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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended June 30, 1996.
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to .
Commission File Number: 0-28016
BIOPSYS MEDICAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0578012
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
3 Morgan, Irvine, CA 92618
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (714) 460-7800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
(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 disclosures 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 value of voting stock held by non-affiliates of the
Registrant was approximately $51,863,672, based upon the average of the high and
low prices of the Registrant's Common Stock reported for such date on the Nasdaq
National Market. Shares of Common Stock held by each executive officer and
director and by each person who owns 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates. The
determination of affiliate status is not necessarily a conclusive determination
for other purposes. As of August 30, 1996, the Registrant had outstanding
9,716,880 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information is incorporated into Part III of this report by
reference to the Proxy Statement for the Registrant's 1996 annual meeting of
stockholders to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year covered
by this Form 10-K.
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BIOPSYS MEDICAL, INC.
INDEX
PAGE
NUMBER
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PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . 21
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . 21
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . . . 22
Item 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . 23
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . 24
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . 27
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . . 27
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . . 28
Item 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . 29
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 29
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . 29
PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . 30
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PART I
ITEM 1. BUSINESS
THE COMPANY
Biopsys Medical, Inc. ("Biopsys" or the "Company") was incorporated in
California in July 1993 and reincorporated in Delaware in April 1996. Biopsys
designs, develops, manufactures and markets products for the diagnosis and
management of breast cancer. The Company's principal product, the Mammotome
Biopsy System, is a less-invasive alternative to open surgical biopsy. The
Company received 510(k) clearance to market the Mammotome Biopsy System from the
United States Food and Drug Administration ("FDA") in April 1995 and commenced
commercial sales in August 1995. As of June 30, 1996, the Mammotome Biopsy
System had been installed in approximately 220 sites, including physicians'
offices, hospitals and breast imaging centers, and had been used in over 13,000
Mammotome procedures.
The Company has designed the Mammotome Biopsy System to combine the
advantages of open surgical biopsy and less-invasive procedures such as core
needle biopsy. The Mammotome Biopsy System is comprised of a disposable
Mammotome probe and a motorized drive unit that is mounted on a stereotactic
x-ray imaging table. In contrast to open surgical biopsy, the Mammotome
procedure is performed under local anesthesia in an outpatient setting, is less
costly and results in less disfigurement for the patient. The procedure
requires a single insertion of the Mammotome probe into the breast through a
small skin nick and is performed in approximately 20 minutes. Once the probe is
positioned in the breast, the physician can capture large tissue samples in
contiguous, radial patterns without removing and reinserting the probe, as is
required during a core needle biopsy procedure. The Company believes that the
advantages of the Mammotome procedure will provide the diagnostic accuracy
necessary to enable the procedure to be used as an alternative to both open
surgical biopsy and core needle biopsy to diagnose early stage breast disease.
To broaden its product offerings for breast cancer diagnosis and disease
management, the Company is developing several potential new products. The
Company is completing development of and has obtained FDA 510(k) clearance of
the MicroMark Clip, a small surgical clip that can be attached to the biopsy
site at the conclusion of the Mammotome procedure to identify the site for
subsequent follow-up. The Company is also completing development of the Breast
Center Manager software system, a comprehensive patient and practice management
system that will be marketed to physicians, hospitals and breast imaging
centers. The Company is also developing a specially designed Ultrasound Table
and Articulating Arm to be used with the Mammotome Biopsy System under
ultrasound guidance.
INDUSTRY OVERVIEW
This Report on Form 10-K contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Actual events or results may differ materially
from those projected in the forward-looking statements as a result of the
factors described herein and in the documents incorporated herein by reference.
Such forward-looking statements include, but are not limited to, statements
concerning the risk of breast cancer; breast cancer screening; improvements in
ultrasound; business strategy; development and introduction of new Products;
research and development; marketing, sales and distribution; manufacturing;
competition; third-party reimbursement; government regulation; and operating and
capital requirements.
MARKET OVERVIEW
Breast cancer is the leading cause of cancer death among women in the
United States aged 40 to 55. According to the American Cancer Society,
approximately 184,300 new cases of breast cancer are expected to be diagnosed
and approximately 44,300 women are expected to die from the disease in 1996.
The reported incidence of breast cancer has increased significantly during the
last several decades. In 1960, there was a lifetime risk that one woman in
fourteen would be diagnosed with the disease. Today, that risk is one woman in
eight. It is believed that the incidence of breast cancer increases with age,
rising sharply after age 40. The direct costs for screening, diagnosis and
treatment of breast cancer in the United States were estimated by industry
sources at approximately $8.5 billion in 1995, of which approximately $4.2
billion were related to diagnostic
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procedures. In Europe, industry sources estimate that approximately 250,000 new
cases of breast cancer are diagnosed each year and approximately 52,000 women
die as a result of the disease.
BACKGROUND
Breasts are glandular organs physiologically designed to produce milk.
Breasts are composed of ducts and mammary glands that are surrounded by fatty
tissue, fibrous connective tissue and blood vessels. The function of the
mammary glands is to produce milk, and the role of the ducts is to carry the
milk to the nipple. There are between five and nine separate ductal systems in
each breast that connect the mammary glands to the nipple. In younger women,
generally below the age of 40, breast tissue is dense and fibrous. In older
women, breast tissue loses its elasticity and firm texture, typically beginning
with the onset of menopause and cessation of estrogen production.
Healthy cells that comprise normal breast tissue grow, divide, and replace
themselves in an orderly manner throughout a woman's life. Sometimes, cells
lose their ability to control their growth, dividing rapidly and growing
uncontrollably, thereby forming tumors. Tumors of the breast range from benign
to malignant. Benign tumors can grow but do not spread to other organs and
therefore are not usually life-threatening. Malignant or cancerous tumors are
capable of invading and destroying healthy tissues and other organs. The causes
of malignant tumors in the breast, or breast cancer, are unknown and there is no
known method of prevention. Breast cancer is a slow growing cancer that
typically starts in the ducts or the mammary glands and less frequently in
surrounding fatty or fibrous tissue. In some women, certain types of benign
breast disease are precursors of malignant tumors and can increase the risk of a
woman developing breast cancer in her lifetime.
Breast cancers can be divided into two fundamental groups, invasive and
noninvasive, and are classified by stages. These stages are progressive,
ranging from stage 0 to stage 4. Noninvasive breast cancers, called stage 0
cancers, are contained within the breast ducts or mammary glands. Stage 1
through 4 cancers are invasive breast cancers that have migrated from the ducts
or mammary glands to surrounding tissue at varying degrees and, as a result,
pose an increased risk of spreading to other organs. For example, stage 1
cancers are small tumors, typically less than two centimeters in diameter, that
have not spread to the lymph nodes. Stage 2 cancers are typically less than
five centimeters in diameter and have spread to the lymph nodes. Stage 3
cancers have spread to the lymph nodes and have spread to the skin or the chest
wall. Stage 4 cancers have spread to other organs, such as the liver, brain or
lungs. It is believed that invasive cancers (stages 1-4) can progress from
earlier stage (stage 0) noninvasive cancers. In addition, although stages 0 and
1 cancers are typically less than 2 centimeters in diameter and stages 2 through
4 cancers are typically larger, it is possible for a cancerous growth to be both
small and invasive, and size is not by itself an indicator of the invasive
potential of the cancer.
According to the American Cancer Society, the five-year survival rate for
breast cancer patients decreases from approximately 96% for stages 0 and 1
cancers to approximately 75% for stages 2 and 3 cancers that have spread to the
lymph nodes and to approximately 20% for stage 4 cancers that have spread to
other organs such as the liver, lungs or brain. Because recurrence is lowest
and survival rates highest if the cancer is diagnosed and treated at an early
stage, it is critical to screen for and diagnose breast cancer as early as
possible.
BREAST CANCER SCREENING
Breast cancer screening is generally recommended as a routine part of
preventive healthcare for women over the age of 20. Screening modalities are
designed to identify tissue that may potentially be cancerous. However,
screening does not provide a definitive diagnosis. The principal means of
breast cancer screening are physical examination and mammography.
PHYSICAL EXAMINATION
The American Cancer Society recommends monthly breast self-examinations for
all women over the age of 20. Additionally, physical examinations of the breast
may be conducted by a physician as part of a regular medical examination.
However, a physical examination of the breast can only detect large, palpable
lesions, generally in excess of one centimeter in diameter. Palpability may
depend upon, among other things, the size of the woman's breast, the location of
the lesion and the age of the woman. Therefore, physical examination typically
cannot detect small, early stage lesions that may be cancerous and
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cannot differentiate between malignant and benign tissue. Other physical
evidence of possible breast cancer includes breast pain and nipple discharges.
MAMMOGRAPHY
Mammography is a type of x-ray modality commonly used for routine breast
cancer screening. Mammography is generally performed in a radiologist's office,
breast imaging center or hospital. Mammography has been used since the 1960s
and is generally regarded as the most effective, noninvasive method for breast
cancer screening. Unlike physical examination, mammograms can identify small,
non-palpable lesions that may be early stage cancers, such as stage 0 and 1
cancers.
A mammogram produces a gray scale image of the internal structure of the
breast and displays potentially cancerous lesions as small white areas. These
tiny white spots, called microcalcifications or calcium deposits, are caused by
the death of cells. Approximately 40% of all biopsies are for
microcalcifications. Microcalcifications result from the death of cells due to
cancerous invasion and are indicators of an early stage cancer or precancerous
condition. Microcalcifications generally occur in the ducts, may be less than a
millimeter in size and often occur in separate clusters in an area less than
five millimeters in size. The identification of microcalcifications during a
mammogram is likely to result in a recommendation that the patient receive a
biopsy or other diagnostic procedure to capture tissue for a definitive
diagnosis.
The American Cancer Society recommends that all women over the age of 40
have a baseline mammogram examination, that women between the ages of 40 and 49
have a mammogram every one to two years and that women over the age of 50 have
an annual mammogram. Unless the patient is at high risk for breast cancer due
to family history or other factors, periodic mammograms are typically not
recommended for women under the age of 40. Many physicians believe that the
generally lower incidence of breast cancer in these age ranges is insufficient
to justify the exposure to radiation associated with mammograms. Furthermore,
mammography is less effective in detecting potentially cancerous lesions in
younger women because these women typically have more dense and fibrous breast
tissue than older women.
Industry sources estimate that approximately 25 million mammograms were
performed in the United States in 1995 with the installed base of approximately
15,000 x-ray mammography units. Although the rate of growth in the number of
mammogram procedures has declined from the high levels of growth experienced in
the early 1990s, the total number of mammograms performed annually during the
past five years has significantly increased. Despite the increase in the number
of mammograms performed, industry sources indicate that over 40% of women over
the age of 40 have never received a mammogram. In Europe, there has been an
increased interest in mammography for breast cancer screening. National
screening programs have recently been established in France, The Netherlands,
the United Kingdom and Sweden. Prospective, randomized breast cancer screening
trials are underway in Europe for the purpose of developing breast cancer
screening guidelines similar to those established by the American Cancer Society
in the United States.
OTHER SCREENING MODALITIES
In the past decade, several other imaging modalities have been adapted for
use as breast cancer screening tools. The most frequently used of such
modalities is ultrasound. Ultrasound uses high frequency sound waves to create
an image of soft tissues in the body. Ultrasound is generally performed in a
physician's office, imaging center or hospital. To date, the principal role of
ultrasound in breast cancer screening has been as a follow-up to mammography or
physical examination, to assist the physician in determining whether a lesion is
likely to be a fluid-filled tissue growth (a cyst), which is usually benign, or
a solid mass which is potentially cancerous. The principal disadvantage of
ultrasound as a breast cancer screening tool is that it does not have the
sensitivity to detect small lesions. However, recent improvements in ultrasound
have increased its ability to differentiate between potentially malignant and
benign tissue and could therefore increase its use as a breast cancer screening
tool. An ultrasound device has recently received premarket approval ("PMA") for
use in breast cancer screening applications. Certain other modalities, such as
magnetic resonance imaging ("MRI"), have been used on an experimental basis for
breast cancer screening. The principal advantage of MRI is that it can image
dense, fibrous breast tissue. However, the use of MRI in breast cancer
screening is relatively new, and MRI is currently much more expensive than other
modalities. Another new screening modality undergoing clinical trials uses
sensors to detect and analyze changes in cellular electrical charge
distributions believed to be associated with the division or proliferation of
cells within the breast.
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BREAST CANCER DIAGNOSIS
If a mammogram or other screening modality detects lesions of a suspicious
nature or if a physical examination detects a palpable lesion or other symptoms,
the woman's physician may recommend a diagnostic procedure to determine whether
a particular lesion is benign or malignant. Diagnostic procedures are necessary
because screening procedures such as mammography, physical examination and other
screening modalities, only indicate the presence of a lesion and, in some cases,
suggest that the lesion is cancerous. Due to the invasive nature and cost of
breast cancer treatment, which includes surgery and radiation therapy or
chemotherapy, it is critical to make a definitive diagnosis of cancer prior to
proceeding with treatment. To make a definitive diagnosis, it is necessary to
capture breast tissue samples for examination under a microscope by a
pathologist, known as a histologic examination. Historically, the most common
diagnostic procedures have been open surgical biopsy, fine needle aspiration
cytology and core needle biopsy.
OPEN SURGICAL BIOPSY
Open surgical biopsy has been the most commonly used method of diagnosing
breast cancer for many years. In an open surgical biopsy procedure, a
radiologist begins by imaging the lesion with an additional mammogram or another
imaging modality to identify the precise location of the lesion (if the lesion
is not palpable). The image guides the radiologist in the insertion and
placement of a wire into the breast to mark the site of the lesion. Ideally,
the wire is placed by the radiologist within one centimeter of the lesion. This
wire is a guide for the surgeon performing the procedure to locate the lesion or
sample that is intended to be excised. However, factors such as the size of the
breast, breast tissue density, lesion location and the type of imaging used
often makes accurate placement of the wire difficult. Once the radiologist
places the wire, the patient is transferred to the operating room. The surgeon
then dissects the tissue around the wire and removes the wire and a sphere of
tissue, typically the size of a golf ball, at the end of the wire. Follow-up
imaging of the excised tissue may be performed to confirm that the tissue
suspected of being malignant has been removed. After the tissue is removed, the
incision in the patient's breast is closed with sutures. Once the procedure is
complete, the tissue samples and any follow-up images taken in connection with
the procedure are sent to the pathology laboratory for analysis.
Although open surgical biopsy typically provides the tissue sample
necessary for a definitive diagnosis, the procedure has several disadvantages.
Open surgical biopsy is typically performed in an operating room with general
anesthesia. The procedure lasts approximately one hour and requires one to two
days of recuperation at home. In many cases, the deep skin incision required
for the procedure and the large amount of tissue removed may result in permanent
breast disfigurement. Open surgical biopsy can also leave internal tissue scars
that can impair the ability of subsequent mammograms to detect potentially
cancerous lesions. Unless the lesion is large enough that it can be removed
without a localization wire, both a surgeon and a radiologist are required to
perform the procedure. In addition, the procedure can fail to accurately
diagnose breast cancer because several manual steps are involved. For example,
the localization wire may be misplaced, an insufficient amount of tissue may be
excised and the histological and pathological laboratory examinations may not
correctly identify the disease. It has been reported in clinical publications
that open surgical biopsies fail to result in an accurate diagnosis of a
suspicious lesion in approximately two to three percent of procedures.
Notwithstanding these shortcomings, open surgical biopsy has been regarded
as the "gold standard" for breast cancer diagnosis. Industry sources estimate
that approximately 800,000 open surgical biopsies are performed annually in the
United States. The Company believes that many women undergoing an open surgical
biopsy were referred for the procedure following a mammogram. The remaining
surgical biopsies were performed following detection of a palpable lesion during
a physical examination or due to other suspicious symptoms.
FINE NEEDLE ASPIRATION CYTOLOGY
Fine needle aspiration ("FNA") cytology for breast cancer diagnosis
increased in the 1970s as a less-invasive alternative to open surgical biopsy.
An FNA procedure is typically performed in an outpatient setting. To perform
FNA, the physician inserts a thin needle into the breast to extract fluids and
cells from suspicious lesions that have been identified from mammography or
physical examination. FNA typically results in the removal of only individual
cells, which are analyzed in a clinical laboratory by a cytologist, a specialist
in the examination of cells. The principal limitation of FNA is that it cannot
remove complete tissue samples from the site of the lesion, which makes it
difficult to make a definitive diagnosis of a suspicious lesion.
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Therefore, in the event that an FNA procedure indicates a lesion may be
cancerous, it is generally necessary to perform additional procedures, which may
include an open surgical biopsy or a core needle biopsy to obtain a definitive
diagnosis and determine the course of treatment.
CORE NEEDLE BIOPSY
Core needle biopsy was developed in the late 1980s as an improvement over
FNA and is a less-invasive alternative to open surgical biopsy. The radiologist
or surgeon performing the core needle biopsy uses a standard tissue biopsy
needle that is inserted into the breast to capture tissue samples for diagnosis.
During the core needle biopsy procedure, the patient lies face down on top of a
stereotactic x-ray imaging table with her breast protruding through an opening
in the table, creating a work space below the table for the physician. An x-ray
imaging system and computer are located on the underside of the table that
enable the physician to localize a lesion in a three-dimensional field and
accurately position the core needle within one millimeter of the targeted lesion
for sampling. The core needle device is mounted on the underside of the
stereotactic imaging table and is positioned by the table's computer.
To begin the procedure, two x-rays are taken from different angles of the
patient's breast that enable the imaging system's computer to identify the exact
location of the abnormal tissue to be biopsied. Based on the x-rays, the
physician maps out a random sampling pattern to obtain tissue samples. The
patient is given a local anesthetic in the breast region and a small nick,
approximately three millimeters in diameter, is made in the patient's skin. The
core needle device consists of a spring loaded firing mechanism, mounted on the
stereotactic table, and a disposable, two-piece needle. The needle consists of
an inner guide containing a groove that penetrates and captures tissue and a
cylindrical outer cutting knife that severs the captured tissue. At each
target, the needle is fired and a sample of tissue of approximately 10
milligrams is captured. At the end of each sampling, the needle is withdrawn
from the breast, the firing mechanism is removed from the table and the tissue
sample is removed from the needle. The needle is then reloaded into the firing
mechanism, the firing mechanism is then reattached to the table and the needle
is then fired into the breast through the original skin nick at the next
sampling point. Typically, the physician takes 10 to 20 samples of the
potentially cancerous site. As with open surgical biopsy, the captured samples
are sent to the pathology laboratory for analysis. The procedure is performed
by a radiologist or a surgeon and typically takes approximately one hour. At
the conclusion of the procedure, the skin nick is covered by a band-aid.
Core needle biopsy represents an improvement over FNA and has received
acceptance as an alternative to open surgical biopsy due to its less-invasive
nature, lower cost and minimal scarring of the breast. The introduction of
prone stereotactic tables in 1989 has led to broader use and acceptance of the
core needle procedure. However, core needle biopsy suffers from some
significant disadvantages, including its limited ability to capture enough
tissue to make a definitive diagnosis, its difficulty in capturing the targeted
tissue and its inability to be used on all types of lesions. For example, the
sample size of approximately 10 milligrams may not be large enough to provide a
sufficient volume of tissue for a definitive pathological diagnosis. In
addition, after the first few firings of the core needle, the volume and quality
of the tissue sample obtained with each firing of the needle will decline due to
bleeding and trauma caused by the needle inside the breast. Furthermore, this
method of sampling, in which the needle is repeatedly fired into and around the
lesion, results in a random sampling pattern rather than a contiguous sample of
tissue in the region of a particular lesion. This random sampling pattern may
cause the physician to miss tissue that is necessary for a complete and
definitive diagnosis. In addition, multiple needle firings can startle
patients, resulting in unintended movement that can necessitate new positioning
x-rays. As a result of these disadvantages, the adoption of core biopsy by
physicians has been limited to certain lesion types and sizes. For example,
many physicians will typically not perform the procedure on breasts with small
lesions or potentially early stage cancers such as microcalcifications.
Core needle biopsy can be performed in a physician's office, breast imaging
center or hospital and the procedure costs approximately $1,200. The
stereotactic table and reusable core needle biopsy firing mechanism cost
approximately $200,000 and $1,000, respectively. Individual, disposable core
biopsy needles used in the core needle biopsy procedure cost approximately $10
to $30. The Company estimates that approximately 300,000 core needle biopsy
procedures were performed in the United States in 1995.
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POST BIOPSY CANCER THERAPY
After tissue samples are collected in an open surgical or less-invasive
biopsy procedure, the samples are sent to the pathology laboratory for analysis.
The results of the pathology examination of the biopsied tissue are usually
available within 24 hours, at which time the patient will be advised of the
results. If the lesion is malignant, the patient is typically scheduled for
surgery to remove the lesion and to sample nearby lymph nodes to determine the
extent to which cancer has spread. Tissue samples obtained during biopsy help
assist in determining the type of surgery to be performed. Surgical procedures
include lumpectomy, in which the cancerous lesion and a margin of surrounding
benign tissue is removed, and mastectomy, in which the entire breast is removed.
In cases of localized breast cancer treated with lumpectomy, the patient
generally receives radiation therapy following the surgery. If the cancer is
more widespread but lumpectomy is still used, the surgery is generally followed
with a chemotherapy regimen. Following lumpectomy surgery, the patient will
receive ongoing mammographic follow-up. If the cancer is very widespread or if
the patient desires to further reduce the risk of reoccurrence of cancer, the
physician will generally recommend a mastectomy, which may be followed with
chemotherapy.
MAMMOTOME BIOPSY SYSTEM AND PROCEDURE
THE MAMMOTOME BIOPSY SYSTEM
Biopsys developed the Mammotome Biopsy System as a less-invasive
alternative to open surgical biopsy. The Company designed the Mammotome Biopsy
System specifically for use as a breast cancer diagnostic tool that combines
many of the advantages of open surgical biopsy and core needle biopsy. The
Mammotome Biopsy System received FDA 510(k) clearance in April 1995 and the
Company commenced commercial sales in August 1995. As of June 30, 1996, the
Mammotome Biopsy System had been installed in a total of approximately 220
physician's offices, hospitals and breast imaging centers in the United States,
and the Company estimates that over 13,000 Mammotome procedures have been
performed.
The Mammotome Biopsy System is comprised of a disposable Mammotome probe, a
motorized drive unit and an integrated vacuum source. The Mammotome probe is
made of stainless steel and molded plastic and is designed for collection of
multiple tissue samples with a single insertion of the probe into the breast.
The tip of the probe is configured with a sampling notch for capturing tissue
samples. Orientation of the sample notch is directed by the physician, who uses
the thumbwheel to direct tissue sampling. A hollow cylindrical cutter severs
and transports tissue samples to the tissue collection chamber that may contain
a tissue collection cassette for pathology. The Mammotome probe is currently
available in 14 and 11 gauge sizes, which can capture tissue samples of
approximately 40 and 100 milligrams, respectively.
The Mammotome Biopsy System includes the motorized drive unit that houses
the Mammotome probe and automatically activates the vacuum and cylindrical
cutter. The integrated vacuum source is a component of the Mammotome Biopsy
System and is used to draw tissue into the sampling notch of the probe. The
motorized drive unit is compatible with all currently available stereotactic
imaging tables. The current list price of the Mammotome drive unit, including
the vacuum source and related reusable accessories, is $7,500. The current list
prices of the single-use, 14 and 11 gauge Mammotome probes and related
disposable components are $135 and $215, respectively.
MAMMOTOME PROCEDURE
The Mammotome procedure is performed under local anesthesia in an
outpatient setting. To begin the procedure, the patient is positioned on a
stereotactic imaging table and two x-rays of the patient's breast are taken to
identify the location of the abnormal tissue, as in core needle biopsy. The
patient is then given a local anesthetic and the Mammotome probe is manually
advanced into the breast to the area of abnormal tissue. Unlike the core needle
method which requires repeated needle firings into previously selected random
targets around the abnormal tissue area, the Mammotome requires only a single
probe insertion in the abnormal tissue area. A post-positioning x-ray of the
breast is taken to verify that the sample notch of the probe is properly
positioned in the center of the abnormal area. Once the position is confirmed,
the vacuum is automatically activated, resulting in tissue being drawn into the
sample notch. The manual advancement of the cutter knob severs tissue and
captures a sample of approximately 40 milligrams of tissue with the 14 gauge
probe and approximately 100 milligrams of tissue with the 11 gauge probe. With
the probe remaining in place inside the breast, the captured sample is drawn
into the tissue collection chamber where it can be placed into a tissue
collection cassette, which enables orderly collection of tissue samples. By
rotating the thumbwheel,
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the physician moves the sampling notch to the next desired position. The
procedure is repeated to capture multiple specimens from different positions in
the target area without having to remove and insert the probe with each
sampling. The ability of the sample notch to be rotated in a circle enables a
large, contiguous area of abnormal breast tissue to be sampled. The vacuum
system also aspirates blood from the sampling area, thereby alleviating the
difficulties associated with excessive blood accumulating in the sampling area.
Upon completion of the procedure, the tissue samples are sent to the pathology
laboratory for examination, and the skin nick is covered by a band-aid.
The Company believes that the following are the principal advantages of the
Mammotome procedure.
- LESS-INVASIVE. The approximately three millimeter diameter skin nick
necessary for insertion of the Mammotome probe is covered with a band-aid after
the procedure and does not result in breast disfigurement or scarring. In an
open surgical biopsy, the deep skin incision required for the procedure requires
sutures and the large amount of tissue removed may result in permanent breast
disfigurement. In addition, open surgical biopsy is typically performed under
general anesthesia and requires one to two days of recuperation at home.
Although core needle biopsy is a less-invasive alternative to open surgical
biopsy, the repeated firing of the biopsy needle into the breast can result in
excessive bleeding during the procedure and may cause more trauma in the breast
than the Mammotome procedure.
- PROCEDURE EFFICIENCY. The Mammotome probe is inserted only once to
collect multiple tissue samples. The number of samples taken typically range
from 10-20 per procedure, each of which can be obtained in 10-20 second
intervals. In contrast, core needle biopsy requires removal, reloading and
repositioning of the needle between each firing of the needle. By reducing the
time required for targeting and sampling, the Company believes that the
physician using the Mammotome Biopsy System can perform the procedure in
approximately 20 minutes.
- LARGE AND CONSISTENT TISSUE SAMPLING. The 14 gauge Mammotome probe
consistently captures samples of approximately 40 milligrams, as compared to the
10 milligram sample size obtained with a standard 14 gauge core needle. The
Company believes that obtaining a large sample size is especially important in
early stage diagnosis, where the sampling may consist of microcalcifications.
The vacuum system is used to gently draw tissue into the sampling notch,
resulting in tissue samples of consistent size and quality during the entire
procedure.
- DIRECTIONAL SAMPLING. The physician can manually direct the sample
notch to obtain tissue samples from specific directions. This capability is
particularly useful if the breast tissue being biopsied presents patterns with
irregular shapes or if the initial probe positioning is slightly off-center. In
these situations, the physician can manually adjust the orientation of the
sampling notch without resetting the computer targets and repositioning the
probe.
- CONTIGUOUS SAMPLING. The Mammotome probe permits samples to be
obtained in contiguous, radial patterns to remove large areas of abnormal or
suspicious tissue. This enables the pathologist to evaluate tissue samples from
the entire area of the lesion and make a more thorough diagnosis. In contrast
to the core needle procedure where the sampling pattern consists of samples from
random targets or locations, the Mammotome probe has the ability to sample more
tissue in a sweeping range over a large area.
- BROAD CLINICAL UTILITY. The Company believes that the advantages of
the Mammotome procedure will provide the diagnostic accuracy necessary to enable
the Mammotome procedure to be used in cases where open surgical biopsy would
otherwise be used. These cases include diagnosis of early stage disease, which
is particularly difficult to diagnose with core needle biopsy.
BUSINESS STRATEGY
Biopsys intends to become a leader in the development of less-invasive
products for breast cancer diagnosis and disease management. The Company's
strategy is designed to take advantage of several current trends in the market
for screening, diagnosis and treatment of breast cancer, including government
and public support for early detection of breast cancer. The Company intends to
develop products that are cost-effective and consistent with trends toward
health-care cost containment and increased attention by payors and patients on
women's health issues. The following are key elements of the Company's
strategy:
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- PROMOTE PHYSICIAN ACCEPTANCE AND TRAINING. Biopsys seeks to gain
physician acceptance of the Mammotome Biopsy System through physician training
and dissemination of clinical and patient outcomes data. The Company's initial
marketing efforts are targeted towards radiologists, surgeons and pathologists,
all of whom the Company believes will be influential in gaining market
acceptance of the Mammotome procedure. Certain of the Company's co-founders and
all of the members of its scientific advisory board are key opinion leaders in
the development of less-invasive approaches for the diagnosis and treatment of
breast cancer, and the Company sponsors ongoing physician training programs on
the Mammotome Biopsy System.
- MARKET AND SELL THROUGH MULTIPLE CHANNELS. Biopsys' strategy is to
market and sell its products through both its direct sales force and marketing
alliances. Currently, the Company has non-exclusive marketing arrangements for
the Mammotome Biopsy System with the two principal manufacturers of stereotactic
tables. The Company believes that this strategy will result in a significantly
broadened marketing effort and will enable the Company to access new customer
accounts.
- DEVELOP ADDITIONAL PRODUCTS FOR BREAST CANCER DIAGNOSIS AND
MANAGEMENT. Biopsys intends to develop additional products and services for
breast cancer diagnosis and disease management. The Company is completing
development of the MicroMark Clip that will enable physicians to mark biopsy
sites for future reference. In addition, the Breast Center Manager software
system is being developed to provide clinicians with an improved means of
managing breast cancer patient data.
- PROMOTE MAMMOGRAPHY SCREENING COMPLIANCE. Biopsys intends to promote
public awareness and support efforts by corporations and women's organizations
to improve mammography screening compliance among women over the age of 40 in
the United States who do not regularly have mammograms. By increasing
mammography screening compliance, the Company believes that the number of
procedures to diagnose early stage breast cancers will increase.
OTHER PRODUCTS
The Company is developing three potential new products, the MicroMark Clip,
the Breast Center Manager software system and an Ultrasound Table and
Articulating Arm.
MICROMARK CLIP
The MicroMark Clip is a small surgical clip that acts as a tissue marker
that can be attached to the biopsy site at the conclusion of the Mammotome
procedure. The MicroMark Clip provides a means to identify or mark the area of
diagnosis or interest for subsequent surgical or radiologic follow-up. If the
biopsy diagnosis is malignant, the MicroMark Clip can be used to guide the
placement of a localization wire used during lumpectomy surgery, and the wire
and clip can then be removed at the time of the surgery. If the biopsy
diagnosis is benign, the MicroMark Clip placed at the biopsy site can be easily
identified on future mammograms. Typically, physicians closely monitor benign
biopsy sites in order to compare previous images with current images to depict
any changes that may lead to additional diagnostic procedures and potential
identification of breast cancers.
The MicroMark Clip is made of titanium and is three millimeters in length.
The MicroMark Clip is delivered to the biopsy site during the Mammotome
procedure using a pre-loaded delivery device. Once introduced into the breast
by the delivery device, the MicroMark Clip is advanced into the tissue and
deployed at the biopsy site.
The Company is completing development of its MicroMark Clip and obtained
510(k) clearance in March 1995. The Company anticipates that the list price of
the MicroMark Clip will be approximately $75. There can be no assurance that
development of the MicroMark Clip will be completed in a timely manner, or at
all, or that the MicroMark Clip will be successfully commercialized or achieve
market acceptance.
BREAST CENTER MANAGER
The Company is completing development of its Breast Center Manager software
system, a comprehensive patient and practice management software system to be
marketed to physicians, hospitals and breast imaging centers. Breast cancer
management is a highly complex process that requires the coordination of the
woman's primary care physician, a radiologist, a surgeon and numerous other
health care professionals over a woman's lifetime. The Company believes that
its Breast Center Manager system enables physicians to establish a database that
improves tracking of the patient at each step of the process from
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screening to diagnosis to treatment. Breast Center Manager software provides an
outcome-based approach to tracking patients with breast disease from detection
through treatment and long term followup. The Breast Center Manager system is
designed to operate on a personal computer. The software is designed to prompt
physicians to make decisions at several points along the patient's path of care
and point out discrepancies in results. The Breast Center Manager utilizes a
unique system called Intellipath which compares and correlates information
collected at all phases of a patient's treatment path, looks for potential
problem situations and prompts appropriate next actions. The Breast Center
Manager system can also generate reports relating to medical practice economics,
including information related to referring physicians and health care payors.
The Company believes that improved monitoring of clinical information and
patient outcome tracking will assist health care providers in complying with the
federal Mammography Quality Standards Act, which establishes certain operational
standards for mammography facilities, and in presenting outcome and other
statistical information to managed care payors.
The Breast Center Manager has a list price of $4,000 and as of June 30,
1996 has been installed in over 20 sites in the United States. There can be no
assurance that development of the Breast Center Manager system will be completed
in a timely manner, or at all, or that the Breast Center Manager system will be
successfully commercialized or achieve any market acceptance.
ULTRASOUND TABLE AND ARTICULATING ARM
This system is comprised of a specially designed Ultrasound Table and
Articulating Arm to be used with the Mammotome Biopsy System under ultrasound
guidance. The system has currently been installed in four clinical marketing
sites. The Company expects to introduce the system late in 1996 or early 1997.
The Company believes this system will be a significant advance for sampling of
lesions under ultrasound guidance. There can be no assurance that development
of the Ultrasound Table and Articulating Arm will be completed in a timely
manner, or at all, or that the system will be successfully commercialized or
achieve market acceptance.
RESEARCH AND DEVELOPMENT
The Company's research and development activities are performed internally
by its research and development staff consisting of 15 individuals as of
June 30, 1996 and supplemented by development work conducted by outside
consultants. The Company's research and development efforts are focused on
developing additional devices that can be used with, or in conjunction with, the
Mammotome Biopsy System. The Company believes that the Mammotome Biopsy System
and these other potential products will provide improved mechanisms for
excising, mapping or defining lesions in breast tissue. The Company will, in
connection with the development of these potential new products, be required to
undertake time-consuming and costly development activities and to seek
regulatory clearances or approvals. In addition, the Company is also exploring
the development of enhanced versions of the Mammotome Biopsy System. There can
be no assurance that any new product development will be successfully completed,
that regulatory clearances, if applied for, will be granted by the FDA on a
timely basis or at all, or that new products developed and introduced by the
Company will receive market acceptance. Failure by the Company to receive
regulatory approval for, or to successfully market new products, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
During the period ended June 30, 1994 and the years ended June 30, 1995 and
1996, the Company had research and development expenses of $378,000, $1,199,000
and $1,489,000, respectively.
MARKETING, SALES AND DISTRIBUTION
The Company markets and sells its products to radiologists and surgeons.
The Company's initial marketing and sales strategy is to focus on the installed
base of approximately 1,000 stereotactic imaging tables located primarily in
physicians' offices, hospitals and breast imaging centers throughout the United
States.
Biopsys' marketing strategy is to promote adoption of the Mammotome Biopsy
System by leading physicians in both radiology and surgery. Biopsys believes
that these opinion leaders may help promote acceptance of the Mammotome Biopsy
System as an alternative to both open surgical biopsy and core needle biopsy.
Biopsys is also facilitating the collection of clinical data and publication of
papers about the Mammotome procedure. The Company is promoting the overall
adoption of
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less-invasive breast biopsy procedures by supporting and teaching courses where
less-invasive biopsy techniques are presented to physicians, including
semi-annual courses taught by Biopsys' co-founders, Drs. Steve Parker and Fred
Burbank.
The Company intends to sell, market and distribute the Mammotome Biopsy
System through a direct sales force. The sales force as of June 30, 1996
consists of 11 individuals familiar with selling and training physicians on the
use of specialty medical devices. The sales force works closely with physicians
and their supporting staffs and provides each site with technical support and
training on the use of the Company's products.
The Company has not established relationships with distributors or other
strategic partners for international sales and marketing. The Company currently
plans to commence international marketing and sales efforts during 1997,
initially in selected countries in Europe. To date, there is limited experience
with biopsy procedures using prone stereotactic imaging tables in most
international markets. The Company currently plans to market and distribute
products through established distributors in selected markets. The Company
anticipates that it will sell products to international distributors at a
discount from the United States list price for resale to customers. There can
be no assurance that the Company will be able to successfully commercialize the
Mammotome Biopsy System or any potential product in any international market.
RELATIONSHIPS WITH STEREOTACTIC TABLE MANUFACTURERS
The Mammotome procedure requires the use of an imaging modality to position
the probe during the procedure. Currently, the only imaging modality with which
the Mammotome Biopsy System is compatible is a prone stereotactic x-ray imaging
table. Two companies, Fischer Imaging Corporation ("Fischer") and Lorad, a
subsidiary of Trex Medical ("Lorad"), have sold substantially all of the
approximately 1,000 prone stereotactic imaging tables installed in the United
States. The Company has established non-exclusive marketing arrangements with
Fischer and Lorad under which Fischer and Lorad can purchase Mammotome drive
units from the Company at a discount from list price and can then bundle
Mammotome drive units with their stereotactic imaging tables for sale to
customers. As a result, physicians, hospitals and breast imaging centers may
purchase a stereotactic table with a Mammotome drive unit from Fischer or Lorad.
The Company is also dependent upon Fischer and Lorad for customer training on
the use of the Mammotome Biopsy System at such sites. However, Mammotome probes
and other disposable products related to the Mammotome Biopsy System are
purchased directly by the customer from the Company, not from Fischer or Lorad.
There can be no assurance that Fischer and Lorad will purchase or promote
the sale of Mammotome drive units or that they will continue their marketing
arrangements with the Company. Lorad also has an arrangement with United States
Surgical Corporation ("USSC"), a competitor of the Company, under which Lorad
manufactures stereotactic tables for USSC on a private label basis. In
addition, Fischer and Lorad may have additional arrangements to market other
competing, less-invasive, breast biopsy systems. There can be no assurance that
these or other imaging equipment manufacturers will not redesign the
stereotactic tables so that they would not be compatible with the Mammotome
Biopsy System. The failure or loss of such marketing arrangements could have a
material adverse affect on the Company's business, financial condition and
results of operations.
MANUFACTURING
The Company has only limited experience in manufacturing the Mammotome
Biopsy System. If the Company is unable to manufacture an adequate number of
drive units or probes on a cost-effective and timely basis, it would have a
material adverse effect on the Company's ability to realize significant product
revenues for at least the next several quarters. The Company currently
contracts with third parties to manufacture certain components of the Mammotome
Biopsy System. Final assembly, sterilization and packaging of the Mammotome
Biopsy System is currently performed by contract manufacturers. The Company has
limited manufacturing capacity for the Mammotome Biopsy System and will be
required to increase its in-house manufacturing capability to manufacture
additional Mammotome drive units and probes. There can be no assurance that the
Company will be able to attract, train and retain the required personnel or will
be able to increase its manufacturing capability in a timely manner, or at all.
Manufacturers often encounter difficulties in scaling up production of their
products, including problems involving production yields, quality control and
assurance, component supply and shortages of qualified personnel. There can be
no assurance that reliable, high-volume manufacturing can be established or
maintained at commercially reasonable costs on a timely basis, or at all. If
the Company is unable to increase its in-house manufacturing capability, the
Company may need to obtain alternative manufacturing facilities or establish
additional contract manufacturing for its products. Delays
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associated with, or inability to establish, such additional capacity could have
a material adverse affect on the Company's business, financial condition and
results of operations.
The Company purchases components used in the Mammotome Biopsy System from
various suppliers. A limited number of parts and components are currently
available only from single sources, including certain components used in the
Mammotome drive unit. The Company is in the process of qualifying additional
sources for these components. There can be no assurance that the Company will
be successful in qualifying any additional sources on a timely basis, or at all.
The Company has, from time to time, experienced difficulties in obtaining
required quantities of components necessary to manufacture its products. For
example, the Company and the industry have experienced shortages of the type of
stainless steel used in the Mammotome probes, and there can be no assurance that
such shortages will not occur in the future. If the Company or any of its
contract manufacturers encounter future manufacturing difficulties, including
problems involving production yields, quality control and assurance, or
shortages of components or qualified personnel, it could have a material adverse
effect on the Company's business, financial condition and results of operations.
Complex medical devices, such as the Company's products, can experience
performance problems in the field that require review and possible corrective
action by the manufacturer. The Mammotome Biopsy System includes a stainless
steel probe designed to be inserted into the breast. To date, the Company has
only limited experience regarding the reliability of the system. Similar to
many other medical device manufacturers, the Company periodically receives
reports from users of its products relating to performance difficulties they
have encountered. The Company believes that the concerns identified in these
reports were not material and have been satisfactorily addressed and resolved.
The Company expects that it will continue to receive customer reports regarding
the performance of the Mammotome Biopsy System. There can be no assurance that
component failures, manufacturing errors or design defects that could result in
an unsafe condition or injury to the patient will not occur. If any such
failures or defects were deemed serious, the Company could be required to
withdraw or recall products, which could result in significant costs to the
Company. However, there can be no assurance that market withdrawals or product
recalls will not occur in the future. Any future product problems could result
in market withdrawals or recalls of products, which could have a material
adverse affect on the Company's business, financial condition or results of
operations. In addition, prior to international commercialization, the Company
will be required to attain and maintain compliance with GMP requirements and ISO
9001 standards. Failure to either attain or maintain compliance with the
applicable regulatory requirements of various regulatory agencies would have a
material adverse effect on the Company's business financial condition and
results of operations.
The Company is also required to register as a medical device manufacturer
with the FDA and state agencies, such as the CDHS and to list its products with
the FDA. As such, the Company is subject to inspections by both the FDA and the
CDHS for compliance with the FDA's GMP and other applicable regulations. These
regulations require that the Company maintain its documents in a prescribed
manner with respect to manufacturing, testing and control activities. Further,
the Company and the third party manufacturers of its products are required to
comply with various FDA requirements for design, safety, advertising and
labeling. The Company has not yet undergone an FDA GMP inspection, however, the
Company has undergone two annual CDHS GMP inspections in January 1995 and in
February 1996, both of which were satisfactory. See "--Government Regulation."
COMPETITION
The medical device industry, including products for breast cancer
diagnosis, is intensely competitive and characterized by innovation and
technological advances. The Company expects that the current high levels of
competition and technological change will increase. The Company believes its
principal competition will consist of open surgical biopsy, core needle biopsy
and other biopsy techniques and devices. Several companies market breast biopsy
devices, including USSC, Bard Radiology, a division of C.R. Bard, Inc.,
Meditech, a division of Boston Scientific Corporation, and Manan Products. USSC
has recently introduced a minimally invasive breast biopsy system that is sold
with a stereotactic table manufactured for USSC on a private label basis by
Lorad. Bard Radiology is currently the leading manufacturer of core needle
biopsy devices. Most of the Company's competitors have longer operating
histories, and significantly greater financial, technical, research, marketing,
sales, distribution and other resources than the Company. In addition, the
Company's competitors offer broad product lines, which they may offer as a
single package, have greater name recognition than the Company and frequently
offer discounts as a competitive tactic. The Company's Mammotome Biopsy System
and the disposable Mammotome probe are priced significantly higher than
currently available, competing core needle biopsy products. The Company may
therefore have to offer discounts on its
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Mammotome drive unit in order to generate demand for disposable Mammotome
probes. There can be no assurance that the Company's current competitors or
potential future competitors will not succeed in developing or marketing
technologies and products that are more effective or commercially attractive
than those that have been and are being developed by the Company or that would
render the Company's technologies and products obsolete or noncompetitive, or
that such companies will not succeed in obtaining regulatory approval for,
introducing or commercializing any such products prior to the Company. For
example, recent improvements in ultrasound have increased its ability to
differentiate between potentially malignant and benign tissue and could
therefore increase its use as a breast cancer screening tool. An ultrasound
device has recently received PMA approval for use in breast cancer screening
applications. In addition, another new screening modality undergoing clinical
trials uses sensors to detect and analyze changes in cellular electrical charge
distributions believed to be associated with the division or proliferation of
cells within the breast. Any such competitive developments could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Several companies are working on the development of noninvasive imaging
technologies for use in diagnosing breast cancer, certain of which are in
clinical trials. The development and physician acceptance of a noninvasive
system for breast cancer diagnosis could have a material, adverse effect on the
Company's business, financial condition and results of operations. Furthermore,
the medical device industry has experienced consolidation and competitors could
acquire companies or technologies that could limit the Company's ability to
compete. In addition to the Lorad/USSC relationship, such manufacturers may
have additional arrangements to market other competing, less-invasive breast
biopsy systems. There can be no assurance that these or other imaging equipment
manufacturers will not redesign their stereotactic tables so that they would not
be compatible with the Mammotome Biopsy System. The inability of the Company to
compete successfully could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company believes that the primary competitive factors in the market for
breast biopsy devices include the invasiveness of the procedure, the ability to
capture sufficiently large and contiguous tissue samples to enable a definitive
diagnosis, ease of use and price. Although the Company believes that its
products compete favorably with respect to these factors, there can be no
assurance that it will be able to do so in the future, or that new less-invasive
surgical instruments or medical devices that perform more favorably than the
Company's products will not be introduced, which would have a material adverse
effect on the Company's business, financial condition and results of operations.
PATENTS AND PROPRIETARY RIGHTS
The Company's ability to compete effectively will depend in part on its
ability to develop and maintain proprietary aspects of its technology. The
Company's policy is to protect its proprietary position by, among other methods,
filing United States and foreign patent applications to protect technology,
inventions and improvements that are important to its business. To date, one
patent has been issued to the Company. This patent relates to certain aspects
of the Mammotome Biopsy System. The Company has filed six and three additional
patent applications in the United States and internationally, respectively.
There can be no assurance that any patents will be issued to the Company or that
patents issued to the Company will offer any degree of protection. There can be
no assurance that any patents that may be issued to the Company or any of the
Company's 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 substantial resources and have made substantial
investments in competing technologies, will not seek to apply for and obtain
patents covering technologies that are more effective than the Company's
technologies or would render the Company's technologies or products obsolete or
uncompetitive, or will prevent, limit or interfere with the Company's ability to
make, use or sell its products either in the United States or in international
markets.
The patent positions of medical device companies, including those of the
Company, are uncertain and involve complex and evolving legal and factual
questions. The coverage sought in a patent application either can be denied or
significantly reduced before or after the patent is issued. Consequently, there
can be no assurance that any patent applications will result in the issuance of
patents, or that any patents issued to the Company will provide significant
protection or commercial advantage or will not be circumvented by others. Since
patent applications are secret until patents are issued in the United States or
corresponding applications are published in international countries, and since
publication of discoveries in the scientific or patent literature often lags
behind actual discoveries, the Company cannot be certain that it was the first
to make the inventions covered by each of its pending patent applications or
that it was the first to file patent applications for such inventions. There
can be no assurance that patents issued to or licensed by the Company or any
patents that may be issued as a result of the Company's pending or future
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patent applications will be of commercial benefit, afford the Company adequate
protection from competing products or technologies or will not be challenged by
competitors or others or declared invalid. Also, there can be no assurance that
the Company will have the financial resources to defend its patents from
infringement or claims of invalidity.
The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights, and companies in the
medical device industry have employed intellectual property litigation to gain a
competitive advantage. There can be no assurance that the Company will not in
the future become subject to patent infringement claims and litigation or
interference proceedings declared by the United States Patent and Trademark
Office ("USPTO") to determine the priority of inventions. The defense and
prosecution of intellectual property suits, USPTO interference proceedings and
related legal and administrative proceedings are both costly and time consuming.
Litigation may be necessary to enforce any patents that may be 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.
Any litigation or interference proceedings will result in substantial
expense to the Company and significant diversion of effort by the Company's
technical and management personnel. An adverse determination in litigation or
interference proceedings to which the Company may become a party could subject
the Company to significant liabilities to third parties or require the Company
to seek licenses from third parties. Although patent and intellectual property
disputes in the medical device area have often been settled through licensing or
similar arrangements, costs associated with such arrangements may be substantial
and could include ongoing royalties. Furthermore, there can be no assurance
that necessary licenses would be available to the Company on satisfactory terms,
or at all. 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.
In addition to patents, the Company relies on trade secrets and proprietary
know-how, which it seeks to protect, in part, through appropriate
confidentiality and proprietary information agreements. These agreement
generally provide that all confidential information developed or made known to
the individual by the Company during the course of the individual's relationship
with the Company, is to be kept confidential and not disclosed to third parties,
expect in specific circumstances. The agreements generally provide that all
inventions conceived by the individual in the course of rendering services to
the Company shall be the exclusive property of the Company; however, certain of
the Company's agreements with consultants, who typically are employed on a
full-time basis by academic institutions or hospitals, do not contain assignment
of invention provisions, and, consequently, the Company may not own any
proprietary technology developed by such consultants. There can be no assurance
that proprietary information or confidentiality agreements with employees,
consultants and others will not be breached, that the Company would have
adequate remedies for any breach, or that the Company's trade secrets will not
otherwise become known to or independently developed by competitors.
THIRD-PARTY REIMBURSEMENT
In the United States, health care providers, such as hospitals and
physicians, that purchase medical devices, such as the Company's Mammotome
Biopsy System, generally rely on third-party payors, principally private health
insurance plans and to a lesser extent, federal Medicare and state Medicaid, to
reimburse all or part of the cost of the procedure in which the medical device
is being used. Reimbursement for breast biopsy procedures performed using
devices that have received FDA clearance or approval has generally been
available in the United States. However, there is currently no specific
reimbursement code for Mammotome procedures, and users of the Company's products
are obtaining reimbursement under a variety of codes for existing methods of
performing breast biopsy. There can be no assurance that currently available
levels of reimbursement will continue to be available, or that adequate
reimbursement will be available in the future for existing products or products
under development. In addition, certain health care providers are moving
towards a managed care system in which such providers contract to provide
comprehensive health care for fixed cost per patient. The Company is unable to
predict what changes will be made in the reimbursement methods utilized by
third-party health care payors. The Company anticipates that in a prospective
payment system, such as the DRG system utilized by Medicare, and in many managed
care systems used by private health care payors, the cost of the Company's
products will be incorporated into the overall cost of the procedure and that
there will be no separate, additional reimbursement for the Company's products.
The Company anticipates that hospital administrators and physicians will justify
the use of the Company's products by the attendant cost savings and clinical
benefits that the Company believes will be derived from the use of its products.
However, there can be no assurance that this will be the case. Furthermore,
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the Company could be adversely affected by changes in reimbursement policies of
governmental or private health care payors, particularly to the extent any such
changes affect reimbursement for procedures in which the Company's products are
used. Given the efforts to control and reduce health care costs in the United
States in recent years, there can be no assurance that any reimbursement for
procedures performed using the Company's products will be available or adequate.
If the Company obtains the necessary international regulatory approvals,
market acceptance of the Company's products in international markets would be
dependent, in part, upon the availability of reimbursement within prevailing
health care payment systems. Reimbursement and health care payment systems in
international markets vary significantly by country, and include both government
sponsored health care and private insurance. To date, the Company has not
obtained any international reimbursement approvals. There can be no assurance
that any such approvals will be obtained in a timely manner, if at all, and
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.
There can be no assurance that reimbursement for procedures performed using
the Company's products will be available in the United States or international
markets under private or governmental insurance systems. Failure by physicians,
hospitals and other users of the Company's products to obtain sufficient
reimbursement from health care payors for procedures in which the Company's
products are used or adverse changes in governmental and private third-party
payors' policies toward reimbursement for such procedures would adversely affect
market acceptance of the Company's products and would have a material adverse
effect on the Company's business, financial condition and results of operations.
GOVERNMENT REGULATION
UNITED STATES
The Company's products are regulated in the United States as medical
devices by the FDA under the Federal Food, Drug, and Cosmetic Act ("FDC Act")
and require premarket clearance or approval by the FDA prior to
commercialization. In addition, certain material changes or modifications to
medical devices also are subject to FDA review and clearance or approval.
Pursuant to the FDC Act, the FDA regulates the research, testing, manufacture,
safety, labeling, storage, record keeping, advertising, distribution and
production of medical devices in the United States. Noncompliance with
applicable requirements can result in warning letters, 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, and criminal prosecution. 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 for non-exempt devices and adherence to GMPs for most
devices). 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 that have not been found substantially equivalent to legally
marketed devices), and generally require clinical testing to ensure safety and
effectiveness and FDA approval prior to marketing and distribution. The FDA
also has the authority to require clinical testing of Class I and Class II
devices. A PMA application must be filed if the proposed device is not
substantially equivalent to a legally marketed Class I or Class II predicate
device or if it is a Class III device for which the FDA has called for such
applications.
If human clinical trials of a device are required and if the device
presents a "significant risk," the manufacturer or the distributor of the device
is required to file an investigational device exemption ("IDE") application
prior to commencing human clinical trials. The IDE application must be
supported by data, typically including the results of animal and, possibly,
mechanical testing. If the FDA does not object to the IDE application within 30
days from filing of the application, human clinical trials may begin as defined
in the IDE. Sponsors of clinical trials are permitted to sell investigational
devices distributed in the course of the study, provided such costs do not
exceed recovery of the costs of manufacture, research, development and handling.
The clinical trials must be conducted under the auspices of an independent
Institutional Review Board ("IRB") established pursuant to FDA regulations, and
with appropriate informed consent.
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Generally, before a new device can be introduced into the market in the
United States, the manufacturer or distributor must obtain FDA clearance of a
510(k) notification or approval of a PMA application. If a medical device
manufacturer or distributor can establish that a device is "substantially
equivalent" to a legally marketed Class I or Class II device, or to a Class III
device for which FDA has not called for PMAs, the manufacturer or distributor
may seek clearance from FDA to market the device by filing a 510(k)
notification. The 510(k) notification will need to be supported by appropriate
data establishing the claim of substantial equivalence to the satisfaction of
FDA. FDA recently has been requiring a more rigorous demonstration of
substantial equivalence.
Following submission of the 510(k) notification, the manufacturer or
distributor may not place the device into commercial distribution until an order
is issued by the FDA. No law or regulation specifies the time limit by which
FDA must respond to a 510(k) notification. At this time, the FDA typically
responds to the submission of a 510(k) notification within 150 to 200 days, but
it may take longer. An FDA order may declare that the device is substantially
equivalent to another legally marketed device and allow the proposed device to
be marketed in the United States. The FDA, however, may determine that the
proposed device is not substantially equivalent or require further information,
including clinical data, to make a determination regarding substantial
equivalence. Such determination or request for additional information could
delay market introduction of the products that are the subject of the 510(k)
notification.
The Company obtained clearances of a series of 510(k) premarket
notifications for the Mammotome Biopsy System from July 1994 through April 1995
and obtained clearance of its 510(k) premarket notification for the MicroMark
Clip in March 1995. The Company believes the Breast Center Manager is not
subject to regulation by the FDA. There can be no assurance that the Company
will be able to obtain necessary clearances or approvals to market any other
products on a timely basis, if at all, and delays in receipt or failure to
receive such clearances or approvals, the loss of previously received clearances
or approvals, or failure to comply with existing or future regulatory
requirements could have a material adverse effect on the Company's business,
financial condition and results of operations.
If a manufacturer or distributor of medical devices cannot establish that a
proposed device is substantially equivalent to a legally marketed device, the
manufacturer or distributor must seek premarket approval of the proposed device
through submission of a PMA application. A PMA application must be supported by
extensive data, including, in many instances, preclinical and clinical trial
data, as well as extensive literature to prove the safety and effectiveness of
the device. Following receipt of a PMA application, if the FDA determines that
the application is sufficiently complete to permit a substantive review, the FDA
will "file" the application. Under the FDC Act, the FDA has 180 days to review
a PMA application, although the review of such an application more often occurs
over a protracted time period, and generally takes approximately two years or
more from the date of filing to complete.
The PMA application approval process can be expensive, uncertain and
lengthy. A number of devices for which premarket approval has been sought have
never been approved for marketing. The review time is often significantly
extended by the FDA, which may require more information or clarification of
information already provided in the submission. During the review period, an
advisory committee likely will be convened to review and evaluate the
application and provide recommendations to the FDA as to whether the device
should be approved. In addition, the FDA will inspect the manufacturing
facility to ensure compliance with the FDA's GMP requirements prior to approval
of an application. If granted, the approval of the PMA application may include
significant limitations on the indicated uses for which a product may be
marketed.
If necessary, the Company will file a PMA application with the FDA for
approval to sell its potential products commercially in the United States when
it has developed such products. There can be no assurance that the Company will
be able to obtain necessary PMA application approvals to market such products on
a timely basis, if at all, and delays in receipt or failure to receive such
approvals, the loss of previously received approvals, or failure to comply with
existing or future regulatory requirements could have a material adverse effect
on the Company's business, financial condition and results of operations.
The Company is also required to register as a medical device manufacturer
with the FDA and state agencies, such as the California Department of Health
Services ("CDHS") and to list its products with the FDA. As such, the Company
is subject to inspections by both the FDA and the CDHS for compliance with the
FDA's GMP and other applicable regulations. These regulations require that the
Company maintain its documents in a prescribed manner with respect to
manufacturing, testing and control activities. Further, the Company and the
third party manufacturers of its products are required to comply with various
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FDA requirements for design, safety, advertising and labeling. The Company has
not yet undergone an FDA GMP inspection. However, the Company has undergone two
annual CDHS GMP inspections in January 1995 and in February 1996, both of which
were satisfactory.
The Company is required to provide information to the FDA on death or
serious injuries alleged to have been associated with the use of its medical
devices, as well as product malfunctions that would likely cause or contribute
to death or serious injury if the malfunction were to recur. In addition, the
FDA prohibits a cleared or approved device from being marketed for uncleared or
unapproved applications. If the FDA believes that a company is not in
compliance with the law, it can institute proceedings to detain or seize
products, issue a recall, enjoin future violations and assess civil and criminal
penalties against the company, its officers and its employees. Failure to
comply with the regulatory requirements could have a material adverse effect on
the Company's business, financial condition and results of operations.
The advertising of most FDA-regulated products is subject to both FDA and
Federal Trade Commission jurisdiction. The Company also is subject to
regulation by the Occupational Safety and Health Administration and by other
governmental entities.
Regulations regarding the manufacture and sale of the Company's products
are subject to change. The Company cannot predict the effect, if any, that such
changes might have on its business, financial condition or results of
operations.
INTERNATIONAL
International sales of the Company's products are subject to the regulatory
agency product registration requirements of each country. The regulatory review
process varies from country to country. The Company has not obtained any
international regulatory approvals permitting sales of its products outside of
the United States. The Company intends to seek regulatory approvals in certain
international markets. There can be no assurance, however, that such approvals
will be obtained on a timely basis or at all.
Prior to marketing and selling its products in Europe, the Company intends
to implement policies and procedures for itself and its third party
manufacturers of its products that will allow the Company to receive ISO 9001
certification. ISO 9001 standards for quality operations have been developed to
ensure that companies know, on a worldwide basis, the standards of quality to
which they will be held. The European Union has promulgated rules that require
that medical products receive by mid-1998 the CE mark, an international symbol
of quality and compliance with applicable European medical device directives.
Failure to receive CE mark certification will prohibit the Company from selling
its products in Europe. ISO 9001 certification is one of the CE mark
certification requirements. There can be no assurance that the Company will be
successful in meeting certification requirements.
PRODUCT LIABILITY AND INSURANCE
The manufacture and sale of medical products entail significant risk of
product liability claims. There can be no assurance that the Company's existing
annual insurance coverage limits of $1 million per occurrence and $3 million in
the aggregate will be adequate to protect the Company from any liabilities it
might incur in connection with the clinical trials or sales of its products. In
addition, the Company may require increased product liability coverage if its
products are successfully commercialized. Such insurance is expensive and in
the future may not be available on acceptable terms, or at all. A successful
product liability claim or series of claims brought against the Company in
excess of its insurance coverage could have a material adverse effect on the
Company's business, financial condition and results of operations.
EMPLOYEES
As of June 30, 1996, the Company had 77 full-time employees. Approximately
15 persons were engaged in research and development activities, 29 persons were
engaged in manufacturing and manufacturing engineering, 10 persons were engaged
in quality assurance and regulatory affairs, 18 persons were engaged in sales
and marketing and 5 persons were engaged in general and administrative
functions. No employees are covered by collective bargaining agreements, and
the Company believes it maintains good relations with its employees.
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ADDITIONAL RISK FACTORS
DEPENDENCE UPON MAMMOTOME BIOPSY SYSTEM. The Mammotome Biopsy System is
currently the Company's only commercial product, and will account for
substantially all of the Company's revenue for the foreseeable future. The
Company received clearance of its 510(k) premarket notification from the FDA in
April 1995 and commercially introduced the Mammotome Biopsy System in August
1995 for use in soft tissue biopsy. To date, the Company has limited experience
in manufacturing, selling and marketing the Mammotome Biopsy System. As of
June 30, 1996, the Mammotome Biopsy System had only been used in approximately
13,000 breast biopsy procedures at approximately 220 sites in the United States.
Clinical experience and follow-up data on patients is limited as the majority of
these procedures were performed after August 1995. There can be no assurance
that the Mammotome Biopsy System will be effective in sampling suspicious breast
tissue. Furthermore there can be no assurance that it will be more effective
than competing products or technologies, capable of being manufactured in
commercial quantities at acceptable costs or successfully marketed. Before the
Mammotome Biopsy System can be sold outside the United States, the Company will
have to obtain foreign regulatory approvals or certifications and establish
foreign distribution capability. There can be no assurance that the Company
will obtain any foreign regulatory approvals or certifications or establish
foreign distribution capabilities on a timely basis, or at all. Since the
Mammotome Biopsy System represents the Company's primary near-term product
focus, if the Mammotome Biopsy System is not successfully commercialized, the
Company's business, financial condition and results of operations would be
materially adversely affected.
UNCERTAINTY OF MARKET ACCEPTANCE. The Company's success is substantially
dependent upon the market acceptance of the Mammotome Biopsy System, which
represents a new less-invasive method of obtaining breast tissues for biopsy.
There can be no assurance that the Mammotome Biopsy System will achieve market
acceptance. The Company believes that market acceptance of the Mammotome Biopsy
System will depend, in part, upon the Company's ability to demonstrate to
physicians the clinical benefits, safety, efficacy and cost-effectiveness of the
Mammotome Biopsy System. In particular, the Company will need to demonstrate
that the Mammotome Biopsy System is an attractive alternative to open surgical
biopsy and other less-invasive diagnostic procedures, such as core needle
biopsy, for obtaining samples of suspicious tissue from the breast. To date,
there are few published reports regarding the efficacy of the Mammotome Biopsy
System. Furthermore, the currently available Mammotome probe removes less
tissue than an open surgical biopsy procedure, and as a result, there can be no
assurance that repeat biopsy procedures will not be required to make a
definitive diagnosis. In order to determine whether the Mammotome Biopsy System
accurately diagnoses suspicious lesions, additional clinical experience and
long-term follow-up data will be necessary. There is limited follow-up data on
patients who have undergone breast biopsy using the Mammotome Biopsy System
because the majority of such biopsy procedures have been performed after
August 1995. Furthermore, open surgical biopsy has been the most widely used
procedure for breast biopsy and there can be no assurance that physicians will
adopt the Mammotome procedure. Market acceptance of the Company's products will
be dependent upon the Company's ability to convince both radiologists and
surgeons to use the Mammotome Biopsy System and the willingness of radiologists,
surgeons, and other potential users to be trained in the use of the Mammotome
Biopsy System. In addition, the Company believes that recommendations and
endorsements by influential physicians will be essential for market acceptance
of its products, and there can be no assurance that such recommendations or
endorsements will be obtained.
Various other factors will affect market acceptance of the Mammotome Biopsy
System. In particular, the Company believes that market acceptance and future
commercial success, if any, will be dependent, in part, upon an increase in the
number of women complying with the mammography screening guidelines recommended
by the American Cancer Society. Currently, a large percentage of women are not
receiving periodic mammograms in accordance with the American Cancer Society's
recommendations. There can be no assurance, however, that mammography screening
compliance rates will increase. If screening compliance rates do not increase,
or increase more slowly than the Company anticipates, the Company's business,
financial condition and results of operations could be materially, adversely
affected. Currently, the Mammotome Biopsy System requires the use of a prone
stereotactic imaging table on which the Mammotome drive unit is mounted.
Stereotactic imaging tables are currently being sold at approximately $200,000
per unit by table manufacturers, and there can be no assurance that the cost of
these tables will not have an adverse effect on market acceptance of the
Mammotome Biopsy System. Since the Mammotome Biopsy System requires a
stereotactic table, the Company is dependent upon the continued manufacture and
sale of the tables to physicians, hospitals and breast imaging centers by
stereotactic table manufacturers. In addition, the Company's current Mammotome
drive unit is not designed to work with other currently used imaging modalities,
such as ultrasound. If the Company is unable to develop the Mammotome Biopsy
System for use with ultrasound or other imaging modalities, the Company's
business, financial condition and results of operations could be materially,
adversely affected.
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The ability of health care providers to obtain adequate reimbursement for
the breast biopsy procedures using the Mammotome Biopsy System will also be
critical for market acceptance of the product. There can be no assurance that
breast biopsy procedures using the Mammotome Biopsy System will be reimbursable
by third-party payors under existing or future reimbursement policies. As a
result, there can be no assurance that the Mammotome Biopsy System will achieve
market acceptance. 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.
RISKS ASSOCIATED WITH PRODUCT PRICING. The Company's Mammotome Biopsy
System and the disposable Mammotome probe are priced significantly higher than
currently available, competing core needle biopsy products. There can be no
assurance that this price increase will be sustained or that the Company will
not be required to discount the drive unit in order to generate market
acceptance of the Mammotome Biopsy System and sales of Mammotome probes. The
inability to place sufficient quantities of Mammotome drive units would limit
the Company's ability to sell disposable Mammotome probes, which would have a
material adverse effect on the Company's business, financial condition and
results of operations.
LIMITED OPERATING HISTORY. The Company has a limited history of operations
that, to date, has consisted primarily of research and development, product
engineering, obtaining FDA clearance of its products and initial development of
a direct sales force in the United States. The Company received clearance of
its 510(k) premarket notification for the Mammotome Biopsy System in April 1995
and commercially introduced the Mammotome Biopsy System in August 1995. There
can be no assurance that the Mammotome Biopsy System will be successfully
commercialized or that the Company will achieve significant revenues. In
addition, the Company has sustained substantial operating losses to date and
there can be no assurance that the Company will achieve or sustain profitability
in the future. Whether the Company can successfully manage the transition to a
larger-scale commercial enterprise will depend upon a number of factors,
including increasing its commercial manufacturing capability and its sales and
marketing capabilities. The Company's inability to establish such capabilities
would have a material adverse effect on the Company's business, financial
condition and results of operations.
LIMITED SALES AND MARKETING EXPERIENCE. The Company has only limited
experience selling and marketing the Mammotome Biopsy System. The Company
intends to sell the Mammotome Biopsy System to physicians, hospitals and breast
imaging centers through a direct sales force in the United States. The Company
currently has an 11 person sales force that covers certain regions in the United
States and the Company does not have an international sales presence. The
Company intends to significantly increase its sales and marketing capability in
fiscal 1997. There can be no assurance that the Company will be able to build a
larger marketing staff or sales force, that establishing such a marketing staff
or sales force will be cost-effective, or that the Company's sales and marketing
efforts will be successful. In order to successfully market its products, the
Company will need to convince the medical community, principally leading
radiologists and surgeons, that the Mammotome procedure is an attractive
alternative to current procedures, such as open surgical biopsy and core needle
biopsy. The Company believes that recommendations and endorsements by
influential physicians will be essential to market acceptance of its products.
There can be no assurance that such recommendations or endorsements will be
obtained. The Company may be required to, among other things, offer substantial
discounts on its Mammotome drive unit to generate demand for Mammotome probes.
The inability to place sufficient quantities of Mammotome drive units would
limit the Company's ability to sell disposable Mammotome probes, which would
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company may also be required to establish
collaborative relationships for the marketing of the Mammotome Biopsy System and
there can be no assurance that such relationships will be entered into or, if
entered into, will be successful.
The Company has not obtained any regulatory approvals to sell the Mammotome
Biopsy System in any foreign markets. If the Company is successful in obtaining
any international regulatory approvals, the Company intends to commence its
international sales and marketing activities, primarily through distribution
arrangements with specialty medical device distributors. Distribution, pricing
and marketing structures, as well as regulatory requirements, vary significantly
from country to country. Additionally, international sales and operations may
be limited or disrupted by the imposition of governmental controls, export
license requirements, political instability, trade restrictions, changes in
tariffs, difficulties in staffing, and coordinating communications among and
managing international operations. Sales through distributors are also subject
to several risks, including the risk that distributors will fail to effectively
promote the Company's products and the risk of financial instability of
distributors. Additionally, the Company's business, financial condition and
results of operations may be adversely affected by fluctuations in international
currency exchange rates, as well as increases in duty rates, difficulties in
obtaining export licenses, constraints on its ability to maintain or increase
prices, and competition. The Company has not established relationships with
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distributors or other strategic partners for international sales and marketing.
There can be no assurance that the Company will obtain any foreign regulatory
approvals or certifications or establish foreign distribution capabilities on a
timely basis, or at all. Furthermore, there is limited experience with
less-invasive breast biopsy procedures using prone stereotactic imaging tables
in most international markets. There can be no assurance that the Company will
be able to successfully commercialize the Mammotome Biopsy System or any future
product in any international market.
HISTORY OF LOSSES AND EXPECTATION OF FUTURE LOSSES. The Company has
experienced significant operating losses since inception and, as of June 30,
1996, had an accumulated deficit of $6.6 million. There can be no assurance
that the Company will successfully commercialize the Mammotome Biopsy System or
achieve significant revenues or any profitability. Furthermore, there can be no
assurance that revenues and profitability, if achieved, will be sustained on a
quarterly or annual basis, or at all.
FLUCTUATIONS IN OPERATING RESULTS. The Company's results of operations may
fluctuate significantly from quarter to quarter and will depend upon numerous
factors, including the extent to which the Company's products gain market
acceptance, actions relating to regulatory and reimbursement matters, progress
of clinical trials, introduction of alternative means for less-invasive biopsy
by competitors of the Company, pricing of competitive products and the cost and
effect of promotional discounts and marketing programs. In particular, the
Company anticipates that it may have to discount the price of the Mammotome
drive unit to generate demand for Mammotome probes and facilitate market
acceptance, and such discounting could adversely affect the Company's gross
margins. There can be no assurance that the Company will successfully
commercialize the Mammotome Biopsy System or achieve significant revenues or any
profitability. Furthermore, there can be no assurance that revenues and
profitability, if achieved, will be sustained on a quarterly or annual basis, or
at all.
RISK OF MARKET WITHDRAWAL OR PRODUCT RECALL. Complex medical devices, such
as the Company's products, can experience performance problems in the field that
require review and possible corrective action by the manufacturer. The
Mammotome Biopsy System includes a stainless steel probe designed to be inserted
into the breast. To date, the Company has only limited experience regarding the
reliability of the system. Similar to many other medical device manufacturers,
the Company periodically receives reports from users of its products relating to
performance difficulties they have encountered. The Company expects that it
will continue to receive customer reports regarding the performance and use of
the Mammotome Biopsy System. There can be no assurance that component failures,
manufacturing errors or design defects that could result in an unsafe condition
or injury to the patient will not occur. If any such failures or defects were
deemed serious, the Company could be required to withdraw or recall products,
which could result in significant costs to the Company. However, there can be
no assurance that market withdrawals or product recalls will not occur in the
future. Any future product problems could result in market withdrawals or
recalls of products, which could have a material adverse affect on the Company's
business, financial condition or results of operations.
EXTENSIVE GOVERNMENT REGULATION. The manufacture and sale of medical
devices, including the Mammotome Biopsy System and the Company's other potential
products, are subject to extensive regulation by numerous governmental
authorities in the United States, principally the FDA, and corresponding state
agencies, such as the CDHS. In order for the Company to market its products for
clinical use in the United States, the Company must obtain clearance from the
FDA of a 510(k) premarket notification or approval of a more extensive
submission known as a premarket approval ("PMA") application. Additionally,
certain material changes to medical devices also are subject to FDA review and
clearance or approval. The process of obtaining FDA and other required
regulatory clearances and approvals is lengthy, expensive and uncertain,
frequently requiring from one to several years from the date of FDA submission
if premarket clearance or approval is obtained at all. Securing FDA clearances
and approvals may require the submission of extensive clinical data and
supporting information to the FDA. The Company obtained clearance of 510(k)
premarket notification for the Mammotome Biopsy System in April 1995 and
obtained clearance of its 510(k) premarket notification for the MicroMark Clip
in March 1995.
The Company has not obtained any international regulatory approvals
permitting sales of its products outside of the United States. Sales of medical
devices outside of the United States are subject to international regulatory
requirements that vary from country to country. The time required to obtain
approval for sale internationally may be longer or shorter than that required
for FDA clearance or approval, and the requirements may differ. In Europe, the
Company will be required to obtain the certifications necessary to enable the
"CE" mark to be affixed to the Company's products by mid-calendar 1998 in order
to continue commercial sales in member countries of the European Union. The CE
mark is an international symbol of quality and complies with applicable European
medical device directives. The Company has not obtained such certifications,
and there can be no
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assurance it will be able to obtain such certifications or any other
international regulatory approval in a timely manner, or at all. 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 products in
the United States or internationally which could have a materially adverse
effect on the Company's business, financial condition and results of operations.
Regulatory clearances or approvals, if granted, may include significant
limitations on the indicated uses for which the product may be marketed. In
addition, to obtain such clearances or approvals, the FDA and certain foreign
regulatory authorities impose numerous other requirements with which medical
device manufacturers must comply. FDA enforcement policy strictly prohibits the
marketing of cleared or approved medical devices for uncleared or unapproved
uses. In addition, product clearances or approvals could be withdrawn for
failure to comply with regulatory standards or the occurrence of unforeseen
problems following the initial marketing. The Company will be required to
adhere to applicable FDA regulations regarding GMP and similar regulations in
other countries, which include testing, control, and documentation requirements.
The Company has not yet undergone an FDA GMP inspection. Ongoing compliance
with GMP and other applicable regulatory requirements will be monitored through
periodic inspections by federal and state agencies, including FDA and CDHS, and
by comparable agencies in other countries. Failure to comply with applicable
regulatory requirements, including marketing products for unapproved uses, could
result in, among other things, warning letters, fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production, refusal of the government to grant premarket clearance or premarket
approval for devices, withdrawal of clearances or approvals and criminal
prosecution. Changes in existing regulations or adoption of new governmental
regulations or policies could prevent or delay regulatory approval of the
Company's products.
There can be no assurance that the Company will be able to obtain FDA
510(k) clearance or PMA approval for its other potential products, the
certifications necessary for affixation of the CE mark on the Company's products
or other necessary regulatory approvals or clearances on a timely basis or at
all. Delays in receipt of or failure to receive such clearances or approvals,
the loss of previously obtained clearances or approvals, or failure to comply
with existing or future regulatory requirements would have a material adverse
effect on the Company's business, financial condition and results of operations.
POTENTIAL VOLATILITY OF STOCK PRICE. The stock market has from time to
time experienced significant price and volume fluctuations that are unrelated to
the operating performance of particular companies. These broad market
fluctuations may adversely affect the market price of the Company's Common
Stock. In addition, the market price of the shares of Common Stock is likely to
be highly volatile. Factors such as market acceptance of the Company's
products, fluctuations in the Company's operating results, announcements of
technological innovations or new products by the Company or its competitors, FDA
and international regulatory actions, actions with respect to reimbursement
matters, developments with respect to patents or proprietary rights, public
concern as to the safety of products developed by the Company or others, changes
in health care policy in the United States and internationally, failure of the
Company's results of operations to be consistent with the expectations of public
market analysts and investors, issuances of changes in stock market analysts'
recommendations and general market conditions may have a significant effect on
the market price of the Common Stock. There can be no assurance that the
Company's future operating results will not be below the expectations of public
market analysts and investors in some future quarter, which would have a
material adverse effect on the price of the Company's Common Stock.
UNCERTAINTY RELATING TO NEW PRODUCT DEVELOPMENT. The Company's strategy
involves the design and development of new products for breast cancer diagnosis
and disease management. The product development process is time-consuming and
costly, and there can be no assurance that product development will be
successfully completed, that necessary regulatory clearances or approvals will
be granted by the FDA on a timely basis, or at all, or that the potential
products will achieve market acceptance. Failure by the Company to develop,
obtain necessary regulatory clearances or approvals for, or successfully market
potential new products could have a material adverse effect on the Company's
business, financial condition and results of operations.
POSSIBLE FUTURE CAPITAL REQUIREMENTS. The Company's future liquidity and
capital funding requirements will depend on numerous factors, including the
extent to which the Company's Mammotome Biopsy System gains market acceptance,
the timing of regulatory actions regarding the Company's potential future
products, the costs and timing of expansion of sales, marketing and
manufacturing activities, obtaining and enforcing patents important to the
Company's business results of clinical trials and competition. There can be no
assurance that such additional capital, if needed, will be available on terms
acceptable
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to the Company, or at all. Certain funding arrangements may require the Company
to relinquish its rights to certain of its technologies, products or marketing
territories. Furthermore, any additional equity financing may be dilutive to
stockholders, and debt financing, if available, may include restrictive
covenants. The failure of the Company to raise capital on acceptable terms when
needed could have a material adverse effect on the Company's business, financial
condition and results of operations.
DEPENDENCE UPON KEY PERSONNEL. The Company is dependent upon a number of
key management and technical personnel. The loss of the services of one or more
key employees would have a material adverse effect on the Company. The
Company's success will also depend on its ability to attract and retain
additional highly qualified management and technical personnel. The Company
faces intense competition for qualified personnel, many of whom are often
subject to competing employment offers, and there can be no assurance that the
Company will be able to attract and retain such personnel. Furthermore, the
Company relies on the services of several medical and scientific consultants,
all of whom are employed on a full-time basis by hospitals or academic or
research institutions. Such consultants are, therefore, not available to devote
their full time or attention to the Company's affairs.
ITEM 2. PROPERTIES
The Company leases an approximately 19,000 square foot facility in Irvine,
California. This facility includes an environmentally controlled, class 10,000
clean room for device assembly, together with warehouse, laboratory and office
space. The facility is leased through December 1998. The Company is currently
attempting to lease an additional facility in Irvine, California to expand its
manufacturing and warehousing capabilities. The Company believes these
facilities will be adequate to meet its current and reasonably anticipated
future requirements.
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
-21-
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market (ticker
symbol BIOP). The number of record holders of the Company's Common Stock at
September 25, 1996 was 78. The Company has not paid any dividends since its
inception and does not intend to pay any dividends in the foreseeable future.
The Company completed an initial public offering of 2,587,500 shares of
Common Stock in May 1996. Prior to the initial public offering, the Company's
Common Stock was not publicly traded.
Quarterly high and low stock prices are as follows:
Quarter Ended High Low
- ------------------------------------------ ---- ---
June 30, 1996 (from May 1, 1996) $28 $15
-22-
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below with respect to the Company's
statements of operations for the period from July 6, 1993 (Inception) to
June 30, 1994 and for the years ended June 30, 1995 and 1996 and with respect to
the Company's balance sheets at June 30, 1995 and 1996 are derived from the
Financial Statements of the Company included elsewhere in this Form 10-K that
have been audited by Deloitte & Touche LLP, independent auditors, and is
qualified by reference to such Financial Statements and Notes related thereto.
The selected financial data set forth below is qualified in its entirety by, and
should be read in conjunction with, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial Statements and
Notes thereto included elsewhere in this Form 10-K.
Period from
July 6, 1993
(Inception) Year Ended June 30,
to June 30, -------------------
1994 1995 1996
------------ -------- ---------
(in thousands, except per share data)
STATEMENTS OF OPERATIONS DATA:
Net sales . . . . . . . . . . . . . . . . . $ -- $ 80 $ 3,475
Cost of sales . . . . . . . . . . . . . . . -- 34 1,899
------- ------- --------
Gross profit . . . . . . . . . . . . . . -- 46 1,576
Operating expenses: . . . . . . . . . . . .
Research and development . . . . . . . . 378 1,199 1,489
Sales and marketing . . . . . . . . . . -- 344 2,168
General and administrative . . . . . . . 302 944 1,864
------- ------- --------
Total operating expenses . . . . . . . 680 2,487 5,521
------- ------- --------
Loss from operations . . . . . . . . . . . (680) (2,441) (3,945)
Interest income (expense), net . . . . . . 5 (32) 478
------- ------- --------
Net loss . . . . . . . . . . . . . . . . . $ (675) $(2,473) $ (3,467)
------- ------- --------
------- ------- --------
Net loss per share (1) . . . . . . . . . . $ (0.43)
--------
--------
Weighted average shares outstanding . . . . 8,029
June 30,
------------------
1995 1996
-------- --------
BALANCE SHEET DATA: . . . . . . . . . . . .
Cash and cash equivalents . . . . . . . . . $ 13 $ 12,122
Short-term and long-term investments . . . 0 25,265
Working capital . . . . . . . . . . . . . . (611) 22,403
Total assets . . . . . . . . . . . . . . . 416 40,914
Total liabilities . . . . . . . . . . . . . 2,829 1,831
Total stockholders' equity (deficit) . . . (2,413) 39,083
(1) See Note 1 of Notes to Financial Statements for information concerning the
calculation of net loss per share.
-23-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of Biopsys should be read in conjunction with the Financial
Statements and related Notes thereto included elsewhere in this Form 10-K. This
Report on Form 10-K contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Actual events or results may differ materially
from those projected in the forward-looking statements as a result of the
factors described herein and in the documents incorporated herein by reference.
Such forward-looking statements include, but are not limited to, statements
concerning the risk of breast cancer; breast cancer screening; improvements in
ultrasound; business strategy; development and introduction of new products;
research and development; marketing, sales and distribution; manufacturing;
competition; third-party reimbursement; government regulation; and operating and
capital requirements.
OVERVIEW
Since its inception in July 1993, the Company has been engaged in the
design, development, clinical testing and, more recently, the manufacture and
sale of the Mammotome Biopsy System. The Company has a limited history of
operations that, to date, has consisted primarily of research and development,
product engineering, obtaining FDA clearance of its products and initial
development of a direct sales force in the United States. The Company received
clearance of its 510(k) premarket notification for the Mammotome Biopsy System
from the FDA in April 1995, began limited sales to selected customers in May
1995 and commercially introduced the Mammotome Biopsy System in August 1995.
For the year ended June 30, 1996, net sales of the Mammotome Biopsy System
totaled $3,475,000. As of June 30, 1996, the Mammotome Biopsy System had been
used in over 13,000 breast biopsy procedures at approximately 220 sites in the
United States.
The Company has a limited history of operations and has experienced
significant operating losses since inception. As of June 30, 1996 the Company
had an accumulated deficit of approximately $6.6 million. Results of operations
may fluctuate significantly from quarter to quarter and will depend upon
numerous factors, including the extent to which the Company's products continue
to gain market acceptance, actions relating to regulatory and reimbursement
matters, progress of clinical trials, introduction of alternative means for
less-invasive breast biopsy by competitors of the Company, pricing of
competitive products and the cost and effect of promotional discounts and
marketing programs. There can be no assurance that the Company will
successfully commercialize the Mammotome Biopsy System or achieve significant
revenues or profitability. Furthermore, there can be no assurance that revenues
and profitability, if achieved, will be sustained on a quarterly or annual
basis, or at all.
The Mammotome procedure requires the use of an imaging modality during the
procedure. Currently, the only imaging modality with which the Mammotome Biopsy
System is compatible is a prone stereotactic x-ray imaging table. Two
companies, Fischer and Lorad, have sold substantially all of the approximately
1,000 prone stereotactic imaging tables installed in the United States. The
Company has established non-exclusive marketing arrangements with Fischer and
Lorad under which Fischer and Lorad can purchase Mammotome drive units from the
Company at a discount from list price and can then bundle Mammotome drive units
with stereotactic imaging tables for sale to customers. However, Mammotome
probes and other disposable products related to the Mammotome Biopsy System are
purchased by the customer directly from the Company, not from Fischer or Lorad.
There can be no assurance that Fischer and Lorad will purchase or promote the
Mammotome drive unit or that they will continue their marketing arrangements
with the Company. Lorad also has an arrangement with USSC, a competitor of the
Company, under which Lorad manufactures stereotactic tables for USSC on a
private label basis. In addition, Fischer and Lorad may have additional
arrangements to market other competing breast biopsy systems. There can be no
assurance that these or other imaging equipment manufacturers will not redesign
the stereotactic tables so that they would not be compatible with the Mammotome
Biopsy System. The failure or loss of such marketing arrangements could have a
material adverse affect on the Company's business, financial condition and
results of operations.
The Company has only limited experience in manufacturing the Mammotome
Biopsy System. If the Company is unable to manufacture an adequate number of
drive units or probes on a cost-effective and timely basis, it would have a
material adverse effect on the Company's ability to realize significant product
revenues for at least the next several quarters. The Company currently
contracts with third parties to manufacture certain components of the Mammotome
Biopsy System. Final assembly, sterilization and packaging of the Mammotome
Biopsy System is currently performed by the Company in-house and by contract
-24-
<PAGE>
manufacturers. The Company has limited capacity to manufacture the Mammotome
Biopsy System and will be required to increase its in-house capability to
manufacture more of the system's components. There can be no assurance that the
Company will be able to attract, train and retain the required personnel or will
be able to increase its manufacturing capability in a timely manner, or at all.
There can be no assurance that reliable, high-volume manufacturing can be
established or maintained at commercially reasonable costs on a timely basis, or
at all. If the Company is unable to increase its in-house manufacturing
capability, the Company may need to obtain alternative manufacturing facilities
or establish additional contract manufacturing for its products. Delays
associated with, or the inability to establish, such additional capacity could
have a material adverse affect on the Company's business, financial condition
and results of operations.
The Company purchases components used in the Mammotome Biopsy System from
various suppliers. A limited number of parts and components are currently
available only from single sources, including certain components used in the
Mammotome drive unit. The Company is in the process of qualifying additional
sources for these components. There can be no assurance that the Company will
be successful in qualifying any additional sources on a timely basis, or at all.
Medical device companies frequently experience difficulties in obtaining
required quantities of components necessary to manufacture their products. For
example, the industry has experienced shortages of the type of stainless steel
used in the Mammotome probes, and there can be no assurance that such shortages
will not occur in the future. If the Company or any of its contract
manufacturers encounter future manufacturing difficulties, including problems
involving production yields, quality control and assurance, shortages of
components or shortages of qualified personnel, it could have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, prior to international commercialization, the Company will be
required to attain and maintain compliance with GMP requirements and ISO 9001
standards. Failure to either attain or maintain compliance with the applicable
regulatory requirements of various regulatory agencies would have a material
adverse effect on the Company's business, financial condition and results of
operations.
RESULTS OF OPERATIONS
YEARS ENDED JUNE 30, 1996 AND 1995
Net sales for the year ended June 30, 1996 were $3,475,000. The Company
was a development stage company during the year ended June 30, 1995 and had net
sales of $80,000 during that period. The Company commenced commercial shipments
of its Mammotome Biopsy System in August 1995. Net sales for the year ended
June 30, 1996 reflect sales of 220 Mammotome drive units and approximately
15,800 disposable probes.
During the year ended June 30, 1996, cost of sales totaled $1,899,000, or
55% of net sales. In addition to direct material and subassembly costs
associated with products sold, cost of sales also reflects a significant
increase in manufacturing personnel and other overhead costs associated with the
commencement of manufacturing and assembly operations, engineering and support
functions, and materials procurement and handling functions.
Research and development expenses increased 24% to $1,489,000 during the
year ended June 30, 1996 from $1,199,000 during the year ended June 30, 1995.
This increase was primarily due to research and development expenses associated
with the continued development of the 11 and 14 gauge probes and the MicroMark
Clip during the year ended June 30, 1996.
Sales and marketing expenses increased to $2,168,000 during the year ended
June 30, 1996 from $344,000 during the year ended June 30, 1995. This increase
was primarily due to the hiring of sales personnel and increased marketing
activities to support the initial commercial sale of the Mammotome Biopsy System
in August 1995.
General and administrative expenses increased to $1,864,000 for the year
ended June 30, 1996 from $944,000 during the year ended June 30, 1995. The
increase was primarily due to increases in administrative personnel and related
costs associated with the initial commercial sale of the Mammotome Biopsy
System.
Net interest income increased to $478,000 during the year ended June 30,
1996 from net interest expense of $32,000 during the year ended June 30, 1995.
The increase was primarily due to higher cash balances associated with
completion of the Company's Preferred Stock financing in July 1995, and the
Company's initial public offering in May 1996.
-25-
<PAGE>
FISCAL YEAR ENDED JUNE 30, 1995 AND PERIOD FROM JULY 6, 1993 (DATE OF INCEPTION)
THROUGH JUNE 30, 1994
During the fiscal year ended June 30, 1995 and the period from July 6, 1993
(date of inception) through June 30, 1994, the Company was a development stage
company. Net sales of $80,000 for the fiscal year ended June 30, 1995 resulted
from limited shipments of the Mammotome Biopsy System, which began in May 1995
to selected customers. Cost of sales for the fiscal year ended June 30, 1995
were directly related to these initial product shipments.
Research and development expenses increased to $1.2 million for the fiscal
year ended June 30, 1995 from $378,000 for the period ended June 30, 1994. This
increase was due to increased development of the Mammotome Biopsy System and
associated hiring of research and development personnel and consultants, and
increased material and prototype expenses.
Sales and marketing expenses were $344,000 for the fiscal year ended
June 30, 1995. The Company had no sales and marketing expenses for the period
ended June 30, 1994. This increase resulted from the hiring of sales and
marketing personnel and costs associated with the planned commercial
introduction of the Company's Mammotome Biopsy System. For the period ended
June 30, 1994, the Company primarily focused on research and development
activities.
General and administrative expenses increased to $944,000 for the fiscal
year ended June 30, 1995 from $302,000 for the period ended June 30, 1994,
primarily as a result of increased personnel and associated costs related to
product clearances and the establishment of administrative functions to support
the Company's operations.
Interest income for the fiscal year ended June 30, 1995 increased to
$50,000 from $5,000 for the period ended June 30, 1994, primarily as a result of
higher average cash balances throughout the fiscal year ended June 30, 1995.
Interest expense for the fiscal year ended June 30, 1995 of $82,000 resulted
primarily from the amortization of the estimated fair market value of warrants
issued in connection with certain promissory notes issued by the Company in
April and June 1995. See Note 6 of Notes to Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
In May 1996, the Company completed an initial public offering of 2,587,500
shares of common stock (including the underwriters overallotment of 337,500
shares) at $15.00 per share. Net proceeds to the Company were approximately
$35.3 million. From inception through April 1996, the Company financed its
operations primarily through the private placement of equity securities totaling
$9.7 million. These equity securities were converted to common stock upon the
initial public offering. As of June 30, 1996, cash, cash equivalents, short
term and long-term investments totaled $37.4 million. The Company's cash used
in operating activities increased to $3.7 million for the year ended June 30,
1996 from $2.4 million for the year ended June 30, 1995, primarily resulting
from an increase in the Company's net loss due to increased sales and marketing
and general and administrative expenses, and an increase in accounts receivable
and inventories related to the commercial introduction of the Mammotome Biopsy
System. For the fiscal year ended June 30, 1995, cash used in operating
activities increased to $2.4 million from $533,000 for the period ended June 30,
1994 as a result of increased research and development activities, initiation of
marketing activities and increased general and administrative expenses to
support preparation and submission of 510(k) applications for the Mammotome
Biopsy System and the MicroMark Clip.
The Company's principal source of liquidity at June 30, 1996 consisted of
cash, cash equivalents, short term and long term investments of $37.4 million.
The Company has adopted investment guidelines which restrict the types and
quality of investments the Company is authorized to enter into. At June 30,
1996, the Company had invested approximately $2.7 million in money market funds,
approximately $15.7 million in commercial paper and corporate bonds rated a
minimum of A1/P1, and approximately $19.0 million in U.S. government treasury
notes or federal agencies. At June 30, 1996, the Company had no long term debt.
The Company has never had and currently does not have commitments for credit
facilities, such as revolving credit agreements or lines of credit, that could
provide additional working capital.
The Company believes that the proceeds from the initial public offering
together with current cash balances will be sufficient to meet the Company's
operating and capital requirements through fiscal 1997. The Company's future
liquidity and capital requirements will depend on numerous factors, including
the extent to which the Company's Mammotome Biopsy System gains market
acceptance, the timing of regulatory actions regarding the Company's potential
future products, the costs and timing
-26-
<PAGE>
of expansion of sales, marketing and manufacturing activities, obtaining and
enforcing patents important to the Company's business, results of clinical
trials and competition. There can be no assurance that the Company will not be
required to raise additional capital, or that such capital will be available on
acceptable terms, or at all.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Independent Auditors' Report, Consolidated Financial Statements and
Notes to Consolidated Financial Statements begin on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
-27-
<PAGE>
PART III
Certain information required by Part III is omitted from this Report on
Form 10-K in that the Registrant will file a definitive proxy statement within
120 days after the end of its fiscal year pursuant to Regulation 14A with
respect to the 1996 Annual Meeting of Stockholders (the "Proxy Statement") to be
held December 9, 1996 and certain information included therein is incorporated
herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item relating to directors is incorporated
by reference to the information under the caption "Proposal No. 1--Election of
Directors" in the Proxy Statement.
The executive officers of the Registrant, who are elected by the board of
directors, are as follows:
Name Age Position
- -------------------- --- ------------------------------------------------
Steven L. Gex. . . . 41 President, Chief Executive Officer and Director
Steven J. Naber. . . 44 Vice President of Finance and Chief Financial
Officer
Luis J. Berga. . . . 43 Vice President of Manufacturing
Mark A. Cole, Ph.D. 40 Vice President of Medical Affairs
Kenneth M. Galt. . . 45 Vice President of Research and Development
Ellen M. Preston . . 41 Vice President of Marketing
Scott W. Tremberth . 43 Vice President of Sales
STEVEN L. GEX has served as President of the Company since August 1993, a
director of the Company since April 1994 and Chief Executive Officer of the
Company since December 1994. From November 1991 until April 1993, Mr. Gex
served as Vice President of Marketing of Laurus Medical Corporation, a surgical
device company that he co-founded. From August 1988 to June 1991, Mr. Gex
served as Vice President of Marketing of Applied Vascular Devices, Inc., a
medical device company. From September 1989 to March 1991, he also served as a
director of Applied Urology, Inc., an affiliated company. Prior to 1988,
Mr. Gex held senior management positions in marketing, business development and
manufacturing operations at Edwards Laboratories, a division of American
Hospital Supply Corporation. Mr. Gex holds a B.S. in Marketing from San Diego
State University.
STEVEN J. NABER joined the Company in July 1995 as Vice President of
Finance and Chief Financial Officer. From July 1991 to June 1995, Mr Naber
served as Vice President, Finance and Chief Financial Officer of Ioptex
Research, Inc., an ophthalmic device company and a subsidiary of Smith & Nephew
plc. From May 1984 until November 1990, Mr. Naber served as Vice President,
Finance and Chief Financial Officer of Gradco Systems, Inc., a publicly-held
office technology company. Prior to May 1984, Mr. Naber held senior financial
positions with Mattel Electronics, Inc. and Kraft, Inc. Mr. Naber is a
certified public accountant and holds a B.B.A. in Accounting from the University
of Iowa.
LUIS J. BERGA joined the company in September 1996 as Vice President of
Manufacturing. From August 1995 until joining the Company, Mr. Berga served as
Vice President Manufacturing, Cardiovascular for Minnetech Corporation, a
medical device company. From June 1985 to August 1995, he held positions of
increasing responsibility from General Manager to Vice President, Manufacturing
at Baxter Healthcare Corporation. Mr. Berga is a certified professional
engineer and holds a B.S. in Industrial Engineering from the University of
Puerto Rico.
MARK A. COLE, PH.D., has been associated with the Company since its
inception in 1993 and has served as Vice President of Medical Affairs since
April 1994. From 1991 until joining the Company, Dr. Cole was an independent
consultant to medical device companies specializing in research, technology
development, regulatory and clinical affairs and product evaluation. Prior to
1991, Dr. Cole held several senior management positions at Optical Radiation
Corporation, an ophthalmic device manufacturer, and Baxter Healthcare
Corporation. Dr. Cole holds a Ph.D. in Pathology from the University of
Southern California.
-28-
<PAGE>
KENNETH M. GALT joined the Company in April 1994 as Vice President of
Research and Development. From December 1990 until joining the Company,
Mr. Galt was responsible for research, development and engineering functions at
Gish Biomedical, Inc., a cardiovascular device company. Prior to 1990, Mr. Galt
held various senior management positions with Trimedyne Inc., a medical laser
manufacturer, and Shiley Inc. (formerly a division of Pfizer Inc.), a medical
device company. Mr. Galt holds a B.S. in Mechanical Engineering from the
University of New Haven.
ELLEN M. PRESTON joined the Company in April 1996 as Vice President of
Marketing. From February 1988 until March 1996, Ms. Preston was employed by
Vistakon, an ophthalmic products company and a subsidiary of Johnson & Johnson,
in several management positions, most recently as a National Sales Director.
Prior to 1988, Ms. Preston held various sales positions at Ethicon, a subsidiary
of Johnson & Johnson, and American Scientific Products, a division of American
Hospital Supply Corporation. Ms. Preston holds a B.S. in Business from Arizona
State University.
SCOTT W. TREMBERTH joined the Company in July 1995 as Director of Sales and
was appointed Vice President of Sales in August 1996. From April 1992 to
June 1995, Mr. Tremberth served in various sales management positions at Scimed
Life Systems, Inc., a cardiovascular device company acquired by Boston
Scientific Corporation in 1995. From September 1979 to March 1992,
Mr. Tremberth held several sales management positions with Baxter Healthcare
Corporation. Mr. Tremberth holds a B.S. in Economics from Ripon College.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
information under the caption "Executive Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
information under the caption "Record Date and Stock Ownership" in the Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
information under the caption "Certain Transactions" in the Proxy Statement.
-29-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The following Financial Statements of Biopsys Medical, Inc. and
Report of Deloitte & Touche LLP, Independent Auditors are in this
Form 10-K.
Page
----
Report of Deloitte & Touche LLP, Independent Auditors F-1
Balance Sheets, June 30, 1996 and 1995 F-2
Statements of Operations, Years Ended June 30, 1996 F-3
and 1995 and period from July 6, 1993 (Inception) to
June 30, 1994
Statements of Stockholders' Equity (Deficit), Years F-4
Ended June 30, 1996 and 1995 and period from
July 6, 1993 (Inception) to June 30, 1994
Statements of Cash Flows, Years Ended June 30, F-5
1996 and 1995 and period from July 6, 1993
(Inception) to June 30, 1994
Notes to Financial Statements F-7
2. FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule is included in this
Form 10-K.
Page
----
Schedule II - Valuation and Qualifying Accounts for the S-1
Period from July 6, 1993 (Inception) to June 30, 1994 and
the Years Ended June 30, 1995 and 1996.
All other schedules are omitted because they are not applicable
or the required information is shown in the Financial Statements
or the notes thereto.
3. EXHIBITS
Refer to (c) below.
(b) REPORTS ON FORM 8-K
The Company was not required to and did not file any reports on
Form 8-K during the year ended June 30, 1996.
(c) EXHIBITS
EXHIBIT
NO. DESCRIPTION
- ------- ---------------------------------------------------------------------
3.1 (1) Restated Certificate of Incorporation of the Company.
3.2 (1) Bylaws of the Company, as amended.
4.1 (1) Specimen Common Stock Certificate.
10.1(1) Form of Indemnification Agreement between the Company and each of its
directors and officers.
10.2(1) 1993 Stock Plan and Form of Stock Option Agreement thereunder.
10.3(2) 1996 Director Option Plan.
10.4(2) 1996 Employee Stock Purchase Plan and forms of agreements thereunder.
10.5(1) Lease dated December 6, 1995 between the Company and The Irvine
Company for a facility located at 3 Morgan, Irvine, California.
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<PAGE>
10.6(1) Use and Cost Sharing Agreement dated December 1, 1995 between the
Company and Premier Laser Systems, Inc.
10.7(1) Amended and Restated Shareholder Rights Agreement dated July 7, 1995,
as amended between the Company and certain holders of the Company's
securities.
10.8(1) Form of Amendment to Stock Option Agreements.
23.1 Consent of Deloitte & Touche LLP, Independent Auditors.
24.1 Power of Attorney.
27.1 Financial Data Schedule.
- --------------------
(1) Filed as an Exhibit to the Company's Registration Statement on Form
S-1 (File No. 333-2498) and incorporated herein by reference.
(2) Filed as an Exhibit to the Company's Registration Statement on
Form S-8 (File No. 333-09301) and incorporated herein by reference.
-31-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
BIOPSYS MEDICAL, INC.
By: /s/ STEVEN L. GEX
--------------------------------------
Steven L. Gex
PRESIDENT AND CHIEF EXECUTIVE OFFICER
KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Steven L. Gex and Steven J.
Naber, jointly and severally, his or her attorneys-in-fact, and each with the
power of substitution, for him or her in any and all capacities, to sign any
amendments to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his or her substitute or substitutes, may do or cause
to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- -------------------------------------- ------------------------------------------------------------- ------------------
<S> <C> <C>
/s/ STEVEN L. GEX President, Chief Executive Officer and Director September 27, 1996
- -------------------------------------- (Principal Executive Officer)
Steven L. Gex
/s/ STEVEN J. NABER Vice President and Chief Financial Officer (Principal September 27, 1996
- -------------------------------------- Financial and Accounting Officer)
Steven J. Naber
/s/ DAVID W. CHONETTE Director September 27, 1996
- --------------------------------------
David W. Chonette
Director September 27, 1996
- --------------------------------------
Edgar J. Cummins
/s/ THOMAS J. FOGARTY, M.D. Director September 27, 1996
- --------------------------------------
Thomas J. Fogarty, M.D.
/s/ NORWICK B.H. GOODSPEED Director September 27, 1996
- --------------------------------------
Norwick B.H. Goodspeed
/s/ NANCY S. OLSON Director September 27, 1996
- --------------------------------------
Nancy S. Olson
/s/ STEVE H. PARKER, M.D. Director September 27, 1996
- --------------------------------------
Steve H. Parker, M.D.
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Biopsys Medical, Inc.
We have audited the accompanying balance sheets of Biopsys Medical, Inc.
as of June 30, 1996 and 1995, and the related statements of operations,
stockholders' equity (deficit) and cash flows for the years ended June 30,
1996 and 1995, and the period from July 6, 1993 (date of inception) to June
30, 1994. Our audits also included the financial statement schedule listed in
the index at Item 14(a)(2). These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement 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, such financial statements present fairly, in all
material respects, the financial position of Biopsys Medical, Inc. as of June
30, 1996 and 1995, and the results of its operations and its cash flows for
the years ended June 30, 1996 and 1995 and the period from July 6, 1993 (date
of inception) to June 30, 1994, in conformity with generally accepted
accounting principles. Also, in our opinion, such 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.
DELOITTE AND TOUCHE LLP
Costa Mesa, California
August 1, 1996
F-1
<PAGE>
BIOPSYS MEDICAL, INC.
BALANCE SHEETS
ASSETS
JUNE 30,
1995 1996
---------- -----------
CURRENT ASSETS:
Cash and cash equivalents. . . . . . . . . . . . $ 13,000 $12,122,000
Short-term investments (Note 2). . . . . . . . . - 9,405,000
Accounts receivable, net of allowance
of $55,000 (1996) 45,000 985,000
Inventories (Note 3) . . . . . . . . . . . . . . 119,000 1,581,000
Prepaid expenses and other current assets. . . . 66,000 141,000
---------- -----------
Total current assets. . . . . . . . . . . . . . 243,000 24,234,000
LONG-TERM INVESTMENTS (Note 2). . . . . . . . . . - 15,860,000
PROPERTY AND EQUIPMENT, net (Note 4). . . . . . . 173,000 776,000
OTHER ASSETS. . . . . . . . . . . . . . . . . . . - 44,000
---------- -----------
$ 416,000 $40,914,000
---------- -----------
---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . $ 200,000 $ 1,270,000
Accrued expenses, including accrued employee benefits
of $52,000 (1995) and $379,000 (1996) 66,000 561,000
Convertible debt payable to stockholders (Note 6) 588,000 -
---------- -----------
Total current liabilities . . . . . . . . . . . 854,000 1,831,000
COMMITMENTS (Note 8)
MANDATORILY REDEEMABLE PREFERRED STOCK, $0.001
par value; (Note 5):
Series B, 1,333,333 shares designated, issued and
outstanding (1995). . . . . . . . . . . . . 1,975,000 -
STOCKHOLDERS' EQUITY (DEFICIT) (Notes 1 and 5):
Convertible preferred stock, $0.001 par value:
Series A, 833,333 shares designated, issued and
outstanding (1995) . . . . . . . . . . . . . . 620,000 -
Common stock, $0.001 par value; 50,000,000 shares
authorized; 1,785,000 (1995) and 9,716,880 (1996)
shares issued and outstanding. . . . . . . . . 2,000 10,000
Additional paid-in capital . . . . . . . . . . . 113,000 45,092,000
Accumulated deficit. . . . . . . . . . . . . . . (3,148,000) (6,615,000)
Deferred stock option compensation (Note 5). . . - 596,000
---------- -----------
Net stockholders' equity (deficit). . . . . . . (2,413,000) 39,083,000
---------- -----------
$ 416,000 $40,914,000
---------- -----------
---------- -----------
See accompanying notes to financial statements.
F-2
<PAGE>
BIOPSYS MEDICAL, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
JULY 6, 1993
(INCEPTION) YEAR ENDED JUNE 30,
TO JUNE 30, -------------------------
1994 1995 1996
--------- ----------- -----------
<S> <C> <C> <C>
Net sales (Note 9). . . . . . . . . . . . . . . . $ - $ 80,000 $ 3,475,000
Cost of sales . . . . . . . . . . . . . . . . . . - 34,000 1,899,000
--------- ----------- -----------
Gross profit . . . . . . . . . . . . . . . . . - 46,000 1,576,000
Operating expenses:
Research and development . . . . . . . . . . . . 378,000 1,199,000 1,489,000
Sales and marketing. . . . . . . . . . . . . . . - 344,000 2,168,000
General and administrative (Note 8). . . . . . . 302,000 944,000 1,864,000
--------- ----------- -----------
Total operating expenses. . . . . . . . . . . . 680,000 2,487,000 5,521,000
--------- ----------- -----------
Loss from operations. . . . . . . . . . . . . . . (680,000) (2,441,000) (3,945,000)
Interest income . . . . . . . . . . . . . . . . . 5,000 50,000 491,000
Interest expense (Note 6) . . . . . . . . . . . . - (82,000) (13,000)
--------- ----------- -----------
Net loss. . . . . . . . . . . . . . . . . . . . . $(675,000) $(2,473,000) $(3,467,000)
--------- ----------- -----------
--------- ----------- -----------
Net loss per share (Note 1) . . . . . . . . . . . $ (0.43)
-----------
-----------
Weighted average shares outstanding (Note 1). . . 8,029,000
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
BIOPSYS MEDICAL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED NET
STOCK SERIES A COMMON STOCK ADDITIONAL STOCKHOLDERS'
------------------ ------------------ PAID-IN ACCUMULATED DEFERRED EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT COMPENSATION (DEFICIT)
------- -------- --------- ------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES,
July 6, 1993
(date of inception) . . . - $ - - $ - $ - $ - $ - $ -
Net proceeds from issuance
of common stock . . . . - - 340,000 - 10,000 - - 10,000
Issuance of common and
Series A preferred stock
to acquire technology
rights . . . . . . . . . 100,000 75,000 1,440,000 2,000 12,000 - - 89,000
Net proceeds from issuance
of Series A
preferred stock. . . . . 733,333 545,000 - - - - - 545,000
Net loss during development
stage (Note 1) . . . . . - - - - - (675,000) - (675,000)
------- -------- --------- ------- ----------- ----------- ------------ -------------
BALANCES,
June 30, 1994. . . . . . 833,333 620,000 1,780,000 2,000 22,000 (675,000) - (31,000)
Net proceeds from issuance
of common stock . . . . - - 5,000 - 1,000 - - 1,000
Issuance of warrants
(Note 6) . . . . . . . . - - - - 90,000 - - 90,000
Net loss during development
stage (Note 1) . . . . . - - - - - (2,473,000) - (2,473,000)
------- -------- --------- ------- ----------- ----------- ------------ -------------
BALANCES,
June 30, 1995 . . . . . . 833,333 620,000 1,785,000 2,000 113,000 (3,148,000) - (2,413,000)
Proceeds from exercise of
common stock options. . . - - 93,500 - 15,000 15,000
Conversion of
warrants (Note 5) . . . . - - 32,624 - - - - -
Conversion of Series A
preferred Stock . . . . . (833,333) (620,000) 833,333 1,000 619,000 - - -
Conversion of Series B
preferred Stock . . . . . - - 1,333,333 1,000 1,974,000 - - 1,975,000
Conversion of Series C
preferred Stock . . . . . - - 3,051,590 3,000 7,092,000 - - 7,095,000
Net proceeds from issuance
of common stock
(Note 5). . . . . . . . . - - 2,587,500 3,000 35,279,000 - - 35,282,000
Deferred compensation
(Note 5). . . . . . . . . 596,000 596,000
Net loss . . . . . . . . . - - - - - (3,467,000) - (3,467,000)
------- -------- --------- ------- ----------- ----------- ------------ -------------
BALANCES,
June 30, 1996 - $ - 9,716,880 $10,000 $45,092,000 $(6,615,000) $596,000 $ 39,083,000
------- -------- --------- ------- ----------- ----------- ------------ -------------
------- -------- --------- ------- ----------- ----------- ------------ -------------
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
BIOPSYS MEDICAL, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JULY 6, 1993
(INCEPTION) YEAR ENDED JUNE 30,
TO JUNE 30, -------------------------
1994 1995 1996
------------ ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . $ (675,000) $(2,473,000) $ (3,467,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization . . . . . . . . . 66,000 129,000 112,000
Deferred compensation . . . . . . . . . . . . . - - 596,000
Changes in assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . - (45,000) (940,000)
Prepaid expenses and other current assets. . . (6,000) (60,000) (75,000)
Inventories. . . . . . . . . . . . . . . . . . - (119,000) (1,462,000)
Other assets . . . . . . . . . . . . . . . . . - - (49,000)
Accounts payable and accrued expenses. . . . . 82,000 184,000 1,565,000
------------ ----------- ------------
Net cash used in operating activities. . . (533,000) (2,384,000) (3,720,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment. . . . . . (50,000) (151,000) (698,000)
Short-term investment purchases. . . . . . . . . - - (10,921,000)
Short-term investment maturities . . . . . . . . - - 1,516,000
Long-term investment purchases . . . . . . . . . - - (15,860,000)
------------ ----------- ------------
Net cash used in investing activities. . . (50,000) (151,000) (25,963,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible debt . . . - 600,000 -
Net proceeds from issuance of common stock . . . 10,000 1,000 35,282,000
Net proceeds from issuance of Series A
preferred stock. . . . . . . . . . . . . . . . 545,000 - -
Net proceeds from issuance of Series B
preferred stock. . . . . . . . . . . . . . . . 1,975,000 - -
Net proceeds from issuance of Series C
preferred stock. . . . . . . . . . . . . . . . - - 6,495,000
Net proceeds from exercise of
stock options and warrants . . . . . . . . . . - - 15,000
------------ ----------- ------------
Net cash provided by financing activities. 2,530,000 601,000 41,792,000
------------ ----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS. . . . . . . . . . . . . . . . . . . 1,947,000 (1,934,000) 12,109,000
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
BIOPSYS MEDICAL, INC.
STATEMENTS OF CASH FLOWS (CONT.)
<TABLE>
<CAPTION>
PERIOD FROM
JULY 6, 1993
(INCEPTION) YEAR ENDED JUNE 30,
TO JUNE 30, -------------------------
1994 1995 1996
------------ ----------- ------------
<S> <C> <C> <C>
CASH AND CASH EQUIVALENTS, beginning of period. . $ - $ 1,947,000 $ 13,000
------------ ----------- ------------
CASH AND CASH EQUIVALENTS, end of period. . . . . $ 1,947,000 $ 13,000 $ 12,122,000
------------ ----------- ------------
------------ ----------- ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for income taxes . . . . . . . . . . . $ 800 $ 800 $ 800
------------ ----------- ------------
------------ ----------- ------------
Cash paid for interest . . . . . . . . . . . . . $ - $ - $ 1,000
------------ ----------- ------------
------------ ----------- ------------
</TABLE>
During the period from July 5, 1993 (date of inception) to June 30,
1994, the Company issued common and preferred stock (see Note 5) in exchange
for rights to certain technology related to the Company's Mammotome Biopsy
System.
In July 1995, the Company issued 257,510 shares of Series C redeemable
preferred stock in repayment of debt totaling $600,000 (see Note 6).
In May 1996, the Company's 833,333, 1,333,333 and 3,051,590 shares of
Series A, B and C preferred stock, respectively, were converted into shares
of common stock at a rate of one-to-one (see Note 5). During the year ended
June 30, 1996, dividends totaling $418,000 were accrued and subsequently
canceled and reversed against the Company's accumulated deficit (see Note 5).
See accompanying notes to financial statements.
F-6
<PAGE>
BIOPSYS MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS
1. GENERAL AND SIGNIFICANT ACCOUNTING POLICIES
Biopsys Medical, Inc. ("Biopsys" or the "Company") designs, develops,
manufactures and markets products for the diagnosis of breast cancer. The
Company's principal product, the Mammotome Biopsy System, represents a
less-invasive alternative to open surgical biopsy. The Company was formed on
July 6, 1993. The Company was in the development stage through June 30, 1995.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles necessarily requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from
these estimates.
CASH AND CASH EQUIVALENTS - All highly-liquid investments purchased with
an original maturity of three months or less are considered to be cash
equivalents.
PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost;
consist primarily of computers, furniture and machinery; and are depreciated on
a straight-line basis over their estimated useful lives of five years.
FAIR VALUE OF FINANCIAL INSTRUMENTS - Statement of Financial Accounting
Standards (SFAS) No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS,
requires management to disclose the estimated fair value of certain assets and
liabilities defined by SFAS No. 107 as financial instruments. Financial
instruments are generally defined by SFAS No. 107 as cash, evidence of ownership
interest in equity, or a contractual obligation that both conveys to one entity
a right to receive cash or other financial instruments from another entity and
imposes on the other entity the obligation to deliver cash or other financial
instruments to the first entity. At June 30, 1996, management believes that the
carrying amount of cash, accounts receivable, accounts payable and accrued
expenses approximate fair value because of the short maturity of these financial
instruments.
REVENUE RECOGNITION - Revenues from product sales are recognized upon
shipment of products to customers, who consist of physicians, hospitals and
breast imaging centers. The Company offers credit to its customers and performs
ongoing credit evaluations of its customers.
INVENTORIES - Inventories are stated at the lower of cost (first-in,
first-out method) or market.
INCOME TAXES - The Company accounts for income taxes using SFAS No. 109,
ACCOUNTING FOR INCOME TAXES, which requires that the Company recognize deferred
tax assets and liabilities based on the differences between the financial
statement carrying amounts and the tax bases of assets and liabilities, using
enacted tax rates in effect in the years in which the differences are expected
to reverse. A valuation allowance related to deferred tax assets is recorded
when it is more likely than not that some portion or all of the deferred tax
asset will not be realized.
SOFTWARE DEVELOPMENT COSTS - Costs incurred in the research and
development of new software products and enhancements to existing software
products are expensed as incurred until technological feasibility has been
established. After technological feasibility is established, any additional
costs are capitalized in accordance with SFAS No. 86, ACCOUNTING FOR THE COST
OF COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED. For the year
ended June 30, 1996, the Company capitalized software development costs
totaling $50,000, representing costs incurred subsequent to the establishment
of technical feasibility. Capitalized software development costs are
included in other assets and are being amortized over the greater of the
straight-line method over two years or the ratio of actual sales to
anticipated sales.
F-7
<PAGE>
NET LOSS PER SHARE - Net loss per share has been computed by dividing the
net loss by the weighted average number of common and common equivalent shares
outstanding during the period. Pursuant to Securities and Exchange Commission
Staff Accounting Bulletin Topic 4D, stock options granted during the twelve
months prior to the date of the initial filing of the Company's Form S-1
Registration Statement have been included in the calculation of common
equivalent shares using the treasury stock method, as if they were outstanding
as of the beginning of each period presented. Historical net loss per share is
not presented as it is not indicative of the ongoing entity.
AMENDED ARTICLES OF INCORPORATION - In March 1996, the Company amended its
Articles of Incorporation to increase the number of shares of common stock
authorized to 50,000,000. The amended Articles of Incorporation also authorize
5,256,916 shares of preferred stock and an additional 5,000,000 shares of
blanket preferred stock, the rights and preferences of which may be established
by the Company's Board of Directors.
NEW ACCOUNTING PRONOUNCEMENT - In October 1995, the Financial Accounting
Standards Board issued SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION.
The Company has determined that it will not change to the fair value method and
will continue to use Accounting Principles Board Opinion No. 25 for measurement
and recognition of employee stock-based transactions (see Note 5).
2. SHORT-TERM AND LONG-TERM INVESTMENTS:
The carrying value and market value of the Company's fixed maturity short-
term and long-term investments which are classified as held-to-maturity at
June 30, 1996 were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
CARRYING UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
Short-term investments
Corporate debt and United States
government agency securities $ 9,405,000 - - $ 9,405,000
Long-term investments
United States Treasury Obligations
maturing within 1 to 2 years $ 15,860,000 $ 28,000 - $ 15,888,000
</TABLE>
The Company did not have any short-term or long-term investments at June
30, 1995.
3. INVENTORIES
Inventories consist of the following at June 30:
1995 1996
--------- ----------
Raw materials. . . . . . . . . . . . . . . . . . $ 35,000 $ 768,000
Work-in-process. . . . . . . . . . . . . . . . . 86,000 629,000
Finished goods held for sale . . . . . . . . . . 5,000 247,000
--------- ----------
126,000 1,644,000
Less valuation reserve . . . . . . . . . . . . . (7,000) (63,000)
--------- ----------
$ 119,000 $1,581,000
--------- ----------
--------- ----------
F-8
<PAGE>
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at June 30:
1995 1996
--------- ----------
Machinery and equipment. . . . . . . . . . . . . $ 74,000 $ 470,000
Office furniture and equipment . . . . . . . . . 125,000 427,000
--------- ----------
199,000 897,000
Less accumulated depreciation. . . . . . . . . . (26,000) (121,000)
--------- ----------
$ 173,000 $ 776,000
--------- ----------
--------- ----------
5. SHAREHOLDERS' EQUITY
SERIES C PREFERRED STOCK - In July 1995, the Company issued 2,794,080
shares of Series C redeemable preferred stock for $2.33 per share, resulting in
net proceeds of $6,495,000. In conjunction with this transaction, convertible
debt payable to stockholders totaling $600,000 was converted into 257,510 shares
of Series C preferred stock (see Note 6).
INITIAL PUBLIC OFFERING - In May 1996, the Company completed an initial
public offering of 2,587,500 shares of the Company's common stock for $15.00 per
share, netting proceeds to the Company after underwriting discounts and expenses
of approximately $35.3 million. Additionally, upon completion of the initial
public offering, warrants to purchase 32,624 shares of the Company's common
stock were exercised (see Note 6).
Upon completion of the initial public offering, the Company's 833,333,
1,333,333 and 3,051,590 outstanding shares of Series A, B and C preferred stock,
respectively, were converted into shares of common stock at a rate of one to
one. Additionally, accrued dividends totaling $418,000 were canceled and
reversed against the Company's accumulated deficit.
STOCK OPTION PLANS - During 1993, the Company adopted and later amended a
Stock Option Plan (the "Plan") under which nonstatutory or incentive stock
options to acquire shares of the Company's common stock may be granted to
employees and nonemployees of the Company. The Plan is administered by the
Board of Directors (the "Administrator") and permits the issuance of options for
the purchase of up to 2,000,000 shares of the Company's common stock at exercise
prices of not less than the fair market value of the underlying shares on the
date of grant. Options granted under the Plan are exercisable over a period of
time (generally not to exceed ten years), designated by the Administrator and
are subject to other terms and conditions as determined by the Administrator.
F-9
<PAGE>
The following table summarizes the activity under the Plan for the periods
indicated:
EXERCISE
OPTIONS PRICE PER
OUTSTANDING SHARE
----------- -------------
Outstanding at July 6, 1993. . . . . . . . . . . -
Granted . . . . . . . . . . . . . . . . . . . . 616,000 $0.08 - $0.15
---------
Outstanding at June 30, 1994 . . . . . . . . . . 616,000
Granted . . . . . . . . . . . . . . . . . . . . 234,000 $0.15
Exercised . . . . . . . . . . . . . . . . . . . (5,000)
---------
Outstanding at June 30, 1995 . . . . . . . . . . 845,000
Granted . . . . . . . . . . . . . . . . . . . . 710,000 $0.23 - $12.00
Exercised . . . . . . . . . . . . . . . . . . . (93,500)
Canceled. . . . . . . . . . . . . . . . . . . . (17,355)
---------
Outstanding at June 30, 1996 . . . . . . . . . . 1,444,145
---------
---------
At June 30, 1996, options to purchase 452,733 shares were exercisable.
During the year ended June 30, 1996, options were granted for the purchase
of up to 710,000 common shares at a price ranging from $0.23 to $12.00 per
share. The Company will record compensation expense resulting from the
difference between the respective grant price per share and the estimated fair
market value of the common stock at the dates of grant ($1.17 for July 1995
grants, $2.33 for October and November 1995 grants, and $7.00 for January 1996
grants), totaling $1,144,000. This amount will be recorded ratably over the
vesting period of the respective options. For the year ended June 30, 1996, the
Company recorded $596,000 of deferred compensation expense associated with these
stock option grants.
In March 1996, the Company's Board of Directors approved the 1996 Director
Option Plan (the "Director Plan") and the 1996 Employee Stock Purchase Plan (the
"Purchase Plan"). The Director Plan and the Purchase Plan each have a total of
150,000 shares of common stock reserved for issuance thereunder. As of June 30,
1996, options to purchase 20,000 shares have been granted and are outstanding at
an exercise price of $15 per share under the Director Plan, and no options have
been issued under the Employee Stock Purchase Plan.
6. CONVERTIBLE DEBT PAYABLE TO STOCKHOLDERS
Convertible debt payable to stockholders was issued in April and June 1995
and consists of promissory notes aggregating $600,000, net of unamortized debt
discount. The outstanding balance of the promissory notes converted into
257,510 shares of Series C preferred stock upon completion of the Series C
financing (see Note 5). In conjunction with these promissory notes, the Company
issued warrants to purchase approximately 32,624 shares of equivalent securities
issued in the next offering for $0.01 per share. The estimated fair value of
the warrants ($90,000) at the date of issuance was recorded as an increase to
paid-in capital and allocated to the promissory notes as a debt discount and was
fully amortized in July 1995.
F-10
<PAGE>
7. INCOME TAXES
Deferred income tax benefits result from the recognition of temporary
differences between financial statement and income tax reporting of income and
expenses. These differences are related primarily to net operating loss
carryforwards, research and development credit carryforwards, inventory and bad
debt reserves, deferred stock option compensation and capitalized research and
development expenses. The components of the Company's deferred tax asset, which
is fully offset by a valuation allowance, are as follows at June 30:
1995 1996
---------- -----------
Net operating losses . . . . . . . . . . . . . . $1,060,000 $ 2,273,000
Research and development credit. . . . . . . . . 16,000 182,000
Inventory and bad debt reserve . . . . . . . . . 3,000 49,000
Deferred stock option compensation . . . . . . . - 250,000
Capitalized research and development expenses. . - 144,000
---------- -----------
1,079,000 2,898,000
Valuation allowance. . . . . . . . . . . . . . . (1,079,000) (2,898,000)
---------- -----------
$ - $ -
---------- -----------
---------- -----------
Net operating losses and research and development credit carryforwards
available to reduce future taxes for tax reporting begin to expire in 2008.
Additionally, under Section 382 of the Internal Revenue Code, which limits a
company's ability to utilize net operating losses generated prior to an
ownership change, approximately $191,000 of the Company's deferred tax asset
related to net operating loss carryforwards is limited as to its utilization.
Any subsequent changes in ownership may affect the Company's ability to utilize
net operating losses generated prior to the ownership change.
8. COMMITMENTS
OPERATING LEASES - The Company leases its corporate office, research and
development and manufacturing facility under an operating lease which expires in
1999. Rent expense totaled $123,000, $61,000 and $17,000 during the years ended
June 30, 1996 and 1995 and the period from July 6, 1993 (date of inception) to
June 30, 1994, respectively. Future commitments at June 30, 1996 under this
lease total $109,000, $112,000 and $57,000 for the years ended June 30, 1997,
1998 and 1999, respectively.
RETIREMENT SAVINGS PLAN - The Company has a retirement savings plan (the
"401(k) Plan") which qualifies under Section 401(k) of the Internal Revenue
Code. Eligible employees may contribute up to $9,500 of their annual
compensation, as defined by the 401(k) Plan. Company contributions are fully
discretionary. As of June 30, 1996, the Company has not made any contributions
to the 401(k) Plan.
9. CERTAIN CONCENTRATIONS
CUSTOMER CONCENTRATIONS - During the year ended June 30, 1995, three
customers comprised 18.8%, 16.2% and 11.4% of the Company's net sales. No
customers comprised in excess of 5% of net sales during the year ended June 30,
1996.
VENDOR CONCENTRATIONS - Certain components of the Company's products are
currently available from single sources. Additionally, shortages of the type of
stainless steel used in the Mammotome probe have existed in the past. Any
disruption in the supply of materials and components used in the Company's
products could adversely affect the Company's results of operations.
F-11
<PAGE>
BIOPSYS MEDICAL, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE PERIOD FROM JULY 6, 1993 (INCEPTION)
TO JUNE 30, 1994 AND THE YEARS ENDED JUNE 30, 1995 AND 1996
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END
CLASSIFICATIONS OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
For the period from July 6, 1993 (inception)
to June 30, 1994
Allowance for doubtful accounts $ - $ - $ - $ -
Allowance for inventory obsolescence $ - $ - $ - $ -
Year ended June 30, 1995
Allowance for doubtful accounts $ - $ - $ - $ -
Allowance for inventory obsolescence $ - $ 7,000 $ - $ 7,000
Year ended June 30, 1996
Allowance for doubtful accounts $ - $56,000 $(1,000) $55,000
Allowance for inventory obsolescence $7,000 $56,000 $ - $63,000
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- -------------------------------------------------
23.1 Consent of Deloitte & Touche LLP, Independent Auditors.
27.1 Financial Data Schedule.
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Number
333-09301 on Form S-8, pertaining to the Biopsys Medical, Inc. 1993 Stock
Plan, 1996 Director Option Plan and 1996 Employee Stock Purchase Plan, of our
report dated August 1, 1996, on the financial statements of Biopsys Medical,
Inc. appearing in this Annual Report on Form 10-K of Biopsys Medical, Inc.
for the year ended June 30, 1996.
DELOITTE & TOUCHE LLP
Costa Mesa, California
September 27, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BIOPSYS
MEDICAL, INC.'S JUNE 30, 1996 FORM 10-K AND THE ACCOUNTANTS REPORT CONTAINED
IN THE "F" PAGES HEREIN AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 12,122,000
<SECURITIES> 9,405,000
<RECEIVABLES> 1,040,000
<ALLOWANCES> 55,000
<INVENTORY> 1,581,000
<CURRENT-ASSETS> 24,234,000
<PP&E> 897,000
<DEPRECIATION> 121,000
<TOTAL-ASSETS> 40,914,000
<CURRENT-LIABILITIES> 1,831,000
<BONDS> 0
0
0
<COMMON> 10,000
<OTHER-SE> 39,073,000
<TOTAL-LIABILITY-AND-EQUITY> 40,914,000
<SALES> 3,475,000
<TOTAL-REVENUES> 3,475,000
<CGS> 1,899,000
<TOTAL-COSTS> 1,899,000
<OTHER-EXPENSES> 5,521,000
<LOSS-PROVISION> 55,000
<INTEREST-EXPENSE> 13,000
<INCOME-PRETAX> (3,467,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,467,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,467,000)
<EPS-PRIMARY> (.43)
<EPS-DILUTED> (.43)
</TABLE>
