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 2016 is equivalent to the year ended
June 30, 2016).
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 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 an Internet site (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 Brien Ragle, CFO, 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.
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. 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). On the low-risk end of the prostate cancer treatment spectrum, 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.
(Mendez MH, et al.
(June 2015)
Current trends and new frontiers in focal therapy for localized prostate cancer.
Current
Urology Report 16:35)
In December 2007, IsoRay
began selling its Cs-131 seeds for the treatment of ocular melanoma. This treatment market has been limited and generated a minimal
amount of revenue for the Company. In June 2009, the Company began selling its Cs-131 seeds for treatment of head and neck tumors
which provides a treatment for a tumor that could not be accessed by other treatment modalities. The Company obtained clearance
in August 2009 from the FDA to permit the loading Cs-131 seeds into bio-absorbable braided sutures, which are commonly referred
to in the industry as braided strands. The addition of this capability furthered the physician’s ability to use Cs-131 seeds
in the treatment of brain, lung, and head and neck tumors as well as another option for physicians to use in tumors in other organs.
This capability led to three additional treatments during fiscal year 2010, by adding lung cancer in August 2009, colorectal cancer
in October 2009, and chest wall cancer in December 2009. Two more treatments were added in fiscal year 2011 as the result of the
braided strand clearance which included the addition of the treatment of brain cancer in September 2010 and the treatment of gynecological
cancer in December 2010 for a total of five new treatment sites through the clearance of the braided strand.
In 2010, the
Company began providing technical assistance and selling Cs-131 brachytherapy seeds for use by physicians at the University
of Kentucky, College of Medicine, performing treatments in women who had recurrent cancers of the uterus, cervix or vagina.
Cs-131 brachytherapy seeds were used as an alternative treatment option for patients who faced a very radical surgery to
treat their recurrent cancers. The Cs-131 brachytherapy seeds provided an improved quality of life over the surgical
treatment option. 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 (Feddock, J., et al.,
Permanent interstitial re-irradiation
with cesium-131: a highly successful second chance for cure in recurrent pelvic malignancies.
Brachytherapy
15
(S1):
p. 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. (Feddock, J., et al.,
Outpatient
interstitial implants - integrating cesium-131 permanent interstitial brachytherapy into definitive treatment for gynecologic
malignancies.
Brachytherapy
15
(S1): p. S93-4, 2016).
In March 2011, the Company
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 for treatment of prostate, brain,
lung, and head and neck tumors as well as tumors in other organs.
From August 2011 to
May 2014, Medical received clearances from the FDA and other governmental agencies permitting production and sale of the
GliaSite
®
Radiation Therapy System (GliaSite
®
RTS) in North America and Europe.
In
March 2016, the Company discontinued the GliaSite
®
RTS product, as anticipated sales failed to occur
domestically Management believes this was due to increased use of braided strands for brain treatment and in Europe due to a
loss of competitive pricing resulting from a strong dollar.
Starting in 2012, multiple
institutions began utilizing Cs-131 brachytherapy seeds loaded in braided strands for treatment of brain, head and neck, lung
and gynecological 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 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.
1,2,3,4
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 & neck and lung cancer.
5,6
During fiscal
2013, the Company began providing technical assistance and selling
Cesium-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 tumor 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. (Brachman, D.,
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
th
, 2016.)
1
- Pham, A., 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): p. 63-71, 2016.
2
- Wernicke, A.G., et al.,
Surgical technique and clinically relevant resection cavity dynamics following implantation of cesium-131 brachytherapy in patients
with brain metastases.
Operative Neurosurgery, 2016. 12(1): p. 49-60, 2016.
3
- Wernicke, A.G., et al.,
Cesium-131 brachytherapy for recurrent brain metastases: durable salvage treatment for previously irradiated metastatic disease.
J Neurosurg: Published online June 3, 2016; DOI: 10.3171/2016.3.JNS152836.
4
- Wernicke, A.G., 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): p. 145-53, 2016.
5
- Parashar, B., et al.,
Analysis
of stereotactic radiation vs. wedge resection vs. wedge resection plus Cesium-131 brachytherapy in early stage lung cancer
.
Brachytherapy 14(5): p. 648-54, 2015.
6
- Pham, A., 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): p. 445-52, 2015.
While management has
not identified additional opportunities to expand treatment to other sites in the body other than those discussed above, we continue
to investigate potential new opportunities with interested physicians and medical facilities. Management continues to focus on
promoting its products into all therapy markets. Cs-131 has unique properties for cancer treatment. Cs-131 has the shortest half-life
of low dose rate brachytherapy isotopes, the fastest delivery of a therapeutic dose of radiation and the lowest total radiation
exposure for all low dose rate brachytherapy isotopes. These unique properties have opened new treatment options for the application
of permanent implant brachytherapy (such as brain, head and neck, lung and gynecological cancers) that are not as viable with competing
isotopes. Recent clinical and institutional results have demonstrated the effectiveness of treating high risk recurrent cancers
in the brain, head and neck, lung and gynecological cancers with Cesium-131. The Company is continuing to research other delivery
systems that will assist in bringing Cesium products to the market.
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 180,890 new cases of prostate cancer diagnosed and an estimated 26,120 deaths associated
with the disease in the United States in 2016.
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:
|
§
|
The extent of the main tumor (T category);
|
|
§
|
Whether the cancer has spread to nearby lymph nodes (N category); and
|
|
§
|
Whether the cancer has metastasized (spread) to other parts of the body (M category).
|
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) recommends
against the use of the PSA test. As a result of the recommendation, prostate cancer diagnosis dropped by 12.2% the month after
the recommendation and has continued to drop
. (
Barocas DA, 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).
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 recently 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.
Still, 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., British Journal of Urology International,
Vol. 109 (Suppl 1), 2012; Merrick, et al., Techniques in Urology, Vol. 7, 2001; Potters, et al., Journal of Urology, May 2005;
Sharkey, et al., 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 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. (Martin JM, Handorf EA,
Kutikov A, et al. (2014)
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.)
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 nerve 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. (Martin JM,
Handorf EA, Kutikov A, et al. (2014)
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:
Use of brachytherapy for the treatment
of localized prostate cancer in the National Cancer Data Base. Cancer
120:2114–2121, 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. 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. (Mahmood U, Pugh T, Frank S, et al.
(2014)
Declining use of brachytherapy
for the treatment of prostate cancer. Brachytherapy
13:157–162) Side effects of these treatments can include bowel problems,
bladder problems, urinary incontinence, impotence, fatigue, lymphedema, and urethral stricture. (American Cancer Society, 2016)
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
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. (American Cancer Society, 2016)
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 extensions or high risk prostate cancers that have metastasized or grown outside the prostate. Combination
therapy treats high risk patients with a full 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. (American Cancer Society,
2015) 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. (American Cancer Society, 2016)
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.
|
So far, no large 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. (American
Cancer Society, 2016)
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. (American Cancer Society, 2016)
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 (Zelefsky MJ, 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,
2007, 327-333).
Other studies have demonstrated
similar, durably high rates of control following brachytherapy for localized prostate cancer out to 15 years post-treatment (Sylvester
J, 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, 2007, 57-64). 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 (Ciezki JP. "Prostate
brachytherapy for localized prostate cancer"
Current Treatment Options in Oncology
, Volume 6, 2005, 389-393).
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 improved clinical outcomes over I-125 and Pd-103, perhaps due
to its shorter half-life. (Shah AB, Shah AA, Fortier GA. A comparison of AUA symptom scores following permanent low dose rate prostate
brachytherapy with iodine-125 and cesium-131. Brachytherapy 2013 12(Suppl. 1)S64)
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 (Buron C,
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, 2007, 812-822).
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 industry growth and facilitate meaningful penetration into the treatment
of other forms of cancer such as lung cancer.
|
|
Isotope Delivery Over Time
|
|
Isotope
|
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 (Benoit RM, et al. “Five year prostate-specific antigen outcomes after
caesium prostate brachytherapy.” Clinical Oncology, Volume 26, 2014, 776-780).
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 elevated risk cases (especially intermediate risk localized prostate cancers) and
a more rapid resolution of side effects. 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 (Moran BJ, Braccioforte MH. PSA Outcomes in a Single Institution, Prospective Randomized 131Cs/125I
Prostate Brachytherapy Trial. (
Brachytherapy
2014 13(S1)S34). 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
2014 13(S1)S38).
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 (Prestidge B. et al. Five-year biochemical control following
Cesium-131 Permanent Prostate Brachytherapy in a Multi-Institutional Trial.
Brachytherapy
2011 10(3S1)S27.), 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 (Frank
SJ, 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, 2007,
2151-2156). 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. (Shah H, et al. A comparison of AUA symptom scores following permanent low-dose-rate
prostate brachytherapy with Iodine-125 and Cesium-131. Brachytherapy 2013:12(SI)S64)).
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. (Prestidge
BR, Bice WS, "Clinical outcomes of a Phase II, multi-institutional Cesium-131 permanent prostate brachytherapy trial".
Brachytherapy
, Volume 6, Issue 2, April-June 2007, Page 78).
2. Gland coverage
was excellent and the dose delivered to critical structures outside the prostate was well within acceptable limits. (Bice WS, Prestidge
BR, "Cesium-131 permanent prostate brachytherapy: The dosimetric analysis of a multi-institutional Phase II trial".
Brachytherapy
2007(6); 88-89.).
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 (Shah AB, Shah
AA, Fortier GA. 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 2013 12(Suppl. 1)S64):
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.
Non-Prostate Product
Offerings
Brain Cancer Treatment
Options
An estimated 23,770 new
cases of malignant primary tumors of the brain or spinal cord are expected to be diagnosed in 2016. About 16,050 people are expected
to die from brain and spinal cord tumors in 2016. 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 man will develop a malignant tumor of the brain or spinal cord is about 1 in 140 and for a woman is 1 in 180.
These numbers would be much higher if benign tumors were also included. (American Cancer Society, 2016).
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 2016, there were sixty-two patients treated with Company products
for brain cancer.
Lung Cancer Treatment
Options
An estimated 224,390
new cases of lung cancer are expected in 2016, accounting for 13% of all cancer diagnoses in the United States. Approximately 27%
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 158,080 deaths will result from lung cancer in 2016. Approximately 2 of 3 people diagnosed with lung cancer
will be older than 65 and fewer than 2% will be younger than 45 years old. Overall, the chance of developing lung cancer is 1 in
17 for a woman and 1 in 14 for a man (combined for both smokers and non-smokers). Naturally, the risk for smokers is much higher
and for non-smokers the risk is lower. (American Cancer Society 2016)
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, 2016)
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. (Parashar, B., et al.,
Analysis of stereotactic radiation vs. wedge resection vs. wedge resection
plus Cesium-131 brachytherapy in early stage lung cancer.
Brachytherapy
14
(5): p. 648-54, 2015).
During
the fiscal year 2016, there were thirteen patients treated with Company products for lung cancer.
Head and Neck Cancer
Treatment Options
An estimated 48,330 new
cases of head and neck cancer are expected to be diagnosed in the United States in 2016. (American Cancer Society, 2016)
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, 2016)
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 2016, there were sixteen patients that were treated with Company products for head and neck cancers.
Gynecological Cancer
Treatment Options (Cervical, Vaginal and Vulvar Cancer)
An estimated 23,560 new
cases of cervical (12,990), vaginal (4,620) and vulvar (5,950) cancers are expected to be diagnosed in the United States in 2016.
A combined estimate of 6,180 deaths are expected to occur from cervical, vaginal and vulvar cancers in the United States in 2016
(American Cancer Society, 2016). 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. (American
Cancer Society, 2016)
During 2016, two abstracts
1,2
and presentations were presented at the World Brachytherapy Conference in San Francisco on the treatment of Re-Irradiation
with Cesium -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 2016, there were thirty-one patients treated with Company
products for gynecological cancers.
1
- Feddock, J., et al.,
Permanent
interstitial re-irradiation with cesium-131: a highly successful second chance for cure in recurrent pelvic malignancies
. Brachytherapy
15(S1): p. S78-9, 2016.
2
- Feddock, J., et al.,
Outpatient interstitial implants - integrating cesium-131 permanent interstitial brachytherapy into
definitive treatment for gynecologic malignancies
. Brachytherapy 15(S1): p. S93-4, 2016.
Colorectal Treatment
Options
An estimated 134,490
new cases of colorectal cancer are expected in the United States in 2016 (American Cancer Society, 2016). Colorectal cancer is
expected to cause an estimated 49,190 deaths during 2016.
For the treatment of
early stage colon and rectal cancers, surgery is often the main treatment. For the treatment of colorectal cancers beyond early
stage, other surgery treatments, radiation therapy, chemotherapy, and targeted therapies can be used. (American Cancer Society,
2016)
Low-dose rate (LDR) brachytherapy,
including Cs-131, is typically utilized in treating individuals with rectal cancer who are not healthy enough to tolerate curative
surgery. This is generally a one-time only procedure and does not require ongoing visits as is common with other types of radiation
therapy. Management believes that the advantages provided by Cs-131 radioisotope shown through the treatment of other cancers will
benefit patients utilizing Cs-131 brachytherapy seeds in the treatment of their colorectal cancers with low-dose rate brachytherapy.
The treatment of colorectal cancer is an additional non-prostate application of the Company’s product which by itself is
not a significant portion of the Company’s business. However, when aggregated with the other non-prostate applications, it
contributes to the overall growth in the Company’s non-prostate applications. During the fiscal year 2016, there were no
patients that were treated with Company products for colorectal cancers.
Ocular Melanoma Treatment
Options
Approximately 2,810 new cases of cancers of the eye and orbit (primarily melanoma) will be diagnosed
in 2016 (American Cancer Society, 2016). Eye and orbit cancers are expected to cause an estimated 280 deaths during 2016. In
addition to brachytherapy to treat ocular melanoma, other treatment options include surgery, external beam radiation,
conformal proton beam radiation therapy, stereotactic radiosurgery, chemotherapy, laser therapy, targeted drugs and
immunotherapy.
Brachytherapy has become
the most commonly used radiation treatment for most eye melanomas. Studies have shown that in many cases it is as effective as
surgery (enucleation). Brachytherapy using Cs-131, I-125, or Pd-103 is done by placing the seeds in a plaque (shaped like a small
cap) that is attached to the eyeball with minute stitches in a procedure that lasts 1 to 2 hours and is usually kept in place for
4 to 7 days. The patient generally stays in the hospital until the plaque is removed from the eye during a procedure that takes
less than 1 hour. Brachytherapy cures approximately 9 out of 10 small tumors and can preserve the vision of some patients. (American
Cancer Society, 2016) Management believes that while Cs-131 provides the best treatment alternative, it is at a disadvantage to
I-125 or Pd-103 as a result of Cs-131's short half-life, which requires it to be ordered and manufactured for each procedure and
unable to be inventoried. Most patients are unwilling to wait for it to be ordered when the other products are often available
immediately. The treatment of ocular melanoma was the first opportunity for the Company to utilize the Cs-131 brachytherapy seed
in a treatment other than a prostate application but does not comprise any portion of the Company’s business, and is not
anticipated to become a viable market for the Cesium-131 application.
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,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
United States
|
|
|
99.64
|
%
|
|
|
99.57
|
%
|
|
|
96.88
|
%
|
Non – United States
|
|
|
0.36
|
%
|
|
|
0.43
|
%
|
|
|
3.12
|
%
|
Total
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
Our Strategy
The key elements of IsoRay's
strategy for fiscal year 2017 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 VP 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
two 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 is expected to launch in September 2016 that focuses its messages tailored to specific decision
makers including the physician, patient, family and friends. The new website will support 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, head
and neck and lung cancers.
Increase utilization
of Cesium-131 in treatment of other solid tumor applications such as brain, gynecological, head and neck and lung 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 2016,
five presentations were accepted by and presented at the annual meeting of the American Brachytherapy Society describing Cs-131
treatment of prostate, gynecologic and head & neck cancers. Two presentations were accepted at the annual meeting of the
American Society for Radiation Oncology (ASTRO) in October 2015. 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.
IsoRay had an
unannounced inspection related to its ISO13485:2003 certification from British Standards Institution (BSI) with no
nonconformities in October 2015. The Company also underwent a microbiologic audit and a surveillance audit in November 2015
and March 2016 respectively. The Company is subject to a recertification audit every three years, two annual maintenance
audits and one additional unannounced audit for a total of four audits during each three year period. The successful audit
confirms 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-1 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, 2015, Medical entered into a new supply contract (the INM Agreement) with The Open Joint
Stock Company, Isotope, a Russian company (JSC Isotope). With the current INM Agreement, Medical can purchase Cs-131 from the Institute
of Nuclear Materials, within the quality standards and within the time periods specified, through March 31, 2017.
The Company also receives
irradiated barium from the University of Missouri Research Reactor (MURR), located in the United States. For the fiscal year 2016,
approximately eighty-three percent (83%) of our Cs-131 was supplied by our Russian supplier and approximately seventeen percent
(17%) of Cs-131 was generated by the irradiated barium from MURR. The Company plans to expand the amount of Cs-131 provided by
the MURR reactor in fiscal year 2017, but there is no assurance as to when or if this will occur.
Management
believes that failure to obtain deliveries of Cs-131 from its Russian supplier <<JSC Isotope>> 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 is negotiating a new supply agreement with its
existing domestic supplier that will provide additional isotope in the near future. Step Two: the Company is examining the
possibility of performing chemical separation at the MURR facility, thereby allowing for a significant increase in isotope
yield without incurring significant additional irradiation costs. Step Three: the Company is refining a plan to utilize its
stock of enriched barium as a contingency in the case of an outage at one or both of its current isotope providers or at a
new isotope supplier.
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 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. 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.
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 2016, the
Company delivered approximately 58% of its Cs-131 seeds to customers configured in Mick
®
cartridges, approximately
28% of the Cs-131 seeds configured in stranded and pre-loaded in a needle form, 7% 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 4% 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.
As of June 30, 2016, IsoRay
had one entity that handled radiopharmacy services at the request of certain individual customers that were able to assay, preload,
and sterilize loose seeds. Shipping Cs-131 brachytherapy seeds to independent radiopharmacies requires loading the seeds with additional
volume of isotope activity than would be required if the seeds were to be preloaded utilizing our in-house loading facility, which
causes the Company to incur additional isotope cost to allow for the additional isotope decay created by the additional processing
time. The Company pre-loaded 96% and 97% of the Cs-131 brachytherapy seeds that it sold to customers during the fiscal years 2016
and 2015, respectively. The Company anticipates continuing to load a significant majority of its customer orders during fiscal
year 2017 unless there is a specific customer requirement for which the Company does not have the loading capability or capacity.
Independent radiopharmacies
traditionally provide the final packaging of the product delivered to the end user thereby eliminating the opportunity for reinforcing
the "branding" of our seed product. By providing our own repackaging service, we are able to preserve the product branding
opportunity, reduce isotope decay loss, control overall product quality and eliminate any concerns related to the handling of our
product by a third party prior to receipt by 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 the additional three year term to April 30, 2019, 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 is continuing through the design process in
anticipation that acceptable financing will be found.
Management believes that construction of the facility will take
12 to 15 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 2016, 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.
Management determined that
a complete overhaul of the Company’s public brand was needed. A marketing firm was hired to review the Company’s existing
market position, brand, products and customers. Based on this market research, management developed a new marketing strategy, focused
on capturing more market share in the prostate cancer treatment market segment, while continuing to position the Company products
for cancer treatment at other body sites. The expected launch of the new marketing plan is the Fall of 2016, including a complete
redesign of the Company brand, website and collateral materials.
In addition, the Company
has started the process to reestablish 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 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 increase 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,
when launched in the Fall of 2016, will deliver the message that Cs-131 is a treatment option for cancers throughout the
body. IsoRay is developing and/or refreshing print and visual media (including physician brochures discussing the clinical
advantages of Cs-131, clinical information binders, informational DVDs, and single sheet glossies with targeted clinical
data). 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);
|
|
§
|
Society for Neuro-Oncology (SNO);
|
|
§
|
American Association of Neurological Surgeons (AANS);
|
|
§
|
American Association for Thoracic Surgery (STS); 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 scheduled for launch in the Fall of 2016 (located at www.isoray.com and
www.proxcelan.com
), patient advocacy efforts, informational patient brochures and DVDs with
patient testimonials, patient focused informational website (www.proxcelan.com), 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.
The Company also 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,
we target 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 concurrence approval 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 VP 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
VP of Sales and Marketing, the addition of two new senior territory managers, and the addition of the Director of
Marketing, 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 expand its customer base outside the U.S. market through use of established distributors in the key markets of other countries.
As of September 1, 2016, 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. 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.
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 equivalent to the cost of the seeds.
It is expected that this reimbursement system established in January 2010 will continue as currently scheduled through calendar
2017 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. At this time, the costs of
our loose seeds (which sometimes is the preferred configuration for the physician) is less than the amount reimbursed by CMS. However,
typically physicians order so few loose seeds that it does not appear to be a significant impairment to the sales process.
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 plans
on submitting application 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 on-par treatment of brachytherapy for reimbursement
by CMS and private insurers with other treatment methods simply as the result of the radiation being 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.
An alternative to the application process would be to seek a legislative effort to establish appropriate payment.
Other Information
Customers
The following are
the Company’s top five customers, facilities or physician practices that utilize multiple surgical facilities at which
primarily prostate brachytherapy procedures are performed, accounted for approximately 53.21% of the total Company product
sales for the twelve months ended June 30, 2016:
Facility
|
|
Location
|
|
% of revenue
|
|
El Camino, Los Gatos, & other facilities (1)
|
|
Northern CA
|
|
|
24.20
|
%
|
Bon Secours DePaul
|
|
MD
|
|
|
9.03
|
%
|
University of Pittsburg Medical Center – Mercy
|
|
PA
|
|
|
8.47
|
%
|
MD Anderson Cancer Center
|
|
TX
|
|
|
6.17
|
%
|
Highline South Ambulatory Surgery Center
|
|
CO
|
|
|
5.34
|
%
|
Total
|
|
|
|
|
53.21
|
%
|
|
(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 $41,361 in the year ended June 30,
2016 when compared to the year ended June 30, 2015.
|
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 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 patent from 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 2016 and 2015, the Company recorded royalty
expense of $18,317 and $14,448, 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, 2016, IsoRay and its subsidiaries incurred approximately $1.81 million in costs related to research and development
activities. The Company expects to continue ongoing research and development activities for the foreseeable future.
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. 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 five 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, 2016,
IsoRay employed 41 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, 2016, 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-six percent of our
sales). We have been treating brain cancer which amounted to approximately eight percent of our product sales, gynecological
cancer which amounted to approximately three percent of our product sales, lung cancer which amounted to two percent
of our product sales, head and neck cancer which amounted to approximately 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 2016. 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.
Unfavorable
Industry Trends in the Prostate Market.
Several factors which began in fiscal 2009 have caused our revenues to significantly
decline. These factors continued into fiscal year 2014, contributing to our failure to improve sales in the prostate market until
the past two fiscal years when we experienced an increase in sales over fiscal year 2014, but this improvement was 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 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.
As
of the end of fiscal 2016, the U.S. Preventative Services Task Force has not further revised its advice regarding PSA testing and
continues to advise that the decision to be screened for prostate cancer should be made after getting information about the uncertainties,
risks, and potential benefits of prostate cancer screening. This advice has led to an increased number of men electing to forgo
PSA testing.
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 2016, 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 2017.
We
Rely Heavily On Five Customers.
Approximately fifty-three percent (53%) of the Company’s revenues are dependent on five
customers and approximately twenty-four percent (24%) 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 2016, approximately eighty-three percent (83%) of our Cesium-131 was supplied through JSC INM from
a reactor located in Russia. Our current contract with JSC INM terminates on March 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. Management is evaluating
other reactors in Belgium and South Africa that meet current specifications to yield Cesium-131 of the purity that the Company
requires for use in its product but thus far has only confirmed such availability from MURR in the United States. Management is
negotiating a new contract with MURR which it believes will substantially increase the supply it receives from MURR but there is
no assurance as to if and when this contract will be executed.
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 two currently used.
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 other 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 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
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 A
Single Russian Supplier 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. 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 March 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 March 2017, which could be due in part
to risks associated with foreign operations and beyond either our or JSC INM's control. If we were unable to obtain supplies
of isotopes from Russia in the future, our overall supply of Cesium-131 could be reduced significantly unless we have a
source of enriched barium for utilization in domestic reactors or expanded capacity beyond the quantity that we already
contract for or find other foreign reactors. The Company has performed a search for enriched barium as part of its annual
impairment testing for its existing inventory of enriched barium and has found no other entity that could supply the required
quantities of enriched barium. While recent testing of regions within the reactor at MURR has found that Cesium-131 can be
produced in economically viable quantities at a viable price, there is no assurance that we can obtain the increased quantity
of isotope at the pricing and quantities that the Company requires in the long term. 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 supplier. Currently, the planned installation of this
additional hot cell is not scheduled until the end of fiscal 2017 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. The strong dollar
contributed to the inability to remain competitive with our GliaSite
®
RTS delivery system in Europe that we discontinued
in March 2016. 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 2017 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 recently hired a 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, including various radiopharmacies, 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.
The Company’s brachytherapy product typically competes with 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 fewer 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 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. Until the fiscal year 2015,
when the Company experienced 13% growth in prostate brachytherapy and 9% overall growth in product sales, revenues had declined
in each of the prior four fiscal years. Fiscal 2016 also showed a favorable increase with overall product sales growing approximately 4% from fiscal 2015 to fiscal 2016.
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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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.
Medical
Device Tax.
Significant reforms to the healthcare system were adopted in the form of the ACA. The ACA includes provisions that,
among other things, require the medical device industry to subsidize healthcare reform in the form of a 2.3% excise tax (the Medical
Device Tax) on the U.S. sales of most medical devices. We believe this tax is assessed on 100% of our product sales that are sold
in the United States. This tax is subject to change due to, among other things, future IRS guidance and interpretations of the
Medical Device Tax regulations, and changes in our product mix. This revenue-based tax, to the extent it remains in effect, will
have a material impact on our consolidated results of operations, cash flows, and financial condition.
In
the year ended June 30, the Company’s medical device tax expense was:
|
|
Amount
|
|
2016
1
|
|
$
|
59,504
|
|
2015
|
|
$
|
99,209
|
|
1
As of January 1, 2016, Congress placed a two year moratorium on this tax and therefore the amount in fiscal 2016 is solely for
a six month period.
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 Federal government passed healthcare
reform legislation, the ACA. The provisions of the ACA have become or will become effective on various dates. While many of the
details regarding the implementation of the ACA are yet to be determined, we believe there will be continuing trends towards expanding
coverage to more individuals, containing health care costs and improving quality.
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:
|
•
|
our ability to set a price we believe is fair for our product;
|
|
•
|
our ability to generate revenues and achieve or maintain profitability;
|
|
•
|
the availability of capital; and
|
|
•
|
our ability to obtain timely approval of any future product modifications.
|
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 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.
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, 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.
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.
Risks
Of Ongoing Litigation.
On May 22, 2015, the first of three lawsuits was filed against IsoRay, Inc. and two of its officers –
Dwight Babcock (the Company’s retired CEO) and Brien Ragle, CFO – related to a press release on May 20, 2015 regarding
a May 19 online publication of the peer-reviewed article in the journal Brachytherapy titled “
Analysis of Stereotactic
Radiation vs. Wedge Resection vs. Wedge Resection Plus Cesium-131 Brachytherapy in Early-Stage Lung Cancer
” by Dr. Bhupesh
Parashar, et al. The lawsuits are class actions alleging violations of the federal securities laws. By Order dated
August 17, 2015, all of the pending lawsuits were consolidated into one case – In re IsoRay, Inc. Securities Litigation;
Case No. 4:15-cv-05046-LRS, in the US District Court for the Eastern District of Washington. On October 16, 2015, an amended
complaint was filed with more detailed allegations relating to alleged violations of federal securities laws. On December
15, 2015, IsoRay filed a motion to dismiss the complaint altogether. On June 1, 2016, the court entered an order denying
IsoRay's motion to dismiss, holding that the complaint's allegations, if accepted as true, state a plausible claim to relief.
The order did not adjudicate the merits of the lawsuit. No other issues were decided in the ruling. On June 15,
2016, IsoRay filed their answer to the amended complaint. Lead Plaintiffs motion for class certification is due to be filed
no later than January 5, 2017. As of this filing, a ten-day jury trial is scheduled for June 18, 2018 along with a timeline
for pre-trial actions by both IsoRay and the Lead Plaintiffs. Management believes this suit is without merit and will continue
to defend against it vigorously. Securities litigation is a lengthy, costly and unpredictable process. Currently management
does not believe that a loss resulting from these claims is probable or reasonably estimable in amount. However, failure
by IsoRay to obtain a favorable resolution of the claims set forth in the complaint could have a material adverse effect on our
business, results of operations and 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 $4,710,808 and $3,681,051 in the fiscal years ended 2016 and 2015, respectively. In addition, we have accumulated deficit from
the inception of business through June 30, 2016 of $66,442,315. 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 and if we do not become profitable our shareholders’ investments could be harmed.
We
May Need Additional Capital In The Future For Acquisitions And Expansion Into Other Markets.
At June 30, 2016, we had cash
and certificates of deposit of $15,359,485. The combination of our current cash and certificates of deposit both current and non-current
balance and projected product sales should provide us with sufficient funds to support operations at current levels of expenses
and revenues for four years. However, we may 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.
Operating a public company involves substantial costs to comply with
reporting obligations under federal securities laws that have continued to increase as provisions of the Sarbanes Oxley Act of
2002 have been implemented and has increased again as a result of the Company remaining subject to the accelerated filer requirements
of the Securities and Exchange Commission as of the year ended June 30, 2016. The accelerated filing timelines and requirement
for the auditor to opine on internal control effectiveness has increased the cost of the quarterly reviews and annual audit and
has required additional employees and technology investment to meet these requirements.
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 2016 the closing price of one share of our common stock reached a high
of $1.68 and a low of $0.55. 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 of or refusals to approve 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.
The
Issuance Of Shares Upon Exercise Of Derivative Securities May Cause Immediate And Substantial Dilution To Our Existing Shareholders.
The issuance of shares upon conversion of the preferred stock and the exercise of common stock warrants and options may result
in substantial dilution to the interests of other shareholders since these selling shareholders may ultimately convert or exercise
and sell all or a portion of the full amount issuable upon exercise. If all derivative securities outstanding as of September 1,
2016 were converted or exercised into shares of common stock, there would be approximately an additional 2,933,677 shares
of common stock outstanding as a result. The issuance of these shares will have the effect of further diluting the proportionate
equity interest and voting power of holders 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,
2016. 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, 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.