10-K 1 a12-4294_110k.htm 10-K

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-K

 


 

x      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2011

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File No. 000-30334

 


 

Angiotech Pharmaceuticals, Inc.

(Exact Name of Registrant as Specified in its Charter)

 


 

British Columbia, Canada

 

98-0226269

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

1618 Station Street, Vancouver, BC, Canada

 

V6A 1B6

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (604) 221-7676

 


 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common shares, without par value

 

OTC Bulletin Board

 

Securities registered pursuant to Section 12(g) of the Act: None

 


 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o  No x

 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o  No x

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer x

 

Smaller reporting company o

(Do not check if a smaller  reporting company)

 

 

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

As of March 29, 2012, the registrant had 12,556,673 outstanding common shares.

 


 

DOCUMENTS INCORPORATED BY REFERENCE

 

None.

 

 

 



 

Angiotech Pharmaceuticals, Inc.

Table of Contents

Annual Report on Form 10-K for the year ended December 31, 2011

 

PART I

 

 

 

 

ITEM 1.

BUSINESS

2

 

 

 

ITEM 1A.

RISK FACTORS

13

 

 

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS

26

 

 

 

ITEM 2.

PROPERTIES

27

 

 

 

ITEM 3.

LEGAL PROCEEDINGS

28

 

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

30

 

 

 

PART II

 

 

 

 

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

31

 

 

 

ITEM 6.

SELECTED FINANCIAL DATA

32

 

 

 

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

36

 

 

 

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

67

 

 

 

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

67

 

 

 

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

68

 

 

 

ITEM 9A.

CONTROLS AND PROCEDURES

68

 

 

 

ITEM 9B.

OTHER INFORMATION

68

 

 

 

PART III

 

 

 

 

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

69

 

 

 

ITEM 11.

EXECUTIVE COMPENSATION

72

 

 

 

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

84

 

 

 

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

86

 

 

 

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

86

 

 

 

PART IV

 

 

 

 

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

88

 

 

 

SIGNATURES

93

 



 

In this Annual Report on Form 10-K, references to “the Company,” “Angiotech,” “us” or “we” are to Angiotech Pharmaceuticals, Inc. and all of its subsidiaries as a whole, except where it is clear that these terms only refer to Angiotech Pharmaceuticals, Inc.

 

Accounting Standards

 

In this Annual Report on Form 10-K, all dollar amounts are in U.S. dollars, except where otherwise stated and financial reporting is made in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”).

 

Currency and Exchange Rates

 

The Company’s consolidated functional and reporting currency is the U.S. dollar. The Canadian dollar is the functional currency for the parent company Angiotech Pharmaceuticals, Inc. (on a non-consolidated basis) and its Canadian subsidiaries, the U.K pound is the functional currency of our U.K subsidiary, Pearsalls Limited, the Danish Kroner is the functional currency of our Danish subsidiary, PBN Medicals Denmark A/S, and the U.S. dollar is the functional currency for all other subsidiaries.

 

NOTICE REGARDING WEBSITE ACCESS TO COMPANY REPORTS

 

We file electronically with the Securities and Exchange Commission (“SEC”) our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (“the Exchange Act”). You may obtain a free copy of our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and any amendments to those reports, on or after the day of filing with the SEC and on our website at: www.angiotech.com. Our website and the information on our website is not part of this Annual Report on Form 10-K.

 

You may also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may also obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers such as us that file electronically.

 

1



 

PART I

 

Item 1.                            BUSINESS

 

Summary

 

Angiotech develops, manufactures and markets medical device products and technologies, primarily within the areas of interventional oncology, wound closure and ophthalmology. Our strategy is to utilize our precision manufacturing capabilities and our highly targeted sales and marketing capabilities to offer novel or differentiated medical device products to patients, physicians and other medical device manufacturers or distributors within certain segments of our target markets.

 

We currently operate in two business segments: Medical Device Technologies and Licensed Technologies. Our Medical Device Technologies segment, which generates the majority of our revenue, develops, manufactures and markets a wide range of single use medical device products, as well as precision manufactured medical device components. These products and components are sold directly to hospitals, clinics, physicians and other end users, as well as to medical products distributors or other third-party medical device manufacturers. Our Licensed Technologies segment includes certain of our legacy technologies for which research and development activities have been concluded.  This segment generates additional revenue in the form of royalties received from partners who have licensed and utilize these technologies in their medical device product lines. Our principal revenues in this segment to date have been royalties derived from sales by our partner Boston Scientific Corporation (“BSC”) of TAXUS® paclitaxel-eluting coronary stents (“TAXUS”) for the treatment of coronary artery disease.

 

For the year ended December 31, 2011, we recorded $208.5 million in direct sales of our various medical products and $24.7 million in royalties and license fees received from our partners. For additional financial information about our business segments and the geographic areas in which we operate, refer to note 23 of the audited consolidated financial statements included in this Annual Report on Form 10-K.

 

Recapitalization and Emergence from Proceedings

 

Over the past several years, royalty revenue we receive from sales of TAXUS coronary stent systems by our partner BSC has declined significantly. These declines led to significant constraints on our liquidity, working capital and capital resources, which adversely impacted our ability to continue to support certain of our business initiatives and service our debt obligations.

 

As a result, after extensively exploring a range of financial and strategic alternatives, on January 28, 2011 we and certain of our subsidiaries (collectively, the “Angiotech Entities”) voluntarily filed for creditor protection (the “CCAA Proceedings”) with the Supreme Court of British Columbia (the “Canadian Court”) under the Companies’ Creditors Arrangement Act (Canada) (the “CCAA”) to implement a recapitalization or restructuring of certain of our debt obligations (the “Recapitalization Transaction”) through a plan of compromise or arrangement (as amended, supplemented or restated from time to time, the “CCAA Plan”). In order to have the CCAA Proceedings recognized in the United States, on January 30, 2011, the Angiotech Entities commenced proceedings under Chapter 15 of Title 11 of the United States Code (the “U.S. Bankruptcy Code”) in the United States Bankruptcy Court (the U.S. Court) for the District of Delaware (together with the CCAA Proceedings, the “Creditor Protection Proceedings”). On January 13, 2011 and March 3, 2011, respectively, our common shares were delisted from the NASDAQ Stock Market (“NASDAQ”) and the Toronto Stock Exchange (“TSX”).

 

On April 4, 2011, a meeting was held for creditors whose obligations were compromised under the CCAA Plan (“Affected Creditors”) to vote for or against the resolution approving the CCAA Plan. The CCAA Plan was approved by 100% of the Affected Creditors, whose votes were registered and sanctioned by the order of the Canadian Court on April 6, 2011. This order was subsequently recognized by the U.S. Court on April 7, 2011. Affected Creditors who did not file a proof of claim in accordance with the procedure for the adjudication, resolution and determination of claims established by order of the Canadian Court on February 17, 2011 (the “Claims Procedure Order”) had their claims forever barred and extinguished and were not permitted to receive distributions under the CCAA Plan. On May 12, 2011 (the “Plan Implementation Date” or the “Effective Date”), all of our existing common shares and options were cancelled without payment or consideration and the Subordinated Noteholders’ claims of $266 million were settled for 12,500,000 new common shares issued in accordance with the terms of the CCAA Plan. All other Affected Creditors elected, or were deemed to have elected, for cash settlement of their claims. As a result, the $4.5 million of distribution claims of Affected Creditors (excluding Subordinated Noteholders) were settled for $0.4 million in cash. For more detail on additional transactions that were consummated as part of the CCAA Plan on the Plan Implementation Date, refer to note 3 in our audited consolidated financial statements for the year ended December 31, 2011.

 

2



 

On February 7, 2011, we entered into a definitive agreement with Wells Fargo Capital Finance, LLC (“Wells Fargo”) to secure a $28.0 million debtor-in-possession credit facility (the “DIP Facility”). The DIP Facility provided us with liquidity for working capital, general corporate purposes and expenses during the implementation of the CCAA Plan. On the Plan Implementation Date, the DIP Facility was repaid and terminated, and we entered into a new credit facility (as amended, the “Exit Facility”) with Wells Fargo, which provides for potential borrowings up to $28 million (see notes 16(c) and 16(f) of the audited consolidated financial statements included in this Annual Report on Form 10-K).

 

On May 12, 2011, upon the close of business, we concluded substantially all the activities relating to the Recapitalization Transaction and the Angiotech Entities emerged from Creditor Protection Proceedings.  During the course of the Creditor Protection Proceedings, the majority of our businesses continued to operate as usual and there were no material disruptions to our operations, marketing or product distribution activities.

 

Business Strategy

 

Our strategy is to target selected segments of markets where we can establish or maintain a leadership position in medical device products or components, and thereby achieve profitable revenue growth and improved cash flows. Key elements of this strategy include:

 

·                          Maintaining and Investing in Our Precision Manufacturing Capabilities and Technology. We maintain multiple facilities with precision manufacturing capabilities specifically tailored to medical products. These operations enable us to control the most material aspects of manufacturing of our products or product components and assure we are able to readily and flexibly provide products and serve our customers in a safe, consistent and high quality manner that complies with all regulations. We believe maintaining and investing in these capabilities and ensuring the on-time delivery of quality products provides a key barrier to entry in our current markets, and may facilitate more rapid capture of new market or product opportunities as compared to competitors that manufacture using mainly outside vendors or third party manufacturers.

 

·                          Developing and Investing in Highly Specialized Sales and Marketing Personnel and Activities. We have developed several focused, specialized groups of sales and marketing personnel that, in combination with third party distribution networks, target highly selective market sub-segments or customers, with an emphasis on product areas where our precision manufacturing capabilities may provide us a competitive advantage or on markets that may be underserved by the largest medical product providers and manufacturers. We believe this hybrid selling approach, as opposed to working solely through third party sales organizations or personnel, facilitates our ability to build our most important product brands and help customers better understand the key advantages of our products and capabilities.

 

·                          Selectively Investing in New Product Development, Intellectual Property and Proprietary Know-How. We maintain dedicated medical device product engineering, regulatory and quality affairs personnel centered primarily in two of our facility locations. We believe maintaining dedicated product development resources in-house, in combination with our in-house manufacturing capabilities, may facilitate a more rapid and disciplined response to new market opportunities and customer needs, and may provide opportunities to improve our gross profit margins or competitive position us through the development of new, proprietary manufacturing technology or know-how.

 

·                          Pursuing Selective and Disciplined Business Development, Product or Business Acquisition Activities. We expect to continue to supplement our in-house product development and commercialization activities by selectively pursuing product licenses, distribution arrangements, acquisitions or other similar transactions. We believe such activities, when pursued within the discipline of our profitable operating model and within defined financial risk parameters, may provide additional opportunity for us to capitalize on, and generate additional operating profit and cash flow, from our significant investments in our dedicated manufacturing and sales and marketing resources.

 

Business Overview

 

Medical Device Technologies

 

Our Medical Device Technologies segment manufactures and markets a wide range of single-use specialty medical device products and medical device components. These products are sold directly to end users or other third-party medical device manufacturers. This segment contains significant manufacturing capabilities as well as specialized direct and indirect sales and distribution capabilities. Many of our medical products are made using our proprietary manufacturing processes and are protected by our patent portfolio or proprietary know-how. Our most significant product groups within this business segment include Interventional Oncology, Wound Closure, Ophthalmology and Medical Device Components.

 

3



 

Interventional Oncology

 

We develop, manufacture and market a range of proprietary single use medical device products for the diagnosis of cancer, primarily biopsy devices and related products. These product lines include a wide range of soft tissue biopsy products, both disposable and re-usable, primarily for use in different types of breast, lung, spinal and bone marrow biopsies. Some key features of our soft tissue biopsy products include specially manufactured high visibility needle tips to facilitate placement under ultrasound guidance, numerically ordered centimeter markings to facilitate precise depth placement, and adjustable needle stops to restrict forward movement and localize the needle to the biopsy site. Other selected product lines in our biopsy group include fixation pins, breast localization markers, tunneling stylets, surgical tunnelers and isotope seed spacers and needles for prostate cancer treatment. We also offer additional product lines for certain selected interventional radiology procedures performed primarily by physicians that also utilize our biopsy product lines.

 

We sell the majority of these product lines through our Interventional Oncology direct sales organization directly to hospitals and other end users. We also employ selected independent sales representatives and third party distributors to market and sell these product lines in territories where we lack direct sales coverage or where such direct investment would not be financially justified. Our most significant product lines include:

 

·                  BioPince™ full core biopsy devices. Our BioPince biopsy instrument product line is used to obtain tissue samples from patients for analysis and diagnosis of disease. We believe that BioPince is the only commercially available “full core” biopsy device, which may provide a more substantive and improved tissue sample and thereby enable clinicians to more rapidly and accurately provide diagnosis of potential disease. BioPince features a proprietary tri-axial “Core, Cut and Capture” cannula system, which allows the device to deliver cylindrical, full-length biopsy specimens that are complete and largely undamaged, which we believe significantly improves the diagnostic value of the sample.

 

·                  Tru-CoreTM II (fully automatic) and SuperCore™ (semi-automatic) disposable biopsy instruments. Our True-Core and SuperCore soft tissue biopsy product lines are designed to address a variety of diagnostic procedures where a “full core” sample may not be necessary, offer a greater variety of needle lengths and sizes and are cost effective by combining disposable needles with reusable instrumentation. These product lines are designed to be light weight, easily maneuverable and operated with one hand. Our SuperCore is a semi-automatic device which allows for placement of the device specimen notch in a lesion before the spring-loaded cutting cannula is fired, which is considered ideal in CT-guided biopsies. We believe that SuperCore is one of the only semi-automatic devices with an adjustable specimen notch, which may provide clinical flexibility.

 

·                  T-Lok™ bone marrow biopsy devices. Our T-Lok™ bone marrow biopsy device is used for collecting bone marrow. Bone marrow collection is a procedure that is typically done after abnormal red or white blood cells are found in a patient. T-LOK has an ergonomically designed twist-lock handle, which we believe improves a clinician’s ability to penetrate hard bone to obtain the biopsy sample. An adjustable needle stop to control the depth of penetration allows the clinician to safely collect bone marrow at the sternum of the patient.

 

·                  SKATER™ line of drainage catheters. Our SKATER drainage system, which includes catheters and related accessories, is used to facilitate drainage of fluid from wounds, infectious tissues or surgical sites. SKATER features larger lumens and drainage holes, kink resistance, resistance to encrustation and high radiopacity. SKATER is offered in multiple sizes and configurations to address the most typical drainage applications including specific designs for centesis, or small volume drainage procedures, drainage from the biliary duct and nephrostomy procedures.

 

Wound Closure

 

We develop, manufacture and market a full line of wound closure products, primarily various types of sutures and surgical needle products. These products are used by surgeons in a wide variety of applications in hospitals, surgery centers and physician offices. We also sell a significant amount of our general suture products for use in dental and oral surgery procedures. Our suture configurations vary in diameter, length, and material. Our product lines also include a full line of bio-absorbable and non-absorbable suture materials, including PolySynTM and PolySyn FATM, Monoderm™, PolyvioleneTM, polypropylene, poly-ethylene-terephthatate, glycolide and e-caprolactone, polyglycolic acid (PGA), plain and chromic gut, nylon and silk. This wide range of materials allows us to offer a range of handling characteristics and bio-absorption times for our product line. Our product lines also include a wide variety of needle types, including drilled-end and channel surgical needles. Drilled-end suture needles have a precisely drilled butt end for maximum suture holding strength and are adequately tempered for securing strong attachment of the suture. Our proprietary needle designs, including our SharpointTM, UltraGlideTM, and M.E.T.TM Microsurgical product lines are used in very precise tissue closures such as corneal transplants, microvascular, microtubal, and nerve repair procedures.

 

We sell many of these product lines directly to hospitals, surgery centers, clinics and other end users through our Wound Closure direct sales organization. We also employ selected independent sales representatives and third party distributors to market and sell these product lines in territories or areas where we lack direct sales coverage or where such direct investment is not financially

 

4



 

justified. We also manufacture certain of these products in finished form for other third party medical device manufacturers and distributors. Our most significant product lines include:

 

·                  Quill™ Knotless Tissue-Closure products. Our Quill product line is a surface modified suture material that contains proprietary patterns of tiny barbs or other patterns, which can eliminate the need for surgeons to tie knots when closing certain wound types. We believe that use of Quill may lead to faster surgical times, improved wound cosmesis and lower wound infection and complication rates. Quill may also provide for stronger wound closure due to its ability to distribute tension across the entire length of a wound over large numbers of barbs or anchors, as opposed to a far fewer number of knots or anchor points with traditional sutures or surgical staples. Due to this ability to distribute tension, we believe Quill may enable certain tissue types to be repaired that are not addressable by other wound closure technologies.

 

·                  LOOK™ brand sutures for dental and general surgery. LOOK sutures are a specialized line of suture products for tissue approximation and ligation, which are offered in a variety of absorbable and non-absorbable suture materials that are well suited for the needs of the oral, periodontal, dermatological and general surgeon.  The needles used on LOOK sutures possess precision manufactured sharpness, penetration and strength characteristics.  Unique to the LOOK suture offering are SmallStitch™ sutures, which are offered in lengths of 8 inches and 10 inches. This shorter length is ideal for the dental and physician office because there is less waste than with traditional sutures.

 

·                  SharpointTM UltraGlide and SharpointTM M.E.T Microsurgical sutures. Our Sharpoint microsurgical needles and sutures are manufactured using a proprietary process that ensures incisions are consistently sharp and dimensionally true in order to meet the needs for a very precise tissue closure in ophthalmic, micro vessel and nerve repair procedures.

 

Ophthalmology

 

We develop, manufacture and market a selection of single-use disposable products for ophthalmic surgery, including various types of surgical blades used primarily in cataract surgery or other ophthalmic surgery where very small incisions are required. Our products include clear corneal knives, standard implant knives, pilot tip implant knives, precision depth knives, crescent knives, spoon knives, stab knives, vitrectomy knives to create small, precise incisions, sub-2mm series knives, and a variety of slit and specialty knives. Other selected products in our ophthalmic group include a variety of cannula needles for the administration of anesthetic or for irrigation or aspiration in ophthalmic surgery, a full line of absorbable and non-absorbable microsurgical ophthalmic sutures, punctum plugs for treatment of dry eye symptoms and trephine blades for penetrating keratoplasty surgery.

 

We sell these product lines directly, primarily to surgery centers and clinics, primarily through a network of third party independent sales representatives and medical product distributors. We also manufacture ophthalmic surgical blades in finished form for other third party medical device manufacturers and distributors. Our most significant product lines include:

 

·                  Sharpoint™ brand disposable ophthalmic surgical blades. Our Sharpoint product line, which is used primarily to make incisions for cataract and other ophthalmic surgery procedures, is manufactured using a proprietary manufacturing process - our Infinite Edge™ Technology - that eliminates blade grinding and produces cutting edges with consistent sharpness and tolerance.  The Sharpoint knife portfolio includes a full range of sizes and styles to fit the needs of the ophthalmic surgeon.

 

·                  Ultrafit™ trephine blades. The UltraFit trephine product line, which are comprised of instruments used in corneal transplant procedures, consists of disposable vacuum trephines, donor punch sets, and short or long handled trephines in a wide range of sizes. Advanced trephine blade technology provides a sharp cutting edge to achieve the critical fit needed for successful cornea transplants.

 

·                  Tan EndoGlide human corneal endothelial cell transplantation device. Tan EndoGlide is an endothelial insertion device for specialized corneal transplant surgery procedures and is designed to reduce damage of donor endothelium used in the procedure. The device consistently delivers donor tissue through a small incision, while making the insertion procedure relatively reliable and consistent, with the surgeon in full control of the donor tissue at all stages of procedure. The Tan EndoGlide device consists of a preparation base, glide cartridge and a glide introducer. The glide cartridge automatically coils the donor tissue into a double coil configuration, with no endothelial surfaces touching, and is designed to fit through a very small scleral or corneal incision.

 

Medical Device Components

 

We develop, manufacture and market a wide range of components, primarily on a made-to-order basis, for other third party medical device manufacturers, who then use the provided components as part of assembling their own finished medical device products. These

 

5



 

products may range from unsterilized product components, which are shipped to the customer for final assembly and sterilization, to fully finished, packaged and sterilized medical device products. These components are typically manufactured using the same manufacturing capabilities and technologies we utilize to produce our various other product lines. Our most significant manufacturing capabilities that we offer for use in making components for third parties include metal grinding and polishing, plasma welding, chemical etching, electropolishing and electro-chemical marking, plastics injection molding, plastics and polymer extrusion and silk suture formation, weaving of medical grade textiles and packaging and assembly.

 

We sell these product lines directly to corporate customers solely through a direct sales organization. Our customers include many leading medical device manufacturers in the cardiology and vascular access, interventional radiology, ophthalmology, orthopedics, women’s health, and wound closure product areas.

 

Licensed Technologies

 

Our Licensed Technologies segment includes certain of our legacy technologies for which research and development activities have been concluded.  This segment generates additional revenue in the form of royalties received from partners who have licensed and utilize these technologies in their medical device product lines. Our principal revenues in this segment to date have been royalties derived from sales by our partner BSC of TAXUS paclitaxel-eluting coronary stents for the treatment of coronary artery disease.

 

We have also licensed the same technology utilized by BSC in its TAXUS product line to our partner Cook Medical Inc. (“Cook”) for use in its Zilver® PTX® paclitaxel-eluting peripheral vascular stent (“Zilver PTX”) for the treatment of vascular disease in the leg. Zilver PTX is currently approved for sale in the E.U. and in certain other countries outside of the U.S., and is awaiting approval by the U.S. Food and Drug Administration (“FDA”) for sale in the U.S.  Should Cook receive U.S. approval for Zilver PTX, we expect we would receive additional royalty revenue in our Licensed Technologies segment.

 

We receive royalty revenue derived from sales of TAXUS and Zilver PTX based on our license agreements with BSC and Cook of several families of intellectual property relating to our proprietary paclitaxel technology. The royalty rate applied to BSC’s sales increases in certain countries depending upon unit sales volume achieved by BSC. The royalty rates applied to Cook’s sales of Zilver PTX are flat rates designated by the geographic location of sales, regardless of the unit volume of sales achieved. There is minimal expense associated with our receipt of royalty revenue derived from TAXUS. We expect we will incur royalty expense associated with Cook’s sales of Zilver PTX under our license agreement with the National Institutes of Health. We may continue to receive royalty revenue from BSC and Cook for the life of the licensed patent families depending upon BSC’s and Cook’s level of product sales and commercial and clinical success.

 

TAXUS Paclitaxel-Eluting Coronary Stents

 

The TAXUS paclitaxel-eluting coronary vascular stent, which incorporates our proprietary paclitaxel technology, is a small, balloon-expanded metal scaffold designed for placement in diseased arteries in the heart to restore blood flow by expanding and holding open the arteries upon deployment.

 

BSC first received approval to sell TAXUS in the E.U. in 2003 and in the U.S. in 2004.  Subsequent to the U.S. approval of the TAXUS Express™ stent system in 2004, BSC has introduced multiple next generation coronary stent platforms that utilize our proprietary paclitaxel technology, including the TAXUS Liberte™ and the recently introduced TAXUS Ion™ coronary stent systems.

 

TAXUS has been studied in multiple human clinical trials, as well as in independent registry studies, which have repeatedly demonstrated the safety and efficacy of TAXUS coronary stent systems, particularly in diabetic patient populations. In patients receiving TAXUS coronary stents, the number of repeat surgery procedures has been shown to be significantly lower in patients receiving TAXUS than those receiving non drug-eluting, or bare metal, coronary stents. The most recent study results announced in November 2011 by our partner BSC include positive long-term data from BSC’s PERSEUS clinical program, which demonstrated favorable two-year safety and efficacy outcomes for the TAXUS ION stent system versus prior-generation paclitaxel-eluting stents.

 

Certain clinicians suggested in 2006 that the use of drug-eluting stents may cause an increased rate of late thrombosis (the formation of blood clots in the stent long after the initial stent implantation) and in turn, potentially lead to an increased rate of myocardial infarctions (heart attacks) or deaths as compared to patients receiving bare metal stents. These suggestions led to a significant decrease in the use of drug-eluting stents beginning in the second half of 2006 and continuing through 2008. While subsequent analysis of clinical data suggest that these concerns may not have been justified and use of drug-eluting stents began to recover in 2009, usage has yet to reach to the levels observed in 2005 prior to the initial reporting of physician concerns.

 

6



 

In addition, starting in mid 2008 and early 2009, several new competitive drug-eluting stents were made commercially available in the United States, Europe and Japan. The reduction in drug-eluting stent usage, combined with the entry of new competitors, has had significant negative impacts on the levels of royalty revenue we receive from BSC. Our royalty revenues derived from sales of TAXUS stent systems by BSC declined by 32% from 2008 to 2009, 47% from 2009 to 2010 and 34% from 2010 to 2011.

 

Zilver PTX Paclitaxel-Eluting Peripheral Vascular Stents

 

The Zilver PTX paclitaxel-eluting peripheral vascular stent, which incorporates our proprietary paclitaxel technology, is a small, self-expanding metal scaffold designed for placement in diseased arteries in the limbs to restore blood flow by expanding and holding open the arteries upon deployment.

 

Cook first received approval to sell Zilver PTX in the E.U. in 2009, and is currently awaiting approval to sell Zilver PTX in the U.S. To date, stent procedures for peripheral artery disease (“PAD”) in the limbs have been limited due to high observed complication rates for such procedures that often lead to a subsequent surgical procedure, as well as risk of stent fracture with existing products, as these stents are exposed and not protected by the patient’s anatomy as they are with coronary stents. Cook has conducted multiple human clinical trials for Zilver PTX in the E.U., U.S., Japan, and selected other countries to assess product safety and efficacy. To date, clinical results for Zilver PTX have suggested significant reductions in complications as compared to traditional PAD treatments. Selected highlights of Cook’s reported regulatory milestones and clinical results include:

 

·                  October 2011 — Cook announced that Zilver PTX had received a unanimous recommendation from the FDA’s Circulatory System Devices Panel of the Medical Devices Advisory Committee, with all 11 of its members voting to recommend approval of Zilver PTX for sale in the U.S. on the basis of its safety, efficacy and acceptable risk profile. Cook in June 2010 had submitted its Pre-Market Approval (“PMA”) application to the FDA for Zilver PTX.

 

·                  September, 2010 — Cook announced that a summary of the final clinical trial results for the randomized study of Zilver PTX was presented at the annual TCT symposium in Washington D.C. The study met its 12-month primary endpoint showing non-inferior event-free survival (“EFS”) and superior patency for the Zilver PTX as compared to balloon angioplasty.

 

·                  May 2010 — Cook presented one-year data at Euro PCR that confirmed sustained clinical outcomes with Zilver PTX. According to data presented, 86.2% of all patient subgroups treated with Zilver PTX demonstrated vessel patency at 12 months without the requirement for an additional intervention. The trial is based on a group of 787 patients, including symptomatic patients, diabetics, and those with the most complex lesions, including long lesions, total occlusions and in-stent restenosis.

 

·                  April 2010 — Cook announced it had enrolled its first patient in its landmark Formula™ PTX® clinical trial. The trial is the first of its kind to evaluate the safety and effectiveness of a paclitaxel-eluting stent to treat renal artery disease, the narrowing of the arteries that supply blood to the kidneys.

 

·                  April 2009 — Cook reported data that showed that 82 percent of patients who were treated with Cook’s Zilver PTX stent were free from re-intervention at two-year follow up. The Zilver PTX Registry study, involving 792 patients globally, is assessing the safety and efficacy of the Zilver PTX in treating peripheral artery disease. Data was compiled at 12 and 24 months for 593 patients and 177 patients, respectively. The corresponding EFS rates were 87 percent and 78 percent, respectively, and freedom from target lesion revascularization was 89 percent and 82 percent, respectively. Detailed evaluation of stent x-rays demonstrated excellent stent integrity through 12 months, confirming previously published results showing 99 percent completely intact stents (less than 1 percent stent fracture rates observed) with a mean follow up of 2.4 years in the challenging superior femoral artery and popliteal arteries, including behind the knee locations.

 

Manufacturing and Product Distribution

 

We have significant precision medical device manufacturing capabilities, with seven facilities that are primarily dedicated to medical device manufacturing located in the United States, Europe and Puerto Rico. Each of our manufacturing facilities has specific, and in some cases proprietary, expertise in certain types of medical device manufacturing as well as experience in complying with the significant regulations, quality and operating requirements that are critical aspects of medical products manufacturing. Our medical device manufacturing capabilities include polymer handling and extrusion, metals, plastics and textile fabrication and packaging and assembly. Our suture manufacturing capabilities include the ability to make and handle various approved polymer materials in multiple lengths, diameters and configurations. Our metal manufacturing capabilities include bending, grinding, flattening, drilling, polishing, chemical etching, plasma welding, thermal curing and wire winding. Our plastics manufacturing capabilities include injection molding, plastic extrusion, insert molding and wire coating. Our textile manufacturing capabilities include braiding and embroidery of selected suture materials, including silk. Our assembly and packaging capabilities include small lot assembly, suture

 

7



 

attachment and kit assembly. We also maintain manufacturing capabilities for certain medical device coating technologies, primarily relating to coatings designed to facilitate medical device lubricity upon implant or insertion.

 

We use a diverse and broad range of raw materials in the design, development and manufacture of our products. Our non-implantable products are manufactured from man-made raw materials including resins, chemicals, plastics and metal. We purchase certain materials and components used in manufacturing our products from external suppliers. In addition, we may purchase certain supplies from single sources for reasons of quality assurance, sole source availability, cost effectiveness or constraints resulting from regulatory requirements. Angiotech works closely with its suppliers to mitigate risk and assure continuity of supply while maintaining high quality and reliability. Alternative supplier options are generally considered and identified, although we do not typically pursue regulatory qualification of alternative sources due to the strength of our existing supplier relationships and the time and expense associated with the regulatory validation process.

 

We maintain raw material, work in process and finished goods in each of our facilities. We distribute products directly from our various manufacturing facilities, many of which include space for safely storing and maintaining medical products and related components. We also maintain an independent product distribution partner in the E.U. for certain of our product lines.

 

We maintain resources to develop procedures and process controls for our products and product candidates to ensure successful technology transfer for commercial scale manufacturing. We expect that process development performed during the pre-clinical post-approval stages of manufacturing will result in products with the desired performance consistency, product tolerances and stability. These activities include scaling up production methods, developing quality control systems, optimizing batch-to-batch reproducibility, testing sterilization methods and establishing reliable sources of raw materials for synthesizing proprietary products.

 

Quality Assurance

 

We are committed to providing quality products to our customers. To meet this commitment, we have implemented modern quality systems and concepts throughout the organization. Our quality system starts with the initial product specification and continues through the design of the product, component specification processes, and the manufacturing, sales and servicing of the product. The quality system is intended to incorporate quality into products and utilizes continuous improvement concepts throughout the product lifecycle. Our operations are certified under applicable international quality systems standards, such as International Organization for Standardization (“ISO”) 9000 and ISO 13485. These standards require, among other items, quality system controls that are applied to product design component material, suppliers and manufacturing operations. These ISO certifications can be obtained only after a complete audit of a company’s quality system has been conducted by an independent outside auditor. Periodic reexamination by an independent outside auditor is required to maintain these certifications.

 

Sales and Marketing

 

We market and sell our various medical device products through a group of specialized sales organizations that consist of direct sales and marketing personnel, which in some cases are supplemented by independent sales representatives and independent medical products distributors, depending on the product category, customer base or geographic location. We currently employ approximately 55 direct sales and marketing personnel in our Interventional Oncology group, approximately 53 direct sales and marketing personnel in our Wound Closure group, and approximately 30 additional direct sales personnel serving customers in our other product areas and selected geographies outside of the U.S. The majority of our direct sales teams are based in the U.S.

 

Our Interventional Oncology and Wound Closure direct sales teams primarily target hospital-based physician customers, alternate site health care providers such as ambulatory surgery centers and urgent care centers. The primary goal of our direct sales teams is to sustain sales volumes or, in certain cases where we have products with a significant technical or other competitive advantage or a new product offering, increase market share of our products.

 

Our independent sales representatives and independent distributors target hospital customers, alternate site health care providers, such as ambulatory surgery centers and urgent care centers and physician and dental offices. These sales representatives and distributors, under the guidance of our senior sales and marketing management, may also target other third party medical products manufacturers or distributors as potential customers for finished private label medical device products in our Wound Closure and Ophthalmology product areas.

 

Our Medical Device Component product area is supported by a small direct sales team, and targets high level managers and supply chain experts within other third party medical device manufacturers.

 

We are not dependent on any single customer and no single customer accounted for more than 10% of our net sales in 2011. Sales personnel work closely with the main decision makers who purchase our products, which primarily include physicians, but may also include: material managers; nurses; hospital administrators; purchasing managers; and ministries of health. Also, for certain of our products and where appropriate, our sales personnel actively pursues approval of Angiotech as a qualified supplier for hospital group purchasing organizations (“GPOs”) that negotiate contracts with suppliers of medical products.

 

8



 

In 2011, 61% of our reported product sales were derived from sales to customers in the U.S., and 39% of our reported product sales were derived internationally.

 

Product Development

 

We maintain new product development capabilities and personnel, with a primary focus on medical device, mechanical and manufacturing engineering. The focus of our product development efforts are primarily on developing improvements to our existing products or manufacturing processes, or on new product opportunities that focus on markets similar to our current target markets, and that may compliment certain of our existing product offerings.

 

The majority of our product development personnel are located at two of our manufacturing facilities, with additional engineering support personnel located in each of our material manufacturing operations. We also employ personnel with expertise in regulatory affairs and quality control that are responsible for regulatory and quality control activities with respect to certain of our existing and new product candidates.

 

We, or our partners, are evaluating selected new product candidates and product line extensions, including certain product candidates that may be undergoing human clinical testing or other testing conducted either by us or our partners. We also may maintain certain pre-clinical or research stage programs and conduct various product and process improvement initiatives related to our currently marketed products and our manufacturing facilities.

 

Government Regulation and other Matters

 

The research and development, manufacturing, labeling, advertising, sale, marketing and third-party reimbursement of our medical device products and those of our suppliers, customers and partners are subject to extensive regulation by the FDA, the U.S. Department of Health and Human Services Centers for Medicare and Medicaid Services (“CMS”), and comparable regulatory agencies in state and local jurisdictions and in foreign countries.

 

Medical product regulations often require registration of manufacturing facilities, carefully controlled research and testing of products, government review and approval or clearance of results prior to marketing of products, adherence to current Good Manufacturing Practices (“cGMPs”) during the production and processing of products, and compliance with comprehensive post-marketing requirements, including restrictions on advertising and promotion and requirements for reporting adverse events to the FDA in the U.S. and other regulatory authorities abroad. In the U.S., these activities are subject to rigorous regulation by the FDA. Similar regulations apply in the E.U. and other markets.

 

Our success is ultimately dependent upon our and our suppliers’, customers or partners obtaining marketing approval or clearance for our or their products or potential product candidates currently under development, and will depend on our and our suppliers’, customers’ and partners’ ability to comply with FDA and other market regulations governing the manufacturing, quality control, pre-clinical evaluation, and clinical testing of their products or product candidates. If we or our present or future suppliers, customers or partners are not able to comply with the continuing FDA regulations that accompany FDA approval, the FDA may require us or our suppliers, customers or partners to recall a device or drug from distribution, withdraw the 510(k) or Premarket Approval for the relevant marketed medical device product, halt our clinical trials or withdraw approval for our clinical trials.

 

We have significant medical device component engineering and manufacturing, as well as finished goods and packaging manufacturing operations. The manufacturing processes used in the production of finished medical devices are subject to FDA regulatory inspection, and must comply with FDA regulations, including its Quality Systems Regulation, which sets forth the cGMP requirements for medical devices. The Quality Systems Regulation requires manufacturers of finished medical devices to follow elaborate design, testing, control, documentation and other quality assurance procedures during the finished device manufacturing process. Our FDA registered facilities are subject to FDA inspection at any time for compliance with the Quality Systems Regulation and other FDA regulatory requirements. Failure to comply with these regulatory requirements and similar foreign requirements may result in civil and criminal enforcement actions, including financial penalties, seizures, injunctions or other measures. In some cases, failure to comply with the Quality System Regulation could prevent us or our customers from marketing products or gaining clearance to market additional products. Our products must also comply with state and foreign regulatory requirements.

 

Our business arrangements and other interactions with healthcare providers and other entities are also governed by numerous federal, state and foreign laws and regulations, including law and regulations:

 

·                  prohibiting kickbacks, which may prohibit making payments to healthcare providers and other individuals in order to induce the purchase of our products or services;

 

9



 

·                  restricting physician self-referrals, such as the federal “Stark Law,” which generally prohibits physicians from referring Medicare or Medicaid patients to entities with which the physician (or an immediate family member) is affiliated for the provision of certain designated health services;

 

·                  proscribing the use, disclosure and maintenance of certain patient health information, such as the federal Health Information Portability and Accountability Act of 1996 (“HIPAA”), as amended by the Health Information Technology for Economic and Clinical Health Act (“HITECH”);

 

·                  prohibiting submission of false or misleading claims to Medicare or Medicaid and retention of overpayments related to the submission of such claims;

 

·                  requiring disclosure of payments made to teaching hospitals and physicians and financial interests held by physicians (and their immediate family members), such as the federal “Physician Payment Sunshine Act” and similar state laws; and

 

·                  providing for prosecution of U.S. companies related to arrangements with foreign government officials and other individuals and entities outside of the U.S.

 

Failure to comply with these laws and regulatory requirements may result in civil and criminal enforcement actions, including financial penalties, seizures, injunctions or other measures.

 

Internationally, the regulation of medical devices is complex. In Europe, our products are subject to extensive regulatory requirements. The regulatory regime in the E.U. for medical devices became mandatory in June 1998. It requires that medical devices may only be placed on the market if they do not compromise safety and health when properly installed, maintained and used in accordance with their intended purpose. National laws conforming to the E.U.’s legislation regulate our products under the medical devices regulatory system. Although the more variable national requirements under which medical devices were formerly regulated have been substantially replaced by the European Union Medical Devices Directive, individual nations can still impose unique requirements that may require supplemental submissions. The E.U. medical device laws require manufacturers to declare that their products conform to the essential regulatory requirements after which the products may be placed on the market bearing the CE Mark. Manufacturers’ quality systems for products in all but the lowest risk classification are also subject to certification and audit by an independent notified body. In the E.U., particular emphasis is being placed on more sophisticated and faster procedures for the reporting of adverse events to the competent authorities. In many of the other foreign countries in which we market our products, we may be subject to regulations affecting, among other things:

 

·                  product standards and specifications;

 

·                  packaging requirements;

 

·                  labeling requirements;

 

·                  quality system requirements;

 

·                  import restrictions;

 

·                  tariffs;

 

·                  duties; and

 

·      tax requirements.

 

Many of the regulations applicable to our devices and products in these countries are similar to those of the FDA. In some regions, the level of government regulation of medical devices is increasing, which can lengthen time to market and increase registration and approval costs. In many countries, the national health or social security organizations require our products to be qualified before they can be marketed and considered eligible for reimbursement.

 

In the U.S., health care providers generally rely on third-party payers, including both private health insurance plans and governmental payers, such as Medicare and Medicaid, to cover and reimburse all or part of the cost of a medical device and the procedures in medical devices that are used. Foreign governments also impose significant regulations in connection with their health care reimbursement programs and the delivery of health care items and services.

 

Our ability to commercialize human therapeutic products and product candidates successfully will depend in part on the extent to which coverage and reimbursement for such products and related treatments will be available from government health administration authorities, private health insurers and other third-party payers or supported by the market for these products. Third-party payers are

 

10



 

increasingly challenging the price of medical products and services and instituting cost containment measures to control or significantly influence the purchase of medical products and services.

 

In the U.S., there have been and we expect there will continue to be a number of legislative and regulatory proposals to change the health care system in ways that could significantly affect our business. For example, the 2010 health reform law was intended to increase the number of individuals covered by health insurance, impose reimbursement provisions intended to restrict the growth in Medicare and Medicaid spending and encourage development of health care delivery programs and models intended to tie payments to quality and care delivery innovations.  Although some provisions of the health reform legislation have been implemented, many of the legislative changes contained within the health reform legislation will not be effective or implemented until 2013, or later.  In addition, the Supreme Court will likely rule on the constitutionality of portions of the health reform law later this year, which could result in repeal of all or portions of the law.  Therefore, the impact of health reform on our business is currently uncertain.  Apart from the 2010 health reform law, efforts by governmental and third-party payers to reduce healthcare costs or the announcement of legislative proposals or reforms to implement government controls could cause a reduction in sales or in the selling price of our products, which could seriously harm our business. We cannot predict the impact on our business of any legislation or regulations related to the healthcare system that may be enacted or adopted in the future.

 

Patents, Proprietary Rights and Licenses

 

Patents and other proprietary rights are essential to our business. We may file patent applications to protect technology, inventions and improvements to inventions that are considered important to our business. We may also rely upon trade secrets, continuing technological innovations and licensing opportunities to develop and maintain our competitive position. Furthermore, we may also endeavor to extend, or capture value from, our intellectual property portfolio by licensing patents and patent applications from others or to others, and initiating research collaborations with outside sources.

 

As part of our patent strategy, we have filed a variety of patent applications internationally. Oppositions have been filed against various granted patents that we either own or license and which are related to certain of our technologies. See “— Legal Proceedings” elsewhere in this Annual Report on Form 10-K for a discussion of the proceedings related to certain of such oppositions. An adverse decision by an Opposition Division in any country, or subsequently, by a Board of Appeal, could result in revocation of our patent or a narrowing of the scope of protection afforded by the patent. The ultimate outcomes of the pending oppositions, including appeals, are uncertain at this time. We do not know whether the patents that we have received or licensed, or those we may be able to obtain or license in the future, would be held valid or enforceable by a court or whether our patents would be found to infringe a competitor’s patents related to its technology or product. Further, we have no assurance that third parties will not (whether pursuant to or in breach of the terms) modify or terminate any license they have granted to us.

 

Competition

 

We expect to face competition from companies marketing, selling and developing medical device or other medical technologies that target the same diseases, clinical indications, customers or markets that our technologies target, as well as competition from other manufacturers of medical device components who sell to similar third party medical device manufacturers, including to some of our current customers. Some of these companies have substantially greater product development, sales and marketing, manufacturing capabilities and experience, proprietary technology or more substantive financial resources than we do. Specifically, we compete with a number of large companies across various of our medical device product lines. These competitors have substantially greater business and financial resources than we do. These competitors include, but are not limited to, the Ethicon division of Johnson & Johnson and Covidien, Inc. in surgical sutures and wound closure devices; C.R. Bard Inc., the Allegiance division of Cardinal Health, Inc. and the Sherwood, Davis & Geck division of Covidien, Inc. in biopsy needle devices; Alcon, Inc., Allergan, Inc. and the Allegiance division of Cardinal Health, Inc. in ophthalmology products; and Accelent Inc., Teleflex Incorporated and Symmetry Medical Inc. in the manufacture of medical devices and device components for other third party medical device manufacturers.

 

The medical device, biotechnology and pharmaceutical industries are subject to rapid and substantial business, operational and technological change. There can be no assurance that developments by others will not render obsolete our products or technologies, that we will be able to keep pace with technological developments or that we will be able to manufacture and market our products at a cost that will be attractive to our customers.

 

Some competitive products have an entirely different approach or means to accomplish the desired therapeutic or diagnostic effect as compared to our product candidates. These competitive products, including any enhancements or modifications made to such products in the future, could be more effective and/or less costly than our products, technologies or our product candidates.

 

There are a number of companies that are marketing or developing competing drug-eluting coronary stents or other treatments for restenosis that may be considered to be directly competitive with our technology. Certain of our competitors have developed and commercialized coronary drug-eluting stents that compete with BSC’s TAXUS stents and which have been approved for use in the U.S., E.U. and certain other countries. The launch of these competing products has had a significant impact on BSC’s sales of

 

11



 

TAXUS, and has resulted in a decline in our royalty revenue received from BSC. The continued successful commercialization of any of these or other technologies to treat restenosis following angioplasty or stent placement could have a material adverse impact on our business.

 

Employees

 

As of December 31, 2011, on a worldwide basis, we had approximately 1,290 employees, including 917 in manufacturing, 23 in research and development, 105 in quality assurance, 164 in sales and marketing and 81 in administration. In addition, we have contractual arrangements with scientists at various research and academic institutions. All such employees and contractors execute confidentiality agreements with us. While we will continue to seek to hire highly qualified employees, we believe that we have employed a sufficient number of qualified personnel.

 

Environmental

 

Our business is subject to a broad range of government regulation and requirements, including federal, state, local and foreign environmental laws and regulations governing, among other matters, air emissions, wastewater discharges, workplace health and safety as well as the use, handling, storage and disposal of hazardous materials and remediation of contamination associated with the release of these materials at or from our facilities or off-site disposal locations. Some of these laws can impose liability for remediation costs on a party regardless of fault or the lawfulness of its conduct. Many of our manufacturing processes involve the use and subsequent regulated disposal of hazardous materials. To date, such matters have not had a material adverse impact on our business or financial condition. We cannot assure you, however, that such matters will not have such an effect in the future.

 

International Operations

 

Our medical devices are manufactured and sold worldwide. Approximately 39% of our medical device revenues are generated outside of the U.S. and geographic expansion remains a core component of our strategy. We currently sell our products in the following international territories: Europe, Asia-Pacific, Latin America and Canada. We are subject to certain risks inherent in conducting business outside the U.S. For more information regarding these risks, see the risk factors under the captions “We are subject to risks associated with doing business globally” and “We may incur losses associated with foreign currency fluctuations” in Item 1A of this Annual Report on Form 10-K, all of which information is incorporated herein by reference.

 

For financial information about foreign and domestic operations and geographic information, see note 23 of the audited consolidated financial statements included in this Annual Report on Form 10-K. In addition, for more information regarding foreign currency exchange risk, refer to the discussion under “Foreign Currency Risk” under Item 7A of this Annual Report on Form 10-K.

 

12



 

Item  1A.              RISK FACTORS

 

You should consider carefully the following information about these risks, together with all of the other information contained within this document. Additional risks and uncertainties not currently known to us or that we currently deem immaterial may impair our business operations. If any of the following risks actually occur, our business, results of operations and financial condition could be harmed.

 

Risks Related to Our Business

 

Our business activities involve various elements of risk. The risks described below and incorporated herein by reference are not the only ones facing us. Additional risks that are presently unknown to us or that we currently deem immaterial may also impact our business. We consider the following issues to be the most critical risks to the success of our business:

 

Our success depends on the successful commercialization of our existing products and new product candidates.

 

The continued and successful commercialization of our medical device products and technology is crucial for our success. Successful product commercialization and product development in the medical device industry is highly uncertain, and very few product commercialization initiatives or research and development projects produce a significant or successful commercial product. Our products and product candidates are in various stages of commercial and clinical development and face a variety of risks and uncertainties. Principally, these risks and uncertainties include the following:

 

·                  Commercialization risk. Even if our, or our customers’ or partners’, products or product candidates are successfully developed, receive all necessary regulatory approvals and are commercially produced, there is no guarantee that there will be market acceptance of them or that they will generate or sustain any significant revenues. Our ability to achieve sustainable market acceptance for any of our medical device products or product components will depend on a number of factors, including but not limited to: (i) whether competitors develop technologies which are superior to, or less costly than, our products or product candidates; (ii) whether our products or product candidates lead to or directly cause unwanted side effects; (iii) whether government and private third-party payers provide adequate coverage and reimbursement for our products or product candidates; (iv) whether our sales and marketing efforts are effective and of reasonable cost, or are able to reach our target markets and customer base.

 

·                  Manufacturing and scale-up risk. We, our suppliers or our partners may face significant or unforeseen difficulties in manufacturing our products or product components, including but not limited to (i) technical issues relating to producing products on a commercial scale at reasonable cost, and in a reasonable time frame, (ii) difficulty meeting demand or timing requirements for component orders due to excessive costs or lack of capacity for part or all of an operation or process; (iii) lack of skilled labor or unexpected increases in labor costs needed to produce a certain product or perform a certain operation; (iv) changes in government regulations, quality or other requirements that lead to additional manufacturing costs or an inability to supply product in a timely manner, if at all; (v) increases in raw material or component supply cost or an inability to obtain supplies of certain critical supplies needed to complete our manufacturing processes. These difficulties may only become apparent when scaling up the manufacturing of a product or product candidate to more substantive commercial scale.

 

·                  Clinical risk. Future clinical trial or study results, whether conducted by or in collaboration with us or by independent third parties, may show or suggest that some or all of our technology, or the technology of our partners that incorporates our technology, is not safe or effective or is not as safe or effective as similar technologies produced by our competitors.

 

·                  Liquidity and working capital risk. We may not have the working capital and financial resources necessary to effectively market or distribute our products to customers or potential customers, or to finance the launch of any potential new products. Our available working capital to market and distribute our products and product candidates is in part dependent on our ability to sustain our cash flow from operations, if any, to obtain outside financing, to effectively manage our working capital and to repay or refinance our existing debt obligations.

 

If we are unsuccessful in dealing with any of these risks, or if we are unable to successfully commercialize our technology for some other reason, it would likely seriously harm our ability to sustain or to generate additional revenue.

 

We may be unsuccessful in marketing, selling and distributing certain of our products.

 

We distribute a number of our products worldwide. In order to achieve commercial success for our approved products, we have established sales and marketing resources in the United States, Europe and other parts of the world. If our distribution personnel or

 

13



 

methods are not sufficient to achieve market acceptance of our products, to maintain our current customer relationships or to ensure we have supply to meet demand for our products, it could harm our prospects, business, financial condition and results of operations.

 

To the extent that we enter into co-promotion or other marketing and sales arrangements with other companies, any revenues received will be dependent on the efforts of others, and we do not know whether these efforts will be successful. Failure to develop an adequate sales and marketing operation or to enter into appropriate arrangements with other companies to market and sell our products will reduce our ability to sustain or generate revenues.

 

The manufacture of many of our products is highly complex and subject to strict regulatory and quality controls. If we or one of our suppliers encounters manufacturing or quality problems, our business could suffer.

 

The manufacture of many of our products is highly complex and subject to strict regulatory and quality controls. In addition, quality is extremely important due to the serious and costly consequences of a product failure. Problems can arise during the manufacturing process for a number of reasons, including equipment malfunction, failure to follow protocols and procedures, raw material problems or human error. If these problems arise or if we otherwise fail to meet our internal quality standards or those of the FDA or other applicable regulatory body, which include detailed record-keeping requirements, our reputation could be damaged, we could become subject to a safety alert or a recall, we could incur product liability and other costs, product approvals could be delayed and our business could otherwise be adversely affected.

 

Any adverse events associated with our products must be reported to regulatory authorities. If deficiencies in our or our collaborators’ manufacturing and laboratory facilities are discovered, or we or our collaborators fail to comply with applicable post-market regulatory requirements, a regulatory agency may close the facility or suspend manufacturing.

 

The significant majority of our products are manufactured, assembled and packaged in facilities that are owned by us. In the event one or more of our facilities is affected by a natural disaster or is unable to operate for any reason, our ability to supply products to our customers may be materially impacted. While we maintain manufacturing disaster and business interruption plans designed to mitigate or eliminate manufacturing interruptions or the financial impact of such, there can be no assurance that such plans or actions taken will be adequate, or that any sales lost during any manufacturing interruption will be recovered.

 

With respect to products manufactured by third-party contractors, we are, and we expect to continue to be, dependent on our collaborators for continuing regulatory compliance, and we may have little or no control over these matters. Our ability to control third-party compliance with the FDA and other regulatory requirements will be limited to contractual remedies and rights of inspection. Our failure or the failure of third-party manufacturers to comply with regulatory requirements applicable to our products may result in legal or regulatory action by those regulatory authorities. There can be no assurance that our or our collaborators’ manufacturing processes will satisfy regulatory, cGMPs or International Standards Organization requirements.

 

In addition, there may be uncertainty as to whether or not we or others who are involved in the manufacturing process will be able to make the transition to commercial production of some of our newly developed products. A failure to achieve regulatory approval for manufacturing facilities or a failure to make the transition to commercial production for our products will adversely affect our prospects, business, financial condition and results of operations.

 

The Company has historically been unprofitable and may not be able to achieve and maintain profitability.

 

We have incurred a loss from operations in a majority of the years in which we have been operating. Our ability to become profitable and maintain profitability will depend on, among other things, our ability to maintain and improve sales of our existing product lines; our ability to successfully market and sell certain new products and technologies; the amount of royalty revenue we receive from our corporate partners; our ability to develop and successfully launch new products and technologies; our ability to improve our profit margins through lower manufacturing costs and efficiencies or improved product sales mix; and our ability to effectively control our various operating costs.

 

Our working capital and funding needs may vary significantly depending upon a number of factors including, but not limited to, our levels of sales and gross profit; costs associated with our manufacturing operations, including capital expenditures, labor and raw materials costs, and our ability to realize manufacturing efficiencies from our various operations; fluctuations in certain working capital items, including inventory and accounts receivable, that may be necessary to support the growth of our business or new product introductions; the level of royalty revenue we receive from corporate partners; progress of our product development programs and costs associated with completing clinical studies and the regulatory process; collaborative and license arrangements with third parties; the cost of filing, prosecuting and enforcing our patent claims and other intellectual property rights; expenses associated with litigation; opportunities to in-license complementary technologies or potential acquisitions; potential milestone or other payments we may make to licensors or corporate partners; and technological and market developments that impact our royalty revenue, sales levels or competitive position in the marketplace.

 

14



 

The significant decline in royalty payments we receive from BSC, the large amount of our outstanding indebtedness and the related cash interest payments due on such indebtedness, as well as the working capital, capital and other operating expenditures required to operate our Medical Device Products segment, among other factors, have adversely affected our operating cash flows, liquidity and profitability. In order to continue to finance our operations, it may be necessary for us to explore new or alternative sources of financing, which may further impact our operating cash flows, liquidity and profitability. Such financing may not be available when needed, or available on attractive or acceptable terms, due to credit market conditions and other factors.

 

We continue to explore options to improve our capital structure and address our current and future capital needs. If we are not able to adequately address our capital needs or refinance our Senior Floating Rate Notes, there can be no assurances that we will have adequate liquidity and capital resources to satisfy our financial obligations, meet the funding requirements necessary to execute our operating plan or achieve profitability.

 

If our products are alleged to be harmful, we may not be able to sell them, we may be subject to product liability claims not covered by insurance and our reputation could be damaged.

 

The nature of our business exposes us to potential liability risks inherent in the testing, manufacturing and marketing of medical devices. Using our medical device product candidates in clinical trials may expose us to product liability claims. These risks will expand with respect to medical devices that receive regulatory approval for commercial sale. In addition, some of the products we manufacture and sell are designed to be implanted in the human body for varying periods of time. Even if a medical device were approved for commercial use by an appropriate governmental agency, there can be no assurance that users will not claim that effects other than those intended may have resulted from our products. Component failures, manufacturing flaws, quality system failures, design defects, inadequate disclosure of product-related risks or product-related information or other safety issues with respect to these or other products we manufacture or sell could result in an unsafe condition or injury to, or death of, a patient. In addition, although many of our products are subject to review and approval by the FDA or other regulatory agencies, under the current state of the law, any approval of our products by such agencies will not prohibit product liability lawsuits from being brought against us in the event that our products are alleged to be defective, even if such products have been used for their approved indications and appropriate labels have been included.

 

In the event that anyone alleges that any of our products are harmful, we may experience reduced demand for our products or our products may be recalled from the market. In addition, we may be forced to defend individual or class action lawsuits and, if unsuccessful, to pay a substantial amount in damages. A recall of some of our products could result in exposure to additional product liability claims, lost sales and significant expense to perform the recall. The outcome of litigation, particularly class action lawsuits, is difficult to assess or quantify. Plaintiffs in these types of lawsuits often seek recovery of very large or indeterminate amounts, including not only actual damages, but also punitive damages. The magnitude of the potential loss relating to these types of lawsuits may remain unknown for substantial periods of time. In addition, the cost to defend against any future litigation may be significant.

 

We do not have insurance covering our costs and losses as a result of any recall of products or devices incorporating our technologies, whether such recall is instituted by a device manufacturer or us as required by a regulatory agency. Insurance to cover costs and losses associated with product recalls is expensive. If we seek insurance covering product recalls in the future, it may not be available on acceptable terms. Even if obtained, insurance may not fully protect us against potential liability or cover our losses. Some manufacturers that suffered such claims in the past have been forced to cease operations or declare bankruptcy.

 

We do have insurance covering product liability. However, our insurance may not fully protect us from potential product liability claims. If a product liability claim or a series of claims is brought against us in excess of our insurance coverage, our business could suffer. Some manufacturers that suffered such claims in the past have been forced to cease operations or declare bankruptcy.

 

Our royalty revenues we receive from BSC have declined significantly, and may continue to decline, thereby negatively impacting our cash flows and liquidity.

 

We do not have control over the sales and marketing efforts, pricing, production volumes, distribution or regulatory environment related to BSC’s paclitaxel-eluting coronary stent program. Our involvement is limited to the terms of our 1997 License Agreement (as amended) with BSC and Cook (the “1977 License Agreement”), which provides for the receipt of royalty revenue based on the net sales of TAXUS.

 

Royalty revenue from BSC has declined significantly, as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Annual Report on Form 10-K.

BSC has attributed this significant decline in royalties primarily to competition in the drug-eluting stent market, price pressure in the drug-eluting stent market and a decline in the overall number of drug-eluting stent procedures. Our royalties may decline further due to these and other factors in the future.

 

In addition, if BSC is impaired in its ability to market and distribute TAXUS, whether for these reasons or due to a failure to comply with applicable regulatory requirements, discovery of a defect in the device, increased incidence of adverse events or

 

15



 

identification of other safety issues, or previously unknown problems with the manufacturing operations for TAXUS (any of which could, under certain circumstances, result in a manufacturing injunction), our revenues could be further reduced. BSC’s failure to resolve these issues in a timely manner and to the satisfaction of the FDA and other regulatory authorities, or the occurrence of similar problems in the future, could delay the launch of additional TAXUS product lines and could have a significant impact on our royalty revenue from sales of TAXUS.

 

Additionally, BSC may terminate our 1997 License Agreement under certain circumstances, including if BSC is unable to acquire a supply of paclitaxel at a commercially reasonable price; if BSC reasonably determines that the paclitaxel-eluting coronary stent is no longer commercially viable; or if our exclusive license agreement with the Public Health Service of the U.S. through the National Institutes of Health (the “NIH”), whereby the NIH granted the Company an exclusive, worldwide license to certain technologies of the NIH for the use of paclitaxel (the “the NIH License Agreement”), certain rights under which are sublicensed to BSC, terminates.

 

The amounts payable by BSC to us vary depending on various factors, including the volume of sales in each quarterly period and patent protection laws in the country of sale. There is no guarantee that royalty payments under our 1997 License Agreement will continue, and demand for BSC’s paclitaxel-eluting coronary stent products could continue to decline as a result of the factors stated above, as well as technological change, changes in reimbursement rates or other factors. Also, the royalty rate payable by BSC could decline if and when patent protection expires, or no longer exists (as defined by our 1997 License Agreement) in certain jurisdictions.

 

Our royalty revenue derived from the sale of paclitaxel-eluting coronary stents depends on BSC’s ability to continue to sell its various TAXUS paclitaxel-eluting stent products and to launch next generation paclitaxel-eluting stents in the United States and in other countries. Historically, stent manufacture and sale have been subject to a substantial amount of patent litigation, and BSC and others may become involved in material legal proceedings related to paclitaxel-eluting stents that could impact BSC’s ability to sell TAXUS, thereby negatively impacting our royalty revenue derived from the sale of paclitaxel-eluting coronary stents.

 

We face and will continue to face significant competition.

 

Competition from medical device companies, pharmaceutical companies, biotechnology companies and academic and research institutions is significant. Many of our competitors and potential competitors have substantially greater product development capabilities, experience conducting clinical trials and financial, scientific, manufacturing, sales and marketing resources and experience than our company. We also face competition from non-medical device companies, such as pharmaceutical companies, which may offer non-surgical alternative therapies for disease states that are currently treated or are intended to be treated using our products. Other companies may:

 

·                           develop and obtain patent protection for products earlier than we do;

 

·                           design around patented technology developed by us;

 

·                           obtain regulatory approvals for such products more rapidly;

 

·                           have greater manufacturing capabilities and other resources;

 

·                           have larger or more experienced sales forces;

 

·                          develop more effective or less expensive products; or

 

·                           have greater success in obtaining adequate third-party payer coverage and reimbursement for their competing products.

 

While we intend to maintain or expand our technological capabilities in order to remain competitive, there is a risk that:

 

·                           research and development by others will render our technology or product candidates obsolete or non-competitive;

 

·                           treatments or cures developed by others will be superior to any therapy developed by us; and

 

·                           any therapy developed by us will not be preferred to any existing or newly developed technologies.

 

If physicians do not recommend and endorse our products or products that use our technology, or if our working relationships with physicians deteriorate, our products or products that use our technology may not be accepted in the marketplace, which could adversely affect our sales and royalty revenues.

 

In order for us to sell our products or continue to receive royalty revenues from the sale of products that use our technologies, physicians must recommend and endorse them. We believe that recommendations and endorsements by physicians are and will be essential for market acceptance of our products, and we do not know whether we will obtain the necessary recommendations or endorsements from physicians. Acceptance of our products or of products that use our technology depends on educating the medical community as to the distinctive characteristics, perceived benefits, safety, clinical efficacy and cost-effectiveness of these products compared to products of competitors, and on training physicians in the proper application of these products. If we are not successful in

 

16



 

obtaining the recommendations or endorsements of physicians for our products, or our collaborators are not successful in doing the same for their products that use our technology, our sales and royalty revenues may not increase or may decline.

 

In addition, if we fail to maintain our working relationships with physicians, many of our products may not be developed and marketed in line with the needs and expectations of professionals who use and support our products. The research, development, marketing and sales of many of our new and improved products are dependent upon our maintaining working relationships with physicians. We rely on these professionals to provide us with considerable knowledge and experience regarding our products and the marketing of our products. Physicians assist us as researchers, marketing consultants, product consultants, inventors and public speakers. If we are unable to maintain our strong relationships with these professionals while continuing to receive their advice and input, the development and marketing of our products could suffer, which could adversely affect the acceptance of our products in the marketplace and our sales.

 

Technological advances and evolving industry standards could reduce our future product sales, which could cause our revenues to grow more slowly or decline.

 

The markets for our products are characterized by rapidly changing technology, changing customer needs, evolving industry standards and frequent new product introductions and enhancements. The emergence of new industry standards in related fields may adversely affect the demand for our products. This could happen, for example, if new standards and technologies emerged that were incompatible with customer deployments of our applications. In addition, any compounds, products or processes that we develop may become obsolete or uneconomical before we recover any of the expenses incurred in connection with their development. We cannot assure you that we will succeed in developing and marketing product enhancements or new products that respond to technological change, new industry standards, changed customer requirements or competitive products on a timely and cost-effective basis. Additionally, even if we are able to develop new products and product enhancements, we cannot assure you that they will achieve market acceptance.

 

The commercial potential of our products and product candidates will be significantly limited if we are not able to obtain adequate levels of reimbursement for them.

 

Our ability to commercialize our medical products and product candidates successfully will depend in part on the extent to which coverage and reimbursement for such products and related treatments will be available from government health administration authorities, private health insurers and other third-party payers or otherwise supported by the market for these products. There can be no assurance that third-party payers’ coverage and reimbursement will be available or sufficient for the products we might develop.

 

Third-party payers are increasingly challenging the price of medical products and services and instituting cost-containment measures to control or significantly influence the purchase of medical products and services. These cost containment measures, if instituted in a manner affecting the coverage of or payment for our products, could have a material adverse effect on our ability to operate profitably. In some countries in the E.U. and in the U.S., significant uncertainty exists as to the reimbursement status of newly approved health care products, and we do not know whether adequate third-party coverage and reimbursement will be available for us to realize an appropriate return on our investment in product development, which could seriously harm our business. In the U.S., while reimbursement amounts previously approved appear to have provided a reasonable rate of return, there can be no assurance that our products will continue to be reimbursed at current rates or that third-party payers will continue to consider our products cost-effective and provide coverage and reimbursement for our products, in whole or in part.

 

We cannot be certain that our products will gain commercial acceptance among physicians, patients and third-party payers, even if necessary international and U.S. marketing approvals are maintained. We believe that recommendations and endorsements by physicians will be essential for market acceptance of our products, and we do not know whether these recommendations or endorsements will be obtained. We also believe that surgeons will not use these products unless they determine, based on clinical data and other factors, that the clinical benefits to patients and cost savings achieved through use of these products outweigh their cost. Acceptance among physicians may also depend upon the ability to train surgeons and other potential users of our products and the willingness of such users to learn these relatively new techniques.

 

If certain single-source suppliers fail to deliver key product components in a timely manner, our manufacturing would be impaired and our product sales could suffer.

 

We depend on certain single-source suppliers that supply components used in the manufacture of certain of our products. If we need alternative sources for key component parts or materials for any reason, these component parts or materials may not be immediately available to us. If alternative suppliers are not immediately available, we will have to identify and qualify alternative suppliers, and production of certain components or products may be delayed. We may not be able to find an adequate alternative supplier in a reasonable time period or on commercially acceptable terms, if at all. Our inability to obtain our key source supplies for the manufacture of our products may require us to delay shipments of products, harm customer relationships or force us to curtail or cease operations.

 

17



 

Our business is subject to economic, political and other risks associated with international sales and operations, including risks arising from currency exchange rate fluctuations.

 

Because we sell our products in a number of countries, our business is subject to the risks of doing business internationally, including risks associated with U.S. government oversight and enforcement of the Foreign Corrupt Practices Act as well as with the United Kingdom’s Bribery Act and anti-corruption laws in other jurisdictions. We anticipate that sales from international operations will continue to represent a significant portion of our total sales. Accordingly, our future results could be harmed by a variety of factors, including:

 

·                  changes in local medical reimbursement policies and programs;

 

·                  changes in foreign regulatory requirements;

 

·                  changes in a specific country’s or region’s political or economic conditions, such as the current financial uncertainties in Europe and changing circumstances in emerging regions;

 

·                  trade protection measures, quotas, embargoes, import or export licensing requirements and duties, tariffs or surcharges;

 

·                  potentially negative impact of tax laws, including tax costs associated with the repatriation of cash;

 

·                  difficulty in staffing and managing global operations;

 

·                  cultural, exchange rate or other local factors affecting financial terms with customers;

 

·                  local economic and financial conditions affecting the collectability of receivables, including receivables from sovereign entities;

 

·                  economic and political instability and local economic and political conditions;

 

·                  differing labor regulations; and

 

·                  differing protection of intellectual property.

 

Substantially all of our sales outside of the U.S. are denominated in local currencies. Measured in local currency, a substantial portion of our international sales was generated in the E.U. The U.S. dollar value of our international sales varies with currency exchange rate fluctuations. Decreases in the value of the U.S. dollar to the Euro have the effect of increasing our reported revenues even when the volume of international sales has remained constant. Increases in the value of the U.S. dollar relative to the Euro, as well as other currencies, have the opposite effect and, if significant, could have a material adverse effect on our reported revenues and results of operations.

 

The United States Foreign Corrupt Practices Act, the United Kingdom Bribery Act, and similar laws in other jurisdictions contain prohibitions against bribery and other illegal payments or for the failure to have procedures in place that prevent such payments. Recent years have seen an increasing number of investigations and other enforcement activities under these laws. Although we have compliance programs in place with respect to these laws, no assurance can be given that a violation will not be found, and if found, the resulting penalties could adversely affect us and our business.

 

Future legislation or regulatory changes to, or consolidation in, the health care system may affect our ability to sell our products profitably

 

There have been, and we expect there will continue to be, a number of legislative and regulatory proposals to change the health care system, and some could involve changes that could significantly affect our business. For example, the 2010 health reform law was intended to increase the number of individuals covered by health insurance, impose reimbursement provisions intended to restrict the growth in Medicare and Medicaid spending and encourage development of health care delivery programs and models intended to tie payments to quality and care delivery innovations.  Included in the health reform law was a 2.3% excise tax on United States sales of a wide range of medical devices.  The excise tax will become effective in 2013 and the Internal Revenue Service (“IRS”) issued proposed rules regarding implementation of the excise tax in February 2012.  We expect the excise tax to increase our operating expenses.

 

Although some provisions of the health reform legislation have been implemented, many of the legislative changes contained within the health reform legislation will not be effective or implemented until future years.  In addition, the Supreme Court will hear arguments related to the constitutionality of portions of the health reform law later this year and the outcome of the case could result in repeal of all or portions of the law.  Therefore, the impact of health reform on our business is currently uncertain.  Apart from the 2010 health reform law, efforts by governmental and third-party payers to reduce healthcare costs or the announcement of legislative

 

18



 

proposals or reforms to implement government controls could cause a reduction in sales or in the selling price of our products, which could seriously harm our business.

 

Additionally, initiatives to reduce the cost of health care have resulted in a consolidation trend in the health care industry, including hospitals. This in turn has resulted in greater pricing pressures and the exclusion of certain suppliers from certain market segments as consolidated groups such as group purchasing organizations, independent delivery networks and large single accounts continue to consolidate purchasing decisions for some of our hospital customers. We expect that market demand, government regulation, and third-party reimbursement policies will continue to change the worldwide health care industry, resulting in further business consolidations and alliances among our customers and competitors, which may reduce competition, exert further downward pressure on the prices of our products and may adversely impact our business, financial condition or results of operations.

 

If we are unable to license new technologies, or our existing license agreements are terminated, our ability to maintain our competitive advantage in our existing products and to develop future products may be adversely affected.

 

We have entered into, and we expect that we will continue to enter into, licensing agreements with third parties to give us access to technologies that we may use to develop products, or that we may use to gain access to new products for us to further develop, market and sell through our commercial sales organizations. The technologies governed by these license agreements may be critical to our ability to maintain our competitive advantage in our existing products and to develop future products.

 

Pursuant to terms of our existing license agreements, licensors have the right under certain specified circumstances to terminate their respective licenses. Events that may allow licensors to exercise these termination provisions include:

 

·                           sub-licensing without the licensor’s consent;

 

·                           a transaction which results in a change of control of us;

 

·                           our failure to use the required level of diligence to develop, market and sell products based on the licensed technology;

 

·                           our failure to maintain adequate levels of insurance with respect to the licensed technologies;

 

·                           our bankruptcy; or

 

·                           other acts or omissions that may constitute a breach by us of our license agreement.

 

In addition, any failure to continue to have access to these technologies may materially adversely affect the benefits that we currently derive from our collaboration and partnership arrangements and may adversely affect our results and operations.

 

We may depend on certain strategic partners for the development, regulatory approval, testing, manufacturing and potential commercialization of our products.

 

We have entered into various arrangements with corporate and academic partners, licensors, licensees and others for the research, development, clinical testing, regulatory approval, manufacturing, marketing and commercialization of our product candidates. For instance, we have partnered with BSC and Cook to develop and market paclitaxel-eluting coronary and peripheral stents. Strategic partners, both existing (particularly BSC) and those that we may collaborate with in the future, are or may be essential to the development of our technology and potential revenue and we have little control over or access to information regarding our partners’ activities with respect to our products.

 

Our strategic partners may fail to successfully develop or commercialize our technology to which they have rights for a number of reasons, including:

 

·                           failure of a strategic collaborator to continue, or delays in, its funding, research, development and commercialization activities;

 

·                           the pursuit or development by a strategic collaborator of alternative technologies, either on its own or with others, including our competitors, as a means for developing treatments for the diseases targeted by our programs;

 

·                           the preclusion of a strategic collaborator from developing or commercializing any product, through, for example, litigation or other legal action; and

 

·                           the failure of a strategic collaborator to make required milestone payments, meet contractual milestone obligations or exercise options which may result in our terminating applicable licensing arrangements.

 

We may not be able to protect our intellectual property or obtain necessary intellectual property rights from third parties, which could adversely affect our business.

 

Our success depends, in part, on ensuring that our intellectual property rights are covered by valid and enforceable patents or effectively maintained as trade secrets and on our ability to detect violations of our intellectual property rights and enforce such rights against others.

 

19



 

The validity of our patent claims depends, in part, on whether pre-existing public information described or rendered obvious our inventions as of the filing date of our patent applications. We may not have identified all prior art, such as U.S. and foreign patents, published applications or published scientific literature that could adversely affect the validity of our issued patents or the patentability of our pending patent applications. For example, patent applications in the U.S. are maintained in confidence for up to 18 months after their filing. In some cases, however, patent applications remain confidential in the U.S. Patent and Trademark Office (the “USPTO”) for the entire time prior to their issuance as a U.S. patent. Patent applications filed in countries outside the U.S. are not typically published until at least 18 months from their first filing date. Similarly, publication of discoveries in scientific or patent literature often lags behind actual discoveries. Therefore, we cannot be certain that we were the first to invent, or the first to file patent applications related to, our technology. In the event that a third party has also filed a U.S. patent application covering a similar invention, we may have to participate in an adversarial proceeding, known as an interference, declared by the USPTO to determine priority of invention in the U.S. It is possible that we may be unsuccessful in the interference, resulting in a loss of some portion or all of our U.S. patent positions. The laws in some foreign jurisdictions do not protect intellectual property rights to the same extent as in the U.S., and many companies have encountered significant difficulties in protecting and defending such rights in foreign jurisdictions. If we encounter such difficulties or we are otherwise precluded from effectively protecting our intellectual property rights in foreign jurisdictions, our business prospects could be substantially harmed.

 

We frequently seek patents to protect our intellectual property. It should be recognized that we may not be able to obtain patent protection for key elements of our technology, as the patent positions of medical device, pharmaceutical and biotechnology companies are uncertain and involve complex legal and factual questions for which important legal issues are largely unresolved. For example, no consistent policy has emerged regarding the scope of health-related patent claims that are granted by the USPTO or enforced by the U.S. federal courts. Rights under any of our issued patents may not provide commercially meaningful protection for our products or afford us a commercial advantage against our competitors or their competitive products or processes. In addition, even if a patent is issued, the coverage claimed in a patent application may be significantly reduced in the patent as granted.

 

There can be no assurance that:

 

·                           patent applications will result in the issuance of patents;

 

·                           additional proprietary products developed will be patentable;

 

·                           licenses we have obtained from third parties that we use in connection with our technology will not be terminated;

 

·                           patents issued will provide adequate protection or any competitive advantages;

 

·                           patents will not be successfully challenged by any third parties; or

 

·                           the patents of others will not impede our or our collaborators’ ability to commercialize our technology.

 

For example, the drug paclitaxel is itself not covered by composition of matter patents. Therefore, although we have developed and are developing an intellectual property portfolio around the use of paclitaxel for intended commercial applications, others may be able to engage in off-label use of paclitaxel for the same indications, causing us to lose potential revenue. Furthermore, others may independently develop similar products or technologies or, if patents are issued to us, design around any patented technology developed by us, which could affect our potential to generate revenues and harm our results of operations.

 

Patent protection for our technology may not be available based on prior art. The publication of discoveries in scientific or patent literature often lags behind actual discoveries. As a consequence, there may be uncertainty as to whether we or a third party were the first creator of inventions covered by issued patents or pending patent applications or that we or a third party were the first to file patent applications for such inventions. Moreover, we might have to participate in interference proceedings declared by the USPTO, or other proceedings outside the U.S., including oppositions, to determine priority of invention or patentability, which could result in substantial cost to us even if the outcome were favorable. An unfavorable outcome in an interference or opposition proceeding could preclude us, our collaborators and our licensees from making, using or selling products using the technology or require us to obtain license rights from prevailing third parties. We do not know whether any prevailing party would offer us a license on commercially acceptable terms, if at all. We may also be forced to pay damages or royalties for our past use of such intellectual property rights, as well as royalties for any continued usage.

 

As part of our patent strategy, we have filed a variety of patent applications internationally. Oppositions have been filed against various granted patents that we either own or license and which are related to certain of our technologies. For a summary of certain of our material current legal proceedings, including those relating to our patents and intellectual property, see the section entitled “Legal Proceedings” under Part I, Item 3 of this Annual Report on Form 10-K.

 

Our future success and competitive position depend in part on our ability to obtain and maintain certain proprietary intellectual property rights used in our approved products and principal product candidates. Any such success depends in part on effectively instituting claims against others who we believe are infringing our rights and by effectively defending claims of intellectual property infringement brought by our competitors and others. The stent-related markets have experienced rapid technological change and obsolescence in the recent past, and our competitors have strong incentives to attempt to stop or delay us from introducing new

 

20



 

products and technologies. See “—We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights.”

 

We do not know whether the patents that we have obtained or licensed, or may be able to obtain or license in the future, would be held valid or enforceable by a court or whether a competitor’s technology or product would be found to infringe such patents. Further, we have no assurance that third parties will not properly or improperly modify or terminate any license they have granted to us.

 

We have obtained licenses from third parties with respect to their intellectual property that we use in connection with certain aspects of our technology or products. However, we may need to obtain additional licenses for the development of our current or future products. Licenses may not be available on satisfactory terms or at all. If available, these licenses may obligate us to exercise diligence in bringing our technology to market and may obligate us to make minimum guarantee or milestone payments. This diligence and these milestone payments may be costly and could adversely affect our business. We may also be obligated to make royalty payments on the sales, if any, of products resulting from licensed technology and may be responsible for the costs of filing and prosecuting patent applications. These costs could affect our results of operations and decrease our earnings.

 

Certain of our key technologies include trade secrets and know-how that may not be protected by patents. There can be no assurance that we will be able to protect our trade secrets. To help protect our rights, we require employees, consultants, advisors and collaborators to enter into confidentiality agreements. We cannot assure you that all employees, consultants, advisors and collaborators have signed such agreements, or that these agreements will adequately protect our trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure. Furthermore, we may not have adequate remedies for any such breach. Any disclosure of confidential data into the public domain or to third parties could allow our competitors to learn our trade secrets and use the information in competition against us.

 

Our ability to operate could be hindered by the proprietary rights of others.

 

A number of medical device, pharmaceutical and biotechnology companies as well as research and academic institutions have developed technologies, filed patent applications or received patents on various technologies that may be related to our business. Some of these technologies, applications or patents may conflict with or adversely affect our technologies or intellectual property rights, including those that we license from others. We are aware of other parties holding intellectual property rights that may represent prior art or other potentially conflicting intellectual property. Any conflicts with the intellectual property of others could limit the scope of the patents, if any, that we may be able to obtain or result in the denial of our current or future patent applications altogether.

 

If patents that cover our activities are issued to other persons or companies, we could be charged with infringement. In the event that other parties’ patents cover any portion of our activities, we may be forced to develop alternatives or negotiate a license for such technology. We do not know whether we would be successful in either developing alternative technologies or acquiring licenses upon reasonable terms, if at all. Obtaining any such licenses could require the expenditure of substantial time and other resources and could harm our business and decrease our earnings. If we do not obtain such licenses, we could encounter delays in the introduction of our products or could find that the development, manufacture or sale of products requiring such licenses is prohibited.

 

We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights.

 

In connection with maintaining the value of our various intellectual property and exclusivity rights, we regularly evaluate the activities of others worldwide. Our success will depend, in part, on our ability to obtain patents, or licenses to patents, maintain trade secret protection and enforce our rights against others. Should it become necessary to protect those rights, we intend to pursue all cost-efficient strategies, including, when appropriate, negotiation or litigation in any relevant jurisdiction. For a summary of certain of our current legal proceedings, including proceedings in respect of patent infringement and intellectual property matters, see the section entitled “Legal Proceedings” under Part I, Item 3 of this Annual Report on Form 10-K.

 

We intend to pursue and to defend vigorously any and all actions of third parties related to our material patents and technology. Any failure to obtain and protect intellectual property could adversely affect our business and our ability to operate could be hindered by the proprietary rights of others.

 

21



 

Our involvement in intellectual property litigation could result in significant expense, adversely affecting the development of product candidates or sales of the challenged product or intellectual property and diverting the efforts of our technical and management personnel, whether or not such litigation is resolved in our favor. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources, and intellectual property litigation may be used against us as a means of gaining a competitive advantage. Competing parties frequently file multiple suits to leverage patent portfolios across product lines, technologies and geographies and to balance risk and exposure between the parties. Uncertainties resulting from the initiation and continuation of any litigation could affect our ability to continue our operations. In the event of an adverse outcome as a defendant in any such litigation, we may, among other things, be required to:

 

·                           pay substantial damages or back royalties;

 

·                           cease the development, manufacture, use or sale of product candidates or products that infringe upon the intellectual property of others;

 

·                           expend significant resources to design around a patent or to develop or acquire non-infringing intellectual property;

 

·                           discontinue processes incorporating infringing technology; or

 

·                           obtain licenses to the infringed intellectual property.

 

We cannot assure you that we will be successful in developing or acquiring non-infringing intellectual property or that necessary licenses will be available upon reasonable terms, if at all. Any such development, acquisition or license could require the expenditure of substantial time and other resources and could adversely affect our business and financial results. If we cannot develop or acquire such intellectual property or obtain such licenses, we could encounter delays in any introduction of products or could find that the development, manufacture or sale of products requiring such licenses could be prohibited.

 

If third parties file patent applications, or are issued patents claiming technology also claimed by us in pending applications, we may be required to participate in interference proceedings with the USPTO, or other proceedings outside the United States, including oppositions, to determine priority of invention or patentability, which could result in substantial cost to us even if the eventual outcome were favorable.

 

We must receive regulatory approval for each of our product candidates before they can be sold commercially in Canada, the U. S. or internationally, which can take significant time and be very costly.

 

The development, manufacture and sale of medical devices and human therapeutic products in Canada, the U.S. and internationally is governed by a variety of statutes and regulations. These laws require, among other things:

 

·                           regulatory approval of manufacturing facilities and practices;

 

·                           adequate and well-controlled research and testing of products in pre-clinical and clinical trials;

 

·                           review and approval of submissions containing manufacturing, pre-clinical and clinical data in order to obtain marketing approval based on establishing the safety and efficacy of the product for each use sought, including adherence to current cGMPs during production and storage; and

 

·                          control of marketing activities, including advertising and labeling.

 

The product candidates currently under development by us or our collaborators will require significant research, development, pre-clinical and clinical testing, pre-market review and approval, and investment of significant funds prior to their commercialization. In many instances, we are dependent on our collaborators for regulatory approval and compliance, and have little or no control over these matters. The process of completing clinical testing and obtaining such approvals is likely to take many years and require the expenditure of substantial resources, and we do not know whether any clinical studies by us or our collaborators will be successful, whether regulatory approvals will be received, or whether regulatory approvals will be obtained in a timely manner. Despite the time and resources expended by us, regulatory approval is never guaranteed. Even if regulatory approval is obtained, regulatory agencies may limit the approval to certain diseases, conditions or categories of patients who can use them.

 

If any of our development programs are not successfully completed in a timely fashion, required regulatory approvals are not obtained in a timely fashion, or products for which approvals are obtained are not commercially successful, it could seriously harm our business.

 

If our process related to product development does not result in an approved and commercially successful product, our business could be adversely affected.

 

We focus our product development activities on areas in which we have particular strengths. The outcome of any development program is highly uncertain, notwithstanding how promising a particular program may seem. Success in pre-clinical and early-stage clinical trials may not necessarily translate into success in large-scale clinical trials. Further, clinical trials are expensive and may require increased investment for which we do not have adequate funding or for which we are not able to access adequate funding.

 

22



 

In addition, we will need to obtain and maintain regulatory approval in order to market new products. Notwithstanding the outcome of clinical trials for new products, regulatory approval may not be achieved. The results of clinical trials are susceptible to varying interpretations that may delay, limit or prevent approval or result in the need for post-marketing studies. In addition, changes in regulatory policy for product approval during the period of product development and review by regulators of a new application may cause delays or rejection. Even if we receive regulatory approval, this approval may include limitations on the indications for which we can market the product. There is no guarantee that we will be able to satisfy the applicable regulatory requirements, and we may suffer a significant variation from planned revenue as a result.

 

Compulsory licensing and/or generic competition may affect our business in certain countries.

 

In a number of countries, governmental authorities have the right to grant licenses to others to use a pharmaceutical or medical device company’s patents or other intellectual property without the consent of the owner of the patent or other intellectual property. Governmental authorities could use this right to grant licenses under our patents or other intellectual property to others or could require us to grant licenses under our patents or other intellectual property to others, thereby allowing our competitors to manufacture and sell their own versions of our products. In other circumstances, governmental authorities could use this right to require us or our licensees to reduce the prices of our products. In all of these situations, our sales or the sales of our licensee(s), and the results of our operations, in these countries could be adversely affected.

 

We are subject to litigation that could strain our resources and distract management.

 

From time to time, we are involved in a variety of claims, lawsuits and other disputes. These suits may concern issues including product liability, contract disputes, employee-related matters, intellectual property and personal injury matters. It is not feasible to predict the outcome of all pending suits and claims, and the ultimate resolution of these matters as well as future lawsuits could have a material adverse effect on our business, financial condition, results of operations or cash flows or reputation.

 

For a summary of certain of our material current legal proceedings, see the section entitled “Legal Proceedings” under Part I, Item 3 of this Annual Report on Form 10-K.

 

We may be subject to damages resulting from claims that we or our employees have wrongfully used or disclosed alleged trade secrets of their former employers.

 

Many of our employees were previously employed at universities or other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although no such claims against us are currently pending, we may be subject to claims that these employees or we have used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management. If we fail in defending such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. A loss of key research personnel or their work product could hamper or prevent our ability to commercialize certain product candidates, which could severely harm our business.

 

We may incur significant costs complying with environmental laws and regulations.

 

Our research and development processes and manufacturing operations involve the use of hazardous materials. In the countries in which we operate or sell our products, we are subject to federal, state, provincial, local and other laws and regulations that govern the use, manufacture, storage, handling and disposal of such materials and certain waste products. The risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of an accident or the discovery of pre-existing contamination at one or more of our facilities, we could be held liable for any damages that result, and any such liability could exceed our resources. In addition, our manufacturing facilities may become subject to new or increased legislation or regulation as a result of climate control initiatives. We may not be specifically insured with respect to these liabilities, and we do not know whether we will be required to incur significant costs to comply with environmental laws and regulations in the future, or whether our operations, business or assets will be harmed by current or future environmental laws or regulations.

 

If we are unable to fully comply with federal and state “fraud and abuse laws,” we could face substantial penalties, which may adversely affect our business, financial condition and results of operations.

 

We are subject to various laws pertaining to health care fraud and abuse, including the U.S. Anti-Kickback Statute, physician self-referral laws (the “Stark Law”), the U.S. False Claims Act, HIPAA (as amended by HITECH), the U.S. False Statements Statute, the Physician Payment Sunshine Act, and state law equivalents to these U.S. federal laws, which may not be limited to government-reimbursed items and may not contain identical exceptions. Violations of these laws are punishable by criminal and civil sanctions, including, in some instances, civil and criminal penalties, damages, fines, exclusion from participation in U.S. federal and state health care programs, including Medicare and Medicaid, and the curtailment or restructuring of operations. Any action against us for violation of these laws could have a significant impact on our business. In addition, we are subject to the U.S. Foreign Corrupt

 

23



 

Practices Act. Any action against us for violation by us or our agents or distributors of this act could have a significant impact on our business.

 

Acquisition of companies or technologies may result in disruptions to our business.

 

As part of our business strategy, we may acquire additional assets, products or businesses principally relating to or complementary to our current operations. Any acquisitions or mergers by us will be accompanied by the risks commonly encountered in acquisitions of companies. These risks include, among other things, higher than anticipated acquisition costs and expenses, the difficulty and expense of integrating the operations and personnel of the companies and the loss of key employees and customers as a result of changes in management.

 

In addition, geographic distances may make integration of acquired businesses more difficult. We may not be successful in overcoming these risks or any other problems encountered in connection with any acquisitions.

 

If significant acquisitions are made for cash consideration, we may be required to use a substantial portion of our available cash, cash equivalents and short-term investments. Future acquisitions by us may cause large one-time expenses or create goodwill or other intangible assets that could result in significant asset impairment charges in the future. Acquisition financing may not be available on acceptable terms, if at all.

 

If we fail to hire and retain key management and technical personnel, we may be unable to successfully implement our business plan.

 

We are highly dependent on our senior management and technical personnel. The competition for qualified personnel in the health care field is intense, and we rely heavily on our ability to attract and retain qualified managerial and technical personnel. Our ability to manage growth effectively will require continued implementation and improvement of our management systems and the ability to recruit and train new employees. We may not be able to successfully attract and retain skilled and experienced personnel, which could harm our ability to develop our product candidates and generate revenues.

 

Risks Relating to Our Indebtedness, Organization and Financial Position

 

We may not be able to service our debt or obtain future financing.

 

We may incur additional debt from time to time to finance our operations, for capital expenditures or for other purposes. The debt that we carry may have important consequences to us, including the following:

 

·                           our ability to obtain additional financing, if necessary, for working capital, capital expenditures, acquisitions or other purposes may be impaired or additional financing may not be available on favorable terms;

 

·                           we are be required to use a portion of our operating cash flow to pay the interest or principal on our debt. These payments reduce the funds that would otherwise be available for our operations and future business opportunities;

 

·                           a substantial decrease in our net operating cash flows could make it difficult for us to meet our debt service requirements and force us to further modify our operations;

 

·                           we may be placed at a competitive disadvantage compared to our less leveraged competitors; and

 

·                          we may be more vulnerable to a downturn in our business or the economy generally.

 

If we cannot service our debt, we will be forced to take actions such as reducing or delaying capital expenditures, selling assets, restructuring or refinancing our debt, or seeking additional equity capital. We can give no assurance that we can do any of these things on satisfactory terms or at all.

 

Our obligation to pay cash interest on our notes has had, and may continue to have, an adverse effect on our liquidity.

 

We are obligated to make periodic cash interest payments on our outstanding indebtedness. As a result of these required cash interest payments, combined with the significant decline in royalty payments we receive from BSC, we have had significant liquidity issues, which led to our need to restructure a significant portion of our indebtedness through the Recapitalization Transaction as concluded in May 2011. For more information on the Recapitalization Transaction, refer to the “Recapitalization Transaction and Emergence from Creditor Protection Proceedings” section of Management’s, Discussion and Analysis and notes 1, 3 and 4 of the audited consolidated financial statements for the year ended December 31, 2011 included in this Annual Report on Form 10-K. If our cash flows are worse than expected, we may be unable to access additional sources of liquidity to fund our cash needs, which could further adversely affect our financial condition or results of operations and our ability to make payments on our debt.

 

24



 

We may not be able to obtain financing or execute other strategic alternatives to meet requirements upon maturity of our existing debt.

 

We continue to have a material amount of outstanding indebtedness, the significant majority of which will become fully due and payable on or before December 1, 2013. As a result, we will need to seek new financing, or other strategic alternatives such as a disposition of part or all of our business, that would allow us to meet our obligations to repay or refinance our outstanding indebtedness. There can be no assurance that we will be able to achieve any transaction or obtain new financing to meet our obligations on favorable terms, if at all. If we are unable to raise new or additional financing or conclude other strategic activities, and as a result we are not able to meet our financial obligations, we may be forced to pursue alternatives to restructure our outstanding indebtedness, including but not limited to extending the maturity on our existing indebtedness, restructuring other terms of our existing indebtedness or seeking protection from our creditors through formal bankruptcy proceedings. If such actions become necessary, they may be costly, and would likely adversely impact our business, operations, liquidity and capital resources, and may also severely limit or eliminate any amounts that may be ultimately received by our outstanding creditors in service of our obligations thereto, or that may be received by shareholders.

 

We have effected reductions in our operating costs and, as a result, our ability to cut costs further and sustain our business initiatives may be limited.

 

Beginning in late 2008 and continuing into 2011, we have implemented various initiatives to reduce operating costs across all functions of the Company and focus our business efforts on our most promising near-term product opportunities. As a result of these cost-cutting initiatives, we may have a more limited ability to further reduce costs to increase our liquidity should such measures become necessary. Any further reductions may have a materially negative impact on our business.

 

Restrictive covenants in our existing and future credit agreements may adversely affect us.

 

We must comply with operating and financing restrictions in our revolving credit facility; which was entered into on May 12, 2011 and provides us with up to $28 million of aggregate principal borrowings (as amended, the “Revolving Credit Facility”); and the indentures governing our other outstanding indebtedness.  The Revolving Credit Facility is subject to a borrowing base, certain reserves and other conditions (for more information, refer to notes 16(c) and 16(f) of the audited consolidated financial statements for the year ended December 31, 2011 included in this Annual Report on Form 10-K).  These restrictions affect, and in many respects limit or prohibit, our ability to:

 

·                           incur additional indebtedness;

 

·                           make any distributions, declare or pay any dividends on or acquire any of our capital stock;

 

·                           incur liens;

 

·                           make investments, including joint venture investments;

 

·                           sell assets;

 

·                           repurchase certain debt; and

 

·                           merge or consolidate with or into other companies or sell substantially all of our assets.

 

We may also have similar restrictions with any future debt.

 

Our Revolving Credit Facility requires us to make mandatory payments upon the occurrence of certain events, including the sale of assets, in each case subject to certain limitations and conditions. Our Revolving Credit Facility also contains financial covenants, including maintaining certain levels of EBITDA and interest coverage ratios. These restrictions could limit our ability to plan for or react to market conditions or to meet extraordinary capital needs or otherwise could restrict our activities. These restrictions could also adversely affect our ability to finance our future operations or capital needs or to engage in other business activities that would be in our interest.

 

Global credit and financial market conditions may exacerbate certain risks affecting our business.

 

Significantly challenging global credit and financial market conditions may make obtaining additional financing for our business difficult or impossible, or may make it more difficult to pursue a refinancing, restructuring or other transaction with respect to our existing indebtedness.

 

In addition, the tightening of global credit may lead to a disruption in the performance of our third-party contractors, suppliers or partners. We rely on third parties for several important aspects of our business, including but not limited to royalty revenue, portions of our product manufacturing and raw materials. If such third parties are unable to satisfy their commitments to us, our business would be adversely affected.

 

25



 

Certain of our products are used in elective medical procedures which are not covered by insurance. Adverse changes in the economy or other conditions or events have had and may continue to have an adverse effect on consumer spending and may reduce the demand for these procedures. Any such changes, conditions or events could have an adverse effect on our sales and results of operations.

 

We and our subsidiaries are permitted to incur substantially more debt, which could further exacerbate the risks associated with our leverage.

 

The respective terms of the indenture governing our outstanding indebtedness under certain conditions expressly permit, or are anticipated to permit, as applicable, the incurrence of additional amounts of debt for specified purposes. Moreover the terms governing our outstanding indebtedness do not impose any limitation on our incurrence of liabilities that are not defined as “Indebtedness” under such indentures or facility (such as trade payables).

 

We are subject to risks associated with doing business globally.

 

As a medical device company with significant operations in the U.S., E.U., Canada and other countries, we are subject to political, economic, operational, legal, regulatory and other risks that are inherent in conducting business globally. These risks include foreign exchange fluctuations, exchange controls, capital controls, new laws or regulations or changes in the interpretation or enforcement of existing laws or regulations, political instability, macroeconomic changes, including recessions and inflationary or deflationary pressures, increases in prevailing interest rates by central banks or financial services companies, economic uncertainty, which may reduce the demand for our products or reduce the prices that our customers are willing to pay for our products, import or export restrictions, tariff increases, price controls, nationalization and expropriation, changes in taxation, diminished or insufficient protection of intellectual property, lack of access to impartial court systems, violations of law, including the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act, disruption or destruction of operations or changes to the Company’s business position, regardless of cause, including war, terrorism, riot, civil insurrection, social unrest, strikes and natural or man-made disasters, including famine, flood, fire, earthquake, storm or disease. The impact of any of these developments, either individually or cumulatively, could have a material adverse effect on our business, financial condition and results of operations.

 

We may incur losses associated with foreign currency fluctuations.

 

We report our operating results and financial position in U.S. dollars in order to more accurately represent the currency of the economic environment in which we operate.

 

Our operations are in some instances conducted in currencies other than the U.S. dollar, and fluctuations in the value of foreign currencies relative to the U.S. dollar could cause us to incur currency exchange losses. In addition to the U.S. dollar, we currently conduct operations in Canadian dollars, Euros, Swiss francs, Danish kroner, Swedish kroner, Norwegian kroner and U.K. pounds sterling. Exchange rate fluctuations may reduce our future operating results and comprehensive income. For a description of the effects of exchange rate fluctuations on our results, see “Quantitative and Qualitative Disclosures about Market Risk” under Item 7.A of this Annual Report on Form 10-K.

 

We have not entered into any forward currency contracts or other financial derivatives to hedge foreign exchange risk, and therefore we are subject to foreign currency transaction and translation gains and losses. We purchase goods and services in U.S. and Canadian dollars, Euros, Swiss francs, Danish kroner, and U.K. pounds sterling, and earn a significant portion of our license and milestone revenues in U.S. dollars. We primarily manage our foreign exchange risk by satisfying foreign-denominated expenditures with cash flows or assets denominated in the same currency.

 

U. S. investors may not be able to obtain enforcement of civil liabilities against us.

 

We were formed under the laws of British Columbia, Canada. A substantial portion of our assets are located outside the U.S. As a result, it may be impossible for U.S. investors to affect service of process within the U.S. upon us or these persons or to enforce against us or these persons any judgments in civil and commercial matters, including judgments under U.S. federal or state securities laws. In addition, judgments of U.S. courts will not necessarily be recognized by courts in non-U.S. jurisdictions. Accordingly, even if a favorable judgment is obtained in a U.S. court, a party may be required to re-litigate a claim in other jurisdictions. In addition, in certain jurisdictions in which certain of our subsidiaries are organized, it is questionable whether a court would accept jurisdiction and impose civil liability if proceedings were commenced in an original action predicated only upon U.S. federal securities laws.

 

Item  1B.                UNRESOLVED STAFF COMMENTS

 

None.

 

26



 

Item 2.                            PROPERTIES

 

As at December 31, 2011, we have 15 facilities located in six different countries, which include Canada, the United States, Puerto Rico, the United Kingdom, Denmark and Switzerland. Of the 15 facilities, seven are primarily used to manufacture and distribute medical devices or materials for medical device products. Our other eight facilities are primarily used for sales and marketing and administrative activities. Collectively, these facilities comprise approximately 428,000 square feet of modern technical manufacturing, research and administrative operations. The following chart summarizes the facilities where our domestic and international operations occur:

 

Location

 

Primary Purpose

 

Segment

 

Owned or Leased

St. Gregoire, France

 

Administration

 

Medical Device Technologies

 

Leased

Lausanne, Switzerland

 

Administration

 

Medical Device Technologies

 

Leased

Stockholm, Sweden

 

Administration

 

Medical Device Technologies

 

Leased

Taunton, United Kingdom

 

Manufacturing

 

Medical Device Technologies

 

Owned

Stenlose, Denmark (3 facilities)

 

Manufacturing

 

Medical Device Technologies

 

2 Leased, 1 Owned

Wheeling, IL

 

Manufacturing

 

Medical Device Technologies

 

Owned

Gainesville, FL

 

Manufacturing

 

Medical Device Technologies

 

Owned

Henrietta, NY

 

Manufacturing

 

Medical Device Technologies

 

Leased

Seattle, WA

 

Administration

 

Medical Device Technologies

 

Leased

Reading, PA

 

Manufacturing

 

Medical Device Technologies

 

Owned

Aguadilla, Puerto Rico

 

Manufacturing

 

Medical Device Technologies

 

Leased

Sao Paulo, Brazil

 

Administration

 

Medical Device Technologies

 

Leased

Vancouver, B.C.

 

Administration

 

Licensed Technologies

 

Leased

 

27



 

Item  3.                         LEGAL PROCEEDINGS

 

Recapitalization Transaction and Emergence from Creditor Protection Proceedings

 

On January 28, 2011, the Angiotech Entities, as part of the Recapitalization Transaction, filed for protection under the CCAA. The CCAA Plan imposed a stay of proceedings against the Angiotech Entities preventing any party from commencing or continuing any action, suit or proceeding against the Angiotech Entities or from exercising other enforcement rights that could arise as a result of the commencement of proceedings under the CCAA. The stay of proceedings generally precluded parties from taking any action against the Angiotech Entities for breach of contractual or other obligations. In order to have the CCAA Proceedings recognized in the U. S., on January 30, 2011, the Angiotech Entities commenced the Chapter 15 Cases. The purpose of the Chapter 15 Cases was to obtain recognition and enforcement in the U. S. of certain relief granted in the CCAA Proceedings, and to obtain the assistance of the U.S. court in effectuating the Recapitalization Transaction. On February 22, 2011, the U.S. court granted an order that among other things, recognized the CCAA Proceedings as a foreign main proceeding.

 

On May 12, 2011, the Recapitalization Transaction was implemented, which effectively eliminated our $250 million aggregate principal amount of our outstanding Subordinated Notes and related accrued interest obligations in exchange for 96% or 12,500,000 of the new common shares which were issued as part of the reorganization. In addition, through the Creditor Protection Proceedings, we also eliminated $4.1 million of certain of our other liabilities. On May 12, 2011, the Monitor filed the Monitor’s Certificate with the Canadian Court, confirming that all steps, compromises, transactions, arrangements, releases and reorganizations were satisfactorily implemented in accordance with the provisions of the CCAA Plan. As a result, the Angiotech Entities were discharged and emerged from Creditor Protection Proceedings. For more information on the CCAA Proceedings and Recapitalization Transaction, refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations, along with notes 1, 3, and 4 in the audited consolidated financial statements in this Annual Report on Form 10-K.

 

Quill Medical, Inc. (“QMI”)

 

On October 4, 2010, the Company was notified that QSR Holdings, Inc. (“QSR”), as a representative for former stockholders of Quill Medical, Inc. (“QMI”), had made a formal demand (the “Arbitration Demand”) to the American Arbitration Association naming the Company, QMI and Angiotech Pharmaceuticals (US), Inc. (“Angiotech US”) as respondents (collectively, the “Respondents”). The Arbitration Demand alleged that the Respondents failed to satisfy certain obligations under the Agreement and Plan of Merger, dated May 25, 2006, by and among Angiotech, Angiotech US, Quaich Acquisition, Inc. and QMI (the “Merger Agreement”), notably including the obligations to make certain earn out payments and the orthopedic milestone payment. On October 1, 2010, QSR also commenced an action in the United States District Court for the Middle District of North Carolina against the Respondents, entitled QSR Holdings, Inc. v. Angiotech Pharmaceuticals, Inc., Angiotech Pharmaceuticals (US), Inc. and Quill Medical, Inc. (the “Federal Litigation”). The Complaint in the Federal Litigation alleged, among other items, that the Respondents: (a) breached certain contractual obligations under the Merger Agreement; (b) made certain misrepresentations or omissions during the initial negotiation of the Merger Agreement; and (c) tortiously interfered with the Merger Agreement.

 

On January 27, 2011, Angiotech and QSR entered into a settlement agreement (the “Settlement Agreement”), which resolved, among other things, any and all claims that the parties may have arising out of the Merger Agreement (including, without limitation, all claims, counterclaims or defenses that were or could have been asserted in the Arbitration Demand and the Federal Litigation) in exchange for a payment of $6.0 million (the “Settlement Amount”) by Angiotech US. In accordance with the terms of the Settlement Agreement, the first $2.0 million of the Settlement Amount was paid on May 26, 2011. The remaining $4.0 million is being paid in installments of $166,667 over a 24 month period.  The Settlement Agreement further provides for complete and mutual releases between the parties, as more fully set forth therein. In accordance with its obligations under the Settlement Agreement, on February 24, 2011, QSR irrevocably dismissed the Federal Litigation and the Arbitration Demand with prejudice.

 

Rex Medical, LP (“Rex”)

 

In connection with the Company’s decision to discontinue selling the Option IVC Filter due to liquidity constraints, on November 18, 2010, Rex initiated an arbitration (the “Rex Arbitration”) against Angiotech US alleging that it had breached certain terms of the License, Supply, Marketing and Distribution Agreement, dated as of March 13, 2008, by and between Angiotech US and Rex (as amended, the “Option Agreement”). On February 16, 2011, Angiotech US entered into a Settlement and License Termination Agreement with Rex (the “Rex Settlement Agreement”) which provided for the full and final settlement and/or dismissal of all claims arising under the Option Agreement and Rex Arbitration. The Rex Settlement Agreement became effective on March 10, 2011 upon the Canadian Court granting an order authorizing Angiotech US to enter into the Rex Settlement Agreement and approving the terms thereof.

 

The following actions were effected under the terms of the Rex Settlement Agreement: (i) the Option Agreement terminated on March 31, 2011; (ii) Angiotech US paid $1.5 million to Rex in February 2011 to settle all claims and royalties owed to Rex prior to January 1, 2011 related to Option IVC Filter sales as well as all current or future milestone payments owing; (iii) in February 2011, Angiotech

 

28



 

US also made a royalty payments to Rex based upon actual cash receipts collected from customers attributable to sales of the Option IVC Filter that were recorded and accrued between January 1, 2011 and the effective date; (iv) from the effective date through the Termination Date, Angiotech US made ongoing royalty payments to Rex on a weekly basis based upon actual cash receipts collected; and (v) Angiotech US delivered certain materials relating to the marketing and sale of the Option IVC Filter.

 

Patent Opposition

 

At the European Patent Office (“EPO”), various patents either owned or licensed by or to the Company are in opposition proceedings. The outcomes of these proceedings have not yet been determined.

 

In addition to the foregoing, the Company may be subject to claims and legal proceedings brought against us in the normal course of business. Such matters are subject to many uncertainties. The Company maintains insurance policies that provide limited coverage for amounts in excess of certain pre-determined deductibles for intellectual property infringement and product liability claims. Management believes that adequate provisions have been made in the accounts where required. However, we are not able to determine the outcome or estimate potential losses of pending legal proceedings to which we may become subject in the normal course of business nor are we able to estimate the amount or range of any possible loss we might incur should we not prevail in such matters. We cannot provide assurance that the legal proceedings listed here, or other legal proceedings not listed here, will not have a material adverse impact on our financial condition or results of operations.

 

29



 

Item  4.        MINE SAFETY DISCLOSURE

 

Not applicable.

 

30



 

PART II

 

Item  5.        MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Our outstanding common shares are privately held, and there is currently no established public trading market for our common stock. As at March 23, 2012, there were 12,556,673 new common shares issued and outstanding which were all held by 44 shareholders of record. See Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” included in this report.  In addition, as of March 23, 2012, there were outstanding options and Restricted Stock Units (“RSUs”) to purchase 1,046,302 common shares; and outstanding and unvested units of restricted stock that would convert into 130,208 common shares once vesting conditions are met.

 

Dividend Policy

 

We have not declared or paid any dividends on our common shares since inception. The declaration of dividend payments is at the sole discretion of our Board of Directors. The Board of Directors may declare dividends in the future depending upon numerous factors that ordinarily affect dividend policy, including the results of our operations, our financial position and general business conditions. Our Revolving Credit Facility and New Floating Rate Note indentures also contain certain customary affirmative and negative covenants which limit our ability to make dividend distributions.

 

Sale of Unregistered Securities Within the Past Twelve Months

 

Upon implementation of the Recapitalization Plan on May 12, 2011, the Company issued 221,354 units of restricted stock and 299,479 RSUs to certain members of senior management.  During the eight months ended December 31, 2011, the Company issued an additional 116,000 RSUs to certain employees and directors of the Company. On May 12, 2011, the Company also issued 708,023 options to certain employees to acquire 5.2% of the new common shares, on a fully-diluted basis. The options are at an exercise price of $20 and expire on May 12, 2018. The grants of these Awards were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act, as transactions by an issuer not involving a public offering, and the issuance of common shares upon exercise of the options was exempt from registration in reliance on Rule 701 of the Securities Act.

 

31



 

Item 6.         SELECTED FINANCIAL DATA

 

The following table sets forth selected consolidated financial information for each of our five most recently completed financial years. This data should be read in conjunction with our Management’s Discussion and Analysis of Financial Condition and Results of Operations, the audited consolidated financial statements, including the notes to the financial statements, and the Risk Factors set out in this Annual Report on Form 10-K.

 

On May 12, 2011, Angiotech implemented a recapitalization transaction that, among other things, eliminated its $250 million 7.75% Senior Subordinated Notes due in 2014 (“Subordinated Notes”) and $16 million of related interest obligations in exchange for the cancellation of all outstanding common shares and issuance of new common shares of Angiotech (the “Recapitalization Transaction”). In connection with this Recapitalization Transaction and as discussed below, the Company adopted fresh start accounting on April 30, 2011 (the “Convenience Date”).

 

Upon implementation of fresh-starting accounting, Angiotech comprehensively revalued its assets and liabilities and eliminated its deficit, additional paid-in-capital and accumulated other comprehensive income balances. Debt and equity were also re-measured based on the reorganization value, being the fair value of the entity before considering liabilities, which were substantively derived from the Company’s financial projections. As the estimated enterprise value calculated for the purposes of fresh start accounting continues to be dependent on the achievement of future financial results and various assumptions, there is no assurance these financial projections will be realized to support the estimated enterprise value. Material adjustments resulting from the reorganization and the application of fresh-start accounting were reflected in the May 1, 2011 consolidated balance sheet and the consolidated statements of operations for the four months ended April 30, 2011.

 

Given that the reorganization and adoption of fresh-start accounting resulted in a new entity for financial reporting purposes, the Company is referred to as the “Predecessor Company” for all periods preceding the Convenience Date and the “Successor Company” for all periods subsequent to the Convenience Date. In addition, the consolidated results of the Successor Company may not be comparable in certain respects to those of the Predecessor Company. For more information, refer to note 1, 3 and 4 of the audited consolidated financial statements included in this Annual Report on Form 10-K.

 

32



 

CONSOLIDATED STATEMENTS OF INCOME

 

 

 

Successor Company

 

Predecessor Company

 

 

 

Eight months ended

 

Four months ended

 

Year ended

 

Year ended

 

Year ended

 

Year ended

 

 

 

December 31,

 

April 30,

 

December 31,

 

December 31,

 

December 31,

 

December 31,

 

(in thousands of U.S. $)

 

2011

 

2011

 

2010

 

2009

 

2008

 

2007

 

REVENUE

 

 

 

 

 

 

 

 

 

 

 

 

 

Product sales, net (1) 

 

$

139,307

 

$

69,198

 

$

211,495

 

$

191,951

 

$

190,816

 

$

170,193

 

Royalty revenue

 

13,670

 

10,941

 

34,461

 

62,171

 

91,546

 

116,659

 

License fees (2) 

 

 

127

 

286

 

25,556

 

910

 

842

 

 

 

152,977

 

80,266

 

246,242

 

279,678

 

283,272

 

287,694

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of products sold (3)

 

90,348

 

32,219

 

106,304

 

104,616

 

101,052

 

94,949

 

License and royalty fees

 

264

 

68

 

5,889

 

10,431

 

14,258

 

18,652

 

Research and development

 

14,076

 

5,686

 

26,790

 

23,701

 

53,192

 

53,963

 

Selling, general and administration

 

60,424

 

24,846

 

89,238

 

81,504

 

98,483

 

99,315

 

Depreciation and amortization

 

23,973

 

14,329

 

33,745

 

33,251

 

33,998

 

33,429

 

In-process research and development

 

 

 

 

 

2,500

 

8,125

 

Write-down of assets held for sale (4) 

 

 

570

 

1,450

 

3,090

 

1,283

 

 

Write-down of property, plant and equipment (5)

 

4,502

 

215

 

4,779

 

 

 

 

Write-down of intangible assets (6) 

 

10,850

 

 

2,814

 

 

 

 

Escrow settlement recovery (7) 

 

 

 

(4,710

)

 

 

 

Write-down of goodwill (8) 

 

 

 

 

 

649,685

 

 

 

 

204,437

 

77,933

 

266,299

 

256,593

 

954,451

 

308,433

 

Operating income (loss)

 

(51,460

)

2,333

 

(20,057

)

23,085

 

(671,179

)

(20,739

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other (expenses) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange (loss) gain

 

1,461

 

(646

)

1,011

 

(1,612

)

540

 

(341

)

Investment and other income

 

547

 

34

 

(571

)

378

 

1,192

 

10,393

 

Debt restructuring costs (9) 

 

 

 

(9,277

)

 

 

 

Interest expense

 

(11,945

)

(10,327

)

(40,258

)

(38,039

)

(44,490

)

(51,748

)

Write-down and other deferred financing charges (10) 

 

 

 

(291

)

(643

)

(16,544

)

 

Write-downs of investments (11)

 

(2,035

)

 

(1,297

)

 

(23,587

)

(8,157

)

Loan settlement gain (12)

 

 

 

1,880

 

 

 

 

Gain on disposal of Laguna Hills manufacturing facility (13)

 

 

 

2,005

 

 

 

 

Total other expenses

 

(11,972

)

(10,939

)

(46,798

)

(39,916

)

(82,889

)

(49,853

)

Loss before reorganization items, gain on extinguishment of debt and settlement of other other liabilities and income taxes

 

(63,432

)

(8,606

)

(66,855

)

(16,831

)

(754,068

)

(70,592

)

Reorganization items

 

 

321,084

 

 

 

 

 

Gain on extinguishment of debt and settlement of other liabilities

 

 

67,307

 

 

 

 

 

Loss from discontinued operations, net of taxes (14)

 

 

 

 

 

 

(9,893

)

(Loss) income before taxes

 

(63,432

)

379,785

 

(66,855

)

(16,831

)

(754,068

)

(80,485

)

Income tax (recovery) expense

 

(2,986

)

267

 

(44

)

6,037

 

(12,892

)

(14,545

)

Net (loss) income

 

(60,446

)

379,518

 

(66,811

)

(22,868

)

(741,176

)

(65,940

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net (loss) income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(4.82

)

$

4.46

 

$

(0.78

)

$

(0.27

)

$

(8.71

)

$

(0.66

)

Discontinued operations

 

 

 

 

 

 

(0.12

)

Total

 

(4.82

)

4.46

 

(0.78

)

(0.27

)

(8.71

)

(0.78

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted weighted average number of common shares outstanding (in thousands)

 

12,528

 

85,185

 

85,168

 

85,130

 

85,118

 

85,015

 

 


Footnotes:

 

(1)

 

During the year ended December 31, 2007, the Predecessor Company recorded a $2.6 million sales credit related to its acceptance of returns of the Contour Threads product as part of the consolidation and discontinuation of the Contour Threads brand name, which was executed concurrently with the launch of the Quill Knotless Tissue-Closure Device product line (formerly known as the Quill SRS brand name).

(2)

 

During the first quarter of 2009, the Predecessor Company received a one-time up-front payment of $25.0 million from Baxter International Inc. (“Baxter”) under the terms of our Amended and Restated Distribution and Licence Agreement between Angiotech US, Angiotech International GmbH, Baxter Healthcare Corporation and Baxter Healthcare, S.A. dated January 1, 2009 (the “Baxter Distribution and License Agreement”). The payment was received in lieu and settlement of future royalty and milestone obligations related to existing formulations of CoSeal and future related products.

 

33



 

(3)

 

During the eight months ended December 31, 2011, the Successor Company’s cost of products sold was temporarily reported at materially higher levels per dollar of sales from May to August 2011 as compared to prior periods due to the impact of fresh start accounting. Upon implementation of fresh start accounting on April 30, 2011, inventory was revalued from $37.5 million to its fair value of $60.1 million. This resulted in a $22.6 million non-cash increase to cost of products sold during May to August 2011 (i.e. the period during which the revalued inventory was sold).  This is also the primary reason for the decline in Medical Device Technologies segment’s consolidated gross margin from 53.4% during the four months ended April 30, 2011 to 35.7% during the eight month ended December 31, 2011.  The temporary non-cash fair value impact of fresh start accounting on inventory was fully charged to cost of products sold during the eight months ended December 31, 2011 and had no impact on the Successor Company’s cash flows, liquidity, credit profile or capital resources. This fresh start accounting adjustment is not expected to negatively affect the Successor Company’s future reported cost of products sold and consolidated gross margins. The Successor Company’s future reported cost of products sold and consolidated gross margins are expected to be relatively consistent with historically reported figures.

(4)

 

As at December 31, 2008, the Predecessor Company had three properties that were designated and classified as held-for-sale in Vancouver, Canada; Syracuse, New York and Puerto Rico. Impairment charges of $0.6 million, $1.5 million, $3.0 million and $1.3 million were recorded during the four months ended April 30, 2011, and the years ended December 31, 2010, December 31, 2009 and December 31, 2008, respectively, to adjust the carrying values of these properties to the lower of cost and fair value less estimated selling costs. The Puerto Rico property was sold for net proceeds of $0.7 million in January 2010, the Vancouver property was sold for net proceeds of $1.8 million in May 2011 and the Syracuse property was sold for net proceeds of $0.9 million in June 2011.

(5)

 

During the eight months ended December 31, 2011, the Successor Company recorded $4.5 million of impairment write-downs of certain manufacturing equipment, furniture and fixtures, and leasehold improvements in connection with: (i) the restructuring of the research and development department; and (ii) the termination of the anti-infective research and development program in the later part of 2011. During the year ended December 31, 2010, the Predecessor Company recorded impairment write-downs of $4.8 million of certain laboratory and manufacturing equipment in connection with: (i) the suspension of its research and development activities related to the fibrin and thrombin technologies acquired from Haemacure Corporation (“Haemacure”) in early 2010; and (ii) restructuring changes that were initiated in connection with the Recapitalization Transaction.

(6)

 

During the eight months ended December 31, 2011, the Successor Company recorded $10.9 million of impairment write-downs related to the termination of its anti-infective research and development program. Similarly, during the year ended December 31, 2010, the Predecessor Company recorded a $1.7 million write-down on certain of its intellectual property in connection with the suspension of research and development activities related to the fibrin and thrombin technologies acquired from Haemacure. In addition, the Predecessor Company also recorded a $1.1 million write-down of the intellectual property related to the Option IVC filter in connection with the termination of its 2008 License, Supply, Marketing and Distribution Agreement with Rex Medical LP (“Rex”).

(7)

 

The $4.7 million recovery represents settlement funds that were received in connection with the resolution of the Predecessor Company’s dispute with RoundTable Healthcare Partners, LP (“Roundtable”) over $13.5 million of escrow funds that were being held by LaSalle Bank in connection with its 2006 acquisition of American Medical Instruments Holding, Inc. All legal proceedings have since been dismissed.

(8)

 

During the third quarter of 2008, the Predecessor Company wrote-down the carrying value of its goodwill associated with the Medical Products segment (now known as our Medical Device Products segment) by $599.4 million. The remaining balance of $26.8 million was subsequently written off in the fourth quarter of 2008. As at December 31, 2008, the Predecessor Company also determined that the goodwill allocated to its Pharmaceuticals Technology segment (now known as our Licensed Technologies segment) was impaired and accordingly, management wrote off the remaining balance of $23.5 million.

(9)

 

During the year ended December 31, 2010, the Predecessor Company incurred debt restructuring costs of $9.3 million for fees and expenses related to the Recapitalization Transaction. These fees and expenses represent professional fees paid to both the Predecessor Company and the 7.75% Senior Subordinated Noteholders’ financial and legal advisors to assist in the analysis of financial and strategic alternatives.

(10)

 

During the year ended December 31, 2010, the Predecessor Company wrote-off $0.3 million of deferred financing costs related to its shelf registration statement that was filed with the SEC in 2009. During the year ended December 31, 2009, the Predecessor Company wrote-off $0.6 million of deferred financing costs due to the early termination of the term loan portion of its credit facility with Wells Fargo Foothill LLC. During the third and fourth quarters of 2008, the Predecessor Company also expensed $13.5 million and $3.0 million of deferred financing charges, respectively, related to the suspension of a note purchase agreement.

(11)

 

During the eight months ended December 31, 2011, the Successor Company recognized a $2.0 million other-than-temporary impairment on its short term investment in equity securities in a publicly traded biotechnology company due to uncertainty about its ability to recover the investment’s cost of $5.3 million.   During the year ended December 31, 2010, the Predecessor Company recorded $1.3 million of write-offs related to its long term investments in three private biotechnology companies that were determined to be irrecoverable. In 2008, the Predecessor Company wrote-down and realized a loss on investments of $10.7 million, $1.9 million and $11.0 million in the second, third and fourth quarters respectively. In 2007, the Predecessor Company wrote-down and realized a loss on investments of $8.2 million.

(12)

 

During the year ended December 31, 2010, the Predecessor Company recorded a $1.9 million loan settlement gain relating to the settlement of its loan to Haemacure in connection with its acquisition of certain product candidates and technology assets from Haemacure.

(13)

 

During the year ended December 31, 2010, the Predecessor Company recorded a $2.0 million gain from the sale of its Laguna Hills manufacturing facility and related long-lived assets.

(14)

 

During the first quarter of 2007, the Predecessor Company recorded impairment charges of $8.9 million related to the discontinuance of the following subsidiaries: American Medical Instruments Inc. (Dartmouth), Point Technologies, Inc and Point Technologies SA.

 

34



 

BALANCE SHEET INFORMATION

 

 

 

Successor Company

 

Predecessor Company

 

As at

 

Year ended December 31,

 

Year ended December 31,

 

(in thousands of U.S.$)

 

2011

 

2010

 

2009

 

2008

 

2007

 

Cash, cash equivalents and short-term investments

 

$

25,432

 

$

37,968

 

$

57,322

 

$

39,800

 

$

91,326

 

Working capital

 

62,052

 

(518,739

)

66,512

 

51,767

 

97,745

 

Total assets

 

608,106

 

305,998

 

370,059

 

385,197

 

1,150,108

 

Total long-term obligations

 

427,153

 

50,211

 

620,160

 

623,655

 

645,096

 

Deficit

 

(60,446

)

(933,352

)

(866,541

)

(843,673

)

(102,497

)

Total shareholders’ equity (deficit)

 

146,407

 

(384,076

)

(313,287

)

(299,873

)

442,072

 

 

QUARTERLY RESULTS

 

The following tables present our unaudited consolidated quarterly results of operations for each of our last eight quarters:

 

 

 

Successor Company

 

Predecessor Company

 

 

 

Quarter ended

 

Quarter ended

 

Two months ended

 

One month ended

 

Quarter ended

 

 

 

December 31,

 

September 30,

 

June 30,

 

April 30,

 

March 31,

 

(in thousands of U.S.$, except per share data)

 

2011

 

2011

 

2011

 

2011

 

2011

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

Product sales

 

$

51,506

 

$

51,899

 

$

35,902

 

$

16,365

 

$

52,834

 

Royalty and license revenue

 

7,106

 

5,497

 

1,068

 

5,309

 

5,758

 

Total revenues

 

58,612

 

57,396

 

36,970

 

21,674

 

58,592

 

Gross Margin:

 

 

 

 

 

 

 

 

 

 

 

Medical Device Products

 

26,887

 

13,103

 

8,968

 

8,074

 

28,906

 

Licensed Technologies

 

6,942

 

5,447

 

1,018

 

5,309

 

5,690

 

Total Gross Margin

 

33,829

 

18,550

 

9,986

 

13,383

 

34,596

 

Operating (loss) income

 

(22,080

)

(18,066

)

(11,314

)

2,378

 

(47

)

Net loss

 

(27,514

)

(18,684

)

(14,248

)

397,519

 

(18,001

)

Basic and diluted loss per common share

 

$

(2.20

)

$

(1.47

)

$

(1.12

)

$

4.67

 

$

(0.21

)

 

 

 

Predecessor Company

 

 

 

Quarter ended

 

 

 

December 31,

 

September 30,

 

June 30,

 

March 31,

 

(in thousands of U.S.$, except per share data)

 

2010

 

2010

 

2010

 

2010

 

Revenue

 

 

 

 

 

 

 

 

 

Product sales

 

$

55,699

 

$

51,868

 

$

52,948

 

$

50,980

 

Royalty and license revenue

 

6,332

 

7,116

 

8,938

 

12,361

 

Total revenues

 

62,031

 

58,984

 

61,886

 

63,341

 

Gross Margin:

 

 

 

 

 

 

 

 

 

Medical Device Products

 

29,278

 

25,060

 

25,077

 

25,776

 

Licensed Technologies

 

5,327

 

5,946

 

7,461

 

10,124

 

Total Gross Margin

 

34,605

 

31,006

 

32,538

 

35,900

 

Operating (loss) income

 

(11,792

)

(6,020

)

(5,376

)

3,131

 

Net loss

 

(27,542

)

(18,500

)

(14,074

)

(6,695

)

Basic and diluted loss per common share

 

$

(0.32

)

$

(0.22

)

$

(0.17

)

$

(0.08

)

 

35



 

Item 7.         MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

ANGIOTECH PHARMACEUTICALS, INC.

 

For the year ended December 31, 2011

 

(All amounts following are expressed in U.S. dollars unless otherwise indicated.)

 

Important Information

 

Financial information presented in this Management’s Discussion and Analysis includes the results of the successor company for the eight months ended December 31, 2011 and four months ended April 30, 2011, and our predecessor company for all periods prior to April 30, 2011. Given that the reorganization and adoption of fresh start accounting results in a new entity for financial reporting purposes, the consolidated financial statements of the Successor Company will not be comparable in certain respects to those of the Predecessor Company. For comparative purposes in this management’s discussion and analysis we have combined the results of the Predecessor Company and the Successor Company for the year ended December 31, 2011. While the adoption of fresh-start accounting has resulted in a new reporting entity, we believe that the comparison of the year ended December 31, 2011 versus the year ended December 31, 2010 provides the best analysis of our operating results. Where specific income statement items have been significantly impacted, either temporarily or permanently, by the reorganization and fresh-start accounting, we have provided detailed explanations of such in the discussion below.

 

The following management’s discussion and analysis (“MD&A”) for the eight months ended December 31, 2011 and four months ended April 30, 2011, should be read in conjunction with our audited consolidated financial statements for the eight months ended December 31, 2011 and four months ended April 30, 2011 prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) and the applicable rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for the presentation of annual financial information. Additional information relating to our company is available by accessing the SEDAR website at www.sedar.com or the SEC’s EDGAR website at www.sec.gov/edgar.shtml.

 

Forward-Looking Statements and Cautionary Factors That May Affect Future Results

 

Statements contained in this Annual Report on Form 10-K that are not based on historical fact, including without limitation statements containing the words “believes,” “may,” “plans,” “will,” “estimates,” “continues,” “anticipates,” “intends,” “expects” and similar expressions, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and constitute “forward-looking information” within the meaning of applicable Canadian securities laws. All such statements are made pursuant to the “safe harbor” provisions of applicable securities legislation. Forward-looking statements may involve, but are not limited to, comments with respect to our objectives and priorities for 2012 and beyond, our strategies or future actions, our targets, expectations for our financial condition and the results of, or outlook for, our operations, research and development and product and drug development. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, events or developments to be materially different from any future results, events or developments expressed or implied by such forward-looking statements.

 

Many such known risks, uncertainties and other factors are taken into account as part of our assumptions underlying these forward-looking statements and include, among others, the following: general economic and business conditions in the U.S., E.U. and the other regions in which we operate; market demand; technological changes that could impact our existing products or our ability to develop and commercialize future products; competition; existing governmental legislation and regulations and changes in, or the failure to comply with, governmental legislation and regulations; availability of financial reimbursement coverage from governmental and third-party payers for products and related treatments; adverse results or unexpected delays in pre-clinical and clinical product development processes; adverse findings related to the safety and/or efficacy of our products or products sold by our partners; decisions, and the timing of decisions, made by health regulatory agencies regarding approval of our technology and products; general capital markets conditions and the requirement for funding to sustain or expand manufacturing, commercialization or our various product development activities; and any other factors that may affect our performance.

 

In addition, our business is subject to certain operating risks that may cause any results expressed or implied by the forward-looking statements in this Annual Report on Form 10-K to differ materially from our actual results. These operating risks include: market acceptance of our technology and products; our ability to successfully manufacture and market our various products; our ability to attract and retain qualified personnel; our ability to complete, in a timely and cost effective manner, pre-clinical and clinical development of certain potential new products; the impact of changes in our business strategy or development plans; our ability to obtain or maintain patent protection for discoveries; potential commercialization limitations imposed by patents owned or controlled

 

36



 

by third parties; our ability to obtain rights to technology from licensors; liability for patent claims and other claims asserted against us; our ability to successfully manufacture, market and sell our products; the availability of capital to finance our activities; our ability to service our debt obligations; and any other factors referenced in our other filings with the applicable securities regulatory authorities.

 

For a more thorough discussion of the risks associated with our business, see the section entitled “Risk Factors” in this Annual Report on Form 10-K.

 

Given these uncertainties, assumptions and risk factors, investors are cautioned not to place undue reliance on such forward-looking statements. Except as required by law, we disclaim any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained in this Annual Report on Form 10-K to reflect future results, events or developments.

 

This Annual Report on Form 10-K contains forward-looking information that constitutes “financial outlooks” within the meaning of applicable securities laws. We have provided this information to give shareholders general guidance on management’s current expectations of certain factors affecting our business, including our future financial results. Given the uncertainties, assumptions and risk factors associated with this type of information, including those described above, investors are cautioned that the information may not be appropriate for other purposes.

 

Business Overview

 

Angiotech develops, manufactures and markets medical device products and technologies. Our products are designed to serve physicians and patients primarily in the areas of interventional oncology, wound closure and ophthalmology. We currently operate in two business segments: Medical Device Technologies and Licensed Technologies.

 

Medical Device Technologies

 

Our Medical Device Technologies segment, which generates the majority of our revenue, develops, manufactures and markets a wide range of single use medical device products, as well as precision manufactured medical device components. These products and components are sold directly to hospitals, clinics, physicians and other end users, as well as to medical products distributors or other third-party medical device manufacturers.

 

Our most significant product groups within this business segment include:

 

·                  Interventional Oncology. We develop, manufacture and market a range of proprietary single use medical device products for the diagnosis of cancer, primarily biopsy devices and related products. We also offer additional product lines for certain selected interventional radiology procedures performed primarily by physicians that also utilize our biopsy product lines. Our most significant product lines include our BioPince™ full core biopsy devices, our True-Core™ and SuperCore™ single use disposable biopsy devices, our T-Lok™ bone marrow biopsy devices and our SKATER™ line of drainage catheters. We sell the significant majority of these product lines through our direct sales organization directly to hospitals and other end users.

 

·                  Wound Closure. We develop, manufacture and market a full line of wound closure products, primarily various types of sutures and surgical needle products. Our most significant product lines include our Quill™ Knotless Tissue-Closure products and our LOOK™ brand sutures for dental and general surgery. We sell these product lines, in particular our Quill product line, directly to hospitals, surgery centers, clinics and other end users through our direct sales organization. We also manufacture certain of these products in finished form for other third party medical device manufacturers and distributors.

 

37



 

·                  Ophthalmology. We develop, manufacture and market a selection of single-use disposable products for ophthalmic surgery, including various types of surgical blades used primarily in cataract surgery, as well as ancillary products including sutures, cannulas, eye shields and punctual plugs. Our most significant product lines include our Sharpoint™ brand disposable ophthalmic surgical blades. We sell these product lines directly, primarily to surgery centers and clinics, through our direct sales organization. We also manufacture ophthalmic surgical blades in finished form for other third party medical device manufacturers and distributors.

 

·                  Medical device components. We develop, manufacture and market a wide range of components, primarily on a made-to-order basis, for other third party medical device manufacturers.  These products may range from unsterilized product components, which are shipped to the customer for final assembly and sterilization, to fully finished, packaged and sterilized medical device products. These components are typically manufactured using the same manufacturing capabilities and technologies we utilize to produce our various other product lines. We sell these product lines directly to corporate customers through our direct sales organization. Our customers include many leading medical device manufacturers in the cardiology and vascular access, interventional radiology, ophthalmology, orthopedics, women’s health, and wound closure product areas.

 

Our strategy is to target certain specialized medical markets where we can establish or maintain a leadership position in medical device products or components, and thereby achieve profitable revenue growth and improved cash flows. Key elements of this strategy include maintaining and investing in our precision manufacturing capabilities and technology, developing and investing in highly specialized sales and marketing personnel and activities, selectively investing in new product development, intellectual property and other proprietary know-how, and pursuing selective and disciplined business development, product or business acquisition activities that would enhance our capabilities or presence within our target customer base and markets.

 

Our Medical Device Technologies segment contains significant precision medical device manufacturing capabilities. We manufacture our products at seven different locations, with each facility having specific, and in some cases, proprietary expertise in certain types of medical device manufacturing as well as experience in complying with the significant regulations, quality and operating requirements that are critical aspects of medical products manufacturing. Certain of our key capabilities include electro-chemical cutting, chemical etching, match point metal grinding, custom insert molding, injection molding, wire and tube forming and plastic extrusion.

 

Our Medical Device Technologies segment markets, sells and distributes our products through a group of highly specialized sales organizations that consist of direct sales and marketing personnel, which in some cases are supplemented by independent sales representatives and independent medical products distributors, depending on the product category, customer base or geographic location. We currently employ approximately 55 direct sales and marketing personnel in our Interventional Oncology group, approximately 53 direct sales and marketing personnel in our Wound Closure group, and approximately 30 additional direct sales personnel serving customers in our other product areas and selected geographies outside of the U.S.

 

We conduct highly selective new product development primarily in two of our manufacturing facility locations. Our product development groups include personnel with expertise in medical products and manufacturing engineering, regulatory affairs and quality assurance. These groups, in addition to supporting certain new product and product line extension initiatives, also support our manufacturing operations in order to enhance our manufacturing capabilities and operating efficiencies.

 

During the year ended December 31, 2011 and in prior years, we had significant research and new product development resources located at our headquarters in Vancouver, BC Canada and in certain of our other facilities that were focused on earlier stage or higher risk programs. Certain of the most substantive of these programs and resources related to our anti-infective medcial device programs, other early stage drug-device combination product or surgical drug-related research programs, certain longer-term research programs relating to our Quill product line and our collaboration with Athersys, Inc. (“Athersys”). In December 2011, we elected to focus our product development resources and efforts on certain of our medical device products franchises where our capabilities and market presence are stronger, and where the potential for near-term returns may be more substantive or certain. As a result, the majority of our earlier stage, higher risk programs have been postponed, discontinued or concluded, including our collaboration with Athersys relating to development of its Multistem® stem cell technology for treatment of patients post-myocardial infarction. These changes are expected to materially reduce or eliminate selected research and development expenses, and have relieved us of any further financial or other obligations relating to Multistem®.

 

Licensed Technologies

 

Our Licensed Technologies segment includes certain of our legacy technologies for which research and development activities have been concluded.  This segment generates additional revenue in the form of royalties received from partners who have licensed and utilize these technologies in their medical device product lines. Our principal revenues in this segment to date have been royalties derived from sales by our partner BSC of TAXUS paclitaxel-eluting coronary stents for the treatment of coronary artery disease.

 

38



 

We have also licensed the same technology utilized by BSC in its TAXUS product line to our partner Cook for use in its Zilver PTX paclitaxel-eluting peripheral vascular stent for the treatment of vascular disease in the leg.  Zilver PTX is currently approved for sale in the E.U. and in certain other countries outside of the U.S., and is awaiting approval by the U.S. Food and Drug Administration (“FDA”) for sale in the U.S. Should Cook receive U.S. approval for Zilver PTX, we expect we would receive additional royalty revenue in our Licensed Technologies segment.

 

The TAXUS paclitaxel-eluting coronary vascular stent, which incorporates our proprietary paclitaxel technology, is a small, balloon-expanded metal scaffold designed for placement in diseased arteries in the heart to restore blood flow by expanding and holding open the arteries upon deployment.

 

BSC first received approval to sell TAXUS in the E.U. in 2003 and in the U.S. in 2004.  Subsequent to the U.S. approval of the TAXUS stent system in 2004, BSC has introduced multiple next generation coronary stent platforms that utilize our proprietary paclitaxel technology, including the TAXUS Express, the TAXUS Liberte™ and the recently introduced TAXUS Ion™ coronary stent system. TAXUS has been studied in multiple human clinical trials, as well as in independent registry studies, which have repeatedly demonstrated the safety and efficacy of TAXUS coronary stent systems, particularly in diabetic patient populations. In patients receiving TAXUS coronary stents, the number of repeat surgery procedures has been shown to be significantly lower in patients receiving TAXUS than those receiving non drug-eluting, or bare metal, coronary stents. The most recent study results announced in November 2011 by our partner BSC include positive long-term data from BSC’s PERSEUS clinical program, which demonstrated favorable two-year safety and efficacy outcomes for the TAXUS Ion™ stent system versus prior-generation paclitaxel-eluting stents.

 

The Zilver PTX paclitaxel-eluting peripheral vascular stent, which incorporates our proprietary paclitaxel technology, is a small, self-expanding metal scaffold designed for placement in diseased arteries in the limbs to restore blood flow by expanding and holding open the arteries upon deployment.

 

Cook first received approval to sell Zilver PTX in the E.U. in 2009, and is currently awaiting approval to sell Zilver PTX in the U.S. To date, stent procedures for peripheral artery disease (“PAD”) in the limbs have been limited due to high observed complication rates for such procedures that often lead to a subsequent surgical procedure, as well as risk of stent fracture with existing products, as these stents are exposed and not protected by the patient’s anatomy as they are with coronary stents. Cook has conducted multiple human clinical trials for Zilver PTX in the E.U., U.S., Japan, and selected other countries to assess product safety and efficacy. To date, clinical results for Zilver PTX have suggested significant reduction in complications as compared to traditional PAD treatments. Selected highlights of Cook’s reported regulatory milestones and clinical results include:

 

·                  October 2011 — Cook announced that Zilver PTX had received a unanimous recommendation from the FDA’s Circulatory System Devices Panel of the Medical Devices Advisory Committee, with all 11 of its members voting to recommend approval of Zilver PTX for sale in the U.S. on the basis of its safety, efficacy and acceptable risk profile. Cook in June 2010 had submitted its Pre-Market Approval (“PMA”) application to the FDA for Zilver PTX.

 

·                  September, 2010 — Cook announced that a summary of the final clinical trial results for the randomized study of Zilver PTX was presented at the annual TCT symposium in Washington D.C. The study met its 12-month primary endpoint showing non-inferior event-free survival (“EFS”) and superior patency for the Zilver PTX as compared to balloon angioplasty.

 

·                  May 2010 — Cook presented one-year data at Euro PCR that confirmed sustained clinical outcomes with Zilver PTX. According to data presented, 86.2% of all patient subgroups treated with Zilver PTX demonstrated vessel patency at 12 months without the requirement for an additional intervention. The trial is based on a group of 787 patients, including symptomatic patients, diabetics, and those with the most complex lesions, including long lesions, total occlusions and in-stent restenosis.

 

·      April 2010 — Cook announced it had enrolled its first patient in its landmark Formula™ PTX® clinical trial. The trial is the first of its kind to evaluate the safety and efficacy of a paclitaxel-eluting stent to treat renal artery disease, the narrowing of the arteries that supply blood to the kidneys.

 

·                  April 2009 — Cook reported data that showed that 82 percent of patients who were treated with Cook’s Zilver PTX stent were free from reintervention at two-year follow up. The Zilver PTX Registry study, involving 792 patients globally, is assessing the safety and efficacy of the Zilver PTX in treating peripheral artery disease. Data was compiled at 12 and 24 months for 593 patients and 177 patients respectively. The corresponding EFS rates were 87 percent and 78 percent, respectively, and freedom from target lesion revascularization was 89 percent and 82 percent, respectively. Detailed evaluation of stent x-rays demonstrated excellent stent integrity through 12 months, confirming previously published results showing 99 percent

 

39



 

completely intact stents (less than 1 percent stent fracture rates observed) with a mean follow up of 2.4 years in the challenging superior femoral artery and popliteal arteries, including behind the knee locations.

 

We receive royalty revenue derived from sales of TAXUS and Zilver PTX based upon our license agreements with BSC and Cook of several families of intellectual property relating to our proprietary paclitaxel technology. The royalty rate applied to BSC’s sales increases in certain countries depending upon unit sales volume achieved by BSC. The royalty rate applied to Cook’s sales of Zilver PTX is a flat rate, regardless of the unit volume of sales achieved. At December 31, 2011 our Successor Company recorded a $4.0 million receivable in connection with a sales milestone fee that was triggered under the license agreement with Cook and is dependent upon Cook achieving a certain targeted level of sales of Zilver PTX. This fee was received on February 3, 2012.

 

There is minimal expense associated with our receipt of royalty revenue derived from TAXUS. We expect we will incur royalty expense associated with Cook’s sales of Zilver PTX under our license agreement with the National Institutes of Health. We may continue to receive royalty revenue from BSC and Cook for the life of the licensed patent families in each respective geography, depending upon BSC’s and Cook’s level of product sales and commercial and clinical success.

 

Significant Recent Developments

 

Amendment to Revolving Credit Facility

 

On March 12, 2012, we entered into an amendment to our Revolving Credit Facility in order to provide increased financial flexibility and further improve our overall liquidity. This amendment provides for, among other things: i) the repurchase of our outstanding Senior Floating Rate Notes, subject to certain terms and conditions; ii) the repurchase of equity held by current or former employees, officers or directors subject to certain limitations; iii) an increase in the amount of cash that can be held by our foreign subsidiaries; iv) the ability to dispose of certain of our intellectual property assets (at which time the component of the borrowing base supported by such intellectual property assets would be reduced to nil); v) a reduction in the restrictions surrounding eligibility of certain accounts receivable; vi) the removal of the lien over our short term investments; vii) a revision to the definition of EBITDA to allow for certain historical and future restructuring and CCAA costs; and viii) less restrictive reporting requirements when advances under the Revolving Credit Facility are below certain thresholds. We estimate total fees of $0.4 million to be paid to complete this amendment.

 

Change in Chief Executive Officer

 

On October 21, 2011, we announced that the employment of William L. Hunter, as the Company’s President and Chief Executive Officer, ended effective October 17, 2011. In addition, effective November 5, 2011 Dr. Hunter resigned from the Company’s Board of Directors. K. Thomas Bailey, the Company’s Chief Financial Officer, was appointed the Interim President and Chief Executive Officer and was subsequently named the President and Chief Executive Officer in February 2012.

 

Recapitalization and Emergence from Proceedings

 

Over the past several years, royalty revenue we receive from sales of TAXUS coronary stent systems by our partner BSC declined significantly. These declines led to significant constraints on our liquidity, working capital and capital resources, which adversely impacted our ability to continue to support our business initiatives and service debt obligations.

 

As a result, after extensively exploring a range of financial and strategic alternatives, on January 28, 2011 we and certain of our subsidiaries (collectively, the “Angiotech Entities”) voluntarily filed for creditor protection (the “CCAA Proceedings”) with the Supreme Court of British Columbia (the “Canadian Court”) under the Companies’ Creditors Arrangement Act (Canada) (the “CCAA”) to implement a recapitalization or restructuring of certain of our debt obligations (the “Recapitalization Transaction”) through a plan of compromise or arrangement (as amended, supplemented or restated from time to time, the “CCAA Plan”). In order to have the CCAA Proceedings recognized in the United States, on January 30, 2011, the Angiotech Entities commenced proceedings under Chapter 15 of Title 11 of the United States Code (the “U.S. Bankruptcy Code”) in the United States Bankruptcy Court (the U.S. Court) for the District of Delaware (together with the CCAA Proceedings, the “Creditor Protection Proceedings”). On January 13, 2011 and March 3, 2011, respectively, our common shares were delisted from the NASDAQ Stock Market (“NASDAQ”) and the Toronto Stock Exchange (“TSX”).

 

On April 4, 2011, a meeting was held for creditors whose obligations were compromised under the CCAA Plan (“Affected Creditors”) to vote for or against the resolution approving the CCAA Plan. The CCAA Plan was approved by 100% of the Affected Creditors, whose votes were registered and sanctioned by the order of the Canadian Court on April 6, 2011. This order was subsequently recognized by the U.S. Court on April 7, 2011. Affected Creditors who did not file a proof of claim in accordance with the procedure for the adjudication, resolution and determination of claims established by order of the Canadian Court on February 17, 2011 (the “Claims Procedure Order”) had their claims forever barred and extinguished and were not permitted to receive distributions under the CCAA Plan. On May 12, 2011 (the “Plan Implementation Date” or the “Effective Date”), all of our existing common shares and

 

40



 

options were cancelled without payment or consideration and the Subordinated Noteholders’ claims of $266 million were settled for 12,500,000 new common shares issued in accordance with the terms of the CCAA Plan. All other Affected Creditors elected, or were deemed to have elected, for cash settlement of their claims. As a result, the $4.5 million of distribution claims of Affected Creditors (excluding Subordinated Noteholders) were settled for $0.4 million in cash. For more detail on additional transactions that were consummated as part of the CCAA Plan on the Plan Implementation Date, refer to note 3 in our audited consolidated financial statements for the year ended December 31, 2011.

 

On February 7, 2011, we entered into a definitive agreement with Wells Fargo Capital Finance, LLC (“Wells Fargo”) to secure a $28.0 million debtor-in-possession credit facility (the “DIP Facility”). The DIP Facility provided us with liquidity for working capital, general corporate purposes and expenses during the implementation of the CCAA Plan. On the Plan Implementation Date, the DIP Facility was repaid and terminated, and we entered into a new credit facility (as amended, the “Revolving Credit Facility”) with Wells Fargo, which provides for potential borrowings up to $28 million (see note 16(f)). We incurred approximately $1.5 million in fees to obtain and complete the Revolving Credit Facility.

 

On May 12, 2011, upon the close of business, we concluded substantially all the activities relating to the Recapitalization Transaction and the Angiotech Entities emerged from Creditor Protection Proceedings.  During the course of the Creditor Protection Proceedings, the majority of our businesses continued to operate as usual and there were no material disruptions to our operations, marketing or product distribution activities.

 

Fresh-Start Accounting

 

Following the completion of the Recapitalization Transaction and our emergence from Creditor Protection Proceedings, we were required to adopt fresh-start accounting in accordance with ASC No. 852 — Reorganization. We elected to apply fresh-start accounting on a convenience date of April 30, 2011 (the “Convenience Date”) after concluding that operating results between the Effective Date and the Convenience Date did not result in a material difference. Material adjustments resulting from the reorganization and the application of fresh-start accounting have therefore been reflected in the May 1, 2011 consolidated balance sheet and the four months ended April 2011 consolidated statements of operations. Material cash payments of $8.7 million made in May 2011 related to the Recapitalization Transaction have been reflected in the period subsequent to the Convenience Date. Given that the reorganization and adoption of fresh-start accounting resulted in a new entity for financial reporting purposes, Angiotech is referred to as the “Predecessor Company” for all periods preceding the Convenience Date and the “Successor Company” for all periods subsequent to the Convenience Date.

 

The going concern enterprise value of the Successor Company’s operations for purposes of fresh start accounting was estimated to be within a range of $450 million to $580 million, excluding the value of cash and cash equivalents and short term investments. We determined that $517 million was the best estimate of the Successor Company’s enterprise value.

 

Upon implementation of fresh-starting accounting, we allocated the estimated reorganization value as detailed in the table below (including the value of cash, short term investments and non-interest bearing liabilities) to our various assets and liabilities based on their estimated fair values and eliminated our deficit, additional paid-in-capital and accumulated other comprehensive income balances. Deferred income taxes were recorded in accordance with ASC No. 740. The reorganization value was first assigned to tangible and identifiable intangible assets. The excess of the reorganization value over and above the identifiable net asset values resulted in goodwill. We also recorded the Successor Company’s debt and equity at the fair value estimated through this process. As the estimated enterprise value is dependent on the achievement of future financial results and various assumptions, there is no assurance that financial results will be realized to support the estimated enterprise value.

 

 

 

in 000’s

 

Successor Company enterprise value

 

$

516,729

 

Add:

 

 

 

Cash and cash equivalents

 

30,222

 

Short-term investments

 

5,294

 

Non-interest bearing liabilities

 

140,563

 

Reorganization value to be allocated to assets

 

$

692,808

 

Less amount allocated to tangible and identifiable intangible assets, based on their fair values

 

567,563

 

Unallocated reorganization value attributed to goodwill

 

125,245

 

 

41



 

Allocation of Reorganization Value to Assets and Liabilities

 

The following table summarizes the April 30, 2011 fresh-start accounting adjustments required to adjust the carrying values of the Successor Company’s asset and liabilities to their estimated fair values:

 

 

 

in 000’s

 

 

 

Debit / (Credit)

 

Inventory

 

$

22,616

 

Deferred income tax assets, current

 

(2,741

)

Deferred income tax assets, non-current

 

(122

)

Assets held for sale

 

143

 

Property, plant and equipment

 

7,423

 

Intangible assets

 

250,466

 

Goodwill

 

119,878

 

Deferred financing costs

 

(4,372

)

Deferred leasehold inducements

 

3,485

 

Deferred income tax liabilities, current

 

(3,544

)

Deferred income tax liabilities, non-current

 

(61,404

)

Other liabilities

 

9,388

 

Net gains from fresh start accounting

 

$

341,217

 

 

The assumptions used and approaches applied on April 30, 2011 to derive estimated fair values of our assets and liabilities on our May 1, 2011 balance sheet are summarized as follows:

 

Inventory

 

As at May 1, 2011, the $60.1 million estimated fair value of inventory was determined as follows:

 

·                  Raw materials — no fair value adjustments were recorded to raw materials, given that their existing carrying values were determined to be representative of current replacement costs.

 

·                  Work-in-process inventory (“WIP”) — the fair value of WIP was determined based on estimated selling prices less conversion costs to complete manufacturing, selling and disposal costs, and a reasonable profit allowance for manufacturing and selling efforts. When selecting the estimated selling prices for WIP, we applied the fair value concept of “best and highest use” by assessing the principal and most advantageous market where the highest profit margin could be obtained.

 

·                  Finished goods inventory — the fair value of finished goods was determined based on estimated selling prices of inventory on hand, less selling and disposal costs, as well as a reasonable profit allowance for selling efforts.

 

The following table summarizes the respective estimated fair values and book values of the Successor Company’s and Predecessor Company’s inventory:

 

 

 

May 1,
2011
Successor
Company

 

 

April 30,
2011
Predecessor
Company

 

Raw materials

 

$

10,705

 

 

$

10,705

 

Work in process

 

25,978

 

 

13,908

 

Finished goods

 

23,418

 

 

12,872

 

Total

 

$

60,101

 

 

$

37,485

 

 

Deferred income taxes and other tax liabilities

 

Deferred income taxes have been adjusted to reflect the tax effects of differences between the estimated fair value of identifiable assets and liabilities and their tax basis and the benefits of any unused tax losses, tax credits, other tax attributes to the extent that these amounts are more likely than not to be realized. Measurement period adjustments were made to deferred income tax liabilities as explained in (a) above.

 

42



 

Property, Plant and Equipment and Assets Held for Sale

 

Property, plant and equipment were recorded at their estimated fair value of $47.7 million based on the highest and best use of these assets. Assets held for sale were recorded at $2.6 million, which represents their fair values less costs to sell. The following approaches were applied to determine fair value:

 

·                  The market approach or sales comparison approach utilizes recent sales or offerings of similar assets to derive a probable selling price. Under this method, certain adjustments may be made to compensate for differences in age, condition, operating capacity and the recentness of comparable transactions.

 

·                  The cost approach considers the current costs required to construct, purchase or replace similar assets. This approach incorporates certain assumptions about the age and estimated useful lives of the assets under consideration, which may include adjustments for the following factors:

 

·                   Physical deterioration: refers to the loss in value resulting from wear and tear, deterioration, deferred maintenance, exposure to the elements, age and design flaws.

 

·                   Functional obsolescence: refers to the loss in value resulting from impediments or factors specific to the asset under consideration, which prevents it from operating efficiently or as intended.

 

·                   Economic obsolescence: refers to the loss in value resulting from external factors such as market conditions, environmental conditions, or regulatory changes.

 

·                  Assets held for sale were adjusted to estimated fair value less selling costs based on recent purchase offers received.

 

·                  Third party appraisers were engaged to assess the value of land and buildings. A combination of the sales comparison and income based approaches were used to estimate the value of land and buildings.

 

·                  Cost and market approaches were used to assess the estimated fair value of leasehold improvements, manufacturing equipment, research equipment, office furniture and equipment and computer equipment.

 

·                  The current carrying values of construction-in-progress (“CIP”) assets were determined to be representative of fair value.

 

The following table summarizes the respective estimated fair values and book values of the Successor Company’s and Predecessor Company’s property, plant and equipment:

 

 

 

May 1,
2011
Successor
Company

 

 

April 30,
2011
Predecessor
Company

 

Land

 

$

3,645

 

 

$

4,810

 

Building

 

14,645

 

 

11,775

 

Leasehold Improvements

 

6,430

 

 

9,426

 

Manufacturing equipment

 

19,407

 

 

12,353

 

Research equipment

 

401

 

 

183

 

Office furniture and equipment

 

1,188

 

 

327

 

Computer equipment

 

1,982

 

 

1,401

 

Total

 

$

47,698

 

 

$

40,275

 

 

 

 

 

 

 

 

Assets held for sale

 

$

2,624

 

 

$

2,481

 

 

Intangible Assets

 

The $377.5 million estimated fair value of intangible assets was determined using the following income approach methodologies:

 

·                  The excess earnings method estimates the value of an intangible asset by quantifying the amount of residual or excess cash flows generated by an asset and discounting those cash flows to the present. The method substantially resembles a traditional financial projection for a company, which includes revenues, costs of goods sold, operating expenses and taxes projected for the next several years based on reasonable assumptions. Unlike a traditional financial projection, however, the excess earnings methodology requires the application of contributory asset charges. These charges represent the return on

 

43



 

and of all contributory assets, and are applied in order to estimate the “excess” earnings generated by the subject intangible asset. Contributory asset charges typically include payments for the use of working capital, tangible assets and other intangible assets.

 

·                  The relief from royalty method is based on the assumption that, in lieu of ownership of an intangible asset, an independent licensor would be willing to pay a royalty in order to enjoy the benefits of the asset. Under this method, value is estimated by discounting the hypothetical royalty payments to their present value over the economic life of the asset.

 

·                  We have several trade names with estimated economic lives of approximately 20 years, the fair values for which were estimated using the relief from royalty method. Royalty rates utilized to conduct this exercise in our case ranged from 0.7% and 3%, and the discount rates applied ranged from 16% to 25%, depending on factors such as risk or development stage of the asset, age, profitability, degree of importance and competition.

 

·                  Customer relationships and developed technologies fair values were estimated using the excess earnings method with estimated economic lives of approximately 20 years. The residual/excess cash flows were discounted at rates ranging from 15% to 40%, reflecting what we believe are reasonable required returns relative to the risk associated with the development stage and market acceptance of certain products. Attrition rates ranging from 1% to 13% were assumed in determining the estimated fair value of various existing customer relationships.

 

·                  Our patents’ fair values were estimated using the relief from royalty method over estimated economic lives of approximately 5 to 14 years. Royalty rates utilized to conduct this exercise in our case from 8% to 15%, and the discount rates applied ranged from 15% to 40%, reflecting what we believe are reasonable required returns relative to the risk associated with the patents’ and/or associated products’ development stage and market acceptance.

 

·                  A tax rate of 30% was assumed in determining the value of each category of intangible assets.

 

The following tables summarize the respective estimated fair values and book values of the Successor Company’s and Predecessor Company’s intangible assets:

 

 

 

May 1, 2011
Fair Values

 

 

 

Successor
Company

 

Customer relationships

 

$

171,000

 

Trade names and other

 

25,200

 

Patents

 

113,900

 

Core and developed technology

 

67,400

 

 

 

$

377,500

 

 

 

 

April 30, 2011
Net book value

 

 

 

Predecessor
Company

 

Acquired technologies

 

$

47,046

 

Customer relationships

 

56,630

 

In-licensed technologies

 

16,870

 

Trade names and other

 

6,488

 

 

 

$

127,034

 

 

Deferred financing costs

 

The estimated fair value of the $4.4 million deferred financing costs was determined to be nil and written off upon application of fresh start accounting.

 

Deferred leasehold inducements

 

The estimated fair value of the $3.5 million deferred leasehold inducements was determined to be nil upon application of fresh start accounting, given that the inducements received are non-refundable, not transferable to a third party and are not expected to give rise

 

44



 

to any cash flows in the future. Furthermore, as current lease rates applicable to the properties under consideration were determined to be reflective of current market rates, no provisions were required to adjust the Successor Company’s current rental agreements to market rates.

 

Other long term liabilities

 

The following items were adjusted in other long term liabilities:

 

·                  Prior to the application of fresh start accounting, the Predecessor Company had recorded $1.9 million of deferred revenue related to upfront fees received from licensors for certain licensing arrangements. While the Successor Company still has an ongoing obligation to provide the licensors with access to the relevant licenses, no further costs are expected to service or maintain the license and related deferred revenue liability. As such, the estimated fair value of the deferred revenue liability was determined to be nil upon application of fresh start accounting.

 

·                  Pursuant to a 1997 license agreement (“NIH License Agreement”) with National Institutes of Health (“NIH”), we agreed to pay to the NIH certain milestone payments upon achievement of specified clinical and commercial development milestones and to pay royalties on net TAXUS sales by BSC and sales of the Zilver™-PTX™ paclitaxel-eluting peripheral stent (“Zilver”) by Cook Medical Inc (“Cook”). Prior to the application of fresh start accounting, the Predecessor Company had a $7.2 million accrual for royalty fees and interest owing to the NIH under this licensing arrangement for the use of certain technologies related to paclitaxel. On December 29, 2010, the Predecessor Company and the NIH entered into an amendment to the NIH License Agreement whereby the parties agreed to eliminate: (i) approximately $7.2 million of unpaid royalties and interest due on sales of TAXUS by BSC; and (ii) future royalties payable on licensed products sold by BSC going forward, in exchange for a 0.25% increase of existing royalty rates for licensed products sold by Cook and an extension of the term for payment of such royalties of approximately two years. Upon implementation of fresh start accounting, the estimated fair value of this liability was determined to be nominal.

 

Debt

 

As discussed above, the Successor Company’s New Floating Rate Notes were issued on May 12, 2011 and replaced the Predecessor Company’s Existing Floating Rate Notes. Based on the interest rate and other terms of the New Floating Rate Notes and the our current credit profile, the $325 million face value of the New Floating Rate Notes was determined to be representative of estimated fair value for the purposes of adopting fresh-start accounting.

 

Additional paid in capital, accumulated deficit and accumulated other comprehensive income

 

Upon implementation of fresh start accounting, additional paid in capital, accumulated other comprehensive income and the remaining accumulated deficit (after the revaluation of the Predecessor Company’s assets and liabilities) were eliminated.

 

Goodwill

 

Upon implementation of fresh start accounting on April 30, 2011, we comprehensively revalued our assets and liabilities at their estimated fair values. After allocating $568 million of the estimated reorganization value as detailed in the table above to tangible and identifiable intangible assets based on their respective estimated fair values, the remaining unallocated portion of the reorganization value of $125 million was recorded as goodwill in accordance with ASC No. 852. Based on management’s analysis, all of the goodwill was determined to be attributable to the Successor Company’s Medical Device Technologies segment. Furthermore, none of the goodwill was determined to be deductible for tax purposes.

 

Management believes the estimated fair value of the goodwill can be primarily attributed to the following:

 

·                  Our assembled workforce;

 

·                  The generally higher multiples / values assigned to companies in the medical device / pharmaceuticals industry sectors as compared to companies in other industry sectors;

 

·                  The recession-resistant nature of our products;

 

·                  Price inelasticity of the our products; and

 

·                  Regulatory barriers to entry in the medical device / pharmaceuticals industry

 

As many of the fair value estimates described above are inherently subject to significant uncertainties, there is no assurance that the estimates and assumptions in these valuations will be realized and actual results may differ materially.

 

45



 

Acquisitions

 

As part of our business development efforts we consider strategic acquisitions from time to time. Terms of certain of our prior acquisitions may require us to make future milestone or contingent payments upon achievement of certain product development and commercialization objectives, as discussed under “Contractual Obligations”. During the eight months ended December 31, 2011 and four months ended April 30, 2011, we did not complete any acquisitions. The fair value of these future milestone and contingent payments was determined to be a nominal value upon adoption of fresh-start accounting.

 

Collaboration, License and Sales and Distribution Agreements

 

In connection with our research and development efforts, we have entered into various arrangements with corporate and academic collaborators, licensors, licensees and others for the research, development, clinical testing, regulatory approval, manufacturing, marketing and commercialization of our product candidates. Terms of the various license agreements may require us, or our collaborators, to make milestone payments upon achievement of certain product development and commercialization objectives and pay royalties on future sales of commercial products, if any, resulting from the collaborations.

 

During the eight months ended December 31, 2011 and four months ended April 30, 2011,  we did not enter into any new collaboration, license, sales or distribution agreements.

 

Agreements relating to our material collaborations, licenses, sales and distribution arrangements are listed in the exhibits index to this Annual Report on Form 10-K and may be found at the locations specified therein.

 

Critical Accounting Policies and Estimates

 

Our consolidated financial statements are prepared in accordance with U.S. GAAP. These accounting principles require management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. We believe that the estimates and assumptions upon which we rely are reasonable and are based upon information available to us at the time the estimates and assumptions were made. Actual results could differ materially from our estimates.

 

We believe the following policies to be critical to understanding our financial condition, results of operations, and expectations for 2012 because these policies require management to make significant estimates, assumptions and judgments about matters that are inherently uncertain.

 

Predecessor Company - Accounting Policies Applicable during Creditor Protection Proceedings

 

Upon commencement of the Creditor Protection Proceedings on January 28, 2011, the Predecessor Company was required to adopt Accounting Standards Codification (“ASC”) No. 852 — Reorganization. Among other things, ASC No. 852 required that the Predecessor Company: (i) distinguish transactions and events which are directly associated with the Recapitalization Transaction from ongoing operations of the business (see note 4); and (ii) identify pre-petition liabilities which were subject to compromise through the reorganization process from those that were not subject to compromise or are post-petition liabilities (see note 3). For other items, the Predecessor Company applied the same accounting policies as detailed in note 2 to our 2011 Financial Statements.

 

(a) Liabilities Subject to Compromise

 

From January 28, 2011 to April 30, 2011, the Predecessor Company presented certain prepetition liabilities that were incurred prior to January 28, 2011 as liabilities subject to compromise.  All claims which arose during the CCAA Proceedings were recognized in accordance with the Predecessor Company’s accounting polices based on our best estimate of the expected amounts of allowed claims, whether known or potential claims, permitted by the Canadian Court (“Allowed Claims”). Liabilities Subject to Compromise of the Predecessor Company were adjusted to the Allowed Claims amount as approved by the Canadian Court. Where a carrying value adjustment arose due to disputes or changes in the amount for goods and services consumed by the Predecessor Company, the difference was recorded as an operating item. In contrast, where carrying value adjustments arose from the claims process under the CCAA or repudiation of contracts, the difference was presented as a Reorganization Item as discussed below (also see note 4 to our 2011 Financial Statements).

 

(b) Reorganization Items

 

ASC No. 852 requires separate disclosure of incremental costs which are directly associated with reorganization or restructuring activities that are realized or incurred during Creditor Protection Proceedings. These Reorganization Items include professional fees incurred in connection with the Creditor Protection Proceedings and implementation of the Recapitalization Transaction. However, Reorganization Items also include gains, losses, loss provisions, recoveries, and other charges resulting from asset disposals, restructuring activities, Revolving Credit Facility or disposal activities, and contract repudiations which haven been specifically undertaken as a result of the CCAA Proceedings and Recapitalization Transaction. Similar costs incurred in 2010 prior to the Predecessor Company’s Creditor Protection Proceedings were  recorded as debt restructuring expenses, write-downs of intangible

 

46



 

assets and write-downs of property, plant and equipment. ASC No. 852 also requires that specific cash flows directly related to Reorganization Items be separately disclosed on the consolidated statement of cash flows.

 

(c) Interest Expense

 

Interest expense on the Predecessor Company’s debt obligations was recognized only to the extent that: (i) the interest expense was not stayed by the Canadian Court and was paid during the Creditor Protection Proceedings or (ii) the interest was an allowed priority, secured claim or unsecured claim. All interest recognized subsequent to the January 28, 2011 CCAA Filing Date has been presented as regular interest expense and not as a Reorganization Item.

 

(d) Fresh-Start Accounting

 

As described in notes 1 and note 3 to our 2011 Financial Statements, upon emergence from Creditor Protection Proceedings, we adopted fresh-start accounting. On the April 30, 2011 Convenience Date, we completed a comprehensive revaluation of its assets and liabilities. All assets and liabilities, except for deferred income tax assets and liabilities, on our May 1, 2011 Successor Company’s Consolidated Balance Sheet are therefore reflected at their newly estimated fair values. In addition, we recorded goodwill of $125 million in accordance with ASC No. 852, which stipulates that the portion of the estimated reorganization value which cannot be attributed to specific tangible or identified intangible assets of the emerging entity should be recorded as goodwill (see note 3 to our 2011 Financial Statements). In addition, the effects of the adjustments on the reported amounts of individual assets and liabilities resulting from the adoption of fresh-start reporting and the effects of the Recapitalization Transaction were reflected in our Successor Company’s opening consolidated balance sheet and our Predecessor Company’s final consolidated statement of operations. Adoption of fresh-start accounting results in a new reporting entity with no beginning retained earnings, deficit, additional paid-in-capital and accumulated other comprehensive income. The financial statements of the Successor Company are not comparable to those of the Predecessor Company. The Predecessor Company’s comparative financial statements are therefore presented to comply with the SEC’s reporting requirements and should not be viewed as a continuum between the Predecessor and Successor Companies’ financial statements.

 

Successor and Predecessor Companies’ Accounting Policies

 

With the exception of the accounting policies applicable to property, plant and equipment and intangible assets, the Successor Company has adopted the same accounting policies as the Predecessor Company as described below:

 

(a) Property, plant and equipment

 

As described in note 3, upon implementation of fresh start accounting on April 30, 2011, Angiotech’s property, plant and equipment were re-measured and recorded at their estimated fair value of $47.7 million. Accordingly, effective May 1, 2011, the fair value of $47.7 million represents the new cost base for the Successor Company’s property, plant and equipment. The respective Company’s property, plant and equipment are recorded at cost less accumulated depreciation. Depreciation was recorded using the straight-line method over the following terms:

 

 

 

Successor Company

 

 

Predecessor Company

 

Buildings

 

15-40  years

 

 

40 years

 

Leasehold improvements

 

Term of the  lease

 

 

Term of the lease

 

Manufacturing equipment

 

3-10 years

 

 

3-10 years

 

Research equipment

 

3-5 years

 

 

5 years

 

Office furniture and equipment

 

2-10 years

 

 

3-10 years

 

Computer equipment

 

1-5 years

 

 

3-5 years

 

 

Where the respective Company had property, plant and equipment under construction, these assets were not depreciated until they were put into use.

 

(b) Goodwill and intangible assets

 

As discussed in note 3 below, the Successor Company recorded $125 million of goodwill upon implementation of fresh start accounting on April 30, 2011. The implied fair value of goodwill represents the excess of the Successor Company’s reorganization value over and above the fair value of its tangible assets and identifiable intangible assets. Based on management’s analysis, all of the goodwill was determined to be attributable to the Successor Company’s Medical Device Technologies segment.

 

47



 

In accordance with Accounting Standards Codification (“ASC”) No. 350 — Intangibles — Goodwill and Other, goodwill is not amortized, but rather it is tested annually for impairment and whenever changes in circumstances occur that would indicate impairment. When the carrying value of a reporting unit’s goodwill exceeds the implied fair value of the goodwill, an impairment loss is recognized which is equal to the excess. Examples of circumstances that could trigger impairment include adverse changes or outcomes in legal or regulatory matters, technological advances, decreases in anticipated demand for products, and increased competition. The Company estimates fair value based on a discounted projection of future cash flows which are subject to significant uncertainty and estimates.

 

Intangible assets with finite lives are amortized based on their estimated useful lives. The amortization method is selected to best reflect the pattern in which the economic benefits are derived from the intangible asset. If the pattern cannot be reliably or reasonably determined, straight line amortization is applied. Amortization was determined using the straight line method over the following terms:

 

 

 

Successor Company

 

Customer relationships

 

10-20  years

 

Trade names and other

 

9-20  years

 

Patents

 

5-20  years

 

Core and developed technology

 

10-20  years

 

 

 

 

Predecessor Company

 

Acquired technologies

 

2-10 years

 

Trade names and other

 

2-12 years

 

Customer relationships

 

10 years

 

In-licensed technologies

 

5-10 years

 

 

(c) Impairment of long-lived assets

 

The respective Company reviews long-lived assets subject to amortization to determine if any adverse conditions exist or a change in circumstances has occurred that would indicate impairment or a change in the remaining useful life. Conditions that may indicate impairment include; but are not limited to; a significant adverse change in legal factors, business climate or strategy decisions that could affect the value of an asset; discontinuation of certain research and development programs or products; product recalls, or adverse actions or assessments by regulators. If an impairment indicator exists, the respective Company tests the asset (asset group) for recoverability. For purposes of the recoverability test, long-lived assets are grouped with other assets and liabilities at the lowest level of identifiable cash flows if the long-lived asset does not generate cash flows independent of other assets and liabilities. If the carrying value of the asset (asset group) exceeds the undiscounted cash flows expected to result from the use and eventual disposition of the asset (asset group), an impairment charge is recorded to write the carrying value down to the fair value in the period identified.

 

The respective Company estimates the fair value of assets (asset groups) by calculating the present value of estimated future cash flows expected to be generated from the asset using a risk-adjusted discount rate. In determining the present value of estimated future cash flows associated with assets (asset groups), certain assumptions are made about future revenue contributions, cost structures, discount rates and the remaining useful lives of the asset (asset group). Variation in the assumptions used could result in material differences when estimating impairment write-downs.

 

(d) Revenue recognition

 

(i) Product sales

 

Revenue from product sales, including shipments to distributors, is recognized when the product is shipped from the respective  Company’s facilities to the customer provided that the respective Company has not retained any significant risks of ownership or future obligations with respect to products shipped. Revenue from product sales is recognized net of provisions for future returns. These provisions are established in the same period as the related product sales are recorded and are based on estimates derived from historical experience and adjusted to actual returns when determinable.

 

Revenue is considered to be realized or realizable and earned when all of the following criteria are met: persuasive evidence of a sales arrangement exists; delivery has occurred; the price is fixed or determinable; and collectability is reasonably assured. These criteria are generally met at the time of shipment when the risk of loss and title passes to the customer or distributor.

 

Amounts billed to customers for shipping and handling are included in revenue. Where applicable, revenue is recorded net of sales taxes. The corresponding costs for shipping and handling are included in cost of products sold.

 

48



 

(ii) Royalty revenue

 

Royalty revenue is recognized when the respective Company has substantially fulfilled its performance obligations under the terms of the contractual agreement, no significant future obligations remain, the amount of the royalty fee is determinable, and collection is reasonably assured. The respective Company records royalty revenue from BSC and from Cook on a cash basis due to the difficulty in accurately estimating the BSC and Cook royalties before the reports and payments are received.

 

(iii) License fees

 

License fees are comprised of fees and milestone payments derived from collaborative and other licensing arrangements. License fees are recognized as revenue when persuasive evidence of an arrangement exists, the contracted fee is fixed or determinable, the intellectual property is delivered to the customer and the license term has commenced, collection is reasonably assured and the performance obligations have been substantially completed.

 

Where license fees are tied to research and development arrangements, under which the respective Company is required to provide services over a period of time and the consideration is contingent upon uncertain future events or circumstances, the respective Company will assess whether it is appropriate to apply the milestone method of revenue recognition in accordance with ASC No. 605-28, Revenue Recognition: Milestone Method.  A milestone payment is recognized as revenue in its entirety when a specified substantive milestone is achieved.  A milestone is considered substantive if: (i) the payment is commensurate with the respective Company’s performance required to achieve the milestone; (ii) the payment relates to past service;  and (iii) the payment is reasonable relative to all of the deliverables and payment terms under the arrangement.  If any portion of the payment is refundable or adjustable based on future performance, the milestone is not considered to be substantive. Fees and non-substantive milestone payments received which require the ongoing involvement of the respective Company are deferred and amortized into income on a straight-line basis over the period of ongoing involvement if there is no other method under which performance can be objectively measured.  In addition, milestone payments related to future product sales are accounted for as royalties.  On January 1, 2011, the Predecessor Company applied ASU No. 2010-17, Milestone Method of Revenue Recognition prospectively to the receipt of future milestone payments without any material impact to its consolidated financial statements.

 

(iv) Multiple-element arrangements

 

When an arrangement includes multiple deliverables, the respective Company applies ASU 605-25 Revenue Recognition: Multiple-Element Arrangements to identify the units of accounting and allocate the consideration to each separate unit of accounting.  A separate unit of accounting is identified if the delivered item(s) have standalone value to the customer and the delivery or performance of undelivered items is considered probable and within the control of the respective Company.  The arrangement consideration is generally allocated to the separate units of accounting based on their relative selling prices, Company specific objective evidence of selling prices, third-party evidence of selling prices, or the Company’s best estimate of the selling prices.  The consideration allocated is limited to the amount that is not contingent on the delivery of additional items or fulfillment of other performance conditions.  Effective January 1, 2011, the Predecessor Company adopted ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements, prospectively without any material impact to its consolidated financial statements. Prior to January 1, 2011 and the issuance of the new guidance under ASU No. 2009-13, the Predecessor Company applied ASC No. 605-25 which had more stringent requirements to identify units of accounting and allocate the arrangement consideration.

 

(e) Income taxes

 

Income taxes are accounted for using the liability method. Deferred income tax assets and liabilities result from the temporary differences between the amount of assets and liabilities recognized for financial statement and income tax purposes, and for operating losses, capital losses and tax credit carry forwards, using enacted tax rates expected to be in effect for the years in which the differences are expected to reverse. A valuation allowance is provided to reduce the deferred income tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred income tax assets will not be realized.

 

(f) Accounting for Uncertainty in Income Taxes

 

The respective Company accounts for uncertainty related to income tax positions in accordance with ASC No. 740-10 — Income taxes. ASC No. 740-10 requires the use of a two-step approach for recognizing and measuring the income tax benefits of uncertain tax positions taken or expected to be taken in a tax return, as well as enhanced disclosures regarding uncertain tax positions. A tax benefit from an uncertain tax position may only be recognized if it is more-likely-than-not that the position will be sustained upon examination by the tax authority based on the technical merits of the position. The tax benefit of an uncertain tax position that meets the more-likely-than-not recognition threshold is measured as the largest amount that is greater than 50% likely to be realized upon settlement with the tax authority. To the extent a full benefit is not expected to be realized, an income tax liability is established. Any

 

49



 

change in judgment related to the expected resolution of uncertain tax positions are recognized in the year of such a change. Accrued interest and penalties related to unrecognized tax benefits are recorded in income tax expense in the current year.

 

(g) Stock-based compensation

 

The respective Company accounts for stock based compensation expense in accordance with ASC No. 718 — Compensation: Stock Compensation and ASC No. 505-50 — Equity: Equity Based Payments to Non-Employees. These standards require the respective  Company to recognize the grant date fair value of stock-based compensation awards granted to employees over the requisite service period. The compensation expense recognized reflects estimates of award forfeitures at the time of grant and revised in subsequent periods, if necessary when forfeitures rates are expected to change.

 

The grant date fair value of stock options is determined using the Black-Scholes model and the following assumptions: the risk-free rate is estimated using yield rates on U.S. Treasury or Canadian Government securities for a period which approximates the expected term of the award; and volatility is estimated by using a weighted average of the Predecessor’s historical volatility and comparable volatilities of companies in the same industry of similar sizes and scale. The Predecessor and Successor Company have not paid any dividends on common stock since their inception and the Successor Company does not anticipate paying dividends on its common stock in the foreseeable future. Generally, the stock options granted have a maximum term of seven years and vest over a three-year period from the date of the grant. When an employee ceases employment at the Successor Company, any unexercised vested options granted will expire either immediately, within 365 days from the last date of service or on the original expiration date at the time the option was granted, as defined in the Successor Company’s Stock Incentive Plan. The expected life of employee stock options is based on a number of factors, including historic exercise patterns, cancellations and forfeiture rates, vesting periods and contractual terms of the options. The costs of the stock options are recognized on a straight line basis over the vesting period.

 

The grant date fair value of Restricted Stock awards and Restricted Stock Units is determined based on the fair value of the Successor Company’s common shares on the grant date as if the award was vested and the shares issued. Restricted Stock awards vest over a three-year period from the date of the grant and when an employee ceases employment, the unvested Restricted Stock either vests or expires immediately as defined in the Successor Company’s Stock Incentive Plan. Restricted Stock Units either vest over a three-year period or immediately if a change in control occurs. In addition, Restricted Stock Units are scheduled to expire at the earlier of December 31, 2012, if a change in control occurs, or seven years from the grant date. The costs of these awards are recognized on a straight-line basis over the expected service period taking into account the expected date of employment cessation. Restricted stock units that vest when a change of control occurs are recognized on a straight-line basis from the grant date to December 31, 2012 taking into account the cessation of employment because the probability of fulfilling the performance condition cannot be determined until the change in control occurs.

 

Results of Operations

 

Overview

 

 

 

Successor Company

 

 

Predecessor Company

 

Combined

 

Predecessor Company

 

Predecessor Company

 

 

 

Eight months ended
December 31,

 

 

Four months ended
April 30,

 

Year ended
December 31,

 

Year ended
December 31,

 

Year ended
December 31,

 

(in thousands of U.S.$, except per share data)

 

2011

 

 

2011

 

2011

 

2010

 

2009

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

Medical Device Technologies

 

$

139,307

 

 

$

69,198

 

$

208,505

 

$

211,495

 

$

191,951

 

Licensed Technologies

 

13,670

 

 

11,068

 

24,738

 

34,747

 

87,727

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

152,977

 

 

80,266

 

233,243

 

246,242

 

279,678

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating (loss) income

 

(51,460

)

 

2,333

 

(49,127

)

(20,057

)

23,085

 

Other expense

 

(11,972

)

 

(10,939

)

(22,911

)

(46,798

)

(39,916

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss before reorganization items, gain on extinguishment of debt and settlement of other other liabilities and income taxes

 

(63,432

)

 

(8,606

)

(72,038

)

(66,855

)

(16,831

)

Reorganization items

 

 

 

321,084

 

321,084

 

 

 

Gain on extinguishment of debt and settlement of other liabilities

 

 

 

67,307

 

67,307

 

 

 

(Loss) income before taxes

 

(63,432

)

 

379,785

 

316,353

 

(66,855

)

(16,831

)

Income tax (recovery) expense

 

(2,986

)

 

267

 

(2,719

)

(44

)

6,037

 

Net (loss) income

 

(60,446

)

 

379,518

 

319,072

 

(66,811

)

(22,868

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net (loss) income per common share

 

$

(4.82

)

 

$

4.46

 

 

 

$

(0.78

)

$

0.27

 

Basic and diluted weighted average number of common shares outstanding (in thousands)

 

12,528

 

 

85,185

 

 

 

85,168

 

85,130

 

 

For comparative purposes we have combined the results of the Predecessor Company and the Successor Company for the year ended December 31, 2011. Where specific income statement items have been impacted significantly as compared to our historical results,

 

50



 

either temporarily (as in the case of Cost of Products Sold) or permanently, by the Recapitalization Transaction and the fresh-start accounting process, we have provided explanations of such in the discussion. The respective fresh start accounting adjustments are requirements resulting from our emergence from the CCAA and Chapter 15 proceedings. As such, these adjustments are non-cash in nature and do not reflect material changes in our business or operations, our cash flows, liquidity and capital resources or credit profile.

 

For the year ended December 31, 2011, we recorded net income of $319.1 million, compared to a net loss of $66.8 million for the year ended December 31, 2010. The $385.9 million increase in net income is primarily due to the following factors: (i) $321.1 million of one-time reorganization items (see Reorganization Items section below for more detailed information); (ii) a $67.3 million one-time gain recognized upon settlement and extinguishment of our $250 million Subordinated Notes and $16 million of related interest obligations in addition to $4.5 million of certain other liabilities; (iii) a $17.8 million reduction in interest expense during the period related to the settlement and extinguishment of the Subordinated Notes; (iv) a $7.1 million decrease in research and development expenses due to reductions in headcount and in discretionary spending related to certain research and development programs; (v) a decrease in other expenses of $9.3 million relating to non-recurring professional fees that were incurred in the third quarter of 2010 relating to our Recapitalization Transaction; (vi) a $5.7 million decrease in license and royalty expenses associated with our TAXUS-derived royalty revenue as a result of an amendment to our license agreement with the NIH, (see “License and Royalty Fees on Royalty Revenue” for more information); and (v) an $2.7 million increase in income tax recoveries. These improvements to net income were partly offset by: (i) a $15.5 million increase in cost of products sold, of which $22.6 million is related to a non-cash adjustment resulting from the revaluation of inventory in connection with the implementation of fresh start accounting on April 30, 2011 (see “Costs of Products Sold” for more information), partly offset by the elimination of costs related to discontinuing sales of the Hemostream and Option IVC Filter products; (ii) a $10.4 million decline in TAXUS royalty revenue derived from BSC’s sales of paclitaxel-eluting coronary stent systems; (iii) an $8.0 million increase in intangible asset impairment write-downs for the year ended December 31, 2011 relating to the suspension of research and development activities for our anti-infective technologies; (iv) a $4.7 million recovery from a litigation settlement recorded during the year ended December 31, 2010; and (v) a $4.3 million increase in depreciation and amortization expense due to changes in estimated useful lives as driven by certain restructuring activities and the revaluation of our tangible and intangible assets upon implementation of fresh start accounting on April 30, 2011.

 

For the year ended December 31, 2010, we recorded a net loss of $66.8 million ($0.78 basic and diluted net loss per common share), compared to a net loss of $22.9 million ($0.27 basic and diluted net loss per common share) for the year ended December 31, 2009. The increase in net loss of $43.9 is due to several factors, including: (i) the receipt of a $25.0 million one-time payment from Baxter International, Inc. (“Baxter”) in 2009, which did not recur in 2010; (ii) a $27.8 million decline in royalty revenue related to the lower sales of TAXUS by BSC, primarily as a result of increased competition in the stent market; (iii) a $1.6 million increase in research and development salary and benefit costs associated with new hires recruited to conduct research and development activities on certain of our medical products; (iv) a $7.7 million increase in selling, general and administrative costs, primarily due to the addition of sales and marketing staff required to support our Quill Knotless Tissue-Closure Device product line; (v) $0.6 million of transaction expenses related to our 2010 acquisition of certain Haemacure Corporation (“Haemacure”) assets and $1.1 million of research and development costs incurred in connection with research and development activities performed on the related fibrin and thrombin technologies; (vi) $9.3 million of professional fees and other debt restructuring costs incurred in connection with the Recapitalization Transaction; (vii) $2.8 million of intangible asset impairment write-downs; (viii) an additional $4.8 million of property, plant and equipment impairment write-downs compared to 2009; (ix) $1.3 million of write-downs on our long term investments; and (x) a $3.2 million increase in the amortization of our deferred financing costs related to a change in the estimated useful lives of the expected interest period for the Subordinated Notes and a change in the expected life of the Existing Credit Facility which was effectively replaced and superseded by the DIP Facility. The unfavorable impact of the factors described above were partially offset by: (i) a $17.9 million increase in gross margin due to an increase in sales of our higher gross margin products as well as improvements achieved with respect to certain manufacturing costs, including reduced labor costs and more efficient utilization of our fixed overhead costs; (ii) a $4.5 million reduction in license and royalty fees associated with the simultaneous drop in royalty revenue noted above; (iii) a $4.7 million recovery from a litigation settlement and a $3.8 million drop in litigation expenses; (iv) $1.0 million of foreign exchange gains; (v) a $1.9 million gain on the settlement of the Haemacure loan upon completion of our acquisition of certain of their assets; (vi) a $2.0 million gain recognized from the sale of a manufacturing facility; and (vii) a $6.0 million tax recovery.

 

51



 

Revenues

 

 

 

Successor Company

 

 

Predecessor Company

 

Combined

 

Predecessor Company

 

Predecessor Company

 

 

 

Eight months ended
December 31,

 

 

Four months ended
April 30,

 

Year ended
December 31,

 

Year ended
December 31,

 

Year ended
December 31,

 

(in thousands of U.S.$)

 

2011

 

 

2011

 

2011

 

2010

 

2009

 

Medical Device Technologies:

 

 

 

 

 

 

 

 

 

 

 

 

Product sales

 

$

139,307

 

 

$

69,198

 

$

208,505

 

$

211,495

 

$

191,951

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Licensed Technologies:

 

 

 

 

 

 

 

 

 

 

 

 

Royalty revenue — paclitaxel-eluting stents

 

10,173

 

 

9,929

 

20,102

 

30,501

 

57,420

 

Royalty revenue — other

 

3,437

 

 

1,062

 

4,499

 

3,960

 

4,751

 

License fees

 

60

 

 

77

 

137

 

286

 

25,556

 

 

 

13,670

 

 

11,068

 

24,738

 

34,747

 

87,727

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

152,977

 

 

$

80,266

 

$

233,243

 

$

246,242

 

$

279,678

 

 

As described above, we operate in two reportable segments:

 

Medical Device Technologies

 

Revenue from our Medical Device Technologies segment for the year ended December 31, 2011 was $208.5 million, compared to $211.5 million for the year ended December 31, 2010. The net $3.0 million decrease is primarily attributable to the elimination of revenue from our sales of Option IVC Filters and Hemostream dialysis catheters, from which we recorded $3.8 million of revenue during the year ended December 31, 2011 as compared to $13.4 million during the year ended December 31, 2010. This decline is a result of the termination of certain license and distribution agreements with Rex Medical relating to our sale of Option IVC Filters and Hemostream dialysis catheters at the end of 2010 and in early 2011. While the elimination of revenue from our sale of Option IVC Filters and Hemostream dialysis catheters has had an adverse impact on aggregate revenue growth for 2011 as compared to 2010, the savings from the elimination of related royalty fees, milestone costs, and selling and marketing expenses have positively impact our cash flows, gross margins and operating profitability (see the “Cost of Products Sold” discussion below). The decline in revenue from these products was partially offset by an increase in sales of our Quill Knotless Tissue-Closure Device product line, as well as an increase in sales of medical device components to other third-party medical device manufacturers.

 

Revenue from our Medical Device Technologies segment for the year ended December 31, 2010 was $211.5 million, compared to $192.0 million for the year ended December 31, 2009. The $19.5 million increase is primarily due to sales growth of certain of our product lines, including our Quill Knotless Tissue-Closure Device product line and our Option IVC Filter as well as modest sales growth of medical device components to third-party medical device manufacturers. The revenue increase was partly offset by the elimination of revenue from our EnSnareTM product line at the beginning of 2010 in connection with the discontinuation of our licensing agreement with Hatch Medical, LLC. In 2009, we elected not to match a competing offer to purchase the distribution rights and as a result, we no longer sell EnSnare.

 

Licensed Technologies

 

Royalty revenue derived from sales of TAXUS by BSC for the year ended December 31, 2011 decreased by 34% compared to the year ended December 31, 2010. The decrease in royalty revenues is due to lower sales of TAXUS by BSC, primarily as a result of competitive pressures in the market for drug-eluting coronary stents. Royalty revenue for the year ended December 31, 2011 was based on BSC’s net sales of $363 million for the period October 1, 2010 to September 30, 2011, of which $242 million was in the U.S., compared to net sales of $539 million for the same period in 2010, of which $271 million was in the U.S. The average gross royalty rate earned on BSC’s net sales in the U.S. was 6.0% for both periods. The average gross royalty rate earned on BSC’s net sales outside the US was 4.4% for the year ended December 31, 2011, compared to an average rate of 5.3% for in the year ended December 31, 2010. These average gross royalty rates are dictated by our tiered royalty rate structure for sales in certain territories, including the U.S., Japan and E.U. Our current year average gross royalty rates have therefore declined in connection with lower sales volumes of TAXUS in the U.S., where sales volumes did not exceed the first tier of royalties earned, as well as lower sales volumes and shifting sales mix in territories outside of the U.S., where the tiered structure, combined with a greater proportion of sales being recorded in certain countries where lower royalty rates are applied due to more limited patent coverage, had a significant impact.

 

Royalty revenue derived from sales of TAXUS by BSC for the year ended December 31, 2010 decreased by 47% compared to the year ended December 31, 2009. The decrease in royalty revenues is due to lower sales of TAXUS by BSC, primarily as a result of competitive pressures in the market for drug-eluting coronary stents. Royalty revenue for the year ended December 31, 2010 was based on BSC’s net sales of $539 million for the period October 1, 2009 to September 30, 2010, of which $271 million was in the U.S., compared to net sales of $926 million for the same period in 2009, of which $411 million was in the U.S. The average gross royalty rate earned on BSC’s net sales for the year ended December 31, 2010 was 6.0% for sales in the U.S. and 5.3% for sales in other countries, compared to an average rate of 6.4% for sales in the U.S. and 6.1% for sales in other countries for corresponding period in 2009. Our average gross royalty rates are dictated by our tiered royalty rate structure for sales in certain territories including

 

52



 

the U.S., E.U. and Japan. Our current year average gross royalty rates have therefore declined in connection with lower sales volumes of TAXUS in these territories.

 

License fees were relatively consistent for the year ended December 31, 2011 as compared to the prior year. For the year ended December 31, 2010, license fees decreased by $25.3 million compared to the year ended December 31, 2009 primarily due to a $25.0 million one-time payment received in the first quarter of 2009 in connection with the the Baxter Distribution and License Agreement discussed above. The payment was recorded as revenue in 2009 because the Company had fulfilled its performance obligations and had no further ongoing involvement in the collaboration.

 

Although royalty revenues from sales of TAXUS by BSC showed signs of stabilizing during 2011, such reven