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EXHIBIT 99.1
TRIPATH IMAGING, INC.
FACTORS AFFECTING FUTURE OPERATING RESULTS
March 2001
From time to time, TriPath Imaging, through its management, may make
forward-looking public statements, such as statements concerning then expected
future revenues or earnings or concerning projected plans, performance, product
development and commercialization as well as other estimates relating to future
operations. Forward-looking statements may be in reports filed under the
Securities Exchange Act of 1934, as amended, in press releases or in oral
statements made with the approval of an authorized executive officer. The words
or phrases "will likely result," "are expected to," "will continue," "is
anticipated," "estimate," "project" or similar expressions are intended to
identify "forward-looking statements" within the meaning of Section 21E of the
Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933,
as enacted by the Private Securities Litigation Reform Act of 1995.
This Form 10-K contains forward-looking statements, including
statements regarding our:
- Projected timetables for the preclinical and clinical
development of, regulatory submissions and approvals for, and
market introduction of our products and services;
- Estimates of the potential markets for our products and
services;
- Sales and marketing plans;
- Assessments of competitors and potential competitors;
- Estimates of the capacity of manufacturing and other
facilities to support our products and services;
- Expected future revenues, operations and expenditures; and
- Projected cash needs.
These statements are based upon the current assumptions of our
management and are only expectations of future results. These statements are
subject to risks and uncertainties, and our actual results may differ
significantly from those that are described in this Form 10-K. These risks and
uncertainties include:
- Our ability to successfully complete preclinical and clinical
development of our products and services;
- Our ability to manufacture sufficient amounts of our products
for development and commercialization activities;
- Our ability to obtain and maintain adequate patent and other
proprietary rights protection of our products and services;
- The content and timing of decisions made by the FDA and other
regulatory agencies;
- The accuracy of our estimates of the size and characteristics
of the markets to be addressed by our products and services;
- Market acceptance of our products and services;
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- Our ability to obtain reimbursement for our products and
services from third-party payors;
- Our ability to establish and maintain licenses, strategic
collaborations and distribution arrangements; and
- The accuracy of our information regarding the products and
resources of our competitors and potential competitors.
The Company wishes to caution readers not to place undue reliance on
these forward-looking statements, which speak only as of the date on which they
are made. In addition, the Company wishes to advise readers that the factors
listed below, as well as other factors not currently identified by management,
could affect the Company's financial or other performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods or events in any
current statement.
The Company will not undertake and specifically declines any obligation
to publicly release the result of any revisions that may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events that may cause management to re-evaluate such forward-looking statements.
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company is hereby filing
cautionary statements identifying important factors that could cause the
Company's actual results to differ materially from those projected in
forward-looking statements of the Company made by or on behalf of the Company.
RISKS RELATED TO OUR BUSINESS
UNCERTAINTIES REGARDING PRODUCT REGULATORY CLEARANCE
The U.S. government extensively regulates the manufacture and sale of
medical diagnostic devices for commercial use. Government agencies in certain
other countries impose similar requirements. We must obtain FDA approval of our
products before we can market and sell them for their principal intended uses in
the United States.
Of our principal products, only PREP and AutoPap have received FDA
approval. If we fail to obtain and maintain FDA approval for any of our future
products, or if FDA approval is delayed or we receive FDA approval for our
products but labeling restrictions make the use of the products uneconomical to
customers, our future product sales will be far less than we anticipate and may
be insufficient to sustain our operations.
To obtain FDA approval for our products, we must submit a premarket
approval application to the FDA. Several factors affect our ability to
successfully obtain FDA approval for the sale of our products, including the
following:
- the premarket approval application process can be expensive
and time-consuming, frequently lasting three to five years or
more;
- we have and may continue to encounter unanticipated delays or
significant unanticipated costs in our efforts to secure FDA
approval;
- ultimately, we have no assurance that the FDA will ever
approve our future products for their principal intended use;
and
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- even if we receive approval on the premarket approval
applications for our products, the FDA's approval may still
not allow us to make some of the specific claims for which we
sought FDA approval.
In addition to the premarket approval application process, we may face
further difficulties in connection with FDA approval of our products for the
following reasons:
- FDA regulations require submission and approval of a premarket
approval application supplement for certain changes to a
product if the changes affect the safety and effectiveness of
the product;
- even if we obtain FDA approval of our premarket approval
applications, that approval may include significant
limitations on the indicated uses for which we may market our
products; and
- any FDA approval may include significant limitations on the
indicated uses for which we may market our products, such as
warnings, precautions or contraindications, requests for
post-market studies, or additional regulatory requirements
An approved product is still subject to continual review and regulation
by the FDA and other regulatory agencies, so long as the product is being
marketed. During this continual review process, any subsequent discovery of
previously unknown or unrecognized problems with the product or a failure of the
product to comply with any applicable regulatory requirements can result in,
among other things:
- fines;
- the refusal of the FDA to approve further premarket approval
applications;
- suspension or withdrawal of our FDA approvals;
- product recalls;
- operating restrictions, including total or partial suspension
of production, distribution, sales and marketing;
- injunctions;
- civil penalties; or
- product seizures and criminal prosecution of our company, our
officers or our employees.
The FDA may not approve future products or commercial enhancements to
our products on a timely basis, if at all. Our regulatory applications also may
be delayed or rejected based on changes in regulatory policies or regulations.
UNCERTAINTIES REGARDING FDA APPROVAL OF THE USE OF AUTOPAP WITH PREP.
A significant part of TriPath Imaging's strategy is to market PREP and
AutoPap together as an integrated system. In order to do so, TriPath Imaging
must obtain FDA approval to market AutoPap to screen slides prepared using PREP.
On September 30, 1999, we submitted a supplement to our existing premarket
approval application for AutoPap to screen PREP slides. Since the filing of the
premarket approval application supplement, TriPath Imaging has had discussions
with the FDA and on December 22, 2000, filed an amendment to the premarket
approval application supplement which was originally filed September 30, 1999.
As a result of ongoing discussions with the FDA regarding the Company's
submissions, the Company believes that it will have various options in
connection with the pending PMA supplement regarding use of the AutoPap system
to screen PREP thin-layer slides. Among these are to accept limitations in the
Company's proposed product labeling or to collect additional data to support the
current labeling proposal. The Company is evaluating its options and considering
the best course of action. In connection with its submissions, the Company has
voluntarily brought to the FDA's attention several assertions recently made by a
former Company employee questioning the use of the AutoPap system to screen
thin-layer preparations. The Company has conducted an internal investigation and
has determined that these assertions appear to be without merit. The FDA has
advised the Company that it will conduct an inspection to investigate these
assertions prior to completing Agency review of the Company's PMA supplement.
The Company cannot determine at this time when the FDA proceedings will conclude
or what conclusions the FDA will reach.
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EARLY STAGE OF DEVELOPMENT
While the Company's products have grown in acceptance as measured by
its revenues, the Company still operates in a very competitive environment.
Since beginning operations in November 1996, the Company has financed its
operations through the private placement and public sales of equity securities,
debt facilities and limited product sales. To achieve profitable operations, the
Company, alone or with others, must continue to successfully develop, obtain
regulatory approval for, introduce, market and sell products. There can be no
assurance that any future regulatory approvals required to market the Company's
products will be obtained in a timely manner or at all, that the Company's
product candidates can be manufactured at an acceptable cost and with acceptable
quality, that any products approved in the future can be successfully marketed
or that the Company can successfully adapt its internal financial controls and
other infrastructure necessary to support substantial commercial operations. The
Company's failure in any of these areas would have a material adverse effect on
the Company's future revenues and profitability.
THE COMPANY MAY HAVE DIFFICULTY MANAGING THE EXPANSION OF ITS OPERATIONS, AND
FAILURE TO DO SO WILL HARM ITS BUSINESS
The Company is experiencing growth in the number of its employees and
the scope of its operations, and anticipates that further expansion will be
required to achieve growth in its customer base and to develop and seize market
opportunities. This expansion could place a significant strain on the Company's
senior management team and operational and financial resources. To manage the
expected growth of its operations and personnel, the Company will need to
improve existing, and implement new, operational and financial systems,
procedures, and controls. It also will need to expand, train, and manage its
growing employee base as well as expand and maintain close coordination among
its sales and marketing, finance, administrative, and operations staff. Further,
the Company may be required to enter into additional relationships with various
suppliers and other third parties necessary to its business. A successful
continued expansion will also require the Company to further develop expertise
in complex joint venture negotiations. The Company cannot guarantee that its
current and planned systems, procedures, and controls will be adequate to
support its future operations, that it will be able to hire, train, retain,
motivate, and manage the required personnel or that the Company will be able to
identify, manage, and benefit from existing and potential strategic
relationships and market opportunities. If the Company does not effectively
manage the budgeting, forecasting, and other process-control issues presented by
such expansion, its business will suffer. If the Company is unable to undertake
new business due to a shortage of staff or resources, its growth will be
impeded. Therefore, there may be times when the Company's opportunities for
revenue growth may be limited by the capacity of its internal and external
resources rather than by the absence of market demand.
Our Chief Executive Officer, Paul R. Sohmer, M.D., joined us in 2000.
Additionally, the Company's Board and its management team have undergone
personnel changes during 2000. Although the Company believes that Dr. Sohmer and
the new members of its Board and management team are currently integrated with
the other members of its management team, the Company cannot assure you that its
management team will be able to continue to work together effectively or manage
its growth successfully. The Company believes that the successful integration of
Dr. Sohmer into its management team is critical to its ability to manage its
operations effectively and support its anticipated future growth.
DEPENDENCE ON A LIMITED NUMBER OF PRODUCTS
The Company anticipates that sales and rentals of PREP and AutoPap for
cervical cancer screening will account for the substantial majority of the
Company's revenues. The Company's long-term success of its core business will
depend, in significant part, on its ability to achieve market acceptance of PREP
and AutoPap in the United States for cervical cancer screening. There can be no
assurance that the Company will achieve market acceptance for PREP and AutoPap,
and the failure to do so would have a material adverse effect on the Company's
business, financial condition and results of operations.
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DEVELOPMENT OF STRATEGIC PARTNERSHIP FOR INTELLECTUAL PROPERTY
An important element of the Company's strategy is its plan to enter
into strategic partnerships for the research and development of alternative
applications for its extensive body of intellectual property. The Company
believes that recent advances in genomics, biology, and informatics are
providing new opportunities to leverage TriPath Imaging's proprietary
technology, but there can be no assurance that the Company will succeed in
finalizing any strategic partnerships to facilitate the exploitation of the
Company's intellectual property estate. The failure to do so could have a
material adverse effect on the Company's future prospects outside of the
cervical cytology market and could impact its financial condition and results of
operations.
LIMITED MANUFACTURING EXPERIENCE AND CAPACITY
We intend to manufacture PREP and AutoPap, and related products either
at our Burlington, North Carolina, or at our Redmond, Washington facilities.
Currently we have limited manufacturing experience and capabilities for high
volume test kit manufacturing.
We expect that we may have to substantially increase our manufacturing
capabilities. We may not be able to recruit and retain skilled manufacturing
personnel to establish sufficient manufacturing capability and capacity. Even if
we are able to establish sufficient manufacturing capability and capacity, we
still may be unable to manufacture our products:
- in a timely manner;
- at a cost or in quantities necessary to make them commercially
viable;
- in conformance with Quality System requirements; or
- in a manner which otherwise insures our products' quality.
If we cannot successfully increase our manufacturing capability and
capacity, or successfully contract with third parties to manufacture our
products, we may never become a profitable company.
DEPENDENCE ON SINGLE OR LIMITED SOURCE SUPPLIERS
We currently obtain certain components of our products on a single
source basis from certain suppliers. If we were unable to successfully obtain
sufficient quantities of components on a cost-competitive and timely basis from
these single and limited source suppliers, we would not be able to manufacture
our products in a cost effective or timely manner. If we cannot manufacture our
products in a cost effective or timely manner, it would harm our ability to
become a profitable company.
If any of the components of our products were no longer available in
the marketplace, we could be forced to further develop our technology to
incorporate alternate components. We also may try to establish relationships
with additional suppliers or vendors for components for our products, so long as
we are not prohibited from doing so by any existing contractual obligations. We
may not be able to further develop our technology to incorporate new components
or establish relationships with additional suppliers or vendors for the
necessary components of our products.
The use of any new components or replacement components from
alternative suppliers into our products may require us to submit premarket
approval application supplements to the FDA. We would then need FDA approval on
any premarket approval application supplements we have filed before we could
market our products with new or replacement components.
Ultimately, we may not be able to successfully develop, obtain, or
incorporate replacement components into our products. Even if we were able to
successfully incorporate new components into our products, the FDA may not
approve these new components quickly, if at all.
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HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT; UNCERTAINTY OF FUTURE
PROFITABILITY
As of December 31, 2000, our accumulated deficit was $184.7 million. We
expect continued losses from our business during 2001, as we continue to market
our products, continue product development initiatives and perform additional
clinical studies.
Our operating expenses have been concentrated in the following areas:
- the extent to which the Company's products gain market
acceptance;
- the timing and volume of system placements;
- regulatory and reimbursement matters;
- introduction of alternative technologies by competitors;
- research and development activities;
- sales and marketing activities;
- litigation related expenses;
- preparation and submission of premarket approval applications
to the FDA;
- general administrative functions;
- pricing of competitive products; and
- the cost and effect of promotional discounts, sales, and
marketing programs and strategies we adopt.
We expect that our marketing and sales expenses associated with our
products will increase in the future as a result of recently expanding our
marketing and sales efforts to further the commercial rollout of our products,
which could contribute to financial losses for us.
To become profitable, we must:
- successfully market our products in the United States;
- develop and obtain regulatory approval for new products;
- manufacture our products profitably and at an acceptable level
of quality; and
- establish appropriate internal financial controls and other
infrastructure necessary to support large-scale business
operations.
OUR STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE
The stock market has, from time to time, experienced extreme price and
volume fluctuations. Often these fluctuations are unrelated or disproportionate
to the actual operating performance of the companies whose stock is fluctuating.
The market prices of securities of biotechnology and medical device companies,
in particular, have been extremely volatile. Many factors could cause the market
price of TriPath Imaging's stock to decline, including:
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- failure to successfully implement aspects of the Company's
growth strategy;
- failure to meet research and development goals related to the
Company's products and services;
- technological innovations by the Company's competitors or in
competing technologies;
- investor perception of the Company's industry; and
- general technology or biotechnology trends.
Occasionally, when the market price of a stock has been volatile,
holders of that stock have instituted securities class action litigation against
the Company that issued the stock. If any of the Company's stockholders brought
such a lawsuit against it, even if the lawsuit was without merit, the Company
could incur substantial costs defending the lawsuit. The lawsuit would also
divert the time and attention of the Company's management.
UNCERTAINTY OF MARKET ACCEPTANCE OF THE COMPANY'S PRINCIPAL PRODUCTS
Our success and growth depend primarily on market acceptance by
clinical laboratories, third party payors and health care providers of our
products for their primary intended use in cervical cancer screening. The market
may never widely accept our products. Market acceptance of our products will
depend on our ability to convince the market that:
- there are limitations in the conventional Pap smear process of
sample collection, slide preparation and screening; and
- our products are better than the conventional Pap smear
process because they substantially overcome its shortcomings.
We may not be able to convince the market that our products are cost
competitive compared to the conventional Pap smear process. In addition,
clinical laboratories, third-party payors, and health care providers may not
accept our products as a replacement to the conventional Pap smear collection
process. Even if PREP, AutoPap and other products do gain market acceptance,
their level of sales will still largely depend on the availability and level of
reimbursement from third-party payors, such as private insurance plans, managed
care organizations and Medicare and Medicaid.
FUTURE CAPITAL NEEDS AND UNCERTAINTY OF AVAILABILITY OF ADDITIONAL FINANCING
The Company has had negative cash flow from operations since it began
doing business, and expects negative cash flow from operations to continue at
least through the third quarter of 2001. The Company did complete a private
placement of equity securities with Roche during 2000 which resulted in
additional funds of $43 million. At December 31, 2000, we had approximately
$54.3 million in cash and cash equivalents. Management believes that its
existing cash and existing debt and lease financing will be sufficient to enable
the Company to meet its future cash obligations at least through 2001.
We may be unable to obtain adequate funds, whether obtained through
financial markets or from collaborative or other arrangements with corporate
partners or other sources, when we need them, or we may be unable to find
adequate funding on favorable terms, if at all. If we were unable to fund our
future capital requirements, it would significantly harm our ability to become a
profitable company.
The size of our future capital requirements depends on several factors,
including:
- the progress and scope of clinical trials;
- the timing and costs of filing future regulatory submissions;
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- the timing and costs required to receive both United States
and foreign governmental approvals;
- the cost of filing, prosecuting, defending and enforcing
patent claims and other intellectual property rights;
- the extent to which our products gain market acceptance;
- the timing and costs of product introductions;
- the extent of our ongoing research and development programs;
- the costs of training laboratory personnel to become
proficient with the use of our products; and
- the costs of developing marketing and distribution
capabilities and manufacturing sufficient quantities of our
products.
Many of these factors may be out of the Company's control. There is no
guarantee that the assumptions underlying management's estimates about its needs
for future capital will prove to be accurate.
CONSEQUENCES OF FUTURE FINANCING ARRANGEMENTS
We may choose to raise additional funding to meet our future capital
requirements through a variety of financing methods, including:
- lease arrangements;
- debt or equity financings; or
- strategic alliances.
If we were to raise additional funding through the sale of equity or
securities convertible into equity, the value of the existing stockholders'
shares could be reduced. In addition, if we obtain additional funds through
arrangements with collaborative partners, we may have to relinquish rights to
certain of our technologies or potential products that we would otherwise seek
to develop or commercialize ourselves.
EFFECTS OF DECISIONS BY CONTROLLING STOCKHOLDERS
As of December 31, 2000, our directors, executive officers or their
affiliates, excluding Roche, owned approximately 7% of our outstanding common
stock and Roche owned approximately 23% of our outstanding common stock.
Pursuant to the terms of the Roche transaction, Roche has the right to purchase
5,000,000 additional shares of our common stock through the exercise of warrants
and has certain anti-dilution rights with respect to these warrants in order
maintain its existing level of ownership. One Roche designee serves as a member
of our Board of Directors. As a result, our controlling stockholders are able to
significantly influence all matters requiring stockholder approval, including
the election of directors and the approval of significant corporate
transactions. This concentration of ownership could also delay or prevent a
change in control of TriPath Imaging that may be favored by other stockholders.
DEPENDENCE ON PATENTS, COPYRIGHTS, LICENSES AND PROPRIETARY RIGHTS
To protect our proprietary technology, rights and know-how, we rely on
a combination of:
- patents;
- trade secrets;
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- copyrights; and
- confidentiality agreements.
We hold 77 foreign patents, 104 U.S. patents and have four additional
U.S. patents pending. These patents will expire from 2012 through 2018. Our
reliance on patents poses the following risks for our company:
- our pending patent applications may not ultimately issue as
patents;
- patents we obtain may not be broad enough to protect our
proprietary rights;
- the claims allowed in any of our existing or future patents
may not provide competitive advantages for our products;
- competitors may challenge or circumvent our patents or pending
applications; and
- in certain foreign countries, protection of our patent and
other intellectual property may be unavailable or very
limited.
This may make the possibility of piracy of our technology and products
more likely. We cannot guarantee that the steps we have taken to protect our
intellectual property will be adequate to prevent infringement or
misappropriation of our technology. In addition, detection of infringement or
misappropriation is difficult. Even if we do detect infringement or
misappropriation of our technology, we may be unable to enforce our proprietary
rights, which could result in harm to our business. We may engage in litigation
to attempt to:
- enforce our patents;
- protect our trade secrets or know-how;
- defend ourselves against claims that we infringe the rights of
others; or
- determine the scope and validity of the patents or
intellectual property rights of others.
Any litigation could be unsuccessful, result in substantial cost to us,
and divert our management's attention, which could harm our business.
RISK OF THIRD-PARTY CLAIMS OF INFRINGEMENT
The large role that patents play in our industry in general may pose
the following risks for our company:
- we cannot be sure that our products or technologies do not
infringe patents of competitors that may be granted in the
future pursuant to pending patent applications;
- we cannot be sure that our products do not infringe any
existing patents or proprietary rights of third parties; and
- we cannot be sure that a court would rule that our products do
not infringe any existing third-party patents or would
invalidate any existing patents in our favor.
If a court were to uphold any claims of infringement made by existing
patent holders, we could then be:
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- prevented from selling our products;
- required to obtain licenses from the owners of the patents; or
- required to redesign our products.
In the event that a court were to uphold a claim of patent infringement
against us, we may not be able to obtain licenses from the owners of the patents
or be able to successfully redesign our products to avoid patent infringement.
If we were unable to obtain the necessary licenses or successfully redesign our
products, it could seriously harm our ability to become a profitable company.
INTERNATIONAL SALES AND OPERATIONS RISKS
The Company is currently selling its products to customers in
Australia, Asia, South America and Europe. While the Company is evaluating
marketing and sales channels abroad, including contract sales organizations,
distributors and marketing partners, the Company has very limited foreign sales
channels in place. There can be no assurance that the Company will successfully
develop significant international sales capabilities or that, if the Company
establishes such capabilities, the Company will be successful in obtaining
reimbursement or any regulatory approvals required in foreign countries.
International sales and operations may be limited or disrupted by the imposition
of government controls, export license requirements, political instability,
trade restrictions, changes in tariffs, difficulties in staffing and managing
international operations, changes in applicable laws, less favorable
intellectual property laws, longer payment cycles, difficulties in collecting
accounts receivable, fluctuations in currency exchange rates and potential
adverse tax consequences. Foreign regulatory agencies often establish product
standards different from those in the United States and any inability to obtain
foreign regulatory approvals on a timely basis, if at all, could have a material
adverse effect on the Company's international business operations. Additionally,
if significant international sales occur, the Company's business, financial
condition and results of operations could be adversely affected by fluctuations
in currency exchange rates as well as increases in duty rates. There can be no
assurance that the Company will be able to successfully commercialize its
products or any future products in any foreign market.
LIMITED MARKETING AND SALES RESOURCES
During the fourth quarter of 2000, the Company added to its marketing
and sales forces to more effectively market its products. Even with the
increased size of its sales force, TriPath Imaging may not be able to
successfully promote its products to clinical laboratories, health care
providers or third-party payors. In addition, the Company must educate health
care providers and third-party payors regarding the clinical benefits and
cost-effectiveness of its products because of the market's limited awareness.
The Company may not be able to recruit and retain additional skilled marketing,
sales, service or support personnel to help in its achievement these goals when
needed.
Our marketing success in the United States and abroad will depend on
whether we can:
- obtain required regulatory approvals;
- successfully demonstrate the cost-effectiveness and
clinical-effectiveness of our products;
- further develop our direct sales capabilities; and
- establish arrangements with contract sales organizations,
distributors and marketing partners.
If we cannot successfully expand our marketing and sales capabilities
in the United States and in international markets, we may never become a
profitable company.
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RISKS RELATED TO OUR INDUSTRY
ABILITY TO ATTAIN OR MAINTAIN REQUIRED COMPLIANCE WITH REGULATIONS GOVERNING
MANUFACTURING OF MEDICAL DIAGNOSTIC DEVICES.
Manufacturers of medical diagnostic devices face strict federal regulations
regarding the quality of manufacturing. For example, the FDA periodically
inspects the manufacturing facilities of diagnostic device manufacturers to
determine compliance with regulations. Our current and future manufacturing and
design operations must comply with these and all other applicable regulations,
including regulations imposed by other governments. If we fail to comply with
quality systems regulations we could face civil or criminal penalties or
enforcement proceedings. These proceedings may require us to recall a product,
to stop placing our products in service or to stop selling our products. Similar
results could occur if we violate equivalent foreign regulations. We may not be
able to attain or maintain compliance with quality systems requirements. Any
failure to comply with the applicable manufacturing regulations would have a
material adverse effect on our business.
COMPETITION; TECHNOLOGICAL CHANGE
The diagnostic market for cervical cancer currently consists of both
the conventional Pap smear procedure and new and developing technologies. Some
of these newly-developed technologies have already received FDA approval with
product labeling that has been marketed as more effective than the conventional
Pap smear for the detection of disease in certain patient populations. TriPath
Imaging may not be able to successfully compete against companies marketing
products based on competing technologies.
Certain of our existing and potential competitors may have several
competitive advantages over us because they:
- possess greater financial, marketing, sales, distribution and
technological resources;
- have more experience in research and development, clinical
trials, regulatory matters, customer support, manufacturing
and marketing; and
- have received third-party payor reimbursement for their
products.
These competitors may manufacture, market and sell their products or
services more successfully than us, which could adversely affect our product
sales.
Competition in the medical device industry is intense. Within the
diagnostic market for cervical cancer, we will face direct competition from
companies that manufacture thin-layer slide preparation or automated screening
systems. Our products could be rendered obsolete or uneconomical because of:
- technological advances by current or future competitors;
- the introduction and market acceptance of competitors'
products; or
- the introduction and market acceptance of new cervical cancer
detection methods.
Our products must remain competitive in accuracy and effectiveness,
cost, including both charges by us to the laboratory and the laboratory's labor
and overhead costs, convenience, perception among influential opinion leaders,
cytopathologists and laboratories, and processing speed and reliability. To
effectively compete, we must keep pace with the rapid product development and
technological change in our industry. Our products must demonstrate accuracy and
cost effectiveness that equals or exceeds conventional preparation and review of
Pap smears and the technology that may be offered by our competitors. We cannot
guarantee that our products will be competitive in any of these areas.
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DEPENDENCE ON THIRD-PARTY REIMBURSEMENT
Our ability to successfully sell our products for cervical cancer
screening in the United States and other countries depends on the availability
of adequate reimbursement from third-party payors such as private insurance
plans, managed care organizations and Medicare and Medicaid. Virtually all of
our revenues will be dependent on customers who rely on third party
reimbursement. Third-party healthcare payors in the United States are
increasingly sensitive to containing healthcare costs and heavily scrutinize new
technology as a primary factor in increased healthcare costs. Third-party payors
may influence the pricing or perceived attractiveness of our products and
services by regulating the maximum amount of reimbursement they provide or by
not providing any reimbursement. Medical community or third-party healthcare
payors may deny or delay acceptance of our products or may provide reimbursement
at levels that are inadequate to support adoption of our technologies.
If these payors do not reimburse for our preparation and screening
products, or only provide reimbursement significantly below the amount
laboratories charge patients to perform screening with our products, our
potential market and revenues will be significantly limited. Use of our products
may never become widely reimbursed, and the level of reimbursement we obtain may
never be sufficient to permit us to generate substantial revenue.
A significant part of the Company's strategy is to market PREP and
AutoPap together, which will require FDA approval for joint use of these
products. Even if the FDA approves our application for joint use of these
products, to successfully market AutoPap and PREP together, a CPT code will need
to be established covering the combined use of these products. The CPT Editorial
Board meets infrequently to review and establish new CPT codes. Any delay in
receiving FDA approval could cause a delay in having a CPT code established for
the use of AutoPap with PREP, if a CPT code is established at all. This delay
could hamper the marketing of the combined product and have a material effect on
TriPath Imaging's business.
Convincing third-party payors to provide reimbursement is a costly and
time consuming process for the following reasons:
- reimbursement approval is required from each payor
individually; and
- obtaining this approval from the third-party payor typically
requires the presentation of scientific and clinical data to
support the use of the products.
Ultimately, whether a third-party payor is willing to provide
reimbursement for the use of our products at a level that can allow our company
to succeed depends on several unpredictable factors, including:
- the level of demand for our products by physicians;
- the payor's determination that our products are an improvement
over the conventional Pap smear process; and
- the payor's determination that our products are safe and
effective, medically necessary, appropriate for specific
patient populations, and cost effective.
The Company may face particular difficulties convincing third-party
payors that its products are cost effective because the up-front, direct costs
of using the products will initially be greater than the cost of the
conventional Pap smear. As a result, the Company will need to convince
third-party payors that the use of its products will result in a net overall
cost savings to the health care system.
LIMITED NUMBER OF CUSTOMERS
A significant portion of our product sales will be concentrated among a
relatively small number of large, and medium-sized, clinical laboratories.
Moreover, due to consolidation in the clinical laboratory
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industry, we expect that the number of potential domestic customers for our
products may decrease. These factors increase our dependence on sales to the
largest clinical laboratories and the bargaining power of those potential
customers. Our market research indicates that over 30% of all U.S. Pap smears
are processed by the two largest laboratories. Each of these companies operates
multiple laboratory facilities nationwide.
We will have to make this number of potential customers aware of our
products and then convince them to accept and use our products. To gain
acceptance of our products within this small customer base, we will have to
successfully demonstrate the benefits of our products over the conventional Pap
smear process and other alternative methods of sample collection, slide
preparation and cervical cancer screening. In addition, to generate demand for
our products among these clinical laboratories, we believe that we must:
- educate doctors and health care providers on, and convince
them of, the clinical benefits and cost-effectiveness of our
products; and
- demonstrate to doctors and health care providers that adequate
levels of third-party payor reimbursement will be available
for our products.
Ultimately, we may not be able to successfully sell our products to
large clinical laboratories. Even if we do successfully sell our products to
large clinical laboratories, those sales may not generate enough revenue to make
us a profitable company.
PRODUCT LIABILITY AND ADEQUATE INSURANCE AGAINST LIABILITY
The commercial screening of Pap smears has generated significant
malpractice litigation. As a result, we face product liability, errors and
omissions or other claims if our products are alleged to have caused a false-
negative diagnosis. Although we have product liability insurance, it could
become increasingly difficult for us to obtain and maintain product liability
coverage at a reasonable cost or in amounts sufficient to protect us against
potential losses. If we are able to obtain adequate product liability insurance
at a reasonable cost a successful product liability claim or a series of claims
brought against us could require us to pay substantial amounts that would
decrease our profitability, if any.
On January 29, 2001, the Company was added as a defendant to an action
commenced on September 12, 2000 in California Superior Court in Los Angeles
County against several other defendants. The complaint alleges that certain
defendants, including the Company, incorrectly analyzed the product of a Pap
smear procedure performed on one of the plaintiffs. The Company believes the
alleged equipment involved was the AutoPap QC instrument, a product no longer
marketed by the Company. The plaintiffs seek general damages against all
defendants in the aggregate amount of $3 million and special damages in an
unspecified amount. The Company intends to defend itself vigorously and has
denied all claims asserted against it in this action. The action is in an early
stage and its ultimate outcome cannot be predicted with certainty; however the
Company believes that the disposition of the matter should not have a material
adverse effect on its financial position.
COMPETITION TO RETAIN KEY PERSONNEL
We will depend heavily on the principal members of our management and
scientific staff. The loss of their services might impede achievement of our
strategic objectives or research and development. Our success depends on our
ability to retain key employees and to attract additional qualified employees,
which may be particularly difficult to do in the future. Competition for highly
skilled scientific and management personnel is intense, particularly in the
geographic areas in which we currently are located, and these resources are
scarce relative to the needs of a growing high technology business sector. The
failure to recruit such personnel or the loss of existing personnel could
adversely affect our business.