===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For fiscal year ended March 31, 2000
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number : 0-20584
ABIOMED, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 04-2743260
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
22 CHERRY HILL DRIVE 01923
DANVERS, MASSACHUSETTS (Zip Code)
(Address of Principal Executive Offices)
(978) 777-5410
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Rule 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of June 12, 2000 was $293,534,401 based on the closing price
of $39.813 on that date as reported on the Nasdaq Stock Market's National
Market. As of June 12, 2000, 10,234,497 shares of the registrant's Common Stock,
$.01 par value, were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for its 2000 Annual Meeting
of Stockholders, which is expected to be filed within 120 days after the end of
the registrant's fiscal year, are incorporated by reference in Part III
(Items 10, 11, 12 and 13) of this Report.
===============================================================================
INTRODUCTORY NOTE
THIS REPORT, INCLUDING THE DOCUMENTS INCORPORATED BY REFERENCE IN THIS
REPORT, INCLUDES FORWARD-LOOKING STATEMENTS. WE HAVE BASED THESE FORWARD-LOOKING
STATEMENTS ON OUR CURRENT EXPECTATIONS AND PROJECTIONS ABOUT FUTURE EVENTS. OUR
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN, OR IMPLIED BY,
THESE FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS ARE IDENTIFIED BY
WORDS SUCH AS "BELIEVE," "ANTICIPATE," "EXPECT," "INTEND," "PLAN," "WILL," "MAY"
AND OTHER SIMILAR EXPRESSIONS. IN ADDITION, ANY STATEMENTS THAT REFER TO
EXPECTATIONS, PROJECTIONS OR OTHER CHARACTERIZATIONS OF FUTURE EVENTS OR
CIRCUMSTANCES ARE FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS IN
THESE DOCUMENTS INCLUDE, BUT ARE NOT NECESSARILY LIMITED TO, THOSE RELATING TO:
- OUR PLANS TO COMMENCE INITIAL CLINICAL TRIALS OF THE ABIOCOR
IMPLANTABLE REPLACEMENT HEART;
- OUR INTENTION TO EXPAND THE MARKET FOR OUR BVS-5000 PRODUCT;
- OUR ABILITY TO OBTAIN AND MAINTAIN REGULATORY APPROVAL OF OUR PRODUCTS
IN THE U.S. AND INTERNATIONALLY;
- THE OTHER COMPETING THERAPIES THAT MAY IN THE FUTURE BE AVAILABLE TO
HEART FAILURE PATIENTS; AND
- OUR PLANS TO DEVELOP AND MARKET NEW PRODUCTS.
FACTORS THAT COULD CAUSE ACTUAL RESULTS OR CONDITIONS TO DIFFER FROM
THOSE ANTICIPATED BY THESE AND OTHER FORWARD-LOOKING STATEMENTS INCLUDE THOSE
MORE FULLY DESCRIBED IN THE "RISK FACTORS" SECTION AND ELSEWHERE IN THIS REPORT.
WE ARE NOT OBLIGATED TO UPDATE OR REVISE THESE FORWARD-LOOKING STATEMENTS TO
REFLECT NEW EVENTS OR CIRCUMSTANCES.
PART I
ITEM 1. BUSINESS
OVERVIEW
ABIOMED is a leading developer, manufacturer and marketer of medical
products designed to safely and effectively assist or replace the pumping
function of the failing heart. Based on technology that has been developed and
refined over a period of approximately three decades, we have been developing
and are preparing to enter human clinical trials for the AbioCor Implantable
Replacement Heart, a battery-powered totally implantable replacement heart
system, which we believe will be the first such device for end-stage heart
failure patients. We currently manufacture and sell the BVS-5000, a temporary
heart assist device, which is the only device approved by the U.S. Food and Drug
Administration, known as the FDA, for the temporary treatment of all patients
with failing but potentially recoverable hearts. We are also engaged in research
and development relating to other devices to support the pumping function of the
heart.
The AbioCor is intended as a replacement device that will replace a
patient's diseased heart and take over its blood pumping function. It is
designed for use by patients with irreparably damaged hearts who are at risk of
imminent death due to heart disease, but whose other vital organs remain viable.
We
2
believe the AbioCor will provide a much-needed treatment option for
approximately 125,000 patients per year in the U.S. for whom there is currently
no effective therapy available. The AbioCor has reached an advanced stage of
pre-clinical testing, including substantial laboratory and animal testing. We
anticipate that we will sell AbioCor systems, if and when approved by applicable
U.S. and international regulatory authorities, for approximately $75,000 to
$100,000 each, subject to the establishment of reimbursement levels by
third-party payors.
We are committed to the clinical introduction of the AbioCor and, to
date, we have invested more than $40 million in its development, including over
$20 million in funding from the National Heart, Lung and Blood Institute. In
1997, we decided that the design of the AbioCor demonstrated sufficient
functionality and operational performance, through laboratory and animal
studies, to warrant accelerated development efforts to bring the product to
market. At that time, we began to significantly increase our investment in
AbioCor development and testing in preparation for initial human clinical
trials. The increased spending has been used to build a pilot-scale
manufacturing facility, to develop the product from a research-based prototype
status to a manufacturable clinical design, to increase system safety and
efficacy by making engineering improvements and refinements, to increase
operational performance, durability and reliability, to substantially expand
laboratory and animal testing of the system and to begin training of surgical
and clinical support teams in selected medical centers for initial clinical
trials. In addition, we began to increase our interaction with regulatory
authorities by presenting to them different portions of our developmental status
and testing plans. To accomplish these tasks, we have significantly increased
the team of engineers, scientists, physicians and technicians working full time
on the AbioCor program to more than 75 full-time employees.
The BVS is a "bridge-to-recovery" device that can temporarily assume
the full pumping function of the heart for patients with potentially reversible
heart failure. In 1992, the BVS became the first heart assist device capable of
providing full circulatory support to be approved by the FDA. The BVS is the
most widely used FDA-approved temporary heart assist device, and to date has
been used to support over 4,000 patients at over 500 medical centers worldwide.
The BVS, which consists of a console and single-use external blood pumps, has
been a profitable product line since fiscal 1995. We believe our experience in
developing, manufacturing and selling the BVS will provide us with a competitive
advantage in commercializing the AbioCor, as well as other future products.
Our focused research and development related to the AbioCor and the BVS
has provided us with the proprietary technology, know-how and experience to
develop additional products. We believe we are the only company in the world
with expertise in the full range of technology to support the pumping function
of the heart. We believe that there are many opportunities to apply our
expertise to address the needs of heart failure patients. We seek to be first to
market with high-quality, easy-to-use and cost-effective technologies for heart
failure patients who currently lack adequate therapies.
ABIOMED is a Delaware corporation. We commenced operation in 1981. As
used herein, ABIOMED includes ABIOMED, Inc. together with our subsidiaries.
ABIOMED and ABIOMED logo and BVS are our registered trademarks. AbioCor,
AbioBooster, AbioVest, BVS-5000, BVS-5000t and Angioflex are our trademarks.
This Report may also include trademarks of companies other than ABIOMED.
3
INDUSTRY OVERVIEW
THE HUMAN HEART
The human heart is the central pump for the body's circulatory system.
The heart has four chambers: the left and the right atria and the left and the
right ventricles. The two atria serve as the inflow chambers of the heart,
collecting blood for delivery to the ventricles. The ventricles are the pumping
chambers of the heart, pumping blood to the lungs and the rest of the body.
The right ventricle of the heart pumps oxygen-depleted blood returning
from the body to the lungs where it is re-oxygenated. The left ventricle
receives oxygen-rich blood returning from the lungs and pumps it back to the
rest of the body. The chambers of the heart are formed of muscle tissue known as
myocardium. The coronary arteries, a specialized network of blood vessels within
the heart, provide oxygen and other nutrients to the heart itself.
The human heart has four valves that help ensure that blood flows in
the proper direction into and out of the ventricles as they are repeatedly
filled and then discharged with the pumping of blood. The timing and rate at
which the heart beats, referred to as its rhythm, is controlled by electrical
impulses in the conduction system of the heart.
HEART DISEASE
Heart disease is the number one cause of death in the U.S., responsible
for more deaths than all forms of cancer combined. In 1996, approximately 20
million people in the U.S. were afflicted with heart disease, resulting in over
700,000 deaths. Illnesses and deaths from heart disease create an immense burden
to many individuals and their families. Patients frequently experience extended
suffering, and the economic cost is substantial. While a number of therapies
exist for the treatment of patients in early stages of heart disease, limited
therapies exist today for most patients with severe heart failure.
The majority of deaths from heart disease can be attributed to coronary
heart disease, or CHD, and congestive heart failure, or CHF. Other types of
heart disease include rhythm disorders and diseases of the valves.
CHD is a disease of the coronary arteries which affects blood flow to
the heart. CHD can lead to a heart attack, technically known as an acute
myocardial infarction, caused by insufficient blood flow to the heart and oxygen
deprivation, resulting in permanent damage to the heart muscle and, in many
cases, death. When CHD leads to a severe heart attack, some patients experience
cardiac arrest, which is an acute stoppage of the heart, and sudden death. For
other patients, medical personnel typically have a period of hours in which to
intervene effectively. Once stabilized by early intervention, a significant
number of these patients experience progressive deterioration of heart function,
eventually leading to death over a period of days or weeks.
CHF is a condition in which the patient's heart cannot provide adequate
blood and oxygen flow to meet the needs of the body. CHF develops over time
primarily due to excess demand on the heart muscle, and may be caused by a
variety of factors, including high blood pressure, problems with the valves of
the heart, CHD, infections of the heart muscle or the valves and heart problems
present at birth. A progressive deterioration of heart function generally
accompanies CHF as the heart becomes swollen and less effective at pumping
blood. For most patients with CHF, medical interventions take place over periods
of months or years.
4
Medical conditions associated with both CHD and CHF can lead to cardiac
arrest. Cardiac arrest is often a result of abnormalities in the heart's
electrical conduction system. These abnormalities, known as rhythm disorders,
can lead to complications, ranging from unsynchronized contractions and
irregular heartbeats to cardiac arrest. Patients who experience cardiac arrest
and die are referred to as sudden deaths. Most cardiac arrests that occur
outside the hospital result in sudden death. Patients experiencing cardiac
arrest generally require initial medical intervention, such as cardiopulmonary
resuscitation, commonly known as CPR, and advanced life support, within minutes.
In general, heart failure is progressive. While approximately half of
all heart failure patients experience sudden death as a result of cardiac
arrest, the remaining patients who die from heart failure typically do so in
hospitals or long-term care facilities.
PREVALENCE AND MORTALITY
The number of patients both suffering and dying from heart disease has
been rising on an annual basis. In 1996 there were approximately 12 million
people with CHD and 4.6 million people with CHF in the U.S., with at least the
same incidence outside the U.S.
Heart disease resulted in over 700,000 deaths in 1996 in the U.S.
Approximately half of all deaths from heart disease were sudden deaths. Of the
deaths that did not occur suddenly, approximately 230,000 were associated with
CHD and 25,000 with CHF. Current therapies to support these patients are
inadequate because they cannot stop the progression of the disease. We believe
that a significant number of such CHD and CHF patients could benefit from the
AbioCor Implantable Replacement Heart.
During 1997 in the U.S., the cost associated with CHD patients was
approximately $100 billion and the cost associated with CHF patients was
approximately $21 billion. Patients who suffer from heart disease often receive
medical treatment for a number of years prior to their deaths. Many late-stage
heart failure patients are confined to hospital beds, at a cost that is often
greater than $2,000 per day.
THERAPIES FOR HEART DISEASE
Patients with early- or mid-stage heart disease typically receive
treatments such as drug therapies, cardiological interventions, including closed
chest procedures and rhythm management therapies, or surgical corrections, such
as coronary bypass surgery and valve replacement. For patients with mid-stage
and particularly end-stage heart disease, however, these treatments are
typically inadequate. Patients with severe heart disease frequently are in need
of heart replacement. Because the supply of available donor hearts is limited,
with only approximately 2,000 per year available in the U.S., mechanical
treatments have been and continue to be developed to extend and improve the
lives of these patients.
MECHANICAL HEART TREATMENTS
Mechanical heart treatments can be divided into two groups of devices:
destination therapies, including heart replacement and permanent heart assist,
and temporary heart assist.
DESTINATION THERAPY. Devices intended to remain in patients for their remaining
lives are classified as destination therapies. Destination therapy devices
consist of replacement hearts and permanent assist devices, including
quality-of-life support devices that provide partial support to the heart.
HEART REPLACEMENT. The goal of heart replacement, whether with a donor
heart or a mechanical device, is to replace the failing human heart with a
viable alternative. Patients with irreparably damaged
5
hearts who are facing imminent death due to CHD or severe CHF are potential
candidates for heart replacement provided that their other vital organs remain
viable. The supply of human donor hearts is currently inadequate to meet the
needs of these patients and no mechanical treatment is yet approved for these
patients.
In the U.S., we believe that approximately 125,000 patients per year
might benefit from an implantable replacement heart with an approximately equal
number of patients outside the U.S. who might also benefit from an implantable
replacement heart. Patients who are likely candidates for an implantable
replacement heart are end-stage CHD and CHF patients. In the U.S. in 1996,
approximately 470,000 people died of CHD and approximately 44,000 people died of
CHF. Because approximately half of these CHD and CHF patients suffered sudden
death, which frequently occurs out of the hospital and before medical care can
be received, the primary potentially addressable market for a replacement heart
in the U.S. consists of approximately 250,000 patients per year. Some of these
patients may have other conditions likely to lead to death within a relatively
short period of time, or may be of an age at which major surgery is deemed
inadvisable, making them unsuitable candidates for a replacement heart.
Excluding such patients, we believe that approximately 125,000 CHD and CHF
patients per year could benefit from a replacement heart in the U.S. Currently,
no life-sustaining treatment is available for these patients except for a
limited supply of qualified donor hearts for transplantation, consisting of
approximately 2,000 hearts per year in the U.S. In addition, many recipients of
heart transplants eventually reject the donor heart and have no other currently
available long-term treatment options.
In addition to the scarcity of donor hearts, there are various other
limitations associated with human heart transplantation. These limitations
include incompatibility between recipient patients and their donor hearts and
the need for patients to take immuno-suppressant drugs for the remaining term of
their lives. Immuno-suppressant drugs are expensive and can increase the
patient's exposure to illness. Patients may also require costly care and
experience extended periods of illness with impaired quality of life while
waiting for a suitable donor heart. As the health of a patient typically
deteriorates over a number of hours, days or weeks, many patients will die while
waiting for a suitable donor heart. In addition, patients who are awaiting a
donor heart generally require extensive tests and hospital time, which result in
substantial expense.
We believe that a mechanical replacement heart would increase the
number of lives saved by mitigating the consequences of the scarcity of
available donor hearts. In addition, a significant portion of heart transplant
patients must endure a long waiting period before a suitable donor heart is
identified, if at all. The development of an implantable mechanical heart could
help alleviate this long and difficult wait.
PERMANENT HEART ASSIST. Permanent assist devices are being developed to
supplement the function of the diseased heart or to stop or slow the progression
of the disease, while leaving the diseased heart in place. These devices
contrast with replacement hearts, which are intended to replace a severely and
irreversibly damaged heart. No permanent heart assist device is yet approved by
the FDA, but a number of companies are developing permanent heart assist
devices, some of which are in clinical trials. Permanent assist devices under
development can be grouped into two categories: those that pump blood directly,
known as ventricular assist devices or VADs, and less invasive devices that are
intended to provide patients with an improved quality of life. The less
invasive, quality-of-life devices include those that wrap around the heart,
either to help the heart pump blood or to inhibit deterioration of the heart by
preventing its further enlargement, and those that attempt to synchronize the
actions of the heart ventricles with electrical impulses. We believe that all
types of permanent heart assist devices potentially may be used to treat certain
CHF patients who are near death as well as those patients who are not at
imminent risk of death but whose daily activities are significantly restricted
due to their weakened hearts.
6
VADs, the more invasive of the two categories, may prove the most
appropriate permanent heart assist devices for certain end-stage CHF patients.
Implantable VADs are intended primarily for patients with severe left
ventricular failure. We believe that VADs are being primarily developed for CHF
patients and that VADs would not be appropriate for long-term support of the
majority of heart failure patients, such as those with massive heart damage,
severe rhythm disorders, blood clots in the ventricles, severe lung disease,
ventricular rupture, chronic right ventricle failure or heart transplant
rejection.
Heart wrap devices as well as electrical stimulation devices may prove
more appropriate than VADs for the larger number of patients with early and
mid-stage CHF because they are expected to be less invasive and pose fewer
risks. These devices can be referred to as "quality-of-life support devices." We
estimate that approximately 200,000 patients per year who are suffering from CHF
but who are not at imminent risk of death might benefit from quality-of-life
support devices.
TEMPORARY HEART ASSIST. Candidates for temporary heart assist devices include
patients with severe but potentially reversible heart failure and patients whose
hearts need help pumping blood while they await transplantation or other
therapies. Temporary heart assist devices typically consist of a specialized
pump that is attached to a patient's heart and driven by a console or external
battery pack. Such devices are intended to be removed from a patient's body once
the patient's heart has had the opportunity to recover its normal function or
the heart is replaced. Temporary heart assist devices can be grouped into three
categories:
BRIDGE-TO-RECOVERY. Bridge-to-recovery devices are used to support the
recovery of patients with reversibly failing hearts. These devices are most
frequently used to support patients whose hearts do not fully restart following
open heart surgery, and who cannot be weaned off the heart-lung machine. Of the
patients who experience such complications, approximately 12,000 die each year
despite available therapies. Bridge-to-recovery devices temporarily assume the
pumping function of the heart, while allowing the heart to rest, heal and
recover its normal function. These devices can also be used for patients who
have not undergone surgery but whose lives are threatened by viral infections
that attack the heart muscle. In addition, bridge-to-recovery devices may prove
beneficial to certain patients who have suffered from a recent heart attack.
BRIDGE-TO-TRANSPLANT. Bridge-to-transplant devices are used to support
patients who have experienced heart disease and are awaiting heart
transplantation. We believe that the market for this category of device may be
limited by the availability of qualified donor hearts.
STAGING. Staging devices are used to support patients before or during
application of other therapies and to support patients with failing hearts being
transported to other facilities. At present, for reasons of specialized care,
patients are transported between medical centers with the assistance of such
devices under practice of medicine guidelines. In the future, staging devices
may be used to support heart failure patients prior to implantation of a
permanent heart assist device or a heart replacement. These devices could help
stabilize the patient and provide the medical team with time to better assess
the patient's condition before selecting an appropriate therapy. In addition,
while bridge-to-recovery devices are approved and used today to assist heart
transplant patients when rejection occurs, in the future staging devices may be
used with transplant patients who have rejected their donor heart and need life
support before receiving a mechanical heart replacement.
7
ABIOMED PRODUCTS AND PRODUCTS UNDER DEVELOPMENT
Our current principal products and products under development are the
AbioCor, a heart replacement device, the BVS, a temporary heart assist device,
and the AbioBooster and AbioVest, which are both permanent heart assist devices.
THE ABIOCOR IMPLANTABLE REPLACEMENT HEART
The AbioCor is a battery-powered totally implantable replacement heart
system, which we expect will be the first such device to begin human clinical
trials. The AbioCor is referred to as totally implantable because it has been
designed to operate alternately on internal battery power or portable external
battery power, in both cases without wires or any other material penetrating the
patient's skin. The AbioCor is referred to as a replacement heart because it has
been designed for implantation in the space vacated by the removal of a
patient's diseased ventricles, where it will take over the full pumping function
of the heart. The AbioCor is intended for use as destination therapy by patients
with irreparably damaged hearts who are at risk of imminent death due to CHD or
severe CHF but whose other vital organs remain viable. We believe that
approximately 125,000 CHD and CHF patients per year could benefit from a
replacement heart in the U.S., and an approximately equal number of patients
could benefit from a replacement heart each year outside of the U.S.
In 1988, we began to receive funding for AbioCor development from the
National Heart, Lung and Blood Institute, known as the NHLBI, to support our
development, testing and validation of the AbioCor. We have maintained this
support by achieving various designated milestones. To date, the NHLBI has
provided over $20 million of the more than $40 million that we have invested to
date for the development of the AbioCor.
DESIGN OF THE ABIOCOR.
The following diagram illustrates the principal components of the
AbioCor.
[Graphic showing AbioCor system]
The AbioCor system consists of the following principal components:
- A thoracic unit, or "replacement heart," which includes two artificial
ventricles with their associated valves and a hydraulic pumping
system. The unit weighs approximately two pounds and provides complete
blood circulation to the lungs and the rest of the body. The
ventricles and their associated valves contain seamless surfaces made
of our proprietary blood-contacting material, Angioflex, and
specialized geometries which result in flow patterns designed to
reduce the risk of blood cell damage and blood clots. Our current
configuration of the thoracic unit is sized for patients with
relatively large chest cavities. If our testing of this configuration
is successful, we plan to develop thoracic units of different sizes to
fit other patients.
- A rechargeable implantable battery, which allows the AbioCor to
operate without any external power supply for limited periods of time.
The battery technology in the AbioCor is lithium-based and designed by
a third party that has expertise in batteries for medical devices. We
have developed a recharging circuit that we believe is considerably
more reliable than the recharging circuit employed in most consumer
electronics today.
- A microprocessor-based implantable electronic device that controls and
monitors the thoracic unit and provides radio communication with an
external monitor affording patients and caregivers the opportunity for
real-time information on its operating status.
8
- An across-the-skin, or transcutaneous, energy transmission system,
which eliminates the need for wires penetrating the patient's skin and
the inherent associated risks of infection. It transfers the power to
operate the AbioCor system and to recharge the implantable battery
without tethering the patient to an external drive console.
- An external rechargeable battery pack and monitor designed to be worn
by the patient. These components supply primary power to the system,
allow patient mobility, provide system diagnostic information, and
recharge the implanted back-up battery as needed. We anticipate that
in the first clinical trials of the AbioCor, the patient may remain
under sustained medical supervision and a portable monitoring device
will be used in place of the patient-worn external battery pack and
monitor.
Our AbioCor design is intended both to extend life and to provide
patients with a good and productive quality of life. Among the quality-of-life
features of AbioCor design are quiet heart valves, elimination of all
post-surgical penetration of the skin, elimination of the need for the patient
to be tethered to a large external drive console, and expected minimal need for
anti-coagulation treatments and immuno-suppression therapies. The AbioCor system
is designed for both low maintenance and low patient involvement.
We have also created tools and methods intended to make the AbioCor
system as easy to implant as possible. These tools include quick-connectors for
relatively easy attachment of the AbioCor to the human anatomy and a virtual
surgery software tool to allow for the simulated implant of the AbioCor into a
three-dimensional software model of the anatomy of a particular patient prior to
opening that patient's chest.
EVOLUTION OF HEART REPLACEMENT TECHNOLOGY. The development of the AbioCor has
included extensive work in the areas of blood compatible surfaces, blood
compatible flow, fabrication techniques for seamless blood pumps and valves,
advanced pumping mechanisms, physiological control, energy transfer, anatomical
fit and surgical techniques. As such, the AbioCor incorporates technology
designed to address the clinical limitations experienced by earlier mechanical
replacement hearts. One earlier attempt was the Jarvik-7 heart from Symbion,
Inc., which was implanted in a small number of patients beginning in 1982.
Although much was learned from these pioneering efforts, the technology
available at that time would not support a totally implanted system. The Symbion
heart required a tube penetrating the skin and a large external console that
severely restricted patient mobility. When initially used in patients, there
were complications relating to infection, stroke and anatomical fit.
In recent years, CardioWest Technologies, Inc. introduced an improved
version of the Symbion heart into clinical trials as a bridge-to-transplant
device. In the most recently published results, 91 patients had received this
mechanical replacement heart worldwide. The majority of these patients have been
successfully supported on this device until transplant. The longest implant
duration was approximately six months, with an average bridge duration of
approximately one month. While the CardioWest device is limited to
bridge-to-transplant trials in a hospital setting because it tethers the
patients to a large external console, it does provide further evidence that a
mechanical heart can be successfully used to replace the human heart in order to
extend life.
We believe that advances in medical knowledge and technology have
permitted us to design the AbioCor to avoid some of the problems that caused
earlier replacement hearts to fail. In addition, the miniaturization of
electronics and advances in the reliability of electronic systems allow for
device controls to be fully implanted today, which eliminates the need for
tethering patients to large external
9
control devices. Computer-aided design and virtual surgery tools have allowed us
to adapt the design of the AbioCor for human fit and evaluate that fit prior to
implantation.
PREPARATION FOR CLINICAL TRIALS. Development of the technological foundation for
the AbioCor has been a significant focus of ABIOMED since we were founded in
1981. Development and testing of the core technology for the AbioCor was
underway prior to our founding. Beginning in 1997, we substantially increased
our research and development activities for the AbioCor with the goal of
accelerating its development in order to enter clinical trials as early as
possible. We decided to significantly increase our investment in the AbioCor
after determining that the AbioCor prototypes then produced had shown sufficient
functionality through laboratory and animal tests to warrant an accelerated
product development effort. The increased spending has been used to build a
pilot-scale manufacturing facility, to develop the product from a research-based
prototype status to a manufacturable clinical design, to increase system safety
and efficacy by making engineering improvements and refinements, to increase
operational performance, durability and reliability, to substantially expand
laboratory and animal testing of the system, and to begin training of surgical
and clinical support teams in selected medical centers for the initial clinical
trials. In addition, in late 1996 we began to increase our interaction with
regulatory authorities by presenting to them different portions of our
developmental status and testing plans. To accomplish these tasks, we have
significantly increased the team of engineers, scientists, physicians and
technicians working full time on the AbioCor program to more than 75 full-time
employees.
We are in advanced stages of preparation to initiate human clinical
trials with the first generation of clinical AbioCor systems. Subject to
regulatory approval, we plan to begin initial clinical trials with patients who,
despite all available therapies, have extremely high probability of death in the
near term due to acute heart failure. Examples of such patients include heart
transplant recipients who are rejecting their donor hearts, surgical patients
placed on bi-ventricular cardiac assist but whose hearts fail to recover, and
hospitalized patients who are facing imminent death following massive heart
attacks. We believe that by initially selecting those patients who have no other
treatment alternative, we will have the opportunity to obtain regulatory
approval to conduct clinical trials based upon the successful completion of
ongoing and planned laboratory and animal tests. As we gain clinical experience
with the most seriously ill patients and demonstrate clinical efficacy and
safety, we expect to enhance the performance range, durability and reliability
of AbioCor systems and plan to seek regulatory approval for subsequent
generations of the AbioCor for use in increasingly broad patient populations.
This regulatory plan is consistent with our experience with the BVS system. Our
BVS product, which has now supported thousands of patients, was originally
approved by the FDA for post-cardiotomy support on the basis of data from less
than half of the approximately 75 patients who were enrolled in the clinical
trials and who were suffering life-threatening conditions for which no
alternative treatment existed. Our plan for AbioCor clinical trials draws upon
our experience with the BVS.
STEPS TO INITIAL CLINICAL TRIALS. Prior to the commencement of initial
clinical trials for the AbioCor, we must successfully complete the following
tasks:
MANUFACTURING QUANTITIES OF CLINICAL-CONFIGURED SYSTEMS FOR
PRE-CLINICAL TESTING AND FOR CLINICAL TRIALS. Since our pilot AbioCor
manufacturing facility became operational in 1997, we have produced more than
100 AbioCor systems and many more individual critical components such as valves
and pumping membranes, which have been used for performance evaluation,
developmental activities, laboratory reliability testing, and animal
implantation tests. We are currently manufacturing more than 50 systems in the
configuration intended for use in pre-clinical tests and, subject to regulatory
approvals, initial clinical trials. While we plan to continue to produce
sufficient quantities of AbioCor systems in our existing facilities to meet our
anticipated needs for the year 2000, we are currently building new expanded
facilities in anticipation of increased demand.
10
ADDITIONAL PRE-CLINICAL AND ANIMAL TESTS TO DEMONSTRATE DEVICE
PREPAREDNESS FOR CLINICAL TRIALS. We have performed component and limited
system-level testing of the AbioCor to evaluate operational performance and
durability. During 1998, we began formal pre-clinical durability and reliability
growth testing of the AbioCor system, consistent with protocols that we believe
will be required by regulatory authorities for approval to conduct initial
clinical trials. We have also conducted and have continued extensive accelerated
testing of the valves and flexing membranes that are critical components of the
AbioCor ventricles. Additional tests that remain include completing laboratory
performance tests similar to those already conducted using larger numbers of
clinical-configured systems for increasing duration.
We have conducted approximately 100 animal tests at various stages of
development of the AbioCor technology. Approximately half of these were research
studies of various configurations and at various stages of development. Since
the beginning of 1998, we have implanted AbioCor systems in approximately 40
calves. The results of our studies in calves have shown that the implanted
components are well tolerated and the AbioCor is capable of effectively
replacing the heart of a calf. Following AbioCor heart replacement, the calves
typically grow normally and perform normal physical functions, including
treadmill exercises. Vital physiological parameters typically return to normal
pre-operative levels within one week after the implantation. Prior to conducting
initial human clinical trials, additional successful animal test need to be
completed. We believe that these additional tests need to be conducted for the
same duration as the majority of tests performed in 1999 but under more formal
test protocols.
READINESS TRAINING OF THE SELECTED INITIAL MEDICAL CENTERS TO
DEMONSTRATE TEAM PREPAREDNESS. In preparation for initial AbioCor clinical
trials, we selected the following leading medical centers as test sites for
initial clinical trials:
- Brigham and Women's Hospital, Boston
- Massachusetts General Hospital, Boston
- Jewish Heart Hospital, Louisville
- Rabin Medical Center, Tel-Aviv
- Texas Heart Institute, Houston
- UCLA Medical Center, Los Angeles
We have worked with each of these centers for many years in connection with the
BVS and believe that each of the centers is well positioned to contribute to the
AbioCor clinical trials. In addition, we are interacting with medical personnel
from various medical centers, including Hahnemann University Hospital,
Philadelphia, from who we receive guidance and feedback as we prepare for
clinical trials.
Prior to conducting initial human clinical trials at any of these
medical centers, the medical centers need to be trained and must demonstrate
that they are clinically ready. Surgical teams from two of these centers have
substantially demonstrated readiness.
SUBMISSION OF APPLICATIONS TO THE APPROPRIATE REGULATORY AUTHORITIES.
At the end of 1996, we commenced our regulatory interaction process for the
AbioCor under the pre-IDE process. We have presented to the FDA key elements of
our proposed initial clinical plan, laboratory test protocols, process protocols
and materials compatibility evaluation. We expect that this information will
become part of the
11
IDE submittal. In addition, we expect that we may be able to use much of the
data developed for our IDE application in our corresponding international
applications.
COMPETITIVE POSITION. We believe that the investment we have made in AbioCor
development, including building manufacturing facilities, extensive device
testing and regulatory preparations, positions us well to be first to enter
clinical trials for, as well as to commercialize, a totally implantable heart
replacement device. No such device is clinically or commercially available
today. We believe that our closest competitor with an advanced design of a heart
replacement device is Pennsylvania State University, which has licensed its
technology for commercialization to a recently formed company. Pennsylvania
State University was the only applicant other than ABIOMED to qualify for the
last round of funding from the NHLBI, which was awarded in 1996. To qualify for
such funding, both ABIOMED and Pennsylvania State University demonstrated to the
satisfaction of NHLBI that the basic design of its system functioned adequately
in laboratory and animal models.
We will not be able to evaluate fully the competitiveness of the
AbioCor with other replacement hearts unless and until each of the products is
commercially available. However, we believe that the AbioCor will compete based
on clinical outcomes, the quality of life it provides, cost effectiveness,
clinical support and customer relationships. For example, we may compete
favorably on the basis of cost because we manufacture the valves for the AbioCor
at a cost which we believe is considerably below the cost of purchasing the
valves from third parties, and because we manufacture all of the
blood-contacting surfaces and valves out of our proprietary blood-contacting
material, Angioflex. In addition, we believe our design will result in the need
for less frequent invasive maintenance than other approaches, resulting in an
improved quality of life. We also believe that our experience in regulatory
affairs, manufacturing, and the marketing of devices to cardiac surgeons will
aid us competitively.
We believe there are significant differences that distinguish an
implantable replacement heart from a VAD, and that a need exists for both types
of devices. We believe that devices being developed for destination therapy must
be implantable rather than external to the body in order to address patients'
quality-of-life needs. Implantable VADs, referred to as left ventricular assist
devices or LVADs, are being developed to attach to a patient's diseased heart
and provide pumping support to the left ventricle only. By contrast, the AbioCor
will replace the diseased ventricles of the heart and take over the pumping
functions of both ventricles. Patients for whom we believe a replacement heart
would be preferable to a VAD include those with massive heart damage, severe
rhythm disorders, blood clots in the ventricles, severe lung disease,
ventricular rupture, chronic right ventricle failure or heart transplant
rejection. We also believe that cardiac surgeons will adopt replacement hearts
as the preferred technology over LVADs once the reliability of both devices is
clinically demonstrated for multiple-year durations.
COST EFFECTIVENESS. We believe there is a significant need for cost-effective
therapies for heart disease. In the U.S., approximately $100 billion was
associated with CHD patients and approximately $21 billion was associated with
CHF patients in 1997. A significant proportion of these costs was attributed to
hospital support. Patients who suffer from heart disease often receive medical
treatment, either in a hospital or at home, for a number of years prior to their
deaths. As the lives of these patients are often restricted as a result of their
conditions and treatment, they often suffer from a reduced quality of life,
including shortness of breath and inability to work. Prior to death, many heart
failure patients are confined to bed and require monitoring and other expensive
forms of support. Approximately 35% of patients who have CHF are hospitalized
one or more times per year. The average length of stay for each hospitalization
for a CHF patient is seven to nine days, with cost that often exceeds $2,000 per
day.
We are developing the AbioCor with the intent to offer a cost-effective
treatment for end-stage heart failure patients. In addition, the AbioCor has the
potential to allow patients an opportunity to return
12
to productive lives. This would allow the medical system to save money by
discharging the patient from the hospital and allowing the person to become
productive and lead a reasonably normal life.
If the reliability of the AbioCor is clinically demonstrated for
multiple-year durations, it has the potential to be considerably less expensive
than heart transplantation over a five year period. One reason for this reduced
cost is that recipients of a mechanical replacement heart are not expected to
need immuno-suppression drugs. The blood and tissue contacting portions of the
AbioCor are constructed of inert and biocompatible materials, which typically do
not stimulate a patient's immune system. Other cost savings could result because
the patient can receive a replacement heart sooner and does not require
extensive tests for donor heart compatibility. While recipients of the AbioCor
will likely need to purchase new batteries periodically, we anticipate that the
annual cost of battery purchases will be significantly less than the cost of
immuno-suppression drugs for donor heart recipients.
While developing the AbioCor, we introduced the BVS, a temporary
heart-assist device, which is currently being sold in the U.S. and international
markets. Certain key elements of the technology developed for the AbioCor, such
as Angioflex and our tri-leaflet heart valves, have been clinically tested in
the BVS and are currently in commercial use. In addition, the BVS has enabled us
to develop significant experience in areas such as research and development,
manufacturing, regulatory compliance, sales and marketing, and clinical support.
We believe our experience with the BVS in these areas will provide us with a
competitive advantage in commercializing the AbioCor.
THE BVS-5000 TEMPORARY HEART ASSIST DEVICE
The BVS was the first heart assist device capable of assuming the full
pumping function of the heart to be approved by the FDA, and is the most widely
used heart assist device today, with over 3,500 patients supported to date. It
is a bridge-to-recovery device designed to provide a patient's failing heart
with full circulatory assistance while allowing the heart to rest, heal and
recover its function. The BVS can support the left, right or both ventricles of
the heart. The average age of patients supported with the BVS is 52, however the
BVS has been used to support patients as young as 9 and as old as 85.
The BVS is the only device that the FDA has approved for the temporary
treatment of all categories of patients with failing but potentially recoverable
hearts. The BVS is most frequently used in patients whose hearts fail to recover
function immediately following heart surgery. The FDA approved the BVS through
its rigorous pre-market approval process for use with these post-surgical
patients in November 1992. In 1996, the FDA approved use of the BVS for all
other categories of post-surgical patients with potentially reversible heart
failure. In 1997, the FDA approved use of the BVS with patients who had not just
undergone surgery, such as patients referred by a cardiologist as a result of
viral infections of the heart or certain heart attacks, expanding its use to the
temporary treatment of all patients with potentially reversible heart failure.
The following diagram illustrates the principal components of the
BVS.
[Graphic showing BVS system]
The BVS system consists of the following components:
- A computer-controlled pneumatic drive and control console, which
automatically adjusts the pumping rate, similar to the natural heart;
- Single-use external blood pumps, which provide pumping of blood for
the left, right or both sides of a patient's heart and are designed to
emulate the function of the natural heart; and
13
- Cannulae, which are specially designed tubes used to connect the blood
pumps to a patient's heart.
The integration of the cannulae, blood pumps and console creates an "external
heart" system with the ability to reduce the load on the heart, provide
pulsatile blood flow to vital organs and allow the heart muscles time to rest
and recover. The BVS is designed to be easy to use and does not require a
specially trained technician constantly to monitor or adjust the pumping
parameters.
The goal of the BVS is to facilitate the recovery of patients' hearts
as quickly as possible. Patients who recover under BVS support typically
stabilize in a period of less than one week. It generally takes three to five
days for the heart muscle to recover its biological energy in a post-cardiotomy
patient, and the partial healing of tissue damage frequently associated with
post-cardiotomy shock occurs over several days in cases in which the heart is
not irreversibly damaged. The BVS, although it is a VAD, serves a different
function than bridge-to-transplant devices, which are intended for long-term use
by patients awaiting a heart transplant.
The BVS is most frequently used to support patients who have undergone
open-heart surgery, when the heart cannot be successfully restarted and weaned
off the heart-lung machine used in surgery. The BVS can assume the full pumping
function of the heart for these patients while reducing certain risks associated
with extended support on the heart-lung machine, including bleeding, strokes and
blood cell damage. The traditional therapy for these patients has been the
combined use of drugs and intra- aortic balloon pumps. Intra-aortic balloon
pumps are capable of providing only a small enhancement to the pumping function
of a failing heart. Despite the availability of such therapy, approximately
12,000 of these patients die each year, approximately half of whom are over the
age of 75. The health of many of the patients who die in this manner
deteriorates over a period of weeks with the patient either dying after
incurring significant expense, or running the risk of permanent damage to their
other organs due to inadequate blood flow.
Other categories of patients who can be supported by the BVS include
those suffering from viral myocarditis, a viral infection of the heart. For
these patients, the BVS assumes the full pumping function of the heart, allowing
the patient's immune system to defend against the virus. Other uses of the BVS
include supporting patients following failed heart transplants and supporting
the right ventricle of a patient's heart in conjunction with the implantation of
a device to assist the left ventricle. The BVS is typically used when the
patient's chances for survival are small. We are also exploring other potential
applications of the BVS, including its use as a staging device to support heart
failure patients prior to a permanent heart assist device or heart replacement.
Any hospital performing open-chest heart surgery may use the BVS. There
are approximately 900 of these hospitals in the U.S. and more than 1,000 such
hospitals outside the U.S. Since FDA approval of the BVS, we have primarily
focused on sales of the BVS to the largest heart surgery medical centers in the
U.S. As of March 31, 2000, more than 450 medical centers in the U.S. had
purchased the BVS, including 70% of the major U.S. centers that perform more
than 500 heart surgeries annually. In marketing the BVS, we are focusing on
selling additional consoles and disposable blood pumps to existing customers
with significant but less emphasis on adding new customers. Over half of current
BVS revenues are derived from sales of BVS single-use blood pumps to existing
customers after those customers have used the BVS to support patients. Our U.S.
list prices for the BVS system are $64,500 for a BVS console and $12,400 for a
BVS single-use blood pump and cannulae set. We are currently seeking to expand
our international sales of the BVS and are recruiting direct sales and support
teams for selected countries in Europe, while working with a third-party
distributor to pursue regulatory approval in Japan.
14
Since the BVS received FDA approval, we have made various improvements
to the BVS system, primarily to make it easier to use. We continue to enhance
the BVS product line and are developing improved blood pumps, cannulae and
consoles. We believe that some of these improvements may permit use of the BVS
for additional patient conditions.
THE ABIOBOOSTER AND THE ABIOVEST
The AbioBooster is intended as either a temporary or a permanent
heart-assist device that will wrap around the heart without direct blood contact
and actively help squeeze the heart. We are designing the AbioBooster as a
quality-of-life device for use in patients with CHF who are not at imminent risk
of death, but whose daily activities are generally restricted due to their
weakened hearts. The AbioBooster consists of a flexible artificial plastic
"muscle" that can be wrapped around the heart to assist its contraction, thereby
increasing blood flow in order to restore quality of life to the patient. The
AbioBooster is in research and development, with prototype designs being
evaluated and tested in our laboratories and in animals.
The AbioVest, which is in an early stage of research, is intended as a
permanent implantable device to wrap around the hearts of certain patients with
CHF without creating the inherent risks of contacting the patient's flowing
blood. The intent of the AbioVest design is to help the heart passively by
preventing progressive heart enlargement.
OTHER PRODUCTS AND TECHNOLOGIES UNDER DEVELOPMENT
We are using the technology and know-how that we have generated in
developing the AbioCor and the BVS to research and develop additional potential
cardiovascular products and related technologies. These new products and
technologies are in various stages of research and development, and include a
variety of specialized implantable and external rotary pumps. We are also
developing devices for use in minimally invasive surgery applications such as
tissue welding and vascular welding for the repair of small arteries. In
addition, research and development activities under our product development
programs incorporate certain technologies that have potential as separate
spin-off products. Examples include new implantable heart valves, implantable
energy transmission systems, implantable monitoring systems for remote
transmission and archival of physiological data, diagnostic software for virtual
surgery, advanced implantable instrumentation and electronics, and external
monitoring systems.
MEDICAL AND ETHICAL ADVISORY BOARDS
We maintain independent advisory boards for medical and ethical issues,
which we consult on a periodic basis. These advisory boards provide guidance to
help us develop products that address patient needs and are acceptable to
society. Our medical advisory board currently consists of ten physicians,
primarily leading cardiac surgeons and cardiologists, who are independent of
ABIOMED and are in addition to the physicians being trained at the selected
initial clinical sites for the AbioCor. Together, these physicians have a broad
range of experience in fields relevant to our products and products under
development.
We consult with leading experts in the field of medical ethics, and we
are in the process of establishing an independent advisory board for ethical
issues. We anticipate that our ethics advisory board will consist of five
members representing different backgrounds and interests. We expect that this
board will be an advocate for patients' interests and will assist us with a
number of matters in connection with clinical trials of the AbioCor. For
example, we anticipate that the board will participate in the evaluation of
patients for inclusion in the initial clinical trials and advise us regarding
the bioethical aspects of our
15
regulatory protocols and public disclosures. The board is also expected to
interact with the internal review boards of medical centers in conjunction with
initial clinical trials and assist us in the review of clinical trial data. We
expect that our ethical advisory board will operate under principles and
procedures that conform to FDA and European Union requirements.
We believe that these advisory boards, together with our own internal
resources and the support of leading medical centers and physicians and other
third parties with which we collaborate, will continue to assist us in advancing
our current products and introducing new products that satisfy patient needs.
RESEARCH AND PRODUCT DEVELOPMENT
As of June 1, 2000, our research and development staff consisted of 114
professional and technical personnel, including 12 with PhDs or MD/PhDs and 35
engineers, many with advanced degrees, covering disciplines such as electronics,
software, reliability testing, fluid mechanics, physics and physiology. Our
research and development efforts are focused on the development of new products,
primarily related to mechanical heart assist and heart replacement, and the
continued enhancement of the BVS and related technologies. Our research and
development personnel are also involved in establishing protocols and monitoring
test data submissions to the FDA and corresponding foreign regulatory agencies
to obtain the necessary clearances and approvals for our products. We are using
sophisticated tools, such as three-dimensional computer-aided design systems,
and procedures in an effort to permit smooth transition of new products from
research to product development to manufacturing. We have substantial expertise
in electro-mechanical systems, cardiac physiology and experimental surgery,
blood-material interactions, fluid mechanics and hemodynamics, internal and
external electronic hardware, software, plastics processing, lasers, and optical
physics. We have applied this expertise to address challenges associated with
the safe and effective pumping of blood.
In 1997, we decided that the design of the AbioCor demonstrated
sufficient functionality and operational performance through laboratory and
animal studies to warrant accelerated product development efforts to bring the
product to clinical use. We expended $15.6 million on research and development
during the fiscal year ended March 31, 2000, $13.4 million during the fiscal
year ended March 31, 1999, and $9.1 million during the fiscal year ended March
31, 1998. These amounts included $11.5 million in fiscal 2000, $9.7 million in
fiscal 1999, and $6.5 million in fiscal 1998 for AbioCor development. Government
contracts and grants funded a substantial portion of these expenses; however we
have used our own resources to fund research and development expenses not
covered by government contracts and grants. Since our inception, U.S. government
agencies, particularly the NHLBI, have provided significant support to our
product development efforts. The most significant current funding comes from the
NHLBI, which supports our development of the AbioCor and AbioBooster. In May
1999, the U.S. government appropriated the final $1.8 million under our current
$8.5 million AbioCor development contract. As of May 1, 2000, the backlog of all
government contracts and grants was $1.5 million, including $0.6 million related
to the AbioBooster. All of our government contracts and grants contain
provisions making them terminable for the convenience of the government and are
subject to government appropriations. We cannot assure that the government will
not terminate, reduce or delay the funding for any of our contracts. In
addition, we cannot assure that we will be successful in obtaining any new
government contracts or further extensions to existing contracts.
SALES, CLINICAL SUPPORT, MARKETING AND FIELD SERVICE
We believe that the sales, clinical support, marketing and field
service teams that we have established for the BVS product line and the
relationships that we have developed with existing customers
16
will be instrumental not only in continuing to expand BVS usage and sales, but
also in launching new products such as the AbioCor.
We sell the BVS in the U.S. through direct sales and clinical support
teams. As of June 1, 2000, our worldwide BVS sales, clinical support, marketing
and field service teams included 36 full-time employees. Our sales force focuses
on BVS sales to new customers, upgrades of existing customers, and increasingly,
expansion of usage by existing customers. Our clinical support group focuses on
training and educating new and existing customers in order to improve clinical
outcomes and increase BVS blood pump usage. We believe that the efforts of our
clinical support group contribute significantly to the number of lives saved by
physicians using the BVS as well as usage and reorders of BVS single-use blood
pumps. We are increasingly focusing our sales and customer support efforts on
increasing BVS usage by existing customers with significant but less emphasis on
adding new customers. Over half of current BVS revenues are derived from sales
of BVS single-use blood pumps to existing customers. We believe that our sales
and support teams and the reputation and relationships they have helped us
develop with our customers will be key assets for the introduction of potential
future products such as the AbioCor, BVS product extensions and other products
under development.
Building on our experience in the U.S., we are working to expand our
international sales efforts, both for the BVS and in preparation for the
AbioCor. We are working to accomplish this through distributors, including a
collaborative arrangement for distribution in Japan, and by selling directly in
selected European markets.
MANUFACTURING
We have over 10 years of experience in the manufacture of the BVS
console, BVS blood pumps, certain cannulae and related accessories. As of
June 1, 2000, our manufacturing staff consisted of 26 people and our quality
assurance staff consisted of 15 people. The manufacture of our BVS blood pumps
and consoles includes assembly, testing and quality control. We manufacture key
blood-contacting components for the BVS blood pumps, including valves and
bladders, from our proprietary Angioflex polymer. We purchase a majority of the
raw materials, parts and peripheral components used in the BVS consoles. We both
purchase and manufacture cannulae depending on the size and design of the
cannulae. Our BVS manufacturing facility is ISO-9001 certified and operates
under the FDA's current Quality Systems Regulations and Good Manufacturing
Practices, known as QSR/GMP.
The manufacture of the AbioCor is based on processes that are similar
to many of the processes used with the BVS. Prior to 1997, we manufactured
AbioCor units one at a time in our research and development facility. In 1997,
we constructed a pilot manufacturing facility, which became fully operational in
1998 and has produced all of the more than 100 AbioCor systems manufactured and
tested since that time.
In October 1999, we commenced construction of new and larger
manufacturing facilities for both the AbioCor and the BVS. These new facilities
are located in the same approximately 80,000 square foot space that our research
and development, sales and marketing and general and administrative group began
occupying in 1999 and is in the same industrial park as our current
manufacturing facilities. We are scheduled to begin occupying the new
manufacturing areas in 2000. We believe that our current manufacturing
facilities will permit us to produce sufficient quantities of AbioCor and BVS
products until the new facilities are available, including sufficient quantities
of the AbioCor for clinical trials.
17
PROPRIETARY RIGHTS, PATENTS AND KNOW-HOW
We have developed significant know-how and proprietary technology, upon
which our business depends. To protect our know-how and proprietary technology,
we rely on trade secret laws, patents, copyrights, trademarks, and
confidentiality agreements and contracts. However, these methods afford only
limited protection. Others may independently develop substantially equivalent
proprietary information, gain access to our trade secrets or disclose such
technology without our approval.
A substantial portion of our intellectual property rights relating to
the AbioCor and the BVS is in the form of trade secrets, rather than patents. We
protect our trade secrets and proprietary knowledge in part through
confidentiality agreements with employees, consultants and other parties. We
cannot assure that our trade secrets will not become known to or be
independently developed by our competitors.
Of our 25 U.S. patents as of June 12, 2000, 5 relate to the AbioCor and
2 relate to the BVS. Of our 22 pending U.S. patent applications as of June 12,
2000, 10 relate to the AbioCor and 3 relate to the BVS. We also own a number of
corresponding patents and patent applications in a limited number of foreign
countries. Our patents may not provide us with competitive advantages. They may
also be challenged by third parties. Our pending or future patent applications
may not be approved. The patents of others may render our patents obsolete or
otherwise have an adverse effect on our ability to conduct business. Because
foreign patents may afford less protection than U.S. patents, they may not
adequately protect our proprietary information.
The medical device industry is characterized by a large number of
patents and by frequent and substantial intellectual property litigation. Our
products and technologies could infringe on the proprietary rights of third
parties. If third parties successfully assert infringement or other claims
against us, we may not be able to sell our products. In addition, patent or
intellectual property disputes or litigation may be costly, result in product
development delays, or divert the efforts and attention of our management and
technical personnel. If any such disputes or litigation arise, we may seek to
enter into a royalty or licensing arrangement. However, such an arrangement may
not be available on commercially acceptable terms, if at all. We may decide, in
the alternative, to litigate the claims or to design around the patented or
otherwise proprietary technology.
Some of our products have been developed in part under government
contracts that require us to manufacture a substantial portion of the products
in the U.S. The government may obtain certain rights to use or disclose
technical data developed under those contracts. We retain the right to obtain
patents on any inventions developed under those contracts (subject to a
non-exclusive, non-transferable, royalty-free license to the government),
provided we follow prescribed procedures.
COMPETITION
Competition in the heart assist and heart replacement markets is
intense and subject to rapid technological change and evolving industry
requirements and standards. Many of the companies developing or marketing heart
assist products have substantially greater financial, product development, sales
and marketing resources and experience than ABIOMED. These competitors may
develop superior products or products of similar quality at the same or lower
prices. Moreover, improvements in current or new technologies may make them
technically equivalent or superior to our products in addition to providing cost
or other advantages. Other advances in medical technology, biotechnology and
pharmaceuticals may reduce the size of the potential markets for our products or
render those products obsolete.
18
No totally implantable replacement heart is commercially or clinically
available today. We are aware of other heart replacement device development
efforts in the U.S., Canada, Europe and Japan. We believe that our closest
competitor with respect to having an advanced design of a heart replacement
device is Pennsylvania State University, which has licensed its technology for
commercialization to a recently formed company. We believe that if and when both
the AbioCor and the Pennsylvania State University replacement heart are
commercially available, the AbioCor will compete based on the quality-of-life it
provides, cost effectiveness, clinical support and customer relationships.
In addition to the developers of implantable replacement hearts, there
are a number of companies, including Thermo Cardiosystems, Inc., Novacor, a
division of Edwards Lifesciences Corp., and Arrow International, Inc. which are
developing permanent heart assist products, including implantable LVADs and
miniaturized rotary ventricular assist devices, that may address markets that
overlap with certain segments of the markets targeted by AbioCor. AbioCor may
compete with those devices for some patient groups, notably patients with severe
CHF due to predominant left ventricular heart failure. Thermo Cardiosystems,
Inc. and Edwards Lifesciences Corp. have commenced clinical trials under an IDE
for PMA approval of LVADs for permanent heart assist. We believe that the
AbioCor, LVADs and other VADs, if developed and proven effective for destination
therapy, will generally be used to address the needs of different patient
populations, with an overlap for certain segments of the heart failure
population. We believe that there is a need for both implantable LVADs and
implantable replacement hearts as destination therapies, and that when both
technologies demonstrate the required durability, surgeons will favor
replacement hearts.
In addition to devices being developed for patients in need of heart
replacement, several companies and institutions are investigating
xenotransplantation, the transplantation of a heart from another species, as a
potential therapy. Most notably, some developers are investigating the use of
genetically engineered pig hearts as an alternative source of donor hearts. This
technology is still in its formative stage and subject to a number of
significant scientific challenges, including controlling elevated immunologic
reactions leading to heightened rejection problems between cross-species
grafting and concerns for cross-species disease transmission to the recipient
and the public at large. We believe that this technology will not achieve
practical application for decades, if ever.
The BVS is a device that can assume the full pumping function of the
heart. The FDA has approved the BVS as a bridge-to-recovery device for the
treatment of all patients with potentially reversible heart failure. In May
1998, Thoratec Laboratories Corporation received FDA approval to market their
device for postcardiotomy recovery of the natural heart, which is one of the
primary patient categories addressed by the BVS. The Thoratec device was
originally approved for bridge-to-transplant and bridge-to-transplant continues
to be the primary use of the device. We are not aware of any other company that
has applied for FDA approval of a device that is directly competitive with the
BVS. Approval by the FDA of products that compete directly with the BVS could
increase competitive pricing and other pressures. We believe that we can compete
with such products based on cost, clinical utility and customer relations.
Our customers frequently have limited budgets. As a result, our
products compete against a broad range of medical devices and other therapies
for these limited funds. Our success will depend in large part upon our ability
to enhance our existing products, to develop new products to meet regulatory and
customer requirements, and to achieve market acceptance. We believe that
important competitive factors with respect to the development and
commercialization of our products include the relative speed with which we can
develop products, establish clinical utility, complete clinical trials and
regulatory approval processes, obtain reimbursement, and supply commercial
quantities of the product to the market.
19
THIRD-PARTY REIMBURSEMENT
We sell our BVS product and intend to sell most of our potential
products under development to medical institutions. Medical institutions and
their physicians typically seek reimbursement for the use of these products from
third-party payors, including Medicare, Medicaid, and private health insurers
and managed care organizations. As a result, market acceptance of our current
and proposed products may depend in large part on the extent to which
reimbursement is available to medical institutions and physicians for use of our
products.
Coverage and the level of payment provided by U.S. and foreign
third-party payors varies according to a number of factors, including the
medical procedure, payor, location, outcome and cost. In the U.S., many private
health care insurance carriers follow the recommendations of the Health Care
Financing Administration, or HCFA, which establishes guidelines for the coverage
of procedures, services and medical equipment and the payment of health care
providers treating Medicare patients. Internationally, healthcare reimbursement
systems vary significantly. In certain countries, medical center budgets are
fixed regardless of levels of patient treatment. In other countries, such as
Japan, reimbursement from government or third party payors must be applied for
and approved. As of the date of this report, the amount that Medicare generally
pays a medical institution for in-patient care of Medicare patients is based on
a number of considerations, including a patient's diagnosis regardless of the
services that are provided. Physicians however bill separately for the
procedures that they perform. Medicare does not currently reimburse medical
institutions for the incremental cost of using the BVS. Certain private health
insurers and managed care providers provide incremental reimbursement to both
the medical institutions and their physicians.
No reimbursement levels have been established for our products under
development, including the AbioCor. Prior to approving coverage for new medical
devices, most third-party payors require evidence that the product has received
FDA approval, European Union approval, or clearance for marketing, is safe and
effective and not experimental or investigational, and is medically necessary
and appropriate for the specific patient for whom the product is being used.
Increasing numbers of third-party payors require evidence that the procedures in
which the products are used, as well as the products themselves, are
cost-effective. Heart transplantation currently qualifies for reimbursement as
does bridge-to-transplant treatment with implantable VADs. Comparatively, we
believe that when the AbioCor product reaches maturity, it should cost less over
a five-year period than heart transplantation today and provide more ventricular
support than VADs. We believe that these factors should benefit the AbioCor when
we begin to seek reimbursement for it from third-party payors. However, we
cannot assure that the AbioCor or our other products under development will meet
the criteria for coverage and reimbursement or that third-party payors will
reimburse physicians and medical institutions at levels sufficient to encourage
the widespread use of the products. Because the AbioCor is an implantable
product designed to assist patients outside of the hospital environment, the
reimbursement standards or level of reimbursement support for the AbioCor may
differ from medical devices used solely within hospitals to assist patients.
GOVERNMENT REGULATION
Clinical trials, manufacture and sale of our products and products
under development, including the BVS, AbioCor, AbioBooster and AbioVest are, or
will be, subject to regulation by the FDA and corresponding state and foreign
regulatory agencies. Noncompliance with applicable regulatory requirements can
result in, among other things, fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, refusal of the
government to grant marketing approval for devices, withdrawal of marketing
approvals, and criminal prosecution. The FDA also has the authority
20
to request repair, replacement or refund of the cost of any device manufactured
or distributed by ABIOMED.
U.S. CLINICAL USE REGULATIONS. The BVS is classified as a Class III medical
device under FDA rules, as will be the AbioCor, the AbioBooster and AbioVest. In
the U.S., medical devices are classified into one of three classes (i.e.,
Class I, II or III) based on the controls deemed necessary by the FDA to
reasonably ensure their safety and effectiveness. Class III medical devices are
subject to the most rigorous regulation. Class III devices, which are typically
life-sustaining, life-supporting or implantable devices, or new devices that
have been found not to be substantially equivalent to legally marketed devices,
must generally receive pre-market approval, or PMA, by the FDA to ensure their
safety and effectiveness. Class III devices are also subject to some of the
requirements applicable to Class I and Class II devices, including general
controls, such as labeling, pre-market notification, performance standards,
post-market surveillance, patient registries and adherence to QSR/GMP
requirements, which include testing, control and documentation requirements.
A PMA application must be filed if a proposed device is a Class III
device for which the FDA has required PMAs. A PMA application must be supported
by valid scientific evidence, which typically includes extensive information
including relevant bench tests, laboratory and animal studies and clinical trial
data to demonstrate the safety and effectiveness of the device. The PMA
application also must contain a complete description of the device and its
components, a detailed description of the methods, facilities and controls used
to manufacture the device, and the proposed labeling, advertising literature and
training materials. By regulation, the FDA has 180 days to review the PMA
application, and during that time an advisory committee may evaluate the
application and provide recommendations to the FDA. Advisory committee reviews
often occur over a significantly protracted period, and a number of devices for
which FDA approval has been sought have never been cleared for marketing. In
addition, modifications to a device that is the subject of an approved PMA, or
to its labeling or manufacturing process, may require the submission of PMA
supplements or new PMAs and approval by the FDA.
If clinical trials of a device are required in order to obtain FDA
approval and the device presents a "significant risk," the sponsor of the trial
will have to file an IDE application prior to commencing clinical trials. The
IDE application must be supported by data, which typically includes the results
of animal testing performed in conformance with Good Laboratory Practices and
formal laboratory testing and documentation in accordance with appropriate
design controls and scientific justification. If the FDA approves the IDE
application, and the institutional review boards or IRBs at the institutions at
which the clinical trials will be performed approve the clinical protocol and
related materials, clinical trials may begin at a specific number of
investigational sites with a specific number of patients, as approved by the
FDA. Sponsors of clinical trials are permitted to charge for investigational
devices distributed in the course of the study provided that compensation does
not exceed recovery of the costs of manufacture, research, development and
handling. An IDE supplement must be submitted to and approved by the FDA before
a sponsor or investigator may make a change to the investigational plan that may
affect its scientific soundness or the rights, safety or welfare of human
subjects.
In November 1992, the FDA approved our PMA for the BVS. In 1996 and
1997, the FDA approved the use of the BVS for additional indications, expanding
its use to the treatment of all patients with potentially reversible heart
failure. In May 1998, we received notice from the FDA that the BVS had
successfully concluded a required post-market surveillance study. The primary
purpose of this post-market surveillance study was to provide a warning system
to alert the health care community to any potential problems with a device
within a reasonable time of the initial marketing of the device. Post-market
surveillance provides clinical monitoring of the experiences with a device once
it is distributed in the general population under actual conditions of use.
21
The AbioCor will be classified as a Class III device and therefore is
subject to the IDE and PMA processes and QSR/GMP requirements. We have submitted
information pertinent to the IDE for the AbioCor under the FDA's pre-IDE
process. The pre-IDE process encourages discussion between ABIOMED and the FDA
regarding the content of the regulatory submission throughout the process of
developing and testing the device and provides ABIOMED early guidance on
pre-clinical and clinical testing required for regulatory approvals.
We anticipate seeking initial approval of the AbioCor for a limited
category of indications and patients, and subsequent approval for additional
indications and patient populations. After the initial PMA is approved, we will
need to file supplemental PMAs for the additional indications. If we obtain
approval of the AbioCor in this manner, the FDA may initially impose conditions
on use of the AbioCor. Nevertheless, we believe that this phased approach will
permit us to obtain initial marketing approval for the AbioCor more quickly than
if we were to seek a single, broader approval.
U.S. MANUFACTURING AND SALES REGULATION. Any devices, including the BVS, which
we manufacture or distribute pursuant to FDA clearances or approvals, are
subject to pervasive and continuing regulation by the FDA and other regulatory
authorities. Manufacturers of medical devices for marketing in the U.S. are
required to adhere to QSR/GMP requirements and must also comply with Medical
Devices Reporting, or MDR, which requires that a firm report to the FDA any
incident in which its product may have caused or contributed to a death or
serious injury, or in which its product malfunctioned and, if the malfunction
were to recur, it would be likely to cause or contribute to a death or serious
injury. Labeling and promotional activities are subject to scrutiny by the FDA
and, in certain circumstances, by the Federal Trade Commission. Current FDA
enforcement policy prohibits the marketing of approved medical devices for
unapproved uses. We are subject to routine inspection by the FDA and other
regulatory authorities for compliance with QSR/GMP and MDR requirements, as well
as other applicable regulations.
INTERNATIONAL REGULATION. We are also subject to regulation in each of the
foreign countries in which we sell our products. Many of the regulations
applicable to our products in these counties are similar to those of the FDA. We
have obtained the requisite foreign regulatory approvals for sale of the BVS in
many foreign countries, including most of Western Europe. We believe that
foreign regulations relating to the manufacture and sale of medical devices are
becoming more stringent. The European Union adopted regulations requiring that
medical devices such as the BVS comply with the Medical Devices Directive, which
includes ISO-9001 and CE certification. In 1998, we received ISO-9001 and CE
certification for the BVS. Many manufacturers of medical devices, including
ABIOMED, have often relied on foreign markets for the initial commercial
introduction of their products. However, an evolving foreign regulatory
environment could make it more difficult, costly and time consuming for us to
pursue this strategy for new products. Implantable devices such as the AbioCor
must comply with the Active Implantable Medical Devices Directive. We are
working toward ISO-9001 and CE certification of the AbioCor. Any delay in
obtaining these certifications for the AbioCor or other products under
development on a timely basis could delay commercial sales of the products in
the European Union.
EMPLOYEES
As of June 1, 2000, we had 211 full-time employees, including:
- 114 in research and development;
- 36 in sales, clinical support, marketing and field service; and
22
- 41 in manufacturing and quality assurance.
Our remaining employees work in a variety of areas, including information
technology, human resources, accounting, facilities, corporate development and
management. We have entered into contractual agreements with all of our
employees, which include confidentiality and non-competition commitments by each
employee. None of our employees is represented by a union.
We consider our employee relations to be good.
EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers are as follows:
Name Age Position
---- --- --------
David M. Lederman, Ph.D................ 55 Chairman of the Board of Directors, President
and Chief Executive Officer
Robert T.V. Kung, Ph.D................. 56 Senior Vice President and Chief Scientific
Officer
Anthony W. Bailey...................... 44 Vice President - Engineering and Director of
AbioCor Program
Eugene D. Rabe......................... 44 Senior Vice President - Global Sales and
Services
John F. Thero.......................... 39 Senior Vice President- Finance, Treasurer and
Chief Financial Officer
DR. DAVID M. LEDERMAN founded ABIOMED in 1981, and has served as
Chairman of the Board and Chief Executive Officer since that time. He has
also served as President of the Company for the majority of the time. Prior
to founding ABIOMED, he was Chairman of the Medical Research Group at the
Everett Subsidiary of Avco Corporation which he joined in 1972. Dr. Lederman
has made many important contributions in the field of cardiac assist and
heart replacement technology, and originated the design and development of
the Company's AbioCor blood pumps and their valves. Dr. Lederman received a
Ph.D. degree in Aerospace Engineering from Cornell University.
DR. ROBERT T.V. KUNG has served ABIOMED since 1982 and has been Senior
Vice President and Chief Scientific Officer since 1995. He was Vice President of
Research and Development from 1987 to 1995 and Chief Scientist from 1982 to
1987. Prior to joining ABIOMED, Dr. Kung was a Principal Research Scientist at
Schafer Associates from 1978 to 1982 and at the Avco Everett Research Laboratory
from 1972 to 1978. He developed non-linear optical techniques for laser
applications and investigated physical and chemical phenomena in re-entry
physics. Dr. Kung has been Principal Investigator for ABIOMED's National
Institute of Health-funded AbioCor and AbioBooster programs and has conceived of
and directed the development of ABIOMED's laser-based minimally invasive
technologies. Dr. Kung received a Ph.D. degree in Physical Chemistry from
Cornell University.
MR. ANTHONY W. BAILEY has served ABIOMED since 1997, and is currently
Vice President, Engineering and Director of the AbioCor Program. From 1987 to
1997, Mr. Bailey was Vice President and General Manager for Pace Medical, Inc.
and from 1982 to 1987, was Manager of Design and Development at Shiley Infusaid,
Inc. Prior to that, Mr. Bailey served in various engineering functions
23
with manufacturers of implantable pacemakers, data acquisition and control
systems and medical monitoring equipment. Mr. Bailey received his Bachelor's
degree from the University of Lowell.
MR. EUGENE D. RABE has served ABIOMED since 1993 and has been Senior
Vice President, Global Sales and Services since 1999. Mr. Rabe assumed
responsibility for international sales in 1996, and was Vice President of
Sales from 1993 to 1999. Prior to joining ABIOMED, Mr. Rabe was Vice
President, Sales and Marketing for Endosonics Corporation. Mr. Rabe was
employed as a Sales Manager for St. Jude Medical, Inc. He has been involved
in the management of sales and marketing of cardiovascular/cardiological
devices for over twelve years. Mr. Rabe received a Bachelor's degree from St.
Cloud State University and an MBA from the University of California.
MR. JOHN F. THERO has served ABIOMED since 1994 and is currently Senior
Vice President of Finance, Treasurer and Chief Financial Officer. From 1994 to
1999 he was Vice President of Finance, Treasurer and Chief Financial Officer.
Prior to joining ABIOMED, Mr. Thero was Chief Financial Officer and acting
President for the restructuring of two venture-backed companies from 1992 to
1995. From 1987 to 1992, he was employed in various capacities including Chief
Financial Officer, by Aries Technology, Inc. From 1983 to 1987, he was employed
by the commercial audit division of Arthur Andersen LLP during which time he
became a Certified Public Accountant. Mr. Thero received a Bachelor's degree in
Economics/Accounting from The College of the Holy Cross.
ITEM 2. PROPERTIES
We lease our headquarters, research and development and production
facilities in two separate buildings in an industrial office park. The addresses
of these leased spaces are 22 Cherry Hill Drive and 33 Cherry Hill Drive in
Danvers, Massachusetts. These facilities are located approximately 22 miles
north of Boston.
Our primary facility consists of approximately 80,000 square feet of
space under an operating lease that expires in 2010. During 1999 we moved our
research and development, sales and marketing and general and administrative
departments into this facility, and it now serves as our headquarters. A
significant portion of this leased space is under construction for an expanded
manufacturing area for the AbioCor and BVS. The lease contains provisions to
allow termination by us, subject to a defined termination fee, in 2005 and
contains options to extend beyond 2010 at market rates.
In addition, we lease facilities of 19,000 square feet, expiring in
June 2001, in the same industrial park as our primary facility. The 19,000
square foot facility contains our AbioCor and BVS manufacturing areas. It is our
intention to move these manufacturing areas in 2000 and early 2001 to our new
larger facilities that are currently under construction and consolidate all of
our operations in one building. We could experience manufacturing interruptions
or delays if our new facilities are not available and qualified before
expiration of the lease in June 2001.
ITEM 3. LEGAL PROCEEDINGS
On February 4, 2000, a jury in U.S. District Court for the District of
Delaware unanimously found in favor of ABIOMED on all remaining claims in a suit
filed by World Heart Corporation and the Ottawa Heart Institute Research
Corporation. The suit, as filed on January 20, 1998, contends that a component
of ABIOMED's AbioCor infringes the plaintiff's intellectual property rights.
World Heart Corporation is currently developing an LVAD, using
technology developed by the Ottawa Heart Institute Research Corporation. The
original complaint sought damages and injunctive relief
24
for alleged breaches of contract, misappropriation of trade secrets, conversion
of trade secrets and patent infringement by ABIOMED. Prior to trial, the
plaintiffs' dropped their patent infringement claim and decided during trial not
to press the claim for conversion. The plaintiffs' claims and allegations relate
to a transcutaneous energy transmission device being developed by the Ottawa
Heart Institute Research Corporation in connection with its LVAD under
development. Between 1992 and 1995, we evaluated prototypes of the Ottawa Heart
Institute Research Corporation's transcutaneous energy transmission device for
possible use in connection with the AbioCor and determined that their prototypes
did not meet our needs. The plaintiffs allege that we subsequently utilized
aspects of their proprietary technology in developing our own transcutaneous
energy transmission device.
Following the jury verdict, the plaintiffs filed a motion for a new
trial. We have filed a motion to oppose that action. The plaintiffs also have
the right to file an appeal to a federal appeals court from any judgment adverse
to their interests. Although ABIOMED believes that all of the plaintiffs' claims
and allegations are without merit and that plaintiffs are not entitled to a new
trial, it is possible that the trial court or an appeals court might grant a new
trial, and, if so, that our defense might not prevail. If we do not ultimately
prevail, we might be required to use or develop alternative transcutaneous
technology, to seek a license to use certain technology, or to modify the design
of our transcutaneous energy transmission device. Although alternative
technologies in the public domain may lack features of our current
transcutaneous energy transmission device design, we believe they can be adapted
to be functionally adequate for providing energy to the AbioCor.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE TO SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended March 31, 2000.
25
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET PRICE
Our common stock is traded on the Nasdaq Stock Market National Market
under the symbol "ABMD." The following table sets forth the range of high and
low sales prices per share of common stock, as reported by the Nasdaq National
Market for our two most recent fiscal years:
FISCAL YEAR ENDED MARCH 31, 1999 HIGH LOW
-------------------------------- ---- ---
First Quarter.................................. 17-1/2 13-3/16
Second Quarter................................. 15-1/2 8-1/4
Third Quarter.................................. 11-3/8 7
Fourth Quarter................................. 13-3/8 8-1/4
FISCAL YEAR ENDED MARCH 31, 2000 HIGH LOW
-------------------------------- ---- ---
First Quarter.................................. 18. 11-7/8
Second Quarter................................. 16-3/4 13
Third Quarter.................................. 59-3/8 15-1/4
Fourth Quarter................................. 83-3/8 33-7/8
NUMBER OF STOCKHOLDERS
As of June 12, 2000, there were approximately 370 holders of record of
our common stock, including multiple beneficial holders at depositories, banks
and brokers included as a single holder in the single "street" name of each
respective depository, bank, or broker.
DIVIDENDS
We have never declared or paid any cash dividends on our capital stock
and do not plan to pay any cash dividends in the foreseeable future. Our current
policy is to retain all of our earnings to finance future growth.
SALES OF UNREGISTERED SECURITIES
In each of January 1998, 1999 and 2000, we issued 400 shares of our
common stock to each of our five non-employee directors as partial consideration
for services rendered to ABIOMED. The issuance of the shares was exempt from
registration under the Securities Act of 1933 based on the exemption from
registration set forth in Section 4(2) thereof.
In July 1997 we sold a total of 1,242,710 shares of our common stock to
Genzyme Corporation and three of our directors for a per share purchase price of
$13.00. The sale of these shares was exempt from registration under the
Securities Act of 1933 based on the exemption from registration set forth in
Section 4(2) thereof.
26
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
FISCAL YEARS ENDED MARCH 31,
-----------------------------------------------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Revenues:
Products $ 8,483 $ 10,872 $ 17,261 $ 18,079 $ 18,377
Contracts 3,118 4,151 5,185 4,011 4,140
--------- --------- --------- --------- ---------
Total revenues 11,601 15,023 22,446 22,090 22,517
--------- --------- --------- --------- ---------
Costs and expenses:
Cost of product revenues 3,234 4,427 6,502 6,772 5,882
Research and development (1) 3,178 3,773 9,091 13,450 15,633
Selling general and administrative 5,051 6,082 9,054 9,772 12,562
--------- --------- --------- --------- ---------
Total costs and expenses 11,463 14,282 24,647 29,994 34,077
--------- --------- --------- --------- ---------
Income (loss) from operations 138 741 (2,201) (7,904) (11,560)
Interest and other income, net 528 535 1,206 1,192 1,106
--------- --------- --------- --------- ---------
Income (loss) from continuing operations 666 1,276 (995) (6,712) (10,454)
Loss from discontinued operations (2) (175) (541) (1,513) - -
--------- --------- --------- --------- ---------
Net income (loss) $ 491 $ 735 $ (2,508) $ (6,712) $ (10,454)
========= ========= ========= ========= =========
Income (loss) from continuing operations per
share (3) $ 0.10 $ 0.18 $ (0.12) $ (0.78) $ (1.19)
Loss from discontinued operations per share (3) (0.03) (0.08) (0.19) - -
--------- --------- --------- --------- ---------
Net income (loss) per share (3) $ 0.07 $ 0.10 $ (0.31) $ (0.78) $ (1.19)
========= ========= ========= ========= =========
Weighted average shares outstanding (3) 6,995 7,162 8,074 8,619 8,789
========= ========= ========= ========= =========
BALANCE SHEET DATA: MARCH 31,
----------------------------------------------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Cash, cash equivalents and marketable
securities $ 10,647 $ 9,361 $ 26,398 $ 18,181 $ 106,384
Working capital 12,745 12,858 29,284 22,144 108,998
Total assets 16,066 18,373 38,755 32,982 121,788
Long-term liabilities - - 64 205 715
Stockholders' equity (4) 13,945 15,225 33,018 27,072 112,924
- --------------------
(1) Research and development expenses include certain contract costs. See
Note 1(d) to Consolidated Financial Statements.
(2) Discontinued operations reflect the results of our dental subsidiary. See
Note 2 to Consolidated Financial Statements.
(3) Number of shares and per share data were calculated on a diluted basis. See
Note 1(g) to Consolidated Financial Statements.
(4) No cash dividends on common stock were declared or paid during any of the
periods presented.
27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
ALL STATEMENTS, TREND ANALYSIS AND OTHER INFORMATION CONTAINED IN THE
FOLLOWING DISCUSSION RELATIVE TO MARKETS FOR OUR PRODUCTS AND TRENDS IN SALES,
GROSS PROFIT AND ANTICIPATED EXPENSE LEVELS, AS WELL AS OTHER STATEMENTS,
INCLUDING WORDS SUCH AS "MAY," "ANTICIPATE," "BELIEVE," "PLAN," "ESTIMATE,"
"EXPECT," AND "INTEND" AND OTHER SIMILAR EXPRESSIONS CONSTITUTE FORWARD-LOOKING
STATEMENTS. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO BUSINESS AND
ECONOMIC RISKS AND UNCERTAINTIES, AND OUR ACTUAL RESULTS OF OPERATIONS MAY
DIFFER MATERIALLY FROM THOSE CONTAINED IN THE FORWARD-LOOKING STATEMENTS.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED BELOW UNDER "RISK FACTORS" AS WELL AS OTHER RISKS
AND UNCERTAINTIES REFERENCED IN THIS REPORT.
OVERVIEW
We are a leading developer, manufacturer and marketer of medical
products designed to safely and effectively assist or replace the pumping
function of the failing heart. We have been developing the AbioCor, a totally
implantable, battery-powered, replacement heart which we believe will be the
first such device for end-stage heart failure patients. We currently manufacture
and sell the BVS, a temporary heart assist device which is the only device
approved by the FDA as a bridge-to-recovery device for temporary treatment of
all patients with failing but potentially recoverable hearts. Our operating
results reflect the dual activities of commercial operations and investments in
the research and development of new technologies.
The BVS is a temporary heart assist device designed to assume the full
pumping function of a patient's failing heart while allowing the heart to rest,
heal and recover its function. The BVS consists of a pneumatic drive and control
console, single-use external blood pumps and cannulae. All of our product
revenues are currently derived from the BVS product line. BVS revenues are split
between sales to new customers and reorders from existing customers. Following
commercial introduction of the BVS in the U.S., our focus was on obtaining
market share beginning with the largest medical centers. As of March 31, 2000,
more than 450 medical centers in the U.S. had purchased the BVS, including 70%
of all major medical centers that perform more than 500 heart surgeries
annually. While continuing to seek additional new customers for the BVS, we have
shifted our focus to emphasize increasing usage and product reorders by existing
customers. Product reorders currently represent approximately half of BVS
product revenues. During fiscal 2000, no single customer represented more than
5% of product revenues.
Research and development is a significant portion of our operations.
Our research and development efforts are focused on the development of new
products, primarily related to heart assist and heart replacement, and the
continued enhancement of the BVS and related technologies. In fiscal 2000, we
incurred $11.5 million in total research and development spending directed at
the AbioCor and $4.1 million in total research and development spending directed
at BVS improvements and development of other products. These expenditures were
partially offset by revenues from contracts and grants of $4.1 million, the
majority of which were from the NHLBI. We retain rights to commercialize all
technological discoveries and products resulting from these contracts and
grants.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statements of
operations data for the periods indicated as a percentage of total revenues:
28
YEAR ENDED MARCH 31,
1998 1999 2000
---- ---- ----
Revenues:
Products................................................... 76.9% 81.8% 81.6%
Contracts.................................................. 23.1 18.2 18.4
------ ------ ------
Total revenues........................................ 100.0 100.0 100.0
------ ------ ------
Costs and expenses:
Cost of product revenues................................... 29.0 30.7 26.1
Research and development................................... 40.5 60.9 69.4
Selling, general and administrative........................ 40.3 44.2 55.8
------ ------ ------
Total costs and expenses.............................. 109.8 135.8 151.3
------ ------ ------
Loss from operations............................................ (9.8) (35.8) (51.3)
Interest and other income, net.................................. 5.4 5.4 4.9
------ ------ ------
Loss from continuing operations................................. (4.4)% (30.4)% (46.4)%
Loss from discontinued operations............................... (6.8) - -
------ ------ ------
Net loss ................................................... (11.2)% (30.4)% (46.4)%
====== ====== ======
FISCAL YEARS ENDED MARCH 31, 2000 AND MARCH 31, 1999
PRODUCT REVENUES. Product revenues increased by $0.3 million, or 2%, to $18.4
million in fiscal 2000 from $18.1 million in fiscal 1999. The increase in
product revenues was primarily attributable to increased unit sales and
increased average selling prices of BVS disposable blood pumps sold to existing
customers, and was partially offset by a reduction in unit sales of BVS systems
sold to new customers. The portion of product revenues derived from sales of
disposable blood pumps and related accessories and services increased by $2.5
million, or 20%, to $15.1 million in fiscal 2000 from $12.6 million in fiscal
1999. The portion of product revenues derived from sales of BVS consoles
decreased by $2.2 million, or 40% in fiscal 2000 from $5.5 million in fiscal
1999. We believe that the increase in sales of blood pumps and the decline in
sales of BVS systems to new customers was largely a result of a decision made at
the beginning of fiscal 2000 to shift the focus of certain of our sales
representatives from sales to new customers to increased support of existing
customers in an effort to increase reorders of higher margin BVS blood pumps.
The increase in product revenues derived from disposable blood pumps is
primarily the result of a 9% increase in reorder unit sales of blood pumps
during fiscal 2000 as compared to the prior year. Domestic product revenues
included approximately $2.3 million from sales-type leases in fiscal 2000 and
$2.7 million in fiscal 1999. Domestic sales accounted for 96% and 97% of total
product revenue during the fiscal years ended March 31, 2000 and 1999,
respectively.
CONTRACT REVENUES. Contract revenues increased by $0.1 million, or 3%, to $4.1
million in fiscal 2000 from $4.0 million in fiscal 1999. Approximately $1.8
million of the contract revenues recognized in both periods were derived from
our AbioCor government contract. The remaining contract revenues recorded were
primarily derived from our AbioBooster government contract and other government
grants.
We account for contract revenues under our government contracts and
grants as work is performed, provided that the government has appropriated
sufficient funds for the work. Through March 31, 2000, the government had
appropriated all of the $8.5 million AbioCor contract amount, including the $1.8
million appropriated and recognized as contract revenues during the quarter
ended June 30, 1999. No amount remained to be recognized under the AbioCor
government contract as of March 31, 2000.
29
As of March 31, 2000, our total backlog of research and development contracts
and grants was $1.6 million, including $0.6 million for AbioBooster research and
development. All of these contracts and grants contain provisions that make them
terminable at the convenience of the government. ABIOMED retains rights to
commercialize all technological discoveries and products resulting from these
efforts.
COST OF PRODUCT REVENUES. Cost of product revenues as a percentage of product
revenues decreased to 32% in fiscal 2000 from 37% in fiscal 1999. The majority
of this decrease in cost of product revenues as a percentage of product revenues
was attributable to higher average selling prices for BVS blood pumps during the
fiscal year ended March 31, 2000 as compared to the same period of the prior
year and to an increase in the proportion of higher margin BVS blood pumps sold
relative to lower margin BVS console sales.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased
by $2.1 million, or 16%, to $15.6 million in the fiscal year ended March 31,
2000, from $13.5 million in the prior fiscal year. Research and development
expenses were 69% of total revenues for the fiscal year ended March 31, 2000 and
61% of total revenues in the prior year. The increase in expenditures during the
fiscal year ended March 31, 2000 was due primarily to increased spending for the
AbioCor, new products and enhancements for the BVS product line and technologies
under government contracts and grants. Research and development expenses during
the fiscal year ended March 31, 2000 included $11.5 million of expenses incurred
in connection with our development activities for the AbioCor, compared to $9.7
million in the prior year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $2.8 million, or 29%, to $12.6 million in
fiscal 2000 from $9.8 million in the prior year. Expenditures increased to 56%
of total revenues from 44% of total revenues in the same period a year earlier.
This increase was primarily attributable to increased legal expenses and
increased selling and marketing expenditures as a result of our implementing new
programs designed to improve sales of our disposable blood pumps. In fiscal
2000, legal expenses included approximately $1.9 million in third-party fees and
other direct costs associated with our successful defense in court of our rights
to technology used in the transcutaneous energy transmission technology used as
a component of our AbioCor Implantable Replacement Heart system. Approximately
$0.1 million in legal defense expenditures were incurred in fiscal 1999.
INTEREST AND OTHER INCOME. Interest and other income consists primarily of
interest earned on our investment balances, net of interest and other expenses.
Interest and other income decreased by $0.1 million, or 7%, to $1.1 million in
fiscal 2000 from $1.2 million in fiscal 1999. This decrease was primarily due to
lower average funds available for investment.
NET LOSS. Net loss for the fiscal year ended March 31, 2000 was approximately
$10.5 million, or $1.19 per share. This compares to a net loss of approximately
$6.7 million, or $0.78 per share, for the prior fiscal year. The losses for both
years are primarily attributable to development and pre-clinical testing costs
associated with the AbioCor.
FISCAL YEARS ENDED MARCH 31, 1999 AND MARCH 31, 1998
PRODUCT REVENUES. Product revenues increased by $0.8 million, or 5%, to
$18.1 million in fiscal 1999 from $17.3 million in fiscal 1998. This increase in
product revenues in fiscal 1999 was primarily attributable to a $1.2 million, or
8%, increase in domestic product revenues. This was derived primarily from
increased average selling prices of BVS disposable blood pumps offset by a
decrease in international product revenues of $0.4 million. Sales of blood pumps
in fiscal 1998 included
30
approximately $1.0 million of reorder pump revenues shipped from backlog. We
generally operate with only a limited backlog. Without the effect of the
shipment from backlog in 1998, our domestic product revenues increased by $1.8
million, or 16%, in fiscal 1999. Domestic unit sales of BVS blood pumps
decreased in fiscal 1999 compared to fiscal 1998 without adjustment for the
effect of this backlog but increased if the effect of the backlog is considered.
Domestic product revenues included approximately $2.7 million from sales-type
leases in fiscal 1999 and $1.3 million in fiscal 1998. International revenues
represented 3% of product revenues in fiscal 1999 and 6% in fiscal 1998.
CONTRACT REVENUES. Contract revenues decreased by $1.2 million, or 23%,
to $4.0 million in fiscal 1999 from $5.2 million in fiscal 1998. This decrease
in contract revenues in fiscal 1999 was primarily attributable to the level of
government appropriation and work performed by us on Phase II of the AbioCor
government contract. We account for contract revenues under our government
contracts and grants as work is performed, provided that the government has
appropriated sufficient funds for the work. Through March 31, 1999, the
government had appropriated $6.7 million of the $8.5 million Phase II AbioCor
development contract amount. During fiscal 1999, our expenditures under the
AbioCor development contract exceeded the appropriated amount. As a result, in
fiscal 1999, we recognized as contract revenues all of the remaining $1.8
million of the $6.7 million appropriated under the AbioCor development contract
and used $7.7 million of our own resources to fund AbioCor development.
COST OF PRODUCT REVENUES. Cost of product revenues as a percentage of
product revenues decreased to 37% in fiscal 1999 from 38% in fiscal 1998. The
changes in cost of product revenues as a percentage of product revenues were
primarily attributable to increased average selling prices and the mix of
products sold.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased by $4.4 million, or 48%, to $13.5 million in fiscal 1999 from $9.1
million in fiscal 1998. This increase is primarily the result of increased
expenditures for labor, materials, and professional services related to
development and testing of the AbioCor and enhancements to the BVS. We
anticipate that our research and development expenses will continue to be
significant and may increase as a result of our plans to further develop and
test the AbioCor, enhancements to the BVS and other potential new products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $0.7 million, or 8%, to $9.8 million in
fiscal 1999 from $9.1 million in fiscal 1998. The increase primarily reflected
increased sales expenses, particularly increased personnel and sales
commissions, related to the increase in product revenues, as well as additional
administrative personnel and legal expenses.
INTEREST AND OTHER INCOME. Interest and other income remained
consistent at $1.2 million in both fiscal 1999 and fiscal 1998.
DISCONTINUED OPERATIONS. Discontinued operations consist of the net
revenues, costs and expenses of our dental subsidiary, ABIODENT. In fiscal 1998,
we made the decision to shift all of our focus to our core cardiovascular
business and to discontinue our dental business. The $1.5 million loss from
discontinued operations for the year ended March 31, 1998 represents a loss from
dental operations of $0.5 million, or $0.07 per diluted share, and an estimated
loss on the disposal of the business, its assets and extinguishment of
liabilities of $1.0 million, or $0.12 per diluted share. In fiscal 1999, we
incurred costs associated with the discontinuance of operations of $0.4 million,
and wrote off remaining net assets totaling $0.3 million.
31
NET LOSS. Net loss for fiscal 1999 was approximately $6.7 million, or
$0.78 per diluted share. This compares to a net loss of approximately $2.5
million, or $0.31 per diluted share, for fiscal 1998. The losses for both years
are primarily attributable to development and pre-clinical testing costs
associated with the AbioCor.
LIQUIDITY AND CAPITAL RESOURCES
We have supported our operations primarily with net revenues from sales
of our BVS product line, government contracts and proceeds from our equity
financings. As of March 31, 2000, our cash, cash equivalents and marketable
securities total $106.4 million. We also have a $3.0 million line of credit from
a bank that expires on October 13, 2000, which bears interest at the bank's
prime rate (9.0% at March 31, 2000).
During fiscal 2000, operating activities used $7.3 million of cash. Net
cash used by operating activities in fiscal 2000 reflected a net loss of $10.5
million, including depreciation and amortization expense of $1.7 million, and
increases in accounts receivable and inventory of $0.3 million and $0.7 million,
respectively. These uses of cash were partially offset by a decrease in prepaid
expenses and other assets of $0.2 million and increases in accounts payable and
accrued expenses of $0.7 million and $1.5 million, respectively. The increase in
accounts receivable was primarily attributable to extended collection periods
for certain customer accounts. The increase in inventory reflects increased
production levels and our decision to increase inventory levels for certain
products and component parts, including purchases of inventory related to the
Company's new BVS-5000t, a backup unit to the current BVS-5000, designed to
allow transport of BVS supported patients between medical centers for
specialized care. The increase in accounts payable was primarily attributable to
the timing of purchases of direct material and capital equipment for
manufacturing, research and development. The increase in accrued expenses
reflects timing of payments and increased operating activity throughout ABIOMED,
including increased size of payroll and payroll related costs, contractor
support and legal charges.
During fiscal 2000, investing activities provided $3.1 million of cash.
Approximately $4.4 million in cash provided from the sale of short-term
marketable securities, net of purchases of similar securities, was partially
offset by purchases of capital equipment and expenditures for leasehold
improvements of $1.4 million. We also acquired an additional $0.2 million in
capital equipment by entering into a capital lease during fiscal 2000. In fiscal
1999, we entered into an operating lease for 80,000 square feet of space in a
building located within the same industrial park as our existing facilities.
During fiscal 2000 we also entered into 36-month operating leases for an
additional $0.7 million in capital purchases of office furniture to be used in
this new facility. Our purpose for this new facility is to consolidate our
operations and to expand our manufacturing and research and development. We
began occupying this facility in fiscal 2000, and we expect to complete our
phased move into this facility in fiscal 2001. We anticipate that we will incur
additional costs of approximately $0.8 million for improvements to this
facility, including costs to construct and qualify environmentally controlled
manufacturing areas for our existing products and for our products under
development.
Financing activities generated $96.9 million of cash during fiscal
2000, primarily as a result of our completion of a public offering of 1,500,000
shares of Common Stock in March. Proceeds to the Company from this offering, net
of expenses, were approximately $95.4 million.
Income taxes incurred during fiscal 2000 were not material, and we
continue to have significant net tax operating loss and tax credit
carryforwards.
32
We believe that our revenue from government contracts and product sales
and existing resources will be sufficient to fund our planned operations,
including the planned increases in our internally funded AbioCor and new BVS
development and product extension efforts, for the foreseeable future. However,
we may require significant additional funds in order to complete the
development, conduct clinical trials, and achieve regulatory approvals of the
AbioCor and other products under development over the next several years. We may
also need additional funds for possible future strategic acquisitions of
businesses, products or technologies complementary to our business. If
additional funds are required, we may raise such funds from time to time through
public or private sales of equity or from borrowings.
RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. CURRENT
AND PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER EACH OF THE RISKS AND
UNCERTAINTIES DESCRIBED IN THIS SECTION AND ALL OF THE OTHER INFORMATION IN THIS
REPORT. OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE
SEVERELY HARMED BY ANY OF THE FOLLOWING RISKS. THE TRADING PRICE OF OUR COMMON
STOCK COULD DECLINE IF ANY OF THESE RISKS AND UNCERTAINTIES DEVELOP INTO ACTUAL
EVENTS.
OUR FUTURE SUCCESS IS HEAVILY DEPENDENT ON DEVELOPMENT OF THE ABIOCOR.
OUR DEVELOPMENT EFFORTS MAY NOT BE SUCCESSFUL.
We are currently devoting our principal research and development and
regulatory efforts, and significant financial resources, to the development of
the AbioCor, an implantable replacement heart system. An implantable replacement
heart is a complex medical device and has never been successfully developed or
marketed by any company. The development of the AbioCor and other new products,
including our AbioBooster and AbioVest heart assist products, presents enormous
challenges in a variety of areas, many or all of which we may have difficulty in
overcoming, including blood compatible surfaces, blood compatible flow,
manufacturing techniques, pumping mechanisms, physiological control, energy
transfer, anatomical fit and surgical techniques. For many years, we and other
parties have been attempting to develop a heart replacement device, but, to
date, none of these efforts has been successful. We cannot be sure that we will
be successful in our development efforts, and in the event that we are unable to
commercialize the AbioCor, our business and financial condition would be
adversely affected. The markets for the AbioCor and our other products under
development are unproven. Even if the AbioCor or any other of our products are
successfully developed and approved by the FDA and corresponding foreign
regulatory authorities, they may not enjoy commercial acceptance or success,
which would adversely affect our business and results of operations. Several
factors could limit our success, including:
- our need to create a market for an implantable replacement heart,
and possible limited market acceptance among physicians, medical
centers, patients and third party payors;
- the need for surgeons to develop or be trained in new surgical
techniques to use our product effectively;
- limitations on the number of patients who may have access to
physicians and medical centers with adequate training, equipment
and personnel to make use of our products;
- limitations inherent in first generation devices, and the
potential failure to develop successive improvements, including
increases in service life, which would reduce the addressable
market for the AbioCor;
33
- the lifestyle limitations that patients will have to accept,
including traveling with external batteries at all times and
potentially avoiding activities such as air travel or diving that
involve significant pressure changes;
- the timing and amount of reimbursement for these products, if any,
by third party payors;
- the introduction by other companies of new treatments, products
and technologies which compete with our products, and may reduce
their market acceptance, or make them obsolete;
- the reluctance, due to ethical considerations, of physicians,
patients and society as a whole to accept medical devices that
replace the heart; and
- the reluctance of physicians, patients and society as a whole to
accept the finite life and risk of mechanical failure of devices
that replace the heart.
The commercial success of the AbioCor and other heart assist products
will require acceptance by cardiovascular surgeons and interventional and heart
failure cardiologists, a limited number of whom significantly influence medical
device selection and purchasing decisions. We may achieve our business
objectives only if the AbioCor and our other products are accepted and
recommended by leading physicians, which is likely to be based on a
determination by these physicians that our products are safe, cost-effective and
represent acceptable methods of treatment. Although we have developed
relationships with leading cardiac surgeons and cardiologists, we cannot assure
that these existing relationships and arrangements can be maintained or that new
relationships will be established in support of the AbioCor and our other
products. If cardiovascular surgeons and cardiologists do not consider our
products to be adequate for the treatment of our target cardiac patient
population or if a sufficient number of physicians recommend and use competing
products, it would seriously harm our business.
PRE-CLINICAL AND CLINICAL TESTING OF OUR NEW PRODUCTS WILL INVOLVE
UNCERTAINTIES AND RISKS WHICH COULD DELAY OR PREVENT NEW PRODUCT INTRODUCTIONS,
REQUIRE US TO INCUR SUBSTANTIAL ADDITIONAL COSTS OR RESULT IN OUR FAILURE TO
BRING OUR PRODUCTS TO MARKET.
Prior to commencing clinical trials of the AbioCor and our other
products under development, we must perform pre-clinical tests which consist of
demonstrating performance, durability and reliability through laboratory and
animal studies. We could encounter significant delays or other setbacks in
pre-clinical testing. Prior to obtaining regulatory approvals in the U.S. and
other countries for the clinical testing in humans of the AbioCor and other
products, we must demonstrate in pre-clinical testing that each product is safe
and has the potential to be effective in humans for the intended duration of
use. We are now conducting pre-clinical testing of the AbioCor. This testing may
not be predictive of results that will be obtained in clinical trials. A number
of companies in the medical industry have suffered delays, cost overruns and
project terminations despite achieving promising results in pre-clinical
testing. In the event that we suffer setbacks in the pre-clinical or clinical
testing of the AbioCor or other heart assist products, these products may be
delayed, require further funding, and possibly may not be brought to market.
If we cannot demonstrate through clinical testing on humans that the
AbioCor or other new products are safe and effective, we will not be able to
obtain regulatory approvals in the U.S. or other countries for the commercial
sale of these products. Delays, budget overruns, and project terminations are
not uncommon even after promising pre-clinical and clinical trials of medical
products. We intend to conduct clinical testing for the AbioCor and other heart
assist products with critically ill patients, and
34
these patients may die or suffer other adverse medical results for reasons which
may or may not be related to the product being tested. Those outcomes could
seriously delay the completion of clinical testing, as could the unavailability
of suitable patients for clinical trials, both of which are outside our control.
We cannot assure that the rate of patient enrollment in our clinical trials will
be consistent with our expectations or be sufficient to allow us to complete our
clinical trials for the AbioCor or our other products under development in a
timely manner, if at all. Delays could defer the marketing and commercial sale
of our products, require further funding, and possibly result in failure to
bring the products to market.
Development and testing of design changes to the AbioCor and other
products under development is often extensive, expensive and time consuming.
Some of the tests for our products may require months or years to perform, and
we could be required to begin these tests again if we modify one of our products
to correct a problem identified in testing. Even modest changes to certain
components of our products can take months or years to complete and test. If
results of pre-clinical or clinical testing of the AbioCor or other products
under development indicate that design changes are required, such changes could
cause serious delays that would adversely affect our results of operations.
IF WE FAIL TO OBTAIN APPROVAL FROM THE FDA AND FROM FOREIGN REGULATORY
AUTHORITIES, WE CANNOT MARKET AND SELL THE ABIOCOR OR OTHER NEW HEART ASSIST
PRODUCTS IN THE U.S. AND IN OTHER COUNTRIES.
Obtaining required regulatory approvals may take several years to
complete and consume substantial capital resources. We cannot assure that the
FDA or any other regulatory authority will act quickly or favorably on our
requests for product approval, or that the FDA or any other regulatory authority
will not require us to provide additional data that we do not currently
anticipate in order to obtain product approvals. We cannot apply for FDA
approval to market the AbioCor and our other products under development until
the product successfully completes its pre-clinical and clinical trials. Several
factors could prevent successful completion or cause significant delays of these
trials, including an inability to enroll the required number of patients or
failure to demonstrate adequately that the product is safe and effective for use
in humans. If safety problems develop, the FDA could stop our trials before
completion. In addition, we are planning to conduct phased clinical trials for
the AbioCor tailored to specific patient populations with different life
expectancies. If we are successful in obtaining FDA approvals for the AbioCor
based on this phased approach, the initial approvals are likely to include
conditions or limitations to particular indications that would limit the
available market for these products. If we are not able to obtain regulatory
approvals for use of the AbioCor or our other products under development, or if
the patient populations for which they are approved are not sufficiently broad,
the commercial success of these products could be limited.
We intend to market the AbioCor and our other new products in
international markets, including the European Union and Japan. We must obtain
separate regulatory approvals in order to market our products in other
jurisdictions. The approval process may differ among those jurisdictions and
approval in the U.S. or in any other jurisdiction does not ensure approval in
other jurisdictions. Obtaining foreign approvals could result in significant
delays, difficulties and costs for us, and require additional trials and
additional expense.
35
IF WE OBTAIN REGULATORY APPROVAL OF OUR NEW PRODUCTS, THE PRODUCTS WILL
BE SUBJECT TO CONTINUING REVIEW AND EXTENSIVE REGULATORY REQUIREMENTS, WHICH
COULD AFFECT THE MANUFACTURING AND MARKETING OF OUR PRODUCTS.
The FDA continues to review products even after they have received
initial approval. If and when the FDA approves the AbioCor or our other products
under development, the manufacture and marketing of these products will be
subject to continuing regulation, including compliance with current Quality
Systems Regulations and Good Manufacturing Practices, known as QSR/GMP, adverse
event reporting requirements and prohibitions on promoting a product for
unapproved uses.
We will also be required to obtain additional approvals in the event we
significantly modify the design of an approved product or the product's labeling
or manufacturing process. Modifications of this type are common with new
products, and we anticipate that the current first generation of the AbioCor
will undergo a number of changes, refinements and improvements over time. For
example, the current configuration of the AbioCor's thoracic unit, or
"replacement heart," is sized for patients with relatively large chest cavities,
and we anticipate that we will need to obtain regulatory approval of thoracic
units of other sizes. If we are not able to obtain regulatory approval of
modifications to our current and future products, the commercial success of
these products would be limited.
We and our third-party suppliers of product components are also subject
to inspection and market surveillance by the FDA for QSR/GMP and other
requirements. Enforcement actions resulting from failure to comply with
government requirements could result in fines, suspensions of approvals, recalls
of products, operating restrictions and criminal prosecutions, and affect the
manufacture and marketing of our products. The FDA could withdraw a previously
approved product from the market upon receipt of newly discovered information,
including a failure to comply with regulatory requirements, the occurrence of
unanticipated problems with products following approval, or other reasons, which
could adversely affect our operating results.
THE COST OF DEVELOPING AND MANUFACTURING THE ABIOCOR AND OUR OTHER
PLANNED NEW PRODUCTS IS SUBSTANTIAL FOR A COMPANY OF OUR SIZE AND WILL EXERT A
STRAIN ON OUR AVAILABLE RESOURCES.
In recent years we have significantly increased our research and
development expenditures for the AbioCor, and we expect that this trend will
continue in the future. We will also need to make significant expenditures to
begin to manufacture and market the AbioCor and our other planned new products
in commercial quantities for sale in the U.S. and other countries, if and when
we obtain regulatory approval to do so. We cannot be sure that our estimates of
capital expenditures for the AbioCor and the development of our other new
products will be accurate. We could have significant cost overruns, which could
reduce our ability to commercialize our products. Any delay or inability to
commercialize our products under development could adversely affect our business
prospects and results of operations. We do not operate at a profit and do not
expect to be profitable for some time. We had a net loss of $10.5 million in
fiscal 2000 and a net loss of $6.7 million in fiscal 1999. We are committed to
making large expenditures for the AbioCor and, to a lesser extent, other new
products, in fiscal 2001 and subsequent fiscal years, which may result in losses
in future periods. These expenditures include costs associated with performing
pre-clinical and clinical trials for the AbioCor, continuing our research and
development relating to the AbioCor and other new products, seeking regulatory
approvals for the AbioCor and, if we receive these approvals, commencing
commercial manufacturing and marketing of the AbioCor. The amount of these
expenditures is difficult to forecast accurately, and cost overruns may occur.
We plan to fund a portion of these expenditures from our limited existing
financial resources and revenues from BVS sales, which are variable and
uncertain. We cannot be sure that we will have the
36
necessary funds to develop and commercialize our new products, or that
additional funds will be available on commercially acceptable terms, if at all.
In the event that we are unable to obtain the necessary funding to develop and
commercialize our products, our business may be adversely affected. Our
operating results may fluctuate unpredictably. Our annual and quarterly
operating results have fluctuated historically and we expect these fluctuations
to continue. Among the factors that may cause our operating results to fluctuate
are:
- costs we incur in developing and testing the AbioCor and other new
products or product enhancements;
- the timing of regulatory actions, such as product approvals or
recalls;
- costs we incur in anticipation of future sales, such as inventory
purchases, expansion of manufacturing facilities, or establishment
of international sales offices;
- the timing of customer orders and deliveries, particularly of BVS
consoles, which are priced significantly higher than the
single-use BVS blood pumps;
- competitive changes, such as price changes or new product
introductions that we or our competitors may make;
- the timing of government appropriations related to our research
contracts and grants; and
- economic conditions in the health care industry and the state of
cost containment efforts, including reimbursement policies.
We believe that period-to-period comparisons of our historical and
future results will not necessarily be meaningful, and that investors should not
rely on them as an indication of future performance. To the extent we experience
the factors described above, our future operating results may not meet the
expectations of securities analysts or investors from time to time, which may
cause the market price of our common stock to decline.
THE BVS PRODUCT LINE, OUR PRINCIPAL PRODUCT AND CURRENT PRIMARY SOURCE
OF REVENUES, IS VULNERABLE TO COMPETITIVE PRESSURES, DISRUPTIONS IN SALES,
CONTINUING REVIEW AND EXTENSIVE REGULATORY REQUIREMENTS.
All of our product revenues to date have come from sales of the BVS
line of products. We believe that we will continue to be dependent on our BVS
product line for at least the next several years, unless and until we are able
to successfully develop or acquire, obtain regulatory approval for, and sell new
products. In the event that a competitor were to introduce new treatments,
products and technologies which compete with our products, add new features to
their existing products or reduce their prices to make their products more
financially attractive to customers, our revenue from our BVS products could
decline. For example, in the event of the expansion of technologies which allow
heart surgical procedures to be performed without stopping the heart, a
reduction in the market for the BVS could potentially result. Further, the BVS
is subject to stringent and continuing FDA and other regulatory requirements,
including compliance with QSR/GMP, adverse event reporting, prohibitions on
promoting the BVS for unapproved uses, and continued inspection and market
surveillance by the FDA. If BVS products are recalled or otherwise withdrawn
from the market, our revenues would likely decline, which would hurt our
business. In addition, variations in the quantity and timing of sales of BVS
consoles have a disproportionate effect on our revenues, because the price of
the console is substantially greater than the price of our disposable
37
blood pumps. If we cannot maintain and increase our revenues from our BVS
product line, our overall business and financial condition could be adversely
affected.
Revenues from our BVS product line in fiscal 2000 increased by 2% from
revenues in fiscal 1999, and in fiscal 1999 our BVS revenues increased by 5%
from revenues in fiscal 1998. To maintain or increase revenues from sales of our
BVS products, we may be required to adopt new sales and marketing strategies,
some of which may require expending additional capital resources. The new
strategies we may adopt include:
- promoting increased use of the BVS by existing customers in order
to increase disposable blood pump sales to those customers;
- selling the BVS to smaller hospitals and medical centers in the
U.S.;
- regularly introducing enhancements to the BVS;
- expanding sales of our BVS product line in international markets,
some of which require separate regulatory approvals; and
- seeking new categories of patients to support with the device.
In the event that we are unsuccessful in carrying out these new
strategies, our revenues may decline.
WE MAY NOT BE SUCCESSFUL IN EXPANDING OUR SALES ACTIVITIES INTO
INTERNATIONAL MARKETS.
We are seeking to expand our international sales of the BVS and prepare
for commercialization of the AbioCor by recruiting direct sales and support
teams for selected countries in Europe and pursuing regulatory approval of the
BVS in Japan. To date we have limited experience in selling the BVS
internationally. In fiscal 2000, approximately 4%, and in fiscal 1999,
approximately 3%, of our revenues from the BVS product line were derived from
international sales. Our international operations will be subject to a number of
risks, which may vary from the risks we experience in the U.S., including:
- the need to obtain regulatory approvals in foreign countries
before our products may be sold or used;
- longer sales cycles;
- dependence on local distributors;
- limited protection of intellectual property rights;
- difficulty in collecting accounts receivable;
- fluctuations in the values of foreign currencies; and
- political and economic instability.
If we are unable to effectively expand our sales activities in
international markets, our results of operations could be negatively impacted.
38
WE DEPEND ON THIRD PARTY REIMBURSEMENT TO OUR CUSTOMERS FOR MARKET
ACCEPTANCE OF OUR PRODUCTS. IF THIRD PARTY PAYORS FAIL TO PROVIDE APPROPRIATE
LEVELS OF REIMBURSEMENT FOR PURCHASE AND USE OF OUR PRODUCTS, OUR PROFITABILITY
WOULD BE ADVERSELY AFFECTED.
Sales of medical products largely depend on the reimbursement of
patients' medical expenses by government health care programs and private health
insurers. The cost of our BVS system is substantial, and we anticipate that the
cost of implanting the AbioCor in a patient will also be substantial. Without
the financial support of the government or third party insurers, the market for
our products will be limited. Medical products and devices incorporating new
technologies are closely examined by governments and private insurers to
determine whether the products and devices will be covered by reimbursement, and
if so, the level of reimbursement which may apply. We cannot be sure that third
party payors will reimburse sales of our products now under development, or
enable us to sell them at profitable prices. We also cannot be sure that third
party payors will continue the current level of reimbursement to physicians and
medical centers for use of the BVS. Any reduction in the amount of this
reimbursement could harm our business.
The federal government and private insurers have considered ways to
change, and have changed, the manner in which health care services are provided
and paid for in the U.S. In the future, it is possible that the government may
institute price controls and further limits on Medicare and Medicaid spending.
These controls and limits could affect the payments we collect from sales of our
products. Internationally, medical reimbursement systems vary significantly,
with some medical centers having fixed budgets, regardless of levels of patient
treatment, and other countries requiring application for, and approval of,
government or third party reimbursement. Even if we succeed in bringing our new
products to market, uncertainties regarding future health care policy,
legislation and regulation, as well as private market practices, could affect
our ability to sell our products in commercially acceptable quantities at
profitable prices.
Prior to approving coverage for new medical devices, most third party
payors require evidence that the product has received FDA approval, is not
experimental, and is medically necessary for the specific patient. Increasingly,
third party payors require evidence that the devices being used are
cost-effective. The AbioCor and our other products under development may not
meet these or future criteria, which could hurt our ability to market and sell
these products.
IF WE FAIL TO ACHIEVE AND MAINTAIN THE HIGH MANUFACTURING STANDARDS
THAT OUR PRODUCTS REQUIRE OR IF WE ARE UNABLE TO DEVELOP ADDITIONAL
MANUFACTURING CAPACITY, WE WILL NOT BE SUCCESSFUL.
Our products require precise, high quality manufacturing. Our failure
to achieve and maintain these high manufacturing standards, including the
incidence of manufacturing errors, design defects or component failures, could
result in patient injury or death, product recalls or withdrawals, delays or
failures in product testing or delivery, cost overruns or other problems that
could seriously hurt our business. We have from time to time voluntarily
recalled certain products. Despite our very high manufacturing standards, we
cannot completely eliminate the risk of errors, defects or failures. In
addition, we are planning to move into a new manufacturing facility in 2000, and
this move could disrupt manufacturing of our products. We cannot be certain that
the products manufactured in the new facility will be manufactured at the same
cost and quality as the BVS and AbioCor are currently being manufactured. In
addition, we cannot be certain that we will be able to obtain ISO 9001
certification of our new facility or approval by regulatory authorities. If we
are not able to manufacture the BVS in accordance with necessary quality
standards, our business and results of operations may be negatively affected.
39
The AbioCor involves even greater manufacturing complexities than our
current product line. The AbioCor must be significantly more durable and meet
different standards, which may be more difficult to achieve, than those which
apply to our current product, the BVS. If we are unable to manufacture the
AbioCor or other future products on a timely basis at acceptable quality and
cost and in commercial quantities, or if we experience unanticipated
technological problems or delays in production, our business will suffer.
The manufacture of our products is and will continue to be complex and
costly, requiring a number of separate processes and components. Achieving
precision and quality control requires skill and diligence by our personnel.
Further, to be successful, we believe we will need to increase our manufacturing
capacity. We may experience difficulties in scaling up manufacturing of our new
products, including problems related to product yields, quality control and
assurance, component and service availability, adequacy of control policies and
procedures, and lack of skilled personnel. If we cannot hire, train and retain
enough experienced and capable scientific and technical workers, we may not be
able to manufacture sufficient quantities of our current or future products at
an acceptable cost and on time, which could limit market acceptance of our
products or otherwise damage our business.
IF OUR SUPPLIERS CANNOT PROVIDE THE COMPONENTS WE REQUIRE, OUR ABILITY
TO MANUFACTURE OUR PRODUCTS COULD BE HARMED.
We rely on third party suppliers to provide us with certain components
used in the BVS, the AbioCor, and our other products under development. Relying
on third party suppliers makes us vulnerable to component part failures and to
interruptions in supply, either of which could impair our ability to conduct
clinical tests or to ship our products to our customers on a timely basis. Using
third party vendors makes it difficult and sometimes impossible for us to test
fully certain components, such as components on circuit boards, maintain quality
control, manage inventory and production schedules and control production costs.
Vendor lead times to supply us with ordered components vary significantly and
can exceed six months or more. Both now and as we expand our manufacturing
capacity, we cannot be sure that our suppliers will furnish us with required
components when we need them. These factors could make it more difficult for us
to effectively and efficiently manufacture our products, and could adversely
impact our results of operations.
Some suppliers may be the only source for a particular component, which
makes us vulnerable to cost increases and supply interruptions. Vendors may
decide to limit or eliminate sales of certain products to the medical industry
due to product liability or other concerns, and we might not be able to find a
suitable replacement for those products. Manufacturers of our product components
may be required to comply with FDA or other regulatory manufacturing regulations
and to satisfy regulatory inspections in connection with the manufacture of the
components. If we cannot obtain a necessary component, we may need to find, test
and obtain regulatory approval for a replacement component, produce the
component ourselves or redesign the related product, which would cause
significant delay and could increase our manufacturing costs. Any of these
events could adversely impact our results of operations.
INTENSE COMPETITION COULD HARM OUR FINANCIAL PERFORMANCE.
Intense competition, rapid technological change and evolving industry
requirements and standards in the heart assist markets could decrease demand for
our products or make them obsolete. Some of the companies, universities and
research organizations developing competing products have greater resources and
experience than we have. Our competitors could commence and complete clinical
testing of their products, obtain regulatory approvals and begin
commercial-scale manufacturing of their
40
products faster than we are able to for our products. They could develop
superior products or products of similar quality at the same or lower prices. In
addition, our customers often have limited budgets. Consequently, our products
compete against a broad range of medical devices and therapies for these limited
funds. We cannot be sure that we will be able to compete effectively and
successfully in the markets in which we participate.
WE OWN PATENTS, TRADEMARKS, TRADE SECRETS, COPYRIGHTS AND OTHER
INTELLECTUAL PROPERTY AND KNOW-HOW THAT WE BELIEVE GIVES US A COMPETITIVE
ADVANTAGE. IF WE CANNOT PROTECT OUR INTELLECTUAL PROPERTY, COMPETITION COULD
FORCE US TO LOWER OUR PRICES, WHICH COULD HURT OUR PROFITABILITY.
Our intellectual property rights are and will continue to be a critical
component of our success. A substantial portion of our intellectual property
rights relating to the AbioCor and BVS is in the form of trade secrets, rather
than patents. In order to preserve certain proprietary information as trade
secrets, we are required to restrict disclosure of information intended to
constitute trade secrets to third parties. We protect our trade secrets and
proprietary knowledge in part through confidentiality agreements with employees,
consultants and other parties. Certain of our consultants and third parties with
whom we have business relationships may also provide services to other parties
in the medical device industry, including companies, universities and research
organizations that are developing competing products. In addition, some of our
former employees may seek employment with, and become employed by, our
competitors. We cannot assure that confidentiality agreements with our
employees, consultants and third parties will not be breached, that we will have
adequate remedies for any such breach, or that our trade secrets will not become
known to or be independently developed by our competitors. The loss of trade
secret protection for technologies or know-how relating to the AbioCor or the
BVS could adversely affect our business prospects.
Our business position will also depend in part on our ability to defend
our existing and future patents and rights and conduct our business activities
free of infringement claims by third parties. We intend to seek additional
patents, but our pending and future patent applications may not be approved, may
not give us a competitive advantage, and could be challenged by others. Patent
proceedings in the U.S. and in other countries may be expensive and time
consuming. In addition, patents issued by foreign countries may afford less
protection than is available under U.S. patent law, and may not adequately
protect our proprietary information. Our competitors may independently develop
proprietary technologies and processes which are the same as or substantially
equivalent to ours, or design around our patents.
Companies in the medical device industry typically obtain patents and
frequently engage in substantial intellectual property litigation. Our products
and technologies could infringe on the rights of others. If a third party
successfully asserts a claim for infringement against us, we may be liable for
substantial damages, unable to sell products using that technology, or would
have to seek a license or redesign the related product. These alternatives may
be uneconomical or impossible. Patent litigation could be costly, result in
product development delays, and divert the efforts and attention of management
from our business.
We have been defending a lawsuit that relates to a portion of the
energy transmission technology used in the AbioCor. World Heart Corporation and
Ottawa Heart Institute Research Corporation filed suit against us in Delaware in
January 1998, seeking damages and injunctive relief because they contend that a
component of the AbioCor infringes their intellectual property rights. On
February 4, 2000, the trial of this suit concluded with the jury unanimously
finding in our favor on all claims presented to it. The plaintiffs have filed a
motion for a new trial, which motion is pending. If a new trial is granted and
if we are not successful in the new trial, we may be required to use or develop
alternate energy transmission technology, seek a license from a third party, or
modify the design of the AbioCor. We may not be able to
41
develop a reasonable alternative design on a timely, cost effective basis and we
may not be able to obtain a license at reasonable cost or on a timely basis. In
either case, our failure to win the lawsuit could hurt our ability to develop or
market the AbioCor, which would adversely affect our business prospects.
IF WE CANNOT ATTRACT AND RETAIN THE MANAGEMENT, SALES AND OTHER
PERSONNEL WE NEED, WE WILL NOT BE SUCCESSFUL.
We depend heavily on the contributions of the principal members of our
technical, sales and support, regulatory and clinical, operating and
administrative management and staff, many of whom would be difficult to replace.
Competition for skilled and experienced management, scientific personnel and
sales personnel in the medical devices industry is intense. If we lose the
services of any of the principal members of our management and staff, or if we
are unable to attract and retain qualified personnel in the future, especially
scientific and sales personnel, our business could be adversely affected.
We expect to grow rapidly if the AbioCor and our other products under
development advance through the approval process. The expansion of personnel and
facilities will strain our management and our financial and other resources. If
we cannot manage this growth successfully, our business will likely suffer.
PRODUCT LIABILITY CLAIMS COULD DAMAGE OUR REPUTATION AND HURT OUR
FINANCIAL RESULTS.
The clinical use of medical products, even after regulatory approval,
poses an inherent risk of product liability claims. We maintain limited product
liability insurance coverage, subject to deductibles and exclusions. We cannot
be sure that product liability insurance will be available in the future or will
be available on acceptable terms or at reasonable costs, or that such insurance
will provide us with adequate coverage against potential liabilities. Claims
against us, regardless of their merit or potential outcome, may also hurt our
ability to obtain physician endorsement of our products or expand our business.
Many patients using the BVS do not survive. There are many factors
beyond our control that could result in patient death, including the condition
of the patient prior to use of the product, the skill and reliability of
physicians and hospital personnel using and monitoring the product, and product
maintenance by customers. However, the failure of the BVS or other life support
products we distribute for clinical test or sale could give rise to product
liability claims and negative publicity.
The risk of product liability claims could increase as we introduce new
products like the AbioCor that are intended to support a patient until the end
of life. The AbioCor will have a finite life and could cause unintended
complications to other organs and may not be able to successfully support all
patients. Its malfunction could give rise to product liability claims whether or
not it has extended or improved the quality of the patient's life. We cannot be
sure that we can obtain liability insurance to cover the BVS, the AbioCor or
other new products at a reasonable cost, if at all. If we have to pay product
liability claims in excess of our insurance coverage, our financial condition
will be adversely affected.
WE HAVE DEPENDED ON GOVERNMENT CONTRACTS TO SUPPORT A SIGNIFICANT
PORTION OF OUR BASIC RESEARCH AND DEVELOPMENT. THIS FUNDING MAY NOT CONTINUE.
We generally rely on external funding for a significant portion of our
basic product research and development. The primary source of this external
funding is government research contracts and grants. We have obtained this type
of funding for the initial development of most of our current products and
products under development. In particular, the National Heart, Lung and Blood
Institute, or NHLBI, awarded us a four-year, $8.5 million extension to our
AbioCor development contract in September 1996,
42
and a five-year, $4.3 million contract for the development of the AbioBooster in
September 1995. As of March 31, 2000, we had recognized all of the revenue under
the AbioCor development contract and all but $0.6 million of the revenue under
the AbioBooster contract. We have not determined the extent to which, if at all,
we will seek additional government funding for the AbioCor or the AbioBooster,
or new government funding for our other products under development. We cannot
assure that any such funding will be available, if we decide to seek it.
Funding for all our government research and development contracts is
subject to government appropriation, and all of these contracts contain
provisions which make them terminable at the convenience of the government. The
government could terminate or reduce or delay the funding for any of our
contracts at any time. In the event that we are not successful in obtaining any
new government contracts or further extensions to existing research and
development contracts, our financial results could be adversely affected.
OUR RIGHTS DISTRIBUTION, CERTIFICATE OF INCORPORATION AND DELAWARE LAW
COULD MAKE IT MORE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US AND MAY PREVENT OUR
STOCKHOLDERS FROM REALIZING A PREMIUM ON OUR STOCK.
Our rights distribution and provisions of our certificate of
incorporation and of the Delaware General Corporation Law may make it more
difficult for a third party to acquire us, even if doing so would allow our
stockholders to receive a premium over the prevailing market price of our stock.
Our rights distribution and those provisions of our certificate of incorporation
and Delaware law are intended to encourage potential acquirors to negotiate with
us and allow our Board of Directors the opportunity to consider alternative
proposals in the interest of maximizing stockholder value. However, such
provisions may also discourage acquisition proposals or delay or prevent a
change in control, which could negatively affect our stock price.
THE MARKET VALUE OF OUR COMMON STOCK COULD VARY SIGNIFICANTLY, BASED ON
MARKET PERCEPTIONS OF THE STATUS OF OUR DEVELOPMENT EFFORTS.
The perception of securities analysts regarding our product development
efforts could significantly affect our stock price. As a result, the market
price of our common stock could change substantially when we or our competitors
make product announcements, particularly announcements relating to the AbioCor
or competing products. Many factors affecting our stock price are industry
related and beyond our control.
IF WE MAKE ACQUISITIONS, WE COULD ENCOUNTER DIFFICULTIES THAT HARM OUR
BUSINESS.
We may acquire companies, products or technologies that we believe
to be complementary to our business. If we do so, we may have difficulty
integrating the acquired personnel, operations, products or technologies.
These difficulties may disrupt our ongoing business, distract our management
and employees and increase our expenses, which could hurt our business.
Future sales of our common stock could adversely affect our stock price.
Future sales of substantial amounts of our common stock in the public market
or the perception that these sales could occur, could adversely affect the
market price of our common stock. As of June 12, 2000, we had outstanding
10,234,497 shares of common stock, plus 1,307,198 shares of common stock
reserved for issuance upon exercise of outstanding options. All of the
outstanding shares of our common stock are freely saleable except shares held
by our affiliates, which are subject to certain limitations on sales.
43
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
We do not use derivative financial instruments for speculative or
trading purposes. However, we are exposed to market risk related to changes in
interest rates. We maintain an investment portfolio consisting mainly of federal
agency obligations, state and municipal bonds, and U.S. Treasury notes with
maturities of one year or less. These held-to-maturity securities are subject to
interest rate risk and will fall in value if market interest rates increase. If
market interest rates were to increase immediately and uniformly by 10 percent
from levels at March 31, 2000, the fair market value of the portfolio would
decline by an immaterial amount. We have the ability to hold our fixed income
investments until maturity, and therefore we would not expect our operating
results or cash flows to be affected to any significant degree by the effect of
a sudden change in market interest rates on its securities portfolio.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Consolidated Financial Statements and Supplementary Data are listed
under Part IV, Item 14, in this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information called for by this Item is not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is hereby incorporated by
reference to the information under Part I, Item 1--Business under the caption
"Executive Officers of the Registrant" in this Report, and by reference to the
information under the headings "Election of Directors" and "Reporting Under
Section 16(a) of the Securities Exchange Act of 1934" in our definitive proxy
statement to be filed within 120 days after the close of our fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is hereby incorporated by
reference to the information under the heading "Executive Compensation" in our
definitive proxy statement to be filed within 120 days after the close of our
fiscal year. Such incorporation by reference shall not be deemed to specifically
incorporate by reference the information referred to in Item 402(a)(8) of
Regulation S-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is hereby incorporated by
reference to the information under the heading "Securities Beneficially Owned by
Certain Persons" in our definitive proxy statement to be filed within 120 days
after the close of our fiscal year.
44
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is hereby incorporated by
reference to the information under the heading "Certain Transactions," if any,
in our definitive proxy statement to be filed within 120 days after the close of
our fiscal year.
45
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) (1) FINANCIAL STATEMENTS
PAGE
----
Report of Independent Public Accountants........................................................... F-1
Consolidated Balance Sheets as of March 31, 1999 and 2000.......................................... F-2
Consolidated Statements of Operations for the Fiscal Years Ended March 31, 1998, 1999 and 2000..... F-3
Consolidated Statements of Stockholders' Equity for the Fiscal Years Ended March 31, 1998, 1999
and 2000...................................................................................... F-4
Consolidated Statements of Cash Flows for the Fiscal Years Ended March 31, 1998, 1999 and 2000..... F-5
Notes to Consolidated Financial Statements......................................................... F-6
(A) (2) FINANCIAL STATEMENT SCHEDULES
Supplemental schedules are not provided because of the absence of
conditions under which they are required or because the required information is
given in the financial statements or notes thereto.
(A) (3) EXHIBITS
(3) Articles of Incorporation and By-Laws.
(a) Restated Certificate of Incorporation - filed as Exhibit
3.1 to our Registration Statement on Form S-3
(Registration No. 333-36657) (the "1997 Registration
Statement").*
(b) Restated By-Laws - filed as Exhibit 3.02 to our Quarterly
Report on From 10-Q for the quarter ended September 30,
1996.*
(c) Certificate of Designations of Series A Junior
Participating Preferred Stock - filed as Exhibit 3.3 to
the 1997 Registration Statement.*
(4) Instruments defining the rights of security holders, including
indentures.
(a) Specimen Certificate of Common Stock - filed as Exhibit
4.1 to our Registration Statement on Form S-1
(Registration No. 33-14861) (the "1987 Registration
Statement").*
(b) Description of Capital Stock (contained in the Restated
Certificate of Incorporation filed as Exhibit 3.1 to the
1997 Registration Statement and in the Certificate of
Designations of Series A Junior Participating Preferred
Stock filed as Exhibit 3.3 to the 1997 Registration
Statement).*
46
(c) Rights Agreement between ABIOMED and BankBoston, N.A., as
Rights Agent dated as of August 13, 1997 (including Form
of Rights Certificate attached thereto as Exhibit A) -
filed as Exhibit 4 to our Current Report on Form 8-K,
dated August 13, 1997.*
(10) Material Contracts.
(a) Option to Purchase Developed Technology between ABIOMED
and the Abiomed Limited Partnership (the "Partnership") -
filed as Exhibit 10.06 to the 1987 Registration
Statement.*
(b) Bill of Sale and Technology Transfer and Intellectual
Property Agreement between ABIOMED and the Partnership -
filed as Exhibit 10(b) to our Annual Report on Form 10-K
for the fiscal year ended March 31, 1991.*
(c) Facility Leases dated September 30, 1993 for the premises
at 33 Cherry Hill Drive - filed as Exhibit 10(e) to our
Annual Report of Form 10-K for the fiscal year ended
March 31, 1994 (the "1994 Form 10-K"), as amended per the
First Amendment to Lease filed as Exhibit 10.03 to our
Form 10-Q for the fiscal quarter ended December 31,
1996.*
(d) Form of Indemnification Agreement for Directors and
Officers - filed as Exhibit 10.13 to the 1987
Registration Statement.*
(e) Abiomed Limited Partnership Amended and Restated
Certificate and Agreement of Limited Partnership (without
schedule of Partners) - filed as Exhibit 10.15 to the
1987 Registration Statement.*
(f) 1992 Combination Stock Option Plan, as amended - filed as
Exhibit 10.2 to our Form 10-Q for the fiscal quarter
ended September 30, 1997 (the "September 1997 10-Q").*
(g) 1988 Employee Stock Purchase Plan, as amended - filed as
Exhibit 10.1 to our September 1997 10-Q.*
(h) 1989 Non-Qualified Stock Option Plan for Non-Employee
Directors - filed as Exhibit 10.1 to our Form 10-Q for
the fiscal quarter ended September 30, 1995.*
(i) NHLBI Contract Extension for Total Artificial Heart -
filed as Exhibit 10.01 to our Form 10-Q for the fiscal
quarter ended September 30, 1996.*
(j) Facility Lease dated August 8, 1996 for the lease of
additional space at 33 Cherry Hill Drive - filed as
Exhibit 10.02 to our Form 10-Q for the fiscal quarter
ended December 31, 1996.*
(k) Facility Lease dated January 8, 1999 for the premises at
22 Cherry Hill Drive - filed as Exhibit 10 to our Form
10-Q for the fiscal quarter ended December 31, 1998.*
47
(l) 1998 Equity Incentive Plan - filed as Exhibit 10 to our
Form 10-Q/A for the fiscal quarter ended September 30,
1998.*
(n) Common Stock Purchase Agreement between ABIOMED and
Genzyme Corporation - filed as Exhibit 99.2 to the 1997
Registration Statement.*
(o) Common Stock Purchase Agreement between ABIOMED and
certain Directors - filed as Exhibit 99.3 to the 1997
Registration Statement.*
(p) Letter of Agreement between ABIOMED and Fleet National
Bank, dated as of October 14, 1999 with respect to Demand
and Term Loans - filed as Exhibit 10 to our Form 10-Q for
the fiscal quarter ended September 30, 1999.*
(q) Form of Change of Control Agreement - filed as Exhibit 10
to our Form 10-Q for the fiscal quarter ended September
30, 1999.*
(r) Schedule related to Change of Control Agreement - filed
as Exhibit 10 to our Form 10-Q for the fiscal quarter
ended September 30, 1999.*
(11) Statement re computation of Per Share Earnings - see Note 1(g),
Notes to Consolidated Financial Statements.
(21) Subsidiaries of the Registrant.
(27) Financial Data Schedules.
(a) Financial Data Schedule as of March 31, 2000 for the
fiscal year ended March 31, 2000.
(b) Financial Data Schedule as of March 31, 1999 for the
fiscal year ended March 31, 1999.
(c) Financial Data Schedule as of March 31, 1998 for the
fiscal year ended March 31, 1998.
(B) REPORTS ON FORM 8-K
We did not file any current reports on Form 8-K during the quarter
ended March 31, 2000.
- ------------
* In accordance with Rule 12b-32 under the Securities Exchange Act of 1934
reference is made to the documents previously filed with the Securities and
Exchange Commission, which documents are hereby incorporated by reference.
48
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
ABIOMED, Inc.
Dated: June 23, 2000 By: /s/ DAVID M. LEDERMAN
---------------------------
DAVID M. LEDERMAN, CHAIRMAN
OF THE BOARD, PRESIDENT
PRINCIPAL EXECUTIVE OFFICER
KNOW ALL BY THESE PRESENTS that each individual whose signature appears
below hereby constitutes and appoints David M. Lederman and John F. Thero, and
each of them, his true and lawful attorneys-in-fact and agents with full power
of substitution, for him and in his name, place and stead, in any and all
capacities, to execute in the name of each such person, and to file with the
Securities and Exchange Commission, together with any exhibits thereto and other
documents therewith, any and all amendments to this Annual Report on Form 10-K
necessary and advisable to enable ABIOMED, Inc. to comply with the rules,
regulations and requirements of the Securities Act of 1934, as amended, in
respect thereof, which amendments may make such changes in the Annual Report on
Form 10-K as the aforesaid attorneys-in-fact executing the same deem
appropriate.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ DAVID M. LEDERMAN Chairman of the Board, June 23, 2000
- -------------------------------- Chief Executive Officer
DAVID M. LEDERMAN President and Director
(Principal executive officer)
/s/ JOHN F. THERO Senior Vice President-Finance, June 23, 2000
- -------------------------------- Chief Financial Officer and
JOHN F. THERO Treasurer (Principal financial
and accounting officer)
/s/ W. GERALD AUSTEN Director June 23, 2000
- --------------------------------
W. GERALD AUSTEN
/s/ PAUL B. FIREMAN Director June 23, 2000
- --------------------------------
PAUL B. FIREMAN
/s/ JOHN F. O'BRIEN Director June 23, 2000
- --------------------------------
JOHN F. O'BRIEN
49
/s/ DESMOND O'CONNELL Director June 23, 2000
- --------------------------------
DESMOND O'CONNELL
/s/ HENRI A. TERMEER Director June 23, 2000
- --------------------------------
HENRI A. TERMEER
50
ABIOMED, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1999 AND 2000
TOGETHER WITH AUDITORS' REPORT
INDEX
PAGE
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-1
CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 1999 AND 2000 F-2
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS
ENDED MARCH 31, 1998, 1999 AND 2000 F-3
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1998, 1999 AND 2000 F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS
ENDED MARCH 31, 1998, 1999 AND 2000 F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-6 - F-18
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ABIOMED, Inc.:
We have audited the accompanying consolidated balance sheets of ABIOMED, Inc. (a
Delaware corporation) and subsidiaries as of March 31, 1999 and 2000, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended March 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ABIOMED, Inc. and subsidiaries
as of March 31, 1999 and 2000, and the results of their operations and their
cash flows for each of the three years in the period ended March 31, 2000, in
conformity with accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Boston, Massachusetts
May 12, 2000
F-1
ABIOMED, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31,
---------------------
1999 2000
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 1) $ 9,279 $101,917
Short-term marketable securities (Note 1) 8,902 4,467
Accounts receivable, net of allowance for doubtful accounts
of approximately $204 and $184 at March 31, 1999 and 2000,
respectively 6,437 6,691
Inventories (Note 1) 2,896 3,546
Prepaid expenses and other current assets 336 526
--------- --------
Total current assets 27,850 117,147
--------- --------
PROPERTY AND EQUIPMENT, AT COST (Note 1):
Machinery and equipment 5,444 6,427
Furniture and fixtures 575 622
Leasehold improvements 1,728 2,277
--------- --------
7,747 9,326
Less--Accumulated depreciation and amortization 3,884 5,375
--------- --------
3,863 3,951
--------- --------
OTHER ASSETS, NET (Note 8) 1,269 690
--------- --------
$ 32,982 $121,788
========= ========
MARCH 31,
---------------------
1999 2000
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 875 $ 1,553
Accrued expenses (Note 10) 4,830 6,360
Current portion of long-term liabilities (Notes 4 and 6) - 236
--------- ---------
Total current liabilities 5,705 8,149
--------- ---------
LONG-TERM LIABILITIES (Notes 4 and 6) 205 715
COMMITMENTS (Notes 6 and 8) - -
STOCKHOLDERS' EQUITY (Notes 3 and 7):
Class B Preferred Stock, $.01 par value-
Authorized--1,000,000 shares; issued and outstanding--none - -
Common Stock, $.01 par value-
Authorized--25,000,000 shares; issued and outstanding--8,650,802
shares and 10,227,847 shares at March 31, 1999 and 2000,
respectively 87 102
Additional paid-in capital 58,220 154,511
Accumulated deficit (31,235) (41,689)
--------- ---------
Total stockholders' equity 27,072 112,924
--------- ---------
$ 32,982 $ 121,788
========= =========
THE ACCOMPANYING NOTES ARE AN
INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-2
ABIOMED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
YEARS ENDED MARCH 31,
-----------------------------------------
1998 1999 2000
REVENUES (Note 1):
Products $ 17,261 $ 18,079 $ 18,377
Contracts 5,185 4,011 4,140
----------- ----------- -----------
22,446 22,090 22,517
----------- ----------- -----------
COSTS AND EXPENSES:
Cost of product revenues 6,502 6,772 5,882
Research and development (Note 1) 9,091 13,450 15,633
Selling, general and administrative 9,054 9,772 12,562
----------- ----------- -----------
24,647 29,994 34,077
----------- ----------- -----------
LOSS FROM OPERATIONS (2,201) (7,904) (11,560)
Interest and other income, net 1,206 1,192 1,106
----------- ----------- -----------
LOSS FROM CONTINUING OPERATIONS (995) (6,712) (10,454)
LOSS FROM DISCONTINUED OPERATIONS (NOTE 2) (1,513) - -
----------- ----------- -----------
NET LOSS $ (2,508) $ (6,712) $ (10,454)
=========== =========== ===========
BASIC AND DILUTED NET LOSS PER SHARE (NOTE 1):
CONTINUING OPERATIONS $ (0.12) $ (0.78) $ (1.19)
DISCONTINUED OPERATIONS (0.19) - -
----------- ----------- -----------
NET LOSS PER SHARE $ (0.31) $ (0.78) $ (1.19)
=========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING (Note 1): 8,074,150 8,619,100 8,789,261
=========== =========== ===========
THE ACCOMPANYING NOTES ARE AN
INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-3
ABIOMED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK TOTAL
NUMBER $.01 ADDITIONAL ACCUMULATED STOCKHOLDERS'
OF SHARES PAR VALUE PAID-IN CAPITAL DEFICIT EQUITY
BALANCE, MARCH 31, 1997 7,008,282 $ 70 $ 37,170 $ (22,015) $ 15,225
Sales of Common Stock, net 1,532,710 16 20,054 - 20,070
Stock options exercised 20,015 - 151 - 151
Stock issued to directors and under
employee stock purchase plan 6,008 - 80 - 80
Net loss - - - (2,508) (2,508)
---------- ---------- ---------- ---------- ----------
BALANCE, MARCH 31, 1998 8,567,015 86 57,455 (24,523) 33,018
Stock options exercised 69,400 1 635 - 636
Stock issued to directors and under
employee stock purchase plan 14,387 - 130 - 130
Net loss - - - (6,712) (6,712)
---------- ---------- ---------- ---------- ----------
BALANCE, MARCH 31, 1999 8,650,802 87 58,220 (31,235) 27,072
Sales of Common Stock, net 1,500,000 15 95,416 - 95,431
Stock options exercised 66,499 - 701 - 701
Stock issued to directors and under
employee stock purchase plan 10,546 - 174 - 174
Net loss - - - (10,454) (10,454)
---------- ---------- ---------- ---------- ----------
BALANCE, MARCH 31, 2000 10,227,847 $ 102 $ 154,511 $ (41,689) $ 112,924
========== ========== ========== ========== ==========
THE ACCOMPANYING NOTES ARE AN
INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-4
ABIOMED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED MARCH 31,
--------------------------------------
1998 1999 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,508) $ (6,712) $ (10,454)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 877 1,386 1,685
Changes in assets and liabilities:
Accounts receivable, net (805) (1,081) (254)
Inventories (859) (568) (650)
Prepaid expenses and other assets (394) (628) 195
Assets and liabilities of discontinued operations, net 1,156 (667) -
Accounts payable 768 (1,183) 678
Accrued expenses 1,013 1,881 1,530
Long-term liabilities 64 141 (36)
--------- --------- ---------
Net cash used in operating activities (688) (7,431) (7,306)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of short-term marketable securities 50,501 40,361 12,748
Purchases of short-term marketable securities (66,471) (25,548) (8,313)
Purchases of property and equipment (2,540) (1,552) (1,358)
--------- --------- ---------
Net cash (used in) provided by investing activities (18,510) 13,261 3,077
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of Common Stock, net 20,070 - 95,431
Proceeds from exercise of stock options
and stock issued under employee purchase plan 231 766 875
Proceeds from issuance of long-term debt - - 615
Repayments of long-term debt and capital lease obligations - - (54)
--------- --------- ---------
Net cash provided by financing activities 20,301 766 96,867
--------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,103 6,596 92,638
CASH AND CASH EQUIVALENTS, EXCLUDING MARKETABLE SECURITIES, AT
BEGINNING OF YEAR 1,580 2,683 9,279
--------- --------- ---------
CASH AND CASH EQUIVALENTS, EXCLUDING MARKETABLE SECURITIES, AT END
OF YEAR $ 2,683 $ 9,279 $ 101,917
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING
ACTIVITIES:
Capital lease obligation incurred for property and equipment $ - $ - $ 221
========= ========= =========
THE ACCOMPANYING NOTES ARE AN
INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-5
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
ABIOMED, Inc. and subsidiaries (the Company) is engaged primarily in the
development, manufacture and marketing of medical products designed to
safely and effectively assist or replace the pumping function of the
failing heart. The Company is developing the AbioCor Implantable
Replacement Heart, a battery-powered totally implantable replacement
heart system. The Company currently markets and sells the
BVS-5000-Registered Trademark-, a temporary heart assist device. The
accompanying consolidated financial statements reflect the application of
certain significant accounting policies described below.
(a) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries, and the
accounts of its majority-owned subsidiary Abiomed Limited
Partnership. All significant intercompany accounts and
transactions have been eliminated in consolidation.
(b) USES OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the
reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimated or
assumed.
(c) PRODUCT REVENUES
The Company recognizes product revenues at the time products are
shipped to customers. Service revenues, which are not material,
are recognized ratably over the periods of the service contracts.
In fiscal 1998, 1999 and 2000, all product revenues were derived
from sales of the BVS 5000 and 6%, 3% and 3%, respectively, of
product revenues were derived from customers located outside of
the United States. No customer accounted for greater than 10% of
product revenues during fiscal 1998, 1999 or 2000.
(d) CONTRACT REVENUES
Research and development is a significant portion of the Company's
operations. The Company's research and development efforts are
focused on the development of new products, primarily related to
cardiac assist and heart replacement, including the continued
enhancement of the BVS and related technologies. A portion of the
Company's research and development expenses have been supported by
contracts and grants with various government agencies. The
Company's government-sponsored research and development contracts
and grants generally provide for payment on a cost-plus-fixed-fee
basis. The Company recognizes revenues under its government
contracts and grants as work is performed, provided that the
government has appropriated sufficient funds for the work. The
Company retains rights to all technological discoveries and
products resulting from these efforts. Costs associated with these
contracts and grants are recorded in the accompanying consolidated
statements of
F-6
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
(1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(d) CONTRACT REVENUES (CONTINUED)
operations as part of research and development expenses and
totaled approximately $4,110,000 $2,957,000 and $2,981,000 for
fiscal 1998, 1999 and 2000, respectively.
The Company, at its sole discretion, may elect to further develop
government-funded technologies or products by spending resources
outside or above the contract limits. In fiscal 2000, the majority
of the Company's research and development expenditures were
directed to development of the AbioCor Implantable Replacement
Heart. These expenditures included amounts funded under the
Company's government contract and amounts funded from the
Company's own resources. Company funding of such expenses is
discretionary and not included in the contracts and grants costs
per above.
(e) INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out)
or market and consist of the following (in thousands):
MARCH 31,
1999 2000
-------- --------
Raw materials $ 1,403 $ 1,490
Work-in-process 636 713
Finished goods 857 1,343
-------- --------
$ 2,896 $ 3,546
======== ========
Finished goods and work-in-process inventories consist of direct
material, labor and overhead.
(f) DEPRECIATION AND AMORTIZATION
The Company provides for depreciation and amortization by charges
to operations in amounts that allocate the cost of depreciable
assets over their estimated useful lives as follows:
ESTIMATED
CLASSIFICATION METHOD USEFUL LIFE
-------------- ------ -----------
Machinery and equipment Straight-line 3- 5 Years
Furniture and fixtures Straight-line 5-10 Years
Leasehold improvements Straight-line Life of lease
F-7
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
(1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(f) DEPRECIATION AND AMORTIZATION (CONTINUED)
Machinery and equipment includes $221,000 related to assets held
under capital leases at March 31, 2000.
(g) NET LOSS PER SHARE
Basic net loss per share is computed by dividing net loss by the
weighted average number of common shares outstanding during the
fiscal year. Diluted net loss per share is computed by dividing
net loss by the weighted average number of dilutive common shares
outstanding during the period. Diluted weighted average shares
reflect the dilutive effect, if any, of common stock options based
on the treasury stock method. No common stock options are
considered dilutive in periods in which a loss is reported, such
as the fiscal years ended March 31, 1998, 1999 and 2000, because
all such common equivalent shares would be antidilutive. The
number of shares that otherwise would have been dilutive for the
years ended March 31, 1998, 1999 and 2000 were 287,709, 95,426 and
751,329, respectively.
(h) CASH AND CASH EQUIVALENTS
The Company classifies any marketable security with a maturity
date of 90 days or less at the time of purchase as a cash
equivalent.
(i) MARKETABLE SECURITIES
The Company classifies any security with a maturity date of
greater than 90 days at the time of purchase as marketable
securities and classifies marketable securities with a maturity
date of greater than one year from the balance sheet date as
long-term investments. Under Statement of Financial Accounting
Standards (SFAS) No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN
DEBT AND EQUITY SECURITIES, securities that the Company has the
positive intent and ability to hold to maturity are reported at
amortized cost and classified as held-to-maturity securities.
The Company has classified all marketable securities at March 31,
1999 and 2000 as held-to-maturity securities. The amortized cost
and market value of marketable securities were approximately
$8,902,000 and $8,973,000 at March 31, 1999 and $4,467,000 and
$4,541,000 at March 31, 2000, respectively. At March 31, 2000
these short-term investments consisted primarily of government
grade securities.
(j) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
As of March 31, 1999 and 2000, the Company's financial instruments
were comprised of cash and cash equivalents, marketable
securities, accounts receivable, accounts payable and capital
lease obligations, the carrying amounts of which approximated fair
market value.
F-8
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
(1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(k) COMPREHENSIVE INCOME
SFAS No.130, REPORTING COMPREHENSIVE INCOME, requires disclosure
of all components of comprehensive income and loss on an annual
and interim basis. Comprehensive income and loss is defined as the
change in equity of a business enterprise during a period from
transactions and other events and circumstances from non-owner
sources. There were no components of comprehensive income or loss
that require disclosure for the years ending March 31, 1998, 1999,
and 2000.
(l) SEGMENT AND ENTERPRISE WIDE DISCLOSURES
SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION, requires certain financial and supplementary
information to be disclosed on an annual and interim basis for
each reportable segment of an enterprise. The Company believes
that it operates in one business segment; the research,
development, and sale of medical devices to assist or replace the
pumping function of the failing heart.
(m) RECLASSIFICATION OF PRIOR YEAR AMOUNTS
Certain prior year financial statement information has been
reclassified to be consistent with the current year presentation.
(n) RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the FASB issued Interpretation No. 44, ACCOUNTING
FOR CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION - AN
INTERPRETATION OF APB OPINION NO. 25. The interpretation clarifies
the application of Accounting Principles Board (APB) Opinion No.
25 in certain situations, as defined. The interpretation is
effective July 1, 2000, but covers certain events occurring during
the period after December 15, 1998, but before the effective date.
To the extent that events covered by this interpretation occur
during the period after December 15, 1998, but before the
effective date, the effects of applying this interpretation would
be recognized on a prospective basis from the effective date. The
Company does not anticipate that the adoption of this
interpretation will have a material effect on its financial
position or results of operations.
The Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101, REVENUE RECOGNITION, in December 1999. The
Company is required to adopt this new accounting guidance through
a cumulative charge to operations, in accordance with APB Opinion
No. 20, ACCOUNTING CHANGES, no later than the Company's fiscal
quarter ending June 30, 2000. The Company believes that the
adoption of the guidance provided in SAB No. 101 will not have a
material impact on future operating results.
F-9
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
(1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(n) RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which is effective
for fiscal years beginning after June 15, 1999 but permits early
adoption as of the beginning of any fiscal quarter after its
issuance. The Company adopted the new statement effective January
1, 1999. The new standard requires that all companies record
derivatives on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending
on the use of the derivative and whether it qualifies for hedge
accounting. The statement does not have an effect on the Company's
results of operations or financial position.
(2) DISCONTINUED OPERATIONS
In the year ended March 31, 1998, the Company made the decision to shift
all of its focus to the Company's core cardiovascular business and to
sell, license or otherwise dispose of its dental business. The Company
reported a $1,513,000 loss, $0.19 per share, from discontinued operations
for the year ended March 31, 1998. This loss included a $967,000
provision for estimated losses to be incurred through the date of final
disposition, including the disposal of assets and extinguishment of the
liabilities of the business.
(3) CAPITAL STOCK
Each share of Common Stock has a voting right of one vote per share and
generally has the right to elect, as a class, at least 25% of the
Company's directors.
In July 1997, the Company completed a private placement of 1,242,710
shares of its Common Stock to Genzyme Corporation and certain of the
Company's directors. Proceeds to the Company from the private placement,
net of direct expenses of approximately $145,000, totaled approximately
$16,010,000.
In November 1997, the Company completed a public offering of 290,000
shares of its Common Stock. Proceeds to the Company from the stock
offering, net of direct expenses of approximately $725,000, totaled
approximately $4,060,000.
In March 2000, the Company completed a public offering of 1,500,000
shares of its Common Stock. Proceeds to the Company from the stock
offering, net of direct expenses of approximately $6,569,000, totaled
approximately $95,431,000.
The Company has authorized 1,000,000 shares of Class B Preferred Stock,
$.01 par value, of which the designation, rights and privileges can be
set by the Board of Directors. No shares of Class B Preferred Stock have
been issued or are outstanding.
F-10
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
(3) CAPITAL STOCK (CONTINUED)
In August 1997, the Company declared a dividend of one Preferred Share
Purchase Right (the "Right") for each outstanding share of Common Stock
to its stockholders of record at August 28, 1997. Each right entitles the
registered holder to purchase from the Company one one-thousandth of a
share of Series A Junior Participating Preferred Stock with a par value
of $0.01 per share, at a price of $90.00 per one one-thousandth of a
share, subject to amendment. In accordance with the terms set forth in
the Rights Agreement, the Rights are not exercisable until the occurrence
of certain events, as defined. In addition, the registered holders of the
Rights will have no rights as a Common stockholder of the Company until
the Rights are exercised. The terms of the Rights may be amended by the
Company's Board of Directors. The Rights expire on August 13, 2007.
(4) FINANCING ARRANGEMENTS
The Company has an unsecured demand line of credit agreement with a bank
under which it can borrow up to $3,000,000 at the bank's prime rate (9%
at March 31, 2000). The Company is required to maintain a compensating
balance of $100,000 plus 5% of any amounts outstanding under the
arrangement. The line of credit expires in October 2000. There were no
borrowings under the Company's line of credit at March 31, 1999 and 2000.
In October, 1999, the Company entered into an agreement with the bank
whereby it was able to draw up to $1,200,000 in term loans through March
31, 2000 for the acquisition of manufacturing equipment and leasehold
improvements. These promissory notes are subject to various financing
covenants, secured by the acquired equipment and leasehold improvements
and are to be repaid in equal monthly installments of principal plus
variable interest through September 1, 2003. The notes bear interest at
either the bank's prime rate or LIBOR rate then in effect, at the
Company's advanced election. Through March 31, 2000, the Company utilized
$615,000 under this loan facility, of which approximately $584,000
remains outstanding as of that date.
The following is a schedule of the principal portion of these term loans
due in fiscal year 2001 and thereafter (in thousands):
YEAR ENDED MARCH 31,
--------------------
2001....................................................................... $ 167
2002....................................................................... 167
2003....................................................................... 167
2004....................................................................... 83
-----
$ 584
=====
F-11
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
(5) INCOME TAXES
The Company accounts for income taxes in accordance with the provisions
of SFAS No. 109, ACCOUNTING FOR INCOME TAXES. The asset and liability
approach used under SFAS No. 109 requires recognition of deferred tax
assets and liabilities for the expected future tax consequences of
temporary differences between the carrying amounts and the tax basis of
other assets and liabilities.
At March 31, 2000, the Company had available net operating loss
carryforwards of approximately $39,362,000. The Company also had
available, at March 31, 2000, approximately $1,471,000 of tax credit
carryforwards to reduce future federal income taxes, if any. The net
operating loss and tax credit carryforwards expire through 2020. These
carryforwards are subject to review by the Internal Revenue Service and
may be subject to limitation in any given year under certain conditions.
The following table summarizes the Company's approximate net operating
loss (NOL) and credit carryforwards that are available as of March 31,
2000 to offset future taxable income and income tax, respectively. The
NOLs and carryforwards are organized by the fiscal year in which they
were generated (in thousands).
TAX DATES OF
YEAR ENDED MARCH 31, NOL CREDITS EXPIRATION
-------------------- --- ------- ----------
1987................................ $ - $ 52 3/31/02
1989................................ - 144 3/31/04
1990................................ 532 - 3/31/05
1991................................ 3,116 50 3/31/06
1992................................ 6,973 61 3/31/07
Thereafter.......................... 28,741 1,164 3/31/08 - 3/31/20
-------- --------
$ 39,362 $ 1,471
======== ========
The Company has not given recognition to any of these future tax benefits
in the accompanying consolidated financial statements due to the
uncertainty surrounding the timing of the realization of the tax
benefits. The Company has placed a valuation allowance of approximately
$20,300,000 as of March 31, 2000 against its otherwise recognizable net
deferred tax asset.
F-12
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
The deferred tax asset consists of the following (in thousands):
MARCH 31,
1999 2000
---- ----
Net operating loss and tax credit carryforwards $ 12,734 $ 17,216
Purchase of technology 815 563
Nondeductible reserves 366 282
Nondeductible accruals 1,192 1,921
Depreciation 169 169
Other, net 239 149
-------- --------
15,515 20,300
Less--Valuation allowance (15,515) (20,300)
-------- --------
$ - $ -
======== ========
(6) COMMITMENTS
(a) As of March 31, 2000, the Company had entered into leases for its
facilities and certain equipment under various operating lease
agreements with terms through fiscal 2010 and an option, at the
Company's election, to terminate in 2005. Total rent expense under
these leases, included in the accompanying consolidated statements
of operations, was approximately $360,000, $350,000 and $622,000,
for fiscal 1998, 1999 and 2000, respectively.
(b) The Company maintains various insurance coverage. Most policies
renew on a fiscal year basis while certain policies have been
secured for three-year periods. Future insurance obligations under
these insurance policies over the remaining policy terms are
approximately $105,000 as of March 31, 2000.
(c) During fiscal year ended March 31, 2000, the Company entered into
36-month operating leases totaling approximately $652,000 for the
lease of office furniture which have annual rental payments of
approximately $215,000. At the end of the initial terms, the
Company can either; 1) renew the leases for additional 12-month
option periods at the then fair market rental value, 2) purchase
the furniture at its then fair market value, but no greater than
25% of its original purchase cost or 3) return the furniture to
the lessor. Rental expense recorded for these leases during the
fiscal year ended March 31, 2000 was approximately $88,000.
During fiscal 2000, the Company also entered into a 36-month
capital lease for computer equipment and software for
approximately $221,000. This capital lease has annual rental
payments of approximately $83,000. These assets are being used in
research and development activities and general operations. At the
end of the initial term, the Company can either; 1) renew the
lease for an additional 6-month option period at a reduced rental
rate, 2) purchase the equipment at its then fair market value, but
no greater than 12.5% of its
F-13
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
(6) COMMITMENTS (CONTINUED)
original purchase cost, or 3) return the equipment to the lessor.
Future minimum lease payments under all noncancellable operating and
capital leases as of March 31, 2000 are approximately as follows (in
thousands):
OPERATING CAPITAL
YEAR ENDED MARCH 31, LEASES LEASE
2001............................................ $ 1,078 $ 83
2002............................................ 999 83
2003............................................ 877 56
2004............................................ 733 -
2005............................................ 1,761 -
Thereafter...................................... - -
------- -------
Total future minimum lease payments $ 5,448 222
=======
Less - amount representing interest (24)
-------
Present value of future minimum lease payments 198
Less - current portion of lease obligation (69)
-------
Long-term portion of lease obligation $ 129
=======
(7) STOCK OPTION AND PURCHASE PLANS
All stock options granted by the Company under the below-described plans
were granted at the fair value of the stock at the date of grant.
Outstanding stock options, if not exercised, expire 10 years from the
date of grant.
The 1992 Combination Stock Option Plan (the Combination Plan), as
amended, was adopted in September 1992 as a combination and restatement
of the Company's then outstanding Incentive Stock Option Plan and
Nonqualified Plan. Options granted and outstanding under the Combination
Plan are primarily held by Company employees and generally become
exercisable ratably over five years.
In addition, the Company has a nonqualified stock option plan for
non-employee directors (the Directors' Plan). The Directors' Plan, as
amended, was adopted in July 1989 and provides for grants of options to
purchase 12,500 shares of the Company's Common Stock to any newly elected
eligible director and grants of additional options to purchase 12,500
shares of Common Stock to existing directors on July 1 of each successive
fifth year. These options vest over a five-year period at the rate of
2,500 shares per year, commencing on June 30 of the year following the
date of grant.
Separate from the Directors' Plan, non-employee directors of the Company
receive as compensation an annual retainer of 400 shares of Common Stock.
The Company issued 2,000 shares of its Common Stock for this purpose
F-14
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(Continued)
(7) STOCK OPTION AND PURCHASE PLANS (CONTINUED)
in the years ended March 31, 1999 and 2000, the fair value of which has
been recorded as compensation expense in the accompanying consolidated
statements of operations.
The Company adopted the 1998 Equity Incentive Plan (the Equity Incentive
Plan) in August 1998. The Equity Incentive Plan provides for grants of
options to key employees, directors, advisors and consultants as either
Incentive Stock Options or Nonqualified Stock Options as determined by
the Company's Board of Directors. A maximum of 500,000 shares of common
stock may be awarded under this plan. Options granted under the Equity
Incentive Plan are exercisable at such times and subject to such terms as
the Board of Directors may specify at the time of each stock option
grant. Options granted under the Equity Incentive Plan through March 31,
2000 have vesting periods of 3 to 5 years from the date of grant.
The following table summarizes stock option activity under these plans:
COMBINATION PLAN DIRECTORS' PLAN EQUITY INCENTIVE PLAN
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise Price of Exercise Price of Exercise Price
Options Price Per Share Options Price Per Share Options Price Per Share
Outstanding,
March 31, 1997 697,875 $ 5.63-$13.50 $10.29 90,000 $ 7.00-$13.88 $10.81 - $ - $ -
Granted 178,850 10.00- 18.00 11.91 50,000 14.00 14.00 - - -
Exercised (20,015) 5.63- 10.63 7.56 - - - - - -
Canceled (37,325) 5.63- 13.25 10.69 - - - - - -
-------- ------------- ------ ------- ------------- ------ ------- ------------- ---------
Outstanding,
March 31, 1998 819,385 5.63- 18.00 10.71 140,000 7.00- 14.00 11.95 - - -
Granted 337,250 9.25- 14.50 11.87 - - - - - -
Exercised (69,400) 5.63- 13.50 9.17 - - - - - -
Canceled (129,850) 5.63- 14.94 11.77 - - - - - -
-------- ------------- ------ ------- ------------- ------ ------- ------------- ---------
Outstanding,
March 31, 1999 957,385 5.63- 18.00 11.08 140,000 7.00- 14.00 11.95 - - -
Granted 117,350 8.88- 13.50 12.81 - - - 203,700 13.38- 67.25 17.92
Exercised (66,499) 5.63- 18.00 10.55 - - - - - -
Canceled (36,288) 8.00- 17.00 11.66 (7,500) 13.88 13.88 (1,300) 13.38 13.38
-------- ------------- ------ ------- ------------- ------ ------- ------------- ---------
Outstanding,
March 31, 2000 971,948 $ 5.63-$18.00 $11.31 132,500 $ 7.00-$14.00 $11.84 202,400 $13.38-$67.25 $ 17.95
======== ============= ====== ======= ============= ====== ======= ============= =========
Exercisable,
March 31, 2000 349,208 $ 5.63-$14.94 $10.07 100,000 $ 7.00-$14.00 $11.21 - $ - $ -
======== ============= ====== ======= ============= ====== ======= ============= =========
Shares available
for future
issuance,
March 31, 2000 29,045 65,000 297,600
======== ======= =======
F-15
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
(7) STOCK OPTION AND PURCHASE PLANS (CONTINUED)
The following table summarizes certain data for options outstanding under
the Combination, Directors' and Equity Incentive Plans at March 31, 2000.
WEIGHTED
WEIGHTED AVERAGE
AVERAGE REMAINING
NUMBER RANGE OF EXERCISE CONTRACTUAL
OF SHARES EXERCISE PRICES PRICE LIFE (YEARS)
--------- --------------- ----- ------------
Options outstanding, end of year: 140,800 $ 5.63 - $ 8.00 $ 7.42 3.32
734,648 8.88 - 12.75 11.37 6.82
405,900 13.25 - 18.00 13.71 8.22
25,500 28.25 - 67.25 48.34 9.81
---------
1,306,848 $12.39 6.93
=========
Options exercisable, end of year: 137,050 $ 5.63 - $ 8.00 $ 7.44 3.26
264,008 8.88 - 12.75 11.19 5.16
48,150 13.25 - 18.00 13.76 4.88
- 28.25 - 67.25 - -
---------
449,208 10.32 4.55
=========
The Company has an Employee Stock Purchase Plan (the Purchase Plan), as
amended. Under the Purchase Plan, all employees (including officers and
directors) of the Company who have completed six months of employment are
eligible to purchase the Company's Common Stock at an exercise price
equal to 85% of the fair market value of the Common Stock. The Company
has reserved 100,000 shares of Common Stock for issuance under the
Purchase Plan, of which 65,746 shares are available for future issuance
as of March 31, 2000. During the fiscal years ended March 31, 1998, 1999
and 2000, 4,039 shares, 12,387 shares and 8,546 shares, respectively, of
Common Stock were sold pursuant to the Purchase Plan.
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. requires the
measurement of the fair value of stock options, stock purchase plans, or
warrants granted to employees to be included in the statement of
operations or disclosed in the notes to financial statements. The Company
has determined that it will continue to account for stock-based
compensation for employees under APB Opinion No. 25 and elect the
disclosure-only alternative under SFAS No 123. The Company has computed
the pro forma disclosures required under SFAS No. 123 for options granted
in fiscal 1998, 1999 and 2000 using the Black-Scholes option pricing
model prescribed by SFAS No. 123. The weighted average information and
assumptions are as follows:
F-16
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
(7) STOCK OPTION AND PURCHASE PLANS (CONTINUED)
YEAR ENDED MARCH 31,
1998 1999 2000
---- ---- ----
Risk-free interest rate 5.50 % 5.68 % 6.50 %
Expected dividend yield - - -
Assumed life 5 years 5 years 5 years
Assumed volatility 33 % 35 % 48 %
The Black-Scholes option-pricing model was developed for use in
estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option-pricing
models require the input of highly subjective assumptions including
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of
the fair value of its employee stock options.
The total fair value of the options granted during fiscal 1998, 1999 and
2000 was computed as approximately $501,000, $483,000 and $1,036,000
respectively. Of these amounts approximately $383,000, $504,000 and
$655,000 would be charged to operations for the years ended March 31,
1998, 1999 and 2000 respectively. The remaining amounts would be
amortized over the remaining vesting periods of the underlying options.
Similarly, the total fair value of stock sold under the Purchase Plan was
computed as approximately $17,000, $31,000 and $129,000 for fiscal 1998,
1999 and 2000, respectively. The resulting pro forma compensation expense
may not be representative of the amount to be expected in future years as
pro forma compensation expense may vary based upon the number of options
granted and shares purchased.
The pro forma net loss and pro forma net loss per common share presented
below have been computed assuming no tax benefit. The effect of a tax
benefit has not been considered since a substantial portion of the stock
options granted are incentive stock options and the Company does not
anticipate a future deduction associated with the exercise of these stock
options.
The pro forma effect of SFAS No. 123 for the years ended March 31, 1998,
1999 and 2000 is as follows:
NET LOSS NET LOSS PER SHARE
----------------------------------- ---------------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
(IN THOUSANDS)
YEAR ENDED MARCH 31,
--------------------
1989................................. $ (2,508) $ (2,908) $(0.31) $(0.36)
1999................................. (6,712) (7,247) (0.78) (0.84)
2000................................. (10,454) (11,238) (1.19) (1.28)
F-17
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
(8) ROYALTY OBLIGATION
Until August 3, 2000, the Company owes a royalty to certain third parties
equal in aggregate to approximately 2.1% of certain revenues derived from
the BVS 5000 and certain other technology. This royalty is subject to
certain maximum revenue amounts and to certain adjustments, as defined,
in the event that the Company sells the underlying technology. For the
years ended March 31, 1998, 1999 and 2000, the amount of this royalty,
net of certain reimbursed expenses, was approximately $338,000, $341,000
and $353,000, respectively. These amounts are reflected as part of the
cost of product revenues in the accompanying consolidated statements of
operations.
This royalty is paid to the third parties through Abiomed Limited
Partnership which, at present, is inactive except with respect to the
distribution of such royalties. In 1995, the Company paid $770,000 to
reduce its royalty obligation to 2.1%, as described above. This one-time
payment capitalized by the Company is being amortized on a straight-line
basis through August 2000 and as of March 31, 2000, $59,000 remains to be
amortized.
(9) EMPLOYEE DEFERRED COMPENSATION PROFIT-SHARING PLAN AND TRUST
The Company has an employee deferred compensation profit-sharing plan
(the 401(k) Plan) that covers all employees who are at least 20 years of
age. The expense provision, which consists of amounts paid by the Company
to match a portion of employees' contributions and discretionary amounts
determined by the Company's Board of Directors, totaled approximately
$166,000, $239,000 and $353,000 for the fiscal years ended March 31,
1998, 1999 and 2000 respectively.
(10) ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
MARCH 31,
1999 2000
---- ----
Salaries and benefits......................................... $2,606 $2,782
Contract services............................................. 337 695
Warranty...................................................... 181 313
Sales taxes................................................... 56 93
Professional fees............................................. 137 1,020
Deferred revenue.............................................. 435 209
Customer advances............................................. 65 67
Other......................................................... 1,013 1,181
------ ------
$4,830 $6,360
====== ======
F-18