Item 1. BUSINESS
The Company
Focal, Inc. ("Focal" or the "Company") develops, manufactures and commercializes a unique family of biodegradable polymers based on the Company's proprietary technology. This unique technology provides a platform for medical devices and drug delivery vehicles. The first product developed from Focal's technology platform is FocalSeal-L lung surgical sealant, which was approved by the U.S. Food and Drug Administration ("FDA") for lung surgery in May 2000 and launched in the U.S. in July 2000. The Company's family of FocalSeal surgical sealant products is currently being developed for use inside the body to seal leaks resulting from neurological, cardiovascular and gastrointestinal surgery. The Company has entered into an exclusive marketing and distribution agreement for its FocalSeal-L lung, cardiovascular and gastrointestinal surgical sealant products in North America with Genzyme Biosurgery (formerly Genzyme Surgical Products), a division of Genzyme Corporation ("Genzyme Biosurgery"). In markets outside North America, Focal has entered into a marketing and distribution agreement for all of its surgical sealant products with Ethicon, Inc., a division of Johnson & Johnson ("Ethicon"). The Company has received FDA and CE mark approval for FocalSeal(TM)-L surgical sealant for lung indications and has received CE mark approval of FocalSeal-S surgical sealant for neurosurgery indications in Europe. In addition, the Company has received marketing approval for FocalSeal-L surgical sealant in Canada.
There are more than 4 million open and minimally invasive lung, neurological, cardiovascular and gastrointestinal surgical procedures performed each year worldwide. In many of these procedures, air or fluid leaks may arise and cannot be effectively treated with existing wound closure products such as sutures and staples. These leaks may occur in an unpredictable and unexpected manner, and the Company's products, may be effective in reducing such post-surgical leaks. Because of the unpredictable nature of these leaks, it may be difficult at the completion of surgery for the surgeon to determine whether a particular surgical site will leak. Accordingly, the Company believes that its FocalSeal surgical sealants may be used routinely in certain procedures. The Company has successfully completed clinical trials of FocalSeal-L surgical sealant for lung surgery in the United States and in Europe. In these clinical trials, FocalSeal-L surgical sealant was effective in sealing air and fluid leaks following lung surgery and no unanticipated adverse device effects were observed. Focal has also completed a clinical trial of FocalSeal-S surgical sealant for neurosurgery in Europe and is working with the FDA on a U.S. clinical trial. Focal intends to develop products for cardiovascular and gastrointestinal surgery indications, although the timing and magnitude of these efforts are dependent on the Company securing additional resources.
Patients with persistent air or fluid leaks may require prolonged hospitalization, have more complications, higher levels of post-operative pain, and a higher risk of mortality. Sutures and staples represent the principal products comprising the over $2.8 billion worldwide wound closure market. Sutures and staples work very effectively in bringing dissected tissues back together after surgery. However, sutures and staples alone do not have inherent sealing capabilities, and therefore cannot consistently eliminate air and fluid leakage at the wound site.
Focal's surgical sealants have the following features which the Company believes allow the product to effectively reduce the incidence of air and fluid leaks following surgery:
o provides an effective seal;
o adheres and conforms very well to underlying tissue;
o expands and contracts with tissue;
o is safe and easy to use;
o remains intact during the critical wound healing process; and
o is bioabsorbable.
FocalSeal surgical sealants, which are biocompatible, are designed to remain intact through the critical wound healing period and are then absorbed and eliminated by the body. Focal has developed two primary formulations of its products, FocalSeal-L surgical sealant and FocalSeal-S surgical sealant, which are designed to have absorption times that parallel long-term and short-term synthetic, absorbable polymer sutures, respectively.
Focal believes the use of its FocalSeal surgical sealants could potentially shorten patient recovery times and hospital stays, and reduce post-surgical complications. Focal's pivotal U.S. clinical trial of FocalSeal-L surgical sealant for lung surgery demonstrated a trend toward earlier patient discharge from the hospital.
The Company received FDA approval for FocalSeal-L lung surgical sealant in the United States in May 2000 and launched the product in July 2000 through Genzyme Biosurgery's sales force. Currently, FocalSeal-L is the only FDA approved lung sealant in the U.S.
FocalSeal-S surgical sealant, the Company's second surgical sealant formulation, is being developed initially to be used to seal cerebrospinal fluid ("CSF") leaks following neurosurgery. Focal received CE Mark approval for this product in November of 1999. The Company is working with the FDA to receive an IDE approval for a clinical trial in the United States.
The Company believes, based upon preclinical evaluation of its polymers, that its FocalSeal-L and FocalSeal-S surgical sealant formulations will also be applicable to cardiovascular surgery, gastrointestinal surgery and other surgical applications. Focal has successfully demonstrated in preclinical models that FocalSeal-L surgical sealant is effective in sealing blood leaks in coronary artery bypass graft ("CABG") surgery and other cardiovascular indications. Focal is currently conducting further preclinical trials.
Focal also intends to develop other applications for the liquid formulations of its platform polymer technology, including local drug delivery vehicles. In local drug delivery applications, the Company believes that its polymers can deliver high concentrations of drugs at local disease sites, thereby potentially enhancing efficacy and reducing toxicity associated with systemic delivery of drugs. The Company believes that its polymer technology will be uniquely effective because it adheres to the target tissue while it is releasing drugs. Focal has demonstrated in preclinical models the ability to obtain sustained release of drugs at a local disease site.
Focal's family of surgical sealants and its other products under development are based on the Company's proprietary synthetic absorbable polymer technology. The Company's liquid formulations are comprised primarily of water, absorbable polymers such as polyethylene glycol ("PEG") and other synthetic components. These components are widely used in other medical products approved for use inside the body, including synthetic absorbable sutures. The Company designs its proprietary polymer formulations in order to control characteristics such as absorption, viscosity, setting time, strength, flexibility and elasticity. This enables the Company to tailor formulations for particular surgical applications. A key distinguishing characteristic of the Company's
polymer formulations is that they are applied as liquids and then converted by light into solid gels inside the body. The solid gel formed after the light has been applied is highly flexible, elastic and transparent and strongly adheres to moist or dry tissue. The resulting solid gel is then absorbed and eliminated from the body over periods of time varying from weeks to months to years.
The Company believes it has built a strong patent portfolio related to its polymer technology. As of December 31, 2000, the Company has received, licensed or believes it has the option or right to license 47 issued United States patents and 36 foreign patents corresponding to certain of the issued United States patents and has 23 patent applications pending in the United States, as well as foreign counterparts of certain of these applications.
Focal was incorporated in Delaware in June 1991. The Company's principal executive offices are located at 4 Maguire Road, Lexington, Massachusetts 02421. Its telephone number is (781) 280-7800.
Surgical Sealant Market
Effective closure of internal wounds following surgical procedures is critical to the restoration of the function of injured and diseased tissue and the ultimate success of the surgical procedure. Failure to effectively seal surgical wounds can result in leakage of air in lung surgery, cerebrospinal fluid in neurosurgery, blood in cardiovascular surgery, and gastrointestinal contents in gastrointestinal surgery. Air and fluid leaks resulting from surgical procedures can lead to significant post-surgical morbidity that may result in prolonged hospitalization, higher levels of postoperative pain and complications and a higher mortality rate.
The current annual worldwide market for wound closure products, consisting primarily of surgical sutures and staples, is estimated at over $2.8 billion. Sutures and staples facilitate healing by joining wound edges and allowing the body to heal naturally. However, because sutures and staples do not have inherent sealing capabilities, they cannot consistently eliminate air and fluid leakage at the wound site. This is particularly the case when sutures and staples are used to close tissues containing air or fluids under pressure, such as the lobes of the lung, the dural membrane surrounding the brain and spinal cord, blood vessels and the gastrointestinal tract. In addition, in minimally invasive surgical procedures, where the physician must operate through small access devices, it can be more difficult and time-consuming for the physician to place sutures and staples as compared to open surgical procedures. The Company believes that the use of surgical sealants in minimally invasive procedures could enhance the efficacy of these procedures through more effective and rapid wound closure.
The limitations of sutures and staples in sealing certain air and fluid leaks have led to the adaptation of other technologies to augment wound closure. These alternatives include the use of liquid fibrin glues and non-liquid collagen patch products. Fibrin glues were originally developed as hemostatic agents to stop diffuse bleeding. They have limited effectiveness in many surgical sealant applications because they do not adhere strongly to, or move and expand with underlying tissue, particularly moist tissue. They are also not capable of withstanding high pressure leaks. In spite of these limitations, annual international sales of fibrin glue sealants are estimated to be approximately $200 million.
Collagen patches have similar limitations, in that they are not highly adherent, strong or elastic. In addition, both collagen patches and fibrin glues are absorbed by enzymatic reaction. Enzymatic reaction can result in variable absorption time from patient to patient, depending upon metabolic rates, and can potentially result in absorption prior to healing of the surgical site. Collagen patches and fibrin glues are derived from animal by-products, including bovine collagen and bovine and/or human plasma. These derivatives have resulted in significant safety concerns such as disease transmission. Furthermore, the wound closure industry has undergone a significant shift away from animal-derived materials to synthetic materials due to the more predictable absorption, superior performance characteristics and more favorable safety profile of synthetic sutures. Currently, the Company estimates that over 65% of suture materials are synthetic, as compared to only approximately 25% in 1975.
Due to the limitations of sutures and staples in achieving rapid, leakproof wound closure and the inadequacy of animal by-product sourced glues and patches, Focal believes that a significant market opportunity exists for its synthetic, absorbable, effective, surgical sealants.
Focal's Synthetic Polymer Technology
Focal's family of surgical sealants and its other products under development are based on the Company's proprietary synthetic, absorbable polymer technology. The Company's polymers are designed to incorporate several beneficial characteristics, which are critical to their use as surgical sealants and in other medical applications, including adherence to tissue; strength, flexibility and elasticity; consistent absorption; and safety and biocompatibility.
The Company's proprietary liquid formulations are primarily comprised of water, absorbable polymers such as polyethylene glycol, or PEG, and other synthetic components. Water makes up approximately 65 to 80% of Focal's formulations and PEG and other synthetic components comprise the remaining 20 to 35% of the formulation. The components of Focal's surgical sealants are widely used in other medical products approved for use inside the body, such as synthetic absorbable sutures, intravenously administered pharmaceuticals, pain medications and eye drops. The Company designs its proprietary polymer formulations in order to control characteristics such as absorption, viscosity, setting-time, strength, flexibility and elasticity. This enables the Company to tailor polymers for particular applications. A key distinguishing characteristic of the Company's
polymer formulations is that they are applied as liquids and are converted by light into solid gels inside the body, a process known as photopolymerization. The solid gel formed after the light has been applied is highly flexible, elastic and transparent and strongly adheres to moist or dry tissue. The design and macromer composition of the Company's polymers enable them to convert quickly to solid gels without generating heat, which is a significant clinical advantage over other in vivo polymerizable materials.
The key technological hurdle which the Company overcame in the development of its synthetic, liquid surgical sealants, was the crucial need to adhere strongly to moist tissue surfaces. The Company's surgical sealants adhere to tissue as a result of a proprietary two-step priming and sealing process. To use FocalSeal surgical sealant, the physician first applies a liquid primer, which penetrates the uneven surfaces of the tissue. Once the primer is brushed on, the sealant is applied over the primer and both are exposed to a specific wavelength of visible light. The primer and sealant contain a photoinitiator, which enables them to convert rapidly to a solid gel upon exposure to light. The viscosity and rapid conversion characteristics of the Company's surgical sealants enable the physician to apply the sealant where desired and avoid significant run-off of the material prior to its conversion to gel. Surgeons can perform the entire surgical sealant application process quickly and efficiently after sufficient training.
The key properties of the Company's synthetic sealant polymers are:
o Adherence to Tissue. The Company's FocalSeal surgical sealants adhere well to both moist and dry tissue, a requirement for an effective sealant. The combination of a viscous liquid formulation polymer incorporating a photoinitiator enables the Company's polymers to adhere to tissue when applied as a liquid and to convert to gel rapidly when exposed to light. The Company's sealants have been shown to be four times more tissue adherent than fibrin glues.
o Strength, Flexibility and the Ability to Seal Leaks. The composition of the Company's polymers provides a high degree of strength, flexibility and elasticity, enabling them to stretch with the tissue to which they are applied. These qualities are especially significant when the polymers are used in areas where resistance to air and fluid pressure is critical, including the lungs, the dural membrane surrounding the brain, the vascular system and the gastrointestinal tract. The Company's sealants have been shown to be 12 times more resistant to burst pressures than fibrin glues.
o Customizable Polymer Characteristics. By modifying the chemical composition of its polymers, the Company is able to control characteristics such as absorption, viscosity, strength, flexibility and elasticity. The customizable nature of the Company's polymer technology enables Focal to design and develop products with characteristics and properties that are tailored for specific clinical indications.
o Hydrolytic Absorption. The Company's synthetic polymers are designed to be predictably broken down by water, a process known as hydrolysis, and are absorbed by the body over a specified period of time depending upon their chemical composition. As a result, the Company's polymers should have a relatively consistent absorption profile from patient to patient. In contrast, collagen patches and fibrin glues are absorbed by enzymatic reaction, which can vary significantly from patient to patient depending upon an individual's metabolism.
o Totally Synthetic Composition; Safety and Biocompatibility. Focal's synthetic polymers are comprised of materials that are commonly found in other medical products approved for use in humans. The PEG backbone allows the formulations to be water-soluble and biocompatible, resulting in minimal reaction with the tissue to which the polymer is applied. In addition, the absence of animal or human derived materials eliminates safety concerns related to transmission of blood borne diseases such as HIV, hepatitis and mad cow disease. Preclinical toxicology testing of FocalSeal-L and FocalSeal-S surgical sealants, and clinical trials of FocalSeal-L and FocalSeal-S surgical sealants, indicate that these biomaterial formulations are non-toxic and safe.
o Transparency. The Company's polymers are transparent, enabling the physician to observe the underlying tissue to which the polymers have adhered to confirm sufficient coverage of the wound site. Other products used as surgical sealants, including fibrin glues and collagen patches, are not transparent.
o Long Acting. The Company's polymers are designed to remain intact during the critical wound healing process.
The Company has also developed proprietary systems to deliver its surgical sealants and other products to the wound site. Easy to use brush applicators have been designed by the Company to apply its FocalSeal surgical sealants and primer over tissue surfaces. These application devices have been tailored to each specific indication, such as lung surgery and neurosurgery. The Company also employs a light source and light wand to generate and deliver consistent amounts of light necessary for conversion of its liquid formulations to solid gels. These light sources and light wands are manufactured by third parties on behalf of Focal.
Products and Product Development Programs
The following table summarizes the status of the Company's products and research and product development programs:
(1) "Preclinical" refers to formulation development and laboratory experimentation in animal models, including animal efficacy, safety and toxicology testing.
FocalSeal Surgical Sealant Products.
Focal is developing its FocalSeal-L and FocalSeal-S liquid surgical sealants for use inside the body as an adjunct to sutures and staples to seal leaks resulting from lung, neurological, cardiovascular and gastrointestinal surgery. The FocalSeal surgical sealant system consists of a procedure kit containing primer and sealant solutions and disposable applicators, a light source used for converting Focal's product from a liquid to a solid gel, and a reusable light wand. The Company's FocalSeal-L surgical sealant product for lung surgery is marketed in North America by Genzyme Biosurgery and is being marketed outside North America by Ethicon. Genzyme Biosurgery also has the marketing rights to surgical sealants for cardiovascular and gastrointestinal indications that Focal may develop in the future. Ethicon has marketing rights to all additional surgical sealant products outside North America. Focal has retained the marketing rights to its neurosurgery sealant in North America and has retained manufacturing rights to its products worldwide.
FocalSeal-L for Lung Surgery. The Company has developed FocalSeal-L surgical sealant to seal air leaks resulting from lung surgery. During lung surgery, air leaks can develop in the lung tissue that has been traumatized during surgery and can unpredictably occur along staple and suture lines. Approximately 300,000 lung surgery procedures, primarily for the treatment of lung cancer, are performed worldwide each year including 190,000 such procedures in the United States. According to the Company's clinical trial data in the U.S. and Europe, the vast majority of patients undergoing lung surgery experience intraoperative air leaks that are not resolved with sutures or staples. Approximately 15% of lung surgery patients have air leaks that persist longer than seven days and approximately 5% of patients have air leaks that are severe enough to warrant additional surgery.
As air leaks from the lung it accumulates in the thoracic cavity, making breathing difficult because the lung cannot expand and contract normally. As a result, patients require insertion of chest drainage tubes to vent accumulated air. These chest tubes prolong pain and limit patient mobility. In addition to remaining in the hospital until the air leaks are resolved, patients with persistent air leaks must receive more intense nursing observation and care while in the hospital than patients who do not experience air leaks. This additional hospitalization and more intensive care, as well as the additional surgery required for patients whose air leaks are severely prolonged, result in substantial additional healthcare costs. Because it is often not possible to determine at the conclusion of surgery which air leaks are likely to be prolonged or sustained, the Company believes that FocalSeal-L surgical sealant may be used routinely in major lung surgery procedures.
The FDA approved the Company's FocalSeal-L lung surgical sealant in May 2000 and the product was launched with Genzyme Biosurgery in the U.S. in July 2000. The approval of FocalSeal-L lung surgical sealant in the U.S. was a major milestone for the Company and the product is currently the only FDA approved lung sealant in the U.S.
A 180 patient, multi-center clinical trial was completed in late 1998 in the United States involving the use of FocalSeal-L surgical sealant in sealing air leaks following lung surgery. The four hospitals involved in the clinical trial were Massachusetts General Hospital, University of Pennsylvania Medical Center, Johns Hopkins University Medical Center and Strong Memorial Hospital. Patients were randomized into the treated (received sutures and/or staples plus FocalSeal-L surgical sealant) or control (received suture and/or staples only) group. In the study, prior to randomization, it was determined that the vast majority of the patients had air leaks following the use of standard sutures and staples. FocalSeal-L surgical sealant was effective in sealing intraoperative air leaks in 92% of the patients who were randomized into the treated group. By contrast, only 29% of those patients in the untreated control group were free of intraoperative air leaks. Through the date of discharge from the hospital, 39% of those patients treated with FocalSeal-L surgical sealant remained leak-free compared with 11% in the control group. In addition, the mean time to air leak cessation was 30.9 hours in the treated group of patients, compared with 52.3 hours in the control group. To summarize, the end points required by the FDA, comparing the treated group with the control group, were as follows:
o % of patients leak-free intraoperatively;
o % of patients leak-free through hospital discharge; and
o time to air leak cessation.
All three of these end points were met with statistical significance and demonstrated clinical significance as well. In addition to these formal end points, a trend toward earlier removal of the chest tube and earlier hospital discharge was demonstrated. On average, chest tubes were removed 0.7 days earlier in the treated group versus the control group and patients were discharged 2.7 days earlier in the treated group versus the control group. There were no unexpected safety results noted when comparing the treated group and the control group, including at the six month follow-up period required for all patients.
Focal and its marketing partner outside North America, Ethicon, are currently selling FocalSeal-L lung surgical sealant under Ethicon's tradename, AdvaSeal-L, in thirteen countries in Europe and certain other countries including Australia and New Zealand. During 2000, sales of AdvaSeal-L represented 9.39% of the Company's total product revenues. The Company believes that the lack of market acceptance in Europe is due in part to the fact that providers have no financial incentive to shorten hospital stays by using Focal's product instead of conventional products under Europe's health care reimbursement system.
FocalSeal-S for Neurosurgery. The Company is developing FocalSeal-S surgical sealant to seal the dura, a membrane that encapsulates the brain and spinal cord and contains cerebrospinal fluid ("CSF") for cushioning and support. In cranial surgeries, the neurosurgeon must open the cranium and penetrate through the dural membrane. Following surgery, the neurosurgeon must meticulously suture the dura in an attempt to achieve leakproof closure, a process that may require the use of up to hundreds of small sutures. These attempts are not always successful, resulting in potentially serious CSF leaks. Approximately 600,000 cranial and spinal surgeries are performed annually in the United States, and the Company estimates that 900,000 procedures are performed each year worldwide. Leakage of CSF has been reported to occur in up to 15% of these procedures. Because these leaks occur in an unpredictable manner, an effective surgical sealant may be used prophylactically in cranial surgery procedures. CSF leakage can result in infections, including meningitis, caused by the passage of infectious agents through the dural leak, as well as debilitating headaches.
In spinal cord surgeries, the surgeon seeks to avoid penetration of the dura. According to published literature, inadvertent penetration of the dura occurs in up to approximately 13% of these procedures. Penetration of the dura can result in leakage of CSF with potential complications similar to those that can arise in cranial surgeries. When inadvertent penetration of the dura occurs in spinal surgeries, the surgeon generally does not elect to use sutures to close the dural leak due to the risk of injuring the spinal cord with the suturing needle. Therefore, there is a real need for a surgical sealant product that can effectively seal CSF leaks in this spinal indication.
Focal received European CE Mark approval of FocalSeal-S surgical sealant in November of 1999 for neurosurgery and spinal surgery indications. The Company and its marketing partner outside North America, Ethicon, plan to continue a limited release of this product in Europe in 2001. A 44 patient clinical trial was completed in 1998 at three hospitals in Europe, including one hospital in The Netherlands and two hospitals in Switzerland. All patients enrolled in the trial received FocalSeal-S surgical sealant on the dural membrane following cranial surgery. There was no control arm of the study. The two clinical end points were sealing of intraoperative CSF leaks and safety. These end points were successfully attained. Following the use of FocalSeal-S surgical sealant, 100% of the patients were leak-free at the end of their surgery. There were no unexpected safety issues noted during the clinical trial, including the three month follow-up period required for all patients.
The Company received approval of its investigational device exemption, or IDE, application for FocalSeal-S from the FDA in the third quarter of 1999 and initiated a multi-center clinical trial in the fourth quarter of 1999. Based on limited enrollment, the Company elected to stop the study and apply for an expanded IDE to include a broader patient population. The Company is working closely with the FDA toward developing an acceptable revised protocol.
Cardiovascular Surgical Sealant. Focal is evaluating use of its FocalSeal-L surgical sealant for use in sealing vascular anastomoses (the attachment of blood vessels in surgical procedures) and arteriotomies (the surgical opening in a vein or artery) in cardiovascular surgeries. There are approximately 1.3 million cardiac and vascular procedures performed annually worldwide, and the Company believes that over 350,000 of these procedures have the potential application for FocalSeal. These procedures include both open and minimally invasive coronary artery bypass graft surgeries and other vascular surgical procedures. In most cardiovascular surgical procedures, vascular anastomoses are performed with sutures. These anastomoses use both blood vessel grafts from the patient's own veins or arteries, which occasionally leak, and synthetic grafts, which regularly leak. In minimally invasive CABG surgeries, achievement of a leakproof vascular anastomosis can be particularly difficult and time consuming because the small access ports through which the surgeon must operate can make placement of sutures difficult. Failure to achieve a leakproof vascular graft anastomosis can result in sudden blood leaks that may potentially be life threatening and may occur unpredictably after the surgery has been completed. These complications can add significant costs to cardiovascular procedures by increasing the level of care required and prolonging hospitalization. The Company's sealants have been shown to be effective in sealing vascular leaks in several preclinical large animal models. A preclinical study was completed by a collaborator from Massachusetts General Hospital using a coronary artery bypass graft surgery model. In this study, FocalSeal-L surgical sealant was effective in sealing blood leaks following a CABG procedure. Additional preclinical testing of the cardiovascular sealant product is in progress. The Company is currently formulating its plans for initiating clinical trials of its cardiovascular sealant in the United States. The Company does not expect to initiate such clinical trials until 2002 at the earliest.
Focal is currently planning to submit a dossier to the regulatory body in Europe to obtain CE Mark approval in 2001.
Gastrointestinal Surgical Sealant. Focal is evaluating the use of its FocalSeal surgical sealants to prevent leakage of gastrointestinal contents following gastrointestinal surgery. Leakage can occur as a result of incomplete reattachment of the portions of the digestive tract being operated upon and may result in infections, delayed healing or fibrosis. Clinically significant gastrointestinal tract leakage is most prevalent and unpredictable in esophageal and large bowel surgeries. Approximately 250,000 gastrointestinal surgeries are performed annually worldwide, including esophageal and large bowel surgeries that have potential application for FocalSeal. Postoperative leaks are reported to occur in up to 5 to 10% of large bowel surgeries and in up to 25% of esophageal surgeries. The Company believes that, due to the unpredictable nature of leaks in these procedures, FocalSeal surgical sealant may be used routinely. The Company's sealants have been shown to be effective in sealing gastrointestinal leaks in several preclinical large animal models.
Local Drug Delivery
Focal's polymers have properties that enable them to incorporate and deliver drugs over a sustained period of time at local disease sites. Local drug delivery can enable the administration of drugs in much higher concentrations than if the drugs were delivered systemically. This can potentially increase the efficacy of the drugs without a corresponding increase in side effects. Focal has explored the delivery of drugs, including pain management, cancer drugs, growth factors, proteins, antibiotics and cardiovascular drugs, with its polymers.
The focus of current research efforts is on the local delivery of cancer drugs for the treatment of breast cancer. These projects are at an early stage of development and while the Company has demonstrated proof of principle that its drug delivery technology may work, there is substantial research and development yet to be performed before these products enter human clinical trials. There are several studies underway at university research hospitals and preliminary results from these ongoing studies are encouraging. The Company is seeking corporate partners to license or assist in the development of the local drug delivery technology or, alternatively, may consider a sale of such technology to a third party.
Tissue Restoration and Repair
The significant biocompatibility of the Focal polymers provides an excellent matrix for cellular growth for the restoration and repair of damaged tissue. This branch of the tissue engineering field is a natural extension of the Focal hydrogel platform. Among the applications that the Company is actively evaluating are bone repair, cartilage repair, disk repair, prevention of post surgical adhesions, and ocular repair. The Company has developed some strong intellectual property in this area in recent years which the Company hopes to exploit through partner funded development programs.
Other Medical Devices
The Company has identified several additional potential applications for its proprietary synthetic, liquid formulation polymer technology, including synthetic coatings for vascular grafts, hemostats and arterial puncture closure devices. Although the Company has generated early stage proof of principle in certain of these indications, the Company is currently devoting minimal resources to these projects. There can be no assurance that the Company will in the future devote resources to any of these research initiatives, that any of such research initiatives will result in the identification of product formulations that demonstrate sufficient promise in animal models to enable them to become candidates to enter human clinical trials, or that any products for which the Company is able to seek and obtain regulatory approvals and introduce commercially either in the United States or internationally will result from these efforts.
Research and Development Expenditures
During the years ended December 31, 1998, 1999 and 2000, the Company incurred expenses of $10.5, $12.6 and $8.0 million, respectively, on Company-sponsored research and development activities, and $5.1, $1.9 and $0.1 million, respectively, on customer-sponsored research and development programs.
Strategic Alliances
Focal's commercial strategy is to enter into strategic marketing alliances with leading medical products company distributors. The Company's strategic marketing relationships with Genzyme Biosurgery and with Ethicon are described below.
Genzyme Biosurgery (a division of Genzyme Corporation)
In October 1999, Focal entered into a Marketing and Distribution Agreement with Genzyme Biosurgery, a division of Genzyme Corporation. Genzyme Biosurgery develops and markets a portfolio of devices, biomaterials and biotherapeutics for the cardiothoracic and general surgery markets. Genzyme Biosurgery was granted exclusive marketing and distribution rights to Focal's surgical sealant products for lung surgery, cardiovascular surgery and gastrointestinal surgery in North America. Focal retained marketing rights to its neurosurgery sealant product and manufacturing rights to all surgical sealant products in North America.
Genzyme Biosurgery has approximately 30 sales representatives selling the FocalSeal-L surgical sealant product since commercial launch in the U.S. in July 2000. In addition, Focal has hired product specialists to support the Genzyme Biosurgery sales force in the field with training and product demonstrations.
Under the terms of the Distribution Agreement, Focal will be reimbursed for its cost of manufacturing FocalSeal-L sealant plus 50% of the gross margin generated from Genzyme Biosurgery's sales of the product to end users. The term of the Distribution Agreement is ten years, with two five-year renewal options, which are automatic if Genzyme Biosurgery meets certain minimum performance standards.
In addition to the Marketing and Distribution Agreement, in October 1999 Focal and Genzyme Biosurgery also entered into a Stock Purchase Agreement, with up to $20.0 million in purchases of the Company's common stock committed by Genzyme Biosurgery over a twenty month period, subject to certain specified conditions. The first $5.0 million purchase was made by Genzyme Biosurgery in November 1999, with Genzyme Biosurgery purchasing approximately 810,000 shares at a 25% premium to the ten day average trading price of the Company's common stock prior to the investment. The second $5.0 million purchase was made by Genzyme Biosurgery in April 2000, with Genzyme Biosurgery purchasing approximately 614,000 shares at the twenty day average trading price of the Company's common stock prior to the investment. The third $5.0 million investment was made by Genzyme Biosurgery in January 2001, with Genzyme Biosurgery purchasing approximately 2.4 million shares at the twenty day average trading price of the Company's common stock prior to the investment. At Focal's option, one additional $5.0 million investment will be made by Genzyme Biosurgery. The final investment of $5.0 million may be called by Focal in the second quarter of 2001, subject to the satisfaction of closing conditions. The final investment will be priced based upon the twenty day trading average of the Company's stock.
Ethicon (a Johnson & Johnson company)
In January 1997, the Company entered into an exclusive Distribution, License and Supply Agreement with Ethicon, Inc., a Johnson & Johnson company, for the research, development and commercialization of the Company's surgical sealant products. Ethicon received marketing rights for all surgical sealant indications in all territories outside North America, while the Company retained manufacturing rights and receives a combined royalty/transfer price on all Ethicon sales. The Ethicon Agreement outlines the basis and timetable for the development, supply, marketing, packaging and distribution of FocalSeal-L and FocalSeal-S surgical sealants for use intraoperatively as surgical sealants for lung surgery and neurosurgery indications and other indications. In August 1998, the Ethicon Agreement was expanded with a funding agreement for development of a cardiovascular surgical sealant. However, in February 2000, Ethicon informed Focal that it does not intend to continue the development and commercialization of the cardiovascular surgical sealant.
Ethicon is responsible for obtaining regulatory clearances and approvals in Japan and countries outside of the European Union. Ethicon will pay Focal a specified percentage of net sales of surgical sealant products manufactured by Focal and shipped to Ethicon. In addition, in the event Focal is unable to achieve specified supply targets or is in non-compliance with the manufacturing standards established for the CE mark and by Ethicon,
Ethicon has the right to manufacture surgical sealants for sale in all territories outside North America. Such manufacturing rights, if exercised by Ethicon, will be royalty-bearing and non-exclusive.
Ethicon may terminate the agreement at any time upon twelve months' prior written notice. In addition, Focal has the right to terminate the agreement on ninety days' prior written notice if Ethicon fails to meet the applicable annual purchase minimums set forth in the agreement. Ethicon is required to satisfy its initial annual purchase minimums on or before April 5, 2001 either by purchasing products or by making a payment to the Company. If Ethicon fails to do so, Focal has the right to terminate.
Patents and Proprietary Rights
The Company believes that patents and other proprietary rights are important to its business. The Company's policy is to file patent applications to protect technology, inventions and improvements to its inventions that are considered important to its business and that provide a competitive advantage. Focal also relies on trade secrets, general know-how, in-licensing opportunities and continuing technological innovation.
The Company has received, licensed or believes it has the option or right to license 47 issued United States patents and 36 foreign patents corresponding to certain of the issued United States patents, has six additional United States patent applications that have been allowed and has 23 patent applications pending in the United States, as well as foreign counterparts of certain of these applications. The issued United States patents have expiration dates ranging from 2010 to 2017. These patents and patent applications cover certain aspects of the Company's photopolymerizable polymer formulations, surgical sealant compositions and methods, and designs for delivery devices.
The Company has licensed from the University of Texas and Endoluminal Therapeutics, Inc. (a company controlled by one of the Company's founding scientists) worldwide rights to certain technologies which are the subject of issued patents and pending patent applications based upon technologies developed by two of the Company's founders. These licenses are terminable in the event of failure by the Company to pay scheduled royalties, failure to commercialize products in the fields covered by these licenses and under certain other conditions.
Because of the substantial length of time and expense associated with bringing new products through the development and regulatory approval processes in order to reach the marketplace, the medical products industry places considerable importance on obtaining patent and trade secret protection for new technologies, products and processes. Accordingly, the Company intends to seek patent protection for its proprietary technology, products and processes.
The Company's success will depend in part on its ability to obtain patent protection for its products, preserve its trade secrets, prevent third parties from infringing upon its proprietary rights and operate without infringing upon the proprietary rights of others, both in the United States and internationally. There can be no assurance that the Company's pending or future patent applications will issue, or that the claims of the Company's issued patents, or any patents that may issue in the future will provide any competitive advantages for the Company's products or that they will not be successfully challenged, narrowed, invalidated or circumvented in the future. Moreover, litigation and interference or opposition proceedings associated with enforcing or defending patents or trade secrets is expensive and can divert the efforts of technical and management personnel.
The Company has filed patent applications in certain foreign countries corresponding to certain patent applications that it filed in the United States and may file additional patent applications inside and outside the United States. The Company believes that the protection afforded by foreign patents or any other foreign intellectual property protection, if obtained, may be more limited than that provided domestically. In addition, there can be no assurance that competitors will not seek to apply for and obtain patents that will prevent, limit or interfere with the Company's ability to make, use, import and sell its products.
The Company is aware that certain medical device, pharmaceutical and other companies, universities and research institutions have filed patent applications or have issued patents relating to the compositions and methods for wound closure and adhesion prevention. In addition, the medical device and pharmaceutical industries have been characterized by extensive litigation regarding patents and other intellectual property rights, and many companies in the medical device and pharmaceutical industries have employed intellectual property litigation to gain a
competitive advantage. There can be no assurance that litigation will not be brought against the Company by third parties in the future challenging the Company's patent rights or claiming infringement by the Company of patents held by the third parties. Because patent applications in the United States are confidential until the patents issue, and publication of discoveries in the scientific and patent literature tends to lag behind actual discoveries by several months, the Company cannot be certain that Company inventors or licensors were the first to conceive of inventions covered by pending patent applications or that the Company was the first to file patent applications for such inventions.
The Company may be required or find it desirable to obtain licenses to patents or proprietary rights of others. No assurance can be given that any licenses required under any patents or proprietary rights of third parties would be made available on terms acceptable to the Company. If the Company does not obtain such licenses, it could encounter delays in product introductions while it attempts to design around such patents, or could find that the development, manufacture or sale of products requiring such licenses is foreclosed. Litigation may be necessary to defend against or assert claims of patent infringement or invalidity, to enforce or defend patents issued to the Company; to protect trade secrets or know-how owned by the Company, or to determine the scope and validity of the proprietary rights of others. In addition, interference proceedings declared by the United States Patent and Trademark Office, or opposition proceedings in a foreign patent office, may be necessary to determine the priority of inventions with respect to patent applications of the Company or its licensors. Litigation, interference or opposition proceedings could result in substantial costs to and diversion of effort by the Company, and adverse determinations in any such proceedings could have a material adverse effect on the business, financial condition or results of operations of the Company.
The Company also relies upon unpatented trade secrets and improvements, unpatented know-how and continuing technological innovation to develop and maintain its competitive position, which it seeks to protect, in part, by confidentiality agreements with its commercial partners, collaborators, employees and consultants. The Company also has invention and patent assignment agreements with its employees and certain, but not all, commercial partners and consultants. There can be no assurance that relevant inventions will not be developed by a person not bound by an invention assignment agreement. There can be no assurance that binding agreements will not be breached, that the Company would have adequate remedies for any breach, or that the Company's trade secrets will not otherwise become known or be independently discovered by competitors.
The Company currently owns the following trademarks:
o Focal(R)
o FocalGel(R)
o FocalSeal(R)
o Corporate Logo
Government Regulation
United States
The Company's proposed products and its research and development activities are subject to regulation by numerous governmental authorities, principally the FDA and corresponding state and foreign regulatory agencies. The Federal Food, Drug, and Cosmetic Act, as amended (the "FDC Act"), the regulations promulgated thereunder, and other federal and state statutes and regulations, govern, among other things, the preclinical and clinical testing, manufacture, safety, efficacy, labeling, storage, record keeping, advertising and promotion of medical devices and drugs, including the products currently under development by the Company. Product development and approval within this regulatory framework takes a number of years and involves the expenditure of substantial resources.
In the United States, medical devices are classified into three different classes, class I, II and III, on the basis of controls deemed necessary to reasonably ensure the safety and effectiveness of the device. Class I devices are subject to general controls (e.g., labeling and adherence to the FDA's good manufacturing practice requirements ("GMPs")) and class II devices are subject to general and special controls (e.g., performance standards, postmarket
surveillance, patient registries, and FDA guidelines). Generally, class III devices are those which must receive premarket approval by the FDA to ensure their safety and effectiveness (e.g., life-sustaining, life-supporting and implantable devices, or new devices which have been found not to be substantially equivalent to legally marketed Class I or II devices).
Unless it is exempt, a new medical device can be marketed only with marketing clearance obtained through a premarket notification under Section 510(k) of the FDC Act or a premarket approval ("PMA") application under Section 515 of the FDC Act. A 510(k) clearance will typically be granted by the FDA if it can be established that the device is substantially equivalent to a "predicate device," which is a legally marketed class I or II device or a preamendment class III device (i.e. one that has been marketed since a date prior to May 28, 1976) for which the FDA has not called for PMAs. The FDA has been requiring an increasingly rigorous demonstration of substantial equivalence and this may include a requirement to submit human clinical trial data. It generally takes four to twelve months from the date of a 510(k) submission to obtain clearance, but it may take longer.
The FDA may determine that a medical device is not substantially equivalent to a predicate device, or that additional information is needed before a substantial equivalence determination can be made. A "not substantially equivalent" determination, or a request for additional information, could prevent or delay the market introduction of new products that fall into this category. For any devices that are cleared through the 510(k) process, modifications or enhancements that could significantly affect the safety or effectiveness, or that constitute a major change in the intended use of the device, will require new 510(k) submissions.
A PMA application must be filed if a proposed device is not substantially equivalent to a legally marketed class I or class II device, or if it is a preamendment class III device for which the FDA has called for PMAs. A PMA application must be supported by valid scientific evidence to demonstrate the safety and effectiveness of the device, typically including the results of clinical trials, bench tests, and laboratory and animal studies. The PMA must also contain a complete description of the device and its components, and a detailed description of the methods, facilities and controls used to manufacture the device. In addition, the submission must include the proposed labeling, advertising literature, and any training materials. The PMA process can be expensive, uncertain and lengthy, and a number of devices for which FDA approval has been sought by other companies have never been approved for marketing.
Upon receipt of a PMA application, the FDA makes a threshold determination as to whether the application is sufficiently complete to permit a substantive review. If the FDA determines that the PMA application is sufficiently complete to permit a substantive review, the FDA will accept the application for filing. Once the submission is accepted for filing, the FDA begins an in-depth review of the PMA. The FDA review of a PMA application generally takes one to three years from the date the PMA is accepted for filing, but may take significantly longer. The review time is often significantly extended by the FDA asking for more information or clarification of information already provided in the submission. During the review period, an advisory committee, typically a panel of clinicians, may be convened to review and evaluate the application and provide a recommendation to the FDA as to whether the device should be approved. The FDA accords substantial weight to the recommendation but is not bound by it. Toward the end of the PMA review process, the FDA generally will conduct an inspection of the manufacturer's facilities to ensure compliance with applicable GMP requirements, which include elaborate testing, control documentation and other quality assurance procedures. The Company underwent an FDA GMP inspection of its facilities in Lexington, Massachusetts, and the FocalSeal-L surgical sealant data was subject to a bioresearch monitoring review in connection with the Company's PMA approval.
If the FDA's evaluations of both the PMA application and the manufacturing facilities are favorable, the FDA may issue either an approval letter or an approvable letter, which usually contains a number of conditions that must be met in order to secure final approval of the PMA. When and if those conditions have been fulfilled to the satisfaction of the FDA, the agency will issue a PMA approval letter, authorizing marketing of the device for certain indications. If the FDA's evaluation of the PMA application or manufacturing facilities is not favorable, the FDA will deny approval of the PMA application or issue a "non-approvable" letter. The FDA may determine that additional clinical trials are necessary, in which case the PMA may be delayed for one or more years while additional clinical trials are conducted and submitted in an amendment to the PMA. Modifications to a device that is the subject of an approved PMA, its labeling or manufacturing process may require approval by the FDA of PMA supplements or new PMAs. Supplements to a PMA often require the submission of the same type of information required for an initial PMA, except that the supplement is generally limited to that information needed to support the proposed change from the product covered by the original PMA. In May 2000, the Company received the
approval letter for the FocalSeal-L surgical sealant. The Company has agreed to a five-year, annual follow up review of the original 180 clinical trial patients to monitor any potential differences between the treated group and the control group. The Company does not consider this requirement burdensome or unusual for a new implantable medical device.
If human clinical trials of a device are required, either for a 510(k) submission or a PMA application, and the device presents a "significant risk," the sponsor of the trial (usually the manufacturer or the distributor of the device) must file an investigational device exemption ("IDE") application prior to commencing human clinical trials. The IDE application must be supported by data, typically including the results of animal and laboratory testing. If the IDE application is approved by the FDA and one or more appropriate Institutional Review Boards ("IRBs"), human clinical trials may begin at a specific number of investigational sites with a specific number of patients, as approved by the FDA. If the device presents a "nonsignificant risk" to the patient, a sponsor may begin the clinical trial after obtaining approval for the study by one or more appropriate IRBs without the need for FDA approval. Submission of an IDE does not give assurance that FDA will approve the IDE and, if it is approved, there can be no assurance that FDA will determine that the data derived from the studies support the safety and efficacy of the device or warrant the continuation of clinical studies. Sponsors of clinical trials are permitted to sell investigational devices distributed in the course of the study provided such compensation does not exceed recovery of the costs of manufacture, research, development and handling. An IDE supplement must be submitted to and approved by the FDA before a sponsor or investigator may make a change to the investigational plan that may affect its scientific soundness or the rights, safety or welfare of human subjects.
The Company's FocalSeal surgical sealant products will be regulated as a class III medical device and will require a separate PMA approval for each indication to be marketed in the United States. In addition, the Company may be required to obtain IDEs for additional applications of FocalSeal surgical sealant and for other products that the Company develops that are regulated by the FDA as medical devices. There is no assurance that data, typically the results of animal and laboratory testing, that may be provided by the Company in support of future IDE applications will be deemed adequate for the purpose of obtaining IDE approval, that the Company will obtain approval to conduct clinical studies of any such future product, or that such clinical studies, if completed, will generate data adequate to support PMA approval. There can be no assurance that PMA approval can be obtained for any product in a timely fashion, or at all.
Upon clearance or approval by the FDA, any device manufactured or distributed by the Company will be subject to pervasive and continuing regulation by the FDA. The Company will be subject to inspection by the FDA and will have to comply with the host of regulatory requirements that usually apply to medical devices marketed in the United States, including labeling regulations, GMP requirements, the Medical Device Reporting ("MDR") regulation (which requires a manufacturer to report to the FDA certain types of adverse events involving its products), and the FDA's prohibitions against promoting products for unapproved or "off-label" uses. The Company's failure to comply with applicable regulatory requirements could result in enforcement action by the FDA, which could have a material adverse effect on the Company's business, financial condition and results of operations.
Other products that may be developed by the Company, including products for local drug delivery, may be regulated as drugs requiring FDA approval of a new drug application ("NDA") prior to commercialization in the United States. The NDA approval process is generally considered more onerous, costly and lengthy than the PMA process, often requiring more extensive preclinical and clinical testing, and many products for which NDAs have been submitted by other companies have never been approved for marketing.
If the FDA believes that a company is not in compliance with law, it can institute proceedings to detain or seize products, issue a recall, enjoin future violations and assess civil and criminal penalties against the Company, its officers and its employees. Failure to comply with the regulatory requirements could have material adverse effect on the Company's business, financial condition and results of operations. In addition, regulations regarding the manufacture and sale of the Company's products are subject to change. The Company cannot predict the effect, if any, that such changes might have on its business, financial condition or results of operations.
International
In order for the Company and its strategic partners to market the Company's products in Europe and other foreign countries, the Company and/or its partners must obtain required regulatory approvals and comply with extensive regulations governing safety, quality and manufacturing processes. These regulations vary significantly from country to country. The time required to obtain approval to market the Company's products may be longer or shorter than that required in the United States. In order to market FocalSeal surgical sealants and other products being developed by the Company in the member countries of the European Union, the Company will be required to obtain CE mark certification. CE mark certification is an international symbol of adherence to quality assurance standards and compliance with applicable European medical device directives. In December 1997, the Company received a CE mark for its FocalSeal-L surgical sealant for lung surgery and obtained ISO 9001 status. In November 1999, the Company received a CE mark for its FocalSeal-S sealant for neurosurgery. In September 2000, Focal successfully completed the CE Mark recertification audit, which occurs every three years. Although the audit has been successfully completed, there can be no assurance that the Company will be successful in maintaining its CE mark certification and ISO 9001 status or that additional CE Mark approvals will be received for other clinical indications.
Sales and Marketing
Focal is marketing and selling its surgical sealants in North America through Genzyme Biosurgery and internationally through Ethicon, Inc., a Johnson & Johnson Company. Genzyme Biosurgery has a team of approximately 30 sales representatives who, together with Focal product specialists, have been distributing the FocalSeal-L lung surgery sealant product throughout the United States since commercial launch in July 2000. In Canada, a team of six of Genzyme Biosurgery's sales representatives are distributing the product, which was launched in Canada in April 2000. The sales team in the United States is initially focused on the top several hundred largest cardiothoracic centers that account for a majority of the lung surgery procedures performed annually. FocalSeal-L surgical sealant is currently being used in over 130 hospitals in the U.S., with a reorder rate of approximately 70%.
Ethicon has a team of specialized sales representatives to sell Focal's product in Europe and certain other countries including Israel and Australia. Sales to date have not been substantial.
The Company has limited sales and marketing experience and capabilities. The Company relies significantly on Genzyme Biosurgery and Ethicon to market and sell its lead products. Its revenue is significantly dependent on the success and efforts of these parties. All product revenues, substantially all collaborative research revenues and substantially all accounts receivable are derived from Genzyme Biosurgery and Ethicon. If the Company terminates its relationships with either Genzyme Biosurgery or Ethicon it may have to enter into additional marketing arrangements, which may not be available on favorable terms. If the Company determines to perform sales and marketing functions independently, it will face a number of risks, including difficulties in hiring, training and retaining a sales and marketing force, and increased expenses to establish a sales and marketing strategy and hire and train employees. Any such third party or independent sales and marketing efforts may not be successful, which could materially impair the Company's ability to generate revenue.
The Company's sales and marketing strategy for other products that it may in the future seek to develop, includes using a combination of the Company's own product specialists, strategic marketing partners and distributors. The sales and marketing plans for these products, if any, will be dependent on the Company's success in entering into strategic marketing relationships, its ability to leverage its own internal sales force to market additional products beyond the surgical sealant products and its ability to hire and retain additional specialized sales personnel.
Manufacturing
The Company believes that it has sufficient manufacturing capacity at its Lexington, Massachusetts facility to meet anticipated supply requirements for FocalSeal-L and FocalSeal-S surgical sealant in the United States and in international markets for the next several years.
The Company performs certain steps in the FocalSeal surgical sealant manufacturing process internally and relies on outside contractors for others. Certain proprietary processes, including polymer synthesis, are
performed by Focal. The Company uses outside contractors for nonproprietary, high volume processes including sterilization and aseptic filling. The Company also contracts with third parties for the manufacture of syringes, applicators, light sources and light wands.
Manufacturers often encounter difficulties in scaling up production of their products, including problems involving production yields, quality control and assurance, component supply and shortages of qualified personnel. The Company expects that it has sufficient current manufacturing capacity to meet commercial needs over the next several years. It may need to establish additional manufacturing capacity if demand for its products increases in future years. There can be no assurance that the Company will be successful in scaling up its manufacturing efforts for new products or increased volume on existing products in the future or that reliable high-volume manufacturing can be maintained at commercially reasonable costs.
The Company would experience supply interruptions in the event it is unable to maintain commercial levels of polymer synthesis, as the Company's polymer formulations are proprietary and are not available from third parties. In addition, there can be no assurance that the Company will not encounter unanticipated problems and delays in connection with its contract manufacturers and suppliers. Delays associated with or difficulties encountered in maintaining commercial manufacturing, the establishment of new manufacturing facilities as needed, or problems encountered with contract manufacturers and suppliers, would result in disruptions of product supply to the Company's marketing partners and for use in clinical trials. In such event Ethicon or Genzyme could, under its agreement with the Company, commence manufacturing of surgical sealant for sales. Any of the foregoing would have a material adverse affect on the Company's financial condition and results of operations.
The Company purchases raw materials used in its products from various suppliers. Certain materials and components are currently purchased by the Company from single sources. These materials have generally been readily available in the marketplace and have not been the subject of shortages. There can, however, be no assurance that the Company or its suppliers or contract manufacturers will not experience material shortages in the future. Any such future shortages of materials or components could have a material adverse effect on the Company's financial condition and results of operations.
The Company is also required to register as a medical device manufacturer with the FDA and to list its products with the FDA. As such, the Company is subject to inspections by the FDA for compliance with applicable GMP requirements, which include elaborate testing, control documentation and other quality assurance procedures. Further, the Company and the third party manufacturers of its products are required to comply with various FDA requirements for design, safety, advertising and labeling.
Complex medical devices, such as the Company's products, can experience performance that require review and possible corrective action by the manufacturer. There can be no assurance that component failures, manufacturing errors or design defects that could result in an unsafe condition or injury will not occur. If any such failures or defects were deemed serious, the Company could be required to withdraw or recall products, which could result in significant costs to the Company. There can be no assurance that market withdrawals or product recalls will not occur in the future. Any future product problems could result in market withdrawals or recalls of products, which could have a material adverse affect on the Company's business, financial condition or results of operations.
Competition and Technological Change
The Company competes with many domestic and foreign medical device, pharmaceutical and biopharmaceutical companies. In the surgical sealant area, the Company will compete with existing methodologies for sealing air and fluid leaks resulting from surgery, including some traditional wound closure products such as sutures and staples, marketed by companies such as Johnson & Johnson, and United States Surgical Corporation (Tyco). Other products currently being marketed include fibrin glue, sold in Europe and the Pacific Rim countries by Immuno AG, Cention and Fujisawa and in the U.S. by Baxter Healthcare Corporation and others. Additional products are under development at Bristol-Myers Squibb Company and Vitex. Other potential competitors in the surgical sealant market include Closure Medical Corporation, B. Braun GmBH, Cryolife, Cohesion and others. Competitive products may also be under development by other large medical device, pharmaceutical and biopharmaceutical companies. The other areas in which Focal is developing products, such as local drug delivery and adhesion prevention, are intensely competitive markets and the Company will encounter competition from major medical device, pharmaceutical and biopharmaceutical companies in such markets. Many of the Company's
current and potential competitors have substantially greater financial, technological, research and development, regulatory and clinical, marketing, sales, and personnel resources than the Company.
Certain of these competitors may also have greater experience in developing products, conducting clinical trials, obtaining regulatory approvals, and manufacturing and marketing such products. Certain of these competitors may obtain patent protection, approval or clearance by the FDA or foreign countries or product commercialization earlier than the Company, any of which could materially adversely affect the Company. Furthermore, if the Company attains significant commercial sales of its products, it will also be competing with respect to manufacturing efficiency and marketing capabilities, areas in which it currently has limited experience. Finally, there can be no assurance that the Company's marketing partners will not pursue parallel development of other technologies or products, which may result in a marketing partner developing additional products that would compete with the Company's products.
Other recently developed technologies or procedures are, or may in the future be, the basis of competitive products. There can be no assurance that the Company's current competitors or other parties will not succeed in developing alternative technologies and products that are more effective, easier to use or more economical than those which have or are being developed by the Company or that would render the Company's technology and products obsolete and non-competitive in these fields. In such event, the Company's business, financial condition and results of operations could be materially adversely affected.
Third Party Reimbursement
Reimbursement and health care payment systems in international markets vary significantly by country. In connection with international product introductions, the Company and its strategic marketing partners may be required to seek international reimbursement approvals. If required, there can be no assurance that any such approvals will be obtained in a timely manner, or at all, and failure to receive such international reimbursement approvals could have an adverse effect on market acceptance of the Company's products in the international markets in which such approvals are sought.
In the United States, health care providers, such as hospitals and physicians, that purchase medical devices such as the Company's products, generally rely on third-party payors, principally federal Medicare, state Medicaid and private health insurance plans, to reimburse all or part of the cost of surgical procedures. The Company anticipates that in a prospective payment system, such as the DRG system utilized by Medicare, and in many managed care systems used by private health care payors, there will be no separate, additional reimbursement for the Company's products. Accordingly, the Company believes that there will be no procedure-specific reimbursement codes for the Company's products. The Company anticipates that hospital administrators and physicians will justify the additional cost of surgical sealants by the attendant cost savings and clinical benefits that the Company believes will be derived from the use of its products.
There can be no assurance that reimbursement for the Company's products will be available in the United States or in international markets under either governmental or private reimbursement systems. Furthermore, the Company could be adversely affected by changes in reimbursement policies of governmental or private health care payors. Failure by physicians, hospitals and other users of the Company's products to obtain sufficient reimbursement from health care payors for procedures in which the Company's products are used or adverse changes in governmental and private third party payors' policies toward reimbursement for such procedures would have a material adverse effect on the Company's business, financial condition and results of operations.
The Company's business may be also materially adversely affected by the continuing efforts of government and third-party payors to contain or reduce the costs of health care through various means. For example, in certain foreign markets, pricing or profitability of certain medical products and prescription pharmaceuticals is subject to government control. In the United States, an increasing emphasis on managed care has put, and will continue to put, pressure on pharmaceutical and medical product pricing. Such initiatives and proposals, if adopted, could decrease the price that the Company receives for any products it may develop and sell in the future, and thereby have a material adverse effect on the Company's business, financial condition and results of operations. Further, to the extent that such proposals or initiatives have a material adverse effect on other companies that are corporate partners or prospective corporate partners for certain of the Company's products, the Company's ability to commercialize its products may be materially adversely affected.
Employees
As of December 31, 2000, the Company employed 66 persons of whom 15 were in research and development, 17 were in manufacturing, 11 were in sales and marketing, 12 were in clinical, regulatory affairs and quality assurance, and 11 were in management, finance and administration. None of the Company's current employees is represented by a labor union or is the subject of a collective bargaining agreement. The Company believes that relations with its employees are good.
Scientific Advisors and Clinical Investigators
Focal has recruited several physician specialists and experienced practitioners in various fields pertaining to its products to serve as scientific advisors and clinical investigators.
There is no fixed term of service for the scientific advisors. Current members may resign or be removed at any time, and additional members may be appointed. In general, members do not serve on an exclusive basis with the Company and are not obligated to assign inventions to the Company. Drs. Langer, Brem, and Slepian are scientific founders of the Company and certain inventions of Dr. Slepian have been licensed to the Company under the Company's license agreements with Endoluminal Therapeutics, Inc., a company controlled by Dr. Slepian. Drs. Langer and Brem also serve as members of the Company's board of directors. Scientific advisors have from time to time received option grants to purchase Common Stock of the Company. Scientific advisors have also received cash compensation, with the amount of such compensation dependent on the time commitment and level of involvement of each advisor. All scientific advisors receive reimbursement for expenses incurred in traveling to and attending meetings on behalf of the Company.
The following individuals are currently either scientific advisors to Focal or surgeons involved in Focal's clinical trials. Their respective areas of specialization are identified below.
Risk Factors That May Affect Operating Results
This Annual Report on Form 10-K contains forward-looking statements. For this purpose, any statements contained herein that are not statements of historical fact may be considered to be forward-looking statements. Although not a complete list of words that might identify forward-looking statements, Focal uses the words "believes," "anticipates," "plans," "expects," "intends" and similar expressions to identify forward-looking statements. There are a number of important factors that could cause our actual results to differ materially from those indicated by forward-looking statements. Factors that could cause or contribute to such differences include those discussed below, as well as those discussed elsewhere in this Form 10-K, including without limitation in "Business-Patents and Proprietary Rights," "Government Regulation," "Sales and Marketing," "Manufacturing," "Competition and Technological Change," and "Third Party Reimbursement," and in "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company expressly disclaims any obligation to update or alter its forward-looking statements, whether as a result of new information, future events or otherwise.
History of Operating Losses; Accumulated Deficit; Uncertainty of Future Profitability. The Company has incurred net losses in each year since its inception, including a net loss of approximately $19.1 million during 2000. At December 31, 2000, the Company had an accumulated deficit of $95.2 million. The Company's operating losses have resulted primarily from expenses incurred in connection with the Company's research, development and marketing activities, including preclinical and clinical trials, development of manufacturing processes and sales, general and administrative expenses. The Company expects to incur net losses for the foreseeable future and may incur net losses in subsequent periods, although the amount of future net losses and time required by the Company to reach profitability are highly uncertain. The Company's ability to achieve and sustain profitability will be dependent upon obtaining regulatory approval for and successfully commercializing its FocalSeal surgical sealants, including receiving adequate sales and marketing support from its strategic marketing partners, Genzyme Biosurgery and Ethicon. There can be no assurance that Focal will obtain required regulatory approvals, or successfully develop, manufacture, commercialize and market products or that the Company will ever record significant product revenues or achieve profitability. Profitability, if achieved, may not be sustained.
Need for Additional Funding in the Near Term; Uncertainty of Access to Capital. The Company anticipates that its existing funds will be sufficient to fund its operating and capital requirements through 2001. The Company expects to use rather than generate funds from operations for the foreseeable future. In particular, the Company will require substantial funds in the near term to conduct research and development, including preclinical testing and clinical trials of its FocalSeal surgical sealant products, and to manufacture and market any products that are approved for commercial sale, including its FocalSeal-L lung surgical sealant, which is currently marketed and sold domestically and internationally. If the Company cannot raise more funds, the Company could be required to reduce its capital expenditures, scale back its research and product developments, reduce its workforce and/or license to others products or technologies the Company would otherwise seek to commercialize itself.
The Company may seek additional funding through collaborative arrangements, borrowing money and by the sale of additional equity securities. Any sales of additional equity securities are likely to result in further dilution to its then-existing stockholders. Further, if the Company issues additional equity securities, the new equity securities may have rights, preferences or privileges senior to those of existing holders of its common stock. The Company may also borrow money from conventional lenders, possibly at high interest rates, which will increase the risk of its investors' holdings. Despite its efforts, additional funding may not be available to it at all or only on terms that are unacceptable to it. The Company also could be required to seek funds through arrangements with collaborative partners or others that may require it to relinquish rights to some of its technologies, product candidates or products which the Company would otherwise pursue on its own.
Even if the Company is able to raise additional funds in a timely manner, its future capital requirements will vary depending on many factors, including the following:
o continued progress in its research and development programs, as well as the magnitude of these programs;
o the resources required to successfully complete its clinical trials;
o the time and costs involved in obtaining regulatory approvals;
o the cost of manufacturing and commercialization activities;
o the cost of any additional facilities requirements;
o the timing, receipt and amount of sales and royalties from its potential products in the market; and
o the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and other patent-related costs, including litigation costs and the costs of obtaining any required licenses to technologies.
The Company's ability to pursue further development and ultimate commercialization of its surgical sealant products for cardiovascular and gastrointestinal surgery is contingent on its ability to secure additional resources for these programs.
Dependence on Strategic Marketing Partners. The Company has established strategic marketing alliances with Genzyme Biosurgery and Ethicon in the field of surgical sealants. Under these agreements, the Company is dependent upon Genzyme and Ethicon for the marketing and sale of the Company's surgical sealants. The Company anticipates that revenues derived from sales of FocalSeal-L surgical sealant in North America by Genzyme Biosurgery will account for a substantial majority of the Company's near term product revenues. In June 1999, Ethicon announced that it has excess inventory of Focal Seal-L and, consequently, the Company recorded negligible product sales under its arrangement with Ethicon in 2000 and expects similar results in 2001. The failure of Genzyme Biosurgery or Ethicon to continue to support the Company in the commercialization of its sealant products would have a material adverse affect on the Company's business, financial condition and results of operations.
The Company's strategy for development and commercialization of certain of its future products may depend upon the Company entering into additional arrangements with research collaborators, corporate partners and others, and upon the subsequent success of these third parties in performing their obligations. There can be no assurance that the Company will be able to enter into additional strategic alliances on terms favorable to the Company. The Company's inability to enter into additional strategic alliances could have an adverse affect on the Company's financial condition and results of operations.
The Company cannot control the amount and timing of resources which its current or any future corporate partners devote to the Company's programs or potential products. If any of the Company's current or future corporate partners breach their agreements with the Company or otherwise fail to conduct their collaborative activities in a timely manner, the clinical development and/or commercialization of products may be delayed, and the Company may be required to devote additional resources to product development and commercialization, or terminate certain development programs. The termination of any current or future strategic alliances could have a material adverse affect on the Company's business, financial condition and results of operations.
In addition, Focal's current and any future strategic partners may develop, either alone or with others, products that compete directly with the development and marketing of the Company's products. Competing products, either developed by the corporate partners or to which the corporate partners have rights, may result in their withdrawal of support with respect to all or a portion of the Company's technology, marketing and development efforts, which would have a material adverse affect on the Company's business, financial condition and results of operations. There can be no assurance that disputes will not arise in the future with respect to the ownership of rights to any products or technology developed with corporate partners. These and other possible disagreements between corporate partners in the Company could lead to delays in or termination of the collaborative
research, development or commercialization of certain products and could require or result in litigation or arbitration, which would be time-consuming and expensive, and would have a material adverse affect on the Company's business, financial condition and results of operations.
Uncertainty of Market Acceptance. The Company's FocalSeal surgical sealants represent a new method of sealing air and fluid leaks that arise in connection with surgery, and there can be no assurance that these products will gain commercial acceptance among physicians, patients and health care payors, even if necessary international and United States marketing approvals can be obtained. The Company believes that recommendations and endorsements by physicians will be essential for market acceptance of FocalSeal, and there can be no assurance that any such recommendations or endorsements will be obtained. Physicians will not use the FocalSeal surgical sealants unless they determine, based on clinical data and other factors, that these systems are an effective means of sealing air and fluid leaks and that the clinical benefits to the patient and cost savings achieved through use of these systems outweigh their cost. Such determinations will depend, in part, on the ability of the Company's FocalSeal-L surgical sealant to reduce the time a lung surgery patient must be connected to a chest tube and the length of hospital stays associated with lung surgery. Acceptance among physicians may also depend upon the Company's ability to train thoracic surgeons and other potential users of the Company's products in the application of liquid surgical sealants, which such physicians typically have not performed, and the willingness of such users to learn these new techniques. Failure of the Company's products to achieve significant market acceptance would have a material adverse effect on the Company's business, financial condition and results of operations.
Uncertainties Related to Early Stage of Commercialization and Development. Except for the FocalSeal-L and FocalSeal-S surgical sealants for lung surgery and neurosurgery indications, all of the Company's products are in early stages of development or research. In addition, FocalSeal-L and FocalSeal-S surgical sealants will potentially require significant additional research and development efforts before either is suitable for any indications beyond lung surgery and neurosurgery, if ever.
The development and commercialization of new bioabsorbable synthetic polymer products are highly uncertain and subject to a number of significant risks. Potential products that appear to be promising at early stages of development may not reach the market for a number of reasons. Such reasons include the possibilities that the potential products will be found ineffective or cause harmful side effects during preclinical testing or clinical trials, fail to receive necessary regulatory approvals, be difficult to manufacture on a commercial scale, be uneconomical, fail to achieve market acceptance or be precluded from commercialization by proprietary rights of third parties. No assurance can be given that any of the Company's development programs will be successfully completed, that clinical trials will generate anticipated results or will commence or be completed as planned, that any PMA application will be accepted or ultimately approved by the FDA, that required regulatory approvals will be obtained on a timely basis, if at all, or that any products for which approval is obtained will be commercially successful. If any of the Company's development programs are not successfully completed, required regulatory approvals are not obtained, or products for which approvals are obtained are not commercially successful, the Company's business, financial condition and results of operations would be materially adversely affected.
Early Stage of Clinical Testing and Lack of Extensive Clinical Data. Focal has commenced United States clinical trials of FocalSeal-S surgical sealant and the Company has been working to expedite its current clinical trial by revising the trial to include a broader study population and a less complicated study protocol. The Company has suspended enrollment of patients under the current protocol and is actively working with the FDA on obtaining agreement on a more efficient format. There are no assurances that the FDA will agree to the revised study protocol or that the FDA will not require the Company to pursue certain clinical endpoints. It may be more difficult for the Company to demonstrate the efficacy of FocalSeal-S surgical sealant in the United States trial than in the European trial, which could result in delays or adversely affect the success of the clinical trial.
There can be no assurance that FocalSeal-S surgical sealants will receive marketing approval from the FDA or that any of the Company's other products will prove to be safe and effective in United States or international clinical trials under applicable regulatory guidelines. In addition, clinical trials may identify significant technical or other obstacles to be overcome prior to obtaining necessary regulatory or international approvals. If the FocalSeal-S surgical sealant product and the Company's other products under development do not prove to be safe and effective in clinical trials or if the Company is otherwise unable to commercialize these products successfully, the Company's business, financial condition and results of operations will be materially and adversely affected.
Uncertainty of Ability to Attract and Retain Key Management, Employees and Consultants. The Company is highly dependent on the principal members of its management and scientific staff. The loss of services of any of these personnel could impede the achievement of the Company's development objectives. Furthermore, recruiting and retaining qualified scientific personnel to perform research and development work in the future will also be critical to the Company's success. There can be no assurance that the Company will be able to attract and retain personnel on acceptable terms given the competition among biotechnology, pharmaceutical and healthcare companies, universities and non-profit research institutions for experienced scientists. In addition, the Company relies on members of its Scientific Advisory Board and a significant number of consultants to assist the Company in formulating its research and development strategy. All of Focal's consultants and the members of the Company's Scientific Advisory Board are employed by employers other than the Company, and may have commitments to, or advisory or consulting agreements with, other entities that may limit their availability to the Company.
Potential Product Liability or Product Recall Exposure; Limited Insurance Coverage. The use of any of the Company's potential products in clinical trials, and the sale of any approved products, may expose the Company to liability claims resulting from the use of its products or to product recalls. Product liability claims might be made directly by consumers, health care providers or by distributors or others selling such products. Focal has obtained product liability insurance coverage, subject to certain policy limits, for its clinical trials. The Company has expanded its insurance coverage to include the sale of commercial products if marketing approval is obtained for products in development. However, insurance coverage is becoming increasingly expensive, and no assurance can be given that the Company will be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect the Company against losses due to liability. There can also be no assurance that the Company will be able to obtain commercially reasonable product liability insurance for any products approved for marketing. A successful product liability claim or series of claims brought against the Company or a product recall could have a material adverse effect on its business, financial condition and results of operations.
Item 2.
Item 2. Properties
Focal currently occupies approximately 54,000 square feet of manufacturing, laboratory and administrative space in Lexington, Massachusetts under a lease which expires in September 2004. Focal has an option to extend this lease for several additional five-year periods. The Company believes that this facility is sufficient to meet the Company's production and other requirements through at least 2004.
Item 3.
Item 3. Legal Proceedings
The Company is not currently a party to any material legal proceedings.
Item 4.
Item 4. Submission Of Matters To a Vote Of Security Holders
None.
Executive Officers of the Company
The executive officers of the Company, who are elected by the Board of Directors, are as follows:
Name Age Position ---- --- -------------------------------------
Ronald S. Rudowsky....... 52 President, Chief Executive Officer and Director Peter K. Jarrett, Ph.D... 44 Vice President of Research and Development Thomas Bromander......... 43 Vice President of Operations Harry R. Trout III ...... 32 Chief Financial Officer
Ronald S. Rudowsky, age 52, has served as President and Chief Executive Officers of the Company and as a director of the Company since February 1, 2001. From October 2000 to February 2001 he served as Chief Operating Officer of the Company; from January 1997 to October 2000 he served as Vice President of Sales and Marketing of the Company; and from January 1994 to January 1997 he served as Director, Procedure Development. From June 1991 to December 1993, he was the Director of Marketing of Ethicon Endo-Surgery, a medical device company and a division of Johnson & Johnson. Previously, he spent 14 years in various sales and marketing positions at Ethicon, Inc. Mr. Rudowsky holds a B.B.A. in Marketing from Marshall University.
Peter K. Jarrett, Ph.D., age 44, has served as Vice President of Research and Development of the Company since June 2000. Dr. Jarrett joined the Company in 1993 as Senior Scientist in Materials Research and Development. In 1996, Dr. Jarrett was promoted to the position of Director of Materials Development and to Senior Director of Materials Research and Development in 1998. From 1984 to 1993, Dr. Jarrett was employed by Davis & Geck, a Tyco company primarily involved in medical devices, in various positions including Research Fellow. Dr. Jarrett received his Ph.D. in 1983 from the University of Connecticut in Polymer Science and received a B.A. in Chemistry from Connecticut College.
Thomas S. Bromander, age 43, has served as Vice President of Operations of the Company since June 2000. Mr. Bromander joined the Company as Manager of Manufacturing in August 1993. Mr. Bromander was promoted to Associate Director of Manufacturing in March 1997 and to Director of Manufacturing in April 1998. From 1991 to 1993, he served as Advanced Engineering Manager at Cordis Corporation (a Johnson & Johnson company), a medical device company, and Manufacturing Manager at Abiomed, Inc., a medical device company. From 1981 to 1991, Mr. Bromander held various engineering positions at C.R. Bard, Inc., a medical device company, including Manufacturing Engineering Manager. Mr. Bromander received his B.S. in Mechanical Engineering from the University of Lowell.
Harry R. Trout III, age 32, has served as Chief Financial Officer of the Company since May 2000. Mr. Trout joined the Company in January 2000 as Corporate Controller. He served as a consultant to the Company from July 1999 to December 1999. From December 1998 to December 1999, he served as an independent consultant working with start-up companies in the technology industry. From 1997 to 1998, he served as Corporate Controller at Fulfillment Plus Corporation, a telecommunications company. From 1991 to 1997, he served as Controller for the Abjerona Company, a real estate conglomerate. From 1988 to 1991, he served as a Senior Accountant with Bicknell & Fuller Corporation, a packaging manufacturer. Mr. Trout holds an M.B.A. from the New Hampshire College Graduate School and a B.S. in Accounting from North Adams State College.
PART II
Item 5.
Item 5. Market For Registrant's Common Equity and Related Shareholder Matters
Market Price of and Dividends on the Company's Common Stock and Related Stockholder Matters
The Company's Common Stock is traded on the NASDAQ National Market under the symbol "FOCL." The following table sets forth the range of the high and low sale prices by quarter as reported on the NASDAQ National Market for the last two fiscal years.
Fiscal Year Ended December 31, 2000 High Low ---- ---
First Quarter........................................... $10.63 $3.88 Second Quarter.......................................... $8.50 $2.31 Third Quarter........................................... $3.78 $2.38 Fourth Quarter.......................................... $3.25 $0.81
Fiscal Year Ended December 31, 1999 First Quarter........................................... $14.00 $5.75 Second Quarter.......................................... $9.00 $6.69 Third Quarter........................................... $7.63 $3.13 Fourth Quarter.......................................... $5.81 $3.38
On March 20, 2001, the closing price per share of the Company's Common Stock was $0.97 per share, as reported by the NASDAQ National Market, and the number of common stockholders of record was 179. The Company has never paid any dividends on its Common Stock. The Company currently intends to retain any earnings for use in its business and does not anticipate paying any cash dividends in the foreseeable future.
Recent Sales of Unregistered Securities
On April 14, 2000 and January 3, 2001, Focal sold 614,250 and 2,427,184 shares, respectively, of its Common Stock, $.01 par value per share, to Genzyme Biosurgery, for aggregate proceeds, in each case, of $5.0 million. No person acted as an underwriter with respect to these transactions. Focal relied on Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act") for the exemption from the registration requirements of the Securities Act, since no registration of the shares to be offered was made prior to issuance and sale.
Item 6.
Item 6. Selected Financial Data
FOCAL, INC. SELECTED CONDENSED FINANCIAL INFORMATION (in thousands, except share and per share data)
FOCAL, INC. SELECTED CONDENSED FINANCIAL INFORMATION (in thousands, except share and per share data)
At December 31, ------------------------------------------------- 1996 1997 1998 1999 2000 ------------------------------------------------- Balance Sheets Cash, cash equivalents and marketable securities $12,208 $33,239 $25,346 $13,463 $ 3,874
Working capital 9,003 30,867 22,188 11,325 2,108 Total assets 14,089 39,606 30,461 18,751 9,153 Capital lease obligations, long term portion 315 1,422 1,391 1,333 651 Deferred revenue 4,000 Total stockholders' equity (deficit) 10,099 32,512 23,776 13,148 (176)
(1) The cumulative effect of change in accounting principle is a one-time noncash charge relating to Focal's adoption of Staff Accounting Bulletin No. 101 ("SAB 101"). SAB 101 was issued by the Securities and Exchange Commission ("SEC") in December 1999. SAB 101 provides guidance related to revenue recognition policies based on interpretations and practices followed by the SEC. The impact of Focal's adoption of SAB 101 was to defer revenue recognition for certain portions of the revenue previously recognized by the Company under its collaborative research and development arrangements into future accounting periods.
(2) Pro forma in 1996 and 1997 - Pro forma net loss per share for 1997 is computed using the weighted average number of outstanding common shares and convertible preferred shares, assuming conversion at date of issuance. Historical earnings per share for 1997 has not been presented since such amounts are not deemed meaningful due to the significant change in the Company's capital structure that occurred in connection with the initial public offering in 1997.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the financial statements, including the notes thereto, appearing elsewhere in this Annual Report on Form 10-K.
The following financial results exclude the impact of the Company's adoption of Staff Accounting Bulletin No. 101 (SAB 101), for all items denoted by an "*". For a discussion of SAB 101's impact on the Company's financial results, refer to "Impact of Recently Issued Accounting Standards" below.
Overview
Focal was founded in 1991, and is focused on the development, manufacture and commercialization of synthetic, absorbable surgical sealants based on the Company's proprietary polymer technology. Since inception, Focal has funded its operations primarily through the private placement of equity securities and through an initial public offering of common stock. In addition, Focal has entered into strategic alliances with corporate partners and has recorded revenues totaling $28.6 million* through December 31, 2000, in connection with these alliances.
Focal introduced its first commercial product, FocalSeal-L surgical sealant for lung surgery indications, in Europe in 1998 through its strategic marketing alliance with Ethicon. In May 2000, the FDA approved FocalSeal-L for commercial sale in North America. Focal launched FocalSeal-L sealant for lung surgery indications in North America in July 2000 through its marketing partner, Genzyme Biosurgery. Focal anticipates that revenues derived from the sales of FocalSeal-L surgical sealant for lung surgery will account for nearly all of the Company's short-term product revenues.
Focal has incurred net losses in each year since its inception, including net losses of approximately $13.5 million* during 2000. At December 31, 2000, Focal had an accumulated deficit of $95.2 million. Focal's operating losses have resulted primarily from expenses incurred in connection with its research, development and marketing activities, including development of manufacturing processes, sales and marketing, and administrative expenses. Focal expects to incur net losses at least through 2004 and may incur net losses in subsequent periods although the amount of future net losses and the time required by Focal to reach profitability are highly uncertain. The Company has marketing and distribution partners for the majority of its products throughout the world, including Genzyme Biosurgery (formerly Genzyme Surgical Products), a division of Genzyme Corporation, in North America and Ethicon, a Johnson & Johnson company, in Europe and other international markets. In 2000, Ethicon continued to sell product to customers from previously purchased inventory. Ethicon is required to satisfy its initial annual purchase minimum on or before April 5, 2001 either by purchasing products or by making a payment to the Company. If Ethicon fails to do so, Focal has the right to terminate the agreement by providing 90 days written notice. The Company's ability to achieve and sustain profitability is dependent in large part on the ability of its marketing partners to effectively market and distribute the Company's sealant products. There can be no assurance that Focal will successfully develop, manufacture, commercialize and market products or that Focal will ever achieve profitability.
Results of Operations
Year ended December 31, 2000, compared to year ended December 31, 1999
Revenues for the year ended December 31, 2000 (the "2000 Period") were $1.8 million* compared with $3.2 million for the year ended December 31, 1999 (the "1999 Period"). Revenues in the 2000 Period included $1.7 million in product revenue and $0.1 million in collaborative research revenues. Revenues in the 1999 Period included $1.4 million in product revenues and $1.8 million in collaborative research revenues.
Product revenues increased to $1.7 million in the 2000 Period from $1.4 million in the 1999 Period. In May 2000, the FDA approved FocalSeal-L for commercial sales in North America. The first North American
shipments of FocalSeal-L surgical sealant were made to Genzyme Biosurgery in July 2000. In 2000, Ethicon continued to sell product to customers from previously purchased inventory. In the 1999 Period, product revenues were 45% of total revenues. In the 2000 Period, product revenues were 95% of total revenues, reflecting the Company's change of focus toward commercialization.
Higher collaborative research and development revenues were recorded in the 1999 Period ($1.8 million) than in the 2000 Period ($0.1 million). In the 1999 Period, collaborative research and development revenues included a milestone payment of $1.0 million from Ethicon in connection with the receipt of CE mark approval of FocalSeal-S sealant and $0.8 million in research funding by a third party for the Company's cardiovascular sealant product under development during 1999. Although the Company recognized a reduced amount of collaborative research and development income in the 2000 Period compared to the 1999 Period, the Company is seeking to enter into collaborative arrangements which could provide research and development funding for the Company's programs in the areas of adhesion prevention, anti-arrhythmia drug delivery, and bone and cartilage restoration and repair.
Cost of product revenues for the 2000 Period totaled $2.8 million compared with $2.4 million for the 1999 Period. These costs were recorded in connection with commercial sales of FocalSeal-L surgical sealant product through Genzyme Biosurgery in the North American market and Ethicon in the international market. Gross margins were relatively consistent, although negative in both periods due to the lack of economies of scale and certain fixed overhead costs being spread over the limited sales volumes. In addition, Focal increased the inventory reserve due to high levels of inventory - resulting in a charge to cost of product revenues of $737,000 in the fourth quarter of 2000.
Research, development, clinical and regulatory expenses were $8.1 million for the 2000 Period, compared with $14.5 million for the 1999 Period. The Company has been working to expedite its current clinical trial for use of its FocalSeal-S neuro surgical sealant by revising the trial to include a broader study population and a less complicated study protocol. The Company has suspended enrollment of patients under the current protocol until a more efficient trial format can be agreed upon with the FDA. As a result of the trial deferment, clinical and regulatory expenses decreased in the 2000 Period. The Company expects research, development, clinical and regulatory expenses to decrease as the Company seeks to enter into collaborative arrangements which could provide research and development funding for the Company's programs.
Sales, general and administrative expenses increased to $6.0 million for the 2000 Period from $3.9 million for the 1999 Period. This increase is primarily due to augmentation of the Company's sales staff and other expenses attributable to the Company's domestic product launch in the second half of 2000. During both the 1999 and 2000 Periods, sales, general and administrative expenses consisted primarily of information systems consulting, audit and tax-related fees, public and investor relations, legal, insurance and general overhead expenses, while sales expenses were incurred only in the 2000 Period.
Interest and other income decreased to $0.7 million in the 2000 Period from $0.9 million in the 1999 Period, as a result of lower average cash balances available for investment, as the Company incurs net losses and draws down on the proceeds from its equity financing arrangements. Other income of $475,000 during the first quarter of 2000 was derived primarily from an insurance payment for inventory damaged at an off site storage facility during 1999.
The Company recorded a net loss of $13.5 million* for the 2000 Period, compared with a net loss of $16.8 million for the 1999 Period. The increased net loss was primarily the result of a decline in collaborative research revenues and an increase in sales expenses associated with the U.S. product launch; as compared with 1999. The Company anticipates that it will incur net operating losses for the foreseeable future.
Year ended December 31, 1999, compared to year ended December 31, 1998
Revenues for the the 1999 Period were $3.2 million compared with $8.2 million for the year ended December 31, 1998 (the "1998 Period"). Revenues in the 1999 Period included $1.4 million in product revenue and $1.8 million in collaborative research revenues. Revenues in the 1998 Period included $3.1 million in product revenues and $5.1 million in collaborative research revenues.
Product revenues decreased to $1.4 million in the 1999 Period from $3.1 million in the 1998 Period. Shipments of FocalSeal-L surgical sealant were made to Ethicon during the first two quarters of 1999 for Ethicon's distribution to its customers. In June 1999, Ethicon announced that it had sufficient inventories to meet anticipated demand for the product for at least several quarters. As a result, there were virtually no additional sales of product to Ethicon in the second half of 1999. However, Ethicon continued to sell product to customers from previously purchased inventory and it is estimated that approximately 3,000 procedures were performed in Europe and other countries outside of North America using FocalSeal-L surgical sealant during 1999. Focal records revenues based on a specified transfer price at the time of shipment of product to its marketing and distribution partner, Ethicon.
Higher collaborative revenues were realized in the 1998 Period than the 1999 Period in connection with Focal's strategic alliance with Ethicon, including $3.0 million in revenues from Ethicon for the development of its lung surgery and neurosurgery sealant products and $1.5 million for the development of its cardiovascular sealant product. In addition, in the 1998 Period $0.5 million in collaborative research revenues were realized from other sources, including a grant from the National Institutes of Health. In the 1999 Period, collaborative revenues included a milestone payment of $1.0 million from Ethicon in connection with the receipt of CE mark approval of FocalSeal-S sealant and $0.8 million in research funding of a cardiovascular sealant product.
Cost of product revenues for the 1999 Period totaled $2.4 million compared with $3.7 million for the 1998 Period. These costs were recorded in connection with commercial sales of FocalSeal-L surgical sealant product through Ethicon in Europe and other international markets. Gross margins were negative in both periods due to the lack of economies of scale and certain fixed overhead costs being spread over the limited sales volumes.
Research, development, clinical and regulatory expenses were $14.5 million for the 1999 Period, compared with $15.6 million for the 1998 Period. The number of staff in research and development was reduced in June 1999 in connection with the completion of substantially all of the development work on FocalSeal-L sealant and FocalSeal-S sealant. Clinical and regulatory expenses decreased in the 1999 Period due to the completion in late 1998 of the U.S. clinical trial of FocalSeal-L surgical sealant. The Company expects research, development, clinical and regulatory expenses to decrease as the Company shifts away from research and development activities for its lead products and toward commercialization of these products.
General and administrative expenses increased to $3.9 million for the 1999 Period from $3.8 million for the 1998 Period. General and administrative expenses during both years consisted primarily of personnel costs, travel, public and investor relations, legal, insurance and general overhead expenses.
Interest income decreased to $0.9 million in the 1999 Period from $1.8 million in the 1998 Period, as a result of lower average cash balances available for investment, as the Company incurred net losses and drew down on the proceeds from its initial public offering.
The Company recorded a net loss of $16.8 million for the 1999 Period, compared with a net loss of $13.4 million for the 1998 Period. The increased net loss was primarily the result of a decline in collaborative research revenues and lower product revenues in 1999 as compared with 1998. The Company anticipates that it will incur net operating losses at least through 2001.
Liquidity and Capital Resources
Since its inception, the Company has financed its operations primarily from the sale of preferred stock in private placements, equity financings, as well as the Company's 1997 initial public offering. In each of April 2000 and January 2001, Focal received a $5.0 million equity investment from Genzyme Biosurgery, in connection with the agreement described below. Through December 31, 2000, the Company has raised approximately $93.5 million from equity financings and has received $7.0 million in equipment lease financing.
Cash used in operations totaled $13.8 million for the year ended December 31, 2000, as compared to the use of $16.6 million for the same period in 1999. The decrease in cash used in operations was due to lower net losses incurred in 2000 (excluding the effect of a cumulative non-cash adjustment for SAB 101)*, compared to 1999, due to sales of FocalSeal-L in North America, offset by an increase in working capital.
Capital expenditures from inception through December 31, 2000 totaled $9.1 million, representing laboratory equipment, office furniture and equipment, computers and certain leasehold improvements. The majority
of these purchases have been financed through either direct financing leases or sale and leaseback arrangements. As of December 31, 2000, the Company did not have any material commitments for future capital expenditures.
In October 1999, in connection with entering into a Marketing and Distribution Agreement with Genzyme Biosurgery, Focal and Genzyme Biosurgery entered into a Stock Purchase Agreement, with up to $20.0 million in purchases of the Company's common stock committed by Genzyme Biosurgery over an eighteen month period, subject to certain specified conditions. The first $5.0 million purchase was made by Genzyme Biosurgery in November 1999, with Genzyme Biosurgery purchasing approximately 810,000 shares at a 25% premium to the ten day average trading price of the Company's common stock prior to the investment. The second $5.0 million purchase was made by Genzyme Biosurgery in April 2000, with Genzyme Biosurgery purchasing approximately 614,000 shares at the twenty day average trading price of the Company's common stock prior to the investment. The third $5.0 million investment was made by Genzyme Biosurgery in January 2001, with Genzyme Biosurgery purchasing approximately 2.4 million shares at the twenty day average trading price of the Company's common stock prior to the investment. At Focal's option, one additional $5.0 million investment will be made by Genzyme Biosurgery. The final investment of $5.0 million may be called by Focal in the second quarter of 2001, subject to the satisfaction of closing conditions. The final investment will be priced based upon the twenty day trading average of the Company's stock.
The Company anticipates that its existing funds at December 31, 2000, including the $5.0 million received from Genzyme Biosurgery in January 2001 and the $5.0 million it expects to receive from Genzyme Biosurgery in the second quarter, subject to the satisfaction of closing conditions, will be sufficient to fund its operating and capital requirements through 2001. The Company expects to use rather than generate funds from operations for the foreseeable future. In particular, the Company will require substantial funds in the near term to conduct research and development, including preclinical testing and clinical trials of its FocalSeal surgical sealant products, and to manufacture and market any products that are approved for commercial sale, including its FocalSeal-L lung surgical sealant which was launched in 2000. If the Company cannot raise more funds, the Company could be required to reduce its capital expenditures, scale back its research and product developments, reduce its workforce and/or license to others products or technologies the Company would otherwise seek to commercialize itself.
The Company may seek additional funding through collaborative arrangements, borrowing money and by the sale of additional equity securities. Any sales of additional equity securities are likely to result in further dilution to its then-existing stockholders. Further, if the Company issues additional equity securities, the new equity securities may have rights, preferences or privileges senior to those of existing holders of its common stock. The Company may also borrow money from conventional lenders, possibly at high interest rates, which will increase the risk of its investors' holdings. Despite the Company's efforts, additional funding may not be available at all or only on terms that are unacceptable to it. The Company also could be required to seek funds through arrangements with collaborative partners or others that may require it to relinquish rights to some of its technologies, product candidates or products which the Company would otherwise pursue on its own.
Even if the Company is able to raise additional funds in a timely manner, its future capital requirements will vary depending on many factors, including the following:
o continued progress in its research and development programs, as well as the magnitude of these programs;
o the resources required to successfully complete its clinical trials;
o the time and costs involved in obtaining regulatory approvals;
o the cost of manufacturing and commercialization activities;
o the cost of any additional facilities requirements;
o the timing, receipt and amount of sales and royalties from its potential products in the market; and
o the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and other patent-related costs, including litigation costs and the costs of obtaining any required licenses to technologies.
Under certain agreements with universities and consultants, the Company is obligated to make payments for sponsored research and consulting services. There were no research funding commitments under these agreements at December 31, 2000. Payments under these agreements are typically made on a quarterly or monthly basis. There can be no assurance that the Company's capital resources will be sufficient to enable the Company to conduct its research and development programs as planned. The Company's future capital requirements will depend on many factors, including continued progress in its research and development programs, progress with pre-clinical testing and clinical trials, the time and costs involved in obtaining regulatory approvals, if any, the costs involved in filing and prosecuting patent applications and enforcing patent claims, competing technological and market developments, the establishment of additional strategic alliances, the cost of manufacturing facilities and of commercialization activities and arrangements, the success of the sales and distribution efforts of its marketing partners, and the cost of product in-licensing and any possible acquisitions. There can be no assurance that the Company's cash, cash equivalents and marketable securities will be adequate to satisfy its capital and operating requirements.
Impact of Recently Issued Accounting Standards
In 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Investments and Hedging Activities", which was amended by FAS 137 and FAS 138, which requires the adoption of FAS 133 by Focal in the first quarter of 2001. Focal does not expect the implementation of this statement to have a significant impact on its results of operations or financial position.
Effective in the fourth quarter of 2000, Focal changed its method of accounting for revenue recognition in accordance with Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements. Previously, Focal had recognized revenue relating to non-refundable, up-front, license and milestone payments and certain research funding payments from its strategic partners in accordance with the contract or distribution arrangement. Under the new accounting method adopted retroactively to January 1, 2000, Focal now recognizes revenue from non-refundable, up-front, license and milestone payments not specifically tied to a separate earnings process, ratably over the term of the research contract or distribution agreement. When payments are specifically tied to a separate earnings process and when considered appropriate, revenue is recognized when earned. In addition, when appropriate, Focal recognized revenue from certain research payments based upon the level of research services performed during the research contract or over the term of the agreement. The cumulative effect of the change on prior years resulted in a charge to income of $5.6 million, which is included in the loss for the year ended December 31, 2000. The pro forma amounts presented in the consolidated statements of operations were calculated assuming the accounting change was made retroactively to prior periods. Included in 2000 revenue is $800,000 of revenue relating to the adoption of SAB 101. The amount of revenue to be recognized in future years that was included in the cumulative effect of change in accounting principle is $800,000 for each of the next six years. After giving effect to the implementation of SAB 101, Focal had a net loss of $19,076,598 or $1.30 per share for the year 2000.
Impact of Inflation and Changing Prices
The Company does not expect inflation, which has been low in recent years, to have any significant impact on its business for the foreseeable future.
Item 7A.
Item 7A. Qualitative and Quantitative Disclosures About Market Risk
The Company maintains an investment portfolio in accordance with its Investment Policy. The primary objectives of the Company's Investment Policy are to preserve principal, maintain proper liquidity to meet operating needs and maximize yields. The Company's Investment Policy specifies credit quality standards for the Company's investment and limits the amount of credit exposure to any single issue, issuer or type of investment.
The Company's investments consist of securities of various types and maturities of one year or less, with an average maturity of 3 months. The Company accounts for its investments in accordance with Statement of
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115). All of the Company's cash equivalents and marketable securities are treated as available-for-sale under SFAS 115.
The securities held in the Company's investment portfolio are subject to interest rate risk. Changes in interest rates affect the fair market value of the available-for-sale securities. After a review of the Company's marketable securities as of December 31, 2000, the Company has determined that in the event of a hypothetical ten percent increase in interest rates, the resulting decrease in fair market value of the Company's marketable investment securities would be insignificant to the financial statements as a whole.
Item 8.
Item 8. Financial Statements and Supplemental Data
Report of Independent Auditors
The Board of Directors and Stockholders Focal, Inc.
We have audited the accompanying balance sheets of Focal, Inc. as of December 31, 1999 and 2000, and the related statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Focal, Inc. at December 31, 1999 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States.
As discussed in Note 1 to the financial statements, in 2000 the Company changed its method of accounting for revenue recognition.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 1, the Company has incurred recurring losses and has a net capital deficiency. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
/S/ ERNST & YOUNG LLP
Boston, Massachusetts January 31, 2001
Focal, Inc. Balance Sheets
December 31, ------------------------------- 1999 2000 ------------------------------- ASSETS Current assets: Cash and cash equivalents $ 8,746,897 $ 3,672,672 Marketable securities 4,715,842 201,318 Accrued interest receivable 76,770 10,111 Accounts receivable 52,579 395,407 Inventories, net 1,573,934 1,982,020 Prepaid expenses and other assets 428,112 408,780 ------------------------------- Total current assets 15,594,134 6,670,308
Notes receivable from related parties 271,753 247,736
Property, plant & equipment 8,241,952 8,378,465 Less: accumulated depreciation and amortization 5,370,919 6,259,839 ------------------------------- Property, plant & equipment, net 2,871,034 2,118,626
Other assets 14,025 -- ------------------------------- Total assets $ 18,750,946 $ 9,036,670 ===============================
LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 729,534 $ 738,278 Accrued liabilities 2,613,875 2,201,257 Current portion of capital lease obligations 926,041 688,828 Current portion of deferred revenue -- 933,877 ------------------------------- Total current liabilities 4,269,450 4,562,240
Capital lease obligations 1,333,090 650,528 Deferred revenue -- 4,000,000 ------------------------------- Total long term liabilities 1,333,090 4,650,528
Stockholders' equity: Preferred stock, $0.01 par value; 5,000,000 shares authorized; none issued and outstanding -- -- Common stock, $.01 par value; 50,000,000 shares authorized; 14,234,208 and 14,935,735 shares issued and outstanding at December 31, 1999 and 2000, respectively 142,342 149,357 Additional paid-in capital 90,178,169 95,366,165 Notes receivable from related parties (828,131) (447,743) Deferred compensation (183,713) -- Accumulated other comprehensive income 8,337 1,319 Accumulated deficit (76,168,598) (95,245,196) ------------------------------- Total stockholders' equity 13,148,406 (176,098) ------------------------------- Total liabilities and stockholders' equity $ 18,750,946 $ 9,036,670 ===============================
See accompanying notes.
Focal, Inc. Statements of Operations
Year ended December 31, ------------------------------------------------ 1998 1999 2000 ------------------------------------------------ Statements of Operations: Revenues: Collaborative research revenues $ 5,113,953 $ 1,772,617 $ 874,375 Product revenues 3,071,490 1,422,919 1,720,568 ------------------------------------------------ Total revenues 8,185,443 3,195,536 2,594,943 Costs and Expenses: Cost of product revenues 3,739,807 2,373,383 2,842,023 Research and development 15,590,647 14,453,371 8,112,363 Sales, general and administrative 3,815,432 3,918,917 5,999,650 ------------------------------------------------ Total costs and expenses 23,145,886 20,745,671 16,954,036 Insurance recovery -- -- 475,408 Interest income and other income 1,765,420 908,460 704,689 Interest expense (212,323) (199,563) (297,602) Loss before cumulative effect of change in accounting principle (13,407,346) (16,841,238) (13,476,598) ------------------------------------------------ Cumulative effect of change in accounting principle -- -- (5,600,000) ------------------------------------------------ Net loss $(13,407,346) $(16,841,238) $(19,076,598) ==============================================
Amounts per common share: Loss before cumulative effect of change in accounting principle $ (1.01) $ (1.24) $ (0.92) Cumulative effect of change in accounting principle regarding revenue recognition -- -- (0.38) ------------------------------------------------ Net loss per share, basic and diluted $ (1.01) $ (1.24) $ (1.30) ================================================ Weighted average shares, basic 13,291,182 13,551,856 14,707,345 and diluted ================================================
Pro forma amounts assuming the change in accounting principle is applied retroactively:
Net loss $(13,626,013) $(13,355,904) $(13,476,598)
Net loss per share, basic and diluted $ (1.03) $ (0.99) $ (0.92)
See accompanying notes
Focal, Inc. Statements of Stockholders' Equity
See accompanying notes.
Focal, Inc. Statements of Cash Flows
See accompanying notes.
Focal, Inc. Notes to Financial Statements December 31, 2000
1. Summary of Significant Accounting Policies
Organization and Business
Focal, Inc. (the "Company") develops, manufactures and commercializes synthetic, absorbable surgical sealants based on the Company's proprietary polymer technology. The Company's family of FocalSeal surgical sealant products is currently being developed for use inside the body to seal air and fluid leaks resulting from lung, neurological, cardiovascular and gastrointestinal surgery.
Liquidity and Management's Plans
The Company has incurred recurring losses and has a net capital deficiency at December 31, 2000. These conditions raise substantial doubt about the Company's ability to continue as a going concern.
Focal will require substantial additional capital resources to fund continuing operations through the end of 2001 and beyond. The Company believes there may be a number of alternatives available to meet the continuing capital requirements of its operations, such as collaborative agreements and public or private financings. There can be no assurance that any of these alternatives will be available on terms acceptable to the Company, or at all. If adequate funds are not available, the Company will be required to significantly curtail its operations and may have to sell or license out significant portions of the Company's technology or potential products or discontinue operations.
The 2000 financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
Use of Estimates
The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Cash, Cash Equivalents and Marketable Securities
Cash and cash equivalents include cash accounts and funds held in investments with original maturities of three months or less. Marketable securities consist of investments in agencies of the U.S. government, investment grade corporate notes and other investments with original maturities of greater than three months. The Company has classified all cash equivalents and marketable securities as available-for-sale securities, which are carried at fair value, with unrealized gains and losses reported as a separate component of stockholders' equity.
The Company invests its cash equivalents and marketable securities with institutions that have strong credit ratings. The Company has developed guidelines relative to investment risk and liquidity.
All product revenues, substantially all collaborative research revenues and substantially all accounts receivable are derived from two customers.
Focal, Inc. Notes to Financial Statements (Continued) December 31, 2000
1. Summary of Significant Accounting Policies (Continued)
Fair Value of Financial Instruments
Carrying amounts of financial instruments held by the Company, which include cash, cash equivalents, marketable securities, accounts receivable, accounts payable and accrued expenses, approximate fair value due to their short duration.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market using estimated standard costs.
Property and Equipment
Property and equipment are recorded at cost and are depreciated using the straight-line method over estimated useful lives of 3-5 years. Property and equipment under capital leases are amortized using the straight-line method over the lease term, typically 4 years.
Revenue Recognition
Revenues from collaborative research agreements are recognized over the contract life. Revenue from non-refundable, up-front, license and milestone payments not specifically tied to a separate earnings process, are recognized ratably over the term of the research contract. When payments are specifically tied to a separate earnings process and when considered appropriate, revenue is recognized when earned. In addition, when appropriate, the Company recognizes revenue from certain research payments based on the level of research services performed during the contract or over the term of the agreement. Payments received in advance of research performed are designated as deferred revenue. Reimbursable expenses incurred or milestones achieved but not yet reimbursed are designated as contract revenues receivable.
Product revenues are recognized only when the contract is signed, the product has been shipped and all obligations have been delivered to the customer, the fee is fixed and determinable, and collection is probable (see Note 8).
Research and Development Costs and Patent Costs
All research and development costs, including the cost of acquiring patents and licensing fees paid in connection with university technology licensing agreements, are expensed as incurred.
Stock Based Compensation
The Company accounts for its stock based compensation arrangements under the provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations. The Company has adopted the disclosure provisions only of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS 123).
Income Taxes
The liability method is used to account for income taxes. Deferred tax assets and liabilities are determined based on differences between the financial reporting and income tax basis of assets and liabilities as well as net operating loss carryforwards and are measured using the enacted tax rates and laws that will be in effect when the differences reverse. Deferred tax assets are reduced by a valuation allowance to reflect the uncertainty associated with their ultimate realization.
Basic and Diluted Net Loss Per Share
Basic and diluted net loss per share is presented in accordance with the provisions of Statement of Financial Accounting Standards No. 128, Earnings Per Share. Basic net loss per share is computed based on the weighted
Focal, Inc. Notes to Financial Statements (Continued) December 31, 2000
1. Summary of Significant Accounting Policies (Continued)
average number of shares of common stock outstanding. Diluted net loss per share does not differ from basic net loss per share since potential common shares to be issued upon exercise of stock options are anti-dilutive for all periods presented.
Reclassifications
Certain reclassifications have been made in the accompanying financial statements in order to conform to the 2000 presentation.
Impact of Recently Issued Accounting Standards
In 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Investments and Hedging Activities", which was amended by FAS 137 and FAS 138, which requires the adoption of FAS 133 by Focal in the first quarter of 2001. Focal does not expect the implementation of this statement to have a significant impact on its results of operations or financial position.
Effective in the fourth quarter of 2000, Focal changed its method of accounting for revenue recognition in accordance with Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." Previously, Focal had recognized revenue relating to non-refundable, up-front, license and milestone payments and certain research funding payments from its strategic partners in accordance with the contract. Under the new accounting method adopted retroactively to January 1, 2000, Focal now recognizes revenue from non-refundable, up-front, license and milestone payments not specifically tied to a separate earnings process, ratably over the term of the research contract or the distribution arrangement. When payments are specifically tied to a separate earnings process and when considered appropriate, revenue is recognized when earned. In addition, when appropriate, Focal recognized revenue from certain research payments based upon the level of research services performed during the research contract or over the term of the agreement. The cumulative effect of the change in accounting principle resulted in a charge to income of $5.6 million, which is included in the loss for the year ended December 31, 2000. The pro forma amounts presented in the consolidated statements of operations were calculated assuming the accounting change was made retroactively to the prior periods presented. Included in revenue for the year ended December 31, 2000 is $800,000 of revenue relating to the adoption of SAB 101. The amount of revenue to be recognized in future years that is included in the cumulative effect of the change in accounting principle is $800,000 for each of the next six years. After giving effect to the implementation of SAB 101, Focal had a net loss of $19,076,598 or $1.30 per share for the year 2000.
Focal, Inc. Notes to Financial Statements (Continued) December 31, 2000
2. Marketable Securities
Available-for-sale marketable securities consisted of the following:
December 31, 1999 --------------------------------------------------- Gross Gross Unrealized Unrealized Estimated Cost Gains Losses Fair Value ---------------------------------------------------
Corporate notes due within one year $4,707,503 $ 8,339 - $4,715,842 --------------------------------------------------- Total debt securities included in marketable securities $4,707,503 $ 8,339 - $4,715,842 ===================================================
December 31, 2000 --------------------------------------------------- Gross Gross Unrealized Unrealized Estimated Cost Gains Losses Fair Value --------------------------------------------------- Corporate notes (maturing in 2025) $ 199,999 $ 1,319 _ $ 201,318
--------------------------------------------------- Total debt securities included in marketable securities $ 199,999 $ 1,319 - $ 201,318 ===================================================
Amortized cost basis was used in computing the cost of marketable securities sold.
3. Inventories
Inventories consist of the following at December 31:
1999 2000 -----------------------------
Purchased parts and subassemblies $ 146,906 $ 1,443,572 Work in process 1,265,623 321,006 Finished goods 161,405 217,442 ----------------------------- $ 1,573,934 $ 1,982,020 =============================
Focal, Inc. Notes to Financial Statements (Continued) December 31, 2000
4. Property and Equipment Property and equipment consist of the following at December 31:
1999 2000 -----------------------------
Leasehold improvements $ 1,187,801 $ 1,216,569 Laboratory equipment 5,530,008 5,511,712 Office equipment, computers and software 897,351 1,009,382 Furniture and fixtures 626,793 640,803 ----------------------------- $ 8,241,953 $ 8,378,465 Less accumulated depreciation and amortization 5,370,919 6,259,839 ----------------------------- $ 2,871,034 $ 2,118,626 =============================
5. Accrued Liabilities
Accrued liabilities consist of the following at December 31:
1999 2000 ---------------------------- Accrued university research funding and outside services $ 687,167 $ 6,883 Accrued payroll and related expenses 620,145 460,358 Accrued professional fees 250,492 347,140 Accrued other 1,056,071 1,386,876 ---------------------------- $ 2,613,875 $ 2,201,257 ============================
6. Stockholders' Equity
Preferred Stock
The Company is authorized to issue up to 5,000,000 shares of preferred stock, $.01 par value, in one or more series, each of such series to have such rights and preferences, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, as shall be determined by the Board of Directors.
In 1997, the Board of Directors of the Company adopted a Preferred Shares Rights Agreement (the "Rights Plan") designed to protect shareholders from unsolicited attempts to acquire the Company on terms that do not maximize stockholder value. In connection with the Rights Plan, the Board of Directors will designate a certain number of shares of the Company's preferred stock as Series A Participating Preferred Stock. Under the Rights Plan, a right to purchase one one-thousandth of one share of the Series A Preferred Stock (the "Rights") will be distributed as a dividend for each share of common stock. The terms of the Rights Plan provide that the Rights will become exercisable upon the earlier of the tenth day after any person or group acquires 15% or more of the Company's outstanding common stock or the tenth business day after any person or group commences a tender or exchange offer which would, if completed, result in the offer or owning 15% or more of the Company's outstanding common stock. The Rights may generally be redeemed by action of the Board of Directors at $.001 per Right at any time prior to the tenth day following the public announcement that any person or group has acquired 15% or more of the outstanding common stock of the Company. The Rights expire on January 28, 2007. The Rights have certain anti-takeover effects in that they would cause substantial dilution to the party attempting to acquire the Company. In October 1999, the Board of Directors approved an amendment to the Rights Plan, which provides that certain purchases of voting stock by Genzyme Biosurgery Corporation will not trigger the exercisability of the Rights under the Rights Plan.
Focal, Inc. Notes to Financial Statements (Continued) December 31, 2000
6. Stockholders' Equity (Continued)
In certain circumstances, the Rights allow the Company's stockholders to purchase the number of shares of the Company's common stock having a market value at the time of the transaction equal to twice the exercise price of the Rights, or in certain circumstances, the stockholders would be able to acquire that number of shares of the acquirer's common stock having a market value, at the time of the transaction, equal to twice the exercise price of the Rights. The Company will continue to issue Rights with future issuances of common stock.
Warrants
Prior to the initial public offering, the Company granted warrants to secure lease financing, to raise capital, to obtain letters of credit and as a form of compensation to various consultants. At December 31, 2000, the Company has common stock warrants outstanding covering 43,782 shares at exercise prices ranging from $5.66 to $12.03 per share expiring at various dates through February 2006.
Stock Options
The 1992 Incentive Stock Plan (the "1992 Plan") authorizes the grant of incentive stock options and nonqualified stock options to employees and nonqualified stock options to consultants. A total of 2,600,000 shares have been reserved for issuance under the 1992 Plan. The exercise price of incentive stock options granted under the 1992 Plan may not be less than 100% of the fair market value of the common stock as of the grant date, as determined by the Board of Directors. The exercise price of nonqualified stock options may not be less than 85% of the fair market value of the common stock as of the grant date. Options issued under the 1992 Plan generally have a four-year vesting period, unless otherwise determined by the Board of Directors. The term of stock options granted under the 1992 Plan may not exceed ten years. Subject to the approval of the Board of Directors, the Plan allows option holders the right to immediately exercise outstanding options (both vested and unvested), with the subsequent share issuances being subject to a repurchase option by the Company under certain conditions according to the original vesting schedule and exercise price.
In May 1999, the Company adopted the 1999 Stock Incentive Plan (the "1999 Plan"). A total of 875,000 shares have been reserved for issuance under the 1999 Plan. The 1999 Plan authorizes the grant of incentive and nonqualified stock options to officers, directors, consultants and advisors of the Company. The Board establishes the exercise price at the time an option is granted and specifies such price in the applicable option agreement. Options issued under the 1999 Plan generally have a four-year vesting period, unless otherwise determined by the Board of Directors. The term of stock options granted under the 1999 Plan may not exceed ten years.
In February 2000, the Board of Directors approved an increase in the number of shares reserved for issuance under the 1999 Plan from 875,000 shares to 1,525,000 shares. The increase was approved by the Company's shareholders at the May 2000 annual meeting.
For certain options granted under the 1992 Plan, the Company recognizes as compensation expense the excess of the deemed value for accounting purposes of the common stock issuable upon exercise of such options over the aggregate exercise price of such options. In connection with these grants, $316,743 and $183,713 of deferred compensation amortization was recorded in the year ended December 31, 1999 and 2000, respectively. There was no compensation expense to be amortized in future periods as of December 31, 2000.
In January 1997, the Board of Directors approved a program under which directors, executive officers and certain other key employees were permitted to exercise options to purchase 1,494,775 common shares in exchange for four-year notes with an interest rate of 6% per annum as permitted by the 1992 Plan. The notes are full recourse and principal and accrued interest are payable upon the maturity of the note. In October 2000, the Board of Directors approved an extension to the maturity of the notes in the program for an additional 12 months or forgiveness due to change in control. Under certain conditions, the shares are subject to a repurchase option by the Company according to the original vesting schedule. At December 31, 2000, a total of 54,572 shares issued under the 1992 Plan were subject to the Company's repurchase option and $447,745 of notes receivable were outstanding and included in the stockholders' equity section of the accompanying financial statements.
Focal, Inc. Notes to Financial Statements (Continued) December 31, 2000
6. Stockholders' Equity (Continued)
The 1997 Employee Stock Purchase Plan (the "Purchase Plan") has 200,000 shares of common stock reserved for issuance thereunder. Under the Purchase Plan, eligible employees may purchase common shares at a price per share equal to 85% of the lower of the fair market value of the common stock at the beginning of a two year offering period or the end of each six month purchase period included in such offering period. Participation in the offering period is limited to 15% of the employee's compensation or $25,000 in any calendar year. The first offering period commenced in January 1998 and the Purchase Plan will terminate in 2007.
The 1997 Non-Employee Director Option Plan (the "Director Plan") has 150,000 shares of common stock reserved for issuance thereunder. Effective with the 1998 annual meeting of stockholders and annually thereafter, each nonemployee director is automatically granted a nonstatutory option to purchase 5,000 shares of common stock. The exercise price of each of these options will be equal to the fair market value of the common stock on the date of grant. Each option granted under the Director Plan will vest on a cumulative monthly basis over a four-year period. The Director Plan will terminate in September 2007, unless terminated earlier in accordance with the provisions of the Director Plan.
The following table presents the activity of all of the Company's stock plans for the years ended December 31, 1998, 1999 and 2000:
1998 1999 2000 ------------------ -------------------- ---------------------- Weighted Weighted Weighted Average Average Average Options Exercise Options Exercise Options Exercise Price Price Price ------------------ -------------------- ----------------------
Outstanding at beginning of year 497,267 $4.42 780,362 $7.55 1,723,274 $5.53 Granted 394,778 9.87 1,171,392 4.40 1,017,816 2.83 Exercised (92,578) 1.26 (53,675) 1.66 (39,264) 2.62 Canceled (19,105) 4.66 (174,805) 8.18 (423,938) 5.93 ------------------ -------------------- ---------------------- Outstanding at end of year 780,362 $7.55 1,723,274 $5.53 2,277,888 $4.30 ================== ==================== ====================== Options exercisable at end of year 189,439 $5.07 310,721 $6.27 912,622 $5.07 ================== ==================== ======================
Weighted average fair value per share of options granted during the year $5.84 $2.55 $2.47 =========== =========== ===========
The following table presents weighted average price and life information about significant option groups outstanding at December 31, 2000:
Options Outstanding Options Exercisable --------------------------------- ----------------------- Weighted Average Weighted Weighted Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life (Yrs.) Price Exercisable Price - -------------------- --------------------------------- -----------------------
$ 0.0000 - $ 1.7500 54,560 5.91 $1.19 47,469 $1.17 $ 2.5000 - $ 2.5000 846,500 9.71 $2.50 161,965 $2.50 $ 2.5940 - $ 4.0625 307,154 8.55 $3.81 148,275 $3.87 $ 4.3750 - $ 4.3750 660,000 8.97 $4.38 291,874 $4.38 $ 4.6875 - $18.0000 409,674 7.77 $8.67 263,039 $8.80 ----------- ---------- 2,277,888 912,622 =========== ==========
Focal, Inc. Notes to Financial Statements (Continued) December 31, 2000
6. Stockholders' Equity (Continued)
FAS 123 Disclosures
If the compensation cost for the option plans had been determined based on the fair value at the grant date for grants in 1998, 1999 and 2000, consistent with the provisions of FAS 123, the pro forma net loss and net loss per share for 1998, 1999 and 2000, would be as follows (in thousands except per share amounts):
1998 1999 2000 ---------------------- ---------------------- ---------------------- As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma ---------------------- ---------------------- ----------------------
Net loss $(13,407) $(14,121) $(16,841) $(17,914) $(19,077) $(20,568) Basic and $(1.01) $(1.06) $(1.24) $(1.32) $(1.30) $(1.40) diluted net loss per share
The fair value of options and warrants issued at the date of grant were estimated using the Black-Scholes model with the following weighted average assumptions:
Options Granted ---------------------------------------- 1998 1999 2000 ----------------------------------------
Expected life (years) 5.0 5.0 5.0 Interest rate 4.5 6.4 6.5 Volatility 66% 60% 130%
The Company has never declared nor paid dividends on any of its capital stock and does not expect to do so in the foreseeable future.
The effects on 1998, 1999 and 2000 pro forma net loss and net loss per share of expensing the estimated fair value of stock options are not necessarily representative of the effects on reporting the results of operations for future years as the periods presented include only two, three and four years, respectively, of option grants under the Company's plans.
Common Stock Reserved for Issuance
At December 31, 2000, the Company has reserved 2,321,670 shares of common stock for issuance upon the exercise of all outstanding warrants and options authorized under the Company's various stock plans.
7. Commitments
The Company has a ten-year lease agreement expiring in 2004 for its principal facility. In connection with this lease, the lessor funded approximately $4,367,000 of leasehold improvements which are reimbursed as part of the minimum lease payments. The Company has certain options to purchase the building and the leasehold improvements.
The Company leases the majority of its equipment, furniture and fixtures under capital leases. Included in property and equipment at December 31, 1999 and 2000, respectively, were assets with a cost basis of $7,994,045 and $8,111,464 acquired under capital leases. Accumulated amortization as of December 31, 1999 and 2000,
Focal, Inc. Notes to Financial Statements (Continued) December 31, 2000
7. Commitments (Continued)
respectively, related to these assets was $5,229,830 and $5,400,476. Amortization of assets under capital leases are included with depreciation and amortization in the accompanying financial statements.
As of December 31, 2000, the Company's minimum lease payments under capital and operating leases are as follows:
Capital Building Leases Operating Lease ---------------------------- 2001 $ 762,782 $ 1,147,974 2002 500,780 1,147,974 2003 204,580 1,147,974 2004 8,317 860,980 Thereafter -- -- ---------------------------- Total minimum lease payments 1,476,459 $ 4,304,902 ============== Less interest 137,103 -------------- Present value of minimum lease payments 1,339,356 Less capital lease obligations due within one year 688,828 -------------- Capital lease obligations - long-term portion $ 650,528 ==============
Total rent expense was $1,114,389, $1,126,917 and $1,046,811 in 1998, 1999, and 2000, respectively.
The Company has a lease commitment totaling $1.5 million from a leasing company for the financing of equipment and leasehold improvements. Under this agreement, the term for financing equipment purchases and leasehold improvements is 48 months and 36 months, respectively. The interest rate is established as of the commencement date for each new drawdown, based on a treasury security index, and is fixed for the term of the financing. There is a fixed percentage buy-out provision at the end of the lease period. The lease financings are collateralized by the equipment and leasehold improvements being financed. As of December 31, 2000, there were $1,339,000 in outstanding borrowings under this financing arrangement. There are no financial covenants in connection with this lease financing.
In September 2000, the Company entered into a sublease agreement with TruExchange, Inc. to sublease 8,000 square feet of space for $24,027 per month. In October 2000, the Company entered into a sublease agreement with Lexigen Pharmaceuticals Corp. to sublease 3,360 square feet of space for $9,800 per month.
8. Research and Development, Licensing and Marketing and Distribution Agreements
In October 1999, the Company entered into a Marketing and Distribution Agreement with Genzyme Biosurgery (formerly Genzyme Surgical Products), a division of Genzyme Corporation. Genzyme Biosurgery was granted exclusive marketing and distribution rights to Focal's surgical sealant products for lung surgery, cardiovascular surgery and gastrointestinal surgery in North America. The Company retained manufacturing rights to these products. Under the terms of the agreement, the Company will be reimbursed for its cost of manufacturing product plus 50% of the gross margin generated from Genzyme Biosurgery's sales of the Company's sealant products to customers. The term of the agreement is for ten years, with two five-year renewal options which are automatic if Genzyme Biosurgery meets certain minimum performance standards. In addition to the Marketing and Distribution Agreement, in October 1999 Focal and Genzyme Biosurgery also entered into a Stock Purchase Agreement, with up to $20.0 million in purchases of the Company's common stock committed by Genzyme Biosurgery over a twenty month period, subject to certain specified conditions. The first $5.0 million purchase was made by Genzyme Biosurgery in November 1999, with Genzyme Biosurgery purchasing approximately 810,000 shares at a 25%
Focal, Inc. Notes to Financial Statements (Continued) December 31, 2000
8. Research and Development, Licensing and Marketing and Distribution Agreements (Continued)
premium to the ten day average trading price of the Company's common stock prior to the investment. The second $5.0 million purchase was made by Genzyme Biosurgery in April 2000, with Genzyme Biosurgery purchasing approximately 614,000 shares at the twenty day average trading price of the Company's common stock prior to the investment. The third $5.0 million investment was made by Genzyme Biosurgery in January 2001, with Genzyme Biosurgery purchasing approximately 2.4 million shares at the twenty day average trading price of the Company's common stock prior to the investment. At Focal's option, one additional $5.0 million investment will be made by Genzyme Biosurgery. The final investment of $5.0 million may be called by Focal in the second quarter of 2001, subject to the satisfaction of closing conditions. The final investment will be priced based upon the twenty day trading average of the Company's stock.
In January 1997, the Company entered into a distribution and licensing agreement with the Ethicon, Inc. division of Johnson & Johnson ("Ethicon") for the research, development and commercialization of the Company's surgical sealant products. Ethicon received marketing rights to all territories outside North America in exchange for (a) a one-time, nonrefundable payment to the Company for past research and development expenditures; (b) fixed quarterly funding for two years to be applied toward future research and development costs; (c) funding of certain additional research and development expenses; (d) payments upon achievement of specific milestones; and (e) specified percentages of product sales, if any, representing a combined royalty and product cost payment. The Company retained worldwide manufacturing rights and North American marketing rights. The term of the Ethicon Agreement extends until January 2007, subject to one-year extensions at Ethicon's discretion. In addition, Ethicon may terminate the agreement at any time upon 12 months' prior written notice with or without cause. In August 1998, the Ethicon Agreement was expanded to include research and development funding for a cardiovascular sealant which Ethicon subsequently elected not to fund.
The Company has collaborative research agreements and technology licensing agreements with certain universities. The Company has worldwide exclusive licenses to the technologies developed under these agreements, in exchange for funding certain research and payment of licensing fees and royalties on applicable product sales. Research and development expense and licensing fees incurred under these agreements during the years ended December 31, 1998, 1999, and 2000, totaled $150,000, $134,000 and $355,000, respectively. In connection with these agreements, the Company has no research funding commitments at December 31, 2000.
9. Income Taxes
Due to net losses incurred by the Company in each year since its inception, no provision for income taxes has been recorded. At December 31, 2000, the Company had federal and state tax net operating loss carryforwards of approximately $86.1 and $51.0 million, respectively, and federal and state research and development tax credit carryforwards of approximately $4.4 million which expire at various times through 2020.
Focal, Inc. Notes to Financial Statements (Continued) December 31, 2000
9. Income Taxes (Continued)
Significant components of the Company's deferred tax assets as of December 31 are as follows:
1999 2000 ---------------------------- Deferred tax assets: Net operating losses $27,418,000 $32,341,000 Research and development tax credits 4,067,000 4,390,000 Other 709,000 2,652,000 ---------------------------- 32,194,000 39,383,000 Valuation allowance (32,194,000) (39,383,000) ---------------------------- Net deferred tax assets $ - $ - ============================
For financial reporting purposes, a valuation allowance has been provided since realization of such deferred tax assets is uncertain. The valuation allowance increased by $7,189,000 during 2000, due primarily to the increase in tax credits and net operating loss carryforwards. The future utilization of the net operating loss carryforwards may be subject to limitations under the change in stock ownership provisions of the Internal Revenue Code.
10. Related Party Transactions
In connection with an employment agreement, interest-bearing loans aggregating $120,000 were made to an officer of the Company. Principal and accrued interest on this loan were paid in full during 1998. Other officer and nonofficer employee notes receivable, certain of which notes contain similar repayment terms as those described above, are outstanding and included in notes receivable from related parties in the accompanying financial statements.
11. Quarterly Financial Information (unaudited)
The quarterly information for the first three quarters of 2000 reflect the quarters as previously reported prior to the adoption of SAB 101. In 2000, the "as restated" quarterly amounts represent the quarterly information restated for the retroactive adoption of SAB 101 to January 1, 2000, as noted in the column headings. Focal increased the inventory reserve due to high levels of inventory - - resulting in a charge to cost of product revenues of $737,000 in the fourth quarter of 2000. The 1999 quarterly information is as previously reported.
Focal, Inc. Statement of Operations
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
During the Company's two most recently completed fiscal years there have been no disagreements with its independent accountants on accounting and financial disclosure matters.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Company
Except as set forth in Part I of this annual report under the caption "Executive Officers of the Company," the information required by this item is incorporated by reference to the information under the captions "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the definitive proxy statement to be filed with the Securities and Exchange Commission with respect to the Company's 2001 Annual Meeting of Stockholders (the "Proxy Statement") to be held May 24, 2001.
Item 11.
Item 11. Executive Compensation
The information required by this item is incorporated by reference from the information under the captions "Election of Directors - Compensation of Directors," "- Compensation of Executive Officers," "- Agreements with Executive Officers," "-Report of the Compensation Committee" and "- Compensation Committee Interlocks and Insider Participation" in the Proxy Statement.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference from the information under the caption "Stock Ownership of Certain Beneficial Owners and Management" in the Proxy Statement.
Item 13.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference from the information under the caption "Certain Relationships and Related Transactions" in the Proxy Statement.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are included as part of this Annual Report on Form 10-K
1. Financial Statements:
Page No. Reports of Independent Auditors............................ 35 Balance Sheets, as of December 31, 1999 and 2000........... 36 Statements of Operations for the Years Ended December 31, 1998, 1999 and 2000...................................... 37 Statements of Stockholders' Equity for the Years Ended December 31, 1998, 1999 and 2000......................... 38 Statements of Cash Flows for the Years Ended December 31, 1998, 1999 and 2000...................................... 39 Notes to Financial Statements.............................. 40
2. Financial Statement Schedules:
All financial statement schedules are omitted because they are not applicable or the required information is shown in the Financial Statements or the notes thereto.
3. Exhibits:
The exhibits listed in the Exhibit Index immediately preceding the Exhibits are filed as a part of this Annual Report on Form 10-K.
(b) Reports on Form 8-K:
None.
The following registered trademarks of the Company are mentioned in this Annual Report on Form 10-K: FocalSeal(R), FocalGel(R) and Focal(R).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FOCAL, INC
Date: March 29, 2001 By: /s/ Ronald S. Rudowsky ------------------------- Ronald S. Rudowsky President and Chief Executive Officer
KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Robert J. DePasqua, Ronald Rudowksy and Harry R. Trout III, jointly and severally, his or her attorneys-in-fact, and each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
Signature Title Date --------- ----- ----
/s/ Robert J. DePasqua Chairman of the Board of March 29, 2001 - ----------------------------- Directors (Robert J. DePasqua)
/s/ Ronald S. Rudowsky President, Chief Executive March 29, 2001 - ----------------------------- Officer and Director (Ronald S. Rudowsky)
/s/ Harry R. Trout III Chief Financial Officer March 29, 2001 - ----------------------------- (Principal Financial and (Harry R. Trout III) Accounting Officer)
/s/ Henry Brem, M.D. Director March 29, 2001 - ----------------------------- (Henry Brem, M.D.)
/s/ Robert Langer, Ph.D. Director March 29, 2001 - ----------------------------- (Robert Langer, Ph.D.)
/s/ Donald Grilli Director March 29, 2001 - ----------------------------- (Donald Grilli)
EXHIBIT INDEX
Exhibit Number
3.2(1) Restated Certificate of Incorporation of the Company. 3.3(1) Bylaws of the Company as amended. 4.2(1) Specimen Common Stock Certificate. 10.1(1) Form of Indemnification Agreement between the Company and each of its directors and officers. 10.2(1)* 1992 Incentive Stock Plan, as amended, and form of Stock Option Agreement thereunder. 10.3(1)* 1997 Directors' Option Plan and forms of agreements thereunder. 10.4(1)* 1997 Employee Stock Purchase Plan and forms of agreement thereunder. 10.5(1) Restated Investors Rights Agreement dated April 12, 1996 among the Company and certain stockholders of the Company. 10.6(1) Lease Agreement dated April 4, 1994 between the Company and The Mutual Life Insurance Company of New York relating to lease of facility located at 4 Maguire Road, Lexington, MA, as amended to date. 10.7(1) Master Loan and Security Agreement dated April 18, 1997 between the Company and Transamerica Leasing. 10.8(1)+ Patent and Technology License Agreement dated June 11, 1992 between the Company and University of Texas. 10.9+ Exclusive License Agreement dated as of January 1, 2001 among the Company, Marvin Slepian, M.D. and Endoluminal Therapeutics, Inc. 10.10(1)+ Distribution, License and Supply Agreement dated January 2, 1997 between the Company and Ethicon, Inc. 10.11(1) Agreement for Consulting Services dated November 15, 1991 between the Company and Robert Langer, Ph.D. 10.12+ Agreement for Consulting Services dated as of January 1, 2001 between the Company and Marvin Slepian, M.D. 10.13(1) Form of Restricted Stock Purchase Agreement and schedule of current officers and directors party thereto. 10.14(2) Preferred Shares Rights Agreement dated as of December 17, 1997, as amended by Amendment No. 1 to Rights Agreement, dated March 31, 2001, by and between the Company and Norwest Bank Minnesota N.A, as Rights Agent 10.15(3)+ Marketing and Distribution Agreement between Focal and Genzyme Surgical Products dated October 21, 1999. 10.16(3) Stock Purchase Agreement between Focal and Genzyme Corporation dated October 21, 1999. 10.17(3) Registration Rights Agreement between Focal and Genzyme Corporation dated October 21, 1999. 10.18(4) Separation Agreement, dated July 12, 2000, between the Company and Tom Bromander. 10.19 Separation Agreement, dated July 12, 2000, between the Company and Peter Jarrett. 10.20(4) Separation Agreement, dated October 30, 2000, between the Company and Ronald Rudowsky. 10.21(4) Separation Agreement, dated August 16, 2000, between the Company and Harry Trout III. 10.22* 1999 Incentive Stock Plan, as amended. 23.1 Consent of Ernst & Young LLP, independent auditors.
(1) Incorporated by reference to the Company's Registration Statement on Form S-1, File No. 333-38379, originally filed with the Securities and Exchange Commission on October 21, 1997. (2) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, filed with the Securities and Exchange Commission on August 14, 2000. (3) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999, filed with Securities and Exchange Commission on March 30, 2000. (4) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000, filed with the Securities and Exchange Commission on November 14, 2000. * Management contract or compensatory plan filed as an exhibit pursuant to Items 14(a) and 14(c) of Form 10-K. + Confidential treatment requested as to certain portions.