FORM 10-K/A
AMENDMENT NO. 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
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 1-13165
CRYOLIFE, INC.
(Exact name of registrant as specified in its charter)
Florida 59-2417093
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1655 Roberts Boulevard N.W., Kennesaw, GA 30144
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code (770) 419-3355
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
Common Stock, $.01 par value New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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 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. [X] Yes [_] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of voting stock held by nonaffiliates of the
registrant was approximately $111,802,000 at February 18, 1998 (7,985,863
shares). The number of common shares outstanding at February 18, 1998 was
9,700,791 (exclusive of treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
Part III: Portions of Registrant's Proxy Statement relating to the Annual
Meeting of Shareholders to be filed not later than April 30, 1998.
----------------
PART I
ITEM 1. BUSINESS.
OVERVIEW
CryoLife is the leader in the cryopreservation of viable human tissues for
cardiovascular, vascular and orthopaedic transplant applications, and develops
and commercializes additional implantable products and single-use medical
devices. The Company estimates that it provided approximately 80% of the
cryopreserved human tissue implanted in the U.S. in 1997. The Company uses its
expertise in biochemistry and cell biology, and its understanding of the needs
of the cardiovascular, vascular and orthopaedic surgery medical specialties,
to continue expansion of its core cryopreservation business and to develop or
acquire complementary implantable products and technologies for these fields.
The Company develops bioprosthetic cardiovascular devices including a novel
design stentless porcine heart valve currently marketed in the European
Community. The Company also develops proprietary implantable surgical
bioadhesives, including BioGlue surgical adhesive, which it has begun
commercializing for vascular applications within the European Community. In
addition, the Company manufactures and distributes, through its Ideas For
Medicine, Inc. ("IFM") subsidiary, single-use medical devices for use in
vascular surgical procedures. The Company has generated compound annual growth
rates in revenues and earnings per share, including contributions from
acquisitions, of 24% and 68%, respectively, since 1993.
CryoLife processes and distributes for transplantation cryopreserved human
heart valves and conduits, human vascular tissue and human connective tissue
for the knee. Revenues from these services, which were $44.2 million, or 87%
of total revenues, in 1997, have grown at a compound annual growth rate of 24%
since 1993. Management believes that cryopreserved human heart valves and
conduits offer certain advantages over mechanical, synthetic and animal-
derived alternatives. Depending on the alternative, these advantages include
more natural functionality, elimination of a chronic need for anti-coagulation
drug therapy, reduced incidence of reoperation and reduced risk of
catastrophic failure, thromboembolism (stroke) or calcification. The Company
estimates that the potential U.S. market for implantable products targeting
indications addressed by the Company's cryopreserved tissues was approximately
$950 million in 1997. Since 1993, cryopreserved human tissues have captured an
increasing share of this market as the total U.S. replacement heart valve
market and CryoLife's revenues from cryopreservation of human heart valves and
conduits grew at compound annual growth rates of approximately 7% and 21%,
respectively. The Company seeks to expand the availability of human tissue
through its established relationships with over 250 tissue banks and organ
procurement agencies nationwide.
CryoLife develops and markets outside of the U.S. bioprosthetic cardiovascular
devices for transplantation, currently consisting of fixed stentless porcine
heart valves. Fixed porcine heart valves are often preferred by surgeons for
procedures involving elderly patients because they eliminate the risk of
patient non-compliance with long-term anti-coagulation drug therapy associated
with mechanical valves, are less expensive than human heart valves and their
shorter longevity is more appropriately matched with these patients' life
expectancies. Fixed porcine heart valves address a worldwide target market
estimated to have been $175 million in 1997. Unlike most other available
porcine heart valves, the Company's stentless porcine heart valves do not
contain synthetic materials which increase the risk of endocarditis, a
debilitating and potentially fatal bacterial infection. The Company's
CryoLife-O'Brien aortic heart valve, currently marketed in the European
Community and certain other territories outside the U.S., is a stentless
porcine heart valve which contains a matched composite leaflet design that
approximates human heart valve blood flow characteristics and requires only a
single suture line which simplifies surgical implantation. The Company intends
to submit a CE Mark application for the CryoLife-Ross pulmonary heart valve,
another of the Company's fixed stentless porcine valves, for marketing in the
European Community. The Company plans to apply its proprietary SynerGraft
technology to its stentless porcine heart valves. SynerGraft involves the
depopulation of living cells from the structure of non-viable animal heart
tissue and the repopulation of such tissue with human cells. This process is
designed to reduce calcification of porcine heart valves, thereby increasing
longevity, and more generally to improve the biocompatibility and
2
functionality of such tissue. The Company believes that its porcine heart
valves, when treated with SynerGraft technology, will expand its opportunity
to address the broader international and U.S. heart valve markets, estimated
to be $348 million and $395 million, respectively, in 1997.
CryoLife is developing implantable biomaterials for use as surgical adhesives
and sealants. The Company's patent protected BioGlue surgical adhesive,
designed for cardiovascular and peripheral vascular applications, is a polymer
based on a derivative of a blood protein and a cross linking agent. The
Company's patent protected FibRx surgical sealant, designed for tissue
hemostasis and suture line sealing, is a light activated, biodegradable
surgical sealant under development which is based on a derivative of the human
blood factors fibrinogen and thrombin. Both of these products may be used with
or without sutures or staples, and may offer advantages over sutures and
staples, including more effective sealing and easier application. The Company
estimates that the annual worldwide market for surgical sutures and staples in
1997 was in excess of $2 billion. The Company recently received CE Mark
Certification for its BioGlue surgical adhesive which permits the Company to
begin marketing this product in the European Community for vascular
applications.
CryoLife manufactures and distributes, through its IFM subsidiary, single-use
medical devices including endarterectomy surgical instruments, intravascular
shunts, infusion ports, accessories utilized in laparoscopic procedures and a
wide range of single and dual lumen balloon catheters. The Company believes
that many of its existing single-use medical devices have novel proprietary
features that offer clinical advantages over competing products. For example,
the Company's Pruitt-Inahara Shunt was the first endarterectomy shunt
available to surgeons which contains a barrier feature designed to reduce
migration of plaque particles to the brain and trauma to the carotid artery
during surgery. Another example is the Company's dual lumen embolectomy
catheter incorporating a novel water irrigation mechanism which enables
physicians to remove whole blood clots more effectively than with single lumen
embolectomy catheters. The Company is benefiting from, and intends to utilize,
its design and manufacturing expertise to develop single-use medical devices
for use in conjunction with its cryopreserved human tissue and biomaterial
products. Examples of such devices under development include a family of
balloon catheters designed to assist in applying the BioGlue surgical adhesive
and a human heart valve holder designed to provide physicians greater control
in implantation procedures.
In the U.S., the Company markets its cryopreservation services for human heart
valves and conduits and human vascular tissue through its in-house technical
service representatives and relies on independent orthopaedic sales
representatives to market its cryopreservation services for human connective
tissue for the knee. Also in the U.S., the Company markets its single-use
medical devices through its in-house technical service representatives.
Internationally, cryopreserved human tissues, bioprosthetic cardiovascular
devices and single-use medical devices are distributed through independent
representatives located in several countries in Europe, South America and
Asia. The Company plans to market and distribute its BioGlue surgical adhesive
internationally through its existing independent representatives and, if
approved for sale in the U.S., through its in-house technical service
representatives.
GROWTH STRATEGY
The Company's primary objective is to continue its consistent growth in
revenues and profitability. The Company has generated compound annual growth
rates in revenues and net income of approximately 21% and 71%, respectively,
since 1993, excluding revenues and net income from IFM, which the Company
acquired in March 1997. The Company's strategy to generate continued growth is
based on increasing the use of cryopreserved tissues as an alternative to
mechanical and synthetic implantable products, developing new markets for
existing products and technologies and developing new products and
technologies for new and existing markets. The Company also selectively
considers strategic acquisitions of complementary technologies and businesses
to supplement its internal growth. The key elements of the Company's business
and growth strategy are to:
. Continue Leadership in Cryopreservation of Human Heart Valves and
Conduits. The Company intends to increase the market penetration of its
cryopreserved human heart valves and conduits by
3
(i) expanding awareness of clinical advantages of cryopreserved human
tissues through continuing educational efforts directed to physicians,
prospective heart valve and conduit recipients and tissue procurement
agencies, (ii) expanding its relationships with the more than 250 tissue
banks and procurement agencies across the U.S. which direct tissue to
the Company for cryopreservation and (iii) expanding its physician
training activities.
. Expand Distribution of Cryopreserved Human Vascular Tissue and
Connective Tissue for the Knee. Using the same strategy it has
successfully employed to expand its distribution of cryopreserved human
heart valves and conduits, the Company intends to increase its
cryopreservation revenues from human vascular tissue and connective
tissue for the knee through continuing educational efforts directed to
vascular and orthopaedic surgeons about the clinical advantages of
cryopreserved vascular and orthopaedic tissue, expanding its
relationships with tissue banks and procurement agencies and expanding
its programs for training physicians in the use of tissue cryopreserved
by the Company.
. Broaden Application of Cryopreservation Services. The Company will
continue to collect, monitor and evaluate implant data to (i) develop
expanded uses for the human tissues currently cryopreserved by the
Company and (ii) identify new human tissues as candidates for
cryopreservation. The Company has recently begun providing cryopreserved
human vascular tissue to be used as dialysis access replacement grafts
for patients undergoing long-term dialysis, and separately, as venous
valve replacements for patients suffering from diseases of the venous
system. The Company has ongoing projects for cryopreserving the
posterior tibialis and anterior tibialis tendons for use in knee
repairs. The Company is also investigating the use of cryopreserved
human osteochondral grafts to repair articular defects, and the use of
cryopreserved human endothelial cells, peripheral nerves and spinal
disks in various surgical applications.
. Develop and Commercialize Bioprosthetic Cardiovascular Devices. The
Company intends to leverage its expertise with stentless human heart
valves to expand commercialization of its stentless porcine heart valves
and to use its stentless porcine heart valves as a platform for the
development and commercialization of the Company's SynerGraft
technology. The Company is expanding its production capacity for its
bioprosthetic cardiovascular devices to address the increased demand it
is currently experiencing. Separately, the Company's patent protected
SynerGraft technology is being developed to expand the target market for
the CryoLife-O'Brien aortic heart valve and the CryoLife-Ross pulmonary
heart valve by minimizing calcification often associated with porcine
tissues and thereby increasing their longevity.
. Develop and Commercialize Biomaterials for Surgical Adhesive and Sealant
Applications. In the second quarter of 1998, the Company plans to
commercialize its patent protected BioGlue surgical adhesive in the
European Community through its existing independent representatives and
to file an application to conduct clinical trials for BioGlue surgical
adhesive in the U.S. The Company also plans to continue development of
its patent protected FibRx surgical sealant. In addition to the adhesive
and sealant applications of these biomaterials, the Company intends to
pursue, either directly or through strategic alliances, certain drug
delivery applications of BioGlue surgical adhesive and FibRx surgical
sealant, such as administering antibiotics, attaching chemotherapy drugs
to tumors, delivering growth agents or delivering bone chips for
orthopaedic bone repair.
. Leverage Existing Capability across Product Lines. The Company plans to
expand sales of its single-use medical devices by leveraging its
established cryopreservation services marketing and sales staff and by
introducing new complementary products. The Company intends to apply its
expertise with stentless human heart valves to expand commercialization
of its stentless porcine heart valves and to use its stentless porcine
heart valves as a platform for the development and commercialization of
the Company's SynerGraft technology. New complementary products under
development include a stentless human heart valve holder being designed
to provide greater physician control in implantation procedures and
modified single and double lumen balloon catheters for use in delivering
the Company's implantable bioadhesives.
4
SERVICES AND PRODUCTS
Cryopreservation of Human Tissue for Transplant/Living Biologic Devices
The Company's proprietary and patent protected cryopreservation process
involves the procurement of tissue from deceased human donors, the timely and
controlled delivery of such tissue to the Company, the screening,
disinfection, dissection and cryopreservation of the tissue by the Company,
the storage and shipment of the cryopreserved tissue and the controlled
thawing of the tissue. Thereafter, the tissue is surgically implanted into a
human recipient.
The transplant of human tissue that has not been preserved must be
accomplished within extremely short time limits (not to exceed eight hours for
transplants of the human heart). Prior to the advent of human tissue
cryopreservation, these time constraints resulted in the inability to use much
of the tissue donated for transplantation. The application by the Company of
its cryopreservation technologies to donated tissue expands the amount of
human tissue available to physicians for transplantation. Cryopreservation
also expands the treatment options available to physicians and their patients
by offering alternatives to implantable mechanical, synthetic and animal-
derived devices. The tissues presently cryopreserved by the Company include
human heart valves and conduits, vascular tissue and connective tissue for the
knee. The following table sets forth, for the types of tissues cryopreserved
by the Company, the cumulative number of units shipped, the number of units
shipped in 1997 and the total number of target market procedures performed
annually in the United States:
NUMBER OF TARGET
NUMBER OF CRYOLIFE UNITS SHIPPED MARKET PROCEDURES
------------------------------------- PERFORMED IN THE
SINCE INCEPTION DURING 1997 U.S. IN 1997
------------------ --------------- -----------------
Human Heart Valves and
Conduits............... 29,500 5,244 95,000
Human Vascular Tissue... 9,300 2,621 34,000
Human Connective Tissue
for the Knee........... 4,800 1,859 270,000
CryoLife maintains and collects extensive clinical data on the use and
effectiveness of implanted human tissues that it has cryopreserved, and shares
this data with implanting physicians. The Company also uses this data to help
direct its continuing efforts to improve its cryopreservation services through
ongoing research and development. Its research staff and technical
representatives assist physicians by providing educational materials, seminars
and clinics on methods for handling and implanting the tissue cryopreserved by
the Company and the clinical advantages, indications and applications for
those tissues. The Company has ongoing efforts to train and educate physicians
on the indications for and uses of its cryopreserved tissues, as well as its
programs whereby surgeons train other surgeons in necessary techniques. The
Company also assists organ procurement agencies through training and
development of protocols and provides necessary materials to improve their
internal tissue processing techniques and to increase efficiency and the yield
of usable tissue.
Human Heart Valves and Conduits. The Company's revenues have been primarily
derived from the cryopreservation of human heart valves and conduits for use
in reconstructive heart valve replacement surgery. CryoLife shipped
approximately 29,500 cryopreserved human heart valves and conduits from 1984
to 1997. Based on CryoLife's records of documented implants, management
believes that the Company's success in the allograft heart valve market is due
in part to physicians' recognition of the longevity and natural functionality
of the Company's cryopreserved human tissues as compared to mechanical and
porcine heart valve alternatives in certain applications. The Company
currently applies its cryopreservion services to human aortic, pulmonary and,
more recently, mitral heart valves for implantation by cardiac surgeons. In
addition, the Company provides cryopreserved conduit tissue, which is the only
source of tissue available to surgeons who wish to perform certain specialized
cardiac repair procedures. Each of these human heart valves and conduits
maintains a viable tissue structure which more closely resembles and performs
like the patient's own tissue than non-human tissue alternatives.
Based on available market data, the Company estimates that of all heart valve
replacement surgeries performed in the U.S. in 1997, 69%, 30% and 1% involved
the replacement of diseased or damaged aortic valves, mitral valves and
pulmonary valves, respectively. Due to the success of a procedure known as the
Ross Switch
5
Procedure, 53% of the valves which CryoLife shipped in 1997 were pulmonary
valves. In the Ross Switch Procedure, the surgeon replaces the patient's
damaged aortic valve with the patient's own pulmonary valve. The patient's
pulmonary valve is then replaced with a cryopreserved pulmonary valve. The
advantage of this procedure is the use of the patient's own valve in the more
stressful aortic position. The resulting benefit to CryoLife and the surgical
community is a more even demand and distribution of the processed human aortic
and pulmonary valves.
The Company estimates that the total heart valve and conduit replacement
market in the U.S. in 1997 was approximately $395 million. Management believes
that approximately 95,000 heart valve and conduit surgeries were conducted in
the U. S. in 1997. Of the total number of heart valve and conduit surgeries,
approximately 64,000, or 67%, involved mechanical heart valves, and
approximately 31,500, or 33%, involved tissue heart valves or conduits,
including porcine and cryopreserved human tissues. Of these tissue heart valve
or conduit replacements, management believes that approximately 6,500, or 21%,
involved cryopreserved human heart valve or conduit replacements. Over 5,200
human heart valves and conduits cryopreserved by the Company were shipped for
implantation in 1997. Since 1993, the total U.S. replacement heart valve
market grew at a compound annual growth rate of approximately 7%, while
CryoLife's revenues from cryopreservation of human heart valves and conduits
grew at a compound annual growth rate of approximately 21%.
Management believes cryopreserved human heart valves and conduits have
characteristics that make them the preferred replacement for most patients.
Specifically, human heart valves, such as those cryopreserved by the Company,
allow for more normal blood flow and provide higher cardiac output than
porcine and mechanical heart valves. Human heart valves are not as susceptible
to progressive calcification, or hardening, as are porcine heart valves, and
do not require anti-coagulation drug therapy, as do mechanical valves. The
synthetic sewing rings contained in mechanical and stented porcine valves are
difficult to treat with antibiotics after they have become infected, a
condition which usually necessitates the surgical removal of these valves at
considerable cost, morbidity and risk of mortality. Consequently, for many
physicians human heart valves are the preferred alternative to mechanical and
stented porcine valves for patients who have, or are at risk to contract,
endocarditis.
The following table sets forth the characteristics of alternative heart valve
implants that management believes make cryopreserved human heart valves the
preferred replacement for most patients:
PORCINE
CRYOPRESERVED -------------------------------- BOVINE
HUMAN STENTED STENTLESS(1) MECHANICAL PERICARDIUM(2)
------------- --------------- --------------- ------------- ---------------
Materials: human tissue glutaraldehyde- glutaraldehyde- pyrolitic glutaraldehyde-
fixed pig fixed pig carbon bi- fixed cow
tissue and tissue leaflet and tissue and
synthetic synthetic synthetic
sewing ring sewing ring sewing ring
Blood Flow Dynamics: normal moderate nearly normal high high elevation
elevation elevation
(Required Pressure) (3) (0-5) (10-20) (5-15) (10-25) (10-30)
Mode of Failure: gradual gradual expected to be catastrophic gradual
gradual
Longevity: 20 years 7-10 years expected to 20 years 10-15 years
exceed stented
porcine valves
Increased Risk of
Thromboembolic Events
(strokes or other
clotting): no occasional expected to be yes occasional
rare
Anti-Coagulation Drug
Therapy Required: none short-term short-term chronic short-term
Responsiveness to
Antibiotic Treatment of
Endocarditis: high low low low low
Average Valve Cost in
U.S.: $6,850 $4,228 $5,500 $4,100(4) $4,500
- --------
(1) Limited long-term clinical data is available since stentless porcine heart
valves only recently became commercially available.
(2) Management believes that bovine pericardium heart valves have experienced
mixed clinical results and are generally not considered a preferred
alternative for most patients.
(3) Pressure measured in mm/Hg.
(4) Mechanical valves also require chronic anti-coagulation drug therapy at a
cost of approximately $450 per year.
6
While the clinical benefits of cryopreserved human heart valves discussed
above are relevant to all patients, they are particularly important for (i)
pediatric patients (newborn to 14 years) who are prone to calcification of
porcine tissue, (ii) young or otherwise active patients who face an increased
risk of severe blood loss or even death due to side effects associated with
the anti-coagulation drug therapy required with mechanical valves and (iii)
women in their childbearing years for whom anti-coagulation drug therapy would
interfere with normal pregnancy.
Human Vascular Tissues. The Company cryopreserves human saphenous and
superficial femoral veins for use in vascular surgeries that require small
diameter conduits (3mm to 6mm), such as coronary bypass surgery and peripheral
vascular reconstructions. Failure to bypass or revascularize an obstruction in
such cases may result in death or the loss of a limb. The Company believes it
offers the only available small diameter conduit product for below-the-knee
vascular reconstruction and shipped approximately 9,300 human vascular tissues
from 1986 to 1997.
A surgeon's first choice for replacing diseased or damaged vascular tissue is
generally the patient's own tissue. However, in cases of advanced vascular
disease, the patient's own tissue is often unusable and the surgeon may
consider using synthetic grafts or transplanted human vascular tissue.
Synthetic small diameter vascular grafts are not available for below-the-knee
surgeries and, in other procedures, have a tendency to shut down due to
occlusion because the synthetic materials in these products attract cellular
material from the blood stream which in turn closes off the vessel to normal
blood flow. Cryopreserved vascular tissues tend not to occlude as quickly
because of the presence of an endothelial cell lining in the donor vein which
remains intact following the cryopreservation process. The Company's
cryopreserved human vascular tissues are used for coronary artery bypass
surgeries, peripheral vascular reconstruction, dialysis access graft
replacement and venous valve transplantation.
In 1986, the Company began a program to cryopreserve saphenous veins for use
in coronary artery bypass surgeries. Although the Company's cryopreserved
human tissue was used in only a small percentage of the nearly 310,000
coronary artery bypass procedures performed in 1997, the Company believes it
is the only commercially available alternative to the patient's own tissue.
Approximately 950 cryopreserved human saphenous veins for use in coronary
artery bypass surgeries were shipped for this application in 1997,
representing approximately 36% of all the human vascular tissue shipped by the
Company during such period. The Company estimates that, in 1997, approximately
20,000 coronary artery bypass surgeries were performed in which human vascular
tissues cryopreserved by the Company could have been used.
In 1989, the Company began a program to cryopreserve long segment saphenous
veins for use in peripheral vascular reconstruction. In cases of peripheral
arteriosclerosis, a cryopreserved saphenous vein can be implanted as a bypass
graft for the diseased artery in order to improve blood flow and maintain a
functional limb. Analysis of clinical data has shown that 80% of patients
receiving CryoLife's preserved vascular tissues in this type of surgical
procedure still have the use of the affected leg three years after surgery.
The alternative for many of these patients was amputation. Approximately 1,570
cryopreserved human saphenous veins were shipped for this application in 1997.
The Company estimates that, in 1997, approximately 22,000 peripheral vascular
reconstruction surgeries were performed in which its cryopreserved human
vascular tissues could have been used.
In 1996, the Company began a program for the cryopreservation of human
superficial femoral veins for use in dialysis access graft replacement as an
alternative for synthetic grafts which have a higher risk of infection than
human tissue. The Company shipped less than 100 cryopreserved human
superficial femoral veins for this application in 1997. The Company estimates
that, in 1997, approximately 30,000 dialysis access graft replacements were
performed in which its cryopreserved human vascular tissues could have been
used.
In 1997, the Company began a program for the cryopreservation of human
superficial femoral veins for venous valve transplant. The cryopreservation of
these human tissues is designed for patients suffering from chronic venous
insufficiency, a condition in which the blood flow returning to the heart from
the legs is compromised due to absent, improperly functioning or destroyed
venous valves. Prior to the introduction of CryoLife's
7
cryopreserved venous valves, treatment for patients suffering from this
ailment generally was limited to drug therapy or compression stockings. The
Company shipped less than 100 cryopreserved human superficial femoral veins
for this application in 1997. The Company estimates that, in 1997,
approximately 20,000 patients with chronic venous insufficiency could have
benefitted from venous valve transplant procedures using its cryopreserved
human vascular tissues.
Human Connective Tissue for the Knee. The Company provides cryopreserved
surgical replacements for the meniscus and the anterior and posterior cruciate
ligaments, which are connective tissues critical to the proper operation of
the human knee. CryoLife has shipped approximately 4,800 human connective
tissues for the knee through 1997.
Human menisci cryopreserved by the Company provide orthopaedic surgeons with
an alternative treatment in cases where a patient's meniscus has been
completely removed. When a patient has a damaged meniscus, the current
surgical alternatives are to repair, partially remove or completely remove the
patient's meniscus, with partial removal being the most common procedure.
Meniscal removal increases the risk of premature knee degeneration and
arthritis and typically results in the need for knee replacement surgery at
some point during the patient's life. Management believes that the Company is
the only provider of cryopreserved meniscal tissue and that there are no
synthetic menisci on the market. The Company estimates that in 1997 in the
U.S. approximately 683,000 patients underwent partial or total meniscectomies.
The Company believes up to 30% of these patients could become candidates for
meniscal replacement within five years.
Tendons cryopreserved by the Company are used for the reconstruction of
anterior cruciate ligaments in cases where the patient's ligaments are
irreparably damaged. Surgeons have traditionally removed a portion of the
patient's patellar tendon from the patient's undamaged knee for use in
repairing a damaged anterior cruciate ligament. Tendons cryopreserved by the
Company provide an alternative to this procedure. Because surgeries using
cryopreserved tissue do not involve the removal of any of the patient's own
patellar tendon, the patient recovery period is typically shorter. The Company
estimates that in 1997 approximately 175,000 cruciate ligament reconstruction
surgeries were performed.
Based on its experience with human heart valves and conduits, management
believes that as the body of clinical data builds regarding the use of
cryopreserved human connective tissues for the knee, the use of such tissues
will increase, although there can be no assurance that this will be the case.
Other Allograft Tissues Under Development. The Company currently has ongoing
projects for cryopreserving the posterior and anterior tibialis tendons for
use in the repair of anterior cruciate ligaments. The Company has other
projects for using preserved osteochondral grafts to repair articular defects
and for the use of cryopreserved human endothelial cells, peripheral nerves
and spinal discs, in various surgical applications.
Bioprosthetic Cardiovascular Devices
The Company is developing bioprosthetic cardiovascular devices based on its
experience with cryopreserved human tissue implants. Like human heart valves,
the Company's porcine heart valves are stentless with the valve opening, or
annulus, retaining a more natural flexibility. Stented porcine and mechanical
heart valves are typically fitted with synthetic sewing rings which are rigid
and can impede normal blood flow. Unlike most other available porcine heart
valves, the Company's stentless porcine heart valves do not contain synthetic
materials which increase the risk of endocarditis, a debilitating and
potentially deadly bacterial infection.
Fixed porcine heart valves are often preferred by surgeons for procedures
involving elderly patients because they eliminate the risk of patient non-
compliance with anti-coagulation drug therapy associated with mechanical
valves, are less expensive than allograft valves and their shorter longevity
is more appropriately matched with these patients' life expectancies. Fixed
porcine heart valves address a worldwide target market estimated to have been
$175 million in 1997.
The Company's SynerGraft technology involves the removal of living cells from
the structure of non-viable animal tissue and the repopulation of such tissue
with human cells. This process is designed to reduce
8
calcification of porcine heart valves, thereby increasing their longevity, and
more generally to improve the biocompatibility and functionality of such
tissue. The Company believes that its porcine heart valves, when treated with
SynerGraft technology, will expand its opportunity to address the broader
international and U.S. heart valve markets, estimated to be $348 million and
$395 million, respectively, in 1997.
The following table sets forth the bioprosthetic cardiovascular devices
currently marketed or under development by the Company, along with the product
features and regulatory or market status for each.
FEATURES REGULATORY/MARKET STATUS
--------------------- ----------------------------
FIXED STENTLESS PORCINE VALVES
CryoLife-O'Brien aortic valve of currently marketed in Europe
matched composite with regulatory approval
leaflet design; under CE Mark
single suture line
CryoLife-Ross pulmonary valve with submission of application
attached conduit for CE Mark for European
marketing approval
anticipated in mid-1998
DEPOPULATED STENTLESS PORCINE VALVES
CryoLife-O'Brien SG aortic valve, as submission of application
above, with antigen for CE Mark for European
reduction properties marketing approval
anticipated in fourth
quarter 1998
CryoLife-Ross SG pulmonary valve, as submission of application
above, with antigen for CE Mark for European
reduction properties marketing approval
anticipated in fourth
quarter 1998
REPOPULATED STENTLESS PORCINE VALVES
CryoLife-O'Brien SynerGraft aortic valve, as pre-clinical
above, repopulated
with human cells
CryoLife-Ross SynerGraft pulmonary valve, as pre-clinical
above, repopulated
with human cells
The CryoLife-O'Brien aortic valve, is a stentless porcine valve with design
features which management believes provide significant advantages over other
stentless porcine heart valves. CryoLife began exclusive worldwide
distribution of this valve in 1992 and acquired all rights to the underlying
technology in 1995. The Company's CryoLife-O'Brien aortic heart valve,
currently marketed in the European Community and certain other territories
outside the U.S., contains a matched composite leaflet design that
approximates human heart valve blood flow characteristics and requires only a
single suture line thereby simplifying surgical implantation. Other stentless
porcine valves require a more complicated implant procedure.
The CryoLife-Ross pulmonary valve, the patent for which the Company acquired
in October 1996, is an advanced design stentless porcine heart valve within an
attached conduit of porcine tissue, which mimics the structure of a human
heart valve. The Company intends to submit a CE Mark application during 1998
for marketing the Cryolife-Ross pulmonary heart valve, another of the
Company's fixed stentless porcine valves, in the European Community.
The Company plans to apply its proprietary SynerGraft technology to its
stentless porcine heart valves. The first of the SynerGraft technology
applications involves developing depopulated stentless porcine heart valves
with antigen reduction properties. This technology removes viable cells from
animal tissues thereby reducing the transplant recipient's immune response to
the remaining depopulated tissues. The auto-immune response typically deposits
calcium which attaches to and hardens implanted porcine heart valve tissue, a
process known as calcification, which reduces the useful life of the implant.
By removing viable animal cells from the tissue while maintaining the
underlying structural strength of the porcine heart valve, this SynerGraft
application is designed to provide a platform for a patient's own cells to
naturally populate the implant. This SynerGraft depopulation technology is
being applied to both the CryoLife-O'Brien aortic heart valve and the
CryoLife-Ross pulmonary heart valve for products under development anticipated
to be known as the CryoLife-O'Brien S.G. and the CryoLife-Ross S.G.
9
The second of the SynerGraft technology applications involves developing
stentless porcine heart valves repopulated with viable human cells prior to
implantation. This technology uses porcine tissues that have been depopulated
of viable animal cells as in the CryoLife-O'Brien S.G. and the CryoLife-Ross
S.G. This SynerGraft repopulation technology is being applied to both the
CryoLife-O'Brien aortic heart valve and the CryoLife-Ross pulmonary heart
valve for products anticipated to be known as the CryoLife-O'Brien SynerGraft
and the CryoLife-Ross SynerGraft.
Implantable Biomaterials for Use as Surgical Adhesives and Sealants
The effective closure of internal wounds following surgical procedures is
critical to the restoration of the function of tissue and to the ultimate
success of the surgical procedure. Failure to effectively seal surgical wounds
can result in leakage of air in lung surgeries, cerebral spinal fluids in
neurosurgeries, blood in cardiovascular surgeries and gastrointestinal
contents in abdominal surgeries. Air and fluid leaks resulting from surgical
procedures can lead to significant post-surgical morbidity resulting in
prolonged hospitalization, higher levels of post-operative pain and a higher
mortality rate.
Sutures and staples facilitate healing by joining wound edges and allowing the
body to heal naturally. However, because sutures and staples do not have
inherent sealing capabilities, they cannot consistently eliminate air and
fluid leakage at the wound site. This is particularly the case when sutures
and staples are used to close tissues containing air or fluids under pressure,
such as the lobes of the lung, the dural membrane surrounding the brain and
spinal cord, blood vessels and the gastrointestinal tract. In addition, in
minimally invasive surgical procedures, where the physician must operate
through small access devices, it can be difficult and time consuming for the
physician to apply sutures and staples. The Company believes that the use of
surgical adhesives and sealants with or without sutures and staples could
enhance the efficacy of these procedures through more effective and rapid
wound closure.
In order to address the inherent limitations of sutures and staples, the
Company is developing and commercializing its BioGlue surgical adhesive and is
developing its FibRx surgical sealant. The BioGlue surgical adhesive is a
polymeric surgical bioadhesive based on a derivative of a blood protein and a
cross-linking agent. BioGlue surgical adhesive is nonbiodegradable and has a
tensile strength that is four to five times that of FibRx surgical sealant.
Target clinical applications for BioGlue surgical adhesive include
cardiovascular and vascular peripheral repair. FibRx surgical sealant is a
light activated surgical sealant based on a derivative of the human blood
factors fibrinogen and thrombin. The Company believes that FibRx is the only
surgical sealant under development offering ease of use to the surgeon through
either single-syringe or spray applicators.
The following table summarizes certain important features, targeted
applications and regulatory and market status of BioGlue surgical adhesive and
FibRx surgical sealant:
BIOGLUE SURGICAL ADHESIVE FIBRX SURGICAL SEALANT
------------------------------ ------------------------------
COMPOSITION: animal albumin and thrombin, fibrinogen and a
glutaraldehyde thrombin inhibitor
METHOD OF APPLICATION: double syringe; mixing device light activated single
provided syringe; or light activated
spray applicator
TARGETED CLINICAL vascular repair; anastomotic hemostasis in cardiovascular
APPLICATIONS: sealing; aortic dissection procedures, skin grafts and
repair; carotid endarterectomy breast reconstruction;
patching; tissue bonding adhesion for skin grafts and
breast reconstruction
PERFORMANCE high tensile strength; non- strength of normal human blood
CHARACTERISTICS: biodegradable clot; biodegradable; flexible,
easily manipulated
REGULATORY/MARKET STATUS
Europe: CE Mark received for regulatory pathway not
cardiovascular and vascular determined; expected to be
repair applications; expect to evaluated in 1998
commence marketing in Europe
in second quarter 1998
United States: submission of application with submission of IND application
the FDA for approval to with the FDA for approval to
conduct clinical trials conduct U.S. clinical trials
anticipated in second quarter anticipated in third quarter
1998 1998
10
The Company estimates that the worldwide market for surgical sutures and
staples in 1997 was in excess of $2 billion. The Company intends to begin
shipping BioGlue surgical adhesive for distribution in the European Community
in the second quarter of 1998. FibRx surgical sealant is progressing through
pre-clinical trials and is presently undergoing toxicology validation
procedures mandated by the FDA prior to the commencement of clinical trials.
Single-Use Medical Devices
CryoLife manufactures and distributes, through its IFM subsidiary, single-use
medical devices including endarterectomy surgical instruments, intravascular
shunts, infusion ports, accessories utilized in laparoscopic procedures and a
wide range of single and dual lumen balloon catheters. The Company believes
that many of its existing single-use medical devices have novel proprietary
features that offer clinical advantages over competing products. For example,
the Company's Pruitt-Inahara Shunt was the first endarterectomy shunt
available to surgeons which contains a barrier feature designed to reduce
migration of plaque particles to the brain and trauma to the carotid artery
during surgery. Another example is the Company's double lumen embolectomy
catheter incorporating a novel water irrigation mechanism which enables
physicians to remove whole blood clots more effectively than with single lumen
embolectomy catheters. The Company is benefiting from, and intends to utilize,
its design and manufacturing expertise in developing single-use medical
devices for use in conjunction with its human tissue and biomaterial products.
Examples of such single-use medical devices under development include a family
of balloon catheters designed to assist in applying the BioGlue surgical
adhesive and a human heart valve holder designed to provide physicians greater
control in implantation procedures.
The Company plans to expand sales of its single-use medical devices by
leveraging its established cryopreservation services marketing and sales staff
to market existing products and by introducing new products. New complementary
products under development include modified single and double lumen balloon
catheters to be used to deliver the Company's implantable bioadhesives. The
Company is working to develop single-use medical devices for use with its
BioGlue surgical adhesive. The Company believes that the introduction of
BioGlue surgical adhesive in the European Community for vascular repair will
create additional marketing opportunities for its single-use medical devices.
SALES, DISTRIBUTION AND MARKETING
Cryopreservation Services
CryoLife markets its cryopreservation services to tissue procurement agencies,
implanting physicians and prospective tissue recipients. The Company works
with tissue banks and organ procurement agencies to ensure consistent and
continued availability of donated human tissue for transplant and educates
physicians and prospective tissue recipients with respect to the benefits of
cryopreserved human tissues.
Procurement of Tissue. Donated human tissue is procured from deceased human
donors by organ procurement agencies and tissue banks. After procurement, the
tissue is packed and shipped, together with certain information about the
tissue and its donor, to the Company in accordance with the Company's
protocols. The tissue is transported to the Company's laboratory facilities
via commercial airlines pursuant to arrangements with qualified courier
services. Timely receipt of procured tissue is important, as tissue that is
not received promptly cannot be cryopreserved successfully. The procurement
agency receives a fee for its services, which is paid by the Company. The
procurement fee and related shipping costs are ultimately reimbursed to the
Company by the hospital with which the implanting physician is associated. The
Company has developed relationships with over 250 tissue banks and organ
procurement agencies throughout the U.S. Management believes the establishment
of these relationships is critical for a growing business in the
cryopreservation services industry and that the breadth of these existing
relationships provides the Company a significant advantage over potential new
entrants to this market. As a result of its maintaining and developing these
relationships, the Company has consistently increased its annual human heart
valve procurement since its inception. The Company employs approximately 14
individuals in the area of tissue procurement, seven of whom are employed as
procurement relations managers and are stationed throughout the country. The
Company's central procurement office is staffed 24 hours per day, 365 days per
year.
11
Preservation of Tissue. Upon receiving tissue, a Company technician completes
the documentation control for the tissue prepared by the procurement agency
and gives it a control/inventory number. The documentation identifies, among
other things, donor age and cause of death. A trained technician then removes
the portion or portions of the delivered tissue that will be cryopreserved.
These procedures are conducted under aseptic conditions in clean rooms. At the
same time, additional samples are taken from the donated tissue and subjected
to the Company's comprehensive quality assurance program. This program may
identify characteristics which would disqualify the tissue for
cryopreservation.
Human heart valves and conduits, vascular tissue and connective tissue for the
knee are cryopreserved in a proprietary freezing process conducted according
to strict Company protocols. After the cryopreservation process, the specimens
are transferred to liquid nitrogen freezers for long-term storage at
temperatures below -135(degrees)C. The entire cryopreservation process is
rigidly controlled by guidelines established by the Company.
Distribution of Tissue to Implanting Physicians. After cryopreservation,
tissue is stored by the Company or is delivered directly to hospitals at the
implanting physician's request. Cryopreserved tissue must be transported under
stringent handling conditions and maintained within specific temperature
tolerances at all times. Cryopreserved tissue is packaged for shipment using
the Company's proprietary processes. At the hospital, the tissue is held in a
liquid nitrogen freezer according to Company protocols pending implantation.
The Company provides a detailed protocol for thawing the cryopreserved tissue.
The Company also makes its technical personnel available by phone or in person
to answer questions. After the Company transports the tissue to the hospital,
the Company invoices the institution for its services, the procurement fee and
transportation costs.
The Company encourages hospitals to accept the cryopreserved tissue quickly by
providing Company-owned liquid nitrogen freezers to client hospitals without
charge. The Company has currently installed more than 300 of these freezers.
Participating hospitals pay the cost of liquid nitrogen and regular
maintenance. The availability of on-site freezers makes it easier for a
hospital's physicians to utilize the Company's cryopreservation services by
making the cryopreserved tissue more readily available. Because fees for the
Company's cryopreservation services become due upon the delivery of tissue to
the hospital, the use of such on-site freezers also reduces the Company's
working capital needs.
Marketing, Educational and Technical Support. The Company maintains active
relationships with approximately 1,600 cardiovascular, vascular and
orthopaedic surgeons who have active practices implanting cryopreserved human
tissues and markets to a broader group of physicians within these medical
specialties. Because the Company markets its cryopreservation services
directly to physicians, an important aspect of increasing the distribution of
the Company's cryopreservation services is educating physicians on the use of
cryopreserved human tissue and on proper implantation techniques. Trained
field support personnel provide back-up and support to implanting institutions
and surgeons. The Company currently has approximately 98 independent technical
service representatives and sub-representatives (who deal primarily with
orthopaedic surgeons and who are paid on a commission basis) as well as 37
persons employed as technical service representatives (who deal primarily with
cardiovascular and vascular surgeons and receive a base salary with a
performance bonus) all of whom provide field support.
The Company sponsors physician training seminars where physicians teach other
physicians the proper technique for handling and implanting cryopreserved
human tissue. The Company conducted seven of these seminars in 1997.
Physicians pay their own expenses to attend these seminars in addition to
paying the Company a fee for attendance. The Company also produces educational
videotapes for physicians. The Company coordinates live surgery demonstrations
at various medical schools. The Company also coordinates laboratory sessions
that utilize animal tissue to demonstrate the respective surgical techniques.
Members of the Company's Medical Advisory Board often lead the surgery
demonstrations and laboratory sessions. Management believes that these
activities improve the medical community's acceptance of the cryopreserved
human tissue processed by the Company.
In order to increase the Company's supply of human tissue for
cryopreservation, the Company educates and trains procurement agency personnel
in procurement, dissection, packaging and shipping techniques. The
12
Company also produces educational videotapes and coordinates laboratory
sessions on procurement techniques for procurement agency personnel. To
supplement its educational activities, the Company employs in-house technical
specialists that provide technical information and assistance and maintains a
staff 24 hours per day, 365 days per year for customer support.
Bioprosthetic Cardiovascular Devices
The Company markets the CryoLife-O'Brien stentless porcine heart valves in the
European Community. The Company's European sales, distribution and marketing
force consists of eight independent representatives, representing each of the
Benelux countries, France, Germany, Greece, Scandinavia, Turkey and the United
Kingdom. Each of these representatives is paid on a commission basis.
Marketing efforts are directed almost exclusively toward cardiovascular and
vascular surgeons, and the Company conducts educational seminars and
conferences to train these surgeons and educate them with respect to the uses
and benefits of its porcine stentless heart valves. In 1997, the Company
conducted one workshop and participated in three European conferences. The
Company intends to market its CryoLife-Ross stentless porcine heart valves, if
CE Mark approval is obtained, through this same European sales force.
BioGlue Surgical Adhesive
The Company plans to market and distribute its BioGlue surgical adhesive
internationally through its existing independent representatives, and if
approved for sale in the U.S., through its in-house technical service
representatives. The initial shipments of BioGlue surgical adhesive to
CryoLife's European distributors, which are currently distributing the
CryoLife-O'Brien stentless porcine heart valve and single-use medical devices
product lines, are scheduled for the second quarter of 1998. The Company
conducts training sessions for European doctors with respect to the
application and administration of BioGlue surgical adhesive.
Single-Use Medical Devices
Following its acquisition of IFM in March 1997, the Company terminated the
majority of IFM's sales representatives and began transitioning the sales and
distribution of single-use medical devices to its in-house technical service
representatives. The Company plans to expand sales of its single-use medical
devices by continuing new product development and leveraging its established
cryopreservation services marketing and sales staff to market the products.
The Company conducted two training seminars for these representatives during
1997.
RESEARCH AND DEVELOPMENT
The Company uses its expertise in biochemistry and cell biology, and its
understanding of the needs of the cardiovascular, vascular and orthopaedic
surgery medical specialties, to continue to expand its core cryopreservation
business in the U.S. and to develop or acquire implantable products and
technologies for these fields. The Company seeks to identify market areas that
can benefit from preserved living tissues and other related technologies, to
develop innovative techniques and products within these areas, to secure their
commercial protection, to establish their efficacy and then to market these
techniques and products. The Company employs approximately 26 people in its
research and development department. There are seven PhDs with specialties as
diverse as immunology, molecular biology, protein chemistry, organic chemistry
and vascular biology.
In order to expand the Company's service and product offerings, the Company is
currently in the process of developing or investigating several technologies
and products, including FibRx surgical sealant, SynerGraft and additional
applications of BioGlue surgical adhesive. The Company is currently
investigating certain drug delivery applications for BioGlue surgical adhesive
and FibRx surgical sealant, such as administering antibiotics, attaching
chemotherapy drugs to tumors, delivering growth agents or delivering bone
chips for orthopaedic bone repair. To the extent the Company identifies
additional applications for these products, the Company may attempt to license
these products to corporate partners for further development of such
applications. The Company's
13
research and development strategy is to allocate available resources among the
Company's four core market areas of cryopreservation services, bioprosthetic
cardiovascular devices, implantable biomaterials and single-use medical
devices, based on the size of the potential market for any specific product
candidate and the estimated development time and cost required to bring the
product to market.
Research on these and other projects is conducted in the Company's research
and development laboratory or at universities or clinics where the Company
sponsors research projects. In 1995, 1996 and 1997, the Company spent
approximately $2.6 million, $2.8 million and $3.9 million, respectively, on
research and development activities on new and existing products. These
amounts represented approximately 9%, 8% and 8% of the Company's revenues for
those respective years. The Company's research and development program is
overseen by its medical and scientific advisory boards. The Company's pre-
clinical studies are conducted at universities and other locations outside the
Company's facilities by third parties under contract with the Company. In
addition to these efforts, the Company may, as situations develop, pursue
other research and development activities.
MANUFACTURING AND OPERATIONS
The Company's facilities (other than its single-use medical device
manufacturing plant) are located in suburban Atlanta, Georgia, and consist of
three separate locations totaling approximately 130,000 square feet of leased
office, laboratory and warehouse space. Approximately 17,500 square feet are
dedicated to laboratory work areas. The primary facility, which does not
include the bioadhesive laboratory and the bioprosthetic manufacturing
operation, has three main laboratory facilities: human tissue processing,
research and development and microbiology. Each of these areas consists of a
general technician work area and adjoining "clean rooms" for work with human
tissue and for aseptic processing. The clean rooms are supplied with highly
filtered air which provides a near-sterile environment.
Human Tissue Processing
The human tissue processing laboratory is responsible for the processing and
cryopreservation of human tissue for transplant. This includes all processing
of heart valves and conduits, vascular tissue and connective tissue for the
knee supplied by CryoLife. This laboratory contains approximately 7,700 square
feet with a suite of seven clean rooms. Currently there are 37 technicians
employed in this area, and the laboratory is staffed for two shifts, 365 days
per year. In 1997, the laboratory processed approximately 14,000 human tissues
for distribution and transplant. The current staffing level is estimated to be
at about half of total capacity. Increasing this capacity could be
accomplished by increasing employees and expanding to three shifts.
Bioprosthetic Cardiovascular Devices
The bioprosthesis laboratory is responsible for the manufacturing of the
CryoLife-O'Brien stentless porcine aortic heart valve. This laboratory is
located in Marietta, Georgia and contains approximately 13,000 square feet,
with about 3,500 square feet of laboratory space and a suite of four clean
rooms for tissue processing. The Company plans renovation to this facility in
1998 which would double the size of the processing area and plans to add the
production of the CryoLife-Ross stentless porcine pulmonary heart valve to its
product line this summer. Currently, this laboratory employs nine technicians
and is scheduled to manufacture approximately 1,500 CryoLife-O'Brien valves in
1998. The planned renovation, with additional staffing, is expected to expand
capacity at this facility to over 6,000 valves.
Implantable Biomedical Devices
The Company produces limited quantities of FibRx surgical sealant in the
biomedical products laboratory, which is located in Marietta, Georgia and
employs 11 technicians. This laboratory contains approximately 11,000 square
feet, including 4,000 square feet of laboratory space and a suite of eight
clean rooms. The Company is also planning an addition of about 8,000 to 15,000
square feet of laboratory and clean room space to support the manufacture of
BioGlue surgical adhesive. BioGlue surgical adhesive is presently manufactured
at the Company's headquarters facility, which has an annual capacity of
approximately 30,000 units. The facility expansion is expected to allow the
manufacture of over 300,000 units of BioGlue surgical adhesive each year, with
modest staff additions.
14
Single-Use Medical Devices
The manufacturing of single-use medical devices is conducted at the Company's
IFM subsidiary located in St. Petersburg, Florida. IFM was purchased by
CryoLife in 1997 and has recently moved to a renovated 30,000 square foot
facility. The Company has 91 employees at this facility. At nearly full
capacity in 1997, production was about 180,000 units. In the new facility, a
single shift can produce approximately 300,000 units annually with full
capacity expected to be nearly 800,000 units annually.
QUALITY ASSURANCE
The Company's operations encompass the provision of cryopreservation services
and the manufacturing of bioprosthetics, bioadhesives and single-use medical
devices. In all of its facilities, the Company is subject to regulatory
standards for good manufacturing practices, including current Quality System
Regulations, which are U.S. Food and Drug Administration ("FDA") regulatory
requirements for medical device manufacturers. The FDA periodically inspects
Company facilities to ensure Company compliance with these regulations. The
Company also operates according to ISO 9001 Quality System Requirements, an
internationally recognized voluntary system of quality management for
companies that design, develop, manufacture, distribute and service products.
The Company maintains a Certification of Approval to the ISO 9001, as well as
EN46001 and ANSI/ISO/ASQC/Q9001, the European and U.S. versions of the
international standard, respectively. This approval is issued by Lloyd's
Register Quality Assurance Limited ("LRQA"). LRQA is a Notified Body
officially recognized by the European Community to perform assessments of
compliance with ISO 9001 and its derivative standards. LRQA performs semi-
annual on-site inspections of the Company's quality systems.
The Company's quality assurance staff is comprised primarily of experienced
professionals from the medical device and pharmaceutical manufacturing
industries. The quality assurance department, in conjunction with the
Company's research and development and select university research staffs,
routinely evaluates the Company's processes and procedures.
Cryopreservation Services
The Company employs a comprehensive quality assurance program in all of its
tissue processing activities. The Company is subject to Quality System
Regulations, additional FDA regulations and ISO 9001. The Company's quality
assurance program begins with the development and implementation of training
courses for the employees of procurement agencies. To assure uniformity of
procurement practices among the tissue recovery teams, the Company provides
procurement protocols, transport packages and tissue transport liquids to the
donor sites.
Upon receipt by the Company, each tissue is assigned a unique control number
that provides traceability of tissue from procurement through the processing
and preservation processes, and ultimately to the tissue recipient. Blood
samples from each tissue donor are subjected to a variety of tests to screen
for infectious diseases. Samples of certain tissues are also sent to
independent laboratories for pathology testing. Following removal of the
tissue to be cryopreserved, a separate disinfection procedure is begun during
which the removed tissue is treated with proprietary antibiotic solutions. A
trained technician then removes samples from the disinfected tissue upon which
serial cultures are performed to identify bacterial or fungal growth.
The materials and solutions used by the Company in processing tissue are pre-
screened to determine if they are of desired quality as defined by Company
protocols. Only materials and solutions that meet the Company's requirements
are approved by quality assurance personnel for use in processing. Throughout
tissue processing, detailed records are maintained and reviewed by quality
assurance personnel.
The Company's tissue processing facilities are annually licensed by the States
of Georgia, New York, Florida and California as facilities that process, store
and distribute human tissue for implantation. The regulatory bodies of these
states perform appropriate inspections of the facilities to ensure compliance
with state law and regulations. In addition, the Company's human heart valve
operations are additionally regulated by the FDA and periodically inspected
for compliance to Quality System Regulations. Other human tissue processed by
the Company is periodically inspected for compliance with the Code of Federal
Regulation ("CFR") Part 1270.
15
CFR 1270 is a FDA regulation which sets forth the requirements with which the
Company must comply in determining the suitability of human tissue for
implantation.
Bioprosthetic, Bioadhesive and Single-Use Medical Device Manufacturing
The Company employs a comprehensive quality assurance program in all of its
manufacturing activities. The Company is subject to Quality System
Regulations, additional FDA regulations and ISO 9001.
All materials and components utilized in the production of the Company's
products are received and thoroughly inspected by trained quality control
personnel, according to written specifications and standard operating
procedures. Only materials and components found to comply with Company
procedures are accepted by quality control and utilized in production.
All materials, components and resulting sub-assemblies are traced throughout
the manufacturing process to assure that appropriate corrective actions can be
implemented if necessary. Each process is documented along with all inspection
results, including final finished product inspection and acceptance. Records
are maintained as to the consignee of product to facilitate product removals
or corrections, if necessary. All processes in manufacturing are validated by
quality engineers to assure that they are capable of consistently producing
product meeting specifications. The Company maintains a rigorous quality
assurance program of measuring devices used for manufacturing and inspection
to ensure appropriate accuracy and precision.
Each manufacturing facility is subject to periodic inspection by the FDA and
LRQA to independently assure the Company's compliance with its systems and
regulatory requirements.
PATENTS, LICENSES AND OTHER PROPRIETARY RIGHTS
The Company relies on a combination of patents, trade secrets, trademarks and
confidentiality agreements to protect its proprietary products, processing
technology, rights and know-how. The Company believes that its patents, trade
secrets, trademarks and technology licensing rights provide it with important
competitive advantages. The Company owns or has licensed rights to 14 U.S.
patents and three foreign patents, including patents relating to its
technology for human heart valve and conduit, vascular tissue and connective
tissue for the knee preservation; tissue revitalization prior to freezing;
tissue transport; fibrin adhesive; organ storage solution; and packaging.
Certain of the above patents relate to the Company's BioGlue surgical adhesive
and FibRx surgical sealant. The Company has eight pending U.S. patent
applications and in excess of 20 pending foreign applications that relate to
areas including heart valve and tissue processing technology and delivery of
bioadhesives for anastomosis and other uses. The Company holds six patents and
has seven patents pending with respect to its single-use medical devices.
There can be no assurance that any patents pending will result in issued
patents. The Company also has exclusive licensing rights for technology
relating to light-sensitive enzyme inhibitors. The remaining duration of the
Company's issued patents ranges from 5 to 17 years. The Company has licensed
from third parties certain technologies used in the development of its FibRx
surgical sealant and SynerGraft technology. These licenses call for the
payment of both development milestones and royalties based on product sales,
when and if such products are approved for marketing. The loss of these
licenses could adversely affect the Company's ability to successfully develop
its FibRx surgical sealant and SynerGraft technologies.
There can be no assurance that the claims allowed in any of the Company's
existing or future patents will provide competitive advantages for the
Company's products, processes and technologies or will not be successfully
challenged or circumvented by competitors. To the extent that any of the
Company's products are not patent protected, the Company's business, financial
condition and results of operations could be materially adversely affected.
Under current law, patent applications in the U.S. are maintained in secrecy
until patents are issued and patent applications in foreign countries are
maintained in secrecy for a period after filing. The right to a patent in the
U.S. is attributable to the first to invent, not the first to file a patent
application. The Company cannot be sure that its products or technologies do
not infringe patents that may be granted in the future pursuant to pending
patent applications or that its products do not infringe any patents or
proprietary rights of third parties. The
16
Company may incur substantial legal fees in defending against a patent
infringement claim or in asserting claims against third parties. In the event
that any relevant claims of third-party patents are upheld as valid and
enforceable, the Company could be prevented from selling certain of its
products or could be required to obtain licenses from the owners of such
patents or be required to redesign its products to avoid infringement. There
can be no assurance that such licenses would be available or, if available,
would be on terms acceptable to the Company or that the Company would be
successful in any attempt to redesign its products or processes to avoid
infringement. The Company's failure to obtain these licenses or to redesign
its products could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company has entered into confidentiality agreements with all of its
employees and several of its consultants and third-party vendors to maintain
the confidentiality of trade secrets and proprietary information. There can be
no assurance that the obligations of employees of the Company and third
parties with whom the Company has entered into confidentiality agreements will
effectively prevent disclosure of the Company's confidential information or
provide meaningful protection for the Company's confidential information if
there is unauthorized use or disclosure, or that the Company's trade secrets
or proprietary information will not be independently developed by the
Company's competitors. Litigation may be necessary to defend against claims of
infringement, to enforce patents and trademarks of the Company, or to protect
trade secrets and could result in substantial cost to, and diversion of effort
by, the Company. There can be no assurance that the Company would prevail in
any such litigation. In addition, the laws of some foreign countries do not
protect the Company's proprietary rights to the same extent as do the laws of
the U.S.
COMPETITION
Cryopreserved Human Tissues and Bioprosthetic Cardiovascular Devices
The Company faces competition from non-profit tissue banks that cryopreserve
and distribute human tissue, as well as from companies that market mechanical,
porcine and bovine heart valves for implantation. Many established companies,
some with resources greater than those of the Company, are engaged in
manufacturing, marketing and selling alternatives to cryopreserved human
tissue. Management believes that it competes favorably with other entities
that cryopreserve human tissue on the basis of technology, customer service
and quality assurance. As compared to mechanical, porcine and bovine heart
valves, management believes that the human heart valves cryopreserved by the
Company compete on the factors set forth above, as well as by providing a
tissue that is the preferred replacement alternative with respect to certain
medical conditions, such as pediatric cardiac reconstruction, valve
replacements for women in their child-bearing years and valve replacements for
patients with endocarditis. Although human tissue cryopreserved by the Company
is initially higher priced than are mechanical alternatives, these
alternatives typically require that the patient take anti-coagulation drug
therapy for the lifetime of the implant. As a result of the costs associated
with anti-coagulants, mechanical valves are generally, over the life of the
implant, more expensive than tissue cryopreserved by the Company.
Notwithstanding the foregoing, management believes that, to date, price has
not been a significant competitive factor.
Generally, for each procedure that may utilize other human tissue that the
Company cryopreserves, there are alternative treatments. Often, as in the case
of veins and ligaments, these alternatives include the repair, partial removal
or complete removal of the damaged tissue and may utilize other tissues from
the patients themselves or synthetic products. The selection of treatment
choices is made by the attending physician in consultation with the patient.
Any newly developed treatments will also compete with the use of tissue
cryopreserved by the Company.
Human and Stentless Porcine Heart Valves. Alternatives to human heart valves
cryopreserved by the Company include mechanical valves, porcine valves and
valves constructed from bovine pericardium. St. Jude Medical, Inc. is the
leading supplier of mechanical heart valves, and has a marketing and
distribution arrangement with a tissue bank for supplies of cryopreserved
human heart valves and Baxter International Inc. is the leading supplier of
porcine heart valves. In addition, management believes that at least three
tissue banks offer cryopreservation services for human heart valves in
competition with the Company. The Company presently distributes its
17
stentless porcine heart valves only outside the U.S. These stentless porcine
heart valves compete with mechanical valves, human heart valves and processed
bovine pericardium. The Company is aware of at least two other companies that
offer stentless porcine heart valves.
Human Vascular Tissue. Synthetic alternatives to veins cryopreserved by the
Company are available primarily in medium and large diameters. Currently,
management believes that there are no other providers of cryopreserved human
vascular tissue in competition with the Company. Companies offering either
synthetic or allograft products may enter this market in the future.
Human Connective Tissue for the Knee. The Company's competition in the area of
connective tissue for the knee varies according to the tissue involved. When
transplant is indicated, the principal competition for human tissues
cryopreserved by the Company are freeze-dried and fresh frozen human
connective tissues. These alternative allografts are distributed by
distributors of Osteotech, Inc. and various tissue banks, among others.
Ligaments and tendons cryopreserved by the Company constitute the principal
treatment options for injuries which require anterior cruciate ligament
repair. To management's knowledge, there are presently no processed or
synthetic alternatives to menisci cryopreserved by the Company.
Implantable Biomedical Devices
The Company competes with many domestic and foreign medical device,
pharmaceutical and biopharmaceutical companies. In the surgical adhesive and
surgical sealant area, the Company will compete with existing methodologies,
including traditional wound closure products such as sutures and staples,
marketed by companies such as Johnson & Johnson, United States Surgical
Corporation, Sherwood, Davis & Geck and others. Other products currently being
marketed include fibrin glue, sold in Europe, and the Pacific Rim countries by
Immuno AG, a subsidiary of Baxter Healthcare Company, Chemo-Sero Therapeutic
Research Institute, Hoechst AG and others, and management believes other
products are under development by Baxter Healthcare Corporation, Bristol-Myers
Squibb Company, V.I. Technologies, Inc. and others. Other competitors in the
surgical sealant market include Closure Medical Corporation, B. Braun GmbH and
Focal, Inc. Competitive products may also be under development by other large
medical device, pharmaceutical and biopharmaceutical companies. Many of the
Company's current and potential competitors have substantially greater
financial, technological, research and development, regulatory and clinical,
manufacturing, marketing and sales, and personnel resources than the Company.
These competitors may also have greater experience in developing products,
conducting clinical trials, obtaining regulatory approvals, and manufacturing
and marketing such products. Certain of these competitors may obtain patent
protection, approval or clearance by the FDA or foreign countries or product
commercialization earlier than the Company, any of which could materially
adversely affect the Company. Furthermore, if the Company commences
significant commercial sales of its products, it will also be competing with
respect to manufacturing efficiency and marketing capabilities, areas in which
it currently has limited experience.
Other recently developed technologies or procedures are, or may in the future
be, the basis of competitive products. There can be no assurance that the
Company's current competitors or other parties will not succeed in developing
alternative technologies and products that are more effective, easier to use
or more economical than those which have or are being developed by the Company
or that would render the Company's technology and products obsolete and non-
competitive in these fields. In such event, the Company's business, financial
condition and results of operations could be materially adversely affected.
See "Risk Factors--Rapid Technological Change."
Single-Use Medical Devices
The Company competes in this market with many larger companies such as Boston
Scientific's SciMed Life Systems, Guidant Corporation's Advanced
Cardiovascular Systems, C.R. Bard, Inc. and Baxter Healthcare Corporation.
Many of these companies are larger and carry broader product lines than
CryoLife which allows them to bundle products to hospitals. Bundling device
products has become a cost-effective way of marketing several products in a
line and of providing incentives for the customer to use several products in a
product line.
18
At present, CryoLife does not bundle its single-use medical devices but
instead offers novel product enhancements.
GOVERNMENT REGULATION
U.S. Federal Regulation
Because human heart valves are, and other Company products may be regulated in
the future as, medical devices, the Company and these products are subject to
the provisions of the Federal Food, Drug and Cosmetic Act ("FDCA") and
implementing regulations. Pursuant to the FDCA, the FDA regulates the
manufacture, distribution, labeling and promotion of medical devices in the
U.S. In addition, various foreign countries in which the Company's products
are or may be distributed impose additional regulatory requirements.
The FDCA provides that, unless exempted by regulation, medical devices may not
be distributed in the U.S. unless they have been approved or cleared for
marketing by the FDA. There are two review procedures by which medical devices
can receive such approval or clearance. Some products may qualify for
clearance to be marketed under a Section 510(k) ("510(k)") procedure, in which
the manufacturer provides a premarket notification that it intends to begin
marketing the product, and shows that the product is substantially equivalent
to another legally marketed product (i.e., that it has the same intended use
and that it is as safe and effective as a legally marketed device and does not
raise different questions of safety and effectiveness than does a legally
marketed device). In some cases, the submission must include data from
clinical studies. Marketing may commence when the FDA issues a clearance
letter finding such substantial equivalence.
If the product does not qualify for the 510(k) procedure (either because it is
not substantially equivalent to a legally marketed device or because it is a
Class III device required by the FDCA and implementing regulations to have an
approved application for premarket approval ("PMA"), the FDA must approve a
PMA application before marketing can begin. PMA applications must demonstrate,
among other matters, that the medical device is safe and effective. A PMA
application is typically a complex submission, usually including the results
of human clinical studies, and preparing an application is a detailed and
time-consuming process. Once a PMA application has been submitted, the FDA's
review may be lengthy and may include requests for additional data. By statute
and regulation, the FDA may take 180 days to review a PMA application although
such time may be extended. Furthermore, there can be no assurance that a PMA
application will be reviewed within 180 days or that a PMA application will be
approved by the FDA.
The FDCA also provides for an investigational device exemption ("IDE") which
authorizes distribution for clinical evaluation of devices that lack a PMA or
510(k). Devices subject to an IDE are subject to various restrictions imposed
by the FDA. The number of patients that may be treated with the device is
limited, as are the number of institutions at which the device may be used.
Patients must give informed consent to be treated with an investigational
device. The device must be labeled that it is for investigational use and may
not be advertised, or otherwise promoted, and the price charged for the device
may be limited. Unexpected adverse experiences must be reported to the FDA.
The FDCA requires all medical device manufacturers and distributors to
register with the FDA annually and to provide the FDA with a list of those
medical devices which they distribute commercially. The FDCA also requires
manufacturers of medical devices to comply with labeling requirements and to
manufacture devices in accordance with Quality System Regulations, which
require that companies manufacture their products and maintain their documents
in a prescribed manner with respect to good manufacturing practices, design,
document production, process, labeling and packaging controls, process
validaiton and other quality control activities. The FDA's medical device
reporting regulation requires that a device manufacturer provide information
to the FDA on death or serious injuries alleged to have been associated with
the use of its products, as well as product malfunctions that would likely
cause or contribute to death or serious injury if the malfunction were to
recur. The FDA's medical device tracking regulation requires the adoption of a
method of device tracking by manufacturers of life-sustaining or implantable
products, the failure of which would be reasonably likely to have serious
adverse health consequences. The manufacturer must adopt methods to ensure
that such devices can be
19
traced from the manufacturing facility to the ultimate user, the patient. The
FDA further requires that certain medical devices not cleared for marketing in
the U.S. follow certain procedures before they are exported.
The FDA inspects medical device manufacturers and distributors and has
authority to seize noncomplying medical devices, to enjoin and/or to impose
civil penalties on manufacturers and distributors marketing non-complying
medical devices, to criminally prosecute violators and to order recalls in
certain instances.
Human Heart Valves. The Company's human heart valves became subject to
regulation by the FDA in June 1991, when the FDA published a notice stating
that human heart valves are Class III medical devices under the FDCA. The June
1991 notice provided that distribution of human heart valves for
transplantation would violate the FDCA unless they were the subject of an
approved PMA or IDE on or before August 26, 1991.
On October 14, 1994, the FDA announced in the Federal Register that neither an
approved application for PMA nor an IDE is required for processors and
distributors who had marketed heart valve allografts before June 26, 1991.
This action by the FDA has resulted in the allograft heart valves being
classified as Class II Medical Devices and has removed them from clinical
trial status. It also allows the Company to distribute such valves to
cardiovascular surgeons throughout the U.S.
Other Tissue. Other than human and porcine heart valves, none of the Company's
other tissue services or products are currently subject to regulation as
medical devices under the FDCA or FDA regulation. Heart valves are one of a
small number of processed human tissues over which the FDA has asserted
medical device jurisdiction. In July 1997, the FDA published a final rule,
which became effective in January 1998, regulating "human tissue." The rule
clarifies and modifies an earlier interim rule and defines human tissue as any
tissue derived from a human body which is (i) intended for administration to
another human for the diagnosis, cure, mitigation, treatment or prevention of
any condition or disease and (ii) recovered, processed, stored or distributed
by methods not intended to change tissue function or characteristics. The FDA
definition excludes, among other things, tissue that currently is regulated as
a human drug, biological product or medical device and excludes kidney, liver,
heart, lung, pancreas or any other vascularized human organ. Human tissue is
regulated by the FDA in a manner the agency has deemed necessary to protect
the public health from the transmission of HIV infection and hepatitis
infection through transplantation of tissue from donors with or at risk for
these diseases. Unlike certain drugs, biologicals and medical devices, human
tissue is not subject to premarket notification or approval by the FDA. It is
likely, moreover, that the FDA will expand its regulation of processed human
tissue in the future. For example, the FDA may determine that the veins and
connective tissue that are currently processed by the Company are medical
devices, or the FDA may determine to regulate human heart valves as "human
tissue" rather than medical devices, but the FDA has not done so at this time.
Complying with FDA regulatory requirements or obtaining required FDA approvals
or clearances may entail significant time delays and expenses or may not be
possible, any of which may have a material adverse effect on the Company. In
addition, the U.S. Congress is expected to consider legislation that would
regulate human tissue for transplant or the FDA could impose a separate
regulatory scheme for human tissue. Such legislation or regulation could have
a material adverse effect on the Company.
Porcine Heart Valves. Porcine heart valves are Class III medical devices, and
FDA approval of a PMA is required prior to commercial distribution of such
valves in the U.S. The porcine heart valves currently marketed by the Company
have not been approved by the FDA for commercial distribution in the U.S. but
may be manufactured in the U.S. and exported to foreign countries if the
valves meet the specifications of the foreign purchaser, do not conflict with
the laws of and are approved by the country to which they will be exported and
the FDA determines that their exportation is not contrary to the public health
and safety.
Single-Use Medical Devices. The products offered by the Company through IFM
are regulated as Class I and Class II medical devices by the FDA. These
products require clearance under a 510(k) procedure. All products currently
marketed by IFM have received a 510(k) clearance from the FDA. In addition,
the IFM facilities are subject to periodic review by the FDA, as are the
Company's records on returned products and reported problems.
20
BioGlue Surgical Adhesive. It is anticipated that BioGlue surgical adhesive
will be regulated as a Class III medical device, as a biologic or in some
other capacity by the FDA. The Company is currently preparing to submit an
application with the FDA for approval to conduct clinical trials for BioGlue
surgical adhesive. There can be no assurance that approval of this application
will be obtained.
Possible Other FDA Regulation. Other products and processes under development
by the Company are likely to be subject to regulation by the FDA (e.g.,
SynerGraft and FibRx surgical sealant). Some may be classified as medical
devices; others may be classified as drugs or biological products or subject
to a regulatory scheme for human tissue that the FDA may adopt in the future.
Regulation of drugs and biological products is substantially similar to
regulation of medical devices. Obtaining FDA approval to market these products
is likely to be a time consuming and expensive process, and there can be no
assurance that any of these products will ever receive FDA approval, if
required, to be marketed.
NOTA Regulation. The Company's activities in processing and transporting human
hearts and certain other organs are also subject to federal regulation under
the NOTA, which makes it unlawful for any person to knowingly acquire, receive
or otherwise transfer any human organ for valuable consideration for use in
human transplantation if the transfer affects interstate commerce. NOTA
excludes from the definition of "valuable consideration" reasonable payments
associated with the removal, transportation, implantation, processing,
preservation, quality control and storage of a human organ. The purpose of
this statutory provision is to allow for compensation for legitimate services.
The Company believes that to the extent its activities are subject to NOTA, it
meets this statutory provision relating to the reasonableness of its charges.
There can be no assurance, however, that restrictive interpretations of NOTA
will not be adopted in the future that would call into question one or more
aspects of the Company's methods of charging for its preservation services.
State Licensing Requirements
Some states have enacted statutes and regulations governing the processing,
transportation and storage of human organs and tissue. The activities engaged
in by the Company require it to be licensed as a clinical laboratory and
tissue bank under Georgia, New York, California and Florida law. The Company
has such licenses, and the Company believes it is in compliance with
applicable state laws and regulations relating to clinical laboratories and
tissue banks which store, process and distribute human tissue designed to be
used for medical purposes in human beings. There can be no assurance, however,
that more restrictive state laws or regulations will not be adopted in the
future that could adversely affect the Company's operations. Certain employees
of the Company have obtained other required licenses.
Foreign Approval Requirements
Sales of medical devices and biological products outside the U.S. are subject
to foreign regulatory requirements that vary widely from country to country.
Approval of a product by comparable regulatory authorities of foreign
countries must be obtained prior to commercialization of the product in those
countries. The time required to obtain foreign approvals may be longer or
shorter than that required for FDA approval. The European Community recognizes
a single approval, called a CE Mark, which allows for distribution of an
approved product throughout the European Community (15 countries) without
additional applications to each country. The CE Mark is awarded by third
parties called Notified Bodies. These Notified Bodies are approved and subject
to review by the Competent Authorities of their respective countries. A number
of countries outside of the European Community accept the CE Mark in lieu of
clinical data submission as an addendum to that country's application process.
The Company has been issued CE Marks for its CyroLife-O'Brien porcine heart
valves, BioGlue surgical adhesive and IFM single-use medical devices by LRQA.
The Company's porcine heart valves may be exported to specified developed
nations, including countries in the European Community, Australia, Canada,
Israel, Japan, New Zealand, South Africa and Switzerland if they comply with
the laws of that country and have valid marketing authorization by the
appropriate authority in that country. Beginning in July 1998, CE Mark
Certification will be required to market porcine heart valves and other
bioprosthetics in the European Community.
21
ENVIRONMENTAL MATTERS
The Company's tissue processing activities generate some biomedical wastes
consisting primarily of human pathological and biological wastes, including
human tissue and body fluids removed during laboratory procedures. The
biomedical wastes generated by the Company are placed in appropriately
constructed and labeled containers and are segregated from other wastes
generated by the Company. The Company contracts with third parties for
transport, treatment and disposal of biomedical waste. Although the Company
believes it is in compliance with applicable laws and regulations promulgated
by the U.S. Environmental Protection Agency and the Georgia Department of
Natural Resources, Environmental Protection Division, the failure by the
Company to comply fully with any such regulations could result in an
imposition of penalties, fines or sanctions, which could have a material
adverse effect on the Company's business.
EMPLOYEES
The Company presently has approximately 330 employees. These employees include
nine persons with PhD degrees. None of the Company's employees is represented
by a labor organization or covered by a collective bargaining agreement, and
the Company has never experienced a work stoppage or interruption due to labor
disputes. Management believes its relations with its employees are good.
RISK FACTORS
DEPENDENCE ON CRYOPRESERVATION OF HUMAN TISSUE
A significant portion of the Company's current revenues is derived from the
cryopreservation of human tissue, particularly heart valves and conduits. The
success of this business depends upon, among other factors, the availability
of sufficient quantities of tissue from human donors. Any material reduction
in the supply of donated human heart tissue could restrict the Company's
growth. The Company relies primarily upon the efforts of third party
procurement agencies (all of which are not-for-profit) and others to educate
the public and foster a willingness to donate tissue. Based on the Company's
experience with human heart valves, management believes that once the use by
physicians of a particular transplantable tissue gains acceptance, demand for
that tissue will exceed the amount of tissue available from human donors.
While availability is not currently a limiting factor for most vascular tissue
and connective tissue for the knee, growth in these areas could ultimately be
limited by tissue availability, in addition to other factors. Failure of the
Company to maintain its supply of tissue for cryopreservation could have a
material adverse effect on the Company's business, financial condition and
results of operations. Furthermore, a reduction in the demand for the
Company's cryopreserved human tissue could also have a material adverse effect
on the Company's business, financial condition and results of operations. Such
reduction could occur if competitors' products were perceived as either
functionally superior or more cost effective, if the number of procedures in
which cryopreserved tissues are used declines or if hospitals acquire
sufficient inventories of cryopreserved tissue to allow a reduction in new
orders. See "--Intense Competition" and "--Uncertainties Regarding Future
Health Care Reimbursement."
INTENSE COMPETITION
The Company faces competition from other companies that cryopreserve human
tissue, as well as companies that market mechanical valves and synthetic and
animal tissue for implantation. Management believes that at least three tissue
banks offer cryopreservation services for human heart valves and many
companies offer processed porcine heart valves and mechanical heart valves. A
few companies dominate portions of the
22
mechanical and porcine heart valve markets, including St. Jude Medical, Inc.,
Medtronic, Inc. and Baxter International Inc. The Company also faces
competition from a number of competitors in the area of single-use medical
devices and is aware that several companies have surgical adhesive products
under development. Competitive products may also be under development by other
large medical device, pharmaceutical and biopharmaceutical companies. Many of
the Company's competitors have greater financial, technical, manufacturing and
marketing resources than the Company and are well established in their
markets. There can be no assurance that the Company's products and services
will be able to compete successfully with the products of these or other
companies. Any products developed by the Company that gain regulatory
clearance or approval will have to compete for market acceptance and market
share. Failure of the Company to compete effectively could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Competition."
RAPID TECHNOLOGICAL CHANGE
The technologies underlying the Company's products and services are subject to
rapid and profound technological change. The Company expects competition to
intensify as technical advances in each field are made and become more widely
known. There can be no assurance that others will not develop products or
processes with significant advantages over the products and processes that the
Company offers or is seeking to develop. Any such occurrence could have a
material adverse effect on the Company's business, financial condition and
results of operations.
UNCERTAINTIES REGARDING PRODUCTS IN DEVELOPMENT
The Company's growth and profitability will depend, in part, upon its ability
to complete development of and successfully introduce new products. The
Company may be required to undertake time consuming and costly development
activities and seek regulatory clearance or approval for new products. See "--
Extensive Government Regulation." Although the Company has conducted pre-
clinical studies on many of its products under development which indicate that
such products may be effective in a particular application, there can be no
assurance that the results obtained from expanded clinical studies will be
consistent with earlier trial results or be sufficient for the Company to
obtain any required regulatory approvals or clearances. There can be no
assurance that the Company will not experience difficulties that could delay
or prevent the successful development, introduction and marketing of new
products, that regulatory clearance or approval of these or any new products
will be granted on a timely basis, if ever, or that the new products will
adequately meet the requirements of the applicable market or achieve market
acceptance. The completion of the development of any of the Company's products
remains subject to all of the risks associated with the commercialization of
new products based on innovative technologies, including unanticipated
technical or other problems, manufacturing difficulties and the possible
insufficiency of the funds allocated for the completion of such development.
Consequently, there can be no assurance that any of the Company's products
under development will be successfully developed or manufactured or, if
developed and manufactured, that such products will meet price or performance
objectives, be developed on a timely basis or prove to be as effective as
competing products. The inability to complete successfully the development of
a product or application, or a determination by the Company, for financial,
technical or other reasons, not to complete development of any product or
application, particularly in instances in which the Company has made
significant capital expenditures, could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company's porcine heart valve products are currently only offered for sale
outside of the U.S., and beginning in the second quarter of 1998, the Company
expects to begin shipping its BioGlue surgical adhesive for distribution in
the European Community. The Company's porcine heart valves and BioGlue
surgical adhesive are subject to the risk that the Company may be unable to
obtain regulatory approval necessary to permit commercial distribution of
these products in the U.S.
The Company's research and development efforts are time consuming and
expensive and there can be no assurance that these efforts will lead to
commercially successful products or services. Even the successful
23
commercialization of a new service or product in the medical industry can be
characterized by slow growth and high costs associated with marketing, under-
utilized production capacity and continuing research, and development and
education costs. Generally, the introduction of new human tissue products
requires significant physician training and years of clinical evidence derived
from follow-up studies on human implant recipients in order to gain acceptance
in the medical community.
EXTENSIVE GOVERNMENT REGULATION
Government regulation in the U.S., the European Community and other
jurisdictions represents a potentially determinative factor in the success of
the Company's efforts to market and develop its products. See "Business--
Government Regulation." The human heart valves to which the Company applies
its cryopreservation services are currently regulated as Class II medical
devices by the FDA and are subject to significant regulatory requirements,
including Quality System Regulations and recordkeeping requirements. There can
be no assurance that changes in regulatory treatment or the adoption of new
statutory or regulatory requirements will not occur, which could adversely
impact the marketing or development of these products or could adversely
affect market demand for these products.
Other allograft tissues processed and distributed by the Company are currently
regulated as "human tissue" under a rule promulgated by the FDA pursuant to
the Public Health Services Act. This rule establishes requirements for donor
testing and screening of human tissue and recordkeeping relating to these
activities. Although the Company's other human tissue allografts are not
currently regulated as medical devices, such tissue may in the future become
subject to more extensive FDA regulation, which could include PMA or product
licensing requirements.
Although the regulatory status of the Company's BioGlue surgical adhesive and
FibRx surgical sealant is not certain, the Company believes that FibRx
surgical sealant will be regulated as a biologic and anticipates that BioGlue
surgical adhesive will be regulated as a Class III medical device, as a
biologic or in some other capacity by the FDA. These products have not been
approved for distribution within the U.S. To date, the FDA has never approved
for sale in the U.S. a surgical adhesive or sealant which, like FibRx surgical
sealant, is composed of human blood components. Management believes that
concerns over viral transmission may have hindered FDA approval of such
products. There can be no assurance that CryoLife's quality control protocols
will sufficiently address FDA concerns or that CryoLife will be able to
develop viral inactivation processes acceptable to the FDA or license such
processes at an acceptable cost. Fixed porcine heart valve products are
classified as Class III medical devices. There can be no assurance that the
Company will be able to obtain the FDA approval required to distribute its
surgical adhesives, surgical sealants or porcine heart valve products in the
U.S. Distribution of these products within the European Community is dependent
upon the Company maintaining its CE Mark and ISO 9001 certifications, of which
there can be no assurance.
Most of the Company's products in development, if successfully developed, will
require regulatory approvals from the FDA and perhaps other regulatory
authorities before they may be commercially distributed. The process of
obtaining required regulatory approvals from the FDA normally involves
clinical trials and the preparation of an extensive PMA application and often
takes many years. The process is expensive and can vary significantly based on
the type, complexity and novelty of the product. There can be no assurance
that any products developed by the Company, independently or in collaboration
with others, will receive the required approvals for manufacturing and
marketing. Delays in obtaining U.S. or foreign approvals could result in
substantial additional cost to the Company and adversely affect the Company's
competitive position. The FDA may also place conditions on product approvals
that could restrict commercial applications of such products. Product
marketing approvals or clearances may be withdrawn if compliance with
regulatory standards is not maintained or if problems occur following initial
marketing. Delays imposed by the governmental clearance process may materially
reduce the period during which the Company has the exclusive right to
commercialize patented products. Also, delays or rejections may be encountered
during any stage of the regulatory approval process based upon the failure of
the clinical or other data to demonstrate compliance with, or upon the failure
of the product to meet, the regulatory agency's requirements for safety,
efficacy and quality, and those requirements may become more stringent due to
changes in applicable law, regulatory agency policy or the adoption of new
24
regulations. Clinical trials may also be delayed due to unanticipated side
effects, inability to locate, recruit and qualify sufficient numbers of
patients, lack of funding, the inability to locate or recruit scientists, the
redesign of clinical trial programs, the inability to manufacture or acquire
sufficient quantities of the particular product candidate or any other
components required for clinical trials, changes in the Company's or its
collaborative partners' development focus and disclosure of trial results by
competitors. To date, the Company has never had to submit clinical trials for
any of its products. In the event that it should be required to perform
clinical trials, there can be no guarantee that it will be able to do so
effectively and efficiently. Even if regulatory approval is obtained for any
of the Company's products or services, the scope of the approval may
significantly limit the indicated usage for which such products or services
may be marketed.
Products marketed by the Company pursuant to FDA or foreign oversight or
approval are subject to pervasive and continuing regulation. In the U.S.,
devices and biologics must be manufactured in registered and, in the case of
biologics, licensed establishments and must be produced in accordance with
Quality System Regulations. Manufacturing facilities and processes are subject
to periodic FDA inspection. Labeling and promotional activities are also
subject to scrutiny by the FDA and, in certain instances, by the Federal Trade
Commission. The export of devices and biologics is also subject to regulation
and may require FDA approval. From time to time, the FDA may modify such
regulations, imposing additional or different requirements. Failure to comply
with any applicable FDA requirements, which may be ambiguous, could result in
civil and criminal enforcement actions, product recalls or detentions and
other penalties and could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the
National Organ Transplant Act ("NOTA") prohibits the acquisition or transfer
of human organs for "valuable consideration" for use in human transplantation.
NOTA permits the payment of reasonable expenses associated with the removal,
transportation, processing, preservation, quality control and storage of human
organs. There can be no assurance that restrictive interpretations of NOTA
will not be adopted in the future that will challenge one or more aspects of
the Company's methods of charging for its cryopreservation services. The
Company's laboratory operations are subject to the U.S. Department of Labor,
Occupational Safety and Health Administration and Environmental Protection
Agency requirements for prevention of occupational exposure to infectious
agents and hazardous chemicals and protection of the environment. Some states
have enacted statutes and regulations governing the processing, transportation
and storage of human organs and tissue. While management believes that the
Company is presently in compliance in all material respects with all such
applicable statutes and regulations, there can be no assurance that more
restrictive state laws or regulations will not be adopted in the future that
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Government Regulation."
UNCERTAINTIES RELATED TO PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY
The Company owns several patents, patent applications and licenses relating to
its technologies, which it believes provide important competitive advantages.
There can be no assurance that the Company's pending patent applications will
issue as patents or that challenges will not be instituted concerning the
validity or enforceability of any patent owned by the Company, or, if
instituted, that such challenges will not be successful. The cost of
litigation to uphold the validity and prevent infringement of a patent could
be substantial. Furthermore, there can be no assurance that competitors will
not independently develop similar technologies or duplicate the Company's
technologies or design around the patented aspects of the Company's
technologies. There can be no assurance that the Company's proposed
technologies will not infringe patents or other rights owned by others. In
addition, under certain of the Company's license agreements, if the Company
fails to meet certain contractual obligations, including the payment of
minimum royalty amounts, such licenses may become nonexclusive or terminable
by the licensor, which could have a material adverse effect on the Company's
business, financial condition and results of operations. Additionally, the
Company protects its proprietary technologies and processes in part by
confidentiality agreements with its collaborative partners, employees and
consultants. There can be no assurance that these agreements will not be
breached, that the Company will have adequate remedies for any breach or that
the Company's trade secrets will not otherwise become known or independently
discovered by competitors, any of which could have a material adverse effect
on the Company's business, financial condition and results of operations.
25
UNCERTAINTIES REGARDING FUTURE HEALTH CARE REIMBURSEMENT
Even though the Company does not receive payments directly from third-party
health care payors, their reimbursement methods and policies impact demand for
the Company's cryopreserved tissue and other services and products. The
Company's cryopreservation services may be particularly susceptible to third-
party cost containment measures. In particular, the initial cost of a
cryopreserved human heart valve generally exceeds the cost of a mechanical,
synthetic or animal-derived valve. The Company is unable to predict what
changes will be made in the reimbursement methods and policies utilized by
third-party health care payors or their effect on the Company. Changes in the
reimbursement methods and policies utilized by third-party health care payors,
including Medicare, with respect to cryopreserved tissues provided for implant
by the Company and other Company services and products, could have a material
adverse effect on the Company. Significant uncertainty exists as to the
reimbursement status of newly approved health care products and services and
there can be no assurance that adequate third-party coverage will be available
for the Company to maintain price levels sufficient for realization of an
appropriate return on its investment in developing new products. Government
and other third-party payors are increasingly attempting to contain health
care costs by limiting both coverage and the level of reimbursement for new
products approved for marketing by the FDA and by refusing in some cases to
provide any coverage for uses of approved products for indications for which
the FDA has not granted marketing approval. If adequate coverage and
reimbursement levels are not provided by government and other third-party
payors for uses of the Company's new products and services, market acceptance
of these products would be adversely affected, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
DEPENDENCE ON KEY PERSONNEL
The Company's business and future operating results depend in significant part
upon the continued contributions of its key technical personnel and senior
management, many of whom would be difficult to replace. The Company's business
and future operating results also depend in significant part upon its ability
to attract and retain qualified management, processing, technical, marketing,
sales and support personnel for its operation. Competition for such personnel
is intense and there can be no assurance that the Company will be successful
in attracting and retaining such personnel. The loss of key employees, the
failure of any key employee to perform adequately or the Company's inability
to attract and retain skilled employees as needed could have a material
adverse effect on the Company's business, financial condition and results of
operations.
PRODUCT LIABILITY AND INSURANCE
The use of the Company's products involves the possibility of adverse effects
that could expose the Company to product liability claims. A recent U.S.
Supreme Court decision held that product liability may exist despite FDA
approval, and future court decisions may also increase the Company's risk of
product liability. From time to time, the Company is involved in legal
proceedings based on product liability claims of a nature considered normal to
its business. The Company is currently involved in one such proceeding. The
Company's products are used by health care providers in connection with the
treatment of patients, who will, on occasion, sustain injury or die as a
result of their condition or medical treatment. If a lawsuit is filed because
of such an occurrence, the Company, along with physicians and nurses,
hospitals and other medical suppliers, may be named as a defendant, and
whether or not the Company is ultimately determined to be liable, the Company
may incur significant legal expenses. In addition, such litigation could
damage the Company's reputation and therefore impair its ability to market its
products or obtain product liability insurance and could cause the premiums
for such insurance to increase. Although the Company has incurred minimal
losses due to product liability claims to date, there can be no assurance that
it will not incur significant losses in the future. The Company currently
maintains product liability insurance in the aggregate amount of $14 million
per year. There can be no assurance that such coverage will continue to be
available on terms acceptable to the Company or will be adequate to cover any
losses due to product claims if actually incurred. Furthermore, if any such
claim is successful, it could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--Legal
Proceedings."
26
USE AND DISPOSAL OF HAZARDOUS MATERIAL
The Company's research, development and processing activities involve the
controlled use of small quantities of radioactive compounds, chemical solvents
and other hazardous materials. The Company's activities also include the
preservation and growth of human cells and the processing of human tissue.
Although the Company believes that its safety procedures for handling,
processing and disposing of hazardous materials and human tissue comply with
the standards prescribed by federal, state and local regulations, the risk of
accidental contamination, injury or disease transmission from these materials
cannot be completely eliminated. In the event of such an accident or
transmission, the Company could be held liable for resulting damages and any
liability could have a material adverse effect on the Company's business,
financial condition and results of operations. Also, any failure to comply
with applicable regulations could result in the imposition of penalties, fines
and sanctions, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
VOLATILITY OF SECURITIES PRICES
The trading price of the Company's Common Stock has been subject to wide
fluctuations from time to time and may continue to be subject to such
volatility in the future. Trading price fluctuations can be caused by a
variety of factors, including quarter to quarter variations in operating
results, announcement of technological innovations or new products by the
Company or its competitors, governmental regulatory acts, developments with
respect to patents or proprietary rights, general conditions in the medical
device or service industries, actions taken by government regulators, changes
in earnings estimates by securities analysts or other events or factors, many
of which are beyond the Company's control. If the Company's revenues or
operating results in future quarters fall below the expectations of securities
analysts and investors, the price of the Company's Common Stock would likely
decline, perhaps substantially. Changes in the trading price of the Company's
Common Stock may bear no relation to the Company's actual operational or
financial results.
ANTI-TAKEOVER PROVISIONS
The Company's Articles of Incorporation and Bylaws contain provisions that may
discourage or make more difficult any attempt by a person or group to obtain
control of the Company, including provisions authorizing the issuance of
preferred stock without shareholder approval, restricting the persons who may
call a special meeting of the shareholders and prohibiting shareholders from
taking action by written consent. In addition, the Company is subject to
certain provisions of Florida law that may discourage or make more difficult
takeover attempts or acquisitions of substantial amounts of the Company's
Common Stock. Further, pursuant to the terms of a shareholder rights plan
adopted in 1995, each outstanding share of Common Stock has one attached
right. The rights will cause substantial dilution of the ownership of a person
or group that attempts to acquire the Company on terms not approved by the
Board and may have the effect of deterring hostile takeover attempts.
SHARES ELIGIBLE FOR FUTURE SALE
Substantially all of the Company's outstanding Common Stock is available for
sale in the public marketplace. As of February 27, 1998, there were also
outstanding stock options to purchase an aggregate of 747,000 shares of Common
Stock at various exercise prices per share. The majority of the shares to be
received upon exercise of these options will be available for immediate resale
in the public markets. No prediction can be made as to the effect, if any,
that sales of shares of Common Stock or the availability of such shares for
sale will have on the market prices prevailing from time to time. The
possibility exists that substantial amounts of Common Stock may be sold in the
public market, which may adversely affect prevailing market prices for the
Common Stock and could impair the Company's ability to raise capital through
the sale of its equity securities.
ABSENCE OF DIVIDENDS
The Company has not paid, and does not presently intend to pay, cash
dividends. The Company's major credit agreement contains, and future credit
agreements may contain, financial covenants, including covenants to maintain
certain levels of net worth and certain leverage ratios, which could have the
effect of restricting the amount of dividends that the Company may pay. It is
not likely that any cash dividends will be paid in the foreseeable future.
27
FORWARD-LOOKING STATEMENTS
This Form 10-K includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") and the Private Securities Litigation Reform Act of 1995. All
statements, other than statements of historical facts, included or
incorporated by reference in this Form 10-K which address activities, events
or developments which the Company expects or anticipates will or may occur in
the future, including approval of statements regarding the Company's
competitive position, the timing and of the application to the FDA for the
stentless CryoLife-O'Brien porcine heart valves, BioGlue surgical adhesive,
and FibRx surgical sealant, other estimated dates relating to the Company's
proposed regulatory submissions, estimates regarding 1998 research and
development expenditures, the Company's expectations regarding the adequacy of
current financing arrangements, product demand and market growth, and other
statements regarding future plans and strategies, anticipated events or trends
and similar expressions concerning matters that are not historical facts are
forward-looking statements. These statements are based on certain assumptions
and analyses made by the Company in light of its experience and its perception
of historical trends, current conditions and expected future developments as
well as other factors it believes are appropriate in the circumstances.
However, whether actual results and developments will conform with the
Company's expectations and predictions is subject to a number of risks and
uncertainties which could cause actual results to differ materially from the
Company's expectations, including the risk factors discussed in this Form 10-K
and other factors, many of which are beyond the control of the Company.
Consequently, all of the forward-looking statements made in this Form 10-K are
qualified by these cautionary statements and there can be no assurance that
the actual results or developments anticipated by the Company will be realized
or, even if substantially realized, that they will have the expected
consequences to or effects on the Company or its business or operations. The
Company assumes no obligation to update publicly any such forward-looking
statements, whether as a result of new information, future events or
otherwise.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
Each of the executive officers of the Registrant was elected by the Board of
Directors to serve until the Board of Directors' meeting immediately following
the next annual meeting of shareholders or until their earlier removal by the
Board of Directors or their resignation. The following table lists the
executive officers of the Registrant and their ages, positions with the
Registrant, and the dates from which they have continually served in their
present positions with the Registrant.
DATE FIRST ELECTED
NAME AGE POSITION TO PRESENT OFFICE
---- --- -------- ------------------
Steven G. Anderson 59 President, Chief Executive February, 1984
Officer and Chairman
Kirby S. Black, PhD 43 Vice President, Research July, 1995
and Development
Edwin B. Cordell, Jr., CPA 39 Vice President and Chief December, 1994
Financial Officer
Albert E. Heacox, PhD 47 Vice President, Laboratory June, 1995
Operations
Gerald B. Seery 41 Vice President, Marketing August, 1995
James C. Vander Wyk, PhD 53 Vice President, Regulatory February, 1996
Affairs and Quality
Assurance
Ronald D. McCall, Esq. 61 Director, Secretary and January, 1984
Treasurer
STEVEN G. ANDERSON, a founder of the Company, has served as the Company's
President, Chief Executive Officer and Chairman since its inception. Mr.
Anderson has more than 30 years of experience in the implantable medical
device industry. Prior to joining the Company, Mr. Anderson was Senior
Executive Vice President and Vice President, Marketing, from 1976 until 1982
of Intermedics, Inc., a manufacturer and distributor of pacemakers and other
medical devices. Mr. Anderson received his BA from the University of
Minnesota.
KIRBY S. BLACK, PHD, has served as Vice President of Research and Development
since July 1995. Dr. Black is responsible for the continued development of the
Company's current products as well as the evaluation of new technologies. Dr.
Black is listed on three patents and has authored 118 publications. Prior to
joining the
28
Company, Dr. Black was Director, Medical Information and Project Leader from
July 1993 until July 1994 at Advanced Tissue Sciences, LaJolla, California.
Dr. Black has also held a number of positions at the University of California
at Irvine, including Director, Transplantation and Immunology Laboratories,
Department of Surgery. Dr. Black received his BS degree from the University of
California, Los Angeles, and his PhD degree from the University of California
at Irvine.
EDWIN B. CORDELL, JR., CPA, has served as Vice President and Chief Financial
Officer of the Company since November 1994. From August 1987 to November 1994,
Mr. Cordell served as Controller and Chief Financial Officer of Video Display
Corporation, a cathode ray tube remanufacturing and distribution company. Mr.
Cordell received his BS in Accounting from the University of Tennessee.
ALBERT E. HEACOX, PHD, has served as Vice President, Laboratory Operations
since June 1988 and has been with the Company since June of 1985. Dr. Heacox
has been responsible for developing protocols and procedures for both
cardiovascular and connective tissues, implementing upgrades in procedures in
conjunction with the Company's quality assurance programs, and overseeing all
production activities of the Company's laboratories. Prior to joining the
Company, Dr. Heacox worked as a researcher with the U.S. Department of
Agriculture and North Dakota State University, developing methods for the
cryopreservation of cells and animal germ plasm storage. Dr. Heacox received a
BA and an MS in Biology from Adelphi University, and received his PhD in
Biology from Washington State University and completed his post-doctorate
training in cell biology at the University of Cologne, West Germany.
GERALD B. SEERY has served as Vice President of Marketing since August 1995
and has been with the Company since July 1993. Mr. Seery is responsible for
developing and implementing the Company's sales and marketing plans and
supervising all tissue procurement activities. Prior to joining the Company,
Mr. Seery held senior marketing management positions with Meadox Medicals from
1982 until 1985, Electro Catheter Corporation from 1985 until 1989 and Daig
Corporation from 1992 until 1993, accumulating fifteen years of specialized
marketing experience in cardiovascular medical devices. Mr. Seery received his
BA in International Economics at The Catholic University of America in
Washington, D.C. in 1978 and completed his MBA at Columbia University in New
York in 1980.
JAMES C. VANDER WYK, PHD, has served as Vice President, Regulatory Affairs and
Quality Assurance of the Company since February 1996. Prior to joining the
Company, Dr. Vander Wyk held senior management positions at Schneider (USA),
Inc. from 1993 until 1996, Pharmacia Deltec, Inc. from 1985 until 1993,
Delmed, Inc. from 1980 until 1985 and Pharmaco, Inc. from 1975 to 1979,
gaining 20 years of experience in Regulatory Affairs and Quality Assurance.
Dr. Vander Wyk received his BS in Pharmacy from the Massachusetts College of
Pharmacy and his PhD in Microbiology from the University of Massachusetts. Dr.
Vander Wyk performed his NIH Postdoctoral Fellowship at the University of
Illinois.
RONALD D. MCCALL has served as a director of the Company and as the Secretary
and Treasurer of the Company since January 1984. From 1985 to the present, Mr.
McCall has been the proprietor of the law firm of Ronald D. McCall, Attorney
At Law, Tampa, Florida. Mr. McCall was admitted to the practice of law in
Florida in 1961. Mr. McCall received his BA and JD degrees from the University
of Florida.
ITEM 6. SELECTED FINANCIAL DATA.
The following Selected Consolidated Financial Data should be read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and other financial information included elsewhere in
this Form 10-K or incorporated herein by reference. The data set forth below
with respect to the Company's Consolidated Income Statements and Balance
Sheets for, and as of the end of, the years ended December 31, 1996 and 1997
are derived from the Company's Consolidated Financial Statements which have
been audited by Ernst & Young LLP, independent auditors, and which are
included elsewhere in this Form 10-K and are qualified by reference to such
Consolidated Financial Statements and Notes thereto. The selected data
presented below for, and as of
29
the end of, each of the years in the three-year period ended December 31,
1995, are derived from the Consolidated Financial Statements of the Company,
which Consolidated Financial Statements have been audited by KPMG Peat Marwick
LLP, independent auditors. The Consolidated Income Statement for the year
ended December 31, 1995, and the report thereon, are included elsewhere in
this Form 10-K. The historical results are not necessarily indicative of
future results of operations.
YEAR ENDED DECEMBER 31,
---------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Revenues:
Cryopreservation.................... $18,938 $22,818 $27,994 $36,293 $44,242
Bioprosthetic cardiovascular
devices............................ 933 414 263 385 576
Single-use medical devices.......... -- -- -- -- 5,591
Other income........................ 1,470 578 969 550 460
------- ------- ------- ------- -------
Total Revenues.................... 21,341 23,810 29,226 37,228 50,869
Expenses:
Cost of cryopreservation and
products........................... 8,759 8,965 10,485 12,593 17,764
Research and development............ 1,384 1,975 2,634 2,807 3,946
General, administrative and
marketing.......................... 10,282 11,085 12,807 15,673 20,548
Interest expense.................... 23 21 4 72 978
------- ------- ------- ------- -------
Total Expenses.................... 20,448 22,046 25,930 31,145 43,236
Income before income taxes............ 893 1,764 3,296 6,083 7,633
Income tax expense.................... 339 498 1,094 2,156 2,908
------- ------- ------- ------- -------
Net income.......................... $ 554 $ 1,266 $ 2,202 $ 3,927 $ 4,725
======= ======= ======= ======= =======
Earnings per share of common stock:
Basic............................... $ .06 $ .14 $ .23 $ .41 $ .49
======= ======= ======= ======= =======
Diluted............................. $ .06 $ .14 $ .23 $ .40 $ .48
======= ======= ======= ======= =======
Weighted average number of shares of
common stock outstanding:
Basic............................... 9,018 9,312 9,379 9,505 9,642
Diluted............................. 9,114 9,373 9,568 9,906 9,942
DECEMBER 31,
---------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
BALANCE SHEET DATA:
Cash, cash equivalents and marketable
securities........................... $ 5,079 $ 6,366 $ 6,182 $ 1,370 $ 111
Total assets.......................... 20,075 21,417 24,132 34,973 53,749
Long-term debt, including current
maturities........................... -- -- -- 3,326 18,362
Retained earnings..................... 506 1,773 3,975 7,902 12,627
Total shareholders' equity............ 16,615 17,933 20,465 24,929 30,227
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
The Company was organized in 1984 to address market opportunities in the area
of biological implantable products and materials, and today is the leader in
the cryopreservation of viable human tissue for cardiovascular, vascular and
orthopaedic applications. A majority of the Company's current revenues are
derived from the cryopreservation of human heart valves and conduits,
reflecting CryoLife's initial exclusive focus on this area. The Company began
cryopreserving aortic heart valves in 1984, pulmonary heart valves in 1986 and
mitral heart valves in 1995. CryoLife has also expanded into the
cryopreservation of other human tissue, including vascular tissue and
connective tissue for the knee.
The Company pays a fee to an organ procurement agency or tissue bank at the
time such organization consigns human tissue to the Company. The Company
generates revenues from cryopreservation services by charging hospitals a fee,
which covers the Company's services, the associated procurement fee and
applicable shipping
30
expenses. The Company records revenue upon shipping tissue. Costs associated
with the procurement, processing and storage of tissue are accounted for as
deferred preservation costs on the Company's balance sheet and are expensed
when the tissue is shipped. The Company continually monitors cryopreserved
tissue in its possession to determine its viability. Tissue determined not to
be suitable for implantation is disposed of properly, and the associated
deferred preservation costs are expensed. As part of an effort to reduce its
working capital needs, while simultaneously facilitating the use of
cryopreserved tissue, the Company provides liquid nitrogen freezers to a
number of hospitals. The Company retains ownership of the liquid nitrogen
freezers and, consequently, incurs associated depreciation charges. The
hospitals are responsible for operating expenses related to the use of the
liquid nitrogen freezers.
The Company has expanded, and intends to continue to expand, its portfolio of
products and services. Much of this expansion has been accomplished through
acquisitions of intellectual property businesses. In 1992, the Company
purchased for $730,000 the exclusive distribution rights for a line of
stentless porcine heart valves which the Company currently markets in the
European Community. In 1996, the Company purchased for $275,000 a patent for
an advanced design stentless pulmonary porcine heart valve. Also in 1996, the
Company acquired the assets of UCFI, a tissue processor, for $750,000 in cash
and a $1.3 million note. In 1997, the Company acquired IFM and its line of
single-use medical devices for $4.5 million in cash, a $5.0 million
convertible debenture and a commitment to pay additional cash consideration
(not to exceed $1.8 million) if certain target net revenues of IFM are
exceeded.
The composition of the Company's revenues is expected to change in future
years, reflecting, among other things, the anticipated growth in shipments of
human vascular tissue and human connective tissue for the knee, the
acquisition of IFM and the introduction into the European Community of BioGlue
surgical adhesive as well as other expected new products.
The following table outlines product shipment and revenue data for the
Company's major product lines from 1995 to 1997:
YEAR ENDED DECEMBER 31,
-----------------------
UNITS SHIPPED AND REVENUES BY MAJOR PRODUCT LINE 1995 1996 1997
------------------------------------------------ ------- ------- -------
(DOLLARS IN THOUSANDS)
Human Heart Valves and Conduits:
Units shipped.................................. 3,499 4,528 5,244
Revenues....................................... $19,767 $24,763 $29,046
Human Vascular Tissue:
Units shipped.................................. 1,765 2,147 2,621
Revenues....................................... $ 6,771 $ 8,172 $10,469
Human Connective Tissue for the Knee:
Units shipped.................................. 573 1,562 1,859
Revenues....................................... $ 1,456 $ 3,358 $ 4,727
Bioprosthetic Cardiovascular Devices:
Units shipped.................................. 198 256 532
Revenues....................................... $ 263 $ 385 $ 576
RESULTS OF OPERATIONS
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues increased 37% to $50.9 million in 1997 from $37.2 million in 1996.
The increase in revenues was primarily due to the growing acceptance in the
medical community of cryopreserved tissues, the Company's ability to procure
greater amounts of tissue, price increases for certain cryopreservation
services and revenues attributable to the Company's line of single-use medical
devices following the IFM acquisition in March 1997. Revenues attributable to
IFM were $5.6 million in 1997.
Revenues from human heart valve and conduit cryopreservation services
increased 17% to $29.0 million in 1997 from $24.8 million in 1996,
representing 57% and 67%, respectively, of total revenues during such years.
This increase in revenues was primarily due to a 16% increase in the number of
heart allograft shipments.
31
Revenues from human vascular tissue cryopreservation services increased 28% to
$10.5 million in 1997 from $8.2 million in 1996, representing 21% and 22%,
respectively, of total revenues during such years. This increase in revenues
was primarily due to a 22% increase in the number of vascular allograft
shipments resulting from the introduction of cryopreserved tissues for new
procedures and an increased demand for the Company's existing cryopreservation
services.
Revenues from human connective tissue for the knee cryopreservation services
increased 38% to $4.7 million in 1997 from $3.4 million in 1996, representing
9% of total revenues during each year. This increase in revenues was primarily
due to a 19% increase in the number of allograft shipments and a greater
proportion of the 1997 shipments consisting of cryopreserved menisci, which
have a significantly higher per unit revenue than the Company's cryopreserved
tendons.
Revenues from the sale of bioprosthetic cardiovascular devices in 1997 were
$576,000 compared to $385,000 in 1996, representing 1% of revenues during each
year. Other revenues decreased to $460,000 in 1997 from $550,000 in 1996.
Other revenues in 1997 consisted primarily of research grant award revenues
related to the Company's SynerGraft technology.
Cost of cryopreservation services and products increased to $17.8 million in
1997 from $12.6 million in 1996. Cost of cryopreservation services and
products as a percentage of revenues increased to 35% in 1997 from 34% in
1996. This increase was primarily due to the increased overhead costs
associated with the new corporate headquarters and the addition of the IFM
product line, partially offset by efficiencies gained with the increase in the
number of allografts processed.
General, administrative and marketing expenses increased 31% to $20.5 million
in 1997 from $15.7 million in 1996, representing 40% and 42%, respectively, of
total revenues during such years. The increased expenses of approximately $4.8
million were primarily attributable to increased costs associated with the
Company's new corporate headquarters, increased fees paid to technical
representatives and other related marketing expenses relating to the growth in
revenues and increases in general overhead expenses to support the growth in
revenues.
The Company has continued its commitment to research and development activity,
spending approximately $3.9 million in 1997 and $2.8 million in 1996,
representing 8% of total revenues during each year. The Company's research and
development expenditures during 1997 were primarily for the development of
bioadhesives for surgical applications and its SynerGraft technology.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenues increased 27% to $37.2 million in 1996 from $29.2 million in 1995.
The increase in revenues was primarily due to growing acceptance in the
medical community of cryopreserved tissues, the Company's ability to procure
greater amounts of tissue and price increases for certain services.
Revenues from human heart valve and conduit cryopreservation services
increased 25% to $24.8 million in 1996 from $19.8 million in 1995,
representing 67% and 68%, respectively, of total revenues during such years.
This increase in revenues was primarily due to a 29% increase in the number of
heart allograft shipments.
Revenues from human vascular tissue cryopreservation services increased 21% to
$8.2 million in 1996 from $6.8 million in 1995, representing 22% and 23%,
respectively, of total revenues during such years. This increase in revenues
was primarily due to a 22% increase in the number of vascular allograft
shipments.
Revenues from human connective tissue for the knee cryopreservation services
increased 127% to $3.4 million in 1996 from $1.5 million in 1995, representing
9% and 5%, respectively, of total revenues during each year. This increase in
revenues was primarily due to a 173% increase in the number of allograft
shipments partially offset by a decrease in the unit revenue of cryopreserved
tendons.
Revenues from the sale of bioprosthetic cardiovascular devices in 1996 were
$385,000 compared to $263,000 in 1995, representing 1% of revenues during each
year. This increase in revenues was primarily due to a 29% increase in the
number of units shipped.
32
Other revenues decreased to $550,000 in 1996 from $969,000 in 1995. Other
revenues in 1996 consisted primarily of research grant award revenues and a
fee from a terminated agreement with Bayer Corporation. Research grant award
revenues in 1996 were primarily related to the development of bioadhesives for
surgical application and the Company's SynerGraft technology. The decrease
compared to 1995 was primarily attributable to the sale of the Company's
patented Viral Inactivation Process ("VIP") technology to Osteotech, Inc. for
approximately $450,000 in 1995. The Company had developed its VIP technology
to eliminate potential viruses from human bone processed by the Company. The
Company sold its bone processing business in 1993.
Costs of cryopreservation services and products increased to $12.6 million in
1996 from $10.5 million in 1995. Cost of cryopreservation services and
products as a percentage of cryopreservation revenues decreased to 34% in 1996
from 36% in 1995. This decrease was primarily due to an increase in the volume
of processed tissue and more efficient processing methods.
General, administrative and marketing expenses increased 23% to $15.7 million
in 1996 from $12.8 million in 1995, representing 42% and 44%, respectively, of
total revenues during such years. The increased expenses of approximately $2.9
million were primarily attributable to additional regulatory and quality
assurance costs related to the Company's CE Mark and ISO 9001 certifications,
increased fees paid to technical representatives and other related marketing
expenses resulting from the growth in revenues and increases in general
overhead expenses to support the growth in revenues.
The Company continued its commitment to research and development activity,
spending approximately $2.8 million and $2.6 million in 1996 and 1995,
representing 8% and 9%, respectively, of total revenues during such years. The
Company's research and development expenditures during 1996 were primarily for
the development of bioadhesives for surgical applications and the SynerGraft
technology.
Seasonality
The demand for the Company's human heart valve and conduit cryopreservation
services is seasonal, with peak demand generally occurring in the second and
third quarters. Management believes that this demand trend for human heart
valve and conduit cryopreservation services is primarily due to the high
number of surgeries scheduled during the summer months. Management believes
that the trends experienced by the Company to date for its human connective
tissue for the knee cryopreservation services indicate that this business may
also be seasonal because it is an elective procedure that may be performed
less frequently during the fourth quarter holiday months. However, the demand
for the Company's vascular tissue cryopreservation services, bioprosthetic
cardiovascular devices and single-use medical devices does not appear to
experience this seasonal trend.
Quarterly Results
The Company achieved record revenues and earnings in both the year and three
months ended December 31, 1997, as compared to comparable prior periods, with
the fourth quarter of 1997 being the Company's tenth consecutive quarter of
record revenues and earnings as compared to the same quarter for prior years.
In the opinion of management, the information set forth in the table below has
been prepared on a basis consistent with the Company's audited Consolidated
Financial Statements appearing elsewhere in the Form 10-K, and all necessary
adjustments (consisting only of normal recurring adjustments) have been
included to present fairly the unaudited quarterly results in accordance with
generally accepted accounting principles ("GAAP"). The results for any quarter
are not necessarily indicative of results to be expected in any future period.
33
The following table presents selected unaudited quarterly income statement
data for each of the eight quarters in the period ended December 31, 1997:
QUARTER ENDED
-------------------------------------------------------------------
1996 1997
--------------------------------- ---------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------- ------- -------- ------- -------- ------- -------- -------
(IN THOUSANDS EXCEPT PER SHARE DATA)
REVENUES:
Cryopreservation
services.............. $8,103 $9,544 $10,067 $8,579 $9,725 $10,910 $12,689 $10,918
Bioprosthetic
cardiovascular
devices............... 157 75 71 82 104 135 177 160
Single-use medical
devices............... -- -- -- -- 554 1,596 1,703 1,738
Interest and other
income................ 174 79 273 24 30 82 72 276
------ ------ ------- ------ ------ ------- ------- -------
Total Revenues......... 8,434 9,698 10,411 8,685 10,413 12,723 14,641 13,092
EXPENSES:
Cost of
cryopreservation
services and
products.............. 2,879 3,289 3,563 2,862 3,426 4,550 5,112 4,676
Research and
development........... 690 701 616 800 849 857 1,243 997
General, administrative
and marketing......... 3,626 4,181 4,239 3,627 4,479 5,165 5,620 5,284
Interest expense....... -- -- 39 33 132 296 317 233
------ ------ ------- ------ ------ ------- ------- -------
Total Expenses......... 7,195 8,171 8,457 7,322 8,886 10,868 12,292 11,190
------ ------ ------- ------ ------ ------- ------- -------
INCOME BEFORE INCOME
TAXES.................. 1,239 1,527 1,954 1,363 1,527 1,855 2,349 1,902
Income tax expense..... 457 539 693 467 575 695 891 747
------ ------ ------- ------ ------ ------- ------- -------
NET INCOME.............. $ 782 $ 988 $ 1,261 $ 896 $ 952 $ 1,160 $ 1,458 $ 1,155
====== ====== ======= ====== ====== ======= ======= =======
EARNINGS PER SHARE OF
COMMON STOCK:
Basic.................. $ .08 $ .11 $ .13 $ .09 $ .10 $ .12 $ .15 $ .12
====== ====== ======= ====== ====== ======= ======= =======
Diluted................ $ .08 $ .10 $ .13 $ .09 $ .10 $ .12 $ .15 $ .12
====== ====== ======= ====== ====== ======= ======= =======
WEIGHTED AVERAGE NUMBER
OF SHARES OF COMMON
STOCK OUTSTANDING:
Basic.................. 9,433 9,491 9,529 9,575 9,581 9,615 9,670 9,694
Diluted................ 9,756 9,933 9,925 9,943 9,877 9,889 9,978 10,023
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, net working capital was $18.8 million, compared to $10.8
million at December 31, 1996, with a current ratio of 4-to-1 at December 31,
1997. The Company's primary capital requirements arise out of general working
capital needs, including capital expenditures for facilities and equipment,
and funding of research and development projects. The Company historically has
funded these requirements through bank credit facilities, cash generated by
operations and equity offerings.
Net cash used in operating activities was $2.2 million for the year ended
December 31, 1997, as compared to net cash provided by operating activities of
$3.2 million for the year ended December 31, 1996. This decrease resulted from
an increase in deferred cryopreservation costs to support the growing
acceptance of the Company's existing cryopreserved tissues as well as new
cryopreserved tissue offerings in 1997.
Net cash used in investing activities was $9.6 million for the year ended
December 31, 1997, as compared to $4.2 million for the year ended December 31,
1996. This increase primarily resulted from the Company's acquisition of IFM.
Net cash provided by financing activities was $10.6 million for the year ended
December 31, 1997, as compared to $1.8 million for the year ended December 31,
1996. This increase was primarily attributable to borrowings under the
Company's credit facility in connection with the acquisition of IFM and the
construction of the new Company and IFM facilities and increased deferred
cryopreservation costs.
34
The Company intends to file a registration statement with the Securities and
Exchange Commission in connection with a public offering of up to 2,500,000
shares of Common Stock (excluding over-allotments) (the "Offering"). The
Company anticipates that, even if the Offering is not consummated, borrowings
under its existing credit agreements and cash generated from operations will
be sufficient to meet its operating and development needs for the next 12
months. However, the Company's future liquidity and capital requirements
beyond that period will depend upon numerous factors, including the timing of
the Company's receipt of FDA approvals to begin clinical trials for its
products currently in development, the resources required to further develop
its marketing and sales capabilities if, and when, those products gain
approval, the resources required to expand manufacturing capacity and the
extent to which the Company's products generate market acceptance and demand.
There can be no assurance that the Company will not require additional
financing or will not seek to raise additional funds through bank facilities,
debt or equity offerings or other sources of capital to meet future
requirements. These additional funds may not be available when needed or on
terms acceptable to the Company, which could have a material adverse effect on
the Company's business, financial condition and results of operations.
INFLATION
Although the Company cannot determine the precise effects of inflation,
management does not believe it has had a significant effect on revenues or
results of operations and does not expect it to have a significant effect in
the near future.
YEAR 2000
The Company is aware of the issues that many computer systems will face as the
millennium (year 2000) approaches. The Company, however, believes that its own
internal software and hardware is year 2000 compliant. The Company believes
that any year 2000 problems encountered by procurement agencies, hospitals and
other customers and vendors are not likely to have a material adverse effect
on the Company's operations. The Company anticipates no other year 2000
problems which are reasonably likely to have a material adverse effect on the
Company's operations. There can be no assurance, however, that such problems
will not arise.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 130, Reporting Comprehensive Income ("Statement 130"). Statement
130 establishes new standards for the reporting and display of comprehensive
income and its components in a full set of general purpose financial
statements. These new standards require that all items recognized as
components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements.
Statement 130 is effective for fiscal years beginning after December 15, 1997.
The adoption of Statement 130 will not have a significant impact on the
Company's Consolidated Financial Statements.
In June 1997, the FASB issued Statement 131, Disclosures About Segments of an
Enterprise and Related Information ("Statement 131"). Statement 131 changes
the way public companies report segment information in annual financial
statements and also requires those companies to report selected segment
information in interim financial reports. Statement 131 is effective for years
beginning after December 15, 1997. The adoption of Statement 131 will not have
a significant impact on the Company's consolidated financial position and
results of operations, but will require additional disclosure in the notes to
the Company's Consolidated Financial Statements.
35
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.
CRYOLIFE, INC.
March 23, 1998
/s/ Edwin B. Cordell, Jr.
By_____________________________________
Edwin B. Cordell, Jr.,
Vice President and
Chief Financial Officer
36