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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For fiscal year ended MARCH 31, 2001
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-20584
ABIOMED, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 04-2743260
(State or Other Jurisdiction of Incorporation or (I.R.S. Employer Identification No.)
Organization)
22 CHERRY HILL DRIVE 01923
DANVERS, MASSACHUSETTS (Zip Code)
(Address of Principal Executive Offices)
(978) 777-5410
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Rule
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of 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/
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of June 25, 2001 was $364,639,910 based on the closing price
of $23.65 on that date as reported on the Nasdaq Stock Market's National Market.
As of June 25, 2001, 20,814,254 shares of the registrant's Common Stock, $.01
par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for its 2001 Annual Meeting
of Stockholders, which is expected to be filed within 120 days after the end of
the registrant's fiscal year, are incorporated by reference in Part III (Items
10, 11, 12 and 13) of this Report.
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INTRODUCTORY NOTE
THIS REPORT, INCLUDING THE DOCUMENTS INCORPORATED BY REFERENCE IN THIS
REPORT, INCLUDES FORWARD-LOOKING STATEMENTS. WE HAVE BASED THESE FORWARD-LOOKING
STATEMENTS ON OUR CURRENT EXPECTATIONS AND PROJECTIONS ABOUT FUTURE EVENTS. OUR
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN, OR IMPLIED BY,
THESE FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS ARE IDENTIFIED BY
WORDS SUCH AS "BELIEVE," "ANTICIPATE," "EXPECT," "INTEND," "PLAN," "WILL," "MAY"
AND OTHER SIMILAR EXPRESSIONS. IN ADDITION, ANY STATEMENTS THAT REFER TO
EXPECTATIONS, PROJECTIONS OR OTHER CHARACTERIZATIONS OF FUTURE EVENTS OR
CIRCUMSTANCES ARE FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS IN
THESE DOCUMENTS INCLUDE, BUT ARE NOT NECESSARILY LIMITED TO, THOSE RELATING TO:
o OUR PLANS REGARDING THE TIMING AND OUTCOME OF INITIAL CLINICAL TRIALS
FOR OUR ABIOCOR IMPLANTABLE REPLACEMENT HEART;
o OUR INTENTION TO EXPAND THE MARKET FOR OUR BVS PRODUCT LINE;
o OUR ABILITY TO OBTAIN AND MAINTAIN REGULATORY APPROVAL OF OUR
PRODUCTS IN THE U.S. AND INTERNATIONALLY;
o THE OTHER COMPETING THERAPIES THAT MAY IN THE FUTURE BE AVAILABLE TO
HEART FAILURE PATIENTS; AND
o OUR PLANS TO DEVELOP AND MARKET NEW PRODUCTS.
FACTORS THAT COULD CAUSE ACTUAL RESULTS OR CONDITIONS TO DIFFER FROM
THOSE ANTICIPATED BY THESE AND OTHER FORWARD-LOOKING STATEMENTS INCLUDE THOSE
MORE FULLY DESCRIBED IN THE "RISK FACTORS" SECTION AND ELSEWHERE IN THIS REPORT.
WE ARE NOT OBLIGATED TO UPDATE OR REVISE THESE FORWARD-LOOKING STATEMENTS TO
REFLECT NEW EVENTS OR CIRCUMSTANCES.
PART I
ITEM 1. BUSINESS
OVERVIEW
ABIOMED is a leading developer, manufacturer and marketer of medical
products designed to safely and effectively assist or replace the pumping
function of the failing heart. In early 2001, we received permission from the
U.S. Food and Drug Administration, known as the FDA, to begin our initial human
clinical trial for the AbioCor Implantable Replacement Heart, a battery-powered
totally implantable replacement heart system, which we believe will be the first
such device for end-stage heart failure patients. This permission to commence
our initial clinical trial of the AbioCor follows decades of fundamental and
applied research, development and testing of technology incorporated today in
the AbioCor system. We currently manufacture and sell the BVS, a heart assist
device, which was the first device approved by the FDA for the temporary
treatment of all patients with failing but potentially recoverable hearts. We
are also engaged in research and development relating to other devices to
replace or support the pumping function of the heart.
The AbioCor is intended as a replacement device that will replace a
patient's diseased heart and take over its blood pumping function. It is
designed for use by patients with irreparably damaged hearts who are at risk of
imminent death due to heart disease, but whose other vital organs remain viable.
We believe the AbioCor will provide a much-needed treatment option for those
patients in the U.S. for whom there is currently no effective therapy available.
If and when approved by applicable U.S. and international regulatory
authorities, we anticipate that we should be able to sell the first generation
AbioCor systems for approximately $75,000 to $100,000 each, subject to the
establishment of reimbursement levels by third-party payors. To date, more than
$60 million have been invested in the
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development and testing of the AbioCor, including over $20 million in funding
from the National Heart, Lung and Blood Institute. We have built a pilot-scale
manufacturing facility for the AbioCor, we have over 75 engineers, scientists,
physicians and technicians working on the AbioCor programs and we are
collaborating with leading medical centers and healthcare professionals.
The BVS is a "bridge-to-recovery" device that can temporarily assume
the full pumping function of the heart for patients with potentially reversible
heart failure. In 1992, the BVS became the first heart assist device capable of
providing full circulatory support to be approved by the FDA. The BVS is the
most widely used FDA-approved temporary heart assist device, and to date has
been used to support thousands of patients at over 600 medical centers
worldwide. The BVS, which primarily consists of single-use external blood pumps,
cannulae and drive and control consoles, has been a profitable product line
since fiscal 1995. We believe our experience in developing, manufacturing and
selling the BVS will provide us with a competitive advantage in commercializing
the AbioCor, as well as other future products.
Our focused research and development related to the AbioCor and the BVS
has provided us with the proprietary technology, know-how and experience to
develop additional products. We believe we are the only company in the world
with expertise in the full range of technology to support the pumping function
of the heart. We believe that there are many opportunities to apply our
expertise to address the needs of heart failure patients. We seek to be first to
market with high-quality and cost-effective technologies for heart failure
patients who currently lack adequate therapies.
ABIOMED is a Delaware corporation. We commenced operation in 1981. As
used herein, ABIOMED includes ABIOMED, Inc. together with our subsidiaries.
ABIOMED, the ABIOMED logo and BVS are our registered trademarks. AbioCor and
Angioflex are our trademarks. This Report may also include trademarks of
companies other than ABIOMED.
INDUSTRY OVERVIEW
THE HUMAN HEART
The human heart is the pump for the body's circulatory system. The
heart has four chambers: the left and the right atria and the left and the right
ventricles. The two atria serve as the inflow chambers of the heart, collecting
blood for delivery to the ventricles. The ventricles are the pumping chambers of
the heart, pumping blood to the lungs and the rest of the body.
The right ventricle of the heart pumps oxygen-depleted blood returning
from the body to the lungs where it is re-oxygenated. The left ventricle
receives oxygen-rich blood returning from the lungs and pumps it back to the
rest of the body. The chambers of the heart are formed of muscle tissue known as
myocardium. The coronary arteries, a specialized network of blood vessels within
the heart, provide oxygen and other nutrients to the heart itself.
The human heart has four valves that help ensure that blood flows in
the proper direction into and out of the ventricles as they are repeatedly
filled and then discharged with the pumping of blood. The timing and rate at
which the heart beats, referred to as its rhythm, is controlled by electrical
impulses in the conduction system of the heart.
HEART DISEASE
Heart disease is the number one cause of death in the U.S., responsible
for more deaths than all forms of cancer combined. In 1996, based on data
published in October 1998, there were approximately
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700,000 deaths due to heart disease. Illnesses and deaths from heart disease
create an immense burden to many individuals and their families. Patients
frequently experience extended suffering, and the economic cost is substantial.
While a number of therapies exist for the treatment of patients in early stages
of heart disease, limited therapies exist today for most patients with severe,
end-stage, heart failure.
The majority of deaths from heart disease can be attributed to coronary
heart disease, or CHD, and congestive heart failure, or CHF. Other types of
heart disease include rhythm disorders and diseases of the valves.
CHD is a disease of the coronary arteries causing reduced blood flow
and insufficient oxygen delivery to the affected portion of the heart. CHD can
lead to a heart attack, also known as an acute myocardial infarction, resulting
in permanent damage to the heart muscle. In severe heart attacks, death can
occur suddenly or gradually over days and weeks.
CHF is a condition resulting from the progressive deterioration of the
heart over extended periods of time. The patient's heart cannot provide adequate
blood flow and oxygen to meet the needs of the body. CHF may be initiated and
aggravated by a variety of factors, including high blood pressure, defective
heart valves, CHD, infections of the heart muscle or the valves and heart
problems resulting from heart defects. Due to the progressive nature of CHF,
medical interventions often take place over periods of months or years.
In general, heart failure is progressive. While approximately half of
all heart failure patients experience sudden death as a result of cardiac
arrest, the remaining patients who die from heart failure typically do so in
hospitals or long-term care facilities.
PREVALENCE AND MORTALITY
The number of patients both suffering and dying from heart disease has
been rising on an annual basis. In 1996, a year for which complete statistics
are available, there were approximately 12 million people with CHD and 4.6
million people with CHF in the U.S., with similar incidence outside the U.S.
Approximately half of the approximate 700,000 deaths from heart disease
in the US in 1996 were sudden deaths. Of the deaths that did not occur suddenly,
most were associated with CHD and approximately 10-20% with CHF. Current
therapies to support these patients are inadequate because they cannot stop the
progression of the disease. We believe that a significant number of such CHD and
CHF patients could benefit from the AbioCor Implantable Replacement Heart.
THERAPIES FOR HEART DISEASE
A broad spectrum of treatment is available for heart failure patients.
Treatments include drug therapies, cardiological interventions, including closed
chest procedures and rhythm management therapies, or surgical corrections, such
as coronary bypass surgery and valve replacement. For patients with end-stage
heart disease, however, these treatments are typically inadequate. Patients with
severe heart disease frequently are in need of heart replacement. Because the
supply of available donor hearts is limited, with only approximately 2,000 per
year available in the U.S., heart assist and replacement treatments have been
and continue to be developed with the goal of extending and improving the lives
of these patients.
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DEVICES FOR CIRCULATORY SUPPORT TREATMENTS
Circulatory support treatments can be divided into two categories: (a)
destination therapies, including heart replacement and permanent heart assist
devices, and (b) temporary heart assist devices.
DESTINATION THERAPY. Devices intended to be in patients for their remaining
lives are classified as destination therapies. Destination therapy devices
consist of replacement hearts and permanent assist devices, including
quality-of-life support devices that provide partial support to the heart on a
permanent basis.
HEART REPLACEMENT. The goal of heart replacement, whether with a donor
heart or a mechanical device, is to replace the failing human heart with a
viable alternative. Patients with irreparably damaged hearts who are facing
imminent death due to CHD or severe CHF are potential candidates for heart
replacement provided that their other vital organs remain viable. The supply of
human donor hearts is currently inadequate to meet the needs of these patients
and no device is yet approved for use in these patients.
In the U.S., we believe that over 100,000 patients per year might
eventually benefit from an implantable replacement heart once it is proven safe,
effective and reliable. An approximately equal number of patients outside the
U.S. might also benefit from an implantable replacement heart. The 2,000
patients saved by heart transplant in the U.S. annually represent a fraction of
those that might be returned to a normal life if a greater supply of donor
hearts or alternative therapy were available. In addition, a significant portion
of heart transplant patients must endure a long waiting period before a suitable
donor heart is identified, if at all. The development of an implantable
mechanical heart could help alleviate this long and difficult wait.
PERMANENT HEART ASSIST. Permanent assist devices are being developed to
supplement the function of the diseased heart or to stop or slow the progression
of the disease, while leaving the diseased heart in place. These devices
contrast with replacement hearts, which are intended to replace a severely and
irreversibly damaged heart. No permanent heart assist device is yet approved by
the FDA, but a number of companies are developing permanent heart assist
devices, some of which are in clinical trials in the U.S. and overseas.
Permanent assist devices under development can be grouped into two categories:
those that pump blood directly, known as ventricular assist devices or VADs, and
less invasive devices that are intended to provide patients with an improved
quality of life. The less invasive, quality-of-life devices include those that
wrap around the heart, either to help the heart pump blood or to inhibit
deterioration of the heart by preventing its further enlargement, and those that
attempt to synchronize the actions of the heart ventricles with electrical
impulses. We believe that all types of permanent heart assist devices
potentially may be used to treat certain heart failure patients who are near
death as well as those patients who are not at imminent risk of death but whose
daily activities are significantly restricted due to their weakened hearts.
VADs, the more invasive of the two categories, may prove the most
appropriate permanent heart assist devices for certain end-stage CHF patients.
Implantable VADs are intended primarily for patients with severe left
ventricular failure. We believe that VADs are being primarily developed for CHF
patients and that VADs would not be appropriate for long-term support of a very
large fraction of heart failure patients, including those with massive heart
damage, severe rhythm disorders, blood clots in the ventricles, severe lung
disease, ventricular rupture, chronic right ventricle failure or heart
transplant rejection.
TEMPORARY HEART ASSIST. Candidates for temporary heart assist devices include
patients with severe but potentially reversible heart failure and patients whose
hearts need help pumping blood while they await
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transplantation or other therapies. Temporary heart assist devices typically
consist of a specialized pump that is attached to a patient's heart and driven
by a console or powered by an external battery pack. Such devices are intended
to be removed from a patient's body once the patient's heart has had the
opportunity to recover its normal function or the heart is replaced. Temporary
heart assist devices can be grouped into three categories:
BRIDGE-TO-RECOVERY. Bridge-to-recovery devices are used to support
patients with potentially reversible failing hearts. These devices are most
frequently used to support patients whose hearts do not fully restart following
open-heart surgery, and who cannot be weaned off the heart-lung machine. Of the
patients who experience such complications, many thousands die each year whose
lives could potentially be saved with a temporary assist device as a "bridge to
recovery". Bridge-to-recovery devices temporarily assume the pumping function of
the heart, while allowing the heart to rest, heal and recover its normal
function. These devices can also be used for patients who have not undergone
surgery but whose lives are threatened by viral infections that attack the heart
muscle. In addition, bridge-to-recovery devices may prove beneficial to certain
patients who have suffered from a recent heart attack.
BRIDGE-TO-TRANSPLANT. Bridge-to-transplant devices are used to support
patients who have experienced life-threatening heart disease and are awaiting
heart transplantation. We believe that the market for this category of device is
limited by the availability of qualified donor hearts.
STAGING. Staging devices are used to support patients before or during
application of other therapies and to support patients with failing hearts being
transported to other facilities. At present, for reasons of specialized care,
patients are transported between medical centers with the assistance of such
devices under hospital guidelines. In the future, staging devices may be used to
support heart failure patients prior to implantation of a permanent heart assist
device or a heart replacement. These devices could help stabilize the patient
and provide the medical team with time to better assess the patient's condition
before selecting an appropriate therapy. In addition, while bridge-to-recovery
devices are approved and used today to assist heart transplant patients when
rejection occurs, in the future staging devices may be used with transplant
patients who have rejected their donor heart and need life support before
receiving an implantable replacement heart.
ABIOMED PRODUCTS AND PRODUCTS UNDER DEVELOPMENT
Our current commercial products and primary products under development
are the BVS product line and the AbioCor system, respectively. Both of these
products are systems, or product lines, that consist of various component
products. In addition, we are in the early stages of research and development of
other potential products for heart failure patients.
THE ABIOCOR IMPLANTABLE REPLACEMENT HEART
The AbioCor is a battery-powered totally implantable replacement heart
system. The AbioCor is referred to as totally implantable because it has been
designed to operate primarily on portable external battery power, without wires
or any other material penetrating the patient's skin. The AbioCor is referred to
as a replacement heart because it has been designed for implantation in the
space vacated by the removal of a patient's diseased ventricles, where it will
take over the full pumping function of the heart. The AbioCor is intended for
use as destination therapy by patients with irreparably damaged hearts who are
at risk of imminent death due to CHD or severe CHF but whose other vital organs
remain viable.
In 1988, we began to receive funding for AbioCor development from the
National Heart, Lung and Blood Institute, known as the NHLBI, to support our
development and testing of the AbioCor. We have maintained this support through
the research phase of our AbioCor development program by
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achieving various designated milestones. The NHLBI has provided over $20 million
of the more than $60 million that has been invested to date for the development
of the AbioCor.
DESIGN OF THE ABIOCOR. The following diagram illustrates the principal
components of the AbioCor.
[DIAGRAM OF REPLACEMENT HEART]
The AbioCor system consists of the following principal components:
o A thoracic unit, or "replacement heart," which includes two
artificial ventricles with their associated valves and a hydraulic
pumping system. The unit weighs approximately two pounds and provides
complete blood circulation to the lungs and the rest of the body. The
ventricles and their associated valves have seamless surfaces made
from our blood-contacting material, Angioflex, and special geometries
with flow patterns designed to reduce the risk of blood cell damage
and blood clots. Our current configuration of the thoracic unit is
sized for patients with relatively large chest cavities. If our
testing of this configuration is successful, we plan to develop
thoracic units of different sizes to fit a larger portion of the
patients who might benefit from a replacement heart.
o A rechargeable implantable battery, which allows the AbioCor to
operate without any external power supply for limited periods of
time.
o A microprocessor-based implantable electronic device that controls
and monitors the thoracic unit and provides radio communication with
an external monitor affording patients and caregivers the opportunity
for real-time information on its operating status.
o An across-the-skin, or transcutaneous, energy transmission system,
which eliminates the need for wires penetrating the patient's skin
and the inherent associated risks of infection. It transfers the
power to operate the AbioCor system and to recharge the implantable
battery without tethering the patient to an external drive console.
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o An external rechargeable battery pack and monitor designed to be worn
by the patient. These components supply primary power to the system,
allow patient mobility, provide system diagnostic information, and
recharge the implanted back-up battery as needed.
The AbioCor design is intended to preserve and restore the quality of a
patient's life. Restoration of the quality of a patient's life means that the
patient should be able to return to a productive lifestyle, free from pain, with
good mental acuity and an ability to carry out everyday activities. Among the
quality-of-life features of the AbioCor design are quiet heart valves, no
penetration of the skin, no tethering to a large external drive console,
potentially reduced need for anti-coagulation treatments, and no need for
immuno-suppression therapies. The AbioCor system is designed for both low
maintenance and low patient involvement. However, we anticipate that in the
first clinical trial of the first generation AbioCor, the patients may remain
under sustained medical supervision and a portable monitoring device will be
extensively used in lieu of the patient-worn external battery pack and monitor.
In addition to heightened patient monitoring, in the first clinical trial we
anticipate the use of more conservative anti-coagulation regiments and greater
limits on patient activities than may be needed after the initial clinical
trial.
We have also created tools and methods intended to make the AbioCor
system easier to implant. These tools include quick-connectors for relatively
easy attachment of the AbioCor to the human anatomy and a virtual surgery
software tool to allow for the simulated implant of the AbioCor into a
three-dimensional anatomical model of a particular patient prior to opening that
patient's chest.
INITIAL CLINICAL TRIAL. In January 2001, we received FDA permission to begin the
initial human clinical trial in five patients. The initial clinical trial is
subject to periodic review and to the readiness of each collaborating medical
center, including training of its surgical and post-operative care teams and
approval of the clinical trial protocol by the hospital's Internal Review Board.
We plan to begin the initial clinical trial with non-transplant eligible
patients who, despite all available therapies, have an extremely high
probability of death within thirty days due to heart failure. Examples of such
patients include heart transplant recipients who are rejecting their donor
hearts, surgical patients placed on bi-ventricular cardiac assist but whose
hearts fail to recover, and hospitalized patients who are facing imminent death
following massive heart attacks. If the AbioCor results with the first group of
five patients are satisfactory to the FDA, as determined after two months of
implantation, the initial clinical trial will be expanded to fifteen patients
with reviews at regular intervals. Our primary goals in the initial clinical
trial are to assess the safety, effectiveness, performance and reliability of
the first generation AbioCor for support of a very specific patient population
with a very high 30-day mortality and no other life-saving option. This will
allow us to learn whether an expanded or modified clinical trial is required or
to support an application for regulatory approval to commercially market and
sell the AbioCor for that subset of patients who meet the criteria of the
initial clinical trial.
Success of the initial clinical trial will be evaluated based upon
periodic review of the survival of AbioCor patients and their quality of life as
measured by a variety of assessment criteria previously used for end stage heart
failure patients. As we gain clinical experience with the most seriously ill
patients and demonstrate clinical efficacy and safety, we expect to enhance the
performance range, durability and reliability of AbioCor systems and plan to
seek regulatory approval for subsequent generations of the AbioCor for use in
increasingly broad patient populations and with longer intended durations. Such
regulatory approval will likely require clinical data and trials beyond this
initial trial. This regulatory plan is consistent with our experience with the
BVS system. Our BVS product, which has now supported thousands of patients, was
originally approved by the FDA for post-cardiotomy support on the basis of data
from less than half of the approximately 75 patients who were enrolled in the
clinical trials and who were suffering life-threatening conditions for which no
alternative treatment existed. Our plan for AbioCor clinical trials draws upon
our experience with the BVS.
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While the AbioCor is designed as a permanent replacement for the
failing heart, the AbioCor today is a first generation device that will likely
require improvement over time to incorporate feedback from its clinical use. The
patients that will be initially treated with the AbioCor will be very large
framed adults who are near death and for whom the AbioCor represents the only
potential viable alternative to death. We have extensively tested the AbioCor.
The results of such testing were part of our IDE submission to the FDA from
which we gained permission to commence initial clinical trials. We believe that
for patients ill enough to qualify for the initial clinical trial the first
generation AbioCor presents the best alternative to potentially extend their
lives and to provide them with an acceptable quality of life. However, we
understand that this patient category represents only a fraction of the
potential patients who might benefit annually from the AbioCor. Our clinical and
regulatory strategy of continuing to improve the AbioCor based on clinical
experience is intended to allow us to demonstrate that the AbioCor can provide
patients with a reasonable quality of life for sustained periods of time. We
believe that demonstration of this capability is needed for eventual use of the
product in end-stage heart failure patients who are not as ill as is required to
qualify for our initial clinical trial.
COST EFFECTIVENESS. We are developing the AbioCor with the intent to offer a
cost-effective treatment for end-stage heart failure patients. In addition, the
AbioCor has the potential to allow patients an opportunity to return to
productive lives. This would allow the medical system to save money by
discharging the patient from the hospital and allowing the person to become
productive and lead a reasonably normal life.
If the safety, effectiveness and reliability of the AbioCor is
clinically demonstrated for multiple-year durations, it has the potential to be
considerably less expensive than heart transplantation over a five-year period.
One reason for this reduced cost is that recipients of a mechanical replacement
heart are not expected to need immuno-suppression drugs. The blood and tissue
contacting portions of the AbioCor are constructed of inert and durable
materials, which are not expected to elicit a response from a patient's immune
system. Other cost savings could result because the patients can receive a
replacement heart sooner and would not require extensive tests and biopsies to
assess donor heart compatibility. While recipients of the AbioCor will need to
purchase new batteries periodically, we anticipate that the annual comparative
cost of battery purchases will be significantly less than the cost of
immuno-suppression drugs required by donor heart recipients.
While developing the AbioCor, we introduced the BVS, a temporary
heart-assist device, which is currently being sold in the U.S. and international
markets. Certain key elements of the technology developed for the AbioCor,
especially the blood contacting material, Angioflex, have been clinically tested
in the BVS and are currently in commercial use. In addition, the BVS has enabled
us to develop significant experience in areas such as research and development,
manufacturing, regulatory compliance, sales and marketing, and clinical support.
We believe our experience with the BVS in these areas will provide us with a
competitive advantage in commercializing the AbioCor.
THE BVS 5000 TEMPORARY HEART ASSIST DEVICE
The BVS was the first heart assist device capable of assuming the full
pumping function of the heart to be approved by the FDA, and is the most widely
used heart assist device today, with thousands of patients supported to date. It
is a bridge-to-recovery device designed to provide a patient's failing heart
with full circulatory assistance while allowing the heart to rest, heal and
recover its function. The BVS can support the left, right or both ventricles of
the heart. The average age of patients supported with the BVS is 53, however the
BVS has been used to support patients as young as 8 and as old as 85 years old.
The BVS is the only device that the FDA has approved for the temporary
treatment of all categories of patients with failing but potentially recoverable
hearts. The BVS is most frequently used in
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patients whose hearts fail to recover function immediately following heart
surgery. The FDA approved the BVS through its rigorous pre-market approval
process for use with these post-surgical patients in November 1992. In 1996, the
FDA approved use of the BVS for all other categories of post-surgical patients
with potentially reversible heart failure. In 1997, the FDA approved use of the
BVS on patients who, prior to BVS insertion, are non-surgical patients with
abrupt heart failure as a result of viral attack of the heart or certain heart
attacks, expanding its use to the temporary treatment of all patients with
potentially reversible heart failure.
The following diagram illustrates the principal components of the BVS.
[DIAGRAM OF THE PRINCIPAL COMPONENTS OF THE BVS.]
The BVS system consists of the following components:
o Single-use external blood pumps, which provide pumping of blood for
the left, right or both sides of a patient's heart and are designed
to emulate the function of the natural heart;
o Cannulae, which are specially designed tubes used to connect the
blood pumps to a patient's heart; and
o A computer-controlled pneumatic drive and control console, which
automatically adjusts the pumping rate to meet the basic needs of the
patient.
The integration of the cannulae, blood pumps and console creates an "external
heart" system with the ability to reduce the load on the heart, provide
pulsatile blood flow to vital organs and allow the heart muscles time to rest
and recover. The BVS is designed to be easy to use and does not require a
specially trained technician constantly to monitor or adjust the pumping
parameters.
The BVS is designed to facilitate the recovery of patients' hearts as
quickly as possible. Patients who recover under BVS support typically stabilize
in a period of less than one week. It generally takes
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three to five days for the damaged but recoverable heart muscle to restore its
function in a post-cardiotomy patient. The BVS, although it is a VAD, serves a
different function than bridge-to-transplant devices, which are intended for
long-term use by patients awaiting a heart transplant.
The BVS is most frequently used to support patients who have undergone
open-heart surgery, when the heart cannot be successfully restarted and weaned
off the heart-lung machine used in surgery. The BVS can assume the full pumping
function of the heart for these patients while reducing certain risks associated
with extended support on the heart-lung machine, including bleeding, strokes and
blood cell damage. The traditional therapy for these patients has been the
combined use of drugs and intra-aortic balloon pumps. Intra-aortic balloon pumps
are capable of providing limited enhancement to the pumping function of a
failing heart. Despite the availability of such therapy, many thousands of these
patients die each year through deterioration over periods of weeks and incurring
significant expense.
Other categories of patients who can be supported by the BVS include
those suffering from viral myocarditis, a viral infection of the heart. For
these patients, the BVS assumes the full pumping function of the heart, allowing
the patient's immune system to defend against the virus. Other uses of the BVS
include supporting patients following failed heart transplants and supporting
the right ventricle of a patient's heart in conjunction with the implantation of
a device to assist the left ventricle. The BVS is typically used when the
patient's chances for survival are small. We are also exploring other potential
applications of the BVS, including its use as a staging device to support heart
failure patients prior to a permanent heart assist device or heart replacement.
Any hospital performing open-chest heart surgery may use the BVS. There
are approximately 900 of these hospitals in the U.S. and more than 1,000 such
hospitals outside the U.S. As of March 31, 2001, more than 500 medical centers
in the U.S. had purchased the BVS, including 70% of the major U.S. centers that
perform more than 500 heart surgeries annually. In marketing the BVS, we are
focusing on selling additional consoles and disposable blood pumps to existing
customers with significant but less emphasis on adding new customers. Over 65%
of current BVS revenues are derived from sales of BVS single-use blood pumps to
existing customers. Our U.S. list prices for the BVS system are $12,400 for a
BVS single-use blood pump and cannulae set and $64,500 for a BVS console.
Since the BVS received FDA approval, we have made various
improvements to the BVS system, primarily to make it easier to use. We
continue to enhance the BVS product line and are developing improved blood
pumps, cannulae and consoles. In April 2000, we received pre-market
supplemental approval from the FDA to begin selling our BVS 5000t
Transport/Backup console. This new console allows for transport of a patient
by ambulance or aircraft between hospitals as necessary in order to expand
the patient's care. We believe this and other pending improvements may permit
use of the BVS for additional patient conditions.
OTHER PRODUCTS AND TECHNOLOGIES UNDER DEVELOPMENT
We are using the technology and know-how derived from the AbioCor and
the BVS in the research and development of other potential cardiovascular
products. We are also using our experience and commitment to this field to
evaluate potential collaborative arrangements relating to third-party
technologies and products.
In September 2000, we acquired the exclusive rights to the implantable
replacement heart developed by The Pennsylvania State University, known as the
Penn State Heart, as well as the assets of BeneCor Heart Systems, Inc., a
company created to further develop and commercialize the Penn State Heart. Along
with the AbioCor, the Penn State Heart is the result of more than three decades
of research and development sponsored by the NHLBI. We are continuing to develop
the Penn State Heart in
11
collaboration with The Pennsylvania State University. The Penn State technology
is different from the first generation AbioCor and the combination strengthens
ABIOMED's commitment to continue to lead in the introduction of heart
replacement technologies.
Other new technologies are in various stages of research, development
or evaluation, and include passive and active heart wraps as well as specialized
implantable and external rotary pumps. In addition, research and development
activities under our product development programs incorporate certain
technologies that have potential as separate spin-off products. Examples include
implantable monitoring systems with remote transmission capability software for
virtual surgery, non-invasive power transmission systems, and external
monitoring systems.
RESEARCH AND PRODUCT DEVELOPMENT
As of April 30, 2001, our research and development staff consisted of
143 professional and technical personnel, including 11 with PhDs or MD/PhDs and
55 engineers, many with advanced degrees, covering disciplines such as
electronics, mechanics, software, reliability engineering, fluid mechanics,
physics, materials and physiology. Included in the 143 employees are 45
employees involved in the manufacturing and quality testing of AbioCor systems.
All of the AbioCor systems manufactured are being used for testing and other
investigational purposes. None of the AbioCor systems manufactured are available
currently nor approved for commercial sale.
Our research and development efforts are focused on mechanical heart
assist and heart replacement, and the continued enhancement of the BVS and
related technologies. Interaction continues with the FDA and corresponding
foreign regulatory agencies to obtain the necessary clearances and approvals for
our products. Sophisticated but established tools, such as three-dimensional
computer-aided design systems, are used to permit smooth transition of new
designs from research to product development and into manufacturing. We have
substantial expertise in electro-mechanical systems, cardiac physiology and
experimental surgery, blood-material interactions, fluid mechanics and
hemodynamics, internal and external electronic hardware, software, plastics
processing, lasers, and optical physics. Our expertise has been primarily
focussed on addressing challenges associated with the safe and effective pumping
of blood.
We expended $22.7, $15.6 and $13.4 million on research and development
in fiscal 2001, 2000 and 1999, respectively. These amounts included $16.6, $11.5
and $9.7 million, respectively, for AbioCor development and testing. Since our
inception, U.S. government agencies, particularly the NHLBI, have provided
significant support to our product development efforts. As of March 31, 2001,
our total backlog of research and development contracts and grants was $1.2
million. All of these contracts and grants contain provisions making them
terminable at the convenience of the government.
SALES, CLINICAL SUPPORT, MARKETING AND FIELD SERVICE
We believe that the sales, clinical support, marketing and field
service teams established for the BVS product line and the relationships
developed with existing customers will be instrumental not only in continuing to
expand BVS usage and sales, but also in launching new products such as the
AbioCor.
The BVS is sold in the U.S. through direct sales and clinical support
teams. As of April 30, 2001, our worldwide BVS sales, clinical support,
marketing and field service teams included 40 full-time employees. Our sales
force focuses on BVS sales to new customers, upgrades of existing customers, and
increasingly, expansion of usage by existing customers. Our clinical support
group focuses on training and educating new and existing customers in order to
help improve clinical outcomes and increase BVS blood pump usage. We believe
that the efforts of our clinical support group contribute significantly to the
12
number of lives saved by physicians using the BVS as well as usage and reorders
of BVS single-use blood pumps. We are increasingly focusing our sales and
customer support efforts on increasing BVS usage by existing customers with
modest effort on adding new customers. Over 65% of current BVS revenues in
fiscal 2001 were derived from sales of BVS single-use blood pumps to existing
customers. We believe that the reputation and customer relationships of our
sales and support teams will be key assets for the introduction of future
products such as the AbioCor, the Penn State Heart and BVS product extensions
and other products under development.
Building on our experience in the U.S., we are working to expand our
international sales efforts, both for the BVS and in preparation for the
AbioCor. We conduct our international sales efforts through distributors and by
selling directly in selected European markets.
MANUFACTURING
We have over 10 years of experience in the manufacture of the BVS
console, BVS blood pumps, certain cannulae and related accessories. As of April
30, 2001, our BVS manufacturing staff consisted of 32 people and our quality
assurance staff consisted of 15 people. The manufacture of our BVS blood pumps
and consoles includes assembly, testing and quality control. Key
blood-contacting components for the BVS blood pumps, including valves and
bladders are manufactured from our proprietary Angioflex polymer. We purchase a
majority of the raw materials, parts and peripheral components used in the BVS
consoles. Depending on the size and design of the cannulae, they are either
purchased or manufactured by us.
Our AbioCor-related manufacturing is currently classified as part of
research and development. As of April 30, 2001, 45 people in our research and
development group were dedicated to AbioCor manufacturing and related quality
assurance. The manufacture of the AbioCor is based on some processes that are
similar to the processes used for the BVS. We manufacture the majority of the
AbioCor blood contacting components in our facility and all such components are
assembled in-house. A majority of the mechanical parts, electronic components
and batteries used to manufacture the AbioCor are purchased. We contract with
third parties to manufacture certain of the electronic systems used in the
AbioCor, such as the external drive console.
In 2000, we moved our AbioCor manufacturing to a new facility that
includes a state-of-the-art cleanroom manufacturing area dedicated to AbioCor
manufacturing. We also moved our BVS console manufacturing to a dedicated area
in this new facility in 2000. In 2001, we completed moving all of our
manufacturing operations to this new facility, including moving our BVS blood
pump and cannulae manufacturing operations to a new state-of-the-art cleanroom
manufacturing area. We believe this new facility gives us the physical capacity
to produce sufficient quantities of AbioCor systems throughout the period of our
clinical trials as well as produce sufficient quantities of BVS disposable blood
pumps and cannulae to meet market demand for the foreseeable future. Our BVS
manufacturing area is ISO 9001 certified and operates under the FDA's current
Quality Systems Regulations and Good Manufacturing Practices, known as QSR/GMP.
We are taking steps towards ensuring that our new AbioCor manufacturing area is
ISO and QSR/GMP compliant for purposes of eventual international and commercial
distribution of AbioCor, subject to regulatory approvals.
PROPRIETARY RIGHTS, PATENTS AND KNOW-HOW
We have developed significant know-how and proprietary technology, upon
which our business depends. To protect our know-how and proprietary technology,
we rely on trade secret laws, patents, copyrights, trademarks, and
confidentiality agreements and contracts. However, these methods afford
13
only limited protection. Others may independently develop substantially
equivalent proprietary information, gain access to our trade secrets or disclose
such technology without our approval.
A substantial portion of our intellectual property rights relating to
the AbioCor and the BVS is in the form of trade secrets, rather than patents. We
protect our trade secrets and proprietary knowledge in part through
confidentiality agreements with employees, consultants and other parties. We
cannot assure that our trade secrets will not become known to or be
independently developed by our competitors.
As of June 5, 2001, of our 28 U.S. patents, 6 relate to the AbioCor and
2 relate to the BVS. Of our 38 pending U.S. patent applications, 23 relate to
the AbioCor and 2 relate to the BVS. We also own a number of corresponding
patents and patent applications in a limited number of foreign countries. Our
patents may not provide us with competitive advantages. They may also be
challenged by third parties. Our pending or future patent applications may not
be approved. The patents of others may render our patents obsolete or otherwise
have an adverse effect on our ability to conduct business. Because foreign
patents may afford less protection than U.S. patents, they may not adequately
protect our proprietary information.
The medical device industry is characterized by a large number of
patents and by frequent and substantial intellectual property litigation. Our
products and technologies could infringe on the proprietary rights of third
parties. If third parties successfully assert infringement or other claims
against us, we may not be able to sell our products. In addition, patent or
intellectual property disputes or litigation may be costly, result in product
development delays, or divert the efforts and attention of our management and
technical personnel. If any such disputes or litigation arise, we may seek to
enter into a royalty or licensing arrangement. However, such an arrangement may
not be available on commercially acceptable terms, if at all. We may decide, in
the alternative, to litigate the claims or to design around the patented or
otherwise proprietary technology.
Some of our products have been developed in part under government
contracts that require us to manufacture a substantial portion of the products
in the U.S. The government may obtain certain rights to use or disclose
technical data developed under those contracts. We retain the right to obtain
patents on any inventions developed under those contracts (subject to a
non-exclusive, non-transferable, royalty-free license to the government),
provided we follow prescribed procedures.
COMPETITION
Competition among providers of treatments for the failing heart is
intense and subject to rapid technological change and evolving industry
requirements and standards. Many of the companies developing or marketing heart
assist products have substantially greater financial, product development, sales
and marketing resources and experience than ABIOMED. These competitors may
develop superior products or products of similar quality at the same or lower
prices. Moreover, improvements in current or new technologies may make them
technically equivalent or superior to our products in addition to providing cost
or other advantages. Other advances in medical technology, biotechnology and
pharmaceuticals may reduce the size of the potential markets for our products or
render those products obsolete.
No totally implantable replacement heart is commercially or clinically
available today. We are aware of other heart replacement device development
efforts in the U.S., Canada, Europe and Japan but are not aware of any plans for
any other totally implantable replacement heart to commence clinical trials in
the U.S. or anywhere in the world. We believe that if and when other totally
implantable replacement hearts are available, the AbioCor will compete with them
based on quality-of-life advantages, cost effectiveness, clinical support and
customer relationships.
14
In addition to the developers of implantable replacement hearts, there
are a number of companies, including Arrow International, Thoratec Corporation
and World Heart Corporation which are developing permanent heart assist
products, including implantable LVADs and miniaturized rotary ventricular assist
devices, that may address markets that overlap with certain segments of the
markets targeted by AbioCor. AbioCor may compete with those devices for some
patient groups, notably patients with severe CHF due to predominant left
ventricular heart failure. We believe that the AbioCor, LVADs and other VADs, if
developed and proven effective for destination therapy, will generally be used
to address the needs of different patient populations, with an overlap for
certain segments of the heart failure population. We believe that there is a
need for both implantable LVADs and implantable replacement hearts as
destination therapies, and that when both technologies demonstrate the required
reliability, surgeons will favor replacement hearts.
In addition to devices being developed for patients in need of heart
replacement, several companies and institutions are investigating
xenotransplantation, the transplantation of a heart from another species, as a
potential therapy. Most notably, some developers are investigating the use of
genetically engineered pig hearts as an alternative source of donor hearts. This
technology remains in its formative stage and subject to a number of significant
scientific challenges, including controlling elevated immunologic reactions
leading to heightened rejection problems between cross-species grafting and
concerns for cross-species disease transmission to the recipient and the public
at large. We believe that this technology will not achieve practical application
for decades, if ever.
The BVS is a device that can assume the full pumping function of the
heart. The FDA has approved the BVS as a bridge-to-recovery device for the
treatment of all patients with potentially reversible heart failure. The BVS
competes with a temporary cardiac assist device from Thoratec Corporation, which
is also capable of assuming the full pumping function of the heart. The Thoratec
device was originally approved for bridge-to-transplant and bridge-to-transplant
continues to be the primary use of the device. In addition, the BVS competes
with blood pumps, such as intra-aortic balloon pumps and centrifugal pumps, that
are used in medical centers for a variety of applications but which are limited
to providing partial pumping support of failing hearts, are non-pulsatile, or
are not recommended for the duration of support generally required for
bridge-to-recovery. We are not aware of any other company that has applied for
FDA approval of a device that is directly competitive with the BVS. Approval by
the FDA of products that compete directly with the BVS could increase
competitive pricing and other pressures. We believe that we can compete with
such products based on cost, clinical utility and customer relations.
Our customers frequently have limited budgets. As a result, our
products compete against a broad range of medical devices and other therapies
for these limited funds. Our success will depend in large part upon our ability
to enhance our existing products, to develop new products to meet regulatory and
customer requirements, and to achieve market acceptance. We believe that
important competitive factors with respect to the development and
commercialization of our products include the relative speed with which we can
develop products, establish clinical utility, complete clinical trials and
regulatory approval processes, obtain reimbursement, and supply commercial
quantities of the product to the market.
THIRD-PARTY REIMBURSEMENT
We sell our BVS product and intend to sell most of our potential
products under development to medical institutions. Medical institutions and
their physicians typically seek reimbursement for the use of these products from
third-party payors, including Medicare, Medicaid, and private health insurers
and managed care organizations. As a result, market acceptance of our current
and proposed products may
15
depend in large part on the extent to which reimbursement is available to
medical institutions and physicians for use of our products.
Coverage and the level of payment provided by U.S. and foreign
third-party payors varies according to a number of factors, including the
medical procedure, payor, location, outcome and cost. In the U.S., many private
health care insurance carriers follow the recommendations of the Health Care
Financing Administration, or HCFA, which establishes guidelines for the coverage
of procedures, services and medical equipment and the payment of health care
providers treating Medicare patients. Internationally, healthcare reimbursement
systems vary significantly. In certain countries, medical center budgets are
fixed regardless of levels of patient treatment. In other countries, such as
Japan, reimbursement from government or third party payors must be applied for
and approved. As of the date of this report, the amount that Medicare generally
pays a medical institution for in-patient care of Medicare patients is based on
a number of considerations, including a patient's diagnosis regardless of the
services that are provided. Physicians however bill separately for the
procedures that they perform. Medicare does not currently reimburse medical
institutions for the incremental cost of using the BVS. Certain private health
insurers and managed care providers provide incremental reimbursement to both
the medical institutions and their physicians.
No reimbursement levels have been established for our products under
development, including the AbioCor. Prior to approving coverage for new medical
devices, most third-party payors require evidence that the product has received
FDA approval, European Union approval, or clearance for marketing, is safe and
effective and not experimental or investigational, and is medically necessary
and appropriate for the specific patient for whom the product is being used.
Increasing numbers of third-party payors require evidence that the procedures in
which the products are used, as well as the products themselves, are
cost-effective. Heart transplantation currently qualifies for reimbursement as
does bridge-to-transplant treatment with implantable VADs. Comparatively, we
believe that when the AbioCor product reaches maturity, it should cost less over
a five-year period than heart transplantation today and provide more circulatory
support than VADs. We believe that these factors should benefit the AbioCor when
our customers begin to seek reimbursement for it from third-party payors.
However, we cannot assure that the AbioCor or our other products under
development will meet the criteria for coverage and reimbursement or that
third-party payors will reimburse physicians and medical institutions at levels
sufficient to encourage the widespread use of the products. Because the AbioCor
is an implantable product designed to assist patients outside of the hospital
environment, the reimbursement standards or level of reimbursement support for
the AbioCor may differ from medical devices used solely within hospitals to
assist patients.
GOVERNMENT REGULATION
Clinical trials, manufacture and sale of our products and products
under development, including the BVS, AbioCor and Penn State Heart are, or will
be, subject to regulation by the FDA and corresponding state and foreign
regulatory agencies. Noncompliance with applicable regulatory requirements can
result in, among other things, fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, refusal of the
government to grant marketing approval for devices, withdrawal of marketing
approvals, and criminal prosecution. The FDA also has the authority to request
repair, replacement or refund of the cost of any device manufactured or
distributed by ABIOMED.
U.S. CLINICAL USE REGULATIONS. The BVS is classified as a Class III
medical device under FDA rules, as will be the AbioCor and the Penn State Heart.
In the U.S., medical devices are classified into one of three classes (i.e.,
Class I, II or III) based on the controls deemed necessary by the FDA to
reasonably ensure their safety and effectiveness. Class III medical devices are
subject to the most rigorous regulation.
16
Class III devices, which are typically life-sustaining, life-supporting or
implantable devices, or new devices that have been found not to be substantially
equivalent to legally marketed devices, must generally receive pre-market
approval, or PMA, by the FDA to ensure their safety and effectiveness. Class III
devices are also subject to some of the requirements applicable to Class I and
Class II devices, including general controls, such as labeling, pre-market
notification, performance standards, post-market surveillance, patient
registries and adherence to QSR/GMP requirements, which include testing, control
and documentation requirements.
A PMA application must be filed if a proposed device is a Class III
device for which the FDA has required PMAs. A PMA application must be supported
by valid scientific evidence, which typically includes extensive information
including relevant bench tests, laboratory and animal studies and clinical trial
data to demonstrate the safety and effectiveness of the device. The PMA
application also must contain a complete description of the device and its
components, a detailed description of the methods, facilities and controls used
to manufacture the device, and the proposed labeling, advertising literature and
training materials. By regulation, the FDA has 180 days to review the PMA
application, and during that time an advisory committee may evaluate the
application and provide recommendations to the FDA. Advisory committee reviews
often occur over a significantly protracted period, and a number of devices for
which FDA approval has been sought have never been cleared for marketing. In
addition, modifications to a device that is the subject of an approved PMA, or
to its labeling or manufacturing process, may require the submission of PMA
supplements or new PMAs and approval by the FDA.
If clinical trials of a device are required in order to obtain FDA
approval and the device presents a "significant risk," the sponsor of the trial
will have to file an Investigational Device Exemption, known as an IDE,
application prior to commencing clinical trials. The IDE application must be
supported by data, which typically include the results of animal testing
performed in conformance with Good Laboratory Practices and formal laboratory
testing and documentation in accordance with appropriate design controls and
scientific justification. If the FDA approves the IDE application, and the
institutional review boards or IRBs at the institutions at which the clinical
trials will be performed approve the clinical protocol and related materials,
clinical trials may begin at a specific number of investigational sites with a
specific number of patients, as approved by the FDA. Sponsors of clinical trials
are permitted to charge for investigational devices distributed in the course of
the study provided that compensation does not exceed recovery of the costs of
manufacture, research, development and handling. An IDE supplement must be
submitted to and approved by the FDA before a sponsor or investigator may make a
change to the investigational plan that may affect its scientific soundness or
the rights, safety or welfare of human subjects.
In November 1992, the FDA approved our PMA for the BVS. In 1996 and
1997, the FDA approved the use of the BVS for additional indications, expanding
its use to the treatment of all patients with potentially reversible heart
failure. In May 1998, we received notice from the FDA that the BVS had
successfully concluded a required post-market surveillance study. The primary
purpose of this post-market surveillance study was to provide a warning system
to alert the health care community to any potential problems with a device
within a reasonable time of the initial marketing of the device. Post-market
surveillance provides clinical monitoring of the experiences with a device once
it is distributed in the general population under actual conditions of use.
The AbioCor will be classified as a Class III device and therefore is
subject to the IDE and PMA processes and QSR/GMP requirements. In January 2001,
the FDA granted an IDE providing us with regulatory permission to commence the
initial clinical trial of the AbioCor. The initial clinical trial is subject to
periodic review and to the readiness of each collaborating medical center,
including training of its surgical and post-operative care teams and approval of
the clinical trial protocol by the hospital's
17
internal review board. We plan to begin these initial clinical trials with
patients who, despite all available therapies, have an extremely high
probability of death within thirty days due to heart failure.
We anticipate seeking initial approval of the AbioCor for a limited
category of indications and patients, and subsequent approval for additional
indications and patient populations. After the initial PMA is approved, we will
need to file supplemental PMAs for the additional indications. If we obtain
approval of the AbioCor in this manner, the FDA may initially impose conditions
on use of the AbioCor. Nevertheless, we believe that this phased approach will
permit us to obtain initial marketing approval for the AbioCor more quickly than
if we were to seek a single, broader approval.
U.S. MANUFACTURING AND SALES REGULATION. Any devices, including the
BVS, which we manufacture or distribute pursuant to FDA clearances or approvals,
are subject to pervasive and continuing regulation by the FDA and other
regulatory authorities. Manufacturers of medical devices for marketing in the
U.S. are required to adhere to QSR/GMP requirements and must also comply with
Medical Devices Reporting, or MDR, which requires that a firm report to the FDA
any incident in which its product may have caused or contributed to a death or
serious injury, or in which its product malfunctioned and, if the malfunction
were to recur, it would be likely to cause or contribute to a death or serious
injury. Labeling and promotional activities are subject to scrutiny by the FDA
and, in certain circumstances, by the Federal Trade Commission. Current FDA
enforcement policy prohibits the marketing of approved medical devices for
unapproved uses. We are subject to routine inspection by the FDA and other
regulatory authorities for compliance with QSR/GMP and MDR requirements, as well
as other applicable regulations.
INTERNATIONAL REGULATION. We are also subject to regulation in each of
the foreign countries in which we sell our products. Many of the regulations
applicable to our products in these counties are similar to those of the FDA. We
have obtained the requisite foreign regulatory approvals for sale of the BVS in
many foreign countries, including most of Western Europe. We believe that
foreign regulations relating to the manufacture and sale of medical devices are
becoming more stringent. The European Union adopted regulations requiring that
medical devices such as the BVS comply with the Medical Devices Directive, which
includes ISO-9001 and CE certification. In 1998, we received ISO-9001 and CE
certification for the BVS. Many manufacturers of medical devices, including
ABIOMED, have often relied on foreign markets for the initial commercial
introduction of their products. However, an evolving foreign regulatory
environment could make it more difficult, costly and time consuming for us to
pursue this strategy for new products. Implantable devices such as the AbioCor
must comply with the Active Implantable Medical Devices Directive. We are
working toward ISO-9001 and CE certification of the AbioCor. Any delay in
obtaining these certifications for the AbioCor or other products under
development on a timely basis could delay commercial sales of the products in
the European Union.
EMPLOYEES
As of April 30, 2001, we had 264 full-time employees, including:
o 143 in research and development (including regulatory affairs and
AbioCor manufacturing);
o 40 in sales, clinical support, marketing and field service; and
o 49 in manufacturing and quality assurance.
Our remaining employees work in a variety of areas, including information
technology, human resources, accounting, facilities, corporate development and
management. We have entered into contractual agreements with all of our
employees, which include confidentiality and non-competition commitments
18
by each employee. None of our employees is represented by a union. We consider
our employee relations to be good.
EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers are as follows:
NAME AGE POSITION
David M. Lederman, Ph.D................ 57 Chairman of the Board of Directors, President and Chief
Executive Officer
William J. Bolt........................ 48 Senior Vice President - Product Development, and Director,
AbioCor Program
Robert T.V. Kung, Ph.D................. 57 Senior Vice President - Research and Chief Scientific Officer
Eugene D. Rabe......................... 45 Senior Vice President - Sales and Marketing
John F. Thero.......................... 40 Senior Vice President - Finance, Treasurer and Chief
Financial Officer
DR. DAVID M. LEDERMAN founded ABIOMED in 1981, and has served as
Chairman of the Board and Chief Executive Officer since that time. He is also
President of ABIOMED. Prior to founding ABIOMED, he was Chairman of the Medical
Research Group at the Everett Subsidiary of Avco Corporation which he joined in
1972. Dr. Lederman has made many important contributions in the field of cardiac
assist and heart replacement technology, has authored over 40 medical
publications, and originated the design and development of the AbioCor blood
pumps and their valves. Dr. Lederman is a member of numerous medical and
scientific professional organizations and has been a frequent speaker in forums
on cardiac support systems and on the financing and commercialization of
advanced medical technology. Dr. Lederman received a Ph.D. degree in Aerospace
Engineering from Cornell University.
MR. WILLIAM J. BOLT has served ABIOMED since 1982 and, has been Senior
Vice President, Product Development since August 2000. He is currently
responsible for the management of all product development, including product
development related to the BVS, AbioCor and the Penn State Heart, and
responsible for manufacturing operations related to the AbioCor. From 1999 to
2000, he was responsible for BVS product development. From 1994 to 1998, he was
President of ABIOMED's dental subsidiary, ABIODENT. From 1982 to 1994, he served
in various roles, from Vice President of Engineering to Vice President of
Operations, where he was the engineer in-charge of the development of the BVS
and other systems. Mr. Bolt received his Bachelor's degree in Electrical
Engineering and an MBA from Northeastern University.
DR. ROBERT T.V. KUNG has served ABIOMED since 1982 and has been Senior
Vice President and Chief Scientific Officer since 1995. He was Vice President of
Research and Development from 1987 to 1995 and Chief Scientist from 1982 to
1987. Prior to joining ABIOMED, Dr. Kung was a Principal Research Scientist at
Schafer Associates from 1978 to 1982 and at the Avco Everett Research Laboratory
from 1972 to 1978. He developed non-linear optical techniques for laser
applications and investigated physical and chemical phenomena in re-entry
physics. Dr. Kung has been Principal Investigator for ABIOMED's National
Institute of Health-funded AbioCor and AbioBooster programs and has conceived of
and directed the development of ABIOMED's laser-based minimally invasive
technologies. Dr. Kung received a Ph.D. degree in Physical Chemistry from
Cornell University.
19
MR. EUGENE D. RABE has served ABIOMED since 1993 and has been Senior
Vice President, Global Sales and Services since 1999 and became Senior Vice
President Sales and Marketing in 2001. Mr. Rabe assumed responsibility for
international sales in 1996, and was Vice President of Sales from 1993 to 1999.
Prior to joining ABIOMED, Mr. Rabe was Vice President, Sales and Marketing for
Endosonics Corporation. Mr. Rabe was employed as a Sales Manager for St. Jude
Medical, Inc. He has been involved in the management of sales and marketing of
cardiovascular/cardiological devices for over twelve years. Mr. Rabe received a
Bachelor's degree from St. Cloud State University and an MBA from the University
of California.
MR. JOHN F. THERO has served ABIOMED since 1994 and is currently Senior
Vice President of Finance, Treasurer and Chief Financial Officer. From 1994 to
1999 he was Vice President of Finance, Treasurer and Chief Financial Officer.
Prior to joining ABIOMED, Mr. Thero was Chief Financial Officer and acting
President for the restructuring of two venture-backed companies from 1992 to
1995. From 1987 to 1992, he was employed in various capacities including Chief
Financial Officer, by Aries Technology, Inc. From 1983 to 1987, he was employed
by the commercial audit division of Arthur Andersen LLP during which time he
became a Certified Public Accountant. Mr. Thero received a Bachelor's degree in
Economics/Accounting from The College of the Holy Cross.
ITEM 2. PROPERTIES
Our headquarters is located in an industrial office park located 22
miles north of Boston. This facility, located at 22 Cherry Hill Drive in
Danvers, Massachusetts, consists of approximately 80,000 square feet of space
under an operating lease that expires in 2010. Construction of this building was
completed in fiscal 2001 and it now houses all of our operations, including
research and development, manufacturing, sales and marketing and general and
administrative departments. During fiscal 2001 we completed construction of new
state-of-the-art manufacturing cleanrooms and moved production of the AbioCor
and BVS products to this new facility. The lease contains provisions to allow
termination by us, subject to a defined termination fee, in 2005 and contains
options to extend beyond 2010 at market rates.
ITEM 3. LEGAL PROCEEDINGS
As of March 31, 2001, we were not party to any material pending legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE TO SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended March 31, 2001.
20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET PRICE
Our common stock is traded on the Nasdaq Stock Market National Market
under the symbol "ABMD." The following table sets forth the range of high and
low sales prices per share of common stock, as reported by the Nasdaq National
Market for our two most recent fiscal years, adjusted as necessary to reflect
the two-for-one stock split we completed in September, 2000:
FISCAL YEAR ENDED MARCH 31, 2000 HIGH LOW
-------------------------------- ---- ---
First Quarter..................................... $ 9.000 $ 5.938
Second Quarter.................................... 8.375 6.500
Third Quarter..................................... 29.688 7.625
Fourth Quarter.................................... 41.688 16.938
FISCAL YEAR ENDED MARCH 31, 2001 HIGH LOW
-------------------------------- ---- ---
First Quarter..................................... $ 22.500 $ 12.625
Second Quarter.................................... 34.750 15.594
Third Quarter..................................... 37.750 20.063
Fourth Quarter.................................... 30.000 13.250
NUMBER OF STOCKHOLDERS
As of June 25, 2001, there were approximately 453 holders of record of
our common stock, including multiple beneficial holders at depositories, banks
and brokers included as a single holder in the single "street" name of each
respective depository, bank, or broker. We estimate that there are more than
5,000 beneficial holders who hold our common stock in street name.
DIVIDENDS
We have never declared or paid any cash dividends on our capital stock
and do not plan to pay any cash dividends in the foreseeable future. Our current
policy is to retain all of our earnings to finance future growth.
SALES OF UNREGISTERED SECURITIES
In March 2001 we issued 952 shares of our Common Stock to each of three
directors as partial consideration for services rendered to ABIOMED. In
September 2000 we issued 110,000 shares of our Common Stock in connection with
our acquisition of technology related to the Penn State Heart. These issuances
of shares were exempt from registration under the Securities Act of 1933 based
on the exemption from registration set forth in Section 4(2) thereof.
21
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data has been derived from
the Company's audited historical financial statements, certain of which
are included elsewhere in this report.
SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
FISCAL YEARS ENDED MARCH 31,
----------------------------------------------------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Revenues:
Products.................................... $ 10,872 $ 17,261 $ 18,079 $ 18,377 $ 22,017
Funded Research and Development............. 4,151 5,185 4,011 4,140 2,879
-------- -------- -------- -------- --------
Total revenues....................... 15,023 22,446 22,090 22,517 24,896
-------- -------- -------- -------- --------
Costs and expenses:
Cost of product revenues.................... 4,427 6,502 6,772 5,882 7,375
Research and development (1)................ 3,773 9,091 13,450 15,633 22,671
Selling general and administrative.......... 6,082 9,054 9,772 12,562 12,411
-------- -------- -------- -------- --------
Total costs and expenses............. 14,282 24,647 29,994 34,077 42,457
-------- -------- -------- -------- --------
Income (loss) from operations................. 741 (2,201) (7,904) (11,560) (17,561)
Interest and other income, net................ 535 1,206 1,192 1,106 6,160
-------- -------- -------- -------- --------
Income (loss) from continuing operations 1,276 (995) (6,712) (10,454) (11,401)
Loss from discontinued operations (2)......... (541) (1,513) -- -- --
-------- -------- -------- -------- --------
Net income (loss) ............................ $ 735 $ (2,508) $ (6,712) $ (10,454) $(11,401)
======== ======== ======== ========= ========
Income (loss) from continuing operations per
share (3) ................................... $ 0.09 $ 0.06 $ (0.39) $ (0.60) $ (0.55)
Loss from discontinued operations per share (3) (0.04) (0.09) -- -- --
-------- -------- -------- --------- --------
Net income (loss) per share (3)............... $ 0.05 $ (0.15) $ (0.39) $ (0.60) $ (0.55)
======== ======== ======== ========= ========
Weighted average shares outstanding (3)....... 14,325 16,148 17,238 17,579 20,583
======== ======== ======== ========= ========
BALANCE SHEET DATA: MARCH 31,
---------------------------------------------------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
Cash, cash equivalents and marketable
securities...................................... $ 9,325 $ 26,398 $ 18,181 $ 106,384 $ 92,498
Working capital................................. 12,858 29,284 22,144 108,998 97,999
Total assets.................................... 18,373 38,755 32,982 121,788 118,013
Long-term liabilities........................... -- 64 205 715 368
Stockholders' equity (4)........................ 15,225 33,018 27,072 112,924 108,678
- --------------------
(1) Research and development expenses include certain contract costs. See Note 9
to Consolidated Financial Statements.
(2) Discontinued operations reflect the results of our dental subsidiary which
was discontinued in fiscal 1998 as we shifted all of our focus to our core
cardiovascular business.
(3) Number of shares and per share data were calculated on a diluted basis. See
Note 1(g) to Consolidated Financial Statements.
(4) No cash dividends on common stock were declared or paid during any of the
periods presented.
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
ALL STATEMENTS, TREND ANALYSIS AND OTHER INFORMATION CONTAINED IN THE
FOLLOWING DISCUSSION RELATIVE TO MARKETS FOR OUR PRODUCTS AND TRENDS IN SALES,
GROSS PROFIT AND ANTICIPATED EXPENSE LEVELS, AS WELL AS OTHER STATEMENTS,
INCLUDING WORDS SUCH AS "MAY," "ANTICIPATE," "BELIEVE," "PLAN," "ESTIMATE,"
"EXPECT," AND "INTEND" AND OTHER SIMILAR EXPRESSIONS CONSTITUTE FORWARD-LOOKING
STATEMENTS. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO BUSINESS AND
ECONOMIC RISKS AND UNCERTAINTIES, AND OUR ACTUAL RESULTS OF OPERATIONS MAY
DIFFER MATERIALLY FROM THOSE CONTAINED IN THE FORWARD-LOOKING STATEMENTS.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED BELOW UNDER "RISK FACTORS" AS WELL AS OTHER RISKS
AND UNCERTAINTIES REFERENCED IN THIS REPORT.
OVERVIEW
We are a leading developer, manufacturer and marketer of medical
products designed to safely and effectively assist or replace the pumping
function of the failing heart. In early 2001, we received permission from the
FDA to begin our initial clinical trial for the AbioCor, a totally implantable,
battery-powered, replacement heart, which we believe will be the first such
device for end-stage heart failure patients. This permission to commence the
initial clinical trial follows nearly three decades of AbioCor research,
development and testing. We currently manufacture and sell the BVS, a temporary
heart assist device which was the first device approved by the FDA as a
bridge-to-recovery device for temporary treatment of all patients with failing
but potentially recoverable hearts. Our operating results reflect the dual
activities of commercial operations and investments in the research and
development of new technologies.
The BVS is a temporary heart assist device designed to assume the full
pumping function of a patient's failing heart while allowing the heart to rest,
heal and recover its function. The BVS consists of single-use external blood
pumps and cannulae and a reusable pneumatic drive and control console. All of
our product revenues are currently derived from the BVS product line. BVS
revenues are split between sales to new customers and reorders from existing
customers. Following commercial introduction of the BVS in the U.S., our focus
was on obtaining market share beginning with the largest medical centers. As of
March 31, 2001, more than 500 medical centers in the U.S. had purchased the BVS,
including 70% of all major medical centers that perform more than 500 heart
surgeries annually. While we continue to seek additional new customers for the
BVS, our primary focus is now to increase usage and product reorders by existing
customers. Product reorders currently represent over 65% of BVS product
revenues. During fiscal 2001, no single customer represented more than 5% of
product revenues.
Research and development is a significant portion of our operations.
Our research and development efforts are focused on the development of new
products, primarily related to heart assist and heart replacement, and the
continued enhancement of the BVS and related technologies. In fiscal 2001, we
incurred $16.6 million in total research and development spending directed at
the AbioCor and $6.1 million in research and development spending directed at
BVS improvements and development of other potential products. These expenditures
were partially offset by revenues from contracts and grants of $2.9 million, the
majority of which were from the NHLBI. We retain rights to commercialize all
technological discoveries and products resulting from these contracts and
grants.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statements of
operations data for the periods indicated as a percentage of total revenues:
23
YEAR ENDED MARCH 31,
1999 2000 2001
---- ---- ----
Revenues:
Products................................................... 81.8% 81.6% 88.4%
Funded research and development............................ 18.2 18.4 11.6
------ ------ ------
Total revenues........................................ 100.0 100.0 100.0
------ ------ ------
Costs and expenses:
Cost of product revenues................................... 30.7 26.1 29.6
Research and development................................... 60.9 69.4 91.0
Selling, general and administrative........................ 44.2 55.8 49.9
------ ------ ------
Total costs and expenses.............................. 135.8 151.3 170.5
------ ------ ------
Loss from operations............................................ (35.8) (51.3) (70.5)
Interest and other income, net.................................. 5.4 4.9 24.7
------ ------ ------
Net loss........................................................ (30.4)% (46.4)% (45.8)%
====== ====== ======
FISCAL YEARS ENDED MARCH 31, 2001 AND MARCH 31, 2000
PRODUCT REVENUES. Product revenues increased by $3.6 million, or 20%,
to $22.0 million in fiscal 2001 from $18.4 million in fiscal 2000. The increase
in product revenues was primarily attributable to increased sales of BVS
disposable blood pumps to new and existing customers, higher average selling
prices for these blood pumps and sales of our new BVS 5000t Transport/Backup
console. The portion of product revenues derived from sales of disposable blood
pumps and related accessories and services increased by $2.8 million, or 19%, to
$17.9 million in fiscal 2001 from $15.1 million in fiscal 2000. The portion of
product revenues derived from sales of BVS consoles increased by $0.8 million,
or 26%, to $4.1 million in fiscal 2001 from $3.3 million in fiscal 2000.
Domestic product revenues included approximately $5.2 million from sales-type
leases in fiscal 2001 and $2.3 million in fiscal 2000. Domestic sales accounted
for 97% of total product revenue during the fiscal year ended March 31, 2001 and
96% of product revenue for the fiscal year ended March 31, 2000.
FUNDED RESEARCH AND DEVELOPMENT REVENUES. Contract revenues decreased
by $1.2 million, or 30%, to $2.9 million in fiscal 2001 from $4.1 million in
fiscal 2000. Approximately $1.8 million of the contract revenues recognized in
both periods were derived from our AbioCor government contract. The decline in
funded research and development revenues is primarily due to the completion or
winding down of research and development work performed under certain
government-sponsored research contracts and grants. As is typical for research
and development programs that have matured to the stage where they are ready to
commence human clinical trials, we do not anticipate additional government
research and development funding for AbioCor and, as a result, we anticipate
that our funded research and development revenues will decline in our new fiscal
year.
As of March 31, 2001, our total backlog of research and
development contracts and grants was $1.2 million. All of these contracts and
grants contain provisions that make them terminable at the convenience of the
government.
COST OF PRODUCT REVENUES. Cost of product revenues as a percentage of
product revenues increased to 33% for the fiscal year ended March 31, 2001 from
32% in the prior fiscal year. The 1% increase is primarily due to production
inefficiencies associated with the production startup of our new BVS 5000t
Transport/Backup console and transitional costs related to our moving and
qualifying our new BVS blood pump manufacturing facility. These increases to our
cost of product revenues were partly offset by
24
the discontinuation of a royalty obligation due to the Abiomed Limited
Partnership. The royalty obligation, which on a net basis was approximately 2.1%
of the majority of BVS product revenues, contractually expired for product sold
after August 3, 2000.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased by $7.1 million, or 45%, to $22.7 million in the fiscal year ended
March 31, 2001, from $15.6 million in the prior fiscal year. Research and
development expenses were 91% of total revenues for the fiscal year ended March
31, 2001 and 69% of total revenues in the prior year. The increase in
expenditures during the fiscal year ended March 31, 2001 was due primarily to
increased spending for the AbioCor, including preparations for initial clinical
trials, development of the Penn State Heart, including approximately $1.1
million of amortized technology acquisition costs, and new products and
enhancements for the BVS product line. Research and development expenses during
the fiscal year ended March 31, 2001 included $16.6 million of expenses incurred
in connection with our development activities for the AbioCor, compared to $11.5
million in the prior year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased by $0.2 million, or 1%, to $12.4 million in
fiscal 2001 from $12.6 million in the prior year. Expenditures decreased to 50%
of total revenues from 56% of total revenues in the same period a year earlier
as a result of our increase in total revenues during the year just ended. In
comparison to the prior fiscal year, reduced legal expenses were partially
offset by increased costs associated with increased sales and administrative
staffing and related activities.
INTEREST AND OTHER INCOME. Interest and other income consists
primarily of interest earned on our investment balances, net of interest and
other expenses. Interest and other income increased by $5.1 million to $6.2
million in fiscal 2001 from $1.1 million in fiscal 2000. This increase was
primarily due to higher average funds available for investment as a result of
the Company's stock offering in March 2000.
NET LOSS. Net loss for the fiscal year ended March 31, 2001 was
approximately $11.4 million, or $0.55 per share. This compares to a net loss of
approximately $10.5 million, or $0.60 per share, for the prior fiscal year. The
losses for both years are primarily attributable to development and pre-clinical
testing costs associated with the AbioCor.
FISCAL YEARS ENDED MARCH 31, 2000 AND MARCH 31, 1999
PRODUCT REVENUES. Product revenues increased by $0.3 million, or 2%, to
$18.4 million in fiscal 2000 from $18.1 million in fiscal 1999. The increase in
product revenues was primarily attributable to increased unit sales and
increased average selling prices of BVS disposable blood pumps sold to existing
customers, and was partially offset by a reduction in unit sales of BVS systems
sold to new customers. The portion of product revenues derived from sales of
disposable blood pumps and related accessories and services increased by $2.5
million, or 20%, to $15.1 million in fiscal 2000 from $12.6 million in fiscal
1999. The portion of product revenues derived from sales of BVS consoles
decreased by $2.2 million, or 40% in fiscal 2000 from $5.5 million in fiscal
1999. We believe that the increase in sales of blood pumps and the decline in
sales of BVS systems to new customers was largely a result of a decision made at
the beginning of fiscal 2000 to shift the focus of certain of our sales
representatives from sales to new customers to increased support of existing
customers in an effort to increase reorders of higher margin BVS blood pumps.
The increase in product revenues derived from disposable blood pumps is
primarily the result of a 9% increase in reorder unit sales of blood pumps
during fiscal 2000 as compared to the prior year. Domestic product revenues
included approximately $2.3 million from sales-type leases in fiscal 2000 and
$2.7 million in fiscal 1999. Domestic sales accounted for 96% and 97% of total
product revenue during the fiscal years ended March 31, 2000 and 1999,
respectively.
25
FUNDED RESEARCH AND DEVELOPMENT REVENUES. Funded research and
development revenues increased by $0.1 million, or 3%, to $4.1 million in fiscal
2000 from $4.0 million in fiscal 1999. Approximately $1.8 million of the
contract revenues recognized in both periods were derived from our AbioCor
government contract.
As of March 31, 2000, our total backlog of research and development
contracts and grants was $1.6 million.
COST OF PRODUCT REVENUES. Cost of product revenues as a percentage of
product revenues decreased to 32% in fiscal 2000 from 37% in fiscal 1999. The
majority of this decrease in cost of product revenues as a percentage of product
revenues was attributable to higher average selling prices for BVS blood pumps
during the fiscal year ended March 31, 2000 as compared to the same period of
the prior year and to an increase in the proportion of higher margin BVS blood
pumps sold relative to lower margin BVS console sales.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased by $2.1 million, or 16%, to $15.6 million in the fiscal year ended
March 31, 2000, from $13.5 million in the prior fiscal year. Research and
development expenses were 69% of total revenues for the fiscal year ended March
31, 2000 and 61% of total revenues in the prior year. The increase in
expenditures during the fiscal year ended March 31, 2000 was due primarily to
increased spending for the AbioCor, new products and enhancements for the BVS
product line and technologies under government contracts and grants. Research
and development expenses during the fiscal year ended March 31, 2000 included
$11.5 million of expenses incurred in connection with our development activities
for the AbioCor, compared to $9.7 million in the prior year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $2.8 million, or 29%, to $12.6 million in
fiscal 2000 from $9.8 million in the prior year. Expenditures increased to 56%
of total revenues from 44% of total revenues in the same period a year earlier.
This increase was primarily attributable to increased legal expenses and
increased selling and marketing expenditures as a result of our implementing new
programs designed to improve sales of our disposable blood pumps. In fiscal
2000, legal expenses included approximately $1.9 million in third-party fees and
other direct costs associated with our successful defense in court of our rights
to technology used in the transcutaneous energy transmission technology used as
a component of our AbioCor Implantable Replacement Heart system. Approximately
$0.1 million in legal defense expenditures were incurred in fiscal 1999.
INTEREST AND OTHER INCOME. Interest and other income consists
primarily of interest earned on our investment balances, net of interest and
other expenses. Interest and other income decreased by $0.1 million, or 7%, to
$1.1 million in fiscal 2000 from $1.2 million in fiscal 1999. This decrease was
primarily due to lower average funds available for investment.
NET LOSS. Net loss for the fiscal year ended March 31, 2000 was
approximately $10.5 million, or $0.60 per share. This compares to a net loss of
approximately $6.7 million, or $0.39 per share, for the prior fiscal year. The
losses for both years are primarily attributable to development and pre-clinical
testing costs associated with the AbioCor.
LIQUIDITY AND CAPITAL RESOURCES
We have supported our operations primarily with net revenues from sales
of our BVS product line, government contracts and proceeds from our equity
financings. As of March 31, 2001, our cash, cash equivalents and marketable
securities totaled $92.5 million.
26
During fiscal 2001, operating activities used $12.0 million of cash.
Net cash used by operating activities in fiscal 2001 reflected a net loss of
$11.4 million, including depreciation and amortization expense of $3.0 million,
and increases in accounts receivable, inventory and prepaid expenses and other
assets of $3.3 million, $0.1 million and $0.8 million, respectively. Cash was
also used to reduce accrued expenses and long-term liabilities by $0.6 million
and $0.1 million, respectively. These uses of cash were partially offset by
increases in accounts payable and deferred revenues of $0.6 million and $0.8
million, respectively. The increase in accounts receivable is attributable to
the $1.8 million due from the AbioCor government contract, all of which was
recognized during fiscal 2001 and which is scheduled to be collected over the
remaining term of the contract which ends December 31, 2001, and extended
collection periods for certain customer accounts. The increase in prepaid
expenses and other assets is primarily due to our capitalization of costs to
patent our technology. The increase in accounts payable and accrued expenses is
primarily attributable to the timing of payments and increased operating
activity throughout ABIOMED, including increased size of payroll and
payroll-related costs, contractor support and purchases of capital equipment.
During fiscal 2001, investing activities used $0.1 million of cash.
Approximately $2.4 million in cash provided from the sale of short-term
marketable securities, net of purchases of similar securities, was offset by
purchases of capital equipment and expenditures for leasehold improvements of
$2.6 million. The equipment and leasehold improvements were needed to complete
the build-out and occupancy of our manufacturing areas located in our new
facility and to build additional pre-clinical test devices for the AbioCor.
Financing activities generated $0.6 million of cash during fiscal 2001,
primarily as a result of Common Stock sold in connection with the exercise of
stock options and our Employee Stock Purchase Plan.
Income taxes incurred during fiscal 2001 were not material, and we
continue to have significant net tax operating loss and tax credit
carryforwards.
We believe that our revenue from government contracts and product sales
and existing resources will be sufficient to fund our planned operations,
including the planned increases in our internally funded AbioCor, Penn State
Heart and new BVS development and product extension efforts, for the foreseeable
future. However, we may require significant additional funds in order to
complete the development, conduct clinical trials, and achieve regulatory
approvals of the AbioCor, Penn State Heart and other products under development
over the next several years. We may also need additional funds for possible
future strategic acquisitions of businesses, products or technologies
complementary to our business. If additional funds are required, we may raise
such funds from time to time through public or private sales of equity or from
borrowings.
RISK FACTORS
An investment in our common stock involves a high degree of risk.
Current and prospective investors should carefully consider each of the risks
and uncertainties described in this section and all of the other information
in this Report. Our business, financial condition and results of operations
could be severely harmed by any of the following risks. The trading price of
our common stock could decline if any of these risks and uncertainties
develop into actual events.
27
OUR FUTURE SUCCESS IS HEAVILY DEPENDENT ON DEVELOPMENT OF THE ABIOCOR.
OUR DEVELOPMENT EFFORTS MAY NOT BE SUCCESSFUL.
We are currently devoting our principal research and development and
regulatory efforts, and significant financial resources, to the development of
the AbioCor, an implantable replacement heart system. An implantable replacement
heart is a complex medical device and has never been successfully developed or
marketed by any company. The development of implantable replacement heart
devices such as the AbioCor and Penn State Heart, and other new products,
presents enormous challenges in a variety of areas, many or all of which we may
have difficulty in overcoming, including blood compatible surfaces, blood
compatible flow, manufacturing techniques, pumping mechanisms, physiological
control, energy transfer, anatomical fit and surgical techniques. For many
years, we and other parties have been attempting to develop a heart replacement
device, but, to date, none of these efforts has been successful. We cannot be
sure that we will be successful in our development efforts, and in the event
that we are unable to commercialize the AbioCor, our business and financial
condition would be adversely affected. The markets for the AbioCor and our other
products under development are unproven. Even if the AbioCor or any other of our
products are successfully developed and approved by the FDA and corresponding
foreign regulatory authorities, they may not enjoy commercial acceptance or
success, which would adversely affect our business and results of operations.
Several factors could limit our success, including:
o our need to create a market for an implantable replacement heart,
and possible limited market acceptance among physicians, medical
centers, patients and third party payors;
o the need for surgeons to develop or be trained in new surgical
techniques to use our product effectively;
o limitations on the number of patients who may have access to
physicians and medical centers with adequate training, equipment and
personnel to make use of our products;
o limitations inherent in first generation devices, and the potential
failure to develop successive improvements, including increases in
service life, which would reduce the addressable market for the
AbioCor;
o the lifestyle limitations that patients will have to accept,
including traveling with external batteries at all times and
potentially avoiding activities such as air travel or diving that
involve significant pressure changes;
o the timing and amount of reimbursement for these products, if any,
by third party payors;
o the introduction by other companies of new treatments, products and
technologies which compete with our products, and may reduce their
market acceptance, or make them obsolete;
o the reluctance, due to ethical considerations, of physicians,
patients and society as a whole to accept medical devices that
replace the heart; and
o the reluctance of physicians, patients and society as a whole to
accept the finite life and risk of mechanical failure of devices
that replace the heart.
The commercial success of the AbioCor and other heart assist products
will require acceptance by cardiovascular surgeons and interventional and heart
failure cardiologists, a limited number of whom
28
significantly influence medical device selection and purchasing decisions. We
may achieve our business objectives only if the AbioCor and our other products
are accepted and recommended by leading physicians, which is likely to be based
on a determination by these physicians that our products are safe,
cost-effective and represent acceptable methods of treatment. Although we have
developed relationships with leading cardiac surgeons and cardiologists, we
cannot assure that these existing relationships and arrangements can be
maintained or that new relationships will be established in support of the
AbioCor and our other products. If cardiovascular surgeons and cardiologists do
not consider our products to be adequate for the treatment of our target cardiac
patient population or if a sufficient number of physicians recommend and use
competing products, it would seriously harm our business.
TESTING OF OUR NEW PRODUCTS WILL INVOLVE UNCERTAINTIES AND RISKS WHICH
COULD DELAY OR PREVENT NEW PRODUCT INTRODUCTIONS, REQUIRE US TO INCUR
SUBSTANTIAL ADDITIONAL COSTS OR RESULT IN OUR FAILURE TO BRING OUR PRODUCTS TO
MARKET.
If we cannot demonstrate through clinical testing on humans that the
AbioCor or other new products are safe and effective, we will not be able to
obtain regulatory approvals in the U.S. or other countries for the commercial
sale of these products. Delays, budget overruns, and project terminations are
not uncommon even after promising pre-clinical and clinical trials of medical
products. We intend to conduct clinical testing for the AbioCor and other heart
assist products with critically ill patients, and these patients may die or
suffer other adverse medical results for reasons which may or may not be related
to the product being tested. Those outcomes could seriously delay the completion
of clinical testing, as could the unavailability of suitable patients for
clinical trials, both of which are outside our control. We cannot assure that
the rate of patient enrollment in our clinical trials will be consistent with
our expectations or be sufficient to allow us to complete our clinical trials
for the AbioCor or our other products under development in a timely manner, if
at all. Delays could defer the marketing and commercial sale of our products,
require further funding, and possibly result in failure to bring the products to
market.
Development and testing of design changes to the AbioCor and other
products under development is often extensive, expensive and time consuming.
Some of the tests for our products may require months or years to perform, and
we could be required to begin these tests again if we modify one of our products
to correct a problem identified in testing. Even modest changes to certain
components of our products can take months or years to complete and test. If
results of pre-clinical or clinical testing of the AbioCor or other products
under development indicate that design changes are required, such changes could
cause serious delays that would adversely affect our results of operations. A
number of companies in the medical industry have suffered delays, cost overruns
and project terminations despite achieving promising results in pre-clinical
testing or early clinical testing. In the event that we suffer setbacks in the
pre-clinical or clinical testing of the AbioCor or other heart assist products,
these products may be delayed, require further funding, and possibly may not be
brought to market.
IF WE FAIL TO OBTAIN APPROVAL FROM THE FDA AND FROM FOREIGN REGULATORY
AUTHORITIES, WE CANNOT MARKET AND SELL THE ABIOCOR OR OTHER NEW HEART ASSIST
PRODUCTS IN THE U.S. AND IN OTHER COUNTRIES.
Obtaining required regulatory approvals may take several years to
complete and consume substantial capital resources. We cannot assure that the
FDA or any other regulatory authority will act quickly or favorably on our
requests for product approval, or that the FDA or any other regulatory authority
will not require us to provide additional data that we do not currently
anticipate in order to obtain product approvals. We cannot apply for FDA
approval to market the AbioCor and our other products under development until
the product successfully completes its clinical trials. Several factors could
prevent successful completion or cause significant delays of these trials,
including an inability to
29
enroll the required number of patients or failure to demonstrate adequately that
the product is safe and effective for use in humans. If safety problems develop,
the FDA could stop our trials before completion. In addition, we are planning to
conduct phased clinical trials for the AbioCor tailored to specific patient
populations with different life expectancies. If we are successful in obtaining
FDA approvals for the AbioCor based on this phased approach, the initial
approvals are likely to include conditions or limitations to particular
indications that would limit the available market for these products. If we are
not able to obtain regulatory approvals for use of the AbioCor or our other
products under development, or if the patient populations for which they are
approved are not sufficiently broad, the commercial success of these products
could be limited.
We intend to market the AbioCor and our other new products in
international markets, including the European Union and Japan. We must obtain
separate regulatory approvals in order to market our products in other
jurisdictions. The approval process may differ among those jurisdictions and
approval in the U.S. or in any other jurisdiction does not ensure approval in
other jurisdictions. Obtaining foreign approvals could result in significant
delays, difficulties and costs for us, and require additional trials and
additional expense.
IF WE OBTAIN REGULATORY APPROVAL OF OUR NEW PRODUCTS, THE PRODUCTS WILL
BE SUBJECT TO CONTINUING REVIEW AND EXTENSIVE REGULATORY REQUIREMENTS, WHICH
COULD AFFECT THE MANUFACTURING AND MARKETING OF OUR PRODUCTS.
The FDA continues to review products even after they have received
initial approval. If and when the FDA approves the AbioCor or our other products
under development, the manufacture and marketing of these products will be
subject to continuing regulation, including compliance with current Quality
Systems Regulations and Good Manufacturing Practices, known as QSR/GMP, adverse
event reporting requirements and prohibitions on promoting a product for
unapproved uses.
We will also be required to obtain additional approvals in the event we
significantly modify the design of an approved product or the product's labeling
or manufacturing process. Modifications of this type are common with new
products, and we anticipate that the current first generation of the AbioCor
will undergo a number of changes, refinements and improvements over time. For
example, the current configuration of the AbioCor's thoracic unit, or
"replacement heart," is sized for patients with relatively large chest cavities,
and we anticipate that we will need to obtain regulatory approval of thoracic
units of other sizes. If we are not able to obtain regulatory approval of
modifications to our current and future products, the commercial success of
these products would be limited.
We and our third-party suppliers of product components are also subject
to inspection and market surveillance by the FDA for QSR/GMP and other
requirements. Enforcement actions resulting from failure to comply with
government requirements could result in fines, suspensions of approvals, recalls
of products, operating restrictions and criminal prosecutions, and affect the
manufacture and marketing of our products. The FDA could withdraw a previously
approved product from the market upon receipt of newly discovered information,
including a failure to comply with regulatory requirements, the occurrence of
unanticipated problems with products following approval, or other reasons, which
could adversely affect our operating results.
THE COST OF DEVELOPING AND MANUFACTURING THE ABIOCOR AND OUR OTHER
PLANNED NEW PRODUCTS IS SUBSTANTIAL FOR A COMPANY OF OUR SIZE AND WILL EXERT A
STRAIN ON OUR AVAILABLE RESOURCES.
In recent years we have significantly increased our research and
development expenditures for the AbioCor, and we expect that this trend will
continue in the future. We will also need to make significant expenditures to
begin to manufacture and market the AbioCor and our other planned new products
in
30
commercial quantities for sale in the U.S. and other countries, if and when we
obtain regulatory approval to do so. We cannot be sure that our estimates of
capital expenditures for the AbioCor and the development of our other new
products will be accurate. We could have significant cost overruns, which could
reduce our ability to commercialize our products. Any delay or inability to
commercialize our products under development could adversely affect our business
prospects and results of operations. We do not operate at a profit and do not
expect to be profitable for some time. We had a net loss of $11.4 million in
fiscal 2001 and a net loss of $10.5 million in fiscal 2000. We are committed to
making large expenditures for the AbioCor and, to a lesser extent, other new
products, in fiscal 2002 and subsequent fiscal years, which may result in losses
in future periods. These expenditures include costs associated with performing
clinical trials for the AbioCor, continuing our research and development
relating to the AbioCor and other new products, seeking regulatory approvals for
the AbioCor and, if we receive these approvals, commencing commercial
manufacturing and marketing of the AbioCor. The amount of these expenditures is
difficult to forecast accurately, and cost overruns may occur. We plan to fund a
portion of these expenditures from our limited existing financial resources and
revenues from BVS sales, which are variable and uncertain. We cannot be sure
that we will have the necessary funds to develop and commercialize our new
products, or that additional funds will be available on commercially acceptable
terms, if at all. In the event that we are unable to obtain the necessary
funding to develop and commercialize our products, our business may be adversely
affected.
OUR OPERATING RESULTS MAY FLUCTUATE UNPREDICTABLY.
Our annual and quarterly operating results have fluctuated historically
and we expect these fluctuations to continue. Among the factors that may cause
our operating results to fluctuate are:
o costs we incur in developing and testing the AbioCor and other new
products or product enhancements;
o the timing of regulatory actions, such as product approvals or
recalls;
o costs we incur in anticipation of future sales, such as inventory
purchases, expansion of manufacturing facilities, or establishment
of international sales offices;
o the timing of customer orders and deliveries, particularly of BVS
consoles, which are priced significantly higher than the single-use
BVS blood pumps;
o competitive changes, such as price changes or new product
introductions that we or our competitors may make;
o economic conditions in the health care industry and the state of
cost containment efforts, including reimbursement policies.
We believe that period-to-period comparisons of our historical and
future results will not necessarily be meaningful, and that investors should not
rely on them as an indication of future performance. To the extent we experience
the factors described above, our future operating results may not meet the
expectations of securities analysts or investors from time to time, which may
cause the market price of our common stock to decline.
31
THE BVS PRODUCT LINE, OUR PRINCIPAL PRODUCT AND CURRENT PRIMARY SOURCE
OF REVENUES, IS VULNERABLE TO COMPETITIVE PRESSURES, DISRUPTIONS IN SALES,
CONTINUING REVIEW AND EXTENSIVE REGULATORY REQUIREMENTS.
All of our product revenues to date have come from sales of the BVS
line of products. We believe that we will continue to be dependent on our BVS
product line for at least the next several years, unless and until we are able
to successfully develop or acquire, obtain regulatory approval for, and sell new
products. In the event that a competitor were to introduce new treatments,
products and technologies which compete with our products, add new features to
their existing products or reduce their prices to make their products more
financially attractive to customers, our revenue from our BVS products could
decline. For example, in the event of the expansion of technologies which allow
heart surgical procedures to be performed without stopping the heart, a
reduction in the market for the BVS could potentially result. Further, the BVS
is subject to stringent and continuing FDA and other regulatory requirements,
including compliance with QSR/GMP, adverse event reporting, prohibitions on
promoting the BVS for unapproved uses, and continued inspection and market
surveillance by the FDA. If BVS products are recalled or otherwise withdrawn
from the market, our revenues would likely decline, which would hurt our
business. In addition, variations in the quantity and timing of sales of BVS
consoles have a disproportionate effect on our revenues, because the price of
the console is substantially greater than the price of our disposable blood
pumps. If we cannot maintain and increase our revenues from our BVS product
line, our overall business and financial condition could be adversely affected.
Revenues from our BVS product line in fiscal 2001 increased by 20% from
revenues in fiscal 2000, and in fiscal 2000 our BVS revenues increased by 2%
from revenues in fiscal 1999. To maintain or increase revenues from sales of our
BVS products, we may be required to adopt new sales and marketing strategies,
some of which may require expending additional capital resources. The new
strategies we may adopt include:
o promoting increased use of the BVS by existing customers in order to
increase disposable blood pump sales to those customers;
o selling the BVS to smaller hospitals and medical centers in the
U.S.;
o regularly introducing enhancements to the BVS;
o expanding sales of our BVS product line in international markets,
some of which require separate regulatory approvals; and
o seeking new categories of patients to support with the device.
In the event that we are unsuccessful in carrying out these new
strategies, our revenues may decline.
WE MAY NOT BE SUCCESSFUL IN EXPANDING OUR SALES ACTIVITIES INTO
INTERNATIONAL MARKETS.
We are seeking to expand our international sales of the BVS and prepare
for commercialization of the AbioCor by recruiting direct sales and support
teams for selected countries in Europe and pursuing regulatory approval of the
BVS in Japan. To date we have limited experience in selling the BVS
internationally. In fiscal 2001, approximately 3%, and in fiscal 2000,
approximately 4%, of our revenues from the BVS product line were derived from
international sales. Our international operations will be subject to a number of
risks, which may vary from the risks we experience in the U.S., including:
32
o the need to obtain regulatory approvals in foreign countries before
our products may be sold or used;
o longer sales cycles;
o dependence on local distributors;
o limited protection of intellectual property rights;
o difficulty in collecting accounts receivable;
o fluctuations in the values of foreign currencies; and
o political and economic instability.
If we are unable to effectively expand our sales activities in
international markets, our results of operations could be negatively impacted.
WE DEPEND ON THIRD PARTY REIMBURSEMENT TO OUR CUSTOMERS FOR MARKET
ACCEPTANCE OF OUR PRODUCTS. IF THIRD PARTY PAYORS FAIL TO PROVIDE APPROPRIATE
LEVELS OF REIMBURSEMENT FOR PURCHASE AND USE OF OUR PRODUCTS, OUR PROFITABILITY
WOULD BE ADVERSELY AFFECTED.
Sales of medical products largely depend on the reimbursement of
patients' medical expenses by government health care programs and private health
insurers. The cost of our BVS system is substantial, and we anticipate that the
cost of implanting the AbioCor in a patient will also be substantial. Without
the financial support of the government or third party insurers, the market for
our products will be limited. Medical products and devices incorporating new
technologies are closely examined by governments and private insurers to
determine whether the products and devices will be covered by reimbursement, and
if so, the level of reimbursement which may apply. We cannot be sure that third
party payors will reimburse sales of our products now under development, or
enable us to sell them at profitable prices. We also cannot be sure that third
party payors will continue the current level of reimbursement to physicians and
medical centers for use of the BVS. Any reduction in the amount of this
reimbursement could harm our business.
The federal government and private insurers have considered ways to
change, and have changed, the manner in which health care services are provided
and paid for in the U.S. In the future, it is possible that the government may
institute price controls and further limits on Medicare and Medicaid spending.
These controls and limits could affect the payments we collect from sales of our
products. Internationally, medical reimbursement systems vary significantly,
with some medical centers having fixed budgets, regardless of levels of patient
treatment, and other countries requiring application for, and approval of,
government or third party reimbursement. Even if we succeed in bringing our new
products to market, uncertainties regarding future health care policy,
legislation and regulation, as well as private market practices, could affect
our ability to sell our products in commercially acceptable quantities at
profitable prices.
Prior to approving coverage for new medical devices, most third party
payors require evidence that the product has received FDA approval, is not
experimental, and is medically necessary for the specific patient. Increasingly,
third party payers require evidence that the devices being used are
cost-
33
effective. The AbioCor and our other products under development may not meet
these or future criteria, which could hurt our ability to market and sell these
products.
IF WE FAIL TO ACHIEVE AND MAINTAIN THE HIGH MANUFACTURING STANDARDS
THAT OUR PRODUCTS REQUIRE OR IF WE ARE UNABLE TO DEVELOP ADDITIONAL
MANUFACTURING CAPACITY, WE WILL NOT BE SUCCESSFUL.
Our products require precise, high quality manufacturing. Our failure
to achieve and maintain these high manufacturing standards, including the
incidence of manufacturing errors, design defects or component failures, could
result in patient injury or death, product recalls or withdrawals, delays or
failures in product testing or delivery, cost overruns or other problems that
could seriously hurt our business. We have from time to time voluntarily
recalled certain products. Despite our very high manufacturing standards, we
cannot completely eliminate the risk of errors, defects or failures. In fiscal
2001 we moved our AbioCor and BVS disposable blood pump and cannulae
manufacturing operations into our new manufacturing cleanrooms. We cannot be
certain that the products manufactured in the new facility will be manufactured
at the same cost and quality as the BVS and AbioCor are currently being
manufactured. If we are not able to manufacture the BVS in accordance with
necessary quality standards, our business and results of operations may be
negatively affected.
The AbioCor involves even greater manufacturing complexities than the
BVS. The AbioCor must be significantly more durable and meet different
standards, which may be more difficult to achieve, than those which apply to our
current BVS product line. If we are unable to manufacture the AbioCor or other
future products on a timely basis at acceptable quality and cost and in
commercial quantities, or if we experience unanticipated technological problems
or delays in production, our business will suffer.
The manufacture of our products is and will continue to be complex and
costly, requiring a number of separate processes and components. Achieving
precision and quality control requires skill and diligence by our personnel.
Further, to be successful, we believe we will need to increase our manufacturing
capacity. We may experience difficulties in scaling up manufacturing of our new
products, including problems related to product yields, quality control and
assurance, component and service availability, adequacy of control policies and
procedures, and lack of skilled personnel. If we cannot hire, train and retain
enough experienced and capable scientific and technical workers, we may not be
able to manufacture sufficient quantities of our current or future products at
an acceptable cost and on time, which could limit market acceptance of our
products or otherwise damage our business.
IF OUR SUPPLIERS CANNOT PROVIDE THE COMPONENTS WE REQUIRE, OUR ABILITY
TO MANUFACTURE OUR PRODUCTS COULD BE HARMED.
We rely on third party suppliers to provide us with certain components
used in the AbioCor, Penn State Heart, BVS and our other products under
development. Relying on third party suppliers makes us vulnerable to component
part failures and to interruptions in supply, either of which could impair our
ability to conduct clinical tests or to ship our products to our customers on a
timely basis. Using third party vendors makes it difficult and sometimes
impossible for us to test fully certain components, such as components on
circuit boards, maintain quality control, manage inventory and production
schedules and control production costs. Vendor lead times to supply us with
ordered components vary significantly and can exceed six months or more. Both
now and as we expand our manufacturing capacity, we cannot be sure that our
suppliers will furnish us with required components when we need them. These
factors could make it more difficult for us to effectively and efficiently
manufacture our products, and could adversely impact our results of operations.
Some suppliers may be the only source for a particular component, which
makes us vulnerable to cost increases and supply interruptions. Vendors may
decide to limit or eliminate sales of certain products
34
to the medical industry due to product liability or other concerns, and we might
not be able to find a suitable replacement for those products. Manufacturers of
our product components may be required to comply with FDA or other regulatory
manufacturing regulations and to satisfy regulatory inspections in connection
with the manufacture of the components. If we cannot obtain a necessary
component, we may need to find, test and obtain regulatory approval for a
replacement component, produce the component ourselves or redesign the related
product, which would cause significant delay and could increase our
manufacturing costs. Any of these events could adversely impact our results of
operations.
INTENSE COMPETITION COULD HARM OUR FINANCIAL PERFORMANCE.
Intense competition, rapid technological change and evolving industry
requirements and standards in the heart assist markets could decrease demand for
our products or make them obsolete. Some of the companies, universities and
research organizations developing competing products have greater resources and
experience than we have. Our competitors could commence and complete clinical
testing of their products, obtain regulatory approvals and begin
commercial-scale manufacturing of their products faster than we are able to for
our products. They could develop superior products or products of similar
quality at the same or lower prices. In addition, our customers often have
limited budgets. Consequently, our products compete against a broad range of
medical devices and therapies for these limited funds. If we do not use
reasonable efforts to further develop the Penn State Heart, certain rights to
that technology could revert back to The Pennsylvania State University and be
used to compete against us. We cannot be sure that we will be able to compete
effectively and successfully in the markets in which we participate.
WE OWN PATENTS, TRADEMARKS, TRADE SECRETS, COPYRIGHTS AND OTHER
INTELLECTUAL PROPERTY AND KNOW-HOW THAT WE BELIEVE GIVES US A COMPETITIVE
ADVANTAGE. IF WE CANNOT PROTECT OUR INTELLECTUAL PROPERTY, COMPETITION COULD
FORCE US TO LOWER OUR PRICES, WHICH COULD HURT OUR PROFITABILITY.
Our intellectual property rights are and will continue to be a critical
component of our success. A substantial portion of our intellectual property
rights relating to the AbioCor, BVS, Penn State Heart and other products under
development is in the form of trade secrets, rather than patents. In order to
preserve certain proprietary information as trade secrets, we are required to
restrict disclosure of information intended to constitute trade secrets to third
parties. We protect our trade secrets and proprietary knowledge in part through
confidentiality agreements with employees, consultants and other parties.
Certain of our consultants and third parties with whom we have business
relationships may also provide services to other parties in the medical device
industry, including companies, universities and research organizations that are
developing competing products. In addition, some of our former employees may
seek employment with, and become employed by, our competitors. We cannot assure
that confidentiality agreements with our employees, consultants and third
parties will not be breached, that we will have adequate remedies for any such
breach, or that our trade secrets will not become known to or be independently
developed by our competitors. The loss of trade secret protection for
technologies or know-how relating to the AbioCor, BVS or Penn State Heart could
adversely affect our business prospects.
Our business position will also depend in part on our ability to defend
our existing and future patents and rights and conduct our business activities
free of infringement claims by third parties. We intend to seek additional
patents, but our pending and future patent applications may not be approved, may
not give us a competitive advantage, and could be challenged by others. Patent
proceedings in the U.S. and in other countries may be expensive and time
consuming. In addition, patents issued by foreign countries may afford less
protection than is available under U.S. patent law, and may not adequately
protect our proprietary information. Our competitors may independently develop
proprietary technologies and processes that are the same as or substantially
equivalent to ours, or design around our patents.
35
Companies in the medical device industry typically obtain patents and
frequently engage in substantial intellectual property litigation. Our products
and technologies could infringe on the rights of others. If a third party
successfully asserts a claim for infringement against us, we may be liable for
substantial damages, be unable to sell products using that technology, or have
to seek a license or redesign the related product. These alternatives may be
uneconomical or impossible. Patent litigation could be costly, result in product
development delays, and divert the efforts and attention of management from our
business.
IF WE CANNOT ATTRACT AND RETAIN THE MANAGEMENT, SALES AND OTHER
PERSONNEL WE NEED, WE WILL NOT BE SUCCESSFUL.
We depend heavily on the contributions of the principal members of our
technical, sales and support, regulatory and clinical, operating and
administrative management and staff, many of whom would be difficult to replace.
Competition for skilled and experienced management, scientific personnel and
sales personnel in the medical devices industry is intense. If we lose the
services of any of the principal members of our management and staff, or if we
are unable to attract and retain qualified personnel in the future, especially
scientific and sales personnel, our business could be adversely affected.
We expect to grow rapidly if the AbioCor and our other products under
development advance through the approval process. The expansion of personnel and
facilities will strain our management and our financial and other resources. If
we cannot manage this growth successfully, our business will likely suffer.
PRODUCT LIABILITY CLAIMS COULD DAMAGE OUR REPUTATION AND HURT OUR
FINANCIAL RESULTS.
The clinical use of medical products, even after regulatory approval,
poses an inherent risk of product liability claims. We maintain limited product
liability insurance coverage, subject to deductibles and exclusions. We cannot
be sure that product liability insurance will be available in the future or will
be available on acceptable terms or at reasonable costs, or that such insurance
will provide us with adequate coverage against potential liabilities. Claims
against us, regardless of their merit or potential outcome, may also hurt our
ability to obtain physician endorsement of our products or expand our business.
Many patients using the BVS do not survive. There are many factors
beyond our control that could result in patient death, including the condition
of the patient prior to use of the product, the skill and reliability of
physicians and hospital personnel using and monitoring the product, and product
maintenance by customers. However, the failure of the BVS or other life support
products we distribute for clinical test or sale could give rise to product
liability claims and negative publicity.
The risk of product liability claims could increase as we introduce new
products like the AbioCor that are intended to support a patient until the end
of life. The AbioCor will have a finite life and could cause unintended
complications to other organs and may not be able to successfully support all
patients. Its malfunction could give rise to product liability claims whether or
not it has extended or improved the quality of the patient's life. We cannot be
sure that we can obtain liability insurance to cover the BVS, the AbioCor or
other new products at a reasonable cost, if at all. If we have to pay product
liability claims in excess of our insurance coverage, our financial condition
will be adversely affected.
36
OUR RIGHTS DISTRIBUTION, CERTIFICATE OF INCORPORATION AND DELAWARE LAW
COULD MAKE IT MORE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US AND MAY PREVENT OUR
STOCKHOLDERS FROM REALIZING A PREMIUM ON OUR STOCK.
Our rights distribution and provisions of our certificate of
incorporation and of the Delaware General Corporation Law may make it more
difficult for a third party to acquire us, even if doing so would allow our
stockholders to receive a premium over the prevailing market price of our stock.
Our rights distribution and those provisions of our certificate of incorporation
and Delaware law are intended to encourage potential acquirers to negotiate with
us and allow our Board of Directors the opportunity to consider alternative
proposals in the interest of maximizing stockholder value. However, such
provisions may also discourage acquisition proposals or delay or prevent a
change in control, which could negatively affect our stock price.
THE MARKET VALUE OF OUR COMMON STOCK COULD VARY SIGNIFICANTLY, BASED ON
MARKET PERCEPTIONS OF THE STATUS OF OUR DEVELOPMENT EFFORTS.
The perception of securities analysts regarding our product development
efforts could significantly affect our stock price. As a result, the market
price of our common stock could change substantially when we or our competitors
make product announcements, particularly announcements relating to the AbioCor
or competing products. Many factors affecting our stock price are industry
related and beyond our control.
IF WE MAKE ACQUISITIONS, WE COULD ENCOUNTER DIFFICULTIES THAT HARM OUR
BUSINESS.
We may acquire companies, products or technologies that we believe to
be complementary to our business. If we do so, we may have difficulty
integrating the acquired personnel, operations, products or technologies. These
difficulties may disrupt our ongoing business, distract our management and
employees and increase our expenses, which could hurt our business.
FUTURE SALES OR OTHER ISSUANCES OF OUR COMMON STOCK COULD ADVERSELY
AFFECT OUR STOCK PRICE.
Future sales of substantial amounts of our common stock in the public
market or the perception that these sales could occur, could adversely affect
the market price of our common stock. As of June 25, 2001, we had outstanding
20,814,254 shares of common stock, plus 3,192,223 shares of common stock
reserved for issuance upon exercise of outstanding options. All of the
outstanding shares of our common stock are freely saleable except shares held by
our affiliates, which are subject to certain limitations on sales.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
We do not use derivative financial instruments for speculative or
trading purposes. However, we are exposed to market risk related to changes in
interest rates. We maintain an investment portfolio consisting mainly of federal
agency obligations, state and municipal bonds, and U.S. Treasury notes with
maturities of one year or less. These held-to-maturity securities are subject to
interest rate risk and will fall in value if market interest rates increase. If
market interest rates were to increase immediately and uniformly by 10 percent
from levels at March 31, 2001, the fair market value of the portfolio would
decline by an immaterial amount. We have the ability to hold our fixed income
investments until maturity, and therefore we would not expect our operating
results or cash flows to be affected to any significant degree by the effect of
a change in market interest rates on our securities portfolio.
37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Consolidated Financial Statements and Supplementary Data are listed
under Part IV, Item 14, in this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information called for by this Item is not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is hereby incorporated by
reference to the information under Part I, Item 1--Business under the caption
"Executive Officers of the Registrant" in this Report, and by reference to the
information in our definitive proxy statement to be filed within 120 days after
the close of our fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is hereby incorporated by
reference to the information in our definitive proxy statement to be filed
within 120 days after the close of our fiscal year. Such incorporation by
reference shall not be deemed to specifically incorporate by reference the
information referred to in Item 402(a)(8) of Regulation S-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is hereby incorporated by
reference to the information under the heading "Securities Beneficially Owned by
Certain Persons" in our definitive proxy statement to be filed within 120 days
after the close of our fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is hereby incorporated by
reference to the information under the heading "Certain Transactions," if any,
in our definitive proxy statement to be filed within 120 days after the close of
our fiscal year.
38
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) (1) FINANCIAL STATEMENTS
PAGE
Report of Independent Public Accountants........................................................... F-1
Consolidated Balance Sheets as of March 31, 2000 and 2001.......................................... F-2
Consolidated Statements of Operations for the Fiscal Years Ended March 31, 1999, 2000 and 2001..... F-3
Consolidated Statements of Stockholders' Equity for the Fiscal Years Ended March 31, 1999,
2000 and 2001..................................................................................... F-4
Consolidated Statements of Cash Flows for the Fiscal Years Ended March 31, 1999,
2000 and 2001..................................................................................... F-5
Notes to Consolidated Financial Statements......................................................... F-6
(A) (2) FINANCIAL STATEMENT SCHEDULES
Supplemental schedules are not provided because of the absence of
conditions under which they are required or because the required information is
given in the financial statements or notes thereto.
(A) (3) EXHIBITS
(3) Articles of Incorporation and By-Laws.
(d) Restated Certificate of Incorporation - filed as Exhibit 3.1
to our Registration Statement on Form S-3 (Registration No.
333-36657) (the "1997 Registration Statement").*
(b) Restated By-Laws - filed as Exhibit 3.02 to our Quarterly
Report on From 10-Q for the quarter ended September 30,
1996.*
(d) Certificate of Designations of Series A Junior Participating
Preferred Stock - filed as Exhibit 3.3 to the 1997
Registration Statement.*
(d) Amendment to the Company's Restated Certificate of
Incorporation to increase the authorized shares of Common
Stock from 25,000,000 to 100,000,000 - filed in conjunction
with the Company's 2000 definitive proxy statement.*
(4) Instruments defining the rights of security holders, including
indentures.
(a) Specimen Certificate of Common Stock - filed as Exhibit 4.1
to our Registration Statement on Form S-1 (Registration No.
33-14861) (the "1987 Registration Statement").*
(b) Description of Capital Stock (contained in the Restated
Certificate of Incorporation filed as Exhibit 3.1 to the
1997 Registration Statement and in the Certificate of
Designations of Series A Junior Participating Preferred
Stock filed as Exhibit 3.3 to the 1997 Registration
Statement).*
39
(c) Rights Agreement between ABIOMED and BankBoston, N.A., as
Rights Agent dated as of August 13, 1997 (including Form of
Rights Certificate attached thereto as Exhibit A) - filed as
Exhibit 4 to our Current Report on Form 8-K, dated August
13, 1997.*
(10) Material Contracts.
(a) Form of Indemnification Agreement for Directors and Officers
- filed as Exhibit 10.13 to the 1987 Registration
Statement.*
(b) 1992 Combination Stock Option Plan, as amended - filed as
Exhibit 10.2 to our Form 10-Q for the fiscal quarter ended
September 30, 1997 (the "September 1997 10-Q").*
(c) 1988 Employee Stock Purchase Plan, as amended - filed as
Exhibit 10.1 to our September 1997 10-Q.*
(d) 1989 Non-Qualified Stock Option Plan for Non-Employee
Directors - filed as Exhibit 10.1 to our Form 10-Q for the
fiscal quarter ended September 30, 1995.*
(e) Facility Lease dated January 8, 1999 for the premises at 22
Cherry Hill Drive - filed as Exhibit 10 to our Form 10-Q for
the fiscal quarter ended December 31, 1998.*
(f) 1998 Equity Incentive Plan - filed as Exhibit 10 to our Form
10-Q/A for the fiscal quarter ended September 30, 1998.*
(g) Form of Change of Control Agreement - filed as Exhibit 10 to
our Form 10-Q for the fiscal quarter ended September 30,
1999.*
(h) Schedule related to Change of Control Agreement - filed as
Exhibit 10 to our Form 10-Q for the fiscal quarter ended
September 30, 1999.*
(11) Statement re computation of Per Share Earnings - see Note 1(g),
Notes to Consolidated Financial Statements.
(21) Subsidiaries of the Registrant.
(B) REPORTS ON FORM 8-K
On January 31, 2001, the Company filed a report on Form 8-K announcing
that it had received permission from the Food and Drug Administration
(FDA) to begin the initial clinical trial of its AbioCor Replacement
Heart.
- ------------
* In accordance with Rule 12b-32 under the Securities Exchange Act of 1934
reference is made to the documents previously filed with the Securities and
Exchange Commission, which documents are hereby incorporated by reference.
40
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
ABIOMED, Inc.
Dated: June 28, 2001 By: /s/ David M. Lederman
---------------------------------
DAVID M. LEDERMAN, CHAIRMAN
OF THE BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
KNOW ALL BY THESE PRESENTS that each individual whose signature appears
below hereby constitutes and appoints David M. Lederman and John F. Thero, and
each of them, his true and lawful attorneys-in-fact and agents with full power
of substitution, for him and in his name, place and stead, in any and all
capacities, to execute in the name of each such person, and to file with the
Securities and Exchange Commission, together with any exhibits thereto and other
documents therewith, any and all amendments to this Annual Report on Form 10-K
necessary and advisable to enable ABIOMED, Inc. to comply with the rules,
regulations and requirements of the Securities Exchange Act of 1934, as amended,
in respect thereof, which amendments may make such changes in the Annual Report
on Form 10-K as the aforesaid attorneys-in-fact executing the same deem
appropriate.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ David M. Lederman Chairman of the Board, June 28, 2001
--------------------------------- Chief Executive Officer
DAVID M. LEDERMAN President and Director
(Principal Executive Officer)
/s/ John F. Thero Senior Vice President-Finance, June 28, 2001
--------------------------------- Chief Financial Officer and
JOHN F. THERO Treasurer (Principal Financial
Officer)
/s/ W. Gerald Austen Director June 28, 2001
---------------------------------
W. GERALD AUSTEN
/s/ Paul B. Fireman Director June 28, 2001
---------------------------------
PAUL B. FIREMAN
41
/s/ John F. O'Brien Director June 28, 2001
-------------------------------
JOHN F. O'BRIEN
/s/ Desmond O'Connell Director June 28, 2001
-------------------------------
DESMOND O'CONNELL
/s/ Henri A. Termeer Director June 28, 2001
-------------------------------
HENRI A. TERMEER
42
ABIOMED, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2000 AND 2001
TOGETHER WITH AUDITORS' REPORT
INDEX
PAGE
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-1
CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2000 AND 2001 F-2
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS
ENDED MARCH 31, 1999, 2000 AND 2001 F-3
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1999, 2000 AND 2001 F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS
ENDED MARCH 31, 1999, 2000 AND 2001 F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-6 - F-20
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ABIOMED, Inc.:
We have audited the accompanying consolidated balance sheets of ABIOMED, Inc. (a
Delaware corporation) and subsidiaries as of March 31, 2000 and 2001, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended March 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ABIOMED, Inc. and subsidiaries
as of March 31, 2000 and 2001, and the results of their operations and their
cash flows for each of the three years in the period ended March 31, 2001, in
conformity with accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Boston, Massachusetts
May 7, 2001
F-1
ABIOMED, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31,
-----------------------------
2000 2001
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 1) $ 101,917 $ 90,462
Short-term marketable securities (Note 1) 4,467 2,036
Accounts receivable, net of allowance for doubtful accounts
of approximately $184 at March 31, 2000 and 2001 (Note 2) 6,691 10,028
Inventories (Note 1) 3,546 3,674
Prepaid expenses and other current assets 526 766
Total current assets --------- ----------
117,147 106,966
--------- ----------
PROPERTY AND EQUIPMENT, AT COST (Note 1):
Machinery and equipment 6,427 7,546
Furniture and fixtures 622 807
Leasehold improvements 2,277 3,528
--------- ----------
9,326 11,881
Less--Accumulated depreciation and amortization 5,375 7,129
--------- ----------
3,951 4,752
--------- ----------
INTELLECTUAL PROPERTY AND OTHER ASSETS, NET (Note 3) 690 6,295
--------- ----------
$ 121,788 $ 118,013
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,553 $ 2,129
Accrued expenses (Note 12) 6,151 5,600
Deferred revenue 209 996
Current portion of long-term liabilities (Notes 5 and 7) 236 242
--------- ----------
Total current liabilities 8,149 8,967
--------- ----------
LONG-TERM LIABILITIES (Notes 5 and 7) 715 368
COMMITMENTS (Notes 7 and 10)
STOCKHOLDERS' EQUITY (Notes 4 and 8):
Class B Preferred Stock, $.01 par value-
Authorized--1,000,000 shares; Issued and outstanding--None -- --
Common Stock, $.01 par value-
Authorized--100,000,000 shares; Issued and outstanding--20,455,694
shares and 20,770,714 shares at March 31, 2000 and 2001,
respectively 205 208
Additional paid-in capital 154,408 158,415
Paid-in capital--warrants -- 3,145
Accumulated deficit (41,689) (53,090)
--------- ----------
Total stockholders' equity 112,924 108,678
--------- ----------
$ 121,788 $ 118,013
========= ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
F-2
ABIOMED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
YEARS ENDING MARCH 31,
---------------------------------------------------
1999 2000 2001
---- ---- ----
REVENUES (Note 1):
Products $ 18,079 $ 18,377 $ 22,017
Funded research and development 4,011 4,140 2,879
---------- ---------- ----------
22,090 22,517 24,896
---------- ---------- ----------
COSTS AND EXPENSES:
Cost of product revenues 6,772 5,882 7,375
Research and development (Note 9) 13,450 15,633 22,671
Selling, general and administrative 9,772 12,562 12,411
---------- ---------- ----------
29,994 34,077 42,457
---------- ---------- ----------
LOSS FROM OPERATIONS (7,904) (11,560) (17,561)
Interest and other income, net 1,192 1,106 6,160
---------- ---------- ----------
NET LOSS $ (6,712) $ (10,454) $ (11,401)
========== ========== ==========
BASIC AND DILUTED NET LOSS PER SHARE (Note 1): $ (0.39) $ (0.60) $ (0.55)
========== ========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING (Note 1): 17,238,200 17,578,522 20,583,363
========== ========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-3
ABIOMED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ADDITIONAL PAID-IN TOTAL
NUMBER $.01 PAID-IN CAPITAL - ACCUMULATED STOCKHOLDERS'
OF SHARES PAR VALUE CAPITAL WARRANTS DEFICIT EQUITY
Balance, March 31, 1998 17,134,030 $ 171 $ 57,370 $ -- $ (24,523) $ 33,018
Stock options exercised 138,800 1 635 -- -- 636
Stock issued to directors
and under employee stock
purchase plan 28,774 1 129 -- -- 130
Net loss -- -- -- -- (6,712) (6,712)
----------- ----- ---------- -------- ----------- -----------
Balance, March 31, 1999 17,301,604 173 58,134 -- (31,235) 27,072
Sales of common stock, net 3,000,000 30 95,401 -- -- 95,431
Stock options exercised 132,998 1 700 -- -- 701
Stock issued to directors
and under employee stock
purchase plan 21,092 1 173 -- -- 174
Net loss -- -- -- -- (10,454) (10,454)
----------- ----- ---------- -------- ----------- -----------
Balance, March 31, 2000 20,455,694 205 154,408 -- (41,689) 112,924
Issuance of common stock
and warrants to acquire
intellectual property 110,000 1 3,145 3,145 -- 6,291
Stock options exercised 192,344 2 670 -- -- 672
Stock issued to directors
and under employee stock
purchase plan 12,676 -- 192 -- -- 192
Net loss -- -- -- -- (11,401) (11,401)
----------- ----- ---------- -------- ----------- -----------
Balance, March 31, 2001 20,770,714 $ 208 $ 158,415 $ 3,145 $ (53,090) $ 108,678
=========== ===== ========== ======== =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-4
ABIOMED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDING MARCH 31,
----------------------------------------------
1999 2000 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (6,712) $ (10,454) $ (11,401)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,386 1,685 2,968
Changes in assets and liabilities:
Accounts receivable, net (1,081) (254) (3,337)
Inventories (568) (650) (128)
Prepaid expenses and other assets (628) 195 (768)
Accounts payable (1,183) 678 576
Accrued expenses 1,025 1,755 (551)
Deferred revenue 189 (225) 787
Long-term liabilities 141 (36) (105)
---------- --------- ---------
Net cash used in operating activities (7,431) (7,306) (11,959)
---------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of short-term marketable securities 40,361 12,748 29,422
Purchases of short-term marketable securities (25,548) (8,313) (26,991)
Purchases of property and equipment (1,552) (1,358) (2,555)
---------- --------- ---------
Net cash provided by (used in) investing activities 13,261 3,077 (124)
---------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, net -- 95,431 --
Proceeds from exercise of stock options and stock issued
under employee stock purchase plan 766 875 864
Proceeds from issuance of long-term debt -- 615 --
Repayments of long-term debt and capital lease obligations -- (54) (236)
---------- --------- ---------
Net cash provided by financing activities 766 96,867 628
---------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,596 92,638 (11,455)
CASH AND CASH EQUIVALENTS, EXCLUDING MARKETABLE SECURITIES, AT
BEGINNING OF YEAR 2,683 9,279 101,917
---------- --------- ---------
CASH AND CASH EQUIVALENTS, EXCLUDING MARKETABLE SECURITIES, AT END
OF YEAR $ 9,279 $ 101,917 $ 90,462
========== ========= =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Capital lease obligation incurred for property and equipment $ -- $ 221 $ --
========== ========= =========
Issuance of common stock and warrants in exchange for
purchase of intellectual property $ -- $ -- $ 6,291
========== ========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-5
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
ABIOMED, Inc. and subsidiaries (the Company) is engaged primarily in the
development, manufacture and marketing of medical products designed to
safely and effectively assist or replace the pumping function of the
failing heart. The Company is developing and testing battery-powered
totally implantable replacement heart systems for patients who would
otherwise die from heart failure. The Company currently markets and sells
a ventricular assist device for the temporary support of patients with
reversible heart failure. The accompanying consolidated financial
statements reflect the application of certain significant accounting
policies described below.
(A) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries, and the
accounts of its majority-owned subsidiary Abiomed Limited
Partnership. All significant intercompany accounts and
transactions have been eliminated in consolidation.
(B) USE OF ESTIMATES
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from
those estimated or assumed.
(C) PRODUCT REVENUES
The Company primarily recognizes BVS product revenues at the time
products are shipped to customers. Product revenues are also
recognized under direct sales-type leases when capital equipment
is shipped in conjunction with disposable single-use blood pumps.
Revenue earned under long-term renewal contracts in which a
customer is restocked with blood pumps as needed for a fixed price
is recognized ratably over the term of the contract. Service
revenues, which are not material, are also recognized ratably over
the term of the service contracts. In fiscal 1999, 2000 and 2001,
all product revenues were derived from sales of the Company's BVS
ventricular assist device and related products. International
sales represented 3%, 4% and 3% of product revenues for the fiscal
years ended March 31, 1999, 2000 and 2001, respectively. No single
customer accounted for greater than 10% of product revenues during
fiscal 1999, 2000 or 2001.
In December 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin (SAB) No. 101, REVENUE RECOGNITION. SAB
No. 101 provides guidance on the recognition, presentation and
disclosure of revenue in financial statements and was adopted by
the Company beginning with the quarter ended June 30, 2000. SAB
101 outlines basic criteria that must be met to recognize revenue
and provides guidance for disclosure related to revenue
recognition policies. The adoption of SAB No. 101 did not have a
material impact on the Company's financial statements.
F-6
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(CONTINUED)
(1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(D) FUNDED RESEARCH AND DEVELOPMENT REVENUES
A portion of the Company's research and development expenses have
been supported by contracts and grants with various government
agencies. The Company's government-sponsored research and
development contracts and grants generally provide for payment on
a cost-plus-fixed-fee basis. The Company recognizes revenues
under its government contracts and grants as work is performed,
provided that the government has appropriated sufficient funds
for the work. The Company retains rights to all technological
discoveries and products resulting from these efforts.
(E) INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out)
or market and consist of the following (in thousands):
MARCH 31,
2000 2001
---- ----
Raw materials....................... $ 1,490 $ 1,418
Work-in-process..................... 713 737
Finished goods...................... 1,343 1,519
-------- --------
$ 3,546 $ 3,674
======== ========
Finished goods and work-in-process inventories consist of direct
material, labor and overhead. Inventories do not currently include
any costs associated with AbioCor or other products under
development.
(F) DEPRECIATION AND AMORTIZATION
The Company provides for depreciation and amortization by charges
to operations in amounts that allocate the cost of depreciable
assets over their estimated useful lives as follows:
ESTIMATED
CLASSIFICATION METHOD USEFUL LIFE
Machinery and equipment Straight-line 3- 5 Years
Furniture and fixtures Straight-line 5-10 Years
Leasehold improvements Straight-line Life of lease
Machinery and equipment includes $123,000 related to assets held
under capital leases at March 31, 2001, net of accumulated
depreciation of $98,000.
F-7
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(CONTINUED)
(1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(G) NET LOSS PER SHARE
Basic net loss per share is computed by dividing net loss by the
weighted average number of common shares outstanding during the
fiscal year. Diluted net loss per share is computed by dividing
net loss by the weighted average number of dilutive common shares
outstanding during the fiscal year. Diluted weighted average
shares reflects the dilutive effect, if any, of potential common
stock such as options and warrants based on the treasury stock
method. No potential common stock is considered dilutive in
periods in which a loss is reported, such as the fiscal years
ended March 31, 1999, 2000 and 2001, because all such common
equivalent shares would be antidilutive. The calculation of
diluted weighted average shares outstanding for the years ended
March 31, 1999, 2000 and 2001 excludes 95,426, 751,329 and
1,808,322 options to purchase common stock, respectively. The
calculation of diluted weighted average shares outstanding for the
year ended March 31, 2001 also excludes warrants to purchase
400,000 shares of common stock issued in connection with the
acquisition of intellectual property (see Note 3).
(H) CASH AND CASH EQUIVALENTS
The Company classifies any marketable security with a maturity
date of 90 days or less at the time of purchase as a cash
equivalent.
(I) MARKETABLE SECURITIES
The Company classifies any security with a maturity date of
greater than 90 days at the time of purchase as marketable
securities and classifies marketable securities with a maturity
date of greater than one year from the balance sheet date as
long-term investments. Under Statement of Financial Accounting
Standards (SFAS) No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN
DEBT AND EQUITY SECURITIES, securities that the Company has the
positive intent and ability to hold to maturity are reported at
amortized cost and classified as held-to-maturity securities.
The Company has classified all marketable securities at March 31,
2000 and 2001 as held-to-maturity securities. The amortized cost
and market value of marketable securities were approximately
$4,467,000 and $4,541,000 at March 31, 2000 and $2,036,000 and
$2,073,000 at March 31, 2001, respectively. At March 31, 2001,
these short-term investments consisted primarily of government
grade securities.
(J) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
As of March 31, 2000 and 2001, the Company's financial instruments
were comprised of cash and cash equivalents, marketable
securities, accounts receivable, accounts payable, equipment term
loans and capital lease obligations, the carrying amounts of which
approximated fair market value.
F-8
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(CONTINUED)
(1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(K) COMPREHENSIVE INCOME
SFAS No.130, REPORTING COMPREHENSIVE INCOME, requires disclosure
of all components of comprehensive income and loss on an annual
and interim basis. Comprehensive income and loss is defined as the
change in equity of a business enterprise during a period from
transactions and other events and circumstances from non-owner
sources. Other than the reported net loss, there were no
components of comprehensive income or loss that require disclosure
for the years ended March 31, 1999, 2000 and 2001.
(L) SEGMENT AND ENTERPRISE-WIDE DISCLOSURES
SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION, requires certain financial and supplementary
information to be disclosed on an annual and interim basis for
each reportable segment of an enterprise. The Company believes
that it operates in one business segment--the research,
development, and sale of medical devices to assist or replace the
pumping function of the failing heart.
(M) IMPAIRMENT OF LONG-LIVED ASSETS
The Company assesses the realizability of long-lived assets in
accordance with SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF. The
Company reviews its long-lived assets for impairment as events and
circumstances indicate the carrying amount of an asset may not be
recoverable. The Company evaluates the realizability of its
long-lived assets based on profitability and cash flow
expectations for the related asset. As a result of its review, the
Company does not believe that any impairment currently exists
related to its long-lived assets.
(N) RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board (FASB)
issued Interpretation (FIN) No. 44, ACCOUNTING FOR CERTAIN
TRANSACTIONS INVOLVING STOCK COMPENSATION--AN INTERPRETATION OF
APB OPINION NO. 25. The interpretation clarifies the application
of Accounting Principles Board (APB) Opinion No. 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES in certain situations, as defined.
The interpretation became effective July 1, 2000, except for the
provisions that relate to modifications that directly or
indirectly reduce the exercise price of an award and the
definition of an employee, which became effective after December
15, 1998. The adoption of FIN No. 44 did not have a material
impact on the Company's financial statements.
SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES, as amended by SFAS No. 137, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES--DEFERRAL OF THE EFFECTIVE DATE
OF FASB STATEMENT NO. 133, and SFAS No. 138, ACCOUNTING FOR
CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES, AN
AMENDMENT OF SFAS NO. 133, is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. These pronouncements
require companies to reflect the fair value of all derivative
instruments, including those embedded in other contracts, as
assets or liabilities in an entity's balance sheet. Changes in
fair value may be accounted for as a component of other
comprehensive income, provided that
F-9
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(CONTINUED)
(1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(O) RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
certain criteria are met as specified in these pronouncements. The
pronouncements will not have a material effect on the Company's
results of operations or financial position.
(2) ACCOUNTS RECEIVABLE
Accounts receivable include amounts due from customers, excluding
long-term amounts due from customers under sales-type leases, net of an
allowance for doubtful accounts. Accounts receivable also include amounts
due from government and other third-party sources related to the
Company's research and development contracts and grants (see Note 1).
Accounts receivable included $503,000 and $1,877,000 due in connection
with research and development contracts and grants at March 31, 2000 and
March 31, 2001, respectively. The contract and grant amounts due at March
31, 2001 included $1,822,000 in connection with AbioCor development that
is scheduled to be collected over the remaining term of that contract
which expires December 31, 2001.
(3) ACQUIRED INTELLECTUAL PROPERTY AND OTHER ASSETS
In September 2000, the Company acquired the exclusive rights to The
Pennsylvania State University implantable replacement heart (referred to
as the Penn State Heart). The terms of this transaction consisted of
payment of 110,000 shares of the Company's common stock, plus the
issuance of warrants to purchase up to 400,000 additional shares of the
Company's common stock at an exercise price of $0.01 per share. Exercise
of the warrants is contingent on the achievement of certain clinical and
regulatory milestones with the Penn State Heart by specified dates. In
connection with this acquisition, the Company capitalized the purchase
cost totaling $6,361,000, which consists of acquisition costs of
approximately $70,000, the fair market value of the 110,000 shares of
common stock issued and the fair market value of the first traunch of
warrants to purchase 110,000 shares of common stock. This amount is
classified as intellectual property, a long-term asset in the
accompanying consolidated balance sheet. The Company is amortizing this
asset ratably over a period of three years, its estimated useful life.
The unamortized cost of this asset as of March 31, 2001 was approximately
$5,300,000. Beyond the initial 110,000 warrants to purchase common stock,
to the extent that the designated milestones are achieved, the Company
intends to expense the value of the remaining 290,000 warrants in the
period that the milestone is achieved and such warrants become
exercisable.
Intellectual property and other assets also includes costs related to the
Company's awarded and pending patents. The Company is amortizing the cost
of these patents on a straight-line basis over seven years. The
unamortized cost of these patents approximated $356,000 and $773,000 as
of March 31, 2000 and 2001, respectively.
Also included in intellectual property and other assets are long-term
accounts receivable related to sales-type leases. The terms of these
non-cancelable leases are one to three years. As of March 31, 2000 and
2001, the long-term amount due from these sales-type leases approximated
$273,000 and $215,000, respectively.
F-10
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(CONTINUED)
(4) CAPITAL STOCK
Each share of common stock has a voting right of one vote per share and
generally has the right to elect, as a class, at least 25% of the
Company's directors.
In March 2000, the Company completed a public offering of 3,000,000
shares of its common stock. Proceeds to the Company from the stock
offering, net of direct expenses of approximately $6,569,000, totaled
approximately $95,431,000.
In August 2000, the Company's Board of Directors approved a two-for-one
split of the Company's outstanding shares to be effected in the form of a
stock dividend. Each shareholder of record at the close of business on
August 25, 2000 received one additional share of common stock for each
share of common stock held on that date. Shares held for issuance in
connection with all stock option plans and rights plans of the Company
were also split on a two-for-one basis in accordance with the provisions
of each such plan. All share and per share information in these financial
statements have been restated for all years to reflect the effect of this
two-for-one stock split. In September 2000, the Company issued common
stock and warrants to acquire rights to certain intellectual property as
described in Note 3. The cost of the common stock and first traunch of
the warrants issued in connection with the transaction are included in
stockholders' equity at values of $3,145,000 and $3,145,000,
respectively.
The Company has authorized 1,000,000 shares of Class B Preferred Stock,
$0.01 par value, of which the designation, rights and privileges can be
set by the Board of Directors. No shares of Class B Preferred Stock have
been issued or are outstanding.
In August 1997, the Company declared a dividend of one Preferred Share
Purchase Right (the Right) for each outstanding share of common stock to
its stockholders of record at August 28, 1997. Each right entitles the
registered holder to purchase from the Company one one-thousandth of a
share of Series A Junior Participating Preferred Stock with a par value
of $0.01 per share, at a price of $45.00 per one one-thousandth of a
share, subject to amendment. In accordance with the terms set forth in
the Rights Agreement, the Rights are not exercisable until the occurrence
of certain events, as defined. In addition, the registered holders of the
Rights will have no rights as a common stockholder of the Company until
the Rights are exercised. The terms of the Rights may be amended by the
Company's Board of Directors. The Rights expire on August 13, 2007.
(5) FINANCING ARRANGEMENTS
The Company had a $3,000,000 unsecured demand line of credit agreement
with a bank that the Company elected not to renew after its scheduled
termination in October 2000. There were no borrowings under the
discontinued line of credit during the fiscal years ended March 31, 1999,
2000 or 2001.
In October, 1999, the Company entered into equipment term loans with a
bank whereby the Company borrowed $615,000 for the acquisition of
manufacturing equipment and leasehold improvements. These term loans are
subject to various financial covenants, secured by the acquired equipment
and leasehold improvements and are to be repaid in equal monthly
installments of principal plus variable interest through September 1,
2003. The loans bear
F-11
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(CONTINUED)
(5) FINANCING ARRANGEMENTS (CONTINUED)
interest at either the bank's prime rate or LIBOR rate then in effect, at
the Company's advanced election. The rate in effect for these loans at
March 31, 2001 was 8.5%. As of March 31, 2001, approximately $417,000
remains outstanding under these loans, which is included within current
and long-term liabilities in the accompanying consolidated balance
sheets.
The following schedule details the future maturities of principal under
these term loans (in thousands):
YEAR ENDING MARCH 31,
2002............................. $ 167
2003............................ 167
2004............................ 83
-----
$ 417
=====
(6) INCOME TAXES
The Company accounts for income taxes in accordance with the provisions
of SFAS No. 109, ACCOUNTING FOR INCOME TAXES. The asset and liability
approach used under SFAS No. 109 requires recognition of deferred tax
assets and liabilities for the expected future tax consequences of
temporary differences between the carrying amounts and the tax basis of
other assets and liabilities.
At March 31, 2001, the Company had available net operating loss
carryforwards of approximately $49,913,000. The Company also had
available, at March 31, 2001, approximately $1,944,000 of tax credit
carryforwards to reduce future federal income taxes, if any. The net
operating loss and tax credit carryforwards expire through 2021. These
carryforwards are subject to review by the Internal Revenue Service and
may be subject to limitation in any given year under certain conditions,
including a change in the control of the Company.
The following table summarizes the Company's approximate net operating
loss (NOL) and credit carryforwards that are available as of March 31,
2001 to offset future taxable income and income tax, respectively. The
NOLs and credit carryforwards are organized by the fiscal year in which
they were generated (in thousands).
F-12
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(CONTINUED)
(6) INCOME TAXES (CONTINUED)
TAX DATES OF
YEAR ENDED MARCH 31, NOL CREDITS EXPIRATION
1987............................... $ -- $ 52 3/31/02
1989............................... -- 144 3/31/04
1990............................... 532 -- 3/31/05
1991............................... 3,116 50 3/31/06
1992............................. 6,973 61 3/31/07
Thereafter......................... 39,292 1,637 3/31/08 - 3/31/21
------- ------
$49,913 $1,944
======= ======
The Company has not given recognition to any of these future tax benefits
in the accompanying consolidated financial statements due to the
uncertainty surrounding the timing of the realization of the tax
benefits. The Company has placed a valuation allowance of approximately
$25,685,000 as of March 31, 2001 against its otherwise recognizable net
deferred tax asset.
The deferred tax asset consists of the following (in thousands):
MARCH 31,
2000 2001
---- ----
Net operating loss and tax credit carryforwards......... $ 17,216 $ 21,910
Purchased technology.................................... 563 310
Nondeductible reserves.................................. 282 369
Nondeductible accruals.................................. 1,921 1,632
Disqualifying stock dispositions........................ -- 470
Deferred revenue........................................ -- 352
Depreciation............................................ 169 381
Other, net.............................................. 149 261
-------- --------
20,300 25,685
Less--Valuation allowance............................... (20,300) (25,685)
-------- --------
$ -- $ --
======== ========
F-13
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(CONTINUED)
(7) COMMITMENTS
As of March 31, 2001, the Company had entered into leases for its
facilities and certain equipment under various operating lease agreements
with terms through fiscal 2010 and an option, at the Company's election,
to terminate in 2005. Total rent expense under these leases, included in
the accompanying consolidated statements of operations, was approximately
$350,000, $622,000 and $855,000, for fiscal 1999, 2000 and 2001,
respectively.
During the fiscal year ended March 31, 2000, the Company entered into
36-month operating leases totaling approximately $652,000 for the lease
of office furniture which have annual rental payments of approximately
$215,000. At the end of the initial terms, the Company can either 1)
renew the leases for additional 12-month option periods at the then fair
market rental value, 2) purchase the furniture at its then fair market
value, but no greater than 25% of its original purchase cost or 3) return
the furniture to the lessor. Rental expense recorded for these leases
during the fiscal years ended March 31, 2000 and 2001 was approximately
$88,000 and $215,000, respectively.
During fiscal 2000, the Company also entered into a 36-month capital
lease for computer equipment and software for approximately $221,000.
This capital lease has annual rental payments of approximately $83,000.
These assets are being used in research and development activities and
general operations. At the end of the initial term, the Company can
either 1) renew the lease for an additional 6-month option period at a
reduced rental rate, 2) purchase the equipment at its then fair market
value, but no greater than 12.5% of its original purchase cost or 3)
return the equipment to the lessor. The future minimum lease payments are
included in current and long-term liabilities in the accompanying
consolidated balance sheets.
Future minimum lease payments under all noncancellable operating and
capital leases as of March 31, 2001 are approximately as follows (in
thousands):
OPERATING CAPITAL
YEAR ENDING MARCH 31, LEASES LEASE
2002....................................................... $ 993 $ 83
2003....................................................... 877 56
2004....................................................... 733 --
2005....................................................... 1,761 --
-------- ------
Total future minimum lease payments $ 4,364 139
========
Less - amount representing interest (10)
------
Present value of future minimum lease payments 129
Less - current portion of lease obligation (75)
------
Long-term portion of lease obligation $ 54
======
F-14
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(CONTINUED)
(8) STOCK OPTION AND PURCHASE PLANS
All stock options granted by the Company under the below-described plans
were granted at the fair value of the underlying common stock at the date
of grant. Outstanding stock options, if not exercised, expire 10 years
from the date of grant.
The 1992 Combination Stock Option Plan (the Combination Plan), as
amended, was adopted in September 1992 as a combination and restatement
of the Company's then outstanding Incentive Stock Option Plan and
Nonqualified Plan. A maximum of 3,100,000 shares of common stock may be
awarded under this plan. Options outstanding under the Combination Plan
are held by Company employees and generally become exercisable ratably
over five years.
The 1998 Equity Incentive Plan (the Equity Incentive Plan) was adopted by
the Company in August 1998. The Equity Incentive Plan provides for grants
of options to key employees, directors, advisors and consultants as
either incentive stock options or nonqualified stock options as
determined by the Company's Board of Directors. A maximum of 1,000,000
shares of common stock may be awarded under this plan. Options granted
under the Equity Incentive Plan are exercisable at such times and subject
to such terms as the Board of Directors may specify at the time of each
stock option grant. Options outstanding under the Equity Incentive Plan
have vesting periods of 3 to 5 years from the date of grant.
The 2000 Stock Incentive Plan (the 2000 Plan) was adopted by the Company
in August 2000. The 2000 Plan provides for grants of options to key
employees, directors, advisors and consultants to the Company or its
subsidiaries as either incentive or nonqualified stock options as
determined by the Company's Board of Directors. Up to 1,400,000 shares of
common stock may be awarded under the 2000 Plan and are exercisable at
such times and subject to such terms as the Board of Directors may
specify at the time of each stock option grant. As of March 31, 2001, no
option grants had been awarded under the 2000 Plan.
The Company has a nonqualified stock option plan for nonemployee
directors (the Directors' Plan). The Directors' Plan, as amended, was
adopted in July 1989 and provides for grants of options to purchase
shares of the Company's common stock to nonemployee Directors of the
Company. Up to 400,000 shares of common stock may be awarded under the
Directors' Plan. Options outstanding under the Director's Plan have
vesting periods of 1 to 5 years from the date of grant.
The following table summarizes stock option activity under all of the
Company's stock option plans:
F-15
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(CONTINUED)
(8) STOCK OPTION AND PURCHASE PLANS (CONTINUED)
WEIGHTED
AVG. EXERCISE
NUMBER OF EXERCISE PRICE
OPTIONS PRICE PER SHARE
Outstanding, March 31, 1998 1,918,770 $2.81 - $ 9.00 $ 5.45
Granted 674,500 4.63 - 7.25 5.94
Exercised (138,800) 2.82 - 6.75 4.59
Canceled (259,700) 2.82 - 7.47 5.89
---------
Outstanding, March 31, 1999 2,194,770 2.82 - 9.00 5.60
Granted 642,100 4.44 - 33.63 8.03
Exercised (132,998) 2.82 - 9.00 5.28
Canceled 4.00 - 8.50 6.04
(90,176)
---------
Outstanding, March 31, 2000 2,613,696 2.82 - 33.63 6.20
Granted 713,000 15.56 - 36.53 18.47
Exercised (192,344) 2.88 - 9.00 4.92
Canceled (225,654) 2.88 - 33.63 10.17
---------
Outstanding, March 31, 2001 2,908,698 2.81 - 36.53 9.01
=========
Exercisable, March 31, 2001 1,092,381 2.81 - 7.47 5.49
=========
Exercisable, March 31, 2000 898,416 2.81 - 7.47 5.16
=========
Exercisable, March 31, 1999 766,074 $ 2.81 - $6.94 $ 4.99
=========
Shares available for future issuance,
March 31, 2001 1,679,694
=========
The following tables summarize certain data for options outstanding and
exercisable under all plans at March 31, 2001.
WEIGHTED
WEIGHTED AVERAGE
AVERAGE REMAINING
NUMBER RANGE OF EXERCISE CONTRACTUAL
OF SHARES EXERCISE PRICES PRICE LIFE (YEARS)
Options outstanding, end of year: 194,672 $ 2.81 - $ 4.00 $ 3.86 2.58
883,756 4.44 - 6.06 5.47 5.49
1,124,270 6.13 - 8.00 6.74 6.95
706,000 14.13 - 36.53 18.46 9.29
---------
2,908,698 $ 9.01 6.78
F-16
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(Continued)
(8) STOCK OPTION AND PURCHASE PLANS (CONTINUED)
WEIGHTED
WEIGHTED AVERAGE
AVERAGE REMAINING
NUMBER RANGE OF EXERCISE CONTRACTUAL
OF SHARES EXERCISE PRICES PRICE LIFE (YEARS)
Options exercisable, end of year: 194,672 $ 2.81 - $ 4.00 $ 3.86 2.58
570,706 4.44 - 6.06 5.43 4.68
327,003 6.13 - 7.47 6.57 5.27
---------
1,092,381 $ 5.49 4.48
=========
The Company has an Employee Stock Purchase Plan (the Purchase Plan), as
amended. Under the Purchase Plan, eligible employees (including officers
and directors) who have completed six months of employment with the
Company or its subsidiaries who elect to participate in the Purchase Plan
instruct the Company to withhold a specified amount from each payroll
period during a six-month payment period (the periods April 1 - September
30 and October 1 - March 31). On the last business day of each payment
period, the amount withheld is used to purchase common stock at an
exercise price equal to 85% of the lower of its market price on the first
business day or the last business day of the payment period. The Company
has reserved 200,000 shares of common stock for issuance under the
Purchase Plan, of which 120,720 shares are available for future issuance
as of March 31, 2001. During the fiscal years ended March 31, 1999, 2000
and 2001, 24,774, 17,092 and 10,772 shares, respectively, of common stock
were sold pursuant to the Purchase Plan.
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, requires the
measurement of the fair value of stock options, stock purchase plans, or
warrants granted to employees to be included in the statement of
operations or disclosed in the notes to financial statements. The Company
has determined that it will continue to account for stock-based
compensation for employees under APB Opinion No. 25 and elect the
disclosure-only alternative under SFAS No 123. The Company has computed
the pro forma disclosures required under SFAS No. 123 for options granted
in fiscal 1999, 2000 and 2001 using the Black-Scholes option pricing
model prescribed by SFAS No. 123. The weighted average information and
assumptions are as follows:
YEAR ENDED MARCH 31,
1999 2000 2001
---- ---- ----
Risk-free interest rate 5.68 6.50% 5.20%
Expected dividend yield -- -- --
Assumed life 5 years 5 years 5 years
Assumed volatility 35% 48% 64%
The Black-Scholes option-pricing model was developed for use in
estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option-pricing
models require the input of highly subjective assumptions including
expected stock price volatility. Because the Company's employee stock
options
F-17
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(CONTINUED)
(8) STOCK OPTION AND PURCHASE PLANS (CONTINUED)
have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of
the fair value of its employee stock options.
The total fair value of the options granted during fiscal 1999, 2000 and
2001 was computed as approximately $483,000, $1,036,000 and $2,561,000,
respectively. Of these amounts approximately $504,000, $655,000 and
$1,145,000 would be charged to operations for the years ended March 31,
1999, 2000 and 2001, respectively. The remaining amounts would be
amortized over the remaining vesting periods of the underlying options.
Additionally, the amounts that would be charged to operations related to
the 15% purchase discount received by participants acquiring stock under
the Purchase Plan was computed as approximately $31,000, $129,000 and
$29,000 for fiscal 1999, 2000 and 2001, respectively. The resulting pro
forma compensation expense may not be representative of the amount to be
expected in future years as pro forma compensation expense may vary based
upon the number of options granted and shares purchased.
The pro forma net loss and pro forma net loss per common share presented
below have been computed assuming no tax benefit. The effect of a tax
benefit has not been considered since a substantial portion of the stock
options granted are incentive stock options and the Company does not
anticipate a future deduction associated with the exercise of these stock
options.
The pro forma effect of applying SFAS No. 123 for the years ended
March 31, 1999, 2000 and 2001 is as follows:
NET LOSS NET LOSS PER SHARE
----------------------------------- ---------------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
(IN THOUSANDS)
YEAR ENDED MARCH 31,
1999................................. $ (6,712) $ (7,247) $(0.39) $(0.42)
2000................................. $ (10,454) $ (11,238) $(0.60) $(0.64)
2001................................. $ (11,401) $ (12,575) $(0.55) $(0.61)
(9) RESEARCH AND DEVELOPMENT
Research and development is a significant portion of the Company's
operations. The Company's research and development efforts are focused on
the development of new products, primarily related to cardiac assist and
heart replacement, including the continued enhancement of the BVS and
related technologies. Research and development costs are expensed when
incurred and include direct materials and labor, depreciation, contracted
services and other costs associated with developing new products and
improving existing products, including amortized costs of purchased
technology. Costs associated with government-funded contracts and grants
are recorded in the accompanying consolidated statements of operations as
part of research and development expenses as shown in the table below.
F-18
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(CONTINUED)
(9) RESEARCH AND DEVELOPMENT (CONTINUED)
The Company, at its sole discretion, may elect to further develop
government-funded technologies or products by spending resources outside
or above the contract limits. In fiscal 2001, the majority of the
Company's research and development expenditures were directed towards the
development and preparation of the AbioCor Implantable Replacement Heart
for initial human clinical trials. These expenditures included amounts
funded under the Company's government contract and amounts funded from
the Company's own resources. Company funding of such expenses is
discretionary and is not included in the contracts and grants costs per
above.
Research and development costs consist of the following amounts (in
thousands):
YEAR ENDED MARCH 31,
1999 2000 2001
---- ---- ----
Internally funded........................................... $ 10,649 $ 12,652 $ 19,349
Incurred under government contracts and grants.............. 2,801 2,981 2,262
Amortization of technology acquired through Penn
State Heart acquisition.................................. -- -- 1,060
-------- -------- --------
Total research and development $ 13,450 $ 15,633 $ 22,671
======== ======== ========
In connection with the Company's acquisition of exclusive rights to the
Penn State Heart, the Company committed to The Pennsylvania State
University that it would use reasonable efforts to further develop the
underlying patent rights and technology. If the Company does not make
such an effort for at least three years from the date of acquisition, the
technology rights can revert back to the University, excluding all
improvements made thereto by the Company.
(10) ROYALTY OBLIGATION
Through August 3, 2000, the Company incurred a royalty to certain third
parties equal on a net basis to approximately 2.1% of certain revenues
derived from the BVS. For the years ended March 31, 1999, 2000 and 2001,
the amount of this royalty, net of certain reimbursed expenses, was
approximately $341,000, $353,000 and $138,000, respectively. These
amounts are reflected as part of the cost of product revenues in the
accompanying consolidated statements of operation and were paid to the
third parties through Abiomed Limited Partnership. With the exception of
final administrative matters, the partnership ceased activity after
August 3, 2000.
(11) EMPLOYEE DEFERRED COMPENSATION PROFIT-SHARING PLAN AND TRUST
The Company has an employee deferred compensation profit-sharing plan
(the 401(k) Plan) that covers all employees who are at least 20 years of
age. Amounts paid by the Company to match a portion of employees'
contributions and discretionary amounts determined by the Company's Board
of Directors totaled approximately $239,000, $353,000 and $508,000 for
the fiscal years ended March 31, 1999, 2000 and 2001 respectively.
F-19
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(CONTINUED)
(12) ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
MARCH 31,
2000 2001
---- ----
Salaries and benefits..................................... $ 2,782 $ 3,057
Contract services......................................... 695 356
Warranty.................................................. 313 406
Professional fees......................................... 1,020 338
Other..................................................... 1,341 1,443
-------- --------
$ 6,151 $ 5,600
======== ========
F-20