ITEM 1. BUSINESS
Overview
Founded in 1992, Anika Therapeutics, Inc. is a global, integrated joint preservation and
regenerative therapies company based in Bedford, Massachusetts. Our mission is to be the global leader in orthopedic joint therapies
and sports medicine with innovative technologies that exceed our customers’ expectations. We are committed to delivering
solutions to improve the lives of patients across a continuum of care from joint pain management and regenerative therapies to
sports medicine and orthopedic joint preservation and restoration. We have nearly thirty years of global expertise commercializing
more than twenty products based on our hyaluronic acid, or HA, technology platform, and we are focused on adding innovative and
differentiated offerings to our consolidated portfolio. Our proprietary technologies for modifying the HA molecule allow product
properties to be tailored specifically to multiple therapeutic uses. Certain of our technology chemically modifies HA to allow
for longer residence time in the body. We have two forms of cross-linked HA gel technologies, and a solid form of HA technology
– HYAFF which is the platform for our regenerative medicine. These proprietary technologies are protected by an extensive
portfolio of owned and licensed patents.
As we look towards the future, our business
is uniquely positioned to capture value within the sports and regenerative medicine market. Our success is driven by our focus
on our talent and culture, investment in innovative research and development programs to feed our product pipeline, expanding our
commercial footprint domestically and internationally, and pursuing strategic inorganic growth opportunities. We intend to continue
to accelerate our commercial capabilities as we transform into a customer-centric company dedicated to advancing the joint preservation
and restoration continuum of care. We believe that this commitment, along with our financial resources and operating history, have
positioned us well to deliver sustained value to our shareholders.
In early 2020, we expanded our overall technology platform through
our strategic acquisitions of Parcus Medical, LLC, or Parcus Medical, a sports medicine implant and instrumentation solutions provider
focused on surgical repair and reconstruction of ligaments and tendons, and Arthrosurface, Incorporated, or Arthrosurface, a joint
preservation technology company specializing in less invasive, bone preserving partial and total joint replacement solutions. The
Company expects the Parcus Medical and Arthrosurface acquisitions to drive growth by:
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Broadening Anika's product portfolio further into the sports medicine joint preservation and restoration space;
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Adding high-growth revenue streams;
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Expanding our commercial capabilities;
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Diversifying our revenue base; and
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Expanding our product pipeline and research and development expertise.
In addition, we believe that our historical
HA and regenerative medicine expertise will be highly complementary to the sports medicine implants and instrumentation expertise
of Parcus Medical and the partial and total joint replacement expertise of Arthrosurface. We believe that the combination of these
three businesses positions Anika to provide innovative solutions along the orthopedic continuum of care and build significant value
for patients, physicians, and key healthcare system stakeholders.
Industry
Historically, our outward-looking industry
focus has been on viscosupplement and regenerative orthopedic products that utilize HA as their major component. These products
are used in a range of treatments, from providing pain relief from osteoarthritis to regenerating damaged tissue such as cartilage.
Osteoarthritis is a debilitating disease that causes pain, swelling, and restricted movement in joints. Treating the pain associated
with osteoarthritis with viscosupplement products has been our predominant focus and our main source of historic revenue over the
past five years. In addition to the treatment of osteoarthritis, our HA-based portfolio has products targeted to orthopedic regenerative
medicine, advanced wound care, products used to prevent post-surgical adhesions after a variety of surgical procedures, as well
as ophthalmic products and veterinary products targeted to treat equine osteoarthritis.
With the recent additions of the
Arthrosurface and Parcus Medical businesses, we have effectively broadened our industry focus and increased our addressable
market. Arthrosurface focuses on less invasive, bone preserving partial and total joint replacement implants and instruments
that may be utilized by physicians when more conservative solutions have been exhausted, but before the need for invasive
total joint replacement procedures is necessary. Parcus Medical has a full portfolio of implants, materials and
instrumentation used for soft tissue fixation in sports medicine procedures designed with surgeon input to ensure usability
for our physician customers.
With this expansion along a broader continuum of care ranging from
joint pain management, a market opportunity we estimate to be approximately $1.0 billion, to sports and regenerative medicine and
less invasive implants, a market opportunity we estimate to be approximately $7.0 billion, we are positioning the company for future
growth, especially within the sports medicine industry. We intend to leverage our technology portfolios and our burgeoning commercial
infrastructure to provide sustained revenue growth and become a leader in the areas in which we do business.
Products
Joint Pain Management Therapies
Our Joint Pain Management Therapies product family consists of injectable
viscosupplement products that provide pain relief from osteoarthritis conditions. These products include MONOVISC, ORTHOVISC, CINGAL,
and HYVISC, HA-based intraarticular injectable products indicated for the treatment of osteoarthritis pain. Our Joint Pain Management
Therapy products are administered to patients in an office setting. We distribute the products in this category using a distributor
model, as more fully described in the section titled “Sales Channel.”
In the United States, MONOVISC and ORTHOVISC
are marketed by DePuy Synthes Mitek Sports Medicine, a division of DePuy Orthopaedics, Inc., or Mitek, under the terms of a pair
of licensing, distribution, supply, and marketing agreements, or the Mitek MONOVISC Agreement and Mitek ORTHOVISC Agreement. In
the United States, MONOVISC and ORTHOVISC have maintained the combined overall viscosupplement market leadership position since
the first quarter of 2018 on a revenue generation basis. Internationally, we market our Joint Pain Management Therapy products
using a growing network of commercial distributors in Canada, Europe, the Middle East, Latin America, and Asia.
HYVISC is a high molecular weight injectable HA product for the treatment of joint dysfunction
in horses due to non-infectious synovitis associated with equine osteoarthritis. HYVISC is distributed by Boehringer Ingelheim
Vetmedica, Inc., or Boehringer, in the United States.
Orthopedic Joint Preservation and Restoration Care
Our Orthopedic Joint Preservation and Restoration Care family consists
of the following key products:
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Several orthopedic regenerative medicine products based on our proprietary
HYAFF technology, which is a solid form of HA. They include HYALOFAST, a biodegradable support for human bone marrow mesenchymal
stem cells used for cartilage regeneration and as an adjunct for microfracture surgery. These products are currently available
in Europe, South America, Asia, and certain other international markets.
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TACTOSET, an HA-enhanced bone repair therapy designed to treat insufficiency
fractures. TACTOSET is available in the United States, and we expect to leverage the commercial infrastructure of our recent acquisitions
to increase market access to sell TACTOSET.
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Arthrosurface’s catalogue of over 150 partial and total joint surface implants
and preservation solutions for the knee, shoulder, hip, ankle, wrist and toe that are designed to treat upper and lower extremity
orthopedic conditions caused by trauma, injury and arthritic disease. These products are designed to be less invasive and more
bone preserving than conventional joint replacements. These products are available in the United States and over 25 international
markets.
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Parcus Medical’s line of surgical implant and instrumentation solutions that are used by surgeons to repair
and reconstruct damaged ligaments and tendons due to sports injuries, trauma and disease. These solutions include screws, sutures,
anchors, and other surgical systems that facilitate surgical procedures on the shoulder, knee, hip, distal extremities, and tissue.
They are typically utilized by surgeons in ambulatory surgical center, or ASC, and
hospital environments. These products are commercialized in the United States and over 60 international markets.
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Other
Our Other product family consists of legacy HA-based products that
do not fit into one of our other primary product categories. These products include:
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Advanced wound care products based on our HYAFF technology are used
for the treatment of skin wounds, ranging from burns to diabetic ulcers. The products cover a variety of wound treatment solutions,
including debridement agents, advanced therapies to aid healing, and scaffolds used as skin substitutes. Leading products include
HYALOMATRIX and HYALOFILL, which are used for the treatment of complex wounds such as burns and ulcers.
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Products used in connection with the treatment of ENT (ears, nose and throat) disorders. The lead
product is MEROGEL, a HYAFF-based woven fleece nasal packing. We have partnered with Medtronic XoMed, Inc., or Medtronic, for worldwide
distribution of these ENT products.
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Ophthalmic products, including injectable, high molecular weight HA
products used as viscoelastic agents in ophthalmic surgical procedures such as cataract extraction and intraocular lens implantation.
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Sales Channels
Since our inception in 1992, we historically utilized a commercial partnership model for
the distribution of our products to end-users. Our strong, worldwide network of distributors has historically provided, and continues
to provide, a solid foundation for our revenue growth and territorial expansion. In 2019, we implemented a hybrid commercial approach
that balances a small direct model with a network of distributor partners in the U.S. market, and we utilized this hybrid approach
for the launch of TACTOSET. The acquisitions of Arthrosurface and Parcus Medical each added to our commercial infrastructure, especially
in the United States. Arthrosurface has approximately 35 sales representatives and 100 distributors in the U.S., while Parcus Medical
employs a similar, though more mature, model as Anika and has over 50 U.S. distributors in place.
For products in our Orthopedic Joint Preservation and Restoration
Care family, including those currently in research and development or those not yet developed, we intend to leverage the expanded
hybrid-direct sales infrastructure of the consolidated entity. This framework pairs an internal direct sales team with external
sales agent partners to maximize territorial coverage and sales generation. Generally, products within this family are sold into
surgical environments, such as hospitals or ambulatory surgery centers, and we believe that we have a strong infrastructure now
in place to service these customers. We intend to cross-train the sales staffs to create a consolidated sales structure selling
all of the products within our portfolio. We also intend to assess each selling territory to maximize our coverage and reach as
many customers and patients as possible.
For longer-term future products in the U.S. market within our Joint
Pain Management Therapies or Other families, we intend to evaluate our commercial model and possible alternatives or augmentations
in each instance on a case-by-case basis, based on market dynamics and other factors. These models could include direct sales,
distribution partnerships, or a hybrid of those forms. For current products in the U.S. market, we intend to retain our current
distribution relationships, including with Mitek, as they continue to provide meaningful revenue and growth opportunities.
Internationally, we expect to maintain our
current distribution model for the foreseeable future. Notwithstanding that general expectation, we will evaluate modifications
or possible alternatives to that model on a case-by-case basis based upon market dynamics and resource allocation. We also intend
to evaluate and synergize our international distributor base to ensure that we maximize our partnerships and grow revenue from
our entire product portfolio.
Manufacturing
We manufacture the majority of our
products ourselves at our facilities in Bedford, Massachusetts, where we make the totality of the products associated with
the historic Anika business, and, following our acquisition of Parcus Medical, in Sarasota, Florida, where we make the vast
majority of the historic Parcus Medical finished products. For the manufacture of the partial and total joint surface
implants and preservation products produced for Arthrosurface, we engage a single third-party organization as a contract
manufacturer. The raw materials necessary to manufacture our products are generally available from multiple sources. However,
we rely on a small number of suppliers for certain key raw materials and a small number of suppliers for certain other
materials required for the manufacturing and delivery of these products.
Research and Development
Our research and development efforts primarily consist of the development
of new medical applications for our technology platform, the development of intellectual property with respect to our technology
platform, the management of clinical trials for certain product candidates, the preparation and processing of applications for
regulatory approvals, and process development and scale-up manufacturing activities for new and existing products. Our development
is focused on orthopedic and regenerative medicine, including products for tissue protection, repair, and regeneration. For the
years ended December 31, 2019, 2018, and 2017, research and development expenses were $16.7 million, $18.2 million, and $18.8 million
respectively. The decrease in 2019 was mainly due to timing and decision-making regarding our clinical activities. We anticipate
that we will continue to commit significant resources to, and increase our aggregate spending on, research and development efforts
including new product development, preclinical activities and clinical trials in the future.
Current research and development activities
include clinical trials for CINGAL, a joint pain management therapy composed of our proprietary cross-linked HA material combined
with an approved steroid, and HYALOFAST, an innovative product for cartilage tissue repair, meant to support eventual regulatory
approval for these products in the United States. In pursuing a U.S. regulatory pathway for CINGAL, we have conducted two Phase
III clinical trials and two follow-up studies, and the United States Food and Drug Administration, or FDA, has indicated an additional
Phase III trial is necessary to support U.S. approval. We are currently working to initiate a pilot study to confirm our trial
design, increase our probability of success in a Phase III trial and generate data that ultimately will be needed to support FDA
approval. We remain on track to commence the CINGAL pilot study in the first half of 2020. We are also conducting a Phase III
trial to support the U.S. regulatory approval of HYALOFAST. We expect to complete patient enrollment in the HYALOFAST study by
the end of 2020.
In addition, we are working to expand our
regenerative medicine pipeline with a new product candidate in the form of an implant for rotator cuff repair utilizing our proprietary
solid HA technology, which could be employed to repair partial and full-thickness rotator cuff tears. We finalized an initial product
prototype, and we are currently performing preclinical testing on the product and developing the surgical instrumentation for the
potential product.
Intellectual Property
We
seek patent and trademark protection for our key technology, products and product improvements, both in the U.S. and in select
foreign countries. When determined appropriate, we enforce and plan to enforce and defend our patent and trademark rights. While
we rely on our patent and trademark estate to provide us with competitive advantages as it relates to our existing and future product
lines, it is not our sole source of protection. We also rely upon trade secrets and continuing technological innovations to develop
and maintain our competitive position. In an effort to protect our trade secrets, we have a policy of requiring our employees,
consultants and advisors to execute proprietary information and invention assignment agreements upon commencement of employment
or consulting relationships with us. These agreements also provide that all confidential information developed or made known to
the individual during the course of their relationship with us must be kept confidential, except in specified circumstances.
Governmental Regulation
The clinical development, manufacturing,
and marketing of our products are subject to governmental regulation in the United States, the European Union, and other territories
worldwide. Various statutes, regulations and interpretations thereof, directives, and guidelines, including the Food, Drug, and
Cosmetic Act in the United States, govern the development, design, non-clinical and clinical research, testing, manufacture, safety,
efficacy, labeling, packaging, storage, record keeping, premarket clearance or approval, adverse event reporting, advertising,
and promotion of our products. Product development and approval within these various regulatory frameworks takes a number of years
and involves the expenditure of substantial resources. Pharmaceutical and medical device manufacturers are also inspected regularly
by the FDA and other applicable regulatory bodies.
Medical products regulated by the FDA are
generally classified as drugs, biologics, or medical devices, and the current classification standards for our current or future
may be altered over time. Drugs and biologic products undergo rigorous preclinical testing prior to beginning clinical trials.
Clinical trials for new drugs or biologic products include Phase I trials in healthy volunteers to understand safety, dosage tolerance,
and pharmacokinetics, Phase II trials in a limited patient population to identify initial efficacy and side effects, and Phase
III pivotal trials to statistically evaluate the safety and efficacy of the product. Medical devices intended for human use are
classified into three categories (Class I, II or III) on the basis of the controls deemed reasonably necessary by the FDA
to assure their safety and effectiveness. Class II devices are cleared for marketing under the premarket notification 510(k)
regulatory pathway, which may include clinical testing. Class III devices require pre-market approval based on valid scientific
evidence of safety and effectiveness, including evidence elicited through appropriate clinical testing. The failure to adequately
demonstrate the quality, safety, and efficacy of a product under development can delay or prevent regulatory approval of the product.
In order to gain marketing approval, we must submit to the relevant regulatory authority for review information on the quality
aspects of the product as well as the non-clinical and clinical data. The FDA undertakes this review in the United States.
In the European Union, medical devices must
be CE Marked in order to be marketed. CE marking a device involves working with a Notified Body, and in some cases a Competent
Authority, to demonstrate that the device meets all applicable requirements of the Medical Devices Directive and that our Quality
Management System is compliant. Drug approval in the European Union follows one of several possible processes: (i) a centralized
procedure involving members of the European Medicines Agency’s Committee for Medicinal Products for Human Use; (ii) a “mutual
recognition procedure” in which an individual country's regulatory agency approves the product followed by “mutual
recognition” of this approval by regulatory agencies of other countries; or (iii) a decentralized procedure in which the
approval is sought through the regulatory agencies of multiple countries at the same time.
Approval timelines can range from several
months to several years, or applications can be denied entirely. Product or product component classifications as drugs, biologics,
or medical devices may change over time due to new regulations or augmented interpretation of data or current regulations. The
approval process can be affected by a number of factors. For example, additional studies or clinical trials may be requested during
the review, which may delay marketing approval and involve unbudgeted costs. As a condition of approval, the regulatory agency
may require post-marketing surveillance to monitor for adverse effects, and may require other additional studies, as it deems appropriate.
After approval for an initial indication, further clinical studies are generally necessary to gain approval for any additional
indications. The terms of any approval, including labeling content, may be more restrictive than expected and could affect the
marketability of a product.
The FDA has broad regulatory compliance
and enforcement powers. If the FDA determines that we failed to comply with applicable regulatory requirements, it can take a variety
of compliance or enforcement actions, including, without limitation, issuing an FDA Form 483 notice of inspectional observations
or a warning letter, imposing civil money penalties, suspending or delaying issuance of approvals, requiring product recall, imposing
a total or partial shutdown of production, withdrawal of approvals or clearances already granted, pursuing product seizures, consent
decrees or other injunctive relief, or criminal prosecution through the Department of Justice. The FDA can also require us to repair,
replace, or refund the cost of products that we manufactured or distributed. Outside the United States, regulatory agencies may
exert a range of similar powers.
We are subject to various U.S. federal
and state laws pertaining to healthcare fraud and abuse, including anti-kickback and false claims laws. Similar review and regulation
of advertising and marketing practices exists in the other geographic areas where we operate.
We are also subject to various laws and
regulations concerning data privacy in the United States, Europe, and elsewhere, including the European Union of the General Data
Protection Regulation (“GDPR”). These regulations impose several requirements on the processing, administration, security,
and confidentiality of personal data. These regulations empower enforcement agencies to impose large penalties for noncompliance.
Environmental Laws
We believe that we are in compliance with
all foreign, federal, state, and local environmental regulations with respect to our manufacturing facilities. The cost of ongoing
compliance with such regulations does not have a material effect on our operations.
Competition
We compete with many companies including
large pharmaceutical firms and specialized medical device companies across all of our product lines. For our Joint Pain Management
Therapies products, our principal competitors are Sanofi Genzyme, Zimmer Biomet, Inc., Bioventus LLC, and Ferring Pharmaceuticals.
Following our acquisitions of Arthrosurface and Parcus Medical, our key competitors for our Orthopedic Joint Preservation and
Restoration Care products include Arthrex, Inc., Smith & Nephew P.l.c., Integra LifeSciences, Inc., Stryker Corporation, Wright
Medical Group N.V., Zimmer Biomet, Inc., and CONMED Corporation. Many of these companies have substantially greater financial
resources, larger research and development staffs, more extensive marketing and manufacturing organizations, and more experience
in the regulatory processes than we have. We also compete with academic institutions, government agencies, and other research
organizations, which may be involved in the research and development and commercialization of products. Many of our competitors
also compete against us in securing relationships with collaborators for their research and development and commercialization
programs.
We compete with other market participants
primarily on the efficacy of our products, our products’ reputation for safety, and the breadth of our sports and regenerative
medicine product portfolio. Other factors that impact competition in our industry are the timing and scope of regulatory approvals,
the availability of raw material and finished product supply, marketing and sales capability, reimbursement coverage, product pricing,
and patent protection. Some of the principal factors that may affect our ability to compete in the sports and regenerative medicine
development and commercialization markets include:
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The quality and breadth of our continued development of our product portfolio;
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Our ability to complete successful clinical studies and obtain FDA marketing and foreign regulatory approvals prior to our competitors;
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Our ability to build our commercial infrastructure, integrate our sales channels and execute our sales strategies;
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The execution by our key partners of their commercial
strategies for our products and our ability to manage our relationships with those key partners;
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Our ability to recruit and retain skilled employees; and
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The availability of capital resources to fund strategic activities related to the significant expansion of our business or product portfolio, including through acquisitions of third parties or certain assets.
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We are aware of a number of companies that
are developing and/or marketing competitive products. In some cases, competitors have already obtained product approvals, submitted
applications for approval, or commenced human clinical studies, either in the United States or in certain foreign countries. All
products face substantial competition. There exist major worldwide competing products for use in joint pain management,
orthopedic joint preservation and restoration, surgical adhesion prevention, advanced wound care, ENT, cosmetic dermatology, ophthalmic
surgery, and the treatment of equine osteoarthritis. There is a risk that we will be unable to compete effectively against our
current or future competitors. Additionally, legislation and regulation aimed at curbing rising healthcare costs has resulted in
a consolidation trend in the healthcare industry to create larger companies, including hospitals, with greater market power. In
turn, this has led to greater and more intense competition in the provision of products and services to market participants. Important
market makers, like group purchasing organizations and integrated delivery networks, have increased their negotiating leverage,
and if these market makers demand significant price concessions or if we are excluded as a supplier by these market makers, our
product revenue could be adversely impacted.
Employees
As of December 31, 2019, we had 154
employees, 128 of whom were located in the United States, 22 of whom were located in Italy, and 4 of whom were located in the
United Kingdom. We consider our relations with our employees to be good. None of our U.S. employees are represented by labor
unions, but certain employees based in Italy are represented by unions, adding complexity and additional risks to the wage and
employment decision processes.
Product Liability
The testing, marketing, and sale of human
health care products entails an inherent risk of allegations of product liability, and we cannot assure that substantial product
liability claims will not be asserted against us. Although we have not received any material product liability claims to date and
generally have coverage under our insurance policy of $5.0 million per occurrence and $5.0 million in the aggregate, we cannot
assure that if material claims arise in the future, our insurance will be adequate to cover all situations. Moreover, we cannot
assure that such insurance, or additional insurance, if required, will be available in the future or, if available, will be available
on commercially reasonable terms. Any product liability claim, if successful, could have a material adverse effect on our business,
financial condition, and results of operations.
Available Information
We are required to file annual, quarterly
and current reports, proxy statements and other information with the SEC. The SEC maintains a website at www.sec.gov that contains
reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
Our Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements, and other information, including amendments and
exhibits to such reports, filed or furnished pursuant to the Securities Exchange Act of 1934 are available free of charge in the
“SEC Filings” section of our website located at http://www.anikatherapeutics.com, as soon as reasonably practicable
after the reports are electronically filed with or furnished to the SEC. The information on our website is not part of this Annual
Report on Form 10-K.
ITEM 1A. RISK FACTORS
Our operating results and financial condition
have varied in the past and could vary significantly in the future depending on a number of factors. You should consider carefully
the risks and uncertainties described below, in addition to the other information contained in this Annual Report on Form 10-K,
before deciding whether to purchase our common stock. If any of the following risks actually occurs, our business, financial condition,
results of operations, and future prospects could be materially and adversely affected. In that event, the trading price of our
common stock could decline, and you could lose part or all of your investment.
Risks Related to Our Business and Competitive
Position
Our financial performance depends
on the continued sales growth and increasing demand for our products and we may not be able to successfully manage the expansion
of our operations.
Our future success
depends on substantial growth in product sales. There can be no assurance that such growth can be achieved or, if achieved, sustained.
There can be no assurance that, even if substantial growth in product sales and the demand for our products is achieved, we will
be able to:
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Maintain and develop the necessary manufacturing capabilities;
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Develop, successfully implement and/or integrate appropriate commercial models to generate increased sales or obtain the assistance of additional marketing partners;
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Attract, retain, and integrate required key personnel; and
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Implement the financial, accounting, and management systems needed to manage our overall business and growing demand for our products.
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Our failure to successfully manage future
growth could have a material adverse effect on our business, financial condition, and results of operations.
Substantial competition could materially
affect our financial performance.
We compete with many
companies, including large pharmaceutical companies, specialized medical devices companies, and healthcare companies. Many of these
companies have substantially greater financial resources, larger research and development staffs, more extensive intellectual technology
portfolios, more extensive marketing and manufacturing organizations, and more experience in the regulatory process than us. We
also compete with academic institutions, government agencies, and other research organizations that may be involved in research,
development, and commercialization of products similar to our own. Because a number of companies are developing or have developed
products for similar applications as our products and have received FDA approval, the successful commercialization of a particular
product will depend in part upon our ability to complete clinical studies and/or obtain FDA marketing and foreign regulatory approvals
prior to our competitors, or, if regulatory approval is not obtained prior to our competitors, to identify markets for our products
that may be sufficient to permit meaningful sales of our products. For example, we are aware of several companies that are developing
and/or marketing products similar to ours for a variety of human applications. In some cases, competitors have already obtained
product approvals, submitted applications for approval, or have commenced human clinical studies, either in the United States or
in certain foreign countries. For example, certain products made by our competitors for the treatment of osteoarthritis in the
knee received FDA approval before ours and have been marketed in the United States since 1997, as well as select markets in Canada,
Europe, and other countries. In addition, the market for our current or future products could be adversely impacted if disruptive
technologies or modalities are developed by third parties. There can be no assurance that we will be able to compete against current
or future competitors or that competition will not have a material adverse effect on our business, financial condition, and results
of operations.
A significant portion of our revenues
are derived from a small number of customers, the loss of which could materially adversely affect our business, financial condition
and results of operations.
We have historically derived the majority of our revenues from a small number of customers
who resell our products to end-users, and most of these customers are significantly larger companies than us. For the year ended
December 31, 2019, five customers accounted for 82% of product revenue, with Mitek alone accounting for 71% of product revenue.
We expect to continue to be dependent on a small number of large customers for the majority of our revenues in the near-term future,
though the significance will be diluted with the implementation of our hybrid commercial model and our recent acquisitions of Arthrosurface,
which utilizes a hybrid model with a direct sales team in the United States, and Parcus Medical, which utilizes a similar model
to us in the United States. The failure of key customers to purchase our products in the amounts they historically have or in amounts
that we expect would seriously harm our business.
In addition, if present and future customers
terminate their purchasing arrangements with us, significantly reduce or delay their orders, or seek to renegotiate their agreements
on terms less favorable to us, our business, financial condition, and results of operations will be adversely affected. If we accept
terms less favorable than the terms of the current agreements, such renegotiations may have a material adverse effect on our business,
financial condition, and/or results of operations. Furthermore, in any future negotiations we may be subject to the perceived or
actual leverage that these customers may have given their relative size and importance to us. Any termination, change, reduction,
or delay in orders could seriously harm our business, financial condition, and results of operations. Accordingly, unless and until
we diversify and expand our customer base, or develop alternative commercial strategies, our future success will significantly
depend upon the timing and size of future purchases by our largest customers, and the financial and operational success of these
customers. The loss of any one of our major customers or the delay of significant orders from such customers, even if only temporary,
could reduce or delay our recognition of revenues, harm our reputation in the industry, and reduce our ability to accurately predict
cash flow, and, as a consequence, it could seriously harm our business, financial condition, and results of operations.
Our license agreements with Mitek provide substantial
control of MONOVISC and ORTHOVISC in the U.S. to Mitek, and Mitek’s actions could have a material impact on our
business, financial condition and results of operations.
The Mitek MONOVISC Agreement and Mitek ORTHOVISC
Agreement provide Mitek with, among other things, the exclusive right to market and sell MONOVISC and ORTHOVISC in the United States,
unilateral decision-making authority over the sale, price, and promotion of MONOVISC and ORTHOVISC, substantial control over the
future development of MONOVISC and ORTHOVISC related to the treatment of pain associated with osteoarthritis, a license to manufacture
and have manufactured such products in the event that we are unable to supply Mitek with MONOVISC or ORTHOVISC in accordance with
the terms of the relevant agreement, and certain rights of first refusal with respect to future products we develop for the treatment
of pain associated with osteoarthritis. In exchange, Mitek pays us a transfer price calculated with reference to historical end-user
prices in the market and a fixed royalty rate per product on their net product sales. As Mitek accounts for a large percentage
of our yearly revenue and has unilateral decision-making authority over in-market activities, including end-user pricing and discounts,
reimbursement strategy, and overall promotion strategy, actions taken by Mitek could impact our ability to predict and generate
revenue and have a material impact on our business, financial condition, and results of operations.
We are dependent upon marketing and distribution partners
and the failure to maintain strategic alliances on acceptable terms will have a material adverse effect on our business, financial
condition, and results of operations.
Though we have implemented a hybrid commercial
approach in the United States and added substantial commercial infrastructure through our acquisitions of Arthrosurface and Parcus
Medical, our success will remain dependent, in part, upon the efforts of our marketing and distribution partners, including our
sales agent partners in the U.S. under our hybrid commercial model, and the terms and conditions of our relationships with such
partners. One partner, Mitek accounted for 71% of our product revenue in fiscal year 2019. We cannot assure you that our partners,
including Mitek, will not seek to renegotiate their current agreements on terms less favorable to us or terminate such agreements.
A failure to renew these partnerships on terms satisfactory to us, or at all, could result in a material adverse effect on our
operating results.
We continue to seek to establish long-term
partnerships in regions and countries not covered by existing agreements, and we may need to obtain the assistance of additional
marketing partners to bring new and existing products to market and to replace certain marketing partners. There can be no assurance
that we will be able to identify or engage appropriate distribution or collaboration partners or effectively transition to any
such new partnerships. The failure to establish strategic partnerships for the marketing and distribution of our products on acceptable
terms and within our planned timeframes could have a material adverse effect on our business, financial condition, and results
of operations.
As our international sales and operations grow, we could
become increasingly subject to additional economic, political, and other risks that could harm our business.
Since we manufacture our products for sale
worldwide, our business is subject to risks associated with doing business internationally. During the years ended December 31,
2019, 2018, and 2017, 21%, 19%, and 20%, respectively, of our product sales were to international distributors. We continue to
be subject to a variety of risks, which could cause fluctuations in the results of our international and domestic operations. These
risks include:
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The impact of recessions and other economic conditions in economies, including Europe in particular, outside the United States;
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Instability of foreign economic, political, and labor conditions;
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Unfavorable labor regulations applicable to our European operations, such as severance and the unenforceability of non-competition agreements in the European Union;
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The impact of strikes, work stoppages, work slowdowns, grievances, complaints, claims of unfair labor practices, or other collective bargaining disputes;
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Difficulties in complying with restrictions imposed by regulatory or market requirements, tariffs, or other trade barriers or by U.S. export laws;
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Imposition of government controls limiting the volume of international sales;
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Longer accounts receivable payment cycles;
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Potentially adverse tax consequences, including, if required or applicable, difficulties transferring funds generated in non-U.S. jurisdictions to the United States in a tax efficient manner;
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Difficulties in protecting intellectual property, especially in international jurisdictions;
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Difficulties in managing international operations; and
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Burdens of complying with a wide variety of foreign laws.
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Our success depends, in part, on our
ability to anticipate and address these and any new risks. We cannot guarantee that these or other factors will not adversely affect
our business or operating results.
Risks Related to Our Commercialization
Activities
We may not succeed in our commercialization efforts for
TACTOSET and certain other products in the United States, and our failure to do so could negatively impact our business and financial
results.
For near-term opportunities in the U.S.
market, especially for our Joint Preservation and Restoration Care products, we intend to utilize our hybrid commercial model and
the commercial infrastructure of our recent acquisitions, Arthrosurface and Parcus Medical. This approach is a departure from our
historical distribution model in the United States, and we cannot be certain that we will be successful in implementing and executing
on this commercial approach or that, even if we are able to implement it, the approach will be successful at scale. The commercialization
of TACTOSET, other current products, and any future products commercialized or launched under this model is subject to many risks,
including that we have not previously commercialized a product on our own and cannot guarantee that we will be able to do so successfully
or profitably. We may not be able to attract or retain the sophisticated personnel required for our approach, to identify or negotiate
favorable or acceptable terms with distribution agents, to achieve in-market pricing at the levels we have targeted, to timely
execute on our strategies for market penetration generally, or to generate meaningful sales of TACTOSET or other products as a
result of other market dynamics. Among other factors, our competitors often offer a broader range of products than we do, which
could make their aggregate offerings more attractive to end-users, distributor agents, group purchasing organizations, hospitals,
and surgeons. Our failure to successfully implement and execute on this commercial approach could have a material adverse effect
on our business, financial condition, and results of operations.
We must achieve market acceptance
of our products in order to be successful in the future.
Our success will depend in part upon the
acceptance of our existing and future products by the medical community, hospitals, physicians, other health care providers, third-party
payers, and end-users. Such acceptance may depend upon the extent to which the medical community and end-users perceive our products
as safer, more effective, or more cost-competitive than other similar products. Ultimately, for our new products to gain general
market acceptance, it may also be necessary for us to develop marketing partners or viable commercial strategies for the distribution
of our products. There can be no assurance that our new products will achieve significant market acceptance on a timely basis,
or at all. Failure of some or all of our future products to achieve significant market acceptance could have a material adverse
effect on our business, financial condition, and results of operations.
Sales of our products are largely dependent upon third
party reimbursement and our performance may be harmed by health care cost containment initiatives or decisions of individual third
party payers.
In the United States and other foreign markets,
health care providers, such as hospitals and physicians, that purchase health care products, such as our products, generally rely
on third party payers, including Medicare, Medicaid, and other health insurance and managed care plans, to reimburse all or part
of the cost of the health care product. We have generally depended upon the distributors of our products to secure reimbursement
and reimbursement approvals. Reimbursement by third party payers, both in the United States and internationally, may depend on
a number of factors, including the individual payer’s determination that the use of our products is clinically useful and
cost-effective, medically necessary, and not experimental or investigational. Since reimbursement approval is required from each
payer individually, seeking such approvals can be a time consuming and costly process which, in the future, could require us or
our marketing partners to provide supporting scientific, clinical, and cost-effectiveness data for the use of our products to each
payer separately. Significant uncertainty exists as to the reimbursement status of newly approved health care products, and any
failure or delay in obtaining reimbursement approvals can negatively impact sales of our new products. In addition, we cannot be
certain that payers who currently provide reimbursement for our products will continue to provide such reimbursement in the future,
and such payer decisions could negatively impact the sales of our current or future products.
In addition, third party payers are increasingly
attempting to contain the costs of health care products and services by limiting both coverage and the level of reimbursement for
new therapeutic products and by refusing, in some cases, to provide coverage for uses of approved products for disease indications
for which the FDA, or the applicable foreign regulatory agency, has granted marketing approval. Also, the U.S. Congress, certain
state legislatures, and certain foreign governments and regulatory agencies have considered reforms, including, among other items,
the potential repeal of the Affordable Care Act in the United States, which may affect current reimbursement practices and create
additional uncertainty about the pricing of our products, including the potential implementation of controls on health care spending
through limitations on the growth of Medicare and Medicaid spending. There can be no assurance that third party reimbursement coverage
will be available or adequate for any products or services developed by us. Outside the United States, the success of our products
is also dependent in part upon the availability of reimbursement and health care payment systems. Domestic and international reimbursement
laws and regulations may change from time to time. Lack of adequate coverage and reimbursement provided by governments and other
third party payers for our products and services, including continuing coverage for MONOVISC and ORTHOVISC in the United States,
and any change of classification by the Centers for Medicare and Medicaid Services for ORTHOVISC and MONOVISC, could have a material
adverse effect on our business, financial condition, and results of operations.
Our business may be adversely
affected if consolidation in the healthcare industry leads to demand for price concessions or if we are excluded from being a supplier
by a group purchasing organization or similar entity.
Because healthcare
costs have risen significantly over the past decade, numerous initiatives and reforms have been launched by legislators, regulators,
and third-party payers to curb these costs. As a result, there has been a consolidation trend in the healthcare industry to create
larger companies, including hospitals, with greater market power. As the healthcare industry consolidates, competition to provide
products and services to industry participants has become and may continue to become more intense. This may result in greater pricing
pressures and the exclusion of certain suppliers from important markets as group purchasing organizations, independent delivery
networks, and large single accounts continue to use their market power to consolidate purchasing decisions. If a group purchasing
organization excludes us from being one of their suppliers, our net sales could be adversely impacted. We expect that market demand,
government regulation, third-party reimbursement policies, and societal pressures will continue to change the worldwide healthcare
industry, which may exert further downward pressure on the prices of our products.
We experience quarterly sales volume variation, which
makes our future results difficult to predict and makes period-to-period comparisons potentially not meaningful.
We experience quarterly fluctuations in
our products sales as a result of multiple factors, many of which are outside of our control. These quarterly fluctuations create
uncertainty as to the volume of sales that we may achieve in a given period. As a result, comparing our operating results on a
period-to-period basis might not be meaningful. You should not rely on our past results as an indication of our future performance.
Our operating results could be disproportionately affected by a reduction in revenue because a proportionately smaller amount of
our expenses varies with our revenue. As a result, our quarterly operating results are difficult to predict, even in the near term.
Risks Related to Our Product Development
and Regulatory Compliance
We are facing a longer than expected pathway to commercialize
our CINGAL product in the United States, and we may face other unforeseen difficulties in achieving regulatory approval for CINGAL,
which could affect our business and financial results.
In the second quarter of 2018, we received
and analyzed the results of our second Phase III clinical trial for CINGAL and found that, while substantial pain reduction associated
with CINGAL was evident at each measurement point, the data did not meet the primary study endpoint of demonstrating a statistically
significant difference in pain reduction between CINGAL and the approved steroid component of CINGAL at the six-month time point.
After completing the analysis of the data related to the totality of our studies for CINGAL and discussing the same with FDA, FDA
indicated that an additional Phase III clinical trial would be necessary to support U.S. marketing approval for CINGAL. We decided
during the second quarter of 2019 to conduct a pilot study to enable us to evaluate our full-scale Phase III clinical trial design,
including patient and site selection criteria, and increase the probability of success for the Phase III trial. We expect to begin
enrolling patients in the pilot study in the first half of 2020, but we may experience significant delays in patient enrollment
or the pilot study may otherwise not be successful. If the pilot study is successful, we expect to commence an additional Phase
III trial, but we cannot guarantee the success of any additional Phase III trial. Because the results of the pilot study or any
additional Phase III trial, or other unforeseen future developments, could have a substantial negative impact on the timeline for
and the cost associated with a potential CINGAL regulatory approval, our overall business condition, financial results, and competitive
position could be affected.
Failure to obtain, or any delay in obtaining, FDA or other
U.S. and foreign governmental approvals for our products may have a material adverse effect on our business, financial condition
and results of operations.
Several of our current products, and certain
future products we may develop, will require clinical trials to determine their safety and efficacy for United States and international
marketing approval by regulatory bodies, including the FDA. Product development and approval within the FDA framework takes a number
of years and involves the expenditure of substantial resources. There can be no assurance that the FDA will accept submissions
related to our new products or the expansion of the indications of our current products, and, even if submissions are accepted,
there can be no guarantee that the FDA will grant approval for our new products, including CINGAL, HYALOFAST, or other line extensions
of our current products, or for the expansion of indications of our current products on a timely basis, if at all. In addition
to regulations enforced by the FDA, we are subject to other existing and future federal, state, local, and foreign regulations
applicable to product approval, which may vary significantly across jurisdictions. Additional approval of existing products may
be required when changes to such products may affect the safety and effectiveness, including for new indications for use, labeling
changes, process or manufacturing changes, the use of a different facility to manufacture, process or package the device, and changes
in performance or design specifications. Failure to obtain regulatory approvals of our products, including any changes to existing
products, could have an adverse material impact on our business, financial condition, and results of operations.
Even if ultimately granted, FDA and international
regulatory approvals may be subject to significant, unanticipated delays throughout the regulatory approval process. Internally,
we make assumptions regarding product approval timelines, both in the United States and internationally, in our business planning,
and any delay in approval could materially affect our competitive position in the relevant product market and our projections related
to future business results.
We cannot be certain that product approvals,
both in the United States and internationally, will not include significant limitations on the product indications, and other claims
sought for use, under which the products may be marketed. The relevant approval or clearance may also include other significant
conditions of approval such as post-market testing, tracking, or surveillance requirements. Any of these factors could significantly
impact our competitive position in relation to such products and could have a negative impact on the sales of such products.
Once obtained, we cannot guarantee
that FDA or international product approvals will not be withdrawn or that relevant agencies will not require other corrective action,
and any withdrawal or corrective action could materially affect our business and financial results.
Once obtained, marketing approval can be
withdrawn by the FDA or comparable foreign regulatory agencies for a number of reasons, including the failure to comply with ongoing
regulatory requirements or the occurrence of unforeseen problems following initial approval. Regulatory authorities could also
limit or prevent the manufacture or distribution of our products. Any regulatory limitations on the use of our products or any
withdrawal or suspension of approval or rescission of approval by the FDA or a comparable foreign regulatory agency could have
a material adverse effect on our business, financial condition, and results of operations.
Our operations and products are subject to extensive regulation,
compliance with which is costly and time consuming, and our failure to comply may result in substantial penalties, including recalls
of our products.
The FDA and foreign regulatory bodies impose
extensive regulations applicable to our operations and products, including regulations governing product standards, packing requirements,
labeling requirements, quality system and manufacturing requirements, import restrictions, tariff regulations, duties, and tax
requirements. We cannot assure you that we will be able to achieve and maintain compliance required for FDA, CE marking, or other
foreign regulatory approvals for any or all of our operations and products or that we will be able to produce our products in a
timely and profitable manner while complying with applicable requirements.
Failure to comply with applicable regulatory
requirements could result in substantial penalties, including warning letters, fines, injunctions, civil penalties, seizure of
products, total or partial suspension of production, refusal to grant pre-market clearance or pre-market approval for devices or
drugs, withdrawal of approvals, and criminal prosecution. Additionally, regulatory authorities have the power to require the recall
of our products. It also might be necessary for us, in applicable circumstances, to initiate a voluntary recall per regulatory
requirements of one or several of our products. The imposition of any of the foregoing penalties, whether voluntarily or involuntary,
could have a material negative impact on our business, financial condition, and results of operations.
Any changes in FDA or international regulations related
to product approval or approval renewal, including those currently under consideration by FDA or those that apply retroactively,
could adversely affect our competitive position and materially affect our business and financial results.
FDA and foreign regulations depend heavily
on administrative interpretation, and we cannot assure you that future interpretations made by the FDA or other regulatory bodies,
with possible retroactive effect, will not adversely affect us. Additionally, any changes, whether in interpretation or substance,
in existing regulations or policies, or any future adoption of new regulations or policies by relevant regulatory bodies, could
prevent or delay approval of our products. In the event our future, or current, products, including HA generally, are classified,
or re-classified, as human drugs, combination products, or biologics by the FDA or an applicable international regulatory body,
the applicable review process related to such products is typically substantially longer and substantially more expensive than
the review process to which they are currently subject as medical devices. In 2018, FDA publicly indicated its intent to consider
HA products for certain indications for regulation as a drug and has indicated that industry should submit new products or indication
expansions to the OCP to designate the appropriate FDA office for review. There exists uncertainty with respect to the final interpretation,
implementation, and consequences of this development, and this or any other potential regulatory changes in approach or interpretation
similar in substance to those mentioned in this paragraph and affecting our products could materially impact our competitive position,
business, and financial results.
Additionally, the implementation of the
new European Medical Device Regulation, or EU MDR, set to take full effect in 2020, is expected to change several aspects of the
existing regulatory framework in Europe. Specifically, the EU MDR will require changes in the clinical evidence required for medical
devices, post-market clinical follow-up evidence, annual reporting of safety information for Class III products, and bi-annual
reporting for Class II products, Unique Device Identification, or UDI, for all products, submission of core data elements to a
European UDI database prior to placement of a device on the market, reclassification of medical devices, and multiple other labeling
changes. Approvals for certain of our currently-marketed products could be curtailed or withdrawn as a result of the implementation
of the EU MDR, and acquiring approvals for new products could be more challenging and costly. For example, the CE Mark indication
for MONOVISC of the treatment of pain associated with osteoarthritis in all synovial joints was limited to the knee joint by our
notified body as a result of the EU MDR, pending our generation of adequate data to support the broader indication previously granted.
We do not expect this limitation to have a material impact on MONOVISC’s revenue generation, but compliance with this and
any other requirements could be time consuming and costly, and our failure to comply may subject us to significant liabilities,
which could have a material adverse effect on our business, financial condition, and results of operations.
We may rely on third parties to support certain aspects
of our clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines,
we may not be able to obtain regulatory approval or commercialize our products, and our business could be substantially harmed.
We have hired experienced clinical development
and regulatory staff, and we have also retained the services of knowledgeable external service providers, including consultants
and clinical research organizations, to develop and supervise our clinical trials and regulatory processes. Despite our internal
investment in staffing, we will remain dependent upon these third-party contract research organizations to carry out portions of
our clinical and preclinical research studies for the foreseeable future. As a result, we have had and will have less control over
the conduct of the clinical trials, the timing and completion of the trials, the required reporting of adverse events, and the
management of data developed through the trials than would be the case if we were relying entirely on our own staff. Outside parties
may have staffing difficulties, may undergo changes in priorities or may become financially distressed, adversely affecting their
willingness or ability to conduct our trials. Failure by these third parties to comply with regulatory requirements or to meet
timing expectations may require us to repeat clinical or preclinical trials, which would delay the regulatory approval process,
or require substantial unexpected expenditures.
We are subject to various healthcare laws and regulations,
and any failure to comply with applicable laws could subject us to significant liability and harm our business.
Our business involves substantial interaction
and collaboration with healthcare professionals, including physician consultants, clinical investigators, and actual and potential
customers. These relationships are subject to federal and state healthcare laws, as well as equivalent foreign regulations. These
statutes and regulations include, without limitation, false claims laws, anti-kickback regulations, the Foreign Corrupt Practices
Act, and the Physician Payments Sunshine Act. Any failure to comply with these laws could subject us to significant liabilities,
which could have a material adverse effect on our business, financial condition, and results of operations.
We are subject to environmental regulations and any failure
to comply with applicable laws could subject us to significant liabilities and harm our business.
We are subject to a variety of local, state,
federal, and foreign government regulations relating to the storage, discharge, handling, emission, generation, manufacture, and
disposal of toxic or other hazardous substances used in the manufacture of our products. Any failure by us to control the use,
disposal, removal, or storage of hazardous chemicals or toxic substances could subject us to significant liabilities, which could
have a material adverse effect on our business, financial condition, and results of operations.
Risks Related to Our Business and Industry
We may not generate the expected benefits of our recent
acquisitions, and the integration of those acquisitions could disrupt our ongoing business, distract our management and increase
our expenses.
Through our recent acquisitions of Parcus
Medical and Arthrosurface, we expanded our product portfolio and pipeline, diversified our business, entered new markets, and increased
the scope of our operations and the number of our employees. The continued successful integration of these other companies into
our operations is critical to our future financial performance. This will require that we integrate more closely the companies’
product offerings and research and development capabilities, retain key employees, assimilate diverse corporate cultures, further
integrate management information systems, consolidate the acquired operations and manage geographically dispersed operations, among
other things, each of which could pose significant challenges. The difficulty of combining the acquired companies with our company
may be increased by the need to integrate personnel, and changes effected in the combination may cause key employees to leave.
To succeed in the market for joint preservation and restoration, we must also invest additional resources, primarily in the areas
of sales and marketing, to extend name recognition and increase market share.
It is possible that the integration process
could take longer than anticipated and could result in the loss of valuable employees, additional and unforeseen expenses, the
disruption of our ongoing business, processes and systems, or inconsistencies in standards, controls, procedures, practices, policies
and compensation arrangements, any of which could adversely affect our ability to achieve the anticipated benefits of the acquisitions.
There may be increased risk due to integrating financial reporting and internal control systems. The diversion of the attention
of management created by the integration process, any disruptions or other difficulties encountered in the integration process,
and unforeseen liabilities or unanticipated problems with the acquired businesses could have a material adverse effect on our business,
operating results and financial condition. There can be no assurance that these acquisitions will provide the benefits we expect
or that we will be able to integrate and develop the operations of Parcus Medical and Arthrosurface successfully. Any failure to
do so could have a material adverse effect on our business, operating results and financial condition.
We may have difficulty managing our growth.
Through our recent acquisitions of Parcus
Medical and Arthrosurface, we have experienced substantial growth in the number of our employees, the scope of our product portfolio
and pipeline, the size of our operating and financial systems, and the geographic area of our operations. Our operations have expanded
significantly through these acquisitions. This growth has resulted in increased responsibilities for our management. To manage
our growth effectively, we must continue to expand our management team, attract, motivate and retain employees, and improve our
operating and financial systems. There can be no assurance that our current management systems will be adequate or that we will
be able to manage our recent or future growth successfully. Any failure to do so could have a material adverse effect on our business,
operating results and financial condition.
We expect to continue to actively explore acquisitions
as a part of our future growth strategy, which exposes us to a variety of risks that could adversely affect our business operations.
Our business and future growth strategy
includes as an important component the acquisition of businesses, technologies, services, or products that we believe are a strategic
fit with or otherwise provide value to our business. We may fund these acquisitions by utilizing our cash, incurring debt, issuing
additional shares of our common stock, or by other means. Completed acquisitions may expose us to a number of risks and expenses,
including unanticipated liabilities, amortization expenses related to intangible assets with definite lives, or risks associated
with entering new markets with which we have limited experience or where commercial alliances with experienced partners or existing
sales channels are not available. Whether or not completed, acquisitions may result in diversion of management resources otherwise
available for ongoing development of our business and significant expenditures.
The acquisitions we have made or may make in the future may make us the subject of
lawsuits from either an acquired company’s stockholders, an acquired company’s previous stockholders, or our current
stockholders.
We may be the subject of lawsuits from either an acquired company’s
stockholders, an acquired company’s previous stockholders, or our current stockholders. These lawsuits could result from
the actions of the acquisition target prior to the date of the acquisition, from the acquisition transaction itself, or from actions
after the acquisition. Defending potential lawsuits could cost us significant expense and distract management’s attention
from the operation of the business. Additionally, these lawsuits could result in the cancellation of, or the inability to renew,
certain insurance coverage that would be necessary to protect our assets.
Customer and employee uncertainty about the effects of any acquisitions could harm
us.
Customers of any companies we acquire may, in response to the consummation
of the acquisitions, delay or defer purchasing decisions, which could adversely affect the success of our acquired businesses.
Similarly, employees of acquired companies may experience uncertainty about their future roles, which may adversely affect our
ability to attract and retain key management, sales, marketing, and technical personnel following an acquisition.
Attractive acquisition opportunities may not be available
to us.
We routinely consider the acquisition
of other businesses or assets. However, we may not locate suitable acquisition targets or have the opportunity to make acquisitions of
such targets on favorable terms, which could negatively impact the growth of our business. In order to pursue such
opportunities, we may require significant additional financing, which may not be available to us on favorable terms, if at
all. Our current or potential competitors, many of which have significantly greater resources than we do, may compete with us
to acquire compatible businesses, which would increase the acquisition prices and could cause us to expend significant time
and funds on acquisitions we are unable to complete.
We may require capital in the future. We cannot give any
assurance that such capital will be available at all or on terms acceptable to us, and if it is available, additional capital raised
by us could dilute your ownership interest or the value of your shares.
We may need to raise capital in the future
depending on numerous factors, including:
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Market acceptance of our existing and future products;
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The success and sales of our products under various distributor agreements and other appropriate commercial strategies, including the ability of our partners to achieve third party reimbursement for our products;
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The successful commercialization of products in development through appropriate commercial models and marketing channels;
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Progress in our product development efforts;
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The magnitude and scope of such product development efforts;
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Any potential acquisitions of products, technologies, or businesses;
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Progress with preclinical studies, clinical trials, and product approvals and clearances by the FDA and other agencies;
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The cost and timing of our efforts to manage our manufacturing capabilities and related costs;
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The cost of filing, prosecuting, defending, and enforcing patent claims and other intellectual property rights and the cost of defending any other legal proceeding;
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Competing technological and market developments;
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The development of strategic alliances for the marketing of certain of our products;
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The terms of such strategic alliances, including provisions (and our ability to satisfy such provisions) that provide upfront and/or milestone payments to us;
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The cost of maintaining adequate inventory levels to
meet current and future product demand; and
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Further expanding our business in international markets.
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To the extent funds generated from our operations,
together with our existing capital resources, are insufficient to meet future requirements, we will be required to obtain additional
funds through equity or debt financings, through strategic alliances with corporate partners and others, or through other sources.
The terms of any future equity financings may be dilutive to our investors and the terms of any debt financings may contain restrictive
covenants, which limit our ability to pursue certain courses of action. Our ability to obtain financing is dependent on the status
of our future business prospects as well as conditions prevailing in the relevant capital markets at the time we seek financing.
No assurance can be given that any additional financing will be made available to us or will be available on acceptable terms should
such a need arise.
If we succeed in raising additional funds
through the issuance of equity or convertible securities, then the issuance could result in substantial dilution to existing stockholders.
Furthermore, the holders of these new securities or debt may have rights, preferences and privileges senior to those of the holders
of common stock. In addition, any preferred equity issuance or debt financing that we may obtain in the future could have restrictive
covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult
for us to obtain additional capital and to pursue business opportunities, including potential acquisitions.
Our global operations, particularly
in Italy, may be adversely affected by the coronavirus outbreak and face risks that could impact our business.
A novel strain of coronavirus, COVID-19, originated in Wuhan, China, in December 2019. The
virus has spread to Italy, which as of March 2020 reportedly had the highest number of coronavirus infections outside Asia. Though
it represents a relatively small percentage of our consolidated business, we conduct commercial activity, product development,
sales and inventory management and other services in our Padova, Italy location, and those business operations are subject to potential
business interruptions arising from protective measures that may be taken by the Italian government or other agencies or governing
bodies. Business disruptions elsewhere in the world could also negatively affect the sources and availability of components and
materials that are essential to the operation of our business in both Italy and the United States. Extended periods of interruption
to our Italian or U.S. operations due to the coronavirus outbreak could adversely impact the growth of our business, could cause
us to cease or delay operations, and could prevent our customers from receiving shipments or processing payments.
The extent to which the coronavirus impacts
our global business, sales and results of operations will depend on future developments, which are highly uncertain and cannot
be predicted. This includes new information that may emerge concerning the severity of the coronavirus, the spread and proliferation
of the coronavirus around the world, and the actions taken to contain the coronavirus or treat its impact, among others.
Our manufacturing processes involve
inherent risks, and disruption could materially adversely affect our business, financial condition, and results of operations.
The operation of biomedical manufacturing plants involves many risks,
including the risks of breakdown, failure, or substandard performance of equipment, the need to comply with the requirements of
directives of government agencies, including the FDA, and the occurrence of natural and other disasters. Such occurrences could
have a material adverse effect on our business, financial condition, and results of operations during the period of such operational
difficulties and beyond.
We rely on a small number of suppliers for certain key
raw materials and a small number of suppliers for a number of other materials required for the manufacturing and delivery of our
products, and disruption could materially adversely affect our business, financial condition, and results of operations.
Although we believe that alternative sources
for many of these and other components and raw materials that we use in our manufacturing processes are available, we cannot be
certain that the supply of key raw materials will continue to be available at current levels or will be sufficient to meet our
future needs. For the manufacture of the surgical joint implant and instrumentation products produced by our subsidiary Arthrosurface,
we engage a single third-party organization as a contract manufacturer. Any supply interruption could harm our ability to manufacture
our products until a new source of supply is identified and qualified. We may not be able to find sufficient alternative suppliers
in a reasonable time period, or on commercially reasonable terms, if at all, and our ability to produce and supply our products
could be impaired.
We use raw materials derived from animal sources to produce
certain of our products, and there is no guarantee that we will be able to continue to utilize this source of material in the future.
Our manufacturing processes and research
and development efforts for some of our ophthalmic and veterinary products involve products derived from animals. We procure our
animal-derived raw materials from a qualified vendor, who controls for contamination and has processes that effectively inactivate
infectious agents; however, we cannot assure you that we can completely eliminate the risk of transmission of infectious agents.
Furthermore, regulatory authorities could in the future impose restrictions on the use of animal-derived raw materials that could
impact our business.
The utilization of animals in research
and development and product commercialization is subject to increasing focus by animal rights activists. The activities of animal
rights groups and other organizations that have protested animal based research and development programs or boycotted the products
resulting from such programs could cause an interruption in our manufacturing processes and research and development efforts.
The occurrence of material operational problems, including but not limited to the events described above, could have a material
adverse effect on our business, financial condition, and results of operations during the period of such operational difficulties
and beyond.
We lease properties in the United States and Italy, and
there is no guarantee that these leaseholds will be without issue or sufficient to support future growth.
We lease approximately 134,000 square feet
of administrative, research and development, and manufacturing space in Bedford, Massachusetts, approximately 10,000 square feet
of administrative, research and development, and warehouse facility in Franklin, Massachusetts, approximately 40,000 square feet
of administrative, research and development, and manufacturing space in Sarasota, Florida, and approximately 33,000 square feet
of office, research and development, training, and warehousing space in Padova, Italy. The current term of the Bedford lease extends
to 2022, and the current term of the Padova lease extends to 2032, each with several options for renewal. Please see Item 2
– Properties for additional information on our current leases. The nature of these leaseholds presents certain risks.
We must maintain a positive working relationship with the respective owners as a dispute with either owner over payment, maintenance,
or any other matter could be disruptive to our business. Additionally, there is a possibility that changes to our business or the
geographic location of the facilities could make either location less suitable to our operations. Any renegotiation or termination
of either lease could result in substantial cost or business interruption to our operations. Additionally, there is no guarantee
that our current space will be sufficient to support our future growth or that any future relocation or expansion of our operations
would be completed smoothly or in a timely manner due to, among other things, unexpected construction delays or unexpected difficulties
related to the achievement of necessary permitting. Any business disruption as a result of any of these factors could have a material
impact on our business, financial condition, and results of operations.
We may face circumstances in the future that will result
in impairment charges, including, but not limited to, goodwill impairment and In-Process Research and Development (“IPR&D”)
charges.
As of December 31, 2019, we had long-lived assets, including goodwill
and IPR&D, of $96.4 million. If the fair value of any of our long-lived assets, including those that we recently acquired in
the acquisitions of Arthrosurface and Parcus Medical for which purchase accounting is not yet complete, decreases as a result of
an economic slowdown, a downturn in the markets where we sell products and services, a downturn in our financial performance or
future outlook or for other reasons, we may be required to record an impairment charge on such assets.
We are required to test intangible assets
with indefinite life periods for potential impairment annually and on an interim basis if there are indicators of a potential impairment.
We also are required to evaluate amortizable intangible assets and fixed assets for impairment if there are indicators of a possible
impairment. Impairment charges could have a negative impact on our results of operations and financial position, as well as on
the market price of our common stock.
We could become subject to product liability claims, which,
if successful, could materially adversely affect our business, financial condition, and results of operations.
The testing, marketing, and sale of human
health care products entail an inherent risk of allegations of product liability, and there can be no assurance that substantial
product liability claims will not be asserted against us. Although we have not received any material product liability claims to
date and have an insurance policy of $5.0 million per occurrence and $5.0 million in the aggregate to cover such product liability
claims should they arise, there can be no assurance that material claims will not arise in the future or that our insurance will
be adequate to cover all situations. Moreover, there can be no assurance that such insurance, or additional insurance, if required,
will be available in the future or, if available, will be available on commercially reasonable terms. Any product liability claim,
if successful, could have a material adverse effect on our business, financial condition, and results of operations.
Our business is dependent upon hiring and retaining qualified
management and technical personnel, including our hiring of a permanent chief executive officer.
We are highly dependent on the members of
our management and technical staff, the loss of one or more of whom could have a material adverse effect on us. We have experienced
a number of management changes in recent years, and there can be no assurances that any future management changes will not adversely
affect our business. We believe that our future success will depend in large part upon our ability to attract and retain technical
and highly skilled executive, managerial, professional, and technical personnel. We face significant competition for such personnel
from competitive companies, research and academic institutions, government entities, and other organizations. There can be no assurance
that we will be successful in hiring or retaining the personnel we require. The failure to hire and retain such personnel could
have a material adverse effect on our business, financial condition, and results of operations.
On January 29, 2020, Joseph Darling, our former President and Chief
Executive Officer, passed away unexpectedly. Dr. Cheryl Blanchard, a member of the Board of Directors, has been named Interim Chief
Executive Officer. The Board of Directors has undertaken a search process to identify and hire a permanent chief executive officer.
A failure to hire a highly qualified successor chief executive officer, or an extended delay in the hiring process, could materially
limit or restrict our ability to execute our long-term strategy and to operate our business.
Currency exchange rate fluctuations may have a negative
impact on our reported earnings.
Approximately 4% of our business during
2019 was conducted in functional currencies other than the U.S. dollar, which is our reporting currency. Thus, currency fluctuations
among the U.S. dollar and the other currencies in which we do business have caused and will continue to cause foreign currency
transaction gains and losses. Currently, we attempt to manage foreign currency risk through the matching of assets and liabilities.
In the future, we may undertake to manage foreign currency risk through additional hedging methods. We recognize foreign currency
gains or losses arising from our operations in the period incurred. We cannot guarantee that we will be successful in managing
foreign currency risk or in predicting the effects of exchange rate fluctuations upon our future operating results because of the
variability of currency exposure and the potential volatility of currency exchange rates.
Information security breaches or business system disruptions
may adversely affect our business.
We rely on our information technology infrastructure
and management information systems to effectively run our business. While we have not previously experienced a material information
security breach caused by illegal hacking, computer viruses, or acts of vandalism or terrorism, we may in the future be subject
to such a breach. Our security measures or those of our third-party service providers may not detect or prevent such breaches.
Any such compromise to our information security could result in an interruption in our operations, the unauthorized publication
of our confidential business or proprietary information, the unauthorized release of customer, vendor, or employee data, the violation
of privacy, including under the GDPR recently promulgated in the European Union, or other laws and exposure to litigation, any
of which could harm our business and operating results.
Risks Related to Our Intellectual Property
We may be unable to adequately protect our intellectual
property rights, which could have a material impact on our business and future financial results.
Our efforts to enforce our intellectual
property rights may not be successful. We rely on a combination of copyright, trademark, patent, and trade secret laws, confidentiality
procedures, and contractual provisions to protect our proprietary rights. Our success will depend, in part, on our ability to obtain
and enforce patents and trademarks, to protect trade secrets, to obtain licenses to technology owned by third parties when necessary,
and to conduct our business without infringing on the proprietary rights of others. The patent positions of pharmaceutical, medical
product, and biotechnology firms, including ours, can be uncertain and involve complex legal and factual questions. There can be
no assurance that any patent applications will result in the issuance of patents or, if any patents are issued, that they will
provide significant proprietary protection or commercial advantage or will not be circumvented by others. Filing and prosecution
of patent applications, litigation to establish the validity and scope of patents, assertion of patent infringement claims against
others, and the defense of patent infringement claims by others can be expensive and time consuming. There can be no assurance
that, in the event that any claims with respect to any of our patents, if issued, are challenged by one or more third parties,
any court or patent authority ruling on such challenge will determine that such patent claims are valid and enforceable. An adverse
outcome in such litigation or patent review process could cause us to lose exclusivity covered by the disputed rights. If a third
party is found to have rights covering products or processes used by us, we could be forced to cease using the technologies or
marketing the products covered by such rights, we could be subject to significant liabilities to such third party, and we could
be required to license technologies from such third party in order to continue production of the products. Furthermore, even if
our patents are determined to be valid, enforceable, and broad in scope, there can be no assurance that competitors will not be
able to design around such patents and compete with us using the resulting alternative technology. We have a policy of seeking
patent protection for patentable aspects of our proprietary technology. We intend to seek patent protection with respect to products
and processes developed in the course of our activities when we believe such protection is in our best interest and when the cost
of seeking such protection is not inordinate. However, no assurance can be given that any patent application will be filed, that
any filed applications will result in issued patents, or that any issued patents will provide us with a competitive advantage or
will not be successfully challenged by third parties. The protections afforded by patents will depend upon their scope and validity,
and others may be able to design around our patents.
We also rely upon trade secrets and proprietary
know-how for certain non-patented aspects of our technology. To protect such information, we require all employees, consultants,
and licensees to enter into confidentiality agreements limiting the disclosure and use of such information. There can be no assurance
that these agreements provide meaningful protection or that they will not be breached, that we would have adequate remedies for
any such breach, or that our trade secrets, proprietary know-how, and our technological advances will not otherwise become known
to others. In addition, there can be no assurance that, despite precautions taken by us, others have not and will not obtain access
to our proprietary technology. Further, there can be no assurance that third parties will not independently develop substantially
equivalent or better technology.
There can be no assurance that we will not infringe upon
the intellectual property rights of others, which could have a significant impact on our business and financial results.
Other entities have filed patent applications
for, or have been issued patents concerning, various aspects of HA-related products or processes, including in the segments in
which we do business. There can be no assurance that the products or processes developed by us will not infringe on the patent
rights of others in the future. The cost of defending infringement suits is typically large, and there is no guarantee that any
future defense would be successful. In addition, infringement could lead to substantial damages payouts or our inability to produce
or market certain of our current or future products. As a result, any such infringement may have a material adverse effect on our
business, financial condition, and results of operations.
Risks Related to Ownership of Our Common
Stock
Our stock price may be highly volatile,
and we cannot assure you that market making in our common stock will continue.
The market price of shares of our common
stock may be highly volatile. Factors such as announcements of new commercial products or technological innovations by us or our
competitors, disclosure of results of clinical testing or regulatory proceedings, government regulation and approvals, developments
in patent or other proprietary rights, public concern as to the safety of products developed by us, and general market conditions
may have a significant effect on the market price of our common stock. The trading price of our common stock could be subject to
wide fluctuations in response to quarter-to-quarter variations in our operating results, material announcements by us or our competitors,
governmental regulatory action, conditions in the health care industry generally or in the medical products industry specifically,
or other events or factors, many of which are beyond our control. In addition, the stock market has experienced extreme price and
volume fluctuations, which have particularly affected the market prices of many medical products companies and which often have
been unrelated to the operating performance of such companies. Our operating results in future quarters may be below the expectations
of equity research analysts and investors. In such an event, the price of our common stock would likely decline, perhaps substantially.
If securities or industry analysts
do not publish or cease publishing research or reports about us, our business, or our market, or if they adversely change their
recommendations regarding our stock, our stock price and trading volume could decline.
The trading market
for our common stock is influenced by the research and reports that securities or industry analysts may publish about us, our business,
our market, or our competitors. No person is under any obligation to publish research or reports on us, and any person publishing
research or reports on us may discontinue doing so at any time without notice. If adequate research coverage is not maintained
on our company or if any of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our
business or provide relatively more favorable recommendations about our competitors, our stock price would likely decline. If any
analysts who cover us were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility
in the financial markets, which in turn could cause our stock price or trading volume to decline.
Our charter documents contain anti-takeover provisions
that may prevent or delay an acquisition of our company.
Our charter documents continue to contain
anti-takeover provisions that could prevent or delay an acquisition of our company. The provisions include, among others, a classified
board of directors, advance notice to the board of stockholder proposals, limitations on the ability of stockholders to remove
directors and to call stockholder meetings, and a provision that allows vacancies on the Board of Directors to be filled by vote
of a majority of the remaining directors. We are also subject to Section 203 of the Delaware General Corporate Law which, subject
to certain exceptions, prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any
“interested stockholder” for a period of three years following the date that such stockholder becomes an interested
stockholder. Those provisions could have the effect of discouraging a third party from pursuing a non-negotiated takeover of our
company at a price considered attractive by many stockholders and could have the effect of preventing or delaying a potential acquirer
from acquiring control of our company.