ended December 31,
1995, filed with the Securities and Exchange Commission pursuant to
Section 13 of the Securities Exchange Act of 1934.
2. CASH, CASH EQUIVALENTS, SHORT-TERM INVESTMENTS AND INVESTMENTS
All highly liquid investments purchased with an original maturity of
ninety days or less are considered to be cash equivalents. The Company
accounts for investments under Statement of Financial Accounting
Standards No. 115 "Accounting for Certain Investments in Debt and Equity
Securities" (SFAS No. 115), whereby investments that are deemed by
management to be held-to-maturity are reported at amortized cost. All
investments as of September 30, 1996 are classified as held-to-maturity
and are carried at amortized cost, which approximates fair market value.
3. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market. The components of inventory are:
September 30, December 31,
1996 1995
------------- ------------
Raw materials $ 200,000 $ 194,000
Work-in-process 214,000 462,000
Finished goods 220,000 378,000
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$ 634,000 $1,034,000
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---------- ----------
6
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PART I. Continued
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
THIS SECTION OF THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE
COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED
IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A
DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE SUBSECTION
ENTITLED "FACTORS AFFECTING OPERATING RESULTS AND MARKET PRICE OF STOCK"
COMMENCING ON PAGE 9.
This Management's Discussion and Analysis of Financial Condition and Results
of Operations (MD&A) should be read in conjunction with the MD&A contained in
the Company's 1995 Annual Report on Form 10-K for the fiscal year ended
December 31, 1995.
RESULTS OF OPERATIONS
Revenues increased 54% to $233,000 in the third quarter of fiscal 1996
and 10% to $708,000 in the first nine months of fiscal 1996, from $151,000
and $645,000 in the corresponding periods of fiscal 1995. All of the revenues
to-date have been generated from international sales of the Uterine Balloon
Therapy-TM- system. The increase in revenues from those of corresponding
periods of the prior year was the result of the continued expansion of
international sales of the Uterine Balloon Therapy system.
Cost of goods sold increased 223% to $446,000 in the third quarter of
fiscal 1996 and 108% to $1,146,000 in the first nine months of fiscal 1996,
from $138,000 and $550,000 in the corresponding periods of fiscal 1995. This
increase was primarily the result of the increased level of revenues, excess
capacity incurred in the Company's new manufacturing facility in Menlo Park,
California and the cost of product to support the Company's ongoing efforts
to achieve third-party reimbursement in international markets.
The Company's research and development expenses increased 74% to
$1,079,000 and 118% to $3,583,000 for the quarter and nine month period ended
September 30, 1996 from $621,000 and $1,644,000 for the corresponding periods
in fiscal 1995. This increase was principally due to the costs of completing
the patient treatment phase in the U.S. clinical trials of the Uterine Balloon
Therapy system, which began in January 1996, increased expenditures associated
with the continuing development of the Uterine Balloon Therapy system and the
ongoing investigation into several other potential products licensed by the
Company including the VersaPoint -TM- system, a bipolar uterine fibroid removal
system. Growth in the Company's research and development staff from fourteen
employees at September 30, 1995 to sixteen at September 30, 1996 further
contributed to the increase in research and development expenses for the
quarterly and nine month periods.
The Company's selling, general and administrative expenses increased 90%
to $1,431,000 and 108% to $3,786,000 for the third quarter and first nine
months of fiscal 1996 from $752,000 and $1,822,000 for the corresponding
periods in fiscal 1995. The increase was primarily the result of Gynecare's
investment in sales and marketing activities focused on obtaining reimbursement
in international markets and managing the international distributor network.
These activities included the ongoing support of reimbursement studies in
several European markets. Growth in the Company's sales and marketing,
accounting and administrative staff from ten employees at September 30, 1995 to
fourteen at September 30, 1996 further contributed to the increase in selling,
general and administrative expenses.
Net interest income increased to $185,000 and $615,000 for the quarter and
nine month period ended September 30, 1996 from $126,000 and $289,000 for the
corresponding periods ended September 30, 1995. The increase was primarily the
result of the increased level of cash and investments held by the Company
during fiscal 1996 compared to that held during fiscal 1995 as a result of the
completion of the Company's initial public offering in November 1995.
As a result of all of the above factors, the Company's total net loss
increased to $2,538,000 and $7,192,000 for the quarter and nine month period
ended September 30, 1996 from $1,234,000 and $3,082,000 for the corresponding
periods ended September 30, 1995.
7
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LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company's cash expenditures have significantly
exceeded its revenues, resulting in an accumulated deficit of $13,827,000 at
September 30, 1996. The Company has funded its operations primarily through
the private placement of equity securities aggregating $15,361,000 during 1994
and 1995 and the completion of its initial public offering in November 1995
aggregating net proceeds of $15,223,000.
Cash and cash equivalents decreased $18,130,000 during the nine month
period ended September 30, 1996 primarily as a result of cash used by the
Company's operations and investments made in short term investments. Cash used
by the Company's operations was $6,387,000 for the nine months ended
September 30, 1996 as compared to $4,259,000 for the corresponding period of
fiscal 1995. This cash was used primarily to fund the U.S. clinical trials,
which began in January 1996, the expansion of marketing programs for the
Uterine Balloon Therapy system in international markets, the costs of obtaining
reimbursement in existing markets, the increasing levels of research and
development of the Uterine Balloon Therapy system and increased general and
administrative expenses to support increased operations.
The Company's capital expenditures for the first nine months of fiscal
1996 and for the corresponding period in fiscal 1995 were $488,000 and
$489,000, respectively. The Company plans to finance its capital needs for the
immediate future principally from the net proceeds of its initial public
offering and interest thereon, and, to the extent available, from bank and
lease financing.*
During the first quarter of fiscal 1996, the Company exercised its option
to extend its license and OEM supply agreement with Gyrus Medical, Inc.
("Gyrus") for an electro-vaporization technology to include the field of
laparoscopy. Under the terms of the new arrangement, this technology,
initially targeted by Gynecare for hysteroscopic applications, will be adapted
for laparoscopic use in the treatment of gynecological conditions, such as
serosal uterine fibroids and endometriosis, as well as general surgical
indications.* A $400,000 deposit on this OEM supply agreement was made in
March 1996. Additional deposits of up to $600,000 will be due over the next 12
to 24 months.
At September 30, 1996, the Company had outstanding borrowings totalling
$509,000 under a secured credit facility. Borrowings bear interest at the
bank's prime rate plus 1.5% per annum, are required to be repaid in monthly
installments over 30 months, and are secured by a pledge of all of the
Company's equipment and fixtures.
The Company believes that its cash, cash equivalents and investments
together with interest thereon will be sufficient to fund its operations and
capital requirements through mid-1997.* However, Gynecare's future liquidity
and capital requirements will depend upon numerous factors, including the
progress of the Company's clinical research and product development programs,
the receipt of and the time required to obtain regulatory clearances and
approvals, and the resources the Company devotes to developing, manufacturing
and marketing its products. The Company's capital requirements also depend on
the resources required to hire and develop a direct sales force in the United
States, the resources required to expand manufacturing capacity and facilities
requirements, the extent to which the Company's products generate market
acceptance and demand, the costs of obtaining reimbursement for use of the
Company's Uterine Balloon Therapy system in new and existing markets, and other
factors. As such, there can be no assurance that the Company will not require
additional financing prior to mid-1997 and, therefore, may be required to seek
to raise additional funds through bank facilities, debt or equity offerings or
other sources of capital prior to such time. Additional funding may not be
available when needed or on terms acceptable to the Company, which would have a
material adverse effect on the Company's business, financial condition and
results of operations.
In November 1996, the Company received notification of 510(k) clearance
from the FDA to market its VersaPoint system for hysteroscopic fibroid removal.
The VersaPoint system is designed to reduce the risks of traditional surgical
- --------------------------------------
* This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Stockholders
are strongly encouraged to review the section entitled "Factors Affecting
Operating Results and Market Price of Stock" commencing on page 9, for a
discussion of factors that could affect future performance.
8
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fibroid removal procedures, including hysterectomy, through the use of
proprietary bipolar electro-vaporization technology. The Company intends to
market this product both in the U.S. and internationally. However, there can
be no assurances that the Company will be successful in its efforts to market
this product. See "Factors Affecting Operating Results and Market Price of
Stock - Dependence on Uterine Balloon Therapy System; Early Stage of Clinical
Testing."
FACTORS AFFECTING OPERATING RESULTS AND MARKET PRICE OF STOCK
Gynecare operates in a rapidly changing environment that involves a number
of uncertainties, some of which are beyond the Company's control. In addition
to the uncertainties described elsewhere in this report, these uncertainties
include:
DEPENDENCE ON UTERINE BALLOON THERAPY SYSTEM; EARLY STAGE OF CLINICAL
TESTING. Currently, the Uterine Balloon Therapy system is the only product
being marketed by the Company. The Company will be required to perform
additional clinical trials and obtain regulatory approvals, including PMA
approval from the FDA, before the product can be marketed in the United States
and in certain foreign countries, including Japan. To date, the Company has had
only limited international sales of the product. There can be no assurance
that the Company's efforts will be successful or that the Uterine Balloon
Therapy system or any other product developed by the Company will be safe or
effective, capable of being manufactured in commercial quantities at acceptable
costs, approved by appropriate regulatory or reimbursement authorities or
successfully marketed. Furthermore, because the Uterine Balloon Therapy system
represents the Company's principal near-term focus, the Company could be
required to cease operations if the Uterine Balloon Therapy system is not
successfully commercialized. In addition, the clinical trials may identify
significant technical or other obstacles to be overcome prior to obtaining
necessary regulatory or reimbursement approvals. Although there has been a
significant success rate in the patients treated to date under the current
protocol for the Uterine Balloon Therapy system, there is only limited follow-
up data for such patients. As a result, there can be no assurance that the
success rate of the procedure will be sustainable or will not decrease over
time. If the Uterine Balloon Therapy system does not prove to be safe and
effective in clinical trials, there would be a material adverse effect on the
Company's business, financial condition and results of operations.
LIMITED OPERATING HISTORY AND REVENUES; ANTICIPATED FUTURE LOSSES. The
Company has generated only limited revenues to date and has experienced net
losses since its inception. As of September 30, 1996, the Company had an
accumulated deficit of $13.8 million. The Company expects its operating losses
to continue for at least the next several years. In addition, the Company
expects that it will continue to expend substantial resources in funding
clinical trials in support of regulatory and reimbursement approvals, expansion
of marketing and sales activities and research and development. There can be
no assurance that the Uterine Balloon Therapy system will be successfully
commercialized or that the Company will achieve significant revenues from
either international or domestic sales. In addition, there can be no assurance
that the Company will achieve or sustain profitability in the future.
UNCERTAINTY OF MARKET ACCEPTANCE. The Company's success is dependent upon
acceptance of Uterine Balloon Therapy by the medical community as a reliable,
safe and cost-effective treatment for excessive menstrual bleeding. The Company
is unable to predict how quickly, if at all, its products will be accepted by
the medical community or, if accepted, the number of procedures that will be
performed. The medical indications that can be treated with Uterine Balloon
Therapy can also be treated by surgery, drugs or other medical devices.
Although the Company believes that its products have certain advantages over
competing products and technologies, the Company does not have sufficient
clinical data demonstrating such advantages. There can be no assurance that any
such advantages will be clinically significant. The Uterine Balloon Therapy
system is designed to be used with a local anesthetic in a clinic or
physician's office. If physicians recommend or require that Uterine Balloon
Therapy be performed under general anesthesia in a hospital or outpatient
surgery center instead of under local anesthesia in a clinic or physician's
office, market acceptance of the Uterine Balloon Therapy system would be
adversely affected, which would have a material adverse effect on the Company's
business, financial condition and results of operations. Although the Company
believes its product may be adaptable to other uterine bleeding disorders,
there can be no assurance that the Company's product will be clinically
effective for any other indications, that regulatory approval of the Company's
product for such other indications could be obtained, that treatment of such
conditions would be commercially feasible or that additional markets for any
such indications will develop. Obtaining FDA approval to market the Uterine
Balloon Therapy system for other indications is likely to require a long period
of time and considerable expense. Patient population estimates are subject to
inherent uncertainties, and the
9
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Company is unable to determine with any degree of certainty the number of
patients for any indication or the number of patients who are suitable for
treatment.
POTENTIAL FLUCTUATIONS IN FUTURE QUARTERLY RESULTS. The Company expects
that its operating results will fluctuate significantly from quarter to
quarter in the future and will depend on a number of factors, many of which
are outside the Company's control. These factors include actions relating to
regulatory and reimbursement matters, the extent to which the Company's
products gain market acceptance, the rate at which the Company establishes
its international distributor network, the timing and size of distributor
purchases, the progress of clinical trials and the introduction of
alternative means for treating excessive menstrual bleeding.
LIMITED MANUFACTURING EXPERIENCE; DEPENDENCE ON SINGLE CONTRACT
MANUFACTURERS AND SOLE SOURCE SUPPLIERS; SCALE-UP RISK. The Company only
recently commenced manufacture of certain components of its products and
depends on contract manufacturers for the production of certain components of
the Uterine Balloon Therapy system. The Company expects to continue to depend
on such manufacturers for the foreseeable future. The integration of the
Company's operations into new facilities, which occurred in November 1995, has
resulted and may continue to result in inefficiencies. Specifically,
manufacturers often encounter difficulties in production of new products,
including problems involving production yields, quality control and assurance,
component supply and shortages of qualified personnel. The Company may
experience a shortage of manufacturing capacity if the new facility fails to
operate as planned. Although the Company intends to maintain sufficient levels
of inventory to avoid any material disruption resulting from the continuing
scale-up of the new facility and transition to in-house manufacturing, there
can be no assurance that the Company will be able to manufacture and supply
sufficient quantities of products to meet product requirements for United
States and international clinical trials and commercial sales. Additionally,
any delay or difficulty in continuing manufacturing activities at the new
facility may have a material adverse effect on the Company's business,
financial condition and results of operations. As a result of commencing
manufacturing in the new facility and the related manufacturing start-up and
overhead costs being spread over low production volumes, gross margins
decreased during the second and third quarters of 1996. Gross margins may
continue to be impacted in future periods as a result of manufacturing in the
new facility.
DEPENDENCE UPON INTERNATIONAL DISTRIBUTORS AND SALES. To date, all of the
Company's sales of the Uterine Balloon Therapy system have been outside the
United States, and the Company anticipates that a significant portion of its
revenues for the next year will continue to be derived from international
sales. The Company markets and sells its products internationally through a
network of distributors. The Company's international sales are dependent upon
the marketing efforts of, and sales by, these distributors. The Company may
also rely on these distributors to assist it in obtaining reimbursement
approvals from both government and private insurers in certain international
markets. In general, the Company has chosen to operate through small
distribution firms because of its belief that these firms will devote greater
attention to the Company's products. The use of small distributors increases
the risks associated with financial instability, which includes the risk that
distributors will cease operations or will be unable to satisfy financial
obligations to the Company. If a distributor were to fail to invest adequate
capital promoting the Company's products or were to cease operations, the
Company would likely be unable to achieve significant sales in the territory.
In addition, because the Company has only recently commenced international
sales, it has only limited sell-through experience with many of its
distributors. Gynecare also does not currently have distributors in a number of
significant international markets that it has targeted and will need to
establish additional international distribution relationships. There can be no
assurance that the Company will engage qualified distributors in a timely
manner. The failure to engage such distributors would have a material adverse
effect on the Company's business, financial condition and results of
operations.
A number of other risks are inherent in international operations and
transactions. International sales and operations may be limited or disrupted
by the imposition of government controls, export license requirements,
political instability, trade restrictions, changes in tariffs, difficulties in
managing international operations and fluctuations in foreign currency exchange
rates. There can be no assurance that the Company will be able to successfully
commercialize the Uterine Balloon Therapy system or any future product in any
international market.
UNCERTAINTY RELATING TO THIRD-PARTY REIMBURSEMENT. The Company's success
will be dependent upon, among other things, its ability to obtain satisfactory
reimbursement from health care payors for the Uterine Balloon Therapy system.
The Company does not expect that third-party reimbursement will be available,
if at all, for use of the Uterine Balloon Therapy system in the United States
unless and until FDA approval is received. If FDA approval is received, third-
10
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party reimbursement for the Uterine Balloon Therapy system would be dependent
upon decisions by the HCFA for Medicare, as well as by individual health
maintenance organizations, private insurers and other payors. While the
Company believes the Uterine Balloon Therapy procedure may be reimbursed in
the United States under existing procedure codes for endometrial ablation,
there can be no assurance that this will occur or that the reimbursement
under these codes will be adequate. Given the efforts to control and
decrease health care costs in recent years, there can be no assurance that
any reimbursement will be sufficient to assure profitability.
Reimbursement systems in international markets vary significantly by
country, and by region within some countries, and reimbursement approvals must
be obtained on a country by country basis. Many international markets have
government managed health care systems that govern reimbursement for new
devices and procedures. In most markets, there are private insurance systems as
well as government managed systems. Large scale market acceptance of the
Uterine Balloon Therapy system will depend on the availability and level of
reimbursement in international markets targeted by the Company. Currently, the
Uterine Balloon Therapy system has not been approved for reimbursement in any
international market. Obtaining reimbursement approvals can require 12 to 18
months or longer. There can be no assurance that the Company will obtain
reimbursement in any country within a particular time, for a particular amount,
or at all.
GOVERNMENT REGULATION. The manufacture and sale of medical devices,
including the Uterine Balloon Therapy system, are subject to extensive
regulation by numerous government authorities in the United States and other
countries. In the United States, the Uterine Balloon Therapy system is
regulated as a medical device and is subject to the FDA's PMA requirements. As
a result, the Company will not be able to commence marketing and commercial
sales of the Uterine Balloon Therapy system in the United States unless and
until it receives PMA approval for marketing of such product from the FDA. The
Uterine Balloon Therapy system is in the early stages of human clinical
investigation and will require completion of the clinical study prior to any
filing for regulatory approval. There can be no assurance as to whether or when
the Company will complete the required clinical trials, whether safety and
efficacy data collected during clinical trials will be sufficient to support a
PMA filing or whether the Company will receive PMA approval for any of its
products. In addition, if approval is received, there can be no assurance that
it would not be for a more limited indication than the Company has requested,
which could limit the addressable market of the Uterine Balloon Therapy system
and have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that the
Company will not be required to conduct additional clinical trials for the
Uterine Balloon Therapy system which may result in substantial costs and
delays. In addition, changes in existing regulations or adoption of new
government regulations or policies could prevent or delay regulatory approval
of the Company's products. Furthermore, if PMA approval is granted, subsequent
modifications to the approved device or manufacturing process may require a PMA
supplement or may require the submission of a new PMA, which could require
substantial additional clinical efficacy data and FDA review. Failure to
obtain PMA approval or to obtain such approval on a timely basis would have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company's future product plans call for the introduction of a uterine
fibroid removal system which is currently under development using the
technology licensed from Gyrus. In the United States, the Company intends to
seek clearance to market the uterine fibroid removal system through a 510(k)
premarket notification, which was filed in June 1996. A 510(k) premarket
notification must be supported by appropriate data establishing, to the
satisfaction of the FDA, that a newly developed device is "substantially
equivalent" to a device that was legally marketed prior to May 1976, or to a
device that the FDA has found to be substantially equivalent to a legally
marketed pre-1976 device. Commercial distribution of a device for which a
510(k) premarket notification is required can begin only after the FDA issues
an order finding the device to be substantially equivalent to a predicate
device. The FDA has recently been requiring a more rigorous demonstration of
substantial equivalence than in the past.
The Company will be required to adhere to applicable FDA regulations
regarding Good Manufacturing Practices (GMP) and similar regulations in other
countries, which include testing, control and documentation requirements. The
Company's success will depend in part on its ability to manufacture its
products in compliance with GMP and EN 46001 and other regulatory requirements,
in sufficient quantities and in a timely manner, while maintaining product
quality and acceptable manufacturing costs. Failure to increase production
volumes in a timely or cost-effective manner or to maintain compliance with GMP
and EN 46001 and other regulatory requirements could have a material adverse
effect on the Company's business, financial condition and results of
operations.
11
<PAGE>
Regulatory approvals, if granted, may include significant limitations on
the indicated uses for which the product may be marketed. FDA enforcement
policy strictly prohibits the marketing of approved medical devices for
unapproved uses. Failure to comply with applicable regulatory requirements,
including marketing products for unapproved uses, could result in, among other
things, FDA warning letters, fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, refusal of the
government to grant premarket clearance or premarket approval for devices,
withdrawal of approvals and criminal prosecution, which would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Sales of medical devices outside of the United States are subject to
international regulatory requirements that vary from country to country. The
requirements for approval for sale internationally may differ from those
required for FDA approval. In Europe, the Company will be required to obtain
the certifications necessary to enable the CE mark to be affixed to the
Company's products by mid-calendar 1998 in order to continue commercial sales
in member countries of the European Union. Although the Company has obtained
all such certifications for its Uterine Balloon Therapy system, there can be no
assurance that it will be able to obtain certifications for its future products
in a timely manner, if at all. A failure to obtain any such certifications
could have a material adverse effect on the Company's business, financial
condition and results of operations.
DEPENDENCE ON LICENSES, PATENTS AND PROPRIETARY TECHNOLOGY. The Company's
success depends in part on its ability to retain licenses, obtain patent
protection for products and processes, and preserve its trade secrets and
proprietary technology. The Company's one issued United States patent was
assigned to the Company by Origin pursuant to a royalty-bearing agreement
covering potential future modifications to the Uterine Balloon Therapy system.
Additionally, pursuant to such agreement, the Company granted to Origin a non-
exclusive, royalty-free license under such patent for use in fields other than
gynecology. The validity and breadth of claims covered in medical device
technology patents involve complex legal and factual questions and, therefore,
may be highly uncertain. No assurance can be given that any patents from
pending patent applications or from any future patent applications will be
issued, that the scope of any patent protection will exclude competitors or
provide competitive advantages to the Company, that any of the Company's
patents will be held valid if subsequently challenged or that others will not
claim rights in or ownership of the patents and other proprietary rights held
by the Company. For example, a third party has challenged the issuance of
certain claims in a patent application filed in Australia. Additionally,
certain of the Company's licenses provide that the license rights revert back
to the licensors in the event of material breach of the license agreements,
including failure to pay minimum royalty amounts or milestone payments when
due, or failure to purchase certain quantities of product from the licensor. To
the extent license rights are involved, the Company is dependent upon
technology licensors to prosecute their patents in the United States and in
foreign countries. The reversion of rights under the Company's license
agreements or failure of the licensors to fully prosecute patents would have a
material adverse effect on the Company's business, financial condition and
results of operations.
There has been substantial litigation regarding patent and other
intellectual property rights in the medical device industry. Litigation, which
could result in substantial cost to and diversion of effort by the Company, may
be necessary to enforce patents issued or licensed to the Company, protect
trade secrets or know-how owned by the Company, defend the Company against
claimed infringement of the rights of others or determine the ownership, scope
or validity of the proprietary rights of the Company and others. An adverse
determination in any such litigation could subject the Company to significant
liabilities to third parties, require the Company to seek licenses from third
parties and prevent the Company from manufacturing, selling or using its
products, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations. In the event of such
an adverse determination, there can be no assurance whether a license would be
offered on terms acceptable to the Company, or at all.
POTENTIAL VOLATILITY OF STOCK PRICE. The securities markets have, from
time to time, experienced significant price and volume fluctuations that may be
unrelated to the operating performance of particular companies. The market
prices of the Common Stock of many publicly-held medical device companies have
in the past been, and can in the future be expected to be, especially volatile.
Announcements of technological innovations or new products by the Company or
its competitors, developments or disputes concerning patents or proprietary
rights, regulatory developments, the issuance of new or changed stock market
analyst reports and recommendations, and economic and other external factors,
as well as period-to-period fluctuations in the Company's financial results,
may have a significant impact on the market price of the Common Stock.
12
<PAGE>
PART II. OTHER INFORMATION
Item 6. (a) Exhibits
11.1 Computation of Net Loss Per Share
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GYNECARE, INC.
By: /s/ MALCOLM M. FARNSWORTH, JR.
---------------------------------------
Malcolm M. Farnsworth, Jr.
Vice President, Finance and
Chief Financial Officer (Principal
Financial Officer), Secretary
Date: November 7, 1996
-------------------------------
14
<PAGE>
EXHIBIT 11.1
COMPUTATION OF NET LOSS
PER SHARE (1)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS ENDED
SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------------- --------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Primary and Fully Diluted:
Weighted average common shares outstanding for the period. . 8,239,000 -- 8,185,000 --
Common Equivalent Shares pursuant to Staff Accounting
Bulletin No. 83. . . . . . . . . . . . . . . . . . . . . . -- 1,688,000 -- 1,688,000
----------- ----------- ----------- -----------
Shares used in computing net loss per share. . . . . . . . . 8,239,000 1,688,000 8,185,000 1,688,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . $(2,538,000) $(1,234,000) $(7,192,000) $(3,082,000)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net loss per share . . . . . . . . . . . . . . . . . . . . . ($0.31) ($0.73) ($0.88) ($1.83)
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
(1) Primary and fully diluted calculations are substantially the same.
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED BALANCE SHEETS AND STATEMENTS OF OPERATIONS FOUND ON PAGES 3 AND 4 OF
THE COMPANY'S FORM 10-Q FOR THE YEAR-TO-DATE, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 4,200
<SECURITIES> 11,132
<RECEIVABLES> 435
<ALLOWANCES> 0
<INVENTORY> 634
<CURRENT-ASSETS> 16,487
<PP&E> 1,450
<DEPRECIATION> 0
<TOTAL-ASSETS> 20,811
<CURRENT-LIABILITIES> 1,222
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> 19,363
<TOTAL-LIABILITY-AND-EQUITY> 20,811
<SALES> 708
<TOTAL-REVENUES> 708
<CGS> 1,146
<TOTAL-COSTS> 1,146
<OTHER-EXPENSES> 3,583
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,192)
<EPS-PRIMARY> (0.88)
<EPS-DILUTED> (0.88)
</TABLE>
