UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
|X| Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended September 30, 1999.
|_| Transition period pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from _____________ to ______________.
0-20727
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(Commission File Number)
Novoste Corporation
-------------------
(Exact Name of Registrant as Specified in Its Charter)
Florida 59-2787476
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3890 Steve Reynolds Blvd., Norcross, GA 30093
--------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone, including area code: (770) 717-0904
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days.
(Item 1) Yes |X| No |_|
(Item 2) Yes |X| No |_|
As of October 22, 1999 there were 14,169,851 shares of the Registrant's Common
Stock outstanding.
Exhibit Index on page: 25
NOVOSTE CORPORATION
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 1999
(unaudited) and December 31, 1998 3
Consolidated Statements of Operations (unaudited) for
the three and nine months ended September 30, 1999
and 1998 4
Consolidated Statements of Cash Flows (unaudited) for
the nine months ended September 30, 1999 and 1998 5
Notes to Unaudited Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-21
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
PART II. OTHER INFORMATION
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
EXHIBIT INDEX 25
2
NOVOSTE CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1999 1998
------------- ------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 8,179,574 $ 2,352,517
Short-term investments 40,429,175 23,695,451
Accounts receivable 1,039,223 8,775
Inventory 2,349,514 537,351
Prepaid expenses 410,698 168,142
------------- ------------
Total current assets 52,408,184 26,762,236
------------- ------------
Property and equipment, net 3,197,354 2,327,467
License agreements, net 115,893 126,121
Other assets 254,192 266,408
------------- ------------
$ 55,975,623 $ 29,482,232
============= ============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 1,806,709 $ 1,059,591
Accrued expenses and taxes withheld 4,284,450 3,905,548
------------- ------------
Total current liabilities 6,091,159 4,965,139
------------- ------------
Shareholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized;
no shares issued and outstanding -- --
Common stock, $.01 par value, 25,000,000 shares authorized;
14,175,255 and 10,704,817 shares issued, respectively 141,753 107,048
Additional paid-in capital 127,908,972 77,022,814
Accumulated deficit (75,847,546) (52,281,002)
------------- ------------
52,203,179 24,848,860
Less treasury stock, 5,780 shares of common stock at cost (23,840) (23,840)
Unearned compensation (2,294,875) (307,927)
------------- ------------
Total shareholders' equity 49,884,464 24,517,093
------------- ------------
$ 55,975,623 $ 29,482,232
============= ============
See accompanying notes.
3
NOVOSTE CORPORATION
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
------------------------------- -------------------------------
Net revenue $ 566,872 $ -- $ 1,204,699 $ --
Cost of sales 539,777 -- 1,216,943 --
------------ ------------ ------------ ------------
Gross Margin 27,095 -- (12,244) --
------------ ------------ ------------ ------------
Operating Expenses
Research and development 6,115,556 5,685,268 17,950,943 13,597,906
Sales and marketing 1,678,437 832,230 4,519,703 1,703,656
General and administrative 917,379 799,805 2,731,284 1,852,670
------------ ------------ ------------ ------------
Total operating expenses 8,711,372 7,317,303 25,201,930 17,154,232
------------ ------------ ------------ ------------
Loss from operations (8,684,277) (7,317,303) (25,214,174) (17,154,232)
------------ ------------ ------------ ------------
Interest income 618,007 511,560 1,647,630 1,724,647
------------ ------------ ------------ ------------
Net loss $ (8,066,270) $ (6,805,743) $(23,566,544) $(15,429,585)
============ ============ ============ ============
Net loss per share $ (0.57) $ (0.64) $ (1.79) $ (1.47)
============ ============ ============ ============
Weighted average shares outstanding 14,134,862 10,601,916 13,170,928 10,483,965
============ ============ ============ ============
See accompanying notes.
4
NOVOSTE CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months
ended September 30,
1999 1998
------------ ------------
Cash flows from operating activities
Net loss $(23,566,544) $(15,429,585)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 691,546 392,536
Issuance of stock for services or compensation 348,723 741,740
Amortization of deferred compensation 566,177 --
Changes in assets and liabilities:
Accounts receivable (1,030,448) --
Inventory (1,812,163) (236,430)
Prepaid expenses (242,555) (117,526)
Accounts payable 747,118 680,528
Accrued expenses and taxes withheld 378,902 766,600
Other 12,215 (195,602)
------------ ------------
Net cash used by operations (23,907,029) (13,397,739)
------------ ------------
Cash flows from investing activities
Maturity (purchase) of short-term investments (16,733,724) 1,581,704
Purchase of property and equipment, net (1,551,206) (1,645,075)
------------ ------------
Net cash (used) provided by investing activities (18,284,930) (63,371)
------------ ------------
Cash flows from financing activities
Proceeds from issuance of common stock 48,019,016 934,469
------------ ------------
Net cash provided by financing activities 48,019,016 934,469
------------ ------------
Net increase in cash and cash equivalents 5,827,057 (12,526,641)
Cash and cash equivalents at beginning of period 2,352,517 35,993,933
------------ ------------
Cash and cash equivalents at end of period $ 8,179,574 $ 23,467,292
============ ============
See accompanying notes.
5
NOVOSTE CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and in accordance with instructions to Article 10 of
Regulation S-X. Accordingly, such consolidated financial statements do not
include all of the information and disclosures required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included.
The operating results of the interim periods presented are not necessarily
indicative of the results to be achieved for the year ending December 31, 1999.
The accompanying consolidated financial statements should be read in conjunction
with the audited financial statements and notes thereto for the year ended
December 31, 1998 included in the Company's 1998 Annual Report on Form 10-K
filed with the Securities and Exchange Commission ("SEC").
The consolidated financial statements include the accounts of Novoste
Corporation and its wholly-owned subsidiaries incorporated in August 1998 in The
Netherlands, in December 1998 in Belgium and February 1999 in Germany.
Significant intercompany transactions and accounts have been eliminated.
Note 2. Inventories
Inventories are stated at the lower of cost or market. Inventories are comprised
of the following at September 30, 1999:
September 30, 1999 December 31, 1998
------------------ -----------------
Finished Goods $ 1,804,089 $ 382,424
Work in Process 42,968 --
Raw Materials 502,457 154,927
------------------ -----------------
Total $ 2,349,514 $ 537,351
================== =================
Note 3. Net Loss Per Share
The basic and diluted loss per share is computed based on the weighted average
number of common shares outstanding. Common equivalent shares are not included
in the per share calculations where the effect of their inclusion would be
antidilutive.
Note 4. Cash Equivalents and Investments
Cash equivalents are comprised of certain highly liquid investments with
maturities of less than three months at the time of their acquisition. In
addition to cash equivalents, we have investments in commercial paper that are
classified as short-term (mature in more than 90 days but less than one year).
Management determines the appropriate classification of debt securities at the
time of purchase and reevaluates such designation as of each balance sheet date.
Debt securities are classified as held-to-maturity when the Company has the
positive intent and ability to hold the securities to maturity. Investments
held-to-maturity are carried at amortized cost, adjusted for the amortization or
accretion of premiums or discounts without recognition of gains or losses that
are deemed to be temporary. Premiums and discounts are amortized or accreted
over the life of the related instrument as an adjustment to yield
6
using the straight-line method, which approximates the effective interest
method. Interest income is recognized when earned.
Marketable equity securities and debt securities not classified as
held-to-maturity are classified as available-for-sale. Available-for-sale
securities are carried at fair value, with the unrealized gains and losses
reported in a separate component of shareholders' equity, if significant. The
amortized cost of debt securities in this category is adjusted for amortization
of premiums and accretion of discounts to maturity. Such amortization is
included in investment income. Realized gains and losses and declines in value
judged to be other-than-temporary on available-for-sale securities are included
in investment income. The cost of securities sold is based on the specific
identification method. Interest and dividends on securities classified as
available-for-sale are included in investment income. At September 30, 1999 fair
value approximated net book value for all short-term investments.
Note 5. Revenue Recognition
Revenues from sales of products are recognized at the time of shipment with
allowances provided for estimated returns, warranty costs and doubtful accounts.
Note 6. Consulting Agreements
On May 13, 1999 the Company granted stock options to the members of its Clinical
Advisory Board. These options were priced at the fair market value on the date
of grant and the related consulting expense will be recognized over the one-year
vesting period.
Note 7. Follow-on Equity Offering
On March 19, 1999 the Company completed a follow-on equity offering (the
"Offering") of 2,400,000 newly issued shares of its common stock at a public
offering price of $20 per share. On March 24, 1999 the Company issued an
additional 160,000 shares of common stock pursuant to the exercise of the
underwriters' over-allotment option. Net proceeds to the Company after the
exercise of the underwriters' over-allotment option and all related expenses
approximated $47.5 million.
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward Looking Information
The statements contained in this Form 10-Q that are not historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including
statements regarding the expectations, beliefs, intentions or strategies
regarding the future. The Company intends that all forward-looking statements be
subject to the safe-harbor provisions of the Private Securities Litigation
Reform Act of 1995. These forward-looking statements reflect the Company's views
as of the date they are made with respect to future events and financial
performance, but are subject to many uncertainties and risks which could cause
the actual results of the Company to differ materially from any future results
expressed or implied by such forward-looking statements. Some of these risks are
discussed below in the section "Certain Factors That May Impact Future
Operations." Additional risk factors are discussed in our prospectus dated March
15, 1999 under the caption "Risk Factors" beginning on page 9 and other reports
filed by the Company from time to time on Forms 10-K, 10-Q and 8-K. The Company
does not undertake any obligation to update or revise any forward-looking
statement, made by it or on its behalf, whether as a result of new information,
future events, or otherwise.
Overview
Novoste commenced operations as a medical device company in May 1992. Since
1994, we have devoted substantially all of our efforts to developing the
Beta-CathTM System, an intraluminal beta radiation catheter delivery system
designed to reduce the frequency of restenosis subsequent to percutaneous
transluminal coronary angioplasty ("PTCA") as well as other interventional
procedures.
For the period since our capitalization through December 31, 1998 we earned
minimal non-recurring revenues and experienced significant losses in each
period. The Company commenced the active marketing of the Beta-CathTM System in
Europe in January 1999. At September 30, 1999 we had an accumulated deficit of
approximately $75.8 million. We expect to continue to incur significant
operating losses through at least 2000 as we conduct clinical trials, seek
regulatory approval or clearance for our products, continue research and
development projects, expand our sales and marketing efforts in contemplation of
product introduction and market development, and increase our administrative
activities to support our growth.
The clinical trials may not demonstrate the safety and efficacy of the Beta-Cath
System. Additionally, we may not obtain necessary approvals for the Beta-Cath
System from the FDA, the State of Georgia Department of Natural Resources or
other state or foreign governmental agencies. Our research and development
efforts may not be successfully completed. We may not successfully introduce the
Beta-Cath System or attract any significant level of market acceptance for the
Beta-Cath System or any other product we develop. We may never achieve
significant revenues from sales of our Beta-Cath System and we may never achieve
or sustain profitability.
Clinical Trials
We are currently conducting two pivotal clinical trials, the Beta-Cath System
Trial and the START Trial as well as several other trials. The pivotal trials
are intended to support a pre-market approval application to the FDA to market
our device in the United States to reduce the incidence of coronary restenosis
following PTCA, stent placement and the treatment of "in-stent" restenosis.
The Beta-Cath System Trial. On July 30, 1997 we initiated our Beta-Cath System
Trial, a randomized, triple-masked, placebo-controlled, multicenter human
clinical trial under an investigational device
8
exemption granted by the FDA. The Beta-Cath System Trial seeks to determine the
clinical safety and effectiveness of the Beta-Cath System in reducing coronary
restenosis following PTCA or stent placement. We initially targeted enrollment
for approximately 1,100 patients in the trial at up to 55 clinical sites located
in the United States. The protocol contemplated that patients would be divided
into two approximately equal subgroups, one receiving PTCA alone and one
receiving coronary stents in addition to PTCA.
Patients in each subgroup of the trial received, determined on a random basis,
either vascular brachytherapy through the Beta-Cath System using a 30mm
radiation source train or no vascular brachytherapy through a placebo version of
the Beta-Cath System. In both subgroups, patients who received the beta
radiation received dosages of 14 gray for vessels ranging from 2.70 to 3.35mm
and 18 gray for vessels ranging from 3.36 to 4.00mm. The protocol provides for
telephone follow-up with patients 30 days after treatment for PTCA patients and
monthly for newly stented patients up to the eighth month, and a follow-up
angiogram eight months after the initial treatment regardless of the treatment.
The primary endpoint of the trial is target vessel revascularization ("TVR"),
the incidence of an additional revascularization procedure in the vessel
originally treated within eight months. Other endpoints of the trial include
angiographic restenosis, late loss index, and the incidence of major adverse
cardiac events.
As is typical for patients undergoing stent placement, the patients in the stent
placement subgroup of the Beta-Cath System Trial received anti-platelet therapy
to prevent stent thrombosis, a condition which can lead to acute closure of the
treated artery. Stent thrombosis typically occurs within 30 days of treatment in
a small percentage of patients receiving stent placement. There were incidences
of stent thrombosis reported in the Beta-Cath System Trial. These patients
developed the condition later following their treatment than is normally
observed. As a result, in November 1998 we modified the Trial protocol for the
stent placement subgroup to extend the anti-platelet therapy from two weeks to
60 days following stent placement and to provide for additional follow-up
contact with these patients in the second, third and fourth months after
treatment. On April 27, 1999 we announced approval of our intention to increase
patient enrollment in the stent placement subgroup of the Trial and to extend
the anti-platelet therapy to a minimum of 90 days following stent placement.
These changes were made based upon a recommendation made by the Data Safety and
Monitoring Board (DSMB) at its March 1999 meeting. The DSMB is an independent
committee of clinicians and statisticians that has responsibility for review of
the study protocol and clinical events at regular intervals during patient
enrollment into the Trial. Based on its review of the available data set,
including the incidence of major adverse cardiac events, the DSMB proposed these
changes to ensure sufficient data to evaluate the safety and effectiveness of
the Beta-Cath System with the revised anti-platelet therapy protocol. We
completed enrollment in the PTCA subgroup in July 1999 and enrollment in the
stent placement subgroup with the extended antiplatelet therapy in September
1999. Enrollment in the Trial was stopped on September 30, 1999 after having
enrolled a total of 1,456 patients at 58 clinical sites, principally located in
the United States. A follow-up angiogram eight months after the initial
treatment will be performed to observe the treated artery. The angiogram will be
analyzed to determine if there has been an incidence of restenosis and to
measure late loss index.
The START Trial. On September 21, 1998 we initiated the "STents And Radiation
Therapy Trial" or START Trial, a randomized, triple-masked, placebo-controlled,
multicenter human clinical trial, under an investigational device exemption
granted by the FDA. The primary endpoint of this trial is target vessel
revascularization within eight months of treatment. The START Trial seeks to
determine the safety and effectiveness of the Beta-Cath System in treating
"in-stent" restenosis. We divided patients into two approximately equal
subgroups, one receiving vascular brachytherapy through the Beta-Cath System
using a 30mm radiation source train and the other receiving no vascular
brachytherapy through a placebo version of the Beta-Cath System. Patients who
received the beta radiation received dosages of 16 gray for vessels ranging from
2.70 to 3.35mm and 20 gray for vessels ranging from 3.36 to 4.00mm, slightly
higher doses than those used in our Beta-Cath System Trial because of radiation
shielding from stents
9
previously implanted in a procedure unrelated to this trial. Although the START
Trial protocol does not contemplate the placement of new stents, we believe that
approximately 20% of the enrolled patients received new stents. We surpassed our
targeted enrollment of 386 patients, and enrollment in this trial was completed
as of April 30, 1999. A total of 476 patients were enrolled at 51 sites, located
principally in the United States. A follow-up angiogram eight months after the
initial treatment will be performed to observe the treated artery. The angiogram
will be analyzed to determine if there has been an incidence of restenosis and
to measure late loss index.
We do not anticipate FDA approval to market the Beta-Cath System in the United
States for any indication any earlier than one year after the FDA accepts our
application for filing. Assuming the START Trial yields positive results, we
expect that our application seeking approval to market the Beta-Cath System in
the United States to treat "in-stent" restenosis will be submitted to the FDA
first and will be based upon the enrollment of 476 patients in that Trial.
The START 40 Trial. In addition, on June 22, 1999 we initiated the START 40
Trial. This multicenter clinical trial has a targeted enrollment of 200 patients
who will receive vascular brachytherapy using a 40 mm active radiation source
train. The START 40 Trial has an identical clinical design to the START Trial
and, therefore, we will use the START Trial's control group in analyzing the
clinical data from the START 40 Trial. The purpose of this trial is to gain
regulatory approval for the longer, 40mm radiation source train. Enrollment in
this trial of the planned 200 patients was completed on October 22, 1999.
BRIE Trial. We are currently conducting a 180 patient multicenter,
non-randomized registry trial in Europe, known as the BRIE trial. This registry
started in July 1998 and is intended to enhance market acceptance of the
Beta-Cath System among physicians and to collect additional clinical data to
support reimbursement approvals. As of October 22, 1999, 171 patients had been
enrolled at nine sites. We reported interim clinical results on August 31, 1999
for the first 90 patients who returned for angiographic follow-up. These
patients were all enrolled prior to the aforementioned extension of
anti-platelet therapy to a minimum of 90 days. The independent core lab provided
the following data:
PTCA Stent Total
Subgroup Subgroup Population
-----------------------------------------------------------------------------
NUMBER OF LESIONS 36 62 98
Restenosis - Initial Obstructed Segment(1) 8% 16% 13%
Late Loss Index 3% 17% 12%
-----------------------------------------------------------------------------
(1) For purposes of the interim analysis, the core lab approximated the
target lesion by analyzing the "initial obstructed segment" of the artery,
a 5mm or 10mm segment containing the minimum lumen diameter (MLD).
Restenosis was calculated using the MLD of this segment as compared to the
interpolated reference vessel diameter at follow-up.
The core lab also provided angiographic data on a broader vessel segment (beyond
the target lesion) to determine if there were cases where the radiation source
train did not adequately cover the arterial segment revascularized by balloon
angioplasty or stent placement, a concept known as "geographic miss". Geographic
miss often reduces the effectiveness of radiation because the target tissue is
insufficiently dosed. This broader variable of Target Vessel Restenosis was
measured with and without late coronary occlusion, an event observed in earlier
vascular brachytherapy trials in a small percentage of stent patients, before
the need for extended anti-platelet therapy (APT) was understood. None of the
patients included in the interim BRIE data analysis received an extended APT
regimen due to the timing of their
10
enrollment. The broader data set is as follows:
PTCA Stent Total
Subgroup Subgroup Population
-----------------------------------------------------------------------------
Number of Lesions 36 62 98
Target Vessel Restenosis 19% 35% 30%
Excluding Late Occlusions 17% 29% 24%
-----------------------------------------------------------------------------
Results of Operations
Net loss for the three months ended September 30, 1999 was $8,066,270, or ($.57)
per share, as compared to $6,805,743 or ($.64) per share, for the three months
ended September 30, 1998. Net loss for the nine months ended September 30, 1999
was $23,566,544 or ($1.79) per share as compared to $15,429,585 or ($1.47) per
share for the year earlier period. The increase in net loss for the three and
nine months ended September 30, 1999 compared to the year earlier period was
primarily due to increased research and development spending related to the
company's clinical trials and product development activities and increased sales
and marketing spending related to the commercial launch of the Beta-Cath System
in Europe.
Net Sales. Net sales of $566,872 were recognized in the three months ended
September 30, 1999. Net sales of $1,204,699 were recognized for the nine months
ended September 30, 1999. No revenues were earned for the three and nine months
ended September 30, 1998. The Company expects net sales to increase in the
future as direct distribution is expanded in Europe, and if and when the
Beta-Cath System is approved by the FDA and launched commercially in the U.S.
Cost of Sales. Cost of sales of $539,777 were incurred in the three months ended
September 30, 1999 and $1,216,943 for the nine months ended September 30, 1999.
No cost of sales were incurred for the three and nine months ended September 30,
1998. The Company expects cost of sales to closely approximate sales for the
year ended 1999 as the Company ramps up both its European production and sales
activities.
Research and Development Expenses. Research and development expenses increased
8% to $6,115,556 for the three months ended September 30, 1999 from $5,685,268
for the three months ended September 30, 1998. For the nine months ended
September 30, 1999 research and development expenses increased 32% to
$17,950,943 from $13,597,906 for the same period in 1998. These increases were
primarily the result of patient enrollment and follow-up costs in the Company's
clinical trials, the cost of supplying the Beta-Cath System to clinical sites,
and costs related to the ongoing development of the Beta-Cath System.
Sales and Marketing Expenses. Sales and marketing expenses increased 202% to
$1,678,437 for the three months ended September 30, 1999 from $832,230 for the
three months ended September 30, 1998. For the nine months ended September 30,
1999 sales and marketing expenses increased 265% to $4,519,703 from $1,703,656
for the same period in 1998. These increases were primarily the result of higher
personnel, trade show, consulting and promotional literature costs associated
with marketing the Company's product on a direct basis in Europe. The Company
expects sales and marketing expenses to increase significantly in the future as
direct distribution is expanded in Europe, and if and when the Beta-Cath System
is approved by the FDA and launched commercially in the U.S.
General and Administrative Expenses. General and administrative expenses
increased 15% to $917,379 for the three months ended September 30, 1999 from
$799,805 for the three months ended September 30, 1998. For the nine months
ended September 30, 1999 general and administrative expenses increased 47% to
$2,731,284 from $1,852,670 for the same period in 1998. This increase for the
three and nine month periods was primarily the result of additional management
personnel and higher salaries. The Company
11
expects general and administrative expenses to increase in the future in support
of a higher level of operations.
Interest Income. Net interest income increased 21% to $618,007 for the three
months ended September 30, 1999 from $511,560 for the three months ended
September 30, 1998. For the nine months ended September 30, 1999 interest income
decreased 5% to $1,647,630 from $1,724,647. The increase in interest income for
the quarter was primarily due to the increase in average cash equivalent and
short-term investment balances arising from the follow-on public offering
completed in March 1999.
Liquidity and Capital Resources
During the nine months ended September 30, 1999 and 1998 the Company used cash
to fund operations of $23.9 million and $13.4 million, respectively. The
increase in cash used in operations was due primarily to increased research and
development activities and the expansion of sales and marketing activities in
Europe. At September 30, 1999 the Company had commitments to purchase $3.2
million in inventory components of the Beta-Cath System over the next year. In
addition, on October 14, 1999 the Company signed a development and manufacturing
supply agreement with AEA Technologies QSA GmbH for a second source of
radioisotope supply and for the development of a smaller diameter source. This
agreement provides for the construction of a production line over the period
October 1, 1999 to February 2001. The cost of this production line is estimated
at $4,000,000 and will be paid by the Company as construction progresses.
Because of the development, manufacturing scale-up and commercialization of the
Beta-Cath System, Novoste's future cash needs for operating and investing
activities are anticipated to be higher than historical levels subject to the
factors discussed below.
On March 19, 1999 the Company completed a follow-on public offering of 2,400,000
newly issued shares of its common stock at a public offering price of $20 per
share. On March 24, 1999 the Company issued an additional 160,000 shares of
common stock pursuant to the exercise of the underwriters' over-allotment
option. Net proceeds to the Company after the exercise of the underwriters'
over-allotment option and all related expenses totaled $47.5 million.
The Company's principal source of liquidity at September 30, 1999 consisted of
cash, cash equivalents and short-term investments of $48.6 million. The Company
did not have any credit lines available or outstanding borrowings at September
30, 1999.
The Company anticipates that its operating losses will continue through at least
2000 as it expends substantial resources in funding clinical trials in support
of regulatory approvals, and continues to expand research and development and
sales and marketing activities. We believe that our existing capital resources
will be sufficient to fund the company through the end of 2000, but those
resources may prove insufficient. We cannot assure that additional financing, if
required, will be available on satisfactory terms, or at all. However, the
Company's future liquidity and capital requirements will depend upon numerous
factors, including, among others: the progress of the Company's clinical
research and product development programs; the receipt of and the time required
to obtain regulatory clearances and approvals; the resources required to gain
approvals; the resources the Company devotes to the development, manufacture and
marketing of its products; the resources required to hire and develop a direct
sales force in the United States and in the larger markets of Europe, develop
distributors internationally, and to expand manufacturing capacity; and market
acceptance and demand for its products. Additional capital may be required to
launch the Beta-Cath System in the United States. Novoste may in the future seek
to raise additional funds through bank facilities, debt or equity offerings or
other sources of capital. There can be no assurance that additional financing,
if required, will be available on satisfactory terms, or at all.
12
Impact of Year 2000
We have completed the process of evaluating the potential impact of what is
commonly referred to as the year 2000 issue, concerning the inability of certain
computer systems to properly recognize and process dates starting with the year
2000 and beyond. We are taking steps to ensure that our business systems
software and equipment will continue to function properly after December 31,
1999. In doing so, we have established a team, which is working directly with
management to (1) assess and test all internal information systems and other
systems that may be affected by the year 2000 date change; (2) assess and test
our products that may be affected by the year 2000 date change; (3) communicate
with third parties that supply our products to ensure they are addressing the
year 2000 issue; and (4) compose a contingency and disaster recovery plan to
ensure resolution of problems that may arise as a result of the year 2000 date
change.
As of September 30, 1999 items (1), (2), (3) and (4) above are complete. Because
the Company is relying on information provided to it by third parties to assess
the Year 2000 readiness of such vendors, the Company cannot provide assurances
that all of its critical vendors are or will be Year 2000 ready. As a
contingency, the Company has increased safety stock levels on its critical
component inventory.
The Beta-Cath System does not contain any real time clocks and therefore the
device itself does not present any year 2000 issues.
With respect to our internal business systems, an assessment of equipment and
software was started in September 1998. In addition, in anticipation of in-house
manufacturing, we purchased a complete manufacturing software package in January
1998 that includes integrated financial modules that replace our previous
financial software program. The contract for the purchase of the new software
package requires year 2000 compliance. We have completed testing to determine
that our internal systems are year 2000 compliant. All internal systems critical
to the Company's overall business have been inventoried and evaluated. As of
September 30, 1999, 90% of the Company's internal systems have been determined
to be year 2000 compliant or where upgraded and are now year 2000 compliant. The
remaining 10% of the Company's internal systems are ether slated for
obsolescence by or before December 31, 1999 or will be upgraded by October 31,
1999.
We have and will continue to devote the necessary resources to resolve all
significant year 2000 issues in a timely manner. Based upon current estimates,
we expect capital expenditures of approximately $100,000 will be necessary to
achieve year 2000 compliance. As of September 30, 1999 the Company has expended
approximately $60,000 for year 2000 compliance.
Regardless of the year 2000 compliance of our systems and products, we may be
adversely affected by disruptions in the operations of the enterprises with
which we interact. These business enterprises include suppliers, clinical
research organizations, corporate partners, both domestic and international,
government agencies, hospitals, physicians and other third parties. We cannot
reasonably predict the impact on our operations and financial condition if any
such businesses are adversely affected by the year 2000 issue.
Statements made herein about the implementation of various phases of our year
2000 program, the costs expected to be associated with that program and the
results we expect to achieve constitute forward-looking information. There are
many uncertainties involved in the year 2000 issue and the following important
factors, among others, could affect the impact of the year 2000 issue: (1) the
inherent uncertainty of the costs and timing of achieving compliance on the wide
variety of systems used by us, (2) the reliance on the efforts of vendors,
customers, government agencies and other third parties beyond our control to
achieve adequate compliance and avoid disruption of our business in early 2000
and (3) the
13
uncertainty of the ultimate costs and consequences of any unanticipated
disruption of our business resulting from the failure of one of our applications
or of a third party's systems.
CERTAIN FACTORS THAT MAY IMPACT FUTURE OPERATIONS
Dependence On The Successful Development And Commercialization Of The Beta-Cath
System
We have not yet successfully commercialized any product in the United States and
only started to sell the Beta-Cath System in Europe in December 1998. We
anticipate that for the foreseeable future we will be solely dependent on the
successful development and commercialization of the Beta-Cath System. Failure to
commercialize the Beta-Cath System would have a material adverse effect on our
business, financial condition and results of operations.
The Beta-Cath System will require further development and clinical testing, as
well as regulatory approval, before we can market it in the United States. Our
development efforts and clinical testing may not be successful.
Commercialization of the Beta-Cath System in Europe is subject to certain
additional risks. Physicians in Europe are generally less receptive to and
slower to adopt new medical devices and technologies than physicians in the
United States due to various factors. These factors include the influence of
national health care policies and reimbursement strategies of health care payors
and the frequent absence of pivotal human clinical trial results at the time a
manufacturer qualifies to apply the CE marking to a new medical device and
commences sale of the device. We may never achieve significant revenue from
sales in Europe or ever achieve or sustain profitability in our European
operations.
Limited Operating History; History Of Losses And Expectation Of Future Losses
Through At Least The Year 2000
We have a limited history of operations. Since our inception in May 1992, we
have been primarily engaged in developing and testing our Beta-Cath System. We
have generated only limited revenue and do not have experience in manufacturing,
marketing or selling our products in quantities necessary for achieving
profitability.
At September 30, 1999 we had accumulated a deficit of approximately $75.8
million since our inception in 1992. The commercialization of the Beta-Cath
System and other new products, if any, will require substantial additional
development, clinical, regulatory, manufacturing, sales and marketing and other
expenditures. We expect our operating losses to continue through at least 2000
as we continue to expand our product development, clinical trials and marketing
efforts. We may never commercialize the Beta-Cath System, or any other product,
or achieve or sustain profitability.
Clinical Testing Of Beta-Cath System; No Assurance Of Its Safety And
Effectiveness
The safety and effectiveness of the Beta-Cath System has not been determined in
a placebo-controlled, pivotal trial. We are currently conducting two
multi-center human clinical trials of the Beta-Cath System to determine its
safety and effectiveness. At September 30, 1999 we completed enrollment in both
the PTCA and stent placement subgroup of the Beta-Cath System Trial and had
enrolled a total of 1,456 patients at 58 clinical sites. We completed enrollment
in the START Trial in April 1999, having enrolled 476 patients at 51 sites,
principally located in the United States.
As is typical for patients receiving stent placement, the patients in the stent
placement subgroup of the Beta-Cath System Trial receive anti-platelet therapy
to prevent stent thrombosis, a condition which can
14
lead to acute closure of the treated artery. Stent thrombosis typically occurs
within 30 days of treatment in a small percentage of patients receiving stent
placement. There were incidences of stent thrombosis reported in the Beta-Cath
System Trial. These patients developed the condition later following their
treatment than is normally observed. As a result, in November 1998, we modified
the Trial protocol for the stent placement subgroup to extend the anti-platelet
therapy from two weeks to 60 days following stent placement and to provide for
additional follow-up contact with these patients in the second, third and fourth
months after treatment. On April 27, 1999 we announced approval of our intention
to increase patient enrollment in the stent placement subgroup of the Trial by
up to 300 more patients and to extend the anti-platelet therapy to a minimum of
90 days following stent placement. These changes were made based upon a
recommendation made by the Data Safety and Monitoring Board (DSMB) at its March
1999 meeting. Based on its review of the available data set, including the
incidence of major adverse cardiac events, the DSMB proposed these changes to
ensure sufficient data to evaluate the safety and effectiveness of the Beta-Cath
System with the revised anti-platelet therapy protocol.
Both of our current pivotal trials require follow-up examinations with patients
after eight months. It is only after analysis of a statistically significant
number of patients in one of these trials that we would apply for the regulatory
approvals required to commence marketing the Beta-Cath System in the United
States. Various factors, including performing follow-up examinations on
patients, could delay completion of either trial for an indeterminate amount of
time. The data from these trials, if completed, may not demonstrate the safety
and effectiveness of the Beta-Cath System and may not be adequate to support our
application to the FDA for pre-market approval. In particular, we cannot be sure
that the incidence of stent thrombosis seen in the Beta-Cath System Trial will
be resolved by the protocol modification. If the Beta-Cath System does not prove
to be safe and effective in clinical trials, our business, financial condition
and results of operations will be materially adversely affected. In addition,
the clinical trials may identify significant technical or other obstacles to
obtaining necessary regulatory approvals. Because vascular brachytherapy in
human coronary arteries is a relatively new treatment, the long-term effects on
patients are not known and likely will not be known for several years. As a
result, even if our current clinical trials indicate the Beta-Cath System is
safe and effective over an eight-month period, we cannot be sure that the
Beta-Cath System will be safe and effective over the long term.
No Assurance of Regulatory Approvals
United States Pre-Market Approvals.
We will not be able to commence marketing or commercial sales of the Beta-Cath
System in the United States unless we receive pre-market approval from the FDA.
We do not expect to submit a pre-market approval application until the second
quarter of 2000 at the earliest, following analysis of a statistically
significant number of patients in the START Trial.
We do not anticipate FDA approval to market the Beta-Cath System in the United
States for any indication any earlier than one year after the FDA accepts our
application for filing. Assuming the START Trial yields positive results, we
expect that our application seeking approval to market the Beta-Cath System in
the United States to treat "in-stent" restenosis will be submitted to the FDA
first and will be based upon the enrollment of 476 patients in that Trial. The
FDA could require that we submit results from our Beta-Cath System Trial prior
to considering our initial application for approval of our device in treating
"in-stent" restenosis. Instead of filing an additional, separate application, we
may amend our initial application relating to "in-stent" restenosis to seek
pre-market approval of the Beta-Cath System for use following PTCA and stent
placement based upon the results of the Beta-Cath System Trial. If we file such
an amendment, the FDA would restart the statutory review period for our initial
application as of the date of the filing of the amendment. This would cause a
delay in obtaining FDA approval. Moreover, if either Trial does not yield
positive results, the FDA's consideration of any application we have submitted
could be adversely affected; any such application could be refused filing for
substantive review, or if filed,
15
could be subject to requests for substantial amounts of additional information,
or ultimately could be denied approval.
The FDA may request additional data or require that we conduct further clinical
trials, either of which could delay or preclude our receipt of pre-market
approval as well as require significant additional expenditures. Such a delay or
failure to receive pre-market approval would have a material adverse effect on
our business, financial condition and results of operations and could result in
cessation of our operations. Even if we receive approval based on the results of
the START Trial, we will be limited to marketing the Beta-Cath System for use
with patients who are being treated for "in-stent" restenosis in a single
coronary artery. In order to market the Beta-Cath System for a broader range of
patients, we will seek to expand the indications for which the Beta-Cath System
can be marketed to include patients receiving PTCA or stent placement. Even if
we receive approval based on the results of the Beta-Cath System Trial, we would
be limited to marketing the Beta-Cath System for use with patients who are being
treated for one lesion in a single coronary artery following PTCA or stent
placement. In order to market the Beta-Cath System for use with a broader range
of patients, we will likely be required to demonstrate to the FDA through
additional clinical trials that the Beta-Cath System is safe and effective in
treating a broader range of indications and the FDA must approve a pre-market
approval application, application amendment or application supplement covering
the broader range of indications for the device.
Foreign Pre-Market Approvals.
Sales of the Beta-Cath System outside the United States are subject to
regulatory requirements that vary widely from country to country but generally
include pre-marketing governmental approval. The time required to obtain
approval for sale in foreign countries may be longer or shorter than required
for FDA approval, and the requirements for the conduct of clinical trials,
marketing authorization, pricing and reimbursement differ from those in the
United States. Moreover, the export of medical devices from the United States
must be in compliance with FDA regulations. In August 1998 we qualified to apply
CE marking to the Beta-Cath System, a requirement necessary to sell our device
in most of Western Europe. We are subject to continuing audit and reporting
requirements related to this marking. We may be delayed or precluded from
marketing the Beta-Cath System in other foreign countries. Foreign pre-market
and other regulatory approvals of the Beta-Cath System, if granted, may include
significant limitations on the indicated uses for which the device may be
marketed.
Approvals to Use, Handle and Transfer Radioactive Materials.
Our business involves the import, manufacture, transfer, use and disposal of
Strontium 90 (Strontium/Yttrium), the beta-emitting radioisotope utilized in the
Beta-Cath System's radiation source train. Accordingly, manufacture,
distribution, use and disposal of the radioactive material used in the Beta-Cath
System in the United States will be subject to federal, state and/or local laws
and regulations relating to the use and handling of radioactive materials.
Specifically, we must obtain approval from the State of Georgia Department of
Natural Resources to commercially distribute our radiation sources to licensed
recipients in the United States. In addition, we must also comply with NRC,
Georgia and United States Department of Transportation regulations on the
labeling and packaging requirements for shipment of radiation sources to
hospitals or other users of the Beta-Cath System. Further, hospitals and/or
physicians in the United States may be required to amend their radiation
licenses to hold, handle and use Strontium 90 prior to receiving and using our
Beta-Cath System.
The distribution and use of the Beta-Cath System outside the United States is
subject to radiation regulatory requirements that vary from country to country
and sometimes vary within a given country. Generally, each country has a
national regulatory agency responsible for regulating the safe practice and use
of radiation in its jurisdiction. In addition, each hospital desiring to use the
Beta-Cath System is generally required to amend its license to store, handle and
receive the Strontium 90 sources in our device. Generally, these licenses are
specific to the amount and type of radioactivity utilized. In addition,
16
generally the use of a radiation source by a physician, either for a diagnostic
or therapeutic application, also requires a license, which again is specific to
the isotope and the clinical application.
Obtaining any of the foregoing radiation-related approvals and licenses can be
complicated and time consuming. If we or any hospital or physician is
significantly delayed in obtaining any of the foregoing approvals or any of
those approvals are not obtained, our business, financial condition and results
of operations could be materially adversely affected.
Risk Of Inadequate Funding
We anticipate that our losses will continue through at least the year 2000 as we
expend substantial resources to fund clinical trials in support of regulatory
approvals, continue development of the Beta-Cath System and launch our product
first in Europe and then in the United States. Our future liquidity and capital
requirements will depend upon numerous factors.
We believe that our existing capital resources will be sufficient to fund the
company through the end of 2000, but those resources may prove insufficient.
Additional capital may be required to launch the Beta-Cath System in the United
States. We may in the future seek to raise additional funds through bank
facilities, debt or equity offerings or other sources of capital. We cannot
assure that additional financing, if required, will be available on satisfactory
terms, or at all.
Rapid Technological Change And Intense Competition
Competition in the medical device industry, and specifically the markets for
cardiovascular devices, is intense and characterized by extensive research and
development efforts and rapidly advancing technology. New developments in
technology could render vascular brachytherapy generally or the Beta-Cath System
in particular noncompetitive or obsolete.
Vascular brachytherapy may compete with other treatment methods designed to
improve outcomes from coronary artery procedures that are well established in
the medical community, such as coronary stents. Stents are the predominant
treatment currently utilized to reduce the incidence of coronary restenosis
following PTCA and were used in approximately 60% of all PTCA procedures
performed worldwide in 1998. Manufacturers of stents include Johnson &
Johnson/Cordis, Medtronic, Inc., Guidant Corporation and Boston Scientific
Corporation. Stent manufacturers often sell many products used in the cardiac
catheterization labs, commonly referred to as cath labs, and as discussed below
certain of these companies are developing vascular brachytherapy devices.
Other devices under development that use vascular brachytherapy include:
o a radioactive-tipped guidewire;
o a radioactive stent; and
o a radioactive fluid-filled balloon.
The most advanced competitive approach may be represented by the radioactive
guidewire, as we are aware that Johnson & Johnson/Cordis and Guidant are
investigating this general type of device in the pivotal clinical trial stage in
the United States. Many of our competitors and potential competitors have
substantially greater capital resources than we do and also have greater
resources and expertise in the areas of research and development, obtaining
regulatory approvals, manufacturing and marketing. We cannot assure you that
competitors and potential competitors will not succeed in developing, marketing
and distributing technologies and products that are more effective than those we
will develop and market or that would render our Beta-Cath System obsolete or
noncompetitive. Additionally, many of the
17
competitors have the capability to bundle a wide variety of products in sales to
cath labs. We may be unable to compete effectively against such competitors and
other potential competitors in terms of manufacturing, marketing and sales.
Any product we develop that gains regulatory clearance or approval will have to
compete for market acceptance and market share. An important factor in such
competition may be the timing of market introduction of competitive products.
Accordingly, we expect the relative speed with which we can develop products,
gain regulatory approval and reimbursement acceptance and supply commercial
quantities of the product to the market to be an important competitive factor.
One of our competitors, Johnson & Johnson/Cordis, has recently submitted a
pre-market approval application to the FDA for its gamma-emitting vascular
brachytherapy device. Other manufacturers may be the first to market a vascular
brachytherapy system to reduce the incidence of restenosis in the United States.
We may also not be the first to market a beta-emitting vascular brachytherapy
system in the United States or be able to market such a system effectively.
Limitations On Third-Party Reimbursement For The Beta-Cath System
The Beta-Cath System, where approved for commercial sale, will be sold primarily
to hospitals. Hospitals and physicians bill various third-party payors, such as
government health programs, private health insurance plans, managed care
organizations and other similar programs, for the health care services provided
to their patients.
If and when we receive FDA approval to market the Beta-Cath System in the United
States, third-party payors may not cover procedures using the Beta-Cath System
or, if covered, third-party payors may place certain restrictions on the
circumstances in which coverage will be available. In addition, payors may deny
reimbursement if they determine a product was not used in accordance with
established payor protocol regarding cost-effective treatment methods or was
used for an unapproved indication. Third-party payors are increasingly
challenging the prices charged for medical products and services and, in some
instances, have put pressure on medical device suppliers and health care
providers to lower their prices. We are unable to predict what changes
third-party health care payors will make in their reimbursement methodologies.
Third-party payors or health care providers may not consider the Beta-Cath
System cost-effective and may not reimburse for its usage or, if they do, may
reimburse at levels that adversely affect its market acceptance and our ability
to sell the Beta-Cath System on a profitable basis.
The cost of health care has risen significantly over the past decade, and
legislators, regulators, third-party payors and health care providers have made
and may continue to make proposals to curb these costs. Failure by hospitals and
physicians to obtain reimbursement from third-party payors, changes in
third-party payors' policies toward reimbursement for the Beta-Cath System or
legislative action could have a material adverse effect on our business,
financial condition and results of operations.
Reimbursement systems in international markets vary significantly by country and
by region within some countries, and reimbursement approvals must be obtained on
a country-by-country basis. Many international markets have government managed
health care systems that control reimbursement for new devices and procedures.
In most markets there are private insurance systems as well as government
managed systems. Reimbursement for our products may not be available in
international markets under either government or private reimbursement systems.
Uncertainty Of Market Acceptance Of Vascular Brachytherapy And The Beta-Cath
System
Even if we obtain regulatory approvals and reimbursement from third party payors
for the use of the Beta-Cath System, our device may not gain any significant
degree of market acceptance among physicians and
18
patients. Vascular brachytherapy is a new treatment method and has not been used
to any significant extent by physicians outside the context of clinical trials.
We believe that physicians' acceptance of vascular brachytherapy generally and
the Beta-Cath System in particular will be essential for our operations and we
may not obtain this acceptance. Even if we establish clinical efficacy of the
Beta-Cath System, cardiologists, radiation oncologists and other physicians may
elect not to recommend vascular brachytherapy generally or the Beta-Cath System
in particular. Even if recommended, physicians may not utilize the Beta-Cath
System in a sufficient number of procedures to generate significant revenues or
to enable us to operate profitably. In addition, market acceptance of our device
could be hindered because using the Beta-Cath System currently requires the
participation not only of an interventional cardiologist, but also a radiation
oncologist appropriately credentialed to administer our beta radiation source
train.
Uncertainty Regarding Our Issued Patent, Pending Patent Applications And Other
Matters
On November 4, 1997 we received United States Patent No. 5,683,345 on the
Beta-Cath System and on May 4, 1999 we received United States Patent No.
5,899,882. United States Patent Nos. 5,683,345 and 5,899,882 may not offer any
protection to us. It may also be reexamined, invalidated or circumvented. In
addition, claims under our other pending applications may not be allowed, or if
allowed, may not offer any protection or may be reexamined, invalidated or
circumvented. Competitors may have or obtain patents that will prevent, limit or
interfere with our ability to make, use or sell our products in either the
United States or international markets.
We received a letter from NeoCardia, L.L.C., dated July 7, 1995, in which
NeoCardia notified us that it is the exclusive licensee of United States Patent
No. 5,199,939, or the Dake patent, and requested that we confirm that our
products did not infringe the claims of the Dake patent. On August 22, 1995 our
patent counsel responded on our behalf that we did not infringe the Dake patent.
The United States Patent and Trademark Office later reexamined the Dake patent.
In the reexamination proceeding some of the patent claims were amended and new
claims were added. We have concluded, based upon advice of patent counsel, that
our Beta-Cath System would not infringe any claim of the Dake patent as
reexamined.
In May 1997 Guidant acquired NeoCardia together with the rights under the Dake
patent. Guidant is attempting to develop and commercialize products that may
compete with the Beta-Cath System and has significantly greater capital
resources than the company. Guidant may sue for patent infringement in an
attempt to obtain damages from us and/or injunctive relief restraining us from
commercializing the Beta-Cath System in the United States. If Guidant were
successful in any such litigation, we might be required to obtain a license from
Guidant under the Dake patent to market the Beta-Cath System in the United
States, if such license were available, or be prohibited from selling the
Beta-Cath System in the United States. Any of these actions could have a
material adverse effect on our business, financial condition and results of
operations, or could result in cessation of our business.
We have two versions of our delivery catheter: a "rapid exchange" catheter and
an "over the wire" catheter. As a result of certain United States patents held
by other medical device manufacturers covering "rapid exchange" catheters, we
currently intend to sell the "over the wire" version of our delivery catheter in
the United States. If further investigation reveals that we may sell a "rapid
exchange" version in the United States without infringing the valid patent
rights of others, we might decide to do so in the future. However, we cannot
assure that we will be able to sell a "rapid exchange" version in the United
States without a license of third party patent rights or that such a license
would be available to us on favorable terms or at all.
19
The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights. Companies in the
medical device industry have employed intellectual property litigation to gain a
competitive advantage. There can be no assurance that we will not become subject
to patent-infringement claims or litigation or interference proceedings declared
by the United States Patent and Trademark Office to determine the priority of
inventions. The defense and prosecution of intellectual property suits, or
interference proceedings and related legal and administrative proceedings are
both costly and time-consuming. Litigation may be necessary to enforce our
patents, to protect our trade secrets or know-how or to determine the
enforceability, scope and validity of the proprietary rights of others. Any
litigation or interference proceedings will result in substantial expense to us
and significant diversion of effort by our technical and management personnel.
An adverse determination in litigation or interference proceedings to which we
may become a party could subject us to significant liabilities to third parties,
require us to seek licenses from third parties, require us to redesign our
products or processes to avoid infringement or prevent us from selling our
products in certain markets, if at all. Although patent and intellectual
property disputes regarding medical devices have often been settled through
licensing or similar arrangements, costs associated with such arrangements may
be substantial and could include significant ongoing royalties. Furthermore,
there can be no assurance that the necessary licenses would be available to us
on satisfactory terms, if at all, or that we could redesign our products or
processes to avoid infringement. Any adverse determination in a judicial or
administrative proceeding or failure to obtain necessary licenses could prevent
us from manufacturing and selling our products, which would have a material
adverse effect on our business, financial condition and results of operations.
Dependence On Single Vendor To Supply Radioisotopes
To date, we have obtained all our beta radiation isotope requirements from a
single supplier, Bebig Isotopentechnik und Umweltdiagnostik GmbH, a German
corporation. Our supply agreement with Bebig has an initial term ending in
November 2000. During the term, we have agreed not to purchase more than 30% of
our annual radioisotope requirements from any supplier other than Bebig. Our
business, results of operations and financial condition could be materially
adversely affected by Bebig's failure to provide us with beta isotopes on a
timely basis during the term of the agreement. On October 14, 1999 the Company
signed a development and manufacturing supply agreement with AEA Technologies
QSA GmbH for a second source of radioactive supply and for the development of a
smaller diameter source. The agreement provides for the construction of a
production line which is expected to be finished in February 2001. The
development of the smaller diameter source may not be successfully completed,
the new production line may not be completed on time and on budget, and the
smaller diameter source may not be manufacturable in commercial quantities.
Limited Manufacturing Experience; Scale-Up Risk
To date, we have not yet successfully commercialized the Beta-Cath System, and
our manufacturing activities have consisted of producing small quantities of our
products for use in clinical trials and our initial product launch in Europe. To
achieve profitability, the Beta-Cath System must be manufactured in commercial
quantities in compliance with regulatory requirements and at acceptable costs.
Production in commercial quantities will require us to expand our manufacturing
capabilities and to hire and train additional personnel. We have no experience
in manufacturing our products in commercial quantities. We may encounter
difficulties in scaling up production, including problems involving production
yields, quality control and assurance, component supply and shortages of
qualified personnel. Difficulties encountered in manufacturing scale up could
have a material adverse effect on our business, financial condition and results
of operations. We cannot assure that future manufacturing difficulties, which
could have a material adverse effect on our business, financial condition and
results of operations, will not occur.
20
Price Volatility And Fluctuations In Operating Results
The market price of our common stock could decline below the public offering
price. Specific factors relating to our business or broad market fluctuations
may materially adversely affect the market price of our common stock. The
trading price of our common stock could be subject to wide fluctuations in
response to quarter-to-quarter variations in operating results, announcements of
technological innovations, new products or clinical data announced by us or our
competitors, governmental regulatory action, developments with respect to
patents or proprietary rights, general conditions in the medical device or
cardiovascular device industries, changes in earnings estimates by securities
analysts, or other events or factors, many of which are beyond our control. In
addition, the stock market has experienced extreme price and volume
fluctuations, which have particularly affected the market prices of many medical
device companies and which have often been unrelated to the operating
performance of such companies. Our revenue or operating results in future
quarters may be below the expectations of securities analysts and investors. In
such an event, the price of our common stock would likely decline, perhaps
substantially. During the twelve month period ended September 30, 1999, the
closing price of our common stock ranged from a high of $30.25 per share to a
low of $11.00 per share and ended that period at $17.84 per share.
In addition, our results of operations may fluctuate significantly from quarter
to quarter and will depend upon numerous factors, including product development
efforts, actions relating to regulatory and reimbursement matters, progress and
costs related to clinical trials, the extent to which our products gain market
acceptance, and competition. These factors may cause the price of our stock to
fluctuate, perhaps substantially.
21
Item 3. Quantitative And Qualitative Disclosures About Market Risk
Interest Rate Risk
The Company's cash equivalents and short-term investments are subject to market
risk, primarily interest-rate and credit risk. The Company's investments are
managed by outside professional managers within investment guidelines set by the
Company. Such guidelines include security type, credit quality and maturity and
are intended to limit market risk by restricting the Company's investments to
high credit quality securities with relatively short-term maturities.
The table below presents principal amounts and related weighted average interest
rates by year of maturity for the Company's investment portfolio. All
investments mature, by policy, in one year or less.
Fair Value
(in thousands) 1999 2000 2001 2002 2003 Total 9/30/99
- -------------------------------------------------------------------------------------------------------
Assets:
Cash equivalents
Fixed rate $8,180 $-- $-- $-- $-- $8,180 $8,180
Average interest rate 5.25%
Held to Maturity investments
Fixed rate 11,810 28,619 -- -- -- 40,429 40,429
Average interest rate 4.95% 5.55%
Total investments
Securities 19,990 28,619 -- -- -- 48,609 48,609
Average interest rate 5.12% 5.55%
Foreign Currency Risk
International revenues from the Company's foreign direct sales and distributor
sales comprised 100% of total revenues for the three and nine month periods
ending September 30, 1999. With the exception of the Australian and New Zealand
distributors, sales are denominated in Euros. The Company experienced an
immaterial amount of transaction gains and losses through the three and nine
month periods ending September 30, 1999. The Company is also exposed to foreign
exchange rate fluctuations as the financial results of its Belgian, German, and
Holland subsidiaries are translated into U.S. dollars in consolidation. As
exchange rates vary, these results, when translated, may vary from expectations
and adversely impact overall expected profitability. The net effect of foreign
exchange rate fluctuations on the Company during the three and nine month
periods ending September 30, 1999 was not material.
22
PART II. OTHER INFORMATION
Item 5. Other Information
In September 1999, Dr. Raoul Bonan completed his leave of absence and returned
to clinical practice at the Montreal Heart Institute. He will continue to serve
as the Company's Medical Director and Vice President of Clinical Affairs on a
part time basis through August 31, 2000.
Item 6. Exhibits and Reports on Form 8-K
10.23 Modifications to Employment Agreement with Dr. Raoul Bonan, July 1,
1999.
10.24 Further modifications to Employment Agreement with Dr. Raoul Bonan,
August 11, 1999.
*10.25 Development and Manufacturing Agreement between AEA Technology-QSA,
GmbH and Novoste Corporation.
27 Financial data schedule
*Portions have been omitted and filed separately with the Securities and
Exchange Commission pursuant to a request for confidential treatment.
(b) The Company did not file any reports on Form 8-K during the three months
ended September 30, 1999.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NOVOSTE CORPORATION
October 31, 1999 /s/ William A. Hawkins
- ---------------- ---------------------------------
Date William A. Hawkins
President & Chief Executive Officer
October 31, 1999 /s/ David N. Gill
- ---------------- ---------------------------------
Date David N. Gill
Vice President - Finance,
Chief Operating Officer
and Chief Financial Officer
(Principal Financial & Accounting Officer)
24
EXHIBIT INDEX
Exhibit
Number Exhibit Description
- ------ -------------------
10.23 Modifications to Employment Agreement with Dr. Raoul Bonan, July 1,
1999.
10.24 Further modifications to Employment Agreement with Dr. Raoul Bonan,
August 11, 1999.
*10.25 Development and Manufacturing Agreement between AEA Technology-QSA,
GmbH and Novoste Corporation.
27 Financial data schedule
*Portions have been omitted and filed separately with the Securities and
Exchange Commission pursuant to a request for confidential treatment.
25