Item 1A.
Risk Factors
In addition to the factors discussed in Managements Discussion and Analysis of Financial Condition and Results of Operations
and elsewhere in this report, the following are some of the important factors that could materially and adversely affect our business, financial condition, results of operations and common stock price and cause our actual results to differ
materially from those projected in any forward-looking statements.
Risks Related to our Business
We expect to derive most of our future revenues from the System One and related products.
We expect to derive most of our future revenues from the sale or rental of the System One and the related products used with the System One,
with the remainder of our revenues largely coming from the sale of a few key disposable products, including blood tubing sets and needles. To the extent that any of our primary products are not commercially successful or are withdrawn from the
market for any reason, our revenues and business prospects will be adversely impacted.
The home hemodialysis market may be smaller
than we expect and may be slow to develop.
We believe our largest product market opportunity is the home
dialysis market. However, this market is presently very small and adoption of home hemodialysis therapies has been limited. Currently, less than 10% of U.S. chronic dialysis patients receive some form of dialysis treatment at home, with most of such
patients receiving peritoneal dialysis rather than home hemodialysis. Most dialysis centers presently do not have the infrastructure to support a significant home hemodialysis patient population. Our growth depends on a significant shift in
patients and the medical communitys understanding and view of home hemodialysis, and will require a substantial increase in the number of patients who adopt home hemodialysis, physicians who are willing to prescribe home hemodialysis,
and dialysis centers that are able and willing to establish and support home hemodialysis. We recently opened a small number of dialysis centers focused on supporting home therapy with NxStage technology as part of our market development activities
to increase home therapy access, but these efforts ultimately may not be successful in expanding the market for our products.
Because
nearly all our home hemodialysis patients are also receiving dialysis more frequently than the traditional thrice weekly treatment, market adoption of the System One for home hemodialysis is also dependent upon the penetration and market acceptance
of more frequent hemodialysis. Given the increased provider costs associated with providing more frequent dialysis, market acceptance will be impacted, especially for U.S. Medicare patients, by whether dialysis centers obtain adequate reimbursement
for additional dialysis treatments provided in excess of three times a week, which is discussed in the immediately following risk factor. New regulations particularly impacting home hemodialysis technologies may impede further market expansion of
the System One for home hemodialysis. We saw the impact of such regulations in 2008, when the Centers for Medicare and Medicaid Services released new Conditions for Coverage that imposed water testing requirements on patients
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using our PureFlow SL product. These water testing requirements increased the burden of our therapy for patients and may have impaired market adoption, especially for our PureFlow SL product. To
the extent additional regulations are introduced that are unique to the home environment, market adoption of the System One could be further impaired.
We are in a developing market and we will need to continue to devote significant resources to developing the home market without any
assurances that our efforts will be successful.
Current Medicare reimbursement rates, at three times per week, limit the price at
which we can market our home hemodialysis products, and adverse changes to reimbursement would likely impede the adoption or continued sale of our home products.
Medicare provides broad and well-established reimbursement in the U.S. for treating end-stage renal disease patients with hemodialysis three
times a week. Most patients using the System One in the home, however, treat themselves, with the help of a care partner, up to six times per week. Reimbursement for more frequent hemodialysis requires medical justification provided by the dialysis
facility based on information from the patients physician. One reimbursement study showed that in 2009 the average number of Medicare payments per month for home hemodialysis was approximately 1.5 times that of in-center hemodialysis. The
total number of paid treatments varied across Medicare Administrative Contractors, but there was a positive correlation between number of paid treatments per month and home hemodialysis utilization in a given jurisdiction. This variance arises from
differing policies of Medicare Administrative Contractors, as well as from varying center billing practices. Currently, only four of the Medicare Administrative Contractor jurisdictions have formal local coverage determinations; the majority do not
have a formal policy and thus review claims on a case by case basis. Some customers may not receive or pursue additional reimbursement in all cases, and providing the required medical justification for treatments beyond three times per week
increases administrative burden. Although access to home and more frequent hemodialysis continues to grow, we believe that current Medicare reimbursement policies lead to adoption rates lower than rates commensurate with the percentage of patients
experts believe can competently perform and medically benefit from this therapy. We believe that more predictable Medicare reimbursement for more frequent dialysis with less administrative burden, including further improving Medicare reimbursement
for home hemodialysis training, would allow adoption of more frequent home hemodialysis at rates more consistent with what are deemed to be appropriate by the medical community. These beneficial changes, however, may never materialize. Conversely,
any reduction in reimbursement rates or adverse changes in the reimbursement criteria for home or more frequent hemodialysis could materially reduce our revenues, earnings and cash flows.
In 2011, the Centers for Medicare and Medicaid Services implemented a new prospective payment system for dialysis treatment. Under the new
prospective payment system, the Centers for Medicare and Medicaid Services makes a single bundled payment to the dialysis facility for each dialysis treatment that covers all renal dialysis services, inclusive of home dialysis and most drugs
frequently administered to dialysis patients. The bundled payment is calculated by adjusting a base payment rate per treatment session to account for geographic variations in labor costs and patient and facility characteristics. This payment system
replaced the former system which paid facilities a composite rate for a defined set of items and services, while paying separately for drugs, laboratory tests, and other services that were not included in the composite rate. With a vast majority of
U.S. patients with end-stage renal disease covered by Medicare, the Medicare reimbursement rate is an important factor in a potential customers decision to use the System One or our other products and limits the fee for which we can sell or
rent our products. A stated goal of the new prospective payment system was to encourage home dialysis. To date, it has not had a positive impact on the adoption of home or more frequent hemodialysis or the price for which we can sell our products.
However, the prospective payment system has had a significant positive impact on the adoption of peritoneal dialysis as evidenced by the significantly increased training rates for peritoneal dialysis. We believe this increased focus on peritoneal
dialysis growth and peritoneal dialysis training has been to the detriment of home hemodialysis training rates, as home training resources, including home training nurses in particular, have been more devoted to peritoneal dialysis training, leaving
less time for home hemodialysis training.
As part of the American Taxpayer Relief Act of 2012, Congress instructed the Centers for
Medicare and Medicaid Services to recalculate the base payment rate under the prospective payment system for services furnished in 2014 and thereafter to account for changes in utilization of renal dialysis drugs since the prospective payment system
was implemented. In response, the Centers for Medicare and Medicaid Services enacted a 12% reduction to the base payment rate to be implemented over a three- to four-year transition period, with overall payments for 2014 remaining unchanged.
However, the Protecting Access to Medicare Act of 2014 replaced this phased-in reduction with reductions to the annual inflation adjustment to the base rate (known as the market basket adjustment) in 20152018. As a result, there is
no reduction to the market basket adjustment in 2015, and the reduction is 1.25 percentage points in 2016 and 2017, and 1 percentage point in 2018. The effect of this change on the adoption of home and more frequent hemodialysis is not yet known.
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We have a history of net losses and a significant accumulated deficit, and we may be unable
to become profitable or to maintain profitability if and when we achieve it.
Since inception, we have incurred negative operating
margins and losses every quarter. At June 30, 2014, we had an accumulated deficit of approximately $376 million. We expect our operating expenses to continue to increase as we grow and expand our business. While we have achieved positive gross
profit for our products since the fourth quarter of 2007, we cannot provide assurance that our gross profit as a percentage of revenues will improve or, if it does improve, the rate at which it will improve. Achieving gross profit improvements will
depend upon our ability to introduce additional process improvements and product design changes, further rationalize our manufacturing operations and supply chain, realize additional economies of scale, and continue to improve product reliability.
We may not be successful at these and other cost reduction initiatives, and cannot provide assurance about achieving profitability, or the timing, extent or sustainability of such profitability.
Our customers in the System One and In-Center segments are highly consolidated and have concentrated buying power.
DaVita and Fresenius own and operate the two largest chains of dialysis centers in the U.S. Collectively, these entities provide treatment to
approximately two-thirds of U.S. dialysis patients, and this percentage may continue to grow with further market consolidation. For example, DaVita acquired DSI Renal, Inc. in September 2011 and Fresenius acquired Liberty Dialysis Holdings, Inc.,
the holding company for Liberty Dialysis and Renal Advantage, in February 2012. With less than one-third of U.S. dialysis patients cared for by independent dialysis centers, our market adoption, at least within the U.S., would be more constrained
without the presence of both DaVita and Fresenius as customers.
Additionally, Fresenius is not only a dialysis service provider, it is
also the leading manufacturer of dialysis equipment worldwide. In February 2011, Fresenius obtained clearance for its 2008K@home hemodialysis system for use in home therapy. DaVita does not manufacture dialysis equipment, but has certain
dialysis supply purchase obligations to Gambro, a dialysis equipment manufacturer and subsidiary of Baxter, under a product supply agreement. Fresenius may choose to offer its dialysis patients only the dialysis equipment Fresenius manufactures,
including its 2008K@home system. We cannot predict what impact Fresenius 2008K@home system will have on our sales to Fresenius in the home market or our overall performance in the home market going forward.
Our agreements with DaVita, Fresenius and other large home market customers are intended to support the continued expansion of patient access
to home hemodialysis with the System One, but like all our agreements with home market customers, these agreements are not requirements contracts and they contain no minimum purchase volumes. Our home market agreement with DaVita expires at the end
of 2015 and our home market agreement with Fresenius expires at the end of 2016, and there can be no assurance that we will renew or extend these agreements on similar terms, if at all, before their expiration. We have no assurance that our sales to
DaVita, Fresenius or other large customers will continue to grow. Given the significance of DaVita and Fresenius as customers in the home market, any adverse change in either customers ordering or clinical practices, as might be the case in
periodic contract negotiations or in response to the establishment of our NxStage Kidney Care dialysis centers, would have a significant adverse impact on our home market revenues, especially in the near term.
The partial or complete loss of sales to DaVita, a key customer for our System One and In-Center product lines, would materially impair
our financial results, at least in the near term
DaVita is our most significant customer. Over 40% of home patients using the
System One are DaVita patients. Direct sales to DaVita represented 31% of our System One segment revenues during the first half of 2014. In addition, sales of products through distributors to DaVita accounted for approximately half of In-Center
segment revenues for the same period. Although we expect that DaVita will continue to be a significant customer in the home market, we cannot be certain that DaVita will continue to purchase or rent the System One or add additional System One
patients in the future. Our home market agreement with DaVita expires at the end of 2015 and our needle purchase agreement with DaVita extends through the end of 2014. DaVitas requirement to purchase needles modestly ramps down during 2014 and
DaVita has no contractual obligations at this time to purchase needles from us thereafter. In addition, we have a distribution agreement in the U.S. with Gambro that extends through the end of 2015, pursuant to which Gambro will exclusively supply
our blood tubing sets to DaVita. The partial or complete loss of DaVita as a customer for any of our product lines would adversely affect our business, at least in the near term.
We face additional risks from the acquisition or development of new lines of business, including in connection with establishing our
NxStage Kidney Care dialysis centers.
In the course of evaluating growth opportunities, we may acquire or develop a new line of
business or products. For example, we recently began establishing NxStage Kidney Care dialysis centers, which are dialysis centers focused on the provision of home therapy and flexible in-center options. There are substantial risks and uncertainties
associated with any change in business lines or strategy, particularly in instances where our customers may perceive the new activity or business line to be in direct competition with their business, which could, in turn, lead them to stop or reduce
their purchases of products from us. In addition to the external risks such new businesses or strategies may represent, we may face internal risks relating to developing knowledge of and experience in the new business and recruiting professionals,
as well as business execution risks.
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New strategies and businesses may also require significant investment and involvement of our senior management, which will take away from the time they ordinarily spend on the remainder of our
business.
If we make any strategic businesses acquisitions, we may encounter substantial integration risks that may prevent us from
realizing the anticipated benefits of our acquisitions. These risks include:
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difficulty in transitioning and integrating the operations and personnel of the acquired businesses, including with respect to differing and complex accounting and financial reporting systems;
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disruption of our ongoing business and distraction of management;
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difficulty in successfully implementing, upgrading and deploying in a timely and effective manner new operational information systems and upgrades of our finance, accounting and product distribution systems;
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difficulty in incorporating acquired technology and rights into our products and technology;
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unanticipated expenses and delays in completing acquired development projects and technology integration;
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difficulty in managing geographically remote units both in the United States and internationally;
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impairment of relationships with partners and customers;
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customers delaying purchases of our products pending resolution of product integration between our existing and our newly acquired products;
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entering markets or types of businesses in which we have limited experience;
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loss of key employees of the acquired company; and
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inaccurate assumptions of the acquired companys product quality or product reliability.
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Failure to manage the risks associated with the development and implementation of new businesses or strategies could materially and adversely
affect our business, results of operations and financial condition.
Our NxStage Kidney Care dialysis centers introduce significant
new risks to our business.
In addition to implicating some of the same business and regulatory risks as are applicable to our
medical products business (including in particular risks related to Medicare reimbursement rates), establishing our NxStage Kidney Care dialysis centers requires that we comply with complex regulatory requirements applicable to this new business. As
health care providers and participants in federal health care programs, our NxStage Kidney Care dialysis centers are subject to extensive government regulations, including:
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Medicare and Medicaid payment rules, including coverage rules that limit the clinical circumstances under which payment will be made for more frequent dialysis treatments;
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anti-kickback and related laws prohibiting payments and other remuneration intended to influence the referral of health care business or selection of a provider;
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prohibitions on submitting false claims for government reimbursement;
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laws regulating the use and disclosure of patient health information; and
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laws regulating the storage and administration of pharmaceuticals.
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Violations of such laws
and regulations may be punishable by criminal and civil sanctions against us, including fines and civil monetary penalties and exclusion from participation in government programs, including Medicare and Medicaid, as well as against executives
overseeing our business. In addition to penalties for violation of laws and regulations, we could be required to repay amounts we received from government payors, or pay additional damages and interest, if we are found to have submitted improper
claims for reimbursement to the government. Whether or not we have complied with the law, an investigation into alleged unlawful conduct could increase our expenses, damage our reputation, divert management time and attention and adversely affect
our business.
We compete against other dialysis equipment manufacturers with much greater financial resources and established
products and customer relationships, which may make it difficult for us to penetrate the market and achieve significant sales of our products.
Fresenius, our second largest customer in the System One segment, with nearly all of those sales in the home market, markets a system for use
in home chronic therapy. Fresenius has also indicated that it is seeking clearance for its sorbent technology within the critical care setting, and has suggested that it would seek clearance for its Portable Artificial Kidney to
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market in the United States for in-center use. Baxter has a research and development collaboration with DEKA Research and Development Corporation and HHD, LLC for the development of a new home
hemodialysis system. Baxter has commented that it obtained CE marking for this system in the European Union in December 2013, for which it plans a limited launch in Europe in 2014, followed by a broader launch in Europe in 2015. Baxter has also
indicated that it expects to complete additional clinical studies and to file for regulatory approval for a home hemodialysis nocturnal indication in the U.S. in late 2015. Other small companies are also working to develop products for this market.
We are unable to predict when, if ever, any of these products may attain regulatory clearance and appear in the market, or how successful they may be should they be introduced, but the introduction of additional viable products to the home market
could adversely affect our sales and growth. We are also unable to predict what impact the Fresenius home hemodialysis systems will have on our sales to Fresenius or our overall home market performance.
The System One in the critical care market competes against Gambro, a subsidiary of Baxter, Fresenius, B. Braun Medical, Inc. and others. Our
product lines in the in-center market compete directly against products produced by Fresenius, Gambro, Nipro Medical Corporation, B. Braun, Baxter, JMS Co. Ltd. and others. Our competitors in each of these markets sell one or more FDA-cleared
medical devices for the treatment of acute or chronic kidney failure. Each of these competitors offers products that have been in use for longer than the System One and are more widely recognized by physicians, patients and providers. These
competitors have significantly more financial and personnel resources, more established sales, service and customer support infrastructures and spend more on product development and marketing than we do. Many of our competitors also have established
relationships with the providers of dialysis therapy, including Fresenius which owns and operates a chain of dialysis centers. The product lines of most of these companies are broader than ours, enabling them to offer a broader bundle of products
and have established sales forces and distribution channels that may afford them a significant competitive advantage. Further consolidation within the highly competitive dialysis industry, demonstrated most recently by Baxters acquisition of
Gambro, may exacerbate these risks.
The market for our products is competitive, subject to change and affected by new product
introductions and other market activities of industry participants, including increased consolidation of ownership of centers by large dialysis chains. If we are successful, our competitors are likely to develop products that offer features and
functionality similar to our products, including the System One. Improvements in existing competitive products or the introduction of new competitive products may make it more difficult for us to compete for sales, particularly if those competitive
products demonstrate better reliability, convenience or effectiveness or are offered at lower prices.
Our ability to successfully market
our products could also be adversely affected by pharmacological and technological advances in preventing the progression of end-stage renal disease or in the treatment of acute kidney failure or fluid overload. If we are unable to effectively
respond to and compete against competitors, alternative treatments and pharmacological and technological advances, it will be difficult for us to expand the market for, and achieve significant sales of, our products.
Our continued growth is dependent on our development and successful commercialization of new and improved products.
Our future success will depend in part on our timely development and introduction of new and improved products that address changing market
requirements. To the extent that we fail to introduce new and innovative products, including without limitation the next generation System One, or incremental product improvements, we may lose revenues or market share to our competitors, which may
be difficult to regain. Our inability, for technological, regulatory, operational or other reasons, to successfully develop and introduce new or improved products could reduce our growth rate or otherwise damage our business. Our developments may
not keep pace with the marketplace and our new or improved products may not adequately meet the requirements of the marketplace.
The success and growth of our business will depend upon our ability to achieve expanded market acceptance of the System One.
In the home market, we have to convince five distinct constituencies involved in the choice of dialysis therapy, namely operators
of dialysis centers, nephrologists, dialysis nurses, patients and payors (private payors and Medicare), that the System One provides an effective alternative to other existing dialysis equipment. In the in-center market, we have to convince most of
the same constituencies that our blood tubing sets and needles provide an effective alternative to other dialysis disposables. In the critical care market, we have to convince hospital purchasing groups, hospitals, nephrologists, dialysis nurses and
critical care nurses that our system provides an effective alternative to other existing dialysis equipment. Each of these constituencies use different considerations in reaching their decision. Lack of acceptance by any of these constituencies will
make it difficult for us to grow our business.
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We may have difficulty gaining widespread or rapid acceptance of any of our products, including
the System One, for a number of reasons including:
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the failure by us to demonstrate that our products are equivalent or superior to existing therapy options;
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competition from products sold by companies with longer operating histories and greater financial resources, more recognizable brand names and better established distribution networks and relationships with hospitals or
dialysis centers;
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the failure by us to continue to improve product reliability and the ease of use of our products;
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limitations on the existing infrastructure in place to support home hemodialysis, including without limitation, home hemodialysis training nurses, and the willingness, costs associated with, and ability of dialysis
centers to build that infrastructure;
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the ownership and operation of some dialysis providers by companies that also manufacture and sell competitive dialysis products;
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the introduction of competing products or treatments that may be more effective, easier to use or less expensive than ours;
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regulations that impose additional burden on patients, such as the Medicare conditions for coverage which impose additional water testing requirements in connection with the use of our PureFlow SL;
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the number of patients willing and able to perform therapy independently, outside of a traditional dialysis center, may be smaller than we estimate; and
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the availability of satisfactory reimbursement from healthcare payors.
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If we are unable
to convince additional hospitals and healthcare providers of the benefits of our products for the treatment of acute kidney failure and fluid overload, we will not be successful in increasing our market share in the critical care market.
We sell the System One in the critical care market for use in the treatment of kidney failure and fluid overload. Physicians
currently treat most acute kidney failure patients using conventional hemodialysis systems or dialysis systems designed specifically for use in the intensive care unit. We will need to convince hospitals and healthcare providers that using the
System One is as effective as using conventional or intensive care hemodialysis systems for treating acute kidney failure or fluid overload and that it provides advantages over conventional or intensive care systems because of its significantly
smaller size, ease of operation and clinical flexibility. In addition, the impact of tightened credit markets on hospitals could impair the manner in which we sell products in the critical care market. Hospitals facing pressure to reduce capital
spending may choose to delay capital equipment purchases or seek alternative financing options.
Our business and results of
operations may be negatively impacted by general economic and financial market conditions and such conditions may increase other risks that affect our business.
Global macro-economic conditions and the worlds financial markets remain susceptible to significant stresses, resulting in reductions in
available credit, foreign currency fluctuations and volatility in the valuations of securities generally. In general, we believe demand for our products in the home and in-center markets will not be substantially affected by the changing market
conditions as regular dialysis is a life-sustaining, non-elective therapy. However, hospitals or centers facing pressure to reduce capital spending may choose to rent equipment rather than purchase it outright, or to enter into other less-capital
intensive purchase structures with us, which may, in turn, have a negative impact on our cash flows. Uncertainty in the general economic environment and governmental spending on public health programs may also lead to a reduction in hospital days
(particularly those due to elective procedures) and delays in capital purchases, both of which can negatively impact our critical care business. Our ability to sell products internationally is particularly vulnerable to adverse impacts from global
macro economic conditions. Government funded hospitals in various international markets may seek to defer capital purchases or tenders. Distributors with reduced access to capital may be less willing to purchase our equipment outright, impairing our
ability to sell our products. Furthermore, unfavorable changes in foreign exchange rates versus the U.S. dollar would increase our product costs which would negatively impact our gross profit and gross profit as a percentage of revenues.
Healthcare reform legislation could adversely affect our revenue and financial condition.
In recent years, there have been numerous initiatives on the federal and state levels, and in foreign countries, for comprehensive reforms
affecting the availability of and reimbursement for healthcare services in the United States and other countries. These initiatives have ranged from fundamental changes to federal and state healthcare reimbursement programs, such as providing
comprehensive healthcare coverage to the public under governmental funded programs, to minor modifications to existing programs.
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In 2010, comprehensive health care reform legislation was passed that, among other things,
imposes a 2.3% excise tax on domestic sales of certain medical devices. Our profitability has been negatively impacted due to the medical device excise tax assessed on nearly all of our products sold in the United States since the beginning of 2013.
Subsequent legislation required an adjustment to the Medicare payment rates to account for changes in the utilization of drugs and biologicals, which resulted in a 12% reduction to the base payment rate that will be implemented over a three- to
four-year transition period, with overall payments for 2014 remaining unchanged. Later legislation pushed these payment reductions to later years, starting with 2016. These changes could affect the adoption of home and more frequent hemodialysis in
the future, particularly if NxStage customers are distracted in efforts to address any revenue shortfalls, or choose to redirect home training resources toward other center activities. Additional healthcare reforms in the United States may have a
material adverse effect on our financial condition and results of operations.
The governments of foreign countries are actively pursuing
similar actions intended to reduce costs related to provision of healthcare. The results of these actions may also have a material adverse effect on our financial condition and results of operations.
As our business continues to grow, we may have difficulty managing our growth and expanding our operations successfully.
As our business continues to grow, we will need to expand our manufacturing, sales and marketing and on-going development capabilities or
contract with other organizations to provide these capabilities for us. As our operations expand, we expect that we will need to manage additional relationships with various partners, suppliers, manufacturers and other organizations. Our ability to
manage our operations and growth requires us to continue to improve our information technology infrastructure, operational, financial and management controls and reporting systems and procedures. Such growth could place a strain on our
administrative and operational infrastructure. We may not be able to make improvements to our management information and control systems in an efficient or timely manner and may discover deficiencies in existing systems and controls. Also, if demand
for our products continues to grow we may not be able to increase our manufacturing capacity fast enough to meet customer demand.
If
we are unable to maintain strong product reliability for our products, we may be unable to grow our business and achieve profitability.
Product reliability issues associated with any of our product lines could lead to decreases in customer satisfaction and our ability to grow or
maintain our revenues and could negatively impact our reputation. Further, any unfavorable changes in product reliability would result in increased service and distribution costs which negatively impacts our gross profit and operating profit and
increases our working capital requirements. We continue to work to maintain strong product reliability for all products. If we are unable to maintain strong product reliability for our existing products, our ability to achieve our growth objectives
as well as profitability could be significantly impaired.
We also need to establish strong product reliability for all new products we
offer. With new products, we are more exposed to risks relating to product quality and reliability until the manufacturing processes for these new products mature. We also choose from time to time to transition the manufacturing and supply of
products and components to different suppliers or locations. As we make these changes, we are more exposed to risks relating to product quality and reliability until the manufacturing processes mature. Like all transitions of this nature, they could
also lead us to incur additional costs in the near-term, which would negatively impact our gross profits in the near-term.
We have
a significant amount of System One field equipment, and our inability to effectively manage this asset could negatively impact our working capital requirements and future profitability.
Because our home market relies upon an equipment service swap model and, for some of our customers, an equipment rental model, our ability to
manage System One equipment is important to minimizing our working capital requirements. Both approaches require that we maintain a significant level of field equipment of the System One and PureFlow SL hardware. While a majority of our home market
customers have committed to purchase, rather than rent, the significant majority of their future System One equipment requirements, there can be no assurance that we will be able to continue to expand or sustain this level of equipment placements
that are purchased rather than rented. Any excess rental or service swap equipment would increase our ongoing cash requirements to fund working capital. In addition, our gross margins may be negatively impacted if we have excess equipment deployed
and unused in the field. If we are unable to successfully track, service and redeploy equipment, we could incur increased costs, realize increased cash requirements and have material write-offs of equipment. This would negatively impact our
working capital requirements and future profitability.
We may be subject to litigation claims from time to time.
From time to time, we are threatened with individual actions involving our business, including without limitation products liability,
employment, intellectual property, commercial and tort claims. The manufacture and marketing of medical devices, in particular, has an attendant risk of product liability claims. If any of our employees or products is found to have caused or
contributed to injuries or deaths, we could be held liable for substantial damages. Any claims made against us could adversely affect our reputation, which could damage our position in the market. Claims can also be time consuming, distracting, and
expensive to defend and could result in a diversion of management and financial resources away from our primary business, in which case our business may suffer.
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While we maintain insurance at levels deemed adequate by management, future claims could
exceed our insurance coverage.
We maintain insurance for property and general liability, directors and officers
liability, product liability, malpractice related to NxStage Kidney Care dialysis centers, workers compensation, and other coverage in amounts and on terms deemed to be adequate by management based on our expectations for future claims. Future
claims, however, may be brought against us that result in court judgments or settlements that exceed the limits of our insurance coverage. In addition, our insurance policies have various exclusions, and we may be subject to a claim for which we
have no coverage. As a result, we may have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by any insurance, which may have a material adverse effect on our financial
condition and results of operations.
We face risks associated with having international operations, and if we are unable to manage
these risks effectively, our business could suffer.
We operate manufacturing facilities in Germany, Italy and Mexico. We also
purchase components, products and supplies from foreign vendors. We are subject to a number of risks and challenges that specifically relate to these international operations, and we may not be successful if we are unable to meet and overcome these
challenges. Significant risks relate to foreign currency, in particular the Euro, Peso, Yen and Thai Baht. To mitigate our foreign currency exposure we engage in hedging transactions on Peso denominated expenses. To the extent we fail to control our
exchange rate risk, our gross profit as a percentage of revenues and profitability could suffer and our ability to maintain mutually beneficial and profitable relationships with foreign vendors could be impaired. In addition to these risks, through
our international operations we are exposed to costs and challenges associated with sourcing and shipping goods internationally and importing and exporting goods, difficulty managing operations in multiple locations, local regulations that may
restrict or impair our ability to conduct our operations and increase compliance costs, health issues, such as pandemic disease risk, and natural disasters, such as flooding, hurricanes and earthquakes, which could disrupt our manufacturing and
logistical and import activities. Risks associated with our international operations may increase where we sell our products and services directly rather than through distributors, such as in the United Kingdom. Furthermore, in certain locations,
such as Mexico, we are also exposed to risks associated with local instability, including threats of violence, which could lead to disruptions in supply at our manufacturing facilities or key vendors.
Our In-Center segment relies heavily upon third-party distributors.
The majority of our products for the in-center market are sold through several distributors, which collectively account for substantially all
of our in-center revenues. Relying on third-party distributors exposes us to many risks, including competitive pressure, compliance risks, credit risk and concentration. Distributors may sell products that compete with our products, and we may be
unsuccessful in motivating our distributors to focus their efforts on selling our products. Any failure on the part of our distributors to comply with applicable laws in the sale and marketing of our products or to fulfill any responsibilities they
may have to protect the intellectual property rights underlying our products could have an adverse effect on our revenues and involve us in legal proceedings. Distributors may face financial difficulties, including bankruptcy, which could harm our
collection of accounts receivable and financial results. In addition, Gambro (a subsidiary of Baxter) and Henry Schein are our most significant distributors for the in-center market, and the loss of Gambro or Henry Schein as our distributors for any
reason could materially adversely affect our business, at least in the near term.
Unless we can demonstrate sufficient product
differentiation in our In-Center segment products, we will continue to be susceptible to further pressures to reduce product pricing and more vulnerable to the loss of our blood tubing set or needle business to competitors in the dialysis industry.
Our blood tubing set and needle businesses have historically been commodities businesses. Our products continue to compete
favorably in the dialysis blood tubing set and needle business, but are increasingly subject to pricing pressures, especially given recent market consolidation in the U.S. dialysis services industry, with Fresenius and DaVita collectively
controlling approximately two-thirds of the U.S. dialysis services business. Unless we can successfully demonstrate to customers the differentiating features of our Streamline blood tubing set, MasterGuard needle, ButtonHole needle or products that
we introduce in the future, we may continue to be susceptible to pressures to reduce our product pricing and more vulnerable to the loss of our blood tubing set and needle business to competitors in the dialysis industry.
The success of our business depends on the services of each of our senior executives as well as certain key engineering, scientific,
manufacturing, clinical and marketing personnel, the loss of whom could negatively affect our business.
Our success depends upon
the skills, experience and efforts of our senior executives and other key personnel, including our research and development and manufacturing executives and managers. Much of our expertise is concentrated in relatively few employees, the loss of
whom for any reason could negatively affect our business. Competition for our highly skilled employees is intense and we cannot prevent the future resignation of any employee. We maintain key person insurance for only our Chief Executive Officer.
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If kidney transplantation becomes a viable treatment option for more patients with
end-stage renal disease, or if medical or other solutions for renal replacement become viable, the market for our products may be limited.
While kidney transplantation is the treatment of choice for most patients with end-stage renal disease, it is not currently a viable treatment
for most patients due to the limited number of donor kidneys, the high incidence of kidney transplant rejection and the higher surgical risk associated with older patients. The development of new medications designed to reduce the incidence of
kidney transplant rejection, progress in using kidneys harvested from genetically engineered animals as a source of transplants or any other advances in kidney transplantation could limit the market for our products and services. The development of
viable medical, pharmaceutical, or other solutions for renal replacement or prolonging kidney life may also limit the market for our products and services.
Risks Related to the Regulatory Environment
We cannot market or commercially distribute our products without obtaining and maintaining necessary regulatory clearances or approvals.
Our products are medical devices subject to extensive regulation in the United States. To market a medical device in the United
States, approval or clearance by the FDA is required, either through the pre-market approval process or the 510(k) clearance process. We have obtained the FDA clearance necessary to sell our current products under the 510(k) clearance process.
Medical devices may only be promoted and sold for the indications for which they are approved or cleared. In addition, even if the FDA has approved or cleared a product, it can take action affecting such product approvals or clearances if serious
safety or other problems develop. We may be required to obtain 510(k) clearances or pre-market approvals for additional products, product modifications, or for new indications of our products. Regulatory pathways for such clearances may be difficult
to define and could change. For example, in 2010 we completed an approved Investigational Device Exemption clinical study intended to support a home nocturnal indication for the System One and submitted the associated 510(k) to the FDA. Although we
met our primary safety and efficacy endpoints for the study, the FDA notified us that their standards for what will be required for a home nocturnal clearance changed from what was required in our approved Investigational Device Exemption. As a
result, the FDA did not clear our 510(k) application for home nocturnal use. In July 2012, the FDA approved a continuation of our Investigational Device Exemption study designed to support a nocturnal indication for the System One. We have completed
the re-started trial and have resubmitted an application for a home nocturnal clearance. We cannot be certain when this or other clearances will be obtained. Delays in obtaining clearances or approvals could adversely affect our ability to introduce
new products or modifications to our existing products in a timely manner, which would delay or prevent commercial sales of our products.
The FDAs policies may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval
of our future products. Although the 510(k) regulation has not been formally changed, the FDA has announced that it is intending to implement modifications to the 510(k) process. If we are slow or unable to adapt to changes in existing requirements
or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained, which would adversely affect our business, prospects and the ability to sell and
promote our products.
Our products are also subject to extensive regulation in foreign markets in which we are currently present or which
we may wish to enter. The regulatory approval process outside the United States exposes us to many of the same risks associated with obtaining FDA clearance. Accordingly, we may be unable to obtain foreign regulatory approvals on a timely basis, if
at all, which would limit our market expansion goals, and any existing foreign regulatory approvals may be curtailed, suspended or withdrawn, which would adversely affect our business. In addition, the regulatory approval procedure in foreign
markets varies from country to country and requires that we comply with numerous regulatory requirements that differ from the FDA clearance process and are not superseded by obtaining clearance or approval from the FDA or another countrys
regulatory authority. In certain foreign markets, some of our products are classified as drugs rather than medical devices, which requires us to demonstrate compliance with separate regulations applicable to drug manufacturers and distributors.
These complex regulations may impose additional approval, manufacturing, surveillance and reporting requirements. Compliance with these additional requirements may increase our costs of doing business in new foreign markets and delay our entry into
such markets.
New regulations affecting our business are periodically adopted in the United States and in other countries. These
regulations may require us to change our existing product technologies, operating procedures or marketing practices in order to continue selling our products. This may expose us to increased costs, as well as risks that we may be unable to satisfy
the new regulatory requirements. For example, extensive revisions to current EU medical device legislation, which is currently being discussed by the Council of the European Union, will impose significant additional obligations. If we are unable to
comply with the new obligations imposed by the regulation, we may need to suspend, curtail or otherwise modify our selling and marketing efforts in the European Union. Any additional regulatory developments in the European Union or elsewhere may
adversely affect our ability to market our existing products or introduce new products in a timely manner, which would have a negative impact on our business.
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Modifications to our marketed devices may require new regulatory clearances or pre-market
approvals, or may require us to cease marketing or recall the modified devices until clearances or approvals are obtained.
In the
United States, modifications to a 510(k) cleared device that could significantly affect its safety or effectiveness, or would constitute a major change in its intended use, require the submission of another 510(k) pre-market notification to address
the change. Although in the first instance we may determine that a change does not rise to a level of significance that would require us to make a pre-market notification submission, the FDA may disagree and require such a submission. If the FDA
requires us to submit a 510(k) for any modification to a previously cleared device, we may be required to cease marketing the device, recall it, and not resume marketing until we obtain clearance from the FDA for the modified version of the device,
and may be subject to fines or other sanctions for failing to obtain such clearance in advance. In the future, we intend to introduce new products and enhancements and improvements to existing products, which may not be cleared by the FDA in a
timely manner, if at all. In addition, the FDA may characterize any new products or significantly modified marketed products in a class that requires submission of a more costly and lengthy pre-market approval application before commercial
distribution would be permissible. Compared to 510(k) submissions, pre-market approval applications require substantially more data and their review by the FDA typically takes significantly longer. Also, products subject to pre-market approval
applications require approval supplements for any change that affects safety and effectiveness before the modified device may be marketed. Delays in our receipt of regulatory clearance or approval will cause delays in our ability to sell our
products, which will have a negative effect on the growth of our revenues.
Outside the United States, modifications to approved devices
expose us to many of the same risks associated with modifications to 510(k) cleared devices. For example, in the European Union any substantial changes to a CE marked device may require a new conformity assessment and a new CE Certificate of
Conformity from our notified body before the proposed change is implemented. There is limited guidance, however, on whether a change to a device should be considered substantial. Therefore, there is a risk that the competent authorities in the
European Union or our notified body disagree with our assessment of the changes introduced to our products, and may come to a different conclusion than the FDA concerning such changes. Delays in conduct of any regulatory assessments in the European
Union or elsewhere will cause delays in our ability to sell our products in those markets and will have a negative effect on our revenue growth.
Even if we obtain the necessary regulatory clearances or approvals, if we or our suppliers fail to comply with ongoing regulatory
requirements, our products could be subject to restrictions or withdrawal from the market.
Numerous regulatory requirements apply
to our products following clearance or approval in the United States, European Union, and other markets, including regulations governing:
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registration of medical devices;
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pricing and reimbursement of medical devices;
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establishment of post-marketing surveillance;
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field safety corrective actions, including product recalls and withdrawals;
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filing reports of device corrections and removals;
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marketing and promotion of medical devices; and
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interactions with physicians.
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In addition, we are subject to the Medical Device Reporting
regulations that require us to report to the FDA if our products may have caused or contributed to patient death or serious injury, or if our device malfunctions and a recurrence of the malfunction would likely result in death or serious injury.
Similar obligations are imposed in foreign countries.
Our failure to comply with these or other applicable regulatory requirements may
result in enforcement measures being taken by regulatory authorities, which may include:
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untitled letters, warning letters, fines, injunctions and civil penalties;
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detention of medical devices believed to be adulterated or misbranded;
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customer notification, or orders for repair, replacement or refund;
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voluntary or mandatory recall, withdrawal or seizure of our products;
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operating restrictions, partial suspension or total shutdown of production;
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refusal to review or delay in issuing pre-market notification or pre-market approval submissions;
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rescission of a regulatory clearance or approval that has already been granted;
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refusal to issue export documentation or approval for our products;
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suspension, withdrawal or variations of CE Certificates of Conformity or delay in obtaining new CE Certificates of Conformity; and
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Such enforcement measures would require unanticipated expenditures to
address or defend such actions and would have an adverse effect on the marketing of our products and, consequently, on our business and financial position.
Any market withdrawals or recalls of our products could expose us to product liability claims and harm our reputation and financial
results.
Medical devices can experience performance problems in the field that require review and possible corrective action. The
occurrence of component failures, manufacturing errors, design defects or labeling inadequacies affecting a medical device could lead to a government-mandated or voluntary recall by the device manufacturer, in particular when such deficiencies may
endanger health. From time to time we have chosen to voluntarily recall certain products that we believed were mislabeled or otherwise defective. Although we do not believe that any of our recent recalls have had any long-term negative effect on our
business, future recalls may materially divert management attention and financial resources, expose us to product liability or other claims, and harm our reputation with customers.
If we or our contract manufacturers fail to comply with the FDAs Quality System Regulations and other quality system requirements,
our manufacturing operations could be interrupted, and our product sales and operating results could suffer.
Our finished goods manufacturing processes, and those of some of our contract manufacturers, must comply with the FDAs Quality System
Regulations which cover the procedures and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage and shipping of our devices. Foreign regulatory authorities impose similar
obligations. The FDA enforces these regulations through periodic unannounced inspections of manufacturing facilities. We and our contract manufacturers have been subject to such inspections on multiple occasions and we anticipate additional
inspections in the future. While our previous inspections have resulted in no significant observations, we cannot provide assurance that we can maintain a comparable level of regulatory compliance in the future at our facilities, or that future
inspections would have the same result.
If one of our manufacturing facilities or those of any of our contract manufacturers fails to
take satisfactory corrective action in response to an adverse quality system inspection, the FDA, the notified body, or the competent authorities in the European Economic Area could take enforcement action, including:
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issuing a public warning letter;
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shutting down part or all of our manufacturing operations;
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suspending or withdrawing our existing CE Certificates of Conformity;
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embargoing the import of certain components;
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ordering the recall or detention of our products;
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refusing to approve new marketing applications or to issue new CE Certificates of Conformity;
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instituting legal proceedings to detain, seize or enjoin the manufacture or distribution of our products; and
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imposing administrative, civil or criminal penalties or other sanctions.
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Any of these actions
could harm our business, reputation and operating results.
We have obligations to protect the privacy and security of patient
health information. Failure or perceived failure to comply with applicable federal and state requirements could subject us to criminal or civil penalties, and contractual liability.
In the course of performing our business we obtain, from time to time, confidential patient health information. For example, we learn patient
names and addresses when we ship System One supplies to home hemodialysis patients. We may learn patient names and be exposed to confidential patient health information when we provide training on our products to our customers staff. Our home
hemodialysis patients may also call our customer service representatives directly and, during the call, disclose confidential patient health information. We also receive and maintain confidential patient health information in
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connection with the operation of our NxStage Kidney Care dialysis centers. U.S. federal and state laws protect the confidentiality of certain patient health information, in particular
individually identifiable information, and restrict the use and disclosure of that information. At the federal level, the Health Insurance Portability and Accountability Act of 1996 and its implementing regulations, as amended under the Health
Information Technology for Economic and Clinical Health Act, or HIPAA, governs the use and disclosure of confidential patient health information known as protected health information. HIPAA and the rules promulgated thereunder require certain
entities to comply with established standards, including standards regarding the privacy and security of protected health information known as the HIPAA Privacy and Security Rules, and to provide notification following a data breach involving
protected health information. We are subject to HIPAA with regard to certain aspects of our business. In addition, many other state and federal laws regulate the use and disclosure of health information, including state medical privacy laws, breach
notification laws and federal and state consumer protection laws. In many cases, these laws are not necessarily preempted by HIPAA, particularly if they afford greater protection to the individual than does HIPAA.
Complying with these federal and state privacy and security requirements impose compliance related costs, subjects us to potential regulatory
audits, and may restrict our business operations. These various laws may be subject to varying interpretations by courts and government agencies creating potentially complex compliance issues for our business. If we were to violate any of our legal
obligations to safeguard any confidential patient health information or protected health information against improper use and disclosure, we could lose customers and be exposed to liability, including potential civil and criminal penalties under
HIPAA and contractual liabilities, and our reputation and business could be harmed. Concerns or allegations about our practices with regard to the privacy or security of personal health information or other privacy-related matters, even if
unfounded, could damage our reputation and harm our business.
We are also subject to laws and regulations in foreign countries covering
data privacy and other protection of health and employee information that may be more onerous than corresponding U.S. laws. These regulations may require that we obtain individual consent before we collect or process any personal data, restrict our
use or transfer of personal data, impose technical and organizational measures to ensure the security of personal data, and require that we notify regulatory agencies, individuals or the public about any data security breaches. As we expand our
international operations, we may be required to expend significant time and resources to put in place additional mechanisms to ensure compliance with multiple data privacy laws. Failure to comply with these laws may result in significant fines and
other administrative penalties and harm our business.
We may be subject to fines, penalties or injunctions if we are determined to
be promoting the use of our products in a manner not consistent with our products cleared indications for use or with other state or federal laws governing the promotion of our products.
Our promotional materials and other product labeling must comply with FDA rules and other applicable laws and regulations. If the FDA or other
federal, state or foreign enforcement authorities determine that our promotional materials or other product labeling constitute promotion of an unapproved or uncleared use, it could request that we modify our materials or subject us to regulatory or
enforcement actions, including the issuance of an untitled letter, a warning letter, injunction, seizure, civil fine and criminal penalties. Promotional activities related to our NxStage Kidney Care dialysis centers also may be scrutinized. Other
federal, state and foreign regulatory agencies, including the U.S. Federal Trade Commission, have issued guidelines and regulations that govern how we promote our products and services, including how we use endorsements and testimonials. If our
promotional materials or activities are inconsistent with any of these guidelines or regulations, we could be subject to enforcement actions, which could result in significant fines, costs and penalties. Our reputation could also be damaged and the
adoption of our products could be impaired.
Medical devices in the European Union may be promoted only for the intended purpose for which
the devices have been CE marked. Failure to comply with this requirement could lead to the imposition of penalties by the competent authorities of the EU Member States. The penalties could include warnings, orders to discontinue the promotion of the
medical device, seizure of the promotional materials and fines. Our promotional materials must also comply with various laws and codes of conduct developed by medical device industry bodies in the European Union governing promotional claims,
comparative advertising, advertising of medical devices reimbursed by the national health insurance systems and advertising to the general public. If our promotional materials do not comply with these laws and industry codes we could be subject to
penalties that could include significant fines. Our reputation could also be damaged and the adoption of our products could be impaired.
We are subject to federal and state laws prohibiting kickbacks and false and fraudulent claims which, if violated, could
subject us to substantial penalties.
The federal healthcare program Anti-Kickback Statute, and similar state laws, prohibit
payments and other forms of remuneration that are intended to induce health care professionals or others either to refer patients or to purchase, lease, order or arrange for or recommend the purchase, lease or order of healthcare products or
services. Other laws prohibit remuneration intended to induce patients to select a particular provider of services, including for dialysis. A number of states have enacted
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laws that require pharmaceutical and medical device companies to monitor and report payments, gifts and other remuneration made to physicians and other health care professionals and health care
organizations. Some state statutes, most notably laws in Massachusetts and Vermont, impose outright bans on certain manufacturer gifts to physicians. Some of these laws, referred to as aggregate spend or gift laws, carry
substantial fines if they are violated. In addition, under the federal Physician Payments Sunshine Act we must collect and report certain data on payments and other transfers of value to physicians and teaching hospitals, which are expected to
become publicly available for the first time in September 2014. It is widely anticipated that public reporting under the Sunshine Act will result in increased scrutiny of the financial relationships between industry, physicians and teaching
hospitals.
These anti-kickback, public reporting and aggregate spend laws affect our sales, marketing and other promotional activities by
limiting the kinds of financial arrangements, including sales programs, we may have with hospitals, physicians or other potential purchasers or users, including patients, of medical devices and services. They also impose additional administrative
and compliance burdens on us. In particular, these laws influence, among other things, how we structure our sales and rental offerings, including discount practices, customer support, education and training programs and physician consulting and
other service arrangements. For our NxStage Kidney Care dialysis centers, they also affect our arrangements with any joint venture partners in a position to refer patients, our medical directors and our patient billing and collection practices.
Although we seek to structure such arrangements in compliance with all applicable requirements, these laws are broadly written and it is often difficult to determine precisely how these laws will be applied in specific circumstances. If we were to
offer or pay inappropriate inducements to purchase, order or use our products or services, or to refer patients to our NxStage Kidney Care dialysis centers, we could be subject to a claim under the federal healthcare program Anti-Kickback Statute,
the federal patient inducement prohibition or similar state laws. If we fail to comply with particular reporting requirements, we could be subject to penalties under applicable federal or state laws.
Other federal and state laws generally prohibit individuals or entities from knowingly presenting, or causing to be presented, claims for
payments to Medicare, Medicaid or other third-party payors that are false or fraudulent, or for items or services that were not provided as claimed. Medical device manufacturers can be held liable under these laws if they are deemed to
cause the submission of false or fraudulent claims by providing inaccurate billing or coding information to customers, by providing improper financial inducements, or through certain other activities. In providing billing and coding
information to customers, we make every effort to ensure that the billing and coding information furnished is accurate and that treating physicians understand that they are responsible for all prescribing decisions, including the decision as to
whether to order dialysis services more frequently than three times per week. In addition, our NxStage Kidney Care dialysis centers are directly subject to these laws with respect to the reimbursement claims they file with government payors.
Potential false or fraudulent claim risk can arise from promoting and billing for services the government deems excessive or not medically necessary, as well as from other billing improprieties and from failure to timely return any identified
overpayments. We are making every effort, including adhering strictly to guidelines in any local coverage determinations issued by Medicare Administrative Contractors with jurisdiction over claims from any of our NxStage Kidney Care dialysis
centers, to ensure that billing by our NxStage Kidney Care dialysis centers is proper and that physicians who order NxStage Kidney Care dialysis services fully document medical need for patients for whom more frequent than thrice weekly therapy is
ordered. Nevertheless, we cannot provide assurance that the government will regard any billing errors that may be made as inadvertent or that the government will not examine our role in providing information to our customers, physicians and patients
concerning the benefits and potential coverage of more frequent therapy. Likewise, our financial relationships with customers, physicians, patients or others in a position to influence the purchase or use of our products may be subject to government
scrutiny or be alleged or found to violate applicable fraud and abuse laws. False claims laws prescribe civil, criminal and administrative penalties for noncompliance, which can be substantial, and given the possibility of exclusion from
participation in government health care programs, potentially crippling to the line of business involved. Moreover, an unsuccessful challenge or investigation into our practices could cause adverse publicity, and be costly to respond to, and thus
could harm our business and results of operations.
Increasingly, foreign countries are adopting laws similar in application and
consequence to the anti-kickback, false claims and Sunshine Act laws in the United States. In the European Union, the provision of benefits or advantages to physicians to induce or encourage the prescription, recommendation, endorsement, purchase,
supply, order or use of medical devices is prohibited. The provision of benefits or advantages to physicians is also governed by the national anti-bribery laws of the EU Member States. One such example is the UK Bribery Act. Increasingly, national
laws or industry codes are imposing obligations of public disclosure of payments made to physicians in certain EU Member States. Moreover, agreements with physicians must often be the subject of prior notification and approval by the
physicians employer or competent professional organization or the competent authorities of the individual EU Member States. If we fail to comply with these laws we may face civil or criminal penalties. The negative consequences of any failure
to comply with these laws may also harm our ability to operate in foreign countries and have a negative effect on our reputation that discourages third parties from doing business with us.
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Foreign governments tend to impose strict price controls, which may adversely affect our
future profitability.
We have begun to market the System One and certain of our other products internationally. In some foreign
countries, particularly in the European Union, the pricing of medical devices is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after a device has been CE marked. To
obtain reimbursement or pricing approval in some countries, we may be required to supply data that compares the cost-effectiveness of our products to other available therapies. If reimbursement of our products is unavailable or limited in scope or
amount, or if pricing is set at unsatisfactory levels, it may not be profitable to sell our products outside of the United States, which would negatively affect the long-term growth of our business. Furthermore, reimbursement provided for our
products in other jurisdictions could change, positively or negatively. In the event reimbursements were to be negatively changed, such as in the United Kingdom where we sell our products directly, our ability to sell our products could be
impaired.
If we violate import and export laws, or if laws governing our exemption from certain duties change, we could be subject
to significant fines, liabilities or other adverse consequences.
We import into the United States disposable medical supplies from
our manufacturing facilities and vendors located outside the United States. We have manufacturing facilities in Mexico, Germany and Italy and export various components and assemblies related to those operations. To a lesser but increasing degree, we
also export finished goods from the United States to foreign countries. The import and export of these items are subject to extensive and complex laws and regulations. To the extent we fail to comply with these laws or regulations, or fail to
interpret our obligations accurately, we may be subject to significant fines, liabilities, import holds and a disruption in our ability to deliver product, which could harm our business and operating results to suffer. To the extent there are
modifications to the Generalized System of Preferences or cancellation of the Nairobi Protocol tariff classifications that apply to our products such that our products would be subject to duties, our profitability would also be negatively impacted.
Failure to comply with the U.S. Foreign Corrupt Practices Act, UK Anti-Bribery Act or similar anti-bribery laws in other countries
could subject us to penalties and other adverse consequences.
We are subject to the U.S. Foreign Corrupt Practices Act which
generally prohibits U.S. companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business and requires companies to maintain accurate books and records and internal controls,
including at foreign controlled subsidiaries. Through our international activities, we are also subject to the UK Anti-Bribery Act and other similar anti-bribery laws in other countries. While we have policies and procedures in place designed to
promote compliance with such laws, our employees or other agents may nonetheless engage in prohibited conduct under these laws for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we
could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.
If we violate environmental and occupational safety laws regulating the use of hazardous materials, we could be subject to significant
fines, liabilities or other adverse consequences.
Our research and development programs as well as our manufacturing operations
involve the controlled use of hazardous materials. Accordingly, we are subject to federal, state and local laws, as well as the laws of foreign countries, governing the use, handling and disposal of these materials. In the event of an accident or
failure to comply with environmental laws, we could be held liable for resulting damages, and any such liability could exceed our insurance coverage.
Our business may be affected by U.S. government contracting risks.
We have agreements with Veterans Health Administration facilities and are one of the key subcontractors on a government contract to develop a
portable medical device to treat sepsis. As a result, we must comply with and are affected by laws and regulations relating to the award, administration and performance of U.S. government contracts which, among other things, impose additional costs
on our business. If we violate any of these laws or regulations, we may be liable for fines, penalties and any additional costs the government incurs in procuring replacement services, and we may be excluded from future U.S. government contracting.
Risks Related to Operations
We obtain some of our raw materials and production services from a single source or a limited group of suppliers, the loss of which may
cause production delays and prevent us from delivering our products on a timely basis.
We depend upon a number of single-source
suppliers for certain of our raw materials, components and finished goods, including the fiber used in our System One filters, our needles, premixed dialysate and sterile bags, as well as sterilization services. Some of our most critical
single-source supply relationships are with Membrana, Kawasumi and Laboratorios PiSA.
Membrana is our sole supplier of the fiber used in
our filters for System One products, and contractually we cannot obtain an alternative source of fiber for our System One products. While our relationship with Asahi could afford us back-up supply in the event of supply disruptions at Membrana, we
do not have the regulatory approvals necessary to use Asahi fiber in our System One cartridge in the United States and the performance of Asahi fiber in the System One has not yet been validated.
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Kawasumi is our only supplier of needles that we sell to our customers. Kawasumis
contractual obligation to supply needles to us expires in February 2017. Our supply chain maintains a limited extra supply of needles to mitigate against the risk of intermittent shortfalls in needle supply, at least in the near term. However, any
significant interruption in Kawasumis ability to supply products to us would impair our business, at least in the short term.
Laboratorios PiSA is our only supplier of premixed dialysate. Our supply agreement with Laboratorios PiSA extends through December 2019. We
have committed to purchase from Laboratorios PiSA a minimum quantity of premixed dialysate over the term of the agreement, which we believe is less than our anticipated requirements. While we can purchase premixed dialysate from other qualified
suppliers, any significant disruption in Laboratorios PiSAs ability to supply premixed dialysate to us would impair our business, at least in the near term.
Our dependence upon these and other single-source suppliers of raw materials, components, finished goods and sterilization services exposes us
to several risks, including disruptions in supply, price increases, late deliveries, and an inability to meet customer demand. This could lead to customer dissatisfaction, damage to our reputation, or customers switching to competitive products. Any
interruption in supply could be particularly damaging to our customers using the System One to treat chronic end-stage renal disease and who need access to the System One and related disposables to continue their therapy.
Finding alternative sources for these raw materials, components, finished goods and sterilization services would be difficult and in many
cases entail a significant amount of time, disruption and cost. Although we believe our supply chain has sufficient inventory of raw materials, components and finished goods to withstand a temporary disruption in supply from any single source
supplier, any permanent or long-term disruption in supply from any single source supplier could lead to supply delays or interruptions which would damage our business and impair our reputation, at least in the near term.
Natural disasters, labor disputes and other adverse developments at our manufacturing facilities may cause production delays and prevent
us from delivering our products on a timely basis.
We rely on our manufacturing facilities in Mexico, Italy and Germany for the
production of our equipment and disposables. The loss of any of these facilities due to fire, natural disaster, war, power failure or other cause beyond our control could cause significant production delays, prevent us from meeting customer demand
for our products, increase our product costs, impair our product quality or reliability, and result in substantially decreased revenues.
While we have labor agreements with our production employees in Mexico and Italy, we may experience strikes, work stoppages, work slowdowns,
grievances, complaints, claims of unfair labor practices, other collective bargaining disputes, anti-union behavior, or other labor disputes at our manufacturing facilities. Some of our key single-source suppliers also have labor agreements in
place, but nonetheless may be subject to similar risks related to labor disputes. Any such activity likely would cause production delays and prevent us from delivering our production commitments to customers, which could adversely affect our
reputation and cause our business and operating results to suffer.
We do not have long-term supply contracts with many of our
third-party suppliers.
We purchase raw materials and components from third-party suppliers, including
some single-source suppliers, through purchase orders and do not have long-term supply contracts with many of our suppliers. Many of our suppliers are not obligated to perform services or supply products for any specific period, in any
specific quantity or at any specific price, except as may be provided in a particular purchase order. We do not maintain large volumes of inventory from most of our suppliers. If we inaccurately forecast demand for finished goods, we may be unable
to meet customer demand which could harm our competitive position and reputation. In addition, if we fail to effectively manage our relationships with our suppliers, we may be required to change suppliers, which may be time consuming and lead to
disruptions in our product supply. Although we believe our supply chain has sufficient inventory of raw materials, components and finished goods to withstand a temporary disruption in supply from any single-source supplier, any permanent or
long-term disruption in supply from any single-source supplier could lead to supply delays or interruptions which would damage our business and impair our reputation, at least in the near term.
Increasing prices for resin, a key material in the manufacture of our products, could impair our ability to achieve profitability.
Resin is a key material in the manufacture of our products, including the System One cartridge. We currently source resin from a
small number of suppliers. Rising prices over the last several years for crude oil, natural gas and other petrochemical intermediates from which resin is produced have resulted in significant price increases for this material, and resin prices may
continue to increase. Our contracts with customers restrict our ability to immediately pass on these price increases, and future pricing to customers may be insufficient to accommodate increasing resin costs. In addition, our overall cost
reduction plans may not sufficiently offset the impact of increased resin costs, which could result in declining margins and operating results.
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Increasing fuel prices could impair our ability to achieve profitability.
We currently incur significant inbound and outbound distribution costs, which are dependent upon fuel prices. Increases in fuel prices could
lead to increases in our distribution costs, which could impair our ability to achieve profitability.
Risks Related to Intellectual
Property
If we are unable to protect our intellectual property and prevent its use by third parties, we will lose a
significant competitive advantage.
We rely on patent protection, as well as a combination of copyright, trade secret and trademark
laws to protect our proprietary technology and prevent others from duplicating our products. However, these means may afford only limited protection and may not:
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prevent our competitors from duplicating our products;
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prevent our competitors from gaining access to our proprietary information and technology; or
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permit us to gain or maintain a competitive advantage.
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These risks may increase in foreign
countries whose laws do not protect intellectual property rights effectively or to the same extent as U.S. laws.
Any of our patents,
including those we may license, may be challenged, invalidated, rendered unenforceable or circumvented. We may not prevail if our patents are challenged by competitors or other third parties. The U.S. federal courts or equivalent national courts or
patent offices elsewhere may invalidate our patents, find them unenforceable, or narrow their scope. Furthermore, competitors may be able to design around our patents, or obtain patent protection for more effective technologies, designs or methods
for treating kidney failure. If these developments were to occur, our products may become less competitive and sales of our products may decline.
We have filed numerous patent applications seeking protection of products and other inventions originating from our research and
development. Our patent applications may not result in an issued patent, and any patents that are issued may not provide meaningful protection against competitors or competitive technologies.
Our products could infringe the intellectual property rights of others, which may lead to costly litigation, result in substantial
damages or royalty obligations, and prevent us from using technology that is essential to our products.
The medical device
industry has been characterized by extensive litigation and administrative proceedings regarding patent infringement and intellectual property rights. Products to provide kidney replacement therapy have been available for more than 30 years and
our competitors hold a significant number of patents relating to kidney replacement devices, therapies, products and supplies. Competitors and other third parties may allege that our products or methods infringe their patents or other intellectual
property rights, and the possibility of such infringement claims may increase as our business expands into new markets.
Infringement and
other intellectual property claims and proceedings brought against us, whether successful or not, could result in substantial costs and harm to our reputation. Such claims and proceedings can also divert management and key personnel from other tasks
important to the success of the business. In addition, intellectual property litigation or claims could require us to:
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cease selling or using any of our products that incorporate the asserted intellectual property, which would adversely affect our revenues;
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pay substantial damages for past use of the asserted intellectual property;
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obtain a license from the holder of the asserted intellectual property, which license may not be available on reasonable terms, if at all and which could reduce profitability; and
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redesign or rename, in the case of trademark claims, our products to avoid infringing the intellectual property rights of third parties, which may not be possible and could be costly and time-consuming if it is possible
to do so.
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Confidentiality agreements with employees and others may not adequately prevent disclosure
of trade secrets and other proprietary information.
In order to protect our proprietary technology and processes, we rely in part
on confidentiality agreements with our corporate partners, employees, consultants, outside scientific collaborators and sponsored researchers, advisors and others. These agreements may not effectively prevent disclosure of confidential information
and trade secrets and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover or reverse engineer trade secrets and proprietary information, and in such
cases we may be unable to assert any trade secret rights against such party. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret
protection could adversely affect our competitive position.
We may be subject to damages resulting from claims that our employees
or we have wrongfully used or disclosed alleged trade secrets of other companies.
Many of our employees have
worked at other medical device companies focused on the development of dialysis products, including our competitors. We may be subject to claims that these employees or we have inadvertently or otherwise used or disclosed trade secrets or other
proprietary information of their former employers. Litigation may be necessary to defend against these claims. If we fail in defending such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights. Even if we
are successful in defending against these claims, litigation could result in substantial costs and harm to our reputation and be a distraction to management.
Risks Related to our Common Stock
The market price of our common stock may fluctuate significantly.
There may be periods of volatility in the market price of our common stock that delay or prevent you from selling your common stock at or above
the price you paid for it. Some of the factors that may cause the market price of our common stock to fluctuate include:
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timing of market launch and market acceptance of our products;
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timing of achieving profitability from operations;
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changes in estimates of our financial results or recommendations by securities analysts or the failure to meet or exceed securities analysts expectations;
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actual or anticipated variations in our quarterly operating results;
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future debt or equity financings;
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developments or disputes with key vendors or customers, or adverse changes to the purchasing patterns of key customers and distributors;
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disruptions in product supply for any reason, including product recalls, our failure to appropriately forecast supply or demand, difficulties in moving products across international borders, or the failure of third
party suppliers to produce needed products or components;
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reports by officials or health or medical authorities, the general media or the FDA regarding the potential benefits of the System One, similar dialysis products distributed by other companies, or more frequent or home
dialysis;
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the FDA or foreign regulatory agencies and notified bodies declining to clear or approve our product candidates or to issue CE Certificates of Conformity, or delays in the FDA or other foreign regulatory agency and
notified body review processes;
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product recalls and withdrawals;
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defaults under our material contracts, including without limitation our credit agreement;
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regulatory developments in the United States and foreign countries;
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changes in third-party healthcare reimbursements, particularly a decline in the level of Medicare reimbursement for dialysis treatments, or the willingness of Medicare contractors to pay for more than three treatments a
week where medically justified;
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litigation involving our company or our general industry;
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announcements of technical innovations or new products by our competitors;
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developments or disputes concerning our patents or other proprietary rights;
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our ability to manufacture and supply our products to commercial standards;
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significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors;
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departures of key personnel;
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investors general perception of our company, our products, the economy and general market conditions; and
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the other risks and uncertainties described in these
Risk Factors
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The
stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of individual companies. These broad market fluctuations may adversely affect the trading price of our common stock. In the
past, following periods of volatility in the market price of a companys securities, stockholders have often instituted class action securities litigation against those companies. Such litigation, if instituted, could result in substantial
costs and diversion of management attention and resources, which could significantly harm our profitability and reputation.
Provisions in our governing documents and under Delaware law may discourage potential acquisition proposals and changes in management
that stockholders may favor.
Provisions in our charter and bylaws and under the corporation law of Delaware, where we are
incorporated, may delay or prevent a takeover attempt that could be viewed as beneficial to stockholders who wish to receive a premium for their shares from a potential bidder. These provisions may also discourage stockholders from attempting to
replace or remove members of our board of directors, which in turn may delay or prevent changes in our current management team that stockholders may favor. These provisions include:
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a prohibition on stockholder actions by written consent;
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the ability of our board of directors to issue preferred stock without stockholder approval, which could be used to institute a poison pill that would work to dilute the stock ownership of a potential
hostile acquirer, effectively preventing acquisitions that have not been approved by our board of directors;
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advance notice requirements for nominations of directors or stockholder proposals;
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the requirement that board vacancies be filled by a majority of our directors then in office; and
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the prohibition on a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in
excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner.
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If we obtain additional financing for acquisitions and other growth initiatives, it may reduce the market value of our common shares.
As part of our growth strategy, we may acquire other businesses and technologies and pursue additional business opportunities. To
finance such activity, we may issue equity securities, which may dilute our existing stockholders, and incur debt, which may place restrictions on our business operations. Such financing activity may reduce the market value of our common shares and
other securities, in particular if the initiatives being funded are not viewed favorably by our stockholders and are ultimately unsuccessful.
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