As used in this Form 10-K, unless the context
requires otherwise, “we” or “us” or “IsoRay” or the “Company” means IsoRay, Inc.
and its subsidiaries.
As used in this Form 10-K, unless the context
requires otherwise, “fiscal year” or “fiscal” means the Company’s financial year that begins on
July 1 and ends on June 30 of the following year (for example: fiscal year 2017 is equivalent to the year ended June 30, 2017).
ITEM 1 – BUSINESS
General
IsoRay, Inc. (formerly known as Century Park
Pictures Corporation) was incorporated in Minnesota in 1983. On July 28, 2005, IsoRay Medical, Inc. (Medical) became a wholly-owned
subsidiary of IsoRay, Inc. pursuant to a merger. Medical was formed under Delaware law on June 15, 2004 and on October 1, 2004
acquired two affiliated predecessor companies that began operations in 1998. Medical, a Delaware corporation, develops, manufactures
and sells isotope-based medical products and devices for the treatment of cancer and other malignant diseases. Medical is headquartered
in Richland, Washington.
IsoRay International LLC (International),
a Washington limited liability company, was formed on November 27, 2007 and is a wholly-owned subsidiary of the Company. International
has entered into various international distribution agreements.
Available Information
Our website address is www.IsoRay.com. Information
on this website is not a part of this Form 10-K (this “Report”). We make our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, Forms 3, 4, and 5 filed on behalf of directors and executive officers, and
any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (Exchange
Act) available free of charge on our website as soon as reasonably practicable after we electronically file such material with,
or furnish it to, the Securities and Exchange Commission (SEC). You can also read and copy any materials we file with the SEC
at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional information about
the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a website (www.sec.gov)
that contains reports, proxy and information statements, and other information regarding issuers that file electronically with
the SEC, including us.
Information regarding our corporate governance,
including the charters of our audit committee, our nominations and corporate governance committee and our compensation committee,
and our Codes of Conduct and Ethics is available on our website (www.IsoRay.com). We will provide copies of any of the foregoing
information without charge upon request to Mark Austin, Controller, 350 Hills Street, Suite 106, Richland, WA, 99354.
Business Operations
Overview
In 2003, IsoRay obtained clearance from the
Food and Drug Administration (FDA) for the use of Cesium-131 (Cs-131) radioisotope in the treatment of all malignant tumors. As
of the date of this Report, such applications include prostate cancer, brain cancer, breast cancer, colorectal cancer, gynecological
cancer, lung cancer, liver cancer, ocular melanoma and pancreatic cancer. The brachytherapy seed form (a sealed source) of Cs-131
may be used in surface, interstitial and intra-cavity applications for tumors with known radio-sensitivity. Management believes
the combination of a short half-life and relatively high-energy of Cs-131 will allow it to become a leader in the brachytherapy
market, and Cs-131 represents the first major advancement in brachytherapy technology in approximately 30 years with attributes
that could make it the long-term “seed of choice” for internal radiation therapy procedures.
Brachytherapy seeds are small devices containing
a therapeutic dose of radiation used in an interstitial radiation procedure. The procedure has become one of the primary treatments
for prostate cancer. The brachytherapy procedure places radioactive seeds as close as possible to (in or near) the cancerous tumor
(the word “brachytherapy” is derived from Greek and means close therapy). A primary advantage of seed brachytherapy
is the ability of the seeds to deliver therapeutic radiation thereby killing the cancerous tumor cells while minimizing exposure
(damage) to adjacent healthy tissue. This procedure allows doctors to administer a higher dose of radiation directly to the tumor.
A seed contains a radioisotope sealed within a titanium capsule. When brachytherapy is the only treatment (monotherapy) used in
the prostate, approximately 70 to 120 seeds are permanently implanted in the prostate during an outpatient procedure. The number
of seeds used varies based on the size of the prostate gland, the isotope used and the activity level specified by the physician.
When brachytherapy is combined with another treatment method (dual-therapy), fewer seeds are used (approximately 40 to 80) in
the procedure. The isotope decays over time (half-life) and eventually the seeds become inert (typically over 6 half-lives). The
seeds may be used as a primary treatment (monotherapy) or as an adjunct therapy with other treatment modalities, or as treatment
for residual disease after excision of primary tumors. The number of seeds for treatment sites other than prostate vary widely
(as few as 8 seeds to more than 100 seeds) depending on the type of cancer, the tumor location, the prescribed activity level
and any additional type of therapy being utilized.
IsoRay began the production and sales
of Cs-131 brachytherapy seeds in October 2004 for the treatment of prostate cancer after receiving clearance of its premarket
notification (510(k)) by the Food and Drug Administration. Prostate cancer treatment represents over 85% of the business of IsoRay
today.
In
late 2014, the first report of five-year clinical outcomes for patients treated with Cs-131 brachytherapy was published in a peer-reviewed
medical journal (Benoit, et al.,
Five Year Prostate-specific Antigen Outcomes after Caesium Prostate Brachytherapy
,
Clin Oncol 25 (December 2014)). In this study of 485
prostate cancer patients treated with Cs-131 brachytherapy seeds, a “biochemical relapse free” success rate of 96%
was reported for low risk patients after five years.
Work is ongoing to employ Cs-131 brachytherapy
seeds where trends are emerging in prostate cancer treatment, including the use of Cs-131 implants in combination with intensity
modulated radiation therapy (IMRT – a form of external beam radiation) for high risk localized prostate cancer (dual-therapy).
For low-risk prostate cancer, studies are ongoing to evaluate the use of Cs-131 in “focal,” or sub-total brachytherapy
of the prostate. It is hypothesized that low-risk patients using focal brachytherapy may achieve rates of prostate cancer control
comparable to that of full gland treatment while significantly reducing side effects. (M.H. Mendez, et al.,
Current trends
and new frontiers in focal therapy for localized prostate cancer,
Current Urology Report 16, 35 (June 2015)).
The
Company’s core product is its Cs-131 sealed source brachytherapy “seed.” These seeds can be inserted individually
into the prostate gland until the physician is satisfied with the radiation dose delivered. The Company also sells “pre-loaded”
needles with Cs-131 brachytherapy seeds inserted in them. In addition to the five year cancer control data mentioned above, a
report from 2017 describes favorable long-term quality of life outcomes following Cs-131 brachytherapy in the treatment of prostate
cancer (S.M. Glaser, et al.,
Long-Term Quality of Life in Prostate Cancer Patients Treated With Cesium
, 131 Int J Radiat
Oncol Biol Phys. 98(5):1053-1058 (2017)).
Individual seeds can also be placed via needle
into the female reproductive tract for the treatment of various gynecologic cancers. This effort has been led by Dr. Jonathan
Feddock of the University of Kentucky. In June 2016, the lead physician from the University of Kentucky conducted two presentations
on gynecological cancer patients who underwent treatment with permanent implantation of Cs-131 brachytherapy seeds. In the first
presentation, it was noted that 21 out of 26 recurrent cancer patients remained visually free of cancer at a median of 14 months
after implantation which equates to 80.7% local control (J. Feddock, et al.,
Permanent interstitial re-irradiation with cesium-131:
a highly successful second chance for cure in recurrent pelvic malignancies,
Brachytherapy 15 (S1)S78-9 (2016)). In the second
presentation, a series of 22 women with pelvic cancer underwent Cesium-131 brachytherapy seed implantation with other forms of
radiation therapy treating patients who were recently diagnosed and had not yet undergone any treatment. All these cancers were
successfully controlled at a median follow-up of 16 months. Side effects using the Cs-131 brachytherapy seeds were minor and all
treatments were performed as outpatient procedures. (J. Feddock, et al.,
Outpatient interstitial implants - integrating cesium-131
permanent interstitial brachytherapy into definitive treatment for gynecologic malignancies,
Brachytherapy 15 (S1):S93-4 (2016)).
Dr. Feddock and his team are continuing ongoing research.
While the FDA clearance granted in August
2009 to permit loading Cesium-131 seeds into bio-absorbable braided sutures or “braided strands” gives the Company
the ability to treat brain, lung, head and neck, colorectal, and chest wall cancers, and gynecological cancer, the Company is
currently pursuing the brain and gynecological cancers applications in addition to its primary focus on prostate cancer. The Company
has also received CE Mark clearance to commercially deliver Cs-131 brachytherapy seeds that are pre-loaded into braided strands
in Europe. This clearance permits the product to be commercially distributed in Europe for treatment of prostate, brain, lung,
and head and neck tumors as well as tumors in other organs.
Starting
in 2012, multiple institutions began utilizing Cs-131 brachytherapy seeds loaded in braided strands for treatment of brain and
head cancers. The application of Cs-131 brachytherapy seeds loaded in braided strands to date has been primarily in salvage cases
as a treatment of last resort for brain and head cancers where aggressive tumors had reoccurred multiple times following standard
of care treatment. From 2014 to 2016 there have been numerous published abstracts and society presentations which have been presented
and support the effectiveness of treating very difficult and aggressive cancers with Cs-131 in multiple body sites. Dr. Gabriella
Wernicke’s group, at Weill Cornell Medical College at the NY Presbyterian Hospital, published four papers on the efficacy,
favorable side-effect profile and cost-effectiveness of Cs-131 brachytherapy seeds in the treatment of metastatic brain cancer.
(A. Pham, et al.,
Neurocognitive function and quality of life in patients with newly diagnosed brain metastasis after treatment
with intra-operative cesium-131 brachytherapy: a prospective trial
, J Neurooncol 127(1):63-71 (2016); A.G. Wernicke, et al.,
Surgical technique and clinically relevant resection cavity dynamics following implantation of cesium-131 brachytherapy in
patients with brain metastases,
Operative Neurosurgery 12(1):49-60 (2016); A.G. Wernicke, et al.,
Cesium-131 brachytherapy
for recurrent brain metastases: durable salvage treatment for previously irradiated metastatic disease,
J Neurosurg DOI: 10.3171/2016.3.JNS152836
(Published online June 3, 2016); A.G. Wernicke, et al.,
The cost-effectiveness of surgical resection and cesium-131 intraoperative
brachytherapy versus surgical resection and stereotactic radiosurgery in the treatment of metastatic brain tumors,
J Neurooncol
127(1):145-53 (2016)). At the same institution, Dr. Bhupesh Parashar has published two journal articles on the effectiveness of
Cs-131 brachytherapy seeds in the treatment of both head and neck and lung cancer. (B. Parashar, et al.,
Analysis of stereotactic
radiation vs. wedge resection vs. wedge resection plus Cesium-131 brachytherapy in early stage lung cancer
, Brachytherapy
14(5):648-54 (2015);
A. Pham, et al.,
Cesium-131 brachytherapy
in high risk and recurrent head and neck cancers: first report of long-term outcomes
, J Contemp Brachytherapy 7(6):445-52
(2015).) In 2017, Dr. Wernicke’s group published favorable results on a series of patients with large brain metastases treated
with Cs-131 in braided strands. A. G. Wernicke, et al.,
Clinical Outcomes of Large Brain Metastases Treated With Neurosurgical
Resection and Intraoperative Cesium-131 Brachytherapy: Results of a Prospective Trial,
Int J Radiat Oncol Biol Phys. 98 (5):1059-1068
(2017)).
During fiscal 2013, the Company began providing
technical assistance and selling Cs-131 brachytherapy seeds for embedding in collagen tiles by physicians at Barrow Neurological
Institute (Barrow) to treat malignant meningioma, primary brain cancers and metastases of cancers to the brain. These physicians
from Barrow have formed a company, GammaTile LLC, and further refined this technology which integrates Cs-131 brachytherapy seeds
and has resulted in the issuance of multiple patents to GammaTile LLC for the treatment of brain cancers. In December 2014 and
June 2016, physicians representing Barrow presented their findings at two society conferences for neuro-oncologists. Highlights
of the presentation included a new treatment delivery system of Cs-131 brachytherapy seeds to the brain while embedded in collagen
tiles by applying directly to brain tissue after tumor removal. The trial presented included 16 patients with 20 tumors. The patients
in the study had multiple reoccurrences of tumors following previous surgeries in conjunction with treatments with external beam
radiation and had an increased risk for additional reoccurrences. Following treatment with Cs-131, 95% of the treated tumors had
no evidence of regrowth at the operative site (local control). The incidence of radiation side effects to the brain from Cs-131
brachytherapy seeds (a common side effect) occurred in only 2 of the 20 treatments. (D. Brachman,
Prospective trial of surgery
and permanent intraoperative brachytherapy (S+BT) using a modular, biocompatible radiation implant for recurrent aggressive meningiomas
,
Society of Neuro-Oncology Conference on Meningioma, Toronto, Canada (June 18, 2016)).
In
November of 2016, Dr. Emad Youssef of the Barrow Neurological Institute presented a study conducted on 13 patients with recurrent
high grade gliomas (primary brain cancer) at the annual meeting of the Society for Neuro-Oncology meeting. (E. Youssef, et al;
Rthp-23. Cs131 Implants For Salvage Therapy Of Recurrent High Grade Gliomas (Hgg)
, Neuro-Oncology Volume 18, Issue
suppl_6, 1 November 2016, Pages vi179).
These patients were
reported to have achieved a 92% rate of local control of their cancers during the follow-up interval. Due to the fact that the
GammaTile™ treatment has displayed promising results in difficult to control recurrent brain cancers, the Company has collaborated
with GammaTile LLC in filing applications to: the U.S. Food and Drug Administration (FDA) to clear GammaTile™ for clinical
use; and a New Technology Add-on Payment to the Center for Medicare and Medicaid Services (CMS) seeking re-imbursement for the
GammaTile™ treatment in the in-patient setting. The application with the FDA is ongoing, however, the NTAP referenced herein
is not currently under consideration and the Company plans to re-file the NTAP in October 2017. In the meantime, CMS has allowed
properly licensed medical centers to apply for re-imbursement under an existing Diagnostic Related Groups (DRG) code that allows
partial recovery of the GammaTile™ treatment cost.
Industry Information
Prostate Cancer Treatment
According to the American Cancer Society,
approximately one in seven men will be diagnosed with prostate cancer during his lifetime. It is the most common form of cancer
in men after skin cancer, and the second leading cause of cancer deaths in men following lung cancer. The American Cancer Society
estimates there will be about 161,360 new cases of prostate cancer diagnosed and an estimated 26,730 deaths associated with the
disease in the United States in 2017.
Prostate cancer treatment remains a key focus
of the Company. Most doctors use the American Joint Committee on Cancer (AJCC) TNM system to stage prostate cancer. This system
is based on three key pieces of information:
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The
extent of the main tumor (T category);
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Whether
the cancer has spread to nearby lymph nodes (N category); and
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Whether
the cancer has metastasized (spread) to other parts of the body (M category).
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These factors are combined to determine an
overall stage, using Roman numerals I through IV (1-4). The lower the number, the less the cancer has spread. A higher number,
such as stage IV, means a more advanced cancer.
Once diagnosed, prostate cancer can generally
be divided into either localized or advanced disease. Further, within the localized category the disease can be further categorized
to one of the three “risk groups”: low, intermediate and high risk. As the risk increases so does the probability
of advanced cancer at diagnosis and the probability of failing treatment with cancer progression or recurrence.
IsoRay’s Cs-131 brachytherapy seeds
are an option in the treatment of prostate cancers of all risk levels of localized disease. The diagnosis of prostate cancer –
and especially low risk prostate cancer – has been potentially reduced with the introduction of guidelines dissuading the
use of serum PSA screening at the general practitioner level as a means to detect prostate cancer early in men with no symptoms
of prostate cancer. Effective July 2012, the U.S. Preventative Services Task Force (USPSTF) recommended against the use of the
PSA test as a screening tool. As a result of the recommendation, prostate cancer diagnosis dropped by 12.2% the month after the
recommendation and has continued to drop. (D.A. Barocas, et al.,
Effect of the USPSTF Grade D Recommendation against Screening
for Prostate Cancer on Incident Prostate Cancer Diagnoses in the United States,
J Urol 194(6) The Journal of Urology (2015)).
In 2017, the USPSTF changed its recommendation
from advising against screening to the position that the decision for men between 55 and 69 to undergo PSA-based screening should
be made by a man in consultation with his doctor. This change may contribute to an increased incidence of prostate screening (and
therefore more prostate cancer cases) as opposed to an unscreened population – although this conclusion will await future
trending information.
Furthermore, the deferral of potentially cancer-eradicating
(definitive) prostate cancer treatments such as surgery and radiation therapy has become more popular as some men with prostate
cancer have decided to “watch” the cancer using a variety of diagnostic tools – a trend known as “active
surveillance.”
As such, the industry has experienced an overall
decrease in the number of low risk cases of prostate cancer diagnosed due to reduced PSA screening, as well as a larger number
of men who are deferring treatment altogether at a higher rate than seen historically. Intense competition in the space due to
numerous established treatment options along with added entrants such as robotic surgery and proton therapy has further eroded
the overall brachytherapy market share. The industry continues to focus on the significant data that supports the use of brachytherapy
in treating prostate cancer. Management believes the current review of cost effective treatment comparisons with other treatment
options, the aging population worldwide and the efficacy of treatment could contribute to the revitalization of brachytherapy
treatment for prostate cancer in the future.
Minimally invasive brachytherapy such as that
provided by the Company’s Cs-131 brachytherapy seeds provides significant advantages over competing treatments including
lower cost, equal or better survival data, fewer side effects, faster recovery time and the convenience of a single outpatient
implant procedure that generally lasts less than one hour (Grimm, et al.,
Comparative analysis of prostate-specific antigen
free survival outcomes for patients with low, intermediate and high risk prostate cancer treatment by radical therapy. Results
from the Prostate Cancer Results Study Group
,
British Journal of Urology International, Vol. 109 (Suppl 1), (2012);
Merrick, et al.,
Effect of prostate size and isotope selection on dosimetric quality following permanent seed implantation
,
Techniques in Urology Vol. 7 (2001); Potters, et al.,
12-Year Outcomes Following Permanent Prostate Brachytherapy in Patients
with Clinically Localized Prostate Cancer
, Journal of Urology (May 2005); Sharkey, et al.,
Brachytherapy versus radical
prostatectomy in patients with clinically localized prostate cancer
, Current Urology Reports, (2002)).
In addition to permanent, low-dose rate (LDR)
brachytherapy, such as Cs-131, localized prostate cancer can be treated with prostatectomy surgery (RP for radical prostatectomy),
external beam radiation therapy (EBRT), three-dimensional conformal radiation therapy (3D-CRT), intensity modulated radiation
therapy (IMRT), dual or combination therapy, permanent, high dose rate brachytherapy (HDR), cryosurgery, hormone therapy, proton
therapy and active surveillance (watchful waiting). The success of any treatment is measured by the feasibility of the procedure
for the patient, morbidities associated with the treatment, overall survival, and cost. When the cancerous tissue is not completely
eliminated, the cancer typically returns to the primary site, often with metastases to other areas of the body.
The National Cancer Data Base (NCDB) contains
a total of 1,547,941 patients with localized prostate cancer that were identified from 1998 to 2010. Overall, 13.4% of patients
were treated with brachytherapy, with an additional 2.6% treated with brachytherapy boost, which is the addition of a brachytherapy
implant in addition to external beam radiation therapy, compared with 49.8% treated with surgery, 26.3% with non-brachytherapy
radiotherapy, 24.1% who received hormone therapy, and 7.8% who received no treatment. (J.M. Martin, et al.,
The rise and fall
of prostate brachytherapy: Use of brachytherapy for the treatment of localized prostate cancer in the National Cancer Data Base,
Cancer 120:2114–2121 (2014)).
Prostatectomy Surgery Options.
In the
radical prostatectomy operation, a surgeon will remove the entire prostate gland plus some of the tissue around it, including
the seminal vesicles. New methods such as laparoscopic and robotic prostatectomy surgeries are currently being used more frequently
in order to minimize the damage that leads to impotence and incontinence, but these techniques require a high degree of surgical
skill. (American Cancer Society, 2016) Surgical resection accounted for approximately 44% of treatments before the introduction
of robotic prostatectomy in the early 2000s and then rose to 60% in 2010. (J.M. Martin, et al.
The rise and fall of prostate
brachytherapy: Use of brachytherapy for the treatment of localized prostate cancer in the National Cancer Data Base,
Cancer
120:2114–2121 (2014); J.M. Martin, et al.,
Use of brachytherapy for the treatment of localized prostate cancer in the
National Cancer Data Base,
Cancer 120:2114–2121 (2014), Duke University, International Focal Therapy Conference, (June
2016)).
External Radiation Therapy.
Primary
External Beam Radiation Therapy (EBRT), Three-dimensional Conformal Radiation Therapy (3D-CRT), Stereotactic Radiotherapy (SBRT),
Intensity Modulated Radiation Therapy (IMRT) and Proton Therapy all involve directing a beam of radiation from outside the body
at the prostate gland to destroy cancerous tissue. Treatments are received on an outpatient basis with the patient usually receiving
five treatments per week over a period of several weeks (up to nine). While the treatments each last only a few minutes, getting
the patient and equipment in place for each treatment takes longer. The use of EBRT as a whole doubled from 11.6% in 2004 to 24%
in 2009. The increase in the number of cases being treated with EBRT during 2004 to 2008 were cases that historically would have
been treated with brachytherapy. During that period there was a nearly complete transition to IMRT as the predominant method with
IMRT treatment increasing from 0.15% to 95.9% of EBRT treatments from 2000 to 2008. (U. Mahmood, et al.,
Declining use of brachytherapy
for the treatment of prostate cancer,
Brachytherapy 13:157–162 (2014). Side effects of these treatments can include
bowel problems, bladder problems, urinary incontinence, impotence, fatigue, lymphedema, and urethral stricture.
Proton beam radiation therapy.
Proton
beam therapy focuses beams of protons instead of x-rays on the cancer. Unlike x-rays, which release energy both before and after
they hit their target, protons cause little damage to tissues they pass through and release their energy only after traveling
a certain distance. This means that proton beam radiation can, in theory, deliver more radiation to the prostate while doing less
damage to nearby normal tissues. Proton beam radiation can be aimed with techniques similar to 3D-CRT and IMRT.
Although in theory proton beam therapy might
be more effective than using x-rays, so far studies have not shown if this is true. As of the filing of this Annual Report, proton
beam therapy is not widely available. The machines needed to make protons are very expensive, and they are not available in many
centers in the United States. Management believes proton beam radiation is not covered by all insurance companies as of the filing
of this Report.
Dual or Combination Therapy.
Dual
therapy is the combination of IMRT or 3-dimensional conformal external beam radiation and seed brachytherapy to treat extra-prostatic disease or high-risk prostate
cancers that have metastasized or grown outside the prostate. Combination therapy treats high risk patients with a course
of IMRT or EBRT over a period of several weeks. When this initial treatment is completed, the patient must then wait for several
more weeks to months to have the prostate seed implant. The process could also involve the seed implant be performed
first, followed by the course of external radiation. Management estimates that at least 25% of all U.S. prostate implants
are now dual therapy cases.
High Dose Rate Temporary Brachytherapy
(HDR).
HDR temporary brachytherapy involves placing soft nylon tubes (catheters) into the prostate gland and then giving
a series of radiation treatments through these catheters. The catheters are then removed and no radioactive material is left in
the prostate gland. Radioactive source containing either Iridium-192 or Cesium-137 is placed into the catheters. This procedure
is typically repeated multiple times over a period of several days while the patient is hospitalized.
Additional Treatments.
Additional,
less frequently used, treatments include cryotherapy, hormone therapy, vaccine treatment and chemotherapy.
Watchful Waiting and Active Surveillance.
Because prostate cancer often grows very slowly, some men (especially those who are older or who have other major health problems)
may never need treatment for their cancer. Instead, their doctor may suggest watchful waiting or active surveillance, terms physicians
may use differently or interchangeably.
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Active
surveillance is often used to mean watching the cancer closely with PSA blood tests,
digital rectal exams (DREs), and ultrasounds at regular intervals to see if the cancer
is growing. Prostate biopsies may be done as well to see if the cancer is starting to
grow faster. If there is a change in a patient’s test results, the doctor would
then talk to the patient about treatment options.
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Watchful
waiting (observation) is sometimes used to describe a less intense type of follow-up
that may mean fewer tests and relying more on changes in a man’s symptoms to decide
if treatment is needed.
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So far, no large randomized studies have compared
active surveillance to treatments such as surgery or radiation therapy. Some early studies of men who are good candidates for
active surveillance have shown that only about a third of the men need to go on to treatment with radiation or surgery.
Low Dose Rate Permanent Brachytherapy (LDR)
.
In this approach, pellets (seeds) of radioactive material are placed inside thin needles, which are inserted through the skin
in the area between the scrotum and anus and into the prostate. The pellets are left in place as the needles are removed and give
off low doses of radiation for weeks or months. Radiation from the seeds travels a very short distance, so the seeds can give
off a large amount of radiation in a very small area. This limits the amount of damage to nearby healthy tissues.
Iodine-125 (I-125) and Palladium-103 (Pd-103)
are two isotopes, other than Cesium-131, that are currently used for LDR permanent brachytherapy. A number of published studies
describing the use of I-125 and Pd-103 LDR brachytherapy in the treatment of early-stage prostate cancer have been very positive
when compared to other treatment options. A study of 2,963 prostate cancer patients who underwent brachytherapy as their sole
therapeutic modality at 11 institutions across the U.S. concluded that low-risk patients (who make up the majority of localized
cases) who underwent adequate implants experienced rates of PSA relapse survival of greater than 90% between eight and ten years
(M.J. Zelefsky et al.,
Multi-institutional analysis of long-term outcome for stages T1-T2 prostate cancer treated with permanent
seed implantation
International Journal of Radiation Oncology, Biology, Physics Volume 67, Issue 2, 327-333 (2007)).
Other studies have demonstrated similar,
durably high rates of control following brachytherapy for localized prostate cancer out to 15 years post-treatment (J. Sylvester,
et al.,
15-year biochemical relapse free survival in clinical stage T1-T3 prostate cancer following combined external beam
radiotherapy and brachytherapy; Seattle experience
International Journal of Radiation Oncology Biology Physics, Vol. 67, Issue
1, 57-64 (2007)). The cumulative effect of these studies has been the conclusion by leaders in the field that brachytherapy offers
a disease control rate as high as surgery, though with a lesser side-effect profile than surgery (J.P. Ciezki ,
Prostate brachytherapy
for localized prostate cancer
, Current Treatment Options in Oncology Volume 6, 389-393 (2005)).
Long-term survival data is now available for
brachytherapy with I-125 and Pd-103, supporting the efficacy of brachytherapy in the treatment of clinically localized cancer
of the prostate gland. Clinical data indicate that brachytherapy offers success rates for early-stage prostate cancer treatment
that are equal to or better than those of RP or EBRT. While historically clinical studies of brachytherapy have focused primarily
on results from brachytherapy with I-125 and Pd-103, management believes that these data are also relevant for brachytherapy with
Cs-131. In fact, it appears that Cs-131 offers comparable and potentially improved clinical outcomes over I-125 and Pd-103, perhaps
due to its shorter half-life. (A.B. Shah, et al.,
A comparison of AUA symptom scores following permanent low dose rate prostate
brachytherapy with iodine-125 and cesium-131
, Brachytherapy 12 (Suppl. 1) S64 (2013)).
In May 2017 a collaborative group of Canadian
researchers published the results of a study that randomized intermediate- to high-risk localized prostate cancer to an external
beam dose escalation and a permanent implant brachytherapy dose escalation (Morris 2017). These patients all underwent standard
external beam radiation therapy and hormonal therapy. This study, known as the “ASCENDE-RT” study, demonstrated a
significant therapeutic advantage to the patients who underwent permanent implant brachytherapy boost, reporting a 20% advantage
(83% versus 63%) in biochemical relapse-free survival at nine years following treatment.
This study is the first in many years to successfully
randomize a group of newly diagnosed, localized prostate cancer patients and demonstrate a statistically significant advantage
to one treatment over another – in this case iodine-125 brachytherapy boost over external beam radiation therapy boost.
The impact on the number of patients considered for “combination therapy” (external beam and brachytherapy) could
be substantial, especially once men are informed of these study results.
Sexual impotence and urinary incontinence
are two major concerns men face when choosing among various forms of treatment for prostate cancer. Studies have shown that brachytherapy
with existing sources results in lower rates of impotence and incontinence than surgery (C. Buron, et al.,
Brachytherapy versus
prostatectomy in localized prostate cancer: results of a French multicenter prospective medico-economic study
, International
Journal of Radiation Oncology, Biology, Physics Volume 67, 812-822 (2007)). Combined with the high disease control rates described
in many studies, these findings have driven the adoption of brachytherapy as a front-line therapy for localized prostate cancer.
Comparing Cesium-131 to I-125 and Pd-103
Clinical Results
The Company’s Cs-131-based permanent
brachytherapy treatment was introduced in 2004, as compared to the other permanent brachytherapy sources - Iodine-125 (introduced
1965) and Palladium-103 (introduced 1986). Thus, it has only been recently that the achievement of significant follow-up in patient
studies has occurred for the Company’s Cs-131 product.
Management believes that the Cs-131 brachytherapy
seed has specific clinical advantages for treating cancer over I-125 and Pd-103, the other isotopes currently used in brachytherapy
seeds. The table below highlights the key differences of the three seeds. The Company believes that the short half-life, high-energy
characteristics of Cs-131 will increase brachytherapy growth and facilitate meaningful penetration into the treatment of other
forms of cancer such as brain cancer.
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Isotope
Delivery Over Time
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Isotope
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Half-Life
|
Energy
|
90%
Dose
|
Total
Dose
|
Cs-131
|
9.7 days
|
30.4 keV
|
33 days
|
115 Gy
|
Pd-103
|
17 days
|
20.8 keV
|
58 days
|
125 Gy
|
I-125
|
60 days
|
28.5 keV
|
204 days
|
145 Gy
|
As stated earlier, Company management believes
that the long-term results already reported for Iodine-125 and Palladium-103 based prostate brachytherapy confirm the validity
of permanent prostate brachytherapy, and at least comparable long-term outcomes are likely with Cs-131 treatment. A recent clinical
report supports this contention (R.M. Benoit, et al.,
Five year prostate-specific antigen outcomes after caesium prostate brachytherapy
,
Clinical Oncology Volume 26, 776-780 (2014)).
However, management also believes that Cs-131
will ultimately prove to possess clinical advantages over the two other permanently implantable isotopes. These advantages include
better performance in rapidly growing cancers and a more favorable side effect profile. Both advantages are related to the combination
of a shorter half-life of Cs-131 and high energy level as compared to the other two isotopes.
The most recent clinical data was presented
at the annual meeting of the American Brachytherapy Society in April 2014. Dr. Brian Moran of the Chicago Prostate Center reported
a 92.6% rate of success at five years after treatment for 69 patients with prostate cancer following treatment with Cesium-131
brachytherapy (B.J. Moran, et al.,
PSA Outcomes in a Single Institution, Prospective Randomized 131Cs/125I Prostate Brachytherapy
Trial
, Brachytherapy 13(S1) S34 (2014)). At the same meeting, Dr. Rajagopalan of the University of Pittsburgh Medical Center
reported a six year success rate of 95.4% in 243 Cs-131 treated patients (
Six-year biochemical outcome in patients treated
with Cs-131 brachytherapy as monotherapy for prostate cancer
, Brachytherapy 13(S1) S38 (2014)).
When taken together with the multi-institutional
five-year outcome presentation by Dr. Prestidge and others, where a group of 100 patients from multiple institutions exhibited
a PSA disease-free rate of 98% at five years (B. Prestidge, et al.,
Five-year biochemical control following Cesium-131 Permanent
Prostate Brachytherapy in a Multi-Institutional Trial
, Brachytherapy 10(3S1) S27 (2011)), a strong case for an outstanding
rate of durable PSA (biochemical) success can be made.
Furthermore, in all three reports a significant
proportion of “intermediate risk” patients (who are at greater risk of failure following any treatment compared to
most prostate cancer patients) were included in the studies. Despite this added risk – 37% of patients across all three
studies were intermediate risk — the three studies together average a 95% rate of success at five-years and beyond for a
total of 412 patients under study.
Improved side-effect profile.
In addition to the cancer-related outcomes
described for prostate brachytherapy, a significant portion of patients who undergo I-125 or Pd-103 brachytherapy experience acute
urinary irritative symptoms following treatment – more so than with surgery or external beam radiation therapy (S.J. Frank,
et al.,
An assessment of quality of life following radical prostatectomy, high dose external beam radiation therapy, and brachytherapy
Iodine implantation as monotherapies for localized prostate cancer,
Journal of Urology Volume 177, 2151-2156 (2007)). These
irritative symptoms can range from an increased frequency of urination to significant pain upon urination. Because the portion
of the urethra that runs through the prostate takes high doses from the implant, these side effects are fairly common following
prostate brachytherapy.
Recent completed studies show that Cs-131,
with the shortest available half-life of the commonly used implantable isotopes, results in a quicker resolution of these irritative
symptoms based on the shorter time interval over which normal tissue receives radiation from the implanted sources than for longer
lived isotopes such as I-125. (H. Shah H, et al.,
A comparison of AUA symptom scores following permanent low-dose-rate prostate
brachytherapy with Iodine-125 and Cesium-131
, Brachytherapy 12(SI) S64 (2013)).
A Cs-131 monotherapy trial for the treatment
of prostate cancer was fully enrolled in February 2007. The trial was a 100 patient multi-institutional study that sought
to (1) document the dosimetric characteristics of Cs-131, (2) summarize the side effect profile of Cs-131 treatment, and (3) track
biochemical (PSA) results in patients following Cs-131 therapy. Some of the significant and specific findings were as follows:
1. Patient
reported irritative urinary symptoms (IPSS Scores) were mild to moderate with relatively rapid resolution within 4-6 months. (B.R.
Prestidge, et al.,
Clinical outcomes of a Phase II, multi-institutional Cesium-131 permanent prostate brachytherapy trial
,
Brachytherapy Volume 6, Issue 2, 78 (April-June 2007)).
2. Gland
coverage was excellent and the dose delivered to critical structures outside the prostate was well within acceptable limits. (W.S.
Bice, et al.,
Cesium-131 permanent prostate brachytherapy: The dosimetric analysis of a multi-institutional Phase II trial
, Brachytherapy
(6) 88-89 (2007)).
3. An abstract
detailing the outcomes of the 100 patient multi-institutional Cesium-131 study was prepared for the 32
nd
Annual Meeting
of the American Brachytherapy Society (April 2011). Notably, the PSA control rate at 5 years was reported as 98%. No other study
of brachytherapy utilizing the competing isotopes Iodine-125 and Palladium-103 has reported five-year rates as high as 98%.
The advantage of the Company’s Cs-131
brachytherapy seed is the resolution of urinary side effects as pictured in the graphic below has been observed in a second study,
presented at the 2013 Annual Meeting of the American Brachytherapy Society (A.B. Shah, et al). The following graph is a comparison
of elevated side effect (AUA) symptom scores following permanent low dose rate prostate brachytherapy with Iodine-125 and Cesium-131.
(Brachytherapy 12(Suppl. 1) S64 (2013)):
As seen in the plot of these AUA scores, the
duration of an elevated side effect score profile resolved to pre-treatment levels more quickly with the Cs-131 group than with
the Iodine-125 group. All patients were treated at the same institution by the same physicians, and the difference in the time
to resolution was considered significant.
Further evidence of the favorable side effect
profile of Cs-131 was published by a group from the University of Pittsburgh Medical Center (UPMC) in August 2017 (Glaser 2017).
This report concluded that only minimal long-term changes were noted to the urinary and bowel quality of life measures, and that
men treated with Cs-131 for their prostate cancers are able to return to baseline measure of quality of life after treatment.
Non-Prostate Product Offerings
Brain Cancer Treatment Options
An estimated 23,800 new cases of malignant
primary tumors of the brain or spinal cord are expected to be diagnosed in 2017. About 16,700 people are expected to die from
brain and spinal cord tumors in 2017. In addition to primary tumors, metastasis of brain tumors from other body sites are estimated
at over 100,000 new cases per year. The chance that a person will develop a malignant tumor of the brain or spinal cord is about
1 in 140 for a man and 1 in 180 for a woman. These numbers would be much higher if benign tumors were also included. (American
Cancer Society, 2017).
The treatment of brain cancer with Cs-131
brachytherapy seeds now has two commercially available delivery methods, those being the use of braided strands, and braided strands
sutured to a bioabsorbable mesh to apply the Cs-131 brachytherapy seeds which generally dissolves after about 45 days. Cs-131
brachytherapy seeds deliver 90% of their dose in 33 days and are therefore well-suited to use with bioabsorbable mesh, single
seed applications, implantable strands, and by implantable device. Beginning in 2012, Barrow began embedding Cs-131 in collagen
tiles (the GammaTile™ technique) and applying these tiles directly to brain tissue after tumor removal which is not currently
commercially available. During the fiscal year 2017, there were sixty-five patients treated with Company products for brain cancer.
In October 2016, the Company filed with
the Center for U.S. Center for Medicare and Medicaid Services (CMS) an application for GammaTile™ to be considered for reimbursement
under the Diagnosis Related Group (DRG) system, the primary means by which hospitals are reimbursed by Medicare and other payors
for in-patient services. The Company also applied for GammaTile™ to be recognized by the International Classification of
Diseases (ICD) system version 10.
Both
applications are proposed to track and reimburse GammaTile™ treatment should Company receive clearance to market GammaTile™
by the U.S. Food and Drug Administration (FDA). In July 2017, the Company announced that it had received a request from FDA to
supply further information related to its March 2017 510(k) filing for GammaTile™. Company is in the process of scheduling
this requested testing and plans to complete it and file with the FDA by third fiscal quarter of 2018, but there is no assurance
this timetable will not be delayed.
Gynecological Cancer Treatment Options
(Cervical, Vaginal and Vulvar Cancer)
An estimated 23,650 new cases of cervical
(12,820), vaginal (4,810) and vulvar (6,020) cancers are expected to be diagnosed in the United States in 2017. A combined estimate
of 6,600 deaths are expected to occur from cervical, vaginal and vulvar cancers in the United States in 2017 (American Cancer
Society, 2017; National Cancer Institute, 2017). In addition to brachytherapy to treat gynecological cancers such as cervical,
vaginal and vulvar cancers, other treatment options include surgery, laser surgery, radiation therapy, chemotherapy, and topical
treatments.
During 2016, two abstracts (J. Feddock,
et al.,
Permanent interstitial re-irradiation with cesium-131: a highly successful second chance for cure in recurrent pelvic
malignancies,
Brachytherapy 15(S1):S78-9 (2016); J. Feddock, et al.,
Outpatient interstitial implants - integrating cesium-131
permanent interstitial brachytherapy into definitive treatment for gynecologic malignancies
, Brachytherapy 15(S1):S93-4 (2016))
and presentations were presented at the World Brachytherapy Conference in San Francisco on the treatment of Re-Irradiation with
Cs-131 in recurrent pelvic malignances in women who have recurrent cancers. Physicians at the University of Kentucky, College
of Medicine reported local control in 80.7% after Cs-131 implantation for the recurrent patients and reported successful control
of 22 women with pelvic cancer that had not had previous treatment. Based upon the positive results seen in the Cs-131 treatment
of recurrent of gynecological cancers, physicians at the University of Kentucky are currently moving Cs-131 treatment into the
primary treatment of these cancers. During the fiscal year 2017, there were forty-five patients treated with Company products
for gynecological cancers.
In April 2017, the group from the University
of Kentucky published a paper in the journal Brachytherapy that described the early experience with a template-based approach
using Cs-131 in the treatment of gynecologic cancers. Although reporting on only five patients, the University of Kentucky physicians
demonstrated the feasibility and safety of replacing a high dose-rate isotope (Iridium-192) with Cesium-131. This report builds
on the earlier published and presented work that strongly suggests a role for Cesium-131 in the treatment of gynecologic cancers.
Head and Neck Cancer Treatment Options
An estimated 49,670 new cases of head and
neck cancer are expected to be diagnosed in the United States in 2017. (American Cancer Society, 2017).
Surgery is the most common option to treat
head and neck cancers. Chemotherapy is often used in conjunction with surgery or radiation therapy depending on the type and stage
of the cancer. External beam radiation therapy and brachytherapy have been used together or in combination with surgery or chemotherapy.
(American Cancer Society, 2017).
Cs-131 brachytherapy seeds allow oncologists
to add targeted radiation treatment to head and neck cancers after surgical resection. This targeted radiation treatment is especially
needed in patients whose neck cancer has recurred following previous radiation therapy. Often these patients cannot tolerate further
external beam radiation therapy for fear of over radiating critical head and neck structures.
Management believes Cs-131brachytherapy seeds
continue to represent an improved approach to brachytherapy treatment of specific head and neck cancers. During the fiscal year
2017, twenty patients were treated with Company products for head and neck cancers.
Lung Cancer Treatment Options
An estimated 222,500 new cases of lung cancer
are expected in 2017, accounting for 13% of all cancer diagnoses in the United States. Approximately 26% of all cancer deaths
are from lung cancer and it accounts for the most cancer related deaths in both men and women in the United States. An estimated
155,870 deaths will result from lung cancer in 2017. (American Cancer Society, 2017).
Lung cancer has historically been treated
utilizing surgery, radiofrequency ablation (RFA), radiation therapy, chemotherapy and targeted therapy including LDR brachytherapy.
More than one kind of treatment may be used, depending on the stage of the patient’s cancer and other factors. (American
Cancer Society, 2017).
The
Company believes that Cs-131, with its shorter half-life (faster rate of decay) and relatively high energy, is better suited for
treating lung cancer in Stages I and II than I-125. The bioabsorbable mesh used in this procedure to apply the Cs-131 brachytherapy
seeds generally dissolves after about 45 days. Cs-131 delivers 90% of its dose in 33 days and is therefore well-suited to use
with bioabsorbable mesh. A report was published in May of 2015 describing outcomes from a series of 52 patients treated with a
limited surgical resection and Cs-131 brachytherapy. (B. Parashar, et al.,
Analysis of stereotactic radiation vs. wedge resection
vs. wedge resection plus Cesium-131 brachytherapy in early stage lung cancer,
Brachytherapy 14 (5):648-54 (2015)). During
fiscal year 2016, thirteen patients were treated with Company products for lung cancer, and a nominal amount were treated in fiscal
2017.
Financial Information About Segments
The Company has determined that it operates
in only one segment, as it only reports profit and loss information on an aggregate basis to its chief operating decision maker.
Financial Information About Geographic
Areas
All of the Company’s long-lived assets
are located in the United States. Revenue by geographic region is based on the shipping addresses of the Company's customers.
The following summarizes revenue by geographic region:
|
|
For the year ended June
30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
United States
|
|
|
99.94
|
%
|
|
|
99.64
|
%
|
|
|
99.57
|
%
|
Non – United States
|
|
|
0.06
|
%
|
|
|
0.36
|
%
|
|
|
0.43
|
%
|
Total
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
Our Strategy
The key elements of IsoRay’s strategy
for fiscal year 2018 include:
Invest
significant capital in sales and marketing development activities to gain more market share in the U.S. market for prostate cancer.
Prostate cancer treatment represents the original and core business for the Company’s Cs-131 product. With five-year
data relating to biochemical (PSA) control of prostate cancer now presented to the prostate cancer field, IsoRay intends to aggressively
increase the number of centers using Cs-131 through its direct sales force and through its international distributors. Because
intermediate- to long-term follow-up data is required to convince clinicians and patients to consider any particular therapy for
localized prostate cancer, the availability of five-year data with Cs-131 in the treatment of prostate cancer represents a significant
milestone. IsoRay hopes to capture much of the incremental market growth if and when seed implant brachytherapy recovers market
share from other treatments, take market share from existing competitors, and expand the use of Cs-131 as a dual therapy option
where it has experienced success. In 2016, the Company started its aggressive sales and marketing approach by hiring industry
sales and marketing veterans to assist in this market development effort, including the hire in March 2016 of a Vice-President
of Sales and Marketing and a consultant Director of Marketing, who, together with the rest of the management team, are developing
a comprehensive strategy to expand the presence of the Company’s Cesium-131 products in the prostate market. In addition,
the Company filled five regional sales positions with experienced sales staff from the prostate brachytherapy industry. In April
2016, the Company contracted with a marketing firm to design a new brand logo for the Company’s products and provide website
development and a consumer-focused public relations and social media campaign, all as part of the Company’s new sales and
marketing strategy. A redesigned website for IsoRay.com was launched in September 2016 that focused its message to specific decision
makers including the physician, patient, family and friends. The new website supports management’s focus on the growth of
product sales from the treatment of prostate cancer and the Company’s efforts to expand into brain, gynecological, and other
cancers.
Increase
utilization of Cesium-131 in treatment of other solid tumor applications such as brain, gynecological, and other cancers.
IsoRay
Medical has clearance from the FDA for its premarket notification (510(k)) for Cs-131 brachytherapy seeds that are preloaded into
bioabsorbable braided sutures and bioabsorbable braided sutures attached to bio absorbable mesh. This FDA clearance allows commercial
distribution for treatment of brain, gynecological, head and neck and lung tumors as well as tumors in other organs. The Company
continues to sell product to physicians treating brain, gynecological, head and neck and lung cancer while continuing to compile
treatment outcomes for publication. IsoRay will continue to explore licenses or joint ventures with other companies to develop
the appropriate technologies and therapeutic delivery systems for treatment of other solid tumors.
Early clinical data support management’s
initiatives into brain cancers and early stage non-small cell lung cancers. Local control – defined as success in preventing
the re-growth of cancer in the immediate vicinity of the treatment area – has been excellent to date. The Company has continued
to provide technical assistance and sell brachytherapy seeds for the use of the GammaTile™ system (multiple patents issued
to GammaTile LLC) at the Barrow to treat malignant meningioma cancer, primary brain cancer and brain metastasis of cancers. IsoRay
plans to continue to support studies and research and assist in the development of new application devices for Cesium-131. The
utilization of the GammaTile™ system over the past three years has developed a product with consistent and repeatable results
as evidenced by the June 2016 presentation at the Society of Neurologic Oncologists. Management intends to continue to facilitate
ongoing research and development of the GammaTile™ product.
Support clinical research and sustained
product development
. The publication and presentation of speculative and real-world data contribute to the acceptability of
Cs-131 in the oncologic marketplace. Discussion in the medico-scientific community of established and novel Cs-131 applications
is considered a prerequisite to expansion into untapped markets. The Company structures and supports clinical studies on the therapeutic
benefits of Cs-131 for the treatment of solid tumors and other patient benefits. We are and will continue to support clinical
studies with several leading radiation oncologists to clinically document patient outcomes, provide support for our product claims,
and compare the performance of our seeds to competing seeds. IsoRay plans to sustain long-term growth by implementing research
and development programs with leading medical institutions in the U.S. and other countries to identify and develop other applications
for IsoRay’s core radioisotope technology. The Company has deployed a secure, regulatory environment compliant, online information
system capable of large usable databases to participating investigators.
During fiscal year 2017, five presentations
were accepted at the annual meeting of the American Society for Radiation Oncology (ASTRO) in September 2016 covering topics related
to Cesium-131 treatment of brain metastases, gynecologic cancers and prostate cancer. The Company will continue to seek to increase
the number of reports made to society meetings and the peer reviewed literature in order to seek to enhance the standing of its
products in the scientific community.
Maintain ISO 13485:2003 certification evidencing
quality control.
In August 2008, the Company obtained its initial ISO 13485:2003 certification. This permitted
the Company to register its products in Europe in 2008 and in Canada and Russia during fiscal year 2009. The ISO 13485:2003
certification demonstrates that the Company is in compliance with this internationally recognized quality standard and the
initial certification was valid for a three year period. In June 2012, the Company received a recertification to ISO 13485:2003
for an additional three year period, which was affirmed through a surveillance audit in June 2013.
In October 2015, IsoRay underwent an unannounced
inspection by British Standards Institution (BSI), IsoRay’s representative to the European Union and designator of IsoRay’s
CE Marks, with no nonconformities found. BSI also conducted a microbiologic audit and a surveillance audit in November 2015 and
March 2016 respectively. In March 2017, BSI conducted its full system inspection and recertification and found no nonconformities
to ISO 13485:2003 medical device standards. IsoRay has scheduled a special BSI audit for March 2018 for the transition from ISO
13485:2003 standard to ISO 13485:2016 standard. This transition will move IsoRay’s quality system into the current state
of the art Quality Management System. The Company must comply with ISO 13485:2016 by end of February 2019 in order to maintain
its CE Marks. The Company is subject to a recertification audit by BSI every three years, two annual maintenance audits and one
additional unannounced audit during each three year period for a total of four audits during each three year period. The successful
audits confirm the Company’s success in meeting the standards of manufacturing and quality systems required for the Company
to market its products in Canada and Europe.
Products
CS-1 Cesium-131 Source
IsoRay markets the CS-1 Cesium-131 brachytherapy
seed for the treatment of prostate cancer, brain cancer, lung cancer, head and neck cancers, gynecological cancer, pelvic/abdominal
cancer, colorectal cancer, and ocular melanoma. The Company intends to market Cs-131 for the treatment of other malignant diseases
as opportunities are identified in the future through the use of existing proven technologies that have received FDA-clearance.
The strategy of utilizing existing FDA-cleared technologies reduces the time and cost required to develop new applications of
Cs-131 and deliver them to market.
Cesium-131 Manufacturing Process and Suppliers
Product Overview
Cs-131 is a radioactive isotope that can be
produced by the neutron bombardment of Barium-130 (Ba-130). To produce the Cs-131 brachytherapy seed, a proprietary chemical separation
is performed that results in 99.9% pure Cs-131 isotope. Purified Cs-131 is adsorbed onto a ceramic core containing a gold X-ray
marker. This internal core assembly is subsequently inserted into a titanium capsule that is then welded shut and becomes a sealed
radioactive source and a biocompatible medical device.
Isotope Suppliers
The Company has identified key reactor facilities
in the U.S., Russia
,
Belgium and South Africa that are capable of meeting the specific requirements of Cs-131 production.
On December 15, 2016, Medical entered into a new supply contract (the INM Agreement) with The Open Joint Stock Company, Isotope,
a Russian company (JSC Isotope). With the INM Agreement, Medical can purchase Cs-131 from the Institute of Nuclear Materials,
within the quality standards and within the time periods specified, through December 31, 2017.
Due to a planned outage at the INM reactor
from November 2017 to July 2018, the Company plans to negotiate an agreement in order to receive supply from the Research Institute
of Atomic Reactors (RIAR) during this outage. The Company has in the past been supplied by RIAR and does not foresee any risk
of isotope availability during the INM outage. INM will begin re-supplying on a 50/50 basis with RIAR beginning approximately
August 2018, and INM will again be the 100% supplier of Russian-sourced Cs-131 beginning in January 2019.
In order to maximize the efficiency of
Cs-131 production from the RIAR reactor, the Company has consigned its supply of “enriched” Barium to the RIAR facility.
“Enriched” in this context refers to a Barium Carbonate supply that contains a greater proportion of the non-radioactive
isotope Barium-130 than is found in nature. This higher proportion of Barium-130 leads to a greatly increased yield of Cesium-131
when it is placed in a high flux neutron environment such as that available at RIAR and a small number of other reactors worldwide.
The Company also receives irradiated barium
from the University of Missouri Research Reactor (MURR), located in the United States. For the fiscal year 2017, approximately
eighty-five percent (85%) of our Cs-131 was supplied by our Russian supplier and approximately fifteen percent (15%) of Cs-131
was generated by the irradiated barium from MURR. The Company has expanded the amount of Cs-131 provided by the MURR reactor by
approximately 100% beginning in fiscal year 2018. This increase in Cesium-131 production is expected to allow the Company to fill
additional orders compared to previous periods.
Management
believes that failure to obtain deliveries of Cs-131 from its Russian supplier, <<JSC Isotope>> (which provides supply
from both the INM and RIAR reactors), would have a material adverse effect on seed production. Management has developed a three-step
process to insulate the Company isotope supply from unplanned outages at the Russian supplier. Step One: management has negotiated
a new supply agreement with its existing domestic supplier that will provide additional isotope beginning in fiscal year 2018.
Step Two: the Company is planning an expansion of on-site services at the MURR facility, which will allow for a chemical separation
to occur in or adjacent to the MURR reactor facility. This on-site chemical processing will in turn allow for a significant increase
in isotope yield without incurring significant additional irradiation costs. Step Three: the Company has transferred its stock
of enriched barium to the Russian RIAR reactor as a contingency in the case of an outage at one or both of its current isotope
providers or at a new isotope supplier in Russia.
Quality Controls
In July 2008, IsoRay had its baseline inspection
by the FDA at its manufacturing and administrative offices in Richland, WA. This inspection was carried out over a five day period
during which the investigator performed a complete inspection following Quality Systems Inspection Techniques (QSIT). At the end
of the inspection, no report of deviations from Good Manufacturing Practices or list of observations (FDA Form 483) was issued
to IsoRay. An additional inspection of IsoRay was conducted by FDA in April 2013. Again the FDA reported no deviations from Good
Manufacturing Practices and did not list any observations (FDA Form 483). In August 2017, FDA conducted an announced QSIT inspection
of the Richland facility and again, did not find any nonconformance to U.S. medical device regulations and did not issue a Form
483.
In October 2015, IsoRay underwent an
unannounced inspection by British Standards Institution (BSI), IsoRay’s representative to the European Union and designator
of IsoRay’s CE Marks with no nonconformities found. BSI also conducted a microbiologic audit and a surveillance audit in
November 2015 and March 2016 respectively. In March 2017, BSI conducted its full system inspection and recertification and found
no nonconformities to ISO 13485:2003 medical device standards. IsoRay has scheduled a special BSI audit for March 2018 for the
transition from ISO 13485:2003 standard to ISO 13485:2016 standard. This transition will move IsoRay’s quality system into
the current state of the art Quality Management System. The Company is subject to a recertification audit by BSI every three years,
two annual maintenance audits and one additional unannounced audit during each three year period for a total of four audits during
each three year period. The successful audits confirm the Company’s success in meeting the standards of manufacturing and
quality systems required for the Company to market its products in Canada and Europe.
The Federal Aviation Administration
(FAA) also conducted an unannounced audit in May 2016. Because IsoRay ships hazardous materials on flights in the U.S., IsoRay
is subject to regulation by the FAA. No findings were made in this audit.
Regulatory Developments
In June of 2017, the Company received
a “notice of timely renewal” from the Washington State Department of Health (WA DOH) in response to its application
to renew Company’s Radioactive Materials License. The WA DOH acts as an agent of the U.S. Nuclear Regulatory Commission
and grants Company its ability to receive and ship radioactive material. The notice of timely renewal grants the Company the ability
to operate under its existing license until the WA DOH conducts an inspection and issues the definitive Radioactive Materials
License. This license is in effect for 10 years as long as the Company operates without actionable breaches of the license. The
previous license was issued in June of 2007 and expired July 31, 2017. Notices of timely renewal which are in effect prior to
final licensing are common practice in the radioactive material handling regulatory environment.
Order Processing
The Company has implemented a just-in-time
production process that is responsive to customer input and orders to ensure that individual customers receive a higher level
of customer service than received from our competitors who have the luxury of longer lead times due to longer half-life products.
Time from order confirmation to completion of product manufacture is reduced to several working days, including receipt of irradiated
barium (from the domestic supplier’s reactor) or unpurified Cs-131 (from the international supplier's reactor), separation
and purification of Cs-131, isotope labeling of the core, loading of cores into pre-welded titanium “cans” for final
welding, testing, quality assurance and shipping.
It is up to each physician to determine the
dosage necessary for implants and acceptable dosages vary among physicians. Many physicians order more seeds than necessary to
assure themselves that they have a sufficient quantity. Upon receipt of an order, the Company either delivers the seeds from its
facility directly to the physician in either loose or preloaded form or sends the order to an independent preloading service that
delivers the seeds preloaded into needles or cartridges just prior to implant. If the implant is postponed or rescheduled, the
short half-life of the seeds makes them unsuitable for use and therefore they must be re-ordered.
Due to the lead time for obtaining and processing
the Cs-131 isotope and its short half-life, the Company relies on sales forecasts and historical knowledge to estimate the proper
inventory levels of isotope needed to fulfill all customer orders. Consequently, some portion of the isotope is lost through decay
and is not used in an end product. Management continues to reduce the variances between ordered isotope and isotope deliveries
and is continually improving its ordering process efficiencies.
Pre-loading Services
In addition to providing loose seeds to customers,
most brachytherapy manufacturers offer their seed product to the end user packaged in various configurations provided in a sterile
or non-sterile package depending on the customer’s preference. These include:
|
§
|
Pre-loaded
needles
(loaded typically with three to five seeds and spacers);
|
|
§
|
Pre-loaded
Mick
®
cartridges
(fits the Mick
®
applicator);
|
|
§
|
Strands
of seeds
(consists of seeds and spacers in a bioabsorbable rigid “carrier sleeve”);
|
|
§
|
Preloaded
strands
(strands of seeds loaded into a needle);
|
|
§
|
Pre-loaded
braided strands (
seeds loaded into a flexible bioabsorbable braided suture); and
|
|
§
|
Pre-loaded
braided strands attached to bioabsorbable mesh
(creates planar implants out of braided
sutures and bioabsorbable mesh).
|
In fiscal year 2017, the Company delivered
approximately 48% of its Cs-131 seeds to customers configured in Mick
®
cartridges, approximately 31% of the Cs-131
seeds configured in stranded and pre-loaded in a needle form, 9% of the Cs-131 seeds configured in a braided strand form, 3% of
the Cs-131 seeds sold in a loose configuration and the remaining 9% configured in either a pre-loaded in a needle or stranded
form.
The role of the pre-loading service is to
package, assay and certify the contents of the final product configuration shipped to the customer. A commonly used method of
providing this service is through independent radiopharmacies. Manufacturers send loose seeds along with the physician’s
instructions to the radiopharmacy which, in turn, loads needles and/or strands the seeds according to the doctor’s instructions.
These radiopharmacies then sterilize the product and certify the final packaging prior to shipping directly to the end user.
In fiscal year 2012, IsoRay obtained
a CE mark which allows shipment of seeds loaded into flexible braided strands and flexible strands attached to bioabsorbable mesh
into the European Union.
Manufacturing Facility
The Company maintains a production facility
located at Applied Process Engineering Laboratory (APEL) in Richland, Washington. The APEL facility became operational in September
2007. The production facility has over 15,000 square feet and includes space for isotope separation, seed production, order dispensing,
a clean room for radiopharmacy work, and a dedicated shipping area. In 2015, the Company entered into a modification to the production
facility lease that modified the requirement to return the facility to ground at the time of exit at Company discretion, exercised
an extension in 2017 to increase the lease term to April 30, 2021, and reduced the required notice to terminate the lease early
from twelve months to six months. This lease modification provides the flexibility required for the Company to plan, design and
construct its own production facility, which is expected to reduce operational cash flow requirements and provide for long-term
security of production capabilities for the Company. The construction of a new facility is subject to obtaining acceptable financing.
No assurances can be given at this time regarding the ability of the Company to obtain such financing. The Company has completed
the design process for a new facility and has permit ready plans to build when the Company needs to move into a new facility.
Management believes that construction of the facility will take 18 to 24 months to complete from the time that ground is broken.
GliaSite
®
Radiation Therapy
System
IsoRay discontinued the GliaSite
®
RTS in March 2016.
Sales and Marketing
Marketing Strategy
In 2017, the Company implemented and began
to execute a new sales and marketing strategy. This strategy involves a more direct focus on the prostate cancer market
and existing Cesium-131 customers, with a secondary focus on developing opportunities in emerging applications, including brain
tumors, gynecological cancers and head and neck tumors. This focus was supported by a complete redesign of the Company
brand, website and collateral materials. This effort was initiated in fall 2016.
This follows the changes to the sales and
marketing team that occurred in 2016, when the Company hired a Vice President of Sales and Marketing, Michael Krachon,
who brings more than twenty years of experience of progressive growth in sales and marketing with the past fifteen years in the
brachytherapy market. Management also engaged the consulting services of industry veteran Lori Woods, who contributes more than
twenty years of experience in the oncology medical device and services industry. Ms. Woods previously served IsoRay from
2006 to 2010 as a Vice-President and eventually as Chief Operating Officer.
Further to support the new marketing strategy,
the Company has started the process of reestablishing its medical advisory boards to provide professional input and insight regarding
the Company’s current products and research and developments efforts. The boards will vary by cancer type/site and the supporting
specialties that treat that cancer. They will include, but not be limited to, radiation oncologists, surgeons, urologists, and
physicists. The boards will be a mix of customers and non-customers, which the Company believes will provide increased insight
regarding the perception of its products and opportunities to meet the needs of the market. The Company held its first advisory
meeting for prostate cancer in September 2016, with the next meeting scheduled at the American Society of Therapeutic Radiation
Oncologists (ASTRO) professional meeting in San Diego; in September 2017, and is looking to continue to build additional
advisory boards as the other applications grow in viability.
The market for treatments for localized prostate
cancer is very competitive and largely hinges upon two factors: the demonstration of long term follow-up data that has been presented
to the prostate cancer treatment profession and the economic and strategic dynamics of the different therapeutic options. Cs-131
was introduced to the prostate cancer marketplace more than a decade after Iodine-125 and Palladium-103, and the resulting time
for mature clinical data to be developed has proven an obstacle to widespread market acceptance. The time to publish these results
is lengthy and includes time to enroll patients in protocols which may take multiple years depending on the size of the enrollment
population, time to aggregate the results at five years from the final patient treatment, time to analyze the data and author
the article followed by the time for peer review, and publication in a medical journal. The total time for this process may approach
a decade from start to publication. Management believes that the impressive results achieved for treatment with Cs-131 at the
five-year mark should create further scientific support for Cs-131 as an attractive treatment for localized prostate cancer, overcoming
at least some of the initial resistance predicated on the lack of long-term follow-up reports. The data that was published in
fiscal year 2015 is discussed in the section titled Industry Information, Prostate Cancer Treatment, “
Comparing Cesium-131
to I-125 and Pd-103 Clinical Results.”
In addition to the challenges presented by the limited published results for
Cs-131, the prostate brachytherapy market has been pressured by the economic differences and strategic dynamics of competing treatment
options such as robotic surgical devices and external beam radiation facilities. These factors have combined to result in the
current multi-year contraction of the prostate brachytherapy market. The declining market has impacted the competitive landscape,
reducing the number of competitors and their respective investments in sales, marketing and product development efforts. Based
upon Company market review and research, there appears to be an opportunity for IsoRay to expand its current market opportunity
with an investment in sales and marketing efforts. The Company believes its recent hires of both sales and marketing veterans
with regional sales support will lead to growth of their market share in the prostate cancer treatment business. The Company also
believes that an increased share of the prostate brachytherapy market share will assist in facilitating Cs-131 brachytherapy cancer
treatment growth in other body sites.
The professional and patient market segments
each play a role in the ultimate choice of cancer treatment and the specific isotope chosen for seed brachytherapy treatment.
The Company has developed a customized brand message for each audience. The Company’s new website was launched
in the fall of 2016, and delivers the message that Cs-131 is a treatment option for cancers throughout
the body. IsoRay is developing and/or refreshing print, visual and digital media (including physician
brochures discussing the clinical advantages of Cs-131, clinical information materials, and digital content
for the website and social media awareness efforts). In addition, the Company attends national professional meetings, including:
|
§
|
American
Brachytherapy Society (ABS);
|
|
§
|
American
Society for Therapeutic Radiation and Oncology (ASTRO);
|
|
§
|
Association
of American Physicists in Medicine (AAPM);
|
|
§
|
American
Urological Association (AUA);
|
|
§
|
Society
for Neuro-Oncology (SNO);
|
|
§
|
American
Association of Neurological Surgeons (AANS);
|
|
§
|
American
Association for Thoracic Surgery (STS);
|
|
§
|
Large
Urology Group Practice Association (LUGPA); and
|
|
§
|
various
local chapter meetings.
|
The Company also continues to consult with
noted contributors from the medical physics community and expects that articles for professional journals regarding the benefits
of and clinical trials involving Cs-131 will continue to be submitted.
In addition, the Company continues to promote
the clinical findings of the various protocols and publications through presentations by respected thought leaders. The Company
will continually review and update all marketing materials as more clinical information is gathered from the protocols and studies.
Apart from clinical studies and papers sponsored
by the Company, several physicians across the country have independently published papers and studies on the benefits of Cs-131.
In today’s U.S. health care market,
patients are more informed and involved in the management of their health than in the past. Many physicians relate incidents of
their patients coming for consultations armed with articles researched on the Internet and other sources describing new treatments
and medications. In many cases, these patients are demanding a certain therapy or drug and the physicians are complying when medically
appropriate.
Because of this consumer-driven market factor,
we also promote our products directly to the general public. We target the prostate cancer patient, his spouse, family, care givers
and loved ones. We emphasize to these segments the specific advantages of the Cs-131 brachytherapy seed through our newly developed
website (located at www.isoray.com), patient advocacy efforts, informational patient materials and patient testimonials, other
awareness efforts through social media channels, and advertisements in specific markets supporting brachytherapy. None of our
websites should be considered a part of this Report.
The Company’s marketing plan with regard
to non-prostate segments includes identifying and exhibiting at scientific meetings attended by specialty physicians who perform
procedures related to Company’s product offerings, direct sales contact with such physicians (for example thoracic surgeons
and neuro-surgeons), the development and dissemination of training videos and other media that outline the Company’s products,
and the implementation of local training events to provide product and procedure information to potential customers.
Further, the Company is partnering with key
clinicians within each application to support early experiences and identify additional facilities that may be interested in the
applications. The Company continues to work with its existing radiation oncology physician customers and to educate
them as to additional or new Company products and expand utility of Cs-131 within the facility and across different disease sites.
To facilitate this expanded position, the Company’s sales managers call on existing radiation oncology physicians and other
key decision makers within an organization to discuss the available clinical results and experiences in coordination with key
Company scientific personnel to educate the customer representatives about different Cs-131 applications and comparisons to competing
treatments.
Sales and Distribution
In the prostate cancer market, the sales organization
targets radiation oncologists and medical physicists as well as urologists and facility administrators as key clinical decision-makers
in the type of radiation therapy offered to prostate cancer patients.
With respect to non-prostate applications,
the Company targets neurosurgeons, thoracic surgeons, gynecologic oncologists and other surgeons in addition to radiation oncologists.
After these clinicians identify the value of the Company’s Cs-131 products, the Company then also needs support for the
procedure from the medical physicists on staff and facility administrators. The sales cycle for non-prostate applications has
proved to be a longer process than for prostate applications and often takes nine months or longer before the Company is licensed
in a new hospital and can make its first sale.
IsoRay has a direct sales organization
consisting of territory sales managers, and a Vice-President of Sales and Marketing responsible for the development of the team
and the execution of the sales plan. The Company’s territory sales managers are responsible for all sales activities in
their respective territories and solicit potential specialist physicians in all areas of the body. This approach allows our territory
sales managers to call on a single location for all applications of our products, resulting in a more efficient sales approach.
With the hiring of the Vice-President
of Sales and Marketing, the addition of two new senior territory managers, and the addition of the Director of Marketing and product
manager, the commercial team is fully committed to and is in the process of executing the commercial plan for the development
of new sales materials, training materials, and website assistance.
The Company expects to continue to explore
the opportunity to extend its customer base outside the U.S. market through use of established distributors in target markets
of other countries. As of September 1, 2017, the Company had independent distributors in Italy, Switzerland and Russia. The Company’s
initial focus on the international markets was for the sale of the GliaSite
®
RTS, which was discontinued in March
2016. This has shifted to targeted prostate and gynecological centers in the targeted markets. Although it still has two international
distribution agreements in place, the Company continues to experience difficulties in generating sales of Cs-131 products through
its international distributors.
Reimbursement
Reimbursement by third party payers is
the primary means of payment for all IsoRay products. The Centers for Medicare and Medicaid Services (CMS) is the primary
payer, providing coverage for approximately 65% of all prostate brachytherapy cases and a majority of non-prostate procedures. Well
established brachytherapy coverage and payment policies are currently in place by CMS and other non-governmental payers for out-patient
procedures. For surgical procedures provided in an in-patient setting, payment is provided as part of a DRG code, which includes
the surgical elements of the procedure.
In the hospital outpatient prospective payment
system (HOPPS) out-patient setting, brachytherapy sources are legislated to be paid individually. Under this umbrella, in 2003,
CMS established a unique HCPCS code for Cs-131 brachytherapy seeds that permitted providers to report the use of Cs-131 directly
to payers. In July 2007, CMS established two separate Cs-131 codes for providers to report loose seeds and stranded seeds
due to the cost differential of these two products. Reimbursement for prostate brachytherapy services and sources is well
established in the U.S. and most providers (hospitals and physicians) are not faced with reimbursement challenges when providing
this treatment option to patients.
In June 2016, the Company rejoined the Coalition
for the Advancement of Brachytherapy (CAB). CAB is a national non-profit association composed of manufacturers and developers
of sources, needles and other brachytherapy devices and ancillary products used in the fields of medicine and life sciences. CAB
has dedicated significant resources to the clinical use of brachytherapy including the treatment of prostate and other types of
cancer as well as vascular disease. In addition, on an annual basis, CAB performs a review of the existing reimbursement structure
for its members, allowing CAB members to have input into the future reimbursement structure for their products. In July, 2017,
CAB disbanded, due to shrinking funding as a result of the consolidation of the brachytherapy market. The Company is
pursuing consulting relationships with key support members of the former CAB organization to ensure that the key actions are performed,
with a dedicated focus to the impact of reimbursement policies on Cesium-131.
As
noted above, there are two different methodologies for CMS payment. The first, the out-patient setting, includes prostate brachytherapy,
and a limited range of other procedures, including some gynecological implants, and as such, is covered by the CMS Outpatient
Prospective Payment System, which since 2010 has provided a fixed reimbursement per seed for stranded and loose seeds. Iodine,
Palladium and Cesium each have their own reimbursement values for stranded and loose seeds. If reported correctly when
seeds are submitted for payment to CMS, providers are reimbursed at a flat rate that is determined by median costs of the seeds. It
is expected that this reimbursement system established in January 2010 will continue as currently scheduled through calendar 2018
but there is no assurance that this will occur. CMS has generally continued its historical trend of declining year over year
reimbursement with few exceptions. Private insurance companies have historically followed the CMS reimbursement policies. The
Company expects that CMS will continue its annual review of payments provided as reimbursement for our various products and that
CMS will continue to provide favorable reimbursement rates for our Cs-131 brachytherapy seeds, but
there
is no assurance this will continue.
The
other payment method is for in-patient procedures, where the patient remains in the hospital for more than 24 hours. Lung, brain
and head and neck implant procedures utilizing brachytherapy sources require the patient to be admitted to the hospital. In-patient
procedures are covered by CMS which remits a set amount depending on the kind of surgery being performed and the status of the
patient. Under this Diagnostic Related Group (DRG) system, the hospital pays for all the items involved in the care of the patient
excluding physician fees. The brachytherapy seeds in these in-patient cases are not paid for separately by CMS, but rather included
as part of the DRG payments from CMS. Because the Company’s seeds may not be reimbursed by CMS, there can be difficulty
in convincing hospitals to use the Company’s products. The Company contracted with a reimbursement consultant in April of
2016 to review opportunities to establish incremental reimbursement from CMS for in-patient care for brachytherapy. The Company
submitted for and was granted an ICD-10 code for the use of Cesium-131 with surgical brain procedures. The Company plans
on considering additional applications for DRG codes for intraoperative brachytherapy treatments in the future. Receipt
of additional DRG codes in the future for brachytherapy applications will assist in the sales to hospitals and institutions that
currently are not reimbursed for brachytherapy radiation for intraoperative care. Management believes the lack of incremental
reimbursement for brachytherapy by CMS and private insurers placed at the time of surgery rather than delivered at a point in
time following surgery may be impeding the faster and broader adoption of intraoperative brachytherapy and unfortunately short
of new legislation changing this system will remain an ongoing deterrent for use of these products.
In October 2016, the Company submitted a New Technology Add-on
Payment (NTAP) application. This filing formally requests additional reimbursement for the Cesium-131 based GammaTile™ treatment
for brain cancer. Because the Company’s 510(k) filing with the U.S. Food and Drug Administration is still pending, this
application is currently not under consideration. The Company plans to re-file the NTAP application in October 2017.
Other Information
Customers
The following are the Company’s top
three customers, facilities or physician practices that utilize multiple surgical facilities at which primarily prostate brachytherapy
procedures are performed, accounted for approximately 37.6% of the total Company product sales for the twelve months ended June
30, 2017:
Facility
|
|
Location
|
|
% of revenue
|
|
El Camino,
Los Gatos, and other facilities
1
|
|
Northern CA
|
|
|
22.9
|
%
|
University of Pittsburg Medical Center – Mercy
|
|
PA
|
|
|
7.9
|
%
|
Bon Secours DePaul
|
|
VA
|
|
|
6.8
|
%
|
Total
|
|
|
|
|
37.6
|
%
|
|
1.
|
The
head of the single largest physician practice also serves as the Company’s medical
director. As the medical director, this physician advises the Company Board of Directors
and management, provides technical advice related to product development and research
and development, and provides internal training to the Company sales staff and professional
training to our sales staff and to other physicians. Revenue from this practice decreased
by $119k in the year ended June 30, 2017 when compared to the year ended June 30, 2016.
|
The loss of either the single largest physician
practice or a combination of the other significant facilities and customers could have a material adverse effect on the Company’s
revenues, which would continue until the Company located new customers to replace them. There can be no assurance this would occur
in a timely manner or at all.
Proprietary Rights
The Company relies on a combination of patent,
copyright and trademark laws, trade secrets, software security measures, license agreements and nondisclosure agreements to protect
its proprietary rights. Some of the Company’s proprietary information may not be patentable.
Our management believes that certain aspects
of the IsoRay seed design and construction techniques are patentable innovations. These innovations resulted in a patent granted
by the USPTO under Patent Number 7,410,458, in August 2008, with an expiration date of December 5, 2025. Certain methodologies
regarding isotope production, separation, and seed manufacture are retained as trade secrets and are embodied in IsoRay’s
procedures and documentation. Four patents have been granted by the USPTO relating to methods of deriving Cs-131 developed by
IsoRay employees: Patent Number 7,479,261, with an expiration date of April 6, 2027; Patent Number 7,531,150, with an expiration
date of July 13, 2027; Patent Number 7,316,644, with an expiration date of August 5, 2025; and Patent Number 7,510,691, with an
expiration date of July 19, 2027. The Company has two patents that were issued on April 23, 2014 and are effective in Canada (Canada
2576907 and 2571349). The Company has patents granted in the Russian Federation which expire at various times in 2024 and 2025.
The Company has a single patent granted in each of the Netherlands and India that both expire on June 22, 2025. The Company has
a single patent pending in the EU and Hong Kong. The Company is continuing its efforts to develop and patent additional methods
of deriving Cs-131 and other isotopes.
There are specific conditions attached
to the assignment of the Cs-131 Trust patent from the late Lane Bray. In particular, the associated Royalty Agreement provides
for 1% of gross profit payment from seed sales to Lane Bray and 1% of gross profit from any use of the Cs-131 process patent for
non-seed products. If IsoRay reassigns the Royalty Agreement to another company, these royalties increase to 2%. The Royalty Agreement
has an anti-shelving clause that requires IsoRay to return the patent if IsoRay permanently abandons sales of products using the
invention. During fiscal years 2017 and 2016, the Company recorded royalty expense of $21,000 and $18,000, respectively, related
to this patent.
The terms of a license agreement with the
Lawrence Family Trust (successor to Don Lawrence) for a patent application and related “know-how” require the payment
of a royalty based on the Net Factory Sales Price, as defined in the agreement, of licensed product sales. Because the licensor’s
patent application was ultimately abandoned, only a 1% “know-how” royalty remains applicable. To date, management
believes that there have been no product sales incorporating the “know-how,” and therefore believes no royalty is
due. Management believes that ultimately no royalties will be paid under this agreement as there is no intent to use this “know-how”
in the future.
The Lawrence Family Trust has disputed management’s
contention that it is not using this “know-how.” On September 25, 2007, and again on October 31, 2007, the Company
participated in nonbinding mediation regarding this matter; however, no settlement was reached with the Lawrence Family Trust.
After additional settlement discussions, which ended in April 2008, the parties failed to reach a settlement. The parties may
demand binding arbitration at any time.
Research and Development
During the three-year period ended June
30, 2017, IsoRay and its subsidiaries incurred approximately $2.11 million in costs related to research and development activities.
The Company expects to continue ongoing research and development activities for the foreseeable future. Chief among R&D expenditures
in fiscal year 2017 are new product development (GammaTile™ and others) and the support of clinical research studies that
are accumulating data on the subjects of prostate and head and neck cancers. Other clinical research, including the study of Cs-131
in the treatment of brain, gynecological and other cancers, are currently funded by sources other than the Company.
Government Regulation
The Company’s present and future intended
activities in the development, manufacture and sale of cancer therapy products are subject to extensive laws, regulations, regulatory
approvals and guidelines. Within the United States, the Company’s therapeutic radiological devices must comply with the
U.S. Federal Food, Drug and Cosmetic Act, which is enforced by the U.S. Food and Drug Administration (FDA). The Company is also
required to adhere to applicable FDA Quality System Regulations, also known as the Good Manufacturing Practices, which include
extensive record keeping and periodic inspections of manufacturing facilities. The Company’s predecessor obtained FDA 510(k)
clearance in March 2003 to market its Cs-131 seed for the treatment of localized solid tumors and other malignant disease and
IsoRay obtained FDA 510(k) clearance in November 2006 to market preloaded brachytherapy seeds and in August 2009 for preloading
flexible braided strands and bioabsorbable mesh.
In the United States, the FDA regulates, among
other things, new product clearances and approvals to establish the safety and efficacy of these products. We are also subject
to other federal and state laws and regulations, including the Occupational Safety and Health Act and the Environmental Protection
Act.
The Federal Food, Drug, and Cosmetic Act and
other federal statutes and regulations govern or influence the research, testing, manufacture, safety, labeling, storage, record
keeping, approval, distribution, use, reporting, advertising and promotion of such products. Noncompliance with applicable requirements
can result in civil penalties, recall, injunction or seizure of products, refusal of the government to approve or clear product
approval applications, disqualification from sponsoring or conducting clinical investigations, preventing us from entering into
government supply contracts, withdrawal of previously approved applications, and criminal prosecution.
In the United States, medical devices are
classified into three different categories over which the FDA applies increasing levels of regulation: Class I, Class II, and
Class III. Most Class I devices are exempt from premarket notification 510(k); most Class II devices require premarket notification
510(k); and most Class III devices require premarket approval. Our Cs-131 seed is a Class II device and received 510(k) clearance
in March 2003.
Approval of new Class III medical devices
is a lengthy procedure and can take a number of years and require the expenditure of significant resources. There is a shorter
FDA review and clearance process for Class II medical devices, the premarket notification or 510(k) process, whereby a company
can market certain Class II medical devices that can be shown to be substantially equivalent to other legally marketed devices.
Since brachytherapy seeds have been classified by the FDA as a Class II device, we have been able to achieve market clearance
for our Cs-131 seed using the 510(k) process.
In August 2011, IsoRay Medical received clearance
from the FDA for its premarket notification 510(k) for the GliaSite
®
RTS. The GliaSite
®
RTS is the
only FDA-cleared balloon catheter device used in the treatment of brain cancer. In May 2014, the Company received clearance from
the FDA for its pre-market notification 510(k) for the radiotherapy solution Cesitrex
®
(liquid Cs-131) for use
with the GliaSite
®
RTS. The Company has since discontinued sales of the GliaSite
®
RTS.
As a registered medical device manufacturer
with the FDA, we are subject to inspection to ensure compliance with FDA’s current Good Manufacturing Practices, or cGMP.
These regulations require that we and any of our contract manufacturers design, manufacture and service products, and maintain
documents in a prescribed manner with respect to manufacturing, testing, distribution, storage, design control, and service activities.
Modifications or enhancements that could significantly affect the safety or effectiveness of a device or that constitute a major
change to the intended use of the device require a new 510(k) premarket notification for any significant product modification.
The Medical Device Reporting regulation requires
that we provide information to the FDA on deaths or serious injuries alleged to be associated with the use of our devices, as
well as product malfunctions that are likely to cause or contribute to death or serious injury if the malfunction were to recur.
Labeling and promotional activities are regulated by the FDA and, in some circumstances, by the Federal Trade Commission.
As a medical device manufacturer, we are also
subject to laws and regulations administered by governmental entities at the federal, state and local levels. For example, our
facility is licensed as a medical device manufacturing facility in the State of Washington and is subject to periodic state regulatory
inspections. Our customers are also subject to a wide variety of laws and regulations that could affect the nature and scope of
their relationships with us.
In support of IsoRay’s global strategy
to expand marketing to Canada, the European Union (EU) and Russia, we initiated the process in fiscal year 2008 to obtain the
European CE Mark, Canadian registration, and certification to ISO 13485:2003, an internationally recognized quality system. During
the fiscal year 2014, the CE Mark was renewed for an additional five years. European law requires that medical devices sold in
any EU Member State comply with the requirements of the European Medical Device Directive (MDD) or the Active Implantable Medical
Device Directive (AIMDD). IsoRay’s brachytherapy seeds are classified in Europe as an active implantable and are subject
to the AIMDD. Compliance with the AIMDD and obtaining a CE Mark involves being certified to ISO 13485:2003 and obtaining approval
of the product technical file by a notified body that is recognized by competent authorities of a Member State. Compliance with
ISO 13485:2003 is also required for registration of a company for sale of its products in Canada. Many of the recognized EU Notified
Bodies are also recognized by Health Canada to conduct the ISO 13485:2003 inspections for Canadian registration. During fiscal
year 2009, the Company received its certification to ISO 13485:2003 and obtained approval from Health Canada for its Canadian
registration. The Company has had no success in selling the product in the Canadian market and through its distributors is currently
focusing on the markets in Switzerland, Italy, and the Russian Federation. On June 18, 2014, the Company entered into an agreement
with MedikorPharma-Ural LLC as the distributor in the Russian Federation. The agreement provides the distributor with the ability
to sell the entire product line. As of June 30, 2017, this agreement is no longer in effect. On July 14, 2017, the Company entered
into an agreement with a new distributor in Russia that provides for the ability to sell the entire product line in the Russian
Federation. The agreement has a one-year initial term with two additional one-year terms which automatically renew unless either
party invoke their right to terminate earlier under the provisions of the agreement. On August 1, 2016, the Company entered into
an agreement with a distributor in Italy for the territory of Italy and Switzerland, as its prior Italian distribution agreement,
with an affiliate of the new distributor, had expired without any sales.
In the United States, as a manufacturer of
medical devices and devices utilizing radioactive byproduct material, we are subject to extensive regulation by not only federal
governmental authorities, such as the FDA and FAA, but also by state and local governmental authorities, such as the Washington
State Department of Health, to ensure such devices are safe and effective. In Washington State, the Department of Health, by agreement
with the federal Nuclear Regulatory Commission (NRC), regulates the possession, use, and disposal of radioactive byproduct material
as well as the manufacture of radioactive sealed sources to ensure compliance with state and federal laws and regulations. Our
Cs-131 brachytherapy seeds constitute both medical devices and radioactive sealed sources and are subject to these regulations.
Moreover, our use, management, and disposal
of certain radioactive substances and wastes are subject to regulation by several federal and state agencies depending on the
nature of the substance or waste material. We believe that we are in compliance with all federal and state regulations for this
purpose.
Seasonality
The
Company believes that some seed implantation procedures are deferred around physician vacations (particularly in the summer months),
holidays, and medical conventions and conferences resulting in a seasonal influence on the Company’s business. These factors
cause a momentary decline in revenue which management believes is ultimately realized in prior or following periods. Because a
material portion of the Company’s business is dependent on three
customers,
physician practices or facilities, simultaneous or extended vacations by the physicians at these facilities or by our single largest
physician whose total revenue alone represents a material portion of the Company’s business could cause significant drops
in the Company’s productivity during those reporting periods.
Employees
As of September 1, 2017, IsoRay employed 36
full-time individuals. The Company’s future success will depend, in part, on its ability to attract, retain, and motivate
highly qualified sales, technical and management personnel. From time to time, the Company may employ independent consultants
or contractors to support its research and development, marketing, sales, accounting and administrative organizations. None of
the Company’s employees are represented by any collective bargaining unit. On September 1, 2017, the Company employed six
direct sales people.
Competition
The Company competes in a market characterized
by technological innovation, extensive research efforts, and significant competition. In general, the IsoRay Cs-131 brachytherapy
seed competes with conventional methods of treating localized cancer, including, but not limited to, all forms of prostatectomy
surgery and external beam radiation therapy which includes intensity modulated radiation therapy, stereotactic radiosurgery and
proton therapy, as well as competing permanent and temporary brachytherapy devices.
Management believes the Company’s patented
Cs-131 separation process is likely to provide a sustainable competitive advantage. Production of Cs-131 also requires specialized
facilities that represent high cost and long lead time if not readily available. In addition, a competitor would need to develop
a method for isotope attachment and seed assembly, would need to conduct testing to meet NRC and FDA requirements, and would need
to obtain regulatory clearances before marketing a competing device. Best Medical received FDA 510(k) clearance to market a Cs-131
seed on June 6, 1993 but to date has not produced any products for sale.
The Company’s brachytherapy products
used in non-prostate applications typically compete with temporary (high dose-rate, HDR), external beam radiation therapy (EBRT),
which can be provided as conventional or intensity modulated radiation therapy, or as stereotactic radiosurgery, a technique that
delivers high doses of radiation to a target in a much lower number of sessions than other forms of EBRT. Manufacturers of EBRT
equipment include Varian Medical Systems, Siemens Healthcare, Elekta AB, and Accuray Incorporated, among others.
In the cases of lung and brain tumors (and
other solid tumors), a surgeon will remove the tumor if it is medically prudent and this offers the patient some benefit in terms
of controlling the growth of the cancer or its symptoms. In many cases, radiation therapy is added following the surgery; this
is known as “adjuvant” radiation therapy. The Company believes that its form of adjuvant radiation therapy deployable
in such cases offers advantages over external beam methods. However, external beam holds the vast majority of the market for adjuvant
radiation therapy.
ITEM 1A – RISK
FACTORS
You should carefully
consider the following factors regarding information included in this Report. The risks and uncertainties described below are
not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also
may impair our business operations. If any of the following risks actually occur, our business, financial condition and operating
results could be materially adversely affected.
Risks Related to Our
Industry and Operations
Our Revenues Depend Upon One Product.
Our
revenues depend solely upon the successful production, marketing, and sales of the Cesium-131 brachytherapy seed in its various
delivery formats. The rate and level of market acceptance of this product varies depending on the perception by physicians and
other members of the healthcare community of its safety and efficacy as compared to that of competing products, if any; the clinical
outcomes of the patients treated; the effectiveness of our sales and marketing efforts or those of our distributors in the United
States, Italy, Switzerland and the Russian Federation; any unfavorable publicity concerning our product or similar products; our
product’s price relative to other products or competing treatments; any decrease in current reimbursement rates from the
Centers for Medicare and Medicaid Services or third-party payers; regulatory developments related to the manufacture or continued
use of the product; availability of sufficient supplies of barium for Cesium-131 seed production; ability to produce sufficient
quantities of Cesium-131; the ability of physicians to apply the correct dosage of seeds and avoid excessive levels of radiation
to patients; and the ability to use this product to treat multiple types of cancers in various organs. Because of our reliance
on this product as the sole source of our revenue, any material adverse developments with respect to the commercialization of
this product may cause us to continue to incur losses rather than profits in the future.
Although Cleared
To Treat Any Malignant Tissue, Our Product Is Primarily Used To Treat A Single Type Of Cancer Which Is In A Declining Market.
Currently, the Cesium-131 seed is used almost exclusively for the treatment of prostate cancer (approximately eighty-eight
percent of our sales). We have been treating brain cancer which amounted to approximately six percent of our product sales, gynecological
cancer which amounted to approximately three percent of our product sales, head and neck cancer which amounted to approximately
two percent of our product sales, lung cancer which amounted to less than one percent of our product sales, and other cancers
including groin cancer, pelvic cancer and colorectal cancer that combined constituted less than one percent of our product sales
in fiscal year 2017. Management believes the Cesium-131 brachytherapy seed will continue to be used to treat other types of cancers
as the Company identifies existing delivery systems that can be utilized or develops new delivery methods for the product, however
these delivery systems may not prove as effective as anticipated. Management believes that clinical data gathered by select groups
of physicians under treatment protocols specific to other organs will be needed prior to widespread acceptance of our product
for treating other cancer sites. If our current and future products do not become accepted in treating cancers of other sites,
our sales will continue to depend primarily on treatment of prostate cancer, a market with increasing competition and ongoing
loss of market share by all brachytherapy products. Even though the past two fiscal years have shown improvements in prostate
revenue, since the U.S. Preventive Services Task Force recommendation in 2012 to no longer routinely conduct prostate exams, the
market for all prostate procedures has dramatically declined. In 2017, the USPSTF changed its recommendation from advising against
screening to the position that the decision for men between 55 and 69 to undergo PSA-based screening should be made by a man in
consultation with his doctor (https://screeningforprostatecancer.org/). This change may contribute to an increased incidence of
screening (and therefore more prostate cancer cases) as opposed to an unscreened population – although this conclusion will
await future trending information.
Unfavorable Industry
Trends in the Prostate Market.
Several factors which began in fiscal 2009 have caused our revenues to significantly decline.
However, since fiscal 2015 we have experienced steady marginal increases in sales, but this improvement is still not back to the
amount of revenues we had in fiscal 2011 or 2012. Beginning in the fall of 2008, U.S. consumers significantly curtailed all spending
(even for life saving medical procedures) which impacted the brachytherapy industry as a whole. In February of 2009, noted urologists
announced at a medical conference that prostate specific antigen (PSA) testing was not as necessary as previously believed. Their
statements were widely publicized. In May 2012, the U.S. Preventive Services Task Force (USPSTF) recommended against routine PSA
screenings for healthy men without symptoms. This recommendation has led to substantial declines in PSA screenings. In addition,
there has been an increase in “active surveillance,” a practice where no immediate medical treatment is provided but
the physician and patient closely monitor the patient’s cancer for signs that the cancer is growing. We believe that declines
in PSA screenings have led to a decline in the number of men diagnosed with prostate cancer, which in turn leads to a decline
in the number of procedures to treat prostate cancer, including brachytherapy procedures. An increase in the proportion of men
diagnosed with prostate cancer but not seeking immediate medical treatment ultimately also leads to a decline in the number of
procedures to treat prostate cancer.
Also, the emergence of
IMRT as the preferred treatment alternative as a result of a much higher reimbursement rate to physicians compared to brachytherapy
treatments has resulted in declining market share for brachytherapy treatment. In fiscal 2017, each of these factors continued
to impact the performance of the Company in the prostate market and the industry as a whole and there is no assurance that they
will not continue to impact sales of the Company in the prostate market through fiscal 2018.
We
Rely Heavily On Three Customers.
Approximately thirty-eight percent (38%) of the Company’s revenues are dependent on
three customers and approximately twenty-three percent (23%)
on
one customer. The loss of any of these customers would have a material adverse effect on the Company’s revenues which may
not be replaced by other customers particularly as these customers are in the prostate sector which is facing substantial competition
from other treatments.
We Rely Heavily
On A Limited Number Of Suppliers.
Some materials used in our product are currently available only from a limited number of
suppliers. In fiscal 2017, approximately eighty-five percent (85%) of our Cesium-131 was supplied through JSC INM from a reactor
located in Russia. Our current contract with JSC INM terminates on December 31, 2017, and will have to be renegotiated. Management
will seek to negotiate favorable pricing but there is no assurance as to the outcome of these negotiations. On August 25, 2017,
the Company executed a consignment inventory agreement with MedikorPharma-Ural LLC to process the Company’s enriched barium
at another nuclear reactor in Russia beginning in November 2017. The term of the consignment agreement is 10 years. Our source
of supply of Cesium-131 from Russia is historically produced using one of two nuclear reactors which supply the irradiation needed
for Cesium-131 production. One of the Russian nuclear reactors will be shut down from December 2017 to mid-2018, and the other
Russian nuclear reactor is scheduled to be shut down for much of 2019. As a result of these upcoming shutdowns, only one of the
Company’s historic Russian suppliers of Cesium-131 will be available during these periods. Medikor will use the barium carbonite
consigned by the Company to contract with a third-party manufacturer to produce and supply Cesium-131 to the Company. This arrangement
has the effect of minimizing the impact on the Company of the planned temporary shutdown of the nuclear reactors that serve as
its sources of Cesium-131 from Russia. Management negotiated a new contract with MURR in 2017 which it believes will increase
the supply it receives from MURR and the Company is currently researching the ability to process Cesium-131 at the MURR reactor
site, which could increase domestic supply approximately 100% from current production volume.
Reliance on any single
supplier increases the risks associated with concentrating isotope production at a single reactor facility which can be subject
to unanticipated shutdowns and political or civil unrest. Failure to obtain deliveries of Cesium-131 from multiple sources could
have a material adverse effect on seed production and there may be a delay before we could locate alternative suppliers beyond
the three currently contracted with.
We may not be able to
locate additional suppliers outside of Russia, other than MURR, capable of producing the level of output of Cesium at the quality
standards we require. Additional factors that could cause interruptions or delays in our source of materials include limitations
on the availability of raw materials or manufacturing performance experienced by our suppliers and a breakdown in our commercial
relations with one or more suppliers. Some of these factors may be completely out of our and our suppliers’ control.
Virtually all titanium
tubing used in brachytherapy seed manufacture comes from a single source, Accellent Corporation. We currently obtain a key component
of our seed core from another single supplier, C5 Medical Werks, LLC. We do not have formal written agreements with Accellent
Corporation. We do have a purchase agreement with C5 Medical Werks, LLC which calls for fixed quantity of seed cores to be shipped
over a 36 month period at a fixed unit price. Any interruption or delay in the supply of materials required to produce our product
could cause harm to our business if we were unable to obtain an alternative supplier or substitute equivalent materials in a cost-effective
and timely manner. To mitigate any potential interruptions, the Company continually evaluates its inventory levels and management
believes that the Company maintains a sufficient quantity on hand to alleviate any potential disruptions.
While we work closely
with suppliers to assure continuity of supply and maintain high quality and reliability, these efforts may not be successful.
Manufacturing disruptions experienced by our suppliers may jeopardize our supply of components. The loss or disruption of our
relationships with outside vendors could subject us to substantial delays in the delivery of our product to customers. Significant
delays in the delivery of our product could result in possible cancellation of orders and the loss of customers.
Due to the stringent
regulations and requirements of the FDA and similar non-U.S. regulatory agencies regarding the manufacture of our product, we
may not be able to quickly establish additional or replacement sources for certain components or materials. A change in suppliers
could require significant effort or investment in circumstances where the items supplied are integral to product performance or
incorporate unique technology. A reduction or interruption in manufacturing, or an inability to secure alternative sources of
raw materials or components, could have a material adverse effect on our business, results of operations, financial condition
and cash flows.
Any casualty, natural
disaster or other significant disruption of any of our suppliers’ operations, or any unexpected loss of any existing exclusive
supply contract could have a material adverse effect on our business.
Although we expect our
suppliers to comply with our contract terms, we do not have control over these suppliers. Our inability to provide a product that
meets delivery schedules could have a material adverse effect on our reputation in the industry, which could have a material adverse
effect on our financial condition and results of operations.
Further, any single source
suppliers or contract manufacturers may operate through a single facility. If an event occurred that resulted in material damage
to this manufacturing facility or our supplier/manufacturing contractor lacked sufficient labor to fully operate the facility,
we may be unable to transfer the manufacture of our product or supply of the component to another facility or location in a cost-effective
or timely manner, if at all. This potential inability to transfer production could occur for a number of reasons, including but
not limited to a lack of necessary relevant manufacturing capability at another facility, or the regulatory requirements of the
FDA or other governmental regulatory bodies. Even if there are many qualified suppliers or contract manufacturers available around
the country and our product or its components are relatively easy to manufacture, such an event could have a material adverse
effect on our financial condition and results of operations.
Doctors And Hospitals
May Not Adopt Our Product And Technologies At Levels Sufficient To Sustain Our Business Or To Achieve Our Desired Growth Rate.
To date, we have attained very limited penetration of the total potential market for our product, particularly in non-prostate
applications. Our future growth and success depends upon creating broad awareness and acceptance of our product by doctors, hospitals
and freestanding clinics, as well as patients. This will require substantial marketing and educational efforts, which will be
costly and may not be successful. The target customers for our product may not adopt its related technologies or may adopt them
at a rate that is slower than desired. We depend extensively on long term protocol results and publications by independent physicians.
Unfavorable protocol results or publications would have an impact on the success of our product. In addition, potential customers
who decide to utilize any of our devices may later choose to purchase competitors’ products. Important factors that will
affect our ability to attain broad market acceptance of our product include:
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doctor
and/or patient awareness and acceptance of our product;
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the
real or perceived effectiveness and safety of our product;
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the
relationship between the cost of our product and the real or perceived medical benefits
of our product;
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the
relationship between the cost of our product and the financial benefits to our customers
using our product, which will be greatly affected by the coverage of, and reimbursement
for, our product by governmental and private third-party payors; and
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market
perception of our ability to continue to grow our business and develop enhancements to
our product.
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We must promote our product
effectively. Factors that could affect our success in marketing our product include:
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the
adequacy and effectiveness of our sales force and that of any distributor’s sales
force;
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the
adequacy and effectiveness of our production, distribution and marketing capabilities
and those of our distributors;
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the
success of competing treatments or products; and
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the
availability and extent of reimbursement from third-party payors for our product.
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If we fail to maintain
our working relationships with health care professionals, many of our products may not be developed and marketed in line with
the needs and expectations of the professionals who use and support our products, which could cause a decline in our earnings
and profitability. The research, development, marketing, and sales of many of our new and improved products is dependent upon
our maintaining working relationships with health care professionals. We rely on these professionals to provide us with considerable
knowledge and experience regarding the development, marketing, and sale of our products. Physicians assist us as researchers,
marketing and product consultants, inventors, and public speakers. If we are unable to maintain our strong relationships with
these professionals and continue to receive their advice and input, the development and marketing of our products could suffer,
which could have a material adverse effect on our consolidated earnings, financial condition, and/or cash flows.
If our product fails
to achieve market acceptance, we may not be able to market and sell the product successfully, which would limit our ability to
generate revenue and could harm our business.
We Rely On Two
Russian Suppliers For Most of Our Cesium-131.
In December 2015, the Company entered into an agreement with The Open Joint
Stock Company <<JSC Isotope>> for the supply of Cs-131 on a fixed cost per curie basis until March 2017. In December
2016, the Company agreed to an addendum extending the expiration period to December 31, 2017. As a result, the Company relies
on JSC Isotope to obtain Cesium-131 from its single Russian reactor source. Through the isotope agreement, we have obtained fixed
pricing for our Russian Cesium-131 through the termination of the contract on December 31, 2017. There can be no guarantee that
JSC Isotope will always be able to supply us with sufficient Cesium-131 or will renew our existing contract on favorable terms
in December 2017, which could be due in part to risks associated with foreign operations and beyond either our or JSC INM’s
control. If we are unable to obtain supplies of isotope from Russia in the future, our overall supply of Cesium-131 could be reduced
significantly. The Company has negotiated an inventory consignment agreement to process the Company’s inventory of enriched
barium with MedikorPharma-Ural LLC at another nuclear reactor in Russia starting in November 2017. Our source of supply of Cesium-131
from Russia is historically produced using two nuclear reactors which supply the irradiation needed for Cesium-131 production.
One of the Russian nuclear reactors will be shut down from December 2017 to mid-2018, and the other Russian nuclear reactor is
scheduled to be shut down for much of 2019. As a result of these upcoming shutdowns, only one of the Company’s historic
Russian suppliers of Cesium-131 will be available during these periods. Medikor will use the barium carbonite consigned by the
Company to contract with a third-party manufacturer to produce and supply Cesium-131 to the Company. This arrangement has the
effect of minimizing the impact on the Company of the planned temporary shutdown of the nuclear reactors that serve as its sources
of Cesium-131 from Russia. It is anticipated that this reactor will be able to produce an equivalent volume of Cesium-131 to replace
the production of INM while the reactor is shut down for maintenance from November 2017 to July 2018. While management is in the
final discussions to substantially increase the supply of isotope from the MURR facility, until MURR has installed an additional
hot cell in its reactor, it is not capable of supplying all of the isotope presently required by the Company on a monthly basis
and even when installed, we will still depend on our Russian suppliers. Currently, the planned installation of this additional
hot cell is not scheduled until the second half of fiscal 2018 and even with this new installation, there is no assurance the
Company will reach acceptable terms with MURR to increase its supply from this domestic reactor.
Increased Prices
For, Or Unavailability Of, Raw Materials Used In Our Product Could Adversely Affect Our Revenues.
Our revenues are affected
by the prices of the raw materials and sub-assemblies used in the manufacture of our product. These prices may fluctuate based
on a number of factors beyond our control, including changes in supply and demand, general economic conditions, labor costs, fuel
related delivery costs, competition, import duties, tariffs, currency exchange rates, and government regulation. Due to the highly
competitive nature of the healthcare industry and the cost containment efforts of our customers and third-party payers, we may
be unable to pass along cost increases for key components or raw materials through higher prices to our customers. If the cost
of key components or raw materials increases, and we are unable fully to recover these increased costs through price increases
or offset these increases through other cost reductions, we could experience lower margins and profitability. Significant increases
in the prices of raw materials or sub-assemblies that cannot be recovered through productivity gains, price increases or other
methods could adversely affect our results of operations.
We Are Subject To
Uncertainties Regarding Reimbursement For Use Of Our Product.
Hospitals and freestanding clinics may be less likely to purchase
our product if they cannot be assured of receiving favorable reimbursement for treatments using our product from third-party payers,
such as Medicare and private health insurance plans. Currently, Medicare reimburses hospitals at fixed rates that cover the cost
of stranded and loose seeds. Clinics and physicians performing procedures in a free standing center are reimbursed at the actual
cost of the seeds. It is expected that CMS will continue to reimburse providers using this same methodology in 2018 but there
is no assurance this will occur.
Brachytherapy seeds have
two CMS codes – one code for loose seeds and a second code for stranded seeds. Reimbursement amounts are reviewed and revised
annually based upon information submitted to CMS on claims by providers. Changes in reimbursement can positively or negatively
affect market demand for our product. We monitor these changes and provide comments, as permitted, when changes are proposed,
prior to implementation.
In-patient procedures
are covered by CMS and hospitals are paid based on the type of surgery and the status of the patient. These procedures are done
as part of a Diagnostic Related Group or DRG system under which the hospital pays for all items involved in the care of the patient
exclusive of the physician fees. Hospitals are less receptive to treatments which require out of pocket costs such as procedures
we use for certain non-prostate applications. Certain of our DRG reimbursement amounts coupled with out-of-pocket costs imposed
on hospitals make some of our non-prostate procedures not financially viable. We rely on our reimbursement consultant to assist
us to improve the rate of reimbursement so that our product reimbursement will create greater incentives to be used. There is
no assurance we will obtain the increase necessary to keep certain procedures viable and improve the margins of others.
Historically, private
insurers have followed Medicare guidelines in establishing reimbursement rates. However, third-party payers are increasingly challenging
the pricing of certain medical services or devices, and we cannot be sure that they will reimburse our customers at levels sufficient
for us to maintain favorable sales and price levels for our product. There is no uniform policy on reimbursement among third-party
payers, and we can provide no assurance that our product will continue to qualify for reimbursement from all third-party payers
or that reimbursement rates will not be reduced. A reduction in or elimination of third-party reimbursement for treatments using
our products would likely have a material adverse effect on our revenues.
Our success in international
markets also depends upon the eligibility of our product for coverage and reimbursement through government-sponsored health care
payment systems and third-party payors. Reimbursement practices vary significantly by country. Many international markets have
government-managed insurance systems that control reimbursement for our new product and procedures. Other foreign markets have
both private insurance systems and government-managed systems that control reimbursement for our new product and procedures. Market
acceptance of our product may depend on the availability and level of coverage and reimbursement in any country within a particular
time. In addition, health care cost containment efforts similar to those we face in the United States are prevalent in many of
the other countries in which we intend to sell our product and these efforts are expected to continue.
Furthermore, any federal
and state efforts to reform government and private healthcare insurance programs, such as those passed by the federal government
in 2010, could significantly affect the purchase of healthcare services and our product in general and demand for our product
in particular. Approximately 60% of men diagnosed with prostate cancer are of Medicare age (65+), providing Medicare with a significant
influence in the marketplace. We are unable to predict the ultimate impact of the healthcare reform passed in 2010, those reforms
that may be enacted in the future both in the United States and in other countries, whether other healthcare legislation or regulations
affecting the business may be proposed or enacted in the future or what effect any such legislation or regulations would have
on our business, financial condition or results of operations.
Our Operating Results
Will Be Subject To Significant Fluctuations.
Our quarterly revenues, expenses, and operating results are likely to fluctuate
significantly in the future. Fluctuation may result from a variety of factors, which are discussed in detail throughout this “RISK
FACTORS” section, including:
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demand
and pricing for the Company’s product;
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effects
of aggressive competitors;
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hospital,
clinic and physician purchasing decisions;
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research
and development and manufacturing expenses;
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patient
outcomes from our product and unfavorable recommendations related to PSA testing;
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physician
acceptance of our product;
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government
or private healthcare reimbursement policies;
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our
manufacturing performance and capacity;
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incidents,
if any, that could cause temporary shutdown of our manufacturing facility;
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the
amount and timing of sales orders;
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rate
and success of future product approvals;
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timing
of FDA clearance, if any, of competitive product and the rate of market penetration of
competing product;
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seasonality
of purchasing behavior in our market;
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overall
economic conditions;
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the
successful introduction or market penetration of alternative therapies; and
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the
outcome of the FDA’s evaluation of the clearance process for class II devices.
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We Are Subject
To The Risk That Certain Third Parties May Mishandle Our Product.
We rely on third parties, such as Federal Express, to deliver
our Cesium-131 seed, and on other third parties to package our product in certain specialized packaging forms requested by customers.
We are subject to the risk that these third parties may mishandle our product, which could result in adverse effects, particularly
given the radioactive nature of our product.
We May Encounter Manufacturing
Problems Or Delays That Could Result In Lost Revenue.
Manufacturing our product is a complex process. We (or our critical
suppliers) may encounter difficulties in scaling up or maintaining production of our product, including:
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problems
involving production yields;
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quality
control and assurance;
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component
supply shortages;
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import
or export restrictions on components, materials or technology;
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shortages
of qualified personnel; and
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compliance
with state, federal and foreign regulations.
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If demand for our product
exceeds our manufacturing capacity, we could develop a substantial backlog of customer orders. If we are unable to maintain larger-scale
manufacturing capabilities, our ability to generate revenues will be limited and our reputation in the marketplace could be damaged.
Failure Of Any Clinical
Studies Or Third-Party Assessments To Demonstrate Desired Outcomes In Proposed Endpoints May Reduce Physician Usage Or Result
In Pricing Pressures That Could Have A Negative Impact On Business Performance.
We may directly conduct or support third party
clinical studies designed to test a variety of endpoints associated with product performance and use across a number of applications.
If, as a result of poor design, implementation or otherwise, a clinical study conducted by us or others fails to demonstrate statistically
significant results supporting performance or use benefits or comparative or cost effectiveness of our product, physicians may
elect not to use our product as a treatment for conditions that may benefit from them. Furthermore, in the event of an adverse
clinical study outcome, our product may not achieve “standard-of-care” designations, where they exist, for the conditions
in question, which could deter the adoption of our product. Also, if serious device-related adverse events are reported during
the conduct of a study it could affect continuation of the study, product approval and product adoption. If we are unable to develop
a body of statistically significant evidence from our clinical study program, whether due to adverse results or the inability
to complete properly designed studies, domestic and international public and private payers could refuse to cover our product,
limit the manner in which they cover our product, or reduce the price they are willing to pay or reimburse for our product. In
the case of a pre-approval study or a study required by a regulatory body as a condition of clearance or approval, a regulatory
body can revoke, modify or deny clearance or approval of the study and/or the product in question.
Other Treatments May
Be Deemed Superior To Brachytherapy.
Our Cesium-131 seed may face competition not only from companies that sell other radiation
therapy products, but also from companies that are developing alternative therapies for the treatment of cancers. It is possible
that advances in the pharmaceutical, biomedical, or gene therapy fields could render some or all radiation therapies, whether
conventional or brachytherapy, obsolete. If alternative therapies are proven or even perceived to offer treatment options that
are superior to brachytherapy, physician adoption of our brachytherapy product could be negatively affected and our revenues from
our brachytherapy product could decline.
Our Industry Is Intensely
Competitive.
The medical device industry is intensely competitive. We compete with both public and private medical device,
biotechnology and pharmaceutical companies that have been in existence longer than we have, have a greater number of products
on the market, have greater financial and other resources, and have other technological or competitive advantages. As physicians
migrate to medical devices such as external beam radiation and robotic surgery that have a much higher capital cost to repay and
higher profit margins, this puts increasing pressure on all brachytherapy products to compete regardless of their superior treatment
results. The market share for brachytherapy continues to decline as a result of this pressure from increasing usage by oncologists
of external beam radiation. In addition, centers that wish to offer the Cesium-131 seed must comply with licensing requirements
specific to the state, province, and/or country in which they do business and these licensing requirements may take a considerable
amount of time to comply with. Certain centers may choose not to offer our Cesium-131 seed due to the time required to obtain
necessary license amendments. We also compete with academic institutions, government agencies, and private research organizations
in the development of technologies and processes and in acquiring key personnel. Although we have patents granted and patents
applied for to protect our isotope separation processes and Cesium-131 seed manufacturing technology, we cannot be certain that
one or more of our competitors will not attempt to obtain patent protection that blocks or adversely affects our product development
efforts. In the case of brain tumors, a surgeon will remove the tumor and radiation therapy is added following the surgery; this
is known as “adjuvant” radiation therapy. The Company believes that its form of adjuvant radiation therapy deployable
in such cases offers advantages over external beam methods. However, external beam holds the vast majority of the market for adjuvant
radiation therapy.
Cost-Containment Efforts
Of Our Customers, Purchasing Groups, Third-Party Payers And Governmental Organizations Could Adversely Affect Our Sales And Profitability.
The continuing efforts of governments, insurance companies and other payors of healthcare costs to contain or reduce these
costs, combined with closer scrutiny of such costs, could lead to patients being unable to obtain approval for payment from these
third-party payors. The cost containment measures that healthcare providers are instituting both in the U.S. and internationally
could harm our business. Some healthcare providers in the U.S. have adopted or are considering a managed care system in which
the providers contract to provide comprehensive healthcare for a fixed cost per person. Healthcare providers may attempt to control
costs by authorizing fewer elective surgical procedures or by requiring the use of the least expensive devices possible, which
could adversely affect the demand for our product or the price at which we can sell our product. Some healthcare providers have
sought to consolidate and create new companies with greater market power, including hospitals. As the healthcare industry consolidates,
competition to provide our product has become and will continue to become more intense. This has resulted and likely will continue
to result in greater pricing pressures and the exclusion of certain suppliers from important marketing segments.
Outside the United States,
we expect to experience pricing pressure from centralized governmental healthcare authorities due to efforts by such authorities
to lower healthcare costs. Implementation of healthcare reforms and competitive bidding contract tenders may limit the price or
the level at which reimbursement is provided for our product and adversely affect both our pricing flexibility and the demand
for our product. Healthcare providers may respond to such cost-containment pressures by substituting lower cost product or other
therapies for our product. We may be required to engage in competitive bidding for the sale of our product to governmental purchasing
agents and hospital groups. Our failure to offer acceptable prices to these customers could adversely affect our sales and profitability
in these markets. Distributors of our product may also negotiate terms of sale more aggressively to increase their profitability.
Failure to negotiate distribution arrangements having advantageous pricing and other terms of sale could cause us to lose market
share and would adversely affect our business, results of operations, financial condition and cash flows.
If We Fail To Comply
With Applicable Healthcare Regulations, We Could Face Substantial Penalties And Our Business, Operations And Financial Condition
Could Be Adversely Affected.
Certain federal and state healthcare laws and regulations pertaining to fraud and abuse and patients’
rights may be applicable to our business. We could be subject to healthcare fraud and abuse and patient privacy regulation by
both the federal government and the states in which we conduct our business, without limitation. The laws that may affect our
ability to operate include, but are not limited to:
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the
federal Anti-Kickback Statute, which prohibits, among other things, knowingly and willfully
soliciting, receiving, offering or paying any remuneration (including any kickback, bribe
or rebate), directly or indirectly, overtly or covertly, in cash or in kind, to induce,
or in return for, the referral of an individual for the furnishing or arranging for the
furnishing of any item or service, or the purchase, lease, order, arrangement for, or
recommendation of the purchase, lease, or order of any good, facility, item or service
for which payment may be made, in whole or in part, under a federal healthcare program,
such as the Medicare and Medicaid programs;
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the
civil federal False Claims Act, which imposes civil penalties, including through civil
whistleblower or qui tam actions, against individuals or entities for, among other things,
knowingly presenting, or causing to be presented, to the federal government, claims for
payment that are false or fraudulent; knowingly making, using or causing to be made or
used, a false record or statement to get a false or fraudulent claim paid or approved
by the government; conspiring to defraud the government by getting a false or fraudulent
claim paid or approved by the government; or knowingly making, using or causing to be
made or used a false record or statement to avoid, decrease or conceal an obligation
to pay money to the federal government;
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the
criminal federal False Claims Act, which imposes criminal fines or imprisonment against
individuals or entities who make or present a claim to the government knowing such claim
to be false, fictitious or fraudulent;
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the
civil monetary penalties statute, which imposes penalties against any person or entity
who, among other things, is determined to have presented or caused to be presented a
claim to a federal health program that the person knows or should know is for an item
or service that was not provided as claimed or is false or fraudulent;
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the
Veterans Health Care Act of 1992 which requires manufacturers of “covered drugs”
to offer them for sale to certain federal agencies, including but not limited to, the
Department of Veterans Affairs, on the Federal Supply Schedule, which requires compliance
with applicable federal procurement laws and regulations and subjects manufacturers to
contractual remedies as well as administrative, civil and criminal sanctions;
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the
federal Health Insurance Portability and Accountability Act of 1996 (HIPAA), which created
new federal criminal statutes that prohibit knowingly and willfully executing, or attempting
to execute, a scheme to defraud any healthcare benefit program or obtain, by means of
false or fraudulent pretenses, representations or promises, any of the money or property
owned by, or under the custody or control of, any healthcare benefit program, regardless
of the payor (e.g., public or private), knowingly and willfully embezzling or stealing
from a health care benefit program, willfully obstructing a criminal investigation of
a health care offense and knowingly and willfully falsifying, concealing or covering
up by any trick or device a material fact or making any materially false statements in
connection with the delivery of, or payment for, healthcare benefits, items or services
relating to healthcare matters;
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HIPAA,
as amended by the Health Information Technology for Economic and Clinical Health Act
of 2009, and their respective implementing regulations, which impose requirements on
certain covered healthcare providers, health plans and healthcare clearinghouses as well
as their respective business associates that perform services for them that involve individually
identifiable health information, relating to the privacy, security and transmission of
individually identifiable health information without appropriate authorization, including
mandatory contractual terms as well as directly applicable privacy and security standards
and requirements;
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the
federal Physician Payment Sunshine Act, created under the Patient Protection and Affordable
Care Act (ACA), and its implementing regulations, which require manufacturers of drugs,
devices, biologics and medical supplies for which payment is available under Medicare,
Medicaid or the Children’s Health Insurance Program (with certain exceptions) to
report annually to the United States Department of Health and Human Services information
related to payments or other transfers of value made to physicians (defined to include
doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals,
as well as ownership and investment interests held by physicians and their immediate
family members, with data collection required reporting to CMS by the 90th day following
each calendar year;
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federal
consumer protection and unfair competition laws, which broadly regulate marketplace activities
and activities that potentially harm consumers;
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the
Foreign Corrupt Practices Act, a U.S. law that regulates certain financial relationships
with foreign government officials (which could include, for example, certain medical
professionals), and state law equivalents of the federal laws, such as anti-kickback,
false claims, consumer protection and unfair competition laws which may apply to our
business practices, including but not limited to, research, distribution, sales and marketing
arrangements as well as submitting claims involving healthcare items or services reimbursed
by any third-party payors, including commercial insurers, and state laws governing the
privacy and security of health information in certain circumstances many of which differ
from each other in significant ways, with differing effect.
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The U.S. Foreign Corrupt Practices Act (FCPA)
and similar anti-bribery laws in non-U.S. jurisdictions generally prohibit companies and their intermediaries from making improper
payments to non-U.S. government officials for the purpose of obtaining or retaining business. Global enforcement of anti-corruption
laws has increased substantially in recent years, with more frequent voluntary self-disclosures by companies, aggressive investigations
and enforcement proceedings by U.S. and non-U.S. governmental agencies, and assessment of significant fines and penalties against
companies and individuals. Our international suppliers create the risk of unauthorized payments or offers of payments by one of
our employees, consultants, sales agents, or distributors, because these parties are not always subject to our control. Any alleged
or actual violations of these regulations may subject us to government scrutiny, severe criminal or civil sanctions and other
liabilities, including exclusion from government contracting, and could disrupt our business, and result in a material adverse
effect on our reputation, results of operations, financial condition, and cash flows.
Governmental regulations outside the U.S.
have become increasingly stringent and more common, and we may become subject to more rigorous regulation by governmental authorities
in the future. In the European Union, for example, a new Medical Device Regulation was published in 2017 which, when it enters
into full force, will impose significant additional premarket and post-market requirements. Penalties for a company’s non-compliance
with governmental regulation could be severe, including fines and revocation or suspension of a company’s business license,
mandatory price reductions and criminal sanctions. Any governmental law or regulation imposed in the future may have a material
adverse effect on us.
Additionally, the compliance environment is
changing, with more states, such as California and Massachusetts, mandating implementation of compliance programs, compliance
with industry ethics codes, and spending limits, and other states, such as Vermont, Maine, and Minnesota, requiring reporting
to state governments of gifts, compensation, and other remuneration to physicians. These laws all provide for penalties for non-compliance.
The shifting regulatory environment, along with the requirement to comply with multiple jurisdictions with different compliance
and/or reporting requirements, increases the possibility that a company may inadvertently run afoul of one or more laws.
If our past or present operations are found
to be in violation of any of the laws described above or the other governmental regulations to which we, our distributors or our
customers are subject, we may be subject to the applicable penalty associated with the violation, including civil and criminal
penalties, damages, fines, exclusion from Medicare, Medicaid and other government programs and the curtailment or restructuring
of our operations. If we are required to obtain permits or licensure under these laws that we do not already possess, we may become
subject to substantial additional regulation or incur significant expense. Any penalties, damages, fines, curtailment or restructuring
of our operations would adversely affect our ability to operate our business and our financial results. The risk of our being
found in violation of these laws is increased by the fact that many of them have not been fully or clearly interpreted by the
regulatory authorities or the courts, and their provisions are subject to a variety of interpretations and additional legal or
regulatory change. Any action against us for violation of these laws, even if we successfully defend against it, could cause us
to incur significant legal expenses, divert our management’s attention from the operation of our business and damage our
reputation. Moreover, achieving and sustaining compliance with applicable federal and state privacy, security and fraud laws may
prove costly.
Healthcare Reform
Measures Could Hinder Our Product’s Commercial Success.
In both the United States and certain foreign jurisdictions
there have been, and we anticipate there will continue to be, a number of legislative and regulatory changes to the healthcare
system that could impact our ability to sell our product profitably. In the United States, the Patient Protection and Affordable
Care Act (the “ACA”) and the Health Care and Education Affordability Reconciliation Act of 2010 (together “the
law” or “the legislation”) provide for a number of healthcare policy changes that are or will be applicable
to us. However, there are many programs and requirements under the law for which the consequences are not fully understood, and
it is unclear what the full impacts will ultimately be from the law. The legislation provides for significant new taxes on medical
device makers in the form of a 2.3 percent excise tax on all U.S. medical device sales that commenced in January 2013 which would
apply to all of our product sales. Although the excise tax has been suspended by Congress until the end of 2017, its status is
unclear for 2018 and subsequent years. Under the legislation, the total cost to the medical device industry is expected to be
approximately $20 billion over 10 years. The law also focuses on a number of Medicare provisions aimed at improving quality and
decreasing costs. It is uncertain at this point what negative unintended consequences these provisions will have on patient access
to new technologies. The Medicare provisions include value-based payment programs, increased funding of comparative effectiveness
research, reduced hospital payments for avoidable readmissions and hospital acquired conditions, and pilot programs to evaluate
alternative payment methodologies that promote care coordination (such as bundled physician and hospital payments). Additionally,
the law includes a reduction in the annual rate of inflation for Medicare payments to hospitals that began in 2011 and the establishment
of an independent payment advisory board to recommend ways of reducing the rate of growth in Medicare spending.
Currently, the U.S. Congress
is considering legislation to repeal and replace the ACA. We cannot predict whether the ACA will be repealed, replaced, or modified
or how such repeal, replacement or modification may be timed or structured. As a result, we cannot quantify or predict the effect
of such repeal, replacement, or modification might have on our business and results of operations. However, any changes that lower
reimbursement for our products or reduce medical procedure volumes could adversely affect our business and results of operations.
The continuing efforts
of the government, insurance companies, managed care organizations and other payors of healthcare services to make and implement
healthcare reforms may adversely affect:
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our
ability to set a price we believe is fair for our product;
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our
ability to generate revenues and achieve or maintain profitability;
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the
availability of capital; and
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our
ability to obtain timely approval of any future product modifications.
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CMS has published final
regulations that implement provisions in ACA related to disclosure of payments made by manufacturers to physicians and teaching
hospitals, effective April 2013. Because we manufacture devices that are covered by the regulations, all payments that we make
to physicians and teaching hospitals are subject to this reporting requirement even if the payment relates to a device that is
not considered a covered device. The tracking and reporting of these payments could have an adverse impact on our business and/or
consolidated results of operations and financial condition and on our relationships with customers and potential customers.
We May Be Unable To
Adequately Protect Or Enforce Our Intellectual Property Rights Or Secure Rights To Third-Party Patents.
Our ability and the
abilities of our distributors to obtain and maintain patent and other protection for our product will affect our success. We are
assigned, have rights to, or have exclusive licenses to patents and patents pending in the U.S. and numerous foreign countries.
The patent positions of medical device companies can be highly uncertain and involve complex legal and factual questions. Our
patent rights may not be upheld in a court of law if challenged. Our patent rights may not provide competitive advantages for
our product and may be challenged, infringed upon or circumvented by our competitors. We cannot patent our product in all countries
or afford to litigate every potential violation worldwide.
Because of the large
number of patent filings in the medical device and biotechnology field, our competitors may have filed applications or been issued
patents and may obtain additional patents and proprietary rights relating to our product or processes competitive with or similar
to ours. We cannot be certain that U.S. or foreign patents do not exist or will not be issued that would harm our ability to commercialize
our product and future product candidates.
Pending And Future
Patent Litigation Could Be Costly And Disruptive And May Have An Adverse Effect On Our Financial Condition And Results Of Operations.
We operate in an industry characterized by extensive patent litigation. Potential patent claims include challenges to the
coverage and validity of the Company’s patents on our product or processes as well as allegations that the Company’s
product infringes patents held by competitors or other third parties. A loss in any of these types of cases could result in a
loss of patent protection or the ability to market our product, which could lead to a significant loss of sales, or otherwise
materially affect future results of operations.
The Company’s commercial
success will depend in part on not infringing the patents or violating the other proprietary rights of third parties. Intellectual
property litigation is expensive and complex and outcomes are difficult to predict. Any pending or future patent litigation may
result in significant damage awards, including treble damages under certain circumstances, and injunctions that could prevent
the manufacture and sale of an affected product or force us to make significant royalty payments in order to continue selling
the affected product. At any given time, we may be involved as either a plaintiff or a defendant in a number of patent infringement
actions, the outcomes of which may not be known for prolonged periods of time. As a healthcare supplier, we can expect to face
claims of patent infringement in the future. A successful claim of patent or other intellectual property infringement against
us could adversely affect our results of operations and financial condition.
The Value Of Our Granted
Patents, and Our Patents Pending, Is Uncertain.
Although our management strongly believes that our patent on the process for
producing Cesium-131, our patents on additional methods for producing Cesium-131 and other isotopes, our patent on the manufacture
of the brachytherapy seed, and anticipated future patent applications, which have not yet been filed, have significant value,
we cannot be certain that other like-kind processes may not exist or be discovered, that any of these patents is enforceable,
or that any of our patent applications will result in issued patents.
Failure To Comply
With Government Regulations Could Harm Our Business
. As a medical device and medical isotope manufacturer, we are subject
to extensive, complex, costly, and evolving governmental rules, regulations and restrictions administered by the FDA, the FAA
and other federal and state agencies, and by governmental authorities in other countries. Compliance with these laws and regulations
is expensive and time-consuming, and changes to or failure to comply with these laws and regulations, or adoption of new laws
and regulations, could adversely affect our business.
In the United States,
as a manufacturer of medical devices and devices utilizing radioactive by-product material, we are subject to extensive regulation
by federal, state, and local governmental authorities, such as the FDA and the Washington State Department of Health, to ensure
such devices are safe and effective. Regulations promulgated by the FDA under the U.S. Food, Drug and Cosmetic Act, govern the
design, development, testing, manufacturing, packaging, labeling, distribution, marketing and sale, post-market surveillance,
repairs, replacements, and recalls of medical devices.
The FAA has authority
to regulate, through its Office of Hazardous Materials Safety, the offering for shipment of hazardous materials, including radioactive
materials of the type marketed by the Company. Because we ship hazardous materials on flights in the U.S., the Company is subject
to these regulations, including periodic audit and, if applicable, enforcement action by the FAA. As they apply to the Company,
the FAA regulations concern the packaging and labeling of hazardous materials. If we fail to comply with these regulations, the
Company could face civil or criminal penalties. In Washington State, the Department of Health, by agreement with the federal Nuclear
Regulatory Commission (NRC), regulates the possession, use, and disposal of radioactive byproduct material as well as the manufacture
of radioactive sealed sources to ensure compliance with state and federal laws and regulations. Our Cesium-131 brachytherapy seeds
and constitute medical devices and radioactive sealed sources and are subject to these regulations.
Under the FDC Act, medical
devices are classified into three different categories, over which the FDA applies increasing levels of regulation: Class I, Class
II, and Class III. Our Proxcelan
®
Cesium-131 seed has been classified as a Class II device and has received clearance
from the FDA through the 510(k) pre-market notification process. Any modifications to the device that would significantly affect
safety or effectiveness, or constitute a major change in intended use, would require a new 510(k) submission. As with any submittal
to the FDA, there is no assurance that a 510(k) clearance would be granted to the Company.
The FDA has been considering
legislative, regulatory and/or administrative changes to the FDA’s 510(k) program. Various committees of the U.S. Congress
have also indicated that they may consider investigating the FDA’s 510(k) process. Under the current 510(k) rules, certain
types of medical devices can obtain FDA approval without lengthy and expensive clinical trials. We have received FDA approval
under the 510(k) rules for our product as sold in various formats. Our R&D programs and new product programs contemplate obtaining
any required FDA approvals under the current 510(k) rules. Any changes to the current 510(k) or related FDA rules that make such
rules more stringent or require more clinical data can significantly increase the time and costs associated with bringing new
product formats or product modifications to market. This may have a material adverse effect on our business, financial condition
and results of operations.
In addition to FDA-required
market clearances and approvals for our product formats, our manufacturing operations are required to comply with the FDA's Quality
System Regulation (QSR), which addresses requirements for a company’s quality program such as management responsibility,
good manufacturing practices, product and process design controls, and quality controls used in manufacturing. Compliance with
applicable regulatory requirements is monitored through periodic inspections by the FDA Office of Regulatory Affairs (ORA). We
anticipate both announced and unannounced inspections by the FDA. Such inspections could result in non-compliance reports (Form
483) which, if not adequately responded to, could lead to enforcement actions. The FDA can institute a wide variety of enforcement
actions ranging from public warning letters to more severe sanctions such as fines; injunctions; civil penalties; recall of our
product; operating restrictions; suspension of production; non-approval or withdrawal of pre-market clearances for new products
or existing products and criminal prosecution. There can be no assurance that we will not incur significant costs to comply with
these regulations in the future or that the regulations will not have a material adverse effect on our business, financial condition
and results of operations.
In addition to the ACA,
various healthcare reform proposals have also emerged at the state level. Like the ACA, these proposals could reduce medical procedure
volumes and impact the demand for our product or the prices at which we sell our product. The impact of these proposals could
have a material adverse effect on our business and/or consolidated results of operations and financial condition.
The automatic spending
cuts of nearly $1 trillion over the next 10 years that were included under the Budget Control Act of 2011, including up to a 2%
cut to Medicare providers and suppliers, took effect in 2013. Medicaid is exempt from these cuts. Any cuts to Medicare reimbursement
which affect our product could have a material adverse effect on our business and/or our consolidated results of operations and
financial condition.
The marketing of our
product in foreign countries will, in general, be regulated by foreign governmental agencies similar to the FDA. Foreign regulatory
requirements vary from country to country. The time and cost required to obtain regulatory approvals could be longer than that
required for FDA clearance in the United States and the requirements for licensing a product in another country may differ significantly
from FDA requirements. We will rely, in part, on foreign distributors to assist us in complying with foreign regulatory requirements.
We may not be able to obtain these approvals without incurring significant expenses or at all, and the failure to obtain these
approvals would prevent us from selling our product in the applicable countries. This could limit our sales and growth.
Quality Problems With
Our Product Could Harm Our Reputation For Producing A High-Quality Product And Erode Our Competitive Advantage, Sales, And Market
Share.
Quality is extremely important to us and our customers due to the serious and costly consequences of product failure,
which can include patient harm. Our operating results depend in part on our ability to sustain an effective quality control system
and effectively train and manage our employee base with respect to our quality system. Our quality system plays an essential role
in determining and meeting customer requirements, preventing defects and improving our product. While we have a network of quality
systems throughout our business lines and facilities, quality and safety issues may occur with respect to any of our product formats.
A quality or safety issue may result in a public warning letter from the FDA, product recalls or seizures, monetary sanctions,
injunctions to halt manufacturing and distribution of products, civil or criminal sanctions, refusal of a government to grant
clearances or approvals or delays in granting such clearances or approvals, import detentions of any future products made outside
the United States, restrictions on operations or withdrawal or suspension of existing approvals. Negative publicity regarding
a quality issue could damage our reputation, cause us to lose customers, or decrease demand for our product and product formats.
Any of the foregoing events could disrupt our business and have an adverse effect on our results of operations and financial condition.
Our Business Exposes
Us To Product Liability Claims.
Our design, testing, development, manufacture, and marketing of our product involve an inherent
risk of exposure to product liability claims and related adverse publicity. Our brachytherapy seed product delivers a highly concentrated
and confined dose of radiation directly to the organ in which it is implanted from within the patient’s body. Surrounding
tissues and organs are typically spared excessive radiation exposure. It is an inherent risk of the industries in which we operate
that we might be sued in a situation where our product results in, or is alleged to result in, a personal injury to a patient,
health care provider, or other user. Although we believe that as of the date of this Annual Report, we have adequate insurance
to address anticipated potential liabilities associated with product liability, any unforeseen product liability exposure in excess
of, or outside the scope of, such insurance coverage could adversely affect our financial condition and operating results. Any
such claim brought against us, with or without merit, could result in significant damage to our business. Insurance coverage is
expensive and difficult to obtain, and, although we currently have a five million dollar policy, in the future we may be unable
to obtain or renew coverage on acceptable terms, if at all. If we are unable to obtain or renew sufficient insurance at an acceptable
cost or if a successful product liability claim is made against us, whether fully covered by insurance or not, our business could
be harmed. The FDA’s medical device reporting regulations require us to report any incident in which our product may have
caused or contributed to a death or serious injury, or in which our product malfunctioned in a way that would be likely to cause
or contribute to a death or serious injury if the malfunction reoccurred. Any required filing could result in an investigation
of our product and possibly subsequent regulatory action against us if it is found that one of our products caused the death or
serious injury of a patient.
Our Business Involves
Environmental Risks.
Our business involves the controlled use of hazardous materials, chemicals, biologics, and radioactive
compounds. Manufacturing is extremely susceptible to product loss due to radioactive, microbial, or viral contamination; material
or equipment failure; vendor or operator error; or due to the very nature of the product’s short half-life. Although we
believe that our safety procedures for handling and disposing of such materials comply with state and federal standards, there
will always be the risk of accidental contamination or injury. In addition, radioactive, microbial, or viral contamination may
cause the closure of the manufacturing facility for an extended period of time. By law, radioactive materials may only be disposed
of at state-approved facilities. At our leased facility we use commercial disposal contractors. Subject to obtaining financing,
we are in the planning process of shutting down our leased manufacturing and office facility, planning the construction of a new
manufacturing and office facility to be owned by the Company on an adjacent property and moving to the new manufacturing facility.
Assuming it is constructed and licensed, we will incur costs related to the clean-up and disposal of hazardous materials, chemicals
and radioactive components of the leased facility. While management believes it has reserved a sufficient amount of funds for
this process, the Company may need more than the amount of the asset retirement obligation to meet the lease requirements and
to receive clearance from the Washington State Department of Health. We may incur substantial costs related to the disposal of
these materials. If we were to become liable for an accident, or if we were to suffer an extended facility shutdown, we could
incur significant costs, damages, and penalties that could harm our business.
In addition, certain
environmental laws assess liability on current or previous owners or operators of real property for the costs of investigation,
removal or remediation of hazardous substances or materials at their properties or at properties which they have disposed of hazardous
substances. Liability for investigative, removal and remedial costs under certain U.S. federal and state laws are retroactive,
strict and joint and several. In addition to cleanup actions brought by governmental authorities, private parties could bring
personal injury or other claims due to the presence of, or exposure to, hazardous substances. The ultimate cost of site cleanup
and timing of future cash outflows is difficult to predict, given the uncertainties regarding the extent of the required cleanup,
the interpretation of applicable laws and regulations, and alternative cleanup methods.
We Rely Upon Key Personnel.
Our success will depend, to a great extent, upon the experience, abilities and continued services of our executive officers,
sales staff and key scientific personnel. If we lose the services of several officers, sales personnel, or key scientific personnel,
our business could be harmed. Our success also will depend upon our ability to attract and retain other highly qualified scientific,
managerial, sales, and manufacturing personnel and their ability to develop and maintain relationships with key individuals in
the industry. Competition for these personnel and relationships is intense and we compete with numerous pharmaceutical and biotechnology
companies as well as with universities and non-profit research organizations. We are highly dependent on our direct sales organization
who promote and support our brachytherapy product. There is intense competition for skilled sales and marketing employees, particularly
for people who have experience in the radiation oncology market. Accordingly, we could find it difficult to hire or retain skilled
individuals to sell our product. Failure to retain our direct sales force could adversely affect our growth and our ability to
meet our revenue goals. There can be no assurance that our direct sales and marketing efforts will be successful. If we are not
successful in our direct sales and marketing, our sales revenue and results of operations are likely to be materially adversely
affected. We may not be able to continue to attract and retain qualified personnel.
Our Ability To Operate
In Foreign Markets Is Uncertain.
Our future growth will depend in part on our ability and the ability of our distributors
to establish, grow and maintain product sales in foreign markets, particularly in the European Union (EU). However, we have limited
experience in marketing and distributing our product in other countries. Foreign operations subject us to additional risks and
uncertainties, including our customers’ ability to obtain reimbursement for procedures using our product in foreign markets;
the burden of complying with complex and changing foreign regulatory requirements; time-sensitive delivery requirements due to
the short half-life of our product; language barriers and other difficulties in providing long-distance customer service; potentially
increased time to collect accounts receivable; significant currency fluctuations, which could cause third-party distributors to
reduce the amount of our product they purchase from us because the cost of our product to them could fluctuate relative to the
price they can charge their customers; reduced protection of intellectual property rights in some foreign countries; and the possibility
that contractual provisions governed by foreign laws would be interpreted differently than intended in the event of a contract
dispute. In addition, the significant appreciation of the U.S. dollar during the past year has made our product much more expensive
in overseas markets. Any future foreign sales of our product could also be adversely affected by export license requirements,
the imposition of governmental controls, political and economic instability, trade restrictions, changes in tariffs, and difficulties
in staffing and managing foreign operations. Many of these factors may also affect our ability to import Cesium-131 from Russia
under our contract with JSC INM. Sanctions placed on financial transactions with Russian banking institutions may interfere with
the Company’s ability to transact business in Russia on a temporary or other basis resulting in an interruption of the Cs-131
supply which could have a temporary material adverse effect on the Company’s business, operating results and financial condition.
Our Ability To Expand
Operations And Manage Growth Is Uncertain.
Our efforts to expand our operations will result in new and increased responsibilities
for management personnel and will place a strain upon the entire company. To compete effectively and to accommodate growth, if
any, we may be required to continue to implement and to improve our management, manufacturing, sales and marketing, operating
and financial systems, procedures and controls on a timely basis and to expand, train, motivate and manage our employees. There
can be no assurance that our personnel, systems, procedures, and controls will be adequate to support our future operations. If
the Cesium-131 seed were to rapidly become the “seed of choice,” it is unlikely that we could immediately meet demand.
This could cause customer discontent and invite competition. There can be no assurance that our personnel, systems, procedures,
and controls will be adequate to immediately react to that growth.
We Rely On The Performance
Of Our Information Technology Systems And Those of Third Parties, The Failure Of Which Could Have An Adverse Effect On Our Business
And Performance.
Our business requires the continued operation of sophisticated information technology systems and network
infrastructure. These systems are vulnerable to interruption by fire, power loss, system malfunction, computer viruses, cyber-attacks
and other events, which may be beyond our control. Systems interruptions could reduce our ability to accept customer orders, manufacture
our product, or provide service for our customers, and could have an adverse effect on our operations and financial performance.
The level of protection and disaster-recovery capability varies from site to site, and there can be no guarantee that any such
plans, to the extent they are in place, will be totally effective. In addition, security breaches of our information technology
systems could result in the misappropriation or unauthorized disclosure of confidential information belonging to us, our employees,
partners, customers, or our suppliers, which may result in significant costs and potential government sanctions. In particular,
if we are unable to adequately safeguard individually identifiable health information, we may be subject to additional liability
under domestic and international laws respecting the privacy and security of health information.
We also rely on third
party vendors to supply and/or support certain aspects of our information technology systems. Third party systems may contain
defects in design or manufacture or other problems that could result in system disruption or unexpectedly compromise the information
security of our own systems, and we are dependent on these third parties to provide reliable systems and software and to deploy
appropriate security programs to protect their systems.
If we are unable to maintain
reliable information technology systems and prevent disruptions, outages, or data breaches, we may suffer regulatory consequences
in addition to business consequences. We have programs to ensure compliance with such laws and regulations. However, there is
no guarantee that we will avoid enforcement actions by governmental bodies. Enforcement actions may be costly and interrupt regular
operations of our business. In addition, there has been a developing trend of civil lawsuits and class actions relating to breaches
of consumer data held by large companies or incidents arising from other cyberattacks.
Our information technology
systems require an ongoing commitment of significant resources to maintain, protect, and enhance existing systems and develop
new systems to keep pace with continuing changes in information processing technology, evolving legal and regulatory standards,
the increasing need to protect patient and customer information, and the information technology needs associated with our changing
products and services. There can be no assurance that our process of consolidating, protecting, upgrading and expanding our systems
and capabilities, continuing to build security into the design of our products, and developing new systems to keep pace with continuing
changes in information processing technology will be successful or that additional systems issues will not arise in the future.
Any significant breakdown, intrusion, interruption, corruption, or destruction of these systems, as well as any data breaches,
could have a material adverse effect on our business. If our information technology systems, products or services or sensitive
data are compromised, patients or employees could be exposed to financial or medical identity theft, and we could lose existing
customers, have difficulty attracting new customers, have difficulty preventing, detecting, and controlling fraud, be exposed
to the loss or misuse of confidential information, have disputes with customers, physicians, and other health care professionals,
suffer regulatory sanctions or penalties under federal laws, state laws, or the laws of other jurisdictions, experience increases
in operating expenses or an impairment in our ability to conduct our operations, incur expenses or lose revenues as a result of
a data privacy breach, product failure, information technology outages or disruptions, or suffer other adverse consequences including
lawsuits or other legal action and damage to our reputation.
Fluctuations In Insurance
Cost And Availability Could Adversely Affect Our Profitability Or Our Risk Management Profile.
We hold a number of insurance
policies, including product liability insurance, directors’ and officers’ liability insurance, and workers’
compensation insurance. If the costs of maintaining adequate insurance coverage increase significantly in the future, our operating
results could be materially adversely affected. Likewise, if any of our current insurance coverage should become unavailable to
us or become economically impractical, we would be required to operate our business without indemnity from commercial insurance
providers. If we operate our business without insurance, we could be responsible for paying claims or judgments against us that
would have otherwise been covered by insurance, which could adversely affect our results of operations or financial condition.
We
Have Incurred Significant Losses To Date, And There Is No Guarantee That We Will Ever Become Profitable.
We incurred net losses
of $6,161,798 and $4,710,808 in the fiscal years ended 2017 and 2016, respectively. In addition, we have accumulated deficit from
the inception of business through June 30, 2017 of $72,604,106. The costs for research and product development of our product
formats along with marketing and selling expenses and general and administrative expenses have been the principal causes of our
losses. We may not ever become profitable.
We May Need Additional
Capital In The Future To Maintain Our NYSE MKT Listing And For Acquisitions And Expansion Into Other Markets.
Our Common Stock
is currently listed on the NYSE MKT stock exchange which will consider delisting a company’s securities if, among other
things, the company fails to maintain minimum stockholder's equity. With our existing cash reserves we believe we will not be
able to maintain our listing on the NYSE MKT unless we raise capital in the next nine to 12 months assuming we maintain our projected
budgeted expenses and contemplated level of revenues. In the event that our common stock is delisted from the NYSE MKT, trading,
if any, in the common stock would be conducted in the over-the-counter market. As a result, our shareholders would likely find
it more difficult to dispose of, or to obtain accurate quotations as to the market value of, our common stock. We may also need
to raise capital for strategic acquisitions or expansion into other markets and there is no assurance management will not pursue
this additional capital if available.
Risks Related to Our Stock and Reporting
Requirements
Our Reporting Obligations
As A Public Company Are Costly.
Reporting requirements of a public company change depending on the reporting classification
in which the Company falls as of the end of its second quarter of each fiscal year. The Company is currently a “smaller
reporting company” which falls in the non-accelerated filer category of filer with a public float less than $75 million.
If the Company were to be reclassified to the category of “accelerated filer,” the Company would have the additional
requirement and cost of a Section 404 audit as part of its Form 10-K filing, as well as other expenses making the public reporting
process more costly.
Our Stock Price Is
Likely To Be Volatile.
The market price of our common stock has experienced fluctuations and is likely to fluctuate significantly
in the future. For example, during fiscal 2017 the closing price of one share of our common stock reached a high of $0.87 and
a low of $0.51. There is generally significant volatility in the market prices and limited liquidity of securities of early stage
companies, and particularly of early stage medical product companies. Contributing to this volatility are various events that
can affect our stock price in a positive or negative manner. These events include, but are not limited to: governmental approvals
or refusals to approve of regulations or actions; market acceptance and sales growth of our product; litigation involving the
Company or our industry; developments or disputes concerning our patents or other proprietary rights; changes in the structure
of healthcare payment systems; departure of key personnel; future sales of our securities; fluctuations in our financial results
or those of companies that are perceived to be similar to us; swings in seasonal demands of purchasers; investors’ general
perception of us; and general economic, industry and market conditions. In addition, the securities of many medical device companies,
including us, have historically been subject to extensive price and volume fluctuations that may affect the market price of their
common stock. If any of these events occur, it could cause our stock price to fall.
The Price Of Our Common
Stock May Be Adversely Affected By The Future Issuance And Sale Of Shares Of Our Common Stock Or Other Equity Securities.
We
cannot predict the size of future issuances or sales of our common stock or other equity securities for future acquisitions or
capital raising activities, or the effect, if any, that such issuances or sales may have on the market price of our common stock.
The issuance and sale of substantial amounts of common stock or other equity securities or announcement that such issuances and
sales may occur, could adversely affect the market price of our common stock.
We Do Not Expect To
Pay Any Dividends For The Foreseeable Future.
We do not anticipate paying any dividends to our shareholders for the foreseeable
future except for dividends on the Series B Preferred Stock, which we intend to pay on or before December 31, 2017. Shareholders
must be prepared to rely on sales of their common stock after price appreciation to earn an investment return, which may never
occur. Any determination to pay dividends in the future will be made at the discretion of our Board of Directors and will depend
on our results of operations, financial conditions, contractual restrictions, restrictions imposed by applicable laws and other
factors that our Board deems relevant.
Certain Provisions
of Minnesota Law and Our Charter Documents Have An Anti-Takeover Effect.
There exist certain mechanisms under Minnesota law
and our charter documents that may delay, defer or prevent a change of control. Anti-takeover provisions of our articles of incorporation,
bylaws and Minnesota law could diminish the opportunity for shareholders to participate in acquisition proposals at a price above
the then-current market price of our common stock. For example, while we have no present plans to issue any preferred stock, our
Board of Directors, without further shareholder approval, may issue shares of undesignated preferred stock and fix the powers,
preferences, rights and limitations of such class or series, which could adversely affect the voting power of the common shares.
In addition, our bylaws provide for an advance notice procedure for nomination of candidates to our Board of Directors that could
have the effect of delaying, deterring or preventing a change in control. Further, as a Minnesota corporation, we are subject
to provisions of the Minnesota Business Corporation Act (MBCA) regarding “business combinations,” which can deter
attempted takeovers in certain situations. Pursuant to the terms of a shareholder rights plan adopted in February 2007 and renewed
in February 2017, each outstanding share of common stock has one attached right. The rights will cause substantial dilution of
the ownership of a person or group that attempts to acquire the Company on terms not approved by the Board of Directors and may
have the effect of deterring hostile takeover attempts. The effect of these anti-takeover provisions may be to deter business
combination transactions not approved by our Board of Directors, including acquisitions that may offer a premium over the market
price to some or all shareholders. We may, in the future, consider adopting additional anti-takeover measures. The authority of
our Board to issue undesignated preferred or other capital stock and the anti-takeover provisions of the MBCA, as well as other
current and any future anti-takeover measures adopted by us, may, in certain circumstances, delay, deter or prevent takeover attempts
and other changes in control of the Company not approved by our Board of Directors.