10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 10-K

 

 

(Mark One)

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

For fiscal year ended March 31, 2014

OR

 

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

For the transition period from                      to                     

Commission File Number: 001-09585

 

 

ABIOMED, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   04-2743260

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

22 Cherry Hill Drive

Danvers, Massachusetts

  01923
(Address of Principal Executive Offices)   (Zip Code)

(978) 646-1400

(Registrant’s Telephone Number, Including Area Code)

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

 

Title of Each Class  

Name of Each Exchange

on Which Registered

Common Stock, $.01 par value   The Nasdaq Stock Market LLC

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

None

 

 

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

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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

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

 

                        Large accelerated  filer  x   Accelerated filer  ¨
                         Non-accelerated filer  ¨   Smaller reporting company  ¨
(Do not check if a smaller reporting company)  

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

The aggregate market value of the registrant’s common stock as of September 30, 2013, held by non-affiliates of the registrant (without admitting that any person whose shares are not included in such calculation is an affiliate) computed by reference to the price at which the common stock was last sold as of such date was $751,970,311. As of May 13, 2014, 39,926,903 shares of the registrant’s common stock, $.01 par value, were outstanding.

 

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement for Abiomed, Inc.’s 2014 Annual Meeting of Stockholders, which is scheduled to be filed within 120 days after the end of Abiomed, Inc.’s fiscal year, are incorporated by reference into Part III (Items 10, 11, 12, 13 and 14) of this Form 10-K.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

             Page      
PART I   
Item 1.  

Business

     1   
Item 1A.  

Risk Factors

     13   
Item 1B.  

Unresolved Staff Comments

     27   
Item 2.  

Properties

     27   
Item 3.  

Legal Proceedings

     27   
Item 4.  

Mine Safety Disclosures

     27   
PART II   
Item 5.  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     28   
Item 6.  

Selected Financial Data

     30   
Item 7.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     31   
Item 7A.  

Quantitative and Qualitative Disclosure About Market Risk

     41   
Item 8.  

Financial Statements and Supplementary Data

     41   
Item 9.  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     41   
Item 9A.  

Controls and Procedures

     42   
Item 9B.  

Other Information

     44   
PART III   
Item 10.  

Directors, Executive Officers and Corporate Governance

     44   
Item 11.  

Executive Compensation

     44   
Item 12.  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     44   
Item 13.  

Certain Relationships and Related Transactions, and Director Independence

     44   
Item 14.  

Principal Accountant Fees and Services

     44   
PART IV   
Item 15.  

Exhibits, Financial Statement Schedules

     45   


Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report, including the documents incorporated by reference in this report, includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We have based these forward-looking statements on our current expectations and projections about future events. Our actual results could differ materially from those discussed in, or implied by, these forward-looking statements. Forward-looking statements are identified by words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “may” and other similar expressions. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. Forward-looking statements in these documents include, but are not necessarily limited to, those relating to:

 

   

our ability to obtain and maintain regulatory approval both in the U.S. and abroad for our existing products as well as for new products in development;

 

   

the ability of patients and other customers using our products to obtain reimbursement of their medical expenses by government healthcare programs and private insurers including potential changes to current government and private insurers’ reimbursements;

 

   

other competing therapies that may in the future be available to heart failure patients;

 

   

our plans to develop and market new products and improve existing products;

 

   

our plans to potentially acquire new businesses or technologies;

 

   

the potential markets that exist or could develop for our products and products under development;

 

   

our business strategy;

 

   

our revenue growth expectations, our level of operating and capital expenses and our goal of achieving and maintaining profitability;

 

   

the outcome of currently pending litigation and governmental investigations; and

 

   

the sufficiency of our liquidity and capital resources.

Factors that could cause actual results or conditions to differ from those anticipated by these and other forward-looking statements include those more fully described in the “Risk Factors” section set forth in Part I, Item 1A and elsewhere in this report. In light of these assumptions, risks and uncertainties, the results and events discussed in the forward-looking statements contained in this report or in any document incorporated by reference might not occur. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this report or the date of the document incorporated by reference. We do not undertake any obligation to update or alter any forward-looking statements whether as a result of new information, future events or otherwise. All subsequent forward-looking statements attributable to us or to any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.


Table of Contents

PART I

 

ITEM 1. BUSINESS

Overview

We are a leading provider of mechanical circulatory support devices and we offer a continuum of care to heart failure patients. We develop, manufacture and market proprietary products that are designed to enable the heart to rest, heal and recover by improving blood flow and/or performing the pumping function of the heart. Our products are used in the cardiac catheterization lab, or cath lab, by interventional cardiologists and in the heart surgery suite by heart surgeons for patients who are in need of hemodynamic support prophylactically or emergently before, during or after angioplasty or heart surgery procedures. We believe heart recovery is the optimal clinical outcome for patients experiencing heart failure because it restores their quality of life. In addition, we believe that for the care of such patients, heart recovery is the most cost-effective solution for the healthcare system.

Our strategic focus and the driver of the majority of our revenue growth is the market penetration of our Impella family of products. Our Impella 2.5 product received 510(k) clearance in June 2008 from the U.S. Food and Drug Administration, or FDA, for partial circulatory support for up to six hours. We received 510(k) clearance in April 2009 for our Impella 5.0 and Impella LD devices for circulatory support for up to six hours. These devices are larger and provide more blood flow to patients than the Impella 2.5. In September 2012, our Impella CP product received 510(k) clearance from the FDA for partial circulatory support for up to six hours. Our Impella 2.5, Impella 5.0, Impella LD and Impella CP products also have CE Mark approval and Health Canada approval which allow us to market these devices in the European Union and Canada. We have placed our Impella products at 859 sites since initial launch.

In November 2012, we announced that the Impella RP received Investigational Device Exemption, or IDE, approval from the FDA for use in RECOVER RIGHT, a pivotal clinical study in the U.S. The RECOVER RIGHT study was designed to enroll up to 30 patients with signs of right side heart failure who require hemodynamic support and are being treated in the cath lab or surgery suite. The Impella RP is a percutaneous catheter-based axial flow pump that is designed to allow greater than four liters of flow per minute and is intended to provide the flow and pressure needed to compensate for right side heart failure. In April 2013, we enrolled the first patient in RECOVER RIGHT and we completed enrollment for the 30 patients in the Impella RP RECOVER RIGHT study in March 2014. In May 2014, we received approval for implementation of a Continuous Access Protocol, or CAP, from the FDA for the RECOVER RIGHT RP trial. The CAP will allow us to enroll up to 22 additional patients at the 15 U.S. investigational sites for a six month period. In April 2014, the Impella RP received CE Marking approval which allows for commercial sales of Impella RP in the EU and other countries that require a CE Marking approval for commercial sale. This product is not currently available for commercial use outside of Europe.

In December 2012, as part of the FDA’s 515 Program Initiative, an FDA panel voted to recommend continuation of Class III status for temporary ventricular support devices within the non-roller type cardiopulmonary bypass blood pumps category, which includes our Impella products. The panel’s recommendation of Class III for this category of device is consistent with the current Class III designation for these device types. The FDA accepted the Panel’s recommendation recently as reflected in its issuance of a Proposed Order reflecting this categorization. The Proposed Order was open for public comment until April 7, 2014. The FDA process will then be to address the public comments and over an unspecified period of time develop and issue a final order classifying these devices in Class III. We will then be required to file a PMA application for our Impella products within 90 days from the issuance of the Final Order. Under the 515 Program Initiative, we will be permitted to continue to market our Impella products pursuant to the 510(k) clearance for a sufficient period of time to allow for the submission and review of PMA applications relating to our Impella products.

We have been working with the FDA to submit a modular PMA submission for Impella 2.5 in response to the Panel’s recommendation of Class III for Impella products. A modular PMA allows for a parallel submission of preclinical and manufacturing data for review while still preparing the clinical module. In July 2013, we received written notification that the FDA has reviewed our proposed PMA shell for modular review of the Impella 2.5 System. The FDA has confirmed that it agrees with our proposed shell and we submitted all modules required by the FDA as part of the planned modular PMA submission in March 2014. The PMA will be treated as a standard PMA and all modules will now be combined for final review by the FDA.

In November 2011, we announced Symphony, a synchronized minimally invasive implantable cardiac assist device designed to treat chronic patients with moderate heart failure by improving patient hemodynamics and potentially improving their quality of life. The device is designed with the primary goal of stabilizing the progression of heart failure and recovering or remodeling the heart. We are currently conducting first-in-human clinical trials of Symphony outside the U.S. This product is not currently approved by the FDA for sale in the U.S.

On October 26, 2012, we were informed that the United States Attorney’s Office for the District of Columbia is conducting an investigation that is focused on our marketing and labeling of the Impella 2.5. On October 31, 2012, we accepted service of a subpoena related to this investigation seeking documents related to the Impella 2.5. We believe we have substantially complied with the subpoena and have submitted the requested documents to the United States Attorney’s Office. On September 13, 2013, we entered into a tolling agreement with the United States Attorney’s Office, pursuant to which we and the United States Attorney’s Office mutually agreed to toll the applicable statutes of limitations for all criminal, civil and administrative offenses and violations that could be charged or claimed against us as of that

 

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date until June 2, 2014. On May 27, 2014, we executed an extension of the tolling agreement through February 2, 2015. Because the investigation is in the early stages, we are unable to predict the ultimate outcome or determine whether a liability has been incurred or make an estimate of the reasonably possible liability, if any, that could result from any unfavorable outcome associated with this inquiry. We have incurred significant expenses related to this investigation, and we expect to continue to incur additional expenses in the future.

On November 16 and 19, 2012, two purported class action complaints were filed against us and certain of our officers in the U.S. District Court for the District of Massachusetts by alleged purchasers of our common stock, on behalf of themselves and persons or entities that purchased or acquired our securities between August 5, 2011 and October 31, 2012. The complaints alleged that the defendants violated the federal securities laws in connection with disclosures related to the FDA and the marketing and labeling of our Impella 2.5 product and seek damages in an unspecified amount. The Court has consolidated these complaints and a consolidated amended complaint was filed by the plaintiffs on May 20, 2013. On July 8, 2013, we filed a motion to dismiss the consolidated class action. Oral arguments on our motion to dismiss were conducted before the presiding district court judge on September 18, 2013. On April 10, 2014, the U.S. District Court entered an order granting our motion and dismissed the consolidated and amended complaint. On May 9, 2014, the plaintiffs filed a notice of appeal.

On February 4, 2013, an alleged stockholder of the Company filed a derivative action on our behalf against each of our directors in the U.S. District Court for the District of Massachusetts. The complaint alleged that the directors breached their fiduciary duties to us and our stockholders in connection with disclosures related to the FDA and the marketing and labeling of our Impella 2.5 product and sought damages in an unspecified amount. On March 22, 2013, we filed a motion to dismiss the derivative action. On June 21, 2013, the District Court granted our motion to dismiss. The plaintiff has appealed the dismissal to the United States Court of Appeals for the First Circuit. Oral argument was conducted before the appellate court on February 5, 2014.

On April 25, 2014, we received a subpoena from the Boston regional office of the United States Department of Health and Human Services, Office of Inspector General requesting materials relevant to our reimbursement of expenses and remuneration to healthcare providers for a six month period from July 2012 through December 2012. The Office of Inspector General has informed us that the subpoena currently relates to a civil investigation. We intend to comply fully and promptly with this request.

Our revenues are primarily generated from our Impella line of products. Revenues from our non-Impella products, largely focused on the heart surgery suite, have been lower over the past several years as we have strategically shifted our sales and marketing efforts towards our Impella products and the cath lab. We expect revenues from our non-Impella products, primarily AB5000, will continue to decrease as we continue to focus on our Impella products.

For the year ended March 31, 2014, we recognized net income of $7.4 million. Even though we were profitable in fiscal 2014, we have incurred losses in the past and may incur additional losses in the future as we continue to invest in research and development related to our products, conduct clinical studies and registries on our products, expand our commercial infrastructure, incur additional legal fees to comply with the ongoing investigations by the Department of Justice and the Office of the Inspector General and defend ourselves from other legal claims, incur additional costs in preparing our PMA application, enter into collaborations with other parties and invest in new markets such as Japan.

Corporate Background

We are incorporated in Delaware and trade on the NASDAQ Global Select Market under the ticker symbol ABMD.

Our principal executive offices are located at 22 Cherry Hill Drive, Danvers, Massachusetts 01923. Our telephone number is (978) 646-1400. We make available, free of charge on our website located at www.abiomed.com, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports, as soon as reasonably practicable after filing such reports with the Securities and Exchange Commission, or SEC. Our corporate governance guidelines, code of conduct, audit committee, governance and nominating committee and compensation committee charters are also posted on our website. The contents of our website are not incorporated by reference into this report.

Our Products

Impella 2.5

The Impella 2.5 catheter is a percutaneous micro heart pump with an integrated motor and sensors. The device is designed primarily for use by interventional cardiologists to support patients in the cath lab who may require assistance to maintain their circulation. The Impella 2.5 device received 510(k) clearance from the FDA in June 2008 for partial circulatory support for up to six hours, has CE mark approval in Europe for up to five days of use and is approved for use in over 40 countries.

 

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The Impella 2.5 catheter can be quickly inserted via the femoral artery to reach the left ventricle of the heart where it is directly deployed to draw blood out of the ventricle and deliver it to the circulatory system. This function is intended to reduce ventricular work and provide flow to vital organs. The Impella 2.5 is introduced with normal interventional cardiology procedures and can pump up to 2.5 liters of blood per minute.

In August 2007, we received approval from the FDA to begin a high-risk percutaneous coronary intervention, or PCI, pivotal clinical trial, known as the Protect II study, for the Impella 2.5. This pivotal study was a superiority study to determine the safety and effectiveness of the Impella 2.5 as compared to medical management with an intra-aortic balloon, or IAB, during “high-risk” angioplasty procedures. In December 2010, we announced the termination of the Protect II study based on a futility determination at the planned interim analysis regarding the primary end-point, which we view as likely to have resulted from how rotational atherectomy was performed by investigators in the study.

In November 2011, we announced additional analysis of the results from the Protect II study, including those patients enrolled following the initiation of the interim analysis, which showed a statistically significant 22% relative reduction in major adverse events compared to an intraortic balloon pump, or IAB, at 90 days per protocol (p=0.023), a 52% relative reduction in repeat revascularization (p=0.024) and a 56% relative reduction in material adverse events post hospital discharge (p=0.002). Furthermore, additional data analysis of the clinical data from the Protect II trial revealed that more aggressive revascularization is beneficial for patients with coronary artery disease and reduced left ventricular function.

A November 2011 update to the American College of Cardiology Foundation (ACCF) /American Heart Association (AHA) Task Force on Practice Guidelines and the Society for Cardiovascular Angiography and Interventions Guidelines for Percutaneous Coronary Intervention, for the first time, included Impella in both the emergent and prophylactic hemodynamic support settings. In addition, a December 2012 update to the AHA’s Recommendations for the Use of Mechanical Circulatory Support: Device Strategies and Patient Selection recommended Impella for use in mechanical circulatory support; a December 2012 update to the ACCF/AHA Guidelines for the Management of ST-Elevation Myocardial Infarction (STEMI) included Impella for use in patients requiring urgent coronary artery bypass grafting with STEMI and in treatment of patients with cardiogenic shock complications after STEMI; and a January 2013 update to the International Society for Heart and Lung Transplantation Guidelines for Mechanical Circulatory Support included Impella for the first time for patients with multi-organ failure.

We are currently conducting USpella, the first U.S. multicenter observational registry collecting clinical data and outcomes for general use patients supported with Impella 2.5, CP, and 5.0 during procedures. In December 2012, as part of the FDA’s 515 Program Initiative, an FDA panel voted to recommend continuation of Class III status for temporary ventricular support devices within the non-roller type cardiopulmonary bypass blood pumps category, which includes our Impella products. The panel’s recommendation of Class III for this category of device is consistent with the current Class III designation for these device types. The FDA accepted the Panel’s recommendation recently as reflected in its issuance of a Proposed Order reflecting this categorization. If the FDA issues a final order classifying these devices in Class III, we will be required to file a PMA application for our Impella products. We will have 90 days to file the PMA from the issuance of the Final Order. Under the 515 Program Initiative, we will be permitted to continue to market our Impella products pursuant to the 510(k) clearance for a sufficient period of time to allow for the submission and review of PMA applications relating to our Impella products.

Pursuant to discussions with the FDA, we have agreed to submit a modular PMA submission for Impella 2.5. A modular PMA allows for a parallel submission of preclinical and manufacturing data for review while still preparing the clinical module. In July 2013, we received written notification that the FDA has reviewed our proposed PMA shell for modular review of Impella 2.5. The FDA has confirmed that it agrees with our proposed shell. In March 2014, we submitted all of the modules required by the FDA as part of the planned modular PMA submission. The PMA will be treated as a standard PMA and all modules will now be combined for final review by the FDA.

Impella CP

In September 2012, we announced that the Impella CP received 510(k) clearance from the FDA. The Impella CP provides blood flow of approximately one liter more per minute than the Impella 2.5 and is indicated for up to six hours of partial circulatory support using an extracorporeal bypass control unit. It is also intended to be used to provide partial circulatory support, for up to six hours, during procedures not requiring cardiopulmonary bypass. The Impella CP received CE Mark approval to be marketed in the European Union in April 2012 and Health Canada approval to be marketed in Canada in June 2012. We began selling Impella CP in the U.S. during the second quarter of fiscal 2013.

Impella 5.0 and Impella LD

The Impella 5.0 and Impella LD are percutaneous micro heart pumps with integrated motors and sensors for use primarily in the heart surgery suite. These devices are designed to support patients who require higher levels of circulatory support as compared to the Impella 2.5.

 

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The Impella 5.0 and Impella LD devices received 510(k) clearance in April 2009, for circulatory support for up to six hours and have CE Mark approval in Europe for up to ten days duration and are approved for use in over 40 countries.

The Impella 5.0 can be quickly implanted via a small incision in the femoral artery in the groin using a guide wire to reach the left ventricle of the heart where it can then be directly deployed to draw blood out of the ventricle, deliver it to the arterial system and perfuse the heart muscle. This function is intended to reduce ventricular work. The Impella LD is similar to the Impella 5.0 but is implanted directly through an aortic graft. The Impella 5.0 and Impella LD can pump up to five liters of blood per minute, providing full circulatory support.

Impella RP

The Impella RP is a percutaneous catheter-based axial flow pump that is designed to allow greater than four liters of flow per minute and is intended to provide the flow and pressure needed to compensate for right heart failure. In November 2012, we announced that the Impella RP received US IDE approval from the FDA for use in RECOVER RIGHT, a pivotal clinical study in the U.S. In March 2014, we completed enrollment of 30 patients at sites that present with signs of right side heart failure, require hemodynamic support, and are being treated in the catheterization lab or cardiac surgery suite. The study collected safety and effectiveness data on the percutaneous use of the Impella RP and will be applied towards the submission of a Humanitarian Device Exemption, or HDE. In May 2014, we received approval for implementation of a Continuous Access Protocol, or CAP, from the FDA for the RECOVER RIGHT RP trial. The CAP will allow us to enroll up to 22 additional patients at the 15 U.S. investigational sites for a six month period.

We expect that the HDE will be approved in late fiscal 2015. An HDE is similar to a PMA application but is intended for patient populations of 4,000 or less per year in the U.S. Approval of an HDE requires demonstration of the safety and probable benefit of the product, which is a lower standard than is applied to a PMA. In order to receive an HDE, there must be no comparable devices approved under PMA that are available to treat the targeted population. An approved HDE authorizes sales of the device to any hospital after Institutional Review Board review and approval by the hospital. In April 2014, the Impella RP received CE Marking approval which allows for commercial sales of Impella RP in the EU and other countries that require a CE Marking approval for sales. This product is not currently available for commercial use outside of Europe.

AB5000

We manufacture and sell the AB5000 Circulatory Support System for the temporary support of acute heart failure patients in profound shock, including patients suffering from cardiogenic shock after a heart attack, post-cardiotomy cardiogenic shock, or myocarditis. We believe the AB5000 is the only commercially available cardiac assist device that is approved by the FDA for all indications where heart recovery is the desired outcome, including patients who have undergone successful cardiac surgery and subsequently develop low cardiac output, or patients who suffer from acute cardiac disorders leading to hemodynamic instability. We are no longer actively manufacturing or selling our BVS 5000 Biventricular Support System. We have transitioned our sales focus in the surgery market from the BVS 5000 to the AB5000, the Impella 5.0, and the Impella LD.

Symphony

In November 2011, we announced Symphony, a synchronized minimally invasive implantable cardiac assist device designed to treat chronic patients with moderate heart failure by improving patient hemodynamics and potentially improving their quality of life. The device is designed with the primary goal of stabilizing the progression of heart failure and recovering or remodeling the heart. To date, we have implanted the device in four patients in first-in-human clinical trials of Symphony outside the U.S. We are evaluating the results of these cases and expect to conduct additional Symphony trials outside of the U.S. in fiscal 2015. Symphony is not currently approved by the FDA for sale in the U.S.

Our Markets

According to the American Heart Association, or AHA, Heart Disease and Stroke Statistics 2014 Update Report, coronary heart disease, or CHD, causes ≈1 of every 6 deaths in the United States. Coronary heart disease is a condition of the coronary arteries that causes reduced blood flow and insufficient oxygen delivery to the affected portion of the heart. Coronary heart disease leads to acute myocardial infarction, or AMI, commonly known as a heart attack, which may lead to heart failure, a condition in which the heart is unable to pump enough blood to the body’s major organs. In 2010, CHD mortality was 379,559. Each year, an estimated 620,000 Americans have a new coronary attack (defined as first hospitalized myocardial infarction or coronary heart disease death) and approximately 295,000 have a recurrent attack. It is estimated that an additional 150,000 “silent” first myocardial infarctions occur each year.

A broad spectrum of therapies exists for the treatment of patients in early stages of CHD. Angioplasty procedures and stents are commonly used in the cath lab to restore and increase blood flow to the heart. These treatments are often successful in slowing the progression of heart disease, extending life, and/or improving the quality of life for some period of time. Patients presenting with acute cardiac injuries potentially have recoverable hearts. Treatment for these patients in pre-shock in the cath lab is primarily focused on hemodynamic

 

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stabilization. Acute heart failure patients in profound shock typically require treatment in the surgery suite. These are patients suffering from cardiogenic shock after a heart attack, post-cardiotomy cardiogenic shock or myocarditis complicated with cardiogenic shock. Chronic heart failure patients have hearts that are unlikely to be recoverable due to left and/or right side heart failure and their conditions cause their hearts to fail over time. Limited therapies exist today for patients with severe, end-stage, or chronic heart failure.

In more severe cases of heart failure, patients are sent directly to the surgery suite for coronary bypass or valve replacement surgery. The most severe acute heart failure patients are in profound cardiogenic shock, including those suffering from myocarditis (a viral attack of the heart), or from those suffering from an impaired ability of the heart to pump blood after a heart attack or heart surgery. According to results of the SHOCK (Should We Emergently Revascularize Occluded Coronaries for Cardiogenic Shock) trial published in the August 26, 1999 edition of The New England Journal of Medicine, approximately 7 to 10% of the patients who are hospitalized for a heart attack suffer from cardiogenic shock and 60 to 80% of those patients die. These patients typically require treatments involving the use of mechanical circulatory support devices that provide increased blood flow and reduce the stress on the heart. Many less severe patients in the cath lab could also benefit from circulatory support devices or other clinical treatment, which could potentially prevent them from entering into profound shock.

There are a few primary types of devices used in the cath lab and surgery suite in the U.S. for circulatory support for pre-shock and profound shock patients: intra-aortic balloons, or IABs, percutaneous assist devices such as Impella, and surgical ventricular assist devices, or VADs.

An IAB is an inflatable balloon inserted via a catheter into a patient’s circulation and is inflated and deflated in the aorta. This is used as an initial line of therapy in the cath lab or the surgery suite for patients with diminished heart function. There are an estimated 170,000 annual IAB procedures globally, with an estimated 75,000 IAB procedures annually in the U.S. However, IABs typically provide only limited enhancement and depend on the patient’s own heart to generate the majority of the patient’s blood flow. In addition, IABs are often required to be used in conjunction with inotropes or other drugs to stimulate heart muscle ejection. The use of these drugs, however, increases the risk of mortality. Clinical publications have demonstrated that the need for two or more inotropes to improve blood flow results in mortality rates of approximately 80%. In addition, IABs have limited effectiveness in patients that are arrhythmic and /or in cardiogenic shock and published reports have indicated that IABs do not reduce mortality for patients in cardiogenic shock.

Percutaneous assist devices and VADs are mechanical devices that help the failing heart pump blood or take over the pumping function of the failing heart. Historically, VADs have been highly invasive and require implantation in the surgery suite. Percutaneous assist devices allow for less invasive placement and removal, and can be done through a small puncture in the leg in the catheterization lab, electrophysiology lab, or operating room. The use of surgically placed VADs generally falls into three sub-categories: recovery, bridge-to-transplant and destination therapy.

Recovery VADs are designed to enable the patient’s heart to rest and potentially recover so that the patient can return home with his or her own heart. Because recovery is the goal, these devices are designed to minimize damage to heart tissue and are removed once the patient’s heart has recovered. If possible, recovery of a patient’s heart is generally preferred to transplantation or prolonged device implantation, both of which have significant side effects for the patient and increase the risk of mortality. We believe heart recovery is a preferred clinical outcome for patients, since it also generally lowers the overall relative cost to the healthcare system versus alternative therapies and treatment paths that may require multiple surgeries, lengthy or repeated hospital stays, chronic therapeutic and immunosuppressant drugs and other related healthcare costs.

Bridge-to-transplant VADs are primarily used to support chronic heart failure patients eligible to receive a heart transplant. Destination therapy generally involves the implantation of a mechanical support device as the last clinical alternative for a chronic patient with end-stage heart failure who is not eligible for transplantation. Our product portfolio is designed to provide a continuum of care in heart recovery to acute heart failure patients from the intensive care unit to the cath lab to the surgery suite to home discharge and to provide an array of choices for clinicians treating acute heart failure patients. Our products provide various levels of blood flow and are capable of supporting a patient for lengths of time ranging from several hours to months to align with the clinical needs of the patient, whether in pre-shock or profound shock. Our primary cath lab products include the Impella ® pumps for partial or full circulatory support. Our primary cath lab products are Impella 2.5 and Impella CP. Our primary surgery suite products include our Impella 5.0, Impella LD and our AB5000 VAD. Our surgery suite products are designed to support acute heart failure patients in need of more blood flow. Our VADs are indicated for longer duration of support of up to 30 days for AMI, cardiogenic shock post-AMI, and myocarditis patients.

Research and Product Development

Since our founding in 1981, we have gained substantial expertise in circulatory support while developing our Impella platform, our BVS and AB5000 systems, and our AbioCor program. Our current strategy is to develop a complete portfolio of products for partial and full circulatory support to treat acute heart failure patients. We intend to continue to use this experience to develop additional circulatory support products. Our research and development efforts are focused on developing a broader portfolio of products across the continuum of care in heart recovery, primarily focused in the area of circulatory care. In addition, we have a number of new products at various stages of development some of which integrate the Impella technology platform.

 

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As of March 31, 2014, our research and development staff consisted of 105 employees. We expended $30.7 million, $25.6 million and $27.2 million on research and development in fiscal years 2014, 2013 and 2012, respectively. Our research and development expenditures include costs related to clinical trials, including ongoing clinical studies for our Impella products.

Sales, Clinical Support, Marketing and Field Service

As of March 31, 2014, our worldwide sales, clinical support, marketing and field service teams included 211 full-time employees, 191 of whom are in the U.S. and Canada and 20 of whom are in Europe and Japan. Over the past five years, we have significantly increased the number of our direct sales and clinical support personnel covering the U.S., Canada, Germany, France, and the U.K.

Our clinical support personnel consist primarily of registered nurses and other personnel with considerable experience in either the surgery suite or the cath lab, and they play a critical role in training current and prospective customers in the use of our products.

International sales (sales outside the U.S., primarily in Europe) accounted for 9%, 7% and 8% of total product revenue during the fiscal years ended March 31, 2014, 2013 and 2012, respectively.

Manufacturing

We manufacture our products in Danvers, Massachusetts and Aachen, Germany. Our Danvers facility manufactures certain Impella subsystems and accessories, including our Automated Impella Console, or AIC, our console for our Impella products, the AB5000, and Portable Driver. Our Aachen facility manufactures most of our Impella disposable products. In addition, we rely on third-party suppliers to provide us with components used in our existing products and products under development. For example, we outsource some of the manufacturing for components and circuit cards within our consoles.

We believe our existing manufacturing facilities give us the necessary physical capacity to produce sufficient quantities of products to meet anticipated demand for at least the next twelve months based on our current revenue forecast. We expect to continue to increase Impella manufacturing capacity in our Aachen and Danvers facilities in fiscal 2015 to support the growing demand for our Impella products. Our U.S. and German manufacturing facilities are certified by the International Organization for Standardization, or ISO, and operate under the FDA’s good manufacturing practice requirements set forth in the current quality system regulation, or QSR.

Intellectual Property

We have developed significant know-how and proprietary technology, upon which our business depends. To protect our know-how and proprietary technology, we rely on trade secret laws, patents, copyrights, trademarks, and confidentiality agreements and contracts. However, these methods afford only limited protection. Others may independently develop substantially equivalent proprietary information or technology, gain access to our trade secrets or disclose or use such secrets or technology without our approval.

A substantial portion of our intellectual property rights relating to the Impella products, AB5000, and other products under development is in the form of trade secrets, rather than patents. We protect our trade secrets and proprietary knowledge in part through confidentiality agreements with employees, consultants and other parties. We cannot assure you that our trade secrets will not become known to or be independently developed by our competitors.

We own or have rights to numerous U.S. and foreign patents. Our U.S. patents have expiration dates ranging from 2015 to 2031 and our foreign patents have expiration dates ranging from 2016 to 2028. We also own or have rights to certain pending U.S. and foreign patent applications. We believe patents will issue pursuant to such applications, but cannot guarantee it. Moreover, neither the timing of any issuance, the scope of protection, nor the actual issue date of these pending applications can be forecasted with precision. Where we have licensed patent rights from third parties, we are generally required to pay royalties.

Our patents may not provide us with competitive advantages. Our pending or future patent applications may not be issued. The patents of others may render our patents obsolete, limit our ability to patent future innovations, or otherwise have an adverse effect on our ability to conduct business. Because foreign patents may afford less protection than U.S. patents, they may not adequately protect our technology.

The medical device industry is characterized by a large number of patents and by frequent and substantial intellectual property litigation. Our products and technologies could infringe on the proprietary rights of third parties. If third parties successfully assert infringement or other claims against us, we may not be able to sell our products or we may have to pay significant damages and ongoing royalties. In addition, patent or intellectual property disputes or litigation may be costly, result in product development delays, or divert the efforts and attention of our management and technical personnel. If any such disputes or litigation arise, we may seek to enter into a royalty or licensing arrangement. However, such an arrangement may not be available on commercially acceptable terms, if at all. We may decide, in the alternative, to litigate the claims or seek to design around the patented or otherwise protected proprietary technology.

 

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The U.S. government may obtain certain rights to use or disclose technical data developed under government contracts that supported the development of some of our products. We retain the right to obtain patents on any inventions developed under those contracts, provided we follow prescribed procedures and are subject to a non-exclusive, non-transferable, royalty-free license to the U.S. government.

Competition

Competition among providers of treatments for the failing heart is intense and subject to rapid technological change and evolving industry requirements and standards. We compete with companies that have substantially greater or broader financial, product development, sales and marketing resources and experience than we do. These competitors may develop superior products or products of similar quality at the same or lower prices. Moreover, improvements in current or new technologies may make them technically equivalent or superior to our products in addition to providing cost or other advantages. Other advances in medical technology, biotechnology and pharmaceuticals may reduce the size of the potential markets for our products or render those products obsolete. Among our medical device competitors are Getinge (Maquet Cardiovascular), Teleflex Inc., Thoratec Corporation, HeartWare International Inc., Jarvik Heart, Terumo Heart, Inc. and CardiacAssist Inc.

Our customers are hospitals that have limited budgets. As a result, our products compete against a broad range of medical devices and other therapies for these limited funds. Our continued success will depend in large part upon our ability to enhance our existing products, to develop new products to meet regulatory and customer requirements, and to achieve market acceptance. We believe that important competitive factors with respect to the development and commercialization of our products include the relative speed with which we can develop products, establish clinical utility, complete clinical trials and regulatory approval processes, obtain and protect reimbursement, maintain cost effectiveness for our products, and supply commercial quantities of our product to meet customer demand.

Third-Party Reimbursement

Our products and services are generally purchased by healthcare institutions that rely on third-party payers to cover and reimburse the costs of related patient care. In the U.S., as well as in many foreign countries, government-funded or private insurance programs pay the cost of a significant portion of a patient’s medical expenses. No uniform policy of coverage or reimbursement for medical technology exists among all these payers. Therefore, coverage and reimbursement can differ significantly from payer to payer and by jurisdiction.

Third-party payers may include government healthcare programs such as Medicare or Medicaid, private insurers or managed care organizations. The Centers for Medicare & Medicaid Services, or CMS, is responsible for administering the Medicare program in the U.S. and, along with its contractors, establishes coverage and reimbursement policies for the Medicare program. Medicare’s coverage and reimbursement policies are particularly significant to our business because a large percentage of the population for which our products are intended includes elderly individuals who are Medicare beneficiaries. In addition, private payers often follow the coverage and reimbursement policies of Medicare. We cannot assure that government or private third-party payers will continue to cover and reimburse the procedures using our products in whole or in part in the future or that payment rates will be adequate.

Medicare payment may be made, in appropriate cases, for procedures performed in the in-patient hospital setting using our technology. Medicare generally reimburses healthcare institutions in which the procedures are performed based upon prospectively determined amounts. For hospital in-patient stays, the prospective payment generally is determined by the patient’s condition and other patient data and procedures performed during the in-patient stay, using a classification system known as International Classification of Diseases, or ICD-9, and diagnosis-related groups, or DRGs. Prospective rates are adjusted for, among other things, regional differences, co-morbidity and complications. Hospitals performing in-patient procedures using our devices generally do not receive separate Medicare reimbursement for the specific costs of purchasing or implanting our products. Rather, reimbursement for these costs is bundled with the DRG-based payments made to hospitals for the procedures during which our devices are implanted, removed, repaired or replaced. Because prospective payments are based on predetermined rates and may be less than a hospital’s actual costs in furnishing care, hospitals have incentives to lower their in-patient operating costs by utilizing products, devices and supplies that will reduce the length of in-patient stays, decrease labor or otherwise lower their costs.

Medicare has announced plans to transition to a new system of International Classification of Diseases, or ICD-10, in October 2015. CMS has stated that the transition from ICD-9 to ICD-10 codes is intended to provide more descriptive information about procedures used to deliver care to patients, and is not a mechanism for remapping DRGs or changing payment. Recently CMS updated their description for Impella to use 5A02(1,2)1D: “Assistance with Cardiac Output Using Impeller Pump,” which continues to map to DRG 216-221. We believe this is an accurate description/DRG assignment and do not expect changes. However future updates before and after implementation are possible.

Coverage and reimbursements for procedures to implant, remove, replace or repair our products are generally established in the U.S. market. For instance, Medicare covers the use of LVADs when used for support of blood circulation post-cardiotomy, as a temporary life-support system until a human heart becomes available for transplant, or as therapy for patients who require permanent mechanical cardiac support. Coverage and reimbursements for procedures to implant the Impella 2.5, CP, 5.0, or LD are also established for in-hospital use by

 

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Medicare including ICD-9 for procedures and DRG coding. Actual coverage and payment may vary by local Medicare fiscal intermediary or third-party insurer. We also announced in 2013 recent coverage decisions by third party insurers including Aetna, Humana, Cigna, HCSC Blue Cross Blue Shield, and United Healthcare, to include Impella policies in their commercial and/or Medicare plans.

In addition to payments to hospitals for procedures using our technology, Medicare makes separate payments to physicians for their professional services when they perform surgeries to implant, remove, replace or repair our devices or when they perform percutaneous insertion and removal of Impella. Physicians generally bill for such services using a coding system known as Current Procedural Terminology, or CPT, codes. Physician services performed in connection with the implantation, removal, replacement or repair of our approved products are billed using a variety of CPT codes. Generally, Medicare payment levels for physician services are based on the Medicare Physician Fee Schedule and are revised annually by CMS.

In general, third-party reimbursement programs in the U.S. and abroad, whether government-funded or commercially insured, are developing a variety of increasingly sophisticated methods of controlling healthcare costs, including prospective reimbursement and capitation programs, group purchasing, reducing benefit coverage, requiring second opinions prior to major surgery, negotiating reductions to charges on patient bills, promoting healthier lifestyle initiatives and exploring more cost-effective methods of delivering healthcare. These types of cost-containment programs, as well as legislative or regulatory changes to reimbursement policies, could limit the amount which healthcare providers may be willing to pay for our medical devices.

Government Regulation

The healthcare industry, and thus our business, is subject to extensive federal, state, local and foreign regulation. Some of the pertinent laws have not been definitively interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. In addition, these laws and their interpretations are subject to change.

Premarket Regulation

In the U.S., the FDA strictly regulates medical devices under the authority of the Federal Food, Drug and Cosmetic Act, or FFDCA, and its regulations. The FDA classifies U.S. medical devices into one of three classes (Class I, II or III) based on the statutory framework described in the FFDCA. Class III devices, which are typically life-sustaining, life-supporting or implantable devices, or new devices that have been found not to be substantially equivalent to legally marketed devices. Class III devices must generally receive a PMA by the FDA to ensure their safety and effectiveness.

When clinical trials of a device are required in order to obtain FDA approval, the sponsor of the trial is required to file an investigational device exemption, or IDE, application before commencing clinical trials. The FDA reviews and must approve an IDE before a study may begin in the U.S. In addition, the study must be approved by an Institutional Review Board, or IRB, for each clinical site.

The FDA, the IRB at each institution at which a clinical trial is being performed or we, may suspend a clinical trial at any time for various reasons, including a belief that the subjects are being exposed to an unacceptable health risk. All clinical studies of investigational devices must be conducted in compliance with FDA requirements. Following the completion of a study, the data from the study must be collected, analyzed and presented in an appropriate submission to the FDA, either through an IDE, 510(k) premarket notification or a PMA.

During the 510(k) process, the FDA reviews a premarket notification and determines whether or not a proposed device is “substantially equivalent” to “predicate devices.” If the intended use and technological characteristics are comparable to a predicate device, the device may be cleared for marketing. If the device has the same intended use as a predicate device and different technological characteristics, but data is submitted to the FDA showing that the device is at least as safe and effective as the legally marketed device, it may also be cleared for marketing. The FDA’s 510(k) clearance pathway usually takes three to 12 months, but it can often last longer and clearance is never assured. In reviewing a premarket notification, the FDA may request additional information, including clinical data. After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, requires a new 510(k) clearance or could require PMA approval. The FDA requires each manufacturer to make this determination in the first instance, but the agency can review any such decision. If the FDA disagrees with a manufacturer’s decision not to seek a new 510(k) clearance, the agency may retroactively require the manufacturer to seek 510(k) clearance or PMA approval. The FDA can also require the manufacturer to cease marketing and/or recall the modified device until 510(k) clearance or PMA approval is obtained. Additionally, the manufacturer may be subject to significant regulatory fines or penalties.

Certain Class III devices that were on the market before May 28, 1976, known as pre-amendment Class III devices, and devices that are determined to be substantially equivalent to them, can be brought to market through the 510(k) process until the FDA, by regulation, calls for PMA applications for these devices. In addition, the Safe Medical Devices Act of 1990, as amended by the Food and Drug Administration Safety and Innovation Act (FDAISIA) of 2012, requires the FDA either down-classify pre-amendment Class III devices to Class I or Class II or to publish an administrative order retaining the devices in Class III. Manufacturers of pre-amendment Class III devices that the FDA retains

 

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in Class III must submit a PMA application within 90 days after the FDA publishes a final order requiring premarket approval for the device, or 30 months after final classification of the device, whichever is later. Failure to meet the deadline can lead the FDA to prevent continued marketing of the device during the PMA application review period. The Impella 2.5, Impella CP, Impella 5.0 and Impella LD received clearance based on a pre-amendment Class III device. If the FDA publishes a final order that calls for a PMA, a PMA must be submitted for the device even if the device has already received 510(k) clearance; however, if the FDA down-classifies a pre-amendment Class III device to Class I or Class II, a PMA application will not be required. In December 2012, as part of the FDA’s 515 Program Initiative, an FDA panel voted to recommend continuation of Class III status for temporary ventricular support devices within the non-roller type cardiopulmonary bypass blood pumps category, which includes our Impella 2.5, Impella CP, Impella 5.0 and Impella LD products.

The PMA approval pathway requires reasonable assurance of the safety and effectiveness of the device to the FDA’s satisfaction. The PMA approval pathway is much more costly, lengthy and uncertain than the 510(k) path. In the PMA process, the FDA examines detailed data to assess the safety and effectiveness of the device. This information includes design, development, manufacture, labeling, advertising, preclinical testing and clinical study data. Prior to approving a PMA, the FDA may conduct an inspection of the manufacturing facilities and the clinical sites where the supporting study was conducted. The facility inspection evaluates the company’s compliance with the Quality System Regulation, or QSR. An inspection of clinical sites evaluates compliance with the IDE requirements. Typically, the FDA will convene an advisory panel meeting to seek review of the data presented in the PMA. The panel’s recommendation is given substantial weight, but is not binding on the agency. By regulation, the FDA has 180 days to review a PMA application not requiring an advisory panel meeting, and 320 days to review a PMA application that does require an advisory panel meeting. While the FDA has approved PMA applications within the allotted time period, reviews can occur over a significantly protracted period, usually 18 to 36 months, but sometimes longer, and a number of devices have never been approved for marketing.

If the FDA’s evaluation is favorable, the PMA is approved and the device may be marketed in the U.S. The FDA may approve the PMA with post-approval conditions intended to ensure the safety and effectiveness of the device including, among other things, restrictions on labeling and promotion, and post-market collection of clinical data. Failure to comply with the conditions of approval can result in material adverse enforcement action, including the loss or withdrawal of the approval. Even after approval of a PMA, a new PMA or PMA supplement is required in the event of a modification to the device, its labeling or its manufacturing process. Even if a device receives 510(k) clearance or PMA approval, the FDA may include significant limitations on the indicated uses for which a device may be marketed. FDA enforcement policy prohibits the promotion of approved medical devices for unapproved uses. In addition, product approvals can be withdrawn for failure to comply with regulatory requirements or the occurrence of unforeseen problems following initial marketing.

In 2009, the FDA implemented the 515 Program Initiative to facilitate the potential reclassification of twenty-six medical devices which are currently classified as Class III devices. Class I and II devices are generally considered to be lower risk than Class III devices and require clearance through the FDA’s 510(k) premarket notification process. Class III devices, however, are typically higher risk and first-of-a-kind and require approval through a PMA which is a much more costly and uncertain process to approval than the 510(k) premarket notification process. Under the 515 Program Initiative, the FDA is reviewing Class III device types to determine whether any of them should be reclassified as Class I or II devices or if they should remain classified as Class III devices and be subject to approval through the PMA process.

In December 2012, as part of the 515 Program Initiative, an FDA panel voted to recommend continuation of Class III status for the temporary ventricular support devices within the non-roller type cardiopulmonary bypass blood pumps category, which includes our Impella products. The panel’s recommendation of Class III for this category of device is consistent with the current Class III designation for these device types. If the FDA accepts the panel’s determination and issues a final order classifying these devices in Class III, we will have 90 days from the date of the issuance of that order to file a PMA application for Impella 2.5 in order for the product to remain on the market. Under the 515 Program Initiative, we will be permitted to continue to market our Impella products pursuant to the 510(k) clearance for a sufficient period of time to allow for the submission and review of PMA applications relating to our Impella products. As of March 31, 2014, we submitted the final module of the modular PMA application to the FDA for our Impella 2.5 device. The PMA will be treated as a standard PMA and all modules will now be combined for final review by the FDA.

In addition, certain devices can be distributed under an HDE, rather than a PMA. In order for a device to be eligible for an HDE, a qualifying target patient population of less than 4,000 patients per year for which there is no other comparable device available to treat the condition must be approved by the FDA. The FDA’s approval of an HDE to treat that qualifying patient population then requires demonstration that the device is safe for its intended application, that it is potentially effective, and that the probable benefits outweigh the associated risks. Within the regulations for an HDE, if a device becomes available through the PMA process that addresses the same patient population as the HDE device, the HDE device may need to be withdrawn from the U.S. market. We are applying for regulatory approval of the Impella RP in the U.S. through the HDE process.

Our AB5000 system is approved by the FDA for use in patients who have undergone successful cardiac surgery and subsequently develop low cardiac output, or patients who suffer from acute cardiac disorders leading to hemodynamic instability. The intent of therapy is to provide circulatory support, restore normal hemodynamics, reduce ventricular work, and allow the heart time to recover adequate mechanical function. In April 2003, the AB5000 Circulatory Support System Console and in September 2003, the AB5000 VAD were approved under PMA supplements. We received FDA clearance for our IAB in December 2006. Our iPulse console was approved by the FDA under a PMA supplement in December 2007. Our Impella 2.5 device received 510(k) clearance in June 2008 for partial circulatory support for up to six hours. We received FDA 510(k) clearance of our Impella 5.0 and Impella LD devices in April 2009 for circulatory support for up to six hours.

 

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Our AB Portable Driver received FDA approval under a PMA supplement in March 2009. All of these products have CE marks allowing distribution within the European Union. In September 2012, we announced that the Impella CP received 510(k) clearance from the FDA for up to six hours of partial circulatory support using an extracorporeal bypass control unit. The Impella CP (previously marketed outside of the U.S. as Impella cVAD) received CE Mark approval to market the device in the European Union in April 2012 and Health Canada approval to market the device in Canada in June 2012.

Postmarket Regulation

The medical devices that we manufacture and distribute pursuant to FDA clearances or approvals are subject to continuing regulation by the FDA and other regulatory authorities. The FDA reviews design, manufacturing, and distribution practices, labeling and record keeping, and manufacturers’ required reports of adverse experience and other information to identify potential problems with marketed medical devices. Among other FDA requirements, we must comply with the FDA’s good manufacturing practice regulations. These regulations govern the methods used in, and the facilities and controls used for, the design, manufacture, packaging and servicing of all finished medical devices intended for human use. We must also comply with Medical Devices Reporting, or MDR, which requires us to report to the FDA any incident in any of our products that may have caused or contributed to a death or serious injury, or required an unnecessary intervention for a patient, or in which any of our products malfunctioned and, if such malfunction were to recur, would be likely to cause or contribute to a death or serious injury. Labeling, advertising, and promotional activities are subject to scrutiny by the FDA and, in certain circumstances, by the Federal Trade Commission. Current FDA enforcement policy prohibits the marketing of approved medical devices for unapproved uses. We are subject to routine inspection by the FDA and other regulatory authorities for compliance with Quality System Regulation, or QSR, and MDR requirements, as well as other applicable regulations. If the FDA were to conclude that we are not in compliance with applicable laws or regulations, or that any of our medical devices are ineffective or pose an unreasonable health risk, the FDA could ban such medical devices, detain or seize adulterated or misbranded medical devices, order a recall, repair, replacement, or refund of such devices, and require us to notify health professionals and others that the devices present unreasonable risks of substantial harm to the public health. The FDA may also impose operating restrictions, enjoin and restrain certain violations of applicable law pertaining to medical devices, and assess civil or criminal fines and penalties against our officers, employees, or us. The FDA may also recommend prosecution to the U.S. Department of Justice.

The FDA and other regulatory agencies actively enforce regulations prohibiting promotion of off-label uses and the promotion of products for which marketing clearance has not been obtained. If the FDA or another regulatory agency determines that our promotional materials or training constitutes promotion of an unapproved use, it could request that we modify our training or promotional materials or subject us to regulatory enforcement actions, including the issuance of a warning letter, injunction, seizure, civil fine and criminal penalties. Although our policy is to refrain from statements that could be considered off-label promotion of our products, the FDA or another regulatory agency could disagree and conclude that we have engaged in off-label promotion.

In June 2011, we received a warning letter from the FDA stating that some of our promotional materials marketed the Impella 2.5 for uses that had not been approved by the FDA. We cooperated with the FDA and made changes to our promotional materials in response to the warning letter. However, in April 2012, we received a follow up letter from the FDA stating that some of our promotional materials continued to market the Impella 2.5 in ways that are not compliant with FDA regulations. After additional action by us, we received a close-out letter in February 2013 from the FDA with respect to this matter, which noted that the FDA’s Office of Compliance had completed its review of the corrective actions we took in response to the warning letter and that the concerns cited appeared to have been addressed.

On October 26, 2012, we were informed that the United States Attorney’s Office for the District of Columbia is conducting an investigation that is focused on our marketing and labeling of the Impella 2.5. On October 31, 2012, we accepted service of a subpoena related to this investigation seeking documents related to the Impella 2.5. We believe we have substantially complied with the subpoena and have submitted the requested documents to the United States Attorney’s Office. On September 13, 2013, we entered into a tolling agreement with the United States Attorney’s Office, pursuant to which we and the United States Attorney’s Office mutually agreed to toll the applicable statutes of limitations for all criminal, civil and administrative offenses and violations that could be charged or claimed against us as of that date until June 2, 2014. On May 27, 2014, we executed an extension of the tolling agreement through February 2, 2015. Because the investigation is in the early stages, we are unable to predict the ultimate outcome or determine whether a liability has been incurred or make an estimate of the reasonably possible liability, if any, that could result from any unfavorable outcome associated with this inquiry. We have incurred significant expenses related to this investigation and we expect to continue to incur additional expenses in the future.

On April 25, 2014, we received a subpoena from the Boston regional office of the United States Department of Health and Human Services, Office of Inspector General requesting materials relevant to our reimbursement of expenses and remuneration to healthcare providers for a six month period from July 2012 through December 2012. The Office of Inspector General has informed us that the subpoena currently relates to a civil investigation. We intend to comply fully and promptly with this request.

The FDA often requires post market surveillance, or PMS, for significant risk devices, such as VADs, that require ongoing collection of clinical data during commercialization that must be gathered, analyzed and submitted to the FDA periodically for up to several years. The PMS data collection requirements are often burdensome and expensive and have an effect on the PMA approval status. The failure to comply with the FDA’s regulations can result in enforcement action, including seizure of products, injunction, prosecution, civil fines and penalties, recall and/or suspension of FDA approval. The export of devices such as ours is also subject to regulation in certain instances.

 

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The FDA, in cooperation with U.S. Customs and Border Protection, or CBP, administers controls over the import and export of medical devices into and out of the U.S. The CBP imposes its own regulatory requirements on the import of medical devices, including inspection and possible sanctions for noncompliance. The FDA also administers certain controls over the export of medical devices from the U.S. International sales of our medical devices that have not received FDA approval are therefore subject to FDA export requirements.

Fraud and Abuse Laws

Our business is regulated by laws pertaining to healthcare fraud and abuse including anti-kickback laws and false claims laws. Violations of these laws are punishable by significant criminal and civil sanctions, including, in some instances, exclusion from participation in federal and state healthcare programs, such as Medicare and Medicaid. Because of the far-reaching nature of these laws, we may be required to alter one or more of our practices to be in compliance with these laws. Evolving interpretations of current laws, or the adoption of new laws or regulations, could adversely affect our arrangements with customers and physicians. In addition, any violation of these laws or regulations could have a material adverse effect on our financial condition and results of operations.

Anti-Kickback Statute

Subject to a number of statutory exceptions, the federal Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, in exchange for or to induce either the referral of an individual for, or the furnishing, recommending, or arranging for, a good or service for which payment may be made under a federal health care program such as Medicare and Medicaid. The term “remuneration” has been broadly interpreted to include anything of value, including gifts, discounts, the furnishing of supplies or equipment, credit arrangements, waiver of payments, and providing anything of value at less than fair market value. The Office of the Inspector General of the U.S. Department of Health and Human Services, or the OIG, and the Department of Justice are responsible for enforcing the federal Anti-Kickback Statute and the OIG is primarily responsible for identifying fraud and abuse activities affecting government healthcare programs.

Penalties for violating the federal Anti-Kickback Statute include substantial criminal fines and/or imprisonment, substantial civil fines and possible exclusion from participation in federal health care programs such as Medicare and Medicaid. Many states have adopted prohibitions similar to the federal Anti-Kickback Statute, some of which apply to the referral of patients for healthcare services reimbursed by any source, not only by the Medicare and Medicaid programs and do not include comparable exceptions to those provided by the federal Anti-Kickback Statute.

The OIG has issued safe harbor regulations that identify activities and business relationships that are deemed safe from prosecution under the federal Anti-Kickback Statute. There are safe harbors for various types of arrangements, including certain investment interests, leases, personal service arrangements, and management contracts. The failure of a particular activity to comply with all requirements of an applicable safe harbor regulation does not mean that the activity violates the federal Anti-Kickback Statute or that prosecution will be pursued. However, activities and business arrangements that do not fully satisfy each applicable safe harbor may result in increased scrutiny by government enforcement authorities such as the OIG.

In recent years, the federal government and several states have enacted legislation requiring biotechnology, pharmaceutical and medical device companies to establish marketing compliance programs and file periodic reports on sales, marketing, and other activities. Similar legislation is being considered in other states. Many of these requirements are new and uncertain, and available guidance is limited. We could face enforcement action, fines and other penalties and could receive adverse publicity, all of which could harm our business, if it is alleged that we have failed to fully comply with such laws and regulations. Similarly, if the physicians or other providers or entities that we do business with are found to have not complied with applicable laws, they may be subject to sanctions, which could also have a negative impact on our business.

On April 25, 2014, we received a subpoena from the Boston regional office of the United States Department of Health and Human Services, Office of Inspector General requesting materials relevant to our reimbursement of expenses and remuneration to healthcare providers during the period of July 2012 through December 2012. The Office of Inspector General has informed us that the subpoena currently relates to a civil investigation. We intend to comply fully and promptly with this request.

Federal False Claims Act

The federal False Claims Act prohibits knowingly filing or causing the filing of a false claim or the knowing use of false statements to obtain payment from the federal government. When an entity is determined to have violated the False Claims Act, it must pay three times the actual damages sustained by the government, plus mandatory civil penalties for each separate false claim. Private individuals can file suits under the False Claims Act on behalf of the government. These lawsuits are known as “qui tam” actions, and the individuals bringing such suits, sometimes known as “relators” or, more commonly, “whistleblowers,” may share in any amounts paid by the entity to the government in fines or settlement. In addition, certain states have enacted laws modeled after the federal False Claims Act. Qui tam actions have increased significantly in recent years, causing greater numbers of healthcare companies to have to defend a false claim action, pay fines or be excluded from Medicare, Medicaid or other federal or state healthcare programs as a result of an investigation arising out of such action.

 

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HIPAA

The Health Insurance Portability and Accountability Act of 1996, or HIPAA, created two new federal crimes: healthcare fraud and false statements relating to healthcare matters. The healthcare fraud statute prohibits knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including private payers. A violation of this statute is a felony and may result in fines, imprisonment or exclusion from government-sponsored programs. The false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. A violation of this statute is a felony and may result in fines or imprisonment.

HIPAA also protects the security and privacy of individually identifiable health information maintained or transmitted by healthcare providers, health plans and healthcare clearinghouses. HIPAA restricts the use and disclosure of patient health information, including patient records. Although we believe that HIPAA does not apply to us directly, most of our customers have significant obligations under HIPAA, and we intend to cooperate with our customers and others to ensure compliance with HIPAA with respect to patient information that comes into our possession. Failure to comply with HIPAA obligations can result in civil fines and/or criminal penalties. Some states have also enacted rigorous laws or regulations protecting the security and privacy of patient information. If we fail to comply with these laws and regulations, we could face additional sanctions.

Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act

In March 2010, Congress enacted the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act, or together, the Affordable Care Act. The law includes provisions that, among other things, reduce or limit Medicare reimbursement, require all individuals to have health insurance (with limited exceptions) and impose increased taxes. Specifically, the law requires the medical device industry to subsidize health care reform in the form of a 2.3% excise tax on United States sales of most medical devices beginning in 2013. We began paying the medical device excise tax in January 2013. We expect that the excise tax will continue to impact our operating expenses in the future. Because many other parts of the Affordable Care Act remain subject to implementation, the long-term impact to us is uncertain. The new law or any future legislation could reduce medical procedure volumes, lower reimbursement for our products, and impact the demand for our products or the prices at which we sell our products.

The Affordable Care Act also includes provisions known as the Physician Payments Sunshine Act, or PPSA, which requires manufacturers of drugs, biologics, devices and medical supplies covered under Medicare and Medicaid to record any transfers of value to physicians and teaching hospitals and to report this data to the Centers for Medicare & Medicaid Services, or CMS, for subsequent public disclosure. The PPSA requires manufacturers to begin collecting data required beginning in August 2013 with the first report required for the period from August 1 through December 31, 2013 to be reported to CMS in early 2014. Similar reporting requirements have also been enacted in several states, and an increasing number of countries worldwide either have adopted or are considering similar laws requiring transparency of interactions with health care professionals. Particularly, some states such as Massachusetts, Minnesota and Vermont, impose an outright ban on certain gifts to physicians. Failure to report appropriate data may result in civil or criminal fines and/or penalties.

Additionally, the compliance environment is changing, with more states, such as California and Massachusetts, mandating implementation of compliance programs, compliance with industry ethics codes, and spending limits, and other states, such as Vermont, Maine, and Minnesota, requiring reporting to state governments of gifts, compensation and other remuneration to physicians. The shifting regulatory environment, along with the requirement to comply in multiple jurisdictions with different compliance and reporting requirements, increases the possibility that a company may run afoul of one or more laws.

International Regulation

We are also subject to regulation in each of the foreign countries in which we sell our products. Many of the regulations applicable to our products in these countries are similar to those of the FDA. The European Union requires that our medical devices comply with the Medical Device Directive or the Active Implantable Medical Device Directive, which includes quality system and CE certification requirements. To obtain a CE Mark in the European Union, defined products must meet minimum standards of safety and quality (i.e., the essential requirements) and then undergo an appropriate conformity assessment procedure. A Notified Body assesses the quality management systems of the manufacturer and the product conformity to the essential and other requirements within the Medical Device Directive. In the European Union, we are also required to maintain certain ISO certifications in order to sell our products. Our Impella 2.5, Impella 5.0, Impella LD, Impella CP, AB5000, BVS 5000, IAB, iPulse console and Portable Driver are all approved under CE mark and are available for sale in the European Union. We are also subject to regulations and periodic review from various regulatory bodies in Canada, Japan and other countries where we sell our products. Lack of regulatory compliance in any of these jurisdictions could limit our ability to distribute products in these countries.

 

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Foreign Corrupt Practices Act

The U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws in non-U.S. jurisdictions generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. Many of our customer relationships outside of the United States are, either directly or indirectly, with governmental entities and are therefore subject to various anti-bribery laws. Although our corporate policies mandate compliance with these anti-bribery laws, we operate in many parts of the world that have experienced governmental corruption to some degree, and in certain circumstances strict compliance with anti-bribery laws may conflict with local customs and practices. Our internal control policies and procedures may not always protect us from reckless or criminal acts committed by our employees or agents. Violations of these laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our business, results of operations and financial condition.

Other Regulations

We are also subject to various international, federal, state and local laws and regulations relating to such matters as safe working conditions, laboratory and manufacturing practices and the use, handling and disposal of hazardous or potentially hazardous substances used in connection with our research and development and manufacturing activities. Specifically, the manufacture of our biomaterials is subject to compliance with federal environmental regulations and by various state and local agencies. Although we believe we are in compliance with these laws and regulations in all material respects, we cannot provide assurance that we will not be required to incur significant costs to comply with these and other laws or regulations in the future.

Seasonality

Our quarterly net sales are influenced by many factors, including new product introductions, acquisitions, regulatory approvals, patient and physician holiday schedules, and other factors. Net sales in the first and second fiscal quarters are typically lower than other quarters of the year due to the seasonality of the United States and European markets, where summer vacation schedules normally result in fewer medical procedures.

Employees

As of March 31, 2014, we had 511 full-time employees, including:

 

   

105 in product engineering, research and development, and regulatory;

 

   

211 in sales, clinical support, marketing, field service and related support;

 

   

142 in manufacturing; and

 

   

53 in general and administration.

We routinely enter into contractual agreements with our employees, which typically include confidentiality and non-competition commitments. Our employees are not represented by unions. We consider our employee relations to be good. If we were unable to attract and retain qualified personnel in the future, our operations could be negatively impacted.

 

ITEM 1A. RISK FACTORS

An investment in our common stock involves a high degree of risk. Before making an investment decision, you should carefully consider these risks as well as the other information we include or incorporate by reference in this report, including our consolidated financial statements and the related notes. The risks and uncertainties we have described are not the only ones we face. Additional risks and uncertainties of which we are unaware or that we deem immaterial may also adversely affect our business. If any of these risks materializes, the trading price of our common stock could fall and you might lose all or part of your investment.

This section includes or refers to forward-looking statements. You should read the explanation of the qualifications and limitations on such forward-looking statements discussed at the beginning of the report.

Risks Related to Our Business

We have incurred losses in previous periods and may incur losses in future periods.

For the years ended March 31, 2014 and 2013, we recognized net income of approximately $7.4 million and $15.0 million, respectively. For the year ended March 31, 2012, we were essentially break-even as we recognized a net income of $1.5 million. Prior to fiscal 2012, we had incurred losses and had no history of profitability. The profitability we achieved in recent years may not be indicative of our ability to

 

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sustain profitability and we may incur losses from operations in future periods. We historically have incurred net losses from our operations. Any losses incurred in the future may result primarily from, among other things, the expansion of our global distribution network, investments in new markets such as Japan, ongoing product and clinical development, costs related to new business development initiatives and legal and other expenses related to our compliance with the subpoena received from the U.S. Department of Justice in October 2012 and the subpoena we received from the Boston regional office of the U.S. Department of Health and Human Services, Office of Inspector General in April 2014 and our defense of other legal claims. Additionally, due to the introduction of the U.S. medical device tax in January 2013 we began incurring a 2.3% excise tax on the sales of certain of our products in the U.S. regardless of whether we are profitable or not. These expenditures may include costs associated with hiring additional personnel, performing clinical trials, continuing our research and development relating to our products under development, seeking regulatory approvals and, if we receive these approvals, commencing commercial manufacturing and marketing activities. The amount of these expenditures is difficult to forecast accurately and cost overruns may occur. We also expect that we will make significant expenditures to market and manufacture in commercial quantities our approved circulatory care products, and any other new products for which we may incur additional expense to obtain regulatory approvals or clearances in the future.

If we fail to obtain and maintain necessary governmental approvals for our products and indications, we may be unable to market and sell our products in certain jurisdictions.

Medical devices such as ours are extensively regulated by the FDA in the U.S. and by other federal, state, local and foreign authorities. Governmental regulations relate to the testing, development, manufacturing, labeling, design, sale, promotion, distribution, importing, exporting and shipping of our products. In the U.S., before we can market a new medical device, or a new use of, or claim for, or significant modification to, an existing product, we must generally first receive either a premarket approval, or PMA, or 510(k) clearance from the FDA. Both of these processes can be expensive and lengthy and entail significant expenses, primarily related to clinical trials. The FDA’s 510(k) clearance process usually takes between three to twelve months, but it can often last longer.

The process of obtaining a PMA approval is much more costly and uncertain than the 510(k) clearance process. It generally takes between one to three years, or even longer, from the time the PMA application is submitted to the FDA. In January 2011, the FDA announced plans to make changes to its 510(k) clearance process. Although the effect of these changes is still unknown, these changes may further delay the time it takes us to prepare applications for 501(k) clearance or the length of time required to receive 510(k) clearance. We cannot assure you that any regulatory clearances or approvals, either foreign or domestic, will be granted on a timely basis, if at all. If we are unable to obtain regulatory approvals or clearances for use of our products under development, or if the patient populations for which they are approved are not sufficiently broad, the commercial success of these products could be limited. The FDA may also limit the claims that we can make about our products. Abiomed will be governed more by the PMA and HDE processes as it converts its Impella products from the 510(k) clearance to the PMA approvals which were called for under the FDA 515i program.PMA and HDE approvals can be supplemented (“PMA or HDE Supplements”) with applications that propose new products that address the same intended use or for new intended uses for the approved products.FDA has indicated it will allow for all Impella products to remain on the market while this conversion takes place.

If we do not receive FDA approval or clearance for one or more of our products, we will be unable to market and sell those products in the U.S. which would have a material adverse effect on our operations and prospects.

We intend to market our products in international markets, including the European Union, Canada, and Japan. Approval processes differ among those jurisdictions and approval in the U.S. or any other single jurisdiction does not guarantee approval in any other jurisdiction. Obtaining foreign approvals could involve significant delays, difficulties and costs for us and could require additional clinical trials.

As a result of determinations made under the FDA’s 515 Program Initiative, we will not be permitted to rely on the 510(k) pre-market notification process to market our Impella products.

The FDA implemented the 515 Program Initiative in 2009 to facilitate the potential reclassification of twenty-six classes of medical devices which are currently classified as Class III devices. Class I and II devices are generally considered to be lower risk than Class III devices and require clearance through the FDA’s 510(k) premarket notification process. Class III devices, however, are typically higher risk and first-of-a-kind and require approval through a PMA which is a much more costly and uncertain process to approval than the 510(k) premarket notification process. Under the 515 Program Initiative, the FDA is reviewing Class III device types to determine whether any of them should be reclassified as Class I or II devices or if they should remain classified as Class III devices and be subject to approval through the PMA process.

In December 2012, as part of the 515 Program Initiative, an FDA panel voted to recommend continuation of Class III status for the temporary ventricular support devices within the non-roller type cardiopulmonary bypass blood pumps category, which includes our Impella products. The panel’s recommendation of Class III for this category of device is consistent with the current Class III designation for these device types. If the FDA accepts the panel’s determination and issues a final order classifying these devices in Class III, we will have 90 days from the date of the issuance of that order to file a PMA application for Impella 2.5 in order for the product to remain on the market. Under the 515 Program Initiative, we will be permitted to continue to market our Impella products pursuant to the 510(k) clearance for a sufficient period of time to allow for the submission and review of PMA applications relating to our Impella products. As of March 31, 2014, we submitted the final module of the modular PMA application to the FDA for our Impella 2.5 device. The PMA will be treated as a standard PMA and all modules will now be combined for final review by the FDA.

 

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Although the effect of the FDA panel’s decision is still unknown, these changes will make it more difficult for us to obtain regulatory clearances and approvals for our products and even if we are successful, the time and costs required for us to obtain those clearances and approvals will be substantially increased. If we are unable to obtain regulatory approvals or clearances for use of our products, or if the patient populations for which they are approved are not sufficiently broad, the commercial success of these products could be limited, which could materially and adversely affect our revenues.

If the FDA or another regulatory or enforcement agency determines that we have promoted off-label use of our products, we may be subject to various penalties, including civil or criminal penalties. We have received an administrative subpoena from the U.S. Department of Justice which is conducting an investigation that is focused on our marketing and labeling of the Impella 2.5 device.

The FDA, the U.S. Department of Justice, the Department of Health and Human Services, Office of the Inspector General and other regulatory or enforcement agencies actively enforce regulations prohibiting promotion of off-label use and the promotion of products for which marketing clearance has not been obtained. If such agency determines that our promotional materials or training constitutes promotion of an unapproved use, it could request that we modify our training or promotional materials or subject us to regulatory enforcement actions, including the issuance of a warning letter, injunction, seizure, civil fine and criminal penalties. Although our policy is to refrain from statements that could be considered off-label promotion of our products, such agency could disagree and conclude that we have engaged in off-label promotion. In June 2011 we received a warning letter from the FDA stating that some of our promotional materials marketed the Impella 2.5 for uses that had not been approved by the FDA. We cooperated with the FDA and made changes to our promotional materials in response to the warning letter. However, in April 2012, we received a follow up letter from the FDA stating that some of our promotional materials continued to market the Impella 2.5 in ways that are not compliant with FDA regulations. After additional actions by us, we received a close-out letter in February 2013 from the FDA with respect to this matter, which noted that the FDA’s Office of Compliance had completed its review of the corrective actions we took in response to the warning letter and that the concerns cited appeared to have been addressed. The close-out letter, however, provides no assurance that there may not be other occurrences that may be subject to regulatory or enforcement action.

On October 26, 2012, we were informed that the United States Attorney’s Office for the District of Columbia is conducting an investigation that is focused on our marketing and labeling of the Impella 2.5. On October 31, 2012, we accepted service of a subpoena related to this investigation seeking documents related to the Impella 2.5. We believe we have substantially complied with the subpoena and have submitted the requested documents to the United States Attorney’s Office. On September 13, 2013, we entered into a tolling agreement with the United States Attorney’s Office, pursuant to which we and the United States Attorney’s Office mutually agreed to toll the applicable statutes of limitations for all criminal, civil and administrative offenses and violations that could be charged or claimed against us as of that date until June 2, 2014. On May 27, 2014, we executed an extension of the tolling agreement through February 2, 2015. Because the investigation is in the early stages, we are unable to predict the ultimate outcome or determine whether a liability has been incurred or make an estimate of the reasonably possible liability, if any, that could result from any unfavorable outcome associated with this inquiry. We have incurred significant expenses related to this investigation, and we expect to continue to incur additional expenses in the future.

We may not be able to resolve these matters, or any similar matters that may come up in the future, without incurring penalties or facing significant consequences. Even if we are successful in resolving this matter without incurring penalties, responding to the subpoena has resulted and in the future will likely result in substantial costs and could significantly and adversely impact our reputation and divert management’s attention and resources, which could have a material adverse effect on our business, operating results, financial condition and ability to finance our operations.

Off-label use of our products may result in injuries that lead to product liability suits, which could be costly to our business.

The use of our products outside the indications cleared for use, or “off-label use,” may increase the risk of injury to patients. Clinicians may use our products for off-label uses, as the FDA does not restrict or regulate a clinician’s choice of treatment within the practice of medicine. Off-label use of our products may increase the risk of product liability claims against us. Product liability claims are expensive to defend and could divert our management’s attention and result in substantial damage awards against us.

We have been named as a party to purported stockholder class actions and a derivative action, and we may be named in additional litigation, all of which may require significant management time and attention, and result in significant legal expenses and may result in an unfavorable outcome, which could have a material adverse effect on our business, operating results and financial condition.

On November 16 and 19, 2012, two purported class action complaints were filed against us and certain of our officers in the U.S. District Court for the District of Massachusetts by alleged purchasers of our common stock, on behalf of themselves and persons or entities that purchased or acquired our securities between August 5, 2011 and October 31, 2012. The complaints alleged that the defendants violated the federal securities laws in connection with disclosures related to the FDA and the marketing and labeling of our Impella 2.5 product and seek damages in an unspecified amount. The Court has consolidated these complaints and a consolidated amended complaint was filed by the plaintiffs on May 20, 2013. On July 8, 2013, we filed a motion to dismiss the consolidated class action. Oral arguments on our motion to dismiss were conducted before the presiding district court judge on September 18, 2013. On April 10, 2014, the U.S. District Court entered an order granting our motion and dismissed the consolidated and amended complaint. On May 9, 2014, the plaintiffs filed a notice of appeal.

 

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On February 4, 2013, an alleged stockholder of the Company filed a derivative action on our behalf against each of our directors in the U.S. District Court for the District of Massachusetts. The complaint alleged that the directors breached their fiduciary duties to us and our stockholders in connection with disclosures related to the FDA and the marketing and labeling of our Impella 2.5 product and sought damages in an unspecified amount. On March 22, 2013, we filed a motion to dismiss the derivative action. On June 21, 2013, the District Court granted our motion to dismiss. The plaintiff has appealed the dismissal to the United States Court of Appeals for the First Circuit. Oral argument was conducted before the appellate court on February 5, 2014.

We intend to defend these lawsuits vigorously. We cannot be assured, however, that we will be successful. We may have to pay damage awards, indemnify our officers and directors from damage awards that may be entered against them or otherwise may enter into settlement arrangements in connection with such claims. Any such payments or settlement arrangements in these current litigations or any future litigation could have material adverse effects on our business, operating results or financial condition. Even if the plaintiffs’ claims are not successful, defending these litigations could result in substantial costs and significantly and adversely impact our reputation and divert management’s attention and resources, which could have a material adverse effect on our business, operating results, financial condition and ability to finance our operations.

Our current and planned clinical trials may not begin on time, or at all, and may not be completed on schedule, or at all.

In order to obtain PMA approval and in some cases, 510(k) clearance, we may be required to conduct well-controlled clinical trials designed to test the safety and effectiveness of the product. In order to conduct clinical studies, we must generally receive an investigational device exemption, or IDE, for each device from the FDA. An IDE allows us to use an investigational device in a clinical trial to collect data on safety and effectiveness that will support an application for premarket approval or 510(k) clearance from the FDA. We have received IDE approval and completed the clinical trial for our Impella RP and are preparing to file an HDE and have closed our Portable Driver IDE study due to lack of enrollment. In December 2010, we announced the termination of our Protect II study based on a futility determination at the planned interim analysis regarding the primary end-point, which we view as likely to be due to unanticipated confounding variables related to the use of rotational atherectomy in the study.

Conducting clinical trials is a long, expensive and uncertain process that is subject to delays and failure at any stage. Clinical trials can take months or years to complete. The commencement or completion of any of our clinical trials may be delayed or halted for numerous reasons, including:

 

   

the FDA may not approve a clinical trial protocol or a clinical trial, or may place a clinical trial on hold;

 

   

subjects may not enroll in clinical trials at the rate we expect and/or subjects may not be followed-up on at the rate we expect;

 

   

subjects may experience adverse side effects or events related or unrelated to our products;

 

   

third-party clinical investigators may not perform our clinical trials on our anticipated schedule or consistent with the clinical trial protocol and good clinical practices, or other third-party organizations may not perform data collection and analysis in a timely or accurate manner;

 

   

the interim results of any of our clinical trials may be inconclusive or negative;

 

   

regulatory inspections of our clinical trials or manufacturing facilities may require us to undertake corrective action or suspend or terminate our clinical trials if investigators find us not to be in compliance with regulatory requirements;

 

   

510(k) clearance of our devices may have the effect of slowing down the progress of related clinical trials since physicians can use our cleared devices commercially outside of the trials;

 

   

our manufacturing process may not produce finished products that conform to design and performance specifications; or

 

   

governmental regulations or administrative actions may change and impose new requirements, particularly on reimbursement.

The results of pre-clinical studies do not necessarily predict future clinical trial results and previous clinical trial results may not be repeated in subsequent clinical trials. We may suffer delays, cost overruns and terminate manufacturing of certain of our products despite achieving promising results in pre-clinical testing or early clinical testing. In addition, the data obtained from clinical trials may be inadequate to support approval or clearance of a submission. The FDA may disagree with our interpretation of the data from our clinical trials, or may find the clinical trial design, conduct or results inadequate to demonstrate the safety and effectiveness of the product candidate. The FDA may also require us to conduct additional pre-clinical studies or clinical trials which could further delay approval of our products. The FDA or other international regulatory agencies will require post market studies which can be burdensome and expensive. If we are unable to receive FDA approval of an IDE to conduct clinical trials or the trials are halted by the FDA or others or if we are unsuccessful in receiving FDA approval of a product candidate, we would not be able to sell or promote the product candidate in the U.S., which could seriously harm our business. Moreover, we face similar risks in each jurisdiction in which we sell or propose to sell our products. If we make modifications to a product, whether in response to results of clinical testing or otherwise, we could be required to start our clinical trials over, which could cause serious delays that would adversely affect our results of operations. Even modest changes to certain components of our products could result in months or years of additional clinical trials.

 

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Our products are subject to extensive regulatory requirements, including continuing regulatory review, which could affect the manufacturing and marketing of our products.

The FDA and other regulatory agencies continue to review products even after they have received initial approval. If and when the FDA or another regulatory agency clears or approves our products under development, the manufacture and marketing of these products will be subject to continuing regulation, including compliance with the FDA’s adverse event reporting requirements, prohibitions on promoting a product for unapproved uses, and Quality System Regulation, or QSR, requirements, which obligate manufacturers, including third-party and contract manufacturers, to adhere to stringent design, testing, control, documentation and other quality assurance procedures during the design and manufacture of a device.

Any modification to an FDA-cleared device that could significantly affect its safety or effectiveness or that would constitute a major change in its intended use, requires a new 510(k) clearance or PMA approval. The FDA requires each manufacturer to make this determination in the first instance, but the FDA may review any such decision. Modifications of this type are common with new products. We anticipate that the first generation of each of our products will undergo a number of changes, refinements, enhancements and improvements over time. If the FDA requires us to seek clearance or approval for modification of a previously cleared product for which we have concluded that new clearances or approvals are unnecessary, we may be required to cease marketing or to recall the modified product until we obtain clearance or approval and we may be subject to significant regulatory fines or penalties, which could have a material adverse effect on our financial results and competitive position. We also cannot assure you that we will be successful in obtaining clearances or approvals for our modifications, if required. We and our third-party suppliers of product components are also subject to inspection and market surveillance by the FDA and other regulatory agencies for QSR and other requirements, the interpretation of which can change. Compliance with QSR and similar legal requirements can be difficult and expensive. Enforcement actions resulting from failure to comply with government requirements could result in fines, suspensions of approvals or clearances, recalls or seizure of products, operating restrictions or shutdown, and criminal prosecutions that could adversely affect the manufacture and marketing of our products. The FDA or another regulatory agency could withdraw a previously approved product from the market upon receipt of newly discovered information, including a failure to comply with regulatory requirements, the occurrence of unanticipated problems with products following approval, or other reasons, which could adversely affect our operating results.

Even after receiving regulatory clearance or approval, our products may be subject to product recalls which may harm our reputation and divert our managerial and financial resources.

The FDA and similar governmental authorities in other countries have the authority to order mandatory recall of our products or order their removal from the market if the governmental entity finds that our products might cause adverse health consequences or death. A government-mandated or voluntary recall by us could occur as a result of component failures, manufacturing errors or design defects, including labeling defects. We have in the past initiated voluntary recalls of some of our products and we could do so in the future. Any recall of our products may harm our reputation with customers and divert managerial and financial resources.

We depend on third-party reimbursement to our customers for market acceptance of our products. If third-party payers fail to provide appropriate levels of reimbursement for purchase and use of our products, our sales and profitability would be adversely affected.

Sales of medical devices largely depend on the reimbursement of patients’ medical expenses by government health care programs and private health insurers. Without the financial support of government reimbursement or third-party insurers’ payments for patient care, the market for our products will be limited. Medical products and devices incorporating new technologies are closely examined by governments and private insurers to determine whether the products and devices will be covered by reimbursement, and if so, the level of reimbursement which may apply.

We cannot be sure that additional third-party payers will cover and/or adequately reimburse sales of our products or other products under development, to enable us to sell them at profitable prices.

In addition, third-party payers are increasingly requiring evidence that medical devices are cost-effective. If we are unable to meet the standards of a third-party payer, that payer may not reimburse the use of our products, which could reduce sales of our products to healthcare providers who depend upon reimbursement for payment. We also cannot be sure that third-party payers will continue the current level of reimbursement to physicians and medical centers for use of our products. Any reduction in the amount of this reimbursement could harm our business.

Changes in health care reimbursement systems in the U.S. and abroad could reduce our revenues and profitability.

In March 2010, the federal government enacted healthcare reform legislation. The legislation has changed the manner in which healthcare services are provided and paid for in the U.S. These changes may impact reimbursement for health care services, including reimbursement to hospitals and physicians. States may also enact further legislation that impacts Medicaid payments to hospitals and

 

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physicians. In addition, the Centers for Medicare & Medicaid Services, or CMS, the federal agency responsible for administering the Medicare program in the U.S., has established new payment levels for hospitals and physicians in line with the new legislation, which can increase or decrease payment to such entities.

The healthcare reform legislation and any future legislative, regulatory and reimbursement initiatives or changes to the reimbursement for our products could adversely affect demand for our products and have a material adverse impact on our revenues. Our business and results of operations could therefore be adversely affected by the current healthcare reform legislation as well as future healthcare reform or regulatory actions.

Internationally, medical reimbursement systems vary significantly from country to country, with some countries limiting medical centers spending through fixed budgets, regardless of levels of patient treatment, and other countries requiring application for, and approval of, government or third-party reimbursement. Even if we succeed in bringing our new products to market, uncertainties regarding future healthcare policy, legislation and regulation, as well as private market practices, could affect our ability to sell our products in commercially acceptable quantities at profitable prices.

We must comply with healthcare “fraud and abuse” laws, and we could face substantial penalties for non-compliance and be excluded from government healthcare programs, which would adversely affect our business, financial condition and results of operations.

Certain federal and state healthcare laws and regulations pertaining to fraud and abuse and patients’ rights may be applicable to our business. We may be subject to healthcare fraud and abuse regulation and patient privacy regulation by both the federal government and the states in which we conduct our business. The laws that may affect our ability to operate include:

 

   

The federal healthcare program Anti-Kickback Statute, which prohibits, among other things, soliciting, receiving or providing remuneration, directly or indirectly, to induce (i) the referral of an individual, for an item or service, or (ii) the purchasing or ordering of a good or service, for which payment may be made under federal healthcare programs such as the Medicare and Medicaid programs;

 

   

Federal false claims laws which prohibit, among other things, knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payors that are false or fraudulent, and which may apply to entities like us that promote medical devices, provide medical device management services and may provide coding and billing advice to customers;

 

   

The federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which prohibits executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters and which also imposes certain requirements relating to the privacy, security and transmission of individually identifiable health information; and

 

   

State law equivalents of each of the above federal laws, such as anti-kickback and false claims laws that may apply to items or services reimbursed by any third-party payor, including commercial insurers, and state laws governing the privacy and security of health information in certain circumstances, many of which differ in significant ways from state to state and often are not preempted by HIPAA, thus complicating compliance efforts.

Additionally, the compliance environment is changing, with more states, such as California and Massachusetts, mandating implementation of compliance programs, compliance with industry ethics codes, and spending limits, and other states, such as Vermont, Maine, and Minnesota, requiring reporting to state governments of gifts, compensation and other remuneration to physicians. The Physician Payments Sunshine Act, or PPSA, which was signed into law on March 23, 2010, requires manufacturers of drug, device, biologics, and medical supplies covered under Medicare, Medicaid, or State Children’s Health Insurance Program, or SCHIP, to report payments made to physicians on an annual basis to the U.S. Department of Health and Human Services, or HHS. Companies were required to start collecting this data on August 1, 2013 and are required to report this information to HHS in 2014. These laws all provide for penalties for non-compliance. The shifting regulatory environment, along with the requirement to comply with multiple jurisdictions with different compliance and reporting requirements, increases the possibility that we may run afoul of one or more laws. On April 25, 2014, we received a subpoena from the Boston regional office of the United States Department of Health and Human Services, Office of Inspector General requesting materials relating to our reimbursement of expenses and remuneration to healthcare providers during the period of July 2012 through December 2012.

Many of these requirements are new and their application is uncertain, and regulatory guidance is limited. We could face enforcement action, fines and other penalties and could receive adverse publicity, all of which could harm our business, if it is alleged that we have failed to fully comply with such laws and regulations. Similarly, if the physicians or other providers or entities that we do business with are found not to comply with applicable laws, they may be subject to sanctions, which could also have a negative impact on our business.

 

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We depend on Impella products for a significant portion of our revenues.

We derive, and expect to continue to derive, most of our revenues from sales of our Impella products. While we cannot fully predict what level of revenues our Impella products will generate, we anticipate that Impella product sales will continue to account for a significant portion of our revenues in the foreseeable future. Implementation of our business strategy depends on continued sales of our Impella products. Our ability to generate sales of our Impella products may be impaired by the factors described below:

 

   

our failure to obtain approvals from the FDA and foreign regulatory authorities or to comply with government regulations, or the withdrawal of market clearance or the taking of other enforcement actions;

 

   

lack of acceptance or continued acceptance by physicians;

 

   

our reliance on specialized suppliers for certain components and materials;

 

   

manufacturing or quality control problems;

 

   

our inability to protect our proprietary technologies or an infringement of others’ patents;

 

   

the loss of a distributor or distributor failure to perform;

 

   

our failure to compete successfully against our existing or potential competitors;

 

   

additional risks associated with selling in international markets;

 

   

long and variable sales and deployment cycles;

 

   

failure by third-party payors to provide appropriate levels of reimbursement;

 

   

our failure to comply with federal and state regulations; and

 

   

product liability claims.

If we fail to compete successfully against our existing or potential competitors, our sales or operating results may be harmed.

Competition from other companies offering circulatory care products is intense and subject to rapid technological change and evolving industry requirements and standards. We compete with companies that have substantially greater or broader financial, product development, sales and marketing resources and experience than we do. These competitors may develop superior products or products of similar quality at the same or lower prices. Moreover, improvements in current or new technologies may make them technically equivalent or superior to our products in addition to providing cost or other advantages.

Our customers are primarily hospitals that have limited budgets. As a result, our products compete against a broad range of medical devices and other therapies for these limited funds. Our success will depend in large part upon our ability to enhance our existing products, to develop new products to meet regulatory and customer requirements and to achieve market acceptance for our products. We believe that important competitive factors with respect to the development and commercialization of our products include the relative speed with which we can develop products, establish clinical utility, complete clinical trials and regulatory approval processes, obtain and protect reimbursement, maintain cost effectiveness for our products, and supply commercial quantities of the product to the market.

Advances in medical technology, biotechnology and pharmaceuticals may reduce the size of the potential markets for our products or render those products obsolete. We are aware of other heart replacement device research efforts in the U.S., Canada, Europe and Japan. In addition, there are a number of companies; including Getinge, Thoratec Corporation, CardiacAssist, Jarvik Heart, HeartWare, MicroMed Technology, EvaHeart, Terumo Heart and several early-stage companies, that are developing heart assist products, including implantable left ventricular assist devices and miniaturized rotary ventricular assist devices.

If we do not effectively manage our growth, we may be unable to successfully develop, market and sell our products.

Our future revenue and operating results will depend on our ability to manage the anticipated growth of our business. We have experienced significant growth in recent years in the scope of our operations and increased the number of our employees. This growth has placed significant demands on our management as well as our financial and operations resources. In order to achieve our business objectives, we will need to continue to grow. However, continued growth presents numerous challenges, including:

 

   

developing our global sales and marketing infrastructure and capabilities;

 

   

expanding manufacturing capacity, maintaining quality and increasing production;

 

   

increasing our foreign and domestic regulatory compliance capabilities;

 

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implementing appropriate operational, financial and IT systems and internal controls;

 

   

identifying, attracting and retaining qualified personnel, particularly experienced clinical staff; and

 

   

training, managing and supervising our personnel worldwide.

Any failure to manage our growth effectively could impede our ability to successfully develop, market and sell our products, which could seriously harm our business.

The demand for some of our products and products under development is unproven, and we may be unable to successfully commercialize our products.

Our products and products under development may not enjoy commercial acceptance or success, which could adversely affect our business and operational results. We need to create markets for our Impella micro heart pumps, AB5000, and other existing products, as well as other new or future products, including achieving market acceptance among physicians, medical centers, patients and third-party payers. In particular, we need to gain acceptance of our Impella products among interventional cardiologists, who have not previously been users of our other devices. The obstacles we will face in trying to create successful commercial markets for our products include:

 

   

limitations inherent in first-generation devices, and our potential inability to develop successive improvements, including increases in service life;

 

   

the introduction by other companies of new treatments, products and technologies that compete with our products;

 

   

the timing and amount of reimbursement for these products, if any, by third-party payers;

 

   

the potential reluctance of clinicians to obtain adequate training to use our products or to use new products;

 

   

the cost of our products; and

 

   

the potential reluctance of physicians, patients and society as a whole to accept medical devices that replace or assist the heart and risk of mechanical failure inherent in such devices.

Our future success depends in part on the development of new circulatory assist products, and our development efforts may not be successful.

We are devoting most of our research and development and regulatory efforts, and significant financial resources, to the development of our Impella heart pumps, Symphony and product extensions of existing commercial products and new products. The development of new products and product extensions presents enormous challenges in a variety of areas, including blood compatible surfaces, blood compatible flow, manufacturing techniques, pumping mechanisms, physiological control, energy transfer, anatomical fit and surgical techniques. We may be unable to overcome all of these challenges, which could adversely affect our results of operations and prospects.

The commercial success of our products will require acceptance by surgeons and interventional cardiologists, a limited number of whom have significant influence over medical device selection and purchasing decisions.

We may achieve our business objectives only if our products are accepted and recommended by leading cardiovascular surgeons and interventional cardiologists, whose decisions are likely to be based on a determination by these clinicians that our products are safe and cost-effective and represent acceptable methods of treatment. Although we have developed relationships with leading cardiac surgeons, the commercial success of our Impella and other products will require that we also develop relationships with leading interventional cardiologists in cath labs, where we have not historically had a significant presence. We cannot assure you that we can maintain our existing relationships and arrangements or that we can establish new relationships in support of our products. If cardiovascular surgeons and interventional cardiologists do not consider our products to be adequate for the treatment of our target cardiac patient population or if a sufficient number of these clinicians recommend and use competing products, it would seriously harm our business.

The training required for clinicians to use our products could reduce the market acceptance of our products and reduce our revenue.

Clinicians must be trained to use our products proficiently. It is critical to the success of our business that we ensure that there are a sufficient number of clinicians familiar with, trained on and proficient in the use of our products. Convincing clinicians to dedicate the time and energy necessary to obtain adequate training in the use of our products is challenging and we may not be successful in these efforts. If clinicians are not properly trained, they may misuse or ineffectively use our products. Any improper use of our products may result in unsatisfactory outcomes, patient injury, negative publicity or lawsuits against us, any of which could harm our reputation and affect future product sales. Furthermore, our inability to educate and train clinicians to use our products may lead to lower demand for our products.

 

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If we are unable to develop additional, high-quality manufacturing capacity, our growth may be limited and our business could be seriously harmed.

To be successful, we believe we will need to increase our manufacturing capacity. We do not have experience in manufacturing our Impella products in the commercial quantities that might be required to meet potential demand, nor do we have experience manufacturing our other products in large quantities. We may encounter difficulties in scaling up manufacturing of our products, including problems related to product yields, quality control and assurance, component and service availability, dependable sources of supply, adequacy of control policies and procedures and lack of skilled personnel. If we cannot hire, train and retain enough experienced and capable scientific and technical workers, we may not be able to manufacture sufficient quantities of our current or future products on-time and at an acceptable cost, which could limit market acceptance of our products or otherwise damage our business. In order for our manufacturing to meet the expected demand for our Impella products, we have been implementing process improvements on the Impella production line at our manufacturing facility in Aachen, Germany to increase the output that we can produce at the facility. In addition to programs designed to further increase yield and capacity levels, we have expanded manufacturing employment in Aachen and Danvers and relocated selected Impella sub-assembly production to our manufacturing facility in Danvers, Massachusetts. We continue to work on initiatives to expand our Impella manufacturing capacity in both Aachen and Danvers. If we are unable to implement these process improvements on a timely basis, it could inhibit our revenue growth.

Each of our products is currently manufactured in a single location, and any significant disruption in production could impair our ability to deliver our products.

We currently manufacture our Impella heart pumps at our facility in Aachen, Germany and we manufacture our other products and certain Impella subassemblies at our facility in Danvers, Massachusetts. Events such as fire, flood, loss of electricity or other disasters could prevent us from manufacturing our products in compliance with applicable FDA and other regulatory requirements, which could result in significant delays before we restore production or commence production at another site. These delays may result in lost sales. Our insurance may not be adequate to cover our losses resulting from disasters or other business interruptions. Any significant disruption in the manufacturing of our products could seriously harm our business and results of operations.

Any failure to achieve and maintain the high manufacturing standards that our products require may seriously harm our business.

Our products require precise, high-quality manufacturing. Achieving precision and quality control requires skill and diligence by our personnel. Our failure to achieve and maintain these high manufacturing standards, including the incidence of manufacturing errors, design defects or component failures, could result in patient injury or death, product recalls or withdrawals, delays or failures in product testing or delivery, cost overruns or other problems that could seriously hurt our business. We have from time to time voluntarily recalled certain products. Despite our very high manufacturing standards, we cannot completely eliminate the risk of errors, defects or failures. If we are unable to manufacture our products in accordance with necessary quality standards, or if we are unable to procure additional high-quality manufacturing facilities, our business and results of operations may be negatively affected.

If we cannot attract and retain key management, scientific, sales and other personnel we need, we will not be successful.

We depend heavily on the contributions of the principal members of our business, financial, technical, sales and support, regulatory and clinical, operating and administrative management and staff, many of whom would be difficult to replace. Our key personnel include our senior officers, many of whom have very specialized scientific, medical or operational knowledge. The loss of the service of any of the key members of our senior management team may significantly delay or prevent our achievement of our business objectives. Our ability to attract and retain qualified personnel, consultants and advisors is critical to our success. For example, many of the members of our clinical staff are registered nurses with experience in the surgery suite or cath lab, of which only a limited number of whom seek employment with a company like ours. Competition for skilled and experienced personnel in the medical devices industry is intense. We face competition for skilled and experienced management, scientific, clinical, engineering and sales personnel from numerous medical device and life sciences companies, universities, governmental entities and other research institutions. If we lose the services of any of the principal members of our management and staff, or if we are unable to attract and retain qualified personnel in the future, especially scientific and sales personnel, our business could be adversely affected.

If our suppliers cannot provide the components we require, our ability to manufacture our products could be harmed.

We rely on third-party suppliers to provide us with some components used in our existing products and products under development. For example, we outsource the manufacturing of most of our consoles other than final assembly and testing and the sterilization process for our products. Relying on third-party suppliers makes us vulnerable to component part failures/obsolescence and to interruptions in supply, either of which could impair our ability to conduct clinical tests or to ship our products to our customers on a timely basis. Using third-party vendors makes it difficult and sometimes impossible for us to test fully certain components, such as components on circuit boards, maintain quality control, manage inventory and production schedules and control production costs. Manufacturers of our product components may be required

 

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to comply with the FDA or other regulatory manufacturing regulations and to satisfy regulatory inspections in connection with the manufacture of the components. Any failure by a supplier to comply with applicable requirements could lead to a disruption in supply. Vendor lead times to supply us with ordered components vary significantly and often can exceed six months or more. Both now and as we expand our manufacturing capacity, we cannot be sure that our suppliers will furnish us required components when we need them. These factors could make it more difficult for us to manufacture our products effectively and efficiently and could adversely impact our results of operations.

Some of our suppliers may be the only source for a particular component, which makes us vulnerable to significant cost increases. We have many foreign suppliers for some of our parts in which we are subject to currency exchange rate volatility. Vendors that are the sole source of certain products may decide to limit or eliminate sales of certain components to the medical industry due to product liability or other concerns and we might not be able to find a suitable replacement for those products. Our inventory may run out before we find alternative suppliers and we might be forced to purchase substantial inventory, if available, to last until we qualify an alternate supplier. If we cannot obtain a necessary component, we may need to find, test and obtain regulatory approval or clearance for a replacement component, produce the component ourselves or redesign the related product, which would cause significant delay and could increase our manufacturing costs. Any of these events could adversely impact our results of operations.

General economic and political conditions could have a material adverse effect on our business.

External factors can affect our profitability and financial condition. Such external factors include general domestic and global economic conditions, such as interest rates, tax rates and factors affecting global economic stability, and the political environment regarding healthcare in general. While the economic environment has shown some signs of improvement, the strength and timing of any economic recovery remains uncertain, and we cannot predict to what extent the global economic slowdown may negatively impact our business. For example, an increase in interest rates could result in an increase in our borrowing costs and could otherwise restrict our ability to access the capital markets. Negative conditions in the credit and capital markets could impair our ability to access the financial markets for working capital or other funds, and could negatively impact our ability to borrow. Such conditions could result in decreased liquidity and impairments in the carrying value of our investments, and could adversely affect our results of operations and financial condition. These and other conditions could also adversely affect our customers, and may impact their ability or decision to purchase our products or make payments on a timely basis.

We do business with foreign governments outside the United States. A number of these countries, including certain European countries, have experienced deterioration in credit and economic conditions. These conditions have resulted in, and may continue to result in, a reduction in the number of procedures that use our products and an increase in the average length of time that it takes to collect accounts receivable outstanding in these countries. In addition, we have been and may continue to be impacted by declines in sovereign credit ratings or sovereign defaults in these countries.

We may not be successful in expanding our direct sales activities into international markets.

We are seeking to expand our international sales of our products by recruiting direct sales and support teams outside the U.S. Our international operations in Germany, France, Canada, Japan and the United Kingdom will be subject to a number of risks, which may vary from the risks we experience in the U.S., including:

 

   

the need to obtain regulatory approvals in foreign countries before our products may be sold or used;

 

   

the need to procure reimbursement for our products in each foreign market;

 

   

the generally lower level of reimbursement available in foreign markets relative to the U.S.;

 

   

longer sales cycles;

 

   

limited protection of intellectual property rights;

 

   

difficulty and delays in collecting accounts receivable;

 

   

different income tax and sales tax environments;

 

   

difficulty in supporting patients using our products;

 

   

fluctuations in the values of foreign currencies; and

 

   

political and economic instability.

If we are unable to effectively expand our sales activities in international markets, our results of operations could be negatively impacted.

 

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We intend to expand our reliance on distributors in some international markets and poor performance by a distributor could reduce our sales and harm our business.

We rely on distributors to market and sell our products in certain parts of Europe, Asia, South America, the Middle East and Australia. Many of these distributors have the exclusive right to distribute our products in their territory. We may hire distributors to market our products in additional international markets. Our success in these markets will depend almost entirely upon the efforts of our distributors, over whom we have little or no control. If a distributor does not market and sell our products aggressively and maintain a continued focus on the sale and distribution of our products, we could lose sales and impair our ability to compete in that market. We are also subject to credit risk associated with shipments to our distributors and this could negatively impact our financial condition and liquidity in the future.

Many of our customer relationships outside of the United States are, either directly or indirectly, with governmental entities, and we could be adversely affected by violations of the United States Foreign Corrupt Practices Act and similar worldwide anti-bribery laws outside the United States.

The U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws in non-U.S. jurisdictions generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. Many of our customer relationships outside of the United States are, either directly or indirectly, with governmental entities and are therefore subject to such anti-bribery laws. Although our corporate policies mandate compliance with these anti-bribery laws, we operate in many parts of the world that have experienced governmental corruption to some degree, and in certain circumstances strict compliance with anti-bribery laws may conflict with local customs and practices. Our internal control policies and procedures may not always protect us from reckless or criminal acts committed by our employees or agents. Violations of these laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our business, results of operations and financial condition.

Our operating results may fluctuate unpredictably.

Historically, our annual and quarterly operating results have fluctuated widely and we expect these fluctuations to continue. Among the factors that may cause our operating results to fluctuate are:

 

   

the timing of customer orders and deliveries;

 

   

competitive changes, such as price changes or new product introductions that we or our competitors may make;

 

   

the timing of regulatory actions, such as product approvals or recalls;

 

   

costs we incur developing and testing our Impella heart pumps and other products;

 

   

costs we incur in anticipation of future sales, such as inventory purchases, expansion of manufacturing facilities, or establishment of international sales offices;

 

   

costs we incur in connection with the class action suits and derivative action that has been filed against us;

 

   

costs we incur in connection with the investigation being conducted by the United States Attorney’s Office for the District of Columbia;

 

   

additional taxes, such as the Medical Device tax;

 

   

timing of certain marketing programs and events;

 

   

economic conditions in the healthcare industry; and

 

   

efforts by governments, insurance companies and others to contain health care costs, including changes to reimbursement policies.

We believe that period-to-period comparisons of our historical results are not necessarily meaningful, and investors should not rely on them as an indication of our future performance. To the extent we experience the factors described above, our future operating results may not meet the expectations of securities analysts or investors from time to time, which may cause the market price of our common stock to decline.

We may be unable to obtain any benefit from our net operating loss carryforwards and research and development credit carryforwards.

At March 31, 2014, the Company had federal and state net operating loss carryforwards, or NOLs, of approximately $193.0 million which expire in varying years from fiscal 2015 through fiscal 2034. During the year ended March 31, 2014, state NOLs of approximately $1.2 million expired. In addition, at March 31, 2014, the Company had federal and state research and development credit carryforwards of approximately $12.5 million and $5.8 million, respectively, which expire in varying years from fiscal 2015 through fiscal 2034.

 

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We are required to regularly assess our ability to realize our deferred tax assets, including our NOLs. If we determine that all or a portion of our deferred tax assets may not be realized, then we will be required to release some or all of our valuation allowance for those assets, which could have a material adverse impact on our results of operations.

We may not have sufficient funds to develop and commercialize our new products.

The development, manufacture and sale of any medical device is very expensive. We cannot be sure that we will have the necessary funds to develop and commercialize our new products, or that additional funds will be available on commercially acceptable terms, if at all. If we are unable to obtain the necessary funding to develop and commercialize our products, our business may be adversely affected. We believe we have sufficient liquidity to finance our operations for the next fiscal year. We also may evaluate from time to time other financing alternatives as necessary to fund operations.

We own patents, trademarks, trade secrets, copyrights and other intellectual property and know-how that we believe gives us a competitive advantage. If we cannot protect our intellectual property and develop or otherwise acquire additional intellectual property, competition could force us to lower our prices, which could hurt our profitability.

Our intellectual property rights are and will continue to be a critical component of our success. A substantial portion of our intellectual property rights relating to the Impella products, AB5000, and other products under development is in the form of trade secrets, rather than patents. Unlike patents, trade secrets are only recognized under applicable law if they are kept secret by restricting their disclosure to third parties. We protect our trade secrets and proprietary knowledge in part through confidentiality agreements with employees, consultants and other parties. However, certain consultants and third parties with whom we have business relationships, and to whom in some cases we have disclosed trade secrets and other proprietary knowledge, may also provide services to other parties in the medical device industry, including companies, universities and research organizations that are developing competing products. In addition, some of our former employees who were exposed to certain of our trade secrets and other proprietary knowledge in the course of their employment may seek employment with, and become employed by, our competitors. We cannot be assured that consultants, employees and other third parties with whom we have entered into confidentiality agreements will not breach the terms of such agreements by improperly using or disclosing our trade secrets or other proprietary knowledge, that we will have adequate remedies for any such breach, or that our trade secrets will not become known to or be independently developed by our competitors. The loss of trade secret protection for technologies or know-how relating to our product portfolio and products under development could adversely affect our business and our prospects.

Our business position also depends in part on our ability to maintain and defend our existing patents and obtain, maintain, and defend additional patents and other intellectual property rights. We intend to seek additional patents, but our pending and future patent applications may not be approved, may not give us a competitive advantage, could be challenged by others, or if issued, could be deemed invalid or unenforceable. Patent prosecution, related proceedings, and litigation in the U.S. and in other countries may be expensive, time consuming and ultimately unsuccessful. In addition, patents issued by foreign countries may afford less protection than is available under U.S. patent law and may not adequately protect our proprietary information. Our competitors may independently develop proprietary technologies and processes that are the same as or substantially equivalent to ours or design around our patents. The expiration of patents on which we rely for protection of key products could diminish our competitive advantage and adversely affect our business and our prospects.

Companies in the medical device industry typically obtain patents and frequently engage in substantial intellectual property litigation. Our products and technologies could infringe on the rights of others. If a third-party successfully asserts a claim for infringement against us, we may be liable for substantial damages, be unable to sell products using that technology, or have to seek a license or redesign the related product. These alternatives may be uneconomical or impossible. Intellectual property litigation could be costly, result in product development delays and divert the efforts and attention of management from our business.

Product liability claims could damage our reputation and adversely affect our financial results.

The clinical use of medical products, even after regulatory approval, poses an inherent risk of product liability claims. We maintain limited product liability insurance coverage, subject to certain deductibles and exclusions. We cannot be sure that product liability insurance will be available in the future or will be available on acceptable terms or at reasonable costs, or that such insurance will provide us with adequate coverage against potential liabilities. Claims against us, regardless of their merit or potential outcome, may also hurt our ability to obtain physician endorsement of our products or expand our business. As we continue to introduce more products, we face an increased risk that a product liability claim will be brought against us.

Some of our products are designed for patients who suffer from late-stage or end-stage heart failure, and many of these patients do not survive, even when supported by our products. There are many factors beyond our control that could result in patient death, including the condition of the patient prior to use of the product, the skill and reliability of physicians and hospital personnel using and monitoring the product and product maintenance by customers. However, the failure of the products we distribute for clinical testing or sale could give rise to product liability claims and negative publicity.

 

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The risk of product liability claims is heightened when we sell products that are intended to support a patient until the end of life. The finite life of our products, as well as complications associated with their use, could give rise to product liability claims whether or not the products have extended or improved the quality of a patient’s life. If we have to pay product liability claims in excess of our insurance coverage, our financial condition will be adversely affected.

Quality problems can result in substantial costs and inventory write-downs.

Government regulations require us to track materials used in the manufacture of our products, so that if a problem is identified in one product it can be traced to other products that may have the same problem. An identified quality problem may require reworking or scrapping related inventory and recalling previous shipments. Because a malfunction in our products can be life-threatening, we may be required to recall and replace, free of charge, products already in the marketplace. Any quality problem could cause us to incur significant expenses, lead to significant write-offs, injure our reputation and harm our business and financial results.

Disruptions of critical information systems or material breaches in the security of our systems could harm our business, customer relations and financial condition.

We rely in part on information technology to store information, interface with customers, maintain financial accuracy and accurately produce our financial statements. If our information technology systems do not effectively and securely collect, store, process and report relevant data for the operation of our business, whether due to equipment malfunction or constraints, software deficiencies or human error, our ability to effectively plan, forecast and execute our business plan and comply with applicable laws and regulations will be impaired, perhaps materially. Any such impairment could have a material adverse effect on our results of operations, financial condition and the timeliness with which we report our internal and external operating results.

Our business requires us to use and store customer, vendor, employee and business partner and, in certain instances patient, personally identifiable information. We are subject to various domestic and international privacy and security regulations, including but not limited to the Health Insurance Portability and Accountability Act of 1996, or HIPAA. HIPAA mandates, among other things, the adoption of uniform standards for the electronic exchange of information in common healthcare transactions, as well as standards relating to the privacy and security of individually identifiable health information, which require the adoption of administrative, physical and technical safeguards to protect such information. In addition, many states have enacted comparable laws addressing the privacy and security of health information, some of which are more stringent than HIPAA. If we fail to comply with these standards, we could be subject to criminal penalties and civil sanctions.

While we devote significant resources to network security, data encryption and other security measures to protect our systems and data, including our own proprietary information and the confidential and personally identifiable information of our customers, employees, business partners and patients, these security measures cannot provide absolute security. The costs to us to eliminate or alleviate network security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant, and our efforts to address these problems may not be successful, resulting potentially in the theft, loss, destruction or corruption of information we store electronically, as well as unexpected interruptions, delays or cessation of service, any of which could cause harm to our business operations. Moreover, if a computer security breach or cyber-attack affects our systems or results in the unauthorized release of proprietary or personally identifiable information, our reputation could be materially damaged and our operations could be impaired. We would also be exposed to a risk of loss or litigation and potential liability, which could have a material adverse effect on our business, results of operations and financial condition.

If we acquire other companies or businesses, we will be subject to risks that could hurt our business.

We may pursue acquisitions to obtain complementary businesses, products or technologies. Any such acquisition may not produce the revenues, earnings or business synergies that we anticipate and an acquired business, product or technology might not perform as we expect. Our management could spend a significant amount of time, effort and money in identifying, pursuing and completing the acquisition. If we complete an acquisition, we may encounter significant difficulties and incur substantial expenses in integrating the operations and personnel of the acquired company into our operations. In particular, we may lose the services of key employees of the acquired company and we may make changes in management that impair the acquired company’s relationships with employees, vendors and customers. Additionally, we may acquire development-stage companies that are not yet profitable and which require continued investment, which could decrease our future earnings or increase our futures losses.

Any of these outcomes could prevent us from realizing the anticipated benefits of an acquisition. To pay for an acquisition, we might use stock or cash. Alternatively, we might borrow money from a bank or other lender. If we use stock, our stockholders would experience dilution of their ownership interests. If we use cash or debt financing, our financial liquidity would be reduced. As a result of our annual impairment testing, we may be required to capitalize a significant amount of intangibles, including goodwill, which may lead to significant amortization or write-off charges. These amortization charges and write-offs could decrease our future earnings or increase our future losses.

 

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We use estimates, make judgments and apply certain methods in measuring the progress of our business in determining our financial results and in applying our accounting policies. As these estimates, judgments and methods change, our assessment of the progress of our business and our results of operations could vary.

The methods, estimates and judgments we use in applying our accounting policies have a significant impact on our results of operations. Such methods, estimates and judgments are, by their nature, subject to substantial risks, complexities, uncertainties and assumptions, and factors may arise over time that may lead us to change our methods, estimates and judgments. Changes in any of our assumptions may cause variation in our reporting and may adversely affect our reported financial results.

Fluctuations in foreign currency exchange rates could result in declines in our reported sales and results of operations.

Because some of our international sales are denominated in local currencies and not in U.S. dollars, our reported sales and earnings are subject to fluctuations in foreign currency exchange rates, primarily the Euro. At present, we do not hedge our exposure to foreign currency fluctuations. As a result, sales and expenses occurring in the future that are denominated in foreign currencies may be translated into U.S. dollars at less favorable rates, resulting in reduced revenues and earnings.

Risks Related to Our Common Stock

The market price of our common stock is volatile.

The market price of our common stock has fluctuated widely and may continue to do so. For example, from April 1, 2013 to March 31, 2014, the price of our stock ranged from a low of $16.05 per share to a high of $30.77 per share. Many factors could cause the market price of our common stock to rise and fall. Some of these factors are:

 

   

variations in our quarterly results of operations;

 

   

the status of regulatory approvals for our products;

 

   

the introduction of new products by us or our competitors;

 

   

acquisitions or strategic alliances involving us or our competitors;

 

   

changes in health care policy or third-party reimbursement practices;

 

   

changes in estimates of our performance or recommendations by securities analysts;

 

   

the hiring or departure of key personnel;

 

   

results of clinical trials of our products;

 

   

future sales of shares of common stock in the public market;

 

   

the outcome of currently pending litigation and governmental investigations; and

 

   

market conditions in the industry, particularly around reimbursement for our products and the economy as a whole.

In addition, the stock market in general and the market for shares of medical device companies in particular have experienced extreme price and volume fluctuations in recent years. These fluctuations are often unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the market price of our common stock. When the market price of a company’s stock drops significantly, stockholders often institute securities class action litigation against that company. Any litigation against us could cause us to incur substantial costs, divert the time and attention of our management and other resources, or otherwise harm our business.

The sale of additional shares of our common stock, or the exercise of outstanding options to purchase our common stock, would dilute our stockholders’ ownership interest.

We have issued a substantial number of options to acquire our common stock and we expect to continue to issue options to our employees and others. If all outstanding stock options were exercised, our stockholders would suffer dilution of their ownership interest. In addition, we have issued from time to time, additional shares of our common stock in connection with acquisitions, public offerings, and other activities. Future issuances of our common stock would also result in a dilution of our stockholders’ ownership interest.

The sale of material amounts of common stock could encourage short sales by third parties and depress the price of our common stock. As a result, our stockholders may lose all or part of their investment.

The downward pressure on our stock price caused by the sale of a significant number of shares of our common stock or the perception that such sales could occur by any of our significant stockholders could cause our stock price to decline, thus allowing short sellers of our stock an opportunity to take advantage of any decrease in the value of our stock. The presence of short sellers in our common stock may further depress the price of our common stock.

 

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Our certificate of incorporation and Delaware law could make it more difficult for a third-party to acquire us and may prevent our stockholders from realizing a premium on our stock.

Provisions of our certificate of incorporation and Delaware General Corporation Law may make it more difficult for a third-party to acquire us, even if doing so would allow our stockholders to receive a premium over the prevailing market price of our stock. Those provisions of our certificate of incorporation and Delaware law are intended to encourage potential acquirers to negotiate with us and allow our Board of Directors the opportunity to consider alternative proposals in the interest of maximizing stockholder value. However, such provisions may also discourage acquisition proposals or delay or prevent a change in control which could negatively affect our stock price.

The market value of our common stock could vary significantly based on market perceptions of the status of our development efforts.

The perception of securities analysts regarding our product development efforts could significantly affect our stock price. As a result, the market price of our common stock has and could in the future change substantially when we or our competitors make product announcements. Many factors affecting our stock price are industry related and beyond our control.

We have not paid and do not expect to pay dividends and any return on our stockholders’ investment will likely be limited to the value of our common stock.

We have never paid dividends on our common stock and do not anticipate paying dividends on our common stock in the foreseeable future. The payment of dividends on our common stock will depend on our earnings, financial condition and other business and economic factors affecting us at such time as our board of directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on our stockholders’ investment will only occur if our stock price appreciates.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

 

ITEM 2. PROPERTIES

Our headquarters is located at 22 Cherry Hill Drive in Danvers, Massachusetts and consists of approximately 96,000 square feet of space under an operating lease. In February 2014, we entered into a lease agreement to continue renting our existing space plus 16,800 additional square feet through February 28, 2021. In addition, we have certain rights to terminate the lease early, subject to the payment of a specified termination fee based on the timing of the termination, as further outlined in the lease amendment. This facility encompasses most of our U.S. operations, including research and development, manufacturing, sales and marketing and general and administrative departments. The monthly lease payments over the term of the lease are as follows:

 

   

The base rent for March 2014 through April 2014 was $66,000 per month; and

 

   

The base rent for May 2014 through February 2016 is $74,050 per month; and

 

   

The base rent for March 2016 through February 2018 will be $70,750 per month; and

 

   

The base rent for March 2018 through February 2021 will be $72,750 per month.

Our European headquarters is located in Aachen, Germany and consists of approximately 33,000 square feet of space under an operating lease. In July 2013, we entered into a lease agreement to continue renting our existing space in Aachen, Germany through July 31, 2023. The lease payments are approximately 34,500€ (euro) (approximately U.S. $47,000 at March 31, 2014 exchange rates) per month. The building houses most of the manufacturing operations for our Impella product line as well as certain research and development functions and the sales, marketing and general and administrative functions for most of our product lines sold in Europe and the Middle East.

We lease a small office in Paris, France, which focuses on the sales and marketing of our product lines sold in France. We also lease a small office in Tokyo, Japan which houses regulatory personnel as we prepare for commercial launch in Japan.

 

ITEM 3. LEGAL PROCEEDINGS

We are involved from time to time in various legal actions, the outcomes of which are not within our complete control and may not be known to us for prolonged periods of time. For a discussion of our material legal proceedings as of March 31, 2014, please see Note 11 to our consolidated financial statements entitled “Commitments and Contingencies,” which is incorporated by reference into this item.

 

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

 

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PART II

 

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

Market Price

Our common stock is traded on the Nasdaq Global Market under the symbol “ABMD.” The following table sets forth the range of high and low sales prices per share of common stock, as reported by the Nasdaq Global Market for our two most recent fiscal years:

 

     High      Low  

Fiscal Year Ended March 31, 2013

     

First Quarter

   $ 26.17       $ 18.74   

Second Quarter

     24.93         19.49   

Third Quarter

     21.29         11.80   

Fourth Quarter

     18.92         11.96   
     High      Low  

Fiscal Year Ended March 31, 2014

     

First Quarter

   $ 23.50       $ 16.05   

Second Quarter

     25.25         18.15   

Third Quarter

     29.24         18.54   

Fourth Quarter

     30.77         25.26   

Number of Stockholders

As of May 15, 2014, we had approximately 561 holders of record of our common stock and there were approximately 9,050 beneficial holders of our common stock. Many beneficial holders hold their stock through depositories, banks and brokers included as a single holder in the single “street” name of each respective depository, bank, or broker.

Dividends

We have never declared or paid any cash dividends on our common stock and do not anticipate paying any cash dividends on our common stock in the foreseeable future. We anticipate that we will retain all of our future earnings, if any, to support operations and to finance the growth and development of our business. Our payment of any future dividends will be at the discretion of our board of directors and will depend upon our financial condition, operating results, cash needs and growth plans.

 

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Performance Graph

The following graph compares the yearly change in the cumulative total stockholder return for our last five full fiscal years, based upon the market price of our common stock, with the cumulative total return on a Nasdaq Composite Index (U.S. Companies) and a peer group, the Nasdaq Medical Equipment-SIC Code 3840-3849 Index, which is comprised of medical equipment companies, for that period. The performance graph assumes the investment of $100 on March 31, 2009 in our Common Stock, the Nasdaq Composite Index (U.S. Companies) and the peer group index, and the reinvestment of any and all dividends.

 

LOGO

Cumulative Total Return ($)

 

     3/31/2009      3/31/2010      3/31/2011      3/31/2012      3/31/2013      3/31/2014  

ABIOMED, Inc

     100.00         210.61         296.53         452.86         381.02         531.43   

Nasdaq Composite Index

     100.00         156.87         181.94         202.25         213.76         274.70   

Nasdaq Medical Equipment SIC Code 3840-3849

     100.00         153.75         180.85         158.14         162.01         186.43   

This graph is not “soliciting material” under Regulation 14A or 14C of the rules promulgated under the Securities Exchange Act of 1934, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference in any of our filings under the Securities Act of 1933, as amended, or the Exchange Act whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.

Transfer Agent

American Stock Transfer & Trust Company, 59 Maiden Lane, New York, NY 10038, is our stock Transfer Agent.

 

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ITEM 6. SELECTED FINANCIAL DATA

SELECTED CONSOLIDATED FINANCIAL DATA

(In thousands, except per share data)

 

     Fiscal Years Ended March 31,  
     2014      2013     2012     2011     2010  
     (in $000’s)  
Statement of Operations Data:            

Revenue:

           

Products

   $ 183,280       $ 157,614      $ 125,286      $ 99,837      $ 84,765   

Funded research and development

     363         510        1,089        1,314        948   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
     183,643         158,124        126,375        101,151        85,713   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses:

           

Cost of product revenue

     37,322         31,596        24,507        21,977        22,529   

Research and development

     30,707         25,647        27,159        26,677        25,954   

Selling, general and administrative

     107,251         84,227        71,711        62,287        60,837   

Amortization of intangible assets

     —           111        1,478        1,395        1,469   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
     175,280         141,581        124,855        112,336        110,789   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     8,363         16,543        1,520        (11,185     (25,076
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

           

Investment income (expense), net

     118         (7     (3     9        373   

Gain on sale of WorldHeart stock

     —           —          —          456        6,389   

Gain on settlement of investment

     —           —          1,017        —          —     

Other income (expense), net

     49         326        9        (143     (39
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
     167         319        1,023        322        6,723   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax provision

     8,530         16,862        2,543        (10,863     (18,353

Income tax provision

     1,179         1,848        1,048        892        671   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 7,351       $ 15,014      $ 1,495      $ (11,755   $ (19,024
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income (loss) per share

   $ 0.19       $ 0.38      $ 0.04      $ (0.32   $ (0.52

Basic weighted average shares outstanding

     39,334         39,113        38,374        37,167        36,875   

Diluted net income (loss) per share

   $ 0.18       $ 0.37      $ 0.04      $ (0.32   $ (0.52

Diluted weighted average shares outstanding

     41,606         41,052        40,172        37,167        36,875   

Balance Sheet Data:

           

Cash, cash equivalents, and short and long term marketable securities

   $ 118,340       $ 88,113      $ 77,223      $ 60,312      $ 58,265   

Working capital

     87,555         89,549        88,124        62,394        64,604   

Total assets

     205,407         169,999        153,911        131,588        129,570   

Stockholder’s equity

     168,353         137,080        126,297        104,743        107,956   

 

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

All statements, trend analysis and other information contained in the following discussion relative to markets for our products and trends in revenue, gross margin and anticipated expense levels, as well as other statements, including words such as “may,” “anticipate,” “believe,” “plan,” “estimate,” “expect,” and “intend” and other similar expressions constitute forward-looking statements. These forward-looking statements are subject to business and economic risks and uncertainties and our actual results of operations may differ materially from those contained in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed under Item 1A Risk Factors as well as other risks and uncertainties referenced in this report.

Overview

We are a leading provider of mechanical circulatory support devices and we offer a continuum of care to heart failure patients. We develop, manufacture and market proprietary products that are designed to enable the heart to rest, heal and recover by improving blood flow and/or performing the pumping function of the heart. Our products are used in the cardiac catheterization lab, or cath lab, by interventional cardiologists and in the heart surgery suite by heart surgeons for patients who are in need of hemodynamic support prophylactically or emergently before, during or after angioplasty or heart surgery procedures. We believe heart recovery is the optimal clinical outcome for patients experiencing heart failure because it restores their quality of life. In addition, we believe that for the care of such patients, heart recovery is the most cost-effective solution for the healthcare system.

Our strategic focus and the driver of the majority of our revenue growth is the market penetration of our Impella family of products. Our Impella 2.5 product received 510(k) clearance in June 2008 from the U.S. Food and Drug Administration, or FDA, for partial circulatory support for up to six hours and has been placed at 859 sites since initial launch.

We received 510(k) clearance in April 2009 for our Impella 5.0 and Impella LD devices for circulatory support for up to six hours. These devices are larger and provide more blood flow to patients than the Impella 2.5.

In September 2012, our Impella CP product received 510(k) clearance from the FDA for partial circulatory support for up to six hours. The Impella CP also has CE Mark approval and Health Canada approval which allow us to market the device in the European Union and Canada. As of March 31, 2014, we have placed Impella CP at approximately 389 U.S. hospitals.

In November 2012, we announced that the Impella RP received Investigational Device Exemption, or IDE, approval from the FDA for use in RECOVER RIGHT, a pivotal clinical study in the U.S. The RECOVER RIGHT study was designed to enroll up to 30 patients with signs of right side heart failure who require hemodynamic support and are being treated in the cath lab or surgery suite. The Impella RP is a percutaneous catheter-based axial flow pump that is designed to allow greater than four liters of flow per minute and is intended to provide the flow and pressure needed to compensate for right side heart failure. In April 2013, we enrolled the first patient in RECOVER RIGHT and we had completed enrollment of the 30 patients in the Impella RP RECOVER RIGHT study in March 2014. In May 2014, we received approval for implementation of a Continuous Access Protocol, or CAP, from the FDA for the RECOVER RIGHT RP Trial. The CAP will allow us to enroll up to 22 additional patients at the 15 U.S. investigational sites for a six month period. In April 2014, the Impella RP received CE Marking approval which allows for commercial sales of Impella RP in the EU and other countries that require a CE Marking approval for commercial sales. This product is not currently available for commercial use outside of Europe.

In December 2012, as part of the FDA’s 515 Program Initiative, an FDA panel voted to recommend continuation of Class III status for temporary ventricular support devices within the non-roller type cardiopulmonary bypass blood pumps category, which includes our Impella products. The panel’s recommendation of Class III for this category of device is consistent with the current Class III designation for these device types. The FDA accepted the Panel’s recommendation recently as reflected in its issuance of a Proposed Order reflecting this categorization. The Proposed Order was open for public comment until April 7 2014. The FDA process will then be to address the public comments and over an unspecified period of time develop and issues a final order classifying these devices in Class III. We will then be required to file a PMA application for our Impella products. We will have 90 days to file the PMA application from the issuance of the Final Order. Under the 515 Program Initiative, we will be permitted to continue to market our Impella products pursuant to the 510(k) clearance for a sufficient period of time to allow for the submission and review of PMA applications relating to our Impella products.

We have been working with the FDA to submit a modular PMA submission for Impella 2.5 in response to the panel’s recommendation of Class III for Impella products. A modular PMA allows for a parallel submission of preclinical and manufacturing data for review while still preparing the clinical module. In July 2013, we received written notification that the FDA has reviewed our proposed PMA shell for modular review of the Impella 2.5 System. The FDA has confirmed that it agrees with our proposed shell and we submitted all modules required by the FDA as part of the planned modular PMA submission in March 2014. The PMA will be treated as a standard PMA and all modules will now be combined for final review by the FDA.

In November 2011, we announced Symphony, a synchronized minimally invasive implantable cardiac assist device designed to treat chronic patients with moderate heart failure by improving patient hemodynamics and potentially improving their quality of life. The device is designed with the primary goal of stabilizing the progression of heart failure and recovering or remodeling the heart. We are currently conducting first-in-human clinical trials of Symphony outside the U.S. This product is not currently approved by the FDA for sale in the U.S.

 

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On October 26, 2012, we were informed that the United States Attorney’s Office for the District of Columbia is conducting an investigation that is focused on our marketing and labeling of the Impella 2.5. On October 31, 2012, we accepted service of a subpoena related to this investigation seeking documents related to the Impella 2.5. We believe we have substantially complied with the subpoena and have submitted the requested documents to the United States Attorney’s Office. On September 13, 2013, we entered into a tolling agreement with the United States Attorney’s Office, pursuant to which we and the United States Attorney’s Office mutually agreed to toll the applicable statutes of limitations for all criminal, civil and administrative offenses and violations that could be charged or claimed against us as of that date until June 2, 2014. On May 27, 2014, we executed an extension of the tolling agreement through February 2, 2015. Because the investigation is in the early stages, we are unable to predict the ultimate outcome or determine whether a liability has been incurred or make an estimate of the reasonably possible liability, if any, that could result from any unfavorable outcome associated with this inquiry. We have incurred significant expenses related to this investigation and we expect to continue to incur additional expenses in the future.

On November 16 and 19, 2012, two purported class action complaints were filed against us and certain of our officers in the U.S. District Court for the District of Massachusetts by alleged purchasers of our common stock, on behalf of themselves and persons or entities that purchased or acquired our securities between August 5, 2011 and October 31, 2012. The complaints alleged that the defendants violated the federal securities laws in connection with disclosures related to the FDA and the marketing and labeling of our Impella 2.5 product and seek damages in an unspecified amount. The Court has consolidated these complaints and a consolidated amended complaint was filed by the plaintiffs on May 20, 2013. On July 8, 2013, we filed a motion to dismiss the consolidated class action. Oral arguments on our motion to dismiss were conducted before the presiding district court judge on September 18, 2013. On April 10, 2014, the U.S. District Court entered an order granting our motion and dismissed the consolidated and amended complaint. On May 9, 2014, the plaintiffs filed a notice of appeal.

On February 4, 2013, an alleged stockholder of the Company filed a derivative action on our behalf against each of our directors in the U.S. District Court for the District of Massachusetts. The complaint alleged that the directors breached their fiduciary duties to us and our stockholders in connection with disclosures related to the FDA and the marketing and labeling of our Impella 2.5 product and sought damages in an unspecified amount. On March 22, 2013, we filed a motion to dismiss the derivative action. On June 21, 2013, the District Court granted our motion to dismiss. The plaintiff has appealed the dismissal to the United States Court of Appeals for the First Circuit. Oral argument was conducted before the appellate court on February 5, 2014.

On April 25, 2014, we received a subpoena from the Boston regional office of the United States Department of Health and Human Services, Office of Inspector General requesting materials relevant to our reimbursement of expenses and remuneration to healthcare providers for a six month period from July 2012 through December 2012. The Office of Inspector General has informed us that the subpoena currently relates to a civil investigation. We intend to comply fully and promptly with this request.

Our revenues are primarily generated from our Impella line of products. Revenues from our non-Impella products, largely focused on the heart surgery suite, have been lower over the past several years as we have strategically shifted our sales and marketing efforts towards our Impella products and the cath lab. We expect revenues from our non-Impella products, primarily AB5000, will continue to decrease as we continue to focus on our Impella products.

For the year ended March 31, 2014, we recognized net income of $7.4 million. Even though we were profitable in fiscal 2014, we may incur additional losses in the future as we continue to invest in research and development related to our products, conduct clinical studies and registries on our products, expand our commercial infrastructure, pay additional excise taxes as a result of the implementation of the medical device tax in the U.S. in January 2013, incur additional legal fees to comply with the subpoena received from the Department of Justice in October 2012 and the Office of the Inspector General in April 2014, defend ourselves from other legal claims, incur additional costs in preparing our PMA application, enter into collaborations with other parties and invest in new markets such as Japan.

Critical Accounting Policies and Estimates

Significant Estimates

Our discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements. The preparation of financial statements in conformity with generally accepted accounting principles of the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We base our estimates on historical experience and various other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, collectability of receivables, realizability of inventory, goodwill and intangible assets, valuation of long-lived assets, accrued expenses, warranty provisions, stock-based compensation, income taxes, including the valuation allowance for deferred tax assets, contingencies and litigation. Provisions for depreciation are based on their estimated useful lives using the straight-line method. Some of these estimates can be subjective and complex and, consequently, actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

 

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Revenue Recognition

We recognize revenue when evidence of an arrangement exists, title has passed (generally upon shipment) or services have been rendered, the selling price is fixed or determinable and collectibility is reasonably assured.

Revenue from product sales to customers is recognized when delivery has occurred. All costs related to product sales are recognized at time of delivery. We do not provide for rights of return to customers on our product sales and therefore we do not record a provision for returns.

Maintenance and service support contract revenues are included in product revenue and are recognized ratably over the term of the service contracts. Revenue is recognized as it is earned in limited instances where we rent console medical devices to customers on a month-to-month basis or for a longer specified period of time. Other service revenues are recognized as the services are performed.

Government-sponsored research and development contracts and grants generally provide for payment on a cost-plus-fixed-fee basis. Revenues from these contracts and grants are recognized as work is performed, provided the government has appropriated sufficient funds for the work. Under contracts in which we elect to spend significantly more on the development project during the term of the contract than the total contract amount, we prospectively recognize revenue on such contracts ratably over the term of the contract as related research and development costs are incurred.

Goodwill

Goodwill is recorded when consideration for an acquisition exceeds the fair value of the net tangible and intangible assets acquired. Goodwill is not amortized, instead we evaluate goodwill for impairment at least annually at October 31, as well as whenever events or changes in circumstances suggest that the carrying amount may not be recoverable.

Goodwill impairment assessments are performed at the reporting unit level. The goodwill test involves a two-step process. The first step is a comparison of the reporting unit’s fair value to its carrying value. If the reporting unit’s fair value exceeds its carrying value, no further procedures are required. However, if the reporting unit’s fair value is less than the carrying value, an impairment of goodwill may exist, requiring a second step to measure the amount of impairment loss. If the implied fair value of goodwill is less than the recorded goodwill, an impairment charge is recorded for the difference.

In applying the goodwill impairment test, we may assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value (“Step 0”). Qualitative factors may include, but are not limited to, macroeconomic conditions, industry conditions, the competitive environment, changes in the market for our products and services, regulatory and political developments, cost factors, and entity specific factors such as strategies and overall financial performance. If, after assessing the qualitative factors, we determine it is not more likely than not that the fair value of a reporting unit is less than its carry amount, then performing the two-step impairment test is unnecessary.

When necessary, impairment of goodwill is tested at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. We estimate the fair value of our single reporting unit using a combination of the income approach and the market approach. The income approach incorporates the use of a discounted cash flow method in which the estimated future cash flows and terminal values for the reporting unit is discounted to a present value using an appropriate discount rate. Cash flow projections are based on management’s estimates of economic and market conditions which drive key assumptions of revenue growth rates, operating margins, capital expenditures and working capital requirements. The discount rate is based on the specific risk characteristics of the reporting unit and its underlying forecast. The market approach estimates fair value by comparing publicly traded companies with similar operating and investment characteristics as the reporting unit. The fair values determined by the market approach and income approach, are weighted to determine the fair value for the reporting unit based primarily on the similarity of the operating and investment characteristics of the reporting unit to the comparable publicly traded companies used in the market approach. In order to assess the reasonableness of the calculated reporting unit’s fair value, we also compare the reporting unit’s fair value to its market capitalization (per share stock price times number of common shares outstanding) and calculate an implied control premium (the excess of the reporting unit’s fair value over the market capitalization).

If the carrying amount of the reporting unit exceeds its fair value, then a second step is performed to measure the amount of impairment loss, if any, by comparing the fair value of each identifiable asset and liability in the reporting unit to the total fair value of the reporting unit. Any impairment loss is expensed in the consolidated statement of operations and is not reversed if the fair value subsequently increases.

We performed a Step 0 qualitative assessment during the annual impairment review for fiscal 2014 as of October 31, 2013 and concluded that it is not more likely than not that the fair value of our single reporting unit is less than its carrying amount. Therefore, we determined that no write-down for impairment of goodwill was required for fiscal 2014. The carrying amount of goodwill at March 31, 2014 was $38.0 million.

 

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Stock-Based Compensation

We record stock-based compensation in our statements of operations based on the fair value method. This expense is determined after consideration of several significant judgments and estimates, including the probable outcome for awards with a performance condition or conditions. The fair value of stock option grants is estimated using the Black-Scholes option pricing model, which requires management to make certain assumptions with respect to selected model inputs. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for a term consistent with the expected life of the stock options. Volatility assumptions are calculated based on historical volatility of our stock. In addition, an expected dividend yield of zero is used in the option valuation model because we do not pay dividends and do not expect to pay any dividends in the foreseeable future. We estimate the expected term of options based on historical exercise experience and estimates of future exercises of unexercised options. Forfeitures are estimated based on an analysis of actual option forfeitures, adjusted to the extent historic forfeitures may not be indicative of forfeitures in the future.

For awards with service conditions only, we recognize compensation cost on a straight-line basis over the requisite service period. For awards with service and performance conditions, we recognize compensation costs using the graded vesting method over the requisite service period. Accruals of compensation cost for awards with performance conditions are based on the probable outcome of the performance conditions. The cumulative effects of changes in the probability outcomes are recorded in the period in which the changes occur.

Income Taxes

Our provision for income taxes is composed of a current and a deferred portion. The current income tax provision is calculated as the estimated taxes payable or refundable on tax returns for the current year. The deferred income tax provision is calculated for the estimated future tax effects attributable to temporary differences and net operating loss carryforwards using expected tax rates in effect in the years during which the differences are expected to reverse.

We regularly assess our ability to realize our deferred tax assets. Assessing the realization of deferred tax assets requires significant management judgment. In determining whether our deferred tax assets are more likely than not realizable, we evaluated all available positive and negative evidence, and weighted the evidence based on its objectivity. Evidence we considered included, our history of net operating losses incurred for most of our existence, expiration of various federal and state attributes, the uncertainty relative to the Department of Justice investigation, our planned PMA application for our Impella products, expansion into new markets, such as Japan, government reimbursement environment for our products, profitability for recent years and uncertainties around forecasted profit before tax for fiscal 2015. Based on our review of all available evidence, we determined that the objectively verifiable negative evidence outweighed the positive evidence and we recorded a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realizable as of March 31, 2014.

Accounting for income taxes requires a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if, based on the technical merits, it is more likely than not that the position will be sustained upon audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. We re-evaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax laws, effectively settled issues under audit and new audit activity. Any changes in these factors could result in the recognition of a tax benefit or an additional charge to the tax provision. We accrue for the effects of uncertain tax positions and the related potential penalties and interest.

Recent Accounting Pronouncements

In June 2013, the FASB issued Accounting Standards Update, or ASU, 2013-11, Income Taxes (ASC Topic 740), Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The ASU requires entities to present unrecognized tax benefits as a decrease in a net operating loss, similar to tax loss or tax credit carryforward if certain criteria are met. The standard clarifies financial presentation requirements for unrecognized tax benefits but will not alter the way in which entities assess deferred tax assets for realizability. The guidance is effective for the fiscal year, and interim periods within that fiscal year, beginning after December 15, 2013. We will adopt this guidance beginning in the first quarter of fiscal 2015. The impact of adoption is not expected to be material.

 

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Results of Operations

The following table sets forth certain consolidated statements of operations data for the periods indicated as a percentage of total revenues:

 

     Year Ended March 31,  
         2014             2013             2012      

Revenues:

      

Product

     99.8     99.7     99.1

Funded research and development

     0.2        0.3        0.9   
  

 

 

   

 

 

   

 

 

 

Total revenues

     100.0        100.0        100.0   
  

 

 

   

 

 

   

 

 

 

Costs and expenses:

      

Cost of product revenue

     20.3        20.0        19.4   

Research and development

     16.7        16.2        21.5   

Selling, general and administrative

     58.4        53.3        56.7   

Amortization of intangible assets

     —          —          1.2   
  

 

 

   

 

 

   

 

 

 

Total costs and expenses

     95.4        89.5        98.8   
  

 

 

   

 

 

   

 

 

 

Income from operations

     4.6        10.5        1.2   
  

 

 

   

 

 

   

 

 

 

Income before income tax provision

     4.6        10.7        2.0   

Income tax provision

     0.6        1.2        0.8   
  

 

 

   

 

 

   

 

 

 

Net income

     4.0     9.5     1.2
  

 

 

   

 

 

   

 

 

 

Fiscal Years Ended March 31, 2014 and March 31, 2013 (“fiscal 2014” and “fiscal 2013”)

Revenue

Our revenues are comprised of the following:

 

     Year Ended
March 31,
 
    
     2014      2013  
     (in $000’s)  

Impella product revenue

   $ 166,971       $ 140,325   

Service and other revenue

     10,944         9,155   

Other products

     5,365         8,134   
  

 

 

    

 

 

 

Total product revenues

     183,280         157,614   

Funded research and development

     363         510   
  

 

 

    

 

 

 

Total revenues

   $ 183,643       $ 158,124   
  

 

 

    

 

 

 

Impella product revenue encompasses Impella 2.5, Impella CP, Impella 5.0, and Impella LD product sales. Other product revenue includes AB5000, BVS5000 and product accessory sales. Service and other revenue represents revenue earned on service maintenance contracts and preventive maintenance calls.

Total revenues for fiscal 2014 increased by $25.5 million, or 16%, to $183.6 million from $158.1 million for fiscal 2013. The increase in total revenue was primarily due to higher Impella revenue due to greater utilization in the U.S., which was primarily attributable to the introduction of Impella CP in the second half of fiscal 2013.

Impella product revenues for fiscal 2014 increased by $26.7 million, or 19%, to $167.0 million from $140.3 million for fiscal 2013. Most of our increase in Impella revenue was from disposable catheter sales in the U.S., as we focus on increasing utilization of our disposable catheter products through continued investment in our field organization and physician training programs. Also, contributing to the sales increase was the introduction of Impella CP to 389 sites in the U.S. since regulatory approval in September 2012. Impella product revenues

 

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outside the US increased by $6.0 million, or 67%, during fiscal 2014. Most of this increase was due to Impella product sales in Europe, primarily Germany, as we expanded our commercial infrastructure there. We expect Impella revenues to continue to increase as we add new customer sites, increase utilization at existing customer sites, continue our commercial launch of Impella CP and expand our efforts in Europe.

Service and other revenue for fiscal 2014 increased by $1.7 million, or 18%, to $10.9 million from $9.2 million for fiscal 2013. The increase in service revenue was primarily due to an increase in preventative maintenance service contracts, as we expand the use of our Impella AIC consoles to additional sites.

Other product revenues for fiscal 2014 decreased by $2.7 million, or 33%, to $5.4 million from $8.1 million for fiscal 2013. The decrease in other revenue was due to a decline in BVS 5000 and AB5000 disposable sales. We are no longer actively producing the BVS 5000 and currently only actively selling the BVS 5000 upon request. We also expect that AB5000 revenue will continue to decline in fiscal 2015 as we focus our sales efforts in the surgical suite on Impella 5.0 and LD.

Cost of Product Revenue

Cost of product revenue for fiscal 2014 increased by $5.7 million, or 18%, to $37.3 million from $31.6 million for fiscal 2013. Gross margin for each of fiscal 2014 and fiscal 2013 was 80%. The increase in cost of product revenues was related to increased Impella demand and higher production volume and costs to support the higher demand for Impella products. Gross margin rates remained stable in fiscal 2014 as we maintained average selling price for Impella products in the U.S., improved manufacturing yields and product cost savings from suppliers on increased volume. These improvements were offset by increased shipments of AIC consoles and higher costs for product testing and inspection.

Research and Development Expenses

Research and development expenses for fiscal 2014 increased by $5.1 million, or 20%, to $30.7 million from $25.6 million in fiscal 2013. The increase in research and development expenses was due primarily to an increase in spending associated with our PMA application for our existing Impella products, increased headcount in quality control, clinical spending on our Impella RP IDE study and product development initiatives associated with Impella RP, Impella CP and Symphony. We expect research and development expenses to increase in fiscal 2015 as we continue to pursue our PMA application for our existing Impella products available for sale in the U.S., work on other clinical studies, such as Impella RP IDE and apply for regulatory approval for our Impella products in Japan. In addition, we expect to incur additional research and development costs as we continue to focus on new product development initiatives associated with Impella CP, Impella RP and Symphony.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for fiscal 2014 increased by $23.1 million, or 27%, to $107.3 million from $84.2 million in fiscal 2013. The increase in selling, general and administrative expenses was primarily due to the hiring of additional U.S. field sales and clinical personnel, increased spending on marketing initiatives as we continue to educate physicians on the benefits of hemodynamic support, implementation of the medical device tax and higher legal expenses related to the Department of Justice investigation and shareholder suits as well as expanded compliance functions. During the year ended March 31, 2014, we incurred legal expenses of approximately $6.2 million in connection with complying with the subpoena received from the Department of Justice in October 2012 and defense of other legal claims. We also incurred $2.7 million of expenses in the year ended March 31, 2014 as a result of the medical device tax, which was implemented in the U.S. in January 2013.

We expect to continue to increase our expenditures on sales and marketing activities, with particular investments in field sales and clinical personnel with cath lab expertise. We also plan to increase our marketing, service, and training investments to support the efforts of the sales and field clinical teams to drive recovery awareness for acute heart failure patients. In addition, we will continue to incur expenses as a result of the recently implemented medical device tax. We also expect to continue to incur significant legal expenses for the foreseeable future related to the Department of Justice and Office of Inspector General investigations, our defense of the appeal of the dismissals of a purported class action and a derivative action and continued expansion of compliance functions.

Amortization of Intangible Assets

Amortization primarily relates to specifically identified assets from the Impella acquisition in May 2005. We fully amortized the remaining net book value of our intangible assets during the year ended March 31, 2013.

 

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Income Tax Provision

During fiscal 2014 and 2013, we recorded a provision for income taxes of $1.2 million and $1.8 million, respectively. The income tax provision for fiscal 2014 is comprised of $0.5 million of income taxes in Germany and $0.8 million for income taxes related to the deferred tax liability relating to tax deductible goodwill. These amounts are offset by $0.1 million reduction in federal and state income taxes due to change in estimate of alternative minimum tax in the U.S. Due to the limitations of net operating loss carryforwards, we estimate that we have an income tax provision in Germany. Accordingly, we have a tax liability in Germany that we expect that we will have to pay in cash. If we continue to be profitable, we expect that our income tax expense could increase in the future.

Net Income

During fiscal 2014, we recognized net income of $7.4 million, or $0.19 per basic share and $0.18 per diluted share compared to net income of $15.0 million, or $0.38 per basic share and $0.37 per diluted share, for the prior fiscal year. The decrease in net income in fiscal 2014 was driven by higher operating expenses from expanding our commercial infrastructure, additional research and development costs, the implementation of the medical device tax in the U.S. in January 2013, and additional legal fees to comply with the subpoena received from the Department of Justice in October 2012 and defend ourselves from other legal claims, which were partially offset by increased Impella sales resulting from greater demand for our products, particularly the Impella CP.

Even though we were profitable in fiscal 2014, we may incur additional losses in the future as we continue to invest in research and development related to our products, conduct clinical studies and registries on our products, prepare our PMA application, expand our commercial infrastructure, pay additional excise taxes, incur additional legal fees, enter into future collaborations with other parties and invest in new markets such as Japan.

Fiscal Years Ended March 31, 2013 and March 31, 2012 (“fiscal 2013” and “fiscal 2012”)

Revenue

Our revenues are comprised of the following:

 

     Year Ended
March 31,
 
     2013      2012  
     (in $000’s)  

Impella product revenue

   $ 140,325       $ 106,925   

Service and other revenue

     9,155         7,273   

Other products

     8,134         11,088   
  

 

 

    

 

 

 

Total product revenues

     157,614         125,286   

Funded research and development

     510         1,089   
  

 

 

    

 

 

 

Total revenues

   $ 158,124       $ 126,375   
  

 

 

    

 

 

 

Total revenues for fiscal 2013 increased by $31.7 million, or 25%, to $158.1 million from $126.4 million for fiscal 2012. The increase in total revenue was primarily due to higher Impella revenue due to greater utilization in the U.S., which was attributable in part to the launch of Impella CP in fiscal 2013.

Impella product revenues for fiscal 2013 increased by $33.4 million, or 31%, to $140.3 million from $106.9 million for fiscal 2012. Most of our increase in Impella revenue was from disposable catheter sales in the U.S., as we focus on increasing utilization of our disposable catheter products through continued investment in our field organization and physician training program. In the second half of fiscal 2013, we began our initial launch of Impella CP in the U.S.

Service and other revenue for fiscal 2013 increased by $1.9 million, or 26%, to $9.2 million from $7.3 million for fiscal 2012. The increase in service revenue was primarily due to an increase in preventative maintenance service contracts, as we expand the use of our Impella AIC consoles.

Other product revenues for fiscal 2013 decreased by $3.0 million, or 27%, to $8.1 million from $11.1 million for fiscal 2012. The decrease in other revenue was due to a decline in BVS 5000 and AB5000 disposable sales.

 

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Cost of Product Revenue

Cost of product revenue for fiscal 2013 increased by $7.1 million, or 29%, to $31.6 million from $24.5 million for fiscal 2012. Gross margin for fiscal 2013 was 80% compared to 81% for fiscal 2012. The increase in cost of product revenues was related to increased Impella demand and higher production volume and costs to support the higher demand for Impella products. The decrease in gross margin was related primarily to increased investment in expanding manufacturing capacity to support future demand for Impella products, start up costs related to the initial production of Impella CP and increased shipments of AIC consoles.

Research and Development Expenses

Research and development expenses for fiscal 2013 decreased by $1.6 million, or 6%, to $25.6 million from $27.2 million in fiscal 2012. The decrease in research and development expenses was due to a decrease in clinical trial expenditures as we completed the Protect II trial for the Impella 2.5 and spending on Impella CP product development activities decreased in fiscal 2013 after the Impella CP was approved in the U.S. in September 2012, and was partially offset by an increase in spending on product development initiatives associated with Impella RP and Symphony.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for fiscal 2013 increased by $12.5 million, or 17%, to $84.2 million from $71.7 million in fiscal 2012. The increase in selling, general and administrative expenses was primarily due to increased personnel expenses related to increased U.S. field sales and clinical headcount, increased spending on marketing initiatives as we continue to educate physicians on the benefits of hemodynamic support and increases in legal expenses. During fiscal 2013, we incurred legal expenses of approximately $3.1 million in connection with complying with the subpoena received from the Department of Justice in October 2012 and defense of other legal claims. We also incurred $0.7 million of expenses in fiscal 2013 for payment of the medical device tax after its implementation in the U.S. in January 2013.

Amortization of Intangible Assets

Amortization of intangible assets for fiscal 2013 decreased by $1.4 million, or 93%, to $0.1 million from $1.5 million for fiscal 2012. Amortization primarily relates to specifically identified assets from the Impella acquisition in May 2005. We fully amortized the remaining net book value of our intangible assets during the year ended March 31, 2013.

Income Tax Provision

During fiscal 2013 and 2012, we recorded provisions for income taxes of $1.8 million and $1.0 million, respectively. The income tax provision is primarily due to $1.1 million of income taxes in Germany that we do not expect will be offset by our net operating loss carryforwards in Germany. Accordingly, we expect to have a tax liability in Germany that we will pay in cash. We have also recorded provisions of $0.8 million for income taxes related to our deferred tax liability on our goodwill and alternative minimum tax in the U.S.

Net Income

During fiscal 2013, we recognized net income of $15.0 million, or $0.38 per basic share and $0.37 per diluted share compared to net income of $1.5 million, or $0.04 per basic and diluted share, for the prior fiscal year. The increase in net income in fiscal 2013 compared to fiscal 2012 was due primarily to increased Impella sales due to greater demand in the U.S.

Liquidity and Capital Resources

At March 31, 2014, our cash, cash equivalents, and short and long-term marketable securities totaled $118.3 million, an increase of $30.2 million compared to $88.1 million in cash, cash equivalents and short-term and long-term marketable securities at March 31, 2013. We believe that our revenue from product sales together with existing resources will be sufficient to fund our operations for at least the next twelve months, exclusive of activities involving any future acquisitions of products or companies that complement or augment our existing line of products.

Our primary liquidity requirements are to fund the expansion of our commercial infrastructure in the U.S., increase our Impella manufacturing capacity, increase our inventory levels in order to meet increasing customer demand for Impella in the U.S., fund new product development, pay for fees related to the Department of Justice and Office of the Inspector General investigations, our defense of appeals and

 

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anticipated appeals relating to the dismissal of purported class actions and a derivative action against us, and our response to information requests and provide for general working capital needs. Through March 31, 2014, we have funded our operations principally from product sales and through the sale of equity securities. We also receive a small amount of funding from government research and development grants.

In November 2012, our Board of Directors authorized a stock repurchase program for up to $15.0 million of our common stock. We financed the stock repurchase program with our available cash. During the year ended March 31, 2013, we repurchased 1,123,587 shares for $15.0 million in open market purchases at an average cost of $13.39 per share, including commission expense. We completed the purchase of common stock under this stock repurchase program in January 2013.

Marketable securities at March 31, 2014 consisted of $97.4 million held in funds that invest in U.S. Treasury and government-backed securities. We are not a party to any interest rate swaps, currency hedges or derivative contracts of any type and have no exposure to commercial paper or auction rate securities markets.

During the year ended March 31, 2014, net cash provided by operating activities was $23.5 million, compared to $26.4 million during the same period in the prior year. The decrease in cash provided by operations was primarily attributable to the decrease in net income of $7.6 million reflected in our net income of $7.4 million for the year ended March 31, 2014 compared to $15.0 million in fiscal 2013, and an aggregate $2.4 million decrease in cash used for accounts payable and accrued expenses primarily related to an increase in payroll accruals due to additional headcount and a $0.7 million increase in cash used for prepaid expenses and other assets. These amounts were partially offset by a $4.7 million decrease in cash used for inventories attributable to our completion of building up of inventory safety stock levels in fiscal year 2013 and a $1.3 million increase in cash provided by accounts receivable due to increases in revenue and timing of receivable collections. In addition, net cash provided by operating activities was impacted by changes in non-cash adjustments, including a $1.7 million increase in stock-based compensation and a $0.8 million increase in write-downs of inventory, partially offset by a $0.2 million decrease in depreciation and amortization expense.

During the year ended March 31, 2014, net cash used for investing activities was $22.3 million, compared to $10.3 million during the same period in the prior year. The increase in cash used for investing activities was primarily attributable to an $11.4 million net increase in purchases of marketable securities, after offsetting proceeds from the sale and maturity of marketable securities. Our additions to property and equipment remained the same for fiscal 2014 at $2.8 million as fiscal 2013. We also paid $0.8 million for an investment in a private medical technology company in fiscal 2014.

During the year ended March 31, 2014, net cash provided by financing activities was $9.6 million, compared to net cash used for financing activities of $11.8 million during the same period in the prior year. The increase in net cash provided by financing activities was primarily attributable to our completion in fiscal 2013 of our share repurchase program, pursuant to which we used $15.0 million in cash used for the repurchase of common stock in fiscal 2013, and which was not repeated in fiscal 2014. Proceeds from the exercise of stock options and cash provided by the issuance of stock under our employee stock purchase plan increased by $6.4 million and $0.1 million, respectively, in fiscal 2014 as compared to fiscal 2013. These amounts were partially offset by a $0.2 million increase in payments in lieu of issuance of common stock for payroll withholding taxes upon vesting of certain equity awards.

Capital expenditures for fiscal 2015 are estimated to range from $3.0 to $5.0 million, and are expected to relate primarily to capital expenditures for manufacturing capacity increases for Impella, leasehold improvements and software development projects.

Cash and cash equivalents held by our foreign subsidiaries totaled $3.3 million and $2.8 million at March 31, 2014 and 2013, respectively. Our operating income outside the U.S. is deemed to be permanently reinvested in foreign jurisdictions. We do not intend or currently foresee a need to repatriate cash and cash equivalents held by our foreign subsidiaries. If these funds are needed in the U.S., we would be required to accrue and pay U.S. taxes to repatriate these funds.

Our liquidity is influenced by our ability to sell our products in a competitive industry and our customers’ ability to pay for our products. Factors that may affect liquidity include our ability to penetrate the market for our products, maintain or reduce the length of the selling cycle, investments in collaborative arrangements with other partners and collect cash from clients after our products are sold. We also expect to continue to incur legal expenses for the foreseeable future related to the Department of Justice and Inspector General’s investigations, our defense of appeals of the dismissals of a purported class action and a derivative action and our response to requests for information. We continue to review our long-term cash needs on a regular basis. At March 31, 2014, we had no long-term debt outstanding.

 

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Contractual Obligations and Commercial Commitments

The following table summarizes our contractual obligations at March 31, 2014 and the effects such obligations are expected to have on our liquidity and cash flows in future periods.

 

     Payments Due By Fiscal Year (in $000’s)  
     Total      Less
than 1
Year
     1-3
Years
     3-5
Years
     More
than 5
Years
 

Contractual Obligations

              

Operating lease commitments

   $ 11,777       $ 1,589       $ 2,961       $ 2,927       $ 4,300   

Contractual obligations(1)

     1,800         1,575         150         75         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total obligations

   $ 13,577       $ 3,164       $ 3,111       $ 3,002       $ 4,300   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Contractual obligations represent future cash commitments and expected liabilities under agreements with third parties, primarily for research and development activities, such as clinical trials and material purchases for new product testing.

We had no long-term debt, capital leases or other material commitments for open purchase orders and clinical trial agreements at March 31, 2014 other than those shown in the table above.

Our headquarters is located at 22 Cherry Hill Drive in Danvers, Massachusetts and consists of approximately 96,000 square feet of space under an operating lease. This facility encompasses most of our U.S. operations, including research and development, manufacturing, sales and marketing and general and administrative departments. In February 2014, we entered into a lease agreement to continue renting our existing space plus 16,800 square feet of additional space through February 28, 2021. Monthly rent is as follows:

 

   

The base rent for March 2014 through April 2014 was $66,000 per month; and

 

   

The base rent for May 2014 through February 2016 is $74,050 per month; and

 

   

The base rent for March 2016 through February 2018 will be $70,750 per month; and

 

   

The base rent for March 2018 through February 2021 will be $72,750 per month.

In addition, we have certain rights to terminate the lease early, subject to the payment of a specified termination fee based on the timing of the termination, as further outlined in the lease amendment.

Our European headquarters is located in Aachen, Germany and consists of approximately 33,000 square feet of space under an operating lease. In July 2013, we entered into a lease agreement to continue renting our existing space in Aachen, Germany through July 31, 2023. The lease payments are approximately 34,500€ (euro) (approximately U.S. $47,000 at March 31, 2014 exchange rates) per month. The building houses most of the manufacturing operations for our Impella product line as well as certain research and development functions and the sales, marketing and general and administrative functions for most of our product lines sold in Europe and the Middle East.

We are also party to a license agreement related to certain circulatory care device patents and know-how. Under this agreement, we would be obligated to pay up to $3.0 million in cash or stock, if certain development and regulatory milestones are achieved. The amount has not been included in the contractual obligations table above due to the uncertainty related to the successful achievement of these milestones.

In April 2014, we entered into an exclusive license agreement with Opsens, Inc. for the rights to certain optical sensor technologies in the field of cardio-circulatory assist devices. Using the technology licensed to us under this agreement, we intend to integrate miniature optical pressure sensors into our Impella heart pump catheters to help further automate the control and operation of the Impella device in the catheterization lab. Pursuant to the terms of the license agreement, we made a $1.5 million upfront payment upon execution of the agreement, which is included in the contractual obligations table above, and agreed to make additional payments of up to $4.5 million upon achievement of specified development milestones. The future milestone payment amounts have not been included in the contractual obligations table above due to the uncertainty related to the successful achievement of these milestones.

We apply the disclosure provisions of Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Guarantees of Indebtedness of Others, to our agreements that contain guarantee or indemnification clauses. These disclosure provisions require that guarantors disclose certain types of guarantees, even if the likelihood of requiring the guarantor’s performance is remote. The following is a description of arrangements in which we are a guarantor.

We enter into agreements with other companies in the ordinary course of business, typically with underwriters, contractors, clinical sites and customers that include indemnification provisions. Under these provisions we generally indemnify and hold harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of our activities. These indemnification provisions generally survive

 

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termination of the underlying agreement. The maximum potential amount of future payments we could be required to make under these indemnification provisions is unlimited. We have never incurred any material costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the estimated fair value of these agreements is minimal. Accordingly, we have no liabilities recorded for these agreements at March 31, 2014.

Clinical study agreements—In our clinical study agreements, we have agreed to indemnify the participating institutions against losses incurred by them for claims related to any personal injury of subjects taking part in the study to the extent they relate to use of our devices in accordance with the clinical study agreement, the protocol for the device and our instructions. The indemnification provisions contained within our clinical study agreements do not generally include limits on the claims. We have never incurred any material costs related to the indemnification provisions contained in our clinical study agreements.

Product warranties—We accrue for estimated future warranty costs on our product sales at the time of shipment. All of our products are subject to rigorous regulation and quality standards. While we engage in extensive product quality programs and processes, including monitoring and evaluating the quality of our component suppliers, our warranty obligations are affected by product failure rates. Our operating results could be adversely affected if the actual cost of product failures exceeds the estimated warranty provision.

Patent indemnifications—In many sales transactions, we indemnify customers against possible claims of patent infringement caused by our products. The indemnifications contained within sales contracts usually do not include limits on the claims. We have never incurred any material costs to defend lawsuits or settle patent infringement claims related to sales transactions.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Primary Market Risk Exposures

Our cash, cash equivalents and short-term marketable securities are subject to interest rate risk and will fall in value if market interest rates increase. Marketable securities at March 31, 2014 consisted of $97.4 million held in funds that invest in U.S. Treasury and government-backed securities. If market interest rates were to increase immediately and uniformly by 10 percent from levels at March 31, 2014, we believe the decline in fair market value of our investment portfolio would be immaterial.

Currency Exchange Rates

We have foreign currency exposure to exchange rate fluctuations and particularly with respect to the euro, British pound sterling and Japanese yen. Therefore, our investment in our subsidiaries is sensitive to fluctuations in currency exchange rates. The effect of a change in currency exchange rates on our net investment in international subsidiaries is reflected in the accumulated other comprehensive (loss) income component of stockholders’ equity. If rates of exchange for the euro, British pound and Japanese yen were to have depreciated immediately and uniformly by 10% relative to the U.S. dollar from levels at March 31, 2014, the result would have been a reduction of stockholders’ equity of approximately $4.4 million.

Fair Value of Financial Instruments

Our financial instruments consist primarily of cash and cash equivalents, and short-term marketable securities, accounts receivable, and accounts payable. The estimated fair values of the financial instruments have been determined by us using available market information and appropriate valuation techniques. Considerable judgment is required, however, to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented are not necessarily indicative of the amounts that we could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our Consolidated Financial Statements and Supplementary Data are provided under Part IV, Item 15 of this Form 10-K.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

 

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ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of March 31, 2014. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of March 31, 2014, these disclosure controls and procedures were effective to provide reasonable assurance that material information required to be disclosed by us, including our consolidated subsidiaries, in reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the Commission rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Evaluation of Changes in Internal Control over Financial Reporting

During the fourth quarter of our fiscal year ended March 31, 2014, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we assessed the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment under the framework in Internal Control—Integrated Framework (1992), our management concluded that our internal control over financial reporting was effective as of March 31, 2014.

Important Considerations

Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

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Deloitte & Touche LLP, an independent registered public accounting firm that audited our financial statements for the year ended March 31, 2014, included in this annual report, has issued an attestation report on the effectiveness of our internal control over financial reporting. This report is set forth below:

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

ABIOMED, Inc.

Danvers, Massachusetts

We have audited the internal control over financial reporting of ABIOMED, Inc. and subsidiaries (the “Company”) as of March 31, 2014, based on criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2014, based on the criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended March 31, 2014 of the Company and our report dated May 28, 2014 expressed an unqualified opinion on those financial statements and financial statement schedule.

/s/ Deloitte & Touche LLP

Boston, Massachusetts

May 28, 2014

 

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ITEM 9B. OTHER INFORMATION

Not applicable.

PART III

 

ITEM 10. DIRECTOR, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by Item 10 of Form 10-K is incorporated by reference to the information in our definitive proxy statement to be filed within 120 days after the close of our fiscal year captioned:

 

   

“Proposal No. 1: Election of Directors,”

 

   

“Executive Officers and Directors,”

 

   

“Audit Committee Report,”

 

   

“Corporate Governance,” and

 

   

“Section 16(a) Beneficial Ownership Reporting Compliance.”

We have adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller and persons performing similar functions. A paper copy of our code of ethics may be obtained free of charge by writing to us care of our Compliance Officer at our principal executive office located at 22 Cherry Hill Drive, Danvers, Massachusetts 01923, or by email at IR@abiomed.com.

 

ITEM 11. EXECUTIVE COMPENSATION

The information required by Item 11 of Form 10-K is incorporated by reference to the information in our definitive proxy statement to be filed within 120 days after the close of our fiscal year end captioned:

 

   

“Executive Compensation”

 

   

“Compensation Discussion and Analysis,”

 

   

“Compensation Committee Interlocks and Insider Participation,” and

 

   

“Compensation Committee Report.”

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCK HOLDER MATTERS

The information required by Item 12 of Form 10-K is incorporated by reference to the information in our definitive proxy statement to be filed within 120 days after the close of our fiscal year end captioned:

 

   

“Securities Beneficially Owned by Certain Persons”

 

   

“Equity Compensation Plans”

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by Item 13 of Form 10-K is incorporated by reference to the information in our definitive proxy statement to be filed within 120 days after the close of our fiscal year end captioned:

 

   

“Executive Compensation,”

 

   

“Proposal No. 1: Election of Directors,” and

 

   

“Certain Relationships and Related-Person Transactions.”

 

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by Item 14 of Form 10-K is incorporated by reference to the information in our definitive proxy statement to be filed within 120 days after the close of our fiscal year end captioned:

 

   

“Audit and Other Fees.”

 

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Table of Contents

PART IV

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

  (a) The following documents are filed as part of this report:

 

(1) The financial statements from our Annual Report for our fiscal year ending March 31, 2013 are attached hereto.

 

     Page

Report of Independent Registered Public Accounting Firm

   F-2

Consolidated Balance Sheets as of March 31, 2014 and 2013

   F-3

Consolidated Statements of Operations for the Fiscal Years Ended March 31, 2014, 2013 and 2012

   F-4

Consolidated Statements of Stockholders’ Equity for the Fiscal Years Ended March 2014, 2013, and 2012

   F-5

Consolidated Statements of Cash Flows for the Fiscal Years Ended March 31, 2014, 2013, and 2012

   F-6

Consolidated Statements of Comprehensive Income (Loss) for the Fiscal Years Ended March  31, 2014, 2013, and 2012

   F-7

Notes to Consolidated Financial Statements

   F-8

(2) Consolidated financial statement schedule

Schedule II: Valuation and Qualifying Accounts

(3) Exhibits

EXHIBIT INDEX

 

Exhibit
No.

 

Description

   Filed with
this Form
10-K
  

Incorporated by Reference

       

Form

   Filing Date    Exhibit
No.
2.1   Share Purchase Agreement for the acquisition of Impella Cardio Systems AG, dated April 26, 2005.       8-K (File No.
001-09585)
   May 16, 2005    2.1
3.1   Restated Certificate of Incorporation.       S-3    September 29, 1997    3.1
3.2   Restated By-Laws, as amended.       10-K (File No.
001-09585)
   May 27, 2004    3.2
3.3   Certificate of Designations of Series A Junior Participating Preferred Stock—filed as Exhibit 3.3 to the 1997 Registration Statement.*       S-3    September 29, 1997    3.3
3.4   Amendment to the Company’s Restated Certificate of Incorporation to increase the authorized shares of common stock from 25,000,000 to 100,000,000.       8-K (File No.
001-09585)
   March 21, 2007    3.4
4.1   Specimen Certificate of common stock.       S-1    June 5, 1987    4.1
10.1*   Form of Indemnification Agreement for Directors and Officers.       S-1    June 5, 1987    10.13
10.2*   Amendment to 1992 Combination Stock Option Plan.       10-Q (File No.
001-09585)
   October 14, 1997    10.2
10.3*   1988 Employee Stock Purchase Plan, as amended.       10-Q (File No.
001-09585)
   February 8, 2005    10.11
10.4*   1989 Non-Qualified Stock Option Plan for Non-Employee Directors.       10-Q (File No.
001-09585)
   October 27, 1995    10.1
10.5*   1998 Equity Incentive Plan.       10-Q/A (File No.
001-09585)
   January 8, 1999    10
10.6*   2000 Stock Incentive Plan Agreement, as amended.       Sch. 14A (File No.
001-09585)
   July 15, 2005    Appendix A
10.7*   Form of Abiomed, Inc. Non-Statutory Stock Option Agreement for the 2000 Stock Incentive Plan for Directors.       10-Q (File No. 001-09585)    February 9, 2006    10.16

 

45


Table of Contents

Exhibit
No.

 

Description

   Filed with
this Form
10-K
    

Incorporated by Reference

       

Form

   Filing Date    Exhibit
No.
10.8*   Form of Abiomed, Inc. Non-Statutory Stock Option Agreement for the 2000 Stock Incentive Plan for Employees or Consultants.       10-Q (File No.
001-09585)
   February 9, 2006    10.17
10.9*   Second Amended and Restated 2008 Stock Incentive Plan.       Sch. 14A    June 29, 2012    Appendix A
10.10*   Form of Non-Statutory Stock Option Agreement for Employees and Consultants under 2008 Stock Incentive Plan.       8-K (File No.
001-09585)
   August 18, 2008    10.1
10.11*   Form of Non-Statutory Stock Option Agreement for Non-Employee Directors under 2008 Stock Incentive Plan.       8-K (File No.
001-09585)
   August 18, 2008    10.2
10.12*   Form of Restricted Stock Agreement under 2008 Stock Incentive Plan.       8-K (File No.
001-09585)
   August 18, 2008    10.3
10.13*   Form of Performance Share Award (Performance and Time Based RSU).       10-Q    August 5, 2011    10.1
10.14*   Form of Performance Share Award (Time Based RSU).       10-Q    August 5, 2011    10.2
10.15*   Form of Change of Control Agreement.       8-K (File No.
001-09585)
   August 18, 2008    10.4
10.16*   Employment Agreement of Michael R. Minogue dated April 5, 2004 (including Change in Control Agreement).       10-Q (File No. 001-09585)    August 9, 2004    10.10
10.17*   Amendment to Employment Agreement with Michael R. Minogue dated December 31, 2008.       10-Q (File No. 001-09585)    February 9, 2009    10.1
10.18*   Amendment to Change in Control Agreement with Michael R. Minogue dated December 31, 2008.       10-Q (File No. 001-09585)    February 9, 2009    10.1
10.19*   Inducement stock option granted to Michael R. Minogue dated April 5, 2004.       10-Q (File No. 001-09585)    August 9, 2004    10.11
10.20*   Restricted Stock Agreement between Abiomed, Inc. and Michael R. Minogue.       10-Q (File No. 001-09585)    October 9, 2005    10.15
10.21*   Offer Letter with Robert L. Bowen dated December 15, 2008.       8-K (File No.
001-09585)
   December 22, 2008    99.2
10.22*   Offer letter with David Weber dated April 23, 2007       10-Q (File No. 001-09585)    August 9, 2007    10.1
10.23*   Summary of Executive Compensation.      X            
10.24*   Summary of Director Compensation.      X            
10.25*   Form of Employment, Nondisclosure and Non Competition Agreement.       10-K (File No. 001-09585)    June 14, 2006    10.20
10.26   Lease agreement dated July 29, 2013 for the facility located in Aachen, Germany.       10-Q    November 8, 2013    10.1
10.27   Amended and Restated Lease dated as of February 24, 2014 between Abiomed, Inc. and Leo C. Thibeault, Jr., Trustee of The Thibeault Nominee Trust.      X            
11.1   Statement regarding computation of Per Share Earnings (see Note 2, Notes to Consolidated Financial Statements).      X            
21.1   Subsidiaries of the Registrant.      X            
23.1   Consent of Deloitte & Touche LLP, independent registered public accounting firm.      X            
31.1   Rule 13a—14(a)/15d—14(a) certification of principal executive officer.      X            
31.2   Rule 13a—14(a)/15d—14(a) certification of principal accounting officer.      X            
32.1   Section 1350 certification.      X            

 

46


Table of Contents

Exhibit
No.

  

Description

   Filed with
this Form
10-K
    

Incorporated by Reference

        

Form

   Filing Date    Exhibit
No.
101    The following financial information from the ABIOMED, Inc. Annual Report on Form 10-K for the fiscal year ended March 31, 2014, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets as of March 31, 2014 and 2013; (ii) Consolidated Statements of Operations for the fiscal years ended March 31, 2014, 2013 and 2012; (iii) Consolidated Statements of Comprehensive Income (Loss) for the fiscal years ended March 31, 2014, 2013 and 2012; (iv) Consolidated Statements of Stockholders’ Equity for the fiscal years ended March 2014, 2013 and 2012; (v) Consolidated Statements of Cash Flows for the fiscal years ended March 31, 2014, 2013 and 2012; and (vi) Notes to Consolidated Financial Statements.      X            

 

* Management contract or compensatory plan.

 

47


Table of Contents

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.

 

    ABIOMED, Inc.
Dated: May 28, 2014     By   /s/    ROBERT L. BOWEN         
      Robert L. Bowen
      Vice President, Chief Financial Officer
     

(Principal Financial Officer and

Principal Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

SIGNATURE

 

TITLE

 

DATE

/S/    MICHAEL R. MINOGUE      

Michael R. Minogue

  President, Chief Executive Officer, President and Chairman (Principal Executive Officer)   May 28, 2014

/S/    ROBERT L. BOWEN      

Robert L. Bowen

 

Vice President,

Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

  May 28, 2014

/S/    W. GERALD AUSTEN      

W. Gerald Austen

  Director   May 28, 2014

/S/    LOUIS E. LATAIF      

Louis E. Lataif

  Director   May 28, 2014

/S/    DOROTHY E. PUHY      

Dorothy E. Puhy

  Director   May 28, 2014

/S/    MARTIN P. SUTTER      

Martin P. Sutter

  Director   May 28, 2014

/S/    HENRI A. TERMEER      

Henri A. Termeer

  Director   May 28, 2014

/S/    PAUL THOMAS      

Paul Thomas

  Director   May 28, 2014

 

48


Table of Contents

ABIOMED, INC.

Consolidated Financial Statements

Index

 

         Page    

Report of Independent Registered Public Accounting Firm

   F-2

Consolidated Balance Sheets as of March 31, 2014 and 2013

   F-3

Consolidated Statements of Operations for the Fiscal Years Ended March 31, 2014, 2013, and 2012

   F-4

Consolidated Statements of Comprehensive Income (Loss) for the Fiscal Years Ended March  31, 2014, 2013, and 2012

   F-5

Consolidated Statements of Stockholders’ Equity for the Fiscal Years Ended March 2014, 2013, and 2012

   F-6

Consolidated Statements of Cash Flows for the Fiscal Years Ended March 31, 2014, 2013, and 2012

   F-7

Notes to Consolidated Financial Statements

   F-8

 

F-1


Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

ABIOMED, Inc.

Danvers, Massachusetts

We have audited the accompanying consolidated balance sheets of ABIOMED, Inc. and subsidiaries (the “Company”) as of March 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended March 31, 2014. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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, such consolidated financial statements present fairly, in all material respects, the financial position of ABIOMED, Inc. and subsidiaries as of March 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2014, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of March 31, 2014, based on the criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated May 28, 2014 expressed an unqualified opinion on the Company’s internal control over financial reporting.

/s/ Deloitte & Touche LLP

Boston, Massachusetts

May 28, 2014

 

F-2


Table of Contents

ABIOMED, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(dollars in thousands)

 

     March 31,  
     2014     2013  

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 20,916      $ 9,451   

Short-term marketable securities

     55,663        67,256   

Accounts receivable, net

     24,357        22,946   

Inventories

     13,948        14,930   

Prepaid expenses and other current assets

     3,082        2,022   
  

 

 

   

 

 

 

Total current assets

     117,966        116,605   

Long-term marketable securities

     41,761        11,406   

Property and equipment, net

     6,889        6,549   

Goodwill

     37,990        35,410   

Other

     801        29   
  

 

 

   

 

 

 

Total assets

   $ 205,407      $ 169,999   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 7,746      $ 7,696   

Accrued expenses

     17,899        15,162   

Deferred revenue

     4,766        4,198   
  

 

 

   

 

 

 

Total current liabilities

     30,411        27,056   

Long-term deferred tax liability

     6,415        5,554   

Other long-term liabilities

     228        309   
  

 

 

   

 

 

 

Total liabilities

     37,054        32,919   
  

 

 

   

 

 

 

Commitments and contingencies (Note 11)

    

Stockholders’ equity:

    

Class B Preferred Stock, $.01 par value

     —           —      

Authorized—1,000,000 shares; Issued and outstanding—none

    

Common stock, $.01 par value

     411        397   

Authorized—100,000,000 shares; Issued—41,122,695 shares at March 31, 2014 and 39,788,383 shares at March 31, 2013;

    

Outstanding—39,916,328 shares at March 31, 2014 and 38,601,384 shares at March 31, 2013

    

Additional paid in capital

     436,136        414,810   

Accumulated deficit

     (250,910     (258,261

Treasury stock at cost—1,206,367 shares at March 31, 2014 and 1,186,999 shares at March 31, 2013

     (16,554     (16,129

Accumulated other comprehensive loss

     (730     (3,737
  

 

 

   

 

 

 

Total stockholders’ equity

     168,353        137,080   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 205,407      $ 169,999   
  

 

 

   

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

F-3


Table of Contents

ABIOMED, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(in thousands, except per share data)

 

     Fiscal Years Ended March 31,  
     2014      2013     2012  

Revenue:

       

Product revenue

   $ 183,280       $ 157,614      $ 125,286   

Funded research and development

     363         510        1,089   
  

 

 

    

 

 

   

 

 

 
     183,643         158,124        126,375   
  

 

 

    

 

 

   

 

 

 

Costs and expenses:

       

Cost of product revenue

     37,322         31,596        24,507   

Research and development

     30,707         25,647        27,159   

Selling, general and administrative

     107,251         84,227        71,711   

Amortization of intangible assets

     —            111        1,478   
  

 

 

    

 

 

   

 

 

 
     175,280         141,581        124,855   
  

 

 

    

 

 

   

 

 

 

Income from operations

     8,363         16,543        1,520   
  

 

 

    

 

 

   

 

 

 

Other income:

       

Investment income (expense), net

     118         (7     (3

Gain on settlement of investment

     —            —           1,017   

Other income

     49         326        9   
  

 

 

    

 

 

   

 

 

 
     167         319        1,023   
  

 

 

    

 

 

   

 

 

 

Income before income tax provision

     8,530         16,862        2,543   

Income tax provision

     1,179         1,848        1,048   
  

 

 

    

 

 

   

 

 

 

Net income

   $ 7,351       $ 15,014      $ 1,495   
  

 

 

    

 

 

   

 

 

 

Basic net income per share

   $ 0.19       $ 0.38      $ 0.04   

Basic weighted average shares outstanding

     39,334         39,113        38,374   

Diluted net income per share

   $ 0.18       $ 0.37      $ 0.04   

Diluted weighted average shares outstanding

     41,606         41,052        40,172   

The accompanying notes are an integral part of the consolidated financial statements.

 

F-4


Table of Contents

ABIOMED, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

 

     Fiscal Years Ended March 31,  
     2014     2013     2012  

Net income

   $ 7,351      $ 15,014      $ 1,495   

Other comprehensive income (loss):

      

Foreign currency translation gains (losses)

     3,025        (1,974     (2,510

Net unrealized (losses) gains on marketable securities

     (18     2        —      
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     3,007        (1,972     (2,510
  

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 10,358      $ 13,042      $ (1,015
  

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

F-5


Table of Contents

ABIOMED, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

(dollars in thousands)

 

     Common Stock      Treasury Stock     Additional
Paid in
Capital
    Accumulated
Deficit
    Accumulated
Other

Comprehensive
(Loss) Income
    Total
Stockholders’
Equity
 
     Number of
shares
    Par
value
     Number of
shares
     Amount          

Balance, April 1, 2011

     37,705,765        377         50,954         (827     379,218        (274,770     745        104,743   

Stock options exercised

     1,516,038        15         —           —          14,242        —          —          14,257   

Stock issued under employee stock purchase plan

     45,445        1         —           —          422        —          —          423   

Stock issued to directors

     5,506        —           —           —          116        —          —          116   

Stock compensation expense

     —          —           —           —          7,773        —          —          7,773   

Comprehensive loss

     —          —           —           —          —          —          (2,510     (2,510

Net income

     —          —           —           —          —          1,495        —          1,495   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2012

     39,272,754        393         50,954         (827     401,771        (273,275     (1,765     126,297   

Restricted stock issued

     91,503        1         —           —          (1     —          — —       

Stock options exercised

     337,212        3         —           —          2,933        —          —          2,936   

Stock issued under employee stock purchase plan

     33,132        —           —           —          555        —          —          555   

Stock issued to directors

     2,828        —           —           —          51        —          —          51   

Repurchase of common stock

     (1,123,587     —           1,123,587         (15,045     —          —                 (15,045

Return of common stock to pay withholding taxes on restricted stock

     (12,458     —           12,458         (257     —          —                 (257

Stock compensation expense

     —          —           —             9,501        —          —          9,501   

Comprehensive loss

     —          —           —           —          —          —          (1,972     (1,972

Net income

     —          —           —           —          —          15,014        —          15,014   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2013

     38,601,384        397         1,186,999         (16,129     414,810        (258,261     (3,737     137,080   

Restricted stock issued

     254,991        3         —           —          (3     —          —          —     

Stock options exercised

     1,029,024        11         —           —          9,349        —          —          9,360   

Stock issued under employee stock purchase plan

     43,779        —           —           —          697        —          —          697   

Stock issued to directors

     6,518        —           —           —          65        —          —          65   

Return of common stock to pay withholding taxes on restricted stock

     (19,368     —           19,368         (425     —          —                 (425

Stock compensation expense

     —          —           —           —          11,218        —          —          11,218   

Other comprehensive income

     —          —           —           —          —          —          3,007        3,007   

Net income

     —          —           —           —          —          7,351        —          7,351   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2014

     39,916,328      $ 411         1,206,367       $ (16,554   $ 436,136      $ (250,910   $ (730   $ 168,353   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

F-6


Table of Contents

ABIOMED, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(in thousands)

 

     Fiscal Years Ended March 31,  
     2014     2013     2012  

Operating activities:

      

Net income

   $ 7,351      $ 15,014      $ 1,495   

Adjustments required to reconcile net income to net cash provided by operating activities:

      

Depreciation and amortization

     2,508        2,723        4,336   

Bad debt expense

     47        33        117   

Stock-based compensation

     11,218        9,501        7,773   

Write-down of inventory

     2,012        1,172        1,833   

Loss on disposal of fixed assets

     —          10        53   

Deferred tax provision

     860        755        789   

Gain on settlement of investment

     —          —          (1,017

Changes in assets and liabilities:

      

Accounts receivable

     (1,312     (2,586     (5,284

Inventories

     (622     (5,315     (6,229

Prepaid expenses and other assets

     (1,039     (326     (239

Accounts payable

     (54     1,183        287   

Accrued expenses and other long-term liabilities

     1,938        3,057        (1,330

Deferred revenue

     559        1,178        1,050   
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     23,466        26,399        3,634   

Investing activities:

      

Purchases of marketable securities

     (87,026     (49,429     (24,502

Proceeds from the sale and maturity of marketable securities

     68,265        42,000        7,750   

Purchase of other investment

     (750     —          —     

Proceeds from settlement of investment

     —          —          1,017   

Purchases of property and equipment

     (2,761     (2,836     (1,745
  

 

 

   

 

 

   

 

 

 

Net cash used for investing activities

     (22,272     (10,265     (17,480

Financing activities:

      

Proceeds from the exercise of stock options

     9,360        2,936        14,257   

Repurchase of common stock

     —          (15,045     —     

Payments in lieu of issuance of common stock for minimum payroll taxes

     (425     (257     —     

Proceeds from the issuance of stock under employee stock purchase plan

     697        555        423   
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used for) financing activities

     9,632        (11,811     14,680   

Effect of exchange rate changes on cash

     639        (862     (675
  

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

     11,465        3,461        159   

Cash and cash equivalents at beginning of year

     9,451        5,990        5,831   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of year

   $ 20,916      $ 9,451      $ 5,990   
  

 

 

   

 

 

   

 

 

 

Supplemental disclosures:

      

Cash paid for income taxes

   $ 1,324      $ 131      $ 17   

Fixed asset expenditures incurred, not yet paid

     60        250        535   

 

The accompanying notes are an integral part of the consolidated financial statements.

 

F-7


Table of Contents

ABIOMED, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

Note 1. Nature of Operations

Abiomed, Inc. (the “Company” or “Abiomed”) is a leading provider of mechanical circulatory support devices and offers a continuum of care in heart recovery to heart failure patients. The Company develops, manufactures and markets proprietary products that are designed to enable the heart to rest, heal and recover by improving blood flow and/or performing the pumping function of the heart. The Company’s products are used in the cardiac catheterization lab, or cath lab, by interventional cardiologists and in the heart surgery suite by heart surgeons for patients who are in need of hemodynamic support prophylactically or emergently before, during or after angioplasty or heart surgery procedures.

Note 2. Summary of Significant Accounting Policies

The accompanying consolidated financial statements reflect the application of certain significant accounting policies described below.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles of the United States of America, or GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The Company bases its estimates on historical experience and various other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. On an ongoing basis, the Company evaluates its estimates, including those related to revenue recognition, collectability of receivables, realizability of inventory, goodwill, intangible and long-lived assets, accrued expenses, stock-based compensation, income taxes including the valuation allowance for deferred tax assets, contingencies and litigation. Provisions for depreciation are based on their estimated useful lives using the straight-line method. Some of these estimates can be subjective and complex and, consequently, actual results may differ from these estimates under different assumptions or conditions.

Cash Equivalents and Marketable Securities

The Company classifies any marketable security with a maturity date of 90 days or less at the time of purchase as a cash equivalent. Cash equivalents are carried on the balance sheet at fair market value.

The Company classifies any security with a maturity date of greater than 90 days at the time of purchase as marketable securities and classifies marketable securities with a maturity date of greater than one year from the balance sheet date as long-term marketable securities. Securities that the Company has the positive intent and ability to hold to maturity are reported at amortized cost and classified as held-to-maturity securities. If the Company does not have the intent and ability to hold a security to maturity, it reports the investment as available-for-sale securities. The Company reports available-for-sale securities at fair value, and includes unrealized gains and, to the extent deemed temporary, unrealized losses in stockholder’s equity. If any adjustment to fair value reflects a decline in the value of the investment, the Company considers available evidence to evaluate whether the decline is “other than temporary” and, if so, marks the security to market through a charge to unrealized loss on short-term marketable securities in the consolidated statements of operations.

Major Customers and Concentrations of Credit Risk

Abiomed primarily sells its products to hospitals and distributors. No customer accounted for more than 10% of total product revenues in fiscal year 2014, 2013 or 2012. No customer had an accounts receivable balance greater than 10% of total accounts receivable at March 31, 2014 and 2013.

Credit is extended based on an evaluation of a customer’s financial condition and generally collateral is not required. To date, credit losses have not been significant and the Company maintains an allowance for doubtful accounts based on its assessment of the collectability of

 

F-8


Table of Contents

ABIOMED, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

 

Note 2. Summary of Significant Accounting Policies (Continued)

 

accounts receivable. Receivables are geographically dispersed, primarily throughout the U.S., as well as in Europe and other foreign countries where formal distributor agreements exist.

Financial instruments which potentially subject the Company to a concentration of credit risk consist of cash, cash equivalents, short and long-term marketable securities and accounts receivable. Management mitigates credit risk by limiting the investment type and maturity to securities that preserve capital, maintain liquidity and have a high credit quality.

Inventories

Inventories are stated at the lower of cost or market. Cost is based on the first in, first out method. The Company regularly reviews inventory quantities on hand and writes down to its net realizable value any inventory that it believes to be impaired. Management considers forecast demand in relation to the inventory on hand, competitiveness of product offerings, market conditions and product life cycles when determining excess and obsolescence and net realizable value adjustments. Once inventory is written down and a new cost basis is established, it is not written back up if demand increases.

Property and Equipment

Property and equipment is recorded at cost less accumulated depreciation. Depreciation is computed using the straight line method based on estimated useful lives of two to ten years for machinery and equipment, three to seven years for computer software, and four to ten years for furniture and fixtures. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful lives of the related assets. Expenditures for maintenance and repairs are expensed as incurred. Upon retirement or other disposition of assets, the costs and related accumulated depreciation are eliminated from the accounts and the resulting gain or loss is reflected in operating expenses.

Property and equipment is reviewed for impairment losses whenever events or changes in circumstances indicate the carrying amount may not be recoverable. An impairment loss would be recognized based on the amount by which the carrying value of the asset or asset group exceeds its fair value. Fair value is determined primarily using the estimated future cash flows associated with the asset or asset group under review discounted at a rate commensurate with the risk involved and other valuation techniques.

Goodwill

Goodwill is recorded when consideration for an acquisition exceeds the fair value of the net tangible and intangible assets acquired. Goodwill is not amortized, instead the Company evaluates goodwill for impairment at least annually at October 31, as well as whenever events or changes in circumstances suggest that the carrying amount may not be recoverable.

Goodwill impairment assessments are performed at the reporting unit level. The goodwill test involves a two-step process. The first step is a comparison of the reporting unit’s fair value to its carrying value. If the reporting unit’s fair value exceeds its carrying value, no further procedures are required. However, if the reporting unit’s fair value is less than the carrying value, an impairment of goodwill may exist, requiring a second step to measure the amount of impairment loss. If the implied fair value of goodwill is less than the recorded goodwill, an impairment charge is recorded for the difference.

In applying the goodwill impairment test, the Company may assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value (“Step 0”). Qualitative factors may include, but are not limited to, macroeconomic conditions, industry conditions, the competitive environment, changes in the market for our products and services, regulatory and political developments, cost factors, and entity specific factors such as strategies and overall financial performance. If, after assessing these qualitative factors, the Company determines it is not more likely than not that the fair value of a reporting unit is less than its carry amount, then performing the two-step impairment test is unnecessary.

When necessary, the goodwill impairment test is performed at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. The Company estimates the fair value of its single reporting unit using a combination of the income approach and the market approach. The income approach incorporates the use of a discounted cash flow method in

 

F-9


Table of Contents

ABIOMED, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

 

Note 2. Summary of Significant Accounting Policies (Continued)

 

which the estimated future cash flows and terminal values for the reporting unit is discounted to a present value using an appropriate discount rate. Cash flow projections are based on management’s estimates of economic and market conditions which drive key assumptions of revenue growth rates, operating margins, capital expenditures and working capital requirements. The discount rate is based on the specific risk characteristics of the reporting unit and its underlying forecast. The market approach estimates fair value by comparing publicly traded companies with similar operating and investment characteristics as the reporting unit. The fair values determined by the market approach and income approach, are weighted to determine the fair value for the reporting unit based primarily on the similarity of the operating and investment characteristics of the reporting unit to the comparable publicly traded companies used in the market approach. In order to assess the reasonableness of the calculated reporting unit’s fair value, the Company also compares the reporting unit’s fair value to its market capitalization (per share stock price times number of common shares outstanding) and calculate an implied control premium (the excess of the reporting unit’s fair value over the market capitalization).

If the carrying amount of the reporting unit exceeds its fair value, then a second step is performed to measure the amount of impairment loss, if any, by comparing the fair value of each identifiable asset and liability in the reporting unit to the total fair value of the reporting unit. Any impairment loss is expensed in the consolidated statement of operations and is not reversed if the fair value subsequently increases.

The Company performed a Step 0 qualitative assessment during the annual impairment review for fiscal 2014 as of October 31, 2013 and concluded that it is not more likely than not that the fair value of the Company’s single reporting unit is less than its carrying amount. Therefore, the two-step goodwill impairment test for the reporting unit was not necessary in fiscal 2014. The carrying amount of goodwill at March 31, 2014 was $38.0 million.

Financial Instruments

The Company’s financial instruments are comprised of cash and cash equivalents, marketable securities, accounts receivable and accounts payable, the carrying amounts of which approximate fair market value as they are highly liquid and primarily short term in nature.

Accrued Expenses

As part of the process of preparing its financial statements, the Company is required to estimate accrued expenses. This process involves identifying services that third parties have performed and estimating the level of service performed and the associated cost incurred on these services as of each balance sheet date in its financial statements. Examples of estimated accrued expenses include contract service fees, such as amounts due to clinical research organizations, investigators in conjunction with clinical trials, professional service fees, such as attorneys and accountants, and third party expenses relating to marketing efforts associated with commercialization of the Company’s product and product candidates. Accrued expenses also include estimates for payroll costs, such as bonuses and commissions. In the event that the Company does not identify certain costs that have been incurred or it under or over-estimates the level of services or the costs of such services, reported expenses for a reporting period could be overstated or understated. The date in which certain services commence, the level of services performed on or before a given date and the cost of services is often subject to the Company’s judgment. The Company makes these judgments and estimates based upon known facts and circumstances.

Revenue Recognition

The Company recognizes revenue when evidence of an arrangement exists, title has passed (generally upon shipment) or services have been rendered, the selling price is fixed or determinable and collectability is reasonably assured.

Revenue from product sales to customers is recognized when delivery has occurred. All costs related to product sales are recognized at time of delivery. The Company does not provide for rights of return to customers on product sales and therefore does not record a provision for returns.

Maintenance and service support contract revenues are included in product sales and are recognized ratably over the term of the service contracts. Revenue is recognized as earned in limited instances where the Company rents its console medical devices on a month-to-month basis or for a longer specified period of time to customers.

 

F-10


Table of Contents

ABIOMED, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

 

Note 2. Summary of Significant Accounting Policies (Continued)

 

Government-sponsored research and development contracts and grants generally provide for payment on a cost-plus-fixed-fee basis. Revenues from these contracts and grants are recognized as work is performed, provided the government has appropriated sufficient funds for the work. Under contracts in which the Company elects to spend significantly more on the development project during the term of the contract than the total contract amount, the Company prospectively recognizes revenue on such contracts ratably over the term of the contract as related research and development costs are incurred.

Product Warranty

The Company generally provides a one-year warranty for certain products sold in which estimated contractual warranty obligations are recorded as an expense at the time of shipment and are included in accrued expenses in the accompanying consolidated balance sheets. The Company’s products are subject to regulatory and quality standards. Future warranty costs are estimated based on historical product performance rates and related costs to repair given products. The accounting estimate related to product warranty involves judgment in determining future estimated warranty costs. Should actual performance rates or repair costs differ from estimates, revisions to the estimated warranty liability would be required.

Translation of Foreign Currencies

All assets and liabilities of the Company’s non-U.S. subsidiaries are translated at year-end exchange rates and revenues and expenses are translated at average exchange rates for the year. The functional currencies of our non-U.S. subsidiaries are the euro, British pound and Japanese yen. Resulting translation adjustments are reflected in the accumulated other comprehensive (loss) income component of stockholders’ equity. Currency transaction gains and losses are included as other income (expense), net in the statements of operations.

Net Income Per Share

Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the fiscal year. Diluted net income per share is computed by dividing net income by the weighted average number of dilutive common shares outstanding during the fiscal year. Diluted shares outstanding is calculated by adding to the weighted average shares outstanding any potential dilutive securities outstanding for the fiscal year. Potential dilutive securities include stock options, restricted stock awards, restricted stock units, performance-based awards and shares to be purchased under the employee stock purchase plan. In fiscal years when a net loss is reported, all common stock equivalents are excluded from the calculation because they would have an anti-dilutive effect, meaning the loss per share would be reduced. Therefore, in periods when a loss is reported basic and dilutive loss per share are the same.

 

     March 31,  
     2014      2013      2012  

Basic Net Income Per Share

        

Net income

   $ 7,351       $ 15,014       $ 1,495   
  

 

 

    

 

 

    

 

 

 

Weighted average shares used in computing basic net income per share

     39,334         39,113         38,374   
  

 

 

    

 

 

    

 

 

 

Net income per share—basic

   $ 0.19       $ 0.38       $ 0.04   
  

 

 

    

 

 

    

 

 

 

 

     March 31,  
     2014      2013      2012  

Diluted Net Income Per Share

        

Net income

   $ 7,351       $ 15,014       $ 1,495   
  

 

 

    

 

 

    

 

 

 

Weighted average shares used in computing basic net income per share

     39,334         39,113         38,374   

Effect of dilutive securities

     2,272         1,939         1,798   
  

 

 

    

 

 

    

 

 

 

Weighted average shares used in computing diluted net income per share

     41,606         41,052         40,172   
  

 

 

    

 

 

    

 

 

 

Net income per share—diluted

   $ 0.18       $ 0.37       $ 0.04   
  

 

 

    

 

 

    

 

 

 

 

F-11


Table of Contents

ABIOMED, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

 

Note 2. Summary of Significant Accounting Policies (Continued)

 

For the fiscal years ended March 31, 2014, 2013 and 2012, approximately 94,000, 438,000 and 410,000 shares of common stock underlying outstanding securities primarily related to out-of-the-money stock options and performance-based awards where milestones were not met were not included in the computation of diluted earnings per share because their inclusion would be anti-dilutive.

Stock-Based Compensation

The Company’s stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, and includes an estimate of awards that will be forfeited.

The fair value of stock option grants is estimated using the Black-Scholes option pricing model. Use of the valuation model requires management to make certain assumptions with respect to selected model inputs. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for a term consistent with the expected life of the stock options. Volatility assumptions are calculated based on historical volatility of the Company’s stock. The Company estimates the expected term of options based on historical exercise experience and estimates of future exercises of unexercised options. In addition, an expected dividend yield of zero is used in the option valuation model because the Company does not pay dividends and does not expect to pay any cash dividends in the foreseeable future. Forfeitures are estimated based on an analysis of actual option forfeitures, adjusted to the extent historical forfeitures may not be indicative of forfeitures in the future.

For awards with service conditions only, the Company recognizes compensation cost on a straight-line basis over the requisite service period. For awards with service and performance conditions, the Company recognizes compensation costs using the graded vesting method over the requisite service period. Accruals of compensation cost for an award with performance conditions are based on the probable outcome of the performance conditions. The cumulative effect of changes in the probability outcomes are recorded in the period in which the changes occur.

Income Taxes

The Company’s provision for income taxes is comprised of a current and a deferred provision. The current income tax provision is calculated as the estimated taxes payable or refundable on tax returns for the current year. The deferred income tax provision is calculated for the estimated future income tax effects attributable to temporary differences and carryforwards using expected tax rates in effect in the years during which the differences are expected to reverse.

Deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each fiscal year end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce net deferred tax assets to the amount that is more likely than not to be realized.

The Company recognizes and measures uncertain tax positions using a two-step approach. The first step is to evaluate the tax position for recognition by determining if, based on the technical merits, it is more likely than not that the position will be sustained upon audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit at the largest amount that is more than 50% likely of being realized upon ultimate settlement. The Company reevaluates these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax laws, effectively settled issues under audit and new audit activity. Any changes in these factors could result in the recognition of a tax benefit or an additional charge to the tax provision. The Company accrues for the effects of uncertain tax positions and the related potential penalties and interest.

Recent Accounting Pronouncements

In June 2013, the FASB issued Accounting Standards Update (ASU) 2013-11, Income Taxes (ASC Topic 740), Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The ASU requires entities to present unrecognized tax benefits as a decrease in a net operating loss, similar to tax loss or tax credit carryforward if certain criteria are met. The standard clarifies presentation requirements for unrecognized tax benefits but will not alter the way in which entities assess deferred tax assets for realizability. The guidance is effective for the fiscal year, and interim periods within that fiscal year, beginning after December 15, 2013. The Company will adopt this guidance beginning in the first quarter of fiscal 2015. The impact of adoption is not expected to be material.

 

F-12


Table of Contents

ABIOMED, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

 

Note 3. Marketable Securities and Fair Value Measurements

Marketable Securities

The Company’s marketable securities are classified as available-for-sale securities and, accordingly, are recorded at fair value. The difference between amortized cost and fair value is reported as a component of other comprehensive income.

The Company’s marketable securities at March 31, 2014 and 2013 are classified on the balance sheet as follows (in thousands):

 

     March 31,  
     2014      2013  
     (in $000’s)  

Short-term marketable securities

   $ 55,663       $ 67,256   

Long-term marketable securities

     41,761         11,406   
  

 

 

    

 

 

 
   $ 97,424       $ 78,662   
  

 

 

    

 

 

 

The Company’s marketable securities at March 31, 2014 and 2013 are invested in the following (in thousands):

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair Market
Value
 
     (in $000’s)  

At March 31, 2014:

           

US Treasury securities

   $ 31,487       $ —         $ —         $ 31,487   

Short-term government-backed securities

     24,174         6         (4      24,176   

Long-term government-backed securities

     41,779         8         (26      41,761   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 97,440       $ 14       $ (30    $ 97,424   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Market
Value
 
     (in $000’s)  

At March 31, 2013:

           

US Treasury securities

   $ 59,020       $ —         $ —         $ 59,020   

Short-term government-backed securities

     8,235         1         —           8,236   

Long-term government-backed securities

     11,405         3         (2      11,406   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 78,660       $ 4       $ (2    $ 78,662   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fair Value Hierarchy

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

Level 1 primarily consists of financial instruments whose value is based on quoted market prices such as exchange-traded instruments and listed equities.

 

F-13


Table of Contents

ABIOMED, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

 

Note 3. Marketable Securities and Fair Value Measurements (Continued)

 

Level 2 includes financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including time value, yield curve, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.

Level 3 is comprised of unobservable inputs that are supported by little or no market activity. Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flows or similar techniques and at least one significant model assumption or input is unobservable.

The following table presents the Company’s fair value hierarchy for its financial instruments measured at fair value as of March 31, 2014 and 2013:

 

     Level 1      Level 2      Level 3      Total  
     (in $000’s)  

At March 31, 2014:

           

U.S. Treasury securities

   $ —         $ 31,487       $ —         $ 31,487   

Short-term government-backed securities

     —           24,176         —           24,176   

Long-term government-backed securities

     —           41,761         —           41,761   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ —         $ 97,424       $ —         $ 97,424   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Level 1      Level 2      Level 3      Total  
     (in$000’s)  

At March 31, 2013:

           

U.S. Treasury securities

   $ —         $ 59,020       $ —         $ 59,020   

Short-term government-backed securities

     —           8,236         —           8,236   

Long-term government-backed securities

     —           11,406         —           11,406   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ —         $ 78,662       $ —         $ 78,662   
  

 

 

    

 

 

    

 

 

    

 

 

 

In May 2013, the Company invested $0.8 million in preferred stock of a private technology company. In addition, the Company committed to invest an additional $0.7 million if this private technology company achieves certain milestones or otherwise at the Company’s option. This other investment is accounted for using the cost method and is measured at fair value on a nonrecurring basis only if there are identified events or changes in circumstance that may have a significant adverse effect on the fair value of these investments. The aggregate carrying amount of this other investment was $0.8 million as of March 31, 2014 and is classified within other assets in the consolidated balance sheets.

Note 4. Accounts Receivable

The components of accounts receivable are as follows:

 

     March 31,  
     2014      2013  
     (in $000’s)  

Trade receivables

   $ 24,542       $ 23,082   

Allowance for doubtful accounts

     (185      (136
  

 

 

    

 

 

 
   $ 24,357       $ 22,946   
  

 

 

    

 

 

 

 

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Table of Contents

ABIOMED, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

 

Note 5. Inventories

The components of inventories are as follows:

 

     March 31,  
     2014      2013  
     (in $000’s)  

Raw materials and supplies

   $ 6,414       $ 6,267   

Work-in-progress

     6,261         5,296   

Finished goods

     1,273         3,367   
  

 

 

    

 

 

 
   $ 13,948       $ 14,930   
  

 

 

    

 

 

 

The Company’s inventories relate to its circulatory care product lines, primarily the Impella and AB5000 product platforms. Finished goods and work-in-process inventories consist of direct material, labor and overhead. During the years ended March 31, 2014, 2013 and 2012, the Company recorded $2.0 million, $1.2 million and $1.8 million, respectively, in write-downs of inventory.

Note 6. Property and Equipment

The components of property and equipment are as follows:

 

     March 31,  
     2014      2013  
     (in $000’s)  

Machinery and equipment

   $ 16,805       $ 14,392   

Furniture and fixtures

     960         969   

Leasehold improvements

     1,876         1,843   

Construction in progress

     1,226         1,541   
  

 

 

    

 

 

 

Total cost

     20,867         18,745   

Less accumulated depreciation

     (13,978      (12,196
  

 

 

    

 

 

 
   $ 6,889       $ 6,549   
  

 

 

    

 

 

 

Depreciation expense related to property and equipment was $2.4 million, $2.5 million and $2.3 million for the years ending March 31, 2014, 2013 and 2012, respectively.

Note 7. Goodwill

The carrying amount of goodwill at March 31, 2014 and 2013 was $38.0 million and $35.4 million, respectively, and has been recorded in connection with the Company’s acquisition of Impella Cardiosystems AG, or Impella, in 2005. The goodwill activity is as follows:

 

     (in $000’s)  

Balance at March 31, 2012

   $ 36,846   

Exchange rate impact

     (1,436
  

 

 

 

Balance at March 31, 2013

     35,410   

Exchange rate impact

     2,580   
  

 

 

 

Balance at March 31, 2014

   $ 37,990   
  

 

 

 

The Company has no accumulated impairment losses on goodwill.

 

F-15


Table of Contents

ABIOMED, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

 

Note 8. Stockholders’ Equity

Stock Repurchase Program

In November 2012, the Company’s Board of Directors authorized a stock repurchase program for up to $15.0 million of its common stock. The Company financed the stock repurchase program with its available cash. During the year ended March 31, 2013, the Company repurchased 1,123,587 shares for $15.0 million in open market purchases at an average cost of $13.39 per share, including commission expense. The Company completed the purchase of common stock under this stock repurchase program in January 2013.

Note 9. Stock Award Plans and Stock-Based Compensation

Stock Award Plans

The Company grants stock options and restricted stock awards to employees and others. All outstanding stock options of the Company as of March 31, 2014 were granted with an exercise price equal to the fair market value on the date of grant. Outstanding stock options, if not exercised, expire 10 years from the date of grant.

The Company’s 2008 Stock Incentive Plan (the “Plan”) authorizes the grant of a variety of equity awards to the Company’s officers, directors, employees, consultants and advisers, including awards of unrestricted and restricted stock, restricted stock units, incentive and nonqualified stock options to purchase shares of common stock, performance share awards and stock appreciation rights. The Plan provides that options may only be granted at the current market value on the date of grant. Each share of stock issued pursuant to a stock option or stock appreciation right counts as one share against the maximum number of shares issuable under the Plan, while each share of stock issued pursuant to any other type of award counts as 1.58 shares against the maximum number of shares issuable under the Plan for grants made on or after August 11, 2010 (and as 1.5 shares for grants made prior to that date). The Company’s policy for issuing shares upon exercise of stock options or the vesting of its restricted stock awards and restricted stock units is to issue shares of common stock at the time of exercise or conversion. At March 31, 2014, a total of approximately 1,317,000 shares were available for future issuance under the Plan.

Stock-Based Compensation

The following table summarizes stock-based compensation expense by financial statement line item in the Company’s consolidated statements of operations for the fiscal years ended March 31, 2014, 2013 and 2012 (in thousands):

 

     March 31,  
     2014      2013      2012  
     (in $000’s)  

Cost of product revenue

   $ 614       $ 450       $ 282   

Research and development

     2,347         1,843         1,719   

Selling, general and administrative

     8,257         7,208         5,772   
  

 

 

    

 

 

    

 

 

 
   $ 11,218       $ 9,501       $ 7,773   
  

 

 

    

 

 

    

 

 

 

The components of stock-based compensation for the fiscal years ended March 31, 2014, 2013 and 2012 were as follows (in thousands):

 

     March 31,  
     2014      2013      2012  
     (in $000’s)  

Restricted stock units

   $ 8,008       $ 5,970       $ 2,808   

Stock options

     2,679         2,680         2,722   

Restricted stock

     314         653         2,095   

Employee stock purchase plan

     217         198         148   
  

 

 

    

 

 

    

 

 

 
   $ 11,218       $ 9,501       $ 7,773   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

ABIOMED, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

 

Note 9. Stock Award Plans and Stock-Based Compensation (Continued)

 

Stock Options

The following table summarized stock option activity for the year ended March 31, 2014:

 

     Options
(in thousands)
     Weighted
Average
Exercise
Price
     Weighted
Average
Remaining
Contractual
Term (years)
     Aggregate
Intrinsic
Value
(in thousands)
 

Outstanding at beginning of year

     4,228       $ 11.49         5.37      

Granted

     336         23.56         

Exercised

     (1,029      9.10         

Cancelled and expired

     (43      18.54         
  

 

 

    

 

 

       

Outstanding at end of year

     3,492       $ 13.27         4.92       $ 44,634   
  

 

 

    

 

 

       

Exercisable at end of year

     2,708       $ 11.40         3.98       $ 39,653   
  

 

 

    

 

 

       

Options vested and expected to vest at end of year

     3,401       $ 13.17         4.85       $ 43,819   
  

 

 

    

 

 

       

The remaining unrecognized stock-based compensation expense for unvested stock option awards at March 31, 2014 was approximately $4.4 million, net of forfeitures, and the weighted-average period over which this cost will be recognized is 2.7 years.

The aggregate intrinsic value of options exercised for fiscal years 2014, 2013 and 2012 was $16.3 million, $4.6 million and $13.4 million, respectively. The total cash received as a result of employee stock option exercises during the years ended March 31, 2014, 2013 and 2012 was approximately $9.4 million, $2.9 million and $14.3 million, respectively. The total fair value of options vested in fiscal years 2014, 2013 and 2012 was $2.5 million, $2.6 million and $3.8 million, respectively.

The weighted average grant-date fair value for options granted during the years ended March 31, 2014, 2013 and 2012 was $9.85, $9.66 and $8.35 per share, respectively.

The Company estimates the fair value of each stock option granted at the grant date using the Black-Scholes option valuation model. The fair value of options granted during the years ended March 31, 2014, 2013 and 2012 were calculated using the following weighted average assumptions:

 

     2014     2013     2012  

Risk-free interest rate

     0.94     0.78     1.47

Expected option life (years)

     4.25        4.31        5.19   

Expected volatility

     51.7     56.2     53.1

The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for a term consistent with the expected life of the stock options. Volatility assumptions are calculated based on the historical volatility of the Company’s stock and adjustments for factors not reflected in historical volatility that may be more indicative of future volatility. The Company estimates the expected term of options based on historical exercise experience and estimates of future exercises of unexercised options. An expected dividend yield of zero is used in the option valuation model because the Company does not pay cash dividends and does not expect to pay any cash dividends in the foreseeable future. The Company estimates forfeitures based on an analysis of actual historical forfeitures, adjusted to the extent historic forfeitures may not be indicative of forfeitures in the future.

 

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Table of Contents

ABIOMED, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

 

Note 9. Stock Award Plans and Stock-Based Compensation (Continued)

 

Restricted Stock and Restricted Stock Units

The following table summarizes restricted stock and restricted stock unit activity for the fiscal year ended March 31, 2014:

 

     Number of Shares
(in thousands)
     Weighted Average
Grant Date 
Fair Value (per
share)
 

Restricted stock and restricted stock units at beginning of year

     1,022       $ 18.44   

Granted

     570         23.34   

Vested

     (364      16.58   

Forfeited

     (54      18.93   
  

 

 

    

 

 

 

Restricted stock and restricted stock units at end of year

     1,174       $ 21.37   
  

 

 

    

 

 

 

The remaining unrecognized compensation expense for outstanding restricted stock and restricted stock units, including performance-based awards, as of March 31, 2014 was $10.4 million and the weighted-average period over which this cost will be recognized is 1.8 years.

The weighted average grant-date fair value for restricted stock and restricted stock units granted during the years ended March 31, 2014, 2013 and 2012 was $23.34, $21.82 and $18.13 per share, respectively. The total fair value of restricted stock and restricted stock units vested in fiscal years 2014, 2013 and 2012 was $6.0 million, $3.0 million and $1.5 million, respectively.

Performance-Based Awards

Included in the restricted stock and restricted stock units activity discussed above are certain awards granted in fiscal years 2014, 2013 and 2012 that vest subject to certain performance-based criteria.

In May 2013, performance-based awards of restricted stock units for the potential issuance of 268,988 shares of common stock were issued to certain executive officers and employees, all of which vest upon achievement of prescribed service milestones by the award recipients and performance milestones by the Company. As of March 31, 2014, the Company has met the prescribed performance milestones for a portion of these awards. These awards are still subject to service requirements for vesting for these employees and the compensation expense is being recognized accordingly.

In May 2012, performance-based awards of restricted stock units for the potential issuance of 195,188 shares of common stock were issued to certain executive officers and employees of the Company, all of which will vest upon achievement of prescribed service milestones by the award recipients and performance milestones by the Company. As of March 31, 2014, the Company has met the prescribed performance milestones for these awards. These awards are still subject to service requirements for vesting for these employees and the compensation expense is being recognized accordingly.

In May 2011 and June 2011, performance-based awards of restricted stock units for the potential issuance of 284,000 shares of common stock were issued to certain executive officers and members of the senior management of the Company, all of which will vest upon achievement of prescribed service milestones by the award recipients and performance milestones by the Company. As of March 31, 2014, the Company has met the prescribed milestones for 234,000 shares underlying these awards. During the three months ended December 31, 2013, the Company determined that it was no longer probable that the underlying performance milestones on the remaining 50,000 restricted stock units and therefore reversed $0.8 million that had been previously recorded as stock-based compensation expense. In March 2014, the Company modified the performance condition on these 50,000 restricted stock units and as of March 31, 2014, the Company believes that it is probable that the prescribed performance milestones will be met and the compensation expense is being recognized accordingly.

During the year ended March 31, 2014, the Company has recorded $3.9 million in stock-based compensation expense for equity awards in which the prescribed performance milestones have been achieved or are probable of being achieved. The remaining unrecognized compensation expense related to these equity awards at March 31, 2014 is $4.5 million based on the Company’s current assessment of probability of achieving the performance milestones. The weighted-average period over which this cost will be recognized is 1.7 years.

 

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Table of Contents

ABIOMED, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

 

Note 9. Stock Award Plans and Stock-Based Compensation (Continued)

 

Employee Stock Purchase Plan

The Company has an employee stock purchase plan, or ESPP. Under the ESPP, eligible employees, including officers and directors, who have completed at least three months of employment with the Company or its subsidiaries who elect to participate in the purchase plan instruct the Company to withhold a specified amount of the employee’s income each payroll period during a six-month payment period (the periods April 1—September 30 and October 1—March 31). On the last business day of each six-month payment period, the amount withheld is used to purchase shares of the Company’s common stock at an exercise price equal to 85% of the lower of its market price on the first business day or the last business day of the payment period. The Company recognized compensation expense of $0.2 million, $0.2 million and $0.1 million for the fiscal years ended March 31, 2014, 2013 and 2012, respectively, related to the ESPP.

Note 10. Income Taxes

At March 31, 2014, the Company had federal and state net operating loss carryforwards, or NOLs, of approximately $193.0 million which expire in varying years from fiscal 2015 through fiscal 2034. During the year ended March 31, 2014, state NOLs of approximately $1.2 million expired. In addition, at March 31, 2014, the Company had federal and state research and development credit carryforwards of approximately $12.5 million and $5.8 million, respectively, which expire in varying years from fiscal 2015 through fiscal 2034.

The Company acquired Impella, a German company, in May 2005, as a result of which, Impella became the Company’s German subsidiary. The Company’s German subsidiary was audited by the local tax authorities for fiscal years 2008 through 2011. In April 2014, we were notified by German tax authorities that there were no adjustments made as a result of the audit to the German subsidiary’s NOLs to date.

The future utilization of the Company’s NOLs and research and development credit carryforwards to offset future taxable income may be subject to a substantial annual limitation under Section 382 of the Internal Revenue Code due to ownership changes that have occurred previously or that could occur in the future. Ownership changes, as defined in Section 382 of the Internal Revenue Code, can limit the amount of NOL and research and development credit carryforwards that a company can use each year to offset future taxable income and taxes payable. The Company completed a Section 382 analysis in fiscal 2014 to determine whether any changes in the composition of its stockholders resulted in an ownership change for purposes of Section 382. The Company believes that all of its federal and state NOLs will be available for carryforward to future tax periods, subject to statutory maximum carryforward limitations. Any future potential limitation to all or a portion of the NOL or research and development credit carryforwards, before they can be utilized, would reduce the Company’s gross deferred tax assets. The Company will continue to monitor subsequent ownership changes, which could impose limitations in the future on the use of its NOLs or research and development credit carryforwards.

The Company regularly assesses its ability to realize its deferred tax assets. Assessing the realization of deferred tax assets requires significant management judgment. In determining whether its deferred tax assets are more likely than not realizable, the Company evaluated all available positive and negative evidence, and weighted the evidence based on its objectivity. Evidence the Company considered included, our history of net operating losses incurred for most of the Company’s existence, expiration of various federal and state attributes, the uncertainty relative to the Department of Justice investigation and the Company’s PMA application for its Impella products, expansion into new markets, such as Japan, government reimbursement environment for the Company’s products, profitability for recent years and uncertainties around forecasted profit before tax for fiscal 2015. Based on the review of all available evidence, the Company determined that the objectively verifiable negative evidence outweighed the positive evidence and it recorded a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realizable as of March 31, 2014. The Company will continue to assess the level of the valuation allowance required. If sufficient positive evidence exists in future periods to support a release of some or all of the valuation allowance, such a release would likely have a material impact on its results of operations.

 

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Table of Contents

ABIOMED, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

 

Note 10. Income Taxes (Continued)

 

Income before provision for income taxes and the provision for income taxes is as follows for the years ended March 31:

 

     2014      2013      2012  
     (in $000’s)  

Income before provision for income taxes:

        

United States

   $ 4,267       $ 10,202       $ 236   

Foreign

     4,263         6,660         2,307   
  

 

 

    

 

 

    

 

 

 

Income before income taxes

   $ 8,530