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BIOSPHERE MEDICAL, INC. IS FILING PAGES 14 TO 23 OF THE COMPANY'S QUARTERLY
REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000, WHICH ARE
DEEMED TO BE FILED SOLELY WITH RESPECT TO THE SECTION TITLED "FACTORS AFFECTING
FUTURE OPERATING RESULTS."
FACTORS AFFECTING FUTURE OPERATING RESULTS
The following important factors, among other things, could cause BioSphere
Medical, Inc.'s actual operating results to differ materially from those
indicated or suggested by forward-looking statements made in this Form 10-Q or
presented elsewhere by management from time to time.
RISK RELATING TO OUR FUTURE PROFITABILITY
BECAUSE WE HAVE A HISTORY OF LOSSES AND OUR FUTURE PROFITABILITY IS UNCERTAIN,
OUR COMMON STOCK IS A HIGHLY SPECULATIVE INVESTMENT
We have incurred operating losses since our inception and, as of June 30,
2000, had an accumulated deficit of approximately $39.7 million. We expect to
spend substantial funds to continue research and product testing, to establish
sales, marketing, quality control, regulatory and administrative capabilities,
and for other general corporate purposes. We expect to incur increasing losses
over the next several years as we expand our commercialization efforts.
We may never become profitable. If we do become profitable, we may not
remain profitable on a continuing basis. Our failure to become and remain
profitable would depress the market price of our common stock and impair our
ability to raise capital and continue our operations.
RISKS RELATING TO REGULATORY MATTERS
IF WE DO NOT OBTAIN THE REGULATORY APPROVALS REQUIRED TO MARKET AND SELL OUR
PRODUCTS, THEN OUR BUSINESS WILL BE UNSUCCESSFUL AND THE MARKET PRICE OF OUR
STOCK WILL SUBSTANTIALLY DECLINE
We are subject to governmental regulation by national and local government
agencies in the United States and abroad with respect to the manufacture,
packaging, labeling, advertising, promotion, distribution and sale of our
products. For example, our products are subject to approval or clearance by the
FDA prior to marketing in the United States for commercial use. The process of
obtaining necessary regulatory approvals and clearances will be time-consuming
and expensive for us. If we do not receive required regulatory approval or
clearance to market our products, we will not be able to develop and
commercialize our products and become profitable, and the value of our common
stock will substantially decline.
We are focusing our immediate product commercialization efforts on our
Embosphere Microspheres. In April 2000, we obtained marketing clearance from the
FDA to use our Embosphere Microspheres in the United States for the embolization
of hypervascularized tumors and arteriovenous malformations. However, we will
require FDA clearance of either a premarket notification under Section 510(k) of
the Federal Food, Drug and Cosmetic Act, which we refer to as a 510(k)
notification, or approval of a premarket approval application under Section 515
of the Federal Food, Drug and Cosmetic Act, which we refer to as a premarket
approval, before we can market Embosphere Microspheres in the United States for
use in the embolization of uterine fibroids. We do not expect to receive the
required clearance for uterine fibroids until 2002, if at all. In either case,
the FDA will require us to undertake clinical trials, which may be lengthy and
expensive. We currently do not have regulatory approvals or clearances to market
any other product in any country, other than approvals to market our Embosphere
Microspheres in the European Union, Australia and Canada for the treatment of
arteriovenous malformations, hypervascularized tumors and blood loss.
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IF THE FDA OR OTHER REGULATORY AGENCIES PLACE RESTRICTIONS ON, OR IMPOSE
ADDITIONAL APPROVAL REQUIREMENTS WITH RESPECT TO, PRODUCTS WE ARE THEN
MARKETING, WE MAY INCUR SUBSTANTIAL ADDITIONAL COSTS AND EXPERIENCE DELAYS OR
DIFFICULTIES IN CONTINUING TO MARKET AND SELL THESE PRODUCTS
Even if the FDA grants to us approval or clearance with respect to any of
our products, it may place substantial restrictions on the indications for which
we may market the product or to whom we may market the product, which could
result in us achieving less sales and lower revenues. The nature of the
marketing claims we are permitted to make in labeling or advertising regarding
our Embosphere Microspheres is limited to those specified in any FDA clearance
or approval, and if the FDA determines that we have made claims beyond those
cleared or approved by the FDA, then we will be in violation of the Federal
Food, Drug, and Cosmetic Act. For example, our products are not specifically
approved for labeling for use for uterine fibroids, which is one of the uses for
which we anticipate physicians may use our products. We may not initiate
discussions with physicians about this use and, if a physician initiates the
discussion, we may only provide peer-reviewed literature.
We may in the future make modifications to our Embosphere Microspheres,
which we determine do not necessitate the filing of a new 510(k) notification.
However, if the FDA does not agree with our determination, it will require us to
make additional filings for the modification, and we will be prohibited from
marketing the modified product until we obtain FDA clearance or approval, which
could delay our ability to introduce product modifications and enhancements into
the market.
Further, the FDA has classified our embolotherapy device into Class III,
which means that even though we have obtained clearance under Section 510(k) of
the Federal Food, Drug and Cosmetic Act to market the device, the FDA could in
the future promulgate a regulation requiring premarket approval of the device
under Section 515 of the Federal Food, Drug and Cosmetic Act to allow it to
remain on the market. A requirement for premarket approval would likely require
us to conduct costly and lengthy clinical trials. We may experience difficulty
in providing to the FDA sufficient data for premarket approval in a timely
fashion, if at all. If we fail to obtain premarket approval, the FDA would
require us to remove our product from the United States market. In addition, the
FDA may require us to conduct a post-market surveillance study on our
embolotherapy device, which is designed to track specific elements of patient
experience with our Embosphere Microspheres product after we have begun
marketing it. If such a study revealed an unexpected rate of adverse events, the
FDA could place further restrictions on our marketing of the device, or rescind
our clearance.
Our legally-marketed products will be subject to continuing FDA
requirements relating to quality control, quality assurance, maintenance of
records, documentation, labeling and promotion of medical devices. We are also
required to submit medical device reports to the FDA to report device-related
deaths, serious injuries and malfunctions, the recurrence of which would be
likely to cause or contribute to a death or serious injury. These reports are
publicly available and, therefore, can become a basis for private tort suits,
including class actions, with respect to our products. Any of these suits would
be costly and time-consuming and would divert our management's attention from
the continued development of our business.
IF WE FAIL TO COMPLY WITH REGULATORY LAWS AND REGULATIONS, WE WILL BE SUBJECT TO
ENFORCEMENT ACTIONS, WHICH WILL AFFECT OUR ABILITY TO MARKET AND SELL OUR
PRODUCTS AND MAY HARM OUR REPUTATION
If we fail to comply with applicable federal, state or foreign laws or
regulations, we could be subject to enforcement actions, which could affect our
ability to develop, market and sell our products successfully and could harm our
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reputation and lead to less acceptance of our products by the market. These
enforcement actions include:
- product seizures;
- voluntary or mandatory recalls;
- voluntary or mandatory patient or physician notification;
- withdrawal of product clearances or approvals;
- withdrawal of investigational drug exemption approval;
- restrictions on or prohibitions against marketing our products;
- fines;
- injunctions;
- civil and criminal penalties; and
- withdrawal of premarket approval or rescission of premarket notification
clearance.
IF OUR CLINICAL TRIALS ARE NOT COMPLETED SUCCESSFULLY, WE WILL NOT BE ABLE TO
DEVELOP AND COMMERCIALIZE OUR PRODUCTS
Although for planning purposes we forecast the timing of completion of
clinical trials, the actual timing can vary dramatically due to factors such as
delays, scheduling conflicts with participating clinicians and clinical
institutions, the rate of patient accruals and the uncertainties inherent in the
clinical trial process. In addition, because we have limited experience in
conducting clinical trials, we may rely on academic institutions or clinical
research organizations to conduct, supervise or monitor some or all aspects of
clinical trials involving our products. Accordingly, we have less control over
the timing and other aspects of these clinical trials than if we conducted them
entirely on our own. As a result of these factors, we or third parties may not
successfully begin or complete our clinical trials and we may not make
regulatory submissions or receive required regulatory approvals to commence or
continue our clinical trials in the time periods we have forecasted, if at all.
If we or third parties fail to commence or complete, or experience delays in,
any of our planned clinical trials, then we are likely to incur additional costs
and delays in our product development programs, which could cause our stock
price to decrease.
RISKS RELATING TO OUR INDUSTRY, BUSINESS AND STRATEGY
IF THE MARKET IS NOT RECEPTIVE TO OUR EMBOSPHERE MICROSPHERES PRODUCT, OUR
BUSINESS PROSPECTS WILL BE SERIOUSLY HARMED
Our Embosphere Microspheres are based on new technologies and therapeutic
approaches and we only recently began selling our Embosphere Microspheres
product in the European Union, United States, Canada and Australia. Our success
will depend upon the medical community, patients and third party payors
accepting our Embosphere Microspheres product as clinically useful,
cost-effective and safe. In particular, our success will depend upon obstetrics
and gynecology physicians referring patients to interventional radiologists to
receive treatment using our products in lieu of, or in addition to, receiving
other forms of treatment which the obstetrics and gynecology physicians can
provide directly.
In addition, if we receive negative publicity associated with any adverse
medical effects attributed to embolization treatments generally or our product
specifically, the market may not accept our products as safe. For example,
Embosphere Microspheres are designed to remain in the body permanently. As a
result, there may be some risk that some or all of the Embosphere Microspheres
used in a medical procedure may travel in the blood system beyond the intended
site of action and occlude, or block, other blood vessels, resulting in
significant adverse health effects on the patient or even death. Moreover, to
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use our Embosphere Microspheres correctly for a particular medical procedure,
physicians must select and use the proper size and quantity of Embosphere
Microspheres. A physician's selection and use of the wrong size or quantity of
Embosphere Microspheres could have significant adverse health effects on the
patient, including death. In addition, there is limited data concerning the
long-term health effects on persons resulting from embolotherapy using our
Embosphere Microspheres. If the market determines or concludes that our product
is not safe or effective for any reason, we may be exposed to product liability
claims, product recalls and fines or other penalties and associated adverse
publicity. In addition, we have provided to our customers a satisfaction
guarantee that requires us to accept the return of any inventory and credit the
entire amount of the original order if a properly-trained customer is not
satisfied with the performance of our embospheres. If we experience adverse
publicity or are subject to product liability claims, excessive guarantee
claims, recalls, fines and the like, we will be unable to commercialize
successfully our products and achieve profitability.
IF WE EXPERIENCE DELAYS, DIFFICULTIES OR UNANTICIPATED COSTS IN
ESTABLISHING THE SALES, DISTRIBUTION AND MARKETING CAPABILITIES NECESSARY TO
SUCCESSFULLY COMMERCIALIZE OUR PRODUCTS, WE WILL HAVE DIFFICULTY MAINTAINING AND
INCREASING OUR SALES We currently lack sales, distribution and marketing
capabilities in the United States and have only limited sales, distribution and
marketing capabilities in the European Union. It will be expensive and
time-consuming for us to develop a marketing and sales force and, consequently,
we could be required to delay our product launches. Moreover, we may choose or
find it necessary to enter into strategic partnerships to sell, market and
distribute our products. The terms of any partnership may not be favorable to
us. We currently rely on 17 distributors to sell our products outside of France.
We may not be able to provide adequate incentive to these distributors to
promote our products. If we are unable to successfully employ qualified
marketing and sales personnel and develop our sales and marketing capabilities,
or if our distributors fail to promote our products, we will have difficulty
maintaining and increasing our sales.
IF WE ARE UNABLE TO OBTAIN ADEQUATE PRODUCT LIABILITY INSURANCE, THEN WE MAY
HAVE TO PAY SIGNIFICANT MONETARY DAMAGES IN A SUCCESSFUL PRODUCT LIABILITY CLAIM
AGAINST US
Product liability insurance is generally expensive for medical device
companies such as ours. Although we maintain limited product liability insurance
coverage for the clinical trials of our products, it is possible that we will
not be able to obtain further product liability insurance on acceptable terms,
if at all. Insurance we subsequently obtain may not provide us with adequate
coverage against all potential claims. If we are exposed to product liability
claims for which we have insufficient insurance, we may be required to pay
significant damages which would prevent or delay our ability to commercialize
our products.
IF WE ARE NOT BE ABLE TO COMPETE EFFECTIVELY, WE MAY EXPERIENCE DECREASED
DEMAND FOR OUR PRODUCTS AND PRICE REDUCTIONS
We have many competitors in the United States and abroad, including medical
device and therapeutics companies, universities and other private and public
research institutions. Our success depends upon our ability to develop and
maintain a competitive position in the embolotherapy market. Our key competitors
are Cordis Corporation, a Johnson & Johnson company, Boston Scientific
Corporation and Nycomed Amersham. These and many of our other competitors have
greater capabilities, experience and financial resources than we do. As a
result, they may develop products which compete with our Embosphere Microspheres
product more rapidly or at less cost than we can. Currently, the primary
products with which our Embosphere Microspheres compete for some of our
applications are polyvinyl alcohol, polymerizing gels and coils. In addition,
our competitors may develop technologies that render our products obsolete or
otherwise noncompetitive.
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We may not be able to improve our products or develop new products or
technologies quickly enough to maintain a competitive position in our market and
continue to grow our business. Moreover, we may not be able to compete
effectively, and competitive pressures may result in less demand for our
products and impair our ability to become profitable.
IF WE FAIL TO OBTAIN AN ADEQUATE LEVEL OF REIMBURSEMENT FOR OUR PRODUCTS BY
THIRD PARTY PAYORS, THERE MAY BE NO COMMERCIALLY VIABLE MARKETS FOR OUR PRODUCTS
The availability and levels of reimbursement by governmental and other
third party payors affects the market for any medical device. We may not be able
to sell our products profitably if reimbursement is unavailable or limited in
scope or amount. Currently, only a limited number of insurance companies fully
or partially reimburse for embolization procedures. These third-party payors
continually attempt to contain or reduce the costs of healthcare by challenging
the prices that companies such as ours charge for medical products. In some
foreign countries, particularly the countries of the European Union where our
Embosphere Microspheres product is currently marketed and sold, the pricing of
medical devices is subject to governmental control and the prices charged for
our products have in some instances been reduced as a result of these controls.
Additionally, in both the United States and some foreign jurisdictions, there
have been a number of legislative and regulatory proposals to change the
healthcare system. Further proposals are likely. These proposals, if adopted,
could result in less sales revenue to us, and could affect our ability to raise
capital and market our products.
IF WE DO NOT RETAIN OUR SENIOR MANAGEMENT AND OTHER KEY EMPLOYEES, WE MAY NOT BE
ABLE TO SUCCESSFULLY IMPLEMENT OUR BUSINESS STRATEGY
The loss of Jean-Marie Vogel, our Chairman, John M. Carnuccio, our
President and Chief Executive Officer, Jonathan McGrath, our Vice-President
Worldwide Research and Development or other key members of our staff could harm
us. Mr. Vogel is the only key employee with whom we currently have a long-term
employment agreement. We also depend on our scientific collaborators and
advisors, all of whom have other commitments that may limit their availability
to us. Our success is substantially dependent on the ability, experience and
performance of these members of our senior management and other key employees,
scientific collaborators and advisors. Because of their ability and experience,
if we lose one or more of these individuals our ability to implement
successfully our business strategy could be seriously harmed.
IF WE DO NOT ATTRACT AND RETAIN SKILLED PERSONNEL, WE WILL NOT BE ABLE TO
EXPAND OUR BUSINESS
Our future success will depend in large part upon our ability to attract
and retain highly skilled scientific, managerial and marketing personnel,
particularly as we expand our activities in clinical trials, the regulatory
approval process and sales and manufacturing. We face significant competition
for this type of person from other companies, research and academic
institutions, government entities and other organizations. Consequently, if we
are unable to attract and retain skilled personnel, we will not be able to
expand our business.
IF THE STRATEGIC REDIRECTION OF OUR BUSINESS IS NOT SUCCESSFUL, WE MAY BE UNABLE
TO ACHIEVE GROWTH IN OUR BUSINESS
In early 1999, we decided to exit the chromatography business, which had
constituted our core business, to focus on the commercialization of microspheres
for use in embolotherapy and other medical applications. We have restated our
historical financial statements to reflect the discontinuation of our
chromatography business. In addition, 73% of 1999 revenue and 66% of revenue for
the first six months of 2000 included in our restated financial statements was
derived from the sale of products we consider to be nonstrategic and which we do
not expect to constitute a significant portion of our revenue on an ongoing
basis. Our strategic shift from the chromatography business to the
commercialization of microspheres may not prove to be successful and,
consequently, we may be unable to grow our business and achieve profitability.
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IF WE MAKE ANY ACQUISITIONS, WE WILL INCUR A VARIETY OF COSTS AND MAY NEVER
SUCCESSFULLY INTEGRATE THE ACQUIRED BUSINESS INTO OURS
We may attempt to acquire businesses, technologies, services or products
that we believe are a strategic fit with our business. We may encounter
operating difficulties and expenditures relating to integrating an acquired
business, technology, service or product. These acquisitions may also absorb
significant management attention that would otherwise be available for ongoing
development of our business. Moreover, we may never realize the anticipated
benefits of any acquisition. We may also make dilutive issuances of equity
securities, incur debt or experience a decrease in the cash available for our
operations, or incur contingent liabilities and/or amortization expenses related
to goodwill and other intangible assets, in connection with any future
acquisitions.
IF WE ARE COMPELLED TO ACQUIRE THE REMAINING INTEREST IN BIOSPHERE MEDICAL S.A.,
WE MAY BE REQUIRED TO INCUR INDEBTEDNESS OR MAKE A SIGNIFICANT CASH PAYMENT,
WHICH MAY RESULT IN A DECREASE IN AVAILABLE CASH FOR OUR OPERATIONS
We currently own 85% of the outstanding capital stock of Biosphere Medical
S.A. We have the right to acquire the remaining 15% of Biosphere Medical S.A. in
2004. The purchase price that we are required to pay if we exercise this right
is equal to 15% of the aggregate sales of Biosphere Medical S.A. and sales of
our microspheres subject to our license agreement with Biosphere Medical S.A.
for the nine-month period prior to the exercise of our right. In addition, the
holder of the remaining 15% of Biosphere Medical S.A. has a "put" right to
require us to purchase the remaining 15% in 2004. The purchase price that we are
required to pay if the minority holder exercises this put right is equal to 15%
of the aggregate sales of Biosphere Medical S.A. and sales of our microspheres
subject to our license agreement with Biosphere Medical S.A. for the nine-month
period prior to the exercise of the put right. In any event, the price that we
are required to pay if the minority holder exercises the put right shall not be
less than FF1,800,000 ($264,000 at June 30, 2000). If we are compelled by the
minority stockholder to acquire the minority interest at a future date, we could
be required to make a significant cash payment, which could result in us
incurring debt or a decrease in the cash available to us for our operations.
RISKS RELATING TO OUR FINANCIAL RESULTS AND NEED FOR FINANCING
WE WILL CONTINUE TO NEED SUBSTANTIAL ADDITIONAL FUNDS, AND IF ADDITIONAL CAPITAL
IS NOT AVAILABLE, WE MAY HAVE TO CURTAIL OR CEASE OUR OPERATIONS
We will need to raise additional funds to develop and commercialize our
products successfully. If we cannot raise more funds, we could be required to
reduce our capital expenditures, scale back our product development, reduce our
workforce and license to others products or technologies that we otherwise would
seek to commercialize ourselves. We may not receive additional funding on
reasonable terms or at all. Other than a $2.0 million credit line with a bank,
we have no committed source of capital. Sepracor is the guarantor of this credit
line. We have entered into a security agreement with Sepracor pursuant to which
we have pledged to Sepracor all of our assets, including our equity interest in
Biosphere Medical S.A., as collateral for Sepracor's guarantee to the bank. We
are likely to raise more money for working capital purposes by selling
additional capital stock, which is a common strategy for companies such as ours.
Any sales of additional shares of our capital stock are likely to dilute our
existing stockholders. Further, if we issue additional equity securities, the
new equity securities may have rights, preferences or privileges senior to those
of existing holders of our common stock. Alternatively, we may borrow money from
commercial lenders, possibly at high interest rates, which will increase the
risk of your investment in us.
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IF OPERATING RESULTS FLUCTUATE SIGNIFICANTLY FROM QUARTER TO QUARTER, THEN OUR
STOCK PRICE MAY DECLINE
Our operating results could fluctuate significantly from quarter to
quarter. These fluctuations may be due to several factors including the timing
and volume of customer orders for our Embosphere Microspheres, customer
cancellations and general economic conditions. We also expect that our operating
results will be affected by seasonality, since we expect our revenues to decline
substantially in the third quarter of each year from the first two quarters of
each year because we do a significant percentage of our business in the European
Union, which typically experiences a slowdown of business during August. Due to
these fluctuations, our operating results in some quarters may not meet the
expectations of stock market analysts and investors. In that case, our stock
price would probably decline.
In addition, a large portion of our expenses, including expenses for
facilities, equipment and personnel, are relatively fixed. Accordingly, if our
revenue declines or does not grow as much as we anticipate, we might not be able
to improve our operating margins. In addition, we plan to significantly increase
operating expenses in the next several years. Failure to achieve anticipated
levels of revenue could therefore significantly harm our operating results for a
particular fiscal period.
RISKS RELATING TO THE PRODUCTION AND SUPPLY OF OUR PRODUCTS
IF WE EXPERIENCE MANUFACTURING DELAYS OR INTERRUPTIONS IN PRODUCTION THEN WE MAY
EXPERIENCE CUSTOMER DISSATISFACTION AND OUR REPUTATION COULD SUFFER
If we fail to produce enough products at our own manufacturing facility or
at a third-party manufacturing facility, we may be unable to deliver products to
our customers on a timely basis, which could lead to customer dissatisfaction
and could harm our reputation and ability to compete. We currently produce all
of our Embosphere Microspheres products in one manufacturing facility in France.
We would likely experience significant delays or cessation in producing our
products at this facility if a labor strike, natural disaster, local or regional
conflict or other supply disruption were to occur. If we are unable to
manufacture our products at our facility in France, we may be required to enter
into arrangements with one or more contract manufacturing companies. We do not
currently have contingency plans in place and, if alternate arrangements are
required, we could encounter delays or difficulties establishing relationships
with contract manufacturers or in establishing agreements on terms that are
favorable to us. In addition, if we are required to depend on third-party
manufacturers, our profit margins may be lower, which will make it more
difficult for us to achieve profitability.
Also, manufacturers, including us, must adhere to the FDA's current Good
Manufacturing Practices regulations, which are enforced by the FDA through its
facilities inspection program. Third-party manufacturers may not be able to
comply or maintain compliance with Good Manufacturing Practices regulations. If
third parties fail to comply, their non-compliance could significantly delay our
receipt of 510(k) clearance or premarket approval. For a premarket approval
device, if we change our manufacturing facility or switch to a third-party
manufacturer we will be required to submit a premarket approval application
supplement. For a 510(k) product, a change in our manufacturing location would
require us to change our registration with the FDA.
BECAUSE WE RELY ON A LIMITED NUMBER OF SUPPLIERS WE MAY EXPERIENCE DIFFICULTY IN
MEETING OUR CUSTOMERS' DEMANDS FOR OUR PRODUCTS IN A TIMELY MANNER OR WITHIN
BUDGET
We currently purchase key components of our Embosphere Microspheres from
approximately 16 outside sources. Some of these components may only be available
to us through a few sources. We generally do not have long-term agreements with
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any of our suppliers. Our reliance on our suppliers exposes us to risks,
including:
- the possibility that one or more of our suppliers could terminate their
services at any time without penalty;
- the potential inability of our suppliers to obtain required components;
- the potential delays and expenses of seeking alternative sources of supply;
- reduced control over pricing, quality and timely delivery due to the
difficulties in switching to alternative suppliers; and
- the possibility that one or more of our suppliers could fail to satisfy any
of the FDA's required current Good Manufacturing Practices regulations.
Consequently, in the event that our suppliers delay or interrupt the supply of
components for any reason, our ability to produce and supply our products could
be impaired, which could lead to customer dissatisfaction.
RISKS RELATING TO INTELLECTUAL PROPERTY
IF WE ARE UNABLE TO OBTAIN PATENT PROTECTION FOR OUR DISCOVERIES, THE VALUE OF
OUR TECHNOLOGY AND PRODUCTS COULD DECLINE AND WE MAY NOT BE ABLE TO DEVELOP AND
COMMERCIALIZE OUR PRODUCTS, OR THE COST OF DOING SO MAY INCREASE
We may not obtain meaningful protection for our technology and products
with the patents and patent applications that we own or license relating to our
microsphere technology. In particular, our patents and patent applications may
not prevent others from designing products similar to or otherwise competitive
with our Embosphere Microspheres and other products commercialized by us. For
example, one of the three patents related to copolymers used to make our present
Embosphere Microspheres will expire in June 2001 and relates to the co-polymers
that are used to make the Embosphere Microspheres. We are currently developing a
microsphere that has marking agents, which are materials that will improve
visualization of the Embosphere Microspheres during a procedure, and cell
adhesion promoters, which are materials that will improve the attraction and
bonding between the Embosphere Microspheres and adjacent cell membranes. The
other two patents that relate to Embosphere Microspheres cover chemical coupling
of marketing agents and cell adhesion promoters on the Embosphere Microspheres.
Coupling is a mechanism for incorporating materials into the Embosphere
Microspheres that enables chemical bonding between an additive and one of the
base materials in the formulation. These two patents do not cover the chemical
components of Embosphere Microspheres. To the extent that our competitors are
able to design products competitive with ours without infringing our
intellectual property rights, we may experience less market penetration with our
products and, consequently, we will have decreased revenues.
We do not know whether competitors have similar United States patent
applications on file, since United States patent applications are secret until
issued. Consequently, the United States Patent and Trademark Office could
initiate interference proceedings involving our owned or licensed United States
patent applications or issued patents. Further, there is a substantial backlog
of patent applications at the United States Patent and Trademark Office, and the
approval or rejection of patent applications may take several years.
We have a license to technology invented by a Japanese inventor. However,
the license is limited to a single Japanese patent application. In other words,
corresponding United States and European patent applications were not filed by
this inventor. We intend to file patent applications directed to improvements of
this inventor's technology. However, patent applications may not issue as
patents, and these patents, if issued, may not provide us with sufficient
protection against competitors. Further, we may be required to obtain additional
licenses concerning the Japanese patent application, and any licenses, if
obtained, may not be on terms that are acceptable to us.
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IF WE BECOME INVOLVED IN EXPENSIVE PATENT LITIGATION OR OTHER PROCEEDINGS TO
ENFORCE OUR PATENT RIGHTS, WE COULD INCUR SUBSTANTIAL COSTS AND EXPENSES OR
SUBSTANTIAL LIABILITY FOR DAMAGES OR BE REQUIRED TO STOP OUR PRODUCT DEVELOPMENT
AND COMMERCIALIZATION EFFORTS
In order to protect or enforce our patent rights, we may have to initiate
legal proceedings against third parties, such as infringement suits or
interference proceedings. By initiating legal proceedings to enforce our
intellectual property rights, we may also provoke these third parties to assert
claims against us. Furthermore, we may be sued for infringing on the
intellectual property rights of others, and, as a result, our patents could be
narrowed, invalidated or rendered unenforceable by a court. We may find it
necessary, if threatened, to initiate a lawsuit seeking a declaration from a
court regarding the proprietary rights of others. For example, we were engaged
in patent litigation related to our discontinued business that settled in
December 1997. Intellectual property litigation is costly, and, even if we
prevail, could divert management attention and resources away from our business.
The patent position of companies like us generally is highly uncertain,
involves complex legal and factual questions, and has recently been the subject
of much litigation. We may not prevail in any patent-related proceeding. If we
do not prevail in any litigation, in addition to any damages we might have to
pay, we could be required to stop the infringing activity or obtain a license.
Any required license may not be available to us on acceptable terms, or at all.
In addition, some licenses may be nonexclusive, and therefore, our competitors
may have access to the same technology licensed to us. If we fail to obtain a
required license or are unable to design around a patent, we may be unable to
sell some of our products, which could have a material adverse affect on us.
Our majority-owned French subsidiary, Biosphere Medical S.A., jointly owns
two United States patents and corresponding foreign patents relating to
microsphere technology for use in connection with embolotherapy with
L'Assistance Publique-Hopitaux De Paris, referred to as AP-HP, a French public
health establishment. Pursuant to the terms of a related license agreement with
AP-HP, Biosphere Medical S.A. may be required to seek AP-HP's participation in
any United States legal proceedings it initiates against third parties to
protect or enforce its rights under the jointly-owned patents. If Biosphere
Medical S.A. is not able to obtain the cooperation of AP-HP in any infringement
suit against a third party, then its ability to pursue a law suit and enforce
these patent rights relating to the microspheres could be harmed, which could
have a material adverse effect on us.
IF ANY OF OUR LICENSES TO USE THIRD-PARTY TECHNOLOGIES IN OUR PRODUCTS ARE
TERMINATED, WE MAY BE UNABLE TO DEVELOP, MARKET AND SELL OUR PRODUCTS
We are dependent on various license agreements relating to each of our
current and proposed products that give us rights under intellectual property
rights of third parties. These licenses impose commercialization, sublicensing,
royalty, insurance and other obligations on us. Our failure, or any third
party's failure, to comply with the terms of any of these licenses could result
in us losing our rights to the license, which could result in us being unable to
develop, manufacture or sell products which contain the licensed technology.
RISKS RELATING TO OUR FOREIGN OPERATIONS
IF WE ARE UNABLE TO MEET THE OPERATIONAL, LEGAL AND FINANCIAL CHALLENGES THAT WE
WILL ENCOUNTER IN OUR INTERNATIONAL OPERATIONS, WE MAY NOT BE ABLE TO GROW OUR
BUSINESS
Our operations are currently conducted primarily through our French
subsidiary. Furthermore, we currently derive substantially all of our revenue
from the sale of our Embosphere Microspheres and other products in the European
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Union. We are increasingly subject to a number of challenges which specifically
relate to our international business activities. Our international operations
may not be successful if we are unable to meet and overcome these challenges,
which would limit the growth of our business. These challenges include:
- failure of local laws to provide the same degree of protection against
infringement of our intellectual property;
- protectionist laws and business practices that favor local competitors,
which could slow our growth in international markets;
- potentially longer sales cycles to sell products, which could slow our
revenue growth from international sales; and
- potentially longer accounts receivable payment cycles and difficulties in
collecting accounts receivable.
BECAUSE WE EXCHANGE FOREIGN CURRENCY RECEIVED FROM INTERNATIONAL SALES INTO U.S.
DOLLARS AND ARE REQUIRED TO MAKE FOREIGN CURRENCY PAYMENTS, WE MAY LOSE MONEY
DUE TO FLUCTUATIONS IN FOREIGN CURRENCY TRANSLATIONS
Most of our business is conducted in French francs and the euro dollar. We
recognize foreign currency gains or losses arising from our operations in the
period incurred. As result, currency fluctuations between the U.S. dollar and
the currencies in which we do business will cause foreign currency translation
gains and losses, which may cause fluctuations in our future operating results.
We do not currently engage in foreign exchange hedging transactions to manage
our foreign currency exposure.
RISKS RELATING TO AN INVESTMENT IN OUR COMMON STOCK
BECAUSE THE MARKET PRICE OF OUR STOCK IS HIGHLY VOLATILE, YOUR INVESTMENT IN US
COULD RAPIDLY LOSE ITS VALUE AND WE MAY INCUR SIGNIFICANT COSTS FROM CLASS
ACTION LITIGATION
The market price of our stock is highly volatile. As a result, your
investment in us could rapidly lose its value. In addition, the stock market
often experiences extreme price and volume fluctuations, which affect the market
price of many medical device companies and which are often unrelated to the
operating performance of these companies.
Recently, when the market price of a stock has been as volatile as our
stock price has been, holders of that stock have occasionally instituted
securities class action litigation against the company that issued the stock. If
any of our stockholders were to bring a lawsuit of this type against us, even if
the lawsuit is without merit, we could incur substantial costs in defending the
lawsuit. The lawsuit could also divert the time and attention of our management.
BECAUSE SEPRACOR INC. AND OUR EXECUTIVE OFFICERS AND DIRECTORS OWN A MAJORITY OF
OUR COMMON STOCK, THEY HAVE SUBSTANTIAL CONTROL OVER US
As of August 1, 2000, Sepracor Inc. beneficially owned approximately 56% of
our outstanding common stock. In addition, as of August 1, 2000, our executive
officers and directors beneficially owned, in the aggregate, approximately 10%
of our outstanding common stock, excluding shares owned by Sepracor which some
of our directors and executive officers may be deemed to beneficially own. Two
of our directors are executive officers of Sepracor. Sepracor and our executive
officers and directors are able to control all corporate actions requiring
stockholder approval irrespective of how our other stockholders may vote,
including:
- the election of directors;
- the amendment of charter documents;
- the approval of mergers and other significant corporate transactions,
including a sale of substantially all of our assets; and
- the defeat of any non-negotiated takeover attempt that might otherwise
benefit the public stockholders.
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This ownership concentration could cause the market price of our common stock to
decline. In addition, conflicts of interest between us and Sepracor may arise,
including with respect to competitive business activities and control of our
management and our affairs.
