Overview
Overview of MEDITE Cancer Diagnostics, Inc.
MEDITE
Cancer Diagnostics, Inc. (the “Company”,
“it”, “we”, or “us”), formerly
CytoCore, Inc
.
, specializes
in the marketing and selling of MEDITE core products (instruments
and consumables), manufacturing, development of new solutions in
histology and cytology and marketing of molecular biomarkers. These
premium medical devices and consumables are for detection, risk
assessment and diagnosis of cancerous and precancerous conditions
and related diseases. Depending upon the type of cancer, segments
within the current target market of approximately $5.8 billion are
growing at annual rates between 10% and 30%. The well-established
brand of MEDITE Cancer Diagnostics is well received and remains a
professional description of the Company’s business. The
Company’s trading symbol is “MDIT”.
In 2016
we focused on implementation of several growth opportunities
including enhanced distribution of core products through focused
sales and distribution channel(s), newly developed and patent
pending assays, new laboratory devices and several marketing
projects like the Chinese standardization projects for histology
and cytology. The Company is optimistic about recent
marketing efforts focusing on larger laboratory chains and other
important strategic relationships. The Company has 75
employees in four countries, a distribution network to about 80
countries and a wide range of products for anatomic pathology,
histology and cytology laboratories available for
sale.
The
Company successfully sold more internally developed and
manufactured devices in 2016 compared to 2015.
After
the successful market entrance into China in 2014, the
Company’s revenues in this market are approximately $897,000
in 2015 compared to $1 million in 2016. The Company’s delayed
financing during 2015 and 2016 has impacted the delivery of sales
due to availability of raw materials, parts, and work in progress
inventory and the needed investment in that inventory. The Company
originally anticipated sales in 2016 of approximately $2 million
with the assumption that the timing of the scheduled capital raise
would happen earlier in the year. Due to the delay in the capital
raise, the Company revised its target to $1.3 million. Total sales
for the year ended December 31, 2016 were approximately $1 million
compared to $897,000 for the same period in 2015. The
Chinese market is growing quickly, and the Company expects it will
be one of two largest markets for its products. By working with its
Chinese distributor, UNIC Medical, the Company has successfully
received China Food and Drug Administration (“CFDA”)
approval for all MEDITE histology laboratory devices at the end of
2014, and for the Cytology device in 2015. The UNIC Medical sales
team is selling MEDITE products in China with slightly increasing
volumes. Also, together with UNIC, we are part of a
government supported project to standardize the histology
laboratory process in China. UNIC Medical is using MEDITE equipment
and consumables for processing, and launching new assays. UNIC has
taken an active role in branding MEDITE Cancer Diagnostics in
China. Medite is working through certain product rollout issues
which have impacted its anticipated increase in sales.
On May 31, 2016, UNIC received CFDA approval as a Class I in
vitro diagnostic reagent for MEDITE's "SureThin" cell preservation
solution. As China adopts Cytopathology standards across
the country, the Company expects 'Liquid Based Cytology Tests
(LBC)' will be used for the majority of Pap collections for
cervical cancer screening. We are prepared to sell the complete
SureThin product line, including the already approved Processor to
this potential market of 485 million women between the ages of 16
and 64 years of age. Management anticipates launching the product
in China by the third quarter of 2017 and in the U.S. by the fourth
quarter of 2017.
The Company’s cytology product line, revenue declined
in Europe (non-Gyn and Gyn applications) during 2016 related to a
competitive threat that management believes has been alleviated.
The Company is in the process of moving forward the submission of
an application to the U.S. Food and Drug Administration
(“FDA”) for SureThin Gyn applications. Once approved we
can compete with some of the dominant suppliers in this $600
million market and target major strategic lab partners. The impact
of the gynecology segment SureThin solution in the US and China
market will drive significant new revenue and gross margin
improvement opportunities in 2017.
The
developed and U.S. patented self-collection device SoftKit is
targeting the growing POC & POP (point of care or point of
people care) market. Growth in this area is due to consumer driven
health care requirements and the necessity to support and address
incremental patient population needs for screening and on-going
diagnostic tests. SoftKit serves as just such a product, addressing
this market requirement. SoftKit is planned to be sold through
various marketing channels that serve the gynecology physician
consumer health and emerging post-acute care as the influence of
clinical labs are expanded. Initially the SoftKit is targeted at
the uterine cancer/HPV screening market. The next phase of testing
will include cervical screening.
Management
believes that 2017 developments, allows us to more fully leverage
the excellent products and biomarker solutions from CytoCore
component of MEDITE. The first entry will be the introduction of
SureCyte+ (fluorogenic) instant staining, offering tremendous lab
efficiencies and enhanced patient care through the use of
SureCyte+. SureCyte+ is the first of many new offering under the
SureCyte brand.
MEDITE’s
Breast Cancer Risk Assessment Product is non-invasive, easy,
gentle, and highly sensitive, enabling young women between 20 and
45 years of age to obtain their individual breast cancer risk
assessment. An automatic and gentle collection device for breast
cells together with a newly developed assay is used to determine a
woman’s risk to develop breast cancer. Knowing the
individual breast cancer risk will provide relief to a majority of
young women who have no elevated risk of developing breast cancer.
For those who have a higher risk, it enables them to monitor that
risk closer for earlier treatment, if needed. The earlier a
precancerous or cancerous situation is detected, the greater the
chance for reducing the fatality rate for these
conditions. Product development of BreastPap continued
in 2016, reflecting feedback from doctors’ test use of
prototype units’ and doctor’s office feedback to
continuously improve the product prior to launching. During the
third quarter, the Company initiated a co-operation with Leibnitz
University of Hannover, Germany, on the final design and usability
of the BreastPap. The project is scheduled to begin on February 15,
2017. The delay in market introduction by management is due to
additional quality assurance measures being performed by the
Company as well as insuring that US feedback from providers are
considered. The Company’s BreastPap product is a risk
assessment tool planned to evaluate the breast cancer risk on
certain results based on the treatment. Upon
receiving the results, women, based upon their physicians’
advice may be candidates for further diagnostic testing. The
BreatPap will undergo further customer testing in the US and EU
markets.
The
Company brought several other innovative products closer to
marketability during 2015, and continued during 2016 as listed
above. Also, in early 2015, the German priority patent
for a fully automated system used in the histology lab, a
“Lab-In-One” unit, was granted. This technology, if
successfully accepted by the market, has the ability to change the
competitive landscape within the industry.
During
the first quarter of 2016, the Company opened a second German
manufacturing facility with approximately 4,000 square
feet in Nussloch. This facility is utilizing the local
workforce and their experience for the specialized skills required
for manufacturing of the newly developed and updated Microtomes
product line and the newly developed Cryostat (instruments used for
sectioning tissue biopsies). During 2016, the Company
manufactured and delivered from order backlog 70 units. The Company
began manufacturing the new Cryostat line during the first quarter
of 2017 and anticipates the first pre serial series to be available
before the end of the second quarter.
The
Company authorized and completed a reverse split of its common
stock of 1:100 to support its present capital needs and future
anticipated growth. This reverse split was effective March 12,
2015. As a result of the reverse split, the Company’s issued
and outstanding common stock was reduced to 19,427,331 from
1,942,733,100.
In
November 2016 MEDITE initiated a $3,000,000 capital raise to
support reduction of outstanding liabilities and working capital
and to increase infrastructure for innovation and growth. This
offering was closed prior to December 31, 2016. In March 2017 the
Company initiated a new offering of up to $4,250,000.
Background
The
Company was incorporated in Delaware in December 1998 as the
successor to Bell National Corporation, a company incorporated in
California in 1958. In December 1998, Bell National, which was then
a shell corporation, acquired InPath, LLC, a development stage
company engaged in the design and development of products used in
screening for cervical and other types of cancer. For accounting
purposes, the acquisition was treated as if InPath had acquired
Bell National. However, Bell National continued as the legal entity
and the registrant for Securities and Exchange Commission
(“SEC”) filing purposes. Bell National merged into
Ampersand Medical Corporation, its wholly-owned subsidiary, in
May 1999, in order to change its state of incorporation to
Delaware. In September 2001, we acquired 100% of the outstanding
stock of AccuMed International, Inc., by means of a merger of
AccuMed into our wholly-owned subsidiary. Shortly after the AccuMed
merger, we changed our name to Molecular Diagnostics, Inc.
Subsequently, in June 2006, we changed our name to CytoCore,
Inc.
On
January 11, 2014, MEDITE Cancer Diagnostics, Inc. (formerly
CytoCore Inc. ., the “Company”) entered into a Stock
Purchase Agreement (the “Purchase Agreement”) with
MEDITE Enterprises, Inc., a Florida corporation
(“MEDITE”), MEDITE GmbH, a corporation organized under
the laws of Germany and wholly owned by MEDITE (the
“Subsidiary”), Michael Ott and Michaela Ott, the sole
shareholders of the MEDITE (collectively, the
“Shareholders”).
Pursuant
to the Purchase Agreement, the Company agreed to acquire
100% of the issued and outstanding capital stock of MEDITE from the
Shareholders in exchange for the issuance of up to 15,000,000
shares of the Company’s common stock (the
“Shares”) to the Shareholders. The Purchase Agreement
also provides that the Shareholders will indemnify the Company for
certain losses during the one year period following the
“Closing” as defined in the Purchase Agreement. In
connection with such indemnification rights, the Purchase Agreement
provided that 3,750,000 of the Shares was deposited with the
Company and held for a period of 12 months to cover certain
indemnification claims that the Company may have against the
Shareholders. These shares were released to the
Shareholders during 2015.
Closing
of the acquisition of MEDITE was conditioned upon: (i) the
completion of a private placement transaction resulting in gross
cash proceeds to the Company of $1.25 million (the “Private
Placement”), and (ii) the conversion of certain accrued wages
of the Company into shares of the Company’s common stock. In
addition, as of the Closing, there shall be no more than 18,750,000
shares of the Company’s common stock exclusive of any shares
of the Company’s common stock issued in connection with the
Private Placement.
On
April 3, 2014, pursuant to the terms and conditions of the Purchase
Agreement, as amended to date, the Company acquired 100% of the
issued and outstanding capital stock of MEDITE in exchange for the
issuance of up to 15,000,000 shares of the Company’s common
stock to the Shareholders, of which 14,687,500 shares were issued
upon the Closing of the Acquisition. In the event that the Company
issues less than $2,500,000 at a price $1.60 in the Private
Placement, the Company was required to issue an additional 312,500
shares of common stock to the Shareholders. The Company issued
these shares during 2015. Also during 2014, prior to the reverse
merger, the Company issued 697,234 shares of common stock for
payment of certain accrued wages of the Company.
Recent Developments
On
November 2, 2016, the Company filed a Form D Notice of Exempt
Offering of Securities for up to $3,000,000 (“$3 Million Form
D”). The Company received $411,915, as an initial funding of
this offering at $0.50 a share, by selling 823,830 shares of common
stock. The offering is subject to a up to 7.5% commission paid to
their broker/dealers totaling $30,894 plus warrants of 7.5%
coverage at $0.50 conversion price per share, with a term of 5
years. The offering closed prior to December 31, 2016.
The
Company filed a Form D on March 7, 2017, initiating a total
offering of $4,250,000, of which $25,000 in stock subscription were
received by the Company as of December 31, 2016, representing the
purchase of 50,000 shares of common stock.
On
October 26, 2016, the board of directors appointed David E.
Patterson to the position of Chief Executive Officer and Director
of the Company. Pursuant to Mr. Patterson’s executive
employment agreement with the Company, the commencement date of Mr.
Patterson’s appointment was October 31, 2016. He was granted
250,000 restricted shares of the Company’s common stock
(the “Shares”). The shares
will vest in
three equal installments on each of the first
three annual anniversary dates of Mr. Patterson’s
appointment, so long as he remains employed by the Company through
each such vesting date. The Company valued the Shares at $0.50 per
share, based on the fair value of the stock on the date of grant.
The Company recorded approximately $7,000 of expense related to
stock based compensation expense during the year ended December 31,
2016.
During
June 2016, the Company issued 292,167 shares of common stock to
directors and consultants for accrued fees totaling to $274,870 as
follows. The Company issued 68,750, 55,462, 68,750 shares of common
stock to our director John Abeles for $55,000, Augusta Ocana for
$44,370 and former director Alexander Miley for $55,000,
respectively. The Company issued 63,125 shares of common stock to
Northlea Partners, LLC, for the accrued fees of $50,500, a
Partnership that John Abeles is the General Partner. The Company
issued 20,455 shares of common stock for accrued fees of $45,000
and 15,625 shares of common stock for $25,000 of fees to
consultants.
Information about Industry Segments
The
Company operates in one industry segment for cancer diagnostics
instruments and consumables for histology and cytology
laboratories.
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Definition:
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Histology
- Cancer diagnostics based on the structures of cells in
tissues
Cytology
- Cancer diagnostics based on the structures of individual
cells
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Cancers
and precancerous conditions are defined in terms of structural
abnormalities in cells. For this reason cytology is widely used for
the detection of such conditions while histology is typically used
for the confirmation, identification and characterization of the
cellular abnormalities detected by cytology. Other diagnostics
methods such as marker-based assays provide additional information
that can supplement, but which cannot replace cytology and
histology. The trend towards more personalized treatment of cancer
increases the need for cytology, histology and assays for
identifying and testing the best treatment alternatives. We believe
that this segment will therefore be increasingly important for
future development of strategies to fight the “cancer
epidemic” (World Health Organization: World Cancer Report
2014) which expects about a 50 % increase in cancer cases worldwide
within the next 20 years.
This
segment sees a trend toward, and demand for, higher automation for
more throughput in bigger laboratories, process standardization,
digitalization of cell and tissue slides and computer aided
diagnostic systems, while also looking for cost effective
solutions. In the US the Patient Protection and Affordable Care Act
(the “Act”) is a national example for the industry.
More people have health insurance and therefore can afford early
cancer screening, while at the same time the payers for health care
continue looking for cost reductions. Management continues to
assess the viability of the Act and future regulations regarding
the insurability of US citizens and providing lower cost
solutions.
MEDITE
acts as a one-stop-shop for histology (also known as anatomic
pathology) laboratories either as part of a hospital, as part of a
chain of laboratories or individually. It is one out of only four
companies offering all equipment and consumables for these
laboratories worldwide. The MEDITE brand stands for innovative and
high quality products – most equipment made in Germany
– and competitive pricing.
For the
cytology market, MEDITE offers a wide range of consumable products
and equipment; in particular for liquid-based-cytology which is an
important tool in cancer screening and detection in the field of
cervical, bladder, breast, lung and other cancer types. It also
developed an innovative, easy to use standardized staining
solutions, and a very innovative and effective early cancer
detection marker-based assays. These new developments are cost
effective solutions able to replace more expensive competitive
products, and therefore are also becoming the first choice for the
growing demand in emerging countries.
All of
the Company’s operations during the reporting period were
conducted and managed within this segment, with management teams
reporting directly to our Chief Executive Officer. Further during
this 2016 period we added key personnel with excellent historical
performance in new product commercialization, sales development and
internal operations improvement. For information on revenues,
profit or loss and total assets, among other financial data,
attributable to our operations, see the consolidated financial
statements included herein.
Description of Business
MEDITE
manufactures, develops, markets and sells a wide range of
laboratory devices and consumable supplies for its target market in
the histology and cytology cancer diagnostics segment. Therefore,
most devices and some consumables are manufactured at its German
facility. This facility also acts as central location managing all
international sales and logistics outside of the Americas. A direct
sales force is employed in Germany, Poland and the U.S,
approximately 80 more countries worldwide are covered with an
existing and continuously expanding network of independent
distributors. In the U.S. MEDITE has established sales and
distribution channels that will prioritize its
products.
A
general goal of MEDITE in sales is to act as a one- stop-shop for
its customers. Instrument purchases are usually bigger investments,
with prices often above the $50,000 level, which are more seasonal
and depend significantly on investment budgets. Therefore, MEDITE
also offers to sell the day to day consumables and sees its brand
not just on the devices, but also on the supply
products.
The
U.S. headquarters in Orlando, Florida manages the Company worldwide
and is developing, establishing and realizing the strategic goals
of the Company. It also acts as distributor for the Americas,
maintaining a warehouse with instruments, repair parts and
consumables available for sale and for warranty obligations to its
customers, and taking care of centralized marketing, regulatory
issues and finance. A second location in the U.S. operates as our
research laboratory for cancer assays and other cytology
developments, and is located in the Chicago area. The
facility in Poland functioned as a research and development
facility and light manufacturing through mid-2016 and recently
began selling the Company’s products as our national direct
sales facility,
For
sales, MEDITE is targeting three major areas; U.S., Europe and
China. While the U.S. is currently the largest potential market for
MEDITE products, it is expected that China will experience
continued growth through 2017 due to much higher growth rates than
Europe and the U.S. are currently experiencing, and the Company
expects that trend to continue.
Currently,
MEDITE’s principal customers are histology and cytology
laboratories associated with hospitals or research institutions and
independent laboratories in markets with direct sales and
distributors in markets covered by them. In the U.S. market, MEDITE
executed several distribution contracts with third party sales
organizations additionally to its direct sales. It also
successfully achieved and renewed contracts with three of the
largest Hospital Group Purchasing Organizations: HealthTrust
Purchasing Group, Brentwood, MA (“HealthTrust”), which
oversees approximately 1,400 hospitals and 2,600 other sites,
Premier, Charlotte, NC, which oversees 2,500 hospitals, and another
70,000 other healthcare sites and Mid-Atlantic Group Network of
Shared Services (“Magnet”) with over 600 hospitals and
approximately 4,000 other healthcare sites.
For
manufacturing of its high quality devices at the German facility,
an enterprise resource planning software is used to manage the
material flow and production planning for about 6,000 different
parts. Management has evaluated and is in the process finalizing
its review of a company-wide system anticipated to be implemented
by the end of 2017. Due to the wide range of products, the
availability of all parts is essential to finish a manufactured
product within an acceptable lead time. Smaller equipment items and
all consumable products have to be available at any time to
guarantee the customer continues to work. Usually orders of these
goods are shipped within 24 hours after receiving the order, while
for own-manufactured equipment, the delivery times is between 6 to
12 weeks. This is considered acceptable. Final assembly of our many
products usually begin after the order is confirmed.
The
Company’s strategy is to use its pipeline of newly developed
and currently under development of innovative devices, consumables
and newly developed assays to set new standards in the industry,
create new markets and to take over additional market shares from
its competition. These new offerings will further allow MEDITE to
develop significant strategic relationships to enhance sales and
revenue growth.
Products
Histology
MEDITE
offers its customers a comprehensive range of histology laboratory
devices for processing tissue, from receiving the tissue in the
laboratory to the final diagnosis. Most important to this segment
are very high levels of reliability, efficiency, and
safety.
Starting
from receiving the biopsies, it may be necessary to decalcify them;
for example from bone. The
USE33
is an
ultrasonic decalcification instrument that automatically runs the
process under controlled temperatures. Due to this
innovative technology, it can increase the speed of decalcification
by 300% compared to just using acid. Instead of days or
even weeks, the biopsies are ready much earlier for further
processing, which shortens the patient’s diagnosis wait time.
This specific instrument also is often used in research
labs.
The
next step is the tissue processing (dehydration and fixation),
which usually run automatically by the laboratory overnight with no
human supervision. MEDITE’s instrument, the
TPC15
Duo or Trio,
offers a very high capacity of 440 or 660 biopsies per run and also
offers two or three independent protocols. Therefore, depending on
the size and kind of tissue, it can process simultaneously the
different steps, and therefore replacing two or three instruments
of similar competitor’s instruments. It also offers a very
high level of safety. In the unlikely situation of an error or just
a power outage, it has a back-up battery, and the emergency mode
puts the biopsies into a safe position. An advantage of this kind
if tissue processer is the usability with Xylene replacements like
Isoproanol, a second grade alcohol The European Unit is proposing
to ban Xylene in laboratories and so the TPC15 is the perfect unit
to do so. Competitor systems with pumps have a higher risk in using
Isopropanol. The price of the unit is very competitive in its
market based on its high capacity.
After
tissue processing, the tissue will be transferred into a paraffin
block using an embedding center. MEDITE was the original inventor
of the three piece units (heating, dispensing, and cooling). It is
much more flexible to adapt to human and laboratory needs. While
the dispensing unit usually is in the center, the others can be
added to the right or left depending if right or left handed.
Additional cooling units can also be added to extend the capacity.
MEDITE offer two types: the low cost set
TES99
when budget
matters, and the high end version
TES Valida
when
design and technology is more important. The TES Valida is
recognized as the best system currently available worldwide. Every
histology lab has at least one system, but usually two or more of
these embedding centers in place – historically the market
consists of sales of several thousand units each year.
With
the paraffin block from the embedding center, the biopsy needs to
be sectioned using a microtome. Several types of automation are
demanded by the market; on the low end a manual microtome, in the
middle a semi-automatic version, and on the high end, a fully
automatic microtome. While originally all microtome manufacturers
were located in Europe (Germany or UK), today only MEDITE still
manufactures its microtomes in Germany. For a microtome, the most
critical functionality is extremely precise mechanics able to cut
slices of 1 or 2 microns in thickness. Five years ago, MEDITE
developed the semi-automatic version
M530
first, then the
fully automatic version
A550
and started in
2014 the development of the manual version
M380
– mainly
for the Chinese market – which the first production of these
units were sold in August 2015. Since 2016, the microtomy
manufacturing was setup in a second German facility in Nussloch
where the roots of worldwide microtomy was with skilled employees.
Since the new versions of all three types of microtomes have been
brought to the market with growing success. For China, a special
type of manual microtome M380 was developed to perfectly match
their usage. As part of tissue sectioning, the freezing microtome,
called “cryostat”, is used for fast biopsies when a
patient needs a diagnosis immediately e.g. still being in the
operational theater. Prototypes of the
M630
were tested in
the field and the manufacturing of the first set of this big
instrument started in 2016 and is expected to be finished for
delivery before end of the fourth quarter of 2017. Based on the
forecast with direct and incremental sales we expect to sell 75
units within the first year. The Company’s strategic goal for
the cryostat is to offer a high quality device for a competitive
price to win 20 to 30% of the market (1,500 to 2,500 units
annually).
When
the sections of the tissue are transferred to a microscopy slide
they undergo a staining process with several different protocols
depending on the type of tissue. To manage high volumes, robotic
multi-staining systems are used. MEDITE offers the most flexible
system,
TST44,
which is
computer controlled and can run several staining protocols
simultaneously, and its unique feature software can even overtake
slower with faster protocols. The maximum capacity is about 400
slides per hour with that system. This robotic stainer has gone
through an updating and modernization project during 2016 with an
expected completion of the project by the end of 2017. It will get
the latest innovative technology software, new color touch screen,
new X-Y-Z robotic technology and a modern newly designed case. For
higher volume throughput, e.g. for cytology laboratories, MEDITE
offers the
COT20
linear
staining system using a kind of conveyor technology to realize a
capacity of over 1,000 slides per hour. Also this high throughput
staining equipment will undergo a revision to increase its capacity
by 50% to 1,500 slides per hour for the higher demand from larger
laboratories until the end of 2017.
Currently,
the final step to the process is to place a cover over the tissue
on the stained microscope slide to preserve it for many years and
make it ready for digital scanning or directly for diagnoses under
the microscope by a pathologist. MEDITE therefore offers the
RCM9000
,
the latest version of a stand-alone robotic coverslipper using
glass coverslips. Another option MEDITE developed is the
ACS720
glass coverslipper which can be connected directly to the TST44
multi-stainer creating a higher level of automation by bridging the
former manual step between two separate instruments. This
instrument combination is very competitive and more and more public
tenders are asking for it. Finally, to also support higher
throughput laboratories, MEDITE developed the robotic coverslipper
TWISTER
using a clear film instead of cover glass. This triples the
capacity of a glass coverslipper up to 1,200 slides per hour. The
first production of 10 units of this new development are partially
sold, and the remaining are to be used for customer demonstrations.
The regular serial production is scheduled for the
fourth quarter of 2017.
Several
smaller devices for stretching, drying, cooling, exhausting,
recycling, printing etc. are also manufactured by MEDITE but not
specifically described herein. These products are usually competing
mainly on price, but quality is still important.
For
2016, MEDITE added to its product portfolio and its 2016 catalogs
some equipment to support environmentally friendly laboratories,
for example recycling machines for alcohol and xylene as well as a
machine for formalin neutralization and dispensing. The Company
added a slide printer in 2015 and has added a cassette printer for
2016, offering a further step to digitalization using barcode
writing on microscope slides and embedding cassettes. Also
stainless steel furniture like grossing stations – used in
every anatomic pathology and histology lab - with the option of
automatic height adjustment and a very competitive price now can be
offered to complete the product portfolio.
In the
segment of histology consumables, MEDITE offers everything
necessary to run its instruments and to run the complete histology
laboratory. This includes embedding cassettes, microscope slides,
paraffin, staining solutions, reagents and other products. Some of
the consumable products are MEDITE developments and exclusively
manufactured by or for it. Others products are MEDITE branded, but
manufactured and delivered from external high quality vendors. The
procurement focus therefore is on high quality, not lowest
price.
Cytology
The
product strategy of MEDITE in this market is to offer products for
the whole process, from cell collection through processing to
diagnosis.
Some of
the histology processing instruments of MEDITE are also used in
cytology labs, like the staining and coverslipping
systems. Characteristics of the sample collected
determine the quality of the results of any tests performed on the
sample. The sensitivity and/or accuracy of a test is, for example,
likely to be reduced if the sample collection device or method does
not capture a sufficient amount of the target analyte, alters the
analyte of interest, or collects significant quantities of
substances that interfere with the analysis. One of the
Company’s major areas for product development is in sample
collection for specific cells and tissues.
For
collecting the cervical cells the Company developed the
SoftPAP
device for the
collection of cervical cell samples that are used in the detection
of cervical dysplasia, cancer and human papillomavirus
(“HPV”) infections. We believe that SoftPAP, which has
been cleared by the Food and Drug Administration
(‘FDA”) for sale in the U.S., and is CE Marked for
international distribution is positioned as a premium value-added
alternative to the spatula, broom and brush-style devices that have
traditionally been used for these purposes. Unlike these
traditional devices, SoftPAP collects only exfoliated cells and
does not scrape, cut or abrade the cervix. This unique sample
collection method has been shown in clinical trials to reduce the
frequency of false negative and false positive results when the
sample is evaluated by cytological methods to detect the presence
of dysplasia and cancer. In addition, women have reported that
having a cervical sample taken using
SoftPAP
is more comfortable than when a
traditional device is used.
SoftKit
is a low cost disposable device for the
self-collection of a sample that can be evaluated to provide an
assessment of the health of the entire female genital tract. The
Company has filed patent applications in multiple
countries. The Company currently is going to
finish the final design of SoftKit for the collection of cellular
samples that can potentially be screened for a variety of
gynecological cancers (including cervical, endometrial, and
ovarian), and for the collection of gynecological samples to be
tested for the presence of HPV and variety of gynecological cancers
and additional indications such as sexually transmitted disease
(“STD”) testing. SoftKit addresses a number of market
niches and segments that are not supported effectively by SoftPAP
or traditional gynecological sampling devices. SoftKit is designed
to eliminate the need for assistance from a medical professional
when collecting gynecological samples for many screening
applications. The Company believes that this feature, in addition
to the range of tests that can be performed on a SoftKit sample and
SoftKit’s low cost, makes it particularly attractive for use
in large scale public health screening programs. We are also
investigating the use of SoftKit in an internet-based,
fee-for-service testing program outside of the U.S. A
Commercialization Officer was brought in the 4th quarter 2016 to
manage its market introduction in the U.S. and worldwide for this
innovative product such as SoftKit and other high value
solutions.
Cervical
cytology specimens are traditionally prepared as
“smears” where the cells on the collecting device are
literally wiped or smeared onto a microscope slide. In the 1980s,
an alternative method, variously called a “monolayer”
or “liquid-based” preparation (“LBP”), was
introduced. In this method, cells are washed off of the collection
device into a preservative solution to form a cell suspension. A
portion of this cell suspension is then transferred to a microscope
slide. LBPs presently account for about 80% of the cervical
cytology slides prepared in the U.S., but despite the technical
benefits of LBPs, only about 20% of the cervical cytology slides in
the European Union and much lower percentages in the rest of the
world are prepared in this manner. The primary limitations to
greater adoption of LBPs outside of the U.S. are the high equipment
and ancillary supply costs associated with the two predominant LBP
methods. With the acquisition of MEDITE, the Company sells two
alternative LBP methods product lines, the
SureThin
line which
is competing against the market leader Hologic, and the
SafePrep
line which is competing against the second largest market player
Becton-Dickinson. Both product lines cover the complete set of
consumables necessary to preserve, extract and process cells onto a
microscopic slide. For the SureThin line, MEDITE also offers a
processing device automatically extracting the cells from the
preservative vial and transferring it on the slide. Both systems
have a significantly lower price than the competition, which is
increasingly important for some markets like the US, where a
cytology laboratory needs to lower its cost due to lower
reimbursement rates. This lower price level itself also creates new
markets, where it is now more affordable even to smaller
laboratories and can better compete against the traditional Pap
smear.
Once a
cytology specimen has been deposited onto a microscope slide, it is
stained in order to assist the cytologist in detecting and
identifying the various features of the deposited cells that are
relevant to determining whether the cells are normal, dysplastic or
cancerous. The Company is developing several proprietary stains for
use in cervical cytology and other screening applications. The new
morphology stain is intended for use as a direct replacement for
the Pap and H&E stains used in most cytological and
histological tests. It will initially be introduced for use in
tests where the specimens are evaluated visually with formulations
for use with our automated slide imaging and analysis system and
possibly also flow cytometer systems to follow.
As
mentioned above, we are developing a family of immunocytological
assays that combine the measurement of bio molecular cancer markers
and cell morphology in a single test. These assays are intended to
detect the presence of specific proteins and other markers that are
indicative of the presence of a target disease; allow
characterization of abnormal cells; or provide an estimate of the
risk of disease progression. These assays are specifically designed
to be compatible with each other and with our proprietary stains,
and may be evaluated using our automated slide imaging and analysis
system. An added benefit of our proprietary stains is that after
the specimen has been evaluated using these stains, it can be
counterstained with Pap stain for conventional confirmation and
archiving. Internal laboratory test are showing a very high level
of specificity and sensitivity, and the Company currently is
preparing a strategy for the clinical evaluation. A system like
this has the potential to displace the current expensive HPV
testing methods by offering a significantly higher specificity and
sensitivity, which management believes offers a significant market
opportunity.
When
“reading” the cytology specimen, a cytologist
traditionally examines the specimen by eye through a conventional
optical microscope to detect, classify, record, mark, and report
abnormal cells. While performing this examination, the cytologist
is also referring to the patient’s medical history, assessing
specimen adequacy, and capturing a variety of metrics and other
information needed for regulatory compliance and operational
purposes. Despite the widespread deployment of computers in the
laboratory, many of these operations are still largely paper-based.
Even in laboratories where medical histories are available to the
cytologists in electronic form and reports are prepared on a
computer, it is not uncommon for the data, and sometimes even draft
reports, to be initially captured on paper and then transcribed.
Over
the last few years, the MEDITE developed software for an imaging
system for computer aided diagnosis of slides including its new
stain SURECYTE and its revolutionary new biomarker-based SURECYTE+
asssays. The intent of a medical screening system like this is to
differentiate between patients who show no evidence of the target
disease state (“normals”) and those who do
(“abnormals”). Patients who have abnormal screening
results are offered follow-up testing to confirm, diagnose,
classify and determine the extent of disease and, where
appropriate, determine the appropriate treatment. Patients who have
a normal screening result are not offered these services. In order
to allow scarce medical resources to be focused upon those patients
having the greatest need, screening programs are structured to
differentiate between normal and abnormal patients as accurately,
rapidly, reliably and cost effectively as possible.
The
Company also is looking at new ways to analyze the SURECYTE data,
for example ploidy analysis (popular in China) and micronuclei
counting. These have both been touted as alternatives to regular
PAP analysis.
The new
Software and SURECYTE stain is also expected to work in Non-GYN
applications (e.g. lung, bladder, thyroid and other cancers) and
being used for Non-GYN imaging together with the SURETHIN
consumables and processing units.
This
new software will provide a computer aided evaluation on all
Non-GYN slides. Currently we are not aware of any other systems
available anywhere in the world that can work together with the
Company’s new SURECYTE+ assays which provides an assessment
of the immune microenvironment.
This
new software also adds ploidy analysis to routine morphology-based
cytological tests. The utility of ploidy measurement in cytological
testing is presently limited by the lack of consistency of
conventional morphological stains. This limitation is addressed by
our SURECYTE stain in combination with our new software and is
expected to be a significant product differentiator. Ploidy will
also be a component of many of the SURECYTE+ -based assays that the
Company will be using for other cytology’s
products.
Although
the evaluation of cervical cytology specimens by automated image
analysis can be traced back to the 1940s and a number of capable
systems have been developed, the FDA has not to date approved any
automated image analysis system to “diagnose”, or
classify as normal or abnormal, cervical cytology specimens without
human intervention. The FDA has, however, approved or cleared
several systems including the AccuMed (a corporate predecessor to
CytoCore) TracCell™ for use in “mapping” or
“location-guided screening”. In these systems, image
analysis is used to identify potentially abnormal cells which are
then presented to a cytologist for classification. This approach,
which has been shown to reduce the time required to differentiate
between normal and abnormal specimens, has been increasingly
adopted by high volume laboratories, but is presently too expensive
for most laboratories. The Company believes that its imager and
associated software will be marketable at a price that will be
affordable for most laboratories.
The
Imager will be optimized for use with the described proprietary
stains and assays. As these stains and assays are designed to be
more effective in highlighting the cellular abnormalities
associated with cancer and precancerous conditions than the
traditional Pap and Thionin stains used in conjunction with other
automated cytology screening instruments, our imager is expected to
deliver superior performance when used in cytological screening
applications. The Company has been developing imaging-based
automated cytology systems since 1994 and has applied this
expertise to the development of the latest generations of Medite
software. Present efforts are directed at porting this software to
the automated image capture and digitization systems developed by
our joint venture with UNIC Medical for sale in the Chinese market
and to automated image capture and digitization systems developed
by selected other manufacturers for sale in other
markets.
Current
methods for breast cancer screening primarily comprise manual
palpitation of the breast and radiographic methods, including
classical radiography and mammography. Regular manual
self-examination is recommended for all women, and periodic breast
cancer screening using radiography or mammography is recommended
for all women over the age of 40 to 45. These methods, however, are
widely recognized as not providing the sensitivity needed in order
to detect small early stage lesions, and are adversely affected by
the presence of high density breast tissue. The high error rates
associated with the use of imaging modalities, such as mammography
on women having dense breasts (dense breasts being common in women
under the age of 40), has led to medical societies and health
authorities recommending against the use of these imaging methods
when screening a woman under the age of 40 for breast cancer. Since
the early 1990’s, it has been known that nipple aspirate
fluid (NAF) can be used as a sample in the assessment of a
woman’s risk of developing breast cancer, and that this
method is applicable to the screening of women who have dense
breasts. In our opinion, currently available collection devices for
that application offered by the competition lack either usability
or market orientation and are much too expensive. Based on the
researched market needs the Company started the development of the
breast cancer risk assessment device
BreastPap
. After the
acquisition of MEDITE, their engineering team advanced the project
and are close to completing the prototype. The goal is to sell to
cytology labs, physicians and clinics which then can be forwarded
to their gynecologist clients. The gynecologist offices then will
offer this test to its female patients in the age of 20 and up.
MEDITE therefore will offer the collection device, the consumable
set (including hygienic barrier) and also the necessary cancer
assay. The newly developed final version of the device is expected
to be ready by the end of 2017 for market introduction, starting in
Europe. Several cytology laboratories as well as gynecologists have
already showed interest in this new product and expect a very good
business with it.
Product Development and Research
With
the acquisition of MEDITE, the Company currently employs 13
full-time equivalents for software, electrical and mechanical
design engineers. The strategic goal is to optimize development
processes to shorten the development period and time to market for
several ongoing and new R&D projects.
MEDITE’s
product development department is including engineering skills and
technology in software development, multilayer circuit board
design, electrical design, 3-D product design in (using CREO design
software), technical regulatory documentation, often individually
for different countries worldwide, and quality management based on
its ISO certificate.
The
main focus of the developing team during 2016 was working on
innovative and new products like the cryostat M630, the manual
microtome M380, the film coverslipper TWISTER, a cytology
processor, the BreastPap and several updates and modernization
projects for existing instruments.
In
addition, a team of experienced researchers in biochemistry, with
successful track records and a very high reputation in that
segment, are working on special stains and assays for detection of
pre-cancerous and cancerous conditions in cytology and histology.
Some of these developed products are currently undergoing the
commercialization process, starting with field studies and are
expected to be rolled out in the near term.
Markets and Marketing Objectives
As
described also in other paragraphs of this report, our target is
basically the worldwide cancer diagnostics market. Currently we
serve in particular the histology and cytology segments of this
total market but we are open to entering other cancer diagnostics
segments in the future when attractive economically. The total
annual market volume of histology and cytology is approximately
$5.8 billion with annual growth rates between 10 and 30% depending
on the specific market, cancer segment and
country.
Cancer is a major threat for mankind and the recently published
“World Cancer Report 2014” by the World Health
Organization, states that the number of cases will increase
world-wide by about 57% to 22 million cases in the next two
decades. At the same time cancer deaths will rise from 8.2 million
to 13 million per year.
MEDITE’s
current and future products will assist in the
detection
of precancerous and cancerous
conditions, and provide the basis for more efficient and cost
effective diagnosis. The net effect of utilizing
MEDITE’s anatomic pathology (tissue based) and cytology (cell
based) products may result in more lives saved at lower
costs.
While
distributing currently into approximately 80 countries of the
world, the Company’s sales and marketing efforts are in
particular focused on the three major markets of U.S., China and
Europe.
Currently
the target groups are the histology and cytology laboratories as
end users. In some countries it sell directly to these
laboratories, while in other countries it sell indirectly to them
through its international network of distributors. Several of the
products currently developing by the Company may also be sold to
national health programs and/or non-governmental public health
agencies, or possibly directly to consumers. The Company use
several means like sales and technical training, advertising
materials, special offers etc. to motivate its distributors selling
MEDITE products. Depending on local markets, the contact to public
health care organizations or other public authorities responsible
for purchasing medical product is important. While in many markets
the laboratories directly can decide about purchases, in others
they have to undergo a tender process.
Worldwide,
approximately 180 million Pap and 60 million breast cancer
screening tests are performed annually. The potential market is
approximately 1.5 to 1.8 billion women for each of these tests.
Bio-molecular screening, diagnostic, and treatment products
consequently are being developed to detect disease states early so
they can be dealt with before they become life threatening and
expensive to treat. The Company is designing and developing
products to satisfy this paradigm shift and focus more on
diagnostic methods and tools for early detection.
With
the new products currently in the late stages of their development
and/or regulatory processes, like the SureThin US Gyn application
or the SoftKit, the Company is targeting different groups of
end-users and establishing the logistics needed to reach and
support these users. Similarly, in addition to marketing to
laboratories, the SoftKit is expected to be marketed to public
health agencies as well as being directly marketed to the patient
to motivate them to purchase it on the internet, a pharmacy or
similar facility. MEDITE will continue to adjust its marketing to
the specific needs of each product group.
For the
cytology and histology laboratories, the Company distributes
national or international product catalogs each year with a wide
overview of the related product lines. These are available in
English, German and Polish languages and offered as export catalogs
to its international distributors who translate them into the
appropriate local languages. The catalogs are sent directly to the
laboratories where MEDITE is selling directly. The Company has
their products also featured on their websites for sales and
distribution of information.
The
Company also uses advertisings in segment-specific journals like
the “The Journal of Histotechnology” in the U.S. or
“Der Pathologe” or “Cyto-Info” in Germany
to both offer specific products and to increase the overall brand
recognition. Its international distributors usually do the same in
their specific country.
MEDITE
is also attending several local, national and international
exhibition and congresses which are segment specific or medical
product orientated like the NSH in the U.S., the ECP in Europe, the
Arab Health exhibition in Dubai, the Medica exhibition in Germany
and many more.
Sales and Distribution
The
Company is distributing its products to over 70 countries worldwide
while focusing on the three major areas of U.S., Europe and
China.
Depending
on their experience, strength in their local market and potential
sales volume, MEDITE uses exclusive or non-exclusive distribution
national contracts. Due to the fact that the three major
competitors, Leica, Thermo and Sakura, are changing their
distribution strategy more towards direct sales, several well
established independent distributors with both international and
national sales coverage contacted the Company to sell MEDITE
products as a priority offering versus other products lines.
.
In the
U.S., as it is currently the potentially biggest market, sales and
distribution is more diversified. MEDITE has managed to become an
approved vendor for three of the largest hospital group purchasing
groups, Premier, HealthTrust and Magnet, with a total of over 5,000
member hospitals and health care providers. The contracts with
Premier, HealthTrust and Magnet were successfully renewed in 2015.
About 98 % of health care providers are members of one or more
group purchasing companies, and therefore it is very important in
the US to be a registered vendor to realize sales with their
members. Being a registered vendor means usually being just one out
of two or three vendors in that segment for the member hospitals,
and also being released from individual purchase contracts with
each customer in using the general term of the hospital group
purchasing organization.
Coupled
with these purchasing group opportunities MEDITE in the U.S. has
deepened selling and marketing relationships with two major
marketing leaders with national distribution channels. One of the
companies is a publically traded international firm with a market
cap of several billion. MEDITE is their chosen provider of
Histology and Cytology solutions. While until now the Company has
not realized the full potential of this distribution channel, it is
working to gain its share of this market. A second distribution
channel in the U.S. is selling MEDITE products through other
established sales organizations, utilizing their sales agreements
with end users and through their sales representative network. This
network is considered an important part of MEDITE’s future
sales growth strategy. These various distribution channels are
managed by senior experienced sales directors to insure planning
and penetration. Thirdly MEDITE will use a direct sales approach,
using employed product specialist e.g. in cytology or even using
our service employees for technical assistance, training,
installation and sales. The channel of directs sales will be
increased in the future using the Company’s own employees or
sales representatives. A similar approach will be implemented by
the second quarter of 2017 in Germany, Europe and the rest of the
world.
In
Europe, the Company is selling direct in Germany and Poland with
employed regional sales representatives and through a network of
independent distributors in all other countries. Some of its sales
partners are working with MEDITE for more than a decade. Also
MEDITE is scheduling several dates for sales training of
distributors and technical training for their technical service
employees for free each year to keep a high level of experienced
staff trained for MEDITE products worldwide, and also to collect
feedback for product improvement and development.
For the
Chinese market, MEDITE is using a strategic distribution agreement
with its local partner UNIC Medical. The major shareholder and
president is a professor of pathology and has established a wide
network of sales teams in China and other Asian countries. With
their help, the brand name MEDITE has attained recognition second
in its segment. MEDITE together with UNIC successfully got Chinese
FDA approval for all MEDITE histology instruments in 2014 and for
the cytology instrument late in 2015. Since then the UNIC team has
been increasingly successful is selling MEDITE products in China
with sales of about $1 million for 2016. The shared goal in China
is to become the market leader in the histology and cytology
market.
The
rest of the world is supported by an experienced team of export
professionals at the German facility also acting as the
Company’s logistic center. Especially in the medical area, a
deep knowledge of custom tariffs and rules, international
regulatory restrictions, international payment terms and dangerous
goods shipment regulations, are major skills needed by these
employees. MEDITE is approved and authorized by the AEO to manage
several customs issues directly.
Government Regulation, Clinical Studies and Regulatory
Strategy
The
development, manufacture, sale, and distribution of medical devices
are subject to extensive governmental regulation worldwide. In the
U.S., our products are regulated under the Medical Device
Amendments to the Food, Drug and Cosmetic Act (the “FD&C
Act”) and cannot be sold, shipped or promoted in interstate
commerce without prior “clearance” or
“approval” by the FDA. In the European Union
(“EU”), medical devices are regulated under the Medical
Device, In-Vitro Device and other Directives that require that each
product be CE Marked to show that it conforms to all of the
requirements of the applicable Directive(s) before it can be
imported into or sold in the EU. MEDITE products which are selling
in the U.S. are FDA registered and all have the CE
mark.
The
regulatory systems in other major markets such as China and South
America continue to undergo substantial changes and now in many
respects resemble the system in the EU. In particular, the CE Mark
is now accepted or required in essentially all significant markets
other than the U.S. In addition to having to obtain the appropriate
regulatory approvals, we are also required to register our products
with the National Health Authority in many countries in which we
expect to do business; may have our quality and manufacturing
systems inspected and/or audited by representatives of various
National Authorities; and may have to conform to additional
regulations imposed by individual countries.
Under
these regulations, we are subject to certain registration,
record-keeping and reporting requirements. Our manufacturing
facilities and those of our strategic partners, may be obligated to
conform to specified quality standards, and are subject to audits
and inspections. We are also subject to national, state and
local laws relating to such matters as safe working conditions,
manufacturing practices and environmental protection.
Failure to comply with these regulations could have a material
adverse effect on our future operations and may impose additional
costs and risks.
In the
U.S., the FD&C Act generally bars selling, advertising,
promoting, or other marketing of medical devices that have not been
authorized (approved or cleared) by the FDA. The promotion or sale
of medical devices for non-approved or “off-label” uses
is prohibited. The FDA also regulates the design and
manufacture of medical devices. These regulations have been
largely, but not completely, harmonized with the ISO quality system
standards for medical devices that are used for similar purposes in
most other countries. This incomplete harmonization requires
us to maintain two separate, but equal quality systems and
increases the cost and complexity of regulatory compliance.
The FDA and the corresponding regulatory agencies in other
countries may withdraw product clearances or approvals for failure
to comply with these regulatory standards and may impose additional
sanctions.
In the
U.S. most low to moderate risk medical devices that have legally
marketed predicates receive “clearance” to market
through a process described in Section 510(k) of the FD&C Act.
In order to receive clearance under the 510(k) process, a product
must be shown to be “substantially equivalent” to an
appropriate legally marketed “predicate device”. High
risk devices and devices that do not have a predicate require
“approval” via a Pre-Market Approval
(“PMA”) submission in which de-novo demonstration of
the safety and efficacy must be established. Changes to a
product, its intended use, and/or its labeling often require the
submission of another 510(k) or PMA application. Obtaining
approval to market via the PMA process takes substantially longer
and is far more expensive than obtaining clearance to market via
the 510(k) notification process.
The
e
2
Collector, which is the
predecessor to the
SoftPAP
collector, was cleared for marketing by the FDA on May 31, 2002,
and the SoftPAP collector received FDA clearance on January 31,
2008. Although most future Company products are expected to qualify
for premarket clearance via the 510(k) process, some future
products may require PMA approval.
In
2010, the FDA began a major review of the 510(k) process, which has
to date resulted in the announcement of a number of changes
including some that will directly impact our future products.
Additional changes, some of which have the potential to
substantially increase the time and cost involved in obtaining
marketing clearance via the 510(k) process, are under
consideration.
In the
U.S., we are subject to various federal and state laws pertaining
to healthcare fraud and abuse, including federal and state
anti-kickback laws and the federal Foreign Corrupt Practices Act,
which make it illegal for an entity to solicit, offer, receive or
pay remuneration or anything of value in exchange for, or to
induce, the referral of business or the purchasing, leasing or
ordering of any item or service paid for by Medicare, Medicaid or
certain other federal healthcare programs. These statutes have been
broadly defined to prohibit a wide array of practices, and our
activities may subject us and our partners to scrutiny under such
laws. Violations may be punishable by criminal and/or civil
sanctions, including fines, as well as the exclusion from
participation in government-funded healthcare programs. Laws
pertaining to these and related matters also exist in other
countries.
Each
country has historically imposed its own unique regulations on
medical products. In recent years, however, there has been a trend
toward the harmonization of these regulations resulting in greater
consistency between countries. This has resulted in a large and
growing number of countries (over 70 as of this writing) adopting
the CE Mark as a central element of their regulatory process for
medical devices. The U.S. is the only major country that has not
adopted the CE Mark. In order for a product to be CE Marked, the
manufacturer must demonstrate to the satisfaction of the regulatory
authorities that the product is safe and effective (conforms to the
“Essential Requirements” for that class of product) and
that it is manufactured in accordance with specified quality
standards. In most countries the CE Mark is a pre-condition
for medical device registration and in some places such as the EU,
is mandatory in order for a product to be imported into or sold
within the country or region. Failure to comply with the
regulations pertaining to CE Marking can result in product seizures
and other sanctions.
Although
Company registration to the ISO 13485 quality system standard is
not required for companies selling Class I (lowest risk category)
medical devices and products in the EU, such registration is for
all practical purposes mandatory for companies selling products in
Class II and higher. All products that are presently being sold and
a significant portion of those that are in development are
currently classified as Class I devices. However, some of our
upcoming products are expected to be in Class II or Class IIa and
some changes that are being discussed in the EU may, if they come
to pass, result in the reclassification of some of our Class I
products into Class II. Our quality system is presently registered
to ISO 9001 which is the parent standard of ISO 13485. We presently
expect that our quality system will be registered to ISO 13485 by
December 31, 2017
The CE
Mark for a product must be renewed every five years and will
generally also require renewal if the requirements imposed by these
Directives and standards change. This renewal increases the cost of
regulatory compliance. In addition, the specific quality system
requirements imposed upon a product are determined by the risk
category into which the product is assigned by the applicable
Directives. All of our current and planned products are presently
considered to be low risk devices and are assigned to Class I which
imposes the lowest level of quality system requirements. If a new
Company product falls within or a current product is reclassified
into a higher risk category, we will incur higher regulatory costs
in order to maintain the CE Mark on the affected
product(s).
The EU
is in the process of determining whether the various Directives
pertaining to medical devices should be “recast” to
bring them into conformance with the recommendations of the Global
Harmonization Taskforce (GHTF) and is also studying the possibility
of replacing these Directives, which must be transposed into
national laws by each country in order to become effective, with
EU-wide laws that do not require transposition. Conversion from the
present Directives to corresponding EU laws could be beneficial in
that it is expected to eliminate country-specific differences in
how the Directives are applied and enforced and therefore
facilitate our compliance with the pertinent regulations in the EU.
Harmonization of the current medical device
classification system with that recommended by the GHTF may,
however, result in some or all of our products being placed in more
restrictive categories that could significantly increase our
regulatory compliance costs and time to market.
The
GHTF, which is comprised of representatives from major medical
device regulatory agencies such as the FDA, has developed a single
unified medical device identification system that will be mandatory
as it is implemented worldwide. These regulations went into
effect in many countries during 2014, and went into effect in
additional countries by the end of 2016 with a final implementation
in 2020. The Company is positioned to comply with these new
regulations under this regulation for our current products and have
the mechanisms in place to obtain such codes and the registrations
of the affected products, if needed, in the future. In a number of
countries these regulations include user fees that will increase
our cost of regulatory compliance.
We are
also required to comply with certain environmental regulations with
respect to products that are sold in various countries. One of
these regulations is the Directive on Packaging and Packaging
Wastes in the EU that: mandates the minimization of packaging;
restricts the use of certain packaging materials; and imposes
requirements, including possible “take-back”
provisions, with respect to the recycling of packaging materials.
All of our current products comply with the requirements of this
Directive. At present, we comply with the recycling portions
of this Directive by ensuring that all packaging materials are
compatible with recycling programs that are in place in the EU.
However, in the future we may be required to take a more
active role in the recycling of certain types of products including
possibly “taking back” and recycling laboratory
instruments. Implementing a compliant take-back program will
increase our operating and regulatory compliance
costs.
In the
EU electronic products, including clinical laboratory instruments
are required to comply with two environmental Directives, one of
which requires that the manufacturer “take back” and
recycle the electronic portions of these instruments and the other
(the so-called RoHS Directive) of which restricts the presence of
certain materials in electronic products. The Company complies with
the RoHS Directive by requiring its suppliers to use only RoHS
complaint materials in the construction of its
products.
The
“REACH” regulation, which requires the registration of
all chemical products produced in or imported into the EU is
presently in its implementation phase. The long term impact of this
extremely complex multi-level regulation on the Company is unknown
at present, but is anticipated to be minimal in the near term as
our sales of chemical products (stains, preservative, etc.) are and
are expected to continue to be at less than the threshold levels
for registration and reporting. An increase in sales of such
products above currently forecast levels and/or a reduction in the
applicable thresholds could potentially result in additional costs
to the Company.
Data
from clinical trials and studies is often required in regulatory
submissions and is highly desirable for use in product marketing
activities. In general, at least one trial or study is necessary
for each new product and additional studies or trials are needed to
support new or modified indications for use and new marketing
claims.
Cost and Reimbursement
In the
U.S., laboratory customers bill most insurers (including Medicare)
for screening and diagnostic tests such as the Pap test. Insurers,
such a private healthcare insurance or managed care payers, in
addition to Medicare, reimburse for the testing, with a majority of
these insurers using the annually-set Medicare reimbursement
amounts as a benchmark in setting their reimbursement policies and
rates. Other private payers do not follow the Medicare rates and
may reimburse for only a portion of the testing or not at all. In
addition, certain provisions of the Affordable Care Act are
expected to significantly affect the reimbursements for many tests
and diagnostic procedures. These changes are expected to be
introduced over the next years. Certain of the changes that have
been proposed under the Affordable Care Act (ACA) would require
that the cost effectiveness of novel new products be demonstrated
in actual clinical use before Centers for Medicare and Medical
Services (“CMS”), the agency that manages Medicare and
Medicaid is allowed to provide reimbursement for such products.
Historically, however, the medical community has generally been
reluctant to adopt, or in some cases even to evaluate, novel
products unless reimbursement is available. If these proposed ACA
rules go into effect in their present form, it is anticipated that
the cost and time required to introduce a novel product into the US
market will be substantially increased. The ACA is currently being
evaluated for a repeal and replace of the current law. Management
is watching closely the impact of some of these
changes.
Outside
of the U.S., healthcare providers and/or facilities are generally
reimbursed through numerous payment systems designed by
governmental agencies, such as the National Health Service in the
United Kingdom, the Servicio Sanitaris Nazionale in Italy and the
Spanish National Health System, as well as private insurance
companies and managed care programs. The manner and level of
reimbursement will depend on the procedures performed, the final
diagnosis, the devices and/or drugs utilized, or any combination of
these factors, with coverage and payment levels determined at the
payer’s discretion.
Our
ability to successfully commercialize the current and future
products will depend, in part, on the extent to which coverage and
reimbursement for such products will be available from third-party
payers in the U.S. such as Medicare, Medicaid, health maintenance
organizations and health insurers, and other public and private
payers in foreign jurisdictions. The coverage policies and
reimbursement levels of these third-party payers may impact the
decisions of healthcare providers and facilities regarding which
medical products they purchase and the prices they are willing to
pay for those products. In some countries, our ability to
commercialize products will also depend upon us becoming a
qualified bidder on the tender offers issued by the National
Healthcare Authority. When we succeed in bringing products to the
market, we cannot be assured that third-party payers will pay for
such products or establish and maintain price levels sufficient for
realization of an appropriate return on our investment in product
development. Additionally, we expect many payers to continue to
explore cost-containment strategies (e.g., competitive bidding for
clinical laboratory services within the Medicare program, so-called
“pay-for-performance” programs implemented by various
public and private payers, etc.) that could potentially impact
coverage and/or payment levels for current or future MEDITE
products.
Competition
Historically,
competition in the healthcare industry has been characterized by
the search for technological innovations and efforts to market such
innovations. Technological advances have accelerated the pace of
change in recent years. The cost of healthcare delivery has always
been a significant factor in markets outside of the U.S. In recent
years, the U.S. market has also become much more cost
conscious. The Company believes technological innovations
incorporated into certain of its products offer cost-effective
benefits that address this particular market
opportunity.
MEDITE
is currently focused upon histology and cytology which are the two
major fields of the anatomic pathology market. Each of these
segments is dominated by only 2 – 3 major players. In
histology the Company’s manufactured instrument line competes
with those from Leica, Sakura and Thermo Fisher while in cytology
its current SureThin and SafePrep product lines compete with
products from the Cytyc division of Hologic and the TriPath
division of Becton-Dickinson. Unlike certain of these competitors,
MEDITE is a global one-stop supplier for all histology and cytology
laboratories.
In
histology, the Company’s recently patented fully automated
system “Histo-Revolution” will become the only system
worldwide which can provide a fully automated lab-in-one solution
in histology. Due to the Company’s patent protection for this
technology, it is protected from replication until 2032 and no
other company can duplicate this.
In
cytology, the Company is currently developing a versatile
fully-automated, objective analysis, screening and evaluation
system for cancer screening that can be used with its current
liquid based cytology SureThin line and the former CytoCore
developed SureCyte stain, which is highly reproducible and produces
staining results within seconds. This same system can be used with
the Company’s newly developed Biomarker SureCyte+ newly
developed assays and, unlike the few competing systems, it is
specifically designed to perform cytological screening for a broad
range of cancers when equipped with the appropriate software and
reagent modules.
In
general, the Company believes that its products compete primarily
on the basis of clinical performance, accuracy, functionality,
reliability, quality, product features and effectiveness in
standard medical applications while being sufficiently versatile to
support future applications. It also believes that cost control and
cost effectiveness are additional key factors in achieving and
maintaining a competitive advantage. It focuses a significant
amount of its product development efforts on producing systems and
tests that will not add to overall healthcare cost.
Operations
The
Company’s operations consist of sales and marketing, research
and development (including information technology), technical
service, accounting and administration and manufacturing. Its
quality assurance manager is independent and authorized to act at
his own discretion in the interest of patient safety.
MEDITE
instruments and certain other products are manufactured in the
Company’s factory in Burgdorf, Germany. Product manufacturing
is monitored by TUV Sud for the UL (“Underwriter
Laboratories”, US electrical standard testing) while its
quality system is periodically audited by DQS. Small lot
manufacturing with Kanban flow control and ERP management is used
to ensure the timely delivery of smaller instruments while
minimizing finished goods inventories. Larger instruments, most of
which are customized to meet the unique requirements of their
purchasers, are manufactured to order with a short turnaround.
Extra safety stock is maintained for the few single source items
that are used in its products, while qualified second sources are
maintained for all other critical items. All incoming purchased
goods intended for resale, whether or not under the MEDITE brand
name, or for use in the manufacture of MEDITE products, are subject
to intensive incoming inspection, and all finished MEDITE
manufactured products receive intense final quality control testing
including 24-48 hour burn-in, as appropriate, to the specific
product before shipment. MEDITE additionally audits and monitors
the quality systems of third party suppliers of MEDITE-branded
consumables and supplies.
The
sales and distribution department is organized into the two major
departments of direct sales and export (distributors). For direct
sales the goal for consumables and smaller instruments is to ship
them within 24 hours after the receipt of the order. The export
department is handling quotes, orders and shipments to almost every
country worldwide. Every query should be answered within 24 hours.
After receiving an order for larger equipment the manufacturing
department informs the export department of the expected shipping
date.
The
MEDITE enterprise resource planning system is an integrated
software that handles sales, material management and production
planning. It is also automatically connected to the accounting
system, transferring customer and supplier invoices, payments and
the material consumption as a just in time controlling
tool. Management has evaluated and is in the process
finalizing its review of a company-wide system anticipated to be
implemented by the end of 2017.
Intellectual Property
The
Company relies on a combination of patents, licenses, trade names,
trademarks, know-how, proprietary technology, trade secrets and
policies and procedures to protect our intellectual property. It
considers such security and protection a very important aspect of
the successful development and marketing of its products in the
U.S., Germany, China and other foreign markets.
Patents,
trademarks and copyrights are essential components in the
protection of MEDITE’s intellectual property worldwide. As
the Company manufactures and sells products globally, it has
designed its intellectual property strategy to provide the
necessary protection while containing and managing the associated
costs. Two of the major components of this strategy are the
aggressive filing of “provisional” patent applications
in the US, and of filing utility patent applications under the
Patent Cooperation Treaty (PCT) or similar entry points into
national patent offices worldwide.
With
the passage of the America Invents Act (AIA), the patent systems in
all major countries now award patents on a
“first-to-file” basis that places a premium upon filing
one or more patent applications as soon as it is determined that an
invention meets the minimum standards for patentability. This
filing is in the form of a “utility” application that
meets all of the requirements for examination by a patent office.
The U.S. offers the opportunity to file “provisional”
patent applications that, while not being in form for examination
and not providing any formal rights or protections, is accepted by
almost all countries as officially establishing the
“priority” or invention date for utility applications
that are derived from it within one year of the date of the filing
of the provisional application. Provisional applications therefore
provide a means of obtaining the earliest possible priority date
while allowing time to refine and expand the scope of the invention
and associated claims that are included in any resulting utility
application. The Company’s practice is to convert each of its
provisional patent applications into some number of utility patent
applications within this 12-month period. In most cases each
provisional application results in one utility filing. However, in
some cases a single provisional application can generate two or
more separate utility applications and/or multiple provisional
applications can be consolidated into a single utility application.
During the examination of a utility application, the examining
patent office may require the Company to divide the application
into two or more separate applications or it may file a
continuation-in-part patent application that expands upon the
technology disclosed in an earlier patent application and which has
the potential of superseding or improving upon the disclosure of
the earlier application. For these reasons, estimating the number
of patents that are likely to be issued based upon the number of
provisional and utility applications filed is
difficult.
Prior
to filing a utility application in the U.S., the Company reviews
the application to determine the country or countries in which
patent coverage is necessary or desirable to support our business
model. If so, a utility patent application is filed through a
Patent Cooperation Treaty (“PCT”) receiving office.
This approach allows it to select the most appropriate receiving
office to perform the initial patentability assessments while
providing a single entry point into over 120 national patent
offices worldwide. Depending upon the nature of the invention and
business considerations, it typically nationalize PCT applications
in some number of countries, the number depending upon anticipated
market size and the locations of potential
competitors.
MEDITE
routinely prepares and intends to continue to prepare additional
patent applications for processes and inventions arising from its
research and development process. The protections provided by a
patent are determined by the claims that are allowed by the patent
office that is processing the application. During the patent
prosecution process it is not unusual for the claims made in the
initial application to be modified or deleted or for new claims to
be added to the application. For this reason, it is not possible to
know the exact extent of protection provided by a patent until it
is issued. Recent changes in US patent law, particularly conversion
to a “first to file” system and introduction of a
challenge period after a patent is granted may influence our IP
strategy, especially as related to the filing of provisional
applications. Several recent court decisions are also expected to
influence these decisions.
Patent
applications filed in the U.S. prior to November 29, 2000, are
maintained in secrecy until any resulting patents are issued. As
there have been examples of U.S. patent applications that have
remained “in prosecution” and, therefore, secret for
decades, it is not possible to know with certainty that any U.S.
patent that we may own, file for or have issued to us will not be
pre-empted or impaired by patents filed before ours and that
subsequently are issued to others. Utility patent applications
filed in the U.S. after November 29, 2000, are published 18
months after the earliest applicable filing date. This revised
standard reduces the chances that such a “submarine”
patent will impair our intellectual property portfolio. Foreign
patent applications are automatically published 18 months after
filing. As the time required to prosecute a foreign utility patent
application generally exceeds 18 months and the foreign patents use
a “first to file” rather than a “first to
invent” standard, the Company does not consider submarine
patents to be a significant consideration in its patent protection
outside of the U.S.
The
Company’s products are or may be sold worldwide under
trademarks and copyrights that it considers to be important to its
business. It owns the trademarks relevant to these products and may
file additional U.S. and foreign trademark and copyright
applications in the future.
Future
technology acquisition efforts will be focused toward those
technologies that have strong patent or trade secret
protection.
The
Company cannot be sure that patents or trademarks issued or which
may be issued in the future will provide us with any significant
competitive advantages. We cannot be sure any of our patent
applications will be granted or that their validity or
enforceability will not be successfully challenged. The cost of any
patent-related litigation could be substantial even if we were to
prevail. In addition, the Company cannot be sure that someone will
not independently develop similar technologies or products,
duplicate our technology or design around the patented aspects of
our products. The protection provided by patents depends upon a
variety of factors, which may severely limit the value of the
patent protection, particularly in certain countries. We intend to
protect much of our core technology as trade secrets, either
because patent protection is not possible or, in management’s
opinion, would be less effective than maintaining secrecy. However,
the Company cannot be sure that our efforts to maintain secrecy
will be successful or that third parties will not be able to
develop the technology independently.
Research and Development Expenditures
The
Company’s research and development efforts are focused on
introducing new products as well as enhancing our existing product
line. We utilize mainly in-house research and development personnel
and in some cases external research and development services
including collaboration with universities, medical centers and
other entities are used if management identifies these
relationships to be helpful and efficient.. Our research and
development activities are presently conducted in the U.S. and
Germany.
Management
believes research and development is critical to our success and
business strategy. Research work in the area of chemical and
biological components is expected to continue for the foreseeable
future as we seek to refine the current process and add additional
capabilities to our analysis procedures, including the detection of
other forms of cancer and precursors to cancer. We anticipate the
need to invest a substantial amount of capital, including the cost
of clinical trials, required to complete current developments and
bring it to market.
The
continuing development of new and update existing technology and
consumables for histology and cytology is necessary to further
increase the Company’s competitiveness and management intends
to spend a certain percentage of revenue on an on-going basis. With
increased revenue, the percentage attributed to research and
development is anticipated to decline, even with the expenditures
increasing.
Components and Raw Materials
Most of
the materials used in Company products are readily available from
multiple diversified sources. As these raw materials typically
account for less than 10 % of the cost of the product, changes in
prices for these materials will not have a significant influence on
our manufacturing costs.
For
paraffin the raw material is oil based and therefore the price
fluctuates depending on the commodity markets. Management believes
that the sales prices are adaptable, and can be adjusted for
significant swings in oil prices.
Some of
the staining solutions reagents are dependent on specific chemicals
where the price also fluctuates. The Company typically will
negotiate a fixed price with our supplier for a term of one year to
limit its exposure.
The
availability of electronic and electrical parts for circuit board
manufacturing is another challenge the Company closely monitors.
The Company has negotiated with our critical parts suppliers to
provide 12 month notice before discontinuing parts and, the Company
if necessary, will place a last large order for sufficient number
of these parts to support the continued manufacture and support of
all MEDITE products that use the part for the anticipated life of
the MEDITE product. In addition it takes advantage of the extended
availability programs that are offered by some manufacturers of
electronic components and assemblies. The Company also attempts to
transfer this discontinuation risk to our external circuit board
module vendors, if possible.
Working Capital Practices
The
Company raised additional cash of $1.355 million from the sale of
equity subsequent to December 31, 2016 through the date of this
filing. Stock subscriptions totaled $25,000 for January 2017,
$405,000 for February 2017, $775,000 for March 2017 and $150,000
through April 10, 2017, a total of $1.355 million to issue
2,710,000 shares of common stock at $0.50. Working capital has
improved by approximately $1 million as of the date of this filing.
Management
continues to expand its product offerings and has also expanded its
sales and distribution channels during 2017.
The
Company has settled three of the five employee notes for $330,000
and warrants. The Company has extended the term of the secured
promissory notes and has paid $183,000 of the balance outstanding
as of the date of this filing and received notice that one
noteholder will convert $50,000 into 100,000 shares of common stock
at $0.50. Management believes that the remainder of the balance
will be settled in some combination of cash and stock.
Management
is actively seeking additional equity financing contemplated in the
$4.25 million stock purchase agreement. The Company has
negotiated with certain parties whose obligations are due in the
next twelve months to extend payment terms beyond one year. One
lender with an outstanding balance of $789,000 has stated that they
will not be able to refinance the debt. The default rate of
interest will increase three percent.
At
December 31, 2016, the Company’s cash balance was $108,000
and its operating losses for the year ended December 31, 2016 and
2015, have used most of the Company’s liquid assets and the
negative working capital has grown by approximately $1.5 million
from December 31, 2015 to December 31, 2016.
Accrued
salaries, vacation and related expenses at December 31, 2016,
includes amounts owed the former CFO approximately $1.1 million and
amounts owed to both the Michaela and Michael Ott totaling
approximately $156,000. Included in advances – related
parties are amounts owed to the Company’s former CFO of
$50,000 at December 31, 2016 and 20,000 Euros, ($21,040 as December
31, 2016) and $75,000 related to two short term bridge loans made
to the Company by its former CEO and current COO of the Company.
The Company is working with the current executives to establish a
payment plan. See further discussion regarding the legal
proceedings with the Company’s former Chief Financial
Officer.
The
Company’s security agreement with its lender has provided
borrowings of 35% of our collateralized assets. The
Company continues to look for opportunities to refinance this debt
to provide additional liquidity.
If
management is unsuccessful in completing its equity financing, they
will begin negotiating with some of their major vendors and lenders
to extend the terms of their debt and also evaluate certain
expenses that have been implemented for the Company’s growth
strategy. However, there can be no assurance that
the Company will be successful in these efforts. The consolidated
financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Employees
As of
December 31, 2016, the Company employed a total of 75 employees
including 5 trainees, one employee on disability and 5 part time
employees which represents 69 full-time-equivalent. None of our
employees are members of a labor union.
Financial Information about Foreign and Domestic Operations and
Export Sales
Markets
outside of North America are an important factor in the
Company’s business strategy. Any business that operates on a
worldwide basis and conducts its business in one or more local
currencies is subject to the risk of fluctuations in the value of
those currencies against the dollar, as well as foreign economic
conditions. Such businesses are also subject to changing political
climates, differences in culture and the local practices of doing
business, as well as North American and foreign government actions
such as export and import rules, tariffs, duties, embargoes and
trade sanctions. The Company does not regard these risks, however,
as a significant deterrent to our strategy to introduce our MEDITE
product lines to foreign markets in the future. The Company’s
current operations include payments and receivables in the three
currencies of USD, EURO and Yen. For USD and Euro we try to
naturally hedge them by having revenues and expenses in both
currencies. Even in not handling other currencies directly, the
exchange rates in both USD and Euro may influence our costs and
prices directly and/or indirectly. The Company intends to adopt
strategies to minimize the risks of changing economic and political
conditions within the foreign countries we intend to do
business.
During
the fiscal year ended December 31, 2016, the Company had direct
foreign operations in Germany, Poland and Austria and distributed
to approximately 80 countries in total.