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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File No. 0-26224
December 31, 1997
INTEGRA LIFESCIENCES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 51-0317849
(State or other jurisdiction of (I.R.S. employer
employer incorporation or organization) identification no.)
105 Morgan Lane
Plainsboro, New Jersey 08536
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 275-0500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
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
Item 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. / /
The aggregate market value of the registrant's Common Stock (its only
voting stock) held by non-affiliates of the registrant as of March 20, 1998 was
approximately $43.8 million. (Reference is made to page 24 herein for a
statement of the assumptions upon which this calculation is based.)
The number of shares of the registrant's Common Stock outstanding as of
March 20, 1998 was 29,905,097.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's definitive proxy statement
relating to its scheduled May 18, 1998 Annual Meeting of Stockholders are
incorporated by reference in Part III of this report.
PART I
ITEM 1. BUSINESS
Integra LifeSciences Corporation (hereinafter referred to as "Integra" or the
"Company") was incorporated as a Delaware corporation in June 1989. Integra
develops, manufactures and markets medical devices, implants and biomaterials
primarily used in the treatment of burns and skin defects, spinal and cranial
disorders, orthopedics and other surgical applications. Integra seeks to be the
world's leading company specializing in implantable medical and
biopharmaceutical therapies to target and control cell behavior, and to build
shareholder value by acquiring, discovering, and developing cost-effective,
off-the-shelf products that satisfy unmet medical needs.
Headquartered in Plainsboro, New Jersey, with a facility in San Diego,
California, Integra markets its products directly as well as through marketing
partners and distributors both domestically and internationally in more than 29
countries. The Company's customers include burn, trauma, plastic and
reconstructive surgeons, neurosurgeons, orthopedic surgeons, operating room
nurses, private label purchasers, and hospital administrators. Integra's
products include VitaCuff(TM), BioPatch(TM), BioMend(TM), and the Company's
flagship product, the INTEGRA(TM) Artificial Skin, Dermal Regeneration
Template(TM) Device ("INTEGRA(TM) Artificial Skin"), which was the first medical
device specifically designed to enable the human body to regenerate functional
dermal tissue to receive a Premarket Approval ("PMA") application from by the
U.S. Food and Drug Administration ("FDA").
Cells, and the matrix that surrounds cells, are organized into tissues. Tissues
are organized into organs, which perform essential functions of the body. During
development and growth, cells normally produce an infrastructure, which consists
of a variety of different proteins including collagen. The Company refers to
this infrastructure of proteins and other molecules as the extra-cellular matrix
("ECM"). The ECM provides cells with structural support and biological signals
so that they can function properly. Equally important, the ECM provides the
integrity that is unique to certain tissues. For example, the matrix of bone is
very hard and functions to support the weight of the body. Cartilage, found at
sites where bone connects to bone, contains a different cell type and matrix
organization that withstands extreme compression, yet allows for almost
frictionless motion between the bones of a joint. Muscles, by contrast, consist
of very specialized cells and matrix that are designed for movement, while skin
is composed of cells and matrix that are tough yet flexible and protect the body
against abrasion and water loss, as well as infection.
For cells to function normally within tissues, the cells must be attached
(anchored) to, and interact with, the ECM proteins that surround them. When
certain tissues become damaged, normal healthy cells attempt to repair the
deficient site by moving into the damaged area, dividing, and depositing new
matrix. However, the repaired tissue is often in the form of a scar, which
consists of cells surrounded by excessive amounts of matrix. Scars do not
function like normal tissue and often fail entirely.
The transplantation of tissues from human donors is restricted by the shortage
of such tissues, the difficulty and expense of transportation, the risk of
rejection, the danger of disease transmission and the requirement, in certain
cases, for life-long use of immuno-suppressant drugs. The grafting of a
patient's own tissue ("autografting") causes damage to the site where the
healthy tissue is harvested and is of limited use for severely wounded patients
who have a minimal amount of healthy tissue for grafting. Currently available
biomaterials (such as metals, ceramics and plastics) used in permanent
implantable devices (such as knee joints or heart valves) are commonly used, but
tend to degrade after years in the body, potentially compromising long-term
performance. The Company believes that its regenerative medicine technologies
have the potential to provide safer, more effective and less expensive methods
for replacing damaged or diseased tissues when compared to other currently
available techniques.
The Company's business strategy has been to selectively acquire and further
develop several platforms of synergistic biomaterials and ECM technologies. The
Company uses the regenerative medicine technologies and proprietary processes it
owns and licenses to fabricate devices manufactured from collagen and other
components of the ECM. Once surgically implanted, these devices serve as
temporary structures intended to support regeneration of functional tissues.
These products are engineered precisely for specific tissues and are directed to
be absorbed into
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the body during the regeneration process. INTEGRA(TM) Artificial Skin is the
first in a series of products that the Company is developing to regenerate a
variety of body tissues, including the dura, peripheral nerve, bone, articular
cartilage and cardiovascular graft.
The Company also develops, sells and has substantial manufacturing experience
with FDA-regulated absorbable medical products that serve a broad range of
applications, including drug delivery, surgical hemostasis (the control of
bleeding), infection control, dental surgery and wound care. These products are
sold primarily through marketing relationships with a number of established
medical companies, including Arrow International, Inc., Bard Access Systems,
Inc., the Calcitek Division of Sulzermedica ("Calcitek"), Johnson & Johnson
Medical, Inc. ("J&J Medical"), Johnson & Johnson Professional, Inc. ("J&J
Professional"), Quinton Instruments Co., and Sorin BioMedica, Inc. ("Sorin").
The Company's commercial products use many of the same biomaterials,
manufacturing processes, and materials engineering techniques used to produce
INTEGRA(TM) Artificial Skin.
The Company intends to further develop and commercialize pharmacological medical
applications of its technologies, particularly those developed by the Company's
Telios Pharmaceuticals, Inc. subsidiary ("Telios"). The Company refers to the
pharmacological applications of its ECM technologies as Matrix Medicine(TM).
This technology is directed to the treatment of human disease characterized by
disruption of the normal interactions between cells and the ECM. Matrix
Medicine(TM) development includes applications for anti-thrombotics, inhibitors
of angiogenesis, prevention of fibrosis and the treatment of cancer. At present,
the Company does not intend to enter human studies for these applications
without development partners.
The Company believes its management and scientific team, development and
manufacturing experience, proprietary technological position and relationships
with established medical institutions and other organizations position it to
achieve its objectives. The Company's research implementation has been to
maintain a relatively small core of scientists and researchers within the
Company and to conduct a large portion of its research and product development
through arrangements with independent medical research centers. The Company
believes this provides a cost-effective approach to managing its research and
product development efforts, while maintaining the ability to respond quickly
and effectively to technological changes.
The Company is actively engaged in five business areas, each of which is
described in detail below: (1) skin defects and burns; (2) neurosurgical; (3)
orthopedic; (4) private label medical products; and (5) developing businesses
and ventures.
Skin Defects and Burns
The Company's primary operating business is the repair of skin defects and burns
where surgical intervention is required. This business encompasses INTEGRA(TM)
Artificial Skin, the Company's leading commercial product, as well as a pipeline
of new products including the development of a second generation of the
Company's INTEGRA(TM) Artificial Skin utilizing a peptide/collagen matrix for
enhanced healing, as well as a number of wound care products under development.
The Company believes the annual severe burn market is approximately $75 million
worldwide, and that the annual market for all burns and scar revision procedures
is estimated to be $350 million worldwide. Additional indications for plastic
surgery and acute wound procedures increase the estimated market to over $1
billion worldwide.
INTEGRA(TM) Artificial Skin
INTEGRA(TM) Artificial Skin is designed to enable the human body to regenerate
functional dermal tissue. Human skin consists of the epidermis (the thin, outer
layer which serves as a protective seal for the body) and the dermis (the
thicker, layer underneath which provides structural strength and flexibility).
The dermis also supports the viability of the epidermis through a vascular
network.
The body normally responds to severe damage to the dermis by producing scar
tissue in the wound area. This scar tissue is accompanied by contraction that
pulls the edges of the wound closer which, while closing the wound, often
permanently reduces flexibility. In severe cases, this contraction leads to a
reduction in the range of motion for the patient, who subsequently requires
extensive physical rehabilitation or reconstructive surgery. Physicians treating
severe wounds, such as full-thickness burns, seek to minimize scarring and
contraction. INTEGRA(TM) Artificial Skin was designed to minimize scar formation
and wound contracture in full thickness skin defects.
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INTEGRA(TM) Artificial Skin consists of two layers, a thin collagen-
lycosaminoglycan ("GAG") sponge and a silicone membrane. The product is applied
with the sponge layer in contact with the excised wound. The collagen-GAG sponge
material serves as a template for the growth of new functional dermal tissue.
The outer membrane layer acts as a temporary substitute for the epidermis to
control water vapor transmission, prevent re-injury and minimize bacterial
contamination.
INTEGRA(TM) Artificial Skin was approved by the FDA under a premarket approval
application ("PMA") for the post-excisional treatment of life-threatening
full-thickness or deep partial-thickness thermal injury where sufficient
autograft is not available at the time of excision or not desirable due to the
physiological condition of the patient. In 1997, the FDA approved a PMA
supplement extending the shelf life for INTEGRA(TM) Artificial Skin from one
year to two years. The FDA's approval order includes requirements to provide a
comprehensive practitioner training program and to conduct a post approval study
at multiple clinical sites. The Company has contracted with 11 burn centers in
the United States to participate in the post approval study, and currently has
approximately 70 patients in the study. The Company offers its training program
to all surgeons specializing in burns throughout the world, and has trained over
700 surgeons worldwide. The Company also offers programs to the entire hospital
team, including operating room personnel, burn unit support staff, and hospital
reimbursement specialists.
In 1996 and 1997, sales of INTEGRA(TM) Artificial Skin have been largely for the
treatment of patients with life-threatening full-thickness or deep
partial-thickness burns where conventional autograft is not available or not
desirable due to the physiological condition of the patient. While the Company
believes that burns are an important market for INTEGRA(TM) Artificial Skin, the
Company is seeking to expand the approved indications for INTEGRA(TM) Artificial
Skin in reconstructive surgery, acute wounds, closure following excision of skin
cancers, and chronic wounds. Recently, the Company received CE Mark
certification in Europe for INTEGRA(TM) Artificial Skin, which included an
indication for reconstructive surgery and full thickness injuries. The broader
reconstructive surgery indications include scar revision procedures, tumor and
skin cancer resection, release of post-burn contractures, congenital skin
defects and revision of hypertrophic and keloid scars.
With the CE mark certification, INTEGRA(TM) Artificial Skin is now approved in
29 countries, including Canada and the United States. The Company sells
INTEGRA(TM) Artificial Skin through a direct technical sales organization in the
United States, Canada, Ireland and the United Kingdom and through distributors
in other international markets. Through its direct sales force and by working
closely with its specialized international distributors, the Company maintains a
continuous working relationship with clinicians in the field of burn care and
reconstructive surgery. Integra believes these relationships are critical to the
long-term success of any new generation product.
In 1997, the Company signed an exclusive importation and sales agreement for
INTEGRA(TM) Artificial Skin in Japan with Century Medical Inc. ("CMI"). CMI is
headquartered in Tokyo, with sales offices in Sapporo, Sendai, Nagoya, Osaka and
Fukuoka. Over the past two decades, CMI has steadily expanded its medical
products distribution business in Japan, and CMI's parent company, ITOCHU
Corporation, reported revenues of $155 billion for 1997. Under this agreement,
CMI is conducting a clinical trial in Japan at its own expense to obtain
Japanese regulatory approvals for the sale of INTEGRA(TM) Artificial Skin in
Japan.
INTEGRA(TM)Artificial Skin sales were $6.0 million and $3.1 million for the
years ended December 31, 1997 and 1996, respectively and accounted for 43% and
28% of the Company's total product sales, respectively.
Product Development
The Company has begun development of a number of new products for its Surgical
Skin Business. The most important of these is a second generation INTEGRA(TM)
Artificial Skin which incorporates the proprietary (arginine-glycine-aspartic)
amino acid peptide sequence ("RGD") which is part of the Company's Telios
technology base. The Company expects this product to reduce significantly the
healing time for full thickness skin repair.
In addition to the effort to expand indications for INTEGRA (TM) Artificial
Skin, the Company is aggressively developing adjunctive products with value
added strategies of particular significance to the wound care business.
Additionally, as data is acquired on the clinical performance of INTEGRA(TM)
Artificial Skin, that feedback is being utilized to generate potential product
improvements necessary to provide the best regenerative dermal matrix product to
Integra's customers.
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Neurosurgical Business
The neurosurgical business encompasses the Company's dural graft and peripheral
nerve conduit products.
Artificial Dural Graft
The dura mater is the tough connective tissue covering the brain and spinal
cord. It acts as a physical barrier and contains the cerebrospinal fluid
("CSF"). There is frequently a need for dural grafts to cover defects in the
dura mater resulting from neurosurgical procedures or other trauma. The Integra
dural regeneration product prevents leakage of the CSF and guides the hystotipic
regeneration of the dural membrane without the adverse effects of scar formation
associated with current, non-regenerative methods of dural repair. The collagen
matrix is entirely resorbed via normal metabolic pathways during the process of
dural regeneration. The Company's dural regeneration template has been implanted
in over 600 patients that comprise two retrospective studies of the product's
performance. The Company is currently evaluating several potential regulatory
strategies for bring this product to market.
There are approximately 325,000 procedures performed worldwide annually where a
dural graft is required. The Company believes the annual market size for this
indication is potentially $40 million. Additionally, the dural graft material is
being clinically assessed for the prevention of fibrosis (adhesions) in spinal
surgery. The potential anti-fibrotic market in the U.S. comprises approximately
600,000 spinal and cranial procedures per year. The Company believes the annual
market size for this indication is potentially $200 million worldwide as an
anti-adhesion material.
Peripheral Nerve Conduit
Although peripheral nerves are one of the few tissues of the body that
spontaneously regenerate, they fail, in the majority of cases, to make useful,
functional connections. Consequently, peripheral nerve injuries often result in
permanent loss of function. Currently, the only method of treatment for a
severed peripheral nerve is microsurgical re-attachment. Integra's peripheral
nerve regeneration conduit is a thin collagen tube designed to facilitate
regeneration of the severed nerve and acts as a bridge between the severed nerve
stumps. The collagen conduit supports nerve regeneration and is resorbed. There
are approximately 20,000 procedures annually in the U.S. that involve severed
peripheral nerves, and the Company believes the worldwide market could amount to
approximately $80 million.
Scar formation at the nerve repair site is the leading cause of failure in
conventional nerve grafting techniques. The Company's collagen tube prevents
scar formation and provides guided peripheral nerve regeneration. The Company's
pre-clinical studies have demonstrated the closure of 5-cm gaps in peripheral
nerves in non-human primates with restored nerve function. The Company initiated
Phase I clinical trials in 1996 in Copenhagen, Denmark. Phase II trials are
planned for the second quarter of 1998.
Japanese Distribution
On March 12, 1998, Integra and CMI announced a strategic alliance for the export
of the neurosurgical product line to Japan. This marks the third agreement for
which CMI will receive rights to distribute Integra's proprietary medical
devices in Japan.
Under the terms of this agreement, CMI will pay a licensing fee of $1 million in
the first quarter of 1998 and will invest $4 million for 500,000 shares of
Integra preferred stock in the second quarter of 1998. CMI will also underwrite
all costs of the Japanese clinical trials and regulatory approval processes.
This seven-year distribution contract begins on the date of regulatory approval
in Japan.
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Product Development
Integra has an active research and development program to develop future
generations of the dural graft and peripheral nerve products in addition to
other regenerative products and technologies that will meet the future needs of
the neuro-surgical community.
Orthopedic
The Company's orthopedics business is predominantly in the development stage.
The Company has a number of projects under way to develop products that support
the regeneration of bone, cartilage and connective tissue. Collaborative
projects include those being undertaken with J&J Professional, Inc. ("JJPI"),
Genetics Institute, Inc. ("GI"), Sofamor/Danek Group, Inc. ("SDG") and the
National Institute of Standards and Technology ("NIST").
Bone Regeneration
The Company supplies GI with a collagen delivery matrix that is used in
conjunction with GI's recombinant human bone morphogenic protein-2 (rhBMP-2) to
stimulate bone regeneration at defect sites. Human clinical trials conducted by
GI have shown the safety and biological activity of the product. GI has
initiated additional larger trials. GI expects to continue testing the product
in clinical studies for orthopedic, oral/maxillofacial and eventually spine
surgery, the last in conjunction with SDG. The Company has an exclusive
supply agreement with GI to provide commercial quantities of the collagen
delivery matrix, should GI successfully commercialize its products.
Cartilage Regeneration
More than 500,000 surgical procedures are performed annually for the treatment
of traumatized articular cartilage. Damaged articular cartilage, which connects
the skeletal joints, is associated with the onset of progressive pain,
degeneration and, ultimately, long-term osteoarthritis. Conventional procedures
for treating traumatic cartilage damage, such as debridement and drilling, do
not stop joint surface degeneration and often require two or more surgeries.
The Company is developing a new device to allow in-vivo regeneration of the
patient's own articular cartilage. This technology will allow the patient's own
body to regenerate a smooth, weight-bearing surface. Conventional approaches
result in the formation of fibrocartilage, which is rough and non-weight bearing
over prolonged periods. Normal articular cartilage is not highly vascularized,
and although it is metabolically active tissue, damaged cartilage generally does
not effectively heal. The conventional procedure for treating traumatic damage
to cartilage involves smoothing damaged portions of the tissue and removing
free-floating material from the joint using arthroscopic surgery. While the
objective of this procedure is to reduce pain and restore mobility, the
long-term result of this procedure often is permanent reduction of joint
mobility and an increased risk of developing osteoarthritis. The Company's
objective in developing its cartilage-specific technology is to produce a
product that provides the proper matrix system to allow the natural regeneration
of the patient's cartilage, with full restoration of function and diminished
risk of osteoarthritis.
The product under development would use the Company's peptide technology to
create an enhanced template that would encourage cells to grow into the template
once implanted into the patient. The Company's peptide portfolio includes
bio-active agents designed to mimic natural ECM proteins to promote chondrocyte
cell adhesion, cell survival and other important cellular functions. The product
under development will use this peptide technology to create an enhanced
template that would recruit chondrocyte cells to the template once implanted.
The template itself would employ proprietary designs based on multiple layers of
collagen material of varying but tightly controlled densities and pore sizes to
provide a scaffold for chondrocyte proliferation and hyaline cartilage
formation. Simultaneously it would prevent the in-growth of unwanted cells that
could lead to scar tissue formation. The Company anticipates that the device
will be absorbed into the body over a period of several weeks. Pre-clinical
studies involving several variations of the above protocols are in progress.
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In February 1998, the Company announced the signing of a strategic alliance with
JJPI to develop and market a new product to regenerate joint cartilage. Integra
has agreed to develop an absorbable, collagen-based implant, designed in
combination with its proprietary RGD peptide technology, that will allow the
body to repair and regenerate articular cartilage found in the knee and other
joints. JJPI will market the product worldwide. Under the terms of the
agreement, JJPI will make payments up to $13 million as Integra meets various
milestones, and will fund all necessary development costs beyond the
pre-clinical phase. Following successful development, Integra will be
responsible for manufacturing the product and for future product development.
JJPI is developing the arthroscopic instrumentation to be used in the surgeries.
The Company believes the product's sales potential, combined with the commitment
from J&J's worldwide marketing and sales force, is a strong validation of the
potential significance of the Telios RGD peptides. The product is being designed
to help overcome the body's inherent deficiencies in regenerating articular
cartilage by promoting the adhesion and function of cells in a manner that will
have much wider clinical use. The Company believes that the combination of its
collagen matrix technology with Telios' RGD peptide technology gives the Company
a unique approach to accelerated cartilage repair. The product is being designed
to be readily available and sterile off-the-shelf. The product's acellular
technique does not require cell cultures. The Company expects these features to
prove substantially more cost-effective than current options.
Tyrosine Polycarbonates Program
The Company is continuing the development of additional ECM technologies. The
goal is to enhance the rate and quality of healing and tissue regeneration with
synthetic biodegradable scaffolds to support cell attachment and growth. To this
end, the Company is developing a new class of resorbable polycarbonates created
through the polymerization of tyrosine, a naturally occurring amino acid. A
well-defined and commercially scaleable manufacturing process is employed to
prepare these materials. Device fabrication by traditional techniques such as
compression molding and extrusion is readily achieved. The Company believes that
this new biomaterial will be safe and effective in promoting full bone healing
when implanted in damaged sites. The Company has licensed this patented
technology from Rutgers University for all applications and continues to work in
collaboration with the technology's inventor, Joachim Kohn, Ph.D. This material
is currently being developed for orthopedic and tissue engineering applications
where strength and bone compatibility are critical issues for success of
healing. The polymer when implanted in bone appears to be osteoconductive; it
conducts bone onto and through the polymer implant. Further, because of the
unique structure of the polymer, the biological breakdown products are
non-acidic. Highly acidic by-products, which are typical of current commercial
orthopedic implants, are a primary cause of sterile abscess which can lead to
pain and even implant failure.
In 1997, the Company completed a pre-clinical animal study, funded by NIST and
the Company. Toxicity studies completed have shown that the polymer is
non-mutagenic and non-cytotoxic. No evidence of systemic toxicity, irritation,
or sensitization was observed. The Company's development activities also include
the use of biomaterials for drug delivery applications. In 1997, the Company was
awarded a second $2 million research and development grant from NIST for the
development of new absorbable and biocompatible tyrosine-based polymer as a
stand alone or in combination with RGD peptides to stimulate in-vivo cartilage
regeneration.
The Company is also developing the polymers for incorporation into its other
manufactured products. The Company has rights to use this material in wound
closure and related drug delivery applications. There is the possibility of
delivering growth factors and other biological response modifiers in a
controlled manner in conjunction with the Company's skin regeneration, cartilage
regeneration and nerve regeneration technologies. In addition, the technology
may prove useful in surgical hemostasis and dental surgery applications where
the sustained delivery of antibiotics at the surgical site could be beneficial.
The Company's strategy is to pursue strategic partnership alliances to assist in
the further development and commercialization of this technology.
Osteoporosis
Nearly 1.5 million Americans are afflicted with osteoporosis. It is estimated
that there are nearly 300,000 new cases of osteoporotic hip fractures each year.
The associated costs of osteoporosis approach $10 billion each year. The Company
is investigating a new therapeutic approach for the treatment of this disease
based on its proprietary technologies developed at Telios. The approach prevents
the attachment of bone dissolving osteoclasts to bone
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tissue thereby slowing or preventing the disease. Pre-clinical studies have
demonstrated the effectiveness of several proprietary peptides in preventing
bone loss. Development efforts are continuing, as are efforts to identify an
appropriate strategic partner to assist the Company in commercializing this
technology.
Decorin for Fibrosis Control
The total U.S. market potential for adhesion prevention products is estimated at
4.5 million procedures worth approximately $900 million. General surgery and
gynecology comprise the largest segments with 40% and 38% shares, respectively.
Medical Device International reports that there were over 400,000 adhesionolysis
procedures performed in 1995, nearly 240,000 of which were for
gynecology-related indications.
It is estimated that by the year 2000, overall U.S. revenues for adhesion
prevention devices will reach $75-$100 million--growing at a double-digit
rate--equivalent to a market penetration of 15%. Although the adhesion
prevention market is a potentially lucrative niche, it is unlikely that it will
be able to support all the products and technologies currently available or
under development. Nevertheless, there is a significant opportunity for a truly
effective product. The Company's decorin-based product offers a unique approach
to this problem by interrupting the mechanism of adhesion formation, rather than
just providing a barrier that attempts to prevent tissues from "sticking to one
another."
Decorin, a natural component of the ECM, is the body's natural regulator of the
growth factor TGF-(beta). TGF-(beta) has many functions in the body including
regulation of cell death, immune system interactions and wound healing. In the
case of adhesion formation, a form of uncontrolled wound healing, when a tissue
experiences trauma from accident, disease or surgery, the effected cells
up-regulate the production of TGF-(beta). This causes a rapid and random
deposition of ECM that ultimately results in scarring or fibrosis. When tissues
are in close proximity to one another the fibrotic tissue attaches to other
nearby tissues and an adhesion is formed. Decorin can bind this excess TGF-
(beta) and stop the fibrosis cascade thereby actually preventing adhesions from
ever starting.
The Company is in early-stage development of a variety of product forms (sprays,
gels, films, solutions). The Company is seeking strategic partners to assist in
the development of this technology, and it anticipates that preclinical studies
will commence this year.
Private Label Medical Products
The Company develops and sells, primarily through licensing and distribution
arrangements, a number of biomaterials-based medical products and devices for
infection control, general surgery and dental surgery. These products accounted
for approximately $8.0 million, $8.1 million and $8.3 million of product sales
for the Company during the years ended December 31, 1997, 1996 and 1995,
respectively, representing approximately 57%, 72% and 100%, respectively, of
the Company's product sales for such years.
The Company has pursued a strategy of developing new products, obtaining
regulatory approvals, and distributing these products through marketing and
distribution partnerships. Typically, these partnerships are with leading
medical device companies that assist in developing the commercial potential of
the Company's medical products. A substantial portion of the Company's medical
products is sold to customers under the terms of multiple-year marketing and
distribution agreements that provide for purchase and supply commitments on the
part of the customer and the Company, respectively. In many cases, marketing
customers have paid license fees to the Company for the marketing and
distribution rights. In the absence of a suitable United States marketing
partner for the Company's hemostasis product line, the Company has elected to
sell certain portions of the hemostasis product line in the United States
through a national network of specialized distributors.
Of the Company's total product sales during 1997, 1996 and 1995, customers
accounting for more than 10% of total product sales included two customers
accounting for 24%, three customers accounting for 42% and four customers
accounting for 56%, respectively.
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Infection Control Products
The Company's patented VitaCuff(TM) product provides protection against
infection arising from long-term catheters. VitaCuff(TM) consists of a silver
nitrate impregnated collagen matrix ring, which is positioned on the catheter
before placement. Once in place the collagen forms a seal at the point of entry,
mechanically preventing microbial invasion along the catheter while at the same
time releasing silver nitrate into the surrounding area. In this application,
silver-nitrate functions as a highly effective, broad-spectrum anti-microbial
agent. VitaCuff(TM) and related products are manufactured by the Company and
marketed through Arrow International, Inc., Bard Access Systems, Inc. and
Quinton Instruments.
The Company manufactures a patented wound dressing composed of a synthetic and
biopolymer composite foam impregnated with an anti-microbial compound which is
marketed by Ethicon, Inc., a Johnson & Johnson subsidiary, under the trade
name BioPatch(TM). The product is applied over the entry point of any
percutaneous device, such as orthopedic traction pins and epidural catheters,
and serves to protect the area from bacterial growth for an extended period. In
1997, the Company extended its licensing and distribution agreement with
Ethicon, Inc. for BioPatch(TM) and agreed to provide them with an exclusive
license to its patents in this field. The Company has also developed a silver
impregnated foam wound dressing which provides anti-microbial protection to
prevent bacterial colonization leading to infection.
Dental Surgery Products
The Company's dental surgery products are extensions of the Company's absorbable
collagen hemostatic sponge technology (see below). Each of the three products,
CollaCote(TM), CollaPlug(TM) and CollaTape(TM), has a unique dimension, shape
and density and provides most of the hemostasis requirements encountered in
dental surgery. Calcitek markets the Company's dental surgery products.
The Company has also developed BioMend(TM) Absorbable Collagen Membrane
("BioMend(TM)") for use in guided tissue regeneration in periodontal surgery.
BioMend(TM) is inserted between the gum and the tooth after surgical treatment
of periodontal disease. BioMend(TM) prevents the gum tissue from interfering
with the regeneration of the periodontal ligament that holds the tooth in place.
BioMend(TM) is intended to be absorbed into the patient after approximately four
to seven weeks, avoiding the requirement for additional surgical procedures to
remove a non-absorbable membrane. Calcitek also markets BioMend(TM).
Surgical and Hemostasis Products
The Company's hemostasis products are used in surgical procedures to help
control bleeding. The Company's absorbable collagen hemostatic sponge products
consist of Helistat(TM) (Absorbable Collagen Hemostatic Sponge), Helitene(TM)
(Absorbable Collagen Hemostatic Agent-Fibrillar Form), Collastat(TM) and related
products. The Company's products have been manufactured for more than 15 years
and are estimated to have been used in several hundred thousand patients. These
products are manufactured by Integra and marketed in the United States through a
network of specialized distributors. Outside of the United States, various
international distributors sell the products. The Company introduced a new
product under its Helistat(TM) line in 1997, a 1" x 9" collagen sponge strip for
sternal hemostasis. The Company's Instat(TM) Products (absorbable collagen
hemostatic agent in fibrillar form) are manufactured by the Company and marketed
in the United States by Ethicon, Inc. In January 1998, the Company announced
that it had signed an agreement with CMI for supply and distribution of the
Company's Helistat(TM) and Helitene(TM) products in Japan. One variant of the
Company's hemostasis product line is a collagen sponge sold by JJPI under the
brand name Bicol(TM) that acts as a moistening agent to prevent drying of brain
tissue and as a protective device to buffer the pressure of retractors in
neuro-surgery.
The domestic market for hemostasis products is dominated by long standing,
traditional products based on gelatin or cellulose technology. The Company's
collagen technologies provide an effective control of surgical bleeding and are
approved to be left in the body following completion of a surgical procedure.
9
Biocompatible Coatings
As an extension of its surgical product line, the Company has developed a
collagen vascular graft coating in conjunction with Sorin. This proprietary
collagen coating provides an alternative to fabric vascular graft products,
which require pre-clotting before use. The Company's product is easier to use
because it eliminates the need for pre-clotting. The Company transferred the
coating technology and pilot plant equipment to Sorin. Integra derives ongoing
revenues from royalties and the sale of materials to Sorin.
The use of prosthetic device implants creates a variety of clinical problems,
including inflammation, encapsulation, thrombosis and infection. These problems
may be overcome by coating the surface of implanted materials with cell
attachment sites which enable the natural development of tissue structure at the
material-tissue interface providing for long-term, stable tissue integration.
The Company is developing PepTite(TM) Biocompatible Coating ("PepTite(TM)")
designed to improve the biocompatibility of implantable materials. The coating
contains the proprietary RGD peptide. The Company is conducting a number of
pre-clinical in-vivo effectiveness studies in collaboration with various implant
manufacturers. The Company has coated and is studying: (a) percutaneous access
catheters to reduce thrombus formation; (b) polyester mesh to enhance
endothelialization of arterial wall defect repairs and reduce inflammation
inhernia and other fascial defects; (c) metal stents; (d) silicone implants to
reduce or eliminate encapsulation of the implant; and (e) certain polymers
utilized in cardiovascular devices to reduce thrombogenicity and enhance tissue
in-growth. The Company's strategy is to develop PepTite(TM) in collaboration
with other medical device manufacturers.
Developing Businesses and Ventures
The company has a number of developing businesses and ventures. These include a
women's health initiative, an Artecor vascular graft, a variety of Matrix
Medicine(TM) products developed at Telios, including Decorin, and a project
surrounding the regeneration of pancreatic islets.
Women's Health Initiative
The Company is working with the Agency for Contraceptive Research and
Development and the Population Council in the development of topical,
trans-dermal and implantable drug delivery systems. These systems are intended
to deliver steroids and other pharmaceuticals for reproductive health
applications such as contraception, fertility enhancement and topical control of
sexually transmitted disease. Products developed through these relationships are
intended to be manufactured exclusively by the Company for worldwide
distribution.
Artecor Vascular Graft
In 1996, the Company formed Medicol Sciences, Ltd., a wholly-owned subsidiary in
the Czech Republic ("Medicol"), and acquired rights to several patented
processes relating to the development and manufacture of small diameter (less
than 6 mm) vascular grafts. The technology employs a collagen-based matrix in
conjunction with an open mesh Dacron fabric. Following sterilization, the
resulting product can be implanted as a vascular graft. The Company also entered
into a consulting agreement with Dr. Milan Krajicek, who is the inventor of the
technology. The Company will be funding continued pre-clinical studies to
determine the effectiveness of the graft in coronary artery by-pass surgery and
for use in peripheral reconstruction procedures.
Matrix Medicine: The Telios Product Pipeline
Integra acquired Telios in 1995 to commercialize Telios technologies relating to
extracellular matrices and integrin-mediated activity, and in particular, their
applications to tissue regeneration. Integra is developing Telios' findings and
methodologies to enhance and accelerate development and commercialization of its
products.
10
Telios's RGD peptide technology is a direct result of the pioneering work begun
in the early 1980s by co-inventors Michael D. Pierschbacher, Ph.D., Integra's
Senior Vice President and General Manager of Telios, and Erkki Ruoslahti, MD,
President and CEO of The Burnham Institute. The patented RGD technology has been
shown to have potential utility in a number of important and rapidly growing
medical therapies. These include tissue regeneration, biocompatible coatings for
implantable medical devices, thrombosis (blood clotting), cancer treatment,
immune system regulation, inflammation, and control of angiogenesis.
Peptides are small synthetic chains of amino acids that are designed to perform
specific functions on cells. Peptides can be engineered to mimic very large
natural matrix proteins that are found within tissues of the body. Peptides bind
integrin receptors found on the surface of virtually all cells of the body.
There are more than 20 such integrin types within this family of cell receptors.
Integrins control cell attachment, growth, migration and differentiation. Cells
present within tissues rely on specific integrin types during tissue
regeneration. Small synthetic peptides can be designed to interact selectively
with certain integrins to achieve differing outcomes by enhancing certain
interactions between cells and matrix. When used in combination with a collagen
scaffold, these peptides signal the appropriate cell-matrix functions through
integrins and promote the formation of new tissue by guiding the attachment and
growth of cells.
The Company's proprietary pharmacological applications of its technologies are
intended to target and control the behavior of human cells through their
interactions with the extracellular matrix. The Company refers to the clinical
applications of these technologies as Matrix Medicine(TM), and is developing
applications for the pharmacological treatment of serious human disease
conditions, including diseases involving thrombosis, fibrosis and angiogenesis.
The Company's Matrix Medicine(TM) technologies are based on the interaction
between a family of cell surface proteins called integrins and the
arginine-glycine-aspartic acid ("RGD") peptide sequence found in the majority
of extracellular matrix proteins, including structural molecules and adhesion
molecules that provide binding sites, structural support, and physiological
information for the maintenance of normal cell function in the body. In 1997
additional significant patents that strengthen the Company's proprietary
position in this technology were issued to The Burnham Institute. These
patents are exclusively licensed to Integra through its Telios subsidiary.
The Company has in development new pharmacological products based on the
interaction between the extracellular matrix and the integrin family of
receptors that are present on virtually all cells in the body. The Company
believes that many major diseases and disorders throughout the body, including
many that are debilitating, life-threatening, costly and difficult or impossible
to treat satisfactorily with existing therapies, involve the disruption or
abnormality of the interaction of cells with the extracellular matrix. The
Company's Matrix Medicine(TM) technologies are intended to modify the
interaction of cells with the matrix in such a way as to provide new treatment
strategies for a range of disorders. The Company is pursuing a strategy to
identify clinical and market leaders in pharmacological areas to co-develop and
license the Company's proprietary technologies and applications. The Company
believes that such development and marketing relationships could result in a
greater likelihood of commercialization of these opportunities by utilizing the
skills of partners to complete clinical trials and market introduction, while
allowing the Company to focus on pre-clinical development. Many of the Company's
technologies are in the early stages of development and will require the
commitment of substantial additional resources by the Company and its potential
strategic partners prior to commercialization. There can be no assurance that
the Company will be able to form strategic alliances or successfully develop
commercial products.
TP-9201 Platelet Aggregation Inhibitor for the Treatment of Stroke
The Company has developed a platelet aggregation inhibitor which has been
demonstrated to be safe in a Phase I clinical trial and is now ready for Phase
II dose ranging trials in patients. Platelets are small cells that circulate in
the blood and have many important functions, one of which is related to the
control of bleeding. Platelets prevent bleeding by first adhering to the vessel
wall in a process called "platelet adhesion and spreading". In a secondary
process of "platelet aggregation," platelets aggregate to form clumps. Without
properly functioning platelets, dangerous bleeding can occur. In diseased or
surgically damaged blood vessels, platelets can aggregate and restrict the vital
supply of blood to the heart, brain and other organs and tissues. This
condition, termed thrombosis, is a common hallmark of cardiovascular diseases
such as heart attack and stroke, and can cause serious complications during and
after surgical procedures. Two kinds of drugs currently available for the
treatment of thrombotic diseases and conditions are anticoagulants and
thrombolytics. Anticoagulants inhibit formation of clots and have both
11
preventive and therapeutic applications. Thrombolytics function by dissolving
already existing clots. However, when the consequences of bleeding are severe,
neither of these agents are generally recommended. Current approaches to
thrombosis prevention that involve inhibition of platelet aggregation carry the
risk of compromising the body's ability to control bleeding. Even minor
bleeding, if allowed to go unchecked, can lead to life-threatening events such
as stroke and other forms of internal hemorrhage.
The Company is developing a selective platelet aggregation inhibitor targeting
the (alpha)IIb(beta)3 integrin receptor that appears on the surface of activated
platelets and mediates their aggregation. A key technical challenge in the
development of a (alpha)IIb(beta)3 inhibitor is to provide a molecule specific
enough to allow the beneficial functions of (alpha)IIb(beta)3, such as those
responsible for the primary event of platelet adhesion and spreading while at
the same time inhibiting the negative effects caused by platelet aggregation.
Anti-platelet agents without such characteristics prevent thrombosis but promote
bleeding. ReoPro, an antibody that blocks the function of (alpha)IIb(beta)3 was
approved by the FDA in 1996 for use to prevent thrombosis after angioplasty
procedures. Eli Lilly, who markets this product, claims that the initial
bleeding problems associated with this product can be controlled by carefully
controlling the dosage. The Company has conducted pre-clinical studies that
demonstrate TP-9201 doses that prevent unwanted platelet aggregation without
reducing the platelets' ability to control capillary bleeding. The unique
properties of this molecule are being developed for application in therapeutic
areas where the separation of bleeding from anti-thrombotic effect is crucial.
The potential markets that could benefit from TP-9201 include: (a) unstable
angina, as transient blockage of coronary arteries by blood clots, often
preceding complete myocardial infarction; (b) restenosis, as reclosure of
arteries, typically after angioplasty; (c) reocclusion, as reclosure of
arteries, typically after angioplasty or treatment of mild myocardial infarction
with thrombolytics; and (d) ischemic stroke, as blockage of blood vessels
supplying the brain, often resulting in permanent brain damage. Additionally,
vascular synthetic grafts can cause thrombosis and have a tendency to leak
blood. TP-9201 may be able to prevent thrombosis without increasing risk of
bleeding associated with these grafts. Finally, problems associated with organ
transplantation thrombosis, which occurs after reestablishing blood flow to the
organ and results in blockage of the microvascular bed and organ failure, could
be reduced with the use of TP-9201.
The Company believes that there are many procedures that may be addressed with
the use of TP-9201 or future products developed from this technology. The
Company intends to seek strategic alliances to further develop this technology.
There can be no assurance that the Company will be able to form strategic
alliances or successfully develop commercial products.
TGF-(Beta) Antagonists to Target Fibrosis and Cancer
Transforming Growth Factor Beta ("TGF-(beta)") is a class of growth factors
(cytokines) that has widespread regulatory effects on many processes that are
essential for normal health. Such processes include cell growth and
differentiation, fetal development, immune regulation, inflammation and tissue
repair. The Company believes that the importance of TGF-(beta) for human
medicine is that an imbalance of TGF-(beta) underlies chronic inflammatory and
fibrotic diseases, and contributes to tumor progression. The Company intends to
develop TGF-(beta) antagonists that correct such TGF-(beta) imbalances. The
Company has licensed from the Burnham Institute, as well as from the University
of Utah, patents and patent applications relating to the control of TGF-(beta)
activity. Potential medical applications of this technology include prevention
of scarring following surgery or trauma and prevention or limitation of fibrosis
of the kidney, lung, liver, skin, arteries and the central nervous system as
well as potentially preventing drug resistance in tumors.
The Company has identified two primary therapeutic approaches to the control of
TGF-(beta): human antibodies directed against TGF-(beta) and recombinant human
decorin. Decorin is a natural regulator of TGF-(beta) activity and suppresses
the production of TGF-(beta) in injured tissues. The Company's human antibody
development program is being carried out under an agreement with Cambridge
Antibody Technology Limited ("CAT"), under which CAT has already developed
several human anti-TGF-(beta) antibodies that are presently under pre-clinical
or clinical investigation. The Company has the right to market all dermal
applications of these antibodies, including the treatment of dermal scarring.
The Company has also developed cell lines expressing recombinant human decorin
and is developing production procedures for decorin.
12
Drug Discovery Capability for Integrin Specific Compounds
The Company has developed integrin receptor and cell based assay systems which
have been used to screen for and discover integrin specific drug candidates for
clinical development. This capability has enabled the successful discovery of
the clinical development candidate TP-9201 (an anti-thrombotic compound that may
be uniquely applicable to the treatment of stroke), an antagonist that
effectively inhibited bone resorption in animal models of osteoporosis and a
compound that effectively inhibits angiogenesis. Based on this experience, the
Company is in a position to expand its drug discovery and screening programs
and is seeking corporate partnerships for collaboration in this effort.
The following integrins are being studied as potentially useful therapeutic
targets in pre-clinical research:
Target Integrin Clinical Indications Suggested Mechanism
- --------------- -------------------- -------------------
(alpha)IIb(beta)3 Thrombosis Platelet aggregation
(alpha)v(beta)3 Angiogenesis Endothelial cell migration
(alpha)v(beta)3 Vascular grafts Endothelial cell migration
(alpha)v(beta)3 Osteoporosis Bone cell adhesion
(alpha)v(beta)3 and/or
(alpha)IIb(beta)3 Restenosis Smooth muscle cell proliferation
(alpha)v(beta)3 and/or
(alpha)5(beta)1 Metastasis Migration of cancer cells
(alpha)v(beta)3 and/or
(alpha)v(beta)5 Bone formation Adhesion of bone-producing cells to bone
(alpha)5(beta)1 Cell survival Control of apoptosis
The Company has developed lead compounds targeting (alpha)IIb(beta)3,
(alpha)v(beta)5, (alpha)v(beta)3 and (alpha)v(beta)1, and is carrying out
continuing pre-clinical research on these compounds through collaborative
arrangements with academic laboratories experienced in the appropriate disease
models. The Company intends to seek strategic alliances to develop further the
application of these compounds. There can be no assurance that the Company
will be able to form strategic alliances or successfully develop commercial
products.
Pancreatic Islet Regeneration
The Company has an ongoing collaboration with Drs. Daniel Salomon and Bruce
Torbet at The Scripps Research Institute for the development of Integra's
proprietary technology to support the regeneration and long term survival of
functioning pancreatic islets for the treatment of diabetes. By providing a
synthetic extracellular matrix that supports the function of appropriate
integrins, these researchers have shown in animal models that islet engraftment
and vascularization can be achieved and that long term viability and glucose
sensitivity can be maintained.
Research Strategy
The Company has either acquired or secured the proprietary rights to several
important scientific platforms. These platforms can be organized into four
distinct but complementary technological categories: a) bioabsorbable and other
materials; b) ECM and other specialized materials structures; c) materials as
delivery vehicles for peptides,
13
cells, growth factors, drugs and other actives; and d) actives. These
technologies provide support for the Company's critical applications in tissue
regeneration, developing pharmacological applications, and additional
opportunities for generating near-term and mid-term revenues from medical
applications. The Company has been able to identify and bring together critical
platform technology components from which it wants to develop solutions to the
problem of targeting and controlling selected cell behavior in the patient's
body for both tissue regeneration and pharmacological application.
The Company focuses its efforts on the convergence of these technology
categories into a type of "basic operating system solution" for technology
development and product performance. Just as a computer's basic operating system
interfaces with its electronic hardware to direct and control the performance of
the computer, specialized absorbable products developed by the Company are
intended to function in the patient's body by directing and controlling targeted
cell behavior to achieve a specified desired medical result.
The Company's research focus is on technology development as opposed to early
stage basic research. Toward that end, Integra focuses on the commercial and
clinical utility of its products by encouraging early and close collaboration
with clinicians. As an example, INTEGRA(TM) Artificial Skin is the result of a
close collaboration between a surgeon and a materials scientist. The surgeon's
ability to define the critical specifications of the product were essential
prerequisites to the product development and demonstration of clinical utility
in human clinical trials. Particularly critical were that the product be readily
available "off the shelf" at the time of early wound excision for patients with
life-threatening injury and that it be a permanent wound cover.
The Company's research implementation is to supplement a relatively small group
of in-house scientists and researchers with collaborative links with a network
of various hospitals and medical organizations which are centers of research in
the Company's technologies. The Company believes this is a cost-effective way to
obtain knowledge and expertise in the Company's technologies while maintaining
an ability to respond quickly and effectively to technological change. To assist
the Company in achieving its objectives, Integra has entered into
collaborations, research and/or licensing arrangements with the following
institutions: (a) Brigham & Women's Hospital, Inc., Boston, MA for INTEGRA(TM)
Artificial Skin; (b) Cambridge Antibody Technology Limited, Cambridge, England,
for product development of human TGF- (beta) antibodies; (c) Duke University
Medical Center, Durham, NC for pre-clinical studies of collagen nerve graft
tubes; (d) Eastern Virginia Medical School, Norfolk, VA for pre-clinical studies
on polymers; (e) Agency for Contraceptive Research and Development, Norfolk, VA
for topical fertility and sexually transmitted disease control; (f) Hospital for
Joint Diseases Orthopedic Institute, New York, NY for pre-clinical studies on
cartilage regeneration; (g) National Institute of Standards and Technology for
resorbable polymers for orthopedic indications and tissue engineering; (h) The
Burnham Institute, La Jolla, CA (formerly La Jolla Cancer Research Foundation)
for basic research on integrin signaling pathways; (i) Massachusetts General
Hospital, Boston, MA for INTEGRA(TM) Artificial Skin studies; (j) Massachusetts
Institute of Technology, Cambridge, MA for INTEGRA(TM) Artificial Skin studies;
(k) Robert Wood Johnson Medical School, Piscataway, NJ for quality control
methodology; (l) Rutgers University, Piscataway, NJ for tyrosine polycarbonate
polymers for orthopedic applications and tissue engineering; (m) University
Hospital Copenhagen, Denmark for clinical studies of collagen nerve graft tubes
and resorbable polymers for tissue engineering; (n) J&J Professional, Inc. for
articular cartilage regeneration; (o) Century Medical Inc., Japan for
INTEGRA(TM) Artificial Skin and neuro-surgical product clinical trials in Japan;
(p) The Scripps Research Institute in the areas of regenerating pancreas and
stroke; and (q) University of Washington Engineered Biomaterials for
bioengineering.
The Company spent approximately $6.4 million, $6.3 million and $5.2 million
during 1997, 1996 and 1995, respectively, on research and development
activities. Research and development activities funded by government grants and
contract development revenues amounted to $500,000, $1.1 million and $1.1
million during 1997, 1996, and 1995, respectively.
Patents and Proprietary Rights
The Company's ability to compete effectively will depend, in part, on the
clinical and commercial success of its development efforts and its ability to
maintain the proprietary nature of its technologies and manufacturing processes.
The Company pursues a policy of seeking patent protection for certain of its
technology, products and product improvements both in the United States and in
selected foreign countries. When appropriate, the Company has and plans to
continue to enforce and defend its patent rights. The Company also relies upon
trade
14
secrets, continuing technological innovations and licensing opportunities to
develop and maintain its competitive position.
As of December 31, 1997, the Company owned or had exclusive license rights to
134 issued or allowed United States patents and 107 issued or allowed foreign
patents, with pending United States patent applications and related foreign
patent applications describing approximately 250 additional inventions. These
patents and patent applications contain composition of matter, process and
method of use claims for various fields of use, primarily involving regenerative
medicine and related technologies. The Company files patent applications both in
the United States and in foreign countries in order to protect both its products
and technologies. In addition, the Company has various licenses to technologies
patented by others. The patent position of biotechnology and pharmaceutical
firms is highly uncertain, involves many complex legal, factual and technical
issues and has recently been the subject of much litigation. There is no clear
policy involving the breadth of claims allowed in such cases or the degree of
protection afforded under such patents. As a result, there can be no assurance
that patent applications relating to the Company's products or technologies will
result in patents being issued, that patents issued or licensed to the Company
will provide protection against competitors or that the Company will enjoy
patent protection for any significant period of time. It is possible that
patents issued or licensed to the Company will be successfully challenged, or
that patents issued to others may preclude the Company from commercializing its
products under development.
Certain of the patents licensed by the Company for specific uses are licensed to
other parties for use in certain fields or are sublicensed to other parties.
Litigation to establish the validity of patents, to defend against infringement
claims or to assert infringement claims against others, if required, can be
lengthy and expensive. There can be no assurance that the products currently
marketed or under development by the Company will not be found to infringe
patents issued or licensed to others.
The Company's competitive position is also dependent upon unpatented trade
secrets. The Company continues to develop a substantial database of information
concerning its research and development. The Company has taken security measures
to protect its data and is in the process of exploring ways to enhance further
the security of its data. However, trade secrets are difficult to protect. There
can be no assurance that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
the Company's trade secrets, that such trade secrets will not be disclosed, or
that the Company can effectively protect its rights to unpatented trade secrets.
In an effort to protect its trade secrets, the Company has a policy of requiring
its employees, consultants and advisors to execute proprietary information and
invention assignment agreements upon commencement of employment or consulting
relationships with the Company. These agreements provide that all confidential
information developed or made known to the individual during the course of their
relationship with the Company must be kept confidential, except in specified
circumstances. There can be no assurance, however, that these agreements will
provide meaningful protection for the Company's trade secrets or other
proprietary information in the event of the unauthorized use or disclosure of
confidential information.
Government Regulation
The Company's research and development activities and the manufacturing and
marketing of the Company's existing and future products are subject to
regulation by numerous governmental agencies in the United States and in other
countries. The FDA and comparable agencies in other countries impose mandatory
procedures and standards for the conduct of clinical trials and the production
and marketing of products for diagnostic and human therapeutic use. The FDA
product approval process has different regulations for drugs, biologics, and
medical devices. The FDA currently classifies the Company's proposed
regenerative medicine products as medical devices.
Review Process for Medical Devices
There are two types of FDA review/approval procedures for medical devices: a
Premarket Notification Section 510(k) ("510(k)") and a Premarket Approval
("PMA") application. A 510(k) requires submission of
15
sufficient data to demonstrate substantial equivalence to a device marketed
prior to May 28, 1976, or to a device marketed after that date which has been
classified into Class I or Class II. Although the mandated period for FDA review
is 90 days, actual review times can be substantially longer, and the sponsor
cannot market the device until FDA clearance is obtained. For those devices that
involve new technology and/or that present significant safety and effectiveness
issues, 510(k) submissions may require significantly more time for FDA review
and may require submission of more extensive safety and effectiveness data,
including clinical trial data.
Among the conditions for clearance to market of a 510(k) submission is the
requirement that the prospective manufacturer's quality control and
manufacturing procedures conform to the FDA's current Quality System
Regulations. In complying with standards set forth in these regulations,
manufacturers must expend time, money and effort for production and quality
control to ensure full technical compliance at all times. Manufacturing
establishments, both international and domestic, are also subject to inspections
by or under the authority of the FDA. Although, at present, the FDA generally
does not inspect such establishments prior to clearance of a 510(k) submission,
it is establishing a program of conducting quality system inspections for new
devices in the future as a standard practice.
The Medical Device Amendments of 1976 amended the Federal Food, Drug and
Cosmetics Act to establish three regulatory classes for medical devices, based
on the level of control required to assure safety and effectiveness. Class III
Devices are defined as life-supporting and life-sustaining devices, devices of
substantial importance in preventing impairment of human health or devices that
present potentially unreasonable risk of illness or injury. Class III devices
are those for which there is insufficient information to show that Class I or
Class II controls can provide a reasonable assurance of safety or effectiveness.
The PMA application review process for Class III devices was established to
evaluate the safety and effectiveness of these devices on a product by product
basis. Manufacturers that wish to market Class III devices must submit and
receive approval of a PMA application from the FDA.
The FDA has substantial content and format requirements for PMA applications,
which include clinical and non-clinical safety and effectiveness data, labeling,
manufacturing processes and quality assurance programs. As part of the PMA
application process, the PMA application may be referred to an FDA Advisory
Panel for review. Additionally, final approval of the product is dependent on an
inspection of the manufacturing facility for compliance with FDA Quality System
Regulations.
All studies in humans for the purpose of investigating the safety and
effectiveness of an investigational medical device must be conducted under the
Investigational Device Exemption ("IDE") regulations. An IDE application to the
FDA includes all preclinical biocompatibility testing, investigational
protocols, patient informed consents, reports of all prior investigations,
manufacturing and quality control information. It takes a number of years from
initiation of the project until submission of a PMA application to the FDA, and
requires the expenditure of substantial resources. If a PMA application is
submitted, however, there can be no assurance on the length of time for the
review process at the FDA or that the FDA will approve the PMA application.
Under either the 510(k) submission or PMA application process, manufacturing
establishments, foreign and domestic, are subject to periodic inspections by the
FDA for compliance with Quality System Regulations. The Company and each of its
operating subsidiaries are subject to such inspections.
To gain approval for the use of a product for clinical indications other than
those for which the product was initially evaluated or for significant changes
to the product, further studies, including clinical trials and FDA approvals are
required. In addition, for products with an approved PMA application, the FDA
requires post-approval reporting and may require post approval surveillance
programs to monitor the product's safety and effectiveness. Results of post
approval programs may limit or expand the further marketing of the product.
16
International Regulatory Requirements
The Company is preparing for the changing international regulatory environment.
"ISO 9000" is an international recognized set of guidelines that are aimed at
ensuring the manufacture and development of quality products. The Company was
audited under ISO standards in 1997, and received certification to ISO9001, a
full quality system. The Company is required to be audited on an annual basis by
a recognized notified body to maintain certification. Companies that meet ISO
standards are internationally recognized as functioning under a quality system.
Approval of a product by regulatory authorities in international countries must
be obtained prior to the commencement of marketing of the product in such
countries. The requirements governing the conduct of clinical trials and product
approvals vary widely from country to country, and the time required for
approval may be longer or shorter than that required for FDA approval of the PMA
application. In June 1998, the European Union Medical Device Directive becomes
effective, and all medical devices must meet the Medical Device Directive
standards and receive CE mark certification. CE mark certification involves a
comprehensive quality system program, and may require submission of data on a
product to the notified body in Europe.
Other United States Regulatory Requirements
In addition to the regulatory framework for product approvals, the Company is
and may be subject to regulation under federal and state laws, including
requirements regarding occupational health and safety; laboratory practices; and
the use, handling and disposal of toxic or hazardous substances. The Company may
also be subject to other present and possible future local, state, federal and
foreign regulations.
The Company's research, development and manufacturing processes involve the
controlled use of certain hazardous materials. The Company is subject to
federal, state and local laws and regulations governing the use, manufacture,
storage, handling and disposal of such materials and certain waste products.
Although the Company believes that its safety procedures for handling and
disposing of such materials comply with the standards prescribed by such laws
and regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of such an accident, the
Company could be held liable for any damages that result and any such liability
could exceed the resources of the Company. Although the Company believes that it
is in compliance in all material respects with applicable environmental laws and
regulations, there can be no assurance that the Company will not incur
significant costs to comply with environmental laws and regulations in the
future, nor that the operations, business or assets of the Company will not be
materially adversely affected by current or future environmental laws or
regulations.
Manufacturing
The Company's primary manufacturing facility is located in Plainsboro, New
Jersey. The Company manufactures the majority of its medical products at this
approximately 35,000 square foot FDA-registered and inspected facility which
also serves as the Company's executive offices. The Company's commercial-scale
manufacturing facility for INTEGRA(TM) Artificial Skin is at this location.
The basic material for many of the Company's medical and regenerative medicine
products is principally purified collagen prepared from bovine tendon in a
four-step process: (i) the raw material is processed with various enzymes and
solvents to purify and render it non-immunogenic; (ii) the purified material is
dispersed into suspensions appropriate for the manufacture of the different
forms of collagen material and then dried using freeze drying techniques; (iii)
the fibrous material yielded from the drying step is "cross-linked" through
chemical bonding of overlying fibers, with different types and degrees of
cross-linking being used for different products; and (iv) the bonded material is
sized and packaged. The Company has installed equipment for the manufacture of
bovine collagen-based products at its Plainsboro facility.
17
The Company also has a lease agreement for a four-building site consisting of
approximately 25,000 square feet in West Chester, Pennsylvania. The West Chester
facility and manufacturing assets were under renovation from 1994 through 1996.
The Company has decided to reduce costs by shutting down the West Chester
facility and consolidating the operations at the Plainsboro site. Through
improved efficiencies, the Plainsboro facility is capable of handling these
additional operations, as well as requirements from increased sales in the
foreseeable future. The West Chester facility transition will occur during the
early part of 1998, and the Company plans on transferring some associates to the
Plainsboro facility.
The Company believes that its existing and renovated manufacturing facilities
are adequate for the foreseeable future and, depending on product mix and
pricing, can support the manufacturing for significant product sales. Further,
the Company believes that suitable additional or alternative space will be
available on commercially reasonable terms when needed in the future.
Competition
In general, the medical technology industry is subject to rapid, unpredictable
and significant technological change. Competition from established
pharmaceutical and medical technology companies is intense. Competition also
comes from early stage companies that have alternative technological solutions
for the Company's primary clinical targets. New technologies are constantly
being developed at universities and research institutions.
The Company's competitive position will depend on its ability to secure
regulatory approval for its products, implement production and marketing plans,
obtain patent protection and secure adequate capital resources. The Company is
aware of several companies seeking to develop dermal replacement and other
products that could, if successfully developed, potentially compete with the
regenerative medicine technologies under development by the Company. A number of
biotechnology, pharmaceutical and chemical companies are developing various
types of wound healing treatments which are alternatives to tissue regeneration
for some conditions, including chronic skin ulcers. These treatments employ a
variety of approaches such as growth factors, tripeptides and wound dressings.
The Company believes that some of these alternatives could be used in
conjunction with the Company's products.
The Company competes primarily on the uniqueness of its technology and product
features and on the quality and cost-effectiveness of its products. Many
competitors or potential competitors have greater financial resources, research
and development capabilities, and marketing and manufacturing experience than
the Company. While there can be no assurance that the Company's products and
technology will not become obsolete, the Company believes that it occupies a
unique position in its industry because INTEGRA(TM) Artificial Skin was the
first regenerative product approved by the FDA and due to the Company's strong
patent portfolio covering the field of regeneration.
The Company is aware of several companies seeking to develop products that
could, if successful and approved, compete with the regenerative medicine
technologies under development by the Company. Several of these companies have
products that may compete with INTEGRA(TM) Artificial Skin, including LifeCell
Corporation (see "Item 3. Legal Proceedings" below), Genzyme Tissue Repair (a
division of Genzyme Corporation), Advanced Tissue Sciences, Inc., Organogenesis,
Inc. and Ortec International, Inc. LifeCell Corporation and Genzyme Tissue
Repair are currently not subject to FDA regulation because they involve the
processing of human cells and tissues and, therefore, are not currently subject
to the costs and expenses and the potential delays associated with the FDA
approval process.
The Company believes that expansion of its markets will be enhanced by the entry
of additional competitors. During the last year several new products have been
approved by the FDA or have moved closer to final approval. These include
products by Johnson & Johnson (Regranex), Advanced Tissue Sciences, Inc.
(Dermagraft) and Organogenesis, Inc. (Apligraf), Regranex is a growth factor
based wound healing compound which competes with the Company's technologies at
Telios. Dermagraft and Apligraf are dermal replacement products targeted
primariliy at chronic wounds. Dermagraft received a recommendation for approval
from the FDA Advisory Panel on January 29, 1998 for treatment of diabetic
ulcers. Graftskin is composed of donor human cells, bovine collagen and other
ingredients and received a recommendation for approval from a FDA Advisory Panel
on January 29, 1998 for treatment of venous stasis ulcers. The Company believes
that success of these products in the market will offer an opportunity for
Integra's technologies in the future. Ultimately, therefore, the Company's
competitive position will depend both on the size of the market for its products
and on the sales and marketing strength established by the
18
Company and its corporate partners. The breadth of the Company's technologies
allows it to compete in a wide range of possible solutions to the problem of
repair of damaged tissue.
Employees
The Company regards its employees as one of its most important assets. The
competitive advantage of life sciences companies depends on a committed
workforce, sound management processes and systems that maximize utilization of
each employee's technical knowledge. The Company has developed such systems and
processes in order to allow it to manage and market effectively its intellectual
capital. To foster employee commitment the Company has implemented incentive
plans that provide its employees the opportunity to invest and benefit from the
Company's success. The Company is dedicated to building on these principles as
it moves forward.
At December 31, 1997, the Company employed 166 full-time people (including
temporary and part-time employees) of which 58 are engaged in production and
production support (including warehouse, engineering, and facilities personnel),
15 in quality assurance/quality control, 35 in research and development, 10 in
regulatory and clinical affairs, 21 in sales/marketing and 27 in administration
and finance. None of the Company's employees is subject to a collective
bargaining agreement.
Forward Looking Statements
This report contains trend information and other forward-looking statements
related to the future use and sales of the Company's products, potential markets
for the Company's products, anticipated expenditure levels compared to
historical amounts and the Company's plans for its research and development
efforts. Such statements are made pursuant to the safe harbor provisions of the
Securities Litigation Reform Act of 1995 and involve risks and uncertainties
which may cause results to differ materially from those set forth in these
statements. Potential risks and uncertainties include, without limitation, those
mentioned in this report and, in particular, those mentioned under "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Factors That May Affect Future Results of Operations".
ITEM 2. PROPERTIES
The Company has a lease for approximately 35,000 square feet for its principal
administrative, marketing, manufacturing and product development activities in
Plainsboro, New Jersey that expires in October 2012. It also holds a lease for
approximately 25,000 square feet of production, administration and warehouse
space in West Chester, Pennsylvania that expires in April 1999, with three
five-year renewal options. The Company has decided to suspend its operations at
the West Chester, Pennsylvania facility. The Company's Telios Pharmaceutical,
Inc. subsidiary leases approximately 18,600 square feet of administrative and
laboratory space located in San Diego, California under a lease that expires in
October 2004. The Company also leases several smaller facilities to support
additional administrative and storage operations.
ITEM 3. LEGAL PROCEEDINGS
In January 1994, ABS LifeSciences, Inc., a wholly-owned subsidiary of the
Company, entered into a five-year distribution agreement with the distributor of
the Company's Chronicure product pursuant to which the distributor is obligated
to purchase certain minimum quantities of wound care products. In October 1995,
the Company's subsidiary filed a complaint in the United States District Court
for the District of New Jersey claiming the distributor breached the
distribution agreement by, among other things, not paying the subsidiary for
certain products delivered. In November 1995, the distributor filed an
affirmative defense and counterclaim alleging, among other things, fraudulent
misrepresentation and breach of contract and seeking damages of approximately
$1.2 million plus unspecified punitive damages. During 1997, the case was
inactive and dismissed by the court based on a tentative settlement with leave
to reinstate on the request of either party. However, the Company has not been
able to consummate an acceptable settlement and has submitted a request to
reinstate the case. The Company intends to continue to defend the counterclaim.
On or about July 18, 1996, Telios filed a patent infringement lawsuit against
three parties: Merck KGaA, a German corporation, Scripps Research Institute, a
California nonprofit corporation, and David A. Cheresh, Ph.D., a research
scientist with Scripps. The lawsuit was filed in the U.S. District Court for the
Southern District of California. The complaint charges, among other things, that
the defendant Merck KGaA "willfully and deliberately induced, and continues to
willfully and deliberately induce, defendants Scripps Research Institute and Dr.
David A. Cheresh to infringe United States Letters Patent No. 4,729,255." This
patent is one of a group of five patents granted to Burnham and licensed by
Telios that are based on the interaction between a family of cell surface
proteins called integrins and the arginine-glycine-aspartic acid (known as
"RGD") peptide sequence found in many extracellular matrix proteins. The Company
is pursuing numerous medical applications of the RGD technology in the fields of
anti-thrombic agents, cancer, osteoporosis, and a cell adhesive coating designed
to improve the performance of
19
implantable devices and their acceptance by the body. The defendants have filed
a countersuit asking for an award of defendants' reasonable attorney fees.
In August 1995, Telios received confirmation of its Chapter 11 plan of
reorganization in the United States Bankruptcy Court for the Southern District
of California. Under the plan, Telios assumed a certain License Agreement and a
certain Research Agreement entered into with the University of Utah and the
University of Utah Research Foundation ("University") in 1991. On March 27,
1996, Telios filed a motion with the bankruptcy court for a determination as to
whether there were any "cure" requirements for the assumed contracts with the
University (the "Motion"). In the meantime, on March 22, 1996, the University
filed a complaint against Telios in the United States District Court for the
District of Utah seeking a declaration that the License Agreement and Research
Agreement were terminated or terminable. The District Court case was
subsequently dismissed in light of the pending Motion in the bankruptcy court.
In November 1997, the bankruptcy court entered an order decreeing that Telios'
license to certain of the patents and technology rights under the License
Agreement had been reduced to a non-exclusive license. However, the court did
not terminate the license. In addition, Telios still retains an exclusive
license to certain patents, technology and rights to make, use and sell licensed
products thereunder, which have been exclusively sublicensed by Telios to
Cambridge Antibody Technology, Limited. A hearing has been set for May 27, 1998
to determine whether Telios has licensing rights to a certain new invention
disclosed by the University under the License Agreement and/or the Research
Agreement.
On or about November 4, 1997, Integra (Artificial Skin) Corporation ("IASC"), a
wholly-owned subsidiary of the Company, and the Massachusetts Institute of
Technology ("MIT") filed a patent infringement lawsuit against LifeCell
Corporation ("LifeCell") alleging that LifeCell infringed United States Patent
Nos. 4,458,678 and 4,505,266 through the making, using and selling of its
AlloDerm(R) and/or XenoDerm(TM) products. The suit was filed in the United
States District Court for the District of Massachusetts. The patents in suit are
licensed by MIT to IASC and relate to treating wounds with products which
encourage tissue regeneration. LifeCell has filed counterclaims seeking
declaratory judgments of non-infringement and patent invalidity and also claims
that MIT and IASC are barred from recovery under the doctrines of laches, patent
misuse and unclean hands alleging, among other things, that MIT and IASC filed
this suit solely to disrupt LifeCell's November 1997 stock offering. LifeCell
has filed a motion to transfer this action to the United States District Court
for the Southern District of Texas which motion MIT and IASC are opposing. The
Company intends to vigorously pursue its claims and vigorously defend against
LifeCell's counterclaims and affirmative defenses.
On or about December 10, 1997, LifeCell filed a complaint against MIT and IASC
in Texas state court claiming tortious interference, business and product
disparagement, unfair competition, civil conspiracy and violation of the Texas
Free Enterprise and Antitrust Act based upon the contention that MIT and IASC
filed the patent infringement suit in Massachusetts in order to interfere with
LifeCell's November 1997 stock offering. LifeCell is seeking unspecified actual
monetary damages in an amount not less than $12 million together with treble
damages, unspecified punitive damages, and other relief. MIT and IASC removed
this case to the United States District Court for the Southern District of Texas
and have filed a motion to transfer it to United States District Court in
Massachusetts. LifeCell filed a motion to remand the case back to Texas state
court which motion MIT and IASC are opposing. MIT and IASC have also filed
motions to dismiss the case for lack of personal jurisdiction and to stay
discovery. The Company also intends to vigorously defend against this suit.
The ultimate liability of the cases disclosed above cannot now be determined
because of the considerable uncertainties that exist. The Company's financial
statements do not reflect any significant amounts related to possible
unfavorable outcomes of these matters. The Company intends to continue its
vigorous defense of these matters. However, it is possible that the Company's
results of operations, financial position and cash flows in a particular period
could be materially affected by these contingencies.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Pursuant to a written consent dated December 27, 1997, the holders of 18,428,836
shares, or approximately 61.6%, of the Company's issued and outstanding shares
of Common Stock approved the following: (i) an amendment to the Company's 1996
Incentive Stock Option and Non-Qualified Stock Option Plan (the "Plan")
increasing the maximum number of options that may be issued under the Plan to an
individual over any one-year period from 300,000 to 1,000,000; (ii) the grant to
Stuart M. Essig, the Company's President and Chief Executive Officer, of an
option under the Plan to purchase
20
1,000,000 shares of Common Stock; and (iii) the grant to Mr. Essig of restricted
units pursuant to which he is to acquire an additional 2,000,000 shares of
Common Stock. These approvals were obtained pursuant to Section 228 of the
Delaware General Corporation Law, subject to the expiration of twenty (20) days
following the mailing on February 24, 1998 of an Information Statement to the
Company's stockholders as required under the Securities Exchange Act of 1934, as
amended.
Additional Information
The following information is furnished in this Part I pursuant to Instruction 3
to Item 401(b) of Regulation S-K: Executive Officers of the Company.
The executive officers of the Company serve at the discretion of the Board of
Directors. The only family relationship between any of the executive officers of
the Company is between Dr. Caruso and Mr. Holtz, who is the nephew of Dr.
Caruso.
The following information indicates the position and age of the Company's
executive officers as of the date of this report and their previous business
experience.
Name Age Position
Richard E. Caruso, Ph.D. 54 Chairman
Stuart M. Essig, Ph.D. 36 President and Chief Executive Officer
George W. McKinney, Ph.D. 54 Vice Chairman, Executive Vice President and Chief Operating Officer
Frederick Cahn, Ph.D. 55 Senior Vice President, Technology
Andre P. Decarie 52 Senior Vice President, Corporate Development
Michael D. Pierschbacher, Ph.D. 46 Senior Vice President and General Manager, Telios
Surendra P. Batra, Ph.D. 51 Vice President, Product Research
Carlos Blanco, M.D. 62 Vice President, Medical Director
David B. Holtz 31 Vice President, Treasurer
Donald Nociolo 35 Vice President, Operations
Judith E. O'Grady 47 Vice President, Regulatory Affairs
Robert D. Paltridge 40 Vice President, North American Sales
Robert G. Runckel 52 Vice President, Marketing and
International Sales
Executive Officers
Richard E. Caruso, Ph.D. founded the Company and is the Chairman of the Board of
Directors. Until December 1997, Mr. Caruso also served as President and Chief
Executive Officer. From 1969 to 1992, Dr. Caruso was a principal of LFC
Financial Corporation, a major entrepreneurial financing company located in
Radnor, Pennsylvania. When he left in 1992, he was a director of the company and
held the position of Executive Vice President. He has 25 years experience in
finance and entrepreneurial ventures. Before joining LFC Financial Corporation,
Dr. Caruso was associated with Price Waterhouse & Co. in Philadelphia, Pa. Dr.
Caruso has served as a director or trustee of the following organizations:
American Capital Open End Mutual Funds, LFC Financial Corporation, 202 Data
Systems, Tenley Enterprises, Inc., and London School of Economics Business
Performance Group. He is currently a director of Susquehanna University, The
Baum School of Art, Uncommon Individual Foundation (Founder) and the Company. He
received a BS degree from Susquehanna University, an MSBA degree from Bucknell
University, and a Ph.D. degree from the London School of Economics, University
of London (UK). Dr. Caruso is also a certified public accountant.
21
Stuart M. Essig, Ph.D. has served the Company as President and Chief Executive
Officer since December 1997. Mr. Essig was elected by the Board of Directors as
the Company's President and Chief Executive Officer and appointed to the Board
in December 1997. Before joining the Company, Mr. Essig supervised the medical
technology practice at Goldman, Sachs & Co. as a managing director. Mr. Essig
has ten years of broad health care experience at Goldman Sachs serving as a
senior merger and acquisitions advisor to a broad range of domestic and
international medical technology, pharmaceutical and biotechnology clients. Mr.
Essig received an A.B. degree from the Woodrow Wilson School of Public and
International Affairs at Princeton University, and an MBA and a Ph.D. degree in
Financial Economics from the University of Chicago, Graduate School of Business.
Mr. Essig also serves on the Board of Directors of Neuromedical Systems, Inc., a
Medical diagnostics products company.
George W. McKinney, Ph.D. has served the Company as Vice Chairman, Executive
Vice President and Chief Operating Officer since May 1997 and as a member of the
Board of Directors since December 1992. Between 1990 and 1997, Dr. McKinney was
Managing Director of Beacon Venture Management Corporation, a venture capital
firm. Between 1992 and 1997, Dr. McKinney also served as President and Chief
Executive Officer of Gel Sciences, Inc. and GelMed, Inc., a privately held
specialty materials firm with development programs in both the industrial and
Medical products field. From 1983 to 1989, Dr. McKinney was a Managing Director
at American Research & Development, a venture capital firm. Between 1986 and
1989, he also served as President and Chief Executive Officer of American
Superconductor, Inc. (NASDAQ: AMSC), a development stage firm in the specialty
materials field. From 1965 to 1983, Dr. McKinney worked for Corning Glass Works
(now Corning, Inc.), a specialty materials firm, in a variety of manufacturing,
engineering, and financial positions. At Corning, he served as President of
Corning Designs, a subsidiary which he founded, as Secretary to the Management
Committee, as Director of Business Development and Planning, as Treasurer,
International, as Assistant Treasurer, Domestic, and as Financial and Control
Manager for the Engineering Division. Dr. McKinney holds a S.B. from MIT in
Management and a Ph.D. from Stanford University in Strategic Planning.
Frederick Cahn, Ph.D. has served the Company as Vice President for Technology
from 1993 to September 1995 and as Senior Vice President of Technology since
September 1995. Between 1987 and 1993, Dr. Cahn was President and Founder of
Biomat Corporation. The Company appointed him to his current position after the
acquisition of Biomat in April 1993. Before founding Biomat, Dr. Cahn served as
Senior Scientist at Digilab Division of Bio-Rad Laboratories developing software
and methods for chemical analysis and quality control for semiconductor and
medical diagnostic applications. From 1980 to 1984, Dr. Cahn was Senior
Scientist for New England Digital Corporation developing acoustic research and
digital signal processing products. From 1988 to the present, he carried out
various research duties as a Research Affiliate with the Massachusetts Institute
of Technology, including a project to demonstrate the feasibility of porous
microcarriers for mass culture of mammalian cells. Dr. Cahn received a BA degree
in Physics and Biology from the University of California at Berkeley, and a
Ph.D. degree in Biophysics from the Massachusetts Institute of Technology.
Andre P. Decarie, Senior Vice President, Corporate Development, joined the
Company as Vice President of Marketing in 1993. Mr. Decarie has been active in
the medical industry for over 20 years, both in senior management positions and
in private consulting. He was Vice President of Sales for Surgical Laser
Technologies and Vice President of Marketing for Hemostatic Surgery Corporation.
He spent over 14 years at United States Surgical Corporation in a variety of
national and international assignments, including sales, marketing and product
development. In 1990, as Director of Continuing Medical Education for USSC, he
led the group which guided the training of over 15,000 surgeons in the US and
hundreds of international surgeons, in techniques of Minimally Invasive Surgery.
He is a member of the ASCRS Research Foundation, and a member of their Gold
Eagle Society. Mr. Decarie holds a BBA degree in Marketing from the University
of Miami.
Michael D. Pierschbacher, Ph.D. joined the Company in October 1995 as Senior
Vice President, Research and Development. Dr. Pierschbacher served Telios, which
was acquired by the Company in connection with the reorganization of Telios
under Chapter 11 of the Bankruptcy Code, as Senior Vice President and Scientific
Director from June 1987 to September 1995. He was a co-founder of Telios in May
1987 and is the co-discoverer and developer of Telios' matrix peptide
technology. Before joining Telios as a full-time employee in October 1988, he
was a staff scientist at the Burnham Institute for five years and remained on
staff there in an adjunct capacity until the end of 1997. He received his
post-doctoral training at Scripps Clinical and Research Foundation and at the
Burnham Institute. Dr. Pierschbacher received his Ph.D. in Biochemistry from the
University of Missouri.
22
Surendra P. Batra, Ph.D. has served the Company as Vice President for Product
Research since January 1992. Between 1991-1992 Dr. Batra was a Research and
Development Manager at ABS LifeSciences, a subsidiary of Integra LifeSciences.
Dr. Batra has worked in the field of protein biochemistry, enzymology,
biomaterials, tissue regeneration and implantable materials, for 15 years and
has published ten (10) research articles. Prior to joining Integra LifeSciences,
Dr. Batra served with Semex Medical, Inc. as a Senior Scientist Group Leader in
biomaterials development, specializing in wound care, ophthalmology, drug
delivery and implantables. Before coming to the United States, Dr. Batra taught
medical biochemistry for eight (8) years in a reputable medical school in New
Delhi, India. Dr. Batra received an MS Chemistry degree from the University of
Meerut, India; an MS in Medical Biochemistry from Delhi University, India and a
Ph.D. in Physiology and Biochemistry from the Reading University in the U.K.
Carlos Blanco, M.D. joined the Company full time in May 1997 and serves as the
Company's Vice President, Medical Director. He had previously served as a
consultant and senior advisor to the Company. From 1985 to 1996, Dr. Blanco was
employed by Marion Laboratories and its successor companies Marion Merrell Dow,
Inc. and Hoechst Marion Roussel, holding positions as Director, International
Marketing; Director, Medical Marketing; Director, Marketing Relations for Wound
Care; and Medical Director, Wound Care. While at Marion, Dr. Blanco was
instrumental in the development of INTEGRA(TM) Artificial Skin. Prior to working
for Marion, Dr. Blanco served in several companies in the wound care business,
most notably for 15 years with The Purdue Frederick Company, where he served as
Director, Clinical Research and Director, Burn/Wound Programs. Dr. Blanco is on
the Board of Directors for the Wound Healing Society, Chairman of Ad hoc
Committee of the International Society of Burn Injuries, Chairman of the
Industry Relations Committee Wound Healing Society and the Board of Trustees of
the American Burn Association. Dr. Blanco received his medical degree from
Seville Medical School in Seville, Spain and his BS degree from Colegio del
Carmen, Melila, Spain.
David B. Holtz joined the Company as the Controller in 1993 and has served as
Vice President, Treasurer since March 1997. His responsibilities include
managing all accounting and information systems functions. He is also
responsible for the preparation of the Company's Securities and Exchange
Commission filings and federal and state tax returns. Before joining the
Company, Mr. Holtz was an associate with Coopers & Lybrand, L.L.P. in
Philadelphia and Cono Leasing Corporation, a private leasing company. He
received a BS degree in Business Administration from Susquehanna University in
1989 and is a certified public accountant.
Donald Nociolo joined the Company as Director, Manufacturing in 1994 and has
served as Vice President, Operations since March 1997. His responsibilities
include managing all manufacturing operations to ensure on-time shipment of GMP
produced and high quality product to all customers. Mr. Nociolo has over ten
years experience working in engineering and manufacturing management in the
Medical device industry. Six of those years were spent working at Ethicon, Inc.,
Johnson & Johnson's suture division. Mr. Nociolo received a BS degree in
Industrial Engineering from Rutgers University and an MBA in Industrial
Management from Fairleigh Dickinson University.
Judith E. O'Grady has served as Vice President of Regulatory Affairs for the
Company, or a predecessor company, since 1988. Included in her responsibilities
are clinical research and quality assurance functions. Ms. O'Grady has worked in
the areas of Medical devices and collagen technology for the past 15 years.
Between 1988 and 1992, she held the position of Vice President of Regulatory
Affairs with Colla-Tec, Inc., a predecessor to the Company, and from 1981 to
1988 with American Biomaterials Company and American Medical Products/Delmed.
Earlier in her career, she served as a Clinical Research Associate with
Surgikos, a Johnson & Johnson subsidiary. Ms. O'Grady received a BS degree in
Nursing from Marquette University and an MS degree in Nursing from Boston
University. Ms. O'Grady is a member of the Board of Directors of the State of
New Jersey League for Nursing.
Robert D. Paltridge joined the Company as National Sales Director in February
1995 and has served as Vice President, North American Sales since September
1997. His responsibilities include managing the sales activities of INTEGRA(TM)
Artificial Skin and the Helistat(TM) and Helitene(TM) collagen hemostatic agents
in North America along with negotiating contracts with national group purchasing
organizations. Mr. Paltridge has 15 years of sales/sales management experience
in the medical device industry. Before joining the Company, he was National
Sales Manager at Strato Medical, a division of Pfizer, Inc. He received a BS
degree in Business Administration from Rutgers University.
Robert G. Runckel joined the Company in 1988 and serves as Vice President,
Marketing and International Sales. Mr. Runckel has 27 years experience in
healthcare sales and marketing, including significant international experience.
From 1988 to 1992, he served in a similar position with Colla-Tec, Inc., a
predecessor of the Company, and American Biomaterials Corporation. Before that,
Mr. Runckel served as Sales Manager of Becton Dickinson Pharmaceutical Systems
and as Marketing Manager, Asia, Africa and Australia for the International Group
of Becton Dickinson and Co., a world-wide manufacturer of medical and laboratory
devices and diagnostics. He received a B.A. degree in Chemistry from the
University of Oregon.
23
PART II
ITEM 5. MARKET PRICE FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock trades on The Nasdaq National Market under the symbol
IART. The following table represents the high and low sales prices for the
Company's Common Stock for each quarter for the last two years.
HIGH LOW
1997
First Quarter $5.875 $3.00
Second Quarter $4.75 $2.50
Third Quarter $5.125 $3.125
Fourth Quarter $4.625 $2.9375
1996
First Quarter $13.50 $6.375
Second Quarter $13.00 $8.75
Third Quarter $11.75 $4.125
Fourth Quarter $7.00 $4.25
The closing price for the Common Stock on March 20, 1998 was $4.6875. For
purposes of calculating the aggregate market value of the shares of Common Stock
of the Company held by nonaffiliates, as shown on the cover page of this report,
it has been assumed that all the outstanding shares were held by nonaffiliates
except for the shares held by directors and executive officers of the Company
and stockholders owning 10% or more of outstanding shares. However, this should
not be deemed to constitute an admission that all such persons are, in fact,
affiliates of the Company. Further information concerning ownership of the
Company's Common Stock by executive officers, directors and principal
stockholders will be included in the Company's definitive proxy statement to be
filed with the Securities and Exchange Commission.
The Company does not currently pay any cash dividends on its Common Stock and
does not anticipate paying dividends in the foreseeable future.
The number of stockholders of record as of March 20, 1998 was approximately 833,
which includes stockholders whose shares were held in nominee name. The number
of beneficial stockholders at that date was over 6,700.
In March 1998, the Company announced that its Board of Directors authorized a
common stock repurchase program. The share repurchase program of up to 500,000
shares (pre-split) was effective immediately. Under the terms of the share
repurchase plan, the Company is allowed to repurchase up to 500,000 of its
outstanding shares of common stock effective immediately. The share repurchase
plan allows the Company to make repurchases from time to time during 1998 in the
open market or through privately negotiated transactions. Repurchased common
shares will be added to the Company's treasury shares. The timing of any share
repurchase will be dictated by overall financial and market conditions and other
corporate considerations.
The Board also approved, subject to shareholder approval, a one-for-two reverse
stock split of the Company's common stock. The reverse stock split is subject to
stockholder approval at the annual shareholders meeting scheduled for May 18,
1998.
24
ITEM 6. SELECTED FINANCIAL DATA
The following data has been selected by the Company and derived from
consolidated financial statements that have been audited by Coopers & Lybrand
LLP, independent accountants. The information set forth below is not necessarily
indicative of the results of future operations and should be read in conjunction
with the Company's consolidated financial statements and notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations appearing elsewhere in this report.
Years Ended December 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands, except per share data)
Statement of Operations Data (1)
Product sales................................... $ 14,001 $11,210 $ 8,356 $ 6,958 $ 3,950
Other revenue................................... 745 1,938 1,873 1,703 826
-------- ------- -------- ------- -------
Total revenue............................... 14,746 13,148 10,229 8,661 4,776
Cost of product sales........................... 7,027 6,671 4,850 4,402 2,535
Research and development........................ 6,406 6,294 5,191 3,085 2,170
Selling and marketing........................... 5,460 4,310 2,455 1,335 677
General and administrative (2).................. 14,764 5,320 3,642 2,170 1,899
Acquired in-process research and development (3) ---- ---- 19,593 (275) 20,642
-------- ------- -------- -------- -------
Total costs and expenses...................... 33,657 22,595 35,731 10,717 27,923
-------- ------- -------- ------- -------
Operating loss.................................. (18,911) (9,447) (25,502) (2,056) (23,147)
Interest income................................. 1,771 1,799 283 221 12
Interest expense................................ ---- ---- (188) (64) (218)
Other income (expense) ......................... 176 120 5 (1) 19
-------- ------- -------- -------- -------
Net loss........................................ $(16,964) $(7,528) $(25,402) $(1,900) $(23,334)
======== ======= ======== ======= =======
Basic and diluted net loss per share............ $ (.57) $ (.27) $ (1.21) $ (.10) $ (1.41)
======== ======== ======== ======== ========
Weighted average number of common shares
outstanding................................... 29,620 28,114 21,073 19,035 16,583
======== ======= ======== ======= ========
December 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Balance Sheet Data (1) (In thousands)
Cash, cash equivalents and short-term investments $ 26,272 $ 34,276 $ 5,710 $ 3,331 $ 5,066
Working capital................................ 29,407 37,936 7,476 3,610 3,488
Total assets................................... 38,356 48,741 19,378 13,703 10,043
Long-term debt................................. ---- ---- ---- 1,754 3,224
Accumulated deficit............................ (75,945) (58,981) (51,453) (26,051) (24,151)
Total stockholders' equity..................... 35,755 46,384 17,427 9,275 3,559
-----------------------------
(1) As the result of the Company's acquisitions of Vitaphore Corporation
in April 1993, Biomat Corporation in June 1993, another company's 50%
interest in a joint venture with Vitaphore Corporation in December
1993 and Telios Pharmaceuticals, Inc. in August 1995, the consolidated
financial results for the periods prior to 1997 are not directly
comparable.
(2) In December 1997, general and administrative expense included the
following two non-cash charges: (i) $1.0 million related to an asset
impairment charge; and (ii) $5.9 million related to an equity-based
signing bonus for the Company's President and Chief Executive Officer.
(3) As a result of the required use of purchase accounting, the 1993 loss
included $20.6 million of acquired in-process research and development
which was charged to expense at the date of the Company's acquisitions
in 1993, and the 1995 loss included $19.6 million of acquired
in-process research and development which was charged to expense at
the date of the Company's acquisition of Telios Pharmaceuticals, Inc.
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
consolidated financial statements, the notes thereto and the other financial
information included elsewhere in this report.
General
The Company has developed principally by combining existing businesses,
acquiring synergistic technologies and forming strategic business and
technological alliances. As a result of the Company's acquisition of Telios
Pharmaceuticals, Inc. ("Telios") in August 1995, the consolidated financial
results for 1995 and 1996 may not be directly comparable.
Results of Operations
1997 Compared to 1996
The Company's net loss increased from $7.5 million in 1996 to $17.0 million in
1997. The 1997 loss included two non-cash charges totaling $6.9 million, which
are included in general and administrative expense.
Total revenues increased 12% from $13.1 million in 1996 to $14.7 million in 1997
as increases in product sales offset decreases in other revenues. Product sales
increased 25% from $11.2 million to $14.0 million due to $6.0 million in sales
of INTEGRA(TM) Artificial Skin ("INTEGRA") in 1997 compared to $3.1 in 1996. The
Company's export sales increased 11% from $1.9 million to $2.1 million as
INTEGRA export sales increased by $860,000. Approximately 72% of INTEGRA sales
in 1996 were in North America compared to 71% in 1996, following the product's
marketing approval from the FDA in March 1996. In 1997, 114 burn centers and
hospitals throughout North America purchased INTEGRA compared to 65 burn centers
and hospitals in 1996. The Company's international sales included INTEGRA sales
to 20 countries throughout the world.
The primary application of INTEGRA has been for patients with severe
life-threatening burns. The Company is also aware of its application in
reconstructive and wound healing procedures and is continuing to focus its
strategy on expanding the approved indications for use of INTEGRA. The Company
believes that INTEGRA can offer improved clinical results compared to existing
treatments for relief of painful scars, wound contractures and hypertrophic
scarring. The Company believes that the following factors will have the greatest
influence on the use and sale of INTEGRA: (i) physician training prior to
product use; (ii) the collection of pharma-economic data to address product
reimbursement issues; (iii) the publication of positive clinical results, and
(iv) the Company's ability to obtain regulatory approvals for expanded
indications.
Sales of the Company's private label and other medical products decreased from
$8.1 million in 1996 to $8.0 million in 1997. Decreases in the Company's
infection control and surgical and hemostasis product lines were offset by
increases in its dental product line and other contract manufacturing. The
dental product line increase was the result of increased orders from the
Company's marketing partner for the BioMend product, which was introduced in
August 1995. The decrease in the surgical and hemostasis product line, which
includes products sold to marketing partners and products marketed directly, was
due to lower unit volume from international distributors and customers.
26
During 1997, the Company's distribution agreement for its ophthalmic products
was terminated, and the Company has discontinued the product line. In January
1998, the Company decided to suspend operations at its leased West Chester,
Pennsylvania facility, and as a result has discontinued its avian collagen wound
care product line and its contract manufacturing activities. The Company's
ophthalmic, avian collagen and contract manufacturing revenues accounted for
less than 5% of product sales in 1997 and 1996. Customers representing greater
than 10% of sales included two customers equaling 24% in 1997 and three
customers equaling 42% in 1996. Because a significant portion of the Company's
private label and other medical products are sold to marketing partners and
distributors, quarter-to-quarter sales in medical products can vary
significantly.
Other revenue, which includes grant revenue, license fees, contract development
revenue and royalties, declined from $1.9 million in 1996 to $745,000 in 1997.
Grant revenue declined by $590,000 as a large portion of 1996 revenue came from
a three-year $2.0 million National Institute of Standards and Technology (NIST)
grant which was completed in 1996. Licensing revenue also declined as the
Company received a $500,000 license fee in 1996 in an agreement with Cambridge
Antibody Technology Limited involving a human antibody development program. The
Company expects its other revenues to increase from 1997 due to the following:
(i) the Company has signed a licensing and distribution agreement with Century
Medical, Inc. for the Company's Dura regeneration product which included a $1.0
million licensing fee in March 1998; (ii) the Company has signed a development
agreement with Johnson & Johnson Professional, Inc. to develop an absorbable,
collagen-based implant designed in combination with a proprietary RGD-peptide
for cartilage regeneration; and (iii) the Company has been awarded a new
three-year $2 million NIST grant to develop absorbable biocompatible polymers in
combination with RGD peptides specifically designed to stimulate in vivo
cartilage regeneration. The Company continues to seek additional research
grants, licensing arrangements and development funding for several of its
technologies and programs, although the timing and amount of such revenue, if
any, can not be predicted.
Cost of product sales increased 5% from $6.7 million (60% of product sales) in
1996 to $7.0 million (50% of product sales) in 1997. The dollar increase in cost
of product sales is due to higher product sales. Cost of product sales as a
percentage of sales decreased due to lower inventory write-offs related to
certain medical product production difficulties in 1996, improved capacity
utilization for INTEGRA, and increased sales in higher margin products. Due to
the high fixed costs of the manufacturing facility for INTEGRA, the Company is
anticipating higher per unit product costs until there is a requirement for
higher production volume. The Company believes its current capacity to produce
INTEGRA and its other medical products is sufficient to support significant
growth, and the utilization of this capacity will affect its gross margin on
product sales. In January 1998, the Company decided to discontinue its
production operations at the West Chester, Pennsylvania leased facility. The
Company anticipates lower production operating costs during 1998 as a result of
this closing.
Research and development expense increased from $6.3 million in 1996 to $6.4
million in 1997. Increases in research and development expenditures associated
with clinical costs for the Company's post-approval study of INTEGRA offset
declines in pre-clinical costs associated the Company's absorbable biocompatible
polymer program. Continuing expenditures include costs associated with efforts
focusing on combining the Company's biomaterials technologies with those
acquired in the Telios acquisition. The Company expects the level of research
and development expenditures in 1998 to be higher than in 1997 as expenditures
related to the post-approval study for INTEGRA continue, and other clinical and
pre-clinical efforts expand. These efforts will continue to focus on additional
clinical indications for INTEGRA and on the Company's other regenerative and
matrix medicine technologies. The amount of resources allocated to fund
particular research and development efforts will vary depending upon a number of
factors, including the progress of development of the Company's
27
technologies, changing competitive conditions and determinations with respect to
the commercial potential of the Company's technologies.
Selling and marketing expense increased 27% from $4.3 million in 1996 to $5.5
million in 1997 as the Company continued to focus its efforts on the domestic
and international market introduction of INTEGRA. During 1997, the Company
expanded its network of domestic and international regional managers for the
sales of INTEGRA. The Company is anticipating a continued increase in selling
and marketing costs associated with INTEGRA, including costs associated with
introduction of INTEGRA into additional markets and for additional indications.
General and administrative expense was $14.8 million in 1997 and included two
non-cash charges in the fourth quarter. The Company incurred a $1.0 million
asset impairment charge associated with certain leasehold improvements at its
leased West Chester, Pennsylvania, and a $5.9 million charge related to an
equity-based signing bonus for the Company's new President and Chief Executive
Officer. Excluding these charges, general and administrative expense increased
48% from $5.3 million in 1996 to $7.9 million in 1997. Significant increases
include the addition of several senior executives and costs related to the
continued maintenance of the Company's intellectual property and patent
infringement litigation. The Company is involved in two patent infringement
litigation cases that are in their early stages, and the Company anticipates
incurring continued significant expenditures during 1998 related to these
matters.
Other income, net, which primarily includes interest income, was $1.9 million in
1996 and 1997 as the decline in interest income from lower investment balances
was offset by income from other items.
1996 Compared to 1995
The Company's net loss decreased from $25.4 million in 1995 to $7.5 million in
1996. As a result of the required use of purchase accounting, the Company's 1995
loss included approximately $19.6 million of acquired in-process research and
development that was charged to expense at the date of the Company's acquisition
of Telios.
Total revenues increased 28% from $10.2 million in 1995 to $13.1 million in 1996
primarily as a result of an increase in product sales. Product sales increased
34% from $8.4 million to $11.2 million due to $3.1 million in sales of INTEGRA
in 1996 compared to minimal sales in the prior year. Approximately 71% of
INTEGRA sales in 1996 were in the United States following its marketing approval
from the FDA in March 1996, and included sales to 65 burn centers and hospitals
throughout the United States and Canada. INTEGRA export sales were to 13
countries in Europe and Asia. Product sales of the Company's other medical
devices decreased from $8.4 million in 1995 to $8.1 million in 1996. Decreases
in the Company's ophthalmic and surgical and hemostasis product lines were
partially offset by increases in its infection control and dental product lines.
The ophthalmic product line decrease was due to production difficulties, which
delayed product shipments during the second half of 1996. The decrease in the
surgical and hemostasis product line, which includes products sold to marketing
partners and products marketed directly, was due to lower unit volumes as well
as lower unit pricing on the products marketed directly. The infection control
and dental product line increases were the result of increases in orders from
marketing partners for the Company's BioPatch and BioMend products.
Approximately 42% and 56% of the Company's product sales were to three customers
in 1996 and four customers in 1995, respectively. The Company's export sales
(including INTEGRA) increased 98% from $945,000 to $1.9 million as INTEGRA
export sales increased by $860,000.
Other revenue, which includes grant revenue, license fees, contract development
revenue and royalties, was $1.9 million in 1996 and 1995. Grant revenue in both
periods was approximately $1.1 million, the
28
largest portion of which came from a three year $2.0 million NIST grant. The
NIST grant was completed as of December 31, 1996. The Company received a
$500,000 license fee in 1996 as part of an agreement with Cambridge Antibody
Technology Limited involving a human antibody development program. The Company
also received a $500,000 license fee in 1995 from the Calcitek Division of
Sulzermedica when the Company's BioMend product receieved FDA marketing
clearance. The Company continues to seek research grants, licensing arrangements
and development funding for several of its technologies, although the timing and
amount of such revenue, if any, can not be predicted.
Cost of product sales increased 38% from $4.9 million (58% of product sales) in
1995 to $6.7 million (60% of product sales) in 1996. The dollar increase in cost
of product sales is due to higher product sales and an increase in manufacturing
capacity associated with INTEGRA and with the Company's West Chester,
Pennsylvania facility. The INTEGRA production facility and additional capacity
at the West Chester facility came on-line during the last quarter of 1995. Cost
of product sales as a percentage of sales increased due to inventory write-offs
related to certain medical product production difficulties and lower capacity
utilization for INTEGRA product during 1996.
Research and development expense increased 21% from $5.2 million in 1995 to $6.3
million in 1996, due to an increase of $1.4 million in research and development
expenses incurred by the Company's Telios operation, which was acquired in
August 1995. Research and development expenditures at Telios include costs
associated with efforts focusing on combining the Company's existing
technologies with those acquired in the acquisition. The Company's research and
development efforts involving INTEGRA decreased significantly from 1995 to 1996
as a result of the transfer of the product to manufacturing. Additional
increases in other research and development projects partially offset the
decrease related to the INTEGRA transfer. These increases included costs
associated with the addition of full-time and part-time research and development
staff and increased expenditures for outside contract activities.
Selling and marketing expense increased 76% from $2.5 million in 1995 to $4.3
million in 1996 as a result of the domestic and international market
introduction of INTEGRA. The Company was required by the FDA to train all
surgeons prior to their use of INTEGRA, and as of December 31, 1996 the Company
had trained approximately 600 surgeons worldwide. During 1996, the Company also
established a network of domestic and international regional managers for the
sales of INTEGRA. INTEGRA training and selling cost increases were partially
offset by a decrease in costs resulting from a reduction in the size of the
Company's direct sales force for certain other medical product lines.
General and administrative expense increased 46% from $3.6 million in 1995 to
$5.3 million in 1996 largely due to increases in costs involving the maintenance
of intellectual property and expenditures related to patent infringement
litigation.
Other income, net, which primarily includes interest income and interest
expense, increased from $100,000 in 1995 to $1.9 million in 1996 largely due to
$1.8 million in interest earned in 1996 on the net proceeds of the Company's
underwritten public offering.
Liquidity and Capital Resources
The Company has funded its operations to date primarily through private and
public offerings of its securities, revenues from sales of existing products,
research grants from government agencies, development agreements with major
industrial companies, borrowings under a revolving credit line and cash acquired
in connection with the Telios acquisition. On February 1, 1996, the Company
completed an underwritten public offering of 4,671,250 shares of its common
stock, which resulted in approximately $35.6 million in net proceeds to the
Company.
29
At December 31, 1997, the Company had cash, cash equivalents and short-term
investments of $26.3 million representing an $8.0 million decrease from December
31, 1996. The principal uses of funds during 1997 were $7.9 million for
operations and $770,000 in purchases of property and equipment.
Under the Company's stock repurchase program (see Item 5. "Market Price for
Registrant's Common Equity and Related Stockholder Matters"), the Company may
utilize from time to time its available cash to repurchase the Company's common
stock on the open market. The amount and timing of any share repurchases will
depend on market conditions as well as the Company's cash position.
In March 1998, the Company entered into a series of agreements under which it
will issue 500,000 shares of preferred stock for $4.0 million during the second
quarter of 1998. The newly issued series of preferred stock will carry an annual
dividend of 2%, and each preferred share will be convertible into one share of
the Company's common stock. The Company anticipates it will continue to use its
liquid assets to fund operations until sufficient revenues can be generated
through product sales and collaborative arrangements. In addition, the Company
may continue to raise additional funding through the use of private or public
offerings. There can be no assurance that the Company will be able to generate
sufficient revenues to obtain profitability or raise additional funding in
equity transactions.
Factors That May Affect Future Results of Operations
The Company believes that the following important factors, among others, have
affected, and in the future could affect, the Company's results of operations
and could cause the Company's future results to differ materially from its
historical results and those expressed in any forward-looking statements made by
the Company.
o The Company believes that its INTEGRA product represents a relatively new
method of treatment, and as such, it is difficult to estimate the potential
market and potential revenue growth for the product. The Company also
believes that INTEGRA provides a substantial enhancement over existing
treatment alternatives for its current indication, which is the treatment
of severe burns. The Company believes that INTEGRA provides longer-term
financial savings and other health benefits by reducing the number of
required procedures and the length of the patient's hospital stay.
However, the cost of the product does require the healthcare provider to
incur a higher initial cost than is customary under traditional treatment
options. In addition, the health care industry in general is under
continued cost containment pressures from government health
administration authorities, private health insurers and other
organizations. Should the Company be unable to demonstrate these savings
to the healthcare provider market and others, the Company may experience
lower than anticipated revenue growth and a resulting adverse effect on
its business, financial condition and results of operations.
o Because a significant portion of the Company's historical medical product
sales have been to a small number of marketing partners, the loss of one of
these customers could have a negative impact on revenues. The Company also
depends on third party distributors for several products domestically and
internationally. The Company's revenues and gross profit margins for these
products are dependent on the continuing efforts of these marketing
partners and third party distributors. The Company believes that its
current relationships with customers regarding these products is
satisfactory.
o There can be no assurance that the Company's planned research and
development efforts will lead to commercially successful products. Many of
the Company's technologies are in the early stages of development and will
require the commitment of substantial additional resources by the Company
and its potential strategic partners prior to commercialization. Their can
be no assurance that any such potential products will be successfully
developed on a timely basis, if at all, be safe and effective in clinical
trials, meet applicable regulatory standards and receive necessary
regulatory approvals, be produced in commercial quantities at acceptable
costs, or be successfully marketed and achieve customer acceptance. There
can also be no assurance that the Company's current plans for clinical
trials to expand the indication of use for INTEGRA will result in an
expanded indication or achieve a greater market acceptance. Costs due to
regulatory delays or demands, unexpected adverse side
30
effects or insufficient therapeutic effectiveness would prevent or
significantly slow development and commercialization efforts and could have
a material adverse effect on the Company.
o The Company depends substantially on its ability to obtain patents (by
license or otherwise), maintain trade secrets and operate without
infringing on the intellectual property rights of third parties. The patent
position of biotechnology and pharmaceutical firms is highly uncertain,
involves many complex legal, factual and technical issues and has recently
been the subject of much litigation. There can be no assurance that patent
applications relating to the Company's products and technologies will
result in patents being issued, that patents issued or licensed by the
Company will provide protection against competitors or that the Company
will enjoy patent protection for any significant period of time. The
Company is currently involved in two patent infringement lawsuits. These
litigation suits, as well as any possible future litigation, can be lengthy
and expensive, and there can be no assurance as to the timing, cost or
eventual outcome of such litigation. The Company's business may be
adversely affected if it is unsuccessful in protecting its patents and
proprietary rights. In addition, the Company is the defendant in several
lawsuits claiming damages that, if decided against the Company, could have
a material adverse effect on the financial position of the Company. The
Company believes these lawsuits are without merit and will continue its
defense against these suits.
o The markets for the Company's actual and proposed products and their
intended use are characterized by rapidly changing technology. Competition
in the general area of medical technology is intense and is expected to
increase. There are many companies in the medical field that have
substantially greater capital resources, research and development staffs
and facilities than the Company. There is a risk that technological
developments will render actual and proposed products or technologies of
the Company non-competitive, uneconomical or obsolete. As a result, the
Company's growth and future financial performance depend in part upon its
ability to introduce new products and enhance existing products to meet the
latest technological advances. Failure by the Company to anticipate or
respond adequately to changes in technology and market factors could have a
material adverse effect on the Company's business.
o The Company has developed by acquiring or securing a number of synergistic
companies and technologies. There are certain risks associated with
business and technology acquisitions, including incorrectly assessing the
value of assets and future prospects, the extent of possible liabilities
and the anticipated costs of incorporating acquired businesses into the
Company. Although the Company is frequently in discussions with others
relating to the possible technology acquisitions and related matters, it
does not currently have any agreement or understanding with respect to any
acquisitions or any material technology transfers. Because these types of
transactions involve risks and could involve the issuance of the Company's
equity, any business or technology acquisition could have a material affect
on the Company's business.
The above factors are not meant to represent an exhaustive list of the risks and
uncertainties associated with the Company's business. These factors as well as
other factors may affect the Company's future results and the Company's stock
price, particularly on a quarterly basis. Finally, because the Company
participates in a highly dynamic industry, its stock price is often subject to
significant volatility.
Other Matters
At December 31, 1997, the Company had net operating loss carryforwards of
approximately $36 million and $28 million for federal and state income tax
purposes, respectively, to offset future taxable income, if any, which expire
through 2012 and 2004, respectively. At December 31, 1997, several of the
Company's subsidiaries had unused net operating loss and tax credit
carryforwards arising from periods prior to the Company's ownership. The net
operating loss carryforwards (excluding Telios) of
31
approximately $10 million for federal income tax purposes expire between 2000
and 2005. The Company's Telios subsidiary has generated approximately $84
million of net operating losses, which expire between 2002 and 2010. The amount
of Telios' net operating loss that is available and the Company's ability to
utilize such loss is dependent on the determined value of Telios at the date of
acquisition. The Company's has valuation allowance of $37.5 million against all
deferred tax assets, including the net operating losses, due to the uncertainty
of realization. The timing and manner in which these net operating losses may be
utilized in any year by the Company are severely limited by the Internal Revenue
Code of 1986, as amended, Section 382 and other provisions of the Internal
Revenue Code and its applicable regulations.
In June 1997, the Financial Accounting Standards Board issued SFAS 130,
"Reporting Comprehensive Income," which established standards for reporting
comprehensive income and its components (revenues, expenses, gains and losses)
in the financial statements. SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information," was also issued in June 1997, and replaces
existing segment disclosure requirements and requires certain financial
information regarding operating segments on the basis used internally by
management to evaluate segment performance. These statements will affect
disclosure and presentation in the financial statements but will have no impact
on the Company's consolidated financial position, liquidity, cash flows or
results of operations. The Company will adopt SFAS 130 and 131 in the first
quarter of 1998 and year-end 1998, respectively.
The Company believes that its financial and operational systems, with limited
modifications, will function properly with respect to dates in the year 2000 and
thereafter. The Company estimates that the costs associated with the Year 2000
issue will be insignificant and as such will not have a material impact on the
Company's financial position or operating results.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements specified by this Item, together with the report thereon of
Coopers & Lybrand L.L.P., are presented following Item 14 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
32
PART III
INCORPORATED BY REFERENCE
The information called for by Item 10 "Directors and Executive Officers of the
Registrant" (other than the information concerning executive officers set forth
after Item 4 herein), Item 11 "Executive Compensation", Item 12 "Security
Ownership of Certain Beneficial Owners and Management" and Item 13 "Certain
Relationships and Related Transactions" is incorporated herein by reference to
the Company's definitive proxy statement for its Annual Meeting of Stockholders
scheduled to be held on May 18, 1998, which definitive proxy statement is
expected to be filed with the Commission not later than 120 days after the end
of the fiscal year to which this report relates.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) Documents filed as a part of this report.
1. Financial Statements. The following financial statements are
filed as a part of this report. All schedules are omitted because
they are not applicable or the required information is included in
the consolidated financial statements or notes thereto.
Report of Independent Accountants.................................................... F-1
Consolidated Balance Sheets as of December 31, 1997 and 1996......................... F-2
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995................................................... F-3
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1997, 1996 and 1995............................................. F-5
Notes to Consolidated Financial Statements........................................... F-6
2. Exhibits.
Exhibit
Number Description Location
------ ----------- --------
2.1(a) Acquisition Agreement between Telios Pharmaceuticals, Inc. and the (2) (Exh. 2.1(a))
Company dated as of April 11, 1995, as amended May 10, 1995
2.1(b) Amendment Nos. 2 and 3 to Acquisition Agreement dated as of July 6, (2) (Exh. 2.1(b))
1995 and July 14, 1995, respectively
33
2.1(c) Amendment No. 4 to Acquisition Agreement dated as of August 14, 1995 (3) (Exh. 2.2)
2.2(a) Combined Disclosure Statement and Plan of Reorganization dated as of (2) (Exh. 2.2(a))
March 31, 1995 Jointly Proposed by Telios Pharmaceuticals, Inc. and
the Company (as modified through May 16, 1995) (the "Plan")
2.2(b) Modifications to the Plan (2) (Exh. 2.2(b))
2.2(c) Order of the United States Bankruptcy Court for the Southern District (2) (Exh. 2.2(c))
of California dated July 21, 1995 confirming the Plan
3.1 Amended and Restated Certificate of Incorporation of the Company (2) (Exh.3.1)
3.2 Amended and Restated By-laws of the Company (5) (Exh. 3)
10.1 License Agreement between MIT and the Company dated as of December 29, (2) (Exh. 10.1)
1993
10.2 License & Research Agreement between ABS LifeSciences, Inc. and (2) (Exh. 10.2)
Hospital for Joint Diseases Orthopaedic Institute dated as of December
26, 1990, as amended on May 9, 1992 and January 12, 1995
10.3 Exclusive License Agreement between the Company and Rutgers University (2) (Exh. 10.5)
dated as of December 31, 1994
10.4 License Agreement for Adhesion Peptides Technology between La Jolla (2) (Exh. 10.6)
Cancer Research Foundation and Telios dated as of June 24, 1987
10.5 Registration Rights Agreement between the Company and Boston (2) (Exh. 10.26)
Scientific Corporation dated as of December 29, 1993
10.6(a) Stockholder Rights Agreement between the Company and Union Carbide (2) (Exh. 10.27(a))
dated as of April 30, 1993 ("Carbide Agreement")
35
10.6(b) Amendment dated November 30, 1993 to Carbide Agreement (2) (Exh. 10.27(b))
10.7 Real Estate Lease & Usage Agreement between BHP Diagnostics, Inc., (2) (Exh. 10.28)
Medicus Technologies, Inc., Integra, Ltd. and the Company dated as of
May 1, 1994
10.8 Shared Facilities Usage Agreement Between BHP Diagnostics, Inc., (2) (Exh. 10.29)
Medicus Technologies, Inc. and Integra, Ltd. and the Company dated as
of May 1, 1994
10.9 Lease between Plainsboro Associates and American Biomaterials (2) (Exh. 10.30)
Corporation dated as of April 16, 1985, as assigned to Colla-Tec, Inc.
on October 24, 1989 and as amended through November 1, 1992
10.10 1992 Stock Option Plan * (2) (Exh. 10.31)
10.11 1993 Incentive Stock Option and Non-Qualified Stock Option Plan * (2) (Exh. 10.32)
10.12 Warrant Agreement between the Company and Boston Scientific (2) (Exh. 10.35)
Corporation dated as of December 29, 1993
10.13 Form of Indemnification Agreement between the Company and [ ] (4)
dated August 16, 1995, including a schedule identifying the
individuals that are a party to such Indemnification Agreements
10.14 Employment Agreement dated December 27, 1997 between Integra (5) (Exh. 10.1)
LifeSciences Corporation and Stuart M. Essig*
10.15 Restricted Units Agreement dated December 27, 1997 by and between (5) (Exh. 10.3)
Integra LifeSciences Corporation and Stuart M. Essig*
10.16 Integra LifeSciences Corporation 1996 Incentive Stock Option and (5) (Exh. 10.4)
Non-Qualified Stock Option Plan (as amended through December 27,
1997)*
10.17 Indemnity letter agreement dated December 27, 1997 from Integra (5) (Exh. 10.5)
LifeSciences Corporation to Stuart M. Essig*
21 Subsidiaries of the Company (1)
23 Consent of Independent Accountants (1)
27 Financial Data Schedule (1)
- ---------------------------------
* Indicates a management contract or compensatory plan or arrangement.
(1) Filed herewith.
(2) Incorporated by reference to the indicated exhibit to the Company's
Registration Statement on Form 10/A (File No. 0-26224) which became
effective on August 8, 1995.
36
(3) Incorporated by reference to the indicated exhibit to the Company's Report
on Form 10-Q for the quarter ended June 30, 1995.
(4) Incorporated by reference to the indicated exhibit to the Company's
Registration Statement on Form S-1 (File No. 33-98698) which became
effective on January 24, 1996.
(5) Incorporated by reference to the indicated exhibit to the Company's
Report on Form 8-K file with the Commission on February 3, 1998.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the last
quarter of the fiscal year covered by this report.
37
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Integra LifeSciences
Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Integra
LifeSciences Corporation and Subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1997.
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 generally accepted auditing
standards. 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Integra
LifeSciences Corporation and Subsidiaries as of December 31, 1997 and 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
/s/ Coopers & Lybrand, L.L.P.
Princeton, New Jersey
February 27, 1998, except for the second paragraph of Note 19
for which the date is March 12, 1998
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------------
In thousands 1997 1996
---- ----
ASSETS
Current Assets:
Cash and cash equivalents.......................................... $ 2,083 $ 11,762
Short-term investments............................................. 24,189 22,514
Accounts receivable, net of allowances of $390 and $228............ 2,780 2,902
Inventories........................................................ 2,350 2,635
Prepaid expenses and other current assets.......................... 400 338
--------- ---------
Total current assets........................................ 31,802 40,151
Property and equipment, net......................................... 6,414 8,554
Other assets........................................................ 140 36
--------- ---------
Total assets........................................................ $ 38,356 $ 48,741
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable, trade............................................ $ 541 $ 162
Accrued expenses and other current liabilities..................... 1,854 2,053
--------- ---------
Total current liabilities................................... 2,395 2,215
Other liabilities................................................... 206 142
--------- ---------
Total liabilities................................................ 2,601 2,357
--------- ---------
Commitments and contingencies
Stockholders' Equity:
Preferred stock, $.01 par value (15,000 authorized shares; no
shares issued or outstanding).................................... --- ---
Common stock, $.01 par value (60,000 authorized shares;
29,903 and 28,551 issued and outstanding at December
31, 1997 and 1996, respectively)................................. 299 285
Additional paid-in capital......................................... 111,728 105,447
Unearned compensation related to stock options..................... (266) (328)
Notes receivable - related party................................... (35) (35)
Unrealized loss on available-for-sale investments.................. (26) (4)
Accumulated deficit................................................ (75,945) (58,981)
---------- ---------
Total stockholders' equity...................................... 35,755 46,384
--------- ---------
Total liabilities and stockholders' equity.......................... $ 38,356 $ 48,741
========= =========
The accompanying notes are an integral part
of these consolidated financial statements
F-2
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
In thousands Years Ended December 31,
--------------------------------------------
1997 1996 1995
---- ---- ----
REVENUE
Product sales............................... $ 14,001 $ 11,210 $ 8,356
Research grants............................. 485 1,072 1,064
Product license fees........................ 14 500 520
Royalties................................... 246 290 239
Contract product development................ --- 76 50
---------- -------- --------
Total revenue........................... 14,746 13,148 10,229
========== ========= =========
COSTS AND EXPENSES
Cost of product sales....................... 7,027 6,671 4,850
Research and development.................... 6,406 6,294 5,191
Selling and marketing....................... 5,460 4,310 2,455
General and administrative.................. 14,764 5,320 3,642
Acquired in-process research and
development............................. --- 19,593
----------- -------- ---------
Total costs and expenses................ 33,657 22,595 35,731
Operating loss.............................. (18,911) (9,447) (25,502)
Interest income............................. 1,771 1,799 283
Interest expense - related party............ --- --- (188)
Other income............................... 176 120 5
---------- ---------- ----------
Net loss.................................... $ (16,964) $ (7,528) $ (25,402)
=========== =========== ===========
Basic and diluted net loss per share........ $ (0.57) $ (0.27) $ (1.21)
=========== =========== ===========
Weighted average number of common and
common equivalent shares outstanding.... 29,620 28,114 21,073
========== ========== ==========
The accompanying notes are an integral part
of these consolidated financial statements
F-3
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands Years Ended December 31,
----------------------------------------
1997 1996 1995
---- ---- ----
OPERATING ACTIVITIES:
Net loss............................................................ $ (16,964) $ (7,528) $ (25,402)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization...................................... 1,903 2,059 1,394
(Gain) loss on sale of assets..................................... (162) (136) (5)
Loss on sale of investments........................................ --- 26 ---
Amortization of discount and interest on investments............... (126) (955) (21)
Acquired in-process research and development....................... --- --- 19,593
Common stock and restricted units issued........................... 5,875 --- 70
Amortization of unearned compensation.............................. 123 83 ---
Provision for impairment of leasehold improvements................. 1,021 --- ---
Deferred revenue................................................... --- (10) (350)
Changes in operating assets and liabilities:
Accounts receivable.............................................. 122 (1,134) (176)
Inventories...................................................... 285 (1,263) (423)
Prepaid and other current assets................................. (62) 130 252
Non-current assets............................................... (81) 159 10
Accounts payable, accrued expenses and other liabilities......... 187 602 (585)
--------- --------- ----------
Net cash used in operating activities.............................. (7,879) (7,967) (5,643)
---------- ---------- ---------
INVESTING ACTIVITIES:
Proceeds from the sales/maturities of investments................... 35,500 21,138 ---
Purchases of investments............................................ (37,071) (41,530) (1,177)
Purchases of property and equipment................................. (770) (1,172) (2,925)
Proceeds from sale of assets and other.............................. 183 304 13
Cash acquired in business acquisitions.............................. --- --- 13,117
Payments of acquired bankruptcy claims and acquisition costs........ --- (10) (2,941)
--------- ---------- ----------
Net cash (used in) provided by investing activities................ (2,158) (21,270) 6,087
---------- ---------- ---------
FINANCING ACTIVITIES:
Proceeds from sales of common stock................................. --- 35,662 1,000
Proceeds from exercised stock options............................... 358 785 71
Payments of long-term debt.......................................... --- (10) (2,182)
Proceeds from long-term debt........................................ --- --- 1,938
Notes receivable - related parties.................................. --- 50 ---
Other financing activities.......................................... --- --- (90)
--------- --------- ---------
Net cash provided by financing activities.......................... 358 36,487 737
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents.................... (9,679) 7,250 1,181
Cash and cash equivalents at beginning of period........................ 11,762 4,512 3,331
--------- --------- ---------
Cash and cash equivalents at end of period.............................. $ 2,083 $ 11,762 $ 4,512
========= ========= =========
The accompanying notes are an integral part
of these consolidated financial statements
F-4
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
In thousands Notes Unearned
Additional Receivable Compensation Unrealized Total
Common Stock Paid-In Related Related to (Loss) on Accumulated Stockholders'
Shares Amount Capital Parties Stock Options Investments Deficit Equity
Balance, December 31, 1994............. 19,414 194 $ 35,218 $ (85) --- --- $(26,051) $ 9,276
Sale of common stock................... 116 1 999 --- --- --- --- 1,000
Issuance of common stock for services
rendered............................... 8 --- 70 --- --- --- --- 70
Conversion of revolving credit line.... 173 2 1,498 --- --- --- --- 1,500
Business acquisition................... 3,574 36 30,877 --- --- --- --- 30,913
Issuance of common stock under stock
option plans....................... 209 2 68 --- --- --- --- 70
Net loss............................... --- --- --- --- --- --- (25,402) (25,402)
------- ------ --------- ------- ------- ------- -------- -------
Balance, December 31, 1995............. 23,494 235 68,730 (85) --- --- (51,453) 17,427
======= ====== ========= ======= ======= ======= ======== =======
Public offering of common stock........ 4,671 47 35,524 --- --- --- --- 35,571
Issuance of common stock under stock
option plans....................... 386 3 782 --- --- --- --- 785
Unearned compensation related to
non-employee stock option........... --- --- 411 --- (411) --- --- ---
Amortization of unearned compensation.. --- --- --- --- 83 --- --- 83
Decrease in notes receivable........... --- --- --- 50 --- --- --- 50
Unrealized loss on investments......... --- --- --- --- --- (4) --- (4)
Net loss............................... --- --- --- --- --- --- (7,528) (7,528)
------- ------ --------- ------- ------- ------- -------- -------
Balance, December 31, 1996............. 28,551 285 105,447 (35) (328) (4) (58,981) 46,384
======= ====== ========= ======= ======= ======== ======== =======
Issuance of common stock under stock
option plans....................... 1,352 14 345 --- --- --- --- 359
Unearned compensation related to
non-employee stock options........ --- --- 61 --- (61) --- --- ---
Amortization of unearned compensation.. --- --- --- --- 123 --- --- 123
Issuance of restricted units........... --- --- 5,875 --- --- --- --- 5,875
Unrealized loss on investments......... --- --- --- --- --- (22) --- (22)
Net loss............................... --- --- --- --- --- --- (16,964) (16,964)
------- ------ --------- ------- ------- ------- -------- -------
Balance, December 31, 1997............. 29,903 $ 299 $ 111,728 $ (35) $ (266) $ (26) $(75,945) $35,755
======= ====== ========= ======= ======= ======== ========= =======
The accompanying notes are an integral part
of these consolidated financial statements
F-5
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
Integra LifeSciences Corporation (the "Company") develops, manufactures and
markets medical devices, implants and biomaterials primarily used in the
treatment of burns and skin defects, spinal and cranial disorders, orthopedics,
private label medical products, and other surgical applications. The Company
seeks to be the world's leading company specializing in implantable medical and
biopharmaceutical therapies to target and control cell behavior.
There are certain risks and uncertainties inherent in the Company's business.
The Company has incurred net operating losses since inception and expects to
continue to incur such losses unless and until product sales and collaborative
arrangements generate sufficient revenue to fund continuing operations. There
can be no assurance that the Company's research and development efforts will
result in commercially successful products or that the Company will be granted
regulatory approvals for its products. The Company's business is characterized
by rapidly changing technology and intense competition. There is a risk that
technological developments will render actual and proposed products or
technologies of the Company non-competitive, uneconomical or obsolete. There are
certain risks associated with the Company's product sales being comprised of a
few significant products. In addition, the Company is subject to various other
risks and uncertainties common within its industry which could have a material
adverse effect on its business.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly owned. All inter-company accounts and
transactions are eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. Cash and cash
equivalents are primarily composed of money market mutual funds, repurchase
agreements and U.S. Government securities. The carrying values of these
instruments reflect their approximate fair values.
Investments
The Company's current investment policy is to invest available cash balances in
high quality debt securities with maturities not to exceed 18 months. Realized
gains and losses are determined on the specific identification cost basis.
The accompanying notes are an integral part
of these consolidated financial statements
F-6
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liquidity
The Company completed a public offering in February 1996, resulting in net
proceeds of $35.6 million (see Note 8). The Company believes that current cash
balances and funds available from existing revenue sources will be sufficient to
finance the Company's anticipated operations for at least the next twelve
months. The Company may in the future seek to issue equity securities or enter
into other financing arrangements with strategic partners to raise funds in
excess of its anticipated liquidity and capital requirements.
Inventories
Inventories, consisting of purchased materials, direct labor and manufacturing
overhead, are stated at the lower of cost (determined on the first-in, first-out
method) or market.
Property and Equipment
Purchases of property and equipment are stated at cost. The Company provides for
depreciation using the straight-line method over the estimated useful lives of
the assets, which are estimated to be between 3 and 15 years. Leasehold
improvements are amortized using the straight-line method over the minimum lease
term or the life of the asset whichever is shorter. The cost of major additions
and improvements is capitalized. Maintenance and repair costs that do not
improve or extend the lives of the respective assets are charged to operations
as incurred. When depreciable assets are retired or sold, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is reflected in operations.
Income Taxes
The Company accounts for income taxes under the asset and liability method.
Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in the statement of operations in the period that includes
the enactment date.
Research and Development
Research and development costs are expensed in the period in which they are
incurred.
Revenue Recognition
The Company's product revenue is recognized at the time that products are
shipped. Research grant revenue and contract product development revenue are
recognized when the related expenses are incurred. Under the terms of current
research grants, the Company is reimbursed for allowable direct and indirect
research expenses. Product licensing fees are recognized when earned, which is
when all related commitments have been satisfied. Royalty revenue is recognized
when the Company's marketing and distribution partners sell royalty products.
The accompanying notes are an integral part
of these consolidated financial statements
F-7
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist principally of cash and cash equivalents, short-term
investments held at major financial institutions and accounts receivable.
The Company's products are sold on an uncollateralized basis and on credit terms
based upon a credit risk assessment of each customer. The Company's provisions
for doubtful accounts receivable for the years ended December 31, 1997, 1996 and
1995 were $318,000, $205,000 and $185,000, respectively. Amounts written off for
the years ended December 31, 1997, 1996 and 1995 were $156,000, $231,000 and
$11,000, respectively.
Loss per Share
In February 1997, the Financial Accounting Standards Board issued SFAS 128,
"Earnings per Share," which simplifies existing computational guidelines,
revises disclosure requirements and increases the comparability of earnings per
share data (EPS) on an international basis. Under SFAS 128, basic EPS excludes
dilution and is computed by dividing net income by the weighted-average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then share in the earnings of he entity. The Company has not
included options and warrants to purchase common stock at $2.9375 to $12.50 per
share of 3,778,000, 3,516,000 and 4,041,000 for the years ended December 31,
1997, 1996 and 1995, respectively, in the diluted per share computation as
the result is antidilutive. The Restricted Units issued by the Company (see
Note 8) are included in the weighted average calculation because no further
consideration is due related to the issuance of the underlying common shares.
Stock Based Compensation
Effective January 1, 1996, the Company adopted SFAS 123, "Accounting for
Stock-Based Compensation". SFAS 123 encourages, but does not require, companies
to recognize compensation expense for grants of stock, stock options, and other
equity instruments to employees based on fair value accounting rules. SFAS 123
does require companies that choose not to adopt the fair value accounting rules
to disclose pro forma net income (loss) and earnings (loss) per share data under
the new method. The Company has adopted the disclosure-only provisions of SFAS
123.
The accompanying notes are an integral part
of these consolidated financial statements
F-8
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS 130,
"Reporting Comprehensive Income," which established standards for reporting
comprehensive income and its components (revenues, expenses, gains and losses)
in the financial statements. SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information," was also issued in June 1997 and replaces
existing segment disclosure requirements and requires certain financial
information regarding operating segments on the basis used internally by
management to evaluate segment performance. These statements will affect
disclosure and presentation in the financial statements but will have no impact
on the Company's consolidated financial position, liquidity, cash flows or
results of operations. The Company will adopt SFAS 130 and 131 in the first
quarter of 1998 and year-end 1998, respectively.
Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, including disclosures of
contingent assets and liabilities, and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates.
Reclassifications
Certain 1996 and 1995 amounts have been reclassified to conform to the 1997
presentation.
3. INVESTMENTS
The Company's current investment balances are classified as available for sale
and have maturities within one year. The Company held all securities until
maturity (or call) during the twelve months ended December 31, 1997. For the
twelve months ended December 31, 1996, securities were sold for proceeds of
$3,938,000 and a net loss of $26,000. Investment balances as of December 31,
1997 and 1996 were as follows:
In thousands Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
1997:
U.S. Government agency securities........... $ 24,215 $ --- $ (26) $ 24,189
=========== ========= ========= =========
1996:
U.S. Government securities.................. $ 2,019 $ --- $ (5) $ 2,014
U.S. Government agency securities........... 20,499 13 (12) 20,500
----------- --------- --------- ---------
Total investments....................... $ 22,518 $ 13 $ (17) $ 22,514
=========== =========== =========== =========
The accompanying notes are an integral part
of these consolidated financial statements
F-9
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. INVENTORIES
Inventories consist of the following:
In thousands December 31,
----------------------------
1997 1996
---- ----
Finished goods............................................. $ 773 $ 1,007
Work-in-process............................................ 1,251 1,270
Raw materials.............................................. 326 358
--------- ---------
$ 2,350 $ 2,635
========= =========
5. PROPERTY AND EQUIPMENT
Property and equipment, net, consists of the following:
In thousands December 31,
--------------------------
1997 1996
---- ----
Machinery and equipment.................................... $ 4,107 $ 4,764
Furniture and fixtures..................................... 221 207
Leasehold improvements..................................... 6,550 7,270
--------- ---------
10,878 12,241
Less: Accumulated depreciation and amortization............ (4,464) (3,687)
---------- ----------
$ 6,414 $ 8,554
========= =========
Depreciation and amortization expense for the years ended December 31, 1997,
1996 and 1995 was $1,903,000 $1,959,000 and $1,295,000, respectively.
6. CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
In thousands December 31,
---------------------------
1997 1996
---- ----
Legal fees.................................................. $ 471 $ 661
Contract research........................................... 252 375
Accrued royalties........................................... 49 216
Customer advances........................................... 12 205
Vacation.................................................... 214 174
Other....................................................... 856 422
--------- ---------
$ 1,854 $ 2,053
========= =========
The accompanying notes are an integral part
of these consolidated financial statements
F-10
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LONG-TERM DEBT
Related Party
In connection with the Company's February 1996 public offering, the Company's
$3,500,000 revolving credit facility, as amended (the "Revolving Credit"), from
a related party (the "Lender") expired. The Lender was a corporation whose
shareholders are trusts whose beneficiaries include beneficiaries of a
principal shareholder of the Company.
In June 1995, $1,500,000 of the outstanding principal balance was converted into
common stock of the Company at a price of $8.65 per share and the amount
committed under the Revolving Credit was reduced from $5,000,000 to $3,500,000.
Interest on the outstanding principal amount of the Revolving Credit was
computed at twelve percent (12%) per annum. During the term of the Revolving
Credit, amounts may have been borrowed, repaid and reborrowed. The outstanding
principal and interest was paid to the Lender when the Revolving Credit expired
in February 1996.
8. STOCKHOLDERS' EQUITY
Common Stock Transactions
On February 1, 1996, the Company completed the issuance of 4,671,250 shares of
its common stock through a public offering, resulting in net proceeds of
approximately $35.6 million.
In April 1995, in a private placement transaction, the Company sold 115,607
shares of its common stock to Manor Care, Inc. at a price of $8.65 per share for
an aggregate of $1,000,000.
Restricted Units
In December 1997, the Company issued 2,000,000 restricted units ("Restricted
Units") as a fully vested equity based signing bonus to the Company's new
President and Chief Executive Officer ("Executive"). Each Restricted Unit
represents the right to receive one share of the Company's common stock. The
shares of common stock underlying the restricted units ("Unit Shares") shall be
delivered to Executive on January 1, 2002 if Executive is employed by the
Company on December 31, 2001. If, prior to December 31, 2001, (a) Executive's
employment with the Company is terminated for cause or (b) he voluntarily leaves
his employment with the Company (other than for good reason or due to
disability), the Unit Shares shall be distributed to Executive on January 1,
2018. In connection with the Restricted Units, the Company incurred a non-cash
compensation charge of $5,875,000 in the fourth quarter of 1997, which is
included in general and administrative expenses.
The accompanying notes are an integral part
of these consolidated financial statements
F-11
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Warrants
Boston Scientific Warrant
In conjunction with a 1993 private placement of 695,894 shares of the Company's
common stock to Boston Scientific Corporation ("BSC"), the Company sold for
additional consideration and issued to BSC a warrant (the "BSC Warrant") to
purchase 695,894 shares of the Company's common stock at an exercise price of
$7.185 per share. The BSC Warrant is exercisable through January 31, 2000.
Stockholders' Rights
As stockholders of the Company, Union Carbide Corporation and BSC are
entitled to registration rights. Executive also has registration rights with
respect to the Units Shares underlying the Restricted Units.
Notes Receivable - Related Parties
Notes receivable - related party at December 31, 1997 is a recourse note due
from a former officer of the Company with a specified maturity date in October
1998. The note is collateralized by shares of the Company.
9. STOCK OPTIONS
As of December 31, 1997, the Company had three stock option plans, the 1992
Stock Option Plan (the "1992 Plan"), the 1993 Incentive Stock Option and
Non-Qualified Stock Option Plan (the "1993 Plan") and the 1996 Incentive Stock
Option and Non-Qualified Stock Option Plan (the "1996 Plan").
The Company has reserved 2,550,000 shares of common stock for issuance under the
1992 Plan. The 1992 Plan permits the Company to grant both incentive and
non-qualified stock options to designated directors, officers, employees and
associates of the Company. Options become exercisable over specified periods,
generally 2% or less per month, and generally expire in five or ten years from
the date of grant. The Company has reserved 1,500,000 shares of common stock for
issuance under each of the 1993 and 1996 Plans. The 1993 and 1996 Plans permit
the Company to grant both incentive and non-qualified stock options to
designated directors, officers, employees and associates of the Company. Options
issued under the 1993 and 1996 Plans become exercisable over specified periods,
generally within five years from the date of grant.
The accompanying notes are an integral part
of these consolidated financial statements
F-12
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In May 1997, the Company's Stock Option Committee and Board of Directors
approved an option exchange program pursuant to which employees with options
having an exercise price in excess of $4.00 per share under the Company's Stock
Option Plans could elect to exchange such options for new stock options with an
exercise of $4.00. Under the exchange program, (i) the number of replacement
options issued in exchange for the original options was determined by the
utilization of a formula based on the percentage decrease in exercise price from
the original grant (not to exceed 25% of the original options and excluding the
first 1,000 options), (ii) the replacement options expiration dates were
adjusted to one year later than the original options expiration dates, and (iii)
the vesting terms of the replacement options were adjusted to proportionately
reflect the decrease in options, when applicable. Under the exchange program,
1,084,484 options with exercise prices ranging from $4.25 to $12.50 were
exchanged for 891,623 options granted with an exercise price of $4.00, which was
in excess of the closing market price at the date of exchange.
The Company has adopted the disclosure-only provisions of SFAS 123, and
accordingly no compensation cost has been recognized for the stock option plans
except the amortization of unearned compensation related to options granted to
outside consultants which amounted to $123,000 and $83,000 for the year ended
December 31, 1997 and 1996, respectively. Had the compensation cost for the
Company's stock option plans been determined based on the fair value at the
grant date for awards in 1997, 1996 and 1995 consistent with the provisions of
SFAS No. 123, the Company's net loss and basic and diluted net loss per share
would have increased to the pro forma amounts indicated below:
In thousands, except per share data
1997 1996 1995
---- ---- ----
Net loss.............................................. $ (16,964) $ (7,528) $ (25,402)
Proforma net loss..................................... (17,777) (8,259) (25,722)
Basic and diluted net loss per share.................. $ (0.57) $ (0.27) $ (1.21)
Proforma basic and diluted net loss per share......... (0.60) (0.29) (1.22)
As options vest over a varying number of years, and awards are generally made
each year, the proforma impacts shown here may not be representative of future
proforma expense amounts. The proforma additional compensation expense was
calculated based on the fair value of each option grant using the Black-Scholes
model with the following weighted-average assumptions:
1997 1996 1995
---- ---- ----
Dividend yield..................... -0- -0- -0-
Expected volatility................ 80% 60% 60%
Risk free interest rate............ 6.2% 6.1% 6.2%
Expected option lives.............. 3 years 3 years 3 years
The accompanying notes are an integral part
of these consolidated financial statements
F-13
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three years ended December 31, 1997, option activity for all the plans
was as follows:
Shares in thousands Weighted-Average
Exercise Price Shares
-------------- ------
December 31, 1994, Outstanding.................................. $ 2.64 2,827
=====
December 31, 1994, Exercisable.................................. 1.55 1,409
=====
Granted......................................................... 8.59 980
Exercised....................................................... 0.34 (209)
Canceled........................................................ 7.48 (263)
-------
December 31, 1995, Outstanding.................................. 4.16 3,335
=====
December 31, 1995, Exercisable.................................. 2.06 1,684
=====
Granted......................................................... 9.77 209
Exercised....................................................... 2.03 (386)
Canceled........................................................ 8.38 (348)
-------
December 31, 1996, Outstanding.................................. 4.34 2,810
=====
December 31, 1996, Exercisable.................................. 2.82 1,900
=====
Granted......................................................... 3.55 2,986
Exercised....................................................... 0.26 (1,352)
Canceled........................................................ 7.76 (1,362)
---------
December 31, 1997, Outstanding.................................. 3.84 3,082
=====
December 31, 1997, Exercisable.................................. 4.68 787
===
December 31, 1997, Available for Grant.......................... 521
===
All options granted under the Plans were at the common stock's fair market value
or greater at the dates of grant. The weighted average exercise price and fair
market value of options granted in 1997, 1996 and 1995 were as follows:
In Excess of Market Price Equal to Market Price
------------------------- ---------------------
Exercise Price Fair Value Exercise Price Fair Value
-------------- ---------- -------------- ----------
Year-ended 1997 $ 4.04 $ 1.93 $ 3.22 $ 2.13
Year-ended 1996 8.55 3.24 10.68 4.52
Year-ended 1995 8.65 3.30 8.57 3.90
The accompanying notes are an integral part
of these consolidated financial statements
F-14
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about the outstanding and exercisable
stock options at December 31, 1997:
Options in thousands Options Outstanding Options Exercisable
-------------------------------------------------- ------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Range of Number as Remaining Exercise Number as Exercise
Exercise Prices of 12/31/97 Contractual Life Price of 12/31/97 Price
--------------- ----------- ---------------- ----- ----------- -----
$2.9375 - $3.9375 1,421 8.5 years $ 2.98 23 $ 3.23
$4.00 to $5.25 1,481 3.9 years 4.02 651 4.00
$6.53 to $11.50 180 2.5 years 9.20 113 8.84
------ -----
3,082 787
===== ===
10. LEASES
The Company leases all of its facilities through noncancelable operating lease
agreements. In November 1992, a corporation whose shareholders are trusts whose
beneficiaries include beneficiaries of a principal shareholder of the Company,
acquired from independent third parties a 50% interest in the general
partnership from which the Company leases its approximately 35,000 square foot
administrative, manufacturing, research and principal warehouse facility in
Plainsboro, New Jersey.
The lease provides for rent escalations of 13.3%, 10.1% and 8.5% in the years
1997, 2002 and 2007, respectively, and expires in October 2012. The total amount
of the minimum lease payments related to the New Jersey facility is being
charged to expense on the straight-line method over the term of the lease. In
1995, the Company completed constructing, as a leasehold improvement, a 10,000
square foot addition to the building.
In 1994, the Company leased and otherwise obtained the use of a four building,
approximately 25,000 square foot medical facility in West Chester, Pennsylvania.
The facilities were acquired in April 1994 by a related party of a principal
shareholder of the Company and are leased and otherwise made available for use
to the Company as of May 1, 1994. The lease agreement provides that the
Company is obligated to pay monthly non-escalating fixed amounts for the
facility for a period of five years, with three five-year options to extend
the lease. The intent of the lease agreement is to make available to the
Company additional freeze drying facilities and other production assets
as well as warehouse and administrative space.
In January 1998, the Company decided to suspend its operations at its West
Chester, Pennsylvania facility. Under SFAS 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of",
the Company is required to review its long-lived assets and certain
identifiable intangibles (collectively, "Long-Lived Assets") for impairment
whenever events or changes in circumstances indicate that the future cash flows
do not recover the carrying value of the Long-Lived Assets. The Company incurred
an asset impairment charge of $1,021,000 in the fourth quarter of 1997, included
in general and administrative expense, related to certain leasehold improvements
made at the West Chester facility. The Company believes the future cash flows
generated by this facility will not support the carrying value of the leasehold
improvements.
The accompanying notes are an integral part
of these consolidated financial statements
F-15
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 1996, the Company leased 7,400 square feet of administrative and laboratory
space in San Diego, California under a five-year lease agreement that provides
for monthly payments with annual escalations. In 1997, the Company leased an
additional 11,200 square feet of space at the San Diego site to increase its
laboratory and administrative operations.
The Company is required to pay for utilities, taxes, insurance and maintenance
at its principal leased facilities. The Company also leases facilities
additional space for administrative support activities and storage under
short-term agreements in New Jersey, California and Pennsylvania. Future minimum
lease payments under operating leases at December 31, 1997 were as follows:
In thousands Related Third
Parties Parties Total
----------- ----------- ------------
1998 $ 390 $ 387 $ 777
1999 270 442 712
2000 210 453 663
2001 210 469 679
2002 213 479 692
Thereafter 2,430 887 3,317
----------- ----------- ------------
Total minimum lease
Payments $ 3,723 $ 3,117 $ 6,840
=========== =========== ============
Total rental expense for the years ended December 31, 1997, 1996 and 1995 was
$640,000, $654,000 and $468,000, respectively, and included $390,000, $390,000
and $210,000 in related party expense for the years ended December 31, 1997,
1996 and 1995, respectively.
11. INCOME TAXES
The temporary differences which give rise to deferred tax assets and
(liabilities) are presented below:
In thousands December 31,
----------------------------------
1997 1996
----------------- ----------------
Net operating loss and tax credit carryforwards $ 31,974 $ 26,371
Inventory reserves and capitalization 1,402 1,051
Other 3,406 1,335
Depreciation 682 196
----------- -----------
Total deferred tax assets before valuation allowance 37,464 28,953
Valuation allowance (37,464) (28,953)
------------ ------------
Net deferred tax assets ---- ----
Depreciation ---- ----
Total deferred tax liabilities ---- ----
----------- -----------
Net deferred tax asset $ ---- $ ----
=========== ===========
The accompanying notes are an integral part
of these consolidated financial statements
F-16
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's valuation allowance of $37.5 million was provided against the
deferred tax assets due to the uncertainty of realization.
A reconciliation of the United States federal statutory rate to the Company's
effective tax rate for the years ended December 31, 1997, 1996 and 1995 is as
follows:
1997 1996 1995
---------- --------- ---------
Federal statutory rate (34.0%) (34.0%) (34.0%)
Expenses not deductible for tax purposes:
Acquired in-process research and
Development -- -- 26.3%
Other 1.4% 1.3% (1.3%)
Increase in valuation allowance for deferred tax assets
and net operating losses not recognized 32.6% 32.7% 9.0%
---------- -------- --------
Effective tax rate --- --- ---
========== ======== ========
At December 31, 1997, the Company had net operating loss carryforwards of
approximately $36 million and $28 million for federal and state income tax
purposes, respectively, to offset future taxable income, if any, which expire
through 2012 and 2004, respectively.
At December 31, 1997, several of the Company's subsidiaries have unused net
operating loss and tax credit carryforwards arising from periods prior to the
Company's ownership. The net operating loss carryforwards (excluding Telios) of
approximately $10 million for federal income tax purposes expire between 2000
and 2005. The Company's Telios subsidiary has generated approximately $84
million of net operating losses, which expire between 2002 and 2010. The amount
of Telios' net operating losses that are available and the Company's ability to
utilize such losses is dependent on the determined value of Telios at the date
of acquisition. The timing and manner in which these net operating losses may be
utilized in any year by the Company are severely limited by Section 382 and
other provisions of the Internal Revenue Code of 1986, as amended, and its
applicable regulations.
12. BUSINESS ACQUISITIONS
Telios Pharmaceuticals, Inc.
On April 11, 1995, the Company entered into an acquisition agreement with Telios
Pharmaceuticals, Inc. ("Telios") setting forth the terms and conditions under
which the Company would acquire all of the outstanding equity securities of
Telios. On July 21, 1995, the United States Bankruptcy Court for the Southern
District of California (the "Bankruptcy Court") confirmed the Combined
Disclosure Statement and Plan of Reorganization (the "Plan") proposed by Telios
and the Company. Effective August 15, 1995, the Company acquired Telios by
issuing 3,573,743 shares of the Company's common stock valued at $30,913,000, or
$8.65 per share. The Company's shares and certain cash disbursements were made
in conjunction with the confirmation of the Plan under US bankruptcy laws and
pursuant to Section 1145 of the Bankruptcy Code.
The accompanying notes are an integral part
of these consolidated financial statements
F-17
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The acquisition was accounted for by the purchase method of accounting and,
accordingly, the purchase price and the expenses associated with the acquisition
were allocated to the assets acquired and the liabilities assumed at the date of
acquisition as follows:
In thousands:
Cash and cash equivalents............................ $ 13,117
Accounts receivable.................................. 75
Prepaid expenses..................................... 344
Fixed assets......................................... 1,310
Other assets......................................... 9
In-process research and development.................. 19,592
Accounts payable and accrued liabilities............. (576)
Bankruptcy claims.................................... (2,717)
------------
$ 31,154
The acquired in-process research and development had no alternative use and was
charged to expense at the date of acquisition. The bankruptcy claim liabilities
include pre-petition and post-petition claims, which have been satisfied in cash
after the acquisition date.
13. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) Profit Sharing Plan and Trust ("401(k) Plan") for
eligible employees and their beneficiaries. All employees are eligible to
participate in the plan once they become full-time employees and attain the age
of 21. The 401(k) Plan provides for employee contributions through a salary
reduction election. Employer discretionary matching and discretionary profit
sharing contributions, which are determined annually by the Company, vest over a
six-year period of service. For the years ended December 31, 1997, 1996 and
1995, the Company's discretionary matching was based on a percentage of salary
reduction elections per eligible participant, and totaled $35,000, $33,000 and
$21,000, respectively. No discretionary profit sharing contribution was made in
any year.
14. ROYALTIES, LICENSE AND DEVELOPMENT AGREEMENTS
MIT Patents
In 1991, Marion Merrell Dow, Inc. ("MMDI"), assigned to the Company its interest
in certain license agreements between MMDI and MIT (the "MMDI Agreement") which
gave MMDI exclusive access to patent rights for use in the field of regenerative
medicine. MMDI also granted to the Company a worldwide exclusive license to
utilize certain technology necessary to continue the development and
commercialization of the patent rights that are the subject of the MMDI
Agreement. The first product that the Company has commercialized under the MMDI
Agreement is the INTEGRA(TM) Artificial Skin product. As consideration for the
rights and license granted to the Company, the Company has agreed to pay to MMDI
royalties equal to a percentage of the net sales of any products subject to the
MMDI Agreement.
The accompanying notes are an integral part
of these consolidated financial statements
F-18
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As a result of the 1993 acquisition of substantially all of the assets of Biomat
Corporation, the Company acquired rights to certain other MIT technology for use
in fields related to regenerative medicine (the "Biomat License Agreement"). In
December 1993, the Company entered into a license agreement with MIT (the
"Integra License Agreement") in which (i) the Company and MIT agreed to amend
and restate the MMDI Agreement and the Biomat License Agreement, (ii) MIT
granted the Company an exclusive license to additional patent rights with broad
use in the field of regenerative medicine, and (iii) MIT modified the
consideration payable by the Company to MIT for access to all MIT technology
subject to such license. The Integra License Agreement provides for payments to
MIT in the form of a common stock warrant and royalties on product sales. For
the year ended December 31, 1997 and 1996, the Company accrued royalties based
on the sales of INTEGRA(TM) Artificial Skin of approximately $6.0 million and
$3.1 million, respectively.
Rutgers University Agreements
In 1993, the Company acquired an option to license from Rutgers University
("Rutgers") patents describing a certain class of biodegradable polymers for
medical applications. As consideration for the option, the Company paid Rutgers
an option fee, which has been expensed, and agreed to fund a limited one-year
research program at Rutgers to evaluate the technology.
In 1993, the Company applied for, and was awarded by the United States
Department of Commerce, a three-year, $2 million grant to fund the development
of this technology. In December 1994, the Company exercised its option and
entered into a license agreement with Rutgers which granted to the Company
certain exclusive proprietary rights for development and provides for the
Company to pay to Rutgers a percentage royalty on the sale of all products
commercialized under the license agreement. As of December 31, 1997, the Company
has not commercialized products under such agreements that would be subject to
royalties.
In October 1997, the Company was notified that its application for an award
from the United States Department of Commerce to fund additional work on a
related class of biodegradable was awarded. This award is a three-year, $2
million grant scheduled to begin in April 1998.
The Burnham Institute
The Company has an agreement with The Burnham Institute ("Burnham"), formerly
the La Jolla Cancer Research Foundation, which grants it an exclusive license to
Burnham's adhesion peptide technology and a right of first refusal to obtain a
license on other technology. The term of the license agreement is for the life
of the related patent rights. Any patent applications, issued patents or
improvements related to Burnham's technology, but made by the Company, belong to
and are owned by Burnham and are exclusively licensed to the Company. The
licensing agreement includes a commitment to pay Burnham 20% of all option and
license fees and milestone payments paid by sublicensees up to an aggregate of
$1 million per year. In addition, a royalty based on net sales of product
containing licensed technology is payable to Burnham. As of December 31, 1997,
the Company has not commercialized products that would be subject to royalties.
The accompanying notes are an integral part
of these consolidated financial statements
F-19
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Brigham and Women's Hospital, Inc.
In 1995, the Company acquired the rights to develop, manufacture and sell
products resulting from cultured epithelial autograft methods patented by the
Brigham and Women's Hospital, Inc., for which the Company funds a limited
research effort and will pay a royalty on the sales of any products that may be
commercialized from the use of these technologies. The Company plans to continue
funding research efforts on this technology.
CONRAD
The Company is continuing its collaboration with the Eastern Virginia Medical
School to further develop polymer based materials for use in reproductive health
applications under the Contraceptive Research and Development (CONRAD) program.
Under the collaboration, CONRAD provides the Company with grant funding to cover
a portion of the expenditures under the program. The Company has the right to
negotiate distribution agreements for any products developed through this
collaboration.
Cambridge Antibody Technology Limited
In January 1996, the Company and Cambridge Antibody Technology Limited ("CAT")
entered into an agreement consisting of a license to CAT of certain rights to
use anti-TGF-(beta) antibodies for the treatment of fibrotic diseases and the
granting of a right of first refusal to CAT for certain rights relating to
decorin, a molecule believed to mediate the production of TGF-(beta) in humans
and animals. Under the agreement, the Company received a $500,000 licensing fee
and is entitled to market any dermal application products developed with
royalties payable to CAT. The Company will also receive royalties upon the sale
by CAT of licensed products other than those directed at dermal applications.
Genetics Institute, Inc. and Sofamor/Danek Group, Inc.
The Company supplies GI with a collagen delivery matrix that is used in
conjunction with GI's recombinant human bone morphogenic protein-2 (rhBMP-2) to
stimulate bone regeneration. Human clinical trials conducted by GI have shown
the safety and biological activity of the product and GI has initiated
additional larger trials. Sofamor/Danek Group, Inc. ("SDG"), GI and the Company
are jointly developing specialized delivery matrices for the release of rhBMP-2
in the spine. These matrices can be used alone or in conjunction with SDG spinal
cages. Human trials have begun and these matrices can be used alone or in
conjunction with SDG's spinal cages. The Company has an exclusive supply
agreement with GI to provide commercial quantities of the collagen delivery
matrix, should GI successfully commercialize its products.
The accompanying notes are an integral part
of these consolidated financial statements
F-20
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Johnson & Johnson Professional, Inc.
In February 1998, the Company announced the signing of a strategic alliance with
J&J Professional, Inc. to develop and market a new product to regenerate
articular cartilage. The Company will develop an absorbable, collagen-based
implant designed in combination with a proprietary RGD peptide. J&J
Professional, Inc. will develop the arthroscopic instrumentation used in the
surgery and will market the combined products worldwide. Under the terms of the
agreement, J&J Professional, Inc. will make payments up to $13 million as the
Company meets various milestones, and will fund all necessary development costs
beyond the pre-clinical phase. Following successful development, the Company
will be responsible for manufacturing the product and for future new product
development.
Other Royalty, License and Development Agreements
As consideration for certain other technology, manufacturing, distribution and
selling rights and licenses granted to the Company, the Company has agreed to
pay royalties on the sales of products that are commercialized relative to the
granted rights and licenses. Royalty payments under these agreements by the
Company were not significant for any of the periods presented.
15. LEGAL MATTERS
In January 1994, ABS LifeSciences, Inc., a wholly-owned subsidiary of the
Company, entered into a five-year distribution agreement with the distributor of
the Company's Chronicure product pursuant to which the distributor is obligated
to purchase certain minimum quantities of wound care products. In October 1995,
the Company's subsidiary filed a complaint in the United States District Court
for the District of New Jersey claiming the distributor breached the
distribution agreement by, among other things, not paying the subsidiary for
certain products delivered. In November 1995, the distributor filed an
affirmative defense and counterclaim alleging, among other things, fraudulent
misrepresentation and breach of contract and seeking damages of approximately
$1.2 million plus unspecified punitive damages. During 1997, the case was
inactive and dismissed by the court based on a tentative settlement with leave
to reinstate on the request of either party. However, the Company has not been
able to consummate an acceptable settlement and has submitted a request to
reinstate the case. The Company intends to continue to defend the counterclaim.
On or about July 18, 1996, Telios filed a patent infringement lawsuit against
three parties: Merck KGaA, a German corporation, Scripps Research Institute, a
California nonprofit corporation, and David A. Cheresh, Ph.D., a research
scientist with Scripps. The lawsuit was filed in the U.S. District Court for the
Southern District of California. The complaint charges, among other things, that
the defendant Merck KGaA "willfully and deliberately induced, and continues to
willfully and deliberately induce, defendants Scripps Research Institute and Dr.
David A. Cheresh to infringe United States Letters Patent No. 4,729,255." This
patent is one of a group of five patents granted to Burnham and licensed by
Telios that are based on the interaction between a family of cell surface
proteins called integrins and the arginine-glycine-aspartic acid (known as
"RGD") peptide sequence found in many extracellular matrix proteins. The Company
is pursuing numerous medical applications of the RGD technology in the fields of
anti-thrombic agents, cancer,
The accompanying notes are an integral part
of these consolidated financial statements
F-21
osteoporosis, and a cell adhesive coating designed to improve the performance of
implantable devices and their acceptance by the body. The defendants have filed
a countersuit asking for an award of defendants' reasonable attorney fees.
In August 1995, Telios received confirmation of its Chapter 11 plan of
reorganization in the United States Bankruptcy Court for the Southern District
of California. Under the plan, Telios assumed a certain License Agreement and a
certain Research Agreement entered into with the University of Utah and the
University of Utah Research Foundation ("University") in 1991. On March 27,
1996, Telios filed a motion with the bankruptcy court for a determination as to
whether there were any "cure" requirements for the assumed contracts with the
University (the "Motion"). In the meantime, on March 22, 1996, the University
filed a complaint against Telios in the United States District Court for the
District of Utah seeking a declaration that the License Agreement and Research
Agreement were terminated or terminable. The District Court case was
subsequently dismissed in light of the pending Motion in the bankruptcy court.
In November 1997, the bankruptcy court entered an order decreeing that Telios'
license to certain of the patents and technology rights under the License
Agreement had been reduced to a non-exclusive license. However, the court did
not terminate the license. In addition, Telios still retains an exclusive
license to certain patents, technology and rights to make, use and sell licensed
products thereunder, which have been exclusively sublicensed by Telios to
Cambridge Antibody Technology, Limited. A hearing has been set for May 27, 1998
to determine whether Telios has licensing rights to a certain new invention
disclosed by the University under the License Agreement and/or the Research
Agreement.
On or about November 4, 1997, Integra (Artificial Skin) Corporation ("IASC"), a
wholly-owned subsidiary of the Company, and the Massachusetts Institute of
Technology ("MIT") filed a patent infringement lawsuit against LifeCell
Corporation ("LifeCell") alleging that LifeCell infringed United States Patent
Nos. 4,458,678 and 4,505,266 through the making, using and selling of its
AlloDerm(R) and/or XenoDerm(TM) products. The suit was filed in the United
States District Court for the District of Massachusetts. The patents in suit are
licensed by MIT to IASC and relate to treating wounds with products which
encourage tissue regeneration. LifeCell has filed counterclaims seeking
declaratory judgments of non-infringement and patent invalidity and also claims
that MIT and IASC are barred from recovery under the doctrines of laches, patent
misuse and unclean hands alleging, among other things, that MIT and IASC filed
this suit solely to disrupt LifeCell's November 1997 stock offering. LifeCell
has filed a motion to transfer this action to the United States District Court
for the Southern District of Texas which motion MIT and IASC are opposing. The
Company intends to vigorously pursue its claims and vigorously defend against
LifeCell's counterclaims and affirmative defenses.
On or about December 10, 1997, LifeCell filed a complaint against MIT and IASC
in Texas state court claiming tortious interference, business and product
disparagement, unfair competition, civil conspiracy and violation of the Texas
Free Enterprise and Antitrust Act based upon the contention that MIT and IASC
filed the patent infringement suit in Massachusetts in order to interfere with
LifeCell's November 1997 stock offering. LifeCell is seeking unspecified actual
monetary damages in an amount not less than $12 million together with treble
damages, unspecified punitive damages, and other relief. MIT and IASC removed
this case to the United
The accompanying notes are an integral part
of these consolidated financial statements
F-22
INTEGRA LIFESCIENCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
States District Court for the Southern District of Texas and have filed a motion
to transfer it to United States District Court in Massachusetts. LifeCell filed
a motion to remand the case back to Texas state court which motion MIT and IASC
are opposing. MIT and IASC have also filed motions to dismiss the case for lack
of personal jurisdiction and to stay discovery. The Company also intends to
vigorously defend against this suit.
The ultimate liability of the cases disclosed above cannot now be determined
because of the considerable uncertainties that exist. The Company's financial
statements do not reflect any significant amounts related to possible
unfavorable outcomes of these matters. The Company intends to continue its
vigorous defense of these matters. However, it is possible that the Company's
results of operations, financial position and cash flows in a particular period
could be materially affected by these contingencies.
16. CONSULTING AND EMPLOYMENT AGREEMENTS
The Company has several consulting agreements with research and other
professional specialists. The Company's agreements with its consultants require
payments through March 2005 in the aggregate amount of $1.1 million.
A member of the Company's board of directors is a partner of a law firm which
provides services to the Company. Amounts paid by the Company for services
rendered were $72,000, $346,000 and $581,000 for the years ended December 31,
1997, 1996 and 1995, respectively.
At December 31, 1997, the Company had employment agreements with five employees
that expire at specified dates through 2001 and require the Company to make
total aggregate minimum payments in the amount of $2.5 million.
17. MAJOR CUSTOMER DATA
A portion of the Company's products are sold to customers under the terms of
multiple-year marketing and distribution agreements that provide for purchase
and supply commitments on the part of the customer and the Company,
respectively. In many cases marketing customers have paid license fees to the
Company for the marketing and distribution rights. The following table
represents customers that accounted for over 10% of product sales in one or more
years:
Customer 1997 1996 1995
-------- ---- ---- ----
Customer A 13% 15% 21%
Customer B -- 15% --
Customer C 11% 12% 12%
Customer D -- -- 12%
Customer E -- -- 11%
---- ---- ----
24% 42% 56%
For the years ended December 31, 1997, 1996 and 1995, the Company's foreign
export sales, primarily to Europe and Japan, were 14%, 16% and 11% of total
product sales, respectively.
The accompanying notes are an integral part
of these consolidated financial statements
F-23
The Company's product sales consists of several products that make up a large
percentage of the total, including the Company's Integra Artificial Skin product
which accounted for 43% of product sales for the period ended December 31, 1997.
18. SUPPLEMENTAL CASH FLOW INFORMATION
Included in other current liabilities at December 31, 1997 is $57,000 related to
fixed asset additions and leasehold improvements that were paid after year-end.
Cash paid for interest expense was $188,000 for the year ended December 31,
1995. There was no cash paid for income taxes during the periods presented.
In connection with the August 1995 acquisition of Telios, the Company issued
3,573,743 shares of its common stock with an aggregate value of $30,913,000 (see
Note 12).
In 1995, the Company and the Lender (see Note 7) agreed to convert $1,500,000 of
the Revolving Credit to common stock at a price of $8.65 per share.
Common stock of the Company valued at $70,000 was issued to two investment banks
for advisory services rendered during 1995.
19. Subsequent Events
Stock Repurchase Program
In February 1998, the Company's Board of Directors authorized a common
stock repurchase program of up to 500,000 shares, effective immediately.
The share repurchase plan allows the Company to make repurchases from time to
time during 1998 in the open market or through privately negotiated
transactions. Repurchased common shares will be added to the Company's treasury
shares. The timing of any share repurchase will be dictated by overall
financial and market conditions and other corporate considerations.
Century Medical, Inc.
On March 12, 1998, the Company entered into a series of agreements with Century
Medical, Inc. ("CMI"), a wholly-owned subsidiary of ITOCHU Corporation, under
which CMI will distribute the Company's neuro-surgery products in Japan. Under
the agreements, CMI will pay an up-front non-refundable licensing fee of $1.0
million in the first quarter of 1998 and purchase 500,000 shares of newly issued
preferred stock of the Company for $4.0 million in the second quarter of 1998.
CMI will also underwrite all costs of the Japanese clinical trials and
regulatory approval processes.
The accompanying notes are an integral part
of these consolidated financial statements
F-24
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INTEGRA LIFESCIENCES CORPORATION
By: /s/ Stuart M. Essig, Ph.D.
-------------------------------
Stuart M. Essig, Ph.D.
President
Pursuant to the requirements of the Securities Act of 1934, this report has been
signed by the following persons, in the capacities indicated, on the 30th day of
March, 1998.
Signature Title
--------- -----
/s/ Richard E. Caruso Chairman of the Board
-----------------------------------
Richard E. Caruso, Ph.D.
/s/ Stuart M. Essig President, Chief Executive Officer and Director
----------------------------------- (Principal Executive Officer)
Stuart M. Essig, Ph.D.
/s/ George W. McKinney Vice Chairman, Chief Operating Officer and Director
-----------------------------------
George W. McKinney, III, Ph.D.
/s/ David B. Holtz Vice President, Treasurer
----------------------------------- (Principal Financial and Accounting Officer)
David B. Holtz
/s/ Keith Bradley Director
-----------------------------------
Keith Bradley, Ph.D.
/s/ William M. Goldstein Director
-----------------------------------
William M. Goldstein, Esq.
/s/ Frederic V. Malek Director
-----------------------------------
Frederic V. Malek
/s/ James M. Sullivan Director
-----------------------------------
James M. Sullivan
/s/ Edmund L. Zalinski Director
-----------------------------------
Edmund L. Zalinski, Ph.D.