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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report: January 31, 1997
UROMED CORPORATION
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(Exact name of registrant as specified in its charter)
Massachusetts 000-23266 04-3104185
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(State or Other (Commission File Number) (I.R.S. Employer
Jurisdiction of Identification No.)
Incorporation)
64A Street, Needham, Massachusetts 02194
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Address of principal executive offices
Registrant's telephone number, including area code: (617)433-0033
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Item 5. Other Events
Update of Certain Information relating to UroMed Corporation (the
"Company"). In October 1996, the Company issued and sold $69,000,000 of its
6% Convertible Subordinated Notes due October 15, 2003 (the "Notes") to
Goldman, Sachs & Co., PaineWebber Incorporated and J.P. Morgan Securities
Inc. (collectively, the "Initial Purchasers"), in a transaction (the
"Initial Sale"), exempt from the registration requirements of the Securities
Act of 1933, as amended (the "Securities Act"). Subsequent to the Initial
Sale, the Initial Purchasers offered and sold the Notes (the "Offering") to
(i) certain "qualified institutional buyers" under Rule 144A under the
Securities Act, (ii) certain institutional accredited investors in a manner
exempt from the registration requirements of the Securities Act, and (iii)
through their selling agent, Goldman Sachs International, in offshore
transactions in reliance on Regulation S under the Securities Act. In
connection therewith, on January 10, 1996, the Company filed an S-3 in
connection with reoffers and resales of the Notes and Common Stock. The
Company is filing this Current Report, in connection with the S-3
Registration Statement, to provide the following information:
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This Report contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), including statements in "the
Company", "Use of Proceeds of the Initial Sale", and "Business" regarding (i)
the planned progression of the Company's commercialization strategies for the
Reliance Insert and Impress-TM- Miniguard, including the timing and extent of
initial sales in the United States and abroad, (ii) the planned increases in
manufacturing capacity for the Reliance Insert and the Impress Miniguard,
including the timing and extent of expenditures needed for capital equipment
and inventory production, (iii) consumer acceptance of the use of the
Reliance Insert and Impress Miniguard as strategies for the self-care of UI
and the size and accessibility of the Company's target markets, (iv) the
protection which may be provided by the Company's patents and related
technology in the area of treatment of incontinence, (v) the Company's
planned uses for the net proceeds of the sale of the Notes and other liquid
resources, and (vi) the extent of future revenues, expenses and results of
operations and the sufficiency of the Company's financial resources to meet
planned operational costs and other expenditure needs. These forward-looking
statements are based largely on the Company's expectations and are subject to
a number of risks and uncertainties, many of which are beyond the Company's
control. Actual results could differ materially from these forward-looking
statements as a result of certain factors. In light of these risks, including
particularly the following risks and uncertainties and those described under
the heading "Risk Factors", there can be no assurance that any
forward-looking statements contained in this Report will prove to be accurate:
- - The uncertainty that the Reliance Insert and the Impress Miniguard will
gain market acceptance either among physicians or UI sufferers in the
United States or in Europe and the risk that the adverse effects
experienced by some of the parties enrolled in clinical trials of the
Company's Reliance Insert will be more prevalent in widespread consumer
use of such products and that such effects will affect the market
acceptance of these products.
- - The dependence by the Company on the success of two products, the Reliance
Insert and the Impress Miniguard , neither of which has been widely
marketed.
- - The uncertainty that the Company will be able to develop the ability to
produce commercial quantities of its products and produce such quantities
at an acceptable cost.
- - The uncertainty that the Company will be able to develop an effective sales
force and implement a successful marketing plan for the Reliance Insert
and the Impress Miniguard in the United States.
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- - The Company's dependence on others for raw materials and certain components
of its products, including certain materials available only from single
sources.
- - The effect of competing products and surgical and non-surgical alternative
treatments for incontinence.
- - The uncertainty that the Company will be able to develop an effective
distribution network and implement a successful distribution strategy for
the Company's products in the United States, Europe and elsewhere.
- - The uncertain protection afforded the Company by its patents and other
intellectual property relating to the Reliance Insert and the Impress
Miniguard.
- - The uncertainty whether the Company will be able to achieve medical
reimbursement for the Reliance Insert or the Impress Miniguard in the
United States or in all the European markets targeted for the Company's
products.
- - The uncertainty whether the Company will be able to manufacture, market
and sell its products at prices that permit it to achieve satisfactory
margins in the production and marketing of its products.
- - Risks relating to FDA or other governmental oversight of the Company's
operations, including the possibility that the FDA could impose costly
additional labeling requirements on, or restrict the marketing of, the
Company's products, or suspend operations at one or more of the Company's
facilities.
THE COMPANY
Overview
UroMed Corporation (the "Company" or "UroMed") is focused on the
development, manufacture and marketing of products for the management of
urological and gynecological disorders. The Company's first two products,
the Reliance-Registered Trademark- Insert (the "Reliance Insert") and
Impress-TM- Miniguard (the "Impress Miniguard"), are intended for the
management of certain types of female urinary incontinence ("UI"). UI is the
loss of bladder control resulting in the involuntary leakage of urine in
amounts considered to be a social or personal problem. According to
published sources, there are more than 10.0 million UI sufferers in the
United States, of which approximately 85% are women. The Company has
initially identified a target market of approximately 1.5 million UI
sufferers whose UI condition is of a level such that management by the use of
the Reliance Insert would be medically appropriate and who meet certain
target demographics. The Impress Miniguard is designed for a broader group
of approximately 3.5 million additional UI sufferers in the United States
whose UI condition is mild to moderate.
The Reliance Insert. The Reliance Insert was cleared by the United States
Food and Drug Administration (the "FDA") for marketing in the United States
in August 1996 based upon a Pre-Marketing Approval application filed by the
Company. The Reliance Insert is a prescription, small, balloon-tipped,
single-use plug designed to be inserted in the urethra and inflated to block
the flow of urine from the bladder to the urethra. The Company has completed
its manufacturing and marketing scale-up and expects commercialization of the
Reliance Insert to continue in 1997. The Reliance Insert is currently
commercially available in seven European countries: the United Kingdom, The
Netherlands, Sweden, Finland, Norway, Denmark and Germany under marketing and
sales agreements with subsidiaries or divisions of Astra A.B. and Byk Gulden
Lomberg. In addition, the first phase of the Company's commercial launch of
the Reliance Insert in France commenced in October 1996 by its French
distributor, a subsidiary of Synthelabo S.A.
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The Impress Miniguard. The Impress Miniguard was cleared by the FDA for
marketing in the United States in May 1996 on the basis of a 510(k)
Notification application. The Impress Miniguard is a small, prescription,
disposable adhesive patch designed to be placed externally against the
urinary opening to block the leakage of urine in mild to moderate UI
patients. The Impress Miniguard technology was acquired from the successor
to Advanced Surgical Intervention, Inc. in May 1996 for a combination of
cash and shares of Common Stock collectively valued at $30.0 million. The
Company is developing a marketing plan for the commercial launch of the
Impress Miniguard in the United States, which is currently expected to occur
in late 1997 or early 1998. The Company is also developing the commercial
manufacturing process for the Impress Miniguard.
The consequences of UI, including depression, discomfort and
embarrassment about appearance and odor, are significant and often result in
a dramatic change in quality of life. The majority of incontinent women
currently manage their condition with diapers and other absorbent products.
Based on an industry source, the Company estimates that retail sales of adult
diapers and other absorbent products were over $1.0 billion in 1995. Based
on its market research, the Company has concluded that patients are generally
dissatisfied with the current options available for the management of UI.
The Company believes that the Reliance Insert and Impress Miniguard both
provide new approaches to managing certain types of female UI. The intended
benefits of the Reliance Insert, such as convenience, ease-of-use,
non-invasive nature of treatment and broad applicability, are similar to
those conferred by a tampon in the case of menstruation; the Impress
Miniguard provides a complementary solution to a broader range of mild to
moderate UI sufferers.
The Company has established a 49-person direct sales force experienced in
the sales of medical devices and new products and has developed a three-phase
marketing strategy for the Reliance Insert in the United States. The Company
targeted a select group of urologists and urogynecologists for the initial
marketing of the Reliance Insert during the last two months of 1996 and
expects to continue this marketing effort into the first quarter of 1997.
The Company will continue to target this group in order to build core groups
of experienced prescribing physicians and consumers. Once these objectives
have been achieved, the Company intends to target a wider range of
physicians, including additional urologists and a select group of
gynecologists, in the second phase of its marketing roll-out program. The
Company expects to commence this second phase in the second quarter of 1997.
The third phase of the Company's marketing roll-out strategy, expected to
begin in mid-1997, will involve marketing to a much broader group of
physicians, as well as a consumer-oriented educational marketing program.
This program will include the placement of patient-educational advertisements
in general circulation publications designed to encourage UI sufferers to
discuss their problem with their physicians.
The Company is also establishing an innovative direct-to-consumer
distribution system under which it expects that, after initial prescription
by a physician, its Reliance Insert and Impress Miniguard would be shipped
directly to consumers following telephone orders. To fulfill these orders,
the Company has established a fulfillment center in New Hampshire with a
licensed pharmacist on staff.
The Company's strategy is to build growth by focusing on the development,
manufacturing and marketing of innovative products for the large and
underserved urological and gynecological markets. The Company's near-term
goals include (i) successful commercialization of the Company's initial
products, the Reliance Insert and Impress Miniguard, in the United States and
abroad, including the development of additional in-house commercial-quantity
manufacturing capacity, (ii) the development and deployment of a
highly-experienced sales force focused on urologists and gynecologists, (iii)
the development of an innovative direct-to-consumer distribution system that
will focus on building relationships with the Company's consumers, and (iv)
the continued development and possible acquisition or in-licensing of other
complementary products that could be
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commercialized rapidly and efficiently by the Company through leverage of its
developing sales force and distribution system.
The Company's current manufacturing operations are located in a 40,000
square foot manufacturing facility in Needham, Massachusetts, where the
Company has two lines of automated equipment dedicated to the
commercial-scale production of its Reliance Insert.
Strategy
The principal elements of the Company's strategy are as follows:
- Focus on urology and gynecology. The Company focuses on
developing patient-driven solutions to address significant medical
needs in the large and underserved urological and gynecological
markets. The Company believes that it has developed expertise in
these segments, particularly in the area of incontinence and in
selected other areas, through its development efforts, clinical
trials and significant interaction with physicians and patients.
Moreover, the Company believes that the opportunities that exist in
these segments can be served effectively by a highly experienced
sales and marketing organization and an effective
direct-to-consumer distribution system.
- Commercialize initial products. The Company is currently focusing
on the commercialization of its first two products, the Reliance
Insert and the Impress Miniguard. The Company is in the final
stages of hiring a highly experienced sales force to focus
initially on the marketing of the Reliance Insert to urologists and
gynecologists. The Company believes that it will be able to
leverage the experience and relationships developed by this sales
force, which it believes is one of the only specialty sales forces
concentrating solely on urology and gynecology office practices, to
commercialize the Impress Miniguard and other products that may be
developed, acquired or in-licensed by the Company in the United
States. The Company has established marketing and sales
relationships with several healthcare companies to commercialize
the Reliance Insert in certain countries in Europe, and intends to
pursue additional such relationships to commercialize the Impress
Miniguard overseas.
- Develop and leverage a direct-to-consumer distribution system. The
Company is developing an innovative, customized direct-to-consumer
distribution system in the United States. The Company expects that
the majority of its sales will be made through this system directly
by mail order to its customers pursuant to prescriptions telephoned
or faxed by a physician's office to the Company's licensed
pharmacy. The Company believes that this approach will permit it
to develop and maintain close and cost-effective interaction with
its patients, which will allow the Company to serve the needs of
its patients quickly and appropriately and gain information that
could be useful in developing new products. The Company intends to
leverage its customer base and distribution system in the future
with additional products designed to serve its target markets.
- Establish automated manufacturing capability to manufacture the
Reliance Insert and Impress Miniguard in commercial quantities.
The Company has developed a proprietary automated, modular
manufacturing process which gives it the ability to manufacture its
Reliance Insert in commercial quantities on its two existing lines
of automated manufacturing equipment. To meet anticipated demand,
the Company ordered an additional line of equipment in 1996 to
increase its manufacturing capacity for the Reliance Insert. The
Company is in the process of developing a
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proprietary manufacturing process for its Impress Miniguard in
preparation for the commercial launch of the product, currently
scheduled for late 1997 or early 1998.
- Supplement internal research and development efforts through
acquisitions and licensing of complementary products and
technologies. The Company intends to continue its research and
development efforts in the urological and gynecological markets
(both within and outside of continence care). In addition, the
Company may seek to acquire the rights to manufacture and market
additional products either through acquisition, as in the case of
the Impress Miniguard, or in-licensing activities, as opportunities
may arise in the future. The Company is seeking to develop, and
will consider acquiring or in-licensing, other technology or
products which it believes it could commercialize effectively by
leveraging its developing sales force, distribution capacity and
physician and patient customer base.
Background
The urinary tract aids the body in eliminating waste. The kidneys
process blood at a high rate and filter waste products from the circulatory
system, creating urine to remove the waste. The ureters drain urine from the
kidneys into the bladder, which serves as a reservoir (storage capacity
ranges from approximately one-quarter to one-half liter) until urination.
The urinary sphincter is a muscle at the base of the bladder which surrounds
the bladder neck and urethra and aids the bladder in maintaining continence.
The urethra is the tube through which urine flows when the bladder empties.
Urinary Continence
In the normal urinary tract, continence, or appropriate storage of urine,
is maintained by a complex interplay of anatomic structures. In a normal
system, the bladder neck and the urinary sphincter work in a coordinated
fashion to act as a valve. During urination, the urethra and urinary
sphincter muscle relax and open, the bladder contracts and the bladder neck
opens, all in a coordinated fashion, causing the passage of urine. In normal
continence, when the bladder neck opens involuntarily in response to
intra-abdominal pressure, the lower portion of the urinary sphincter tightens
in turn so as to maintain continence. Similarly, the urethra is also under
muscular control so as to keep this tube closed during the urine storage
phase.
A malfunction in any part of this system can cause incontinence. The
most common anatomic incontinence pathology is bladder neck or urethra
hypermobility, which results from a lack of bladder neck support caused
primarily by weak surrounding tissue. The weakening of tissue surrounding
the bladder, urethra and bladder neck arises most commonly in women as a
consequence of pelvic trauma caused by pregnancy and childbirth. Other
causes of incontinence include physiological, anatomical and neurological
disorders.
Incidence and Types of UI
According to published sources, there are approximately 10.0 million UI
sufferers in the United States, of which approximately 85% are women. UI
afflicts women of all ages, primarily those over 40, and tends to get worse
over time. The Company believes that UI is more prevalent among women as
compared to men primarily because women do not have a prostate to aid in
occluding (or closing) the urethra; women have far shorter urethras (and
hence less occlusive force); and, most importantly, women suffer significant
pelvic trauma during pregnancy and childbirth. In pregnancy and childbirth,
a woman's pelvic nerves and muscles are stretched to a great degree and, as a
result, the continence function is often impaired. UI therefore shows an
increase in incidence as a function of the number of children born to a woman.
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There are three major types of UI, described as follows: Stress
incontinence refers to the involuntary loss of urine during coughing,
laughing, sneezing, jogging or any other physical activity that causes a
sufficient increase in intra-abdominal pressure. Stress incontinence is the
most common type of UI in women under 60. This condition varies in severity
from those women who leak urine as a result of certain sudden movements or
physical activities to those who leak urine simply upon standing up. Stress
incontinence is caused by one of two conditions: (i) hypermobility, a lack of
anatomic stability caused primarily by weak surrounding tissue, which results
in the abnormal movement of the bladder neck and urethra in response to
sufficient intra-abdominal pressure or exertion; or (ii) intrinsic
sphincteric deficiency, or the inability of the urinary sphincter valve
muscle to function properly. Hypermobility is the more common cause of
stress incontinence, accounting for approximately 85% of all stress
incontinence cases, while intrinsic sphincteric deficiency is less common,
accounting for approximately 15% of all stress incontinence cases. Urge
incontinence refers to the involuntary loss of urine due to an unwanted
bladder contraction which is associated with a strong, uncontrollable desire
to urinate, often referred to as urgency. Causes of urge incontinence
include an overactive bladder muscle, neurologic abnormalities, such as those
caused by a stroke, and urethral instability or abnormal relaxation patterns.
Mixed incontinence is a mixture of stress and urge incontinence.
The Company estimates that approximately 60% to 70% of female UI
sufferers in the United States suffer from stress incontinence or mixed
incontinence in which the urge component is relatively mild or moderate. The
Reliance Insert and Impress Miniguard were designed for the management of
certain types of stress incontinence, including the stress incontinence
component of mixed incontinence of the type described above.
Market Overview
In addition to being a serious health problem, UI is also associated with
significant costs to the health care system. According to published sources,
the direct costs of caring for persons of all ages with incontinence in the
United States aggregate more than $15.0 billion annually. The Company
believes, based on its market research, that only approximately 2.5 million
of the women who suffer from UI in the United States discuss their UI
disorder with a gynecologist, urologist or urogynecologist during an annual
visit.
Current Treatments
Gynecologists, urologists and urogynecologists currently deal with a
woman's incontinence by following a program of therapy that corresponds to
the severity of the condition and the physician's familiarity with available
treatment methods. Most women tend to manage their disorder by using
diapers, pads or other absorbent products. Current treatments include:
surgery; indwelling, or Foley, catheters; behavioral therapy, pelvic muscle
training exercises and related techniques; implantable devices and injectable
materials; vaginal pessaries; and pharmaceuticals.
Adult diapers and pads, which capture urine upon leakage, function
similarly to baby diapers. While these products have improved over the last
several years, major disadvantages include the lack of control over urine
flow, the embarrassment about appearance and odor, the perceived social
stigma, the bulky size, the inconvenience, the lack of dryness and the
significant compromise of freedom in one's lifestyle. However, patients do
have the convenience and privacy of purchasing these products without seeing
a physician. Based on various industry sources and its own market research,
the Company estimates that the typical UI sufferer in the United States who
regularly uses adult diapers and specialized incontinence pads spends
approximately $1,000 to $1,500 per year on these products, and that retail
sales of these and other absorbent products were over $1.0 billion in 1995.
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Surgery is more appropriate for stress incontinence than for urge or
mixed incontinence and, unlike other possible therapies, is intended to be
curative. In these procedures, the physician elevates and stabilizes the
urethra and the bladder neck in order to prevent hypermobility. Surgeries of
this nature are delicate and complicated procedures in which outcomes are
generally varied. Current surgical procedures require vaginal or abdominal
incisions and are typically performed under general anesthesia. As such,
surgery is expensive and traumatic, often involving an inpatient procedure, a
hospital stay and a period of several weeks until full recovery.
An indwelling, or Foley, catheter is a balloon-tipped tube inserted
through the urethra into the patient's bladder in order to allow bladder
drainage directly through the tube into a urine collection bag. The
principal advantages of this technique are that a UI patient typically
remains dry and no invasive procedure is required. However, a patient
experiences the inconvenience of a long tube and collection bag and may
suffer from certain medical conditions, such as urinary tract infections,
arising from a continuously indwelling catheter. The Company believes that
there are other devices in development which are designed to combine a
continuously indwelling catheter with a valve which may be opened
periodically by a patient to permit voiding and, accordingly, do not require
a collection bag. The Company believes these devices suffer disadvantages
common to the use of catheters, including that they must be installed and
removed by a physician and are subject to risks such as increased urinary
tract infection rates; irritation: migration; incrustation; expulsion;
obstructive non-natural voiding; and valve malfunction.
Other current treatments available for the treatment of UI have similar
or related shortcomings. Behavioral therapy and related techniques,
including bladder and habit training, pelvic muscle exercises, biofeedback
and electrical stimulation, typically alleviate the symptoms of UI only in
part and are seldom curative. The use of implantable devices, such as the
implantation of artificial urinary sphincters, has been limited due to their
highly invasive natures and the relatively high rates of significant
complications as compared to other available treatment methods. The use of
injectables, such as collagen, which are injected around the urethra to
create a mild obstruction, are a potentially attractive alternative to
surgery; however, they are expensive, present some degree of side effects,
and in some cases must be repeated to maintain efficacy. Vaginal pessaries
are diaphragm-like devices which are used to obstruct the bladder neck and
urethra by applying pressure through the neighboring vaginal cavity. These
treatments are rarely effective without causing pain, and can have other
adverse side effects including vaginal discharge and tissue erosion. The use
of pharmaceuticals to alleviate UI generally target urge incontinence only,
can have side effects, often affecting the cardiovascular and circulatory
systems, and are not curative.
The Reliance Insert
Description of the Reliance Insert
The Reliance Insert acts as an expandable stopper, or plug, to block the
flow of urine, rather than as an absorbent product. The Company believes
that the Reliance Insert is appropriate for use with most levels of severity
of stress incontinence (whether caused by hypermobility or intrinsic
sphincteric deficiency) and will be most appropriate for those women who have
significant stress incontinence problems, but desire to avoid surgery. The
Company believes that a discrete form of blockage might be preferable to
adult diapers and other absorbent products.
The sterile Reliance Insert consists of three principal precision-made
components: a balloon, a thermoplastic elastomer body and a valve operated by
a specialized piece of string, assembled into a compact unit, and is
available in five different lengths. The balloon is designed to inflate when
the reusable applicator, a small modified air syringe, is depressed. The
body is a tapered shaft, ranging from three to five centimeters in length,
with an oval plate at one end and a lumen within the shaft. The oval plate
is intended to assist in securing the device in place. The lumen, or
internal tube, allows sufficient passage of air to inflate the balloon when
the applicator is depressed and houses the
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valve mechanism, which forms an airtight seal to maintain the balloon in an
inflated form.
The Reliance Insert, designed as a single-use device, is inserted by a
patient into the urethra with a removable applicator, which is then depressed
in order to inflate the balloon. When the user needs to urinate, she simply
pulls on a string, thereby deflating the Reliance Insert, removes the device
and urinates naturally. Following urination, a new Reliance Insert can be
put in place.
The Company also distributes three accessories for the use of the
Reliance Insert: an applicator that inflates the balloon component of the
Reliance Insert, a mirror designed for use in patient training, and a sterile
sizing device for use by the patient's physician in determining the
appropriate size of Reliance Insert to be used by a particular patient. The
applicator and mirror are packaged with the Reliance Inserts for delivery to
consumers and the sizing device will be distributed directly to physicians in
the United States.
Target Market for the Reliance Insert
The Reliance Insert has been designed to provide a female stress
incontinence sufferer with immediate lifestyle benefits similar to those
conferred by a tampon in the case of menstruation, including convenience,
ease-of-use, non-invasive nature of treatment and broad applicability. The
Company has developed this approach primarily because its market research
indicates that the majority of female stress incontinence sufferers choose to
manage their condition with diapers, pads and other absorbent products and
appear to prefer relatively non-invasive and easy-to-use therapies. Based on
its market research, the Company estimates that the initial target market for
the Reliance Insert in the United States will be a subgroup, comprised of
approximately 1.5 million women, of the approximately 2.5 million women who
visit a urologist, gynecologist or urogynecologist each year and discuss
their UI disorder with their physician. This subgroup consists of women
whose UI condition is of a level of severity such that management by the use
of the Reliance Insert would be medically appropriate, who have the manual
dexterity to use the product and who meet certain target demographic
characteristics, including age.
The Company believes that usage of the Reliance Insert will vary
significantly among patients based on severity of incontinence, income,
price, availability of reimbursement, level of activity and personal
preference. The Company believes that a typical UI sufferer in the Company's
target markets who elects to use the Reliance Insert may use between one and
three Reliance Inserts daily. Patients enrolled in the Company's clinical
trials for the Reliance Insert, who do not pay for the device, have averaged
use of approximately 90 Reliance Inserts per month.
Launch Strategy in the United States Market
The Company's United States marketing and sales strategy for the Reliance
Insert currently contemplates a three-stage process, employing the use of its
direct sales force in conjunction with an in-house marketing, sales and
clinical education support staff, to contact gynecologists, urologists and
urogynecologists and to train them and their staffs in the correct
prescription and use of the Reliance Insert. The Company intends to pursue
the initial marketing and commercialization of the Reliance Insert in the
following series of three phases:
Phase I: Key Account Development Phase. The first stage of the
Company's marketing strategy for the Reliance Insert, which began in the
fourth quarter of 1996 and which will progress through the first quarter
of 1997, will involve building strong support for the use of the Reliance
Insert among a select group of physicians, including urologists and
urogynecologists. The Company has identified these physicians through
surveys and profiling as being good candidates to advocate the use of the
Reliance Insert, act as referral centers and build up a substantial core
of active users.
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Phase II: National or Expanded Launch Phase. Following the achievement
of certain milestones in the Key Account Development Phase, the Company
intends to commence Phase II. This stage will involve expansion of its
sales efforts to additional physicians, including gynecologists. During
this stage of the Company's commercialization efforts, advertising
directed towards gynecologists and urologists will be used to complement
the Company's direct sales efforts to create increased awareness and
interest in the Reliance Insert. The Company also intends to implement a
limited public relations campaign as a means to raise awareness of the
social and personal issues women face when dealing with incontinence, to
build support among physicians and advocacy groups and to initiate
consumer interest.
Phase III. Consumer Promotion Phase. After the attainment of certain
goals of Phase II, the Company intends to commence the third phase of its
marketing program. This phase will involve the direct promotion of the
use of the Reliance Insert to consumers. In addition to the activities of
Phase II, the Consumer Promotion Phase will include an advertising and
public relations campaign targeted directly toward potential Reliance
users, including placement of patient-education advertisements in major
women's publications. The Company intends to use this public relations
and advertising campaign as a means of creating awareness on the part of
UI sufferers that UI is a treatable condition that afflicts a significant
number of women. The campaign will be designed to inform the public of
the existence of the Reliance Insert in order to motivate women consumers
to visit their doctors, or discuss their UI problems with their doctors
during regularly-scheduled visits, and determine whether the Reliance
Insert might be appropriate for them.
Once a physician has indicated an interest in prescribing the Reliance
Insert, the Company's sales representatives will provide educational support
to the physician's professional staff, primarily the practice nurse or
nurses. The Company anticipates that office nursing staffs will become the
primary interface with patients in their introduction to, and successful use
of, the Reliance Insert. The Company intends to provide nurses with
materials to assist in educating patients in the use of the Reliance Insert.
Launch Strategy in International Markets
The Company has begun commercializing the Reliance Insert in certain
international markets. Several independent studies have concluded that the
prevalence of incontinence in other countries is similar to that reported for
the United States. Based on its market research, the Company believes that
women in international markets are motivated by the same needs to manage the
problem of incontinence. However, due to the country-by-country variability
in incontinence management, the Company has determined that developing
market-by-market alliances with companies situated in each foreign market may
be the most appropriate strategy for introducing the Reliance Insert
internationally. Generally, under marketing and sales agreements in place
with each of the Company's European distributors, the Company has agreed to
manufacture and deliver the Reliance Insert to the distributor and the
distributor has assumed the responsibility for the presentation of the
Reliance Insert in its market, including providing detailing, promotion,
distribution and regulatory support. In this way, cultural, social, economic
and health care delivery considerations may be factored into the development
of a marketing strategy. Under the marketing and sales agreements, each of
the distributors has the right to determine how best to market the Reliance
Insert in the markets covered by the agreements and to set the pricing of the
Reliance Insert in such markets.
Under each of these sales and marketing agreements, the Company has
agreed to sell to the respective distributor such number of Reliance Inserts
as are necessary to satisfy the distributor's requirements. The price to be
paid to the Company under each of these agreements is a wholesale price that
varies over time and is determined by reference to the prices at which the
distributor resells the Reliance Inserts to its customers, subject to a
minimum price specified in each agreement.
<PAGE>
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Although these sales and marketing agreements do not require the distributors
to purchase a minimum amount of Reliance Inserts, the Company may under
certain circumstances terminate a sales and marketing agreement prior to its
scheduled expiration in the event that an agreed upon level of sales from the
Company to the distributor has not been met.
In certain international markets the Reliance Insert is being distributed
through the wholesale and retail systems currently in place and will be
delivered to the patient at the pharmacy. In some markets, mail order
distribution directly to patients may be an acceptable possibility.
The Company has entered into marketing and sales agreements with each of
the following companies:
E. Tosse & Co. MbH. In December 1994, the Company entered into a
distributorship agreement for the Reliance Insert in Germany with E. Tosse &
Co. MbH ("Tosse"), a part of the Byk Gulden Lomberg pharmaceutical division
of the Atlanta Company, which gave Tosse the exclusive right to market the
Reliance Insert in Germany. Under this seven-year agreement, the initial
medical education phase of the launch of the Reliance Insert in Germany
occurred in September 1995. Subject to the terms of the agreement, Tosse has
agreed to invest a minimum of approximately $21 million over the length of
the agreement in marketing and sales resources in Germany. Tosse's sales
force has detailed the Reliance Insert to both urologists and gynecologists
and commercial sales of the Reliance Insert are underway in Germany.
Porges S.A. In August 1995, the Company entered into a distributorship
agreement with a French medical device company, Porges S.A. ("Porges"), a
subsidiary of Synthelabo S.A., which gives Porges the exclusive right to
distribute the Reliance Insert in France. This seven-year agreement called
for a scheduled market launch of the Reliance Insert in France by the second
half of 1996 which market launch occurred in October 1996. Subject to the
terms of the agreement, Porges has agreed to invest a minimum of
approximately $5 million over the length of the agreement in marketing and
sales resources in France. If commercialization of the Reliance Insert in
France proceeds as expected, Porges resource investment could increase to as
much as $12 million over the seven-year period. Porges made an initial
advance of $250,000 prior to the beginning of the commercialization of the
Reliance Insert in France.
Astra Tech AB. In August 1995, the Company entered into an exclusive
multi-national distributorship agreement with Astra Tech AB ("Astra Tech"), a
subsidiary of Astra AB, a leading pharmaceutical company based in
Scandinavia. The five-year agreement gives Astra Tech exclusive rights to
distribute the Reliance Insert in Sweden, Norway, Denmark and Finland, as
well as The Netherlands and the United Kingdom. Subject to the terms of the
agreement, Astra Tech has agreed to invest a minimum of $14 million in
advance commitments in marketing and sales resources in these territories.
If the commercialization of the Reliance Insert in the countries covered by
this agreement proceeds as expected, the total investments to be made by
Astra Tech in commitments of resources under the agreement could approach $30
million. Astra Tech also made an up-front payment of $1 million, subject to
certain contingencies. The first phase of the professional market launches
of the Reliance Insert occurred in Sweden, Norway, Denmark, Finland and The
Netherlands in March 1996, and in the United Kingdom in April 1996.
<PAGE>
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Pricing of the Reliance Insert
The Company has not yet finalized its pricing of the Reliance Insert in
the United States. The Company intends to price the Reliance Insert so that
it will be accessible to its initial target market in the United States. The
Company believes that the absence of a significant initial cost in connection
with the commencement of use of the Reliance Insert will give it a
competitive advantage over certain other treatments. See "--Current
Treatments."
The pricing of the Reliance Insert in the various European countries
covered by its existing marketing and sales agreements has been and will be
determined by the Company's European distributors in their respective
territories. The Company's European distributors have generally priced the
Reliance Insert in the various European markets based on the particular
market and the availability of third-party reimbursement.
Manufacturing of the Reliance Insert
The Company has expended substantial efforts on the manufacturing
scale-up activities for the relatively large volume of devices that it
expects will be required for complete commercialization of the Reliance
Insert in the United States and abroad. The Company has automated its
manufacturing process in order to achieve the high volume, high quality
production required to meet the Company's current sales forecast within
desired cost objectives. The Company is currently producing the Reliance
Insert in relatively low-level commercial quantities on the two currently
installed lines of the Company's automated assembly equipment. This
equipment, with robotics assistance, progressively assembles the Reliance
Insert. Although the Company believes its current equipment has the capacity
to produce enough Reliance Inserts to meet the initial demands of
commercialization in the United States, the Company expects to order
additional lines of automated assembly equipment in 1997 in order to meet
anticipated demand. See "--Facilities."
The principal materials used in the Reliance Insert are supplied by three
resin suppliers and one supplier of other materials. Although the Company
currently has only a limited number of supply agreements in place, the
Company may, in the future, seek to enter into additional agreements for
protected supply with certain of its resin suppliers if it considers this to
be a cost-effective means of assuring the availability of essential
materials. The Company intends to maintain adequate and ample inventory to
avoid product flow interruptions. It is the Company's view that suitable
alternative suppliers for certain materials other than resins can be located.
Certain of the component parts of the Reliance Insert are custom produced
for the Company using the Company's proprietary processes. The balance of
the components of the Reliance Insert are manufactured by the Company at its
manufacturing facility. The Company considers the production of
thermoplastic elastomers to the tolerances required for use in the Reliance
Insert to be a key technology developed by the Company. Although the Company
currently utilizes a sole vendor for the production of the balloon and body
components of the Reliance Insert, the Company believes that there is an
ample supply of qualified vendors. The additional accessories for the
Reliance Insert and their components are readily available from several
suppliers. The packaging for the Reliance Insert consists of generic medical
grade materials which are readily available from multiple vendors. See
"--Patents and Proprietary Rights."
The Company's manufacturing facility for the Reliance Insert, as an
FDA-registered facility subject to "Good Manufacturing Practices," is subject
to regulation and periodic inspection by the FDA. See "--Facilities."
<PAGE>
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Clinical Results of the Reliance Insert
In connection with the Pre-Marketing Approval application upon which the
FDA based clearance of the Reliance Insert, the Company has conducted
on-going human clinical trials of the Reliance Insert at ten centers in the
United States during different periods since 1992. As of March 31, 1996, 255
patients, comprising over 2,000 patient months, had used the Reliance Insert
on a daily basis over varying periods of time and approximately 190,000
Reliance Inserts had been used by patients in these clinical trials. As of
that date, 51 patients have used the Reliance Insert for more than one year,
and the longest follow-up on any one patient was 38 months.
Results of the Company's trials of the Reliance Insert involving 63
patients who had used the Reliance Insert for over one year were published in
the June 1996 edition of the Journal of Endourology. These included the
following highlights:
- 80 percent of these patients reported experiencing complete
dryness.
- 95 percent of these patients reported experiencing a significant
reduction in urine loss.
- 70 percent of these patients reported experiencing improvement in
their quality of life after commencing use of the Reliance Insert.
- 97 percent of these patients reported that they would recommend use
of the device to a friend who suffers from stress incontinence.
The clinicians conducting the trials of the Reliance Insert also
reported that the Company's clinical trials had demonstrated incidences of
transitory hematuria (incidence of blood in the urine), urinary tract
infection, device migration and anatomical findings of urinary tract or
mucosal irritation. However, the clinicians concluded that these adverse
effects were well within the range expected with other commonly-accepted
self-catheterization techniques and that such effects tended to decrease in
frequency over time. The clinicians attributed this decrease to a patient
habituation period associated with the use of the Reliance Insert similar to
habituation periods associated with other self-catheterization techniques.
Regulatory Status of the Reliance Insert
FDA Clearance. The Company received final regulatory clearance from the
FDA to market the Reliance Insert in the United States in August 1996. This
clearance was granted on the basis of clinical trial data included in a
Pre-Market Approval ("PMA") application originally filed by the Company as a
shorter-form 510(k) Notification application in December 1994. The Company's
application for regulatory clearance for the Reliance Insert was filed as a
510(k) Notification application rather than a PMA at the request of the Staff
of the FDA. After numerous consultations between the Company and the Staff
of the FDA after the filing of the Company's 510(k) Notification application,
the FDA took the unusual step of converting the Company's 510(k) Notification
application to a longer-form PMA in June 1996 and calling a special review
panel to consider the Company's application. This review panel met on July
25, 1996 and voted unanimously to recommend clearance of the Company's
application to the FDA, subject to certain specified conditions. The Company
believes that the relatively expedited review of the Company's application
after its conversion to a PMA was possible because the Company's clinical
studies of the Reliance Insert had been designed originally to obtain FDA
clearance under a PMA. The FDA's final clearance of the Company's PMA was
granted conditioned upon final labeling review and an undertaking to complete
a five-year post-market surveillance study covering 150 patients designed to
determine (i) the degree of urinary tract bacteriology associated with use of
the device, including
<PAGE>
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type and frequency of symptomatic bacteriuria, and (ii) the long-term effect
of use of the device on urethral integrity. See "--Government Regulation."
European Authorization. The process of obtaining necessary authorization
or approvals to market medical devices in Europe varies from country to
country. In Germany, this process was accomplished by delivery by Tosse, one
of the Company's European distributors, of notice to the German government
that it was beginning commercial distribution of the Reliance Insert.
Similarly, the required notification to the French government by Porges,
another distributor, of its intent to distribute the Reliance Insert in
France has been made. The countries of Finland, Denmark and the United
Kingdom require no formal application or registration process in order for
Astra Tech, the Company's third European distributor, to sell the Reliance
Insert in these countries. Applications filed by Astra Tech in each of
Sweden, The Netherlands and Norway for the approval to market the Reliance
Insert were approved in each of these countries. The Company has also
received approval to affix the CE Mark to the Reliance Insert and any
accessories to the Reliance Insert sold in Europe. Generally, no clinical
trials of the Reliance Insert were required for clearance in these European
markets. See "--Third-Party Reimbursement" and "--Government Regulation."
The Impress Miniguard
Acquisition of the Impress Miniguard. The Impress Miniguard technology was
acquired by the Company in May 1996 from the ASI Liquidating Trust, the
successor to Advanced Surgical Intervention, Inc., a medical device
manufacturer that suspended operations in June 1994. In consideration for
the Impress Miniguard technology, the Company paid the trust $7.0 million in
cash and issued to the trust approximately 2.3 million shares of Common Stock
with a value of $23.0 million. At the closing of this acquisition, the
Company entered into consulting agreements with three of the principal
inventors of the Impress Miniguard to assist the Company in developing its
manufacturing capability for the product.
Description of the Impress Miniguard
The Impress Miniguard has been designed to provide sufferers of mild to
moderate UI with the immediate lifestyle benefits offered by a non-invasive
and easy-to-use self-management therapy. The Impress Miniguard permits the
Company to offer a complementary and simple product for mild to moderate
stress incontinence sufferers. Unlike conventional pads or diapers, the much
smaller Impress Miniguard is placed directly against the urinary opening
where it is secured by an adhesive. Accordingly, the Impress Miniguard might
be preferred by many UI sufferers for comfort and discretion reasons, as well
as the ability, unlike pads or diapers, to block urine leakage at its source.
The Impress Miniguard is not designed to be the product of choice for severe
UI sufferers, many of whom may be candidates for the use of the Reliance
Insert.
The Impress Miniguard is a one-piece, disposable, triangular pad made of
soft foam, measuring approximately 3.3 centimeters in length and 2.6
centimeters in width at its widest point. The Impress Miniguard is
self-applied by a patient between the labia covering the urinary opening, and
secured in place by a thin layer of adhesive gel covering the flat side of
the patch. The shape of the Impress Miniguard and the adhesive gel together
form a seal which helps to prevent the involuntary leakage of urine. The
Impress Miniguard is designed as single-use device; after application the
Impress Miniguard remains against the urinary opening until the patient
desires to urinate. Prior to urination, the patient removes the device
manually and urinates naturally. After urination, a new Impress Miniguard
can be put in place. The Impress Miniguard is available in one size designed
to fit all UI sufferers for whom it is an appropriate therapy.
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Target Market for the Impress Miniguard
The Impress Miniguard has been designed to treat a broad range of UI
sufferers, including those who may prefer, for medical, severity level or
psychological reasons, to use this product rather than the Reliance Insert,
or those whose UI problem is relatively mild. The Company estimates that the
initial target market for the Impress Miniguard in the United States will be
3.5 million women, including approximately 1.0 million of the approximately
2.5 million women in the United States who visit a urologist, gynecologist or
urogynecologist each year and discuss their UI condition with their
physician. Because the Impress Miniguard offers an easy-to-use, non-invasive
strategy for the management of UI, the Company believes that its planned
consumer awareness programs for the product may allow it to reach an
additional 2.5 million women in the United States who currently manage their
UI condition through over-the-counter products, such as diapers or pads, and
have not discussed their UI condition with a urologist, gynecologist or
urogynecologist.
The Company believes that usage of the Impress Miniguard will vary
significantly among patients based on severity of incontinence, income,
price, availability of reimbursement, level of activity and personal
preference. The Company believes that a typical UI sufferer in the Company's
target markets who elects to use the product may use between one and three
Impress Miniguardes daily. Patients enrolled in the clinical trials of the
Impress Miniguard, who did not pay for the product, averaged use of
approximately 110 devices per month.
Launch Strategy in the United States
The Company currently intends to leverage its existing sales force, and
the experience gained by the Company and this sales force during the
commercial launch of the Reliance Insert, to pursue a similar strategy to
commercialize the Impress Miniguard in the United States. The Company
expects this commercialization to begin in late 1997 or early 1998 with an
initial intensive marketing effort focused on a selected group of urologists
and gynecologists with whom the Company's sales force has established
relationships. After establishing a foothold for the Impress Miniguard in
the incontinence self-care market through these physicians, the Company
intends to broaden its marketing efforts to a wider range of physicians,
including more generalists, building on the experience of a small but
established customer base of Impress Miniguard users. During the course of
these efforts, the direct sales force currently being established by the
Company will perform similar physician detailing and instruction activities
with respect to the Impress Miniguard. The Company believes that, based on
the relative simplicity of the Impress Miniguard, its ease-of-use and
non-invasive character, and the benefits of the experience expected to be
gained by the Company's sales force in launching the Reliance Insert, the
commercialization efforts for the Impress Miniguard and market acceptance of
the Impress Miniguard should progress more quickly than those currently
contemplated for the Reliance Insert. The Company's marketing and
commercialization strategies for the Impress Miniguard are in their formative
stages, and will be adjusted to reflect the Company's experience in regards
to the continence care market.
The timing and success of the Company's commercialization of the Impress
Miniguard will be dependent on the development by the Company of the ability
to produce commercial quantities of the Impress Miniguard. See
"--Facilities."
Launch Strategy in International Markets
Although the Company is currently focused on its preparations for the
commercialization of the Impress Miniguard in the United States, it intends
to eventually commercialize the Impress Miniguard in certain other countries
after the successful completion of its market launch in the United States and
the development of sufficient manufacturing capacity. The Company believes
that
<PAGE>
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it will follow a commercialization strategy in Europe for the Impress
Miniguard similar to that employed for the Reliance Insert.
Pricing of the Impress Miniguard
The Company has not yet set the pricing of the Impress Miniguard in the
United States or abroad. The Company intends to price the Impress Miniguard
so that it will be accessible to its initial target market in the United
States. The Company believes that the absence of a significant initial cost
in connection with the commencement of use of the Impress Miniguard will give
it a competitive advantage over certain treatments. See "--Current
Treatments."
Manufacturing of the Impress Miniguard
The Company intends to begin the first phase of its manufacturing
operations for the Impress Miniguard by the end of the fourth quarter of
1997. This phase will include manual assembly of the foam pad that makes up
the body of the Impress Miniguard, and the application of the adhesive gel to
the face which is placed against the urinary opening during use. Because
Advanced Surgical Intervention, Inc., the company which originally developed
the Impress Miniguard, never progressed to commercial-stage manufacturing of
the Impress Miniguard, the Company has been required to develop its own
manufacturing process for the product. The Company ordered automated
assembly and packaging equipment for the Impress Miniguard late in the fourth
quarter of 1996. The Company anticipates that it will be in full operation
by the end of 1997 in anticipation of the planned commercial launch of the
Impress Miniguard in the United States in early 1998.
Clinical Results of the Impress Miniguard
In connection with an application for FDA clearance, clinical trials of
the Impress Miniguard were conducted by its developer, Advanced Surgical
Intervention, Inc., at 12 centers in the United States. These studies, which
concluded in October 1993, enrolled 356 patients suffering from mild to
moderate stress incontinence who used the device for twelve weeks following
an initial four week control period. Patients were asked to perform home pad
weight studies to determine the efficacy of the device and complete bladder
diaries and satisfaction surveys relating to, among other things, the impact
of incontinence on their quality of life and the impact of use of the device
on such quality. The clinicians who conducted this study reported the
following significant results:
- 52 percent of patients reported that they were completely dry when
using the device.
- 84 percent of patients reported that use of the device improved
their overall daily living.
- 97 percent of patients reported that they were able to learn to use
the device without instructions from a physician.
The clinicians who conducted the trials of the Impress Miniguard did not
report any significant adverse events associated with use of the device.
However, some slight tissue irritation was reported by some of the patients
using the device.
Regulatory Status of the Impress Miniguard
FDA Clearance. FDA clearance to market the Impress Miniguard was granted
on May 8, 1996 on the basis of a 510(k) Notification application originally
filed by Advanced Surgical Intervention, Inc. in September 1995. This
application was based on the clinical trial data compiled with respect to the
Impress Miniguard by Advanced Surgical Intervention, Inc. FDA clearance was
<PAGE>
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issued without the requirement that a post-market surveillance study be
conducted with respect to use of the Impress Miniguard or subject to any
other conditions.
European Authorization. Because of the timing encompassed by the
Company's commercialization strategy for the Impress Miniguard, including the
Company's current emphasis on initial commercialization in the United States,
the Company is not currently pursuing any notifications or applications to
market the Impress Miniguard in Europe. The Company believes that the
notification and application processes for most countries in Europe for the
Impress Miniguard will involve application to the Company's "Notified Body"
to affix the CE Mark to the Impress Miniguard. See "--Government Regulation."
Intended Benefits of Reliance and Impress Miniguard
The Company's philosophy in the treatment of UI is to offer a continuum
of care, including a range of self-care options depending on the severity of
the affliction and certain attributes of particular patients.
The intended benefits of both the Reliance Insert and the Impress
Miniguard for the management of stress incontinence in appropriate patients
include:
Convenience. Unlike diapers and pads, the Reliance Insert and Impress
Miniguard are each intended to stop urine from leaving the urinary tract
until a woman desires to urinate. The Reliance Insert and Impress Miniguard
are each relatively small, with only a small string extending from the user's
body in the case of the Reliance Insert, and a small patch surrounding the
urinary opening, in the case of the Impress Miniguard. It is intended that
the lack of exterior constraints and small size of each product may allow the
patient a more natural lifestyle than that achieved with diapers and other
absorbent products.
Ease of Use. The Reliance Insert and Impress Miniguard are each designed
to be easy to use. The Company believes that the majority of stress
incontinence sufferers can easily learn to use the Reliance Insert after
appropriate demonstration and training. The Company believes the Impress
Miniguard is even easier to use than the Reliance Insert, and could be used
by a majority of the stress incontinence sufferers in the United States.
Less-Invasive Self-Care. The Reliance Insert and Impress Miniguard are
each designed to be a relatively low-risk, non-invasive treatment as compared
to surgery or the permanent implantation of foreign materials into the body.
A patient and her physician can simply decide to discontinue use of either
product in the event that any adverse effects occur. Use of the Reliance
Insert or the Impress Miniguard is intended to avoid the potentially
frustrating experience of undergoing the effort, time, expense and
inconvenience of an invasive therapy or exercise therapy only to determine
that the chosen form of treatment may not be effective or appropriate.
Broad Applicability. The Company believes that the Reliance Insert may
potentially be appropriate for use with most levels and types of stress
incontinence, ranging from those patients who have a mild form of the
condition, and will occasionally use the product, to those patients with the
most severe form that generally requires surgery. The Company believes that
the Impress Miniguard may potentially be appropriate for use with an even
broader range of women with mild to moderate stress incontinence.
Flexibility and Ease of Prescription. Unlike surgery or the implantation
of artificial materials, the prescription of the Reliance Insert or Impress
Miniguard is not intended to be time consuming or technically demanding. In
addition, the availability of both the Reliance Insert and the Impress
Miniguard is expected to give a prescribing physician flexibility in
prescribing a non-invasive or less-invasive product for the self-care of UI,
depending on the severity level of the
<PAGE>
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patient's UI and other medical and psychological factors. In the case of the
Reliance Insert, after initial diagnosis, sizing by the physician or nursing
staff and instruction, the device would become a patient self-care item.
Similarly, after a simple physician consultation and brief instruction, the
Impress Miniguard would also become a patient self-care item.
The clinical trials conducted with respect to the Reliance Insert and
Impress Miniguard have demonstrated certain comparative disadvantages, or
perceived comparative disadvantages, which could adversely affect market
acceptance of such products. For example, the Reliance Insert and the
Impress Miniguard represent management methods for the treatment of stress
incontinence and are not permanent cures. Moreover, as patient-managed
therapies, their use may be discontinued by a patient at any time. A
considerable number of patients chose to withdraw from the Company's clinical
trials of the Reliance Insert for a variety of reasons, including the demands
of compliance with study protocols (including follow-up doctor visits,
laboratory testing and requirements that patients comply with record-keeping
requirements), discomfort experienced while using the Reliance Insert and, in
some patients, urinary tract infections experienced while using the device.
The Company expects that patients will experience a foreign-body sensation
and, in some cases, discomfort, during acclimation and use of the product.
Results of the clinical trials of the Impress Miniguard indicated that a
small number of patients experienced slight tissue irritation after use of
the device. The Impress Miniguard is not designed to be the product of
choice for severe incontinence and certain UI patients using the Impress
Miniguard may require a back-up pad for complete protection under certain
circumstances. In addition, the Reliance Insert and the Impress Miniguard
will each be prescription items in the United States market, which will
require the patient to visit her physician. See "--Research and Development."
Marketing and Sales
The Company's U.S. marketing strategy is designed to promote awareness
of its initial products, the Reliance Insert and Impress Miniguard, as
representing a highly desirable continuum of care for the management of
stress incontinence. The Company will focus initially on the acceptance of
the Reliance Insert, and will implement its marketing program by
systematically providing information and educational support to the target
physicians who will prescribe the Reliance Insert and to the physician's
practice staff who will educate the patient.
The Company believes that the problem of incontinence is often discussed
during a woman's annual physical examination. The physicians most aware of
the problem of incontinence in the United States are gynecologists,
urologists and urogynecologists. There are currently approximately 35,000
gynecologists (a relatively small number of which are urogynecologists), and
9,000 urologists in the United States.
The Company has recently developed a sales organization designed
initially to address 43 key territories. These territories were identified
by the Company as having relatively large populations of women and
significant numbers of urologists or gynecologists in which to focus the
initial rollout of the Reliance Insert. After the commercial launch of the
Reliance Insert, the Company believes that it will be able to leverage the
experience and relationships gained by this sales force during this campaign
to launch the Impress Miniguard, and any other complementary products
developed, acquired or licensed by the Company, in the United States. This
sales force is composed primarily of 42 full-time Territory Managers, of whom
twelve are Senior Territory Managers. Each of the Senior Territory Managers
has a minimum of seven years experience in medical device sales and
substantial managed care experience. Each of the remaining Territory
Managers has a minimum of three years of medical sales experience. These
Territory Managers, who generally will work out of their homes in their
respective territories, report to six Regional Sales Managers, each with a
minimum of seven years of medical device sales and management experience,
organized under a Director of Sales and the Vice President, Sales and
Marketing of the Company. Approximately one-half of the members of the
Company's sales force have urology sales experience,
<PAGE>
-19-
while many of the remainder have OB/GYN sales experience. Most of the sales
force also have experience in launching innovative new products. The Company
believes that using a direct sales force will provide the highest quality,
fastest and most cost-effective means for introducing its products to the
broad physician base targeted by the Company. The role of each sales
representative will be to educate physicians and their staffs as to the
intended clinical safety and efficacy of the Company's products and train the
office staff in the appropriate patient in-service protocol to ensure proper
use and acceptance of the products. The Company may supplement its direct
sales force with contract sales representatives or corporate partnership
relationships where it believes it is appropriate to do so.
Distribution
The Company intends to adopt an innovative distribution system in the
United States, with an emphasis on direct distribution to and interaction
with its consumers. First, a physician prescribing the product, his or her
office staff or the patient receiving the prescription, will telephone or fax
the patient's prescription into the Company. Next, the patient will be
encouraged to telephone the Company directly to place an initial order for
the Reliance Insert. During this call, the patient will be encouraged to
join the Company's free "Personally Fit for Success" Program, or PFS Program,
which will offer the patient access to a telephone "help line" and certain
discounts on initial orders of the Reliance Insert. The Company plans to
place at least three outgoing calls to each member of the PFS Program during
the first 30 days after receipt of her initial prescription, to follow up on
her initial usage of the Reliance Insert and help with any product questions.
The Company expects that it will follow a similar protocol for the
distribution of the Impress Miniguard.
Prescriptions will be filled by a licensed pharmacist based at a Company
fulfillment center located in Nashua, New Hampshire, which will be a pharmacy
licensed to dispense medical devices, and then Reliance Inserts will be sent
directly to patients as ordered from time to time. Initially, this
pharmacist's primary role will be to ensure that Reliance Inserts of the
proper size are delivered pursuant to the prescriptions sent to the Company.
The Company intends to market a Reliance Insert starter kit to each new
patient. Each kit will contain a Reliance applicator, a mirror to assist the
patient in the initial applications of the Reliance Insert, and 20 Reliance
Inserts. After this initial purchase, the Company plans to market additional
Reliance Inserts to its customers in packs of 20 Reliance Inserts and 50
Reliance Inserts (which will be initially the most economical size for a
patient to purchase). Other pack sizes may be added as the Company deems
necessary. The Company has not yet made a final determination on the pack
sizes of the Impress Miniguard for sale in the United States.
The Company is not currently planning to stock pharmacies with the
Reliance Insert or the Impress Miniguard; however, it intends to fill orders
placed directly from individual pharmacies or doctors for patients not
electing to deliver their prescriptions directly to the Company. The Company
may consider stocking pharmacies or adopting other distribution strategies in
the future.
Third-Party Reimbursement
United States
In the United States, third-party reimbursement is generally available
for surgical procedures for incontinence, but generally is unavailable for
patient management products such as diapers and pads. Although the Company
believes that the prospect of widespread government or private insurance
reimbursement in the United States for the Reliance Insert or Impress
Miniguard for the near term is unlikely, the Company does not believe that
reimbursement is necessary for the successful launch of either product in the
United States. The Company intends, however, to continue to work with
managed care organizations to explore the possibility of reimbursement for
the use of
<PAGE>
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either or both products in the United States. Any such reimbursement is
likely to be variable among these third-party payors.
International Markets
The availability of third-party reimbursement for the use of the
Company's Reliance Insert, Impress Miniguard or/and any related incontinence
products varies among the foreign countries that the Company has targeted for
the marketing and sale of such products. Prior to the market launch of the
Reliance Insert in Germany in September 1995, the Company received notice
that the use of the Reliance Insert would be fully reimbursable by the German
government. Because the procedure for applying for reimbursement in France is
more involved and includes a requirement that clinical studies be conducted
in France, it is unclear whether or when the Company's distributor in France,
Porges, will apply for reimbursement for the Reliance Insert in France. The
Company and Astra Tech, one of the Company's distributors, successfully
applied for reimbursement for the use of the Reliance Insert in each of
Norway and Sweden, and parts of Denmark and Finland. The process of applying
for reimbursement for the Reliance Insert in The Netherlands, where
reimbursement is available only through private insurers, and the United
Kingdom is a more involved process, which the Company and its European
distributors began prior to the professional market launches in The
Netherlands, which occurred in March 1996, and the United Kingdom, which
occurred in April 1996. The Company is unable to predict when final
reimbursement decisions will be rendered in such countries. Changes in the
availability of third-party reimbursement for the Reliance Insert, for
products of the Company's competitors or for surgical procedures may affect
the pricing of the Reliance Insert or its relative cost to the patient.
Research and Development
The Company believes that its future success will depend in large part
upon its ability to enhance its Reliance Insert and Impress Miniguard and to
develop other new products. Accordingly, the Company intends to devote
significant funds and efforts to research and development. The Company
currently has 30 employees dedicated to its research and development effort.
See "Use of Proceeds of the Initial Sale."
The Company believes that there is potential for improvement in the
diagnosis and treatment of a number of urological and gynecological
disorders. The Company believes that advancements in urology and gynecology
have been hampered by the relatively smaller research and development
resources dedicated to these disciplines as compared to other areas, such as
cardiology.
Competition
The incontinence product industry is highly competitive. The Company
believes that the primary competitive factors include the level of physician
and consumer awareness and acceptance of available treatment methods,
consistency of product quality and delivery, price, technical capability and
the training of health care professionals and consumers in the use of
available treatment methods. The Company's ability to compete in this
industry will also be affected by its product development capabilities and
innovation, its ability to obtain required regulatory clearances, its ability
to protect the proprietary technology included in its products, its
manufacturing and marketing capabilities and its ability to attract and
retain skilled employees. Current major competitors who compete in the adult
absorbent market include Kimberly-Clark Corp., Procter & Gamble Co., Johnson
& Johnson, Confab Technologies, Inc. and INBRAND Corp. Current major
competitors who compete in the catheter/urine collection bag drainage system
market include C.R. Bard, Inc., Kendall Co., Mentor Corp., ConvaTec Ltd.
and Baxter Technologies, Inc. Current major competitors who compete in the
market for surgical or implantable products for incontinence include American
Medical Systems, Inc., C.R. Bard, Inc., Boston Scientific Corporation,
Johnson & Johnson and Mentor Corp. The Company is also aware that at least
one manufacturer of catheters has
<PAGE>
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announced that it is seeking to develop a single-use plug device intended to
compete with the Reliance Insert, and the Company believes that other
companies may also be seeking to develop potentially competing devices,
including indwelling valved devices.
Many of the Company's competitors and potential competitors have
significantly greater financial, manufacturing, marketing, distribution and
technical resources and experience than the Company. It is possible that
other large health care and consumer products companies may enter this
industry in the future. Furthermore, smaller companies, academic
institutions, governmental agencies and other public and private research
organizations will continue to conduct research, seek patent protection and
establish arrangements for commercializing products. Such products may
compete directly with any products which may be offered by the Company.
Finally, competitors in the medical device industry have in the past and may
in the future employ litigation to gain a competitive advantage.
Patents and Proprietary Rights
The Company's success will depend in part on its ability to obtain and
maintain patent protection for its products, to preserve its trade secrets
and to operate without infringing the proprietary rights of third parties.
The Company's strategy regarding the protection of its proprietary rights and
innovations is to seek patents on those portions of its technology that it
believes are patentable and to protect as trade secrets other confidential
and proprietary information.
As of August 31, 1996, the Company held five issued United States patents
and had thirteen additional United States patent applications and various
foreign patent applications pending relating to the Company's technology
underlying the Reliance Insert and other related products. The Company
believes that the primary issued United States patent relating to the
Reliance Insert, which includes both method and device claims and expires in
the year 2010, contains broad claims relating to the construction and use of
expandable remove-to-void urethral plugs.
The Company holds two patents and has two patent applications pending
with respect to the Impress Miniguard and related products. The issued
patents relating to the Impress Miniguard and related products include device
claims and expire in the year 2011. The two applications filed by the
Company with respect to the Impress Miniguard and related technology contain
both method and device claims.
The Company believes that its patents, and any additional patents which
may issue pursuant to these applications and any continuations or
continuations-in-part, may provide the Company with a substantial competitive
advantage in the female incontinence markets for urethral insert products and
exterior barrier products which use adhesive technology. However, there can
be no assurance as to the degree of protection offered by any of these
patents or that any patents will be issued with respect to the Company's
pending patent applications. The Company also holds licenses to two issued
United States patents, and has jointly filed one pending United States patent
application and various foreign patent applications, relating to applications
of the Company's technology outside of the area of incontinence.
Some of the technology used in the Company's products is not covered by
any patent or patent application of the Company. The Company seeks to
maintain the confidentiality of its proprietary technology by requiring
employees who work with proprietary information to sign confidentiality
agreements and by limiting access by parties outside the Company to such
confidential information. There can be no assurance, however, that these
measures will prevent the unauthorized disclosure or use of this information,
or that others will not be able to independently develop such information.
Moreover, as is the case with the Company's patent rights, the enforcement by
the Company of its trade secret rights can be lengthy and costly, with no
guarantee of success.
<PAGE>
-22-
To date, no claims have been brought against the Company alleging that
its technology or products infringe intellectual property rights of others.
However, there can be no assurance that such claims will not be brought
against the Company in the future or that any such claims will not be
successful.
In addition to the proprietary protection afforded by the Company's
intellectual property activities, the Company believes that the production
processes that it has developed for the Reliance Insert and that it is
developing for the Impress Miniguard, involving the production of components
in high volumes, at acceptable costs and with very low fault tolerances, are
key assets of the Company. Because it believes that any potential competitor
attempting to produce an expandable urethral plug, external adhesive barrier
device or similar devices would also have to develop production processes
involving the production of components at high volumes, at acceptable costs
and at very low fault tolerances in order to compete effectively, the Company
believes that its development efforts with regard to production processes are
an important competitive advantage. See "--Manufacturing of the Reliance
Insert."
The Company has selected the name Reliance for its incontinence insert
product through a program of market research and testing. As part of the
Company's global branding and marketing strategy, the Company has filed for
and received trademark registrations for the Reliance name in the United
States and in a number of other countries where it plans to market the
Reliance Insert. In late 1994, the Company became aware that Howmedica, Inc.
("Howmedica"), a medical products company, has claimed rights to the
Reliance name in several countries. In April 1995, the Company and Howmedica
entered into an agreement which permits each party to use the Reliance name
for its specific product areas in those countries where both parties have
filed or will file registrations. Howmedica does not currently market
products for the treatment of UI. There can be no assurance that further
trademark registration of Reliance or any other name that may be selected by
the Company will ever be obtained or, if a trademark registration is
obtained, that such trademark or the Company's use thereof will not be
challenged, invalidated, prevented or circumvented in the future.
The Company has selected the name Impress Miniguard for its adhesive
patch incontinence device. The Company will file applications for
appropriate trademark registrations in the United States, Europe and other
countries for the Impress Miniguard.
Government Regulation
United States
The Reliance Insert and Impress Miniguard, as well as certain products
currently under development by the Company, are regulated as medical devices
by the FDA under the Federal Food, Drug and Cosmetic Act (the "FDC Act") and
require regulatory clearance prior to commercialization in the United States.
Under the FDC Act, the FDA regulates clinical testing, manufacturing,
labeling, distribution and promotion of medical devices in the United States.
Various states and other countries in which the Company's products may be
sold in the future may impose additional regulatory requirements.
Following the enactment of the Medical Device Amendments to the FDC Act
in May 1976, the FDA classified medical devices in commercial distribution
into one of three classes, Class I, II or III. This classification is based
on the controls necessary to reasonably ensure the safety and efficacy of
medical devices. Class I devices are those whose safety and efficacy can
reasonably be ensured through general controls, such as adequate labeling,
pre-market notification and adherence to FDA-mandated "Good Manufacturing
Practices." Generally, Class II devices are those whose safety and efficacy
can reasonably be ensured through the use of special controls, such as
performance standards, post-market surveillance, patient registries and FDA
guidelines. Class III devices are
<PAGE>
-23-
devices which must receive pre-market approval by the FDA to ensure their
safety and efficacy, generally life-sustaining, life-supporting or
implantable devices, and also include all new not substantially equivalent
devices introduced after May 28, 1976. The Reliance Insert is a Class III
device, and the Impress Miniguard is a Class II device.
If a manufacturer or distributor of medical devices can establish that a
new device is "substantially equivalent" to a legally marketed Class I or
Class II medical device or to a Class III medical device for which the FDA
has not required pre-market approval, the manufacturer or distributor may
seek FDA marketing clearance for the device by filing a 510(k) Notification
application. The 510(k) Notification application and the claim of substantial
equivalence may have to be supported by various types of information
indicating that the device is as safe and effective for its intended use as a
legally marketed predicate device and a 510(k) Notification application may
require the submission of data including clinical data.
Following submission of the 510(k) Notification application, the
manufacturer or distributor may not place the device into commercial
distribution until an order is issued by the FDA. The FDA has no specific
time limit by which it must respond to a 510(k) Notification application.
The FDA may agree with the manufacturer or distributor that the proposed
device is "substantially equivalent" to another legally marketed device, and
allow the proposed device to be marketed in the United States. The FDA may,
however, determine that the proposed device is not substantially equivalent,
or may require further information, such as additional clinical test data,
before it is able to make a determination regarding substantial equivalence.
Such determination or request for additional information could delay the
market introduction of a product. FDA clearance for the Impress Miniguard
was granted on the basis of a 510(k) Notification application originally
filed by Advanced Surgical Intervention, Inc.
If a manufacturer or distributor cannot establish to the FDA's
satisfaction that a new device is substantially equivalent to a legally
marketed medical device, the manufacturer or distributor will have to seek
pre-market approval or reclassification of the device. A PMA, which must
prove that a device is safe and effective, must be supported by extensive
data, including preclinical and clinical trial data, to demonstrate the
safety and efficacy of the device. Upon receipt, the FDA will conduct a
preliminary review of the PMA to determine whether the submission is
sufficiently complete to permit a substantive review. If sufficiently
complete, the submission is declared fileable by the FDA. By regulation, the
FDA has 180 days to review a PMA after it has been determined to be fileable.
While the FDA has at times responded to PMA's within the allotted time
period, PMA reviews more often occur over a longer time period and generally
take approximately two years or more from the date of filing to complete. A
number of devices for which FDA marketing clearance has been sought have
never been cleared for marketing. FDA clearance for the Reliance Insert was
granted on the basis of a PMA originally filed by the Company as a 510(k)
Notification application in December 1994. Clearances granted by the FDA on
the basis of PMA's are granted subject to publication of notice in the
Federal Register, which initiates a 30-day period during which interested
persons may seek review of the decision to clear the PMA. Although the
Reliance Insert has been cleared for marketing by the FDA, the notice
initiating such 30-day period for the Reliance Insert has not yet been
published in the Federal Register.
After clearance is granted on the basis of a PMA, continued market
clearance is contingent upon the submission of annual post-clearance reports
required by FDA regulations. In addition to the general requirements of the
FDA regulations for post-clearance reports, the FDA clearance of the Reliance
Insert requires that post-clearance reports contain an evaluation of the
long-term effects of the Reliance Insert, including the results of a
five-year post-marketing study covering 150 patients designed to determine
(i) the degree of urinary tract infection associated with use of the device,
including type and frequency of symptomatic bacteriuria, and (ii) the
long-term effect of use of the device on urethral integrity. Subject to
certain exceptions, changes to an approved device, including the materials
used therein, and its manufacturing and quality processes, require additional
<PAGE>
-24-
submissions to the FDA. If the FDA believes that the Company is not in
compliance with applicable law and regulations, the FDA can take one or more
of the following actions: withdraw previously approved applications; require
notification to users regarding newly found, unreasonable risks; request
repair, refund or replacement of faulty devices; request corrective
advertisements, formal recalls or temporary marketing suspension; refuse to
review or clear applications to market any of the Company's future products
in the United States or to allow the Company to enter into government supply
contracts; or institute legal proceedings to detain or seize products, enjoin
future violations or assess criminal penalties against the Company, its
officers or employees.
If a manufacturer commercializes a medical device, it is required to
register with the FDA and to list all of its devices. In addition, any such
manufacturer will be subject to inspection on a routine basis for compliance
with the FDA's GMP regulations. The Company's facility in Needham,
Massachusetts, was registered with the FDA and successfully passed an
inspection in connection with the Company's PMA application for the Reliance
Insert. The FDA's regulations also require that such manufacturer
manufacture its products and maintain its documents in a prescribed manner
with respect to manufacturing, testing and quality control activities.
Further, such manufacturer is required to comply with various FDA
requirements for labeling and reporting of adverse reactions, and may be
required to meet rules governing product tracking and post-market
surveillance. See "--Facilities."
The Company's planned distribution system requires maintenance of a
licensed pharmacy at its New Hampshire order-fulfillment center. This
facility will be subject to ongoing inspection and regulation by the State of
New Hampshire, which has authority to revoke the pharmacy license or modify
the terms of the license. The Company is not licensed to distribute medical
products in any state other than New Hampshire. Although the Company does
not believe its lack of a pharmacy license in other states will materially
interfere with its ability to distribute products to consumers in the United
States, an adverse decision by a regulator in any state could require the
Company to suspend distribution to consumers in that state while it seeks an
appropriate license or, if such license is not forthcoming or too costly to
obtain, to terminate distribution in that state.
International
Sales of medical device products outside the United States are subject to
foreign regulatory requirements that vary widely from country to country and
with respect to the nature of the particular medical device. The time
necessary to obtain approvals required by other countries may be longer or
shorter than that required for FDA approval, and requirements for licensing
may differ from FDA requirements. Some countries have historically permitted
human studies earlier in the product development cycle than the United
States. Other countries, such as Japan, have standards similar to those of
the FDA. This disparity in the regulation of medical devices may result in
more rapid product approvals in certain countries than in the United States,
while approvals in countries such as Japan may take longer than in the United
States. Nevertheless, in general the Company believes that these foreign
regulatory requirements are less stringent then those imposed by the FDA.
As required by German law, notification was made by the Company to the
German Government prior to the German market launch of the Reliance Insert in
September 1995. A similar notification procedure requirement is necessary
for the sale of the Reliance Insert in France. One of the Company's
distributors, Astra Tech, successfully completed the various notifications
required by Norway, Sweden, Denmark, Finland, The Netherlands and the United
Kingdom prior to the market launches of the Reliance Insert in these
countries in 1995 and early 1996.
Effective January 1, 1995, member countries of the European Union are
required to comply with the Medical Devices Directive ("MDD"). Under the
system established by the MDD, all medical devices other than active implants
and in vitro diagnostic products must qualify for CE Marking by June 14,
1998. During the period from January 1, 1995 to June 14, 1998, medical
<PAGE>
-25-
devices must comply with the requirements of the MDD or the national
requirements that were in force on December 31, 1994.
In order to qualify for CE Marking, the manufacturer must comply with the
Essential Requirements of the MDD. These relate to safety and performance.
In order to demonstrate compliance with these requirements of the MDD, the
manufacturer must undergo conformity assessment which depends on the class of
the product. The Company chose as its conformity assessment type testing of
the product by a Notified Body and assessment of the manufacturer's quality
system used in production by a Notified Body. In February 1996,
representatives of the Notified Body chosen by the Company reviewed the
Company's facility and operations in Needham, Massachusetts, for conformity
to the Essential Requirements of the MDD and Annex. Upon conclusion of the
inspection, the representative recommended to the Notified Body that the
Company be granted approval to use the CE Mark, and in March 1996 the Company
received certification of eligibility to use the CE Mark on the Reliance
Insert and any accessories for the Reliance Insert sold in Europe. The
Company intends to apply to its Notified Body to gain the ability to affix
the CE Mark to the Impress Miniguard in advance of any contemplated
commercialization of such product in Europe. Any such application, if
granted, would eliminate the need to acquire many of the additional
regulatory approvals otherwise required to market the products in Europe.
International sales of unapproved medical devices are also subject to FDA
export requirements. For each country to which an unapproved medical device
is exported, the manufacturer or distributor may first need to obtain
documentation from the medical device regulatory authority of such country
stating that the sale of such device is not in violation of that country's
medical device laws. This documentation may then need to be submitted to the
FDA with a request for a permit for export to such country. These
requirements depend on both the regulatory status and classification of the
product in the United States.
Employees
As of December 31, 1996, the Company employed approximately 169
individuals on a permanent basis and 31 on a temporary basis. The Company
believes that it has been highly successful in attracting experienced and
capable personnel. However, there can be no assurance that the Company will
continue to do so.
None of the Company's employees is covered by collective bargaining
agreements. The Company considers relations with its employees to be good.
Facilities
In December 1994, the Company moved to a 40,000 square-foot facility in
Needham, Massachusetts. This lease expires in 2001; however, the Company has
the option to extend the lease for an additional five years. This leased
facility includes expanded research and manufacturing space and, to a lesser
degree, expanded administrative space. The FDA regulates companies that
manufacture commercial medical devices and requires that such companies
manufacture such devices in a properly designed environment. The new
facility was selected and built-out with the intention of complying with the
FDA's "Good Manufacturing Practices" regulations and requirements necessary
for approvals and commercial sales within the United States. The Company
registered the facility with the FDA in connection with its PMA application
for the Reliance Insert and FDA representatives inspected the facility and
operations prior to granting approval of such application. Although the
Company's facility passed inspection in connection with this approval, as a
registered manufacturing facility subject to GMP, this facility is subject to
future inspection no less frequently than once every two years.
<PAGE>
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In order to support commercialization of the Reliance Insert and the
Impress Miniguard in the United States and abroad the Company believes it is
likely that the Company will be required to acquire additional manufacturing
space to accommodate contemplated manufacturing operations for the Impress
Miniguard, either through expansion of the Company's manufacturing space into
space currently used for research and development, marketing or other
administrative functions at the Company's existing facility, and relocation
of such operations elsewhere, or through the acquisition of additional
manufacturing space. Any such additional manufacturing space would be
required to be registered and qualified in the same manner as the Company's
current facility, and would be subject to the same inspection requirements.
See "--Government Regulation."
The Company also leases a 6,200 square foot fulfillment center in Nashua,
New Hampshire, where the Company's staff pharmacist is located, and holds a
right of first offer on an additional 6,200 square feet of space at the same
location. This lease expires in 1997; however, the Company has the right to
renew the lease for five additional one-year terms after the expiration of
the initial term. The initial direct-to-consumer shipments of the Company's
products will be made from this location.
Legal Proceedings
The Company is not involved in any material legal proceedings, nor is the
property of the Company the subject of any such proceedings.
RISK FACTORS
The Company's financial condition and results of operation, as well as the
market price for the Company's common stock, no par value (the "Common
Stock"), and the Notes, are also likely to be affected by the following
factors:
Uncertainty of Market Acceptance of the Reliance Insert and Impress Miniguard
Each of the Reliance Insert and the Impress Miniguard represents a new
approach to managing certain types of female UI, and there can be no
assurance that either product will gain any significant degree of market
acceptance. The Company believes that recommendations by physicians will be
essential for market acceptance of both the Reliance Insert and the Impress
Miniguard, which will be marketed on a prescription basis, and there can be
no assurance that any such recommendations, if such recommendations are
forthcoming, will be followed. In addition, there can be no assurance that
the Reliance Insert or the Impress Miniguard will be accepted by female UI
sufferers in the United States or abroad. The Reliance Insert must be
inserted into the urethra. Accordingly, some female UI sufferers may not be
willing to use the device. Furthermore, the Reliance Insert and, to a lesser
degree, the Impress Miniguard, may not be appropriate for use by UI patients
who lack sufficient dexterity or who suffer from other physical or mental
conditions that could have an impact on the safe and efficacious use of the
devices. Certain transitory adverse effects such as hematuria (incidence of
blood in the urine), urinary tract infection, device migration and anatomical
findings such as irritation of the mucosa, were evident in varying degrees in
the Company's clinical trials of the Reliance Insert. The observation of
such adverse effects in patients, or the perception that the product could
cause any such adverse effects, could have the effect of discouraging some
potential users of the Reliance Insert. The Reliance Insert and the Impress
Miniguard are each patient-managed therapies and as such patients may at any
time decide to discontinue their use. During the course of the Company's
clinical trials of the Reliance Insert, a considerable number of the patients
enrolled in the trials chose to discontinue use of the Reliance Insert prior
to the end of a complete year for a variety of reasons, including discomfort
and, in some cases, urinary tract infections, experienced while using the
device. The Company expects that patients will experience a foreign-body
sensation, and in some cases, discomfort, during acclimation
<PAGE>
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and use of the product. Results of the clinical trials of the Impress
Miniguard indicated that some patients experienced slight tissue irritation
after use of that device and that 48% of the patients were unable to report
that they were completely dry when using the device. Although the safety and
efficacy of the Reliance Insert and Impress Miniguard were each deemed to be
sufficient for clearance by the FDA, there can be no assurance that either
product will continue to prove to be safe and effective over the long-term
and after wider use. Finally, the pricing of the Reliance Insert and the
Impress Miniguard in the United States and in many foreign markets has not
yet been finally determined, and the pricing policies of the Company and its
European distributors could adversely impact market acceptance of these
products as compared to competing products and treatments.
Any of the foregoing factors, or other factors, including the
availability or non-availability of third-party reimbursement, could limit or
detract from market acceptance of the Company's products in the United States
and abroad. Insufficient market acceptance of the Reliance Insert or the
Impress Miniguard would have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--The
Reliance Insert," "--The Impress Miniguard," and "--Third Party
Reimbursement."
Dependence on Two Products
The Company expects to derive substantially all of its revenues for the
next several years from sales of the Reliance Insert and the Impress
Miniguard. The Company's failure to commercialize successfully both of these
products would have a material adverse effect on the Company's business,
financial condition and results of operations. To date, the Company has not
conducted extensive clinical trials or sought regulatory clearance for any
products other than the Reliance Insert and the Impress Miniguard.
Consequently, the Company does not expect that commercialization of other new
products will be feasible without a substantial, continuing commitment to
research and development for an extended period of time or acquisitions of
new properties, or both. There can be no assurance as to whether or when
commercialization of other products might begin or as to the likelihood that
any such initiative would be successful. See "Business--Research and
Development."
Limited Manufacturing Capability and Experience
The Company has limited experience in manufacturing commercial quantities
of its Reliance Insert and has not manufactured significant quantities of any
other products, including the Impress Miniguard. In addition, the Company is
currently unable, due in part to the current volume of production, to
manufacture Reliance Inserts at a cost below the price at which such products
are currently being sold to the Company's European distributors. In order to
successfully commercialize the Reliance Insert in the United States and
abroad, the Company will have to reduce per-unit manufacturing costs while
maintaining the extremely high quality standards required. In addition, the
Company will not have the manufacturing capacity sufficient to support
expected demand for the Reliance Insert generated by sales to direct
customers in the United States and sales to the Company's distributors in
Europe unless the Company continues to increase its capacity to manufacture
such products as planned during the next year. Moreover, in the event that
demand for the Reliance Insert is greater than expected, the Company may not
be able to develop additional manufacturing capacity to produce quantities of
the Reliance Insert sufficient to supply such requirements in a timely
fashion. In the event that the Company's planned expansion of its
manufacturing capacity is delayed for any reason due to problems encountered
during such expansion, the Company may be unable to produce quantities of the
Reliance Insert to fulfill its commitments to its European distributors or
the demand of the United States market. The Company has not yet developed
any capacity to manufacture the Impress Miniguard, and has not yet been able
to demonstrate that it will be able to manufacture the Impress Miniguard or
to develop such capacity on a cost-effective basis. Even if the Company does
develop such capacity, it may not be able to develop sufficient capacity to
produce the quantities of the Impress Miniguard that may be required to
support its sales. In order to develop sufficient
<PAGE>
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additional manufacturing capacity, the Company will have to make substantial
capital expenditures on additional units of the Company's automated assembly
equipment for the Reliance Insert and new equipment to manufacture the
Impress Miniguard, and expand the Company's existing manufacturing facility
into space currently used for other functions, or acquire additional
manufacturing space at other locations. In the event that the Company is
unable to manufacture sufficient quantities of the Reliance Insert or the
Impress Miniguard to support its obligations under its European marketing and
sales agreements and ultimately to support sales in the United States, the
Company may be required to enter into arrangements with third parties to
manufacture these products. These other manufacturers may not be able to
manufacture the Reliance Insert or Impress Miniguard on commercially
acceptable terms or in quantities sufficient to permit the successful
commercialization of such products. See "Business--The Reliance
Insert--Manufacturing of the Reliance Insert," and "--The Impress
Miniguard--Manufacturing of the Impress Miniguard."
Dependence on Others for Components and Raw Materials
Certain of the raw materials for the manufacture of the Reliance Insert
and the Impress Miniguard are available only from single sources, and certain
of the components of the Reliance Insert are manufactured by third parties.
Interruptions in supplies of raw materials or components of the Reliance
Insert may occur as a result of business risks particular to such suppliers
or the failure of the Company and any such supplier to agree on satisfactory
terms. Such sources may also decide for reasons beyond the control of the
Company, such as concerns about potential medical product liability risk in
general, to cease supplying such materials or components for use in medical
devices generally. In the event of such an interruption, alternative sources
of raw materials or components may be limited. The Company is currently a
party to supply agreements with only some of its key suppliers and may not be
able to obtain agreements with some of its suppliers of raw materials or
components if it so desires. In the event that the Company replaces its
current raw materials used in the Reliance Insert or Impress Miniguard with
alternative materials, such product, as modified, may require new FDA and
other regulatory approvals, and additional clinical and other testing may be
required in order to obtain such approvals. Any interruption in the supply
of raw materials currently used by the Company or any components incorporated
in the Reliance Insert, or the usage of any alternative raw materials, would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business--The Reliance Insert--Manufacturing
of the Reliance Insert."
Lack of Marketing and Sales Experience; Dependence on European Marketing and
Sales Agreements
Although the FDA has cleared the Reliance Insert and Impress Miniguard
for marketing in the United States, the Company has sold only limited amounts
of the Reliance Insert in the United States and has not sold the Impress
Miniguard. The Company is in the process of developing a direct marketing and
sales group in the United States for its products and has begun to
commercialize the Reliance Insert internationally through marketing and sales
agreements. However, there can be no assurance that the Company can build an
effective sales force, attract and retain its own qualified marketing and
sales group in the United States, or otherwise design and implement an
effective marketing and sales strategy for the Reliance Insert, the Impress
Miniguard or any future product developed by the Company.
The Company believes that a portion of its future product revenue will be
derived from certain European markets including Germany, France, The
Netherlands, the United Kingdom, Sweden, Norway, Denmark and Finland. The
Company has entered into marketing and sales agreements with several European
companies providing for the marketing and sale of the Reliance Insert in
these countries on an exclusive basis. In general, pursuant to these
agreements, the Company is required to provide sufficient quantities of
Reliance Inserts for sale by its European distributors, and the Company's
European distributors are permitted to market and sell the Reliance
<PAGE>
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Insert in such countries at prices and in a manner determined by such
companies. There can be no assurance that the Company's European
distributors will be able to successfully market and sell the Reliance Insert
in their respective countries, that they will devote sufficient resources to
support the market launch of the Reliance Insert in those countries, or that
they will market the Reliance Insert at prices that will permit it to gain
market acceptance in their respective territories. In addition, these
agreements impose certain obligations upon the Company relating to delivery
of commercial quantities of the Reliance Insert, the maintenance of product
liability insurance and the clinical performance of the Reliance Insert.
Failure or inability of the Company to comply with any of these obligations
under these agreements could permit the Company's distributors to terminate
their respective agreements. In addition, there can be no assurance that
each or any of these distributors will perform its obligations under its
respective agreement with the Company. Any such termination or
non-performance, or any failure by the Company's European distributors to
effectively market the Reliance Insert in their respective territories, will
have a material adverse impact on the Company's ability to market and sell
the Reliance Insert in these territories, and perhaps other territories,
including the United States. The Company has not entered into any
distribution arrangements with respect to the Impress Miniguard for the
European market or elsewhere, and does not currently have a marketing
strategy that would enable it to undertake commercialization of the Impress
Miniguard in Europe on a unilateral basis. In the event that the Company is
successful in developing satisfactory distribution arrangements in one or
more European markets for the Impress Miniguard, such distribution
arrangements will be subject to risks and uncertainties similar to those of
the Company's existing relationships with respect to the Reliance Insert.
See "Business--Marketing and Sales," "--The Reliance Insert--Launch Strategy
in International Markets" and "--The Impress Miniguard--Launch Strategy in
International Markets."
Limited Operating History; History of Losses; Profitability Uncertain
Since inception in October 1990, the Company has been primarily engaged
in research and development of the Reliance Insert. The Company acquired the
Impress Miniguard technology in May 1996. The Company has experienced
significant operating losses since inception and, as of September 30, 1996,
had an accumulated deficit of $65.8 million, including $30.2 million relating
to the acquisition of the Impress Miniguard technology and related expenses.
In addition, the development and commercialization by the Company of the
Reliance Insert, the Impress Miniguard and other new products, if any, will
require substantial product development expenditures for the foreseeable
future. The Company's future profitability is dependent upon its ability to
successfully commercialize these products. There can be no assurance that
the Company will generate sufficient revenue to pay interest and principal on
the Notes or to achieve continued profitability. The Company expects its
operating losses to increase over the foreseeable future and there can be no
assurance that the Company will be profitable in the future or that the
Company's existing capital resources and any funds provided by future
operations will be sufficient to fund the Company's needs, or that other
sources of funding will be available.
Lack of Distribution Experience; Unconventional Distribution System
The Company has limited experience in distributing units of its products
to its ultimate consumers. In Europe, where nearly all of the sales of the
Company's products have been made to date, the Company relies on the
distribution systems of third party distributors. In addition, the
distribution system that the Company is developing in the United States is
designed as a direct-to-consumer system in which the Company expects that
most of its sales will be made over the telephone during calls originating
with the consumer, rather than in sales directly to pharmacies. These orders
would be filled directly by the Company. The Company is aware of no other
medical device manufacturer who has employed such a distribution strategy in
the United States. There can be no assurance that the Company's distribution
system, once developed, will be successful in filling orders made by the
Company's customers on a timely, accurate and cost-effective basis, or that
the Company's consumers will be willing to telephone orders to the Company
directly. In addition, as a
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licensed pharmacy, the Company's fulfillment center in Nashua, New Hampshire
is subject to state and federal regulation of its operations. Any
significant failure by the Company to fill orders for its products on an
accurate and timely basis, or otherwise to meet ongoing licensing
requirements, could result in a suspension or loss of its license and
interruption of its distribution activities, which in turn would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Distribution" and "--Government
Regulation."
Competition and Technological Advances
The incontinence product industry is highly competitive. The Company's
ability to compete in the UI management field will depend primarily upon
physician and consumer acceptance of the Reliance Insert and the Impress
Miniguard, consistency of product quality and delivery, price, technical
capability and the training of health care professionals and consumers.
Other factors within and outside the Company's control will also affect its
ability to compete, including its product development and innovation
capabilities, its ability to obtain required regulatory clearances, its
ability to protect the proprietary technology included in its products, its
manufacturing, marketing and distribution capabilities and its ability to
attract and retain skilled employees. Certain of the Company's competitors
have significantly greater financial, technical, research, marketing, sales,
distribution and other resources. See "Business--Competition."
Risks Relating to FDA Oversight and Other Government Regulation
The medical devices currently being manufactured, or proposed to be
manufactured, by the Company, including the Reliance Insert and the Impress
Miniguard, and the facilities at which the Company manufactures its products,
are subject to regulation by the FDA and, in many instances, by comparable
agencies in the foreign countries in which these devices are distributed and
sold. Although clearance to market the Reliance Insert and Impress Miniguard
in the United States has been granted by the FDA, the process of obtaining
regulatory approvals for the marketing and sale of any additional products,
or the modification of existing products, by the Company could be costly and
time-consuming and there can be no assurance that such approvals will be
granted on a timely basis, if at all. The regulatory process may delay the
marketing of new products for lengthy periods, impose substantial additional
costs and furnish an advantage to competitors who have greater financial
resources. Moreover, regulatory approvals for new or modified products, if
granted, may include significant limitations on the indicated uses for which
a product is marketed. In addition, the extent of potentially adverse
governmental regulations that might arise from future legislative,
administrative or judicial action cannot be determined. The final approval
granted by the FDA for marketing the Reliance Insert in the United States was
conditioned upon final labeling review and an undertaking to complete a
five-year post-marketing study covering 150 patients designed to determine
(i) the degree of urinary tract infection associated with use of the device,
including type and frequency of symptomatic bacteriuria, and (ii) the
long-term effect of use of the device on urethral integrity. If the FDA
believes that the Company is not in compliance with applicable law and
regulations, the FDA can take one or more of the following actions: withdraw
previously approved applications; require notification to users regarding
newly found, unreasonable risks; request the repair, refund or replacement of
faulty devices; request corrective advertisements, formal recalls or
temporary marketing suspension; refuse to review or clear applications to
market any of the Company's future products in the United States or to allow
the Company to enter into government supply contracts; or institute legal
proceedings to detain or seize products, enjoin future violations or assess
criminal penalties against the Company, its officers or employees. Civil
penalties for Food, Drug and Cosmetic Act violations may be assessed by the
FDA in lieu of or in addition to instituting legal action. Any such action
by the FDA could result in disruption of the Company's operations for an
indeterminate period of time. The Company's manufacturing facility in
Needham, Massachusetts, the operations conducted there, and any future
manufacturing facilities developed or acquired by the Company and any
operations conducted there are subject to on-going inspections by the FDA.
The Company registered the facility with the FDA in connection with its
Pre-Market Approval
<PAGE>
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application for the Reliance Insert and FDA representatives inspected the
facility and operations prior to granting approval of such application.
Although the Company's facility passed inspection in connection with this
approval, as a registered manufacturing facility subject to "Good
Manufacturing Practices" ("GMP"), this facility is subject to future
inspections no less frequently than once every two years. Any revocation of
the Company's approval for marketing either the Reliance Insert or the
Impress Miniguard, or any material product recall or loss of certification of
the Company's manufacturing facility, would have a material adverse effect on
the Company's business, financial condition and results of operations. The
Company is also subject to regulation under federal, state and local
regulations regarding maintenance of a licensed pharmacy, work place safety,
environmental protection and hazardous and controlled substance controls,
among others. The Company cannot predict the extent of government
regulations or impact of new government regulations which might have an
adverse effect on the production and marketing of the Company's products.
See "Business--Research and Development," "--The Reliance Insert--Regulatory
Status of the Reliance Insert," "--The Impress Miniguard--Regulatory Status
of the Impress Miniguard," and "--Government Regulation."
Risk of Inadequate Funding; Future Capital Funding
The Company plans to continue to expend substantial funds on expansion of
its manufacturing facilities or acquisition of additional manufacturing
facilities, marketing and distribution of its products, research and product
development and pursuit of regulatory approvals. The Company also intends to
invest in additional equipment in order to establish sufficient manufacturing
capabilities to supply commercial volumes of its Reliance Insert and Impress
Miniguard in the United States and abroad. Changes in technology or sales
growth beyond currently contemplated manufacturing capabilities will require
further capital investment. There can be no assurance that the Company's
existing capital resources and any funds generated from future operations
will be sufficient to finance any required investment or pay interest and
principal of the Notes or that other sources of funding will be available.
In addition, future sales of substantial amounts of the Company's securities
in the public market could adversely affect prevailing market prices and
could impair the Company's future ability to raise capital through the sale
of its securities.
Uncertainty Regarding Patents and Protection of Proprietary Technology
The Company's ability to compete effectively will depend, in part, on its
ability to develop and maintain proprietary aspects of its technology. There
can be no assurance as to the validity of the United States patents held by
the Company with respect to the technology underlying the Reliance Insert,
the validity of the United States patents with respect to the technology
underlying the Impress Miniguard, or as to the degree of protection offered
by these patents. There can be no assurance that the Company's patents 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 that will prevent, limit or
interfere with the Company's ability to make, use and sell its products
either inside or outside the United States. The defense and prosecution of
patent litigation or other legal or administrative proceedings related to
patents is both costly and time-consuming, even if the outcome is favorable
to the Company. During the pendency of any such proceedings, the Company may
be restrained, enjoined or otherwise limited in its ability to make, use or
sell a product incorporating the patents or technology that are the subject
of such claim, which would have a material adverse effect on the Company's
business, financial condition and results of operations. An adverse outcome
in any such proceeding could subject the Company to significant liabilities
to third parties, require disputed rights to be licensed from others or
require the Company to cease making, using or selling any products. There
can be no assurance that any licenses required under any patents or
proprietary rights would be made available on terms acceptable to the
Company, if at all.
<PAGE>
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The Company also relies on unpatented proprietary technology and there
can be no assurance that others may not independently develop the same or
similar technology or otherwise obtain access to the Company's unpatented
proprietary technology. In addition, the Company cannot be certain that
others will not independently develop substantially equivalent or superseding
proprietary technology, or that an equivalent product will not be marketed in
competition with the Company's products, thereby substantially reducing the
value of the Company's proprietary rights. There can be no assurance that
any confidentiality agreements between the Company and its employees will
provide meaningful protection for the Company's trade secrets, know-how or
other proprietary information in the event of any unauthorized use or
disclosure of such trade secrets, know-how or other proprietary information.
Finally, there can be no assurance that the Company's Reliance trademark or
any trademarks chosen and registered for the Impress Miniguard will provide
meaningful protection. See "Business--Patents and Proprietary Rights."
Product Liability Risk; Limited Insurance Coverage
The manufacture and sale of medical products and the conduct of clinical
trials using new technology entail the risk of product liability claims.
There can be no assurance that the Company's existing insurance coverage
limits are adequate to protect the Company from any liabilities which it
might incur in connection with the clinical trials of the Company's Reliance
Insert, the commercialization of the Reliance Insert in the United States and
in Europe or the contemplated commercialization of the Impress Miniguard.
The Company will require increased product liability insurance coverage in
connection with the broad commercial distribution of its products in the
United States and abroad. Such insurance is expensive and in the future may
not be available on acceptable terms, if at all. A successful product
liability claim or series of product liability claims brought against the
Company in excess of its insurance coverage would have a material adverse
effect on the Company's business, financial condition and results of
operations. In addition, any claims, even if not ultimately successful,
could adversely affect the market acceptance of the Company's products.
Dependence on Key Personnel
The Company is dependent upon a number of key scientific and management
personnel (most of whom do not have employment agreements providing for a
fixed term of employment). The loss of the services of one or more key
individuals would have a material adverse effect on the Company's business,
financial condition and results of operations. The Company's success will
also depend on its ability to attract and retain other highly qualified
scientific and management personnel. The Company faces competition for such
personnel and there can be no assurance that the Company will be able to
attract or retain such personnel. See "Management."
Uncertainty Relating to Third-Party Reimbursement
In the United States and many foreign countries, third-party
reimbursement is currently generally available for surgical procedures for
incontinence, but generally unavailable for patient-managed products such as
diapers and pads. As part of its near-term marketing plan in the United
States, the Company does not believe it will obtain government or private
insurance reimbursement for its Reliance Insert or Impress Miniguard and that
the prospect of substantial third-party reimbursement for either device in
the United States may be unlikely. In Europe, the Company and its European
distributors have agreed to adopt a strategy of pursuing reimbursement for
the use of the Reliance Insert in each of their respective territories where
it is appropriate. The availability of third-party reimbursement for the
Reliance Insert in Europe varies from country to country. While the Company
has received notice that full reimbursement for the use of the Reliance
Insert will be provided by the relevant German, Swedish and Norwegian
governmental authorities and by certain authorities covering much of Denmark
and Finland, it is unclear whether reimbursement will be available for the
Reliance Insert in the remainder of Denmark or Finland, or whether
reimbursement will be available for the Reliance Insert in France, The
Netherlands or the
<PAGE>
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United Kingdom. It is also unclear whether or not such reimbursement
approvals that the Company has received may at some point in the future be
reversed. The Company has not yet established a strategy with respect to
seeking reimbursement for the Impress Miniguard outside of the United States.
If third-party reimbursement is unavailable in the relevant European country
or in the United States, consumers will have to pay for the Reliance Insert
or Impress Miniguard themselves, resulting in greater relative out-of-pocket
cost of such therapies as compared to surgical procedures and other
management options for which third-party reimbursement is available. Changes
in the availability of third-party reimbursement for the Reliance Insert or
Impress Miniguard, for products of the Company's competitors or for surgical
procedures may affect the pricing of the Company's products or the relative
cost to the consumer. The Company is not able to predict the effect that the
availability or unavailability of third-party reimbursement for the Reliance
Insert or Impress Miniguard may have on the commercialization of such
products abroad or in the United States. See "Business--Third-Party
Reimbursement."
International Sales and Operations Risks
The Reliance Insert is currently being marketed and sold by the Company's
European distributors in Germany, Sweden, Denmark, Norway, The Netherlands,
the United Kingdom and Finland and the Company intends to sell the Reliance
Insert in France through its French distributor. International sales and
operations may be limited or disrupted by the imposition of government
controls, export license requirements, political instability, trade
restrictions, changes in tariffs or difficulties in staffing and managing
international operations. Foreign regulatory agencies often establish product
standards different from those in the United States and any inability to
obtain foreign regulatory approvals on a timely basis would have an adverse
effect on the Company's international business and its financial condition
and results of operations. Additionally, the Company's business, financial
condition and results of operations may be adversely affected by fluctuations
in currency exchange rates as well as increases in duty rates and
difficulties in obtaining export licenses. There can be no assurance that
the Company will be able to successfully commercialize the Reliance Insert,
the Impress Miniguard or any future product in any foreign market. See
"Business--The Reliance Insert--Launch Strategy in International Markets" and
"--The Impress Miniguard--Launch Strategy in International Markets."
Volatility of Market Prices
The market price of the Common Stock and Notes may be highly volatile.
Factors such as quarter-to-quarter variations in the Company's operations or
financial performance and announcements of technological innovations or new
products, results of clinical trials or other regulatory or reimbursement
events by the Company or its competitors or any of its or their regulators
could cause the market price of the Common Stock or Notes to fluctuate
significantly. In addition, in recent years the stock markets in general,
and the market prices for medical technology companies in particular, have
experienced significant volatility, which often may have been unrelated to
the operating performance of the affected companies. Such volatility may
adversely affect the market price of the Common Stock or Notes. See "Price
Range of Common Stock and Dividend Policy."
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Certain Charter and By-Law Provisions May Affect Market Prices
The Company's Restated Articles of Organization and the Company's Amended
and Restated By-Laws contain provisions that may have the effect of making it
more difficult for a third party to acquire control of, or of discouraging
acquisition bids for, the Company. This could limit the price that certain
investors might be willing to pay in the future for shares of Common Stock or
the Notes. See "Description of Capital Stock."
Certain Massachusetts Laws May Affect Market Prices
Certain Massachusetts laws contain provisions that may have the effect of
making it more difficult for a third party to acquire control of, or of
discouraging acquisition bids for, the Company. These laws include Chapter
110F of the Massachusetts General Laws, which prohibits certain "business
combinations" with "interested stockholders," and Chapter 110D, entitled
"Regulation of Control Share Acquisitions." These provisions could limit the
price that certain investors might be willing to pay in the future for shares
of Common Stock or the Notes. See "Description of Capital Stock."
Effect of Issuance of Preferred Stock
Shares of preferred stock may be issued in the future without further
stockholder approval and upon such terms and conditions, and having such
rights, privileges and preferences, as the Board of Directors may determine.
The rights of the holders of Common Stock will be subject to, and may be
adversely affected by, the rights of the holders of any preferred stock that
may be issued in the future. In addition, the issuance of preferred stock
could have the effect of making it more difficult for a third party to
acquire control of, or of discouraging acquisition bids for, the Company.
This could limit the price that certain investors might be willing to pay in
the future for shares of Common Stock or the Notes. See "Description of
Capital Stock."
Absence of Trading Market; Transfer Restrictions
There is no existing trading market for the Notes and there can be no
assurance as to the liquidity of any such market that may develop, the
ability of the holders of Notes to sell such securities, the price at which
the holders of Notes would be able to sell such securities or whether a
trading market, if it develops, will continue. If such a market were to
exist, the Notes could trade at prices higher or lower than their principal
amount depending on many factors, including prevailing interest rates, the
market for similar securities and the operating results of the Company.
Concentration of Ownership
As of December 31, 1996, directors and officers of the Company and their
affiliates owned approximately 24% of the outstanding Common Stock (including
options to purchase Common Stock exercisable within 60 days of such date).
As a result, such persons have the ability to assert significant influence
over the Company and the direction of its affairs and business. See
"Principal Stockholders."
Absence of Dividends
The Company has not paid cash dividends and does not anticipate doing so
for the foreseeable future. See "Price Range of Common Stock and Dividend
Policy."
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Shares Available for Future Sale
The future sale of shares of the Company's Common Stock could have an
adverse effect on the market price of the Common Stock or the Notes. The
Company currently has two effective registration statements on file with the
Securities and Exchange Commission initially covering the resale of up to an
aggregate of 8,519,538 shares of Common Stock held by certain current
shareholders of the Company. Of these 8,519,538 shares, 6,184,512 shares are
covered by a registration statement which was declared effective in October
1995 registering shares of Common Stock held by 73 holders. These shares,
representing shares of Common Stock issued upon the conversion of the
Company's previously outstanding convertible preferred stock, were registered
at the request of the holders of such shares. All of these shares, with the
exception of 1,641,257 shares held by an affiliate of the Company, may be
sold currently under Rule 144(k) under the Securities Act without regard to
volume or other limitations. The remaining 2,335,026 shares, which were
issued to the former shareholders of Advanced Surgical Intervention, Inc. in
connection with the acquisition of the Impress Miniguard technology in May
1996, are covered by a registration statement which was declared effective in
June 1996. These shares are held by 273 holders, with the largest number of
shares held by any single holder thereunder being approximately 252,000
shares. The Company believes that many of the shares covered by these
registration statements have been sold in the open market prior to the date
hereof. All of the shares covered by these registration statements are
freely tradeable in the open market without volume limitations. As of
December 31, 1996 the Company also has options outstanding to purchase an
aggregate of 1,535,283 shares of Common Stock and has an additional 1,076,354
shares of Common Stock reserved for issuance of options which may be granted
and exercised under the Company's existing employee benefit plans. Any
shares of Common Stock issued upon the exercise of such outstanding options
or any options granted in the future will be, upon issuance, freely tradeable
on the open market, subject in some cases to the volume limitations imposed
by Rule 144 under the Securities Act.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1996, and as adjusted to give effect to the issuance and sale
by the Company of $69.0 million aggregate principal amount of Notes.
September 30, 1996
-----------------------
Actual As Adjusted
------ -----------
(in thousands)
Convertible subordinated notes $ -- $ 69,000
Stockholders' equity:
Preferred Stock, $.01 par value; 500,000 shares
authorized; no shares issued -- --
Common Stock, no par value; 50,000,000 shares
authorized; 26,423,927 shares issued (1) 106,664 106,664
Additional paid-in capital 737 737
Net unrealized (loss) on investments
available-for-sale (35) (35)
Deferred compensation (229) (229)
Accumulated deficit (65,841) (65,841)
-------- -------
Total stockholders' equity 41,295 41,295
-------- -------
Total capitalization $ 41,295 $110,295
-------- -------
-------- -------
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- -------------------
(1) Does not include (i) 1,405,403 shares issuable upon exercise of employee,
director and consultant stock options outstanding as of December 31,
1996, (ii) 1,221,922 shares issuable upon the exercise of employee,
director and consultant stock options that may be granted from time to
time pursuant to the Company's existing employee benefit plans, or (iii)
the shares issuable upon conversion of the Notes. See "Principal
Stockholders."
USE OF PROCEEDS OF THE INITIAL SALE
The net proceeds to the Company from the Initial Sale were approximately
$66.2 million after deduction of the offering discounts, commissions and
offering expenses.
At the completion of the Initial Sale the Company had cash, cash
equivalents and short-term investments of approximately $106.6 million. The
Company intends to use its available cash during the 24 month period
following the Initial Sale for: (i) sales and marketing efforts in
connection with the launch of the Reliance Insert and the continued
development of a direct sale and marketing group for the United States; (ii)
capital expenditures and the acquisition of additional manufacturing
equipment, and the possible expansion of the Company's manufacturing facility
or acquisition or development of an additional manufacturing facility, to
increase the Company's capability to produce commercial quantities of the
Reliance Insert; (iii) sales and marketing efforts related to the Impress
Miniguard; (iv) capital expenditures and acquisition of manufacturing
equipment in connection with the development of the Company's manufacturing
capability for the Impress Miniguard; (v) ongoing research and development
and clinical trials of the Reliance Insert and Impress Miniguard, as well as
other urological and gynecological products and (vi) working capital and
general corporate purposes, including the possible acquisition or
in-licensing of businesses, products and technologies in the health care
area, [although the Company has no specific plans or commitments for any such
acquisition and is not currently engaged in negotiation regarding any
acquisition.] The amounts and timing of the expenditures of the net proceeds
for these purposes will depend on numerous factors, such as the status of the
competition, manufacturing yields and the market acceptance of the Reliance
Insert and Impress Miniguard and any other products introduced by the Company
in the United States and abroad, the status of the Company's product
development efforts and the results of clinical trials. Excluding any
possible revenues from the sale of the Reliance Insert and Impress Miniguard
in Europe or the United States or the sale of the Impress Miniguard in the
United States, the Company expects that the net proceeds of the Initial Sale
together with the Company's current cash, cash equivalents and short-term
investments, will be sufficient to fund the Company's operating expenses and
capital requirements for the foreseeable future.
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 50,000,000 shares of
Common Stock, no par value, and 500,000 shares of preferred stock, $.01 par
value ("Preferred Stock").
Common Stock
As of December 31, 1996, there were 24,446,257 shares of Common Stock
outstanding. Holders of Common Stock are entitled to one vote for each share
held of record on all matters submitted to a vote of stockholders.
Accordingly, holders of a majority of the shares of Common Stock entitled to
vote in any election of Directors may elect all of the Directors standing for
election. Subject to preferential dividend rights with respect to any
outstanding Preferred Stock, holders of Common Stock are entitled to receive
ratably such dividends, if any, as may be declared by the Board of Directors
out of funds legally available therefor. Upon liquidation, dissolution or
winding up of the Company, holders of Common Stock are entitled to share
ratably in the assets of the Company legally available for distribution to
the holders of Common Stock, and subject to any prior rights of any
outstanding Preferred Stock. Holders of Common Stock have no cumulative
voting rights nor any preemptive, subscription, redemption or conversion
rights. All outstanding shares of
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Common Stock are, and the shares issuable upon the conversion of the Notes
offered hereby will be, when issued and paid for, validly issued, fully paid
and non-assessable. The rights, preferences and privileges of holders of
Common Stock are subject to, and may be adversely affected by, the rights of
the holders of shares of any series of Preferred Stock which the Company may
designate and issue in the future.
Preferred Stock
The Board of Directors is authorized, without stockholder approval, to
issue the Preferred Stock in one or more series, with such rights,
preferences and qualifications as the Board of Directors may in its
discretion determine. The Company currently has no plans to issue any shares
of Preferred Stock. If the Company issues Preferred Stock in the future, the
terms of the Preferred Stock may include, among other things, extraordinary
voting, dividend, redemption or conversion rights which could discourage
acquisition bids of the Company and adversely affect the holders of Common
Stock.
Massachusetts Law and Certain Charter and By-Law Provisions
Certain Anti-Takeover Provisions
The Company is subject to the provisions of Chapter 110F of the
Massachusetts General Laws, an anti-takeover law. In general, this statute
prohibits a Massachusetts corporation with more than 200 stockholders from
engaging in a "business combination" with "interested stockholders" for a
period of three years after the date of the transaction in which the person
becomes an interested stockholder, unless either (i) the Board of Directors
approves the business combination or the transaction in which the interested
stockholder became an interested stockholder prior to such stockholder
becoming an interested stockholder, (ii) the interested stockholder acquires
90% of the outstanding voting stock of the corporation (excluding shares held
by certain affiliates of the corporation) at the time the stockholder becomes
an interested stockholder or (iii) the business combination is approved by
both the Board of Directors at a meeting or by written consent and holders of
two-thirds of the outstanding voting stock of the corporation (excluding
shares held by the interested stockholder) at a meeting and not by written
consent. An "interested stockholder" is a person who, together with
affiliates and associates, owns (or at any time within the prior three years
did own) 5% or more of the corporation's voting stock. A "business
combination" includes a merger, a stock or asset sale, and certain other
specified transactions resulting in a financial benefit to the stockholder.
In addition, Massachusetts General Laws Chapter 110D, entitled "Regulation of
Control Share Acquisition," provides, in general, that any stockholder of a
corporation subject to this statute who acquires 20% or more of the
outstanding voting stock of a corporation may not vote such stock unless the
stockholders of the corporation so authorize at a meeting and not by written
consent.
Massachusetts General Laws Chapter 156B, Section 50A, requires that,
unless an express election is made, a publicly held Massachusetts corporation
have a classified Board of Directors consisting of three classes as nearly
equal in size as possible. The Company is subject to the provisions of
Section 50A.
Certain of the provisions of the Company's Restated Articles of
Organization discussed above and the Massachusetts Business Corporation Law
would make more difficult or could discourage a proxy contest or the
acquisitions of control by a holder of a substantial block of the Company's
stock or the removal of the incumbent Board of Directors and could also have
the effect of discouraging a third party from making a tender offer or
otherwise attempting to obtain control of the Company, even though such an
attempt might be beneficial to the Company and its stockholders. In
addition, because certain provisions of the Restated Articles of Organization
and the Massachusetts Business Corporation Law are designed to discourage
accumulations of large blocks of the Company's stock by purchasers whose
objective is to have such stock repurchased by the Company at a premium, such
provisions could tend to reduce the temporary fluctuations in the market
price of the Company's stock which are caused by such accumulations.
Accordingly,
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stockholders could be deprived of certain opportunities to sell their stock
at a temporarily higher market price.
Reference is made to the full text of the foregoing statutes, the
Company's Restated Articles of Organization and the Company's Amended and
Restated By-laws for their entire terms, and the partial summary contained
herein is not intended to be complete.
Elimination of Monetary Liability for Officers and Directors
The Company's Restated Articles of Organization also incorporate certain
provisions permitted under the Massachusetts General Laws relating to the
liability of Directors. The provisions eliminate a Director's liability for
monetary damages for a breach of fiduciary duty, including gross negligence,
except in circumstances involving certain wrongful acts, such as the breach
of a Director's duty of loyalty or acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law or
authorization of distributions in violation of the Restated Articles of
Organization or of loans to officers or Directors of the Company, but do not
eliminate a Director's duty of care. Moreover, the provisions do not apply
to claims against a Director for violations of certain laws, including
federal securities laws. The Company's Restated Articles of Organization and
Amended and Restated By-Laws also contain provisions to indemnify the
Directors, officers, employees or other agents to the fullest extent
permitted by the Massachusetts General Laws. The Company believes that these
provisions will assist the Company in attracting or retaining qualified
individuals to serve as Directors or officers.
Indemnification of Officers and Directors
The Company's Restated Articles of Organization also contain provisions
to indemnify its Directors, officers, employees or other agents to the
fullest extent permitted by the Massachusetts General Laws. These provisions
may have the practical effect in certain cases of eliminating the ability of
stockholders to collect monetary damages from Directors. The Company
believes that these provisions will assist the Company in attracting or
retaining qualified individuals to serve as Directors or officers.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Common Stock of the Company is
Boston EquiServ LLP.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock is traded on The Nasdaq Stock Market under the symbol
URMD. The following table sets forth, for the periods indicated, the range
of high and low sales prices for the Common Stock as reported by Nasdaq.
High Low
---- ---
1994
First Quarter (1) . . . . . . . . $ 8 3/4 $ 5
Second Quarter. . . . . . . . . . 6 1/2 3 3/8
Third Quarter . . . . . . . . . . 5 1/2 3
Fourth Quarter. . . . . . . . . . 5 3/4 3
1995
First Quarter . . . . . . . . . . $ 7 1/2 $ 5 1/8
Second Quarter. . . . . . . . . . 8 5/8 5 7/8
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Third Quarter . . . . . . . . . . 11 3/4 7 1/4
Fourth Quarter. . . . . . . . . . 13 1/4 8 1/4
1996
First Quarter . . . . . . . . . . $16 1/2 $ 9 1/4
Second Quarter. . . . . . . . . . 14 1/2 8 3/4
Third Quarter . . . . . . . . . . 14 5/8 9 1/4
Fourth Quarter. . . . . . . . . . 12 1/4 8 3/4
1997
First Quarter (through
January 24, 1997). . . . . . . . $ 9 3/4 $ 6 3/4
- -------------------
(1) From March 16, 1994, the closing date of the Company's initial public
offering.
On January 24, 1997, the last reported bid price of the Common Stock on
The Nasdaq Stock Market was $8.875 per share. As of December 31, 1996,
there were approximately 427 holders of record of the Common Stock.
The Company has never paid dividends on its capital stock and does not
anticipate paying any dividends in the foreseeable future. The Company
currently intends to retain its earnings, if any, for the development of its
business.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of December 31, 1996
for (i) each person who is known by the Company to own beneficially more than
5% of the outstanding shares of Common Stock, (ii) each director of the
Company, (iii) each of the three other executive officers of the Company
whose total salary and bonuses for 1995 exceeded $100,000, and (iv) all of
the directors and officers of the Company as a group.
Shares Beneficially
Owned(1)
-------------------
Name Number Percent
- ---- ------ -------
John G. Simon. . . . . . . . . . . . . . . 4,212,956(2) 16.0%
Massachusetts Financial Services Company 3,426,700(3) 13.0%
500 Boylston Street
Boston, Massachusetts 02116-3741
Steven J. Gilbert. . . . . . . . . . . . . 1,642,337(4) 6.2%
Soros Capital L.P.. . . . . . . . . . . . . 1,445,454(5) 5.5%
888 Seventh Avenue
New York, New York 10106
Joanne H. Moon . . . . . . . . . . . . . . 278,670(6) 1.1%
Richard A. Sandberg. . . . . . . . . . . . 11,879(7) *
Thomas E. Tierney. . . . . . . . . . . . . 59,130(8) *
David P. Fialkow . . . . . . . . . . . . . 59,130(9) *
Elizabeth B. Connell, M.D. . . . . . . . 28,750(10) *
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Carl J. Wisnosky . . . . . . . . . . . . . 103,052(11) *
Paul J. Murphy . . . . . . . . . . . . . . 48,749(12) *
All directors and executive officers as a
group (14 persons) . . . . . . . . . . . 6,427,700(13) 24.3%
- -------------------
* Less than 1%
(1) Unless otherwise indicated in these footnotes, each stockholder has sole
voting and investment power with respect to the shares beneficially
owned. Includes shares issuable upon exercise of options exercisable as
of December 31, 1996 or within 60 days after such date.
(2) Includes (1) 32,920 shares held by The Clarendon 1993 Irrevocable Trust,
of which Mr. Simon is a Trustee and over which Mr. Simon shares
investment and voting control, (ii) 16,460 shares issuable upon exercise
of nonstatutory stock options, and (iii) 185,329 shares held by UroMed
employees and Medical and Scientific Advisory Board members with respect
to which Mr. Simon has the right to direct the vote pursuant to
contractual relationships between the Company and such persons.
(3) Represents shares beneficially owned by certain other entities as well as
Massachusetts Financial Services Company ("MFS") for which MFS exercises
sole voting and sole dispositive power. Information has been obtained
from MFS.
(4) Includes 1,432,253 shares owned by Soros Capital L.P. of which Mr.
Gilbert is managing general partner. Also includes 20,210 shares
issuable upon exercise of nonstatutory stock options.
(5) Based on information provided to the Company by Boston EquiServe LLP,
transfer agent for the Company.
(6) Includes (i) 38,670 shares issuable upon exercise of incentive stock
options, (ii) an aggregate of 9,400 shares owned by trusts of which Ms.
Moon is a trustee for the benefit of her minor children, and (iii)
155,600 owned by a revocable trust of which Ms. Moon's husband is the
sole trustee. Ms. Moon disclaims beneficial interest in these shares
held by trusts for the benefit of other persons.
(7) Includes 11,710 shares issuable upon exercise of nonstatutory stock
options.
(8) Represents (i) 53,130 shares issuable upon exercise of nonstatutory stock
options, and (ii) 6,000 shares held by Mr. Tierney's spouse.
(9) Includes 3,750 shares issuable upon exercise of nonstatutory stock options.
(10) Represents 28,750 shares issuable upon exercise of nonstatutory stock
options.
(11) Includes 34,583 shares issuable upon exercise of incentive stock options.
<PAGE>
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(12) Includes 48,000 shares issuable upon exercise of incentive stock options.
(13) Includes 269,596 shares issuable upon exercise of incentive and
nonstatutory stock options.
<PAGE>
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
UROMED CORPORATION
Dated: January 31, 1997 By: /s/ Paul J. Murphy
------------------------------------
Paul J. Murphy, Treasurer and
Chief Financial Officer
