ITEM 1. BUSINESS
Overview
We are a global, integrated orthopedic medicines company committed
to improving the lives of patients with degenerative orthopedic diseases and traumatic conditions with clinically meaningful therapies
along the continuum of care, from palliative pain management to regenerative cartilage repair. We have over two decades of global
expertise developing, manufacturing, and commercializing products based on our proprietary hyaluronic acid (“HA”) technology.
Our orthopedic medicine portfolio includes ORTHOVISC, MONOVISC, and CINGAL, which alleviate pain and restore joint function by
replenishing depleted HA, and HYALOFAST, a solid HA-based scaffold to aid cartilage repair and regeneration.
Our therapeutic offerings consist of products in the following areas:
Orthobiologics, Dermal, Surgical, and Other, which includes our ophthalmic and veterinary products. All of our products are based
on HA, a naturally occurring, biocompatible polymer found throughout the body. Due to its unique biophysical and biochemical properties,
HA plays an important role in a number of physiological functions such as the protection and lubrication of soft tissues and joints,
the maintenance of the structural integrity of tissues, and the transport of molecules to and within cells.
Our proprietary technologies for modifying the HA molecule allow
product properties to be tailored specifically to therapeutic use. Our patented technology chemically modifies HA to allow for
longer residence time in the body. We also offer products made from HA based on two other technologies: HYAFF, which is a solid
form of HA, and ACP gel, an autocross-linked polymer of HA. Our technologies are protected by an extensive portfolio of owned
and licensed patents.
Since our inception in 1992, we have utilized a commercial partnership model for the
distribution of our products to end users. Our strong, worldwide network of distributors has historically provided, and continues
to provide, a solid foundation for our revenue growth and territorial expansion. In 2015, we made the strategic decision to commercialize
our next generation viscosupplementation product, CINGAL, in the United States by utilizing a direct sales model, initially through
the engagement of a contract sales organization. Ultimately, we intend to transition the direct sales function into our company
as part of a broader buildout of our commercial capabilities. We believe that the combination of the direct and distribution commercial
models will maximize the revenue and profitability potential from our current and future product portfolio.
We began a strategic project in 2015 to move the manufacturing of
our HYAFF-based products, which were previously manufactured by a third party in Italy, to our Bedford, Massachusetts facility.
Our main purposes behind this strategic move are to gain control of supply chain management, to improve the efficiency of our manufacturing
process, and to enhance our research and development capabilities, with the aim of accelerating future product development.
The following sections provide more specific information about our
products and related activities:
Orthobiologics
Our orthobiologics products primarily consist of viscosupplementation
and regenerative orthopedic products. These products are used in a wide range of treatments, from providing pain relief from osteoarthritis
to regenerating damaged tissue such as cartilage. Osteoarthritis is a debilitating disease causing pain, swelling, and restricted
movement in joints. It occurs when the cartilage in a joint gradually deteriorates due to the effects of mechanical stress, which
can be caused by a variety of factors, including the normal aging process. In an osteoarthritic joint, particular regions of articulating
surfaces are exposed to irregular forces, which results in the remodeling of tissue surfaces that disrupt the normal equilibrium
or mechanical function. As osteoarthritis advances, the joint gradually loses its ability to regenerate cartilage tissue, and the
cartilage layer attached to the bone deteriorates to the point where eventually the bone becomes exposed. Advanced osteoarthritis
often requires surgery and the possible implantation of artificial joints. The current treatment options for osteoarthritis, before
joint replacement surgery, include viscosupplementation, analgesics, non-steroidal anti-inflammatory drugs, and steroid injections.
Our viscosupplementation franchise includes ORTHOVISC, ORTHOVISC
mini
, MONOVISC, and CINGAL. ORTHOVISC is available in the United States, Canada, and other international markets for the
treatment of osteoarthritis of the knee, and in Europe and certain international markets for the treatment of osteoarthritis in
all joints. ORTHOVISC
mini
is available in Europe, and it is designed for the treatment of osteoarthritis in small joints.
MONOVISC is our single injection osteoarthritis treatment indicated for all joints in Europe and certain international markets,
and for the knee in the United States, Turkey, and Canada. ORTHOVISC has been marketed by us internationally since 1996, and it
was approved by the FDA for sale in the United States in 2004. ORTHOVISC
mini
and MONOVISC became available in certain international
markets in the second quarter of 2008. MONOVISC was approved by the FDA for sale in the United States in February 2014, and the
related U.S. commercial introduction of the product occurred in April 2014. In the United States, our viscosupplementation franchise,
consisting of our ORTHOVISC and MONOVISC products, continues to maintain a market leadership position. CINGAL, our second single-injection
osteoarthritis product, received regulatory approval from Health Canada in November 2015 for the treatment of pain associated with
osteoarthritis of the knee. In March 2016, we received CE Mark approval of CINGAL as a viscoelastic supplement or as a replacement
for synovial fluid in human joints. We successfully achieved commercial launch of the product in Canada during May 2016 and in
the European Union during June 2016. Upon achievement, if any, of such regulatory approval in the United States, we plan to commercialize
the product through a direct sales model, initially through the engagement of a contract sales organization, with the ultimate
goal of transitioning the direct sales function into our company as part of a broader buildout of our commercial capabilities.
For additional information about CINGAL in the United States, see the section captioned “
Business—Research and Development
of Potential Products
.”
In the United States, ORTHOVISC is indicated for the treatment of
pain caused by osteoarthritis of the knee in patients who have failed to respond adequately to conservative, non-pharmacologic
therapy and to simple analgesics, such as acetaminophen. ORTHOVISC is a sterile, clear, viscous solution of hyaluronan dissolved
in physiological saline and dispensed in a single-use syringe. A complex sugar of the glycosaminoglycan family, hyaluronan is a
high molecular weight polysaccharide composed of repeating disaccharide units of sodium glucuronate and N-acetyl glucosamine. ORTHOVISC
is injected into joints in a series of three intra-articular injections one week apart. ORTHOVISC became available for sale in
the United States on March 1, 2004, and it is marketed by DePuy Synthes Mitek Sports Medicine (“Mitek”) under
the terms of a ten-year licensing, distribution, supply, and marketing agreement which was entered into in December 2003 and was
extended for an additional 5 years in November 2012 (the “Mitek ORTHOVISC Agreement”). Outside of the U.S., we have
a number of distribution relationships servicing international markets including Canada, Europe, the Middle East, Latin America,
and Asia. We will continue to seek to establish distribution relationships in other key markets. See the sections captioned “
Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Management Overview
” and “
Risk
Factors.
”
In the United States, MONOVISC is also indicated for the treatment
of pain caused by osteoarthritis of the knee in patients who have failed to respond adequately to conservative, non-pharmacologic
therapy and to simple analgesics, such as acetaminophen. MONOVISC is a sterile, clear, viscous solution of partially cross-linked
sodium hyaluronate in a phosphate buffered saline solution. A treatment of MONOVISC is comprised of one injection of the product
delivered directly into the affected joint. MONOVISC became available for sale in the United States in April 2014, and it is also
marketed by Mitek under the terms of a fifteen-year licensing, distribution, supply, and marketing agreement, which was entered
into on December 21, 2011 (the “Mitek MONOVISC Agreement”). Outside of the United States, we have a number of distribution
relationships servicing international markets including Canada, Europe, Latin America, Asia, and certain other international countries.
We continue to seek to establish distribution relationships in other key markets. See the sections captioned “
Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Management Overview
” and “
Risk
Factors.
”
In addition to the four viscosupplementation products discussed
above, we also offer several additional products used in connection with orthopedic regenerative medicine. These
products are based on the HYAFF technology and are currently available in Europe, South America, and Asia. They include
HYALOFAST, a biodegradable support for human bone marrow mesenchymal stem cells used for cartilage regeneration and as an
adjunct for microfracture surgery; HYALONECT, a woven gauze used as a graft wrap; and HYALOSS MATRIX, HYAFF fibers used to
mix blood/bone grafts to form a paste for bone regeneration. We also offer HYALOGLIDE, an ACP gel used in tenolysis
treatment, with the potential for use in flexor tendon adhesion prevention and for use in the shoulder for prevention of
adhesive capsulitis with additional clinical data. This product is commercialized through a network of distributors,
primarily in Europe, the Middle East, and Korea. In addition to these products, we received CE Mark approval in December 2016
for a product which utilizes our proprietary HA technology to treat pain associated with lateral epicondylitis, better known
as tennis elbow. Outside of the United States, this product will be marketed under the trade name ORTHOVISC-T. We submitted a
CE Mark application for this treatment during the first quarter of 2016 and received CE Mark approval in December 2016. We
expect to initially commercialize this treatment through our European, and certain other, distribution partners in the first
half of 2017. Additionally, in the second quarter of 2016, we submitted an Investigational Device Exemption
(“IDE”) to the FDA to conduct a Phase III clinical trial for this treatment, and the IDE was approved by the FDA
in June 2016. In total, orthobiologics products accounted for 87%, 84%, and 82% of our product revenue in 2016, 2015,
and 2014 respectively.
Dermal
Our dermal products consist of advanced wound care products, based
on the HYAFF technology, and an aesthetic dermal filler, based on our proprietary chemically modified cross-linked HA technology.
Products utilizing our HYAFF technology are used for the treatment of skin wounds, ranging from burns to diabetic ulcers. The
products cover a variety of wound treatment solutions including debridement agents, advanced therapies to aid healing, and scaffolds
used as skin substitutes. Leading products include HYALOMATRIX and HYALOFILL, for the treatment of complex wounds such as burns
and ulcers. The dermal products are commercialized through a network of distributors, primarily in the United States, Europe,
Latin America, and the Middle East. Several of the products are also cleared for sale in the United States including HYALOMATRIX,
HYALOFILL, HYALOGRAN, and HYALOMATRIX 3D. We previously entered into a distribution agreement for the sale of advanced wound care
products in nine South American countries, including Argentina, Brazil, Mexico, and Chile, on an exclusive basis through 2018.
We have also entered into an agreement with Medline Industries, Inc. to commercialize HYALOMATRIX in the United States on an exclusive
basis through 2019.
Our aesthetic dermatology product is a dermal filler based on our
proprietary, chemically modified, cross-linked HA, and it is commercialized in certain European Union countries, Canada, South
Korea, and select countries in the Middle East. Internationally, this product is marketed under the ELEVESS name. In the United
States, the trade name is HYDRELLE, although the product is not currently marketed in the United States.
Surgical
Our surgical business consists of products used to prevent post-surgical
adhesions after abdominal-pelvic, spinal, and ear, nose, and throat (“ENT”) surgeries. HYALOBARRIER is a clinically
proven post-operative adhesion barrier for use in the abdominopelvic area. The product is currently commercialized in Europe,
the Middle East, and certain Asian countries through a distribution network, but it is not approved for sale in the United States.
HYALOSPINE, a product designed to prevent post-surgical adhesions following spinal surgery, was CE Mark approved in January 2015.
INCERT, approved for sale and commercialized through a network of distributors in Europe, Turkey, and Malaysia, is a chemically
modified, cross-linked HA product, for the prevention of spinal post-surgical adhesions. There are currently no plans at this time
to distribute INCERT in the United States.
Surgical adhesions occur when fibrous bands of tissues form between
adjacent tissue layers during the wound healing process. Although surgeons attempt to minimize the formation of adhesions, they
nevertheless occur quite frequently after surgery. Adhesions in the abdominal and pelvic cavity can cause particularly serious
problems such as intestinal blockage following abdominal surgery and infertility following pelvic surgery. Fibrosis following spinal
surgery can complicate re-operation and may cause pain.
We offer several products used in connection with the treatment of
ENT disorders. The lead products are MEROGEL, a woven fleece nasal packing, and MEROGEL INJECTABLE, a thick, viscous hydrogel
composed of cross-linked hyaluronic acid—a biocompatible agent that creates a moist wound-healing environment. We have
partnered with Medtronic XoMed, Inc. (“Medtronic”) for worldwide distribution of these ENT products.
Other
Our other products include our ophthalmic and
veterinary products, which are legacy products and not a part of our core business. Our ophthalmic business includes injectable,
high molecular weight HA products used as viscoelastic agents in ophthalmic surgical procedures such as cataract extraction and
intraocular lens implantation. These products coat, lubricate, and protect sensitive tissue such as the endothelium, and they function
to maintain the shape of the eye, thereby facilitating ophthalmic surgical procedures. Our veterinary product, HYVISC, is a high
molecular weight injectable HA product for the treatment of joint dysfunction in horses due to non-infectious synovitis associated
with equine osteoarthritis. HYVISC has viscoelastic properties that lubricate and protect the tissues in horse joints. HYVISC is
distributed by Boehringer Ingelheim Vetmedica, Inc. (“Boehringer”) in the United States and in selected countries
in the Middle East.
See Note 15
“Revenue by Product Group, by Significant
Customer and by Geographic Location; Geographic Information”
to our consolidated financial statements included elsewhere
in this Annual Report on Form 10-K for a discussion regarding our segments and geographic sales.
See also the section captioned “
Risk Factors—Risks
Related to Our Business and Industry—We experience quarterly sales volume variation, which makes our future results difficult
to predict and makes period-to-period comparisons potentially not meaningful
” for a discussion regarding the effect that
quarterly sales volume variation could have on our business and financial performance.
See also the section captioned “
Risk Factors —Risks
Related to Our Business and Industry—A significant portion of our revenues are derived from a small number of customers,
the loss of which could materially adversely affect our business, financial condition and results of operations
” for
a discussion regarding our dependence on large-volume customers and the effects that the loss of any such customer could have on
our business and financial performance.
See also the section captioned “
Risk Factors—Risks
Related to Our Business and Industry—Our manufacturing processes involve inherent risks, and disruption could materially
adversely affect our business, financial condition and results of operations
” for a discussion of the sources and availability
of raw materials related to the manufacture of our products.
Research and Development of Potential Products
Our research and development efforts primarily consist of the development
of new medical applications for our HA-based technology, the management of clinical trials for certain product candidates, the
preparation and processing of applications for regulatory approvals or clearances at all relevant stages of product development,
and process development and scale-up manufacturing activities for our existing and new products. Our development focus includes
products for tissue protection, repair, and regeneration. For the years ended December 31, 2016, 2015 and 2014, these expenses
were $10.7 million, $9.0 million, and $8.1 million, respectively. We anticipate that we will continue to commit significant
resources to, and increase our aggregate spending on, research and development activities, including in relation to clinical trials,
in the future.
Our second single-injection osteoarthritis product under development
in the United States is CINGAL, which is composed of our proprietary cross-linked HA material combined with an approved steroid
and is designed to provide both short- and long-term pain relief to patients. We completed an initial CINGAL phase III clinical
trial, including the associated statistical analysis for 368 enrolled patients, during the fourth quarter of 2014 with data indicating
that the product met all primary and secondary endpoints set forth for the trial. During the first half of 2015, we completed a
CINGAL retreatment study with 242 patients who had participated in the phase III clinical trial and reported safety data related
to the retreatment study. This initial phase III clinical trial and the associated retreatment study supported the Health Canada
and CE Mark approval of the product, and the commercial launch of the product in both Canada and the European Union occurred in
the second quarter of 2016. In the United States, after discussions with the FDA related to the regulatory pathway for CINGAL,
we conducted a formal meeting with the FDA’s Office of Combination Products (“OCP”) to present and discuss our
data in September 2015, and we submitted a formal request for designation with OCP a month later. In its response to our formal
request for designation, OCP assigned the product to the FDA’s Center for Drug Evaluation and Research (“CDER”)
as the lead agency center for premarket review and regulation. Since then, we have been in ongoing discussions with CDER to understand
the requirements for submitting a New Drug Application (“NDA”) for CINGAL. We held a meeting with CDER at the end of
September 2016 to align on an approval framework and on submission requirements for this NDA for CINGAL, including the execution
of an additional Phase III clinical trial to supplement our strong, existing CINGAL pivotal study data. We submitted an Investigational
New Drug Application (“IND”) in late 2016, and discussions with CDER to this point indicate that they do not have objections
to our clinical protocol design. As a result, we plan to commence this second phase III clinical trial in the first quarter of
2017 with the first patient to be treated in the second quarter of 2017.
We have several research and development programs underway for new
products, including for HYALOFAST (in the United States), an innovative product for cartilage tissue repair, HYALOBONE, a bone
void filler, and other early stage regenerative medicine development programs. HYALOFAST received CE Mark approval in September
2009, and it is commercially available in Europe and certain international countries. During the first quarter of 2015, we submitted
an IDE for HYALOFAST to the FDA, which was approved in July 2015. We commenced patient enrollment in a clinical trial in December
2015, and we are advancing site initiations and patient enrollment activities. In the second quarter of 2016, a supplement to the
HYALOFAST IDE was approved to expand the inclusion criteria for the clinical study. The purpose of this supplement is to allow
us to increase enrollment rates with the ultimate goal of decreasing the time needed to complete the clinical trial. We are also
currently proceeding with other research and development programs, one of which utilizes our proprietary HA technology to treat
pain associated with common repetitive overuse injuries, such as lateral epicondylitis, also known as tennis elbow. We submitted
a CE Mark application for this treatment during the first quarter of 2016 and received a CE Mark for the treatment of pain associated
with tennis elbow in December 2016. Outside of the United States, this product will be marketed under the trade name ORTHOVISC-T.
Additionally, in the second quarter of 2016, we submitted an IDE to the FDA to conduct a phase III clinical trial for this treatment,
which was approved by the FDA in June 2016 and which we plan to commence during the second half of 2017. We also have other research
and development programs underway focused on expanding the indications of our current products, including one program being conducted
and funded by our U.S. MONOVISC distribution partner, Mitek, seeking to expand MONOVISC’s indication to include treatment
of pain associated with osteoarthritis of the hip.
In June 2015, we entered into an agreement with the Institute for
Applied Life Sciences at the University of Massachusetts Amherst to collaborate on research to develop a therapy for rheumatoid
arthritis. The purpose of this research is to develop a novel modality for the treatment of rheumatoid arthritis and, if successful,
it is expected to yield a potential product candidate that we could begin to move towards commercialization as early as 2017.
Our research and development efforts may not be successful in (1) developing
our existing product candidates, (2) expanding the therapeutic applications of our existing products, or (3) resulting
in new applications for our HA technology. There is also a risk that we may choose not to pursue development of potential product
candidates. We may not be able to obtain regulatory approval for any new applications we develop. Furthermore, even if all regulatory
approvals are obtained, there can be no assurances that we will achieve meaningful sales of such products or applications.
See also the section captioned “
Risk Factors—Risks
Related to Our Business and Industry—Failure to obtain, or any delay in obtaining, FDA or other U.S. and foreign governmental
approvals for our products may have a material adverse effect on our business, financial condition and results of operations
”
for a discussion regarding the impact of government regulations on our product development activities.
Patent and Proprietary Rights
Our products and trademarks, including our corporate name, product
names, and logos, are proprietary. We rely on a combination of patent protection, trade secrets and trademark laws, license agreements,
and confidentiality and other contractual provisions to protect our proprietary information.
We have a policy of seeking patent protection for patentable aspects
of our proprietary technology. In the United States, we own 21 patents, 1 of which is co-owned with other parties, license 14 patents,
and have 5 patent applications currently pending. These U.S. patents have expiration dates through 2030. Internationally, we own
151 patents, 7 of which are co-owned with other parties, license 81 patents, and have 9 patent applications currently pending.
Outside of the United States, we own, co-own, license, or have filed for patents in 28 jurisdictions. Our international patents
have expiration dates through 2032. In 2016, we were granted 1 new patent in Canada. Many of these patents, including all
licensed patents, belong to the Anika S.r.l. patent estate, which is extensive and partly intertwined with its former parent company,
Fidia Farmaceutici S.p.A. (“Fidia”), through a patent licensing agreement that provides Anika S.r.l. with access to
certain of Fidia’s patents to the extent required to support Anika S.r.l.’s products. In 2016, 9 of the patents belonging
to the Anika S.r.l. patent estate expired in the United States and 47 expired internationally. We intend to seek patent protection
for products and processes developed in the course of our activities when we believe such protection is in our best interests and
when the cost of seeking such protection is not inordinate relative to the potential benefits.
Other entities have filed patent applications for, or have been issued
patents concerning, various aspects of HA-related products or processes. In addition, the products or processes we develop may
infringe the patent rights of others in the future. Any such infringement may have a material adverse effect on our business, financial
condition, and results of operations.
We rely upon trade secrets and proprietary know-how for certain non-patented
aspects of our technology. To protect such information, we require certain customers and vendors, and all employees, consultants,
and licensees to enter into confidentiality agreements limiting the disclosure and use of such information. These agreements, however,
may not provide adequate protection.
See also the section captioned “
Risk Factors—Risks
Related to Our Intellectual Property— We may be unable to adequately protect our intellectual property rights, which could
have a material impact on our business and future financial results
” for a discussion of the risks we face with respect
to protecting intellectual property developed by us.
We have granted Mitek an exclusive and non-transferable royalty bearing
license to develop, commercialize, and sell ORTHOVISC and MONOVISC in the United States pursuant to the Mitek ORTHOVISC Agreement
and the Mitek MONOVISC Agreement. These agreements include a license to manufacture, and have manufactured, such products in the
event that we are unable to supply Mitek with ORTHOVISC or MONOVISC in accordance with the terms of the relevant agreement. We
have also granted Mitek the exclusive, royalty free right to use the trademarks ORTHOVISC and MONOVISC in connection with the marketing,
distribution, and sale of the licensed products within the United States.
Government Regulation
The clinical development, manufacturing, and marketing of our products
are subject to governmental regulation in the United States, the European Union and other territories worldwide. Various statutes,
regulations, directives, and guidelines, including the Food, Drug, and Cosmetic Act in the United States, govern the development,
design, non-clinical and clinical research, testing, manufacture, safety, efficacy, labeling, packaging, storage, record keeping,
premarket clearance or approval, adverse event reporting, advertising, and promotion of our products. Product development and approval
within these various regulatory frameworks takes a number of years and involves the expenditure of substantial resources. Pharmaceutical
and medical device manufacturers are also inspected regularly by the FDA and other applicable regulatory bodies.
Medical products regulated by the FDA are generally classified as
drugs, biologics, or medical devices. Medical devices intended for human use are classified into three categories (Class I,
II or III) on the basis of the controls deemed reasonably necessary by the FDA to assure their safety and effectiveness. Class II
devices are cleared for marketing under the premarket notification 510(k) regulatory pathway, which may include clinical testing.
Class III devices require pre-market approval based on valid scientific evidence of safety and effectiveness, including evidence
elicited through appropriate clinical testing. Drugs and biologic products undergo rigorous preclinical testing prior to beginning
clinical trials. Clinical trials for new drugs or biologic products include Phase I trials in healthy volunteers to understand
safety, dosage tolerance, and pharmacokinetics, Phase II trials in a limited patient population to identify initial efficacy and
side effects, and Phase III pivotal trials to statistically evaluate the safety and efficacy of the product. The failure to adequately
demonstrate the quality, safety, and efficacy of a product under development can delay or prevent regulatory approval of the product.
In order to gain marketing approval, we must submit to the relevant regulatory authority for review information on the quality
aspects of the product as well as the non-clinical and clinical data. The FDA undertakes this review in the United States.
In the European Union, medical devices must be CE Marked in order
to be marketed. CE marking a device involves working with a Notified Body, and in some cases a Competent Authority, to demonstrate
that the device meets all applicable requirements of the Medical Devices Directive and that our Quality Management System is compliant.
Drug approval in the European Union follows one of several possible processes: (i) a centralized procedure involving members of
the European Medicines Agency’s Committee for Medicinal Products for Human Use; (ii) a “mutual recognition procedure”
in which an individual country's regulatory agency approves the product followed by “mutual recognition” of this approval
by regulatory agencies of other countries; or (iii) a decentralized procedure in which the approval is sought through the regulatory
agencies of multiple countries at the same time.
Approval timelines can range from several months to several years,
or applications can be denied entirely. The approval process can be affected by a number of factors. For example, additional studies
or clinical trials may be requested during the review, which may delay marketing approval and involve unbudgeted costs. As a condition
of approval, the regulatory agency may require post-marketing surveillance to monitor for adverse effects, and may require other
additional studies, as it deems appropriate. After approval for an initial indication, further clinical studies are generally necessary
to gain approval for any additional indications. The terms of any approval, including labeling content, may be more restrictive
than expected and could affect the marketability of a product.
As a condition of approval, the relevant regulatory agency requires
that the product continues to meet applicable regulatory requirements related to quality, safety, and efficacy, and it requires
strict procedures to monitor and report any adverse effects. Where adverse effects occur or may occur, the regulatory agency may
require additional studies or changes to the labeling. Compelling new “adverse” data may result in a product approval
being withdrawn at any stage following review by an agency and discussion with the product manufacturer.
The branch of the FDA responsible for product marketing oversight
routinely reviews company marketing practices and also may impose pre-clearance requirements on materials intended for use in marketing
of approved drug products. We are also subject to various U.S. federal and state laws pertaining to healthcare fraud and abuse,
including anti-kickback and false claims laws. Similar review and regulation of advertising and marketing practices exists in the
other geographic areas where we operate.
The FDA has broad regulatory compliance and enforcement powers. If
the FDA determines that we failed to comply with applicable regulatory requirements, it can take a variety of compliance or enforcement
actions, including, without limitation, issuing an FDA Form 483 notice of inspectional observations or a warning letter, imposing
civil money penalties, suspending or delaying issuance of approvals, requiring product recall, imposing a total or partial shutdown
of production, withdrawal of approvals or clearances already granted, pursuing product seizures, consent decrees or other injunctive
relief, or criminal prosecution through the Department of Justice. The FDA can also require us to repair, replace or refund the
cost of products that we manufactured or distributed. Outside the US, regulatory agencies may exert a range of similar powers.
See also the sections captioned “
Risk
Factors—Risks Related to Our Business and Industry—Failure to obtain, or any delay in obtaining, FDA or other U.S.
and foreign governmental approvals for our products may have a material adverse effect on our business, financial condition and
results of operations,
” “
Risk Factors—Risks Related to Our Business and Industry—Once obtained,
we cannot guarantee that FDA or international product approvals will not be withdrawn or that relevant agencies will not require
other corrective action, and any withdrawal or corrective action could materially affect our business and financial results,
”
“
Risk Factors—Risks Related to Our Business and Industry—Our operations and products are subject to extensive
regulation, compliance with which is costly and time consuming, and our failure to comply may result in substantial penalties,
including recalls of our products,
” and “
Risk Factors—Risks Related to Our Business and Industry—Any
changes in FDA or international regulations related to product approval, including those that apply retroactively, could adversely
affect our competitive position and materially affect our business and financial results
” for a discussion regarding
the potential impact of government regulations on our business and financial results.
Competition
We compete with many companies including, among others, large pharmaceutical
firms and specialized medical products companies, across all of our product lines. Many of these companies have substantially greater
financial resources, larger research and development staffs, more extensive marketing and manufacturing organizations, and more
experience in the regulatory processes than we have. We also compete with academic institutions, government agencies, and other
research organizations, which may be involved in the research and development and commercialization of products. Many of our competitors
also compete against us in securing relationships with collaborators for their research and development and commercialization programs.
We compete with other market participants primarily on the efficacy
of our products, our products’ reputation for safety, our focus on HA-based products, and the breadth of our HA-based product
portfolio. Other factors that impact competition in our industry are the timing and scope of regulatory approvals, the availability
of raw material and finished product supply, marketing and sales capability, reimbursement coverage, product pricing, and patent
protection. Some of the principal factors that may affect our ability to compete in the HA development and commercialization markets
include:
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The quality and breadth of our continued development of our technology portfolio;
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Our ability to complete successful clinical studies and obtain FDA marketing and foreign regulatory approvals prior to our
competitors;
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The successful execution of our commercial strategies;
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Our ability to recruit and retain skilled employees; and
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The availability of capital resources to fund strategic activities related to the significant expansion of our business or
product portfolio.
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We are aware of several companies that are developing and/or marketing
products utilizing HA for a variety of human applications. In some cases, competitors have already obtained product approvals,
submitted applications for approval, or commenced human clinical studies, either in the United States or in certain foreign countries.
All of our products face substantial competition. There exist major worldwide competing products, made from HA and other materials,
for use in orthopedics, surgical adhesion prevention, advanced wound care, ENT, cosmetic dermatology, and ophthalmic surgery. There
is a risk that we will be unable to compete effectively against our current or future competitors. Additionally, legislation and
regulation aimed at curbing rising healthcare costs has resulted in a consolidation trend in the healthcare industry to create
larger companies, including hospitals, with greater market power. In turn, this has led to greater and more intense competition
in the provision of products and services to market participants. Important market makers, like group purchasing organizations,
have increased their negotiating leverage, and if these market makers demand significant price concessions or if we are excluded
as a supplier by these market makers, our product revenue could be adversely impacted.
See also the sections captioned “
Risk Factors—Risks
Related to Our Business and Industry—Substantial competition could materially affect our financial performance
”
and
“Risk Factors—Risks Related to Our Business and Industry—Our business may be adversely affected if consolidation
in the healthcare industry leads to demand for price concessions or if we are excluded from being a supplier by a group purchasing
organization or similar entity”
for additional discussion of the impact competition could have on our business and financial
results.
Employees
As of December 31, 2016, we had 122 employees, 21 of whom were
located outside the United States. We consider our relations with our employees to be good. None of our U.S. employees are
represented by labor unions, but most of the employees based in Italy are represented by unions, adding complexity and additional
risks to the wage and employment decision processes.
Environmental Laws
We believe that we are in compliance with all foreign, federal, state,
and local environmental regulations with respect to our manufacturing facilities and that the cost of ongoing compliance with such
regulations does not have a material effect on our operations.
Product Liability
The testing, marketing, and sale of human health care products entails
an inherent risk of allegations of product liability, and we cannot assure that substantial product liability claims will not be
asserted against us. Although we have not received any material product liability claims to date and have coverage under our insurance
policy of $5.0 million per occurrence and $5.0 million in the aggregate, we cannot assure that if material claims arise in the
future, our insurance will be adequate to cover all situations. Moreover, we cannot assure that such insurance, or additional insurance,
if required, will be available in the future or, if available, will be available on commercially reasonable terms. Any product
liability claim, if successful, could have a material adverse effect on our business, financial condition, and results of operation.
Available Information
Our Annual Reports on Form 10-K, including our consolidated
financial statements, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other information, including amendments
and exhibits to such reports, filed or furnished pursuant to the Securities Exchange Act of 1934, as amended, are available free
of charge in the “SEC Filings” section of our website located at http://www.anikatherapeutics.com, as soon as reasonably
practicable after the reports are filed with or furnished to the SEC. The information on our website is not part of this Annual
Report on Form 10-K. Reports filed with the SEC may be viewed at www.sec.gov or obtained at the SEC Public Reference Room
at 100 F Street NE, Washington, D.C. 20549. Information regarding the operation of the Public Reference Room may be obtained by
calling the SEC at 1-800-SEC-0330.
ITEM 1A. RISK FACTORS
Our operating results and financial condition have varied in the
past and could vary significantly in the future depending on a number of factors. You should consider carefully the risks and uncertainties
described below, in addition to the other information contained in this Annual Report on Form 10-K, before deciding whether to
purchase our common stock. If any of the following risks actually occurs, our business, financial condition, results of operations,
and future prospects could be materially and adversely affected. In that event, the trading price of our common stock could decline,
and you could lose part or all of your investment.
Risks Related to Our Business and Industry
Failure to obtain, or any delay in obtaining, FDA or other U.S. and foreign governmental
approvals for our products may have a material adverse effect on our business, financial condition and results of operations.
Several of our current products, and any future products we may develop,
will require clinical trials to determine their safety and efficacy for United States and international marketing approval by regulatory
bodies, including the FDA. Product development and approval within the FDA framework takes a number of years and involves the expenditure
of substantial resources. There can be no assurance that the FDA will accept submissions related to our new products or the expansion
of the indications of our current products, and, even if submissions are accepted, there can be no guarantee that the FDA will
grant approval for our new products, including CINGAL, HYALOFAST, or other line extensions of our current products, or for the
expansion of indications of our current products on a timely basis, if at all. In addition to regulations enforced by the FDA,
we are subject to other existing and future federal, state, local, and foreign regulations applicable to product approval, which
may vary significantly across jurisdictions. Additional approval of existing products may be required when changes to such products
may affect the safety and effectiveness, including for new indications for use, labeling changes, process or manufacturing changes,
the use of a different facility to manufacture, process or package the device, and changes in performance or design specifications.
Failure to obtain regulatory approvals of our products, including any changes to existing products, could have an adverse material
impact on our business, financial condition, and results of operations.
Even if ultimately granted, FDA and international regulatory approvals
may be subject to significant, unanticipated delays throughout the regulatory approval process. Internally, we make assumptions
regarding product approval timelines, both in the United States and internationally, in our business planning, and any delay in
approval could materially affect our competitive position in the relevant product market and our projections related to future
business results.
We cannot be certain that product approvals, both in the United States
and internationally, will not include significant limitations on the product indications, and other claims sought for use, under
which the products may be marketed. The relevant approval or clearance may also include other significant conditions of approval
such as post-market testing, tracking, or surveillance requirements. Any of these factors could significantly impact our competitive
position in relation to such products and could have a negative impact on the sales of such products.
Once obtained, we cannot guarantee that FDA or international
product approvals will not be withdrawn or that relevant agencies will not require other corrective action, and any withdrawal
or corrective action could materially affect our business and financial results.
Once obtained, marketing approval can be withdrawn by the FDA or
comparable foreign regulatory agencies for a number of reasons, including the failure to comply with ongoing regulatory requirements
or the occurrence of unforeseen problems following initial approval. Regulatory authorities could also limit or prevent the manufacture
or distribution of our products. Any regulatory limitations on the use of our products or any withdrawal or suspension of approval
or rescission of approval by the FDA or a comparable foreign regulatory agency could have a material adverse effect on our business,
financial condition, and results of operations.
Our operations and products are subject to extensive regulation, compliance with
which is costly and time consuming, and our failure to comply may result in substantial penalties, including recalls of our products.
The FDA and foreign regulatory bodies impose extensive regulations
applicable to our operations and products, including regulations governing product standards, packing requirements, labeling requirements,
quality system and manufacturing requirements, import restrictions, tariff regulations, duties, and tax requirements. We cannot
assure you that we will be able to achieve and maintain compliance required for FDA, CE marking, or other foreign regulatory approvals
for any or all of our operations and products or that we will be able to produce our products in a timely and profitable manner
while complying with applicable requirements.
Failure to comply with applicable regulatory requirements could result
in substantial penalties, including warning letters, fines, injunctions, civil penalties, seizure of products, total or partial
suspension of production, refusal to grant pre-market clearance or pre-market approval for devices or drugs, withdrawal of approvals,
and criminal prosecution. Additionally, regulatory authorities have the power to require the recall of our products. It also might
be necessary for us, in applicable circumstances, to initiate a voluntary recall per regulatory requirements of one or several
of our products. The imposition of any of the foregoing penalties, whether voluntarily or involuntary, could have a material negative
impact on our business, financial condition, and results of operations.
Any changes in FDA or international regulations related to
product approval, including those that apply retroactively, could adversely affect our competitive position and materially affect
our business and financial results.
FDA and foreign regulations depend heavily on
administrative interpretation, and we cannot assure you that future interpretations made by the FDA or other regulatory bodies,
with possible retroactive effect, will not adversely affect us. Additionally, any changes, whether in interpretation or substance,
in existing regulations or policies, or any future adoption of new regulations or policies by relevant regulatory bodies, could
prevent or delay approval of our products. In the event our future, or current, products, including HA generally, are classified,
or re-classified, as human drugs, combination products, or biologics by the FDA or an applicable international regulatory body,
the applicable review process related to such products is typically substantially longer and substantially more expensive than
the review process to which they are currently subject as medical devices, which could materially impact our competitive position,
business, and financial results.
We are implementing a direct sales model to commercialize our CINGAL product, as
well as certain other future products, in the United States and we may face unforeseen difficulties and delays in implementing
this new model, which could affect our business and financial results.
For the first time, we are implementing a direct
sales model to market and promote one of our products, CINGAL, in the United States, initially through a contract sales organization,
with the ultimate goal of transitioning the direct sales function into our company as part of a broader buildout of our commercial
capabilities. We may also use this direct model to commercialize other of our products in the United States in the future. Our
success in utilizing this sales model will initially depend in part on our ability to successfully develop and implement the necessary
internal and external resources to manage the contract sales organization and the sales of the product. Our longer term success
will depend on our ability to transition the direct sales function into our company and to manage all resources associated with
this function. We cannot assure you that there will not be unforeseen roadblocks or delays in finalizing the contracts related
to, and implementing, the relationship with the contract sales organization, nor we can we assure you that we will not face setbacks
in transitioning the direct sales function into our organization. The initial implementation timeline of this direct sales model
is also dependent on CINGAL obtaining FDA approval in a timely manner, of which there is no guarantee. Failure to timely implement
our direct sales model or to successfully manage the implementation or transition process could materially impact our competitive
position, business, and financial results.
Substantial competition could materially affect our financial
performance.
We compete with many companies, including large pharmaceutical companies,
specialized medical products companies, and healthcare companies. Many of these companies have substantially greater financial
resources, larger research and development staffs, more extensive marketing and manufacturing organizations, and more experience
in the regulatory process than us. We also compete with academic institutions, government agencies, and other research organizations
that may be involved in research, development, and commercialization of products similar to our own. Because a number of companies
are developing or have developed HA products for similar applications and have received FDA approval, the successful commercialization
of a particular product will depend in part upon our ability to complete clinical studies and obtain FDA marketing and foreign
regulatory approvals prior to our competitors, or, if regulatory approval is not obtained prior to our competitors, to identify
markets for our products that may be sufficient to permit meaningful sales of our products. For example, we are aware of several
companies that are developing and/or marketing products utilizing HA for a variety of human applications. In some cases, competitors
have already obtained product approvals, submitted applications for approval, or have commenced human clinical studies, either
in the United States or in certain foreign countries. There exist major competing products for the use of HA in ophthalmic surgery.
In addition, certain HA products made by our competitors for the treatment of osteoarthritis in the knee received FDA approval
before ours and have been marketed in the United States since 1997, as well as select markets in Canada, Europe, and other countries.
There can be no assurance that we will be able to compete against current or future competitors or that competition will not have
a material adverse effect on our business, financial condition, and results of operations.
We may rely on third parties to support certain aspects of our clinical trials.
If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may not be able to
obtain regulatory approval or commercialize our products and our business could be substantially harmed.
We have hired experienced clinical development and regulatory staff,
and we have also retained the services of knowledgeable external service providers, including consultants and clinical research
organizations, to develop and supervise our clinical trials and regulatory processes. Despite our internal investment in staffing,
we will remain dependent upon these third party contract research organizations to carry out portions of our clinical and preclinical
research studies for the foreseeable future. As a result, we have had and will have less control over the conduct of the clinical
trials, the timing and completion of the trials, the required reporting of adverse events, and the management of data developed
through the trials than would be the case if we were relying entirely on our own staff. Outside parties may have staffing difficulties,
may undergo changes in priorities or may become financially distressed, adversely affecting their willingness or ability to conduct
our trials. Failure by these third parties to comply with regulatory requirements or to meet timing expectations may require us
to repeat clinical or preclinical trials, which would delay the regulatory approval process, or require substantial unexpected
expenditures.
We are dependent upon marketing and distribution partners and the failure to maintain
strategic alliances on acceptable terms will have a material adverse effect on our business, financial condition and results of
operations.
Our success will be dependent, in part, upon the efforts of our marketing
and distribution partners and the terms and conditions of our relationships with such partners. One partner, Mitek accounted for
75% of our product revenue in fiscal year 2016. We cannot assure you that our partners, including Mitek, will not seek to renegotiate
their current agreements on terms less favorable to us or terminate such agreements. A failure to renew these partnerships on terms
satisfactory to us, or at all, could result in a material adverse effect on our operating results.
We continue to seek to establish long-term distribution relationships
in regions and countries not covered by existing agreements, and we may need to obtain the assistance of additional marketing partners
to bring new and existing products to market and to replace certain marketing partners. There can be no assurance that we will
be able to identify or engage appropriate distribution or collaboration partners or effectively transition to any such partners.
The failure to establish strategic partnerships for the marketing and distribution of our products on acceptable terms and within
our planned timeframes could have a material adverse effect on our business, financial condition, and results of operations.
We must achieve market acceptance of our products in order
to be successful in the future.
Our success will depend in part upon the acceptance of our existing
and future products by the medical community, hospitals and physicians and other health care providers, third-party payers, and
end-users. Such acceptance may depend upon the extent to which the medical community and end-users perceive our products as safer,
more effective, or more cost-competitive than other similar products. Ultimately, for our new products to gain general market acceptance,
it may also be necessary for us to develop marketing partners or viable commercial strategies for the distribution of our products.
There can be no assurance that our new products will achieve significant market acceptance on a timely basis, or at all. Failure
of some or all of our future products to achieve significant market acceptance could have a material adverse effect on our business,
financial condition, and results of operations.
Our manufacturing processes involve inherent risks, and disruption
could materially adversely affect our business, financial condition, and results of operations.
The operation of biomedical manufacturing plants involves many risks,
including the risks of breakdown, failure, or substandard performance of equipment, the occurrence of natural and other disasters,
and the need to comply with the requirements of directives of government agencies, including the FDA. In addition, we rely on a
single supplier for certain key raw materials and a small number of suppliers for a number of other materials required for the
manufacturing and delivery of our HA products. Although we believe that alternative sources for many of these and other components
and raw materials that we use in our manufacturing processes are available, we cannot be certain that the supply of key raw materials,
specifically HA, will continue be available at current levels or will be sufficient to meet our future needs. Any supply interruption
could harm our ability to manufacture our products until a new source of supply is identified and qualified. We may not be able
to find sufficient alternative suppliers in a reasonable time period, or on commercially reasonable terms, if at all, and our ability
to produce and supply our products could be impaired.
We use raw materials derived from animal sources to produce certain of our products,
and there is no guarantee that we will be able to continue to utilize this source of material in the future.
Our manufacturing processes and research and development efforts
for some of our ophthalmic and veterinary products involve products derived from animals. We procure our animal-derived raw materials
from a qualified vendor, who controls for contamination and has processes that effectively inactivate infectious agents; however,
we cannot assure you that we can completely eliminate the risk of transmission of infectious agents. Furthermore, regulatory authorities
could in the future impose restrictions on the use of animal-derived raw materials that could impact our business.
The utilization of animals in research and development and product
commercialization is subject to increasing focus by animal rights activists. The activities of animal rights groups and other organizations
that have protested animal based research and development programs or boycotted the products resulting from such programs could
cause an interruption in our manufacturing processes and research and development efforts. The occurrence of material operational
problems, including but not limited to the events described above, could have a material adverse effect on our business, financial
condition, and results of operations during the period of such operational difficulties and beyond.
We are in the process of transferring the manufacturing of our HYAFF products from
Italy to our Bedford, MA facility, which carries inherent risks of supply interruption.
We are currently in the process of transferring the manufacturing
responsibilities for our HYAFF products from our previous contract manufacturer in Italy to our facility in Bedford, MA. This process
requires us to take several steps including, but not limited to, building excess inventory of the products, installing the necessary
equipment, including certain pieces of our equipment removed from our contract manufacturer’s facility, in our Bedford, MA
facility, and validating the equipment and achieving regulatory approval of the manufacturing processes in accordance with all
applicable law and regulations. There is no guarantee that any of these activities will not become delayed or otherwise disrupted,
which could lead to a supply interruption for the HYAFF products. Such an interruption could ultimately have a material adverse
effect on our business, financial condition, and results of operations.
Our Italian subsidiary, Anika Therapeutics S.r.l. (“Anika S.r.l.”)
is moving from its current facility in Abano Terme, Italy to a new facility in Padova, Italy, and there is no guarantee that this
facility move will not result in an interruption of our business.
Anika S.r.l. currently occupies warehousing, and administrative space
in Abano Terme, Italy. In October 2015, Anika S.r.l. entered into a build-to-suit lease agreement to lease a new warehousing, research
and development, and administrative facility in Padova, Italy. We expect that we will move into this new facility in the first
quarter of 2017. There is no guarantee that this move will be completed smoothly and in a timely manner due to, among other things,
unexpected construction delays or unexpected difficulties related to the lessor achieving necessary permitting, and any delay has
the potential to cause a disruption to our business activities. If there is a business disruption or the move is delayed, this
could ultimately have a material adverse effect on our business, financial condition, and results of operations.
Our financial performance depends on the continued sales growth
and increasing demand for our products and we may not be able to successfully manage the expansion of our operations.
Our future success depends on substantial growth in product sales.
There can be no assurance that such growth can be achieved or, if achieved, sustained. There can be no assurance that, even if
substantial growth in product sales and the demand for our products is achieved, we will be able to:
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Develop and maintain the necessary manufacturing capabilities;
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Obtain the assistance of additional marketing partners or develop appropriate alternative sales strategies;
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Attract, retain, and integrate required key personnel; and
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Implement the financial, accounting, and management systems needed to manage growing demand for our products.
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Our failure to successfully manage future growth could have a material
adverse effect on our business, financial condition, and results of operations.
We may face circumstances in the future that will result in impairment charges,
including, but not limited to, goodwill impairment and In-Process Research and Development (“IPR&D”) charges.
As of December 31, 2016, we had long-lived assets, including goodwill,
of $69.8 million. If the fair value of any of our long-lived assets decreases as a result of an economic slowdown, a downturn in
the markets where we sell products and services, or a downturn in our financial performance or future outlook, we may be required
to record an impairment charge on such assets.
We are required to test intangible assets with indefinite life periods
for potential impairment annually and on an interim basis if there are indicators of a potential impairment. We also are required
to evaluate amortizable intangible assets and fixed assets for impairment if there are indicators of a possible impairment. Impairment
charges could have a negative impact on our results of operations and financial position, as well as on the market price of our
common stock.
Customer, vendor, and employee uncertainty about the effects of any acquisitions could harm us.
We and the customers of any companies we acquire may, in response
to the consummation of any acquisitions, delay or defer purchasing decisions. Any delay or deferral in purchasing decisions by
customers could adversely affect our business. Similarly, employees of acquired companies may experience uncertainty about their
future role until or after we execute our strategies with regard to employees of acquired companies. This may adversely affect
our ability to attract and retain key management, sales, marketing, and technical personnel following an acquisition.
We engage in acquisitions as a part of our growth strategy, which exposes us to
a variety of risks that could adversely affect our business operations.
Our business strategy includes the acquisition of businesses, technologies,
services, or products that we believe are a strategic fit with our business. We may fund these acquisitions by utilizing our cash,
incurring debt, issuing additional shares of our common stock, or by other means. Completed acquisitions may expose us to a number
of risks and expenses, including unanticipated liabilities, amortization expenses related to intangible assets with definite lives,
or risks associated with entering new markets with which we have limited experience or where commercial alliances with experienced
partners or existing sales channels are not available. Whether or not completed, acquisitions may result in diversion of management
resources otherwise available for ongoing development of our business and significant expenditures.
We may not be able to realize the expected benefits of any completed
acquisitions, including growth synergies and cost savings from the integration of acquired businesses or assets with our existing
operations and technologies, as rapidly as expected, or at all. In addition, the integration and reorganization processes for our
acquisitions may be complex, costly, and time consuming and include unanticipated issues, expenses, and liabilities. We may have
difficulty in developing, manufacturing, and marketing the products of a newly acquired company in a manner that enhances the performance
of our combined businesses or product lines and allows us to realize value from expected synergies. Moreover, we may lose key clients
or employees of acquired businesses as a result of the change in ownership to us. Following an acquisition, we may not achieve
the revenue or net income levels that justify the acquisition. Acquisitions may also result in one-time charges, such as write-offs
or restructuring charges, impairment of goodwill or acquired In-Process Research and Development, which could adversely affect
our operating results. The failure to achieve the expected benefits of any acquisition may harm our business, financial condition,
and results of operations.
The acquisitions we have made or may make in the future may make us the subject
of lawsuits from either an acquired company’s stockholders, an acquired company’s previous stockholders, or our current
stockholders.
We may be the subject of lawsuits from either an acquired company’s
stockholders, an acquired company’s previous stockholders, or our current stockholders. These lawsuits could result from
the actions of the acquisition target prior to the date of the acquisition, from the acquisition transaction itself, or from actions
after the acquisition. Defending potential lawsuits could cost us significant expense and distract management’s attention
from the operation of the business. Additionally, these lawsuits could result in the cancellation of, or the inability to renew,
certain insurance coverage that would be necessary to protect our assets.
Attractive acquisition opportunities may not be available to us in the future.
We will consider the acquisition of other businesses. However, we
may not locate suitable acquisition targets or have the opportunity to make acquisitions of such targets on favorable terms in
the future, which could negatively impact the growth of our business. In order to pursue such opportunities, we may require significant
additional financing, which may not be available to us on favorable terms, if at all. The availability of such financing is limited
by the continued tightening of the global credit markets. We expect that our competitors, many of which have significantly greater
resources than we do, will compete with us to acquire compatible businesses. This competition could increase prices for acquisitions
that we would likely pursue.
Sales of our products are largely dependent upon third party reimbursement and
our performance may be harmed by health care cost containment initiatives.
In the United States and other foreign markets, health care providers,
such as hospitals and physicians, that purchase health care products, such as our products, generally rely on third party payers,
including Medicare, Medicaid, and other health insurance and managed care plans, to reimburse all or part of the cost of the health
care product. We generally depend upon the distributors of our products to secure reimbursement and reimbursement approvals. Reimbursement
by third party payers, both in the United States and internationally, may depend on a number of factors, including the payer’s
determination that the use of our products is clinically useful and cost-effective, medically necessary, and not experimental or
investigational. Since reimbursement approval is required from each payer individually, seeking such approvals can be a time consuming
and costly process which, in the future, could require us or our marketing partners to provide supporting scientific, clinical,
and cost-effectiveness data for the use of our products to each payer separately. Significant uncertainty exists as to the reimbursement
status of newly approved health care products, and any failure or delay in obtaining reimbursement approvals can negatively impact
sales of our new products.
In addition, third party payers are increasingly attempting to contain
the costs of health care products and services by limiting both coverage and the level of reimbursement for new therapeutic products
and by refusing, in some cases, to provide coverage for uses of approved products for disease indications for which the FDA, or
the applicable foreign regulatory agency, has granted marketing approval. Also, the U.S. Congress, certain state legislatures,
and certain foreign governments and regulatory agencies have considered reforms, including, among other items, the potential repeal
of the Affordable Care Act in the United States, which may affect current reimbursement practices and create additional uncertainty
about the pricing of our products, including the potential implementation of controls on health care spending through limitations
on the growth of Medicare and Medicaid spending. There can be no assurance that third party reimbursement coverage will be available
or adequate for any products or services developed by us. Outside the United States, the success of our products is also dependent
in part upon the availability of reimbursement and health care payment systems. Domestic and international reimbursement laws and
regulations may change from time to time. Lack of adequate coverage and reimbursement provided by governments and other third party
payers for our products and services, including continuing coverage for MONOVISC and ORTHOVISC in the United States, and any change
of classification by the Centers for Medicare and Medicaid Services for ORTHOVISC and MONOVISC, could have a material adverse effect
on our business, financial condition, and results of operations.
We may seek financing in the future, which could be difficult to obtain and which
could dilute your ownership interest or the value of your shares.
We had cash, cash equivalents, and investments of $124.8 million
at December 31, 2016. Our future capital requirements and the adequacy of available funds will depend, however, on numerous
factors, including:
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Market acceptance of our existing and future products;
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The success and sales of our products under various distributor agreements and other appropriate commercial strategies, including
the ability of our partners to achieve third party reimbursement for our products;
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The successful commercialization of products in development;
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Progress in our product development efforts;
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The magnitude and scope of such product development efforts;
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Any potential acquisitions of products, technologies, or businesses;
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Progress with preclinical studies, clinical trials, and product approvals and clearances by the FDA and other agencies;
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The cost and timing of our efforts to manage our manufacturing capabilities and related costs;
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The cost of filing, prosecuting, defending, and enforcing patent claims and other intellectual property rights and the cost
of defending any other legal proceeding;
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Competing technological and market developments;
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The development of strategic alliances for the marketing of certain of our products;
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The terms of such strategic alliances, including provisions (and our ability to satisfy such provisions) that provide upfront
and/or milestone payments to us; and
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The cost of maintaining adequate inventory levels to meet current and future product demand.
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To the extent funds generated from our operations, together with
our existing capital resources, are insufficient to meet future requirements, we will be required to obtain additional funds through
equity or debt financings, through strategic alliances with corporate partners and others, or through other sources. The terms
of any future equity financings may be dilutive to our investors and the terms of any debt financings may contain restrictive covenants,
which limit our ability to pursue certain courses of action. Our ability to obtain financing is dependent on the status of our
future business prospects as well as conditions prevailing in the relevant capital markets at the time we seek financing. No assurance
can be given that any additional financing will be made available to us or will be available on acceptable terms should such a
need arise.
We could become subject to product liability claims, which, if successful, could
materially adversely affect our business, financial condition, and results of operations.
The testing, marketing, and sale of human health care products entail
an inherent risk of allegations of product liability, and there can be no assurance that substantial product liability claims will
not be asserted against us. Although we have not received any material product liability claims to date and have an insurance policy
of $5.0 million per occurrence and $5.0 million in the aggregate to cover such product liability claims should they arise, there
can be no assurance that material claims will not arise in the future or that our insurance will be adequate to cover all situations.
Moreover, there can be no assurance that such insurance, or additional insurance, if required, will be available in the future
or, if available, will be available on commercially reasonable terms. Any product liability claim, if successful, could have a
material adverse effect on our business, financial condition, and results of operations.
Our business is dependent upon hiring and retaining qualified management and technical
personnel.
We are highly dependent on the members of our management and technical
staff, the loss of one or more of whom could have a material adverse effect on us. We have experienced a number of management changes
in recent years, and there can be no assurances that such management changes will not adversely affect our business. We believe
that our future success will depend in large part upon our ability to attract and retain technical and highly skilled managerial,
professional, and technical personnel. We face significant competition for such personnel from competitive companies, research
and academic institutions, government entities, and other organizations. There can be no assurance that we will be successful in
hiring or retaining the personnel we require. The failure to hire and retain such personnel could have a material adverse effect
on our business, financial condition, and results of operations.
We are subject to environmental regulations and any failure to comply with applicable
laws could subject us to significant liabilities and harm our business.
We are subject to a variety of local, state, federal, and foreign
government regulations relating to the storage, discharge, handling, emission, generation, manufacture, and disposal of toxic or
other hazardous substances used in the manufacture of our products. Any failure by us to control the use, disposal, removal, or
storage of hazardous chemicals or toxic substances could subject us to significant liabilities, which could have a material adverse
effect on our business, financial condition, and results of operations.
As our international sales and operations grow, we could become increasingly subject
to additional economic, political, and other risks that could harm our business.
Since we manufacture and sell our products worldwide, our business
is subject to risks associated with doing business internationally. During the years ended December 31, 2016, 2015, and 2014, 19%,
18%, and 13%, respectively, of our product sales were to international distributors. We continue to be subject to a variety of
risks, which could cause fluctuations in the results of our international and domestic operations. These risks include:
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The impact of recessions and other economic conditions in economies, including Europe in particular, outside the United States;
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Instability of foreign economic, political, and labor conditions;
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Unfavorable labor regulations applicable to our European operations, such as severance and the unenforceability of non-competition
agreements in the European Union;
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The impact of strikes, work stoppages, work slowdowns, grievances, complaints, claims of unfair labor practices, or other collective
bargaining disputes;
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Difficulties in complying with restrictions imposed by regulatory or market requirements, tariffs, or other trade barriers
or by U.S. export laws;
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Imposition of government controls limiting the volume of international sales;
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Longer accounts receivable payment cycles;
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Potentially adverse tax consequences, including, if required or applicable, difficulties transferring funds generated in non-U.S.
jurisdictions to the United States in a tax efficient manner;
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Difficulties in protecting intellectual property, especially in international jurisdictions;
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Difficulties in managing international operations; and
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Burdens of complying with a wide variety of foreign laws.
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Our success depends, in part, on our ability to anticipate and address
these risks. We cannot guarantee that these or other factors will not adversely affect our business or operating results.
Currency exchange rate fluctuations may have a negative impact on our reported
earnings.
Approximately 9% of our business during fiscal year 2016 was conducted
in functional currencies other than the U.S. dollar, which is our reporting currency. Thus, currency fluctuations among the U.S.
dollar and the other currencies in which we do business have caused and will continue to cause foreign currency transaction gains
and losses. Currently, we attempt to manage foreign currency risk through the matching of assets and liabilities. In the future,
we may undertake to manage foreign currency risk through additional hedging methods. We recognize foreign currency gains or losses
arising from our operations in the period incurred. We cannot guarantee that we will be successful in managing foreign currency
risk or in predicting the effects of exchange rate fluctuations upon our future operating results because of the variability of
currency exposure and the potential volatility of currency exchange rates.
A significant portion of our revenues are derived from a small
number of customers, the loss of which could materially adversely affect our business, financial condition and results of operations.
We have historically derived the majority of our revenues from a
small number of customers who resell our products to end-users, and most of these customers are significantly larger companies
than us. For the year ended December 31, 2016, five customers accounted for 83% of product revenue, with Mitek alone accounting
for 75% of product revenue. We expect to continue to be dependent on a small number of large customers, especially Mitek, for the
majority of our revenues for the foreseeable future. The failure of these customers to purchase our products in the amounts they
historically have or in amounts that we expect would seriously harm our business.
In addition, if present and future customers terminate their purchasing
arrangements with us, significantly reduce or delay their orders, or seek to renegotiate their agreements on terms less favorable
to us, our business, financial condition, and results of operations will be adversely affected. If we accept terms less favorable
than the terms of the current agreements, such renegotiations may have a material adverse effect on our business, financial condition,
and/or results of operations. Furthermore, in any future negotiations we may be subject to the perceived or actual leverage that
these customers may have given their relative size and importance to us. Any termination, change, reduction, or delay in orders
could seriously harm our business, financial condition, and results of operations. Accordingly, unless and until we diversify and
expand our customer base, or develop alternative commercial strategies, our future success will significantly depend upon the timing
and size of future purchases by our largest customers, and the financial and operational success of these customers. The loss of
any one of our major customers or the delay of significant orders from such customers, even if only temporary, could reduce or
delay our recognition of revenues, harm our reputation in the industry, and reduce our ability to accurately predict cash flow,
and, as a consequence, it could seriously harm our business, financial condition, and results of operations.
Information security breaches or business system disruptions may adversely affect
our business.
We rely on our information technology infrastructure and management
information systems to effectively run our business. While we have not previously experienced a material information security breach
caused by illegal hacking, computer viruses, or acts of vandalism or terrorism, we may in the future be subject to such a breach.
Our security measures or those of our third-party service providers may not detect or prevent such breaches. Any such compromise
to our information security could result in an interruption in our operations, the unauthorized publication of our confidential
business or proprietary information, the unauthorized release of customer, vendor, or employee data, the violation of privacy,
or other laws and exposure to litigation, any of which could harm our business and operating results.
Our business may be adversely affected if consolidation
in the healthcare industry leads to demand for price concessions or if we are excluded from being a supplier by a group purchasing
organization or similar entity.
Because healthcare costs have risen significantly
over the past decade, numerous initiatives and reforms have been launched by legislators, regulators, and third-party payers to
curb these costs. As a result, there has been a consolidation trend in the healthcare industry to create larger companies, including
hospitals, with greater market power. As the healthcare industry consolidates, competition to provide products and services to
industry participants has become and may continue to become more intense. This may result in greater pricing pressures and the
exclusion of certain suppliers from important markets as group purchasing organizations, independent delivery networks, and large
single accounts continue to use their market power to consolidate purchasing decisions. If a group purchasing organization excludes
us from being one of their suppliers, our net sales could be adversely impacted. We expect that market demand, government regulation,
third-party reimbursement policies, and societal pressures will continue to change the worldwide healthcare industry, which may
exert further downward pressure on the prices of our products.
We experience quarterly sales volume variation, which makes our future results
difficult to predict and makes period-to-period comparisons potentially not meaningful.
We experience quarterly fluctuations in our products sales as a result
of multiple factors, many of which are outside of our control. These quarterly fluctuations create uncertainty as to the volume
of sales that we may achieve in a given period. As a result, comparing our operating results on a period-to-period basis might
not be meaningful. You should not rely on our past results as an indication of our future performance. Our operating results could
be disproportionately affected by a reduction in revenue because a proportionately smaller amount of our expenses varies with our
revenue. As a result, our quarterly operating results are difficult to predict, even in the near term.
Risks Related to Our Intellectual Property
We may be unable to adequately protect our intellectual property rights, which
could have a material impact on our business and future financial results.
Our efforts to enforce our intellectual property rights may not be
successful. We rely on a combination of copyright, trademark, patent, and trade secret laws, confidentiality procedures, and contractual
provisions to protect our proprietary rights. Our success will depend, in part, on our ability to obtain and enforce patents and
trademarks, to protect trade secrets, to obtain licenses to technology owned by third parties when necessary, and to conduct our
business without infringing on the proprietary rights of others. The patent positions of pharmaceutical, medical product, and biotechnology
firms, including ours, can be uncertain and involve complex legal and factual questions. There can be no assurance that any patent
applications will result in the issuance of patents or, if any patents are issued, that they will provide significant proprietary
protection or commercial advantage or will not be circumvented by others. In the event a third party has also filed one or more
patent applications for any of its inventions, we may have to participate in interference proceedings declared by the U.S. Patent
and Trademark Office to determine priority of invention, which could result in the failure to obtain, or the loss of, patent protection
for the inventions and the loss of any right to use the inventions. Even if the eventual outcome is favorable to us, such interference
proceedings could result in substantial cost to us, including, but not limited to, the diversion of management’s attention
away from our other operations. Filing and prosecution of patent applications, litigation to establish the validity and scope of
patents, assertion of patent infringement claims against others, and the defense of patent infringement claims by others can be
expensive and time consuming. There can be no assurance that, in the event that any claims with respect to any of our patents,
if issued, are challenged by one or more third parties, any court or patent authority ruling on such challenge will determine that
such patent claims are valid and enforceable. An adverse outcome in such litigation could cause us to lose exclusivity covered
by the disputed rights. If a third party is found to have rights covering products or processes used by us, we could be forced
to cease using the technologies or marketing the products covered by such rights, we could be subject to significant liabilities
to such third party, and we could be required to license technologies from such third party in order to continue production of
the products. Furthermore, even if our patents are determined to be valid, enforceable, and broad in scope, there can be no assurance
that competitors will not be able to design around such patents and compete with us using the resulting alternative technology.
We have a policy of seeking patent protection for patentable aspects of our proprietary technology. We intend to seek patent protection
with respect to products and processes developed in the course of our activities when we believe such protection is in our best
interest and when the cost of seeking such protection is not inordinate. However, no assurance can be given that any patent application
will be filed, that any filed applications will result in issued patents, or that any issued patents will provide us with a competitive
advantage or will not be successfully challenged by third parties. The protections afforded by patents will depend upon their scope
and validity, and others may be able to design around our patents.
We also rely upon trade secrets and proprietary know-how for certain
non-patented aspects of our technology. To protect such information, we require all employees, consultants, and licensees to enter
into confidentiality agreements limiting the disclosure and use of such information. There can be no assurance that these agreements
provide meaningful protection or that they will not be breached, that we would have adequate remedies for any such breach, or that
our trade secrets, proprietary know-how, and our technological advances will not otherwise become known to others. In addition,
there can be no assurance that, despite precautions taken by us, others have not and will not obtain access to our proprietary
technology. Further, there can be no assurance that third parties will not independently develop substantially equivalent or better
technology.
There can be no assurance that we will not infringe upon the intellectual property
rights of others, which could have a significant impact on our business and financial results.
Other entities have filed patent applications for, or have been issued
patents concerning, various aspects of HA-related products or processes. There can be no assurance that the products or processes
developed by us will not infringe on the patent rights of others in the future. The cost of defending infringement suits is typically
large, and there is no guarantee that any future defense would be successful. In addition, infringement could lead to substantial
damages payouts or our inability to produce or market certain of our current or future products. As a result, any such infringement
may have a material adverse effect on our business, financial condition, and results of operations.
Risks Related to Ownership of Our Common Stock
Our stock price may be highly volatile, and we cannot assure
you that market making in our common stock will continue.
The market price of shares of our common stock may be highly volatile.
Factors such as announcements of new commercial products or technological innovations by us or our competitors, disclosure of results
of clinical testing or regulatory proceedings, government regulation and approvals, developments in patent or other proprietary
rights, public concern as to the safety of products developed by us, and general market conditions may have a significant effect
on the market price of our common stock. The trading price of our common stock could be subject to wide fluctuations in response
to quarter-to-quarter variations in our operating results, material announcements by us or our competitors, governmental regulatory
action, conditions in the health care industry generally or in the medical products industry specifically, or other events or factors,
many of which are beyond our control. In addition, the stock market has experienced extreme price and volume fluctuations, which
have particularly affected the market prices of many medical products companies and which often have been unrelated to the operating
performance of such companies. Our operating results in future quarters may be below the expectations of equity research analysts
and investors. In such an event, the price of our common stock would likely decline, perhaps substantially.
If securities or industry analysts do not publish or cease
publishing research or reports about us, our business, or our market, or if they adversely change their recommendations regarding
our stock, our stock price and trading volume could decline.
The trading market for our common stock is influenced by the research
and reports that securities or industry analysts may publish about us, our business, our market, or our competitors. No person
is under any obligation to publish research or reports on us, and any person publishing research or reports on us may discontinue
doing so at any time without notice. If adequate research coverage is not maintained on our company or if any of the analysts who
cover us downgrade our stock or publish inaccurate or unfavorable research about our business or provide relatively more favorable
recommendations about our competitors, our stock price would likely decline. If any analysts who cover us were to cease coverage
of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could
cause our stock price or trading volume to decline.
We do not intend to pay dividends on our common stock in the foreseeable future.
We have never declared or paid any cash dividends on our common stock.
We currently intend to retain earnings, if any, for use in our business and do not anticipate paying cash dividends on our common
stock in the foreseeable future. Accordingly, investors are not likely to receive any dividends on their common stock in the foreseeable
future, and their ability to achieve a return on their investment will therefore depend on appreciation in the price of our common
stock.
Our charter documents contain anti-takeover provisions that may prevent or delay
an acquisition of our company.
Certain provisions of our Restated Articles of Organization and Amended
and Restated By-laws could have the effect of discouraging a third party from pursuing a non-negotiated takeover of us and preventing
certain changes in control. These provisions include a classified Board of Directors, advance notice to the Board of Directors
of stockholder proposals, limitations on the ability of stockholders to remove directors and to call stockholder meetings, and
the provision that vacancies on the Board of Directors be filled by vote of a majority of the remaining directors. In addition,
the Board of Directors adopted a ten-year Shareholders Rights Plan in April 2008. We are also subject to Chapter 110F of the
Massachusetts General Laws which, subject to certain exceptions, prohibits a Massachusetts corporation from engaging in any of
a broad range of business combinations with any “interested stockholder” for a period of three years following the
date that such stockholder becomes an interested stockholder. All of these provisions, policies, and plans are reviewed periodically
by our Board of Directors. These provisions could discourage a third party from pursuing a takeover of us at a price considered
attractive by many stockholders, since such provisions could have the effect of preventing or delaying a potential acquirer from
acquiring control of us and our Board of Directors.