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Our
exposure to each of these risks may increase our costs, impair our ability to
market and sell our products and require significant management attention,
resulting in harm to our business and financial results.
Our operations are vulnerable to
interruption or loss due to hurricanes, storm, fire, terrorist attacks, failure
or breach of our computer systems or information technology, or other events
beyond our control, which could adversely affect our business.
We
currently conduct all of our management activities, most of our research and
development activities and assemble many of our products at a single location
in Fort Lauderdale, Florida. We have taken various precautions to safeguard our
facilities, such as obtaining insurance, installing hurricane shutters,
establishing health and safety protocols and securing off-site storage of
computer data. However, a casualty due to a hurricane, storm or other natural
disasters, a fire, terrorist attack, or other unanticipated problems at this
location or any of our third-party contracted facilities could cause
substantial delays in our operations, delay or prevent assembly of our RIO
systems and shipment of our implants, damage or destroy our equipment and
inventory, and cause us to incur substantial expenses. Furthermore, we are
dependent upon our computer systems and information technology and any failure,
interruption, or security breach, such as a computer virus or unauthorized
access, of such computer systems or information technology could cause
substantial delays in our operations, interrupt our business, and result in a
loss of data. Our insurance does not cover losses caused by certain events such
as floods or other activities and may not be adequate to cover our losses in
any particular case. Any damage, loss or delay could seriously harm our business
and have an adverse effect on our financial results.
Changes to financial accounting standards
may affect our reported results of operations.
A
change in accounting standards or practices can have a significant effect on
our reported results and may even affect our reporting of transactions
completed before the change is effective. New accounting pronouncements and
varying interpretations of accounting pronouncements have occurred and may
occur in the future. Changes to existing standards or the questioning of
current practices may adversely affect our reported financial results or the
way we conduct our business.
We use estimates, make judgments and apply
certain methods in measuring the progress of our business, in determining our
financial results and in applying our accounting policies. As these estimates,
judgments, and methods change, our assessment of the progress of our business
and our results of operations could vary.
Accounting
principles generally accepted in the United States and accompanying accounting
pronouncements, interpretations, and practices for many areas of our business
are very complex and involve significant and sometimes subjective judgments.
The methods, estimates, and judgments we use in applying our accounting
policies have a significant impact on our results of operations. Such methods,
estimates, and judgments are, by their nature, subject to substantial risks,
uncertainties, and assumptions, and factors may arise over time that lead us to
change our methods, estimates, and judgments. For example, changes to our
standard terms for sales of our products could lead to changes in the
application of our accounting policies. Changes in any of our assumptions may
adversely affect our reported financial results.
Class action
securities litigation or shareholder derivative litigation, if instituted
against us, could result in substantial costs and a diversion of our management
resources, which could significantly harm our business.
In
May 2012, two shareholder complaints were filed in the U.S. District Court for
the Southern District of Florida against the Company and certain of its
officers and directors as purported class actions on behalf of all purchasers
of the Companys common stock between January 9, 2012 and May 7, 2012. The
cases were filed under the captions
James H. Harrison, Jr. v. MAKO Surgical Corp. et al.,
No. 12-cv-60875 and
Brian Parker v. MAKO Surgical Corp. et al.,
No. 12-cv-60954. The court consolidated the
Harrison
and
Parker
complaints under the caption
In re MAKO Surgical Corp. Securities
Litigation
, No. 12-60875-CIV-Cohn/Seltzer, and appointed Oklahoma Firefighters Pension and Retirement System and
Baltimore County Employees Retirement System to serve as co-lead plaintiffs.
In September 2012, the co-lead plaintiffs filed an amended complaint that
expanded the
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proposed
class period through July 9, 2012. The amended complaint alleges the Company,
its Chief Executive Officer, President and Chairman, Maurice R. Ferré, M.D.,
and its Chief Financial Officer, Fritz L. LaPorte, violated federal securities
laws by making misrepresentations and omissions during the proposed class
period about the Companys financial guidance for 2012 that artificially
inflated the Companys stock price. The amended complaint seeks an unspecified
amount of compensatory damages, interest, attorneys and expert fees, and
costs. In October 2012, the Company, Dr. Ferré, and Mr. LaPorte filed a motion
to dismiss the amended complaint in its entirety. The court has not ruled on
that motion.
Additionally,
in June and July 2012, four shareholder derivative complaints were filed
against the Company, as nominal defendant, and its board of directors, as well
as Dr. Ferré and, in two cases, Mr. LaPorte. Those complaints allege that the
Companys directors and certain officers violated their fiduciary duties,
wasted corporate assets and were unjustly enriched by allowing the Company to
make misrepresentations or omissions that exposed the Company to the Harrison and
Parker class actions and damaged the Companys goodwill.
Two
of the derivative actions were filed in the Seventeenth Judicial Circuit in and
for Broward County, Florida and have been consolidated under the caption
In re MAKO
Surgical Corporation Shareholder Derivative Litigation
, No.
12-cv-16221. By order dated July 3, 2012, the court stayed
In re MAKO Surgical Corporation
Shareholder Derivative Litigation
pending a ruling on the motion to
dismiss filed in the
In re MAKO Surgical Corp.
Securities Litigation
class action.
The
two other actions were filed in the U.S. District Court for the Southern
District of Florida under the captions
Todd Deehl v. Ferré et al
., No.
12-cv-61238 and
Robert Bardagy v. Ferré et al
., No. 12-cv-61380. On August
29, 2012, the court consolidated these two federal cases under the caption
In re MAKO
Surgical Corp. Derivative Litig.
Case No. 12-61238-CIV-COHN-SELTZER
and approved the filing of a consolidated complaint. The consolidated complaint
alleges that MAKOs directors and two of its officers breached fiduciary
duties, wasted corporate assets and were unjustly enriched by issuing, or
allowing the issuance of, annual sales guidance for 2012 that they allegedly
knew lacked any reasonable basis. The consolidated complaint seeks an
unspecified amount of damages, attorneys and expert fees, costs and corporate
reforms to allegedly improve MAKOs corporate governance and internal
procedures. On October 31, 2012, MAKO and the individual defendants each filed
motions to dismiss the consolidated complaint. The court has not ruled on those
motions.
Also
on October 31, 2012, the Companys board of directors appointed a demand review
committee, consisting of two independent directors, to review, investigate, and
prepare a report and recommendation to the full board regarding the claims
raised in the federal derivative action,
In re MAKO Surgical Corp. Derivative Litig
.,
and a demand made on the board by two Company shareholders, Amy and Charles
Miller, challenging the Companys sales projections for 2012 and
statements about its future financial outlook and demanding that the board of
directions file suit on behalf of the Company. Additionally, on November 19, 2012, upon recommendation of
the demand review committee, the Company and the individual defendants filed a
joint motion to stay the federal derivative action pending the completion of
the demand review committees investigation. The court has not ruled on the
motion to stay. The demand review committee has not yet completed its review,
investigation and report.
Risks Related to Our Intellectual Property
If we, or the other parties from whom we
license intellectual property, are unable to secure and maintain patent or
other intellectual property protection for the intellectual property contained
in our products, our ability to compete will be harmed.
Our
commercial success depends, in part, on obtaining and maintaining patent and
other intellectual property protection for the technologies contained in our
products. The patent positions of medical device companies, including ours, can
be highly uncertain and involve complex and evolving legal and factual
questions. Our patent position is uncertain and complex, in part, because of
our dependence on intellectual property that we license from others. If we, or
the other parties from whom we license intellectual property, fail to obtain
and
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maintain adequate patent or
other intellectual property protection for intellectual property contained in
our products, or if any protection is reduced or eliminated, others could use
the intellectual property contained in our products, resulting in harm to our
competitive business position. In addition, patent and other intellectual
property protection may not provide us with a competitive advantage against
competitors that devise ways of making competitive products without infringing
any patents that we own or have rights to.
U.S.
patents and patent applications may be subject to interference proceedings and
U.S. patents may be subject to reexamination proceedings in the U.S. Patent and
Trademark Office. Foreign patents may be subject to opposition or comparable
proceedings in the corresponding foreign patent offices. Any of these
proceedings could result in loss of the patent or denial of the patent
application, or loss or reduction in the scope of one or more of the claims of
the patent or patent application. Changes in either patent laws or in
interpretations of patent laws may also diminish the value of our intellectual
property or narrow the scope of our protection. Interference, reexamination and
opposition proceedings may be costly and time consuming, and we, or the other
parties from whom we license intellectual property, may be unsuccessful in
defending against such proceedings. Thus, any patents that we own or license
may provide limited or no protection against competitors. In addition, our
pending patent applications and those we may file in the future may have claims
narrowed during prosecution or may not result in patents being issued. Even if
any of our pending or future applications are issued, they may not provide us
with adequate protection or any competitive advantages. Our ability to develop
additional patentable technology is also uncertain.
Non-payment
or delay in payment of patent fees or annuities, whether intentional or
unintentional, may also result in the loss of patents or patent rights
important to our business. Many countries, including certain countries in
Europe, have compulsory licensing laws under which a patent owner may be
compelled to grant licenses to other parties. In addition, many countries limit
the enforceability of patents against other parties, including government
agencies or government contractors. In these countries, the patent owner may
have limited remedies, which could materially diminish the value of the patent.
In addition, the laws of some foreign countries do not protect intellectual
property rights to the same extent as do the laws of the U.S., particularly in
the field of medical products and procedures.
If we are unable to prevent unauthorized
use or disclosure of our proprietary trade secrets and unpatented know-how, our
ability to compete will be harmed.
Proprietary
trade secrets, copyrights, trademarks and unpatented know-how are also very
important to our business. We rely on a combination of trade secrets,
copyrights, trademarks, confidentiality agreements and other contractual
provisions and technical security measures to protect certain aspects of our
technology, especially where we do not believe that patent protection is
appropriate or obtainable. We require our employees and consultants to execute
confidentiality agreements in connection with their employment or consulting
relationships with us. We also require our employees and consultants to
disclose and assign to us all inventions conceived during the term of their
employment or engagement while using our property or which relate to our
business. We also have taken precautions to initiate reasonable safeguards to
protect our information technology systems. However, these measures may not be
adequate to safeguard our proprietary intellectual property and conflicts may,
nonetheless, arise regarding ownership of inventions. Such conflicts may lead
to the loss or impairment of our intellectual property or to expensive
litigation to defend our rights against competitors who may be better funded
and have superior resources. Our employees, consultants, contractors, outside
clinical collaborators and other advisors may unintentionally or willfully
disclose our confidential information to competitors. In addition,
confidentiality agreements may be unenforceable or may not provide an adequate
remedy in the event of unauthorized disclosure. Enforcing a claim that a third
party illegally obtained and is using our trade secrets is expensive and time
consuming, and the outcome is unpredictable. Moreover, our competitors may
independently develop equivalent knowledge, methods and know-how. Unauthorized
parties may also attempt to copy or reverse engineer certain aspects of our
products that we consider proprietary. As a result, other parties may be able
to use our proprietary technology or information, and our ability to compete in
the market would be harmed.
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We could become subject to patent and other
intellectual property litigation that could be costly, result in the diversion
of managements attention, require us to pay damages and force us to
discontinue selling our products.
The
medical device industry is characterized by competing intellectual property and
a substantial amount of litigation over patent and other intellectual property
rights. In particular, the fields of orthopedic implants and CAS are well
established and crowded with the intellectual property of competitors and
others. A number of companies in our market, as well as universities and
research institutions, have issued patents and have filed patent applications
which relate to the use of CAS and, to a lesser extent, haptics and robotics.
Determining
whether a product infringes a patent involves complex legal and factual issues,
and the outcome of a patent litigation action is often uncertain. We have not
conducted an extensive search of patents issued or assigned to other parties,
including our competitors, and no assurance can be given that patents
containing claims covering our products, parts of our products, technology or
methods do not exist, have not been filed or could not be filed or issued.
Because of the number of patents issued and patent applications filed in our
technical areas, our competitors or other parties, including parties from whom
we license intellectual property, may assert that our products and the methods
we employ in the use of our products are covered by U.S. or foreign patents
held by them. In addition, because patent applications can take many years to
issue and because publication schedules for pending applications vary by
jurisdiction, there may be applications now pending of which we are unaware and
which may result in issued patents which our current or future products
infringe. Also, because the claims of published patent applications can change
between publication and patent grant, there may be published patent
applications that may ultimately issue with claims that we infringe. There
could also be existing patents that one or more of our products or parts may
infringe and of which we are unaware. As the number of competitors in the
market for CAS and robotics assisted implant systems grows, and as the number
of patents issued in this area grows, the possibility of patent infringement
claims by or against us increases. In certain situations, we or parties from
whom we license intellectual property may determine that it is in our best
interests or their best interests to voluntarily challenge a partys products
or patents in litigation or other proceedings, including patent interferences
or reexaminations. As a result, we may become involved in litigation or other
proceedings that could be costly, result in diversion of managements
attention, require us to pay damages and force us to discontinue selling our
products.
Infringement
actions and other intellectual property claims and proceedings brought against
or by us, whether with or without merit, may cause us to incur substantial
costs and could place a significant strain on our financial resources, divert
the attention of management from our business and harm our reputation. Some of
our competitors may be able to sustain the costs of complex patent or
intellectual property litigation more effectively than we can because they have
substantially greater resources.
We
cannot be certain that we will successfully defend against allegations of
infringement of patents and intellectual property rights of others. In the
event that we become subject to a patent infringement or other intellectual
property lawsuit and if the other partys patents or other intellectual
property were upheld as valid and enforceable and we were found to infringe the
other partys patents or violate the terms of a license to which we are a
party, we could be required to pay damages. We could also be prevented from
selling our products unless we could obtain a license to use technology or
processes covered by such patents or were able to redesign the product to avoid
infringement. A license may not be available at all or on commercially
reasonable terms or we may not be able to redesign our products to avoid
infringement. Modification of our products or development of new products could
require us to conduct clinical trials and to revise our filings with the FDA
and other regulatory bodies, which would be time consuming and expensive. In
these circumstances, we may be unable to sell our products at competitive
prices or at all, our business and operating results could be harmed and our
stock price may decline. In addition, any uncertainties resulting from the
initiation and continuation of any litigation could have a material adverse
effect on our ability to raise the funds necessary to continue our operations.
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We may be subject to damages resulting from
claims that our employees, our consultants or we have wrongfully used or
disclosed alleged trade secrets of their former employers.
Many
of our employees and consultants were previously employed at universities or
other medical device companies, including our competitors or potential
competitors. We could in the future be subject to claims that these employees
or consultants, or we, have inadvertently or otherwise used or disclosed trade
secrets or other proprietary information of their former employers. Litigation
may be necessary to defend against these claims. If we fail in defending
against such claims, a court could order us to pay substantial damages and
prohibit us from using technologies or features that are essential to our
products and processes, if such technologies or features are found to
incorporate or be derived from the trade secrets or other proprietary
information of the former employers. In addition, we may lose valuable
intellectual property rights or personnel. A loss of key research personnel or
their work product could hamper or prevent our ability to commercialize certain
potential products, which could severely harm our business. Even if we are
successful in defending against these claims, such litigation could result in
substantial costs and be a distraction to management.
Risks Related to Regulatory Compliance
If we fail to comply with the extensive
government regulations relating to our business, we may be subject to fines,
injunctions and other penalties that could harm our business.
Our
medical device products and operations are subject to extensive regulation by
the FDA, pursuant to the Federal Food, Drug, and Cosmetic Act, or FDCA, and
various other federal, state and foreign governmental authorities. Government
regulations and requirements specific to medical devices are wide ranging and
govern, among other things:
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design, development and
manufacturing;
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testing, labeling and
storage;
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clinical trials;
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product safety;
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marketing, sales and
distribution;
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premarket clearance or
approval;
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record keeping procedures;
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advertising and
promotions;
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recalls and field corrective
actions;
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post-market surveillance,
including reporting of deaths or serious injuries and malfunctions that, if
they were to recur, could lead to death or serious injury; and product
export.
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In
the U.S., before we can market a new medical device, or a new use of, or claim
for, or significant modification to, an existing product, we must first receive
either premarket clearance under Section 510(k) of the FDCA, or approval of a
PMA from the FDA, unless an exemption applies. In the 510(k) marketing
clearance process, the FDA must determine that a proposed device is
substantially equivalent to a device legally on the market, known as a
predicate device, with respect to intended use, technology and safety and
effectiveness, in order to clear the proposed device for marketing. Clinical
data is sometimes required to support substantial equivalence. The PMA approval
pathway requires an applicant to demonstrate the safety and effectiveness of
the device based, in part, on data obtained in clinical trials. Both of these
processes can be expensive and lengthy and entail significant user fees, unless
exempt. The FDAs 510(k) marketing clearance process usually takes from three
to 12 months, but it can last longer. The process of obtaining PMA approval is
much more costly and uncertain than the 510(k) marketing clearance process. It
generally takes from one to three years, or even longer, from the time the PMA
application is submitted to the FDA until an approval is obtained. There is no
assurance that we will be able to obtain FDA clearance or approval for any of
our new products on a timely basis, or at all.
The
FDA is currently considering proposals to reform its 510(k) marketing clearance
process and such proposals could include increased requirements for clinical
data and a longer review period. For example, in July
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2011, the FDA issued a
draft guidance document entitled 510(k) Device Modifications: Deciding When to
Submit a 510(k) for a Change to an Existing Device, which is intended to
assist manufacturers in deciding whether to submit a new 510(k) for changes or
modifications made to the manufacturers previously cleared device. Once
finalized, the draft guidance will replace the 1997 guidance document on the
same topic. The new draft guidance would make substantive changes to existing
policy and practice regarding the assessment of whether a new 510(k) is
required for changes or modifications to existing devices. Specifically, the
new draft guidance, once finalized, would take a more conservative approach and
require new 510(k)s for certain changes or modifications to existing, cleared
devices that might not have triggered new 510(k)s under the 1997 guidance. We
cannot predict which of the 510(k) marketing clearance reforms currently being
discussed and/or proposed might be enacted, finalized or implemented by the FDA
and whether the FDA will propose additional modifications to the regulations
governing medical devices in the future. Any such modification could have a
material adverse effect on our ability to commercialize our products.
The
FDA, state, foreign and other governmental authorities have broad enforcement
powers. Our failure to comply with applicable regulatory requirements could
result in governmental agencies or a court taking action, including any of the
following sanctions:
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untitled letters, warning
letters, fines, injunctions, consent decrees and civil penalties;
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customer notifications or
repair, replacement, refunds, detention or seizure of our products;
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operating restrictions or
partial suspension or total shutdown of production;
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refusing or delaying
requests for 510(k) marketing clearance or PMA approvals of new products or
modified products;
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withdrawing 510(k)
marketing clearances or PMA approvals that have already been granted;
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refusing to provide
Certificates for Foreign Government (CFG);
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refusing to grant export
approval for our products; or
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pursuing criminal
prosecution.
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In
addition, in the course of performing our business we obtain certain
confidential patient health information, such as patient names and dates of
MAKOplasty procedures. Although we believe that we are neither a covered entity
nor, as of February 17, 2010, a business associate of our hospital customers
and, as such, are not directly subject to the standards set forth in HIPAA or
HITECH, there is no guarantee that the government will agree with our
determination. If the government determines that we are a business associate,
we could be subject to enforcement measures, including civil and criminal
penalties and fines for violations of the privacy or security standards.
Further, we have entered into agreements with certain covered entity customers
that contain commitments by us to protect the privacy and security of patients
health information and, in some instances, require that we indemnify the
covered entity for claims, liability, damages and costs or expenses arising out
of or in connection with a breach of this covenant by us. If we were to violate
one of these covenants, we could lose customers and be exposed to liability
and/or reputational damage.
Failure to obtain regulatory approval in
additional foreign jurisdictions will prevent us from expanding the
commercialization of our products abroad.
To
be able to market and sell our products in most other countries, we must obtain
regulatory approvals and comply with the regulations of those countries. These
regulations, including the requirements for approvals and the time required for
regulatory review, vary from country to country. Obtaining and maintaining
foreign regulatory approvals are expensive, and we cannot be certain that we
will receive regulatory approvals in any foreign country in which we plan to
market our products. If we fail to obtain or maintain regulatory approval in
any foreign country in which we plan to market our products, our ability to
generate revenue will be harmed.
As
we modify existing products or develop new products in the future, including
new instruments, we apply for permission to affix to such products a European
Union CE mark, which is a legal requirement for medical devices intended for
sale in the European Union. In addition, we will be subject to annual
regulatory audits in order to maintain those CE mark permissions. In November
2008, the British Standards Institute, or BSI,
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an independent global notified
body, conducted an annual assessment of our quality management system, which
concluded that our quality management system complied with the requirements of
ISO13485 in all material respects. As a result of the change in classification
of orthopedic implants in the European Union, we have updated our ISO
certifications to include class III devices, such as orthopedic implants. BSI
conducts annual assessments of our quality management system in order to
confirm that our quality management system complies with the requirements of
ISO13485 in all material respects and periodic full recertification audits of
our quality management system in order to confirm that we comply with the
requirements of the Medical Devices Directive of the European Union. Our last
full recertification audit was completed in December 2010 and BSI recommended
continuation of our certification allowing us to apply the CE Mark to our
products. During our last annual assessment in November 2012, we received no
major nonconformances. We expect that BSI will continue to conduct annual
audits to assess our compliance with BSI certification standards. In connection
with achieving CE marking, which is a legal requirement for medical devices
intended for sale in the European Union, we have also submitted design dossiers
to BSI for the purpose of review and approval. We do not know whether we will
be able to obtain permission to affix the CE mark for new or modified products
or that we will continue to meet the quality and safety standards required to
maintain the permissions we have already received. If we are unable to maintain
permission to affix the CE mark to our products, we will no longer be able to
sell our products in member countries of the European Union or other areas of
the world that require CE approval of medical devices.
If we or our third-party manufacturers or
suppliers fail to comply with the FDAs Quality System Regulation, our
manufacturing operations could be interrupted and our product sales and
operating results could suffer.
We
and some of our third-party manufacturers and suppliers are required to comply
with the FDAs Quality System Regulation, or QSR, which covers the methods and
documentation of the design, testing, production, control, quality assurance,
labeling, packaging, sterilization, storage and shipping of our products. We
and our manufacturers and suppliers are also subject to the regulations of
foreign jurisdictions regarding the manufacturing process if we or our
distributors market our products abroad. The FDA enforces the QSR through
periodic inspections of manufacturing facilities. In January 2009, the FDA
conducted its first audit of our facility, during which we received certain
inspectional observations. We have addressed the observations and submitted a
response to the FDA on a voluntary basis. We believe all inspectional
observations were resolved and we received a copy of the establishment
inspection report (EIR) and a cover letter from the FDA in August 2009. We
continue to monitor our quality management efforts in order to improve our
overall level of compliance. To date, our facilities have not been inspected by
any other regulatory authorities. We anticipate that we and certain of our
third-party manufacturers and suppliers will be subject to inspections by
regulatory authorities in the future. If our facilities or those of our
manufacturers or suppliers fail to take satisfactory corrective action in
response to an adverse QSR inspection, the FDA could take enforcement action,
including any of the following sanctions:
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untitled letters, warning
letters, fines, injunctions, consent decrees and civil penalties;
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customer notifications or
repair, replacement, refunds, detention or seizure of our products;
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operating restrictions or
partial suspension or total shutdown of production;
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refusing or delaying
requests for 510(k) marketing clearance or PMA approvals of new products or
modified products;
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withdrawing 510(k)
marketing clearances or PMA approvals that have already been granted;
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refusing to provide CFGs;
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refusing to grant export
approval for our products; or
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pursuing criminal
prosecution.
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Any
of these sanctions could impair our ability to produce our products in a
cost-effective and timely manner in order to meet our customers demands. We
may also be required to bear other costs or take other actions that may have a
negative impact on our future sales and our ability to generate profits.
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Our products may in the future be subject
to product actions that could harm our reputation, business operations and
financial results.
Manufacturers
may, on their own initiative, initiate a product action, including a
non-reportable market withdrawal or a reportable product recall, for the
purpose of correcting a material deficiency, improving device performance, or
other reasons. Additionally, the FDA and similar foreign governmental
authorities have the authority to require an involuntary recall of
commercialized products in the event of material deficiencies or defects in
design, or manufacture or labeling. In the case of the FDA, the authority to
require a recall must be based on an FDA finding that there is a reasonable
probability that the device would cause serious injury or death. In addition,
foreign governmental bodies have the authority to require the recall of our
products in the event of material deficiencies or defects in design or
manufacture. Product actions involving any of our products would divert
managerial and financial resources and have an adverse effect on our financial
condition and results of operations.
For
example, in 2011, we initiated one product action which we then determined was
reportable to the FDA pursuant to correction / removal guidelines, related to a
voluntary field corrective action concerning a software error discovered during
product surveillance. Under certain circumstances, the error value calculated
by the RIO system, designed for safety and accuracy of the MAKOplasty
procedure, could be incorrect. This incorrect error value could lead to a
possible incorrect interpretation of the registration accuracy of the RIO system,
which could then result in bone resection that is not consistent with the
preoperative surgical plan. We released a software update in February 2011
designed to correct this error. We received a closure notification from the FDA
on January 20, 2012. Most recently, in September 2012, we notified the FDA of a
correction to the software for our RIO system after identifying a malfunction
in the MAKOplasty PKA application that allows the burr tip to exit the haptic
boundary with the burr enabled under certain circumstances. As a result, the
burr may be unrestricted to the desired haptic region during use, potentially
allowing for additional removal of bone or burring divot which may be mediated
with bone cement. To date, no injuries have been reported. The FDA has
classified this as a Class II recall. We expect the software upgrade to be
completed across all units in the United States by March 31, 2013.
Companies
are required to maintain certain records of product actions, even if they
determine such product actions are not reportable to the FDA. If we determine
that certain product actions do not require notification of the FDA, the FDA
may disagree with our determinations and require us to report those actions as
recalls. A future recall announcement could harm our reputation with customers
and negatively affect our sales. In addition, the FDA could take enforcement
action, including any of the following sanctions for failing to report the
recalls when they were conducted or failing to timely report or initiate a
reportable product action:
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untitled letters, warning
letters, fines, injunctions, consent decrees and civil penalties;
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customer notifications or
repair, replacement, refunds, recall, detention or seizure of our products;
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operating restrictions or
partial suspension or total shutdown of production;
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refusing or delaying our
requests for 510(k) marketing clearance or premarket approval application, or
PMA, approvals of new products or modified products;
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withdrawing 510(k)
marketing clearances or PMA approvals that have already been granted;
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refusing to provide
Certificates for Foreign Government, or CFGs;
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refusing to grant export
approval for our products; or
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pursuing criminal
prosecution.
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Any
of these sanctions could impair our ability to produce our products in a
cost-effective and timely manner in order to meet our customers demands. We
may also be required to bear other costs or take other actions that may have a
negative impact on our future sales and our ability to generate profits.
If our products, or malfunction of our
products, cause or contribute to a death or a serious injury, we will be
subject to medical device reporting regulations, which can result in voluntary
corrective actions or agency enforcement actions.
Under
the FDA Medical Device Reporting, or MDR, regulations, we are required to
report to the FDA any incident in which our product may have caused or
contributed to a death or serious injury or in which our product malfunctioned
and, if the malfunction were to recur, would likely cause or contribute to
death or serious injury. In addition, all manufacturers placing medical devices
in European Union markets are legally bound to report any serious or potentially
serious incidents involving devices they produce or sell to the relevant
authority in whose jurisdiction the incident occurred. We have experienced and
anticipate in the future to experience events that require reporting to the FDA
pursuant to the MDR regulations. Any adverse event involving our products could
result in future voluntary corrective actions, such as product actions or
customer notifications, or agency action, such as inspection, mandatory recall
or other enforcement action. Any corrective action, whether voluntary or
involuntary, as well as defending ourselves in a lawsuit, will require the
dedication of our time and capital, distract management from operating our
business, and may harm our reputation and financial results.
In
addition, as the frequency of use of the RIO system increases and our business
continues to grow, we may experience an increase in the number of MDR reports
we file. The decision to file an MDR involves a judgment by us as the
manufacturer. We have made decisions that certain types of events are not
reportable on an MDR; however, there can be no assurance that the FDA will
agree with our decisions. If we fail to report MDRs to the FDA within the
required timeframes, or at all, or if the FDA disagrees with any of our
determinations regarding the reportability of certain events, the FDA could
take enforcement actions against us, which could have an adverse impact on our
reputation and financial results.
We may be subject to fines, penalties or
injunctions if we are determined to be promoting the use of our products for
unapproved or off-label uses, resulting in damage to our reputation and
business.
Our
promotional materials and training methods must comply with FDA and other
applicable laws and regulations, including the prohibition of the promotion of
a medical device for a use that has not been cleared or approved by FDA. Use of
a device outside its cleared or approved indications is known as off-label
use. We believe that the specific surgical procedures for which our products
are marketed fall within the scope of the surgical applications that have been
cleared by the FDA. However, physicians may use our products off-label, as the
FDA does not restrict or regulate a physicians choice of treatment within the
practice of medicine. If the FDA determines that our promotional materials or
training constitutes promotion of an off-label use, it could request that we
modify our training or promotional materials or subject us to regulatory or
enforcement actions, including the issuance of an untitled letter, a warning
letter, injunction, seizure, civil fine and criminal penalties. It is also
possible that other federal, state or foreign enforcement authorities might
take action if they consider our promotional or training materials to
constitute promotion of an unapproved use, which could result in significant
fines or penalties under other statutory authorities, such as laws prohibiting
false claims for reimbursement. In that event, our reputation could be damaged
and adoption of the products would be impaired. Although our policy is to
refrain from statements or actions that could be considered off-label promotion
of our products, the FDA or another regulatory agency could disagree and
conclude that we have engaged in off-label promotion. In addition, the
off-label use of our products may increase the risk of injury to patients, and,
in turn, the risk of product liability claims. Product liability claims are
expensive to defend and could divert our managements attention and result in
substantial damage awards against us.
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We may be subject to fines, penalties, or
licensure requirements, or legal liability, if it is determined that our
MAKOplasty Sales Specialists are practicing medicine without a license.
State
laws prohibit the practice of medicine without a license. Our MAKOplasty Sales
Specialists provide pre-operative and intra-operative clinical and technical
support to our customers, including assistance setting up the equipment,
participation in the pre-operative planning process, and facilitation of the
surgeons use of the RIO system during surgery. We do not believe that our
MAKOplasty Sales Specialists are engaged in the practice of medicine, but
rather are assisting our customers in the safe and proper usage of our
equipment and products. Nevertheless, a governmental authority or individual
actor could allege the activities of our MAKOplasty Sales Specialists to
constitute the practice of medicine. A state may seek to have us discontinue
the services provided by our MAKOplasty Sales Specialists or subject us to
fine, penalties or licensure requirements. Any determination that our
MAKOplasty Sales Specialists are practicing medicine without a license may
result in significant liability to us.
The application of state certificate of
need regulations could substantially limit our ability to sell our products and
grow our business.
Some
states require healthcare providers to obtain a certificate of need or similar
regulatory approval prior to the acquisition of high-cost capital equipment
such as our RIO system. In some states, the process required of our customers
to obtain this certificate is lengthy and could result in a longer sales cycle
for our RIO system. Further, in many cases, only a limited number of these
certificates are available. As a result, our customers may be unable to obtain
a certificate of need for the purchase of our RIO system which could cause our
sales to decline.
Federal regulatory reforms may adversely affect
our ability to sell our products profitably.
From
time to time, legislation is drafted and introduced in Congress that could
significantly change the statutory provisions governing the clearance or
approval, manufacture and marketing of a medical device. In addition, FDA
regulations and guidance are often revised or reinterpreted by the agency in
ways that may significantly affect our business and our products. It is
impossible to predict whether legislative changes will be enacted or FDA regulations,
guidance or interpretations changed, and what the impact of such changes, if
any, may be.
Without
limiting the generality of the foregoing, Congress has enacted, and the
President signed into law, the Food and Drug Administration Amendments Act of
2007, or the Amendments. This law requires, among other things, that the FDA
propose, and ultimately implement, regulations that will require manufacturers
to label medical devices with unique identifiers unless a waiver is received
from the FDA. Once implemented, compliance with those regulations may require
us to take additional steps in the manufacture of our products and labeling.
These steps may require additional resources and could be costly. In addition,
the Amendments will require us to, among other things, pay annual establishment
registration fees to the FDA for each of our FDA registered facilities and
certify to the clinical trial reporting provisions contained in the Amendments.
We may be subject, directly or indirectly,
to federal and state healthcare regulations, including fraud and abuse laws,
and could face substantial penalties if we are unable to fully comply with such
regulations and laws.
While
we do not control referrals of healthcare services or bill directly to Medicare,
Medicaid or other third-party payors, many healthcare laws and regulations
apply to our business. For example, we could be subject to healthcare fraud and
abuse and patient privacy regulation and enforcement by both the federal
government and the states in which we conduct our business. The healthcare laws
and regulations that may affect our ability to operate include:
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the federal healthcare
programs Anti-Kickback Statute, which prohibits, among other things, persons
or entities from soliciting, receiving, offering or providing remuneration,
directly or
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indirectly, in return for
or to induce either the referral of an individual for, or the purchase order
or recommendation of, any item or service for which payment may be made under
a federal healthcare program such as the Medicare and Medicaid programs;
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federal false claims laws
which prohibit, among other things, individuals or entities from knowingly
presenting, or causing to be presented, claims for payment from Medicare,
Medicaid, or other third-party payors that are false or fraudulent, or are
for items or services not provided as claimed, and which may apply to
entities like us to the extent that our interactions with customers may
affect their billing or coding practices;
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the federal Health
Insurance Portability and Accountability Act of 1996, or HIPAA, which
established new federal crimes for knowingly and willfully executing a scheme
to defraud any healthcare benefit program or making false statements in connection
with the delivery of or payment for healthcare benefits, items or services,
as well as leading to regulations imposing certain requirements relating to
the privacy, security and transmission of individually identifiable health
information;
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the Health Information
Technology for Economic and Clinical Health Act, or HITECH, which made
HIPAAs privacy and security standards directly applicable to business
associates of covered entities; and
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state law equivalents of
each of the above federal laws, such as anti-kickback and false claims laws
which may apply to items or services reimbursed by any third-party payor,
including commercial insurers, and state laws governing the privacy of health
information in certain circumstances, many of which differ from each other in
significant ways and often are not preempted by HIPAA, thus complicating
compliance efforts.
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Additionally,
several bills have been passed or are pending, at both the state and federal
levels, that expand the anti-kickback laws to require, among other things,
extensive tracking and maintenance of databases regarding relationships to
physicians and healthcare providers. The Health Care Reform Legislation and
associated regulations impose new reporting and disclosure requirements on
device manufacturers for any transfer of value made or distributed to
physicians and teaching hospitals, effective in 2013. The implementation of the
infrastructure to comply with these bills and regulations could be costly and
any failure to provide the required information may result in civil monetary
penalties.
While
we do not believe that the provisions of HITECH which make HIPAAs privacy and
security standards directly applicable to business associates of covered
entities apply to us since we do not believe that we are a business associate,
there is no guarantee that the government will agree with our determination
that we are not a business associate. If the government determines that we are
a business associate, compliance with the provisions of HITECH could be costly,
and we could be subject to enforcement measures, including civil and criminal
penalties and fines.
The
orthopedic medical device industry is, and in recent years has been, under
heightened scrutiny as the subject of government investigations and enforcement
actions involving manufacturers who allegedly offered unlawful inducements to
potential or existing customers in an attempt to procure their business,
specifically including arrangements with physician consultants. We have
arrangements with surgeons, hospitals and other entities which may be subject
to scrutiny. For example, we have consulting agreements with orthopedic
surgeons using or considering the use of our present and future RIO system and
MAKOplasty implants and disposable products, for assistance in product
development, and professional training and education, among other things. Our
policies prohibit the payment to surgeons and other healthcare professionals
for consulting services in the form of stock options or other equity interests
in our company. We may, however, make payment for some of these consulting
services in the form of royalties or milestone payments rather than per hour or
per diem amounts that would require verification of time worked. In addition,
we sometimes allow hospitals a period of evaluation of our products at no
charge.
If
our operations are found to be in violation of any of the laws described above
or any other governmental regulations that apply to us, including the FCPA, we
may be subject to penalties, including civil and criminal
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penalties, damages,
fines, exclusion from the Medicare and Medicaid programs and the curtailment or
restructuring of our operations. Any penalties, damages, fines, exclusions, curtailment
or restructuring of our operations could adversely affect our ability to
operate our business and our financial results. The risk of our being found in
violation of these laws is increased by the fact that many of these laws are
broad and their provisions are open to a variety of interpretations. Any action
against us for violation of these laws, even if we successfully defend against
it, could cause us to incur significant legal expenses and divert our
managements attention from the operation of our business. If the surgeons or
other providers or entities with whom we do business are found to be
non-compliant with applicable laws, they may be subject to sanctions, which
could also have a negative impact on our business.
New regulations
related to conflict minerals could adversely impact our business.
The
Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions
to improve transparency and accountability concerning the supply of certain
minerals, known as conflict minerals, originating from the Democratic Republic
of Congo (DRC) and adjoining countries. As a result, in August 2012 the SEC
adopted annual disclosure and reporting requirements for those companies who
use conflict minerals mined from the DRC and adjoining countries in their
products. These new requirements will require due diligence efforts in 2013,
with initial disclosure requirements beginning in May 2014. There will be costs
associated with complying with these disclosure requirements, including for diligence
to determine the sources of conflict minerals used in our products and other
potential changes to products, processes or sources of supply as a consequence
of such verification activities. The implementation of these rules could
adversely affect the sourcing, supply and pricing of materials used in our
products. As there may be only a limited number of suppliers offering conflict
free conflict minerals, we cannot be sure that we will be able to obtain
necessary conflict minerals from such suppliers in sufficient quantities or at
competitive prices. Also, we may face reputational challenges if we determine
that certain of our products contain minerals not determined to be conflict
free or if we are unable to sufficiently verify the origins for all conflict
minerals used in our products through the procedures we may implement.