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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
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AMENDMENT NO. 1
TO
(Mark One)
[x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934. For the fiscal year ended December 31, 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 0-28266
HEARTPORT, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 94-3222307
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
200 CHESAPEAKE DRIVE, REDWOOD CITY, CA 94063
Address of Principal Executive Offices) (Zip Code)
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(415) 306-7900
Registrant's Telephone Number, Including Area Code
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Securities registered pursuant to Section 12(b) of the Act:NONE
Securities registered pursuant to Section 12(g) of the Act:COMMON STOCK
(Title of Class)
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 requirements for the past 90 days.
Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of March 14, 1997: approximately $324 million (based on
the last reported sale price of $27.25 per share on March 14, 1997 on the
Nasdaq National Market).
The number of shares of Common Stock outstanding as of March 14, 1997
was 24,567,738.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT FORM 10-K REFERENCE
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Proxy Statement for Registrant's Annual Meeting Part III, Items 11-13
to be held on May 28, 1997
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TABLE OF CONTENTS
PAGE
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Part I
Item 1. Business............................................... 1
Item 2. Properties............................................. 24
Item 3. Legal Proceedings...................................... 24
Part II
Item 4. Submission of Matters to a Vote of Security Holders.... 24
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.................................. 25
Item 6. Selected Financial Data................................ 26
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 27
Item 8. Financial Statements and Supplementary Data............ F-1
Part III
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................. III-1
Item 10. Directors and Executive Officers of the Registrant..... III-1
Item 11. Executive Compensation................................. III-3
Item 12. Security Ownership of Certain Beneficial Owners and
Management........................................... III-3
Item 13. Certain Relationships and Related Transactions......... III-4
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K.......................................... IV-1
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PART I
ITEM 1.BUSINESS.
The discussion in this Item and elsewhere in this Annual Report on Form
10-K contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially 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
"Risk Factors."
INTRODUCTION
Heartport, Inc. ("Heartport" or the "Company") has developed and is
marketing proprietary systems and novel procedures that are designed to
enable cardiac surgeons to perform a wide range of heart surgeries in a
minimally invasive manner through small incisions, or "ports," between the
ribs without the need to crack open the chest as required in conventional
heart surgery. Although fundamentally changing the means of providing access
to the heart, the Company's Port-Access-TM- surgical procedures closely
parallel the conventional procedures that have been used in heart surgery
since the mid-1950s. The Company believes that its systems and procedures
have the potential to offer efficacy equal to that of conventional heart
surgery, but with the benefits of reduced trauma and complications, reduced
pain and suffering, shorter hospital stays, reduced convalescence time, and
lower overall cost. As of March 21, 1997, to the Company's knowledge, the
Company's systems have been used to complete 211 Port-Access coronary artery
bypass graft ("CABG") procedures (143 single vessel, 46 double vessel, 19
triple vessel and 3 quadruple vessel) and 176 Port-Access mitral valve
procedures (79 repairs and 97 replacements). The Company believes that its
Port-Access systems and procedures will have a significant impact on the
field of heart surgery in the same way that minimally invasive surgical
procedures such as laparoscopy impacted general surgery and arthroscopy
impacted orthopedic surgery.
The Company markets its Port-Access systems with a direct sales force
in the United States and Europe. Once a purchase order from a hospital or
medical center is received, the Company trains the surgical team in
Port-Access systems and procedures. As of March 21, 1997, 70 teams have
completed Port-Access training and 43 have initiated human cases. The Company
has a 50,000 sq. ft. cardiovascular research and training facility in Utah
for training U.S. surgical teams. European surgical teams are trained at a
facility in Sweden.
BACKGROUND
Cardiovascular disease is the leading cause of death in the United
States and many other developed countries. Two of the principal types of
cardiovascular disease are coronary artery disease ("CAD") and valvular heart
disease ("VHD"). In CAD, one or more coronary arteries are narrowed,
resulting in the risk of insufficient blood flow to the heart muscle. In VHD,
one or more heart valves are dysfunctional, resulting in suboptimal pumping
of blood. Conventional open-chest heart surgery (commonly referred to as
"open-heart" surgery) is one of the leading methods of treating CAD, VHD, and
other types of cardiovascular disease.
Heart surgery is widely regarded as one of the most important medical
advances of the twentieth century. This field of surgery was made possible
during the 1950s by the development of technology that enabled physicians to
perform cardiopulmonary bypass ("CPB") and stop the heart during surgery. CPB
protects the patient by taking over the function of the heart in circulating
oxygenated blood throughout the patient's organs and tissues, thereby
permitting the heart to be safely stopped. The procedure of placing the
patient on CPB and stopping the heart is the standard of care in heart
surgery because it offers several critical advantages. First, stopping the
heart allows the surgeon to achieve a high degree of surgical accuracy and
precision, which is directly related to the length and quality of the
patient's life following surgery. Second, stopping the heart protects the
heart muscle during surgery. The stopped heart requires virtually no blood
flow, whereas the beating heart requires a constant supply of oxygenated
blood and will sustain damage if that supply is interrupted. Third, the
majority of cardiac surgery procedures are extremely difficult to perform if
the heart is not stopped. For example, in most multi-vessel coronary artery
bypass surgeries, the heart must be turned and manipulated to access the
three major vascular beds of the heart and to operate upon the various
coronary arteries, a nearly impossible task while the heart is beating. In
valve repair and replacement, the heart itself must be opened to repair or
replace the diseased valve since the valves are located inside the heart.
Opening a beating heart poses a high risk of death. Thus, placing the patient
on CPB and stopping
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the heart is necessary to enable surgeons to safely and accurately perform
the full range of surgical procedures anywhere on the surface or the interior
of the heart.
Since heart surgery was pioneered in the mid-1950s, remarkable advances
have occurred in the surgical treatment of cardiovascular disease. CAD is
most effectively treated by CABG procedures, in which an artery or vein is
used to bypass the narrowing in a coronary artery and restore blood flow
downstream of the narrowing. The treatment for VHD involves either repairing
the diseased heart valve, most commonly with the implantation of a prosthetic
annuloplasty ring, or replacing it with a prosthetic mechanical or tissue
valve. Until the introduction of Heartport's technology, CABG and valve
repair and replacement procedures were virtually always performed in a highly
invasive surgery in which the patient's chest is opened widely to gain access
to the heart, the patient is placed on CPB, and the patient's heart is
stopped. Worldwide, approximately 800,000 CABG and valve procedures are
performed each year in this manner. The Company estimates that over 15
million open-chest heart surgeries of this type have been performed since the
advent of heart surgery in the 1950s.
Although highly efficacious, open-chest heart surgery is extremely
traumatic and painful, typically requires a lengthy period of convalescence,
and is expensive. The heart sits in the middle of the chest, protected by
skeletal armor consisting of the sternum or "breast bone," the rib cage, and
the spine. In conventional heart surgery, the heart is accessed by means of a
sternotomy, whereby a surgeon makes a 12- to 18-inch incision in the
patient's chest, the sternum is cut in half with a bone saw, and the rib cage
is then spread open with a steel retractor. The procedure is highly
traumatic, resulting in a lengthy and painful recovery period. In 1995,
open-chest heart surgery patients in the United States remained in the
hospital for an average of ten days and required a significant period of
convalescence following discharge. Conventional cardiac surgery is also
expensive, and in-patient costs on average for a CABG procedure are
approximately $40,000 per patient and for a valve procedure are approximately
$50,000 per patient. In addition, substantial costs are incurred during
convalescence. With approximately 400,000 open-chest heart surgeries
performed in the United States each year, the total cost to the U.S.
healthcare system is substantial.
The development and widespread adoption of minimally invasive surgical
approaches have revolutionized many surgical fields, including general
surgery, orthopedics, gynecology, urology, and neurosurgery. Notable examples
include laparoscopic procedures in the field of general surgery and
arthroscopic procedures in the field of orthopedic surgery. Such procedures
are designed to be as efficacious as conventional surgery, but with
substantially reduced trauma, thereby decreasing complications, reducing pain
and suffering, speeding recovery, and decreasing costs associated with many
aspects of patient care. This movement toward minimally invasive surgery has
been driven by advances in both device technology and surgical technique. A
minimally invasive approach is most advantageous in cases in which
significant trauma results from gaining surgical access to an affected organ
or site. Cardiac surgery represents a particularly significant opportunity
for a minimally invasive approach due to the extreme trauma associated with
opening the chest. Heartport has demonstrated that its Port-Access minimally
invasive surgical approach has the potential to significantly reduce
complications, pain and suffering, convalescence, and expense, while
maintaining the high efficacy of conventional open-chest surgery.
Less-invasive alternatives to conventional heart surgery began to
emerge in the early 1980s. For example, percutaneous transluminal coronary
angioplasty ("PTCA"), or balloon angioplasty, was developed as an alternative
to CABG surgery. In a PTCA procedure, the cardiologist inserts a small
balloon catheter into the narrowed coronary artery and inflates the balloon
to expand the narrowed section, thereby increasing the internal diameter of
the vessel to increase blood flow. A PTCA procedure is less traumatic,
requires less time in the hospital, and involves a shorter recuperation
period than a conventional open-chest CABG procedure. As a result, a PTCA
procedure in the United States is less expensive on a per-procedure basis,
with costs of approximately $16,000 in 1994. In 1995, 460,000 PTCA procedures
were performed in the United States, and an additional 275,000 such
procedures were performed elsewhere in the world.
Although PTCA is less invasive than conventional CABG, a major drawback
of PTCA is the high rate of restenosis, or renarrowing of the blood vessel at
the treatment site. Restenosis within six months following a PTCA procedure
occurs at rates ranging from 15% to 50%. The majority of PTCA patients
eventually undergo another PTCA procedure or require CABG surgery. Although
the cost of a single PTCA procedure may be substantially less than a
conventional CABG procedure, a recent study indicated that three years after
the procedure, PTCA has no cost advantage over conventional open-chest CABG
due to the need for subsequent interventions. Furthermore,
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another recent study concluded that the quality of life, post intervention,
is higher for conventional open-heart surgery patients because of the
follow-up interventions required in PTCA. The Company believes that the
dramatic reduction in trauma associated with the Port-Access approach will
magnify this advantage. More recently, clinicians have begun to employ
mechanical coronary artery stents, metal prostheses designed to hold open
arteries, as a means of preventing restenosis. Although long-term clinical
data is not yet available, stents appear to reduce but not eliminate the
problem of restenosis associated with non-surgical treatment of CAD.
Restenosis rates for conventional open-chest CABG are significantly
lower than those for non-surgical approaches. Studies indicate that
open-chest coronary artery bypass grafts have 17-year patency rates (the
maintenance of sufficient blood flow through the affected artery) of 92% when
the left internal mammary artery ("IMA") graft is used, 85% when the right
IMA graft is used, and 10-year patency rates of approximately 60% when a
saphenous vein graft from the patient's leg is used. In addition, a Duke
University study suggests that patients with three-vessel CAD and patients
with severe two-vessel CAD have improved survival after conventional
open-chest CABG surgery in comparison to PTCA and other medical treatments.
Thus, conventional open-chest CABG remains the preferred treatment for severe
CAD because of these higher long-term success rates.
Another less-invasive alternative to conventional open-chest CABG
surgery has recently been developed by a small number of cardiac surgeons. In
a limited number of cases, these surgeons have been using low-technology
surgical tools to perform minimally invasive CABG surgery on the beating
heart. This technique subjects the patient to the risk of several types of
cardiovascular stress. Open-chest CABG surgery without CPB on the beating
heart has been available since the advent of open-chest heart surgery forty
years ago, but has very rarely been practiced. Such beating heart surgery,
whether open-chest or minimally invasive, has generally been, and the Company
believes is likely to continue to be, limited to the small percentage of
cases in which the heart does not need to be opened, turned, or manipulated
and in which the patient is able to tolerate the stress of undergoing heart
surgery without the support of CPB and the benefits resulting from stopping
the heart.
The Company believes that to achieve the high efficacy and patient
safety and broad scope of conventional open-chest cardiac surgery, the
patient must be placed on CPB and the heart stopped. As a result,
conventional open-chest heart surgery represents the standard of care for the
treatment of CAD, VHD, and other cardiac conditions. To date, the only way to
place the patient on CPB and stop the heart has been to crack the patient's
chest. Heartport was formed with the objective of developing a minimally
invasive approach to cardiac surgery that would permit surgeons to perform
the full range of highly efficacious cardiac surgeries, with the patient on
CPB and the heart stopped, but without the trauma associated with a
sternotomy and reducing the complications associated with traditional CPB.
THE HEARTPORT SOLUTION
Heartport has developed proprietary systems for performing several
different types of minimally invasive heart surgery. These systems and
devices have been cleared or exempted by the Food and Drug Administration
("FDA") for commercial sale in the United States and by a Notified Body in
Europe. Heartport's core platform is an endovascular cardiopulmonary bypass
("EndoCPB") system, which allows surgeons to place the patient on CPB and
stop and protect the patient's heart without the need for a sternotomy. Using
the Company's EndoCPB-TM- platform and procedure-specific application
systems, the surgeon is able to perform cardiac surgery by accessing the
heart through one or more small incisions, or "ports," placed between the
patient's ribs. The Company's first several application systems comprise
reusable and disposable devices for Port-Access CABG and for Port-Access
mitral valve repair and mitral valve replacement (collectively, "MVR")
surgeries. Application systems for performing additional cardiac surgery
procedures, including Port-Access aortic valve replacement ("AVR"), are also
under development. These future systems will require regulatory clearances or
exemptions prior to commercial distribution. Although fundamentally changing
the means of providing access to the heart, the Port-Access surgical
procedures closely parallel the conventional procedures that have been used
in heart surgery since the mid-1950s. The Company believes that its systems
and procedures have the potential to offer efficacy equal to that of
conventional open-chest surgery, but with the benefits of reduced trauma and
complications, reduced pain and suffering, shorter hospital stays, reduced
convalescence time, and lower overall cost. See "Risk Factors -- No Assurance
of Market Acceptance" and "--No Assurance of Regulatory Clearance or
Approval; Significant Domestic and International Regulation."
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MARKETS AND APPLICATIONS
Cardiovascular disease is the leading cause of death in the United
States and other developed countries. In the United States, it causes
approximately one million deaths per year, which represents over 40% of all
deaths. CAD is one of the most common forms of cardiovascular disease,
affecting more than 11 million people in the United States. If untreated, CAD
can cause a myocardial infarction or "heart attack." Each year, approximately
1.5 million people experience heart attacks in the United States, resulting
in approximately 500,000 deaths. Each year on a worldwide basis,
approximately 600,000 CAD patients undergo conventional open-chest CABG
surgery, over 700,000 CAD patients undergo PTCA or other non-surgical
interventions, and approximately 200,000 VHD patients undergo open-chest
valve repair or replacement procedures. MVRs represent approximately 40% and
AVRs represent approximately 60% of valve surgery procedures. The per-patient
cost of these heart surgery procedures in the United States averages
approximately $16,000 for PTCA, $40,000 for conventional CABG, and $50,000
for conventional valve surgery. The Company has demonstrated that its
Port-Access EndoCPB platform and procedure-specific Port-Access application
systems provide a minimally invasive surgical alternative for CABG and MVR
procedures.
CORONARY ARTERY BYPASS GRAFTING--CABG. Currently, the most efficacious
treatment for CAD is conventional open-chest CABG surgery. In a conventional
open-chest CABG, a 12- to 18-inch incision is made in the patient's chest,
the patient's sternum is cut in half with a bone saw, and the rib cage is
spread open with a steel retractor. Blood is re-routed past a narrowing in
one or more coronary arteries by either grafting an artery from the chest
wall to the coronary artery below the narrowing, or grafting a section of
artery or vein from another part of the body both to the aorta (which serves
as a source of oxygenated blood) and to a point below the narrowed segment on
the affected coronary artery, or both. Using the IMA from the chest wall is
the most efficacious procedure given its long term patency in such open-chest
procedures. The IMA is dissected free from the chest wall and prepared for
grafting to the coronary artery. Large tubes, or cannulae, are inserted
directly through the walls of the heart and the aorta in order to place the
patient on CPB, the aorta is compressed closed with an external cross-clamp,
and a catheter is used to administer the cardioplegic solution that stops the
heart. The artery from the chest wall is then sutured in place on the
affected coronary artery, which sits motionless atop the stopped heart,
enabling the highest degree of surgical accuracy and precision. The patient's
chest is closed and the sternum is held together with steel wire. Afterward,
the patient has a long and painful recovery. In the United States, open-chest
CABG patients spend an average of ten days in the hospital, and the Company
estimates that up to two or more days are spent in the intensive care unit
("ICU"). For some period following surgery, a ventilator breathes for the
patient because the trauma to the rib cage and sternum makes unassisted
breathing extremely painful.
Each step in the Company's Port-Access CABG procedure parallels a
corresponding step in conventional CABG. Instead of accessing the heart
through a 12- to 18-inch opening in the chest, however, the procedure is
accomplished through ports between the patient's ribs. During the procedure,
the Company's EndoCPB System, a series of proprietary catheters inserted via
certain of the patient's peripheral vessels, circulates oxygenated blood
throughout the body and stops and protects the heart. The Company's
Port-Access-TM- CABG System is designed to enable the surgeon to access the
heart and its associated vessels, visualize the interior of the thoracic
cavity, access and prepare the arterial or venous grafts, attach the grafts
to the diseased coronary artery resting motionless atop the stopped heart,
and do various other supporting activities. Upon completion of the surgical
procedure, the heart is allowed to spontaneously resume normal activity and
CPB is discontinued. The patient leaves the operating room with the heart
revascularized in the same manner as in a conventional open-chest CABG
procedure, but with the port incisions sutured closed rather than with the
chest held together with steel wire.
VALVE REPAIR AND REPLACEMENT. A leading treatment for VHD is the
surgical replacement or repair of the diseased heart valve. In conventional
open-chest MVR surgery, the heart is accessed via a sternotomy, the patient
is placed on CPB, the patient's heart is stopped, and the heart is drained of
blood. The diseased valve is then accessed through an incision in the left
atrium, one of the upper chambers of the heart, and the valve is either
repaired, most commonly with the implantation of a prosthetic annuloplasty
ring, or is removed and replaced with a mechanical or tissue prosthetic
valve.
Similar to Port-Access CABG, each step in the Company's Port-Access MVR
procedure closely parallels the corresponding step in a conventional MVR
procedure, but no sternotomy is required. The Company's Port-Access-TM- MVR
System utilizes the EndoCPB system to place the patient on CPB, stop and
protect the heart, and empty the
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heart of blood. The Company's Port-Access MVR System is designed to permit
the surgeon to visualize the interior of the thoracic cavity, open the left
atrium of the heart to gain access to the mitral valve, visualize the
interior of the heart, assess valve function, repair or remove the diseased
valve, size the prosthesis (either a prosthetic heart valve or annuloplasty
ring), deliver and attach the prosthesis, close the heart, allow the heart to
spontaneously resume normal activity, and then discontinue CPB. The patient
leaves the operating room with the heart valve repaired or replaced in the
same manner as in a conventional, open-chest MVR procedure, but with the port
incisions sutured closed rather than the chest held together with steel wire.
OTHER PROCEDURES. The Company believes that its Port-Access technology
and approach to cardiac surgery may also enable it to develop systems to
treat a range of cardiovascular disease in addition to CAD and mitral valve
diseases. The Company is currently developing Port-Access systems to treat
aortic valve disease and other cardiac diseases.
STRATEGY
The Company's objective is to become the global leader in research,
development, and commercialization of systems for minimally invasive cardiac
surgery. Key elements of the Company's strategy include:
ESTABLISH PORT-ACCESS MINIMALLY INVASIVE CARDIAC SURGERY AS A STANDARD
OF CARE FOR CAD AND VHD. The Company believes that it is the first to
design, develop, and receive FDA-clearance for devices and systems for the
minimally invasive surgical treatment of CAD and VHD. The Company is
currently introducing its proprietary technology to leading cardiac surgery
centers in the United States and Europe. Prior to shipment, the Company
provides its customers with extensive training on the EndoCPB, Port-Access
CABG System and Port-Access MVR System and procedures at either the
Heartport Research and Training Center ("HRTC") in Utah or at a facility in
Sweden. As of March 21, 1997, 70 surgical teams have been through the
Company's training program, of which 43 have begun performing procedures. In
addition, the Company intends to support clinically driven research efforts
to prove the efficacy and benefits of Port-Access minimally invasive cardiac
surgery.
MARKET TO HIGH VOLUME CARDIAC SURGERY CENTERS WITH DIRECT SALES FORCE.
The cardiac surgery market in the United States and Europe is highly
concentrated, with 300 centers responsible for over 50% of the more than
500,000 open-chest surgeries performed annually in the two geographies. The
Company believes that rapid penetration of these high volume centers is
achievable with a relatively small direct sales force. As of March 21, 1997
the Company has 12 cardiovascular sales specialists in the United States and
5 cardiovascular sales specialists in Europe with an average of over ten
years experience selling cardiac surgery and cardiology products.
PROMOTE PORT-ACCESS PARTNERSHIPS. The Company has developed a
procedural selling approach to market its systems to cardiac surgeons, called
the Port-Access Partnership-SM-. The Company intends to utilize its
Port-Access Partnership to promote customer loyalty. In the partnership,
the Company trains a center's surgical team, supplies patient and referring
physician educational materials, supports local market media efforts and
furnishes proprietary reusable devices for Port-Access procedures in exchange
for a purchase order for Port-Access disposable products necessary to perform
Port-Access cardiac surgery.
EXPAND PORT-ACCESS APPLICATIONS BY LEVERAGING CORE TECHNOLOGY. The
Company has developed its EndoCPB System to enable minimally invasive
Port-Access CABG, Port-Access MVR, Port-Access AVR, and other Port-Access
heart surgeries, with the patient on CPB and the heart stopped. The Company
intends to expand the use of its EndoCPB platform to address other types of
heart surgery. See "Risk Factors--No Assurance of Market Acceptance" and
"--No Assurance of Regulatory Clearance or Approval; Significant Domestic and
International Regulation."
TARGET INTERNATIONAL MARKETS. The Company intends to continue to
devote resources to penetrate international markets given the substantial
size and economic attractiveness of these markets. The Company has received
the necessary regulatory approvals in Europe, and is pursuing approvals in
Canada, Australia, and Asia to market its EndoCPB and Port-Access systems. In
addition, the Company has trained surgical teams from leading centers in
England, Scotland, Germany, France, Spain, Belgium, Sweden, Canada,
Australia, and Malaysia in the use of Port-Access techniques.
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PROTECT AND ENHANCE PROPRIETARY POSITION. The Company currently holds
issued and allowed patents covering a number of fundamental aspects of the
Company's EndoCPB System and procedure-specific Port-Access systems. As of
March 14, 1997, the Company owns 25 issued or allowed United States patents,
and owns an exclusive field of use license on one issued United States patent
and on one issued foreign patent. In addition, as of March 14, 1997, the
Company has 84 pending United States patent applications and has filed 37
patent applications that are currently pending in Europe, Japan, Australia,
and Canada. In addition, in 1996, the Company acquired certain intellectual
property assets of Endosurgical Development Corporation ("EDC"). The Company
intends to continue to pursue its patent filing strategy and to vigorously
defend its intellectual property position against infringement. See "Risk
Factors--Uncertainty Regarding Patents and Protection of Proprietary
Technology; Risks of Future Litigation."
COMPLEMENT INTERNAL PRODUCT DEVELOPMENT WITH STRATEGIC ALLIANCES. The
Company intends to leverage its technology platform through strategic
alliances with corporate partners. In September, 1995, the Company formed a
strategic relationship with St. Jude Medical, Inc. ("St. Jude Medical"), the
world's leading producer of prosthetic heart valves, for the joint
development of prosthetic valve and annuloplasty ring delivery systems for
Port-Access delivery. The Company receives royalties from St. Jude Medical
upon sale of certain St. Jude Medical products that incorporate the Company's
proprietary technology. The Company expects to pursue additional strategic
relationships with corporations and research institutions with respect to the
research, development, regulatory approval, manufacturing and marketing of
certain of its potential products and procedures. See "Strategic
Relationships."
TECHNOLOGY
The Company believes it is currently the only company marketing a
technology designed to permit minimally invasive cardiac surgery to be
performed on a stopped heart with CPB support. The Company's systems for
minimally invasive cardiac surgery consist of a common platform, the EndoCPB
System, and procedure-specific application systems comprising proprietary
reusable, disposable and implantable devices.
ENDOVASCULAR CARDIOPULMONARY BYPASS. The EndoCPB System is a series of
proprietary catheters used to place the patient on CPB and to stop and
protect the heart during cardiac surgery, without performing a sternotomy.
There are five key components: the Endoaortic Clamp-TM-, a saline-filled
balloon catheter, occludes the ascending aorta, stops and cools the heart via
delivery of cardioplegic solution, monitors aortic root pressures, and drains
excess blood from the heart; the Endovenous Drainage-TM- cannula removes
deoxygenated blood from the body; the Endoarterial Return-TM- cannula returns
oxygenated blood to the body; the Endopulmonary Vent-TM- drains excess blood
from the heart via the pulmonary artery; and the Endocoronary Sinus-TM-
Catheter provides an alternative route for delivery of cardioplegic solution.
Each component of the EndoCPB System is positioned within the vascular system
via peripheral vascular access.
PORT-ACCESS CORONARY ARTERY BYPASS GRAFTING. The Port-Access CABG
System currently consists of 25-30 reusable and disposable devices designed
to perform the entire CABG procedure in a minimally invasive manner. The
system includes devices for accessing the heart and its associated vessels,
visualizing the interior of the thoracic cavity, accessing and preparing the
arterial and venous grafts, attaching the grafts to the diseased coronary
artery, and various other supporting activities. The devices are designed to
permit the surgeon to operate through ports with the same surgical precision
and accuracy as is possible using conventional cardiac surgical instruments
through a sternotomy.
PORT-ACCESS MITRAL VALVE REPAIR AND MITRAL VALVE REPLACEMENT. The
Port-Access MVR System currently consists of 25-30 reusable and disposable
devices. This system is designed to be compatible with existing implantable
prosthetic heart valves and prosthetic annuloplasty rings. They permit the
surgeon to perform mitral valve surgery in a minimally invasive manner, and
offer the surgeon the ability to visualize the interior of the thoracic
cavity, open the left atrium of the heart to gain access to the mitral valve,
visualize the interior of the heart, assess valve function, repair or remove
the diseased valve, size the prosthesis (either a prosthetic heart valve or
annuloplasty ring), deliver and attach the prosthesis and close the heart.
The Port-Access MVR System is designed to permit precise and accurate surgery
to be performed through small ports.
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PORT-ACCESS AORTIC VALVE REPLACEMENT AND OTHER PROCEDURES. The Company
is in the process of developing a Port-Access AVR system. In addition, the
Company is actively developing systems for performing other Port-Access
cardiac surgery procedures. There can be no assurance, however, that any such
systems will be successfully developed, be granted required regulatory
clearances or approvals, or achieve any significant level of market
acceptance.
REGULATORY STATUS
UNITED STATES
In October, 1996, the Company received 510(k) clearance from the FDA to
market its EndoCPB system and several proprietary Class II disposable
surgical devices for its Port-Access surgery systems. In addition, the
Company received pre-market notification exemptions clearing its core
reusable and disposable surgical devices to be labeled and used for minimally
invasive cardiovascular surgery. These clearances and exemptions allowed the
Company to commercially launch its Port-Access CABG System and Port-Access
MVR System in early 1997.
The Company has also submitted 510(k) notifications for enhancements to
its EndoCPB System and for additional specialty disposable devices to further
enhance performance of the Port-Access CABG and MVR procedures. Additional
510(k) submissions are planned for 1997 for devices to facilitate Port-Access
procedures other than CABG and MVR. There can be no assurance that the FDA
will act favorably or quickly on the Company's 510(k) submissions, and
significant difficulties and costs may be encountered by the Company in its
efforts to obtain these additional FDA clearances that could delay or
preclude the Company from marketing and selling products for additional
procedures. See "Risk Factors--No Assurance of Regulatory Clearance or
Approval; Significant Domestic and International Regulations," and
"Government Regulation."
INTERNATIONAL
In January, 1997, the Company received CE Mark clearance for its
EndoCPB System which allows the sale of its Port-Access CABG and MVR systems
in all countries of the European Union. The Company has also submitted
amendments to its Product Dossiers for enhancements to its EndoCPB System to
further enhance performance of the Port-Access CABG and MVR procedures.
Additional CE Mark submissions are planned for 1997 for devices to facilitate
Port-Access procedures other than CABG and MVR. See "Risk Factors--No
Assurance of Regulatory Clearance or Approval; Significant Domestic and
International Regulations," and "Government Regulation."
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SCIENTIFIC ADVISORY BOARD
The Company has established a Scientific Advisory Board composed of
individuals with expertise in the field of cardiac surgery. The Scientific
Advisory Board periodically reviews the Company's clinical progress and
product development plans and identifies potential applications of the
Company's technology. In addition, members of the Scientific Advisory Board
will be available on an individual basis to consult with the Company as
needed. The members of the Scientific Advisory Board are consultants to the
Company and have substantial constraints on the amount of time they can
devote to Company matters. The members of the Scientific Advisory Board are
as follows:
NAME OCCUPATION/TITLE
William A. Baumgartner, M.D. Professor of Surgery, Cardiac Surgeon In-Charge,
Johns Hopkins Hospital
Lawrence H. Cohn, M.D. Professor of Surgery,
Harvard Medical School,
Chief, Division of Cardiac Surgery,
Brigham and Women's Hospital
Delos M. Cosgrove, M.D. Chairman, Department of Thoracic and
Cardiovascular Surgery,
The Cleveland Clinic Foundation
James L. Cox, M.D. Evarts C. Graham Professor of Surgery,
Vice-Chairman, Department of Surgery,
Chief, Division of Cardiothoracic Surgery,
Washington University School of Medicine
Bruce A. Reitz, M.D. Professor and Chairman,
Department of Cardiothoracic Surgery,
Stanford University School of Medicine
STRATEGIC RELATIONSHIPS
The Company intends to pursue strategic relationships with corporations
and research institutions with respect to the research, development,
regulatory approval, manufacturing, and marketing of certain of its potential
products and procedures. The Company has formed a strategic relationship with
St. Jude Medical, the world's leading producer of prosthetic heart valves,
for the joint development of prosthetic valve and annuloplasty ring delivery
systems for Port-Access MVR and a prosthetic valve system for Port-Access
AVR. Under the terms of an agreement entered into in September, 1995 and
amended in January, 1997, the Company granted St. Jude Medical a
non-exclusive, worldwide, royalty bearing license to make, use, and sell a
minimally invasive prosthetic valve system incorporating a Port-Access
delivery system and a St. Jude Medical valve or annuloplasty ring prosthesis
for use in Port-Access heart valve repair and replacement procedures. St.
Jude Medical has no minimum purchase obligations under the agreement. In
addition, the Company borrowed $3.0 million from St. Jude Medical. As of
December 31, 1996, the entire amount of the loan had been converted to
prepaid royalty payments. See Note 4 of Notes to Financial Statements.
Although the Company intends to pursue additional strategic relationships in
the future, there can be no assurance that the Company will be successful in
establishing or maintaining any such relationships or that any such
relationship will be successful. See "Risk Factors--Reliance on Strategic
Relationships."
RESEARCH AND DEVELOPMENT
The Company believes that its future success will depend in large part
on its ability to develop and introduce clinically advanced Port-Access
minimally invasive cardiac surgery systems that are effective, easy to use,
safe, and reliable. The Company's research and development department focuses
upon the continued development and refinement of its existing Port-Access
devices, systems, and procedures as well as upon the development of new
devices, systems, and procedures for treating other cardiac diseases.
To date, the Company has developed systems for Port-Access CABG and
Port-Access MVR surgery. A system for Port-Access aortic valve replacement is
currently under development. In collaboration with its clinical
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advisory board and consultants, the Company is actively developing methods
and devices for future Port-Access surgical procedures, as well as continuing
development of reusable, disposable, and implantable devices to further
refine current Port-Access procedures. The Company believes that its EndoCPB
and Port-Access technologies are potentially applicable to a wide variety of
other cardiac surgical procedures. There can be no assurance, however, that
the Company will be successful in developing devices or systems for such
procedures, or that such devices or systems, if any, will be granted required
regulatory clearances or approvals, or achieve any significant level of
market acceptance. See "Risk Factors--No Assurance of Market Acceptance"
and "--Significant Competition; Rapid Technological Change."
MANUFACTURING
The Company is committed to producing high-quality products and expects
to internally manufacture the most proprietary, value-added components and
products and outsource less critical manufacturing jobs. The Company
manufactures its products at its Redwood City, California, facilities. The
Company believes that its facilities have sufficient capacity to meet the
Company's anticipated manufacturing needs through the end of 1997.
The Company manufactures its products based on forecasted product
orders, and purchases subassemblies and components prior to receipt of
purchase orders from customers. Lead times for materials and components
ordered by the Company vary significantly, and depend on factors such as the
business practices of the specific supplier, contract terms, and general
demand for a component at a given time. Certain components used in the
Company's products have long lead times. As a result, there is a risk of
excess or inadequate inventory if orders do not match forecasts.
To meet anticipated demand, the Company must increase the rate by which
it manufactures its products. Until recently, the Company's manufacturing
activities have consisted primarily of manufacturing limited quantities of
products for use in laboratory testing, clinical trials and initial low
volume commercial sales. The manufacture of the Company's products is
complex, involving a number of separate processes and components. The Company
does not have experience in manufacturing its products in commercial
quantities. Although the Company is scaling up its capacity to produce
products in volume to support its commercial launch, there can be no
assurance that it will be able to make the transition to commercial
production successfully. In addition, the Company believes that cost
reductions in its manufacturing operations will be required for it to
commercialize its systems on a profitable basis. Certain manufacturing
processes are labor-intensive, and achieving significant cost reductions will
depend, in part, upon reducing the time required to complete these processes.
Medical device manufacturers often encounter difficulties in scaling up
manufacturing of new products, including problems involving product yields,
quality control and assurance, component and service availability, adequacy
of control policies and procedures, lack of qualified personnel, compliance
with FDA regulations, and the need for further FDA approval of new
manufacturing processes and facilities. To date, the Company has experienced
variable yields in scaling up manufacturing of certain of its product
components, and there can be no assurance that such variability will not
continue or will not adversely impact the Company's ability to meet demand
for its products. The Company has considered and will continue to consider as
appropriate the internal manufacture of components currently provided by
third parties, as well as the implementation of new production processes.
There can be no assurance that manufacturing yields or costs will not be
adversely affected by the transition to in-house production or to new
production processes when such efforts are undertaken, and that such a
transition would not materially and adversely affect the Company's business,
financial condition, and results of operations. While the Company has
received ISO 9001 certification, to date, the FDA has not inspected the
Company's compliance with Good Manufacturing Practices ("GMP") requirements,
which include testing, control, and documentation requirements, although the
Company expects such inspections to be made in the near future. There can be
no assurance that FDA GMP requirements will be met.
The Company uses or relies on certain components and services used in
its devices that are provided by sole source suppliers. The qualification of
additional or replacement vendors for certain components or services is a
lengthy process. Any significant supply interruption would have a material
adverse effect on the Company's ability to manufacture its products and,
therefore, a material adverse effect on its business, financial condition,
and results of operations. See "Risk Factors--Limited Manufacturing
Experience; Dependence on Key Suppliers."
The regulatory clearances received to date by the Company require
compliance with FDA regulations for GMP. Even after the FDA has cleared or
approved a device, it will periodically inspect the manufacturing facilities
and processes for compliance with GMP. In addition, in the event that
additional manufacturing sites are added or manufacturing processes are
changed, such new facilities and processes are also subject to FDA inspection
for compliance with GMP. The Company's manufacturing facilities and processes
have not yet been inspected by the
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FDA for compliance with GMP. See "Risk Factors--No Assurance of Regulatory
Clearance or Approval; Significant Domestic and International Regulation."
SALES, MARKETING, TRAINING, AND DISTRIBUTION
The Company's EndoCPB and Port-Access systems in the United States are
marketed both to cardiac surgeons and to cardiac surgery centers. In the
United States, there are approximately 900 cardiac surgery centers and
approximately 2,500 cardiac surgeons. The Company believes it can market its
products in the United States with a moderately sized direct sales
organization. Outside the United States, there are approximately 2,500
cardiac surgeons. In Europe, the Company is building a direct sales force,
and in other geographic regions the Company will evaluate direct and indirect
sales channels as appropriate. The Company currently has a limited sales and
marketing organization in the United States and Europe. Establishment of a
sales force capable of effectively commercializing the Company's EndoCPB and
Port-Access systems will require substantial efforts and require significant
management and financial resources. There can be no assurance that the
Company will be able to establish such a sales capability on a timely basis,
if at all. See "Risk Factors--Limited Sales, Marketing, and Distribution
Experience."
The Company has developed a procedural selling approach to market its
systems to cardiac surgeons, called the Port-Access Partnership-TM-. The
Company intends to utilize its Port-Access Partnership to promote customer
loyalty. In the partnership, Heartport trains the center's surgical
team, supplies patient and referring physicians educational materials,
supports local market media efforts and furnishes proprietary reusable
devices for Port-Access procedures in exchange for a purchase order
for Port-Access disposable products necessary to perform Port-Access cardiac
surgery.
The Company's sales and marketing strategy includes developing and
maintaining a close working relationship with its customers in order to
assess and satisfy their needs for products and services. The Company intends
to meet with its Scientific Advisory Board and other clinical consultants
periodically to share ideas regarding the marketplace, existing products,
products under development, and existing or proposed research projects.
The effective and rapid training of surgical teams in the use of
Heartport's systems and devices is critical to the Company's efforts to
develop its business. To that end, in October, 1996 the Company acquired
substantially all of the assets of Utah Biomedical Test Laboratory ("UBTL").
UBTL's Utah facility was established in the early 1970s to be the home of the
United States government's artificial heart program. This 50,000 square foot
facility, now called the Heartport Research and Training Center ("HRTC"), is
currently in the process of being converted into a state-of-the-art
cardiovascular research and training center. Surgical teams began training at
HRTC in January, 1997. In addition, the Company has a contract facility in
Sweden where it trains European surgical teams. The Company also plans to
work with selected cardiac surgery centers to enhance the Company's
technology and broaden its applicability to treat CAD, VHD, and other
cardiovascular diseases. In addition, the Company intends to support
rigorous, clinically driven research efforts to prove the efficacy and
benefits of Port-Access minimally invasive cardiac surgery. Finally, the
Company anticipates there will be presentations on Port-Access procedures by
investigators at national and international meetings and the publication of
scholarly reports in peer-reviewed publications.
COMPETITION
The Company expects that the market for minimally invasive cardiac
surgery, which is currently in the early stages of development, will become
intensely competitive. Competitors are likely to include a variety of
different companies that currently specialize in devices for conventional
cardiac surgery, as well as those that specialize in non-cardiac minimally
invasive surgery. The Company believes that a number of large companies,
including the Ethicon Endosurgery division of Johnson & Johnson, United
States Surgical Corporation, Medtronic, Inc., Baxter International, Genzyme
Corporation, Guidant Corporation and others with significantly greater
financial, manufacturing, marketing, distribution, and technical resources
and experience than the Company, may be focusing on the development of
minimally invasive cardiac surgery technology. In addition, new companies
have been and are likely to continue to be started to pursue opportunities in
this market. Several companies have announced interest in and development of
products for the minimally invasive cardiac surgery field. For example, there
are companies
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pursuing minimally invasive cardiac surgery on a beating heart, which, if
successful, could materially adversely affect the Company's ability to
establish a market for its technology.
Cardiovascular diseases that can be treated with the Company's
Port-Access systems can also be treated by pharmaceuticals or other medical
devices and procedures, including PTCA, intravascular stents, atherectomy
catheters and lasers. Many of these alternative treatments are widely
accepted in the medical community and have a long history of use. In
addition, technological advances with other therapies for heart disease such
as drugs or future innovations in cardiac surgery techniques could make such
other therapies more effective or lower in cost than the Company's
Port-Access procedures and could render the Company's technology obsolete.
There can be no assurance that physicians will use Port-Access procedures to
replace or supplement established treatments, such as conventional open-chest
heart surgery and PTCA, or that the Company's Port-Access systems will be
competitive with current or future technologies. Such competition could have
a material adverse effect on the Company's business, financial condition, and
results of operations. Any product developed by the Company that gains
regulatory approval will have to compete for market acceptance and market
share. An important factor in such competition may be the timing of market
introduction of competitive products. Accordingly, the relative speed with
which the Company can develop products, complete clinical testing and
regulatory approval processes, train physicians in the use of its products,
gain reimbursement acceptance, and supply commercial quantities of the
product to the market are expected to be important competitive factors. In
addition, the Company believes that the primary competitive factors in the
market for Port-Access systems will be safety, efficacy, ease of use, quality
and reliability, cost-effectiveness, training support, innovation, breadth of
product line, and price. The Company also believes that physician
relationships and customer support are important competitive factors. The
Company has experienced delays in completing the development and introduction
of new products, product variations and product features, and there can be no
assurance that such delays will not continue or recur in the future. Such
delays could result in a loss of market acceptance and market share. There
can be no assurance that the Company will be able to compete successfully
against current and future competitors. Failure to do so would have a
material adverse effect upon the Company's business, financial condition, and
results of operations. See "Risk Factors--Significant Competition; Rapid
Technological Change."
GOVERNMENT REGULATION
UNITED STATES
The Company's Port-Access systems are regulated in the United States as
medical devices. As such, the Company is subject to extensive regulation by
the FDA. Pursuant to the Federal Food, Drug, and Cosmetic Act of 1938, as
amended, and the regulations promulgated thereunder (the "FDC Act"), the FDA
regulates the clinical testing, manufacture, labeling, distribution and
promotion of medical devices. Noncompliance with applicable requirements can
result in, among other things, fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, failure of
the government to grant premarket clearance or premarket approval for
devices, withdrawal of marketing approvals, a recommendation by the FDA that
the Company not be permitted to enter into government contracts and criminal
prosecution. The FDA also has the authority to request repair, replacement or
refund of the cost of any device manufactured or distributed by the Company.
In the United States, medical devices are classified into one of three
classes, Class I, II, or III, on the basis of the controls deemed by the FDA
to be necessary to reasonably ensure their safety and effectiveness. Class I
devices are subject to general controls (e.g., labeling, premarket
notification and adherence to GMPs). Class II devices are subject to general
controls and to special controls (e.g., performance standards, postmarket
surveillance, patient registries, and FDA guidelines). Generally, Class III
devices are those that must receive premarket approval by the FDA to ensure
their safety and effectiveness (e.g., life-sustaining, life-supporting and
implantable devices, or new devices which have not been found substantially
equivalent to legally marketed devices), and require clinical testing to
ensure safety and effectiveness and FDA approval prior to marketing and
distribution. A PMA application must be filed if the proposed device is not
substantially equivalent to a legally marketed predicate device or if it is a
Class III device for which the FDA has called for such applications.
Before a new device can be introduced into the market, the manufacturer
must generally obtain marketing clearance through a premarket notification
under Section 510(k) of the FDC Act or a PMA application under
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Section 515 of the FDC Act. A 510(k) clearance typically will be granted if
the submitted information establishes that the device is "substantially
equivalent" to a legally marketed Class I or II medical device or to a Class
III medical device for which the FDA has not called for PMAs. A 510(k)
notification must contain information to support a claim of substantial
equivalence, which may include laboratory test results or the results of
clinical studies of the device in humans. Commercial distribution of a device
for which a 510(k) 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 and is more likely
to require the submission of human clinical trial data. It generally takes
from four to twelve months from the date of submission to obtain FDA
clearance of a 510(k) notification, but it may take longer. The FDA may
determine that a proposed device is not substantially equivalent to a legally
marketed device, or that additional information is needed before a
substantial equivalence determination can be made. A PMA application must be
filed if a proposed device is not substantially equivalent to a legally
marketed Class I or Class II device or if it is a Class III device for which
the FDA has called for PMAs. A PMA application must be supported by valid
scientific evidence that typically includes extensive data, including
preclinical and human clinical trial data to demonstrate the safety and
efficacy of the device. A "not substantially equivalent" determination, or a
request for additional information, could delay the market introduction of
new products that fall into this category. See "Risk Factors--No Assurance of
Regulatory Clearance or Approval; Significant Domestic and International
Regulation."
If human clinical trials of a device are required in support of either
a 510(k) notification or a PMA application, and the device presents a
"significant risk," the sponsor of the trial (usually the manufacturer or the
distributor of the device) is required to file an IDE application with the
FDA prior to commencing human clinical trials. The IDE application must be
supported by data, typically including the results of animal and laboratory
testing. If the IDE application is approved by the FDA and one or more
appropriate institutional review boards ("IRBs"), human clinical trials may
begin at a specific number of investigational sites with a specific number of
patients, as approved by the FDA. If the device presents a "nonsignificant
risk" to the patient, a sponsor may begin the clinical trial after obtaining
approval for the study by one or more appropriate IRBs, but not the FDA.
Sponsors of clinical trials are permitted to sell those devices distributed
in the course of the study provided such compensation does not exceed
recovery of the costs of manufacture, research, development and handling. An
IDE supplement must be submitted to and approved by the FDA before a sponsor
or an investigator may make a change to the investigational plan that may
affect its scientific soundness or the rights, safety or welfare of human
subjects.
A PMA application must also contain the results of all relevant bench
tests, laboratory and animal studies, a complete description of the device
and its components, and a detailed description of the methods, facilities and
controls used to manufacture the device. In addition, the submission must
include the proposed labeling, advertising literature and training methods
(if required). Upon receipt of a PMA application, the FDA makes a threshold
determination as to whether the application is sufficiently complete to
permit a substantive review. If the FDA determines that the PMA application
is sufficiently complete to permit a substantive review, the FDA will accept
the application for filing. Once the submission is accepted for filing, the
FDA begins an in-depth review of the PMA application. An FDA review of a PMA
application generally takes one to three years from the date the PMA
application is accepted for filing, but may take significantly longer. The
review time is often significantly extended by the FDA asking for more
information or clarification of information already provided in the
submission. During the review period, an advisory committee, typically a
panel of clinicians, will likely be convened to review and evaluate the
application and provide recommendations to the FDA as to whether the device
should be approved. The FDA is not bound by the recommendations of the
advisory panel. Toward the end of the PMA application review process, the FDA
generally will conduct an inspection of the manufacturer's facilities to
ensure that the facilities are in compliance with the applicable GMP
requirements.
If the FDA's evaluations of both the PMA application and the
manufacturing facilities are favorable, the FDA will either issue an approval
letter or an "approvable letter" containing a number of conditions which must
be met in order to secure final approval of the PMA application. When and if
those conditions have been fulfilled to the satisfaction of the FDA, the
agency will issue an approval of the PMA application, authorizing commercial
marketing of the device for certain indications. If the FDA's evaluation of
the PMA application or manufacturing facilities is not favorable, the FDA
will deny approval of the PMA application or issue a "not approvable letter."
The FDA may also determine that additional clinical trials are necessary, in
which case the PMA could be delayed for several years while additional
clinical trials are conducted and submitted in an amendment to the PMA
application. The PMA process can be
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expensive, uncertain, and lengthy, and a number of devices for which FDA
approval has been sought by other companies have never been approved for
marketing.
Use of a medical device for applications not covered in a 510(k)
notification or a PMA, or modifications to a device that has been cleared to
market through a 510(k) notification or an approved PMA, its labeling, or its
manufacturing process, may require submission of a new 510(k) notification, a
new PMA application, or a PMA application supplement. New 510(k)
notifications, PMA applications, or PMA supplements often require the
submission of the same type of information required for the original
submission except that it is generally limited to that information needed to
support the proposed change from the product covered by the original
submission.
Any products manufactured or distributed by the Company pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA, including record-keeping requirements and reporting of adverse
experiences with the use of the device. Device manufacturers are required to
register their establishments and list their devices with the FDA and certain
state agencies, and are subject to periodic inspections by the FDA and
certain state agencies. The FDC Act requires devices to be manufactured in
accordance with GMP regulations that impose certain procedural and
documentation requirements upon the Company with respect to manufacturing and
quality assurance activities. Toward the end of the clearance or approval
process, the FDA generally will conduct an inspection of the manufacturer's
facilities to ensure that the facilities are in compliance with the
applicable GMP requirements. The FDA is currently implementing changes to the
GMP regulations that, among other things, require design controls and
maintenance of service records, and will likely increase the cost of
complying with GMP requirements.
Labeling and promotion activities are subject to scrutiny by the FDA
and in certain instances, by the Federal Trade Commission. The FDA actively
enforces regulations prohibiting marketing of products for unapproved uses.
The Company and its products are also subject to a variety of state laws and
regulations in those states or localities where its products are or will be
marketed. Any applicable state or local regulations may hinder the Company's
ability to market its products in those states or localities. The Company is
also subject to numerous federal, state and local laws relating to such
matters as safe working conditions, manufacturing practices, environmental
protection, fire hazard control, and disposal of hazardous or potentially
hazardous substances. There can be no assurance that the Company will not be
required to incur significant costs to comply with such laws and regulations
now or in the future.
Changes in existing requirements or adoption of new requirements or
policies could adversely affect the ability of the Company to comply with
regulatory requirements. Failure to comply with regulatory requirements could
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 incur significant costs to comply with laws
and regulations in the future. See "Risk Factors--No Assurance of Regulatory
Clearance or Approval; Significant Domestic and International Regulation."
INTERNATIONAL
In order for the Company to market Port-Access systems in Europe and
certain other foreign jurisdictions, the Company must obtain required
regulatory approvals and clearances and otherwise comply with extensive
regulations regarding safety and manufacturing processes and quality. These
regulations, including the requirements for approvals or clearance to market
and the time required for regulatory review, vary from country to country.
There can be no assurance that the Company will obtain regulatory approvals
in such countries or that it will not be required to incur significant costs
in obtaining or maintaining its foreign regulatory approvals. Delays in
receipt of approvals to market the Company's products, failure to receive
these approvals or future loss of previously received approvals could have a
material adverse effect on the Company's business, financial condition, and
results of operations.
The time required to obtain approval for sale in foreign countries may
be longer or shorter than that required for FDA approval, and the
requirements may differ. In addition, there may be foreign regulatory
barriers other than premarket approval, and the FDA must approve exports of
devices that require a PMA but are not yet approved domestically. The current
rules provide that, in order to obtain FDA export approval, the Company must
provide the
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FDA with documentation from the medical device regulatory authority of the
importing country stating that the import of the device is not a violation of
that country's medical device laws.
The European Community has promulgated rules that require that medical
products receive by mid-1998 the right to affix the CE Mark, an international
symbol of adherence to quality assurance standards and compliance with
applicable European medical device directives. The Company received the CE
Mark in January, 1997, which allows it to sell its Port-Access CABG System
and Port-Access MVR System in member countries of the European Union.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company believes that its competitive position will be dependent in
significant part on its ability to protect its intellectual property. The
Company's policy is to seek to protect its proprietary position by, among
other methods, filing United States and foreign patent applications related
to its technology, inventions and improvements that are important to the
development of its business. As of March 14, 1997, the Company owns 25 issued
or allowed United States patents, and owns an exclusive field of use license
on one issued United States patent and on one issued foreign patent. In
addition, as of March 14, 1997 the Company has 84 pending United States
patent applications, and has filed 37 patent applications that are currently
pending in Europe, Japan, Australia, and Canada. There can be no assurance
that the Company's issued United States patents, or any patents that may be
issued in the future, will effectively protect the Company's technology or
provide a competitive advantage. There can be no assurance that any of the
Company's patents or patent applications will not be challenged, invalidated,
or circumvented in the future. In addition, there can be no assurance that
competitors, many of which have substantially more resources than the Company
and have made substantial investments in competing technologies, will not
seek to apply for and obtain patents that will prevent, limit or interfere
with the Company's ability to make, use, or sell its products either in the
United States or internationally.
The Company also relies upon trade secrets, technical know-how and
continuing technological innovation to develop and maintain its competitive
position. The Company typically requires its employees, consultants, and
advisors to execute confidentiality and assignment of inventions agreements
in connection with their employment, consulting, or advisory relationships
with the Company. There can be no assurance, however, that these agreements
will not be breached or that the Company will have adequate remedies for any
breach. Furthermore, no assurance can be given that competitors will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's proprietary technology,
or that the Company can meaningfully protect its rights in unpatented
proprietary technology.
Patent applications in the United States are maintained in secrecy
until patents issue, and patent applications in foreign countries are
maintained in secrecy for a period after filing. Publication of discoveries
in the scientific or patent literature tends to lag behind actual discoveries
and the filing of related patent applications. Patents issued and patent
applications filed relating to medical devices are numerous and there can be
no assurance that current and potential competitors and other third parties
have not filed or in the future will not file applications for, or have not
received or in the future will not receive, patents or obtain additional
proprietary rights relating to products or processes used or proposed to be
used by the Company. The Company is aware of patents issued to third parties
that contain subject matter related to the Company's technology. Based, in
part, on advice of its patent counsel, the Company believes that the
technologies employed by the Company in its devices and systems do not
infringe the claims of any such patents. There can be no assurance, however,
that third parties will not seek to assert that the Company's devices and
systems infringe their patents or seek to expand their patent claims to cover
aspects of the Company's technology.
The medical device industry in general, and the industry segment that
includes products for the treatment of cardiovascular disease in particular,
has been characterized by substantial competition and litigation regarding
patent and other intellectual property rights. Any such claims, whether with
or without merit, could be time-consuming and expensive to respond to and
could divert the Company's technical and management personnel. The Company
may be involved in litigation to defend against claims of infringement by
other patent holders, to enforce patents issued to the Company, or to protect
trade secrets of the Company. If any relevant claims of third-party patents
are upheld as valid and enforceable in any litigation or administrative
proceeding, the Company could be prevented from practicing the subject matter
claimed in such patents, or would be required to obtain licenses from the
patent owners
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of each such patent, or to redesign its products or processes to avoid
infringement. There can be no assurance that such licenses would be available
or, if available, would be available on terms acceptable to the Company or
that the Company would be successful in any attempt to redesign its products
or processes to avoid infringement. Accordingly, an adverse determination in
a judicial or administrative proceeding or failure to obtain necessary
licenses could prevent the Company from manufacturing and selling its
products, which would have a material adverse effect on the Company's
business, financial condition, and results of operations. The Company intends
to vigorously protect and defend its intellectual property. Costly and
time-consuming litigation brought by the Company may be necessary to enforce
patents issued to the Company, to protect trade secrets or know-how owned by
the Company or to determine the enforceability, scope and validity of the
proprietary rights of others. See "Risk Factors--Uncertainty Regarding
Patents and Protection of Proprietary Technology; Risks of Future
Litigation."
THIRD-PARTY REIMBURSEMENT
The Company expects that sales volumes and prices of the Company's
products will be heavily dependent on the availability of reimbursement from
third-party payors and that individuals seldom, if ever, will be willing or
able to pay directly for the costs associated with the use of the Company's
products. The Company's products typically are purchased by doctors, clinics,
hospitals, and other users, which bill various third-party payors, such as
governmental programs and private insurance plans, for the healthcare
services provided to their patients. Third-party payors carefully review and
increasingly challenge the prices charged for medical products and services.
Reimbursement rates from private companies vary depending on the procedure
performed, the third-party payor, the insurance plan, and other factors.
Medicare reimburses hospitals a prospectively determined fixed amount for the
costs associated with an in-patient hospitalization based on the patient's
discharge diagnosis, and reimburses physicians a prospectively determined
fixed amount based on the procedure performed, regardless of the actual costs
incurred by the hospital or physician in furnishing the care and unrelated to
the specific devices used in that procedure. Medicare and other third-party
payors are increasingly scrutinizing the level of reimbursement for covered
products and whether to cover new products at all.
In foreign markets, reimbursement is obtained from a variety of
sources, including governmental authorities, private health insurance plans,
and labor unions. In most foreign countries, there are also private insurance
systems that may offer payments for alternative therapies. Although not as
prevalent as in the United States, health maintenance organizations are
emerging in certain European countries. The Company may need to seek
international reimbursement approvals, although there can be no assurance
that any such approvals will be obtained in a timely manner or at all.
Failure to receive international reimbursement approvals could have an
adverse effect on market acceptance of the Company's products in the
international markets in which such approvals are sought.
The Company believes that reimbursement in the future will be subject
to increased restrictions such as those described above, both in the United
States and in foreign markets. The Company believes that the overall
escalating cost of medical products and services has led to and will continue
to lead to increased pressures on the health care industry, both foreign and
domestic, to reduce the cost of products and services, including products
offered by the Company. There can be no assurance as to either United States
or foreign markets that third-party reimbursement and coverage will be
available or adequate, that current reimbursement amounts will not be
decreased in the future or that future legislation, regulation, or
reimbursement policies of third-party payors will not otherwise adversely
affect the demand for the Company's products or its ability to sell its
products on a profitable basis, particularly if the Company's systems are
more expensive than competing cardiac surgery procedures. If third-party
payor coverage or reimbursement is unavailable or inadequate, the Company's
business, financial condition, and results of operations could be materially
adversely affected. See "Risk Factors--Limitations on Third-Party
Reimbursement."
EMPLOYEES
As of December 31, 1996, the Company had a total of 275 employees.
The Company maintains compensation, benefit, equity participation, and work
environment policies intended to assist in attracting and retaining qualified
personnel. The Company believes that the success of its business will depend,
in significant part, on its ability to attract and retain such personnel.
None of the Company's employees is represented by a collective
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bargaining agreement, nor has the Company experienced any work stoppage. The
Company considers its relations with its employees to be good.
RISK FACTORS
This Annual Report on Form 10-K contains forward-looking statements
that involve risks and uncertainties. The Company's actual results may
differ materially from those discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
the following:
EARLY STAGE OF UTILIZATION; NO ASSURANCE OF SAFETY AND EFFICACY
The Company's EndoCPB System, Port-Access CABG System, and Port-Access MVR
System and related devices are at an early stage of clinical utilization, and
there can be no assurance as to their clinical safety and efficacy. As of
March 21, 1997, to the Company's knowledge, clinicians have completed only
211 Port-Access CABG procedures and only 176 Port-Access MVR procedures using
Heartport's systems and devices. Port-Access minimally invasive cardiac
surgery has many of the risks of open-chest heart surgery, including bleeding
from the wound or internal organs, irregular heartbeat, formation of blood
clots and related complications, infection, heart attack, heart failure,
stroke, and death. Port-Access minimally invasive cardiac surgery also has
additional risks compared to open-chest surgery, including tearing or
splitting of major blood vessels, damage to blood vessels in the groin, and
groin pain. Although there can be no assurance in this regard, the Company
believes, based on the limited clinical experience to date, that mortality
and morbidity rates associated with Port-Access surgical procedures should be
comparable to mortality and morbidity rates experienced with conventional
open-chest procedures. If, with further experience, any of the Company's
systems do not prove to be safe and effective or if the Company is otherwise
unable to commercialize them successfully, the Company's business, financial
condition, and results of operations will be materially adversely affected
and the Company's business could cease.
NO ASSURANCE OF MARKET ACCEPTANCE
There can be no assurance that the Company's EndoCPB and Port-Access
systems will gain any significant degree of market acceptance among
physicians, patients, and health care payors, even if necessary regulatory
and reimbursement clearances and approvals are obtained. The Company believes
that physicians' acceptance and healthcare payors' reimbursement of
Port-Access procedures will be essential for market acceptance of its
systems, and there can be no assurance that any such recommendations or
approvals will be obtained. Physicians will not recommend Port-Access
procedures unless they conclude, based on clinical data and other factors,
that Port-Access procedures are an attractive alternative to other treatments
for cardiovascular disease. Most patients with cardiovascular disease first
consult with a cardiologist, who may treat the patient with pharmaceuticals
or non-surgical interventions such as percutaneous transluminal coronary
angioplasty ("PTCA") and intravascular stents, or may refer the patient to a
cardiac surgeon for open-chest CABG surgery. Cardiologists may not recommend
Port-Access procedures until such time, if any, as Port-Access CABG can be
successfully demonstrated to be as safe and cost-effective as other accepted
treatments. In addition, cardiac surgeons may elect not to recommend
Port-Access procedures until such time, if any, as the efficacy of the
Company's Port-Access procedures can be successfully demonstrated as compared
to conventional, open-chest surgery methods, which have become widely adopted
by cardiac surgeons since the initial use of such surgery in the mid-1950s.
Even if the clinical efficacy of Port-Access procedures is established,
cardiologists, cardiac surgeons, and other physicians may elect not to
recommend the procedures for any number of other reasons. Failure of the
Company's products to achieve significant market acceptance would have a
material adverse effect on the Company's business, financial condition, and
results of operations.
FLUCTUATIONS IN OPERATING RESULTS
Results of operations may vary significantly from quarter to quarter
depending upon numerous factors, including the following: demand for the
Company's products; the number of cardiac surgery teams trained in the use
of the Company's systems; the number of hospitals that begin using the
Company's products; the ability of the
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Company to manufacture, test and deliver its products in commercial volumes;
health care reform and reimbursement policies; delays associated with the FDA
and other regulatory approval processes; changes in pricing policies by the
Company or its competitors; the number, timing, and significance of product
enhancements and new product announcements by the Company and its
competitors; the ability of the Company to develop, introduce, and market new
and enhanced versions of the Company's products on a timely basis; customer
order deferrals in anticipation of enhancements or new products offered by
the Company or its competitors; product quality problems; personnel changes;
and the level of international sales. In addition, the Company has begun to
develop both a domestic and an international direct sales force. The timing
of such development and the rate at which new sales people become productive
could also cause material fluctuations in the Company's quarterly operating
results.
Operating results have been and will continue to be difficult to
forecast. Future revenue, if any, is also difficult to forecast because the
market for minimally invasive cardiac surgery systems is rapidly evolving,
and due to the inherent risks associated with new medical device technology.
Accordingly, the Company believes that period-to-period comparisons of its
operating results are not necessarily meaningful and should not be relied
upon as indications of future performance. Failure by the Company, for any
reason, to achieve additional regulatory approvals and to begin to generate
and increase revenue from sales of its products would have a material adverse
effect on the Company's business, operating results, and financial condition.
Due to the foregoing factors, it is likely that in some future quarter the
Company's operating results will be below the expectations of public market
analysts and investors. In such event, the price of the Company's Common
Stock would likely be materially adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
and "Research and Development," "Manufacturing," "Competition,"
"Government Regulation," and "Third-Party Reimbursement."
RISKS ASSOCIATED WITH NEW SURGICAL PROCEDURE; EXTENSIVE TRAINING REQUIREMENTS
Use of the Company's EndoCPB System, Port-Access CABG System, and
Port-Access MVR System to date has shown that, as with any novel surgical
procedure, there is a significant learning process involved for surgeons and
other members of the cardiac surgery team to become proficient. In addition,
certain patients requiring heart surgery cannot be treated with the present
Port-Access systems, depending upon what kind of condition they have and how
severe it is. These patients include people with severe peripheral vascular
disease (arteriosclerosis), a poorly functioning aortic valve, an enlarged
heart, or certain types of chest scarring. Broad use of the Company's systems
will require extensive training of numerous physicians, and the time required
to begin and complete such training could adversely affect market acceptance.
Although the Company has begun to train physicians at its Utah facility and
at a facility in Sweden, there can be no assurance that the Company will be
able to rapidly train physicians in numbers sufficient to generate adequate
demand for the Company's products and systems. Any delay in training would
have a material adverse effect on the demand for the Company's products and
systems and, therefore, a material adverse effect on its business, financial
condition, and results of operations.
LIMITED MANUFACTURING EXPERIENCE; DEPENDENCE ON KEY SUPPLIERS
To meet anticipated demand, the Company must increase the rate by which
it manufactures its products. To date, the Company's manufacturing activities
have consisted primarily of manufacturing limited quantities of products for
use in laboratory testing, clinical trials and initial low-volume commercial
sales. The manufacture of the Company's products is complex, involving a
number of separate processes and components. The Company does not have
experience in manufacturing its products in commercial quantities. Although
the Company is scaling up its capability to produce products in volume to
support its commercial launch, there can be no assurance that it will be able
to make the transition to commercial production successfully. In addition,
the Company believes that cost reductions in its manufacturing operations
will be required for it to commercialize its systems on a profitable basis.
Certain manufacturing processes are labor-intensive, and achieving
significant cost reductions will depend, in part, upon reducing the time
required to complete these processes. Medical device manufacturers often
encounter difficulties in scaling up manufacturing of new products, including
problems involving product yields, quality control and assurance, component
and service availability, adequacy of control policies and procedures, lack
of qualified personnel,
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compliance with FDA regulations, and the need for further FDA approval of new
manufacturing processes and facilities. To date, the Company has experienced
variable yields in scaling up manufacturing of certain of its product
components, and there can be no assurance that such variability will not
continue or will not adversely impact the Company's ability to meet demand
for its products. The Company has considered and will continue to consider as
appropriate the internal manufacture of components currently provided by
third parties, as well as the implementation of new production processes.
There can be no assurance that manufacturing yields or costs will not be
adversely affected by the transition to in-house production or to new
production processes when such efforts are undertaken, and that such a
transition would not materially and adversely affect the Company's business,
financial condition, and results of operations. While the Company has
received ISO 9001 certification, to date, the FDA has not inspected the
Company's compliance with GMP requirements, which include testing, control,
and documentation requirements, although the Company expects such inspections
to be made in the near future. There can be no assurance that FDA GMP
requirements will be met. See "Manufacturing."
The Company uses or relies on certain components and services used in
its devices that are provided by sole source suppliers. The qualification of
additional or replacement vendors for certain components or services is a
lengthy process. Any significant supply interruption would have a material
adverse effect on the Company's ability to manufacture its products and,
therefore, a material adverse effect on its business, financial condition,
and results of operations.
The Company manufactures its products based on forecasted product
orders, and purchases subassemblies and components prior to receipt of
purchase orders from customers. Lead times for materials and components
ordered by the Company vary significantly, and depend on factors such as the
business practices of the specific supplier, contract terms, and general
demand for a component at a given time. Certain components used in the
Company's products have long lead times. As a result, there is a risk of
excess or inadequate inventory if orders do not match forecasts.
SIGNIFICANT COMPETITION; RAPID TECHNOLOGICAL CHANGE
The Company expects that the market for minimally invasive cardiac
surgery, which is currently in the early stages of development, will be
intensely competitive. Competitors are likely to include a variety of
different companies that currently specialize in devices for conventional
cardiac surgery, as well as those that specialize in non-cardiac minimally
invasive surgery. The Company believes that a number of large companies,
including the Ethicon Endosurgery division of Johnson & Johnson, United
States Surgical Corporation, Medtronic, Inc., Baxter International, Genzyme
Corporation, Guidant Corporation and others with significantly greater
financial, manufacturing, marketing, distribution, and technical resources
and experience than the Company, may be focusing on the development of
minimally invasive cardiac surgery technology. In addition, new companies
have been and will continue to be started to pursue opportunities in this
market. Several companies have announced interest in and development of
products for the minimally invasive cardiac surgery field. For example, there
are companies pursuing minimally invasive cardiac surgery on a beating heart,
which, if successful, could materially adversely affect the Company's ability
to establish a market for its technology.
Cardiovascular diseases that can be treated with the Company's
Port-Access systems can also be treated by pharmaceuticals or other medical
devices and procedures including PTCA, intravascular stents, atherectomy
catheters and lasers. Many of these alternative treatments are widely
accepted in the medical community and have a long history of use. In
addition, technological advances with other therapies for heart disease such
as drugs or future innovations in cardiac surgery techniques could make such
other therapies more effective or lower in cost than the Company's
Port-Access procedures and could render the Company's technology obsolete.
There can be no assurance that physicians will use Port-Access procedures to
replace or supplement established treatments, such as conventional open-chest
heart surgery, PTCA, or intravascular stents, or that the Company's
Port-Access systems will be competitive with current or future technologies.
Such competition could have a material adverse effect on the Company's
business, financial condition, and results of operations. Any product
developed by the Company that gains regulatory clearance or approval will
have to compete for market acceptance and market share. An important factor
in such competition may be the timing of market introduction of competitive
products. Accordingly, the relative speeds with which the Company can develop
products, complete clinical testing and regulatory approval processes, train
physicians in the use of its products, gain reimbursement acceptance, and
supply commercial quantities of the product to the market are expected to be
important competitive factors. The Company has experienced delays in
completing the development and introduction of new products, product
variations and product features, and there can be no assurance that such
delays will not continue or recur in the future. Such delays could result in
a loss of market acceptance and market share. There can be no assurance that
the Company will be able to
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compete successfully against current and future competitors. Failure to do so
would have a material adverse effect upon the Company's business, financial
condition, and results of operations. See "Competition."
SUBSTANTIAL FUTURE LOSSES AND FUTURE CAPITAL REQUIREMENTS
Since its inception in May, 1991, the Company has been engaged in the
research and development of minimally invasive cardiac surgery systems and
related technology. In December, 1996, the Company commercially introduced
its Port-Access systems and is now engaged in extensive physician training
and selling activities. Through its "Port-Access Partnership" program, the
Company has adopted a sales model in which the Company trains a center's
surgical team, supplies patient and referring physician educational
materials, supports local market media efforts and furnishes proprietary
reusable devices for Port-Access procedures in exchange for a purchase order
for Port-Access disposable products necessary to perform Port-Access cardiac
surgery. Since December 31, 1996, substantially all of the Company's product
sales have been in connection with initial purchase orders for disposable
products from centers participating in the Port-Access Partnership program.
The Company only recently began to generate revenue from the sale of
products and has been unprofitable since inception. For the period from
inception to December 31, 1996, the Company has incurred cumulative net
losses of approximately $50.6 million. For at least the next 18 months, the
Company expects to continue to incur significant losses and expects to incur
losses in 1997 in excess of those incurred in 1996. There can be no assurance
that the Company will achieve or sustain profitability in the future. Failure
to achieve significant commercial revenues or profitability would have a
material adverse effect on the Company's business, financial condition, and
results of operations.
The Company believes that it may require additional financing. The
Company's future liquidity and capital requirements will depend upon numerous
factors, including the following: the extent to which the Company's products
gain market acceptance; the timing and costs of product introductions; the
extent of the Company's ongoing research and development programs; the costs
of training physicians to become proficient in the use of the Company's
products and procedures; the costs of expanding manufacturing capacity; the
costs of developing marketing and distribution capabilities; the progress and
scope of clinical trails required for any future products; the timing and
costs of filing future regulatory submissions; the timing and costs required
to receive both domestic and international governmental approvals for any
future products; and the costs of protecting and defending its intellectual
property. Issuance of additional equity securities could result in dilution
to stockholders. There can be no assurance that additional financing will be
available on terms acceptable to the Company, or at all. The Company's
inability to fund its capital requirements would have a material adverse
effect on the Company's business, financial condition, and results of
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
UNCERTAINTY REGARDING PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY; RISKS
OF FUTURE LITIGATION
The Company believes that its competitive position will be dependent in
significant part on its ability to protect its intellectual property. The
Company's policy is to seek to protect its proprietary position by, among
other methods, filing United States and foreign patent applications related
to its technology, inventions, and improvements that are important to the
development of its business. As of March 14, 1997, the Company owns 25 issued
or allowed United States patents, and owns an exclusive field of use license
on one issued United States patent and on one issued foreign patent. In
addition, as of March 14, 1997, the Company has 84 pending United States
patent applications and has filed 37 patent applications that are currently
pending in Europe, Japan, Australia, and Canada. There can be no assurance
that the Company's issued United States patents, or any patents that may be
issued in the future, will effectively protect the Company's technology or
provide a competitive advantage. There can be no assurance that any of the
Company's patents or patent applications will not be challenged, invalidated,
or circumvented in the future. In addition, there can be no assurance that
competitors, many of which have substantially more resources than the Company
and have made substantial investments in competing technologies, will not
seek to apply for and obtain patents that will prevent, limit, or interfere
with the Company's ability to make, use, or sell its products either in the
United States or internationally.
The Company also relies upon trade secrets, technical know-how, and
continuing technological innovation to develop and maintain its competitive
position. The Company typically requires its employees, consultants, and
advisors to execute confidentiality and assignment of inventions agreements
in connection with their employment, consulting, or advisory relationships
with the Company. There can be no assurance, however, that these agreements
will not be breached or that the Company will have adequate remedies for any
breach. Furthermore, no assurance can be given that competitors will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's proprietary technology,
or that the Company can meaningfully protect its rights in unpatented
proprietary technology.
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Patent applications in the United States are maintained in secrecy
until patents issue, and patent applications in foreign countries are
maintained in secrecy for a period after filing. Publication of discoveries
in the scientific or patent literature tends to lag behind actual discoveries
and the filing of related patent applications. Patents issued and patent
applications filed relating to medical devices are numerous and there can be
no assurance that current and potential competitors and other third parties
have not filed or in the future will not file applications for, or have not
received or in the future will not receive, patents or obtain additional
proprietary rights relating to products or processes used or proposed to be
used by the Company. The Company is aware of patents issued to third parties
that contain subject matter related to the Company's technology. Based, in
part, on advice of its patent counsel, the Company believes that the
technologies employed by the Company in its devices and systems do not
infringe the claims of any such patents. There can be no assurance, however,
that third parties will not seek to assert that the Company's devices and
systems infringe their patents or seek to expand their patent claims to cover
aspects of the Company's technology.
The medical device industry in general, and the industry segment that
includes products for the treatment of cardiovascular disease in particular,
has been characterized by substantial competition and litigation regarding
patent and other intellectual property rights. Any such claims, whether with
or without merit, could be time-consuming and expensive to respond to and
could divert the Company's technical and management personnel. The Company
may be involved in litigation to defend against claims of infringement by
other patent holders, to enforce patents issued to the Company, or to protect
trade secrets of the Company. If any relevant claims of third-party patents
are upheld as valid and enforceable in any litigation or administrative
proceeding, the Company could be prevented from practicing the subject matter
claimed in such patents, or would be required to obtain licenses from the
patent owners of each such patent, or to redesign its products or processes
to avoid infringement. There can be no assurance that such licenses would be
available or, if available, would be available on terms acceptable to the
Company or that the Company would be successful in any attempt to redesign
its products or processes to avoid infringement. Accordingly, an adverse
determination in a judicial or administrative proceeding or failure to obtain
necessary licenses could prevent the Company from manufacturing and selling
its products, which would have a material adverse effect on the Company's
business, financial condition, and results of operations. The Company intends
to vigorously protect and defend its intellectual property. Costly and
time-consuming litigation brought by the Company may be necessary to enforce
patents issued to the Company, to protect trade secrets or know-how owned by
the Company, or to determine the enforceability, scope, and validity of the
proprietary rights of others. See "Intellectual Property and Other
Proprietary Rights" and "Competition."
MANAGEMENT OF EXPANDING OPERATIONS; ACQUISITIONS
The Company has recently experienced rapid expansion of its operations,
which has placed, and is expected to continue to place, significant demands
on the Company's administrative, operational and financial personnel and
systems. In this respect, the Company hired a significant number of new
employees in the second half of 1996 and expects to continue hiring during
1997. In order to compete effectively against current and future competitors,
the Company believes that it must continue to expand its operations,
particularly in the areas of research and development, clinical affairs,
manufacturing and sales and marketing. If the Company were to experience
significant growth in the future, such growth would likely result in new and
increased responsibilities for management personnel and place significant
strain upon the Company's management, operating, and financial systems and
resources. To accommodate such growth and compete effectively, the Company
must continue to implement and improve information systems, procedures, and
controls, and to expand, train, motivate, and manage its work force. The
Company has recently installed an integrated financial, manufacturing, and
inventory information system. There can be no assurance that such system will
be adequate to meet the Company's requirements. Although the Company has
recently hired several new members of management, all of the foregoing
demands will require additional management personnel as well. The Company's
future success will depend to a significant extent on the ability of its
current and future management personnel to operate effectively, both
independently and as a group. There can be no assurance that the Company's
personnel, systems, procedures, and controls will be adequate to support the
Company's future operations. Any failure to implement and improve the
Company's operational, financial, and management systems or to expand, train,
motivate, or manage employees could have a material adverse effect on the
Company's business, financial condition, and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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The Company may make acquisitions in the future, and the Company
regularly evaluates such opportunities. Product and technology acquisitions
entail numerous risks, including difficulties in the assimilation of acquired
operations and products, diversion of management's attention to other
business concerns, amortization of acquired intangible assets and potential
loss of key employees of acquired companies. The Company's management has had
limited experience in assimilating acquired organizations and products into
the Company's operations. No assurance can be given as to the ability of the
Company to integrate successfully any operations, personnel or products that
might be acquired in the future, and the failure of the Company to do so
could have a material adverse effect on the Company's results of operations.
RELIANCE ON STRATEGIC RELATIONSHIPS
The Company intends to pursue strategic relationships with corporations
and research institutions with respect to the research, development,
regulatory approval, and marketing of certain of its potential products and
procedures. The Company's future success may depend, in part, on its
relationships with third parties, including, for example, the Company's
relationship with St. Jude Medical, Inc., their strategic interest in the
potential products or procedures under development and, eventually, their
success in marketing such products or procedures or willingness to purchase
any such products. The Company anticipates that these third parties may have
the unilateral right to terminate any such relationship without significant
penalty. There can be no assurance that the Company will be successful in
establishing or maintaining any such strategic relationships in the future or
that any such relationships will be successful. See "Strategic
Relationships."
RISK OF PRODUCT LIABILITY
The Company faces an inherent and significant business risk of exposure
to product liability claims in the event that the use of its products results
in personal injury or death and there can be no assurance that the Company
will not experience any material product liability losses in the future.
Also, in the event that any of the Company's products prove to be defective,
the Company may be required to recall or redesign such products. The Company
maintains limited insurance against certain product liability claims, but
there can be no assurance that such coverage will continue to be available on
terms acceptable to the Company or that such coverage will be adequate for
any liabilities actually incurred. A successful claim brought against the
Company in excess of available insurance coverage, or any claim or product
recall that results in significant adverse publicity against the Company, may
have a material adverse effect on the Company's business, financial
condition, and results of operations.
LIMITED SALES, MARKETING, AND DISTRIBUTION EXPERIENCE
The Company currently has a limited sales and marketing organization in
the United States and Europe. The Company plans to market its approved
systems through a direct sales force in the United States and through a
combination of direct and indirect sales channels internationally.
Establishment of a sales force capable of effectively commercializing the
Company's EndoCPB and Port-Access systems will require substantial efforts
and require significant management and financial resources. There can be no
assurance that the Company will be able to establish such a sales capability
on a timely basis, or at all. See "Sales, Marketing, Training, and
Distribution."
DEPENDENCE ON KEY PERSONNEL
The Company's future business and operating results depend in
significant part upon the continued contributions of its key technical and
senior management personnel, many of whom would be difficult to replace and
certain of whom perform important functions for the Company beyond those
functions suggested by their respective job titles or descriptions. The
Company's business and future operating results also depend in significant
part upon its ability to attract and retain qualified management,
manufacturing, technical, marketing, and sales and support personnel for its
operations. Competition for such personnel is intense, and there can be no
assurance that the Company will be successful in attracting or retaining such
personnel. The loss of any key employee, the failure of any key employee to
perform in his or her current position, or the Company's inability to attract
and retain skilled employees, as needed, could materially adversely affect
the Company's business, financial condition, and results of operations.
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NO ASSURANCE OF REGULATORY CLEARANCE OR APPROVAL; SIGNIFICANT DOMESTIC AND
INTERNATIONAL REGULATION
The Company's individual devices are subject to regulatory clearances
or approvals by the FDA. The Company believes that most of its devices and
systems will be subject to United States regulatory clearance through the
510(k) premarket notification process rather than a more extensive pre-market
approval ("PMA") submission. Although the Company has received clearance from
the FDA to market the EndoCPB System in the United States, securing FDA
approvals and clearances for additional Port-Access devices and other
products under development by the Company will require submission to the FDA
of extensive technical information and may require submission of extensive
clinical data. There can be no assurance that the FDA will act favorably or
quickly on the Company's 510(k) or other submissions, and significant
difficulties and costs may be encountered by the Company in its efforts to
obtain FDA clearance that could delay or preclude the Company from marketing
and selling its products in the United States. Furthermore, there can be no
assurance that the FDA will not request additional data, require that the
Company conduct further clinical studies, or require a more extensive PMA
submission, causing the Company to incur substantial costs and delays. The
Company's business, financial condition, and results of operations are
critically dependent upon FDA clearance or approval of the Company's systems.
Failure to obtain such clearance or approval, or to obtain such clearance or
approval on a timely basis, would have a material adverse effect on the
Company's business, financial condition, and results of operations, and could
result in postponement of the commercialization of the Company's products or
even cessation of the Company's business in the United States.
Sales of medical devices outside of the United States are subject to
foreign regulatory requirements that vary widely from country to country. The
time required to obtain approval for sale in foreign countries may be longer
or shorter than that required for FDA clearance or approval, and the
requirements may differ. In addition, if the FDA were to require a PMA
submission for any of the Company's products, the Company would be required
to obtain FDA approval to export such devices and systems to international
markets prior to their approval by the FDA for commercialization in the
United States. Although the Company has received approval to market the
EndoCPB System in Europe, securing approvals for additional Port-Access
devices and other products under development by the Company will require
additional approvals and there can be no assurance that such approvals will
be received on a timely basis, or at all. Most other countries in which the
Company intends to operate either do not currently regulate medical systems
or have minimal regulatory requirements, although these countries may adopt
more extensive regulations in the future that could impact the Company's
ability to market its systems. In addition, significant costs and requests
for additional information may be encountered by the Company in its efforts
to obtain regulatory approvals. Any such events could substantially delay or
preclude the Company from marketing its systems internationally.
In addition, the FDA and certain foreign regulatory authorities impose
numerous other requirements with which medical device manufacturers must
comply. Product approvals can be withdrawn for failure to comply with
regulatory standards or the occurrence of unforeseen problems following
initial marketing. The Company will also be required to adhere to applicable
FDA regulations setting forth current Good Manufacturing Practices ("GMP")
requirements, which include testing, control, and documentation requirements.
Ongoing compliance with GMP and other applicable regulatory requirements is
monitored through periodic inspections by state and federal agencies,
including the FDA, and by comparable agencies in other countries. Failure to
comply with applicable regulatory requirements can result in fines,
injunctions, civil penalties, recall or seizure of products, total or partial
suspension of production, denial or withdrawal of premarket clearance or
premarket approval for devices, and criminal prosecution. Furthermore,
changes in existing regulations or adoption of new regulations or policies
could delay or even prevent the Company from obtaining future regulatory
approvals or clearances. For example, the FDA is currently implementing major
revisions to its GMP regulations that, among other things, require design
controls and maintenance of service records, and will likely increase the
cost of complying with GMP requirements. Such revisions could have a material
adverse effect on the Company's business, financial condition, and results of
operations. See "Government Regulation."
LIMITATIONS ON THIRD-PARTY REIMBURSEMENT
The Company expects that sales volumes and prices of the Company's
products will be heavily dependent on the availability of reimbursement from
third-party payors and that individuals seldom, if ever, will be willing or
able to pay directly for the costs associated with the use of the Company's
products. The Company expects that its products typically will be purchased
by doctors, clinics, hospitals, and other users, which bill various
third-party payors, such as governmental programs and private insurance
plans, for the healthcare services provided to their
22
<PAGE>
patients. Third-party payors carefully review and increasingly challenge the
prices charged for medical products and services. Reimbursement rates from
private companies vary depending on the procedure performed, the third-party
payor, the insurance plan, and other factors. Medicare reimburses hospitals
a prospectively determined fixed amount for the costs associated with an
in-patient hospitalization based on the patient's discharge diagnosis, and
reimburses physicians a prospectively determined fixed amount based on the
procedure performed, regardless of the actual costs incurred by the hospital
or physician in furnishing the care and unrelated to the specific devices
used in that procedure. Medicare and other third-party payors are
increasingly scrutinizing whether to cover new products and the level of
reimbursement for covered products.
In foreign markets, reimbursement is obtained from a variety of
sources, including governmental authorities, private health insurance plans,
and labor unions. In most foreign countries, there are also private insurance
systems that may offer payments for alternative therapies. Although not as
prevalent as in the United States, health maintenance organizations are
emerging in certain European countries. The Company may need to seek
international reimbursement approvals, although there can be no assurance
that any such approvals will be obtained in a timely manner or at all.
Failure to receive international reimbursement approvals could have an
adverse effect on market acceptance of the Company's products in the
international markets in which such approvals are sought.
The Company believes that reimbursement in the future will be subject
to increased restrictions such as those described above, both in the United
States and in foreign markets. The Company believes that the overall
escalating cost of medical products and services has led to and will continue
to lead to increased pressures on the health care industry, both foreign and
domestic, to reduce the cost of products and services, including products
offered by the Company. There can be no assurance as to either United States
or foreign markets that third-party reimbursement and coverage will be
available or adequate, that current reimbursement amounts will not be
decreased in the future or that future legislation, regulation, or
reimbursement policies of third-party payors will not otherwise adversely
affect the demand for the Company's products or its ability to sell its
products on a profitable basis, particularly if the Company's systems are
more expensive than competing cardiac surgery procedures. If third-party
payor coverage or reimbursement is unavailable or inadequate, the Company's
business, financial condition, and results of operations could be materially
adversely affected. See "Third-Party Reimbursement."
VOLATILITY OF STOCK PRICE
The Company's stock price has been, and is likely to continue to be,
highly volatile. The market price of the Company's Common Stock has
fluctuated substantially in recent periods, rising from $21.00 at the
Company's initial public offering on April 25, 1996, to a high of $43.75 on
May 15, 1996, and to a low of $18.375 on July 16, 1996. On March 14, 1997
the price of the Company's Common Stock was $27.25. The market price of the
shares of Common Stock may be significantly affected by factors such as
actual or anticipated fluctuations in the Company's operating results,
announcements of technological innovations, new products or new contracts by
the Company or its competitors, developments with respect to patents or
proprietary rights, conditions and trends in the medical device and other
technology industries, adoption of new accounting standards affecting the
medical device industry, changes in financial estimates by securities
analysts, general market conditions, and other factors. In addition, the
stock market has from time to time experienced significant price and volume
fluctuations that have particularly affected the market prices for the common
stocks of early stage companies. These broad market fluctuations may
adversely affect the market price of the Company's Common Stock, and there
can be no assurance that the market price of the Common Stock will not
decline below the public offering price. In the past, following periods of
volatility in the market price of a particular company's securities,
securities class action litigation has often been brought against that
company. Such litigation, if brought against the Company, could result in
substantial costs and a diversion of management's attention and resources.
CONTROL BY PRINCIPAL STOCKHOLDERS, OFFICERS AND DIRECTORS
The present directors, executive officers, and principal stockholders
of the Company and their affiliates beneficially own approximately 51.6% of
the outstanding Common Stock. As a result, these stockholders will be able to
continue to exert significant influence over all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions. Such concentration of ownership may have
the effect of delaying or preventing a change in control of the Company.
23
<PAGE>
EFFECT OF CERTAIN CHARTER PROVISIONS; ANTITAKEOVER EFFECTS OF RIGHTS PLAN,
CERTIFICATE OF INCORPORATION, BYLAWS, AND DELAWARE LAW
The Company's Board of Directors has the authority to issue up to
20,000,000 shares of Preferred Stock and to determine the price, rights,
preferences, privileges and restrictions, including voting and conversion
rights of such shares, without any further vote or action by the Company's
stockholders. The rights of the holders of 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 could
have the effect of making it more difficult for a third party to acquire a
majority of the outstanding voting stock of the Company. Other than the
Series A Preferred Stock issuable under the stockholder rights plan, the
Company has no current plans to issue shares of Preferred Stock. In addition,
the Company's Certificate of Incorporation provides for a classified Board of
Directors such that approximately only one-third of the members of the Board
are elected at each annual meeting of stockholders. Classified Boards may
have the effect of delaying, deferring, or discouraging changes in control of
the Company. Further, the Company has adopted a stockholder rights plan that,
in conjunction with certain provisions of the Company's Certificate of
Incorporation and Bylaws and of Delaware law, could delay or make more
difficult a merger, tender offer, or proxy contest involving the Company.
ITEM 2.PROPERTIES.
The Company's principal administrative, sales, manufacturing, and
research and development facility occupies approximately 70,000 square feet
in three adjacent buildings in an office park in Redwood City, California,
pursuant to leases which expire between April, 1999 and July, 1999. The
Company is currently negotiating for approximately an additional 15,000
square feet of manufacturing and office space in another building in the same
office park. The Company believes its facilities will be adequate through
the end of 1997, but the Company will need additional space thereafter. The
Heartport Research and Training Center occupies approximately 50,000 square
feet in Utah. The initial term of the lease on this facility expires in
December, 2001.
ITEM 3.LEGAL PROCEEDINGS.
None.
PART II
ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
24
<PAGE>
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock has traded publicly on the Nasdaq National
Market under the symbol "HPRT" since April 25, 1996. The Company's initial
public offering price was $21.00 per share. The following table sets forth,
for the periods indicated, the high and low closing sale prices for the
Company's Common Stock as reported by the Nasdaq National Market.
HIGH LOW
---- ---
YEAR ENDED DECEMBER 31, 1996:
Second Quarter (from April 26, 1996, the first
trading date)..................................... $41.00 $26.875
Third Quarter....................................... 30.25 21.250
Fourth Quarter...................................... 36.50 22.875
YEAR ENDED DECEMBER 31, 1997:
First Quarter (through March 14, 1997).............. 32.69 21.375
On March 14, 1997, the last sale price of the Company's Common Stock as
reported by the Nasdaq National Market was $27.25 per share. There were
approximately 328 holders of record of the Company's Common Stock as of March
14, 1997. See "Risk Factors--Volatility of Stock Price."
The Company has never declared or paid cash dividends on its Common
Stock and currently does not anticipate paying cash dividends in the
foreseeable future. In addition, the Company's debt facility restricts the
ability to pay cash dividends.
25
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data should be read in conjunction
with the Company's financial statements and related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein. The statement of operations data for
the three years in the period ended December 31, 1996, and the balance sheet
data at December 31, 1995 and 1996 are derived from the audited financial
statements included elsewhere herein. The statement of operations data for
the period from May 17, 1991 (inception) to December 31, 1992 and for the
year ended December 31, 1993, and the balance sheet data at December 31,
1992, 1993 and 1994 are derived from audited financial statements not
included herein.
<TABLE>
<CAPTION>
PERIOD FROM
1996 1995 1994 1993 MAY 17, 1991
---- ---- ---- ---- (INCEPTION) TO
YEAR ENDED DECEMBER 31, DECEMBER 31, 1992
------------------------------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................ $ 624 $ -- $ -- $ -- $ --
Cost of goods sold............... 561 -- -- -- --
-------- ------- ------- ------- -----
Gross profit 63 -- -- -- --
Operating expenses:
Research and development....... 21,059 8,477 4,207 1,493 428
Selling, general and
administrative............... 11,223 1,229 734 364 210
Patent acquisition............... 5,216 -- -- -- --
-------- ------- ------- ------- -----
Loss from operations............. (37,435) (9,706) (4,941) (1,857) (638)
Interest income.................. 3,973 542 120 58 66
Interest expense................. (592) (189) -- -- --
-------- ------- ------- ------- -----
Net loss $(34,054) $(9,353) $(4,821) $(1,799) $(572)
-------- ------- ------- ------- -----
Pro forma net loss per share(1).. $ (1.50) $ (.47)
-------- ------- ------- -----
Shares used in calculation
of proforma net loss per
share(1)...................... 22,771 19,782
-------- -------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets................... $ 94,226 $ 12,692 $ 1,721 $ 696 $2,447
Working capital.................. 87,561 11,234 1,089 505 237
Total assets..................... 101,852 14,266 2,621 983 2,600
Long-term obligations, less
current portion............... 4,717 4,034 61 10 5
Accumulated deficit.............. (50,599) (16,545) (7,192) (2,371) (572)
Total stockholders' equity....... 90,470 8,775 1,928 781 2,517
</TABLE>
___________________
(1) Shares of Common Stock issuable upon exercise of outstanding options
and warrants are excluded from the computations as their effect is
antidilutive, except that such securities issued during the
twelve-month period prior to the Company's initial public offering
at prices below the initial public offering price have been included
in the calculation as if they were outstanding. See Note 1 of Notes to
Financial Statements.
26
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
Since its inception in May, 1991, the Company has been engaged in the
research and development of Port-Access minimally invasive cardiac surgery
systems and related technology. In December, 1996, the Company commercially
introduced its Port-Access systems and is now engaged in extensive physician
training and selling activities. Through its "Port-Access Partnership"
program, the Company has adopted a sales model in which the Company trains a
center's surgical team, supplies patient and referring physician educational
materials, supports local market media efforts and furnishes proprietary
reusable devices for Port-Access procedures in exchange for a purchase order
for Port-Access disposable products necessary to perform Port-Access cardiac
surgery. Since December 31, 1996, substantially all of the Company's product
sales have been in connection with initial purchase orders for disposable
products from centers participating in the Port-Access Partnership program.
The Company has hired a significant number of employees each year to
conduct and support its research and development and product
commercialization activities. At December 31, 1996, 1995, and 1994, the
Company had 275, 73, and 44 employees, respectively. The Company anticipates
that its workforce will continue to grow rapidly in the next several years to
support product development, clinical affairs and training, manufacturing,
and sales and marketing.
The Company only recently began to generate revenue from the sale of
products, and it has been unprofitable since inception. For the period from
inception to December 31, 1996, the Company has incurred cumulative net
losses of approximately $50.6 million. For at least the next 18 months, the
Company expects to continue to incur significant losses, and expects to incur
losses in 1997 in excess of those incurred in 1996.
The foregoing and the discussion appearing elsewhere in this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contain forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially 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 "Risk
Factors."
RESULTS OF OPERATIONS
NET SALES. Net sales consist of initial sales of the Company's
EndoCPB, Port-Access CABG and Port-Access MVR systems. The Company
recognizes revenue upon product shipment. In 1996, net sales were $624,000,
all of which was recognized in the fourth quarter.
COST OF GOODS SOLD. Cost of goods sold of $561,000 in 1996 consisted
primarily of material, labor and overhead costs associated with
manufacturing the Company's disposable and reusable devices in its EndoCPB,
Port-Access CABG, and Port-Access MVR systems sold.
Because cost of goods sold includes the cost of the Company's reusable
devices, for which the Company receives no corresponding revenue under the
Company's Port-Access Partnership sales model, the Company's gross margin
will vary significantly based upon the mix of reusable and disposable
devices shipped. During periods where net sales to new centers in the
Port-Access Partnership program constitute a significant percentage of total
net sales, and as a result, reusable devices shipped by the Company account
for a significant percentage of total devices shipped, the Company's gross
margin will be low. As repeat sales of disposable devices to previously
trained centers increase, the Company expects margins to improve. In
addition, if the Company is able to improve its yield and manufacturing
efficiencies in the production of its devices, the Company believes its gross
margins will also improve.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
consist primarily of personnel costs, consulting fees and other costs in
support of product development, clinical trials, physician training, and
27
<PAGE>
regulatory submissions, as well as costs incurred in producing products for
research and development activities, physician training, and clinical trials,
and the cost of prosecuting United States and foreign patent applications
relating to the Company's technology. In addition, prior to
commercialization of the Company's products, costs incurred in physician
training were included in the Company's research and development expenses.
Research and development expenses increased to $21.1 million in 1996 from
$8.5 million in 1995 and $4.2 million in 1994. The increase from 1995 to 1996
was attributable to an increase in physician training and in manufacturing
expenses related to the production of products for physician training and
clinical trials, as well as to an increase in research and development
staffing. The increase from 1994 to 1995 was primarily attributable to an
increase in research and development staffing. The Company anticipates that
it will continue to devote substantial resources to research and development.
However, the Company anticipates that research and development expenses will
not change significantly in 1997 as start-up costs for manufacturing and
physician training incurred during the Company's development phase will not
recur in 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses consist primarily of costs for administrative, sales
and marketing personnel, as well as legal, accounting and other professional
fees. Selling, general and administrative expenses increased to $11.2 million
in 1996 from $1.2 million in 1995 and $734,000 in 1994. The increase from
1995 to 1996 was primarily due to increased hiring of sales and marketing
personnel in anticipation of the Company's product launch and increased
administrative staffing and associated expenses necessary to manage and
support the Company's increased scale of operations. Since commercialization
of the Company's products, physician training costs have been included in the
Company's selling, general and administrative expenses. As a result, the
Company believes that its selling, general and administrative expenses will
continue to increase substantially as it expands its physician training
activities, builds its sales force, marketing staff and administrative staff,
and incurs other costs in connection with commercialization of its products
and the support of its growing operations.
PATENT ACQUISITION EXPENSE. Patent acquisition expense of $5.2 million
consists of the cost to acquire a United States patent, several pending U.S.
patent applications, and related rights from Endosurgical Development
Corporation in July, 1996 for consideration consisting of shares of Common
Stock and cash. See Note 7 of Notes to Consolidated Financial Statements.
INTEREST INCOME. Interest income primarily represents interest earned
by the Company on its cash and short-term investments. Interest income
increased to $4.0 million in 1996 from $542,000 in 1995 and $120,000 in 1994.
The increase in each period was primarily due to the Company's higher average
investment balances resulting from cash received in venture capital
financings in 1995 and the Company's initial public offering in 1996.
INTEREST EXPENSE. Interest expense represents interest on long-term
debt. Interest expense increased to $592,000 in 1996 from $189,000 in 1995.
The Company had no long-term debt until March, 1995. See Note 4 of Notes to
Consolidated Financial Statements.
INCOME TAXES. The Company has not generated any net income to date and
therefore has not paid any federal income taxes since its inception. The
provision for income taxes consists solely of state minimum taxes.
Realization of deferred tax assets is dependent on future earnings, if
any, the amount and timing of which are uncertain. Accordingly, a valuation
allowance has been established in an amount equal to the net deferred tax
assets of the Company to reflect these uncertainties.
At December 31, 1996, the Company had net operating loss carryforwards
for income tax purposes of approximately $43.0 million for federal and $39.0
million for state, which will expire at various dates through 2011, if not
utilized. The principal differences between financial reporting losses and
losses for tax purposes are the result of capitalizing research and
development expenses and start-up costs for tax purposes. The Company also
has research and development credits available to reduce future federal and
state income taxes, if any, of approximately $550,000 and $500,000,
respectively. The Tax Reform Act of 1986 and state tax statutes contain
provisions that may limit the net operating loss carryforwards and research
and development credits available for use in any given year should certain
events occur, including additional sales of equity securities and other
changes in ownership. Such events could limit the eventual utilization of
these carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has funded its operations and investments
in property and equipment primarily through the private sale of preferred
stock, totaling approximately $25.1 million, and through an initial public
offering of Common Stock in April, 1996, totaling approximately $110.8
million. The Company also has a $15.0 million debt facility with a commercial
bank. No amount was outstanding under this facility at December 31, 1996.
28
<PAGE>
Net cash used in operating activities was approximately $27.5 million,
$8.3 million, and $4.5 million in 1996, 1995, and 1994, respectively. For
such periods, net cash used in operating activities resulted primarily from
increasing net losses. Net cash used in investing activities was
approximately $58.3 million, $5.1 million, and $1.9 million in 1996, 1995,
and 1994, respectively. The net cash used in investing activities was
primarily attributable to the purchase of short-term investments and the
purchase of property and equipment. Net cash provided by financing activities
was approximately $111.9 million, $20.4 million, and $6.0 million in 1996,
1995, and 1994, respectively. The net cash provided in 1996 was primarily
attributable to the initial public offering of Common Stock and the net cash
provided in 1995 and 1994 was primarily attributable to the sale of preferred
stock and proceeds from long-term borrowings.
Capital expenditures for equipment and leasehold improvements to
support the Company's expanded operations were approximately $6.1 million,
$875,000, and $703,000 in 1996, 1995, and 1994, respectively. The
expenditures in 1996 were primarily incurred in the acquisition of equipment
for research and development and physician training and in the expansion of
the Company's administrative facilities and manufacturing capacity. The
Company expects that its capital expenditures will continue to grow as the
Company's employee base and manufacturing operations expand. In addition,
the Company presently plans to spend approximately $11.0 million in 1997 for
capital expenditures related to training facility improvements and the
expansion of its manufacturing capacity and facilities. At December 31, 1996,
the Company had approximately $89.9 million in cash, cash equivalents, and
short-term investments and approximately $87.6 million in working capital.
29
<PAGE>
HEARTPORT, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.......................................................... F-2
Consolidated Balance Sheets................................................................................ F-3
Consolidated Statements of Operations...................................................................... F-4
Consolidated Statements of Stockholders' Equity............................................................ F-5
Consolidated Statements of Cash Flows...................................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Heartport, Inc.
We have audited the accompanying consolidated balance sheets of Heartport, Inc.
as of December 31, 1996 and 1995, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1996. Our audits also included the financial
statement schedule listed in the Index at Item 14(d). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Heartport, Inc. at
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996 in conformity
with generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
San Jose, California
January 24, 1997
F-2
<PAGE>
HEARTPORT, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents......................................................................... $ 33,445 $ 7,412
Short-term investments............................................................................ 56,407 5,198
Accounts receivable, net of allowance for doubtful accounts of $33 in 1996........................ 550 --
Inventories....................................................................................... 2,107 --
Prepaid expenses and other........................................................................ 1,717 82
------------- -------------
Total current assets................................................................................ 94,226 12,692
Property and equipment:
Equipment......................................................................................... 4,908 1,389
Furniture and fixtures............................................................................ 1,372 262
Leasehold improvements............................................................................ 1,699 224
------------- -------------
7,979 1,875
Accumulated depreciation and amortization......................................................... 1,584 507
------------- -------------
6,395 1,368
Deposits, intangibles and other assets, net......................................................... 1,231 206
------------- -------------
Total assets........................................................................................ $ 101,852 $ 14,266
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................................. $ 4,570 $ 812
Accrued compensation and related benefits......................................................... 1,433 173
Accrued clinical trial costs...................................................................... -- 79
Current portion of long-term debt................................................................. 662 394
------------- -------------
Total current liabilities........................................................................... 6,665 1,458
Noncurrent liabilities:
Long-term debt, less current portion.............................................................. 1,334 3,913
Other long-term liabilities....................................................................... 383 120
Deferred royalty income........................................................................... 3,000 --
------------- -------------
Total noncurrent liabilities........................................................................ 4,717 4,033
Commitments
Stockholders' equity:
Convertible preferred stock, $0.001 par value, issuable in series, 10,240 shares authorized
Issued and outstanding shares -- none in 1996, and 9,237 in 1995................................ -- 9
Preferred stock, $0.001 par value; 20,000 shares authorized, none issued and outstanding.......... -- --
Common stock, $0.001 par value:
Authorized shares -- 100,000
Issued and outstanding shares -- 24,415 in 1996, and 9,084 in 1995.............................. 24 9
Additional paid-in capital........................................................................ 142,018 26,395
Notes receivable from stockholders................................................................ (973) (1,093)
Accumulated deficit............................................................................... (50,599) (16,545)
------------- -------------
Total stockholders' equity.......................................................................... 90,470 8,775
------------- -------------
Total liabilities and stockholders' equity.......................................................... $ 101,852 $ 14,266
------------- -------------
------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
HEARTPORT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
----------- ----------- ------------
<S> <C> <C> <C>
Net sales................................................................................. $ 624 $ -- $ --
Cost of goods sold........................................................................ 561 -- --
----------- ----------- ------------
Gross profit.............................................................................. 63 -- --
Operating expenses:
Research and development................................................................ 21,059 8,477 4,207
Selling, general and administrative..................................................... 11,223 1,229 734
Patent acquisition...................................................................... 5,216 -- --
----------- ----------- ------------
Loss from operations...................................................................... (37,435) (9,706) (4,941)
Interest income........................................................................... 3,973 542 120
Interest expense.......................................................................... (592) (189) --
----------- ----------- ------------
Net loss.................................................................................. $ (34,054) $ (9,353) $ (4,821)
----------- ----------- ------------
----------- ----------- ------------
Pro forma net loss per share.............................................................. $ (1.50) $ (.47)
----------- -----------
----------- -----------
Shares used in calculation of pro forma net loss per share................................ 22,771 19,782
----------- -----------
----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
HEARTPORT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED
STOCK COMMON STOCK ADDITIONAL
------------------------ ------------------------ PAID-IN NOTES ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT
----------- ----------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993.... 5,080 $ 5 6,093 $ 6 $ 3,204 $ (63) $ (2,371)
Issuances of convertible
preferred stock............. 1,591 2 -- -- 5,947 -- --
Issuances of common stock..... -- -- 187 -- 15 (11) --
Exercises of common stock
options..................... -- -- 62 -- 11 (9) --
Payments of stockholders'
notes receivable............ -- -- -- -- -- 15 --
Repurchases of common stock... -- -- (383) -- (26) 24 --
Net loss...................... -- -- -- -- -- -- (4,821)
----------- ----------- ----------- ----------- ----------- ----------- ------------
Balance at December 31, 1994.... 6,671 7 5,959 6 9,151 (44) (7,192)
Issuances of convertible
preferred stock............. 2,566 2 -- -- 15,982 -- --
Issuances of preferred stock
warrants.................... -- -- -- -- 29 -- --
Exercises of common stock
options..................... -- -- 3,093 3 1,211 (1,049) --
Issuances of common stock..... -- -- 32 -- 22 -- --
Net loss...................... -- -- -- -- -- -- (9,353)
----------- ----------- ----------- ----------- ----------- ----------- ------------
Balance at December 31, 1995.... 9,237 9 9,084 9 26,395 (1,093) (16,545)
Conversion of convertible
preferred stock into common
stock....................... (9,237) (9) 9,237 9 -- -- --
Repurchases of common stock... -- -- (184) -- (69) 69 --
Payments of stockholders'
notes receivable............ -- -- -- -- -- 51 --
Exercises of common stock
options..................... -- -- 327 -- 67 -- --
Issuances of common stock..... -- -- 5,951 6 115,425 -- --
Issuances of warrants......... -- -- -- -- 200 -- --
Net loss...................... -- -- -- -- -- -- (34,054)
----------- ----------- ----------- ----------- ----------- ----------- ------------
Balance at December 31, 1996.... -- $ -- 24,415 $ 24 $ 142,018 $ (973) $ (50,599)
----------- ----------- ----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ----------- ----------- ------------
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Balance at December 31, 1993.... $ 781
Issuances of convertible
preferred stock............. 5,949
Issuances of common stock..... 4
Exercises of common stock
options..................... 2
Payments of stockholders'
notes receivable............ 15
Repurchases of common stock... (2)
Net loss...................... (4,821)
-------------
Balance at December 31, 1994.... 1,928
Issuances of convertible
preferred stock............. 15,984
Issuances of preferred stock
warrants.................... 29
Exercises of common stock
options..................... 165
Issuances of common stock..... 22
Net loss...................... (9,353)
-------------
Balance at December 31, 1995.... 8,775
Conversion of convertible
preferred stock into common
stock....................... --
Repurchases of common stock... --
Payments of stockholders'
notes receivable............ 51
Exercises of common stock
options..................... 67
Issuances of common stock..... 115,431
Issuances of warrants......... 200
Net loss...................... (34,054)
-------------
Balance at December 31, 1996.... $ 90,470
-------------
-------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
HEARTPORT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------------------------
1996 1995 1994
----------- ----------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................................................. $ (34,054) $ (9,353) $ (4,821)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization........................................................... 1,084 330 151
Common stock and warrants issued for services rendered and certain technology........... 4,355 -- 4
Compensation related to stock options................................................... 183 -- --
Changes in operating assets and liabilities:
Accounts receivable................................................................... (550) -- --
Inventories........................................................................... (2,107) -- --
Prepaid expenses and other............................................................ (1,635) 182 (243)
Accounts payable, accrued expenses, and deposit....................................... 5,201 541 443
----------- ----------- ------------
Net cash used in operating activities..................................................... (27,523) (8,300) (4,466)
INVESTING ACTIVITIES
Purchases of short-term investments....................................................... (120,629) (5,198) (1,092)
Maturities of short-term investments...................................................... 69,420 1,092 --
Purchases of property and equipment....................................................... (6,104) (875) (703)
Proceeds from sale of equipment........................................................... -- -- 18
Increase in deposits, intangibles and other assets........................................ (1,031) (79) (80)
----------- ----------- ------------
Net cash used in investing activities..................................................... (58,344) (5,060) (1,857)
FINANCING ACTIVITIES
Proceeds from issuances of preferred stock................................................ -- 15,984 5,949
Proceeds from issuances of common stock................................................... 111,159 165 2
Proceeds from payment of stockholders' notes receivable................................... 51 -- 15
Repurchase of common stock................................................................ -- -- (2)
Proceeds from long-term borrowings........................................................ 1,155 4,519 50
Repayment of long-term borrowings......................................................... (465) (261) (1)
----------- ----------- ------------
Net cash provided by financing activities................................................. 111,900 20,407 6,013
----------- ----------- ------------
Net increase (decrease) in cash and cash equivalents...................................... 26,033 7,047 (310)
Cash and cash equivalents at beginning of year............................................ 7,412 365 675
----------- ----------- ------------
Cash and cash equivalents at end of year.................................................. $ 33,445 $ 7,412 $ 365
----------- ----------- ------------
----------- ----------- ------------
SUPPLEMENTAL DISCLOSURES OF CASH INFORMATION
Cash paid for interest.................................................................... $ 346 $ 182 $ --
NONCASH FINANCING ACTIVITIES
Issuance of preferred stock warrants in connection with debt financing.................... $ -- $ 29 $ --
Issuance of common stock for notes receivable............................................. $ -- $ 1,049 $ 20
Issuance of common stock for technology................................................... $ 4,155 $ 22 $ --
Repurchase of common stock through forgiveness of notes receivable from stockholders...... $ 69 $ -- $ 24
Conversion of long-term debt to deferred royalty income................................... $ 3,000 $ -- $ --
Conversion of preferred stock to common stock............................................. $ 9 $ -- $ --
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
HEARTPORT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Heartport, Inc. (the Company) is engaged principally in the research,
development, manufacturing and sale of minimally invasive cardiac surgery
systems and related technology. The Company's customers are cardiac surgery
centers in the United States and Europe. The consolidated accounts include the
accounts of Heartport, Inc. and its wholly owned subsidiaries. Significant
intercompany accounts and transactions have been eliminated. During 1996, the
Company determined that it is no longer in the development stage.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with insignificant
interest rate risk and with an original maturity of three months or less when
purchased to be cash equivalents.
REVENUE RECOGNITION
The Company recognizes revenue upon shipment. Deferred royalty income
includes advances received but unearned under an agreement with St. Jude
Medical, Inc.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that subject the Company to credit risk consist
principally of cash, cash equivalents, and short-term investments. By policy,
the Company places its cash, cash equivalents, and short-term investments only
with high credit quality financial institutions and corporations and, other than
its investments in U.S. Government Treasury instruments, limits the amounts
invested in any one institution or type of investment. In addition, the Company
performs credit evaluations of its customers' financial condition and generally
requires no collateral. During 1996, three customers accounted for approximately
20%, 17%, and 11% of net sales. During 1996, sales to European customers were
approximately 25% of net sales. All sales are denominated in U.S. dollars.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values for short-term investments are based on quoted market prices
or pricing models using current market rates.
The fair value of the Company's long-term debt is estimated using a
discounted cash flow analysis based on the Company's current incremental
borrowing rate for similar types of borrowing arrangements.
SHORT-TERM INVESTMENTS
All investments are designated as available-for-sale. Available-for-sale
securities are carried at fair value with unrealized gains and losses, net of
tax, reported in a separate component of stockholders' equity. The amortized
cost of available-for-sale debt securities is adjusted for the amortization of
premiums and the accretion of discounts to maturity. Such amortization is
included in interest income. Realized gains and losses and declines in value
judged to be other-than-temporary on available-for-sale securities are included
in investment income. The cost of securities sold is based on the specific
identification method. Interest and dividends on securities classified as
available-for-sale are included in interest income.
F-7
<PAGE>
HEARTPORT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market. Inventories at December 31, 1996 were as follows:
<TABLE>
<CAPTION>
(IN
THOUSANDS)
<S> <C>
Materials and purchased parts.................................................. $ 1,625
Work in progress............................................................... 84
Finished goods................................................................. 398
------
Total inventories.............................................................. $ 2,107
------
------
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed by the
straight-line method over the estimated useful lives of the assets, ranging from
three to five years, or over the term of the lease, if shorter. Amortization of
assets recorded under capital leases is included with depreciation expense.
NET LOSS PER SHARE
Except as noted below, historical net loss per share is computed using the
weighted average number of common shares outstanding. Common equivalent shares
from stock options, warrants and convertible preferred stock are excluded from
the computation as their effect is antidilutive, except that, pursuant to the
Securities and Exchange Commission (the SEC) Staff Accounting Bulletins, common
and common equivalent shares issued during the twelve-month period prior to the
Company's initial public offering in April, 1996, at prices below the initial
public offering price have been included in the calculation as if they were
outstanding for all periods presented prior to the offering (using the treasury
stock method and the public offering price for stock options and warrants and
the if-converted method for convertible preferred stock).
Historical net loss per share information is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Net loss per share............................................ $ (1.66) $ (.71) $ (.37)
------------ ------------ ------------
------------ ------------ ------------
Shares used in computing net loss per share................... 20,494,000 13,110,000 13,181,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
PRO FORMA NET LOSS PER SHARE
Pro forma net loss per share has been computed as described above and also
assumes the conversion of convertible preferred shares not included above that
automatically converted upon completion of the Company's initial public offering
(using the if-converted method) from the original date of issuance.
ACCOUNTING FOR EMPLOYEE STOCK OPTIONS
The Company accounts for stock options using the intrinsic value method in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees".
In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation", the
Company has adopted the pro forma disclosure of accounting for options under the
fair value method.
2. COMMITMENTS
The Company leases its facilities under noncancelable operating leases that
expire in the years 1999 through 2001. The Company has various options on the
facilities leases that could extend them through 2010. Rental expense was
$959,000 (net of sublease income of $14,000), $435,000 (net of sublease income
F-8
<PAGE>
HEARTPORT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. COMMITMENTS (CONTINUED)
of $161,000), and $246,000 (net of sublease income of $64,000) for the years
ended December 31, 1996, and 1995 and 1994, respectively.
The future minimum lease payments as of December 31, 1996 were as follows:
<TABLE>
<CAPTION>
(IN
THOUSANDS)
<S> <C>
1997..................................................................................... $ 1,154
1998..................................................................................... 1,167
1999..................................................................................... 891
2000..................................................................................... 318
2001..................................................................................... 328
------
$ 3,858
------
------
</TABLE>
3. INVESTMENTS
Investments as of December 31, including cash equivalents and short-term
investments, were as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ----------
(IN THOUSANDS)
<S> <C> <C>
Money market funds..................................................... $ 7,959 $ 7,415
Commercial paper....................................................... 18,289 998
Auction rate preferred stock........................................... 8,000 4,200
Corporate notes........................................................ 35,462 --
U.S. government agency securities...................................... 12,945 --
--------- ----------
Total available-for-sale investments................................... 82,655 12,613
Amounts classified as cash equivalents................................. (26,248) (7,415)
--------- ----------
Amounts included in short-term investments............................. $ 56,407 $ 5,198
--------- ----------
--------- ----------
</TABLE>
There were no material realized or unrealized gains or losses in any
category of investment in 1996, 1995, or 1994.
4. DEBT AND DEFERRED ROYALTY INCOME
Debt at December 31 was as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Note payable due in 2000, at prime rate plus 1%............................ $ -- $ 3,000
Equipment financing........................................................ 1,966 1,267
Other debt................................................................. 30 40
--------- ---------
Total long-term debt....................................................... 1,996 4,307
Current portion of long-term debt.......................................... (662) (394)
--------- ---------
Long-term debt, less current portion....................................... $ 1,334 $ 3,913
--------- ---------
--------- ---------
</TABLE>
In 1995, the Company entered into an agreement with St. Jude Medical, Inc.
whereby the Company agreed to license certain patents to St. Jude Medical, Inc.
In connection with the agreement, the Company borrowed $3,000,000 from St. Jude
Medical, Inc. in the form of a note. During 1996, upon reaching certain
milestones contained in the agreement, the entire note balance automatically
converted into deferred royalty income.
F-9
<PAGE>
HEARTPORT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. DEBT AND DEFERRED ROYALTY INCOME (CONTINUED)
In 1995, the Company entered into a financing agreement with a leasing
company to finance up to $2,500,000 of fixed asset purchases. Borrowings under
the agreement are payable in monthly installments through 2001, bear interest at
rates from 11.8% to 14.3%, and are secured by the financed assets. The Company
issued the lender a warrant to purchase 18,800 shares of Series C convertible
preferred stock at $6.25 per share, which was exercised in 1996 in connection
with the initial public offering.
The carrying value of the Company's long-term debt approximates its fair value.
As of December 31, 1996, aggregate debt maturities were as follows:
<TABLE>
<CAPTION>
(IN
THOUSANDS)
<S> <C>
1997..................................................................................... $ 662
1998..................................................................................... 805
1999..................................................................................... 407
2000..................................................................................... 110
Thereafter............................................................................... 12
------
$ 1,996
------
------
</TABLE>
As of December 31, 1996, the Company has an unused credit facility with a
commercial bank of $15,000,000.
5. STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
Convertible preferred stock at December 31, 1995 was as follows:
<TABLE>
<CAPTION>
DESIGNATED SHARES ISSUED AND
SERIES SHARES OUTSTANDING
- -------------------------------------------------------------------------- ----------- -------------------
(IN THOUSANDS)
<S> <C> <C>
A........................................................................ 5,200 5,080
B........................................................................ 1,840 1,591
C........................................................................ 3,200 2,566
----------- -----
Total preferred stock..................................................... 10,240 9,237
----------- -----
----------- -----
</TABLE>
The preferred stock was converted to Common Stock in connection with the
Company's initial public offering.
COMMON STOCK
At December 31, 1996, 2,620,000 shares of outstanding common stock owned by
employees of and consultants to the Company were subject to repurchase, at the
option of the Company, at the original purchase price in the event of the
termination of their employment or consulting relationship.
STOCK OPTION PLANS
Under the 1993 Stock Option Plan (the 1993 Plan), the Company may grant
incentive and nonstatutory stock options to purchase up to 6,720,000 shares of
common stock to directors, employees and consultants. Options may be granted at
an exercise price of not less than 85% of the fair value of the stock at the
date of grant for nonstatutory stock options and 100% of the fair value of the
stock at the date of grant for incentive stock options as determined by the
Board of Directors. Generally, options vest under such conditions as determined
by the Board of Directors, typically over a five year period, and expire after
ten years. During 1996, the Company adopted the 1996 Stock Option Plan (the 1996
Plan), under which the Company reserved 2,110,000 shares of common stock for
issuance to employees, consultants and directors of the Company in addition to
the 3,390,000 shares incorporated from the 1993 plan.
F-10
<PAGE>
HEARTPORT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
Activity under the Stock Option Plans is as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
--------------------------------------------
SHARES AGGREGATE
AVAILABLE NUMBER OF EXERCISE
FOR GRANT SHARES PRICE PER SHARE PRICE
----------- ----------- ------------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Balance at December 31, 1993..................... 850 430 $ 0.063 $ 27
Shares authorized.............................. 1,600 -- $ -- --
Options granted................................ (1,243) 1,243 $ 0.063 - $ 0.375 339
Options exercised.............................. -- (62) $ 0.063 - $ 0.375 (11)
Options canceled............................... 53 (53) $ 0.063 - $ 0.375 (16)
----------- ----------- -----------
Balance at December 31, 1994..................... 1,260 1,558 $ 0.063 - $ 0.375 339
Shares authorized.............................. 3,840 -- $ -- --
Options granted................................ (3,586) 3,586 $ 0.375 - $ 0.781 1,565
Options exercised.............................. -- (3,093) $ 0.063 - $ 0.781 (1,214)
Options canceled............................... 48 (48) $ 0.063 - $ 0.375 (10)
----------- ----------- -----------
Balance at December 31, 1995..................... 1,562 2,003 $ 0.063 - $ 0.781 680
Shares authorized.............................. 2,110 -- $ -- --
Options granted................................ (2,160) 2,160 $ 0.781 - $41.000 31,575
Options exercised.............................. -- (327) $ 0.063 - $29.25 (67)
Options canceled............................... 399 (399) $ 0.063 - $39.50 (1,045)
----------- ----------- -----------
Balance at December 31, 1996..................... 1,911 3,437 $ 0.063 - $41.00 $ 31,143
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
In addition, during 1996 the Company issued 940,000 nonstatutory options
outside of the plans to employees. These options have exercise prices ranging
from $21.75 to $25.625.
The following table summarizes information concerning outstanding and
exercisable options as of December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED ------------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OF SHARES LIFE PRICE OF SHARES PRICE
- ----------------- ----------- --------------- ------------- ------------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
$ 0.06 - $ 7.50 2,335 9.2 $ 2.834 736 $ 0.999
$ 7.51 - $15.00 245 9.2 $ 12.566 7 $ 11.786
$ 15.01 - $25.00 1,183 9.5 $ 21.813 56 $ 21.400
$ 25.01 - $35.00 542 9.7 $ 26.400 1 $ 29.826
$ 35.01 - $45.00 72 9.4 $ 38.826 1 $ 36.868
--
----- ------------- --- ---------
4,377 9.4 $ 12.021 801 $ 3.213
--
--
----- ------------- --- ---------
----- ------------- --- ---------
</TABLE>
At December 31, 1995, options to purchase 845,000 shares of common stock
were exercisable.
STOCK BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," (SFAS 123)
requires use of option
F-11
<PAGE>
HEARTPORT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, because the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
Pro forma information regarding net loss and net loss per share is required
by SFAS 123, which also requires that the information be determined as if the
Company had accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of that Statement. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions for 1996
and 1995: Expected dividend yield of 0%, expected stock price volatility of 67%,
risk-free interest rate of 5.97%, and the expected life of options of 3 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Had the
Company elected to recognize compensation expense based on the fair value of the
options granted at grant dates as prescribed by SFAS No. 123, net loss and loss
per share would have been increased to the pro forma amounts indicated in the
table below:
<TABLE>
<CAPTION>
1996 1995
-------------- -------------
<S> <C> <C>
Net loss -- as reported.................................................. $ (34,054,000) $ (9,353,000)
Net loss -- pro forma.................................................... $ (38,166,000) $ (9,501,000)
Loss per share -- as reported............................................ $ (1.50) $ (.47)
Loss per share -- pro forma.............................................. $ (1.68) $ (.48)
</TABLE>
The weighted average fair value of options granted in 1996 and 1995 was
$7.41 and $0.22 per share, respectively. The weighted-average remaining
contractual life of all options outstanding at December 31, 1996 is 9.4 years.
The pro forma effect on net income for 1996 is not representative of the pro
forma effect on net income in future years because it does not take into
consideration pro forma compensation expense related to grants made prior to
1995, and the compensation expense that will be recognized in future years as
the graded vesting periods become exercisable.
STOCK PURCHASE PLAN
Under the 1996 Employee Stock Purchase Plan (the Purchase Plan), employees
may purchase common stock at the lower of 85% of the fair market value of the
common stock at the beginning or end of each offering period of up to an
aggregate total of 240,000 shares of the Company's common stock. During the year
ended December 31, 1996, 19,000 shares were issued under the Purchase Plan.
SHAREHOLDER RIGHTS PLAN
On March 26, 1996, the Board of Directors of the Company declared a dividend
of one preferred share purchase right (a "Right") for each outstanding share of
common stock outstanding on the effective date of the Offering. Each Right will
entitle stockholders to purchase 1/1000 of a share of Series A Junior
participating preferred stock of the Company, a designated series of preferred
stock for which each 1/1000 of a share has economic attributes and voting rights
equivalent to one share of the Company's common
F-12
<PAGE>
HEARTPORT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
stock, at an exercise price of $0.001 per share. The Rights only become
exercisable in certain limited circumstances involving acquisitions of or tender
offers for 20% or more of the Company's capital stock. At any time prior to the
announcement of any such acquisition or offer, the Rights are redeemable by the
Company at a price of $0.001 per Right. For a limited period of time after the
announcement of any such acquisition or offer, each Right becomes exercisable
or, at the discretion of Board, may be exchanged for one share of common stock
per Right. The Rights expire in the year 2006.
COMMON STOCK RESERVED
At December 31, 1996, the Company has reserved shares of common stock for
future issuances as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Stock option plans............................................................. 5,348
Stock options outside the plans................................................ 940
Stock purchase plan............................................................ 221
Stock warrants................................................................. 18
-----
Total........................................................................ 6,527
-----
-----
</TABLE>
STOCK SPLIT
On April 25, 1996, the Company effected a 1.6-for-1 split of the Company's
common stock. All outstanding share and per share amounts have been
retroactively adjusted to reflect the stock split.
6. INCOME TAXES
Due to operating losses and the inability to recognize the benefits
therefrom, there is no provision for income taxes for 1996, 1995, or 1994.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets as of December 31, 1996 and 1995 are as
follows:
<TABLE>
<CAPTION>
1996 1995
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................................................ $ 16,900 $ 5,400
Research credit carryforwards................................................... 900 430
Capitalized research and development............................................ 500 570
Acquired patent................................................................. 1,800 --
Other temporary differences..................................................... 600 430
---------- ---------
Total deferred tax assets..................................................... 20,700 6,830
Valuation allowance............................................................... (20,700) (6,830)
---------- ---------
Net deferred tax assets....................................................... $ -- $ --
---------- ---------
---------- ---------
</TABLE>
Realization of deferred tax assets is dependent upon future earnings, the
timing and amount of which are uncertain. Accordingly, a valuation allowance, in
an amount equal to the net deferred tax asset as of December 31, 1996 and 1995
has been established to reflect these uncertainties. The change in the valuation
allowance was a net increase of $13,870,000, $3,905,000, and $1,900,000 for
fiscal years 1996, 1995, and 1994, respectively.
F-13
<PAGE>
HEARTPORT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
As of December 31, 1996, the Company had net operating loss carryforwards
for federal and California tax purposes of approximately $43,000,000 and
$39,000,000 respectively, which will expire from 1999 through 2011. As of
December 31, 1996, the Company also had research and development tax credit
carryforwards of approximately $550,000 and $500,000, respectively, for federal
and California tax purposes, which will expire in years 2007 through 2011, if
not used.
Utilization of net operating loss and credit carryforwards may be subject to
an annual limitation due to the ownership change limitations provided by the
Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
7. PATENT ACQUISITION
Patent acquisition expenses consist of the cost to acquire a United States
patent and related rights from Endosurgical Development Corporation for
consideration consisting of shares of Common Stock and cash, for a total expense
of $5,216,000.
8. EMPLOYEE BENEFIT PLAN
The Company has a savings plan, which qualifies under Section 401(k) of the
Internal Revenue Code. Under the plan, participating employees may defer up to
15% of their pre-tax salary, up to statutory limits. The Company currently does
not match employee contributions made to the savings plan.
F-14
<PAGE>
PART III
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
OFFICERS AND DIRECTORS
The officers and directors of the Company, and their ages as of
December 31, 1996, are as follows:
NAME AGE POSITION
---- --- --------
Wesley D. Sterman, M.D. 36 President, Chief Executive Officer,
Director, and Co-Founder
Richard B. Brewer 45 Chief Operating Officer
David B. Singer 34 Senior Vice President, Finance and
Chief Financial Officer
Bradford J. Shafer 36 General Counsel and Secretary
Robert J. Chin, Ph.D. 51 Vice President of Regulatory Affairs
and Quality Assurance
Hanson S. Gifford, III 36 Vice President of Research and
Development
Timothy J. Haines 39 Vice President and Managing
Director, Europe
Steven E. Johnson 38 Vice President of Manufacturing
C. Richard Neely, Jr. 42 Vice President, Finance and
Controller
Lawrence C. Siegel, M.D. 39 Vice President of Clinical Affairs
Casey M. Tansey 39 Vice President of Sales and
Marketing
Frank M. Fischer(1) 55 Director
Robert V. Gunderson, Jr.(2) 45 Director
Joseph S. Lacob(2) 41 Director
John H. Stevens, M.D. 36 Director and Co-Founder
Petri T. Vainio, M.D.(1) 37 Director
Steven C. Wheelwright, Ph.D.(1)(2) 53 Director
_____________
(1) Member of Compensation Committee
(2) Member of Audit Committee
WESLEY D. STERMAN, M.D. founded the Company with Dr. Stevens in May,
1991, and has served as the Company's President and Chief Executive Officer
since that time. Prior to founding the Company, Dr. Sterman was founder,
President and Chief Executive Officer of EndoVascular Technologies, Inc., a
medical device manufacturer, from July, 1989 to September, 1991. Dr. Sterman
has B.S. degrees both in Biology and in Chemistry from Stanford University.
Dr. Sterman received an M.D. from the Stanford University School of Medicine
and an M.B.A. from the Graduate School of Business at Stanford University,
where he was an Arjay Miller Scholar.
RICHARD B. BREWER has been Chief Operating Officer of the Company since
January 22, 1997 and served as Executive Vice President of Operations of the
Company since February, 1996. Prior to joining the Company, Mr. Brewer served
in various capacities with Genentech, Inc., a biotechnology company, from
1984 to 1995, most recently as Senior Vice President, U.S. Sales and
Marketing, Genentech Europe Ltd., and Genentech Canada, Inc. Mr. Brewer
earned a B.S. from Virginia Polytechnic Institute and an M.B.A. from
Northwestern University.
DAVID B. SINGER has been Senior Vice President, Finance and Chief
Financial Officer of the Company since June, 1996. Prior to joining the
Company, Mr. Singer served as President, Chief Executive Officer and a
Director of Affymetrix, Inc., a genomics and diagnostic company. From
November, 1990 to February, 1993, Mr. Singer served in various senior
management roles of Affymax N.V., a biotechnology company, including Vice
President, Finance and Treasurer. From 1988 to 1990, Mr. Singer was an
assistant to various senior officers of Baxter Healthcare Corporation
("Baxter"), a medical supply company. Mr. Singer serves on the Board of
Directors of Affymetrix, Inc. Mr. Singer holds a B.A. from Yale University
and an M.B.A. from the Graduate School of Business at Stanford University.
III-1
<PAGE>
BRADFORD J. SHAFER has been General Counsel and Secretary of the
Company since July, 1996. From July, 1985 until July, 1996, he was an
attorney with the law firm of Brobeck, Phleger & Harrison LLP, where he was a
partner since January, 1993. Mr. Shafer holds a B.A. from the University of
the Pacific and a J.D. from the University of California, Hastings College of
the Law.
ROBERT J. CHIN has been Vice President of Regulatory Affairs and
Quality Assurance of the Company since January, 1995. He also served as Vice
President of Clinical Affairs of the Company from January 1995 until
November, 1996. From 1977 until April, 1994, Dr. Chin served in various
capacities with Baxter. His most recent position at Baxter was Vice
President, Quality Assurance and Regulatory Affairs for the Edwards C.V.S.
Division, a manufacturer and supplier of heart valve therapies. From April,
1994 until joining the Company in 1995, Dr. Chin served as Vice President,
Regulatory and Clinical Affairs and Quality Assurance of Imagyn Medical, a
medical device company. Dr. Chin earned a B.S. in Engineering, an M.S. in
Chemical Engineering and a Ph.D in Electrochemical Engineering all from the
University of California at Los Angeles. Dr. Chin is a Professional Engineer,
and has received Regulatory Affairs Certification by the Regulatory Affairs
Professional Society.
HANSON S. GIFFORD, III, has been Vice President of Research and
Development of the Company since February, 1996. Prior to that time, Mr.
Gifford served as the Company's Director of Research and Development
beginning in July, 1993. From 1992 to 1993, he served as Managing Director of
Bavaria Medizin Technologie, GmbH, a German medical device company. From 1990
to 1991, he served as President of Cardiovascular Therapeutic Technologies,
Inc., a medical device company. From 1985 to 1990, he served in various
research and development, clinical research, and marketing capacities at
Devices for Vascular Intervention, Inc., a medical device company. Mr.
Gifford earned a B.S. in Mechanical Engineering from Cornell University.
TIMOTHY J. HAINES has been the Managing Director, Europe since March,
1997. From July, 1993 until joining the Company, Mr. Haines was employed by
Datascope Corporation where he was President of Intravascular, Inc., a
vascular graft subsidiary, and subsequently President of the Patient
Monitoring Division. From September, 1990 until July, 1993 Mr. Haines was
Vice President, Operations of Telectronics Inc. Mr. Haines received a B.S. in
Economics from Exeter University (England) and an M.B.A. from INSEAD European
School of Management (France).
STEVEN E. JOHNSON has been Vice President of Manufacturing of the
Company since August, 1994. Prior to joining the Company, Mr. Johnson served
in various capacities with Advanced Cardiovascular Systems, Inc., a medical
device company, from 1983 to 1994, most recently as Vice President,
Manufacturing. Mr. Johnson earned a B.S. in Industrial Engineering from GMI
Engineering and Management Institute.
C. RICHARD NEELY, JR. has been Vice President, Finance and Controller
of the Company since December, 1996. Prior to joining the Company, Mr. Neely
served as Vice President and Chief Financial Officer of Sanmina Corporation,
an electronics manufacturing company, from April, 1996 to August, 1996. Mr.
Neely served in various capacities with Advanced Micro Devices, Inc., a
semiconductor company, from 1980 to April, 1996, most recently as Director
and Group Controller. Mr. Neely earned a B.A. in Economics from Whitman
College and a M.B.A. from the University of Chicago.
LAWRENCE C. SIEGEL, M.D. has been Vice President of Clinical Affairs of
the Company since November, 1996. Prior to joining the Company, Dr. Siegel
served in various capacities with the Stanford University School of Medicine
from 1986 to 1996, most recently as Associate Professor of Anesthesia and
Chief of Cardiovascular Anesthesiology. Dr. Siegel earned a B.S. in
Electrical Engineering from Massachusetts Institute of Technology and a M.D.
from Harvard Medical School. Dr. Siegel is a board certified
anesthesiologist.
CASEY M. TANSEY has been Vice President of Sales and Marketing of the
Company since December, 1995. From 1988 until joining the Company in 1995,
Mr. Tansey served in various capacities with the Edwards C.V.S. Division of
Baxter. Mr. Tansey's most recent position at Baxter/Edwards was Vice
President, North American Sales. Mr. Tansey earned a B.S. in Business
Administration and an M.B.A. from the College of Notre Dame.
FRANK M. FISCHER has been a Director of the Company since October,
1992. Mr. Fischer has been the President and Chief Executive Officer and a
Director of Ventritex, Inc., a manufacturer of implantable cardiac
defibrillators, since July, 1987. From May, 1977 until joining Ventritex, Mr.
Fischer held various positions with
III-2
<PAGE>
Cordis Corporation, a manufacturer of medical products, serving most recently
as President of the Implantable Products Division. Mr. Fischer serves on the
Board of Directors of Heartstream, Inc., a medical device company. Mr.
Fischer holds an M.S. in Management from Rensselaer Polytechnic Institute.
ROBERT V. GUNDERSON, JR. has been a Director of the Company since May,
1995. Mr. Gunderson has been a partner of the law firm of Gunderson Dettmer
Stough Villeneuve Franklin & Hachigian, LLP, since its formation in
September, 1995. From May, 1988, until September, 1995, Mr. Gunderson was a
partner of the law firm of Brobeck, Phleger & Harrison, LLP. Mr. Gunderson
holds an M.A. from Stanford University, an M.B.A. in finance from the Wharton
School, University of Pennsylvania and a J.D. from the University of Chicago.
JOSEPH S. LACOB has been a Director of the Company since April, 1992.
Mr. Lacob is a general partner of Kleiner Perkins Caufield & Byers ("Kleiner
Perkins"), a venture capital firm he joined in 1987. Prior to joining Kleiner
Perkins, he was Marketing Manager for Cetus Corporation, a biotechnology
company. Mr. Lacob serves as Chairman of the Board of Directors of CellPro,
Incorporated, and is a Director of Pharmacyclics, Inc. and eight privately
held companies. Mr. Lacob holds a B.S. in Biochemistry from the University of
California at Irvine, a Masters in Public Health from the University of
California at Los Angeles, and an M.B.A. from the Graduate School of Business
at Stanford University.
JOHN H. STEVENS, M.D. founded the Company with Dr. Sterman in May,
1991, and has been a Director of the Company since that time. Dr. Stevens is
a member of the Stanford University Medical Center team that performed the
ten Port-Access CABG Phase I clinical trial procedures and which has been
performing Port-Access CABG and MVR procedures on a regular basis since FDA
clearance was received in October, 1996. Formerly Chief Resident of the
Department of Cardiothoracic Surgery at the Stanford University School of
Medicine, and Senior Registrar in Cardiothoracic Surgery at the Great Ormond
Street Hospital for Sick Children in London, England, Dr. Stevens is now an
Associate Professor in the Department of Cardiothoracic Surgery at Stanford
University School of Medicine. Dr. Stevens earned B.U.S. and B.S. degrees in
Communications and Psychology from the University of Utah and an M.D. from
Stanford University.
PETRI T. VAINIO, M.D. has been a Director of the Company since April,
1992. Dr. Vainio is a general partner of Sierra Ventures, a venture capital
firm he joined in 1988. He currently serves on the Board of Directors of
Connective Therapeutics, Inc., a biotechnology company. Dr. Vainio holds M.D.
and Ph.D. degrees from the University of Helsinki, Finland, and an M.B.A.
from the Graduate School of Business at Stanford University.
STEVEN C. WHEELWRIGHT has been a Director of the Company since January,
1995. Dr. Wheelwright currently serves as a senior associate dean at the
Graduate School of Business, Harvard University, where he has been a
professor since July, 1988. Dr. Wheelwright additionally served as a
professor of the Graduate School of Business, Harvard University, from
August, 1985, to August, 1986. From August, 1986 to August, 1988, Dr.
Wheelwright served as a professor at the Graduate School of Business at
Stanford University. Dr. Wheelwright is also a member of the Board of
Directors of Quantum Corporation, a mass storage device company, T.J.
International Corporation, an engineered wood products company, and
Alleghany-Ludlum Steel Corporation, a specialty steel company.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference to
the Proxy Statement for the Registrant's 1997 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference to
the Proxy Statement for the Registrant's 1997 Annual Meeting of Stockholders.
III-3
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference to
the Proxy Statement for the Registrant's 1997 Annual Meeting of Stockholders.
III-4
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1+ Agreement and Plan of Merger dated April 3, 1995, for
the reincorporation merger of Stanford Surgical
Technology, Inc., a California corporation, into
Heartport, Inc., a Delaware corporation.
3.1+ Restated Certificate of Incorporation.
3.2+ Bylaws of the Registrant.
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2+ Specimen Common Stock certificate.
4.3+ Third Amended and Restated Rights Agreement among
Registrant and the Founders and Investors specified
therein dated April 17, 1995.
4.4# Rights Agreement between the Registrant and the First
National Bank of Boston dated April 25, 1996.
10.1+ Form of Indemnification Agreement entered into by and
between Registrant and its officers and directors.
10.2+ 1993 Stock Option Plan and forms of agreements thereunder.
10.3# 1996 Stock Option Plan as amended and restated
October 21, 1996.
10.4# Employee Stock Purchase Plan, as amended and restated
October 21, 1996.
10.5+ Real Property Lease between the Registrant and
Metropolitan Insurance Company dated September 21, 1992,
as amended.
10.6+ Equipment Financing Agreement between the Registrant and
Lease Management Services, Inc. dated February 23, 1995.
10.7+* Agreement between the Company and St. Jude Medical, Inc.
dated September 11, 1995.
10.8# Third Amendment to Lease Agreement between Heartport
Research and Training Center, Inc. and University of
Utah Research Foundation dated as of October 25, 1996.
10.9* Amendment to agreement between Registrant and St. Jude
Medical, Inc. dated January 31, 1997.
10.10# Loan and Security Agreement dated December 31, 1996
between the Registrant and Silicon Valley Bank.
11.1# Computation of Net Loss Per Share.
23.1# Consent of Ernst & Young LLP, Independent Auditors.
27.1# Financial Data Schedule
___________
* Confidential treatment has been requested for certain portions of this
exhibit. Omitted portions have been filed separately with the Securities
and Exchange Commission.
+ Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (File No. 333-1906)
# Previously filed.
IV-1
<PAGE>
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Registrant during the quarter
ended December 31, 1996.
(c) EXHIBITS
See paragraph (a).
(d) The following financial statement schedules required by Regulation S-X
are filed herewith:
SCHEDULE NO. DESCRIPTION
------------ -----------
II Valuation and Qualifying Accounts
All other schedules are not applicable.
IV-2
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this
amendment to its Annual Report on Form 10-K to be signed on its behalf by the
undersigned, thereunto duly authorized, in Redwood City, California, on this
18th day of April, 1997.
HEARTPORT, INC.
By: /s/ David B. Singer
---------------------------------
David B. Singer
SENIOR VICE PRESIDENT, FINANCE AND
CHIEF FINANCIAL OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this amendment to Annual Report on Form 10-K has been signed below
by the following persons on behalf of the registrant and in the capacities
and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Wesley D. Sterman, M.D.* President, Chief Executive April 18, 1997
- ----------------------------- Officer and Director
Wesley D. Sterman, M.D. (Principal Executive
Officer)
/s/ David B. Singer Senior Vice President, April 18, 1997
- ----------------------------- Finance and Chief Financial
David B. Singer Officer (Principal Financial
and Accounting Officer)
/s/ Frank M. Fischer* Director April 18, 1997
- -----------------------------
Frank M. Fischer
/s/ Robert V. Gunderson, Jr.* Director April 18, 1997
- -----------------------------
Robert V. Gunderson, Jr.
/s/ Joseph S. Lacob* Director April 18, 1997
- -----------------------------
Joseph S. Lacob
/s/ John H. Stevens, M.D.* Director April 18, 1997
- -----------------------------
John H. Stevens, M.D.
/s/ Petri T. Vainio, M.D.* Director April 18, 1997
- -----------------------------
Petri T. Vainio, M.D.
/s/ Steven C. Wheelwright* Director April 18, 1997
- -----------------------------
Steven C. Wheelwright
*By: /s/ David B. Singer
------------------------
David B. Singer
Attorney-in-Fact
<PAGE>
SCHEDULE II
HEARTPORT, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
Balance Charged to Balance
Beginning Costs and End
of Period Expenses Deductions of Period
--------- ---------- ---------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Year Ended December 31, 1996
Allowance for doubtful accounts $- $33 $- $33
Year Ended December 31, 1995
Allowance for doubtful accounts $- $- $- $-
Year Ended December 31, 1994
Allowance for doubtful accounts $- $- $- $-
</TABLE>